High Risk Series: An Overview (Letter Report, 02/95, GAO/HR-95-1).
In 1990, GAO began a special effort to identify federal programs at high
risk of waste, fraud, abuse, and mismanagement. GAO issued a series of
reports in December 1992 on the fundamental causes of the problems in
the high-risk areas. This report is part of the second series that
updates the status of those areas. The Overview discusses the urgent
need to continue addressing critical high-risk problems, including such
areas as Defense Department (DOD) contract and inventory management,
revenue collections, major lending programs, and oversight of tens of
billions of dollars in contracts. Also, GAO has designated new areas as
high risk, such as long-standing financial management weaknesses in DOD,
growing fraudulent tax filings, and several critical information system
modernization projects that are plagued with problems. In five areas,
such as the Pension Benefit Guaranty Corporation, improvement has been
significant enough for GAO to remove them from the high-risk list. In
only three areas--DOD weapons system acquisition and inventory
management and the Internal Revenue Service's collection of delinquent
receivables--has little progress been made. The series also includes a
Quick Reference Guide and a separate report for each of 10 areas,
detailing continuing significant problems and needed corrective action.
Readers have the following three options in ordering the high-risk
series: (1) request any of the individual reports in the series,
including the Overview (HR-95-1), the Guide (HR-95-2), or any of the 10
issue area reports; (2) request the Overview and the Guide as a package
(HR-95-21SET); or (3) request the entire series as a package
(HR-95-20SET).
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HR-95-1
TITLE: High Risk Series: An Overview
DATE: 02/01/95
SUBJECT: Systems conversions
Financial management systems
Internal controls
Contract administration
Government collections
Government guaranteed loans
Inventory control systems
Accountability
ADP procurement
Management information systems
IDENTIFIER: IRS Tax System Modernization Program
TSM
DOD Corporate Information Management Initiative
CIM
GAO High Risk Program
OMB High Risk Program
Bank Insurance Fund
BIF
Retirement Protection Act of 1994
Customs Service Seized Asset Program
FAA Air Traffic Control Modernization Program
FmHA Direct Farm Loan Program
FmHA Farm Ownership Loan Program
FmHA Guaranteed Farm Loan Program
Guaranteed Student Loan Program
National Direct Student Loan Program
Superfund Program
High Risk Series 1995
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Cover
================================================================ COVER
High-Risk Series
February 1995
AN OVERVIEW
GAO/HR-95-1
Overview
Abbreviations
=============================================================== ABBREV
ATC - Air Traffic Control
CFO - Chief Financial Officers
CIM - Corporate Information Management
EPA - Environmental Protection Agency
FAA - Federal Aviation Administration
FDIC - Federal Deposit Insurance Corporation
FmHA - Farmers Home Administration
FTA - Federal Transit Administration
GAO - General Accounting Office
GPRA - Government Performance and Results Act
HCFA - Health Care Financing Administration
HUD - Housing and Urban Development
IRS - Internal Revenue Service
NASA - National Aeronautics and Space Administration
OMB - Office of Mangement and Budget
PBGC - Pension Benefit Guaranty Corporation
RTC - Resolution Trust Corporation
TSM - Tax Systems ModernizationCALLING ATTENTION TO HIGH-RISK AREAS
Letter
=============================================================== LETTER
February 1995
The President of the Senate
The Speaker of the House of Representatives
In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas we considered high
risk because they were especially vulnerable to waste, fraud, abuse,
and mismanagement. This effort, which has been strongly supported by
the Senate Committee on Governmental Affairs and the House Committee
on Government Reform and Oversight, brought much needed focus to
problems that were costing the government billions of dollars.
In December 1992, we issued a series of reports on the fundamental
causes of problems in designated high-risk areas. We are updating
the status of our high-risk program in this second series. In this
Overview report, we discuss the urgent need to continue addressing
critical high-risk problems, covering such areas as Defense
Department contract and inventory management, revenue collection
operations, major lending programs, and oversight of tens of billions
of dollars in contracts. We also introduce newly designated
high-risk areas, such as serious and long-standing financial
management weaknesses in Defense, growing fraudulent tax filings, and
several critical information systems modernization projects that are
plagued with problems.
Overall, legislative and agency actions in response to our
recommendations have resulted in progress toward resolving many
high-risk problems. In five areas, such as the Pension Benefit
Guaranty Corporation, improvement has been significant enough for us
to remove their high-risk designation. In only three areas, Defense
weapons systems acquisition and inventory management and the Internal
Revenue Service's collection of delinquent receivables, has there
been little progress.
In addition to efforts to address individual high-risk areas, the
Congress has moved to address critical problems on a broader basis by
passing the 1993 Government Performance and Results Act and, in 1994,
expanding the Chief Financial Officers Act. These pieces of landmark
legislation establish the framework to better manage and measure
results of federal operations.
In addition to this Overview, the series includes a Quick Reference
Guide (GAO/HR-95-2), which provides information on the 18 high-risk
areas we have tracked over the past few years. For each area, the
Guide summarizes the problems, root causes, progress, and outlook for
the future; identifies a key GAO contact person; and provides a list
of related GAO products. The series also includes separate reports
for 10 areas, detailing continuing significant problems and
resolution actions needed.
Copies of this report series are being sent to the President and the
Republican and Democratic leadership of the Congress, committee
chairs and ranking minority members, all other members of the
Congress, the Director of the Office of Management and Budget, and
the heads of major departments and agencies.
Charles A. Bowsher
Comptroller General
of the United States
EXECUTIVE SUMMARY
============================================================ Chapter 0
Many critical government operations are highly vulnerable to waste,
fraud, abuse, and mismanagement. The government is needlessly losing
billions of dollars and missing huge opportunities to achieve its
objectives at less cost and with better service delivery. These
vulnerabilities expose the government to future losses. Mitigating
these losses is especially important at a time when the government
faces large budget deficits. This report series updates our efforts
to address high-risk problems and identifies further actions needed.
At the heart of high-risk situations is a lack of fundamental
accountability, which has led to hundreds of management weaknesses
throughout government, many persisting for years. These weaknesses
have fostered an environment with inefficient processes that do not
provide reliable information and that urgently need to be streamlined
and improved. Moreover, almost all of the government's major
departments and agencies have not been able to pass the test of an
independent financial statement audit. This situation justifiably
reinforces the public's low level of confidence in how the government
manages their tax dollars.
This is not to say that no progress has been made. In fact, in 15 of
the 18 high-risk areas, congressional and agency efforts have
prompted long-needed improvements. In some areas, progress has been
sufficient for us to remove the high-risk designation.
This report highlights:
six broad current high-risk categories that will be the focus of our
program over the next 2 years;
progress achieved in most of the high-risk areas we have emphasized
since our program's inception in 1990; and
recent legislation establishing the framework needed to better manage
and measure results of federal operations.
CURRENT HIGH RISKS
---------------------------------------------------------- Chapter 0:1
Our focus over the next 2 years will be on six broad categories.
Collectively, these high-risk areas affect almost all of the
government's $1.25 trillion revenue collection efforts and hundreds
of billions of dollars of federal expenditures.
(See figure in printed
edition.)
PROVIDING FOR ACCOUNTABILITY
AND COST-EFFECTIVE
MANAGEMENT OF DEFENSE
PROGRAMS
-------------------------------------------------------- Chapter 0:1.1
While our military capabilities are unparalleled in the world today,
Defense cannot accurately account for its more than $250 billion
annual budget and over $1 trillion in assets worldwide. It also has
been unable to adequately fix well-known areas of major
vulnerability. These include
holding inventory, valued by Defense at $36 billion, that is no
longer needed for current operating requirements;
disbursing $25 billion to vendors that cannot be matched to
supporting documentation to determine if payments were proper;
relying on contractors to voluntarily return hundreds of millions of
dollars in overpayments; and
paying billions of dollars in added costs when acquiring weapons
systems.
These poor practices are draining resources that could be used to
further enhance military readiness. At the heart of these problems
is a long-standing culture that has not valued good financial
management. No military service or major Defense component has been
able to obtain a financial audit opinion because of hundreds of
billions of dollars in assets not accounted for and countless
failures in performing the most rudimentary bookkeeping tasks. The
Secretary of Defense said it well: "We need to reform our financial
management. It is a mess, and it is costing us money we desperately
need."
Effective implementation of the landmark Chief Financial Officers Act
throughout the Department of Defense is critical. We have made
numerous recommendations to strengthen Defense accountability and
management. While Defense has acknowledged the severity of its
financial management problems and established goals to correct them,
it still lacks the realistic plans and expertise needed to accomplish
those goals. These issues are discussed in more detail on pages 38
to 44.
ENSURING ALL REVENUES ARE
COLLECTED AND ACCOUNTED FOR
-------------------------------------------------------- Chapter 0:1.2
Although responsible for collecting 98 percent of the government's
revenues--currently $1.25 trillion annually--the Internal Revenue
Service (IRS) has not kept its own books and records with the same
degree of accuracy it expects of taxpayers. For the last 2 years, we
have been unable to express an opinion on IRS' financial statements
due to serious accounting and internal control problems.
In response to our audit reports, IRS has expressed its commitment to
develop meaningful and reliable financial information and establish
sound internal controls. However, IRS' financial management
weaknesses are pervasive, have been repeatedly reported, and warrant
prompt attention. IRS' financial systems are out of date, produce
unreliable data on tax receivables, and do not adequately control
unauthorized access to taxpayer information. IRS' financial
operations fail to perform some of the most basic accounting
practices--reconciling collection deposits, assessing the
collectibility of receivables, and ensuring that all transactions
have been properly recorded to taxpayer accounts.
IRS is losing ground in collecting mounting tax receivables. Poor
information systems are a major barrier to making decisions. Also,
IRS has had difficulty in coping with rapidly increasing filing
fraud. Fraudulent paper and electronic filings have flourished and,
unless brought under control, heavy losses will continue--tens of
millions of dollars annually. Problems related to collecting and
accounting for revenues are discussed on pages 44 to 53.
OBTAINING AN ADEQUATE RETURN
ON MULTIBILLION DOLLAR
INVESTMENTS IN INFORMATION
TECHNOLOGY
-------------------------------------------------------- Chapter 0:1.3
Today's information technology offers unprecedented opportunities to
improve the delivery of government services and reduce program costs.
Using technology well is central to enhancing the information
available to federal managers and the public. Unfortunately, the
government has not been able to take full advantage of these
opportunities. The result is wasted resources, a frustrated public
unable to get quality service, and a government ill-prepared to
measure results and manage its affairs in a businesslike manner.
Despite an estimated $200 billion investment in the last 12 years,
there is too little evidence of promised capabilities being delivered
on time and within budget. For example:
The largest component of the Federal Aviation Administration's $36
billion air traffic control modernization to improve air safety has
had to be dramatically revamped.
IRS' $8 billion Tax Systems Modernization, intended to overhaul the
tax collection process, has experienced continuing delays and design
difficulties.
Defense's Corporate Information Management initiative, estimated to
save billions of dollars by streamlining Defense's business
operations in critical areas, has failed to meet program objectives.
The National Weather Service effort to improve its weather prediction
systems has experienced cost growth for its radar and satellite
components and has lacked a systems architecture to guide the
development and implementation of these and other components.
Problems in this area are discussed on pages 54 to 59.
CONTROLLING MEDICARE CLAIMS
FRAUD AND ABUSE
-------------------------------------------------------- Chapter 0:1.4
Medicare is undermined by flawed payment policies, weak billing
controls, and inconsistent program management. Instances of scams,
abuses, and fraud abound in the $162 billion program. Insurers have
owed Medicare millions of dollars for mistaken payments. Moreover,
to maximize profits, providers continue to exploit loopholes and
billing control weaknesses.
Under current policy, the Congressional Budget Office projects
Medicare payments will reach $380 billion a year by 2003. The Health
Care Financing Administration has moved to counteract the program's
abuses, but its overall management of these activities is not
sufficient. Stronger controls are essential to deter a drain on
taxpayer funds. See pages 60 to 63.
MINIMIZING LOAN PROGRAM
LOSSES
-------------------------------------------------------- Chapter 0:1.5
The federal government provides this country's largest source of
credit. The government managed direct loan portfolios of $155
billion and had guaranteed loans totaling $699 billion at the end of
fiscal year 1994. In fiscal year 1994 alone, lending agencies wrote
off about $2.8 billion of direct loans and terminated for default
$16.4 billion of guaranteed loans. Future costs to the government of
tens of billions of dollars are anticipated.
This extraordinary exposure reinforces the need to effectively manage
credit programs. Oftentimes a lender of last resort, federal credit
programs will incur losses, but these costs can be reduced by
overcoming management control problems.
Improvements have been made by the Department of Agriculture in the
$18 billion farm loan program, but the program incurred over $6
billion in losses from fiscal year 1991 through fiscal year 1994 and
still has nearly $5 billion on the books in outstanding loans to
farmers who are behind on loan payments. See pages 64 to 65.
Between fiscal years 1991 and 1994, annual guaranteed student loan
losses declined from $3.6 billion to $2.4 billion, due in part to
improvements initiated by the Education Department. However,
problems with school eligibility and the accuracy and availability of
loan data could threaten the future delivery of Education's student
financial aid. See pages 66 to 67.
The Department of Housing and Urban Development (HUD), which insures
some $400 billion in housing loans, guarantees more than $400 billion
in outstanding securities, and spends $25 billion a year on housing
programs, is currently the subject of numerous "reinvention"
proposals; however, the agency must address fundamental internal
control, management, staffing, and systems problems regardless of
what changes are made. See pages 68 to 69.
IMPROVING MANAGEMENT OF
FEDERAL CONTRACTS AT
CIVILIAN AGENCIES
-------------------------------------------------------- Chapter 0:1.6
Civilian agencies rely on contractors to provide goods and services
costing tens of billions of dollars a year. It is critical to ensure
that the government gets what it pays for and that contractors' work
is done at reasonable cost. But this has not always been the case.
The Department of Energy has allowed its management and operating
contractors extensive latitude in spending $15 billion annually, and
it has not required contractors to have financial audits despite
continuing disclosures of abuse and poor management. As a result,
the government is not adequately protected. See pages 70 to 72.
Ineffective oversight by the National Aeronautics and Space
Administration (NASA), which spends about $13 billion a year under
contract, has resulted in cost growth and schedule slippage in
completing large space projects. See pages 72 to 73.
Contract management problems in the Environmental Protection Agency's
(EPA) multibillion dollar Superfund hazardous waste cleanup program
have provided contractors too little incentive to control costs. See
pages 74 to 75.
HIGH-RISK PROGRAM SUCCESSES
-------------------------------------------------------- Chapter 0:1.7
In 15 of 18 high-risk areas we have followed, there has been progress
in attacking root causes of problems. In 5 areas, enough progress
has been made to remove their high-risk designation, although we will
continue to monitor their status.
(See figure in printed
edition.)
Progress in each of the 18 areas is discussed in the accompanying
Quick Reference Guide (GAO/HR-95-2).
IMPORTANCE OF RECENT
LEGISLATIVE FRAMEWORK FOR
MANAGEMENT REFORM
-------------------------------------------------------- Chapter 0:1.8
While specific actions have been identified to fix individual
high-risk areas, broader, more fundamental problems in government
also need to be addressed. Calls for civil service reform,
government reorganization, privatization, and devolution of functions
and programs to states and local governments are all areas worth
exploring. Such changes may lessen the government's vulnerability,
and we are working with the Congress on these and other broad
reforms.
It is important to move toward a smaller, more efficient government
that focuses on accountability and managing for results. To
successfully achieve these goals, accurate and reliable cost
information and performance data are absolutely essential. The
Government Performance and Results Act (GPRA) and the Chief Financial
Officers (CFO) Act help provide the critical impetus for generating
such management information.
GPRA establishes pilot projects to define expected results up front
and then measure their attainment. This is intended to move
decisionmakers from a focus on inputs and spending to one on outcomes
and results. The CFO Act, as expanded by the 1994 Government
Management Reform Act, establishes a financial management leader in
each major department, requires annual audited financial statements
for all major departments and agencies for fiscal year 1996, and
mandates the development of cost information and the modernization of
financial systems.
Effectively implementing such landmark legislation should go a long
way toward solving high-risk problems and restoring citizens'
confidence in government. It is essential that agencies adhere to
the statutory deadline for having audited financial statements and
that basic accountability objectives are met. As part of our
continuing evaluation of high-risk areas, we will work with the
Congress and the Executive Branch to promote effective implementation
of the CFO Act and GPRA.
These issues are discussed in more detail on pages 76 to 86.
CALLING ATTENTION TO HIGH-RISK
AREAS
============================================================ Chapter 1
Over 12 years ago, in the face of seemingly endless accounts of
control breakdowns and program failures, the Congress passed the
Federal Managers' Financial Integrity Act of 1982. The act required
federal managers to evaluate their internal control and accounting
systems and to correct problems.
Since 1983, heads of the 18 largest federal agencies have identified
well over 3,000 weaknesses and reported progress in resolving them.
Yet, our audits have shown that similar problems surface over and
over, and that the condition of controls and accounting systems
remains very poor.
In November 1989, we reported\1 that fraud, waste, abuse, and
mismanagement continued to cost the taxpayers billions of dollars,
rendered programs ineffective, and painted a picture of federal
agencies unable to manage their operations or fully account for their
assets. It was during this time that the American public learned of
a scandal at HUD, where serious deficiencies had gone unabated for
many years.
In 1990, we established our high-risk program, placing special
attention on 14 areas considered to be especially vulnerable.
(See figure in printed
edition.)
Since 1990, we have added four areas.
(See figure in printed
edition.)
In December 1992, we issued a series of reports on the designated
areas. We reported that some agencies were openly recognizing
high-risk problems and developing and implementing corrective
actions. We also reported that legislation needed to address certain
individual high-risk areas had been passed, some agencies had
developed sound plans for correcting problems, and a number of
financial management improvements had been achieved.
Despite these advances, major problems persisted and the danger of
billions of dollars in losses remained. Since the 1992 series was
issued, we have continued to devote substantial audit effort to
high-risk areas to press for further improvements.
Since 1989, the Office of Management and Budget (OMB) also has had a
high-risk program, which today encompasses 57 areas. As reported in
the President's fiscal year 1996 budget submission, OMB has also
found that the concentrated attention resulting from such an effort
has helped spark a number of important improvements. In our most
recent review of OMB's high-risk program,\2 we agreed in most cases
with OMB's evaluation of the progress made by agencies to address
identified problems.
--------------------
\1 Financial Integrity Act: Inadequate Controls Result in
Ineffective Federal Programs and Billions in Losses (GAO/AFMD-90-10,
Nov. 28, 1989).
\2 OMB's High-Risk Program: Comments on the Status Reported in the
President's Fiscal Year 1995 Budget (GAO/AIMD-94-136, Sept. 20,
1994).
THE HIGH-RISK PROGRAM SUCCESSES
============================================================ Chapter 2
After 5 years, the high-risk program continues to demonstrate its
value in prompting long-needed improvements. Significant efforts by
agencies, coupled with legislation and congressional oversight, have
addressed many identified deficiencies. Congressional hearings have
been particularly important in defining solutions and bringing about
changes. For some areas, we are removing the high-risk designation.
Others are on the right path to resolution, while only three areas
have shown little improvement.
FIVE AREAS SHOW SIGNIFICANT
PROGRESS
-------------------------------------------------------- Chapter 2:0.1
In five areas, legislative and agency actions in response to our
recommendations have resulted in improvements significant enough for
us to remove their high-risk designation.
(See figure in printed
edition.)
We will, however, continue to closely monitor these areas. If
significant problems again arise, we will consider returning the area
to the high-risk program. Additional information on each of these
areas is provided in the Quick Reference Guide (GAO/HR-95-2).
We put the Bank Insurance Fund on our high-risk list because
unprecedented numbers of bank failures and insurance losses in the
late 1980s and early 1990s had depleted the Fund's reserves. These
failures resulted from the banking industry's shift to increasingly
risky lending activities in response to a shrinking customer base and
increased competition. Banks' lending risks were exacerbated by weak
internal controls, flawed corporate governance systems, and lax
regulatory supervision. By year-end 1991 the Fund was in a deficit
position.
In various reports and testimonies, we recommended that the Congress
rebuild the Fund and put safeguards in place to improve regulation
and minimize future losses to the Fund. These safeguards included
management and auditor reporting on the effectiveness of internal
controls, independent audit committees, safety and soundness
standards, prompt corrective actions to minimize Fund losses, and
accounting reforms to ensure reliable financial reports.
The Congress responded by passing several pieces of legislation. The
Omnibus Reconciliation Act of 1990 removed caps on premium increases
and gave the Federal Deposit Insurance Corporation (FDIC) increased
flexibility to set premium rates. The FDIC Improvement Act of 1991
provided for rebuilding the depleted deposit insurance fund and
required significant corporate governance, regulatory, and accounting
reforms. These reforms, which have largely been implemented by FDIC
and others, address the serious weaknesses that contributed to
earlier record bank failures.
The rapid rebuilding of the Fund's reserves, which stood at $17.5
billion at June 30, 1994, has substantially reduced the Fund's risks.
We are currently performing the 1994 financial audit of the Fund and
will be issuing our report in March 1995.
The Resolution Trust Corporation (RTC) was created in August 1989 to
resolve hundreds of failed savings and loan institutions and dispose
of their assets. Although original estimates indicated that RTC
would need $50 billion to close known failed thrifts, cost estimates
escalated rapidly. By May 1990, the number of known failed thrifts
had increased and RTC's most conservative cost estimates had grown to
nearly $90 billion. In addition, RTC faced significant risks
associated with contracting out the management and disposition of
failed thrift assets worth hundreds of billions of dollars. As a
result, RTC was part of our high-risk program almost from the
Corporation's inception.
We made numerous recommendations in reports and testimonies over the
years aimed at reducing the total thrift cleanup costs. We called
for providing RTC with adequate and timely funding for failed thrift
closures and for management reforms designed to improve RTC's asset
disposition, contracting, and financial management activities. We
also pointed to the need for RTC to better estimate the value of
failed thrift assets so that the Congress would have the best
possible information on which to base its funding decisions.
In response, the Congress passed several laws that provided RTC with
additional funding, mandated that RTC implement specific management
reforms, and required the establishment of an interagency transition
task force with specific responsibilities to facilitate the transfer
of RTC's workload, personnel, and operations to FDIC by January 1996.
For its part, RTC made numerous improvements in its estimating
processes, internal controls, and financial management systems in
order to provide more reliable, auditable cost data. As a result, we
have been able to attest to the accuracy of RTC's balance sheet
beginning in 1991 and its financial statements since that time. RTC
has also fully implemented most of the congressionally mandated
reforms and continues to work on the others. Finally, RTC and FDIC
have established a task force that has begun to work on transition
issues.
Although the transition remains an area of concern, RTC no longer
poses the risk it once did. As of November 1994, RTC had completed
the resolution of 743 failed thrifts; disposed of $432 billion of the
$463 billion in assets from those failed thrifts; and made notable
improvements in its disposition, contracting, and management
activities. We are currently performing the 1994 financial audit of
RTC and will report the results in mid-1995.
In December 1992, we reported that the Pension Benefit Guaranty
Corporation's (PBGC) weak financial condition threatened the
program's viability. In 1993, management deficiencies hindered
PBGC's ability to effectively assess and monitor its financial
condition. Its single-employer fund had a $2.9 billion deficit, and
it faced $71 billion in underfunding in the ongoing plans it insured.
To reduce these threats, we recommended a combination of legislative
actions and strengthened oversight and enforcement efforts. In
particular, we supported legislation to strengthen funding standards
and make the variable rate premium more risk related. We also
recommended that PBGC correct significant system and control
weaknesses in its liability estimation and premium and accounting
operations.
PBGC substantially improved its internal controls for estimating its
liability for future benefits, enabling us for the first time to
express an opinion on its 1992 balance sheet. Also on December 8,
1994, the Congress passed the General Agreement on Tariffs and Trade
(GATT) which contains provisions to strengthen minimum funding
standards and phase out the cap on variable rate premiums paid by
underfunded defined benefit pension plans. We reported that most
companies with underfunded pension plans will put more money into
their plans. The agency estimates that these provisions will lower
the underfunding in plans it insures and reduce the deficit in its
single-employer fund.
Congressional and agency actions should reduce PBGC's exposure to
losses and, correspondingly, the risk to the federal government. We
are currently working on the 1994 financial audit and will issue our
report in March 1995.
We put the State Department's management of overseas real property on
our high-risk list because of insufficient maintenance of facilities,
lax oversight of overseas post operations, inadequate information
systems, and poor planning. These problems had resulted in
deteriorated facilities, increased costs, and questionable managerial
decisionmaking.
In response, State's actions included establishing priorities for
construction projects based on specific criteria, better evaluating
contractors' performance, hiring additional qualified staff,
surveying the maintenance conditions of posts, streamlining and
updating housing standards, and improving information systems.
Related State initiatives underway include:
conducting global maintenance surveys at over 170 overseas posts and
establishing 2 regional maintenance assistance centers;
implementing a facilities evaluation and assistance program;
implementing an information resource management system and upgrading
the real estate management system; and
conducting financial audits at a number of overseas posts.
These initiatives significantly reduce the overseas property
management program's vulnerabilities.
The Federal Transit Administration's (FTA) grant management was on
our high-risk list because, until 1993, FTA focused more on awarding
grants than on ensuring their proper use. Oversight was superficial
and inconsistent, and FTA seldom used its enforcement powers to
compel grant recipients to fix problems, even those that were
long-standing.
We made numerous recommendations that focused on, among other things,
ensuring that grant recipients have adequate management systems,
strengthening reviews of recipients, and linking awards of grant
funds to compliance with rules. In particular, we recommended that
FTA withhold funds from grantees that did not complete corrective
actions or were not in compliance with existing grant requirements.
Over the past few years, FTA has made substantial improvements in its
process to oversee its $4.6 billion grants program, including
organizational changes, increased oversight staff levels, and better
training. FTA has made a concerted effort to change the attitudes of
its oversight staff and grantees towards safeguarding federal funds.
FTA has gone from relying primarily on grantee certifications of
compliance to implementing various initiatives and systems that, over
time, should instill a more proactive approach to its grant
management, oversight, and enforcement responsibilities. Most
importantly, FTA has recently used its most powerful enforcement
tool--withholding funds--to sanction grantees found to be mismanaging
their programs.
FTA is in the process of implementing its improvement plan, but we
believe that as these initiatives are carried out, the risk
associated with the FTA grant program will continue to decrease.
REMAINING PROGRAMS SHOW
MIXED RESULTS
-------------------------------------------------------- Chapter 2:0.2
For the remaining 13 high-risk areas,\1 agencies have made varying
degrees of progress in designing corrective action plans and are in
different stages of implementing those plans. For 10 areas, we have
seen a genuine commitment to improve.
(See figure in printed
edition.)
In the remaining three areas, agencies have made little progress.
(See figure in printed
edition.)
The high-risk program clearly has had a valuable impact and we will
continue to focus on all 13 of these areas in the future. The
following section, which discusses our future plans for the high-risk
program, highlights problems remaining in the 13 areas and introduces
newly identified areas.
--------------------
\1 The titles of some of these high-risk areas have been changed
slightly to reflect the current focus of coverage.
GAO'S HIGH-RISK FOCUS
============================================================ Chapter 3
(See figure in printed
edition.)
These 6 categories encompass the 13 areas being carried over and 7
newly added areas. All involve billions of dollars of taxpayers'
money and will require a concerted effort to reduce significant
risks.
PROVIDING FOR ACCOUNTABILITY
AND COST-EFFECTIVE
MANAGEMENT OF DEFENSE
PROGRAMS
-------------------------------------------------------- Chapter 3:0.1
Defense is accountable for more than $1 trillion in assets and, in
fiscal year 1994, spent $272 billion--approximately 50 percent of the
government's discretionary spending in fiscal year 1994. However,
many of Defense's management systems and practices are inadequate for
safeguarding its assets or achieving its missions in the most
cost-effective manner.
Recently, concerns have been raised about the current state of combat
readiness. While the link to accountability has not often been
drawn, funds lost through waste, fraud, abuse, and mismanagement are
unavailable for training and equipment repairs. Defense has
initiated actions to address most of its management problems, but the
problems are all still far from being resolved. Defense's high-risk
management problems fall in four areas:
(See figure in printed
edition.)
FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 3:0.2
Defense's financial management systems, practices, and procedures
continue to be hampered by significant weaknesses.\1 This situation
is the worst in government and is the product of many years of
neglect. According to former Secretary of Defense Les Aspin:
"Accounting, business-type efficiency, and indirect support functions
were secondary considerations of top DOD leaders...The [DOD]
financial management community adapted to shortcomings and lacked a
sense of urgency for correcting them."
In presenting the fiscal year 1995 budget, Secretary of Defense
William Perry said:
"[O]ur financial management...is a mess, and it is costing us money
we desperately need."
Following are just a few examples of Defense's financial management
problems.
While over $400 billion in adjustments were made to correct errors in
Defense reported financial data for fiscal years 1991 through 1993,
the resulting statements were still not reliable.
Vendors were paid $25 billion that cannot be matched to supporting
documentation to determine if payments were proper.\2
An estimated $3 million in fraudulent payments were made to a former
Navy supply officer for over 100 false invoice claims, and
approximately $8 million in Army payroll payments were made to
unauthorized persons, including 6 "ghost" soldiers and 76
deserters.\3
While Defense has acknowledged the severity of its financial
management problems and established goals for their correction, it
still lacks realistic plans and the necessary expertise. A key
contact for this area is identified on page 87.
--------------------
\1 Financial Management: Financial Control and System Weaknesses
Continue to Waste DOD Resources and Undermine Operations
(GAO/T-AIMD/NSIAD-94-154, Apr. 12, 1994).
\2 Financial Management: Status of Defense Efforts to Correct
Disbursement Problems (GAO/AIMD-95-7, Oct. 5, 1994)
\3 GAO/T-AIMD/NSIAD-94-154.
CONTRACT MANAGEMENT
-------------------------------------------------------- Chapter 3:0.3
Despite reduced levels of reported defective contract pricing,
long-standing contractor cost estimating problems continue, and other
contract management problems have emerged. As a result, significant
risks remain.
Serious control weaknesses continue to result in numerous and large
erroneous, and in some cases fraudulent, payments to defense
contractors. During one 6-month period in fiscal year 1993,
contractors returned to the government $751 million, and in fiscal
year 1994, they returned $957 million, most of which appears to have
been overpayments detected by the contractors.
Contractors' systems for charging costs to the government continue to
result in contractors' billing for, and Defense paying for, large
unallowable amounts. From fiscal years 1991 to 1993, Defense
auditors questioned about $3 billion in contractor overhead charges.
The recent emphasis on acquisition reform, including passage of the
Federal Acquisition Streamlining Act of 1994, is a positive step
toward strengthening the acquisition system. However, Defense must
sustain efforts to ensure the integrity and fairness of its
contracting and procurement processes. This must include eliminating
sizable and numerous overpayments to its contractors and aggressively
dealing with contractors to ensure that long-standing deficiencies in
cost-estimating systems are corrected.
More information on these contracting issues is provided in Defense
Contract Management (GAO/HR-95-3).
WEAPONS SYSTEMS ACQUISITION
-------------------------------------------------------- Chapter 3:0.4
Defense is committed to reforming its major weapons acquisition
process (involving about $80 billion a year) and has begun to
reassess many of its most expensive weapon programs for opportunities
to cutback to meet anticipated shortfalls in funding. Defense has
also initiated reforms to address weapons systems acquisition issues
since the inception of our high-risk program. However, pervasive
problems, including (1) unreliable cost data, (2) unrealistic
schedule estimates, (3) unaffordable program plans, and (4)
contracting for weapon systems before needed technology is available,
continue to add billions of dollars to acquisition costs.
Both Defense and the Congress have initiated actions that attempt to
address these serious problems. Defense has implemented a number of
long-standing recommendations and has adopted an acquisition strategy
that calls for proving technologies before incorporating them into
the procurement process. In October 1994, the Congress legislated
changes in the acquisition process and has also directed a
reevaluation of the military services' roles and missions and the
most cost-effective mix of weapons.
However, it is too early to assess the effectiveness of these
acquisition reform efforts. Defense must quickly provide the
regulations needed for implementing the recently enacted acquisition
reform law. Successful reform will also require continuing strong
congressional support.
As part of this high-risk series, we are issuing a separate report on
Defense Weapons Systems Acquisition problems and additional needed
improvements (GAO/HR-95-4).
INVENTORY MANAGEMENT
-------------------------------------------------------- Chapter 3:0.5
Defense's inventory management practices continue to result in
billions of dollars in unneeded stock. Even after Defense disposed
of unneeded inventory costing
$43 billion\4 over the last 3 years, it still holds items valued at
$36 billion (or 47 percent of its total current inventory) that are
not needed for current operating requirements or war reserves. While
Defense has done some testing of new procedures in a few areas, such
as prime vendor delivery of medical supplies, overall it has made
little progress. Defense must aggressively work to change its
inventory management culture so that it can achieve higher levels of
readiness in the future using fewer dollars. In addition,
congressional oversight will be necessary to maintain Defense's focus
on these problems.
A separate report on Defense Inventory Management provides more
information on this problem and additional needed improvements
(GAO/HR-95-5).
--------------------
\4 We estimate that this inventory had a value of $914 million.
ENSURING ALL REVENUES ARE
COLLECTED AND ACCOUNTED FOR
-------------------------------------------------------- Chapter 3:0.6
Fair and equitable administration of tax laws demands that the
government collect what it is owed. Yet, with annual collections
currently at $1.25 trillion, IRS and Customs, the government's
principal revenue collectors, continue to be unable to adequately
account for and collect all that is due the government. The result
is the potential loss of billions of dollars in revenue.
High-risk revenue collection problems fall in four areas.
(See figure in printed
edition.)
IRS FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 3:0.7
IRS' significant financial management weaknesses cause errors in
taxpayer accounts and an inability to adequately account for
collection operations--bookkeeping problems IRS would not accept from
taxpayers. IRS' systems are antiquated and were not designed to
provide the meaningful and reliable financial information needed to
effectively manage and report on IRS' operations.
Our financial audits have highlighted a wide range of problems with
the quality of IRS' revenue information, internal controls over
billions of dollars of assets, and unauthorized access to taxpayer
information.\5 Although efforts are under way to address
recommendations from our 1992 financial audits, as of May 1994, IRS
had completed action on only 4 of the 44 recommendations we made.
In our audit of IRS' fiscal year 1993 financial statements, we found
unreliable data on its estimated $71 billion of valid accounts
receivable (having an estimated collectable amount of $29 billion),
which adversely impacted IRS' collection ability;
over $90 billion of transactions that had not been posted to taxpayer
accounts; and
the inability to identify the amount of excise and social security
taxes collected, resulting in billions of dollars of subsidies to
recipient trust funds.
IRS' serious, long-standing, and pervasive financial management
problems hamper the effective collection of revenues and preclude the
preparation of auditable financial statements. Without adequate,
reliable information about noncompliant and delinquent taxpayers, IRS
cannot measure the effectiveness of its enforcement and collection
programs. A key contact for this area is identified on page 87.
--------------------
\5 Financial Audit: Examination of IRS' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-2, June 30, 1993) and Financial Audit:
Examination of IRS' Fiscal Year 1993 Financial Statements
(GAO/AIMD-94-120, June 15, 1994).
IRS RECEIVABLES
-------------------------------------------------------- Chapter 3:0.8
Meanwhile, tax receivables continue to grow. In some respects, the
problem of collecting IRS receivables is worse today than it was 5
years ago when we designated this as a high-risk area.
Between 1990 and 1994, the reported inventory of tax debt increased
from $87 billion to $156 billion. Coupled with this growth is
another troubling fact. By 1994, annual collections of delinquent
taxes had declined from $25.5 billion to $23.5 billion.
IRS' tax receivable collection is hampered by inaccuracies in records
needed for strategically planning and making decisions on collection
cases and by a lack of information to determine the optimum size and
mix of staff for collection. Other impediments include a lengthy,
antiquated, and rigid collection process and decentralized lines of
responsibility and accountability. It is also difficult to balance
collection efforts with the need to protect taxpayer rights.
Additional information on problems with IRS Receivables is contained
in a separate report being issued as part of this high-risk series
(GAO/HR-95-6).
FILING FRAUD
-------------------------------------------------------- Chapter 3:0.9
Another high-risk area for IRS is filing fraud. In the past several
years, detected filing fraud for both paper and electronic filing
programs has doubled or tripled annually as shown below in figure
1.\6
Figure 1: Fradulent Returns
Detected
(See figure in printed
edition.)
During the first 6 months of 1994, IRS identified about 34,700
fraudulent paper returns and 24,000 fraudulent electronic
returns--increases of 151 percent and 52 percent, respectively, over
the same period a year earlier. Thus, the upward trend continues.
Based on detected schemes alone, IRS has acknowledged the government
loses tens of millions of dollars to refund schemes annually. A key
contact for this area is identified on page 88.
--------------------
\6 IRS Automation: Controlling Electronic Filing Fraud and Improper
Access to Taxpayer Data (GAO/T-AIMD/GGD-94-182, July 19, 1994).
CUSTOMS SERVICE FINANCIAL
MANAGEMENT AND THE ASSET
FORFEITURE PROGRAM
------------------------------------------------------- Chapter 3:0.10
With responsibility for about $20 billion in revenues, Customs is an
important collector for the government. However, our 1992 high-risk
report pointed to major weaknesses in Customs' management and
organizational structure that diminished the agency's ability to
detect trade violations on imported cargo; collect applicable duties,
taxes, fees, and penalties; control financial resources; and report
on financial operations.
Since that report, Customs has taken several actions to address these
problems, including revising its planning process, improving controls
over identification and collection of revenues owed, aggressively
pursuing delinquent receivables, and embarking on an agencywide
reorganization plan. Although these improvement efforts will require
sustained management attention, they are properly focused and should
reduce Customs' risks in the general management arena. Therefore, we
are narrowing the scope of our high-risk work at Customs to focus on
its financial management problems. More information on Managing the
Customs Service can be found in the Quick Reference Guide
(GAO/HR-95-2).
Despite other improvements, Customs still needs to make significant
additional efforts to correct its financial management and internal
control systems weaknesses. Our audits of Customs' financial
statements for fiscal years 1992 and 1993 disclosed that the agency
had not yet fully resolved many of the financial management problems
that we reported earlier.\7 Although efforts are underway to address
recommendations from our fiscal year 1992 financial statements audit,
as of May 1994, Customs had completed actions on only 11 of the 54
recommendations we made. Our financial audit for fiscal year 1993
found that Customs had not implemented controls, systems and
processes to reasonably ensure that
carriers, importers, and their agents complied with trade laws. As a
result, revenue owed to the federal government may not have been
identified and quotas and other legal restrictions may have been
violated. Moreover, important trade statistics may not be reliable.
sensitive data maintained in its automated systems, such as import
inspection criteria and law enforcement data, were adequately
protected from unauthorized access and modification.
full accountability for its assets and the use of its appropriated
funds were provided, or the costs of its programs and computer
modernization efforts were reliably determined.
Customs also needs to address problems in its asset forfeiture
program. We put both Customs' and the Justice Department's asset
forfeiture programs on our original high-risk list because the
programs--with inventories valued at almost $2 billion in
1994--focused more on taking property away from criminals and less on
managing property taken. Both agencies have since initiated
management and systems changes to improve program operations.
However, our audits of Customs' fiscal years 1993 and 1992 financial
statements have also revealed serious weaknesses in key internal
control and systems that affected Customs' ability to control,
manage, and report the results of its seizure efforts, including
accountability and stewardship over property seized. As a result,
tons of illegal drugs and millions of dollars in cash and other
property have been vulnerable to theft and misappropriation. For
instance, in our fiscal year 1993 audit, we found that
seized asset inventory records contained information on drugs that
had been transferred to other agencies as early as 2 years before and
did not show thousands of pounds of drugs that Customs was still
holding; and
physical security was weak at 20 of the 21 facilities we visited.
Over the past several years, drugs and property have occasionally
been stolen from Customs storage facilities. For example, in fiscal
year 1993, thieves broke into a Customs facility and stole 356 pounds
of cocaine.
Customs is taking action to address the internal control and systems
problems; however, these efforts are in various stages of
development.
Additional information on Asset Forfeiture Programs can be found in a
separate report issued as part of this series (GAO/HR-95-7).
--------------------
\7 Financial Audit: Examination of Customs' Fiscal Year 1992
Financial Statements (GAO/AIMD-93-3, June 30, 1993) and Financial
Audit: Examination of Customs' Fiscal Year 1993 Financial Statements
(GAO/AIMD-94-119, June 15, 1994).
OBTAINING AN ADEQUATE RETURN
ON MULTIBILLION DOLLAR
INVESTMENTS IN INFORMATION
TECHNOLOGY
------------------------------------------------------- Chapter 3:0.11
Huge, complex, and expensive computer modernizations are under way
across the federal government to replace older generation automated
information processing. Many of these long-term, multibillion dollar
efforts are intended to harness information technology's power to
provide agencies better capability to produce higher quality services
tailored to the public's changing needs and delivered more
effectively, faster, and at lower cost.
Yet, after spending more than $200 billion on information management
systems during the last 12 years, project after project continues to
lag behind schedule, consistently fails to provide intended mission
benefits, and exceeds estimated costs by hundreds of millions of
dollars.
Successful automation projects are more often the exception than the
rule. As a result, critical financial, program, and management
information systems remain largely incompatible, costly to operate
and maintain, and woefully inadequate in meeting current users'
needs.
To reduce costs, increase service, and raise productivity,
information systems projects should not simply automate existing
inefficient or ineffective processes. Rather, functional processes
should first be simplified, redirected, and reengineered.
Information technology, however, is often procured as the fix to
outdated, inefficient procedures before new work processes and
organizational structures have been adequately designed or decided
on.
We are adding to our high-risk list four multibillion dollar
information technology initiatives because they experienced past
failure, involve complex technology, or are critical to agencies'
missions. Key contacts for these initiatives are identified on page
87 and 88.
(See figure in printed
edition.)
AIR TRAFFIC CONTROL
MODERNIZATION
------------------------------------------------------- Chapter 3:0.12
The air traffic control (ATC) modernization project covers all parts
of the $36 billion Federal Aviation Administration (FAA) effort to
overhaul the nation's air traffic control system and includes the
remainders of the Advanced Automation System, components of which
were canceled, replaced, and/or restructured. That system failed
because FAA did not recognize the technical complexity of the effort,
realistically estimate the resources required, adequately oversee its
contractors' activities, or effectively control system
requirements.\8
--------------------
\8 Advanced Automation System: Implications of Problems and Recent
Changes (GAO/T-RCED-94-188, Apr. 13, 1994).
IRS' TAX SYSTEMS
MODERNIZATION
------------------------------------------------------- Chapter 3:0.13
Through fiscal year 1995, IRS will have spent or obligated over $2.5
billion on its $8 billion Tax Systems Modernization (TSM) initiative
to automate selected tax processing functions. Yet, the overall
design for TSM is still incomplete and IRS is continuing to automate
existing problem-plagued functions with limited understanding of
whether or how different systems will eventually connect to improve
tax processing overall.\9 Given budget constraints and the risks
involved, the Congress reduced IRS' fiscal year 1995 budget request
by $339 million, and IRS has agreed to establish the needed business
and technical foundation to achieve TSM's goals and objectives.
--------------------
\9 Tax Systems Modernization: Status of Planning and Technical
Foundation (GAO/T-AIMD-GGD-94-104, Mar. 2, 1994).
DEFENSE'S CORPORATE
INFORMATION MANAGEMENT
INITIATIVE
------------------------------------------------------- Chapter 3:0.14
The Corporate Information Management (CIM) initiative was estimated
by Defense to save billions by streamlining Defense Department
operations and managing resources more effectively; however, results
to date have been mixed. Defense has largely been consumed with
trying to pick the best of its hundreds of existing automated systems
and standardizing their use across military components.\10
As a result, Defense is spending some $3 billion annually to develop
and modernize automated information systems, while major Defense
business processes supported by these systems--such as personnel,
payroll, inventory management, supply distribution, and contract
administration--have not been examined for process reengineering
opportunities.
--------------------
\10 Defense Management: Stronger Support Needed for Corporate
Information Management Initiative to Succeed (GAO/AIMD/NSIAD-94-101,
April 1994); Defense ADP: Corporate Information Management Must
Overcome Major Problems (GAO/IMTEC-92-17, September 1992).
NATIONAL WEATHER SERVICE
MODERNIZATION
------------------------------------------------------- Chapter 3:0.15
Although the National Weather Service's program to modernize its
weather observing, information processing, and communications systems
was originally expected to be completed in 1994, it is now estimated
to not be completed until at least 1999. Also, the system that is to
be the centerpiece of the modernization has recently experienced
design problems and is being restructured. Additionally, the many
systems comprising the modernization have long proceeded without the
benefit of an overall architecture to guide their design,
development, and evolution. This has negatively affected the
modernization's cost and performance by requiring additional
resources to acquire, interconnect, and maintain hardware and
software.\11
In addition to focusing on these four high-risk initiatives, we are
working with (1) the Congress to amend the Paperwork Reduction Act to
provide a leadership structure for, and strengthen the management of,
the government's information technology resources and (2) the
Executive Branch on new guidance designed to bring into the
government strategic information management "best practices" that
successful organizations, public and private, have used to improve
mission performance.\12 These are important steps toward ensuring
that the federal government obtains an adequate return on its
information technology investments.\13
--------------------
\11 Weather Forecasting: Systems Architecture Needed for National
Weather Service Modernization (GAO/AIMD-94-28, Mar. 11, 1994).
\12 Executive Guide: Improving Mission Performance Through Strategic
Information Management and Technology (GAO/AIMD-94-115, May 1994).
\13 Government Reform: Using Reengineering and Technology to Improve
Government Performance (GAO/T-OCG-95-2, Feb. 2, 1995) and Paperwork
Reduction Act: Reauthorization Can Strengthen Government's
Management of Information and Technology (GAO/T-AIMD/GGD-95-80, Feb.
7, 1995).
CONTROLLING MEDICARE CLAIMS
FRAUD AND ABUSE
------------------------------------------------------- Chapter 3:0.16
Medicare is one of the fastest growing programs in the federal
budget. In fiscal year 1994 the government spent over $440 million a
day, or about $162 billion, on Medicare. CBO estimates that, under
current policy, Medicare spending will reach about $380 billion a
year by 2003. The portion of Medicare spending attributable to
waste, fraud, and abuse is difficult to quantify; however, health
care experts have estimated that 10 percent of national health
spending is lost to these practices. Even a lesser percentage, if
applied to the $162 billion Medicare program, is a devastating amount
and becomes even more devastating as the program grows.
The Health Care Financing Administration (HCFA) has made a number of
regulatory and administrative changes aimed at correcting flawed
payment policies, weak billing controls, and deficient program
management. For example, in 1993, HCFA raised the standards for
contractor performance regarding analyses of payment data to identify
excessive spending. In 1994, the agency awarded a contract for
developing a national automated claims processing system intended to
replace the many systems currently operating. Through these efforts,
using modern data analysis techniques and greater uniformity in
claims processing, HCFA expects to reduce Medicare's inappropriate
payments. However, these improvements, while worthwhile, are not
sufficient to protect Medicare against continued program losses.
Although HCFA is aware that health care scams and abusive billing
practices plague Medicare, the exploitation continues. HCFA's
controls against fraud and abuse have not kept pace with health
care's more complicated financial arrangements. Moreover, the broad
discretion given to HCFA's claims processing contractors has resulted
in uneven implementation of fraud and abuse controls. This problem
has been compounded by HCFA's contractor management which, while
improving, remains relatively weak.
As a result, HCFA does not have the information necessary to ensure
that contractors are adequately protecting Medicare payments from
provider exploitation or fraud. For example, HCFA cannot explain why
some contractors pay many more claims for certain procedures than do
other contractors because HCFA does not know what criteria its
contractors use to identify claims ineligible for payment. In
addition, HCFA makes little use of management reports submitted by
contractors that describe their claims review activities. For
example, HCFA did not probe a contractor report that showed a 53
percent drop (amounting to nearly $27 million) in the amount of
savings achieved through claims review.
Also, government funding of contractor fraud and abuse controls has
not increased commensurate with the growing volume of claims--per
claim funding for antifraud and antiabuse activities declined between
1989 and 1993 by 20 percent. Today Medicare pays more claims with
less scrutiny than it did 6 years ago as shown in table 1.
Table 1
Medicare Claims Processed Versus Claims
Reviewed
Claims Review
Year Claims Processed Requirements
------------------ ------------------ --------------------
1989 483.5 million 20 percent
1994 735.7 million 5 percent
------------------------------------------------------------
Reduced antifraud and antiabuse funding translates into greater
Medicare losses. HCFA figures indicate that spending for antifraud
and antiabuse activities can reduce Medicare program costs on average
by 11 times the amount invested. By not adequately funding these
activities, the federal government is missing a significant
opportunity to control Medicare program costs.
Medicare Claims high-risk issues are discussed in more detail in a
separate report issued as part of this series (GAO/HR-95-8).
MINIMIZING LOAN PROGRAM
LOSSES
------------------------------------------------------- Chapter 3:0.17
The federal government continues to be the nation's largest source of
credit. In fiscal 1994, the government reported that it obligated
almost $23 billion in new direct loans and guaranteed $204 billion in
new non-federal lending. As of September 30, 1994, OMB estimated
non-tax receivables, primarily direct loans and loans acquired as a
result of claims paid on defaulted guaranteed loans, to be $241
billion. Of that amount, $50 billion was delinquent. The following
three loan programs present high risks of losses.
(See figure in printed
edition.)
FARM LOAN PROGRAMS
------------------------------------------------------- Chapter 3:0.18
Farm loan programs have evolved into a continuous source of credit
for many borrowers and have had a high rate of loan defaults, which
resulted in the loss of over $6 billion of taxpayers' money from
fiscal years 1991 through 1994.\14 Although Farmers Home
Administration (FmHA) has taken steps to correct some problems,
little progress has been made in correcting other basic problems with
farm loan programs.
On the positive side, field office lending officials have been
provided with extensive training in credit and financial analysis to
improve the quality of new loans being made. FmHA's reviews show
that most new direct and guaranteed loans now meet lending standards.
Also, compliance with standards for servicing guaranteed loans has
recently improved.
However, field officials still do not always follow established
procedures for servicing outstanding direct loans. In addition,
neither Agriculture nor the Congress have addressed problems
involving loan and property management policies; therefore, the
agency, for example, continues to make loans to borrowers who either
are delinquent or did not repay their previous debts, and reduce and
forgive the debts of borrowers who do not repay their loans.
Even though FmHA forgave about $6 billion in unpaid loans from fiscal
year 1991 through fiscal year 1994, its outstanding loan portfolio
still contains nearly $5 billion in delinquent debt. We believe that
FmHA needs firm guidance from the Congress on the acceptable level of
loan losses and the length of time borrowers may receive farm loan
assistance.
A separate report on Farm Loan Programs issued as part of this
high-risk series offers additional information on FmHA's improvement
efforts (GAO/HR-95-9).
--------------------
\14 Within the U.S. Department of Agriculture, farm loans have been
historically administered by FmHA. In October 1994, the
responsibility was transferred to the newly created Consolidated Farm
Service Agency. Because of the general familiarity with the agency's
earlier name, we refer to FmHA in this report.
STUDENT FINANCIAL AID
PROGRAMS
------------------------------------------------------- Chapter 3:0.19
Education's loan programs have generally succeeded in providing
eligible students access to money for postsecondary education.
However, largely due to structural problems, the programs have been
costly--$2.4 billion in losses in the guaranteed student loan program
alone in fiscal year 1994.
Education is taking action to address some of the guaranteed loan
program's weaknesses, including transferring some of the program's
risks and financial costs to lenders and guaranty agencies. As
required by law, Education is also phasing down the guaranteed loan
program and replacing it with a new direct loan program.
Despite improvement efforts, many of Education's problems with the
guaranteed loan program continue. For example, we and the Education
Inspector General could not attest to the accuracy of the guaranteed
loan program's fiscal year 1992 or 1993 financial statements because
of unreliable loan
data.\15
Some of Education's problems with the guaranteed loan program could
also affect the direct loan and other student financial aid programs.
For example, Education's loan data continue to be unreliable. Such
information is needed to determine if ineligible students received
additional financial aid or if the maximum allowable borrowing amount
has been exceeded. Without this data, new financial assistance in
the form of guaranteed loans, direct loans, or grants could be given
to ineligible students. In addition, Education's problems with
preventing unscrupulous schools from participating in the guaranteed
loan program could surface in the new direct loan program as it is
rapidly phased in--Education plans to go from just over 100 to about
1,400 participating schools in a single year. Without a viable
strategy to guide the Department during this period of rapid growth,
Education has put the new direct loan program at risk of not
achieving its objectives efficiently and effectively.
Additional information on Education's improvement actions and its new
direct loan program is given in a separate report on Student
Financial Aid issued as part of this series (GAO/HR-95-10).
--------------------
\15 Financial Audit: Federal Family Education Loan Program's
Financial Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131,
June 30, 1994).
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
------------------------------------------------------- Chapter 3:0.20
Effectively managing HUD, which insures some $400 billion in housing
loans, guarantees more than $400 billion in outstanding securities,
and spends $25 billion a year on housing programs, has been hampered
by four long-standing problems: (1) weak internal controls, (2) an
ineffective organizational structure, (3) an insufficient mix of
staff with the proper skills, and (4) inadequate information and
financial management systems. Some of these problems were major
factors leading to incidents of fraud, waste, abuse, and
mismanagement reported in the late 1980s.
Important HUD initiatives to address these longstanding problems are
either still in the planning stage or in the process of being
implemented. It is much too early to assess their effectiveness.
Recently, HUD's Secretary announced a proposal to "reinvent" the
agency over the next 4 years by consolidating its housing assistance
and community development programs into three performance-based block
grant funds, transforming public housing to make it more competitive,
and changing the Federal Housing Administration into an
entrepreneurial government-owned corporation. If implemented, this
proposal would shift many program design and implementation
responsibilities to states and localities and would change HUD's
primary role into that of overseer and information clearing house.
It is difficult to predict the impact of such sweeping changes on the
corrective actions and plans that HUD already has under way.
However, no matter what form HUD eventually takes, its fundamental
weaknesses must be addressed. The current discussion on how best to
"reinvent" HUD presents the agency, OMB, and the Congress with an
excellent opportunity to work together to eliminate internal control,
management, staffing, and systems problems.
Additional information on the Department of Housing and Urban
Development improvement efforts can be found in a separate report
being issued as part of this report series (GAO/HR-95-11).
IMPROVING MANAGEMENT OF
FEDERAL CONTRACTS AT
CIVILIAN AGENCIES
------------------------------------------------------- Chapter 3:0.21
Civilian agencies spend tens of billions of dollars per year on
contracts and have become increasingly dependent on contractors to
help manage and carry out agency missions. However, once contracts
are awarded, federal agencies do not always effectively control
contractors' costs and performance. At the core of contract
management problems, we have found a lack of senior-level management
attention to agencies' contracting activities. Our high-risk efforts
will focus on three areas.
(See figure in printed
edition.)
DEPARTMENT OF ENERGY
------------------------------------------------------- Chapter 3:0.22
Energy spends about $15 billion annually through management and
operating contracts. But its use of cost-reimbursement contracts,
allowance of excessive contractor latitude, and inadequate oversight
of contractor activities and costs have failed to protect the
government from fraud, waste, abuse, and mismanagement. Energy did
not require its contractors to prepare auditable financial
statements, and the net expenditures reports that contractors did
prepare were not being audited every 5 years as required.
Contractors were not able to provide consistent and reliable detailed
cost information so that Energy managers could evaluate whether costs
were reasonable and contractors were operating programs effectively.
In addition, Energy's managers and staff have not received the data
needed to determine the nature and extent of environmental
contamination or to set priorities and monitor the progress of
clean-up efforts.
In 1993, Energy began a comprehensive reform initiative. While
Energy is still in the process of developing specific implementation
plans, actions planned to date include using alternatives to
cost-reimbursement contracts, increasing competition for contracts,
strengthening financial information systems, and improving management
and control of certain costs. Policy changes can be implemented
almost immediately, but changes in regulations and procedures will
take much longer. We are concerned, however, that staff training and
information systems improvements are not scheduled to take place
until most of the other contract reform initiatives have been
implemented. Energy's practice of introducing policies and reforms
before staff are fully trained and systems fully developed has
contributed to previous contract reform failures.
Energy has plans to include contractor operations in its agencywide
financial statement audits; however, we doubt Energy's ability to
accomplish such audits within the near future. Although Energy
published its strategic plan for information management in July 1994,
some actions will not be completed before fiscal year 1997.
Additional information on Department of Energy Contract Management
problems and improvement initiatives can be found in the Quick
Reference Guide (GAO/HR-95-2).
NASA
------------------------------------------------------- Chapter 3:0.23
Despite recent improvement initiatives, NASA continues to struggle
with the management of its contracts, valued at between $12 billion
and $13 billion and representing about 90 percent of its funding.
Traditionally, NASA's contract management efforts have been hampered
by
procurements based on unrealistic funding expectations--its 1993
five-year budget request totaled $90 billion, $20 billion more than
was likely to be appropriated;
the lack of adequate systems and information with which to monitor
contractor activities; and
field centers not adhering to contract management requirements.
Compounding NASA's inability to adequately oversee contractors has
been its practice of assuming virtually all risk related to contract
cost and results. This practice has contributed directly to frequent
funding increases, schedule delays, and performance problems on many
of NASA's large space projects.
NASA has been addressing its problems, but it is not yet clear
whether its efforts will be effective. Also, additional efforts are
needed. For example, NASA's new CFO must fill the financial
leadership role and actively work towards the goals laid out in the
CFO Act. Further, NASA needs to aggressively use its new authority
to penalize contractors claiming reimbursement of unallowable costs.
Additional information on NASA Contract Management can be found in
the Quick Reference Guide (GAO/HR-95-2).
SUPERFUND
------------------------------------------------------- Chapter 3:0.24
Since the Environmental Protection Agency's (EPA) Superfund program
began in 1980, thousands of waste sites have been discovered, and
their cleanup has proven far more complicated and costly than
anticipated. Recent estimates indicate that cleaning up the
thousands of hazardous waste sites--many of which are owned by the
federal government--could result in over $300 billion in federal
costs and many billions more in private expenditures.
Superfund relies heavily on contractors to perform cleanup work, but
its extensive use of cost-reimbursable contracts give contractors
little incentive to control costs. A recent review of three
contractors showed that all three billed the government for
entertainment, tickets for sporting events, or alcoholic beverage
costs that either were not permitted or appeared questionable under
applicable regulations. Furthermore, EPA's problems are compounded
by backlogs of requests by procurement officials for audits to verify
the accuracy of contractors' charges.
After years of giving insufficient attention to correcting known
contract management problems, EPA management has begun focusing
greater attention on better controlling costs and other problems.
However, little progress has been made in reducing the risk from
insufficient or untimely audits. As of August 1994, there were 528
unfulfilled requests for audits of EPA contractor costs.
Additional information on EPA's Superfund Program Management
improvement initiatives and remaining problems is provided in a
separate report issued as part of this high-risk series
(GAO/HR-95-12).
IMPLEMENTING THE LEGISLATIVE
FRAMEWORK FOR MANAGEMENT REFORM
============================================================ Chapter 4
A critical factor in resolving specific high-risk areas is addressing
broader, more fundamental government management problems. A major
breakthrough since the establishment of our high-risk program is the
passage of legislation--the Government Performance and Results Act
(GPRA) and the Chief Financial Officers (CFO) Act--that provide the
structure necessary to help achieve improved government
accountability and stewardship and to lower costs by focusing on
results.
The Congress framed it this way: Set goals, operate programs, and
measure results using reliable financial and management information.
Effectively implementing this framework will require agencies to
redirect the focus of management, substantially improve financial
systems, and measure results.
MANAGING FOR RESULTS
-------------------------------------------------------- Chapter 4:0.1
GPRA seeks to fundamentally change the focus of federal management
and accountability from a preoccupation with inputs, such as program
appropriations, to results and outcomes of federal programs. With
successful implementation, this change can help address the question:
What are the American people getting for their investment in the
federal government?
The experiences of state governments and foreign countries that are
leaders in public management show that GPRA's three key
elements--strategic planning, performance measurement, and public
reporting and accountability--could influence the basic culture of
government so that it is more results-oriented.\1 The Congress
intends through GPRA to improve performance by providing managers
freedom to experiment and find innovative ways to improve program
results, while increasing their accountability for achieving those
results.
GPRA requires an agency to do the following.
Develop a 5-year strategic plan for its program activities by 1997,
laying out the organization's fundamental mission and long-term goals
and objectives for accomplishing that mission. To be updated every 3
years, this plan is to serve as the starting point and basic
underpinning of the agency's goal-setting and performance measurement
process.
Submit, beginning in 1999, annual program performance plans to OMB
and subsequent program performance reports to the President and the
Congress. OMB is to develop an overall federal government
performance plan that is to be submitted annually to the Congress
with the President's budget.
GPRA implementation began with performance planning and reporting
pilots at selected agencies. Already, more than 70 programs and
agencies have been designated as pilots, ranging in size from small
programs to entire agencies, including IRS, the Social Security
Administration, and the Defense Logistics Agency.
GPRA's vision of making major changes in the way federal agencies are
managed and held accountable will require agencies to develop the
capacity to manage for results. Currently, the lack of complete and
reliable financial and other management information precludes many
agencies from effectively measuring performance. Strong financial
management systems and the aggressive use of information technology
are preconditions for the success of GPRA.
This legislation requires us to report to the Congress on the
implementation of the act, including the prospects that all federal
agencies--even those not designated to do pilot projects--will comply
with the act. Working with the Congress, we have designed a strategy
for evaluating the pilots' implementation of results-oriented
management that will identify the lessons learned from implementing
GPRA as they happen.
--------------------
\1 See, for example, Managing for Results: State Experiences Provide
Insights for Federal Management Reforms (GAO/GGD-95-22, Dec. 21,
1994).
IMPROVING FINANCIAL SYSTEMS
AND REPORTS
-------------------------------------------------------- Chapter 4:0.2
Reliable financial information is key to better managing government
programs, providing accountability, and addressing high-risk
problems. However, as highlighted earlier in our discussions of a
number of risk areas, the government's financial systems are all too
often unable to perform the most rudimentary bookkeeping for
organizations, many of which are oftentimes larger than many of the
nation's largest private corporations.
Further, the government's financial systems are fast aging. About 30
percent of them were installed more than 5 years ago, and another 34
percent have already passed the 10-year mark. Agencies' antiquated
financial systems simply do not adequately meet critical requirements
for comparable data and users' reporting needs. Also, OMB has
reported that only one-half of agencies' financial management systems
meet existing agency automated data processing technical standards,
and a mere 2 percent comply with agencies' own targeted or planned
technology standards.
Today's financial systems have no shortage of paper output but
provide agency managers and the Congress little meaningful financial
information. Greatly improved financial reporting is essential and
would include
financial information that is linked with program and budget data for
use in both management control and planning,
reports on program cost trends and other performance indicators from
which managers can make informed decisions on running government
operations effectively and efficiently, and
financial data that is consistent and compatible and meets standard
data requirements so consolidated financial reports will be useful.
Before 1990, this information was not required and the reliability of
financial information for only a minor part of the government's $1.5
trillion annual spending was independently checked. With passage of
the CFO Act in 1990, the Congress paved the way for the federal
government to have the same kind of financial statement reporting as
required in the private sector and by state and local governments.
Under the 1990 act, financial statements prepared and audited as part
of a pilot program involving 10 agencies have resulted in
significantly more accurate and useful information on the
government's financial status and its operations;
a better understanding of the limited extent to which the Congress
and program managers can rely on the financial information they
receive, considering that almost all of the government's major
departments and agencies have not been able to pass the test of an
independent financial statement audit;
substantial savings through the recovery and more efficient use of
funds;
a much better understanding of the extent and pervasive nature of
internal control and financial management systems problems; and
improvement in management's accountability for, and focus on, strong
financial management.
In 1994, the Government Management Reform Act made the CFO Act's
requirement for annual audited financial statements permanent and
expanded it to cover the 24 major agencies that constitute virtually
the entire executive branch budget, as shown in table 2.
Table 2
Agencies Required to Have Annual Audited
Financial Statements
1994
Outlays
(in
billions
of Percent of
Agency/Department dollars) Total
----------------------------------- ---------- -----------
HHS 278.9 17.6
Defense 299.0 18.9
Treasury 307.6 19.4
SSA 345.8 21.8
Agriculture 60.8 3.8
Labor 37.0 2.3
OPM 38.6 2.4
Veterans Affairs 37.4 2.4
Transportation 37.2 2.3
Education 24.7 1.6
HUD 25.8 1.6
Energy 17.8 1.1
NASA 13.7 0.9
Justice 10.0 0.6
Interior 6.9 0.4
EPA 5.9 0.4
AID 2.5 0.2
State 5.7 0.4
FEMA 4.2 0.3
Commerce 2.9 0.2
NSF 2.6 0.2
SBA 0.8 0.1
GSA 0.3 0.0
NRC 0.05 0.0
============================================================
Total CFO Entities 1,566.15 98.8
============================================================
Non-CFO Entities 18.23 1.2
============================================================
Total Government 1,584.38 100.0
------------------------------------------------------------
The act also requires the preparation of annual governmentwide
financial statements to be audited by GAO and issued to the President
and the Congress.
The CFO Act is a landmark in establishing accountability and is
central to achieving management reform initiatives and solving
high-risk problems. Effectively implementing this legislation must
be a top priority of the administration, and continuing congressional
oversight will be important to ensure results.
Foremost, inspectors general and agencies must ensure that the CFO
Act's time frame for preparing audited financial statements for
fiscal year 1996 does not slip. Also, agencies must
give priority to implementing basic accounting practices, such as
reconciliations;
upgrade financial systems to meet reporting requirements and provide
comparable data; and
improve the capabilities of financial personnel.
To help accomplish the expanded CFO Act's objectives, we will
initially focus our own audit efforts on the Departments of the
Treasury and Defense and review the work of the inspectors general
and public accounting firms that will audit the rest of government.
Within Treasury, we will audit (1) IRS, (2) the Bureau of the Public
Debt, which is responsible for managing the over $4 trillion national
debt, and (3) Treasury's Financial Management Service operations--the
center of the government's trillion-dollar check paying and
accounting operation. We plan to focus on Defense's departmentwide
financial statements and, currently, we are auditing the Department
of the Navy, which is among the largest and most complex federal
agencies.
We are closely working with the Department of the Treasury and others
as they develop governmentwide financial statements, which we will
audit annually. Ultimately, these reports will, for the first time,
give the President and the Congress an overall and complete picture
of where the government stands financially.
CFO ACT AND GPRA RESULTS
WILL BE A CORNERSTONE FOR
OUR HIGH-RISK PROGRAM
-------------------------------------------------------- Chapter 4:0.3
Together, the CFO Act and GPRA requirements provide an important
means to transform the way the federal government is managed and a
powerful incentive to improve data and management controls. We will
use the results of CFO Act financial audits and agencies' GPRA
programs to help identify high-risk areas and assess agencies'
progress to resolve them. Ultimately, the full implementation of
these laws will provide heightened emphasis on effectively managing
government programs and overcoming high-risk problems.
KEY CONTACTS FOR NEWLY DESIGNATED
HIGH-RISK AREAS
============================================================ Chapter 5
DEFENSE FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 5:0.1
David Connor, Director
Defense Audits
Accounting and Information Management Division
202-512-9095
DEFENSE CORPORATE
INFORMATION MANAGEMENT (CIM)
INITIATIVE
-------------------------------------------------------- Chapter 5:0.2
Jack Brock, Director
Information Resources Management--
Defense
Accounting and Information Management Division
202-512-6240
Donna Heivilin, Director
Defense Management and NASA
National Security and International Affairs Division
202-512-8412
IRS FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 5:0.3
Gregory Holloway, Director
Civil Audits--General Government
Accounting and Information Management Division
IRS FILING FRAUD
-------------------------------------------------------- Chapter 5:0.4
Jennie S. Stathis, Director
Tax Policy and Administration Issues
General Government Division
202-512-5407
IRS TAX SYSTEMS
MODERNIZATION (TSM)
INITIATIVE
-------------------------------------------------------- Chapter 5:0.5
Hazel Edwards, Director
Information Resources Management--General Government
Accounting and Information Management Division
202-512-6418
FAA AIR TRAFFIC CONTROL
MODERNIZATION AND NATIONAL
WEATHER SERVICE
MODERNIZATION
-------------------------------------------------------- Chapter 5:0.6
Joel Willemssen, Director
Information Resources Management--Resources, Community, and Economic
Development
Accounting and Information Management Division
202-512-6416
1995 HIGH-RISK SERIES
============================================================ Chapter 6
An Overview (GAO/HR-95-1)
Quick Reference Guide (GAO/HR-95-2)
Defense Contract Management (GAO/HR-95-3)
Defense Weapons Systems Acquisition (GAO/HR-95-4)
Defense Inventory Management (GAO/HR-95-5)
Internal Revenue Service Receivables (GAO/HR-95-6)
Asset Forfeiture Programs (GAO/HR-95-7)
Medicare Claims (GAO/HR-95-8)
Farm Loan Programs (GAO/HR-95-9)
Student Financial Aid (GAO/HR-95-10)
Department of Housing and Urban Development (GAO/HR-95-11)
Superfund Program Management (GAO/HR-95-12)
The entire series of 12 high-risk reports can be ordered by using the
order number GAO/HR-95-20SET.