High-Risk Series: An Overview (Letter Report, 02/01/97, GAO/HR-97-1).

GAO provided an overview of progress agencies have made to improve
serious and widespread weaknesses that have been the focus of GAO's
high-risk program for several years.

GAO found that: (1) overall, agencies are taking high-risk problems
seriously, trying to correct them, and making progress in many areas;
(2) Congress has also acted to address problems affecting these
high-risk areas through oversight hearings and specific legislative
initiatives, such as the Health Insurance Portability and Accountability
Act of 1996 to protect Medicare from exploitation and Title VI of the
Federal Agriculture Improvement and Reform Act of 1996 to reduce the
financial risk associated with farm lending programs; (3) landmark
legislation in the 1990s also established broad management reforms,
which, if implemented successfully, will help resolve high-risk problems
and provide greater accountability in many government programs and
operations, including financial management, information technology,
acquisition of goods and services, and debt collection; (4) the
administration has embraced these management reforms and has made
implementation of them a priority; (5) full and effective implementation
of legislative mandates, GAO's suggestions, and corrective measures by
agencies, however, has not yet been achieved because the high-risk areas
involve long-standing problems that are difficult to correct; (6) as a
result, while agencies are making progress, these problems must be more
fully resolved before GAO can remove their high-risk designation; and
(7) to ensure that this occurs, sustained management attention and
congressional oversight are necessary.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HR-97-1
     TITLE:  High-Risk Series: An Overview
      DATE:  02/01/97
   SUBJECT:  Financial management
             Risk management
             Internal controls
             Contract administration
             Debt collection
             Government guaranteed loans
             Accountability
             Cost control
             ADP procurement
             Information systems
IDENTIFIER:  2000 Decennial Census
             Medicare Program
             IRS Tax System Modernization Program
             FAA Air Traffic Control Modernization Program
             CIM
             DOD Corporate Information Management Initiative
             Supplemental Security Income Program
             Superfund Program
             DOD Voluntary Disclosure Program
             Defense Business Operations Fund
             IRS Document Processing System
             FAA Advanced Automation System
             Federal Family Education Loan Program
             NASA Space Station Program
             Joint Financial Management Improvement Program
             Federal Acquisition Computer Network
             High Risk Series 1997
             HCFA Medicare Transaction System
             
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Cover
================================================================ COVER


High-Risk Series

February 1997

AN OVERVIEW

GAO/HR-97-1

Overview


Abbreviations
=============================================================== ABBREV

  ATC - air traffic control
  CFO - Chief Financial Officer
  CIM - Corporate Information Management
  DOD - Department of Defense
  DOE - Department of Energy
  EPA - Environmental Protection Agency
  FAA - Federal Aviation Administration
  FASA - Federal Acquisition Streamlining Act of 1994
  FASAB - Federal Accounting Standards Advisory Board
  GPRA - Government Performance and Results Act
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  HUD - Department of Housing and Urban Development
  IG - Inspector General
  IRS - Internal Revenue Service
  JFMIP - Joint Financial Management Improvement Program
  MTS - Medicare Transaction System
  NASA - National Aeronautics and Space Administration
  NWS - National Weather Service
  OMB - Office of Management and Budget
  SSA - Social Security Administration
  SSI - Supplemental Security Income
  TSM - Tax Systems Modernization
  USDA - Department of Agriculture

Letter
=============================================================== LETTER



February 1997

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 its work identified as
high risk because of vulnerabilities to waste, fraud, abuse, and
mismanagement.  This effort, which was supported by the Senate
Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight, brought a much-needed focus on
problems that were costing the government billions of dollars. 

In December 1992, GAO issued a series of reports on the fundamental
causes of problems in high-risk areas, and in a second series in
February 1995, it reported on the status of efforts to improve those
areas.  This, GAO's third series of reports, provides the current
status of designated high-risk areas. 

Overall, legislative and agency actions have resulted in progress
toward resolving many previously identified high-risk problems.  Such
actions have established a solid foundation to help ensure greater
progress, but much remains to be done to fully implement the
corrective actions needed to remove the high-risk designation from
the areas we have identified.  Effective and sustained follow-through
by agency managers, along with continued oversight by the Congress,
is essential to further headway. 

In addition to this overview, the series includes the Quick Reference
Guide (GAO/HR-97-2), which provides information on the 25 high-risk
areas currently included in GAO's high-risk program.  For each area,
the guide summarizes the problems and progress, identifies a key GAO
contact person, and provides a list of related GAO products.  The
series also includes 12 separate reports detailing continuing
significant issues and resolution actions needed in 19 of the
high-risk areas. 

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

James F.  Hinchman
Acting Comptroller General
of the United States


EXECUTIVE SUMMARY
============================================================ Chapter 0

Over the past 7 years, we have called attention to critical
government operations that are highly vulnerable to waste, fraud,
abuse, and mismanagement.  Persistent and long-standing high-risk
areas result in the government needlessly losing billions of dollars
and missing huge opportunities to achieve its objectives at less cost
and with better service delivery.  To help improve this situation, we
have made hundreds of recommendations to get at the heart of
high-risk problem areas, which have at their core a lack of
fundamental accountability. 

Overall, agencies are taking high-risk problems seriously, trying to
correct them, and making progress in many areas.  The Congress has
also acted to address problems affecting high-risk areas through
oversight hearings and specific legislative initiatives, such as the
Health Insurance Portability and Accountability Act of 1996 to
protect Medicare from exploitation and Title VI of the Federal
Agriculture Improvement and Reform Act of 1996 to reduce the
financial risk associated with farm lending programs. 

Landmark legislation in the 1990s also established broad management
reforms, which, if implemented successfully, will help resolve
high-risk problems and provide greater accountability in many
government programs and operations, including financial management,
information technology, acquisition of goods and services, and debt
collection.  The administration has embraced these management reforms
and has made implementation of them a priority.  Among these laws are
(1) the expanded Chief Financial Officers (CFO) Act of 1990 to
prepare financial statements that can pass the test of an independent
audit and provide decisionmakers reliable financial information, (2)
the 1993 Government Performance and Results Act to measure
performance and focus on results, and (3) the 1995 Paperwork
Reduction Act and the 1996 Clinger-Cohen Act to make wiser
investments in information technology. 

Full and effective implementation of legislative mandates, our
suggestions, and corrective measures by agencies, however, has not
yet been achieved because the high-risk areas involve long-standing
problems that are difficult to correct.  As a result, while agencies
are making progress, these problems must be more fully resolved
before we can remove their high-risk designation.  To ensure that
this occurs, sustained management attention and congressional
oversight are necessary.  We will continue to closely monitor
agencies' progress in resolving high-risk areas. 


   CATEGORIES OF HIGH-RISK FOCUS
---------------------------------------------------------- Chapter 0:1

This report highlights progress agencies have made to improve
high-risk areas in six broad categories, covering serious and
widespread weaknesses that have been the focus of our program for
several years.  These categories affect almost all of the
government's annual $1.4 trillion revenue collection efforts and
hundreds of billions of dollars of annual federal expenditures. 



   (See figure in printed
   edition.)

In addition to these broad categories, we have identified planning
for the 2000 Decennial Census as a high-risk area. 


      PROVIDING FOR ACCOUNTABILITY
      AND COST-EFFECTIVE
      MANAGEMENT OF DEFENSE
      PROGRAMS
-------------------------------------------------------- Chapter 0:1.1

The Department of Defense (DOD) has had some success in addressing
its inventory management problems, is working to reform its weapon
systems acquisition process, and has recognized the need for
infrastructure reductions.  However, much remains to be done to
resolve DOD's five high-risk areas. 

First, DOD's lingering financial management problems--among the most
severe in government--leave the Department without accurate
information with which to manage its vast resources, which in fiscal
year 1996 included a budget of over $250 billion and over $1 trillion
in assets worldwide.  Financial audits have highlighted significant
deficiencies in every aspect of DOD's financial management and
reporting, resulting in failure of any major DOD component to receive
a positive audit opinion.  The deficiencies identified prevent DOD
managers from obtaining the reliable financial information needed to
make sound decisions on alternate uses for both current and future
resources.  DOD's financial management leaders have recognized the
importance of tackling these problems and have many initiatives
underway to address widespread financial management problems.  Fixing
DOD's financial management problems is also critical to the
resolution of the Department's other high-risk areas.  See page 33. 

Also, because of fundamental control deficiencies in contract and
inventory management systems and procedures, DOD is vulnerable to
billions of dollars being wasted on excess supplies and millions of
dollars in contractor overpayments.  Improvements are necessary to
maintain appropriate controls over DOD's centrally managed
inventories valued at $69.6 billion in fiscal year 1995 and contracts
now costing about $110 billion annually.  See pages 35 and 36. 

In addition, despite DOD's past and current efforts to reform its
acquisition system, wasteful practices still add billions of dollars
to defense weapon systems acquisition costs, which are about $79
billion annually.  DOD continues to (1) generate and support
acquisition of new weapon systems that will not satisfy the most
critical weapon requirements at minimal cost and (2) commit more
procurement funds to programs than can reasonably be expected to be
available in future defense budgets.  Many new weapon systems cost
more and do less than anticipated, and schedules are often delayed. 
Moreover, the need for some of these costly weapons, particularly
since the collapse of the Soviet Union, is questionable.  See page
38. 

Finally, over the last 7 to 10 years, DOD has reduced operations and
support costs, which will amount to about $146 billion this year. 
However, billions of dollars are wasted annually on inefficient and
unneeded DOD activities.  Consequently, this year, we have added a
new high-risk area covering DOD's efforts to reduce its
infrastructure.  DOD has, in recent years, undergone substantial
downsizing in force structure.  However, commensurate reductions in
operations and support costs have not been achieved.  Reducing the
cost of excess infrastructure activities is critical to maintaining
high levels of military capacities.  Expenditures on wasteful or
inefficient activities divert limited defense funds from pressing
defense needs such as the modernization of weapon systems.  See page
39. 


      ENSURING ALL REVENUES ARE
      COLLECTED AND ACCOUNTED FOR
-------------------------------------------------------- Chapter 0:1.2

In 1995, the Internal Revenue Service (IRS) reported collecting $1.4
trillion from taxpayers, disbursing $122 billion in tax refunds, and
managing an estimated accounts receivable inventory of $113 billion
in delinquent taxes. 

The reliability of such financial information is critical to
effectively manage the collection of revenue to fund the government's
operations.  However, our audits of IRS' financial statements have
identified many significant weaknesses in accurately accounting for
revenue and accounts receivable, as well as for funds provided to
carry out IRS' operations.  IRS has made progress in improving
payroll processing and accounting for administrative operations and
is working on solutions to revenue and accounts receivable accounting
problems.  However, much remains to be done, and effective management
follow-through is essential to achieving fully the goals of the CFO
Act.  See page 43. 

Also, IRS is hampered in efficiently and effectively managing its
huge inventory of accounts receivable due to inadequate management
information.  The root cause here is IRS' antiquated information
systems and outdated business processes, which handle over a billion
tax returns and related documents annually.  See page 45. 

IRS is attempting to overhaul its information systems and tax
processing operations through its Tax Systems Modernization (TSM)
effort.  IRS reports that it has already spent or obligated over $3
billion on TSM.  IRS and the Department of the Treasury have taken
several steps to address modernization problems, but much more
progress is needed to fully resolve serious underlying management and
technical weaknesses.  See page 49. 

Further, IRS' efforts to reduce filing fraud have resulted in some
success, especially through more rigid screening in the electronic
filing program, but this continues to be a high-risk area for which
IRS needs better management information.  IRS' goal is to increase
electronic filings, which would strengthen its fraud detection
capabilities.  But to achieve its electronic filing goal, IRS must
identify those groups of taxpayers who offer the greatest opportunity
for filing electronically and develop strategies focused on
eliminating or alleviating impediments that have inhibited those
groups from participating in the program.  See page 47. 

Also, the Customs Service has made progress in addressing major
weaknesses in its financial management and internal control systems. 
However, audits of Customs' financial statements continue to show
significant problems in these areas.  These problems diminish
Customs' ability to reasonably ensure that (1) duties, taxes, and
fees on imports are properly assessed and collected and refunds of
such amounts are valid, (2) sensitive data maintained in automated
systems are adequately protected from unauthorized access and
modification, and (3) core financial systems provide reliable
information for managing operations. 

We have made numerous recommendations to Customs to address its
financial management weaknesses and have assisted in developing
corrective actions.  It will be important for top management at
Customs to provide continuing support to ensure that its planned
financial management improvements are properly implemented.  See page
51. 

Also, the Departments of Justice and Treasury have made many
improvements in their asset forfeiture programs over the years. 
However, significant enhancements to internal controls and property
management are still needed in order to effectively reduce the
vulnerability to theft and misappropriation of seized property,
including tons of illegal drugs and millions of dollars of cash and
real property.  See page 53. 


      OBTAINING AN ADEQUATE RETURN
      ON MULTIBILLION DOLLAR
      INVESTMENTS IN INFORMATION
      TECHNOLOGY
-------------------------------------------------------- Chapter 0:1.3

In the past 6 years, federal agencies have spent about $145 billion
on information systems, which are now integral to nearly every aspect
of the federal government's operations.  Yet, despite years of
experience in developing and acquiring systems, agencies across
government continue to have chronic problems harnessing the full
potential of information technology to improve performance, cut
costs, and/or enhance responsiveness to the public. 

In addition to IRS' TSM, the information systems modernization
efforts of the following three agencies in particular are at high
risk of being late, running over cost, and falling short of promised
benefits: 

  -- The Federal Aviation Administration's (FAA) $34-billion air
     traffic control modernization has historically experienced cost
     overruns, schedule delays, and performance shortfalls.  While
     FAA has had success on a recent small, well defined effort to
     replace one aging system, the underlying causes of its past
     problems in modernizing larger, more complex air traffic control
     (ATC) systems remain and must be addressed for the modernization
     to succeed.  We recently identified and made recommendations to
     correct several of these root causes,

including (1) strengthening project cost estimating and accounting
practices and (2) defining and enforcing an ATC-wide systems
architecture, and we have work under way to identify other
improvements that could help to resolve the modernization's
long-standing problems.  See page 55. 

  -- DOD continues to spend billions of dollars to streamline
     operations and implement standard information systems under the
     umbrella of its Corporate Information Management (CIM)
     initiative.  Until its new process for controlling system
     investments is implemented, however, the Department cannot
     realize the savings goals expected from this initiative.  See
     page 57. 

  -- The success of the National Weather Service's (NWS) $4.5 billion
     modernization effort hinges on how quickly the Service addresses
     problems with the existing system's operational effectiveness
     and efficient maintenance and on how well it develops and
     deploys the remaining system.  NWS has acknowledged that a
     technical blueprint is needed and is currently developing one. 
     See page 59. 

Also, a newly designated high-risk area involves information systems
security weaknesses across government.  These weaknesses pose high
risk of unauthorized access and disclosure or malicious use of
sensitive data.  Many federal operations that rely on computer
networks are attractive targets for individuals or organizations with
malicious intentions.  Examples include law enforcement, import entry
processing, and various financial transactions.  Most notable,
Defense systems may have experienced as many as 250,000 attacks from
hackers during 1995 alone, with about 64 percent of those being
successful and most going undetected. 

Since June 1993, we have issued over 30 reports describing serious
information security weaknesses at major federal agencies.  In
September 1996, we reported that, during the previous 2 years,
serious information security control weaknesses had been reported for
10 of the 15 largest federal agencies.  We have made dozens of
recommendations to individual agencies for improvement and they have
acted on many of them.  See page 61. 

We are also adding to our high-risk program this year another serious
governmentwide issue, the "Year 2000 Problem." This problem poses the
high risk that computer systems throughout government will fail to
run or malfunction because computer equipment and software were not
designed to accommodate the change of date at the new millennium. 

For example, IRS' tax systems could be unable to process returns,
which in turn could jeopardize the collection of revenue and the
entire tax processing system.  Federal systems used to track student
education loans could produce erroneous information on their status,
such as indicating that an unpaid loan has been satisfied.  Or the
Social Security Administration's disability insurance process could
experience major disruptions because the interface with various state
systems fails, thereby causing delays and interruptions in disability
payments to citizens.  See page 62. 


      CONTROLLING FRAUD, WASTE,
      AND ABUSE IN BENEFIT
      PROGRAMS
-------------------------------------------------------- Chapter 0:1.4

The Congress and the President have been seeking to introduce changes
to Medicare to help control program costs, which were $197 billion in
fiscal year 1996.  At the same time, they are concerned that the
Medicare program loses significant amounts due to persistent
fraudulent and wasteful claims and abusive billings.  The Congress
has passed legislation to protect Medicare from exploitation by
adding funding to bolster program safeguard efforts and making the
penalties for Medicare fraud more severe.  Effective implementation
of this legislation and other agency actions are key to mitigating
many of the inherent vulnerabilities that make Medicare, the nation's
second largest social program, a perpetually attractive target for
exploitation.  See page 65. 

The Supplemental Security Income (SSI) program is another new
high-risk area.  SSI, which provided about $22 billion in federal
benefits to recipients between January 1, 1996, and October 31, 1996,
is at high risk of overpayments, which have grown to over $1 billion
annually.  One root cause of these overpayments is the difficulty the
Social Security Administration has in corroborating financial
eligibility information that program beneficiaries self report and
that affects their benefit levels.  Determining whether a claimant's
impairment qualifies an individual for disability benefits can often
be difficult as well, especially in cases involving applicants with
mental impairments and other hard-to-diagnose conditions.  See page
68. 


      MINIMIZING LOAN PROGRAM
      LOSSES
-------------------------------------------------------- Chapter 0:1.5

The federal government is accountable for effectively managing
hundreds of billions of dollars in direct loans and loan guarantees
for a variety of programs involving, for example, farmers, students,
and home buyers. 

In 1995, the federal government reported disbursing $19 billion in
new direct loans and guaranteeing $123 billion in non-federal
lending.  As of September 30, 1995, total federal credit assistance
outstanding was reported to be over $941 billion, consisting of (1)
$204 billion in loans receivables held by federal agencies, including
$160 billion in direct loans and $44 billion in defaulted guaranteed
loans that are now receivables of the federal government, and (2)
$737 billion in loans guaranteed by the federal government. 

Since our high-risk program began 7 years ago, we have called
attention to difficulties major lending agencies have experienced in
managing federal credit programs and the resulting exposure to large
losses. 

  -- The Department of Education has achieved some results in
     implementing legislative initiatives by the Congress to address
     many of the underlying problems with the student financial aid
     programs' structure and management.  In fiscal year 1995, the
     federal government paid out over $2.5 billion to make good its
     guarantee on defaulted student loans--an amount that represents
     an improvement over the last several years.  The Department has
     taken many administrative actions to correct problems and
     improve program controls, but it must overcome management and
     oversight problems that have contributed to abuses by some
     participating schools.  See page 73. 

  -- The Department of Housing and Urban Development (HUD) is
     responsible for managing more than $400 billion in insured
     loans; $435 billion in outstanding securities; and, in fiscal
     year 1995, over $31.8 billion in discretionary budget outlays. 
     However, effectively carrying out these responsibilities is
     hampered by HUD's weak internal controls, inadequate information
     and financial management systems, and an ineffective
     organization structure.  HUD has undertaken some improvement
     efforts to correct these problems through such means as
     implementing a new management planning and control program. 
     However, HUD's improvement efforts are far from fruition.  See
     page 76. 

  -- Since our last high-risk report series, the Congress has enacted
     legislation to make fundamental changes in the farm loan
     programs' loan-making, loan-servicing, and property management
     policies.  The Department of Agriculture is in the process of
     implementing the new legislative mandates and other
     administrative reforms to resolve farm loan program risks.  The
     impact of these actions on the $17 billion farm loan portfolio's
     financial condition will not be known for some time.  See page
     72. 

The Debt Collection Improvement Act of 1996 also was enacted to
expand and strengthen agencies' debt collection practices and
authorities.  Implementing the act's provisions can improve agencies'
lending program performance. 


      IMPROVING MANAGEMENT OF
      FEDERAL CONTRACTS AT
      CIVILIAN AGENCIES
-------------------------------------------------------- Chapter 0:1.6

With government downsizing, civilian agencies will continue to rely
heavily on contractors to operate programs.  While this approach can
help to achieve program goals with a reduced workforce, it can also
result in increased vulnerability to risks, such as schedule
slippages, cost growth, and contractor overpayments, as we have seen
with the weak contract management practices of some of the
government's largest contracting agencies. 

  -- Most of the Department of Energy's (DOE) $17.5 billion in annual
     contract obligations is for its management and operating
     contracts.  DOE has made headway to overcome its history of weak
     contractor management through a major contract reform effort
     that has included developing an extensive array of policies and
     procedures.  Although the Department recently adopted a policy
     favoring competition in the award of these contracts, in actual
     practice most contracts continue to be made noncompetitively. 
     See page 79. 

  -- The National Aeronautics and Space Administration (NASA) has
     made considerable progress in better managing and overseeing
     contracts, for which it spends about $13 billion a year.  The
     improvements have included establishing a process for collecting
     better information for managing contractor performance and
     placing greater emphasis on contract cost control and contractor
     performance.  Our most recent work, however, identified
     additional problems in contract management and opportunities for
     improving procurement oversight.  See page 81. 

  -- For the past several years, the Environmental Protection Agency
     (EPA) has focused attention on strengthening its management and
     oversight of Superfund contractors.  Nonetheless, EPA remains
     vulnerable to contractor overpayments.  At the same time, the
     magnitude of the nation's hazardous waste problem, estimated to
     cost hundreds of billions of dollars, calls for the efficient
     use of available funds to protect public health and the
     environment.  See page 82. 


      PLANNING FOR THE 2000
      DECENNIAL CENSUS
-------------------------------------------------------- Chapter 0:1.7

A new high-risk area involves the need for agreement between the
administration and the Congress on an approach that will both
minimize risk of an unsatisfactory 2000 Decennial Census and keep the
cost of doing it within reasonable bounds.  The longer the delay in
securing agreement over design and funding, the more difficult it
will be to execute an effective census, and the more likely it will
be that the government will have spent billions of dollars and still
have demonstrably inaccurate results. 

The country can ill afford an unsatisfactory census at the turn of
the century, especially if it comes at a substantially higher cost
than previous censuses.  The census results are critical to
apportioning seats in the House of Representatives; they are also
used to allocate billions of dollars in federal funding for numerous
programs and to guide the plans for decisions of government,
business, education, and health institutions in the multibillion
dollar investments they make.  See page 84. 


   SHIFTING THE FOCUS TO
   ACCOUNTABILITY AND MANAGING FOR
   RESULTS
---------------------------------------------------------- Chapter 0:2

As countless studies by GAO have long noted and this high-risk series
of reports demonstrates, federal agencies often fail to appropriately
manage their finances, identify clearly what they intend to
accomplish, or do the job effectively with a minimum of waste.  After
decades of seeing high-risk problems and management weaknesses recur
in agency after agency, the Congress moved to address this situation
governmentwide through broad management reforms, including the
following: 

  -- The Chief Financial Officers Act of 1990, as expanded in 1994,
     began requiring annual audited financial statements for all
     major government entities, starting with fiscal year 1996. 

  -- Under the Government Performance and Results Act of 1993, the
     focus of federal

agencies turns away from such traditional concerns as staffing and
activity levels and toward a single overriding issue:  results. 

  -- The Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of
     1996 require, among other things, that agencies set goals,
     measure performance, and report on progress in improving the
     efficiency and effectiveness of operations through the use of
     information technology. 

  -- The Federal Acquisition Streamlining Act of 1994 and sections of
     the Clinger-Cohen Act have provided agencies with tools for
     streamlining and simplifying their processes for acquiring goods
     and services. 

The Office of Management and Budget (OMB) has emphasized requirements
called for by this legislative foundation.  For example, OMB has not
granted any agencies waivers in meeting the CFO Act's audited
financial statement requirements and has accelerated aspects of
GPRA's implementation.  Agencies are now implementing these new laws,
with some positive results already. 

Through legislation such as this, the Congress has provided an
excellent framework for monitoring agencies' progress in and holding
managers accountable for identifying and resolving high-risk
problems.  Also, GAO has long supported annual congressional hearings
that focus on agencies' accountability for correcting high-risk
problems and implementing broad management reforms. 

These issues are discussed in more detail beginning on page 87. 


RESOLVING THE HIGH-RISK AREAS: 
CURRENT STATUS OF IMPROVEMENT
EFFORTS
============================================================ Chapter 1

The creation of our high-risk program in 1990 was preceded by more
than a decade of seemingly endless accounts of control breakdowns and
program failures.  In 1982, the Congress passed the Federal Managers'
Financial Integrity Act, which required federal managers to evaluate
their internal control and accounting systems and to correct
problems.  Since then, the largest federal agencies have identified
thousands of internal control and accounting systems weaknesses and
reported progress in resolving them. 

Over the past 7 years, a substantial part of our audit efforts have
identified areas that place the federal government at substantial
risk of loss from programs that are ineffectively managed and poorly
controlled.  We have also monitored agencies' efforts to overcome
high-risk areas through administrative measures and actions by the
Congress. 

Currently, our high-risk program focuses on six broad categories that
encompass high-risk areas involving billions of dollars in taxpayers'
money. 



   (See figure in printed
   edition.)

Separate from these categories, another high-risk area involves
avoiding an expensive and flawed census in 2000. 

Agencies have made progress in designing corrective actions and are
in different stages of implementing them.  The Congress has helped as
well through its oversight process and by legislation to address
several specific high-risk problems and provide broad management
reforms. 

While improvements have been made in a number of areas, high-risk
problems must be more fully resolved before we can remove their
high-risk designation. 

Additionally, as of February 1997, we are designating five new areas
as high risk. 



   (See figure in printed
   edition.)


The following sections discuss the current status of agencies'
efforts to resolve the 20 high-risk areas identified in our 1995
report series and introduce the 5 newly identified areas.  Concerted
effort to continue to reduce these significant risks will be
required, and we will continue to focus on all 25 of these areas. 


   PROVIDING FOR ACCOUNTABILITY
   AND COST-EFFECTIVE MANAGEMENT
   OF DEFENSE PROGRAMS
---------------------------------------------------------- Chapter 1:1

DOD is responsible for over $1 trillion in assets worldwide and 3
million military and civilian personnel.  With a budget of over $250
billion in fiscal year 1996, DOD is accountable for about half of the
government's discretionary spending.  However, the lack of useful and
reliable financial information and weaknesses in fundamental
management systems and practices seriously impair DOD's
accountability for its vast resources. 

DOD is also faced with transforming its Cold War operating and
support structure in much the same way it has been working to
transform its military force structure.  Making this transition is a
complex, difficult challenge that will affect hundreds of thousands
of civilian and military personnel.  If DOD does not address this
challenge now, however, pressing needs will go unmet while scarce
defense resources will be wasted or used inefficiently. 



   (See figure in printed
   edition.)


      FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 1:1.1

While many improvement efforts are under way, DOD does not yet have
adequate financial management processes in place to produce the
information it needs for making decisions affecting its operations
and accountability.  No military service or other major DOD component
has been able to withstand the scrutiny of an independent financial
statement audit.  This situation is one of the worst in the federal
sector and is the product of many years of neglect. 

Weaknesses permeate critical DOD financial management areas and
include the following problems: 

  -- the lack of an overall integrated financial management system
     structure,

  -- no reliable means of accumulating accurate cost information,

  -- continuing problems in accurately accounting for billions of
     dollars in disbursements,

  -- breakdowns in rudimentary required financial control procedures,

  -- the critical need to upgrade its financial management workforce
     competencies, and

  -- antiquated bureaucratic business practices that underscore the
     need for reengineering business practices. 

DOD's financial management leaders have recognized the importance of
tackling these problems, have expressed a commitment to financial
management reform, and have many initiatives underway to address
long-standing financial management weaknesses.  However, DOD faces
fundamental challenges in critical areas if its envisioned financial
management reforms are to realize meaningful, sustained improvements. 

As part of our high-risk series, we are issuing a separate report on
Defense Financial Management problems, progress, and needed
improvements (GAO/HR-97-3). 


      CONTRACT MANAGEMENT
-------------------------------------------------------- Chapter 1:1.2

As DOD seeks to streamline its contracting and acquisition
processes--including contract administration and audit--to adjust to
reduced staffing levels, new business process techniques will be key
to accomplishing effective and efficient oversight in the future. 

To maintain appropriate controls over contract expenditures, DOD will
need to do the following: 

  -- Improve and simplify its contract payment system, which is
     essential to achieving effective control over DOD's payment
     process.  Otherwise, DOD continues to risk overpaying
     contractors millions of dollars.  DOD is aware of the
     seriousness of its payment problems and is taking steps to
     address them. 

  -- Further strengthen its oversight of contractor cost-estimating
     systems, which are critical to ensuring sound price proposals
     and reducing the risk that the government will pay excessive
     prices.  Sound cost estimating systems also permit less
     government oversight and management attention.  While DOD has
     improved its oversight of contractors' cost-estimating systems,
     poor cost-estimating systems remain an area of concern at some
     contractor locations. 

  -- Strengthen the administration of DOD's Voluntary Disclosure
     Program, including improving coordination between DOD and the
     Department of Justice.  DOD's Voluntary Disclosure Program is
     intended to encourage defense contractors to voluntarily
     disclose potential civil or criminal fraud to the government. 
     Our work has shown that contractor participation in the program
     has been relatively small and the dollar recoveries modest. 

Defense Contract Management problems are further discussed in a
separate high-risk series report (GAO-HR-97-4). 


      INVENTORY MANAGEMENT
-------------------------------------------------------- Chapter 1:1.3

Because DOD's culture believed it was better to overbuy items than to
manage with just the amount of stock needed, about half of its
current inventory of spare parts, clothing, medical supplies, and
other secondary inventory items does not need to be on hand to
support war reserves or current operating requirements. 

Since our 1995 high-risk report, DOD has had some success in
addressing its inventory management problems and is in the midst of
changing its inventory management culture.  Also, with reduced force
levels and implementation of some of our recommendations, DOD has
reduced its centrally managed inventory by about $23 billion, from
about $93 billion in September 1989 to about $70 billion in September
1995.  DOD has implemented certain commercial practices, but only in
a very limited manner.  DOD has made little progress in developing
the management tools needed to help solve its long-term inventory
management problems.  It has not achieved the desired benefits from
the Defense Business Operations Fund, and the Corporate Information
Management initiative has not produced the economies and efficiencies
anticipated. 

Consequently, it has become increasingly difficult for inventory
managers to manage DOD's multibillion dollar inventory supply systems
efficiently and effectively.  In the short term, DOD needs to
emphasize the efficient operation of its existing inventory systems
and make greater use of proven commercial practices.  In the
long-term, DOD must establish goals, objectives, and milestones for
changing its culture and adopting new management tools and practices. 

Additional information on these matters is presented in a separate
high-risk series report on Defense Inventory Management
(GAO/HR-97-5). 


      WEAPON SYSTEMS ACQUISITION
-------------------------------------------------------- Chapter 1:1.4

Even though DOD spends about $79 billion annually to research,
develop, and acquire weapon systems, it has a history of establishing
questionable requirements for weapon systems; projecting unrealistic
cost, schedule, and performance estimates; and beginning production
before adequate testing has been completed.  DOD's leadership has
emphasized a commitment to reform its weapon systems acquisition
process and become a smarter buyer by pursuing a number of positive
initiatives to reinvent and improve the cost-effectiveness of its
acquisition processes.  In addition, the Congress has passed a series
of legislative reforms for the weapon systems acquisition process. 

The ultimate effectiveness of DOD's current initiatives to reduce the
costs and improve the outcomes of its weapon systems acquisition
processes cannot yet be fully assessed because they are in various
stages of implementation.  But the fundamental reforms needed to
correct weapon systems acquisition problems, such as successfully
completing testing before beginning production, have not yet been
formulated, much less instituted. 

Progress and remaining problems in Defense Weapon Systems Acquisition
are discussed in a separate report being issued as part of this
high-risk series (GAO/HR-97-6). 


      DEFENSE INFRASTRUCTURE
-------------------------------------------------------- Chapter 1:1.5

This year, we have added to our high-risk areas Defense's efforts to
reduce its infrastructure.  For fiscal year 1997, DOD estimates that
about $146 billion, or two-thirds, of its budget will be for
operations and support activities.  These activities, which DOD
generally refers to as its support infrastructure, include
maintaining installation facilities, providing nonunit training to
the force, providing health care to military personnel and their
families, repairing mission-essential equipment, and buying and
managing spare part inventories. 

DOD recognizes the need for infrastructure reductions.  DOD's
laboratory infrastructure is estimated to have an excess capacity of
35 percent.  Its overhead costs for transportation services are 2 to
3 times the basic cost of transportation.  In addition, funds are
being spent to operate and maintain aging and underutilized
buildings, roads, and other infrastructure that will likely be
declared excess by DOD in the near future. 

Defense must use resources for the highest priority operational and
investment needs rather than maintaining unneeded property,
facilities, and overhead.  DOD has programs to identify potential
infrastructure reductions in many areas.  However, breaking down
cultural resistance to change, overcoming service parochialism, and
setting forth a clear framework for a reduced Defense infrastructure
are key to avoiding waste and inefficiency. 

To do this, the Secretary of Defense and the military service
Secretaries need to give greater structure to their efforts by
developing an overall strategic plan.  The plan needs to establish
time frames and identify organizations and personnel responsible for
accomplishing fiscal and operational goals.  In developing the plan,
DOD should consider using a variety of means to achieve reductions,
including such things as consolidations, privatization, outsourcing,
reengineering, and interservice agreements.  It should also consider
the need and timing for future base realignment and closure actions. 

Additional information about Defense Infrastructure problems can be
found in a separate high-risk series report (GAO/HR-97-7). 


   ENSURING ALL REVENUES ARE
   COLLECTED AND ACCOUNTED FOR
---------------------------------------------------------- Chapter 1:2

To ensure its ability to efficiently and fairly administer the
nation's tax system, IRS has articulated a business vision for the
future.  This vision calls for reducing the volume of paper returns,
providing better customer service, and improving compliance by
modernizing its operations. 

Since developing its business vision in 1992, IRS has made some
progress in modernizing its operations; however, the gap between IRS'
current level of performance and that proposed in its vision is
great.  Specifically, the efficient administration of the nation's
tax system is undermined by problems in four areas of IRS'
operations:  financial management, accounts receivable, filing fraud,
and tax systems modernization. 

These issues are highlighted below and discussed further in a
separate high-risk series report, IRS Management (GAO/HR-97-8). 

Also, the Customs Service has made progress in resolving its
high-risk problems and the Departments of Justice and the Treasury
have improved the management of asset forfeiture programs. 
Nonetheless, Customs continues to have significant financial
management weaknesses and additional improvements are necessary to
adequately control asset forfeitures. 



   (See figure in printed
   edition.)


      IRS FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 1:2.1

IRS needs to make substantial improvements in its accounting and
financial reporting to comply fully with the CFO Act's requirements. 
Our audits under the act have described IRS' difficulties in (1)
properly accounting for its reported $1.4 trillion in tax revenues,
in total and by reported type of tax, (2) reliably determining the
amount of accounts receivable owed for unpaid taxes, (3) regularly
reconciling its Fund Balance with Treasury accounts, and (4) either
routinely providing support for receipt of the goods and services it
purchases or, where supported, accurately recording the purchased
item in the proper period. 

IRS has made some progress in addressing these issues.  This is
particularly notable in IRS' administrative accounting operations,
which track its over $7 billion appropriation to fund agency
activities.  For example, IRS recently reported that it has
identified substantially all of the reconciling items for its Fund
Balance with Treasury accounts.  It has also successfully transferred
its payroll processing to the Department of Agriculture's National
Finance Center and has begun designing short and long-term strategies
to fix the problems that contribute to its nonpayroll expenses being
unsupported or reported in the wrong period. 

Further, in the revenue accounting area, IRS has designed an interim
approach to capture the detailed support for revenue and accounts
receivable until longer term solutions can be identified and
implemented.  The issues with IRS' revenue accounting operations are
complex, and the remedies needed are multifaceted and encompass
organizational, managerial, technological, and procedural
improvements.  IRS' revenue accounting problems are especially
affected and complicated by antiquated automated data processing
systems that must be substantially modified to meet financial
reporting requirements ushered in by the CFO Act. 

Follow-through by IRS is essential to ensure that its financial
management improvement plans are effectively carried out.  Solving
these problems is essential to providing reliable financial
information and ensuring taxpayers that their federal tax dollars are
properly accounted for in accordance with federal accounting
standards.  The accuracy of IRS' financial statements is also key to
both IRS and the Congress for (1) ensuring adequate accountability
for IRS programs, (2) assessing the impact of tax policies, and (3)
measuring IRS' performance and cost effectiveness in carrying out its
numerous tax enforcement, customer service, and collection
activities. 


      IRS RECEIVABLES
-------------------------------------------------------- Chapter 1:2.2

In fiscal year 1996, IRS reported it had collected almost $30 billion
in delinquent taxes--more than in any previous year.  Also, the
Congress has recently taken actions that could help to reduce the
amount of delinquent taxes in the future by requiring more electronic
deposits of employment taxes, expanding voluntary withholding, and
authorizing IRS to test the use of private debt collectors. 

However, fundamental problems continue to hamper IRS' efforts to
efficiently and effectively manage and collect its reported $216
billion inventory of tax debts. 

  -- The outdated equipment and processes used to match tax returns
     and related information documents can require several years to
     identify potential delinquencies before initiating collection
     actions. 

  -- Information systems problems prevent IRS from effectively
     measuring the results of improvement efforts, determining the
     best collection actions to take for specific taxpayers,
     identifying the most effective collection tools and techniques,
     and devising programs needed to prevent delinquencies from
     occurring. 

IRS has undertaken many initiatives to deal with its accounts
receivable problems--such as (1) correcting errors in its tax
receivable masterfile, (2) developing more information with which it
can better define the inventory of tax debts, characteristics of
delinquent taxpayers, and appropriate collection techniques, (3)
attempting to speed up aspects of the collection process, and (4)
automating many of the processes carried out by collection employees
in field offices. 

These efforts appear to have had some impact on collections and the
tax debt inventory, but many are long-term in nature and demonstrable
results may not be available for several years.  Overall, IRS needs a
comprehensive collection strategy that involves setting priorities,
modernizing outdated equipment and processes, and establishing goals,
timetables, and systems to measure progress. 


      FILING FRAUD
-------------------------------------------------------- Chapter 1:2.3

Through the early 1990s, the number of fraudulent returns that IRS
detected spiraled upward, reaching a peak in 1994 of over 75,000
returns involving $160 million.  After being urged to take immediate
action by us, the Congress, and a Treasury task force, IRS introduced
new controls and expanded existing controls in an attempt to reduce
its exposure to filing fraud. 

Those controls were focused on (1) deterring the filing of fraudulent
returns by more rigidly screening applicants to the electronic filing
program and verifying electronic returns at the point of receipt and
(2) identifying questionable returns after they have been filed by
automating fraud research and detection techniques and more
aggressively verifying social security numbers. 

IRS' efforts produced some positive results.  For example, in 1995,
IRS (1) identified problems with over 4 million social security
numbers on returns filed electronically and (2) detected invalid
social security numbers on paper returns that resulted in over $800
million in reduced refunds or additional taxes.  Unfortunately, IRS
identified many more problems than it was able to deal with and ended
up releasing about 2 million refunds without resolving the problems. 

The number of fraudulent returns identified by IRS has declined since
1994.  However, IRS does not have sufficient information to determine
whether the decline is the result of fewer staff assigned to the
program, changes in the program's operating and reporting procedures,
or a general decline in the incidence of fraud. 

To control filing fraud, it is critically important for IRS to (1)
optimize controls, such as upfront filters that are intended to deter
the filing of fraudulent returns, and (2) maximize the effectiveness
of available staff.  Modernization is the key to achieving these
objectives, and electronic filing is the cornerstone of that
modernization.  IRS' business vision calls for increasing the number
of electronic returns to 80 million by 2001.  However, recent filing
trends indicate that IRS will fall far short of that goal.  To
achieve its goal, IRS must identify those groups of taxpayers who
offer the greatest opportunity for filing electronically and develop
strategies focused on eliminating or alleviating impediments that
have inhibited those groups from participating in the program. 


      TAX SYSTEMS MODERNIZATION
-------------------------------------------------------- Chapter 1:2.4

Over the last decade, IRS has been attempting to overhaul its
timeworn, paper-intensive approach to tax return processing.  In
1995, we identified serious management and technical weaknesses in
the modernization program which jeopardize its successful
completion,\1 recommended many actions to fix the problems, and added
IRS' modernization to our high risk list.  Since then, IRS and
Treasury have together taken several steps to implement our
recommendations, but much remains to be done.  At stake is the over
$3 billion that IRS has spent or obligated on this modernization
since 1986, as well as any additional funds that IRS plans to spend
on modernization. 

In May 1996, Treasury reported to the House and Senate Appropriations
Committees on steps under way and planned to exert greater management
oversight over IRS' modernization efforts.\2 For example, it
established a Modernization Management Board as the primary review
and decision-making body for modernization and for policy and
strategic direction.  In addition, Treasury scaled back the overall
size of the modernization by approximately $2 billion and is working
with IRS to obtain additional contractor help to accomplish the
modernization.  Pursuant to congressional direction, we assessed IRS'
actions to correct its management and technical weaknesses, as
delineated in Treasury's report on tax systems modernization.  We
reported in June and September 1996 that IRS had initiated many
activities to improve its modernization efforts, but had not yet
fully implemented any of our recommendations. 

To help oversee IRS' modernization, the Congress is taking oversight
actions as well.  For example, it directed IRS to (1) submit a
schedule for transferring a majority of its modernization development
and deployment to contractors and (2) establish a schedule for
implementing GAO's recommendations.  It also directed the Secretary
of the Treasury to (1) provide quarterly reports on the status of
IRS' corrective actions and modernization spending and (2) submit a
technical architecture for the modernization that has been approved
by Treasury's Modernization Management Board. 

IRS has continued to take steps to address our recommendations and
respond to congressional direction.  For example, IRS created an
investment review board to select, control, and evaluate its
information technology investments.  Thus far, the board has
reevaluated and terminated selected major modernization development
projects, such as the Document Processing System.  IRS also provided
a November 26, 1996, report to the Congress that set forth IRS'
schedule for shifting modernization development and deployment to
contractors.  While we recognize IRS and Treasury actions to address
these problems, we remain concerned.  Much remains to be done to
fully implement essential improvements.  IRS needs to continue to
make concerted, sustained efforts to fully implement our
recommendations and respond effectively to the requirements outlined
by the Congress.  It will take both management commitment and
technical discipline for IRS to do this effectively. 


--------------------
\1 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156,
July 26, 1995). 

\2 Report to House and Senate Appropriations Committees:  Progress
Report on IRS's Management and Implementation of Tax Systems
Modernization, Department of the Treasury, May 6, 1996. 


      CUSTOMS SERVICE FINANCIAL
      MANAGEMENT
-------------------------------------------------------- Chapter 1:2.5

Customs has taken several actions to address significant weaknesses
in its financial management and internal control systems.  These
actions include, for example, statistically sampling compliance of
commercial importations through ports of entry to better focus
enforcement efforts and to project and report lost duties, taxes, and
fees due to noncompliance. 

However, Customs still has not fully corrected significant problems
in these areas, which continue to be identified during audits of
Customs' financial statements under the CFO Act.  These problems
diminish Customs' ability to reasonably ensure that (1) duties,
taxes, and fees on imports are properly assessed and collected and
refunds of such amounts are valid, (2) sensitive data maintained in
automated systems are adequately protected from unauthorized access
and modification, and (3) core financial systems provide reliable
information for managing operations. 

We have made numerous recommendations to Customs to address its
financial management weaknesses and have assisted in developing
corrective actions.  It will be important for top management at
Customs to provide continuing support to ensure that its planned
financial management improvements are properly implemented. 

Customs Service Financial Management is further discussed in the
Quick Reference Guide (GAO/HR-97-2). 


      ASSET FORFEITURE PROGRAMS
-------------------------------------------------------- Chapter 1:2.6

Over the years, the Departments of Justice and Treasury have made
many improvements to their asset forfeiture programs, which had
inventories valued at about $2 billion in 1995.  However, significant
enhancements to internal controls and property management are still
needed in order to effectively reduce the vulnerability to theft and
misappropriation of seized property, including tons of illegal drugs
and millions of dollars of cash and real property.  In addition,
Justice and Treasury should aggressively pursue options for
efficiency gains through consolidation of their programs for managing
and disposing of seized assets. 

The Quick Reference Guide (GAO/HR-97-2) provides additional
information on the risks associated with Asset Forfeiture Programs. 


   OBTAINING AN ADEQUATE RETURN ON
   MULTIBILLION DOLLAR INVESTMENTS
   IN INFORMATION TECHNOLOGY
---------------------------------------------------------- Chapter 1:3

During the past 6 years, agencies have spent over $145 billion
building up their information technology infrastructure--all too
often with disappointing results.  Many system development efforts
suffer from multimillion dollar cost overruns, schedule slippages
measured in years, and/or marginal benefits in terms of improving
mission performance, cutting costs, and enhancing responsiveness to
the public.  A case in point is the IRS tax systems modernization
previously discussed. 

The federal government's poor return on information technology
investments also has left the Congress and executive branch severely
handicapped by the lack of reliable data for measuring the costs and
results of agency operations and making well-informed decisions. 
Recognizing the urgent need for improvement, the 104th Congress
passed landmark reforms in information technology management.  The
1995 Paperwork Reduction Act and the 1996 Clinger-Cohen Act require
agencies to implement a framework of modern technology management. 

These legislative initiatives are discussed later in this overview
and in a separate report on Information Management and Technology,
issued as part of this series (GAO/HR-97-9).  That report also
discusses high-risk information system modernization efforts and
governmentwide information security and technology issues, which are
highlighted in the following discussion. 



   (See figure in printed
   edition.)


      AIR TRAFFIC CONTROL
      MODERNIZATION
-------------------------------------------------------- Chapter 1:3.1

Over the past 15 years, the Federal Aviation Administration's (FAA)
ambitious air traffic control modernization, which is expected to
cost $34 billion through the year 2003, has experienced cost
overruns, schedule delays, and performance shortfalls.  These
problems led FAA in 1994 to restructure the $7.6 billion former
centerpiece of the modernization--the Advanced Automation System. 
The acquisition of 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.\3

FAA has made some progress since then.  However, much remains to be
accomplished.  For example, systems comprising the modernization have
long proceeded without a complete systems architecture--or
blueprint--to guide them, leading to unnecessarily higher spending to
buy, integrate, and maintain hardware and software.\4 We have
recommended that FAA develop and enforce a complete systems
architecture, and implement a management structure for doing so that
is similar to the Chief Information Officer provisions of the
Clinger-Cohen Act of 1996. 

Also, FAA's poor cost estimating processes and cost accounting
practices leave it at risk of making ill-informed decisions on
critical multimillion, even billion, dollar air traffic control
systems.\5 We recommended that FAA institutionalize defined processes
for estimating the costs of projects and develop and implement a
managerial cost accounting capability. 

Additionally, FAA's organizational culture, which does not reflect a
strong enough commitment to mission focus, accountability,
coordination, and adaptability, has contributed to its modernization
difficulties.\6 We recommended that FAA develop a comprehensive
strategy for addressing this issue. 


--------------------
\3 Advanced Automation System:  Implications of Problems and Recent
Changes (GAO/T-RCED-94-188, April 13, 1994). 

\4 Air Traffic Control:  Complete and Enforced Architecture Needed
for FAA Systems Modernization (GAO/AIMD-97-30, February 3, 1997). 

\5 Air Traffic Control:  Improved Cost Information Needed to Make
Billion Dollar Modernization Investment Decisions (GAO/AIMD-97-20,
January 22, 1997). 

\6 Aviation Acquisition:  A Comprehensive Strategy is Needed for
Cultural Change at FAA (GAO/RCED-96-159, August 22, 1996). 


      DEFENSE'S CORPORATE
      INFORMATION MANAGEMENT
      INITIATIVE
-------------------------------------------------------- Chapter 1:3.2

Defense started the Corporate Information Management (CIM) initiative
in 1989 with the expectation of saving billions of dollars by
streamlining operations and implementing standard information systems
supporting such important business areas as supply distribution,
materiel management, personnel, finance, and transportation. 
However, 8 years after beginning CIM, and after spending a reported
$20 billion, Defense's savings goal has not been met because the
Department has not yet implemented sound management practices. 

We have made numerous recommendations for improving the Department's
management of CIM, such as (1) better linking system modernization
projects to business process improvement efforts, (2) establishing
plans, performance measures, and clearly defined roles and
responsibilities for implementation, and (3) improving controls over
information technology investments.\7 But Defense has yet to
successfully implement these recommendations. 

Not surprisingly, the results of Defense's major technology
investments have been meager and some investments are likely to
result in a negative return on investment.  For example, after
spending over $700 million, Defense has abandoned its system
modernization strategy for materiel management.  For depot
maintenance, Defense expects to spend over $1 billion to develop a
standard system that by its own estimates will achieve less than 2.3
percent in reduced operational costs over a 10-year period. 

The Department estimates that it will spend more than an additional
$11 billion on system modernization projects between now and 2000. 
As part of its Clinger-Cohen Act implementation efforts, the
Department is establishing a framework to use its planning,
programming, and budgeting system to better manage this investment. 

While this is a step in the right direction, these corrective actions
are just the beginning.  This investment remains at risk until
Defense makes well-informed business decisions based on an accurate
picture of the costs of technology investments and their related
benefits and an appreciation for how they fit into the Department's
long- and short-term goals. 


--------------------
\7 See, for example, Defense Management:  Stronger Support Needed for
Corporate Information Management Initiative to Succeed
(GAO/AIMD/NSIAD-94-101, April 12, 1994). 


      NATIONAL WEATHER SERVICE
      MODERNIZATION
-------------------------------------------------------- Chapter 1:3.3

Although the development and deployment of the observing systems
associated with the National Weather Service's (NWS) modernization,
which has been underway for 15 years at a cost of about $4.5 billion,
are nearing completion, unresolved issues still remain.  These issues
concern the observing systems' operational effectiveness and
efficient maintenance, as well as the development and deployment of
remaining modernization component systems. 

For example, the new radars are not always up and running when severe
weather is threatening and the ground-based sensors fall short of
performance and user expectations, particularly when the weather is
active.\8 Further, the centerpiece of the modernization--the
forecaster workstations that will integrate observing systems' data
and support forecaster decision-making--is far from providing all the
promised capabilities and has been delayed and become more expensive
because of design problems and management shortcomings.  In 1996, we
made several recommendations that, if implemented, will strengthen
NWS' ability to acquire these workstations.\9

As we reported in our 1995 high-risk series, the modernization and
evolution of this major systems initiative has long begged for a
comprehensive systems architecture to guide the effort.  NWS has
acknowledged that a technical blueprint is needed and is currently
developing one.  However, NWS will continue to incur higher systems
development and maintenance costs and experience reduced performance
until the systems architecture is developed and enforced. 


--------------------
\8 See, for example, Weather Forecasting:  Radar Availability
Requirements Not Being Met (GAO/AIMD-95-132, May 31, 1995) and
Weather Forecasting:  Unmet Needs and Unknown Costs Warrant
Reassessment of Observing System Plans (GAO/AIMD-95-81, April 21,
1995). 

\9 Weather Forecasting:  Recommendations to Address New Weather
Processing Systems Development Risks (GAO/AIMD-96-74, May 13, 1996). 


      INFORMATION SECURITY
-------------------------------------------------------- Chapter 1:3.4

Information security is a newly designated high-risk area.  Malicious
attacks on computer systems are an increasing threat to our national
welfare.  The federal government's system interconnectivity and
linkage to the Internet, combined with poor security management, is
putting billions of dollars worth of assets at risk of loss and vast
amounts of sensitive data at risk of unauthorized disclosure. 
Increasing reliance on networked systems and electronic records has
elevated concerns about the possibility of serious disruption to
critical federal operations, such as law enforcement, import entry
processing, various financial transactions, payroll, defense
operational plans, electronic benefit payments, and electronically
submitted Medicare claims. 

Information security problems are widespread.  In May 1996, we
reported that the Department of Defense's systems may have
experienced as many as 250,000 attacks by hackers during fiscal year
1995, about 64 percent of the attacks were successful at gaining
access, and only a small percentage of the attacks were detected.\10
Also, in September 1996, we reported that, during the previous 2
years, serious information security control weaknesses had been
reported for 10 of the 15 largest federal agencies.\11

We have repeatedly made dozens of recommendations to agencies to
improve information security and some agencies have acted to
eliminate specific control weaknesses.  However, stronger central
leadership is also necessary by OMB, which has an important role in
promoting awareness of information security problems and monitoring
agency information security practices. 


--------------------
\10 Information Security:  Computer Attacks at Department of Defense
Pose Increasing Risks (GAO/AIMD-96-84, May 22, 1996). 

\11 Information Security:  Opportunities for Improved OMB Oversight
of Agency Practices (GAO/AIMD-96-110, September 24, 1996). 


      THE YEAR 2000 PROBLEM
-------------------------------------------------------- Chapter 1:3.5

At 12:01 on New Year's morning of the year 2000, many computer
systems could either fail to run or malfunction, thereby producing
inaccurate results, because computer equipment and software were not
designed to accommodate the change of date to a new millennium. 
Simply put, the systems will not know whether it is the year 2000 or
1900, for example, since they are designed to operate with the year
designated as only two digits, in this case "00." We are adding this
problem as a new high-risk area because, unless it is resolved in
time, widespread operational and financial impacts could affect
federal, state, and local governments, foreign governments, and
private sector organizations worldwide. 

For example, IRS' tax systems could be unable to process returns,
which in turn could jeopardize the collection of revenue and the
entire tax processing system.  Federal systems used to track student
education loans could produce erroneous information on them, such as
indicating that an unpaid loan had been satisfied.  Or the Social
Security Administration's disability insurance process could
experience major disruptions because the interface with various state
systems fails, thereby causing delays and interruptions in disability
payments to citizens. 

While this issue will reach a crescendo at the turn of the century,
date-related problems have been manifesting themselves for some
years, and more problems are beginning to show up as the new century
approaches.  With every federal agency at risk of system failures and
the year 2000 fast approaching, federal agencies must immediately
assess their Year 2000 risk exposure, and plan and budget for
achieving Year 2000 compliance for all of their mission-critical
systems.  Correcting this problem in federal agencies will involve
extensive, resource-intensive efforts due to factors such as the
large scale of their systems and the numerous dependencies and
interactions with systems of both private sector organizations and
state agencies.  We are working with the Congress and the executive
branch to assess progress in resolving the Year 2000 problem. 


   CONTROLLING FRAUD, WASTE, AND
   ABUSE IN BENEFIT PROGRAMS
---------------------------------------------------------- Chapter 1:4

A broad segment of the nation's citizens--including the elderly,
blind, and disabled--benefit from government programs such as
Medicare and Supplemental Security Income (SSI).  Unfortunately,
these programs experience billions of dollars in losses annually
because of fraudulent claims and payments to those who are
ineligible.  With greater control, these losses could be lessened,
thereby reducing already enormous program costs. 



   (See figure in printed
   edition.)


      MEDICARE
-------------------------------------------------------- Chapter 1:4.1

The continuing need to control claims fraud and abuse in the Medicare
program, one of the largest entitlements in the federal budget, is
heightened by two factors.  First, although growth in Medicare costs,
which were $197 billion in fiscal year 1996, has moderated somewhat
during the last 2 years, many believe even this lower growth rate
cannot be sustained.  Second, the Medicare trust fund that pays for
hospital and other institutional services is expected to be depleted
within the next 5 years. 

No one can determine with precision how much Medicare loses each year
to fraudulent and abusive claims, but losses could be from $6 billion
to as much as $20 billion in fiscal year 1996.  Reducing unnecessary
or inappropriate Medicare payments would result in large savings and
help dampen the growth in Medicare costs. 

The Health Care Financing Administration (HCFA), which runs the
Medicare program, has begun to acquire a new claims processing
system, the Medicare Transaction System (MTS), to provide, among
other things, better protection from fraud and abuse.  In the past,
we have reported on risks associated with this project, including a
plan to implement the system in a single stage, rather than
incrementally; difficulty in defining requirements; inadequate
investment analysis; and significant schedule problems.  HCFA has
responded to these concerns by changing its single-stage approach to
one under which the system will be implemented incrementally, and is
working to resolve other reported problems.  We plan to monitor these
efforts. 

HCFA's interim processing environment includes consolidation of
existing systems and processing sites.  While this is essential, it
adds another element of complexity and risk to Medicare claims
processing.  The success of this overall improvement initiative will
depend upon close management attention to the interim transition
period and addressing reported problems with MTS requirements
definition, scheduling, and cost. 

Also, since our first series of high-risk reports, HCFA has made some
regulatory and administrative changes aimed at curbing fraudulent and
unnecessary payments.  However, in recent years, sizeable cuts in the
budget for program safeguards, where most of the funding for the
fight against abusive billing is centered, have diminished efforts to
thwart improper billing practices.  In addition, Medicare's
fast-growing managed care program suffers from excessive payments and
weak oversight of Medicare health maintenance organizations (HMOs). 

The government has made important strides to protect Medicare from
exploitation.  Recent legislation--the Health Insurance Portability
and Accountability Act of 1996--will add funding to bolster program
safeguard efforts.  The legislation also makes more severe the
penalties for Medicare fraud and enhances HCFA's efforts to oversee
Medicare HMOs. 

In other actions, the Department of Health and Human Services
Inspector General and other federal and state agencies are fighting
Medicare fraud in five states in an effort called Operation Restore
Trust.  After the first year of operation, the effort yielded more
than $40 million in recoveries of payments for claims that were not
allowed under Medicare rules. 

Medicare high-risk issues are discussed in more detail in a separate
report issued as part of this series (GAO/HR-97-10). 


      SUPPLEMENTAL SECURITY INCOME
-------------------------------------------------------- Chapter 1:4.2

The SSI program, which is operated by the Social Security
Administration (SSA) and pays cash benefits to the low-income aged,
blind, and disabled, has grown in size and complexity since its
inception in 1974.  During the first 10 months of 1996, about 6.6
million SSI beneficiaries received about $22 billion in federal
benefits. 

This year, we have included the SSI program as a high-risk area
because overpayments have grown to over $1 billion per year, which is
about 5 percent of total benefit payments.  Also, criticisms have
been raised regarding SSA's ability to effectively manage SSI
workloads and internal control weaknesses that leave the program
susceptible to fraud, waste, and abuse. 

Our reports have highlighted several long-standing SSI program
problem areas.  These involve (1) determining initial and continuing
financial eligibility for beneficiaries, (2) determining disability
eligibility and performing continuing disability reviews, and (3)
inadequate return-to-work assistance for recipients who may be
assimilated back into the workforce. 

For example, in August 1996, we reported that about 3,000 current and
former prisoners in 13 county and local jail systems had been
erroneously paid $5 million in SSI benefits, primarily because SSA
lacked timely and complete information.  Also, the subjective nature
of certain disability criteria limits SSA's ability to ensure
reasonable consistency in administering the program. 

To address SSI program problems, SSA has initiated a major redesign
of the disability claims and appeals process, which will be
implemented over the next several years.  Additionally, the Congress
recently passed legislation to tighten eligibility criteria for
children and immigrants, remove substance abusers from the SSI rolls,
and strengthen existing laws aimed at preventing SSI payments to
individuals in correctional institutions.  The legislation also
requires SSA to conduct more reviews of SSI recipients to ensure that
they remain eligible.  It is too early to determine how these changes
will affect the SSI program's vulnerability to inappropriate
expenditures. 

The magnitude of the SSI program and its demonstrated vulnerability
to fraud, waste, abuse, and mismanagement call for decisive
management action to address long-standing problems.  Redesign of the
disability claims process must remain an agency priority, and SSA
must also establish effective program policy, management
accountability, and internal controls to protect taxpayers' dollars
and assure timely and accurate decisions for SSI claimants. 

Additional information on the Supplemental Security Income Program
problems and improvements can be found in the Quick Reference Guide
(GAO/HR-97-2). 


   MINIMIZING LOAN PROGRAM LOSSES
---------------------------------------------------------- Chapter 1:5

The federal government is responsible for collecting billions of
dollars from lending programs.  At the end of fiscal year 1995, the
federal government had a reported $204 billion in loan receivables,
including at least $38 billion in delinquencies, and an additional
$737 billion in loan guarantees.  This portfolio represents a wide
variety of credit programs involving housing, farming, education,
small business, and other activities. 

While the nature of these programs results in some expected losses,
agencies are required to mitigate them through effective credit
management and prudent debt collection procedures.  But,
historically, GAO and others have reported that agencies have not
always properly managed their lending programs. 

To help in this area, the 104th Congress passed the Debt Collection
Improvement Act of 1996 to expand and strengthen federal agency debt
collection practices and authorities.  While this important new
legislation can provide a much needed new impetus to improve lending
program performance, it will take time to implement, and additional
attention by agency management and actions by the Congress are
necessary as well. 



   (See figure in printed
   edition.)


      FARM LOAN PROGRAMS
-------------------------------------------------------- Chapter 1:5.1

In February 1995, we noted that some progress had been made in
addressing two of the causes of the U.S.  Department of Agriculture's
(USDA) farm loan programs' problems.  We reported that addressing the
remaining problems would require strengthening weak loan and property
management policies and further clarification of the agency's role by
the Congress. 

Since then, the Congress enacted Title VI of the Federal Agriculture
Improvement and Reform Act of 1996, which made fundamental changes in
the programs' loan-making, loan-servicing, and property management
policies.  For example, the changes would prohibit delinquent
borrowers from obtaining additional direct farm operating loans and
limit the number of times delinquent borrowers can receive debt
forgiveness. 

If implemented properly, this legislation should significantly reduce
the financial risk associated with the farm lending programs, and
combined with USDA's actions to improve compliance with program
standards, should reduce the farm lending programs' vulnerability to
loss.  However, USDA is still in the process of implementing the
mandated reforms and their impact on the loan portfolio's financial
condition will not be known for some time. 

Additional information on problems and improvements involving Farm
Loan Programs can be found in the Quick Reference Guide
(GAO/HR-97-2). 


      STUDENT FINANCIAL AID
      PROGRAMS
-------------------------------------------------------- Chapter 1:5.2

We previously reported that while federal student aid programs have
succeeded in giving students access to money for postsecondary
education, the Department of Education has been less successful at
protecting the financial interests of the U.S.  taxpayers.  We also
expressed concern that Education's long-standing management problems
could hamper its implementation and administration of the Ford Direct
Loan Program. 

In our previous high-risk reports, we discussed legislative
initiatives by the Congress to address many of the underlying
problems with the student financial aid programs' structure and
management.  These reports also discussed numerous administrative
actions taken by Education to correct the problems and improve
program controls. 

The Department has generally been responsive to recommendations for
improvements and some results have been achieved.  For example,
Federal Family Education Loan Program default costs declined
slightly, from $2.7 billion in fiscal year 1992 to $2.5 billion in
fiscal year 1995.  In January 1997, the Department announced that
default costs continued to decline through fiscal year 1996.  Also,
collections on defaulted loans increased from $1 billion in fiscal
year 1992 to $2 billion in fiscal year 1995. 

Nonetheless, the financial risk to taxpayers from student financial
aid program vulnerabilities remains substantial.  For example,
inadequate Department oversight has contributed to abuses on the part
of some schools participating in federal student aid programs.  These
abuses included instances in which schools received Pell grant funds
for students who never applied for the grants or never enrolled in or
attended the schools.  In another instance, a chain of proprietary
schools falsified student records and misrepresented the quality of
its educational programs in order to increase its revenues from
students receiving Pell grants. 

The student financial aid programs' procedural and structural
problems remain.  Some of these arose from the statutory design of
the programs and will remain unless the design is changed through
congressional actions.  Others can be mitigated through more
effective management by the Department.  The Department has taken
corrective actions in responding to many of our recommendations and
those made by others.  However, overseeing the student aid programs'
complex and cumbersome structure and processes presents a continuing
management challenge to the Department. 

Additional information on Education's Student Financial Aid issues
can be found in a separate report being issued as part of this series
(GAO/HR-97-11). 


      DEPARTMENT OF HOUSING AND
      URBAN DEVELOPMENT
-------------------------------------------------------- Chapter 1:5.3

One of the nation's largest financial institutions, HUD is
responsible for managing more than $400 billion in insured loans,
$485 billion in outstanding securities, and about $180 billion in
prior years' budget authority for which it has future financial
commitments.  Because of these responsibilities and the large
discretionary budget outlays for HUD's programs, which were about
$31.8 billion in fiscal year 1995, it is imperative that the
deficiencies hampering HUD's leadership in effectively managing the
agency be resolved. 

HUD's management deficiencies involve (1) weak internal controls, (2)
inadequate information and financial management systems, (3) an
ineffective organizational structure, and (4) an insufficient mix of
staff with the proper skills.  These problems are not new--we
reported them in 1995 and they were a major factor contributing to
the incidents of fraud, waste, abuse, and mismanagement reported in
the late 1980s.  Fundamental control weaknesses also contributed to
the HUD Inspector General's inability to give an opinion on the
Department's fiscal year 1995 financial statements. 

HUD has made some progress in overhauling its operations to correct
these problem areas.  For example, HUD has (1) implemented a new
management planning and control program intended to identify and rank
the major risks in each program and devise strategies to abate those
risks, (2) implemented portions of new systems, (3) eliminated the
regional office structure and transferred direct authority for staff
and resources to the assistant secretaries, and (4) stepped up staff
training.  Also, HUD has continued efforts to reinvent and reengineer
its current wide array of programs. 

However, these efforts are far from reaching fruition and
long-standing, fundamental problems remain.  HUD's programs will
remain high-risk until the agency completes more of its planned
corrective actions and until the administration and the Congress
reach closure on a restructuring that focuses HUD's mission and
consolidates, reengineers, and/or reduces HUD's programs.  What is
needed is for the administration and the Congress to agree on the
future direction of federal housing and community development policy
and put in place the organizational and program delivery structures
that are best suited to carry out that policy--a process that will
involve inherent tradeoffs in the needs of those seeking HUD's
assistance and with other demands on the total federal budget. 

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 series (GAO/HR-97-12). 


   IMPROVING MANAGEMENT OF FEDERAL
   CONTRACTS AT CIVILIAN AGENCIES
---------------------------------------------------------- Chapter 1:6

Civilian agencies rely on the private sector as a means to carry out
their programs through contracts involving goods and services costing
tens of billions of dollars a year.  While this approach can be used
to reduce the workforce, it is critical that the government gets what
it pays for under these contracts and that the contractors' work is
done at reasonable cost.  But this is not always the case, due to
problems with the oversight and control of contractor operations. 



   (See figure in printed
   edition.)


      DEPARTMENT OF ENERGY
-------------------------------------------------------- Chapter 1:6.1

Through a major contract reform effort, DOE has made headway to
overcome its history of weak contractor management.  As the federal
government's largest civilian contracting agency, in fiscal year
1995, DOE spent about $17.5 billion to, among other things, maintain
its weapons complex, fund its national laboratories, and clean up its
legacy of environmental contamination. 

We designated DOE's contracting as a high-risk area in 1990 because
its extensive reliance on contracting and its history of inadequate
oversight of contractors failed to protect the government from fraud,
waste, and abuse.  Since then we have issued a series of reports and
testimonies that have identified some of the costly effects of DOE's
contracting practices, contributed to the Congress' budget
deliberations, and provided an impetus for DOE to reform its
contracting. 

In 1994, a DOE contract reform team made sweeping recommendations
aimed at the Department's weak contract practices.  In response, DOE
has made progress in developing an extensive array of policies and
procedures, such as publishing a new regulation adopting a standard
of full and open competition for the award of its management and
operating contracts.  DOE's proposed contract reforms are
unprecedented in scope and provide a comprehensive plan to address
DOE's past contracting problems, but competition is not yet the
practice. 

Implementing the reforms will require a period of years as current
contracts are either competitively awarded or noncompetitively
renewed with reform provisions incorporated into the contracts. 
Continued high-level monitoring and oversight by DOE will be needed
so that DOE does not lose its momentum and priority in implementing
contract reform. 

Additional information on the Department of Energy Contract
Management problems and improvement initiatives can be found in a
separate report being issued as part of this series (GAO/HR-97-13). 


      NASA
-------------------------------------------------------- Chapter 1:6.2

NASA has made considerable progress in improving its contract and
procurement operations which in recent years have totalled about $13
billion a year, about 90 percent of NASA's annual budget.  For
example, NASA has established a process for collecting better
information for managing contractor performance, placed greater
emphasis on contract cost control and contractor performance, and
improved its use of contract audit services. 

Efforts such as these have achieved results in a number of areas, and
NASA has demonstrated that it can take timely action once a potential
problem has surfaced.  For instance, NASA lowered the value of
contract changes for which prices had not yet been negotiated from
$6.6 billion in December 1991 to less than $500 million in September
1996.  Also, the number of unresolved audits by the Defense Contract
Audit Agency was reduced to 13 in June 1996 from 92 in 1994. 

As one of the largest civilian contracting agencies, NASA will
inevitably experience periodic problems in procurement activity, as
shown by our recent work that identified additional contract
management problems and opportunities to improve procurement
oversight.  For instance, in July 1996, we reported on problems in
controlling costs in the International Space Station Program, which
accounts for over 10 percent of NASA's annual procurement funding. 

While NASA's efforts are encouraging, the agency must be able to
identify contract management problems early so they can be evaluated,
monitored, and corrected before they become systemic.  NASA's
approach to periodically assessing its management of procurement
functions could benefit from additional agencywide guidance to help
ensure more consistent and thorough coverage of the procurement
cycle. 

Additional information on NASA Contract Management is in the Quick
Reference Guide (GAO/HR-97-2). 


      SUPERFUND
-------------------------------------------------------- Chapter 1:6.3

Cleaning up the nation's hazardous waste problems has proved to be
far more complicated and costly than anticipated when the Superfund
program was started at the Environmental Protection Agency (EPA) in
1980.  Recent estimates show that cleaning them up could amount to
over $300 billion in federal costs and many billions more in private
expenditures. 

While about half of the Superfund program's budget annually goes to
contractors, EPA has had long-standing problems in controlling
contractors' charges.  We have repeatedly reported that EPA has not
overseen its cost-reimbursable contracts as necessary to prevent
contractors from overcharging the government.  EPA has focused
attention on strengthening its management of Superfund contracts for
the past several years, continued to exercise oversight, such as
conducting reviews of its regions' performance in this area, and made
other improvements. 

Nonetheless, Superfund contracting problems persist.  EPA's regions
are still too dependent upon contractors' own cost proposals to
establish the price of cost-reimbursable work, and EPA continues to
pay its cleanup contractors a high percentage of total contract costs
to cover administrative expenses rather than ensuring that the
maximum amount of available monies is going toward the actual cleanup
work.  Also, little progress has been made in improving the
timeliness of audits to verify the accuracy of billions of dollars in
Superfund contract charges.  The backlog has remained steady at about
500 unfulfilled requests for audits. 

Consequently, the agency remains vulnerable to overpaying its
contractors and not achieving the maximum cleanup work with its
limited resources.  EPA needs to better estimate the costs of
contractors' work, use the estimates to negotiate reasonable costs,
provide contractors with appropriate incentives to hold down their
administrative expenses, and increase the timeliness of contract
audits. 

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-97-14). 


   PLANNING FOR THE 2000 DECENNIAL
   CENSUS
---------------------------------------------------------- Chapter 1:7

Another newly designated high-risk area involves the risk to the
nation of an unsatisfactory or costly census in 2000.  Public
cooperation is key to the decennial census, but over the years,
voluntary cooperation has eroded.  By 1990, the most expensive census
in history produced results that were less accurate than those of the
preceding census. 

In anticipation of the need to deal with an even larger nonresponse
workload than in 1990, the Census Bureau has designed statistical
sampling and estimation procedures that should be more accurate and
cost-effective than visiting every nonresponding household.  But the
Bureau has so far failed to demonstrate convincingly to the Congress
exactly what effects these procedures would have, and the Congress
has concerns over the proposed approach.  As a result, the Congress,
which under the Constitution and court decisions has the authority to
determine the manner in which the census will be taken, could choose
to preclude the Bureau from moving forward with its sampling plan. 

The administration has done little to plan for the possibility that
greater amounts of funding than now anticipated may be necessary to
cover added personnel, facilities, and equipment costs if sampling
and estimation are not used.  Careful advance planning and higher
priority is necessary to avoid the risk of a very expensive and
seriously flawed census in 2000.  Given the dependence of many
decisions affecting governments, businesses, and citizens on the
results of the census, the country can ill-afford an unsatisfactory
census at the turn of the century, especially if it comes at a
substantially higher cost than previous censuses. 

The problems that could impede effectively planning for the 2000
Decennial Census are discussed further in the Quick Reference Guide
(GAO/HR-97-2). 


USING LEGISLATIVE FOUNDATION TO
MONITOR HIGH-RISK AREAS AND
EFFECTIVELY OPERATE PROGRAMS
============================================================ Chapter 2

Resolving specific high-risk problems and implementing broader
management reforms will require a concerted effort by agency
managers.  In this regard, the Congress has held oversight hearings
and established the legislative framework necessary to achieve better
financial, information, and acquisition management and measure the
results of program operations.  This framework will help agencies
identify and monitor high-risk areas and operate programs more
effectively and will assist the Congress in overseeing agencies'
efforts to achieve these results. 

  -- The expanded Chief Financial Officers (CFO) Act of 1990 provides
     the framework for identifying and correcting financial
     management weaknesses and reliably reporting on the results of
     financial operations. 

  -- The Government Performance and Results Act (GPRA) of 1993
     emphasizes managing for results and pinpointing opportunities
     for improved performance and increased accountability. 

  -- The Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of
     1996 (1) explicitly focus on the application of information
     resources in supporting agency missions and

improving agency performance and (2) set forth requirements for
improving the efficiency and effectiveness of operations and the
delivery of services to the public through the effective use of
information technology. 

  -- The Federal Acquisition Streamlining Act (FASA) of 1994 and
     sections of the Clinger-Cohen Act have provided agencies the
     tools for streamlining and simplifying their processes for
     acquiring goods and services. 


   IMPROVING FINANCIAL INFORMATION
---------------------------------------------------------- Chapter 2:1

Timely, reliable, useful, and consistent financial information is
central to better managing government programs, providing
accountability, and addressing high-risk problems.  As a number of
high-risk areas show, federal financial management suffers from
decades of neglect and failed attempts to improve financial
management and modernize outdated financial systems.  As a result,
financial information has not been reliable enough to use in federal
decision-making or to provide the requisite public accountability. 
Good information on the full costs of federal operations is
frequently absent or extremely difficult to reconstruct, and
complete, useful financial reporting is not yet in place. 

The landmark CFO Act spelled out a long overdue and ambitious agenda
to help resolve these types of financial management deficiencies. 
The act established a CFO structure in 24 major agencies and OMB to
provide the necessary leadership and focus.  To help instill greater
accountability and fix pervasive and costly control breakdowns,
financial statements were required to be prepared and audited,
beginning with those for fiscal year 1991, for revolving and trust
funds and commercial activities.  For 10 agencies, audited financial
statements were required as a part of a pilot program to test this
concept for an agency's entire operations.  Moreover, the CFO Act set
expectations for

  -- the deployment of modern systems to replace existing antiquated,
     often manual, processes;

  -- the development of better performance and cost measures; and

  -- the design of results-oriented reports on the government's
     financial condition and operating performance by integrating
     budget, accounting, and program information. 

Important and steady progress is being made under the act to bring
about sweeping reforms and rectify the devastating legacy from
inattention to financial management.  Moreover, the regular
preparation of financial statements and independent audit opinions
required by the 1990 act are bringing greater clarity and
understanding to the scope and depth of problems and needed
solutions. 

The success of these efforts formed the basis for congressional
action in 1994 to pass the Government Management Reform Act, which
expanded to all 24 CFO Act agencies the requirement for the
preparation and audit of financial statements for their entire
operations, beginning with those for fiscal year 1996.  Together,
these agencies account for virtually the entire federal budget.  This
essential expansion of the CFO Act's requirements provides a greater
impetus for accelerated governmentwide implementation of financial
management reform. 

Also, the 1994 expansion to the CFO Act requires the preparation and
audit of consolidated governmentwide financial statements, beginning
with those for fiscal year 1997.  For the first time, the American
public will have an annual report card on the results of current
operations and the financial condition of its national government. 
This, in conjunction with the 24 CFO Act agencies' financial
statements, will set the foundation for the federal government to
have the kind of financial reporting already required by (1) the
securities laws for the private sector, partly in response to the
stock market crash of 1929 and (2) the Single Audit Act for state and
local governments, driven in part by financial crises such as that
experienced by New York City in the early 1970s. 

In addition, the Federal Financial Management Improvement Act of 1996
requires agencies to comply with federal accounting standards,
federal financial systems requirements, and the U.S.  government's
standard general ledger.  This legislation also requires (1) auditors
performing financial audits under the CFO Act to report whether
agencies' financial management systems comply with these requirements
and (2) agency heads to establish remediation plans if an agency's
financial management systems do not comply. 

The requirements of these laws underscore the importance to improved
federal financial management of efforts by the Federal Accounting
Standards Advisory Board (FASAB) to recommend federal accounting
standards and the Joint Financial Management Improvement Program
(JFMIP) to develop uniform financial systems requirements.  FASAB and
JFMIP are joint activities of the Secretary of the Treasury, the
Director of OMB, and the Comptroller General to foster better
financial management governmentwide. 

Since passage of the CFO Act, we and the Inspector General (IG)
community have been laying the groundwork by performing financial
statement audits of major Departments and agencies throughout
government.  We have worked in tandem with agency CFOs and IGs, OMB,
and Treasury over several years to be a catalyst for the preparation
and audit of agencywide financial statements across government.  To
successfully meet the CFO Act's requirements, it will be essential
for the federal financial management and audit communities to give
priority to meeting the act's time frame for preparing audited
financial statements. 

As auditor for the governmentwide financial statements, we plan to
ensure in-depth audit coverage of (1) the four agencies (the
Departments of the Treasury, Defense, and Health and Human Services
and the Social Security Administration) which are likely to have the
greatest impact on the governmentwide financial statements and (2)
the remaining 20 CFO Act agencies and other federal entities that
will be included in the consolidated statements. 

Making CFO Act reforms a reality in the federal government remains a
challenge and a great deal more perseverance will be required to
sustain the current momentum and successfully overcome decades of
serious neglect in fundamental finance management operations and
reporting methods.  But fully and effectively implementing the CFO
Act is a very important effort because it is key to better
accountability, implementing broader management reforms, and
supporting the goals of GPRA.  CFO Act audited financial statements
will interpret, analyze, and provide the nation's leaders, agency
managers, and the public at large with a wealth of relevant
information on the government's true financial status. 


   MANAGING FOR RESULTS
---------------------------------------------------------- Chapter 2:2

Traditionally, federal agencies have used either the amount of money
directed toward their programs, the level of staff deployed, or even
the number of tasks completed as some of the measures of their
performance.  But at a time when the value of many federal programs
is undergoing intense public scrutiny, an agency that reports only
these measures has not answered the defining question of whether
these programs have produced real results. 

Under GPRA, every major federal agency must now ask itself basic
questions:  What is our mission?  What are our goals and how will we
achieve them?  How can we measure our performance?  How will we use
that information to make improvements? 

GPRA requires agencies to set goals, measure performance, and report
on their accomplishments. 

  -- No later than September 30, 1997, executive agencies are to
     issue to the Congress, OMB, and the public strategic plans
     covering a period of at least 5 years.  These plans are to be
     updated every 3 years. 

  -- Beginning with fiscal year 1999, executive agencies are to
     develop annual performance

plans that link the strategic goals with daily activities.  These
plans are to be developed as part of the President's budget. 

  -- Executive agencies are to develop annual performance reports and
     submit them to the President and appropriate congressional
     committees.  The first reports will cover fiscal year 1999. 

This will not be an easy transition, nor will it be quick.  And for
some agencies, GPRA will be difficult to apply.  The challenges they
face in establishing outcome-oriented goals and measures and managing
on the basis of them were experienced by agencies participating in a
pilot program authorized by the act.  But GPRA has the potential for
adding greatly to government performance--a particularly vital goal
at a time when resources are limited and public demand is high. 

To help the Congress and federal managers put GPRA into effect, we
have identified key steps that agencies need to take toward its
implementation, along with a set of practices that can help make that
implementation a success.\1 We learned of these practices from
organizations that have successfully taken initiatives similar to the
ones required by the act.  The key steps and practices drawn from the
organizations we studied provide a useful framework for federal
agencies working to implement GPRA. 


--------------------
\1 Executive Guide:  Effectively Implementing the Government
Performance and Results Act (GAO/GGD-96-118, June 1996). 


   MANAGING INFORMATION TECHNOLOGY
   BETTER
---------------------------------------------------------- Chapter 2:3

High-risk system development problems are common across government
and have been for many years.  A broad solution is needed to help
agencies prevent these problems and maximize the benefits of
technology for improving performance and reducing costs.  Similarly,
there is a need to strengthen federal agencies' ability to
effectively address emerging technology issues and problems on a
governmentwide basis. 

To improve this situation, we have worked closely with the Congress
since our 1995 high-risk report to fundamentally revamp and modernize
federal information management practices.  Our study of leading
public and private sector organizations showed how they applied an
integrated set of management practices to create the information
technology infrastructure they needed to dramatically improve their
performance and achieve mission goals.\2 These practices provide
federal agencies with essential lessons in how to overcome the root
causes of their chronic information management problems. 

The 104th Congress used these lessons to create the first significant
reform in information technology management in over a decade:  the
1995 Paperwork Reduction Act and the Clinger-Cohen Act of 1996. 
These laws require agencies to implement a framework of modern
technology management--one that is based on practices followed by
leading public and private sector organizations that have
successfully used technology to dramatically improve performance and
meet strategic goals. 

These laws emphasize involving senior executives in information
management decisions, establishing senior-level Chief Information
Officers, tightening controls over technology spending, redesigning
inefficient work processes, and using performance measures to assess
technology's contribution to achieving mission results for the
American people. 

These management practices provide a proven, practical means of
addressing the federal government's information problems, maximizing
benefits from technology spending, and controlling the risks of
system development efforts.  The challenge now is for agencies to
apply this framework to their own technology efforts, particularly
those at high risk of failure. 

Effectively implementing these reforms will require agencies to put a
strong Chief Information Officer leadership structure in place and to
institutionalize processes to select, control, and evaluate
technology projects.  Oversight by the Congress will be important to
monitor progress by agencies and OMB in implementing these practices
and promoting effective governmentwide technology investment reforms. 


--------------------
\2 Executive Guide:  Improving Mission Performance Through Strategic
Information Management and Technology--Learning from Leading
Organizations (GAO/AIMD-94-115, May 1994). 


   STREAMLINING PROCUREMENT
---------------------------------------------------------- Chapter 2:4

In recent years, the Congress has become increasingly concerned that
the acquisition system used by federal agencies has been wasteful,
adding billions to the cost of obtaining goods and services. 
Numerous statutes and regulations, each intended to promote valid
objectives, had resulted over time in a complex system that burdened
both contracting officials and prospective vendors.  In enacting
FASA, the Congress sought to ease that burden and to provide the
tools for improving the process. 

FASA established a simplified acquisition threshold of $100,000, and
provided for significant simplification of procurements at or below
that amount.  It encouraged the acquisition of commercial items by
exempting such purchases from a number of requirements.  The act also
provided for the development of a Federal Acquisition Computer
Network that, if implementation problems are addressed, would
facilitate the procurement of goods and services electronically.\3
The Clinger-Cohen Act provided for further simplification of the
procurement process, particularly for commercial items. 

In addition, Title V of FASA requires federal agencies to establish
cost, schedule, and performance goals for acquisition programs and
report annually on the progress in meeting those goals.  The
Department of Defense is required to report on progress in reducing
the time for incorporating new technology into weapon systems.  Title
V also requires the development of results-oriented acquisition
process guidelines. 


--------------------
\3 Acquisition Reform:  Obstacles to Implementing the Federal
Acquisition Computer Network (GAO/NSIAD-97-26, January 3, 1997). 


   CONGRESSIONAL OVERSIGHT IS KEY
---------------------------------------------------------- Chapter 2:5

Continued annual oversight by appropriate congressional committees
will be important to ensure that agencies effectively implement these
laws and achieve their goals, which can result in better

  -- data to help make spending decisions,

  -- assessments of the performance and cost of federal activities
     and operations,

  -- management of the federal government's enormous investment in
     information technology, and

  -- federal procurement processes. 


KEY CONTACTS FOR NEWLY DESIGNATED
HIGH-RISK AREAS
============================================================ Chapter 3


   DEFENSE INFRASTRUCTURE
---------------------------------------------------------- Chapter 3:1

David R.  Warren, Director
Defense Management Issues
National Security and International Affairs
 Division
(202) 512-8412


   INFORMATION SECURITY
---------------------------------------------------------- Chapter 3:2

Jack L.  Brock, Director
Information Resources Management
Accounting and Information Management
 Division
(202) 512-6240


   THE YEAR 2000 PROBLEM
---------------------------------------------------------- Chapter 3:3

William S.  Franklin, Director
Information Resources Management
Accounting and Information Management
 Division
(202) 512-6499

Joel C.  Willemssen, Director
Information Resources Management
Accounting and Information Management
 Division
(202) 512-6408



   SUPPLEMENTAL SECURITY INCOME
---------------------------------------------------------- Chapter 3:4

Jane L.  Ross, Director
Income Security Issues
Health, Education and Human Services
 Division
(202) 512-7215


   2000 DECENNIAL CENSUS
---------------------------------------------------------- Chapter 3:5

Bernard L.  Ungar, Associate Director
Federal Management and Workforce Issues
General Government Division
(202) 512-4232


1997 HIGH-RISK SERIES
============================================================ Chapter 4

An Overview (GAO/HR-97-1)

Quick Reference Guide (GAO/HR-97-2)

Defense Financial Management (GAO/HR-97-3)

Defense Contract Management (GAO/HR-97-4)

Defense Inventory Management (GAO/HR-97-5)

Defense Weapon Systems Acquisition (GAO/HR-97-6)

Defense Infrastructure (GAO/HR-97-7)

IRS Management (GAO/HR-97-8)

Information Management and Technology (GAO/HR-97-9)

Medicare (GAO/HR-97-10)

Student Financial Aid (GAO/HR-97-11)

Department of Housing and Urban Development (GAO/HR-97-12)

Department of Energy Contract Management (GAO/HR-97-13)

Superfund Program Management (GAO/HR-97-14)
























The entire series of 14 high-risk reports can be ordered by using the
order number GAO/HR-97-20SET. 


*** End of document. ***