High-Risk Program: Information on Selected High-Risk Areas (Letter
Report, 05/16/97, GAO/HR-97-30).

This report contains additional information on 12 areas included in
GAO's list of government programs at high risk for waste, fraud, abuse,
and mismanagement: defense inventory management, Medicare, supplemental
security income, information security, contract management at the
Department of Energy, student financial aid, air traffic control
modernization, NASA contract management, Customs Service financial
management, farm loan programs, National Weather Service modernization,
and asset forfeiture programs. It includes descriptions of key open GAO
recommendations relevant to each area, the implementation status of
those recommendations, and remaining challenges to addressing these
high-risk problems. Where possible, GAO has identified the federal
dollars involved with each program and discusses federal dollars at risk
from abusive or wasteful practices.

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

 REPORTNUM:  HR-97-30
     TITLE:  High-Risk Program: Information on Selected High-Risk Areas
      DATE:  05/16/97
   SUBJECT:  Risk management
             Defense procurement
             Student financial aid
             Contract administration
             Financial management
             Farm credit
             Cost control
             Systems conversions
             Health care programs
             Computer security
IDENTIFIER:  Medicare Program
             Supplemental Security Income Program
             High Risk Series 1997
             DOD Prime Vendor Program
             Federal Family Education Loan Program
             William D. Ford Federal Direct Loan Program
             FAA Air Traffic Control Modernization Program
             NWS Modernization Program
             Treasury Asset Forfeiture Fund
             GAO High Risk Program
             
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Cover
================================================================ COVER


Information for House Majority
Leader Richard Armey and
Representative Pete Sessions

May 1997

HIGH-RISK PROGRAM - INFORMATION ON
SELECTED HIGH-RISK AREAS

GAO/HR-97-30

High-Risk Program

(918906)


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

  ATC - x
  FAA - x
  HMO - x
  NASA - X
  NWS - x
  SSI - x

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


B-xxxxxx

May 16, 1997

The Honorable Richard Armey
Majority Leader
House of Representatives

The Honorable Pete Sessions
House of Representatives

As requested in your April 18, 1997, letter, enclosed is additional
information on 12 areas included in GAO's latest update on its
High-Risk Program.\1 It includes descriptions of key open GAO
recommendations relevant to each area, the implementation status of
those recommendations and why they have not been fully implemented,
and remaining challenges to addressing high-risk problems.  With
regard to costs, where possible, we have identified the federal
dollars involved with each program or area, and discuss federal
dollars at risk from abusive or wasteful practices.  In some cases,
we have also indicated the estimated savings that might be attained
or the costs that could be avoided if specific changes were made in
these areas. 

As agreed with your offices, unless you publicly release this
information earlier, we will not distribute it until 30 days from the
date of this letter. 

To facilitate further GAO assistance, the GAO teams responsible for
each of these high-risk areas are identified within the enclosed
material.  If you have any questions or need additional information
on any of the enclosed material, please contact me on (202) 512-2600,
or George Stalcup, Associate Director, on (202) 512-9490. 

Gene L.  Dodaro
Assistant Comptroller General

Enclosures


--------------------
\1 High-Risk Series (GAO/HR-97-20SET, Feb.  1997). 


DEFENSE INVENTORY MANAGEMENT
============================================================ Chapter 0


   OVERVIEW
---------------------------------------------------------- Chapter 0:1

In 1990, we identified the Department of Defense's (DOD) secondary
inventory management as a high-risk area because levels of unneeded
inventory were too high and systems for determining inventory
requirements were inadequate.  Inventory management problems have
plagued DOD for decades.  Despite numerous efforts on DOD's part to
correct these problems, we continue to consider inventory management
a high-risk area because it is vulnerable to fraud, waste, abuse, and
mismanagement.  We recently reported that, as of September 30, 1995,
about $34 billion, or about half of DOD's $69.6 billion secondary
inventory, was not needed to support war reserve or current operating
requirements.  Most of the problems that contributed to the
accumulation of this unneeded inventory still exist, such as outdated
and inefficient inventory management practices that frequently do not
meet customer demands, inadequate inventory oversight, weak financial
accountability, and overstated requirements.  Because of these
problems, we believe that a portion of DOD's annual expenditure of
approximately $15 billion for additional inventory is likely to be
spent for unneeded inventory. 

DOD recognizes that it needs to make substantial improvements to its
logistics system.  While we continue to see pockets of improvement,
as evidenced by each service's and the Defense Logistics Agency's
(DLA) reengineering efforts, DOD has made little overall progress in
correcting systemic problems that have traditionally resulted in
large unneeded inventories.  DOD top management needs to continue its
commitment to changing its inventory management culture so that it
provides its forces with necessary supplies in a timely manner while
avoiding the accumulation of unnecessary materials. 

To effectively address its inventory management problems, DOD must
adopt a strategy that includes both short- and long-term actions. 

  -- In the short term, DOD must continue to emphasize the efficient
     operation of its existing logistics systems.  This includes
     reducing and disposing of unneeded inventory, implementing
     efficient and effective inventory management practices, training
     personnel in these practices and rewarding the right behavior,
     improving requirements data accuracy, and enforcing existing
     policies and procedures to minimize the acquisition and
     accumulation of unnecessary inventory. 

  -- In the long term, DOD must establish goals, objectives, and
     milestones for changing its culture and adopting new management
     tools and practices.  A key part to changing DOD's management
     culture will be an aggressive approach to using best practices
     from the private sector.  From our discussions with more than 50
     private sector companies, we identified best practices which, if
     applied in an integrated manner, could help streamline DOD's
     logistics operations, potentially save billions of dollars, and
     improve support to the military customer.  In our opinion, DOD
     has not been aggressive enough in pursing these practices. 
     Recent DOD reengineering efforts have not incorporated some of
     the most advanced practices found in the private sector for
     reparable parts, and they have been slow to adopt best practices
     for hardware items. 


   POTENTIAL SAVINGS
---------------------------------------------------------- Chapter 0:2

Our work identified opportunities for reducing the cost of operations
and improving the overall effectiveness and efficiency of DOD support
operations.  We believe that there are about $2.3 billion in fiscal
year 1996 expenditures for secondary items that could be avoided. 
For example, DOD spends about $14 billion a year to purchase
secondary inventory items--spare and repair parts, clothing, medical
supplies, and other support items--to support its operating forces. 
At September 30, 1996, DOD had $8.6 billion under contract or on
purchase request to buy additional inventory.  Of this amount, we
estimate that about $1.6 billion of the $8.6 billion exceeded current
operating and war reserve requirements.  Even using DOD's definition
of needed inventory, which includes an additional 2-years worth of
requirements, there would still be about $664 million of the $8.6
billion that would be classified as excess to current operations and
war reserves.  In a recent report (Defense Logistics:  Much of the
Inventory Exceeds Current Needs, GAO/NSIAD-97-71, Feb.  28, 1997) GAO
noted that 145 inventory items had inventory valued at $28.4 million
that represented 20 or more years of supply on hand and that had an
additional $11.3 million on order.  These items included circuit card
assemblies, hydraulic pump linear valves, combining glasses,
oscillators, and identification markers. 

In addition, in a September 1996 report (1997 DOD Budget:  Potential
Reductions to Operation and Maintenance Program, GAO/NSIAD-96-220,
Sep.  18, 1996), GAO reported that DOD's fiscal year 1997 operation
and maintenance budget request could be reduced by $723 million
because of potential unnecessary inventory purchases.  Specifically,
GAO noted that (1) a $188 million reduction could be taken because
Army budget requests for spare parts were not based on accurate
requirements data, (2) a $87 million reduction could be taken because
the Navy and the Air Force used inaccurate data to determine
requirements, (3) a $60 million reduction could be taken because the
Navy counted depot level maintenance requirements for aviation spare
parts twice, and (4) a $388 million reduction could be taken because
the Air Force did not consider spare parts that were available for
reclamation from aircraft and engines with no identified future use. 

In many cases, potential savings cannot be precisely quantified until
DOD has taken specific action on our recommendations.  For example,
in the best practices area, in response to our recommendations, DOD
has adopted best practices to improve the management of personnel
items (medical, food, and clothing supplies), but these initiatives
cover less than 3 percent of DOD's secondary items.  Between 1991 and
1995, we issued a series of reports that identified and recommended
ways DOD could apply best management practices to personnel items. 
These reports focused on improved partnerships between suppliers and
DOD facilities, principally through the use of prime vendors.  A
prime vendor provides timely and direct delivery between customers
and suppliers, and orders additional stock from manufacturers on
short notice, with quick turnaround, to minimize inventory holding
costs.  This approach reduces the need to stock and distribute
inventory from DOS's warehouse system. 

Since 1993, DLA has taken steps to use prime vendors for personnel
items.  One of DLA's most successful initiative has been the
implementation of a prime vendor program for medical supplies and
pharmaceutical products.  We reported in 1995 that approximately 150
DOD hospitals and medical treatment facilities were using prime
vendors in 21 different geographic regions across the United States. 
The use of this program has allowed DOD to reduce stock levels at
both wholesale and retail locations.  Reducing inventory levels has
also enabled DOD to reduce the warehouse space needed to store these
items.  At one storage depot alone, DLA reduced the storage space
used for medical and pharmaceutical items by about 40 percent over a
3-year period. 

We estimate that between September 1991 and September 1996, DOD
reduced its pharmaceutical, medical, and surgical inventories and
associated management costs by about $714 million through the use of
best practices, such as prime vendors.  The majority of savings has
resulted from the issuance of medical supplies to military customers
without having to replace inventories through the purchase of
additional stocks.  Similar prime vendor programs are being
implemented for food and clothing items. 

The prime vendor program also enables DOD hospitals to reduce
inventory costs.  For example, we reported in August 1995 that the
Walter Reed Army Medical Center, in addition to a $3.8 million
reduction in pharmaceutical inventories, saves over $6 million a year
in related inventory management expenses by using a prime vendor.  In
addition, as a result of the elimination of inventories after the
prime vendor program was established, Walter Reed was able to convert
a former warehouse holding medical supplies into a medical training
facility. 


   KEY OPEN RECOMMENDATIONS AND
   IMPLEMENTATION STATUS
---------------------------------------------------------- Chapter 0:3

The key area that we principally focused on in the inventory
management area in 1995 and 1996 centered on the implementation of
best management practices adopted in the private sector to solve
longstanding inventory management problems.  We have made several key
recommendations designed at rectifying these longstanding problems. 

While DOD has taken steps to improve its logistics practices and
reduce inventories, such as through long-term contracting, direct
vendor delivery, and electronic commerce, DOD has not made enough
progress with its $5.7 billion inventory of hardware items.  It still
has large amounts of items, such as bolts, valves, and fuses, that
cost millions of dollars to manage and store.  We estimate that this
inventory could satisfy DOD's requirements for the next 2 years,
assuming demands remain constant.  In contrast, some private sector
companies we visited maintain inventory levels that last only 90
days.  These companies have achieved these lean inventory levels and
saved millions in operating costs by developing innovative supplier
partnerships that give established commercial distribution networks
the responsibility to manage, store, and distribute inventory on a
frequent, regular basis. 

Although we recommended in 1993 that DOD pursue innovative
partnerships with its suppliers to reduce logistics costs, DOD is
only now in the initial stages of testing this type of partnership
through its "Virtual Prime Vendor" program for hardware supplies.  If
successfully implemented, this concept could enable DOD to improve
service to its customers and reduce overall logistics costs.  In our
opinion, this program is close to those efforts we have observed in
the private sector and provides DOD with an excellent opportunity to
achieve greater inventory reductions by minimizing the need to store
inventory at wholesale and retail locations.  If DOD were able to
achieve similar performance from this effort as those in the private
sector, hardware inventories and related management costs could be
reduced by billions of dollars and parts needed to complete repairs
would be more readily available to the end user. 

In addition to the opportunities to improve the management of
hardware items, there are even greater opportunities to improve DOD's
management of reparable parts.  As of September 30, 1995, DOD held
more than $50 billion worth of these parts, but its efforts to
streamline its logistics system for them have not included key best
practices we have identified.  Over the past 15 months, we have
reported on the various problems with the DOD's pipeline for
reparable parts and on the substantial improvement opportunities
available to DOD.  For example: 

  -- In April 1997, we reported that we examined 24 different types
     of Army aviation parts, and calculated that the Army's logistics
     system took an average of 525 days to ship broken parts from
     field units to the depot, repair them, and ship the repaired
     parts to using units.  We estimated that all but 18 days (97
     percent) was the result of unplanned repair delays, depot
     storage, or transportation time.  We also calculated the Army
     uses its inventory six times slower than a major airline,
     British Airways.  That airline had developed a process to move
     parts through its repair pipeline much faster.  For example, one
     part we examined had an Army repair pipeline time of 429 days;
     in contrast, British Airways was able to complete this process
     in 116 days. 

  -- In July 1996, we reported that the Navy's repair process can
     create as many as 16 time-consuming steps as parts move through
     the depot repair pipeline.  Component parts can accumulate at
     each step in the process, which increases the total number of
     parts that are needed to meet customer demands and to ensure a
     continuous flow of parts.  By tracking parts through each of the
     16 steps and using the Navy's flow time data, we estimated that
     it could take, on average, about 4 months from the time a broken
     part is removed from an aircraft to the time it is ready for
     reissue.  Our analysis did not include the amount of time parts
     were stored in warehouses awaiting repair or issue to the
     customer. 

  -- In February 1996, we reported that using its current logistics
     pipeline process, the Air Force can spend several months to
     repair the parts and then distribute them to the end user.  One
     part we examined had an estimated repair cycle time of 117 days;
     it took British Airways only 12 days to repair a similar part. 
     The complexity of the Air Force's repair and distribution
     process creates as many as 12 different stopping points and
     several layers of inventory as parts move through the process. 
     Parts can accumulate at each step in the process, which
     increases the total number of parts in the pipeline. 

In our reports, we stated that DOD's improvement efforts were not as
extensive as they could be because they have not incorporated the
best practices we have seen in the private sector.  These practices
are the prompt repair of items, the reorganization of the repair
process, the establishment of partnerships with key suppliers, and
the use of third-party logistics services.  When used in an
integrated manner, these best practices have successfully reduced
costs and improved logistics operations.  We have recommended that
DOD test these concepts and expand them to other locations, where
feasible. 

Each service is developing initiatives to improve the management of
its logistics pipeline for reparable aircraft parts to make their
logistics processes faster, better, and cheaper.  Because these
programs have only recently begun, they have had limited impact in
improving DOD's overall logistics operations. 


   WHY RECOMMENDATIONS HAVE NOT
   BEEN IMPLEMENTED AND WHAT
   REMAINS TO BE DONE
---------------------------------------------------------- Chapter 0:4

Most of the problems that contributed to the accumulation of unneeded
inventory still exist, such as outdated and inefficient inventory
management practices that frequently do not meet customer demands,
inadequate inventory oversight, weak financial accountability, and
overstated requirements.  Correcting these problems, as a result of
implementing our recommendations to adopt best practices, generally
involves development of long-term strategies.  However, the
"corporate culture" within DOD has been traditionally resistant to
change.  Organizations often find changes in operations threatening
and are unwilling to change current behavior until proposed ideas
have been proven.  This kind of resistance must be overcome if the
services are to expand their concept of operations.  DOD's top
management needs to continue its commitment to changing its inventory
management culture so that it provides its forces with necessary
supplies in a timely manner while avoiding the accumulation of
unneeded materials.  We believe that the adoption of best practices
is key to changing DOD's inventory management culture. 


   OTHER INFORMATION
---------------------------------------------------------- Chapter 0:5

There are several House and Senate committees and subcommittees that
have particular interest or ongoing initiatives related to this
high-risk area.  For example, Senator Carl Levin, both in his current
capacity as Ranking Minority Member of the Senate Armed Services
Committee and as the former Chairman of the Subcommittee on Oversight
of Government Management and the District of Columbia, Senate
Governmental Affairs Committee, has requested GAO's reviews of DOD's
inventory management practices to identify areas where costs can be
reduced and problems can be avoided if DOD adopted leading-edge
practices that have been applied successfully by the private sector. 
The House Budget Committee has also expressed concern over and
requested information on issues surrounding inventory management. 

In addition, we have testified several times this year before
congressional committees on high-risk inventory management issues,
including the Senate Committee on Governmental Affairs and the
Subcommittee on National Security, International Affairs, and
Criminal Justice, House Committee on Government Reform and Oversight. 



                CONGRESSIONAL CONTACTS WITH INTEREST IN
                  DEFENSE INVENTORY MANAGEMENT ISSUES

Committee                       Key Staff
------------------------------  --------------------------------------
Senate

Armed Services                  Cord Sterling, Professional Staff
                                Member (majority)
                                (202) 224-9346

                                Peter Levine, Counsel for Senator
                                Levin
                                (202)224-3871

                                David Lyles, Minority Staff Director
                                (202) 224-3871

Governmental Affairs            William Greenwalt, Chief Investigator
                                (202) 224-4751

                                Linda Gustitus, Subcommittee Minority
                                Staff Director and Chief Counsel
                                (202) 224-4551

House

National Security               Jeff Schwartz, Professional Staff
                                Member
                                (202) 226-1036

                                Craig Hall, Staff Member
                                (202) 225-0892

Budget                          Wayne Struble, Director, Budget
                                Priorities (majority)
                                (202) 226-7270

                                Michael Lofgren, Budget Analyst
                                (202) 226-7270

Government Reform and           Robert Charles, Subcommittee Staff
Oversight                       Director/Chief Counsel
                                (202) 225-2577

                                Jim Wilon, Subcommittee Counsel
                                (202) 225-2577

                                Mark Stephenson, Professional Staff
                                Member (minority)
                                (202) 225-5051
----------------------------------------------------------------------


                EXECUTIVE BRANCH CONTACTS WITH INTEREST
                 IN DEFENSE INVENTORY MANAGEMENT ISSUES

Agency                          Contact
------------------------------  --------------------------------------
Department of Defense           John Phillips
                                Deputy Under Secretary of Defense,
                                Logistics
                                (703) 697-1368

                                Robert Mason
                                Assistant Deputy Under Secretary of
                                Defense, Logistics (Maintenance)
                                (703) 697-7980

                                James Emahiser
                                Assistant Deputy Under Secretary of
                                Defense, Logistics (Materiel and
                                Distribution Management)
                                (703) 697-9238

                                General Johnnie Wilson
                                Commander, U.S. Army Materiel Command
                                (703) 617-9626

----------------------------------------------------------------------


                PRIVATE SECTOR CONTACTS WITH INTEREST IN
                  DEFENSE INVENTORY MANAGEMENT ISSUES

----------------------------------------------------------------------
General Vincent Russo (U.S. Army, Ret.)
Defense Logistician
(770) 997-4870

Dr. John Coyle
Professor of Transportation and Logistics
Penn State University
(814) 865-0585

Logistics Management Institute
(202) 651-8070

Council of Logistics Management
(630) 574-0985
----------------------------------------------------------------------

   ONGOING AUDIT WORK
---------------------------------------------------------- Chapter 0:6

  -- DOD Suspended Stocks

  -- ICP Consolidation under the Defense Logistics Agency

  -- DOD's Property Disposal Process

  -- Best Management Practices for Hardware Supplies

  -- DOD Parts Destruction

  -- Navy's Inventory Requirements


   KEY GAO CONTACT
---------------------------------------------------------- Chapter 0:7

David R.  Warren
Director, Defense Management Issues
(202) 512-8412


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 0:8

Inventory Management:  The Army Could Reduce Logistics Costs for
Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82, Apr.  15,
1997). 

Addressing the Deficit:  Budgetary Implications of Selected GAO Work
for Fiscal Year 1998 (GAO/OCG-97-2, Mar.  14, 1997). 

High-Risk Series:  Defense Inventory Management (GAO/HR-97-5, Feb. 
1997). 

Defense Logistics:  Much of the Inventory Exceeds Current Needs
(GAO/NSIAD-97-71, Feb.  28, 1997). 

Defense Inventory:  Spare and Repair Parts Inventory Costs Can Be
Reduced (GAO/NSIAD-97-47, Jan.  17, 1997). 

Logistics Planning:  Opportunities for Enhancing DOD's Logistics
Strategic Plan (GAO/NSIAD-97-28, Dec.  18, 1996). 

1997 DOD Budget:  Potential Reductions to Operation and Maintenance
Program (GAO/NSIAD-96-220, Sept.  18, 1996). 

Defense IRM:  Critical Risks Facing New Materiel Management Strategy
(GAO/AIMD-96-109, Sept.  6, 1996). 

Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, Aug.  16, 1996). 

Inventory Management:  Adopting Best Practices Could Enhance Navy
Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July
12, 1996). 

Defense Logistics:  Requirement Determinations for Aviation Spare
Parts Need to Be Improved (GAO/NSIAD-96-70, Mar.  19, 1996). 

Best Management Practices:  Reengineering the Air Force's Logistics
System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb.  21,
1996). 

Inventory Management:  DOD Can Build on Progress in Using Best
Practices to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug.  4,
1995). 

Defense Inventory:  Opportunities to Reduce Warehouse Space
(GAO/NSIAD-95-64, May 24, 1995). 

Best Practices Methodology:  A New Approach for Improving Government
Operations (GAO/NSIAD-95-154, May 1995). 

Defense Business Operations Fund:  Management Issues Challenge Fund
Implementation (GAO/NSIAD-95-79, Mar.  1, 1995). 

Defense Supply:  Inventories Contain Nonessential and Excessive
Insurance Stocks (GAO/NSIAD-95-1, Jan.  20, 1995). 

Defense Supply:  Acquisition Leadtime Requirements Can Be
Significantly Reduced (GAO/NSIAD-95-2, Dec.  20, 1994). 

Reengineering Organizations:  Results of a GAO Symposium
(GAO/NSIAD-95-34, Dec.  13, 1994). 

Commercial Practices:  Opportunities Exist to Enhance DOD's Sales of
Surplus Aircraft Parts (GAO/NSIAD-94-189, Sept.  23, 1994). 

Organizational Culture:  Use of Training to Help Change DOD Inventory
Management Culture (GAO/NSIAD-94-193, Aug.  30, 1994). 

Partnerships:  Customer-Supplier Relationships Can Be Improved
Through Partnering (GAO/NSIAD-94-173, July 19, 1994). 

Commercial Practices:  DOD Could Reduce Electronics Inventories by
Using Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994). 

Commercial Practices:  Leading-Edge Practices Can Help DOD Better
Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr.  13, 1994). 

Defense Transportation:  Commercial Practices Offer Improvement
Opportunities (GAO/NSIAD-94-26, Nov.  26, 1993). 

Defense Inventory:  Applying Commercial Purchasing Practices Should
Help Reduce Supply Costs (GAO/NSIAD-93-112, Aug.  6, 1993). 

Commercial Practices:  DOD Could Save Millions by Reducing
Maintenance and Repair Inventories (GAO/NSIAD-93-155, June 7, 1993). 

DOD Food Inventory:  Using Private Sector Practices Can Reduce Costs
and Eliminate Problems (GAO/NSIAD-93-110, June 4, 1993). 

Organizational Culture:  Techniques Companies Use to Perpetuate or
Change Beliefs and Values (GAO/NSIAD-92-105, Feb.  27, 1992). 

DOD Medical Inventory:  Reductions Can Be Made Through the Use of
Commercial Practices (GAO/NSIAD-92-58, Dec.  5, 1991). 

Commercial Practices:  Opportunities Exist To Reduce Aircraft Engine
Support Costs (GAO/NSIAD-91-240, June 28, 1991). 


MEDICARE
============================================================ Chapter 1


   OVERVIEW
---------------------------------------------------------- Chapter 1:1

Medicare provides health insurance for nearly all elderly Americans
age 65 and older and many of the nation's disabled.  One of the
largest entitlement programs in the federal budget, Medicare spent
nearly $200 billion in fiscal year 1996, and its costs are expected
to increase more than 8 percent annually for the next 5 years. 
Before the end of that period, however, the trust fund that finances
hospital, nursing home, and home health care is expected to be
insolvent.  While the Congress and the President have introduced
changes to control Medicare costs, they are concerned that
significant amounts of these costs are lost to fraudulent and
wasteful claims. 

In addition to being costly, Medicare is complex.  Providing health
care coverage to about 38 million people, Medicare pays nearly a
million providers who submit about 800 million individual claims each
year.  Most Medicare services are provided through the
fee-for-service sector, where any qualified provider can bill the
program for each covered service rendered.  In recent years,
increasing numbers of Medicare beneficiaries have enrolled in health
maintenance organizations (HMO), a type of managed care, to receive
covered services.  Nearly 90 percent of Medicare beneficiaries,
however, remain under fee-for-service care.  Each of these delivery
systems has its unique set of problems. 

In 1992 and again in 1995, GAO reported that the Medicare program was
highly vulnerable to waste, fraud, abuse, and mismanagement.  Since
1992, the Health Care Financing Administration (HCFA), the Department
of Health and Human Services' (HHS) agency responsible for running
the Medicare program, has made some regulatory and administrative
changes aimed at curbing fraudulent and unnecessary payments. 
However, in recent years, sizable 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. 

Problems in funding program safeguards and HCFA's limited oversight
of its contractors continue to contribute to fee-for-service program
losses.  While HCFA expects a major computer system acquisition
project to reduce certain weaknesses, the project itself has several
risks that may keep HCFA from attaining its goals.  On the managed
care side, Medicare payment rates to HMOs are excessive and HCFA
oversight is weak.  These flaws leave beneficiaries without
information essential to guide their HMO selection and without
assurance that HMOs are screened adequately and disciplined for
unacceptable care. 

Since GAO issued its 1995 high-risk report, the government has made
important strides in efforts to protect Medicare from exploitation. 
Recent legislation--the Health Insurance Portability and
Accountability Act of 1996 (P.L.  104-191), popularly known as the
Kassebaum-Kennedy Act--provides assured funding for program
safeguards, although per-claim expenditures will remain below the
level of 1989 after adjusting for inflation.  Nevertheless, we expect
that the funding, if properly applied, can significantly improve
anti-fraud and anti-abuse efforts.  In addition, HCFA anticipates
that it will gain enhanced oversight capacity and reduced
administrative costs when the new claims processing system--the
Medicare Transaction System (MTS), now progressing through its design
phase--is fully implemented, which HCFA expects to occur after the
year 2000.  Further, the HHS Inspector General and other federal and
state agencies banded together to fight 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 payment
recoveries for claims that were not allowed under Medicare rules, as
well as convictions for fraud, impositions of civil monetary
penalties, and the exclusion of providers from the program.  Methods
used in this program will be applied to detect fraud and abuse in
other locations in the future. 

Progress is also being made in addressing program management issues. 
For example, the Health Insurance Portability and Accountability Act
gives additional flexibility to HCFA to contract with firms
specializing in utilization review and makes the penalties for
Medicare fraud more severe.  In addition, HCFA is improving its
credentialing process for Medicare providers and is currently
evaluating commercially available software for its potential to
screen out some types of inappropriate claims.  Finally, the new
Health Insurance Portability legislation and several planned consumer
information efforts offer the potential for improved HCFA oversight
of HMOs. 

Many of Medicare's vulnerabilities are inherent in its size and
mission, making the government's second largest social program a
perpetually attractive target for exploitation.  That wrongdoers
continue to find ways to dodge safeguards illustrates the dynamic
nature of fraud and abuse and the need for constant vigilance and
increasingly sophisticated ways to protect the system.  Judicious
changes in Medicare's day-to-day operations entailing HCFA's improved
oversight and leadership, its appropriate application of new
anti-fraud-and-abuse funds, and the mitigation of MTS acquisition
risks, are necessary ingredients to reduce substantial future losses. 
Moreover, as Medicare's managed care enrollment grows, HCFA must
ensure that payments to HMOs better reflect the cost of
beneficiaries' care, that beneficiaries receive information about
HMOs sufficient to make informed choices, and that the agency's
expanded authority to enforce HMO compliance with federal standards
is used.  To adequately safeguard the Medicare program, HCFA needs to
meet these important challenges promptly. 


   POTENTIAL SAVINGS
---------------------------------------------------------- Chapter 1:2

No one can claim with precision how much Medicare loses each year,
but our work suggests that by reducing unnecessary or inappropriate
payments, the federal government can realize large savings and help
dampen the growth in Medicare costs.  The hidden nature of improper
billing and health care crimes precludes a rigorously quantified
estimate of expenditures attributable to fraud and abuse.  Estimates
of the costs of fraud and abuse ranging from 3 to 10 percent have
been cited for health expenditures nationwide, so applying this range
to Medicare suggests that such losses in fiscal year 1996 could have
been from $6 billion to as much as $20 billion. 


   KEY OPEN RECOMMENDATIONS AND
   IMPLEMENTATION STATUS
---------------------------------------------------------- Chapter 1:3

Special Payments to Teaching Hospitals (GAO/HRD-89-33)\1

Because Medicare's extra payments to teaching hospitals are too high,
our work has shown that the Congress can save about $1 billion
annually by reducing the percentage of add-on payments that teaching
hospitals receive.  Since the GAO report was issued, the
Congressional Budget Office and the Prospective Payment Review
Commission also found that the percentage was too high.  Their
analyses of recent data continue to show a reduction is warranted. 
Decreasing the indirect medical education adjuster has been under
consideration in the Medicare savings debate. 


--------------------
\1 This issue was also discussed in GAO's report Addressing the
Deficit:  Budgetary Implications of Selected GAO Work for Fiscal Year
1998 (GAO/OCG-97-2, Mar.  14, 1997). 


      EXCESSIVE PAYMENTS FOR
      COSTLY TECHNOLOGIES
      (GAO/HRD-92-59)
-------------------------------------------------------- Chapter 1:3.1

Provider costs and Medicare reimbursements for medical procedures
involving new technologies, such as magnetic resonance imaging (MRI)
are often high in order to offset initial expenditures for equipment
and low rates of usage.  We reported, however, that HCFA does not
make timely adjustments to the Medicare reimbursement rates as new
medical technologies mature and unit costs decline.  Therefore, we
recommended that HCFA (1) survey facility costs and revise the
Medicare fee schedule to more accurately reflect the costs that are
incurred and (2) periodically review and adjust the Medicare
reimbursements for procedures using high-cost technologies. 

To help bring Medicare payment rates more in line with actual costs,
the Congress has enacted several mandates to reduce rates for
specific procedures and services--including payments for MRI scans. 
In addition, HCFA has several rate-reduction projects planned or
underway.  None of these projects, however, targets new and expensive
technologies.  We continue to believe that significant program
savings would result from an ongoing, systematic process for
evaluating the reasonableness of Medicare payment rates for maturing
medical technologies. 


      RAPID SPENDING GROWTH IN
      HOME HEALTH CARE
      (GAO/HEHS-96-16)
-------------------------------------------------------- Chapter 1:3.2

Since 1990, Medicare outlays for home health care services--provided
to beneficiaries who are home-bound and need skilled care--have grown
at an average rate of over 30 percent a year.  We reported that the
increase in home health outlays is largely due to increased usage
that has accompanied deterioration in program controls.  Funding for
review of claims had declined by over one- third.  In addition, a
court struck down HCFA's interpretation of benefit coverage
requirements; this court ruling in effect widened Medicare coverage
of home health.  Consequently, we suggested that the Congress may
wish to consider clarifying the scope of the benefit and providing
extra resources to strengthen controls against abuse of the home
health benefit.  At issue is whether the benefit should continue to
be more of a long-term care benefit or whether it should be limited
primarily to post-acute care. 

The HCFA Administrator and the Congress have made a number of
proposals designed to gain better control of the Medicare home health
benefit.  These proposals are under active Congressional
consideration.  The Health Insurance Portability and Accountability
Act of 1996 provides assured funding for Medicare program integrity
activities beginning in fiscal year 1997.  If appropriate funding is
allocated to home health care oversight from newly available funds,
the intent of the recommendation will be met. 

Further, the administration has proposed moving to a Prospective
Payment System (PPS) to help control cost growth in home health
benefits.  While the proposal has appeal, what remains unclear about
PPS is whether an appropriate unit of service can be defined for
calculating prospective payments and whether HCFA's databases are
adequate for establishing reasonable rates. 


      REFERRALS TO IMAGING
      FACILITIES (GAO/HEHS-95-2)
-------------------------------------------------------- Chapter 1:3.3

In 1993, we reported that physicians with a financial interest in
imaging facilities referred their Medicare patients for more imaging
services than physicians without such investments.  As part of the
Omnibus Budget Reconciliation Act of 1993 (OBRA), the Congress
included provisions to restrict physicians from referring their
patients to facilities in which the physician has a financial stake. 
In 1995, we recommended that HCFA develop the procedures needed for
Medicare claims processing contractors to monitor these referrals. 
Although OBRA restrictions were effective as of January 1, 1995, HCFA
has not issued final regulations and guidance needed to assure
compliance with OBRA. 


      MEDICARE REIMBURSEMENT FOR
      THERAPY IN NURSING HOMES
      (GAO/HEHS-95-23)
-------------------------------------------------------- Chapter 1:3.4

Nursing home residents receive therapy services (e.g., physical
therapy) from various providers.  We reported that Medicare is
vulnerable to overcharges from unscrupulous providers, due in part to
its flawed reimbursement methods, and in part to its inadequate
screening of providers.  Consequently, we recommended that HCFA set
explicit limits to ensure that Medicare pays no more for therapy
services than would any prudent purchaser.  Furthermore, we
recommended that Medicare certification requirements be strengthened
so that those entities billing Medicare would be more accountable for
the services they provide to beneficiaries. 

HCFA has proposed revised salary equivalency guidelines for
contracted physical therapy and respiratory services, speech language
pathology, and occupational therapy services.  However, even with
these guidelines, the Medicare-established limits will not apply if a
therapy company bills Medicare directly.  HCFA is also exploring ways
to strengthen controls over these types of services in skilled
nursing facilities (SNF).  The Administrator has proposed and we have
supported requiring that virtually all services furnished to SNF
residents be billed by the SNF itself.  This would facilitate a SNF
prospective payment system, limit the possibility of double billing,
and help to control overutilization of part B services billed by
outside suppliers. 


      EXCESSIVE PAYMENTS FOR
      MEDICAL SUPPLIES
      (GAO-HEHS-95-171)
-------------------------------------------------------- Chapter 1:3.5

Medicare reimburses providers of certain medical items and supplies
according to fee schedules that do not reflect substantially lower
market prices.  For example, Medicare pays $2.32 for a pad of gauze
that is available at the wholesale level for 19 cents.  Excessive
fees invite submission of abusive claims by unscrupulous providers. 
Coupled with inadequate review of such claims, these above-market
fees and payment rates lead to Medicare and taxpayers losing hundreds
of millions of dollars. 

Current law imposes cumbersome administrative requirements that HCFA
must follow when adjusting payment rates.  In one situation where
HCFA made such an adjustment, it took 3 years.  In addition, for some
items, HCFA lacks the authority to adjust payment rates.  We
recommended that the Congress give HHS the authority to adjust fee
schedules promptly when overpriced services and supplies are
identified.  HHS has submitted legislative proposals to the Congress
on several occasions since 1987 that would provide HCFA and the
carriers the authority to adjust or limit fee-schedule amounts. 


      SCREENING MEDICARE CLAIMS
      (GAO-HEHS-96-49)
-------------------------------------------------------- Chapter 1:3.6

Medicare is only supposed to reimburse providers for services that
are medically necessary.  We reported that the several dozen Medicare
claims processors often use different automated screens to
distinguish necessary from unnecessary services, based on criteria
developed locally.  We also reported that these screens do not target
medical procedures that are overused nationwide.  (Up to several
hundred million dollars per year are at stake.) Consequently, we
recommended that HCFA act as a clearinghouse--gathering information
on both local medical policies and screens for procedures that are
widely overused, and disseminating the information to all the claims
processors.  We also recommended that HCFA hold the claims processors
accountable for implementing local medical policies and screens for
procedures that are overused nationwide. 

As of May 22, 1996, HCFA reported that it had completed work on some
model medical policies and was working on others.  However,
concerning the collection, analysis, and dissemination of information
on effective prepayment screens, HCFA stated that the implementation
of the planned Medicare Transaction System is needed to develop a
fully comprehensive database of screens that can be analyzed and
shared with all carriers.  Full implementation of the system is not
scheduled until after the year 2000. 

HCFA is exploring ways to identify widespread overutilization by
analyzing trends and national patterns.  Until HCFA systematically
identifies widespread overutilization, it cannot hold its contractors
accountable for correcting overutilization that is national in scope. 


      MEDICARE PAYMENT RATES TO
      RISK CONTRACT HMOS
      (GAO/HEHS-96-21,
      GAO/T-HEHS-97-78,
      GAO/HEHS-97-16)
-------------------------------------------------------- Chapter 1:3.7

Most Medicare beneficiaries who join a HMO belong to a "risk
contract" HMO, which provides them with all covered services in
exchange for a flat fee, paid by Medicare.  We have reported that
Medicare generally overpays these risk HMOs because its payment
methods do not correct enough for risk HMOs enrollees' tendency to be
healthier and less costly than the average beneficiary.  With risk
HMO enrollment at more than 11 percent of beneficiaries and growing
rapidly, these excess payments become substantial.  Given the
problem's heightened urgency, we suggested that the Congress might
wish to give HHS the authority to reduce Medicare HMO payment rates
in areas where market data indicate that these rates are too high. 

In addition, we recently recommended that the Secretary of HHS should
direct HCFA to correct the inflated cost average underlying
Medicare's HMO payment rates.  We estimate this change would save
several hundred million dollars annually. 


      MEDICARE HMO OVERSIGHT
      (GAO/HEHS-95-155,
      GAO/HEHS-97-23,
      GAO/T-HEHS-97-109)
-------------------------------------------------------- Chapter 1:3.8

Beneficiaries' confidence in Medicare managed care depends
significantly on the effectiveness of HCFA oversight.  Although HCFA
has instituted several promising improvements, its monitoring and
enforcement of performance standards for Medicare HMOs still falls
short; quality assurance reviews are not comprehensive, enforcement
actions are too often weak, and the appeals process for beneficiaries
is slow.  We recommended that HHS develop more consumer-oriented
oversight of the Medicare HMO program, including (a) routinely
publishing comparative data on HMOs' performance and on known
deficiencies and (b) assigning sufficient, trained staff to monitor
and verify the effectiveness of HMOs' quality assurance practices. 


      PAYMENTS TO RURAL HEALTH
      CLINICS (GAO/HEHS-97-24,
      GAO/OCG-97-2)
-------------------------------------------------------- Chapter 1:3.9

The Rural Health Clinics (RHC) program was established in 1977 to
provide reimbursement to health clinics in underserved rural
communities.  Today, the federal government continues to reimburse
RHC providers through the Medicare and Medicaid programs on the basis
of their actual costs of providing care, while most other providers
receive lower payments limited by set fee schedules.  RHCs continue
to receive cost-based reimbursement out of recognition that a fee
schedule approach does not help ensure financial viability of low
volume rural health care providers.  Since 1989, the number of RHCs
has grown by over 30 percent a year to nearly 3,000, with total
payments to them expected to be over $1 billion annually by the year
2000. 

We found that contrary to its purpose, the RHC program is generally
not focused on serving populations that have difficultly obtaining
primary care in isolated rural areas.  Rather, our work suggests that
the additional funding provided to RHCs each year increasingly
benefits well-staffed, financially viable clinics in populated areas
that already have extensive health care delivery systems in place. 
We recommended that the Congress eliminate cost-based reimbursement
to RHCs unless they are located in areas with no other Medicare and
Medicaid providers or can demonstrate that existing providers will
not accept new Medicare and Medicaid patients and that the funding
would be used to expand access to them.  Assuming such improvements
in the targeting of payments, the Congressional Budget Office
estimated that the Medicare savings would be $200 million between
1998 and 2002 (the Medicaid savings would be $140 million). 


      MEDICARE INCENTIVE PAYMENTS
      IN HEALTH CARE SHORTAGE
      AREAS (GAO/HEHS-95-200,
      GAO/OCG-97-2)
------------------------------------------------------- Chapter 1:3.10

The Medicare Incentive Payment (MIP) program was established in 1987
amid concerns that low Medicare reimbursement rates for primary care
services caused access problems for Medicare beneficiaries in
underserved areas.  To encourage physicians to locate and serve
Medicare beneficiaries in such areas, physicians receive an
additional 10-percent payment from Medicare for the services they
deliver in urban and rural Health Professional Shortage Areas
designated by HHS.  In 1995, a representative of HCFA stated that
this program provided about $107 million in bonuses to physicians, an
amount 16 percent higher than the previous year. 

Our work leads us to question the appropriateness of the program. 
Recent surveys of the Medicare population show that neither provider
shortages nor low reimbursement rates were causing wide spread access
problems.  Also, we found that at least one-third of these
designations are outdated or erroneous and that evidence suggests
that the MIP program did not play a significant role in physician
decisions to practice in underserved areas because the payment is too
low.  The Congressional Budget Office estimated that elimination of
the program would save $380 million between 1998 and 2002. 


   WHY RECOMMENDATIONS HAVE NOT
   BEEN IMPLEMENTED AND WHAT
   REMAINS TO BE DONE
---------------------------------------------------------- Chapter 1:4

As can be seen from the discussion of the individual key
recommendations, the government has made some progress in protecting
the Medicare program from exploitation.  One of the long-standing
problems facing HCFA has been its lack of resources needed to
implement many of our recommendations.  The recent passage of the
Health Insurance Portability and Accountability Act, however, should
help HCFA in this regard by providing HCFA an opportunity both to
stabilize its scrutiny of Medicare claims and more effectively
regulate risk contract HMOs.  Adequate funding of the anti-fraud and
anti-abuse activities coupled with strong HCFA oversight of its
fee-for-service and managed care contracts constitute the foundation
for managing a program that is always likely to be a target for
exploitation. 

Another recurring difficulty has been the length of time it takes to
implement regulatory changes in those situations where HCFA has
agreed with our recommendations.  The process is complicated and
takes several years to complete.  Additionally, the Congress has not
acted on our recommendations in some cases. 

A successful implementation of the Medicare Transaction System could
help address various Medicare problems, including providing better
controls over fraud and abuse.  However, HCFA needs to mitigate the
risks associated with the acquisition of this system.  Today, we are
releasing our report, Medicare Transaction System:  Success Depends
Upon Correcting Critical Management and Technical Weaknesses
(GAO/AIMD-97-78, May 16, 1997), which includes numerous
recommendations to address these risks.  Both OMB and HHS have agreed
with these recommendations and said that they will take action to
address them.  As HCFA faces this challenge as well as those
presented by the growing and complex Medicare program, it needs to
make additional technological improvements, such as greater use of
commercial software to identify areas vulnerable to billing abuses. 
Further, it must apply continued vigilance over day-to-day operations
and exhibit strong leadership to effectively manage the program,
thereby controlling the risks to both the taxpayers and
beneficiaries. 



                Congressional Contacts With Interest In
                            Medicare Issues

Committee/
Subcommittee            Key Staff               Area of Interest
----------------------  ----------------------  ----------------------
Senate

 Governmental      Majority: Farnham       -Medicare fraud and
Affairs                                         abuse
(202) 224-4751          Minority: McFarland
                                                -HCFA efforts on
                                                Government Performance
                                                and Results Act

Finance                 Majority Staff          -Medicaid programs'
(202) 224-4515          Director: Paull         impact on Medicare
                                                expenditures
                        Majority Staff: James,
                        Bonmartini, Smith,      -Medicare pricing
                        Vachon                  issues

                        Minority Staff: Podoff  -Medicare fraud and
                                                abuse

                                                -Payment policies for
                                                Medicare HMOs

Appropriations          Majority Staff:         -Medicare fraud and
(202) 224-3471          Sourwine                abuse costs
                                                -Medicare Transaction
Labor, Health, and      Minority Staff:         System
Human Services and      Reinecke
Education
(202) 224-7230

Labor and Human         Majority Staff:         -Implementation of
Resources               Harrington, Guice       Health Insurance
(202) 224-5375                                  Portability and
                        Minority Staff: Ewers   Accountability Act


Aging                   Majority Staff:         -Medicare HMO payment
(202) 224-0136          Spaulding               issues

Special Committee       Majority Staff          -Medicare fraud and
on Aging                Director: Totman        abuse
(202) 224-5364
                        Majority Staff: Jones   -Medicare home health

                        Minority Staff          -Consumer information
                        Director: Lesley        on Medicare HMOs

                        Minority Staff: Cohen   -Medicare and Medicaid
                                                dual eligibles

                                                -Disenrollments from
                                                Medicare HMOs

                                                -Geographic
                                                differences in
                                                Medicare HMO premiums
                                                and benefits

House

Budget                  Majority Staff:         -Medicare financing
(202) 226-7270                                  and
Cantwell savings

Commerce                Majority Staff: Cohen,  -Medicare managed care
(202) 225-2927 Staff:   Berger                  payment issues
Nelson issues
                        Minority Staff          -Medicare fraud and
                        Director: Stuntz        abuse

                        Minority                -Medicare management

                                                -Medicare pricing

Education and the       Majority Staff:         -Effects of Health
Workforce               Mueller                 Insurance Portability
(202) 225-4527                                  and Accountability Act
                        Minority Staff: Bruns
Employer-Employee
Relations
(202)225-4527

Government Reform and
Oversight
(202) 225-5074


Human Resources         Majority Staff:         -Medicare fraud and
(202) 225-2548          Halloran, Sayer         abuse

                        Minority Staff:         -Medicare management
                        Stroman
                                                -Medicare Transaction
                                                System

                                                -HCFA efforts on
                                                Government Performance
                                                and Results Act

Ways and Means
(202) 225-3625

Health                  Majority Staff          ï¿½Medicare managed care
(202) 225-3943          Director: Kahn          payment issues

                        Majority Staff: Lynch,  ï¿½Home health and
                        Rosen                   skilled nursing
                                                facility cost growth
                        Minority Staff
                        Director: Vaughn        ï¿½Medicare pricing

                                                ï¿½Solvency of Medicare
                                                part A trust fund

                                                ï¿½End-stage renal
                                                disease claims and
                                                payments

                                                ï¿½Prospective payment
                                                systems for post acute
                                                care

                                                ï¿½Age threshold for
                                                Medicare eligibility
----------------------------------------------------------------------

   ONGOING AUDIT WORK
---------------------------------------------------------- Chapter 1:5

The following ongoing jobs are related to the Medicare High-Risk
issue: 

  -- Medicare HMO Post-Acute Care

  -- Medicare Certification of Home Health Agencies

  -- Review of Durable Medical Equipment Medical Policies

  -- Medicare HMOs:  Patterns of Beneficiary Disenrollment and
     Indicators of Problem Plans

  -- Review of Modern Management Practices That Can be Implemented in
     Medicare to Achieve Savings and Improve Operations

  -- Review of the Health Insurance Portability and Accountability
     Act's Medicare Fraud Reduction Measures

  -- Cost-Effectiveness of Medicare Prepayment Screens

  -- Review of Home Health Benefits Under the Medicare Program

  -- Medicare Payments for Durable Medical Equipment

  -- Review of Medicare Payments to HMOs for Institutionalized
     Beneficiaries

  -- Implications of Including For-Profit Home Health Utilization
     Rates in Developing a Prospective Payment System

  -- Review of Lab Service Utilization Rates for Medicare End-Stage
     Renal Disease Patients

  -- Review of Medicare Payments for Oxygen Equipment and Supplies

  -- Variation in Medicare Direct Graduate Medical Education Payments

  -- Information on HCFA's Reorganization

GAO is also working closely with the HHS Inspector General on the
annual audit of the Department's financial statements pursuant to the
Chief Financial Officers Act of 1990, as amended, and will continue
to monitor efforts by HCFA to implement the Medicare Transaction
System. 


   KEY GAO CONTACTS
---------------------------------------------------------- Chapter 1:6

William J.  Scanlon
Director, Health Financing and Systems Issues
(202) 512-7114

Bernice Steinhardt
Director, Health Services, Quality and Public Health Issues
(202) 512-7119

Joel Willemssen
Director, Information Resources Management Issues
(202) 512-6253

Bob Dacey
Director, Consolidated Audits and Computer Security Issues
(202) 512-3317

Gloria Jarmon
Director, Civil Audits - Health, Education, and Human Services Issues
(202) 512-4476


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 1:7

Medicare Transaction System:  Success Depends Upon Correcting
Critical Management and Technical Weaknesses (GAO/AIMD-97-78, May 16,
1997). 

Nursing Homes:  Too Early to Assess New Efforts to Control Fraud and
Abuse (GAO/ T-HEHS-97-114, Apr.  16, 1997). 

Medicare Managed Care:  HCFA Missing Opportunities to Provide
Consumer Information (GAO/T-HEHS-97-109, Apr.  10, 1997). 

Medicare Post-Acute Care:  Cost Growth and Proposals to Manage It
Through Prospective Payment and Other Controls (GAO/T-HEHS-97-106,
Apr.  9, 1997). 

Addressing the Deficit:  Budgetary Implications of Selected GAO Work
for Fiscal Year 1998 (GAO/OCG-97-2, Mar.  14, 1997). 

Medicare Post-Acute Care:  Home Health and Skilled Nursing Facility
Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90,
Mar.  4, 1997). 

Medicare:  Inherent Program Risks and Management Challenges Require
Continued Federal Attention (GAO/T-HEHS-97-89, Mar.  4, 1997). 

Medicare HMOs:  HCFA Could Promptly Reduce Excess Payments by
Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78, Feb. 
25, 1997). 

Medicare:  HCFA Should Release Data to Aid Consumers, Prompt Better
HMO Performance (GAO/HEHS-97-23, Oct.  22, 1996). 

Medicare:  Early Resolution of Overcharges for Therapy in Nursing
Homes is Unlikely (GAO/HEHS-96-145, Aug.  16, 1996). 

Medicare:  Private Payer Strategies Suggest Options to Reduce Rapid
Spending Growth (GAO/T-HEHS-96-138, Apr.  30, 1996). 

Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/ HEHS-96-16, Mar.  27, 1996). 

Medicare:  Millions Can Be Saved by Screening Claims for Overused
Services (GAO/ HEHS-96-49, Jan.  30, 1996). 

Fraud and Abuse:  Providers Target Medicare Patients in Nursing
Facilities (GAO/HEHS-96-18, Jan.  24, 1996). 

Medicare Managed Care:  Growing Enrollment Adds Urgency to Fixing HMO
Payment Problem (GAO/HEHS-96-21, Nov.  8, 1995). 

Fraud and Abuse:  Medicare Continues to Be Vulnerable to Exploitation
by Unscrupulous Providers (GAO/T-HEHS-96-7, Nov.  2, 1995). 


SUPPLEMENTAL SECURITY INCOME
============================================================ Chapter 2


   OVERVIEW
---------------------------------------------------------- Chapter 2:1

Since its inception in 1974, the Supplemental Security Income (SSI)
program has grown significantly.  About 6.6 million recipients now
receive roughly $22 billion in federal benefits.  To date, our work
has shown that several longstanding problems have affected Social
Security Administration's (SSA) ability to protect taxpayer dollars
from being overpaid to recipients and to manage the SSI program. 
These problems generally involve SSA's failure to adequately (1)
verify recipient's initial and continuing financial eligibility, (2)
minimize and collect SSI overpayment, (3) address program fraud and
abuse, (4) determine whether SSI recipients remain disabled, and (5)
help SSI recipients enter the workforce and ultimately leave the
program.  These deficiencies have affected program size and integrity
and contributed to significant annual increases in overpayment to
recipients.  During 1996, SSA had more than $2.3 billion in
overpayments that were owed to the agency, including $895 million in
newly detected overpayment during the year.  Rapid program growth,
combined with the program's demonstrated vulnerability to fraud,
abuse, and overpayments were primary factors in our decision to add
the SSI program to our list of high-risk areas in 1997. 

In the following section, we have identified prior GAO work in which
recommendations for addressing SSI program problems have not yet been
fully addressed by SSA.  We have arranged the reports in line with
the five problem areas listed above (some reports apply to more than
one area).  For each recommendation, we discuss potential savings and
provide the current status of actions taken by SSA. 


   REPORT FINDINGS AND
   RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:2


      PROBLEM AREA 1:  INADEQUATE
      ATTENTION TO VERIFYING
      RECIPIENT'S INITIAL AND
      CONTINUING FINANCIAL
      ELIGIBILITY
-------------------------------------------------------- Chapter 2:2.1

GAO Report:  Supplemental Security Income:  SSA Efforts Fall Short in
Correcting Erroneous Payments to Prisoners (GAO/HEHS-96-152, Aug. 
30, 1996). 

SSI provides cash payments to indigent aged, blind, or disabled
individuals to meet basic needs--food, clothing, shelter.  Prisoners
are ineligible for SSI because prisons and jails meet those basic
needs.  Despite procedures to identify SSI recipients in county and
local jails, SSA has paid millions of benefit dollars to incarcerated
individuals.  During our review, SSA initiated a program to better
identify current prisoners receiving SSI benefits.  However, it has
not taken action to identify former prisoners who have received
benefits or to recover the overpayment. 


         KEY OPEN RECOMMENDATIONS: 
------------------------------------------------------ Chapter 2:2.1.1

In order to identify SSI recipients who have been erroneously paid in
prior years, we recommend that the Commissioner of SSA direct SSA
field offices to obtain information from county and local jails on
former prisoners.  SSA should then process this information to (1)
determine if it made erroneous payments to any of these prisoners,
(2) establish overpayment for the ones it paid, and (3) attempt to
recover all erroneous payments. 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.1.2

During our review, we found that in 1995, SSA erroneously paid $5
million in SSI payments to about 3,000 current and former prisoners
in several county and local jails.  About $1 million of the erroneous
overpayment were made to 615 former prisoners.  We also found that
SSA was unaware that it had erroneously paid 454 (74 percent) of the
former prisoners, was still making payments to these individuals, and
was by withholding a portion of their current payments to recover the
overpaid funds.  To develop information on former prisoners, we
obtained automated lists from two county systems of all prisoners
released in the first 6 months of 1995.  We then matched their SSNs
against SSI records to identify those who received SSI payments while
incarcerated.  Because of limitations in our sample, we could not use
the findings of our review to project how many former prisoners
nationally were likely to have received erroneous SSI payments.  We
were also unable to project the total program savings associated with
recovering the overpaid funds.  However, our sample review leads us
to believe that SSA could recover additional overpaid SSI funds if it
complied with our recommendation. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.1.3

While SSA has begun to obtain better information on SSI recipients
currently in local and county jails, it has not yet developed
information on the universe of former prisoners who may have received
SSI payments, nor has it taken action to recover any overpaid SSI
funds from this population.  SSA has acknowledged that the
productivity of securing information on former prisoners appears
desirable and worthy of further investigation.  However, they have
expressed concerns about the availability of data, the potential
hardship placed on county and local jail officials who will have to
provide this additional data, the cost-effectiveness of processing
data on current prisoners who may no longer be receiving SSI
payments, and other matters.  In response to SSA's comments, we
demonstrated that obtaining necessary data on former prisoners should
not pose a significant problem to SSA.  We also noted that any
additional hardship this "onetime" effort may pose to local and
county jails may be offset by the potential to recover erroneously
paid SSI state supplements.  Therefore, we continue to believe that
decisive agency action is necessary to identify and recover more
erroneous SSI payments made to former prisoners.  SSA told us that
they plan to conduct a cost/benefit analysis to determine how
effective it would be to obtain data on former prisoners.  However,
as of May 1997, they had not yet begun such an effort. 


      PROBLEM AREA 2:  INADEQUATE
      ATTENTION TO REDUCING AND
      COLLECTING SSI OVERPAYMENT
-------------------------------------------------------- Chapter 2:2.2

GAO Report:  Debt Management:  More Aggressive Actions Needed to
Reduce Billions in Overpayments (GAO/HRD-91-46, July 9, 1991). 

SSA has experienced longstanding problems in controlling and
collecting overpayment made to beneficiaries in both its title II and
title XVI programs.  Although these problems have been reported by
GAO since 1989, SSA still has made little progress in preventing and
collecting overpaid benefits. 


         KEY OPEN RECOMMENDATIONS: 
------------------------------------------------------ Chapter 2:2.2.1

That the Commissioner of SSA

  -- accelerate completing the management information system needed
     to support effective debt management, and

  -- establish specific dollar collection goals for recovering debts
     owed by former beneficiaries. 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.2.2

Our review included both title II and title XVI overpayments
experienced by SSA, rather than strictly focusing on SSI overpayment. 
However, we concluded that compliance with our recommendations and
use of such innovative tools as the tax refund offset would result in
increased overpayment recoveries and significant savings in both
programs.  In our 1997 high-risk testimony, we noted that more than
$2.3 billion in SSI overpayments were still owed to SSA.  About $895
million in newly detected overpayment was detected by SSA during this
year.  We believe that substantially more SSI overpayments could be
recovered if SSA placed a greater organizational focus on deterring
and collecting overpayments and implemented such tools as the tax
refund offset (TRO) for delinquent SSI debt.  However, to date, we
have not projected what the total program cost savings would be. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.2.3

The agency has implemented a number of our recommendations resulting
from our report.  The two remaining open recommendations are in
process and SSA is currently developing a new system to track
recovery of overpayment.  Full implementation is dependent on the
release and effectiveness of SSA's new management information system. 
Specific dollar collection goals are planned to be established
following SSA's evaluation of the data it is currently tracking
regarding the recovery of overpayment.  SSA is making progress toward
completing the remaining recommendations in this area. 

Despite SSA's actions, one area of continued concern is the low
priority SSA has historically placed on controlling and collecting
title XVI overpayments.  This is evidenced by SSA's failure to
utilize debt collection tools that it has had the authority to use
for many years.  For example, SSA has had the authority to use TROs
to pursue SSI overpayments since 1984.  The TRO is used by SSA for
its title II program and has proven effective in another welfare
program--Food Stamps--for collecting delinquent debt from recipients
who no longer receive benefits.  SSA has claimed that implementation
of the SSI tax refund offset was imminent.  However, current agency
plans call for implementing this tool sometime beyond fiscal year
1997, or more than 13 years after obtaining authority to do so. 
Moreover, SSA still lacks overpayment collection tools for the SSI
program commonly available in other means tested programs.  These
include such things as credit bureau reporting and private collection
agencies.  SSA has legislative authority to use credit bureaus and
private collection agencies to collect delinquent title II debt, but
is excluded from using such tools to pursue SSI overpayments. 

GAO Report:  Supplemental Security Income:  Administrative and
Program Savings Possible by Directly Accessing State Data
(GAO/HEHS-96-163, Aug.  29, 1996). 

SSA is responsible for ensuring that SSI payment amounts are correct
and that only those eligible for SSI benefits receive them.  To
fulfill these responsibilities, SSA needs accurate and timely
information on recipients' income, assets, and living arrangements. 
An effective way to obtain information is through on-line access to
state maintained recipient data.  However, SSA has not made
sufficient progress toward effectively using on-line data from the
states. 


         KEY OPEN RECOMMENDATIONS: 
------------------------------------------------------ Chapter 2:2.2.4

To prevent overpayments or detect them sooner, we recommend that the
Commissioner of SSA

  -- require claims representatives to use on-line access to states'
     information to routinely check for unreported sources of income
     when initial and subsequent assessments of eligibility are done,
     provided that it is cost-effective to do so. 

  -- develop automatic interfaces with state databases that comply
     with laws and standards governing computer matching, privacy,
     and security that can (1) more fully automate the earnings and
     UI computer matches and (2) identify additional income sources
     that do not currently have computer matches. 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.2.5

We estimated that, if available and effectively used, direct on-line
access to state databases could have prevented or more quickly
detected more than $131 million in SSI overpayment caused by
unreported or underreported income nationwide in one 12-month period. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.2.6

As of March 1997, more than 21 states had offered to provide SSA with
varying access to state records to facilitate case processing, and 15
states were already providing some limited on-line access.  The
agency expects additional states will be phased in starting in
October of 1997.  However, SSA still has not committed to
specifically implementing our recommendation, which calls for using
on-line access for overpayment prevention, rather than using it
simply as a tool to assist claims representatives with case
processing.  SSA agreed that on-line access could be a useful tool
for reducing overpayment and agreed with our recommendations. 
However, SSA noted that although on-line access is easy and
inexpensive in many states, this may not be true for all states.  For
example, they commented that some state agencies may not have
automated data or the systems within agencies or between agencies in
the same state may be incompatible.  SSA also noted that because
on-line access presumably will be more costly and difficult in some
states than in others, a more thorough analysis of its costs and
benefits is necessary before on-line access is used for overpayment
prevention.  In responding to SSA's comments, we noted that there are
states where on-line connections now access data inexpensively and
easily.  Thus, there is no reason why SSA cannot use the state data
in those states for overpayment prevention while it examines the
cost-effectiveness of on-line access in other states. 


      PROBLEM AREA 3:  FAILURE TO
      ADEQUATELY ADDRESS PROGRAM
      VULNERABILITY TO FRAUD AND
      ABUSE
-------------------------------------------------------- Chapter 2:2.3

GAO Report:  Supplemental Security Income:  Disability Program
Vulnerable to Applicant Fraud When Middlemen Are Used
(GAO/HEHS-95-116, Aug.  31, 1995). 

The number of immigrants receiving SSI disability benefits rose from
45,000 in 1983 to 267,000 in 1993.  An undetermined number of these
individuals obtained SSI benefits through fraudulent activity
involving middlemen.  SSA's own data shows that middlemen have been
involved in coaching claimants to appear mentally ill, providing
dishonest translation services, and submitting false medical
information provided by third party providers.  For example, a
Washington state middleman arrested for fraud had helped at least 240
immigrants obtain $7 million in SSI benefits by providing false
information. 


         KEY OPEN RECOMMENDATIONS: 
------------------------------------------------------ Chapter 2:2.3.1

We recommend that the Commissioner of Social Security develop a more
aggressive, programwide strategy for improving the quality of
information obtained from applicants, maintaining and sharing data
collected on interpreters and middlemen among field offices, and
using information that results from the work of other government
agencies--local, state, and federal--to pursue cases in which fraud
is suspected.  Such a strategy should include developing improved
ways to more effectively manage SSA's resources to further facilitate
communications with non-English speaking applicants, possibly by
requiring that SSA bilingual staff or SSA contracted staff conduct
the interviews and by exploring video conferencing technology (to
better utilize bilingual staff in other offices). 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.3.2

Our report noted that the actual number of ineligible non-English
speaking applicants receiving SSI benefits was unknown and we did not
quantify the extent of fraudulent activity in this area.  However, we
documented a significant increase in the number of immigrants
receiving benefits and thousands of cases involving middlemen fraud
which cost millions of program dollars.  Based on a lifetime benefit
calculation, we also estimated that a single ineligible recipient
could receive about $51,000 in disability benefits from the SSI
program and an additional $62,000 from the Medicaid and Food Stamps
programs by the age of 65. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.3.3

SSA agreed with the intent of our recommendations and stated that it
is exploring these recommendations as it continues its efforts to
minimize fraud involving middlemen.  In 1996, the agency established
a National and Regional Fraud Committee, whose goal is to achieve a
comprehensive programwide focus on all types of fraud and develop a
fraud tactical plan.  SSA also established regional fraud committees
that are responsible for coordinating the sharing of middlemen
information maintained by local SSA offices.  SSA also noted that
half of its field office new hires were bilingual, a step that SSA
believes will reduce fraudulent middlemen involvement.  However, we
have done no independent analysis of staffing allocations, local
office language needs, and other issues related to SSA's claims.  SSA
has also begun to implement a Civil and Monetary Penalty program,
whereby penalties can be levied against applicants, middlemen and
other third-party providers (eg.  medical providers) involved in
fraudulent activities.  However, this initiative is in the very early
stages and no cases have been processed under the new Civil and
Monetary Penalty authority to date. 

GAO Report:  Supplemental Security Income:  Some Recipients Transfer
Valuable Resources to Qualify for Benefits (GAO/HEHS-96-79, Apr.  30,
1996). 

The SSI program is designed to support individuals with limited
resources to meet basic needs.  However, current laws do not prohibit
the transfer of valuable resources to qualify for SSI benefits. 
Restrictions against such transfers have been in place for years in
the medicaid program because of the Congress' concern that elderly
individuals were transferring resources to qualify for federal
medical coverage. 


         MATTER FOR CONGRESSIONAL
         CONSIDERATION: 
------------------------------------------------------ Chapter 2:2.3.4

In light of the potential for reduced program expenditures and
increased program integrity, we suggested that the Congress consider
reinstating an SSI transfer-of-resources restriction.  The
restriction could be calculated in a way that takes into account the
value of the resource transferred, so that individuals transferring
more valuable resources would be ineligible for SSI benefits for
longer periods of time than those who transfer less valuable
resources. 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.3.5

Since 1989, the number of SSI recipients reporting asset transfers
has increased almost 2,000 percent.  Between 1988 and 1994, about
9,300 SSI recipients reported transferring resources.  We reviewed
automated data maintained by SSA for 3,505 recipients reporting such
transfers and determined that these recipients transferred cars,
homes, land, cash, and other resources worth over $74 million.  We
calculated that the average cash value of transferred resources was
about $21,000 per recipient.  Our calculations did not include almost
6,000 transfers documented in SSA's nonautomated case files, nor did
it include recipients who failed to report resource transfers. 
Consequently, the total amount of resources transferred was larger
than our estimates. 

Based on our analysis, we estimated that eliminating asset transfers
could have saved the SSI program about $14.6 million between 1990 and
1995.  CBO has estimated that implementing a transfer of asset
restriction similar to that used in the Medicaid program would result
in savings to the SSI program of more than $20 million between fiscal
years 1998 and 2002. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.3.6

SSA agreed with our findings and conclusions that reinstating a
transfer of resource restriction would increase SSI program
integrity.  SSA noted that it was continuing to work with the
Congress to include a provision restoring an SSI transfer-of-resource
restriction in welfare reform legislation.  In May of 1996, the
agency proposed a draft bill to the Administration and the Congress,
seeking to amend the Social Security Act and reinstitute a transfer
of resource penalty for individuals who transfer resources at less
than fair market value.  At present, no legislative action has yet
occurred on this issue. 


      PROBLEM AREA 4:  INADEQUATE
      REVIEWS OF SSI RECIPIENTS'
      DISABILITY
-------------------------------------------------------- Chapter 2:2.4

GAO Report:  Social Security Disability:  Alternatives Would Boost
Cost-Effectiveness of Continuing Disability Reviews (GAO/HEHS-97-2,
Oct.  16, 1996). 

SSA is required by law to conduct periodic examinations, called
continuing disability reviews (CDR), to determine whether a recipient
has medically improved to the extent that the person is no longer
considered disabled, and thereby is ineligible for payments. 


         KEY OPEN RECOMMENDATIONS: 
------------------------------------------------------ Chapter 2:2.4.1

We recommend that, to the extent SSA is authorized to act, the
Commissioner of SSA replace the current system for scheduling of CDRs
for DI and SSI recipients with a more cost-effective process that
would (1) select for review beneficiaries with the greatest potential
for medical improvement and subsequent benefit termination, (2)
correct a weakness in SSA's CDR process by conducting CDRs on a
random sample from all other beneficiaries, and (3) help ensure
program integrity by instituting contact with beneficiaries about
their medical condition who are not selected for CDRs.  As part of
this effort, the Commissioner should develop a legislative package to
obtain the authority the agency needs to enact the new process for
those portions of the DI and SSI populations subject to required
CDRs. 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.4.2

SSA estimates that CDRs will remove 95,000 (or 5 percent) of the 1.9
million SSI recipients who are currently due or overdue for CDRs
because they are no longer medically eligible for benefits.  On the
basis of this number, we estimate that in fiscal year 1996 alone,
these recipients would have received $481 million in federal SSI
benefits and about $418 million in federal and state Medicaid
benefits.  In addition, SSA estimates that conducting CDRs on adult
SSI recipients for whom medical improvement is expected or possible
results in about $3 in federal program savings for every $1 spent
conducting CDRs.  The cost-effectiveness of performing CDRs may be
improved further by implementing GAO's recommendations. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.4.3

Although SSA has agreed to consider changing the required scheduling
of CDRs and has expanded the title II profiling system used to
conduct CDRs to the SSI program to improve the cost-effectiveness of
SSI CDRs, it has not agreed to take any action on parts two and three
of our recommendation.  The agency has not complied with these parts
because it believes that its ongoing strategy to improve the
effectiveness of CDRs is, in general, more efficient than the steps
suggested by GAO. 

GAO believes that while targeting CDRs is the most cost-beneficial,
it is also important for ensuring program integrity that all
beneficiaries have a chance to be selected for a CDR.  This is
particularly important given the fact that SSA has been unable to
conduct all required CDRs for almost a decade and SSA estimates that
the backlog will not be eliminated for another 7 years.  Moreover,
increased beneficiary contact is valuable to remind beneficiaries
that their disability status is being monitored and that they are
responsible for reporting medical improvement. 


      PROBLEM AREA 5: 
      INSUFFICIENT AGENCY EMPHASIS
      ON HELPING SSI RECIPIENTS
      ENTER THE WORKFORCE
-------------------------------------------------------- Chapter 2:2.5

GAO Reports: 

SSA Disability:  Program Redesign Necessary to Encourage Return to
Work (GAO/HEHS-96-62, Apr.  24, 1996). 

SSA Disability:  Return-to-Work Strategies From Other Systems May
Improve Federal Programs (GAO/HEHS-96-133, July 11, 1996). 

Social Security:  Disability Programs Lag in Promoting Return to Work
(GAO/HEHS-97-46, Mar.  17, 1997). 

SSA is responsible for encouraging SSI beneficiaries to return to
work whenever possible.  In fiscal year 1996 SSA reimbursed state VR
agencies about $65 million for successful rehabilitations (e.g. 
recipients were involved in substantial gainful activity for at least
9 months following rehabilitation).  However, few SSI recipients have
left the rolls to return to work, partly because SSI does little to
enhance recipients' work capacities and promote economic
independence. 


         KEY OPEN RECOMMENDATIONS: 
------------------------------------------------------ Chapter 2:2.5.1

The commissioner of SSA should place greater priority on return to
work, including a comprehensive return-to-work strategy that
integrates, as appropriate, earlier intervention, earlier
identification and provision of necessary return-to-work assistance
for applicants and beneficiaries, and changes in the structure of
cash and medical benefits (e.g., changes in the amount of earnings a
recipient may have while still retaining medical benefits) to
encourage more recipients to return to work.  The Commissioner should
also identify legislative changes needed to implement such a
strategy. 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.5.2

In 1996 GAO estimated that if an additional 1 percent of the 6.3
million Disability Insurance (DI) and SSI working-age beneficiaries
were to leave the rolls by returning to work, lifetime cash benefits
would be reduced by an estimated $2.9 billion.\1 However, it is
unclear the extent to which any savings would be offset by program
costs. 


--------------------
\1 This body of work analyzes DI and SSI recipients together. 
Therefore, no separate figures for the SSI program are available. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.5.3

SSA has taken various steps to help more DI and SSI beneficiaries
return to work.  However, these steps do not fully address GAO's
recommendation that SSA undertake a comprehensive strategy to
redirect the goals and practices of the SSI and DI program so that
greater emphasis is placed on return to work. 

SSA has not indicated whether it intends to fully implement GAO's
recommendations.  It has argued that implementation would be
difficult because there is a lack of rigorous studies on the
cost-effectiveness of return-to-work efforts in the private sector
and in other countries.  Moreover, the agency contends that because
it is only one player among many in the complex VR process, it does
not have the ability to develop a comprehensive strategy on it own. 
Finally, SSA argued that under current law, disability programs do
not provide for, or even allow, many of the strategies suggested in
the reports. 

GAO's recommendations do not specify which practices SSA should
develop in its comprehensive return-to-work strategy.  Rather, we
have suggested that an appropriate plan should be developed by the
agency, and assumed it would incorporate an assessment of the costs
and benefits of the various VR practices.  Moreover, GAO believes
that while all pertinent players should be involved in formulating a
comprehensive VR strategy, SSA is the appropriate agency to take the
lead in forging a partnership on redesigning the disability programs
to place a greater emphasis on return-to-work.  Finally, GAO agrees
that current law must be changed and recommends that the Commissioner
develop a legislative strategy describing suggested changes. 

GAO Report:  PASS Program:  SSA Work Incentive for Disabled
Beneficiaries Poorly Managed (GAO/HEHS-96-51, Feb.  28, 1996). 

The Plan to Achieve Self Support (PASS) work incentive program was
established as part of the SSI program to help disabled recipients
return to employment.  PASS provisions allow SSI recipients to
exclude income and resources from benefit calculations that otherwise
would reduce their benefits, as long as the assets are used to pay
for expenses associated with reaching employment goals.  However,
very few recipients leave the SSI disability rolls by returning to
work. 


         KEY OPEN RECOMMENDATIONS: 
------------------------------------------------------ Chapter 2:2.5.4

The Commissioner of Social Security should, after seeking legislation
if necessary, (1) clarify the goals of the PASS program; (2) improve
field staff's ability to determine feasibility of proposed PASSes,
(3) strengthen internal controls, and (4) obtain more information on
program participation and impact. 


         POTENTIAL COST SAVINGS: 
------------------------------------------------------ Chapter 2:2.5.5

The most substantial savings to the SSI program can be realized by
recipients leaving the rolls to work.  However, GAO has reported that
only about 1 in every 500 DI and few SSI recipients is terminated
from the rolls because he/she returns to work.  While savings could
be realized from increasing the effectiveness of the PASS program, it
is difficult to estimate the amount of the savings because SSA does
not maintain the needed data.  However, in the short term, program
dollars may also be saved by improving internal controls and by
making it more difficult for recipients to obtain a PASS.  In 1995,
at the time of GAO's study, the PASS program cost SSA about $30
million in increased benefits.  Due to recent policy and procedural
changes enacted by SSA, the number of PASSes granted has decreased by
about one half.  One SSA official stated that this could reduce the
cost of the program by about $15 million. 


         IMPLEMENTATION STATUS AND
         WHAT REMAINS TO BE DONE: 
------------------------------------------------------ Chapter 2:2.5.6

SSA has begun to address the first three recommendations by
developing and implementing a standardized PASS application, revising
operating procedures, and requiring that centralized decision-makers
make all decisions about PASS applications and changes to PASS plans. 
However, it is too early to determine whether the revised operating
instructions have been properly implemented, which is critical in
order to address recommendation number 3.  Also, SSA is reviewing all
of the application decisions the centralized decision-makers made in
March 1997 for consistency and accuracy.  However, SSA is not willing
to share information pertaining to its findings until a finalized
report is issued. 

SSA is in the process of addressing recommendation 4 by developing a
data base that tracks:  1) decisions on initial PASS applications, 2)
periodic compliance reviews of PASS plans, 3) extensions or other
changes to PASS plans, and 4) suspensions and terminations of PASS
plans.  However, SSA does not track and, has no plans to track, what
happens to recipients once their PASS has been completed or
terminated.  Thus, SSA cannot evaluate the impact of the PASS program
on employment and benefits. 

SSA contends that it has not fully implemented GAO's recommendations
because it believes it does not have the legislative authority
necessary to enact some of them--particularly recommendations 1 and
3--and did not share with us whether it is currently seeking such
authority.  In regard to areas where SSA does have legislative
authority to make changes, an official stated that it does not want
to make any more changes until it has gathered information on how
well the program is functioning under the new operating instructions
and centralized decision-makers.  However, SSA has been aware of the
issues raised by GAO and could have sought legislative remedies at
any time, but did not begin evaluating such proposals until the
report was issued.  Moreover, GAO continues to believe that it is
important for SSA to collect and analyze data on PASS participants
that will allow them to assess the impact of this 20-year old program
on employment and welfare benefits. 


         MATTER FOR CONGRESSIONAL
         CONSIDERATION AND
         IMPLEMENTATION STATUS: 
------------------------------------------------------ Chapter 2:2.5.7

The Congress may wish to consider whether individuals otherwise
financially ineligible for SSI because their DI benefits or other
income exceed the eligibility threshold should continue to gain
eligibility for SSI through the PASS program. 

The Congress has not yet acted on this matter for consideration. 


   ONGOING GAO WORK AND ISSUES OF
   CONTINUING CONCERN
---------------------------------------------------------- Chapter 2:3

Our prior work in the SSI program suggests that several longstanding
problem areas have placed the program at considerable risk of fraud,
waste, abuse, and mismanagement.  While attempts have been made by
SSA in the past to make the SSI program more efficient, significant
issues remain unaddressed.  As a result, our concerns continue about
underlying SSI program vulnerabilities and the level of SSA
management attention devoted to these vulnerabilities.  To more
precisely identify the "root causes" of longstanding SSI problems and
the actions necessary to address them, we are presently conducting a
broad-based review of the SSI program.  This work is designed to
explore program design issues, operational policy, management
philosophy and agency culture, and programmatic and legislative
options for achieving substantive change.  It is also intended to
serve as the basis for future high-risk work in the area and to
highlight particular program areas where more in-depth analysis is
necessary.  We anticipate completing our audit work in the fall of
1997, and issuing our report findings in January 1998. 

In addition to the broad-based SSI study discussed above, we also
have ongoing work targeted to specific aspects of the SSI program. 
This work includes (1) a review of how SSA can improve data sharing
with, and on-line access to, other federal agencies' data to identify
and prevent overpayment, (2) a review of SSA's processes for matching
SSI/Medicaid computer data to identify SSI overpayment to nursing
home residents, and (3) a review of SSA's experience obtaining child
support payment data from states to detect SSI program overpayment. 



                CONGRESSIONAL CONTACTS WITH INTEREST IN
                  SUPPLEMENTAL SECURITY INCOME ISSUES

                       Congressional Committees
----------------------------------------------------------------------
GAO Report                          Committee/Subcommittee
----------------------------------  ----------------------------------
Supplemental Security Income: SSA   -Subcommittee on Oversight, House
Efforts Fall Short in Correcting    Committee on Ways and Means
Erroneous Payments to Prisoners     (202) 225-7601
(GAO/HEHS-96-152, Aug. 30, 1996).
                                    -Subcommittee on Human Resources,
                                    House Committee on Ways and Means
                                    (202) 225-1025


Debt Management: More Aggressive    -Subcommittee on Oversight, House
Actions Needed to Reduce Billions   Committee on Ways and Means
in Overpayment (GAO/HRD-91-46,      (202) 225-7601
July 9,1991).


Supplemental Security Income:       -Subcommittee on Oversight, House
Administrative and Program Savings  Committee on Ways and Means
Possible by Directly Accessing      (202) 225-7601
State Data (GAO/HEHS-96-163, Aug.
29, 1996).                          -Subcommittee on Human Resources,
                                    House Committee on Ways and Means
                                    (202) 225-1025


Supplemental Security Income:       -Senate Special Committee on
Disability Program Vulnerable to    Aging
Applicant Fraud When Middlemen Are  (202) 224-5364
Used (GAO/
HEHS-95-116, Aug. 31, 1995).

Supplemental Security Income: Some  -Subcommittee on Oversight, House
Recipients Transfer Valuable        Committee on Ways and Means
Resources to Qualify for Benefits   (202) 225-7601
(GAO/HEHS-96-79,
Apr. 30, 1996).                     -Subcommittee on Human Resources,
                                    House Committee on Ways and Means
                                    (202) 225-1025

Social Security Disability:         -Subcommittee on Social Security,
Alternatives Would Boost Cost-      House Committee on Ways and Means
Effectiveness of Continuing         (202) 225-9263
Disability Reviews (GAO/
HEHS-97-2, Oct. 16, 1996).

SSA Disability: Program Redesign    -Senate Special Committee on
Necessary to Encourage Return to    Aging
Work (GAO/HEHS-96-62, Apr. 24,      (202) 224-5364
1996).

SSA Disability: Return-to-Work      -Senate Special Committee on
Strategies From Other Systems May   Aging
Improve Federal Programs (GAO/      (202) 224-5364
HEHS-96-133, July 11, 1996).

Social Security: Disability         -Senate Committee on Finance
Programs Lag in Promoting Return    (202) 224-4515
to Work, (GAO/T-HEHS-97-46, Mar.
17, 1997).                          -House Committee on Ways and
                                    Means
                                    (202) 225-3625

PASS Program: SSA Work Incentive    -Senate Committee on Finance
for Disabled Beneficiaries Poorly   (202) 224-4515
Managed (GAO/HEHS-96-51, Feb. 28,
1996).                              -House Committee on Ways and
                                    Means
                                    (202) 225-3625
----------------------------------------------------------------------




                  EXECUTIVE AGENCIES WITH INTEREST IN
                  SUPPLEMENTAL SECURITY INCOME ISSUES

Agency                              Contact
----------------------------------  ----------------------------------
Social Security Administration      John Callahan
(SSA)                               Acting Commissioner
                                    (410) 965-3120

                                    John Dyer
                                    Acting Principal Deputy
                                    Commissioner
                                    (410) 965-9000

                                    David Williams
                                    Inspector General
                                    (410) 966-8337


Office of Management and Budget     Richard Green
(OMB)                               Program Examiner
                                    (202) 395-3000
----------------------------------------------------------------------

   GAO CONTACT
---------------------------------------------------------- Chapter 2:4

Jane Ross
Director, Income Security Issues
(202) 512-7215


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 2:5

Addressing the Deficit:  Budgetary Implications of Selected GAO Work
for Fiscal Year 1998 (GAO/OCG-97-2, Mar.  14, 1997). 

Supplemental Security Income:  SSA is Taking Steps to Review
Recipients' Disability Status (GAO/HEHS-97-17, Oct.  30, 1996). 

Social Security Disability:  Improvements Needed to Continuing
Disability Review Process (GAO/HEHS-97-1, Oct.  16, 1996). 

Social Security:  Disability Programs Lag in Promoting Return to Work
(GAO/T-HEHS-96-147, June 5, 1996). 

Social Security:  New Functional Assessments for Children Raise
Eligibility Questions (GAO/HEHS-95-66, Mar.  10, 1995). 


INFORMATION SECURITY
============================================================ Chapter 3


   OVERVIEW
---------------------------------------------------------- Chapter 3:1

In 1997, we identified information security as a new high-risk area
that touches virtually every major aspect of government operations. 
Malicious attacks on computer systems are an increasing threat to our
national welfare.  We rely heavily on interconnected systems to
control critical functions, such as communications, financial
services, transportation, and utilities.  Though greater use of
interconnected systems promises significant benefits in improved
business and government operations, such systems are much more
vulnerable to anonymous intruders, who may manipulate data to commit
fraud, obtain sensitive information, or severely disrupt operations. 

Despite the sensitivity and criticality of federal information
systems, they are not being adequately protected from unauthorized
access.  System interconnectivity, combined with poor security
management, is resulting in serious pervasive risks for the federal
government, such as potential disclosure of sensitive data and loss
of assets worth billions of dollars due to fraud.  In addition,
increasing reliance on networked systems and electronic records has
elevated concerns that critical federal operations are vulnerable to
serious disruption.  This is because automated systems and electronic
records are fast replacing manual procedures and paper documents,
which in many cases are no longer available as "backup" if automated
systems fail.  Further, although such disruption could be
precipitated by natural disasters or accidents, there is evidence
that some organizations are developing strategies and tools for
conducting premeditated attacks on information systems. 

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, various
financial transactions, payroll, defense operational plans,
electronic benefit payments, and electronically submitted medicare
claims. 

Since June 1993, we have issued over 30 reports describing serious
information security weaknesses at major federal agencies.  For
example, in May 1996, we reported that tests at the Department of
Defense showed that Defense systems may have experienced as many as
250,000 attacks during 1995, that about 64 percent of attacks were
successful at gaining access, and that only a small percentage of
these attacks were detected.\1 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.\2

For half of these agencies, the weaknesses had been reported
repeatedly for 5 years or longer.  Several of our most disturbing
reports on information security are for limited official use and,
therefore, cannot be discussed here because of the risk that
unscrupulous individuals may attempt to exploit reported weaknesses. 

Many of the federal information security weaknesses and causal
factors reported over the last few years were identified as a direct
result of the annual financial statement audits initiated under the
Chief Financial Officers Act of 1990.  Although these audits pertain
primarily to financial management systems, they generally include a
review of computer-based controls that affect a significant portion
of an agency's broader operations. 


--------------------
\1 Information Security:  Computer Attacks at Department of Defense
Pose Increasing Risks (GAO/AIMD-96-84, May 22, 1996); Information
Security:  Computer Attacks at Department of Defense Pose Increasing
Risks (GAO/T-AIMD-96-92, May 22, 1996); and Information Security: 
Computer Hacker Information Available on the Internet
(GAO/T-AIMD-96-108, June 5, 1996). 

\2 Information Security:  Opportunities for Improved OMB Oversight of
Agency Practices (GAO/AIMD-96-110, Sept.  24, 1996). 


   LEVEL OF RESOURCES AT RISK
---------------------------------------------------------- Chapter 3:2

Because virtually every aspect of federal operations relies on
automated systems, the risks, as described above, are enormous. 
There is no summary information available on actual federal dollars
lost, and damage due to unauthorized disclosure of sensitive
information, such as browsing of taxpayer records, cannot be readily
quantified.  However, an attack on Rome Laboratory, the Air Force's
premier command and control research facility, illustrates the risks. 

In the Rome incident, two hackers took control of laboratory support
systems for several days, established links to foreign Internet
sites, and stole tactical and artificial intelligence research data. 
By masquerading as a trusted user at Rome Laboratory, they were also
able to successfully attack systems at other government facilities,
including the National Aeronautics and Space Administration's Goddard
Space Flight Center, Wright-Patterson Air Force Base, some defense
contractors, and other private sector organizations. 

Because the Air Force did not know it was attacked for at least 3
days, vast damage to Rome Laboratory systems and the information in
those system could have occurred.  To its credit, the Air Force
working with international authorities eventually caught the hackers,
but was never able to conclusively determine what was done with the
copied data. 

The Air Force Information Warfare Center estimated that the attacks
cost the government over $500,000 at the Rome Laboratory alone. 
Their estimate included the time spent taking systems off the
networks, verifying systems integrity, installing security patches,
and restoring service, and costs incurred by the Air Force's Office
of Special Investigations and Information Warfare Center.  It also
included estimates for time and money lost due to the Laboratory's
research staff not being able to use their computer systems. 


   KEY OPEN GAO RECOMMENDATIONS
   AND IMPLEMENTATION STATUS
---------------------------------------------------------- Chapter 3:3

Our reports contain dozens of recommendations to individual agencies
for improvement.  Agencies have acted on many of these
recommendations.  However, several underlying factors need to be
addressed to help ensure that federal agencies adequately protect
their systems and data on a continuing basis.  These factors include: 

  -- insufficient awareness and understanding of information security
     risks among senior agency officials,

  -- poorly designed and implemented security programs that do not
     adequately monitor controls or proactively address risk,

  -- a shortage of personnel with the technical expertise needed to
     manage controls in today's sophisticated information technology
     environment, and

  -- limited oversight of agency practices at a governmentwide level. 

In light of the increasing importance of information security and the
pattern of widespread problems that has emerged, stronger central
leadership is needed.  Our previously cited September 1996 report\3
concluded that the Office of Management and Budget (OMB) needs to
play a more proactive role in promoting awareness and in monitoring
agency practices--a role that was recently reemphasized in the
Paperwork Reduction Act and Clinger-Cohen Act.  In particular, we
recommended that OMB engage assistance from private contractors and
others with appropriate expertise to assist in monitoring agency
information security programs.  Also, as chair of the Chief
Information Officers Council, OMB should encourage council members to
adopt information security as one of their top priorities and develop
a strategic plan for addressing the root causes of agency security
problems.  Such a plan could include

  -- developing information on existing and emerging information
     security risks,

  -- establishing a program for reviewing the adequacy of individual
     agency security programs using interagency teams of reviewers,
     and

  -- developing or identifying training and certification programs
     that could be shared among agencies. 

As of May 1997, OMB had taken some steps to raise the awareness of
its program examiners regarding information security, primarily by
holding a training session in September 1996 that is planned to be
repeated annually.  However, little had been done by the CIO Council. 
The Council has included information security in its plans as one of
the issues it will address.  Specifically, the Council was briefed on
the Government Information Technology Services (GITS) Board's
security and privacy initiatives at the Council's March 17, 1997,
meeting.  Further, the Council's Education and Training Working Group
has recommended in its action plan that IT security be included as a
continuing element of IT training.  In the Council's first 6-month
progress report for September 1996 through February 1997, information
security received only minor mention as part of other efforts and as
a long-term effort to better understand security threats.  At this
time, it is unclear as to what specific actions will actually be
implemented over the next year. 

Specific recommendations and actions taken to date are listed in the
following table. 

(Due to its sensitive nature, additional information is being
provided separately for limited official use only.)



                                                                         Key Recommendations by GAO Regarding
                                                                                 Information Security

GAO Report                    Key Recommendation                                           Status     Agency Response                         GAO's Position
----------------------------  -----------------------------------------------------------  ---------  --------------------------------------  --------------------------------------
IRS Systems Security: Tax     The Commissioner should prepare a plan for (1) correcting    Some       In commenting on a draft of our         We are in the process of following up
Processing Operations and     all the weaknesses identified at the 5 facilities we         action     report, IRS agreed with our             with IRS to determine the extent of
Data Still at Risk Due to     visited, as detailed in this report, and (2) identifying     taken      conclusions and recommendations and     corrective action taken. Consequently,
Serious Weaknesses (GAO/      and correcting security weaknesses at the other IRS                     stated that it is working to implement  it is too early to comment on whether
AIMD-97-49, Apr. 8, 1997).    facilities. The Commissioner should (1) provide this plan               them. For example, IRS stated that it   IRS is complying with our
                              to congressional appropriation, authorization, and                      created an Office of Systems Standards  recommendations.
                              oversight committees and subcommittees, (2) report IRS'                 and Evaluation to establish and
                              progress on the plan in its fiscal year 1999 budget                     enforce standards and policies for all
                              submission, and (3) identify the weaknesses discussed in                major security programs, including
                              this report as being material in IRS' 1996 FMFIA report and             physical security, data security, and
                              subsequent reports until they are corrected.                            systems security.

                              Also, the Commissioner should strengthen computer security              However, IRS did not commit to
                              management by directing the Deputy Commissioner to (1)                  implement all recommendations by the
                              reevaluate IRS' current approach to computer security and               time frames specified. In addition,
                              (2) report the results to the above cited congressional                 IRS' response did not clearly indicate
                              committees and subcommittees by June 1997.                              that security weaknesses would be
                              Last, the Commissioner should ensure that IRS completely                corrected systematically and
                              and consistently monitors, records, and reports the full                consistently across all facilities.
                              extent of electronic browsing for all systems that can be
                              used to access taxpayer data. We recommend that the
                              Commissioner report disciplinary actions taken and that
                              these statistics along with an assessment of its progress
                              in eliminating browsing, be included in IRS' annual budget
                              submission.

Information Security:         As chair of the CIO Council, OMB should encourage council    Some       The CIO Council has included            At this time, it is unclear as to what
Opportunities for Improved    members to adopt information security as one of their top    action     information security in its plans as    specific actions will actually be
OMB Oversight of Agency       priorities and develop a strategic plan for addressing the   taken      one of the issues it will address.      implemented by the CIO Council over
Practices (GAO/AIMD-96-110,   root causes of agency security problems.                                Further, the Council's Education and    the next year.
Sept. 24, 1996).                                                                                      Training Working Group has recommended
                              OMB should encourage the development of improved sources of             in its action plan that IT security be
                              information with which to monitor compliance with OMB                   included as a continuing element of IT  OMB has taken some steps to improve
                              guidance and the effectiveness of agency information                    training. In the Council's first 6-     its oversight of individual agency
                              security programs.                                                      month progress report for 9/96 through  practices, but it remains to be seen
                                                                                                      2/97, information security received     how well this will be implemented in
                              OMB should (1) supplement reviews of audit reports to                   only minor mention as part of other     agency program examinations.
                              include reviewing audits conducted under the Chief                      efforts and as a long-term effort to
                              Financial Officers Act to identify findings related to                  better understand threats.
                              information security; and (2) use this information, in
                              conjunction with reports on agency self assessments, to                 In a December 1996 letter to
                              assist in proactively monitoring the scope of such reviews              congressional oversight committees,
                              and the effectiveness of agency information security                    OMB said that it is implementing GAO's
                              practices.                                                              recommendations. In September 1996,
                                                                                                      OMB held what it said was its first
                              OMB should implement a program for increasing program                   annual training session on information
                              examiners' understanding of information security management             security for OMB program examiners. At
                              issues so that they can readily identify and understand the             that session, OMB alerted program
                              implications of information security weaknesses related to              examiners to the security-related
                              agency programs.                                                        information that may be found in CFO
                                                                                                      reports. Also, OMB said it will again
                                                                                                      point out this information when it
                                                                                                      distributes CFO Act reports to program
                                                                                                      examiners.


Information Security:         The Secretary of Defense should strengthen the Department's  Some       DOD says that it is moving              DOD has taken important first steps,
Computer Attacks at           information security program by improving related policies,  action     aggressively to address its security    including establishing an information
Department of Defense Pose    training, network monitoring techniques, incident response   taken      weaknesses, but that it will take       security goal in its IRM Strategic
Increasing Risks (GAO/AIMD-   capabilities.                                                           time.                                   Plan. Also, top civilian and military
96-84, May 22, 1996).                                                                                                                         management have acknowledged a
                                                                                                                                              departmentwide risk management
                                                                                                                                              approach to address vulnerabilities.
                                                                                                                                              However, DOD has not fully responded
                                                                                                                                              to any of the recommendations.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------
\3 GAO/AIMD-96-110, Sept.  24, 1996. 


   WHY RECOMMENDATIONS HAVE NOT
   BEEN IMPLEMENTED AND WHAT
   REMAINS TO BE DONE
---------------------------------------------------------- Chapter 3:4

Inadequate information security is primarily a management problem. 
Ensuring adequate security requires ongoing attention to monitor
risks and the effectiveness of mitigating controls.  We have found
that many federal managers either are not fully aware of these risks
or have not given information security the level of attention needed
to ensure its effectiveness. 

Also, as with any type of control activity, information security
costs money and, in some cases, may seem to diminish efficiency.  As
a result, in an environment of severe resource constraints, it is
especially important for managers to ensure that information security
receives sufficient attention and resources. 

The challenge for the Congress and for federal managers is to view
the management of information security risks as an integral element
of program management.  This means (1) considering the security
implications whenever computer and telecommunications technology is
being used to support program operations, (2) weighing the potential
costs and benefits, (3) determining what level of risk is acceptable
in light of the expected benefits, and (4) providing adequate
resources to monitor controls and keep risks at an acceptable level. 



                    CONGRESSIONAL AND ADMINISTRATION
                 CONTACTS WITH INTEREST IN INFORMATION
                            SECURITY ISSUES

Committee or Office                 Key Staff
----------------------------------  ----------------------------------
Senate Committee on Governmental    Ellen Brown, Majority
Affairs                             (202) 224-4751

                                    David Plocher, Minority
                                    (202) 224-9682

                                    Brian Dettelbach, Minority
                                    (202) 224-7948

House Committee on Science,         Richard Russell, Majority
Subcommittee on Technology          (202) 225-8844

                                    Donna Farmer, Majority
                                    (202) 225-8844

Office of Management and Budget,    Bruce McConnell, Chief,
Office of Information and           Information Policy and Technology
Regulatory Affairs                  Branch
                                    (202) 395-3785

                                    Ed Springer, Policy Analyst
                                    (202) 395-3562
----------------------------------------------------------------------

   ONGOING AUDIT WORK
---------------------------------------------------------- Chapter 3:5

The following assignments are underway: 

  -- GAO is reviewing successful information security management
     practices at leading private sector and state organizations in
     order to identify practices that could be used by federal
     agencies.  This assignment was requested by Chairman Thompson
     and Senator Glenn, RMM, of the Senate Committee on Governmental
     Affairs.  The assignment is expected to be completed in early
     1998. 

  -- GAO is reviewing the Federal Aviation Administration's (FAA) air
     traffic control (ATC) computer security practices to determine
     whether FAA is effectively managing computer security for its
     operational systems and for future ATC modernization systems. 
     Staff members from the Senate Committee on Governmental Affairs
     and the House Committee on Science, Subcommittee on Technology
     have expressed interest in this assignment which is expected to
     be completed in early 1998. 

  -- GAO is reviewing the State Department's computer security
     program, with emphasis on the department's vulnerability to
     unauthorized access to its information resources.  The
     assignment is expected to be completed in late 1997. 

  -- GAO is reviewing the Social Security Administration's use of the
     Internet to disseminate information on personal earnings and
     benefits to individuals.  This assignment was requested by
     Chairman Bunning and Representative Kennelly, RMM, of the House
     Ways and Means Subcommittee on Social Security. 

  -- GAO will shortly begin a follow up review of IRS' progress in
     correcting previously reported information security weaknesses. 

  -- GAO and agency IGs are both reviewing information security
     controls in conjunction with federal financial statement audits,
     which are being performed pursuant to the Chief Financial
     Officers Act of 1990.  To prepare for the first governmentwide
     audit, GAO is reviewing the IGs' assessments of controls at the
     24 CFO agencies.  At selected Department of Treasury agencies,
     GAO is actually performing the review of computer-based
     controls.  At a few other agencies, GAO is working jointly with
     the IG staff on this segment of the audit.  To support these
     efforts, GAO has developed a methodology for evaluating
     computer-based controls and is providing technical advice and
     training to the IG community. 


   KEY GAO CONTACTS
---------------------------------------------------------- Chapter 3:6

Jack Brock
Director, Information Resources Management
(202) 512-6240

Bob Dacey
Director, Consolidated Audit and Computer Security Issues,
(202) 512-3317

Dr.  Rona Stillman
Chief Scientist for Computers and Telecommunications
(202) 512-6412

Keith Rhodes
Technical Director, Office of the Chief Scientist for Computers and
Telecommunications
(202) 512-6288

Jean Boltz
Assistant Director, Information Resources Management
(202) 512-5247


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 3:7

Social Security Administration:  Internet Access to Personal Earnings
and Benefits Information (GAO/T-AIMD/HEHS-97-123, May 6, 1997). 

IRS Systems Security:  Tax Processing Operations and Data Still at
Risk Due to Serious Weaknesses (GAO/AIMD-97-49, Apr.  8, 1997). 

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

Financial Audit:  Examination of IRS' Fiscal Year 1995 Financial
Statements (GAO/ AIMD-96-101, July 11, 1996). 

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

Information Security:  Computer Attacks at Department of Defense Pose
Increasing Risks (GAO/T-AIMD-96-92, May 22, 1996). 

Financial Audit:  Federal Family Education Loan Program's Financial
Statements for Fiscal Years 1994 and 1993 (GAO/AIMD-96-22, Feb.  26,
1996). 

Department of Energy:  Procedures Lacking To Protect Computerized
Data (GAO/AIMD-95-118, June 5, 1995). 

Information Superhighway:  An Overview of Technology Challenges
(GAO/AIMD-95-23, Jan.  23, 1995). 

Financial Audit:  Examination of Customs' Fiscal Year 1993 Financial
Statements (GAO/AIMD-94-119, June 15, 1994). 

HUD Information Resources:  Strategic Focus and Improved Management
Controls Needed (GAO/AIMD-94-34, Apr.  14, 1994). 

IRS Information Systems:  Weaknesses Increase Risk of Fraud and
Impair Reliability of Management Information (GAO/AIMD-93-34, Sept. 
22, 1993). 


DEPARTMENT OF ENERGY'S CONTRACT
MANAGEMENT
============================================================ Chapter 4


   OVERVIEW
---------------------------------------------------------- Chapter 4:1

The Department of Energy's (DOE) contracting practices and problems
stem from the time of the Manhattan Project's development of the
atomic bomb during World War II.  This undertaking involved special
contracting arrangements, such as least interference in the
contractor's work and indemnification of a contractor's liability. 
Decades later, DOE continued to enter into contracts in which
competition was the exception, reimbursement of virtually any cost to
the contractor was the practice, and lax oversight of contractors was
the norm. 

In 1990, we designated DOE contracting as a high-risk area vulnerable
to waste, fraud, abuse, and mismanagement.  This designation was
precipitated by DOE's history of weak oversight of contractors
coupled with heavy reliance on contractors to fulfill DOE's missions. 
We subsequently issued a series of reports and testimonies,
identifying some of the costly effects of DOE's practices.  These
products have contributed to the Congress's budget deliberations and
provided an impetus for DOE to reform its contracting. 

Although the past Secretaries of Energy have instituted various
remedies and have moved in the direction of improved contracting,
changing the way DOE does business has not come easily or quickly. 


   LEVEL OF RESOURCES AT RISK
---------------------------------------------------------- Chapter 4:2

DOE generally fulfills its multiple missions with contractors who
manage and operate its federally owned facilities.  In fiscal year
1996, DOE contracted out about 92 percent of its $17.8 billion in
obligations (or about $16.4 billion) to, among other things, maintain
its weapons complex, fund its national laboratories, and clean up its
legacy of environmental contamination.  At risk are not only these
funds but more importantly, the DOE missions being financed by them. 
For example, from 1980 through 1996, DOE conducted 80 projects
(costing or projected to cost about $64 billion) that it designated
as major systems acquisitions--projects that are critical to DOE's
mission and cost over $100 million.  Thirty-one of these were
terminated prior to completion after spending over $10 billion, 15
were completed and most were finished behind schedule and with cost
overruns, and 34 are ongoing and also suffer from cost overruns and
schedule delays. 


   KEY OPEN GAO RECOMMENDATIONS
   AND IMPLEMENTATION STATUS
---------------------------------------------------------- Chapter 4:3

Reforming contracts has been an elusive and longstanding DOE goal. 
In April 1992, we reported that the Secretary's recognition of
contract management weaknesses, commitment to strengthening contract
controls, and actions to address some contracting weaknesses were
important first steps for reform.\1 However, we concluded that the
weaknesses would not be corrected in the near future because the
corrective actions would take several years to implement. 

After reviewing the agency's contracting practices, the Secretary's
Contract Reform Team issued, in February 1994, its report entitled
Making Contracting Work Better and Cost Less.  The Team focused its
efforts on management and operating contracts and identified numerous
problems that needed correcting.  The 48 recommendations (47 in the
report and one directed by the Secretary) for specific actions sought
to make sweeping changes in DOE's policies and practices, often
completely contrary to the way DOE has done business. 

DOE's reforms are, in part, the result of GAO's previous criticisms,
observations, and recommendations regarding DOE's contracting
practices.  More recently we have provided critiques to DOE during
the development of its reforms.  While current reforms are
unprecedented in scope and provide a comprehensive plan, the real
test of DOE's success will occur as DOE implements, monitors,
corrects where needed, and standardizes best practices for a totally
new way of doing business.  This effort will require time as the
current contracts are either competitively awarded or
noncompetitively renewed with reform provisions incorporated into the
contracts. 


--------------------
\1 Energy Management:  Vulnerability of DOE's Contracting to Waste,
Fraud, Abuse, and Mismanagement (GAO/RCED-92-101, Apr.  10, 1992). 


   IMPLEMENTATION HAS BEGUN BUT
   MORE REMAINS TO BE DONE
---------------------------------------------------------- Chapter 4:4

DOE is making headway in developing policies, procedures, and
guidelines in response to the Contract Reform Team's recommendations. 
Along with the recommendations, the Contract Reform Team assigned to
a specific DOE office the responsibility for completing each action
and established deadlines for them.  As of August 1996, DOE reported
completing 47 of the 48 recommended actions; the last one is nearing
completion.  Specifically, DOE has

  -- published a policy adopting a standard of full and open
     competition,

  -- developed guidance for contract performance criteria and
     measures,

  -- created incentive mechanisms for contractors, and

  -- developed training in performance-based contracting for DOE
     personnel. 

Possibly DOE's most important reform initiative--to open its
management and operating contracts to competition--has become policy. 
DOE's new policy adopts a standard of full and open competition and
directs that DOE competitively award its contracts to the fullest
extent possible.  Also, the Contract Reform Team's report recommended
that the terms of the contract be negotiated before extending
existing contracts.  The recommendation is intended to improve DOE's
bargaining position with respect to contract costs and deliverables
and encourage new contractors to bid on DOE's contracts. 

However, DOE has awarded most of its recent contracts
noncompetitively.  Of the 24 decisions made from July 5, 1994, to the
end of August 1996, DOE decided to extend 16 contracts on a
noncompetitive basis and to competitively award the other eight.\2
DOE had long-term relationships with many of the contractors whose
contracts it decided not to compete.  The average age of the 16
contracts was about 35 years, and 12 of them had never been
competitively awarded. 

Also, although contrary to a recommendation by the Contract Reform
Team, DOE may have weakened its bargaining position when it
conditionally decided to extend the contracts for three of its
laboratories prior to their negotiation with the contractor.  As a
result, DOE placed itself in the same weak negotiating position it
has maintained for years. 

DOE officials maintain that they are improving existing contracts
without the benefit of competition.  However, DOE is still
negotiating in a noncompetitive environment and will not gain the
full benefits of competition. 


--------------------
\2 According to DOE's Procurement and Assistance Data System, DOE had
42 active management and operating contracts as of July 1, 1996. 


   OTHER INFORMATION
---------------------------------------------------------- Chapter 4:5

In December 1996 we reported on the status of DOE contract reform
efforts to the Subcommittee on Energy and Power, House Committee on
Commerce.\3 While many committees have been following DOE's contract
reform efforts, we have had continued contact with other House
committees, include the Subcommittee on Energy and Water Development,
Committee on Appropriations; and the Energy and Environment
Subcommittee, Committee on Science. 

The Department's Inspector General is also evaluating DOE's contract
reform efforts.  Their recent report entitled, Inspection of the
Performance Based Incentive Program at the Richland Operations Office
(DOE/IG-0401, Mar.  10, 1997), is very critical of the incentives
that DOE paid under this contract. 


--------------------
\3 Department of Energy:  Contract Reform Is Progressing, But Full
Implementation Will Take Years (GAO/RCED-97-18, Dec.  10, 1996). 


   ONGOING AUDIT WORK
---------------------------------------------------------- Chapter 4:6

We are currently reviewing one of DOE's efforts under contract
reform.  Under this effort, DOE has signed a fixed-price contract for
environmental cleanup at its Idaho facility.  DOE's goal is to reduce
cleanup costs and shift the risk of nonperformance from DOE to the
contractor.  The House Commerce Committee has requested that we
provide information on the history and current status of the project. 
While this is our only ongoing work, the House Science Committee and
National Security Committee have express interest in our doing
additional work on DOE contract reform efforts. 


   KEY GAO CONTACT
---------------------------------------------------------- Chapter 4:7

Vic Rezendes
Director, Energy, Resources, and Sciences Issues
(202) 512-3841


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 4:8

Department of Energy:  Management and Oversight of Cleanup Activities
at Fernald (GAO/RCED-97-63, Mar.  14, 1997). 

Department of Energy:  Contract Reform Is Progressing, But Full
Implementation Will Take Years (GAO/RCED-97-18, Dec.  10, 1996). 

Department of Energy:  DOE Has Had Limited Success With Major System
Acquisitions (GAO/RCED-97-17, Nov.  26, 1996). 

Hanford Waste Privatization (GAO/RCED-96-213R, Aug.  2, 1996). 

Environmental Protection:  Issues Facing the Energy and Defense
Environmental Management Programs (GAO/T-RCED/NSIAD-96-127, Mar.  21,
1996). 

Federal Research:  Information on Fees for Selected Federally Funded
Research and Development Centers (GAO/RCED-96-31FS, Dec.  8, 1995). 

Nuclear Facility Cleanup:  Centralized Contracting of Laboratory
Analysis Would Produce Budgetary Savings (GAO/RCED-95-118, May 8,
1995). 

DOE Management:  Contract Provisions Do Not Protect DOE From
Unnecessary Pension Costs (GAO/RCED-94-201, Aug.  26, 1994). 

Energy Management:  Modest Reforms Made in University of California
Contracts, but Fees Are Substantially Higher (GAO/RCED-94-202, Aug. 
25, 1994). 

High-Risk Series:  Department of Energy Contract Management
(GAO/HR-93-9, Dec.  1992). 

Energy Management:  Vulnerability of DOE's Contracting to Waste,
Fraud, Abuse, and Mismanagement (GAO/RCED-92-244, Apr.  14, 1992). 


STUDENT FINANCIAL AID
============================================================ Chapter 5


   OVERVIEW
---------------------------------------------------------- Chapter 5:1

The former Guaranteed Student Loan Program (now called the Federal
Family Education Loan Program or FFELP) was included in GAO's
original list of high-risk programs in 1990.  At that time, student
loan defaults were rising rapidly posing significant losses to the
government--in 1991 the Department of Education paid out $3.6 billion
to make good its guarantee on defaulted student loans.  In 1995, we
revised this designation to include all federal student financial aid
distributed under title IV of the Higher Education Act of 1965, as
amended.  GAO did so because of abuses and instances of fraud we
identified in the Pell grant program and because all of the Title IV
programs share the same vulnerabilities to losses due to fraud,
waste, abuse, and mismanagement. 

At the core of the Department's financial accountability difficulties
are persistent problems with the individual student aid programs'
processes, structure, and management.  These problems include (1)
overly complex processes, (2) inadequate financial risk to lenders or
state guaranty agencies for defaulted loans, and (3) management
shortcomings.  Although the Department can mitigate some of these
circumstances through more effective oversight and management, many
of the initiatives it took and which we discussed in our reports have
not been fully implemented.  Progress towards their full
implementation has been mixed. 

Our work has shown that student aid programs have many participants
and involve complicated, cumbersome processes.  Three principal
participants--students, schools, and the Department of Education--are
involved in all the financial aid programs; two additional
participants--lenders and guaranty agencies--also have roles in
FFELP.  In general, each student aid program has its own processes,
which include procedures for student applications, school
verifications of eligibility, and lenders or other servicing
organizations that collect payments.  Further, the introduction of
the Ford Direct Loan Program (FDLP)--in which students borrow
directly from the Department through their school--has added a new
dimension of complexity.  Rather than replacing FFELP as initially
planned, FDLP now operates along side it.  Essentially, this means
that the Department has two programs to manage that are similar in
purpose but that operate differently. 

The structure of the student aid programs makes protecting the
financial interests of the government difficult for the Department
for two reasons.  First, because HEA placed nearly all the financial
risk for defaults on the federal government, it continues to bear a
major portion of the risk for loan losses.  And, although the 1992
and 1993 amendments to HEA established slightly more risk sharing,
the current structure still makes protecting the taxpayers' financial
interests difficult.  Protecting the financial interests of the
government is also difficult because the loan programs now serve more
students from low-income families and those attending proprietary
schools than in the past.  As the number of these higher-risk
borrowers has increased, so has the number of defaults.  Both of
these conditions enhance access for low-income students, yet a
tension exists because they jeopardize financial accountability. 

Management shortcomings also continue as a major problem and
contribute to the Department's financial accountability difficulties. 
In the past, congressional hearings and investigations, the
Department's Office of Inspector General (OIG) reports, our reports,
and other studies and evaluations have shown that the Department (1)
did not adequately oversee schools that participated in the programs,
(2) managed each title IV program through a separate administrative
structure, with poor or little communication among programs, (3) used
inadequate management information systems that contained unreliable
data, and (4) did not have sufficient and reliable student loan data
to determine the Department's liability for outstanding loan
guarantees.  In some areas, such as gatekeeping,\1 the Department has
improved some of its practices.  In others, many of the shortcomings
we identified in the past remain.  For example, Department
initiatives to improve information resources management have not been
fully successful in producing needed improvements in data quality and
systems integration.  This situation also effects the programs'
internal controls.  For example: 

  -- Poor quality and unreliable FFELP student loan data remain in
     the Department's systems.  As a result, the Department is unable
     to obtain from its systems complete, accurate and reliable FFELP
     data necessary to report on its financial position. 

  -- Inaccurate loan data are being loaded in the National Student
     Loan Data System.  This system is the Department's principal
     student financial aid database intended to help resolve data
     quality problems. 


--------------------
\1 Gatekeeping generally refers to the Department's procedures for
determining which schools may participate--and whether they should
continue participating--in federal student aid programs. 


   LEVEL OF RESOURCES AT RISK
---------------------------------------------------------- Chapter 5:2

About $38 billion of federal student financial aid was available to
postsecondary students in fiscal year 1996.  This is a major part of
all aid that students received.  Generally, in awarding such aid, the
government relies on third parties (schools, lenders, and state
guaranty agencies) to determine student eligibility and aid levels,
and make payments.  In addition, the government is exposed to
billions in potential losses on its approximately $122 billion in
outstanding government backed student loans, if they are not properly
managed.  These include outstanding contingent liabilities the
government assumed by guaranteeing federally-sponsored student
(FFELP) loans that totalled about $92 billion at the end of fiscal
year 1996.  The government paid out about $2.8 billion in claims for
defaulted student loans in fiscal year 1996.  Also, the Department
had about $30 billion in outstanding direct (FDLP) loans and
defaulted guaranteed student loans at the end of fiscal year 1996. 


   PROGRESS IN ADDRESSING PROBLEMS
---------------------------------------------------------- Chapter 5:3

The Department has generally been responsive to addressing problems
in its student aid programs.  In July 1996, we reported the
Department had completed actions or had actions in progress or
planned to address 186 (91 percent) of 205 recommendations made over
a 4-year period--most by OIG and us--to improve its management of
federal student financial aid.\2 These actions have the potential to
further remedy many of the underlying problems with the program. 

The Department has also begun planning a major reengineering effort
to resolve these types of problems over the next several years.  This
effort, known as Easy Access for Students and Institutions, or
"Project EASI," is envisioned as a student-based, integrated data
system through which all management and control functions will be
conducted. 


--------------------
\2 Department of Education:  Status of Actions to Improve the
Management of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). 


   KEY OPEN GAO RECOMMENDATIONS
   AND IMPLEMENTATION STATUS
---------------------------------------------------------- Chapter 5:4

We have made numerous recommendations related to these four areas as
a result of our reviews of the operations of the student aid
programs.  Several of the more significant recommendations have yet
to be fully addressed by the Department.  The table below lists these
recommendations, the current status of the Department's actions to
address them, and our position on whether or not the Department's
response is addressing the problem that led to our recommendation. 

GAO Report                              Key Recommendation                                 Education's Response                               GAO's Position
--------------------------------------  -------------------------------------------------  -------------------------------------------------  --------------------------------------
Student Financial Aid: Data Not Fully   The Secretary of Education should take actions to  The Department of Education formed an NSLDS        While the Department's actions so far
Utilized to Identify Inappropriately    improve the accuracy and completeness of student   project team tasked with reviewing alleged         may be able to screen out obvious
Awarded Loans and Grants                financial aid data, such as continuing to screen   defaulters receiving subsequent loans. As of the   errors and inconsistencies, we believe
(GAO/HEHS-95-89, July 11, 1995).        data entered into the National Student Loan Data   summer of 1996, for the 1995-96 school year, the   that the Department needs to continue
                                        System (NSLDS) to ensure that they are in a        team identified 100,376 student aid applicants     working towards permanently resolving
                                        consistent format, and testing the accuracy and    who should not have received federal student       the need for accurate and valid data
                                        validity of data in NSLDS. Further, the Secretary  loans. The system showed that these applicants     in the NSLDS.
                                        should analyze student aid data more closely to    had previously defaulted on a loan. The
                                        identify patterns of noncompliance with federal    Department is working with a contractor to
                                        requirements, such as following up on students     identify and verify critical data items in NSLDS.
                                        identified as ineligible in the data matches, and  It has established a NSLDS Data Quality Action
                                        take appropriate corrective actions.               Team which has developed plans to resolve data
                                                                                           quality issues discussed in GAO's report. Edit
                                                                                           checks established in NSLDS have led to reduced
                                                                                           data errors.

Financial Audit: Guaranteed Student     The Secretary of Education should direct the       In December 1996, the Department's OIG issued its  We believe that the Department is
Loan Program's Internal Controls and    Assistant Secretary for Postsecondary Education    revised Audit Guide for lenders and lender         taking appropriate action to address
Structure Need Improvement (GAO/AFMD-   to require that guaranty agencies and lenders      servicers requiring an independent public          this recommendation. The progress and
93-20, Mar. 16, 1993).                  annually provide Education an independent public   accountant to perform an examination-level         effectiveness of these actions will be
                                        accountant's positive attestation on the claims    attestation relative to lenders' and lender        monitored during our reviews of the
                                        for payment submitted to the federal government,   servicers' management assertions regarding         Department's fiscal years 1996 and
                                        and the basis for such attestation, including an   interest billing statements to the Department.     1997 financial statement audits.
                                        opinion on the adequacy of internal controls over  Reports and opinions regarding interest billing
                                        such claims.                                       testing are to be in compliance with reporting
                                                                                           requirements under the Single Audit Act. In July
                                                                                           1996, the OIG issued updated guidance in the form
                                                                                           of a revised interim Compliance Supplement for
                                                                                           use by auditors of guaranty agencies in fiscal
                                                                                           year 1996 single audits. Reporting requirements
                                                                                           are those covered under the Single Audit Act. OMB
                                                                                           sent out the Compliance Supplement for comment in
                                                                                           March 1997.

                                        The Secretary of Education should direct the       The Department issued a task order to the FFELP    We believe that the Department is
                                        Assistant Secretary for Postsecondary Education    contractor to develop auditable subsidiary         taking appropriate action to address
                                        to establish and maintain subsidiary ledgers for   ledgers. However, the technical and business       this recommendation. The progress and
                                        GSLP.                                              proposals were unacceptable to the Department.     effectiveness of these actions will be
                                                                                           Instead, it will be adapting a commercial off-     monitored during our reviews of the
                                                                                           the-shelf software package to implement permanent  Department's fiscal years 1996 and
                                                                                           FFELP subledgers. OPE is awaiting official         1997 financial statement audits.
                                                                                           acceptance of the system by the Office of the
                                                                                           Chief Financial Officer before proceeding
                                                                                           further. Education anticipates completing this
                                                                                           effort in December 1997.

Financial Management: Education's       The Secretary of Education should direct the       In December 1996, the Department's OIG issued its  We believe that the Department is
Student Loan Program Controls Over      Assistant Secretary of Postsecondary Education     revised Audit Guide for lenders and lender         taking appropriate action to address
Lenders Need Improvement (GAO/AIMD-     and the Chief Financial Officer to coordinate      servicers requiring an independent public          this recommendation. We will be
93-33, Sept. 9, 1993).                  efforts to develop a comprehensive strategy for    accountant to perform an examination-level         monitoring the progress during our
                                        determining the accuracy of information reported   attestation relative to lenders' and lender        reviews of the Department's fiscal
                                        on lenders' quarterly billings which would         servicers' management assertions regarding         years 1996 and 1997 financial
                                        include developing objective criteria for          interest billing statements to the Department.     statement audits.
                                        selecting and reviewing lenders participating in   Reports and opinions regarding interest billing
                                        FFELP.                                             testing are to be in compliance with reporting
                                                                                           requirements under the Single Audit Act. The
                                                                                           Department developed reasonability edits in the
                                                                                           FFELP subsystems to compare billing data reported
                                                                                           on Form 799, Lender's Interest and Special
                                                                                           Allowance Request and Report and data submitted
                                                                                           to the NSLDS. Once the edits and level of
                                                                                           reasonableness are finalized, the Department will
                                                                                           analyze the variances and forward the results to
                                                                                           the Guarantee Agency and Lender Oversight Service
                                                                                           (GLOS) for follow up. The Department will also
                                                                                           analyze the variances for about two years and
                                                                                           possibly redesign Form 799. It anticipates
                                                                                           completion in December 1998.

                                        The Secretary of Education should direct the       In December 1996, the Department's OIG issued its  We believe that the Department is
                                        Assistant Secretary of Postsecondary Education     revised Audit Guide for lenders and lender         taking appropriate action to address
                                        and the Chief Financial Officer to coordinate      servicers that requires that the lender's          this recommendation. We will be
                                        efforts to develop a comprehensive strategy for    auditors specifically audit and report on the      monitoring the effectiveness of the
                                        determining the accuracy of information reported   integrity of billings to the Department. In        tracking system during our reviews of
                                        on lenders' quarterly billings which would         addition, a tracking system was developed to       the Department's fiscal years 1996 and
                                        include annually performing mandatory review       monitor receipt of lender audit reports and        1997 financial statement audits.
                                        procedures at selected lenders which, at a         provide a database of findings cited in the
                                        minimum, would include reviewing results of        report. Those entities with identified weaknesses
                                        annual compliance audits--required by the Higher   are flagged and receive appropriate follow-up
                                        Education Amendments of 1992--and other audits of  action.
                                        lenders and following up on identified weaknesses
                                        to determine if appropriate corrective actions
                                        have been taken.

                                        The Secretary of Education should direct the       The Department developed reasonability edits in    We believe that the Department is
                                        Assistant Secretary of Postsecondary Education     the FFELP subsystems to compare billing data       taking appropriate action to address
                                        and the Chief Financial Officer to coordinate      reported on Form 799, Lender's Interest and        this recommendation. We will be
                                        efforts to monitor and follow up with lenders      Special Allowance Request and Report and data      monitoring the progress of these
                                        whose quarterly billings fail to meet Education's  submitted to NSLDS. Once the edits and level of    actions during our reviews of the
                                        internal automated edit checks and reasonability   reasonableness are finalized, the Department will  Department's fiscal years 1996 and
                                        tests.                                             analyze the variances and forward the results to   1997 financial statement audits.
                                                                                           GLOS for follow up. The Department will also
                                                                                           analyze the variances for about two years and
                                                                                           possibly redesign Form 799. It anticipates
                                                                                           completion in December 1998.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

   WHAT REMAINS TO BE DONE
---------------------------------------------------------- Chapter 5:5

In addition to addressing our specific recommendations, the
Department must also continue to take comprehensive action to address
the four management issues we described above.  These actions
include: 

  -- Continuing its ongoing efforts to improve gatekeeping.  Among
     the more significant actions underway that the Department needs
     to sustain is full implementation of the Institutional
     Participation and Oversight Service (IPOS) Challenge.  Under
     this initiative, the Department plans to (1) use a computer
     model to identify schools for review based on their risk of
     noncompliance, and (2) have review teams decide on the basis of
     a school's overall compliance record how to structure school
     reviews and which compliance and penalty actions to recommend in
     cases of violations. 

  -- Ensuring that both FFELP and FDLP are managed with the resources
     needed to minimize program abuse and that regulatory and other
     corrective actions are followed to address potential program
     administration problems we identified.  These include ensuring
     that schools allowed to participate in FDLP have resolved
     problems that place them at risk of losing eligibility to
     participate in other title IV programs, and that defaults on
     income contingent loans are correctly included in calculating
     cohort default rates for these schools. 

  -- Integrating its information systems and ensuring the accuracy
     and validity of National Student Loan Data System (NSLDS) data
     and data in other systems to better identify possible program
     misuse by students, schools, and other program participants. 
     The Department currently does not have, and needs to develop, an
     integrated, fully functional, title IV-wide recipient database. 
     Such a system would show the total amount of aid students have
     received through the Department.  This is necessary to improve
     program monitoring, data quality and accuracy, ensuring that
     students are not receiving more aid than they are eligible for,
     and improving data systems' efficiency and cost.  Accurate and
     valid data are required to effectively manage and oversee
     compliance with program requirements.  For example, the current
     system cannot always identify where a student is enrolled, even
     after an award is made and thousands of dollars in student aid
     are disbursed. 

  -- Continuing its efforts to improve financial management,
     including improving the accuracy, quality, and reliability of
     the Department's student loan data.  Such steps are essential to
     producing auditable financial statements for the Department of
     Education pursuant to the Chief Financial Officers Act of 1990,
     as amended.  The Department's auditors expressed a disclaimer of
     opinion on its fiscal year 1995 financial statements due
     primarily to scope limitations resulting from unreliable student
     loan data.  The lack of complete and reliable FFELP student loan
     data prevented the auditors from assessing whether the
     Department's liability estimate for guaranteed loan defaults
     about $13 billion was accurate, or was materially over or under
     stated. 

The fiscal year 1996 financial audit is ongoing, and the auditor
expects to issue its opinion this summer.  The Chief Financial
Officer and the 10 largest guaranty agencies are compiling data
elements from the guaranty agencies' databases, such as default and
collection rates, to be input into the Department's liability model. 
In addition, the guaranty agencies' auditors are to perform
agreed-upon procedures to ensure that data from which data elements
were developed is reliable.  However, it is too early to tell whether
this data will provide a reliable basis for estimating the liability. 



                CONGRESSIONAL CONTACTS WITH INTEREST IN
                      STUDENT FINANCIAL AID ISSUES

Committee Subcommittee              Key staff
----------------------------------  ----------------------------------
House Committee on Education and    Majority
the Workforce\a                     Sally Stroup
                                    (202) 225-6558
-Subcommittee on Postsecondary
Education and Life Long             Mark Brenner
Learning\a                          (202) 225-7101

-Subcommittee on Oversight and      George Conant
Investigations                      (202) 225-6558

                                    Minority
                                    Marshall Grigsby
                                    (202) 225-7116

                                    David Evans
                                    (202) 225-7116

Senate Committee on Labor and       Majority
Human Resources\a                   Pam Devitt
                                    (202) 224-6770

                                    Minority
                                    Marianna Pierce
                                    (202) 224-5501

House Committee on Government       Majority
Reform and Oversight                Larry Halloran
                                    (202) 225-2548
-Subcommittee on Human Resources
                                    Chris Allred
                                    (202) 225-2548
----------------------------------------------------------------------
\a Committee or Subcommittee with jurisdiction over the
reauthorization of the Higher Education Act of 1965, as amended. 



                 EXECUTIVE BRANCH OFFICIALS AND PRIVATE
                 SECTOR INDIVIDUALS/ORGANIZATIONS WITH
                INTEREST IN STUDENT FINANCIAL AID ISSUES

Agency                              Key staff
----------------------------------  ----------------------------------
Advisory Committee on Student       Dr. Robert Alexander, Chairperson
Financial Assistance                (202) 708-7439

                                    Dr. Brian Fitzgerald, Staff
                                    Director
                                    ( 202) 708-7439

Department of Education             Mr. Tom Bloom, Inspector General
                                    ( 202) 205-5439

Office of Management and Budget     Ms. Pat Smith, Education Branch
                                    (202) 395-5882

Institute for Higher Education      Mr. Jamie Merisotis, President
Policy                              (202) 588-8383
----------------------------------------------------------------------

   ONGOING AUDIT WORK
---------------------------------------------------------- Chapter 5:6

We presently have eleven reviews underway that relate to the
operation of and risk associated with the student aid programs. 

  -- Identifying the relationship between reliance on financial aid
     revenues and school performance in the proprietary school
     sector. 

  -- Extent of the mismatch between occupational education supported
     by the student aid programs and employment opportunities. 

  -- Eligibility of illegal aliens for federal student financial aid. 

  -- Review of the income contingent repayment plan in FDLP. 

  -- Review of trends in the cumulative amounts borrowed for
     postsecondary education. 

  -- Review of a proposal for an increase in the loan volume
     threshold for auditing lenders under FFELP. 

  -- Efforts to reduce defaults at Historically Black Colleges and
     Universities. 

  -- Assessment of the Department's compliance with NSLDS
     requirements. 

  -- Survey of school's use of NSLDS. 

  -- Preparation for the fiscal year 1997 Audit of Loans Receivable. 

  -- Preparation for the fiscal year 1997 Audit of Liability for Loan
     Guarantees. 


   GAO CONTACTS
---------------------------------------------------------- Chapter 5:7

Carlotta Joyner
Director, Education and Employment Issues
(202) 512-7014

Joel Willemssen
Director, Information Resources Management
(202) 512-6408

Bob Dacey
Director, Consolidated Audits and Computer Security Issues
(202) 512-3317

For fiscal year 1997 audit preparation:
Ms.  Gloria Jarmon
Director, Civil Audits/HEHS
(202) 512-4476


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 5:8

Addressing the Deficit:  Budgetary Implications of Selected GAO Work
for Fiscal Year 1998 (GAO/OCG-97-2, Mar.  14, 1997). 

High-Risk Series:  Student Financial Aid (GAO/HR-97-11, Feb.  1997). 

Reporting of Student Loan Enrollment Status (GAO/HEHS-97-44R, Feb. 
6, 1997). 

Department of Education:  Status of Actions to Improve the Management
of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). 

Financial Audit:  Federal Family Education Loan Program's Financial
Statements for Fiscal Years 1994 and 1993 (GAO/AIMD-96-22, Feb.  26,
1996). 

Student Financial Aid:  Data Not Fully Utilized to Identify
Inappropriately Awarded Loans and Grants (GAO/HEHS-95-89, July 11,
1995). 

High-Risk Series:  Student Financial Aid Programs (GAO/HR-95-10, Feb. 
1995). 

Financial Audit:  Federal Family Education Loan Program's Financial
Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131, June 30,
1994). 

Financial Management:  Education's Student Loan Program Controls Over
Lenders Need Improvement (GAO/AIMD-93-33, Sept.  9, 1993). 

Direct Student Loans:  The Department of Education's Implementation
of Direct Lending (GAO/HRD-93-26, June 10, 1994). 

Financial Audit:  Guaranteed Student Loan Program's Internal Controls
and Structure Need Improvement (GAO/AFMD-93-20, Mar.  16, 1993). 


FAA'S AIR TRAFFIC CONTROL
MODERNIZATION
============================================================ Chapter 6


   OVERVIEW
---------------------------------------------------------- Chapter 6:1

GAO first designated the Federal Aviation Administration's (FAA) air
traffic control (ATC) modernization as a high-risk area in 1995.\1 We
did so because of the modernization's enormous cost and complexity,
its criticality to FAA's vital mission of ensuring safe and efficient
air travel, and its problem-plagued past.  In our 1997 high-risk
report,\2 we again included the modernization, not only for the same
reasons we included it in 1995, but also because our recent work on
the modernization showed pervasive and fundamental problems in FAA's
approach to managing the modernization. 

To address the problems that we have thus far identified, we recently
made a series of very detailed recommendations aimed at correcting
key modernization management problems, to which FAA has been slow in
responding and initiating corrective action.  We have also initiated
and planned work to evaluate other key aspects of the modernization's
management.  Our goals are to pinpoint root causes of the
modernization's problems, to recommend fundamental management change
to correct the problems, and to vigilantly monitor implementation of
these recommendations.  When the underlying management weaknesses
have been corrected, the ATC modernization will no longer be
categorized as a high-risk area. 


--------------------
\1 High-Risk Series:  An Overview (GAO/HR-95-1, Feb.  1995). 

\2 High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, Feb.  1997). 


   ATC MODERNIZATION:  A BRIEF
   HISTORY AND DESCRIPTION
---------------------------------------------------------- Chapter 6:2

FAA's primary mission is to ensure safe, orderly, and efficient air
travel throughout the United States.  FAA's ability to fulfill this
mission depends on the adequacy and reliability of the nation's ATC
system, a vast network of computer hardware, software, and
communications equipment.  Within the ATC system, air traffic
controllers use automated information processing and display,
communication, navigation, surveillance, and weather resources to
view key information, such as aircraft location, aircraft flight
plans, and prevailing weather conditions, and to communicate with
pilots. 

The ATC system of the late 1970s was a blend of several generations
of automated and manual equipment, much of it labor-intensive and
obsolete.  FAA recognized that it could increase ATC operating
efficiency by increasing automation.  Additionally, FAA forecasted
increased future demand for air travel, brought on by airline
deregulation of the late 1970s.  It also anticipated that meeting the
demand safely and efficiently would require improved and expanded
services, additional facilities and equipment, improved workforce
productivity, and the orderly replacement of aging equipment. 
Accordingly, in December 1981, FAA initiated its plan to modernize,
automate, and consolidate the existing ATC system by the year 2000. 

This ambitious modernization program includes the acquisition of new
radars and automated data processing, navigation, and communication
equipment in addition to new facilities and support equipment.  FAA
estimates that the modernization will cost over $34 billion through
the year 2003 and total over 200 projects.  The Congress has already
appropriated about $23 billion of this $34 billion investment. 

Over the past 15 years, the modernization program has experienced
cost overruns, schedule delays, and performance shortfalls that have
affected FAA's ability to deliver systems as promised.  For example,
the acquisition of the Advanced Automation System, which was
estimated to cost $7.6 billion and was the centerpiece of the
modernization before FAA restructured the effort in 1994, failed
because FAA did not recognize the technical complexity of the effort,
did not realistically estimate the resources required, did not
adequately oversee its contractors' activities, and did not
effectively control systems requirements. 


   COST AND SERVICE DELIVERY
   IMPLICATIONS
---------------------------------------------------------- Chapter 6:3

Because the ATC modernization is at high risk, both billions of
dollars in federal funds and critical federal function are
jeopardized.  The federal funding profile between fiscal years 1998
and 2003 alone is about $6 billion for new system investments, not to
mention the billions of dollars to be spent maintaining these systems
and investing in even more systems beyond 2003.  With respect to
federal function, the cost implications to public and private sector
operations of just an isolated ATC interruption for even short time
periods can be significant.  Since FAA is responsible for providing
safe and efficient air travel both now and in the future, when
traffic volumes are expected to increase, FAA must modernize its ATC
systems, but it must do so effectively and efficiently.  To do less
not only risks the funds being spent on modernized systems, but also
the delivery of vital government services. 


   WHAT NEEDS TO BE DONE
---------------------------------------------------------- Chapter 6:4

Effectively managing a modernization as large and technically complex
as the ATC modernization requires, among other things, an effective
organizational structure, disciplined investment management
processes, mature system and software development and acquisition
processes, reliable data upon which to base important decisions, a
well-defined architecture, or blueprint, to guide and constrain
system development and evolution, and a healthy organizational
culture.  Our work evaluating the modernization has been and
continues to be directed at determining how well FAA is meeting these
and other important requirements. 


   RECENT GAO WORK AND KEY OPEN
   RECOMMENDATIONS
---------------------------------------------------------- Chapter 6:5

Our recent work shows that FAA is not meeting many of the above cited
requirements.  For example, we reported that (1) FAA's processes for
acquiring the software for its new ATC systems are immature, and at
times chaotic, (2) FAA's cost estimating processes and cost
accounting practices are not adequate to effectively manage its
billion dollar information technology investments, (3) FAA's failure
to define and enforce an overall ATC systems architecture has
resulted in unnecessarily higher spending to buy, integrate, and
maintain hardware and software, (4) FAA's organizational culture does
not reflect a strong commitment to mission focus, accountability,
coordination, and adaptability, and (5) FAA lacks a comprehensive
plan for augmenting, and transitioning to, the Global Positioning
System for civil air navigation. 

To address these deficiencies, we have made over a dozen detailed
recommendations to FAA.  FAA is delinquent in responding to and
initiating action to correct most of these recommendations.  The
following table summarizes these recommendations.)

GAO Report                    Key Recommendation                                           Status       FAA's Response                              GAO's Position
----------------------------  -----------------------------------------------------------  -----------  ------------------------------------------  --------------------------------
Air Traffic Control:          FAA should improve its software acquisition process          Open         FAA's official response is due on May 20,   FAA's response is not yet due.
Immature Software             capability by:                                                            1997.
Acquisition Processes         ï¿½ assigning responsibility for software acquisition process
Increase FAA System           improvement to FAA's CIO,
Acquisition Risks (GAO/       ï¿½ providing FAA's CIO with the authority to implement and
AIMD-97-47, Mar. 21, 1997).   enforce ATC modernization software acquisition process
                              improvements,
                              ï¿½ requiring the CIO to develop and implement a formal plan
                              for ATC software acquisition process improvement based on
                              GAO's evaluation results,
                              ï¿½ allocating adequate resources to ensure that planned
                              initiatives are implemented and enforced, and
                              ï¿½ requiring that, before being approved, every ATC
                              modernization acquisition project have software acquisition
                              processes that satisfy at least SA-CMM level 2
                              requirements.


Air Traffic Control:          FAA should ensure that a complete ATC systems architecture   Open         FAA has not yet officially responded to     FAA is delinquent in responding
Complete and Enforced         is developed and enforced before deciding on the                          this recommendation. This response was due  to the recommendations.
Architecture Needed for FAA   architectural characteristics for replacing the Host                      on
Systems Modernization (GAO/   Computer System.                                                          April 4, 1997.
AIMD-97-30, Feb. 3, 1997).

                              FAA should establish an effective management structure for   Open         FAA has not yet officially responded to     FAA is delinquent in responding
                              developing, maintaining, and enforcing the complete ATC                   this recommendation. This response was due  to the recommendations.
                              systems architecture. This management structure should be                 on April 4, 1997.
                              similar to the department-level Chief Information Officers
                              as prescribed in the Clinger-Cohen Act of 1996.

Air Traffic Control:          FAA should institutionalize defined processes for            Open         FAA has not yet officially responded to     FAA is delinquent in responding
Improved Cost Information     estimating ATC projects' costs. These processes should                    this recommendation. This response was due  to the recommendations.
Needed to Make Billion        include:                                                                  on March 24, 1997.
Dollar Modernization          ï¿½ a corporate memory
Investment Decisions (GAO/    ï¿½ structured approaches for estimating software size and
AIMD-97-20, Jan. 22, 1997).   complexity
                              ï¿½ cost models calibrated to past experiences
                              ï¿½ audit trails that record cost model inputs
                              ï¿½ processes for dealing with cost for schedule constraints,
                              and
                              ï¿½ data collection and feedback processes.

                              FAA should disclose the inherent uncertainty in all ATC      Open         FAA has not yet officially responded to     FAA is delinquent in responding
                              projects' official cost estimates presented to the Congress               this recommendation. This response was due  to the recommendations.
                              and executive oversight agencies.                                         on March 24, 1997.

                              FAA should acquire or develop and implement a managerial     Open         FAA has not yet officially responded to     FAA is delinquent in responding
                              cost accounting capability.                                               this recommendation. This response was due  to the recommendations.
                                                                                                        on March 24, 1997.

                              The Secretary of Transportation should report FAA's lack of  Open         FAA has not yet officially responded to     FAA is delinquent in responding
                              a cost accounting capability as a material internal control               this recommendation. This response was due  to the recommendations.
                              weakness in the Department's FMFIA reports until the                      on March 24, 1997.
                              problem is corrected.
                                                                                                        FAA's lack of a cost accounting capability
                                                                                                        was not identified as a material internal
                                                                                                        control weakness in the Department's 1996
                                                                                                        FMFIA report.

Aviation Acquisition:         FAA should develop a comprehensive strategy for cultural     Open         In November 1996, the FAA Administrator     FAA did not meet the deadline.
A Comprehensive Strategy Is   change that includes specific responsibilities and                        directed the Associate Administrators for
Needed for Cultural Change    performance measures for all stakeholders throughout FAA                  Research and Acquisitions and Air Traffic
at FAA                        and provide the incentives needed to promote the desired                  Services to develop the comprehensive
(GAO/RCED-96-159, Aug. 22,    behaviors and to achieve agency-wide cultural change.                     strategy recommended by GAO. The
1996).                                                                                                  Administrator directed that the strategy
                                                                                                        be defined by April 30, 1997 and updated
                                                                                                        at 6-month intervals.


National Airspace System:     FAA should prepare a comprehensive plan for augmenting the   Partially    FAA published a satellite navigation        FAA has not yet developed a
Comprehensive FAA Plan for    Global Positioning System (GPS) and transitioning to it and  imple-       program master plan and a plan for          comprehensive plan for
Global Positioning System is  update this plan regularly. The plan should include, among   mented       transitioning to GPS. Additionally, FAA     augmenting GPS that includes
Needed (GAO/RCED-95-26, May   other things, schedule and cost estimates for developing                  has developed preliminary cost and          firm cost and schedule estimates
10, 1995).                    and implementing the wide and local area augmentation                     schedule estimates for acquiring the wide   for developing and implementing
                              systems as well as information on the probability that FAA                area augmentation system.                   the wide and local area
                              will meet these estimates.                                                                                            augmentation systems..

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                KEY CONGRESSIONAL CONTACTS WITH INTEREST
                      IN FAA's AIR TRAFFIC CONTROL
                          MODERNIZATION ISSUES

Committee                           Key staff
----------------------------------  ----------------------------------
House Committee on Appropriations/  Rich Efford (Majority)
Subcommittee on Transportation &    (202) 225-2141
Related Agencies
                                    Cheryl Smith (Minority)
                                    (202) 225-3481

House Committee on Science,         Richard Russell (Majority)
Subcommittee on Technology          (202) 225-8844

                                    Jeff Groves (Majority)
                                    (202) 225-8844

                                    Mike Quear (Minority)
                                    (202) 225-6917

House Committee on Transportation   David Schaffer (Majority)
& Infrastructure/Subcommittee on    (202) 226-3220
Aviation
                                    Mary Walsh (Minority)
                                    (202) 225-9161

Senate Committee on                 Wally Burnett (Majority)
Appropriations/Subcommittee on      (202) 224-7281
Transportation & Related Agencies
                                    Peter Rogoff (Minority)
                                    (202) 224-7245

Senate Committee on Governmental    Bill Greenwalt (Majority)
Affairs                             (202) 224-4751

                                    Ellen Brown (Majority)
                                    (202) 224-4751

                                    Brian Dettelbach (Minority)
                                    (202) 224-2627

                                    David Plocher (Minority)
                                    (202) 224-2627

Senate Committee on Commerce,       Ann Hodges (Majority)
Science & Transportation/           (202) 224-4852
Subcommittee on Aviation
                                    Sam Whitehorn (Minority)
                                    (202) 224-0411
----------------------------------------------------------------------

   ONGOING GAO WORK
---------------------------------------------------------- Chapter 6:6

We have four ongoing assignments focusing on key aspects of FAA's
modernization: 

  -- FAA's effectiveness in managing its year 2000 conversion effort. 

  -- FAA's effectiveness in managing ATC computer security. 

  -- FAA's satisfaction of the Clinger-Cohen Act investment
     management requirements. 

  -- FAA's progress in augmenting the Global Positioning System. 



                          KEY AGENCY CONTACTS

Agency                              Contact
----------------------------------  ----------------------------------
Federal Aviation Administration     Monte Belger
                                    Acting Deputy Administrator
                                    (202) 267-7111

                                    Dr. George Donahue
                                    Associate Administrator for
                                    Research and Acquisitions
                                    (202) 267-7222
----------------------------------------------------------------------

   KEY GAO CONTACTS
---------------------------------------------------------- Chapter 6:7

Dr.  Rona Stillman
Chief Scientist for Computers and Telecommunications
(202) 512-6412

John Anderson
Director, Transportation Issues
(202) 512-2834

Linda Calbom
Director, Civil Audits - Resources, Community, and Economic
Development
(202) 512-9508


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 6:8

Air Traffic Control:  Status of FAA's Standard Terminal Automation
Replacement System Project (GAO/RCED-97-51, Mar.  5, 1997). 

DOT's Budget:  Safety, Management, and Other Issues Facing the
Department in Fiscal Year 1998 and Beyond (GAO/T-RCED/AIMD-97-86,
Mar.  6, 1997). 

Air Traffic Control:  Good Progress on Interim Replacement for
Outage-Plagued System, Bt Risks Can Be Further Reduced
(GAO/AIMD-97-2, Oct.  17, 1996). 

Air Traffic Control:  Status of FAA's Modernization Program
(GAO/RCED-95-175FS, May 26, 1995). 

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


NASA CONTRACT MANAGEMENT
============================================================ Chapter 7


   OVERVIEW
---------------------------------------------------------- Chapter 7:1

In 1990, we identified NASA contract management as an area at high
risk for fraud, waste, abuse, and mismanagement.  Our decision to
place NASA contract management on our high-risk list was primarily
based on work by the NASA Inspector General and NASA management's
growing concern about its ability to adequately oversee contractors'
performance. 

Early in our high-risk work, we identified three major causes of
NASA's contract management problems: 

  -- Unrealistic expectations for future budgets. 

  -- Ineffective oversight of contractors. 

  -- Noncompliance with contract management requirements. 

Since the early 1990s, NASA has greatly tempered its future budget
expectations.  Also, the agency has made considerable progress in
addressing its contract management problems since it began to focus
special attention on them, beginning in the late 1980s.  However,
NASA still needs to ensure that it has relevant and reliable methods
for timely and accurate monitoring of its contract management
activities.  Such methods are key to the long-term effectiveness of
NASA's contract management. 

NASA's 5-year budget expectations in the early 1990s were between $13
billion and $21 billion higher than the budgets it was likely to
receive.  Such unrealistic expectations adversely impact NASA's
contract management activities because,when actual budgets are
significantly lower than expected, contract adjustments, such as
slowing the pace of work in order to spend less, can result.  Such
adjustments cause work to take longer and cost more.  Over the course
of several years, NASA eliminated most of the original gap we
reported between its program plans and likely budgets.  Currently,
NASA is planning for a slightly declining budget for the next 5
years--a total of $66.5 billion--well below the $92 billion 5-year
budget NASA was planning in the early 1990s. 

A major initiative that NASA hopes will help improve its oversight of
contractors is the development and implementation of a fully
integrated financial management system.  The new agencywide system,
which is currently scheduled to begin implementation by October 1998,
will replace a patchwork of existing systems that are incapable of
comprehensively producing timely and reliable accounting information
and reports.\1

NASA has completed a variety of efforts to influence contractors'
performance, including changing how it shares risk under research and
development contracts and the restructuring of contract award fees so
that space system performance is emphasized.  To help improve
agencywide compliance with contract management requirements, NASA has
instituted a variety of changes that are intended to ensure more
consistent interpretation and implementation of such requirements
across the agency.  For example, NASA has published improved guidance
or made other changes intended to reduce the amount of government
equipment provided to contractors and to improve the use of audits in
helping oversee contractors' activities. 

In actively working to identify and correct its contract management
problems, NASA has been responsive to our specific recommendations
for improving its contract management and related activities.  Also,
NASA has independently evaluated other contract management problems
and designed, implemented, and measured the effectiveness of its
corrective actions.  However, NASA still needs to ensure that it has
established relevant and reliable ways to help assess the
effectiveness of its contract management activities.  We will
continue to evaluate NASA's contract management and related
activities. 


--------------------
\1 The NASA Inspector General has expressed concern about NASA's
ability to overcome numerous management, functional and technical
challenges of implementing reengineered business processes (budget,
asset management, personnel/payroll,etc.) needed for the integrated
financial management system. 


   RESOURCES AT RISK
---------------------------------------------------------- Chapter 7:2

When looked at functionally, NASA can be seen principally as a
procurement organization.  In a typical year, NASA uses between 85
percent and 90 percent of its budget for purchasing goods and
services--about $12 billion or more each year.  Establishing and
maintaining adequate management control over NASA's procurement
activities is imperative, given the amount of money in the system and
potentially at risk. 


   KEY OPEN GAO RECOMMENDATIONS
   AND IMPLEMENTATION STATUS
---------------------------------------------------------- Chapter 7:3

Over the past 6 years, we have issued over 40 reports and testimonies
dealing partly or wholly with NASA's contract management and related
activities.  Over 30 of these products provided information or
analyses on key parts of the procurement cycle--from choosing the
type of procurement instrument, through contract award and oversight
of contractor performance, to contract closing--or addressed major
contract management-related activities, including project cost
estimating, planning, budgeting, and accounting.  Fifteen of the
reports contained 82 recommendations for correcting or improving
NASA's contract management and related activities.  NASA has been
responsive to all our major recommendations for improving NASA
contract management and related activities and has implemented or is
implementing them.\2 The one key outstanding matter relates to NASA
fulfilling its commitment to improve its ability to oversee contract
management activities. 


--------------------
\2 Some of our recommendations became obsolete before they could be
acted on because of other changes at NASA.  In other cases, NASA took
alternative actions that were intended to produce the same results as
our recommended actions. 


   WHY RECOMMENDATIONS HAVE NOT
   BEEN IMPLEMENTED AND WHAT
   REMAINS TO BE DONE
---------------------------------------------------------- Chapter 7:4

Even though NASA is acting to implement key recommendations related
to contract management or contract management-related activities,
there are actions it still needs to take. 

In our most recent high-risk report to NASA,\3 we noted that NASA has
effectively addressed many problems throughout the procurement cycle
but that a procurement operation as large as NASA's inevitably
experiences periodic problems.  The key was to identify such problems
early so that they could be evaluated, monitored, and corrected
before they became systemic.  In this regard, we noted that
continuous effective oversight required NASA to have relevant and
reliable performance measurements and to do periodic performance
reviews.  We told NASA that resolving remaining high-risk issues is
largely based on improvements to the processes and systems it uses to
assess and oversee its procurement activities and their capability to
consistently produce accurate and reliable information. 

NASA acknowledged that it needed to improve the procurement
self-assessment process.  It said it would issue additional guidance
to its field centers on performing assessments and that its
procurement management survey teams would review the centers'
processes for conducting these assessments.  We told NASA that we are
planning to evaluate its procurement self-assessment process and
procurement performance measurements. 


--------------------
\3 NASA Procurement:  Contract Management Oversight
(GAO/NSIAD-97-114R, Mar.  18, 1997). 


   OTHER INFORMATION
---------------------------------------------------------- Chapter 7:5

Currently, the majority and minority staffs on the House Science
Committee and its Space and Aeronautics Subcommittee are aware and
generally interested in our NASA contract management high-risk work. 
However, we are presently working on only one congressionally
requested assignment in the high-risk area--cost control in the Space
Station program.  The requesters are Senator Bumpers and
Representative Dingell.  The NASA Inspector General has a continuous
body of work in the procurement area. 


   GAO AUDIT WORK
---------------------------------------------------------- Chapter 7:6

Ongoing and planned work on contract management and related
activities, include: 

  -- International Space Station cost control (ongoing). 

  -- NASA's mid-level procurement pilot program (planned). 

  -- NASA's procurement evaluation processes (planned). 


   NASA CONTACT
---------------------------------------------------------- Chapter 7:7

Robert J.  Wesolowski
Acting Assistant Inspector General for Auditing
(202) 358-1232


   KEY GAO CONTACTS
---------------------------------------------------------- Chapter 7:8

Louis J.  Rodrigues, Director
Defense Acquisition Issues
(202) 512-4841

Thomas J.  Schulz, Associate Director
Defense Acquisition Issues
(202) 512-4841


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 7:9

NASA Contract Management:  Performance Measurement
(GAO/NSIAD-97-114R, Mar.  18, 1997). 

Potential Improvements in NASA's Assessments of Its Procurement
Function (GAO/NSIAD-97-80R, Feb.  4, 1997). 

NASA Infrastructure:  Challenges to Achieving Reductions and
Efficiencies (GAO/NSIAD-96-187, Sept.  9, 1996, and
GAO/T-NSIAD-96-38, Sept.  11, 1996). 

Space Station:  Cost Control Difficulties Continue (GAO/NSIAD-96-135,
July 17, 1996, and GAO/T-NSIAD-96-210, July 24, 1996). 

NASA Contract Management (GAO/NSIAD-96-95R, Feb.  16, 1996). 

NASA Budgets:  Gap Between Funding Requirements and Projected Budgets
(GAO/NSIAD-95-155BR, May 12, 1995). 


CUSTOMS SERVICE FINANCIAL
MANAGEMENT
============================================================ Chapter 8


   OVERVIEW
---------------------------------------------------------- Chapter 8:1

The U.S.  Customs Service (Customs) has a challenging and diverse
mission which includes collecting duties, taxes, and fees on imports
and enforcing trade laws.  In 1991, GAO added Customs as a high-risk
area because it had major weaknesses in its management and
organizational structure that diminished its ability to detect trade
violations on imported cargo; collect applicable duties, taxes, fees,
and penalties; control financial resources; and report on financial
operations.  In February 1995, we reported that Customs had taken
several actions in an effort to reduce risks in the general
management arena.  Such actions included aggressively pursuing
delinquent receivables which resulted in collections of over $37
million and embarking on an agency-wide reorganization plan. 
Additional efforts, however, were still needed in the financial
management area.  Since then, the scope of our high-risk work at
Customs has focused on its financial management problems. 

A number of our key open recommendations related to financial
management resulted from our efforts to audit Customs' fiscal year
1992 and 1993 principal financial statements, under the Chief
Financial Officers (CFO) Act.  We identified critical control
weaknesses in areas related to trade compliance, computer security,
and administrative operations, which includes financial reporting. 
At that time, Customs did not have a means to reliably measure
overall compliance with trade laws, which hindered its ability to
ensure that all imported goods were identified and related duties
collected; disposition of goods moving to other ports, warehouses, or
foreign trade zones (FTZs) were adequately monitored; and the
appropriateness of duty refunds, referred to as drawbacks,\1

were verified.  Also, Customs' controls to prevent or detect
unauthorized access and intentional or inadvertent unauthorized
modifications to critical and sensitive data and computer programs
were ineffective, thereby jeopardizing the security and reliability
of the operations central to Customs' mission.  Further, fundamental
problems, including financial management systems that were poorly
designed or not designed to report financial results and performance
information, impaired its ability to produce reliable financial
information. 

As recently reported in our February 1997 high-risk series, Customs
has and continues to take 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.  Customs also developed a methodology to
estimate and disclose the liability for future claims for drawback
payments and other refunds.  In addition, meaningful steps toward
correcting its computer access problems were also taken.  Further,
Customs reorganized its Office of Finance and established financial
advisor positions in key organizational units to more effectively
meet financial management responsibilities. 

Although these actions have resulted in substantial progress, Customs
still has not fully corrected problems in these areas, which continue
to be identified during audits of Customs' financial statements under
the CFO Act.  These problems continue to hinder Customs' ability to
reasonably ensure that

  -- duties, taxes, and fees on imports are properly assessed and
     collected and refunds of such amounts are valid;

  -- sensitive data maintained in its automated systems, such as
     critical information used to monitor Customs' law enforcement
     operations, are adequately protected from unauthorized access
     and modification; and

  -- core financial systems capture all activities that occurred
     during the year and provide reliable information for management
     to use in controlling operations. 


--------------------
\1 Drawback payments are refunds of duties and taxes paid on imported
goods that are subsequently exported or destroyed. 


   RESOURCES AT RISK
---------------------------------------------------------- Chapter 8:2

In fiscal year 1996, Customs processed over 27 million import
transactions with a value of over $775 billion.  This represents a
100 percent growth over 10 years, while resources remained static. 
The increase in the volume of imports makes it impractical for
Customs to observe and inspect all shipments to ensure compliance of
trade laws by the trade community.  Also, federal laws allow
importers to transfer goods from their original ports of entry to
other locations within the United States prior to the assessment of
duties, referred to as in-bond transfers.  Such transfers increase
the risk of trade violations because it is not practical for Customs
to closely monitor the movement of goods within the United States to
ensure that they are not unloaded, substituted, or augmented in
transit. 

In early 1994, Customs began a compliance measurement (CM) program,
in response to GAO's recommendations, to statistically sample trade
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.  Compliance measurement
was developed as a series of building blocks expanding and improving
the precision of the measure of trade compliance from one year to the
next.  As such, other important processes such as in-bond
transactions and foreign trade zone entries are not covered by this
port of entry compliance measurement program. 

As a result of this compliance measurement program, Customs reported
an overall port of entry compliance rate of approximately 80 percent
and 82 percent for fiscal year 1995 and 1996, respectively.  Because
these are statistically-based examinations, Customs can project the
level of noncompliance and associated loss of revenue.  Accordingly,
Customs reported revenue undercollections of $218 million and $274
million and overcollections of $83 million and $101 million for
fiscal year 1995 and fiscal year 1996, respectively. 

Although this reflects progress, these programs do not identify the
specific importers who are in violation of trade laws.  The
compliance measurement results only allow Customs to assess
performance by major key industry areas, providing a basis for
Customs to work with these groups in improving compliance.  However,
the inability to specifically identify import violators hinders
Customs ability to actually identify and collect associated revenue. 
As such, until Customs can identify and focus on the non-complying
entities or such entities voluntarily become more compliant, lost
duties, taxes, and fees will continue to occur.  Customs is
attempting to address this situation through the development of
innovations such as the Primary Focus Industries (PFIs) and tariff
areas, which focus on special areas of non-compliance.  In the
meantime, however, the potential for revenue to go uncollected at
ports of entry, and for goods moving in-bond,\2 or through bonded
warehouses\3 and FTZs, exists. 

Customs officials stated that first-ever nation-wide compliance
measurement programs are scheduled to occur in 1997 for in-bond
shipments of goods and those entered into bonded warehouses, however,
until these are implemented fully, not only will Customs be unable to
project the loss of revenue, but any such revenue will remain
uncollected.  The Office of the Inspector General (OIG) estimated
total revenue associated with goods moving in-bond to be between $9
to $11 billion during fiscal year 1996, comprising almost half of the
total revenue collected during the fiscal year.  OIG also reported a
total value of about $5.2 billion for merchandise entered into bonded
warehouses for fiscal year 1996. 

Finally, a similar strategy to measure compliance of goods entering
FTZs, as well as issues related to revenue collection will need to be
addressed.  According to Customs officials, about $144 billion of
merchandise entered FTZs during fiscal year 1995. 


--------------------
\2 In-bond shipment refers to goods authorized, by law, to move
within the United States prior to release or export, without
appraisement or classification. 

\3 Foreign goods held in bonded warehouses and foreign trade zones
are not assessed duty, tax, and fees until the goods are released
into the commerce of the United States. 


   KEY OPEN GAO RECOMMENDATIONS
   AND IMPLEMENTATION STATUS
---------------------------------------------------------- Chapter 8:3

GAO has made several recommendations to Customs in an effort to
promote better financial management and strengthen its controls. 
Although actions have been initiated on all key open GAO
recommendations (See following table for summary information on these
recommendations.) and improvements continue, recommendations deemed
critical to improving the assessment and collection of revenue,
strengthening automated systems security, and integrating core
financial systems remain open.  GAO made these recommendations
realizing that most of these problems would require long-term efforts
to effectively plan and implement solutions to address the
long-standing root causes.  Although recent discussions with Customs
officials revealed their continued commitment towards improvement
efforts, we reiterate the importance that Customs' top and mid-level
management provide the support needed to ensure that these important
actions are properly implemented and that related problems do not
recur. 



                       High Risk Series Analysis and Update
                     Schedule of Key Open GAO Recommendations
                            Department of the Treasury
                     
                     United States Customs Service (Financial
                                   Management)

              Recommendations related to
              ensuring duties, taxes and fees
              on imports are properly assessed
GAO report    and collected and refunds of      Status of implementation and
number        such amounts are valid            what remains to be done
------------  --------------------------------  --------------------------------
AIMD-94-      The Commissioner of Customs       In July 1994, Customs' Acting
119,          should direct the Assistant       Assistant Commissioner for
June 15,      Commissioner for Inspection and   Inspection and Control directed
1994          Control to require personnel at   all jurisdictions to reconcile
              ports of entry to maintain        discrepant AMS bills of lading,
              accurate and up-to-date data in   or supply an alternative method
              the Automated Manifest System     for completing the task.
              (AMS) and to routinely
              investigate all shipments that    However, in its March 1997
              have not been released by the     report, the Office of Inspector
              end of a prescribed period.       General (OIG) reports that
                                                Customs' controls over bills of
                                                lading and in-bond shipments
                                                still do not ensure that
                                                transactions appearing as "open"
                                                items on Automated Commercial
                                                System (ACS) exception reports
                                                are true exceptions. Further,
                                                during fiscal year 1996, Customs
                                                had approximately one million
                                                bills of lading and in-bond
                                                shipment transactions "open" in
                                                ACS. According to Customs, both
                                                it and the OIG's testing of a
                                                sample of these open bills of
                                                lading transactions did not
                                                indicate any significant loss of
                                                revenue. The OIG attributes the
                                                large number of "open"
                                                exceptions to a variety of
                                                systemic control weaknesses,
                                                such as a high rate of input
                                                errors that ACS edit controls
                                                were not designed to prevent,
                                                and because the ACS In-Bond
                                                Module used to record manually
                                                filed in-bond shipment
                                                transactions did not require the
                                                input of merchandise quantity,
                                                and the module did not interface
                                                with and update other ACS
                                                modules.

AIMD-94-      The Commissioner of Customs       In early 1994, Customs
38,           should direct the Assistant       implemented a compliance
March 7,      Commissioner for Inspection and   measurement program to
1994          Control to develop and            statistically sample trade
              implement, in conjunction with    compliance of commercial
              Customs' Chief Financial          importations through ports of
              Officer, a strategy for           entry to better focus
              inspecting cargo from both high-  enforcement efforts and to
              and low-risk carriers to help     project and report lost duties,
              provide reasonable assurance      taxes and fees due to
              that all cargo delivered is       noncompliance.
              accurately and completely
              identified on manifest and entry  For fiscal year 1996, Customs
              documents. Carriers undergoing    continued its statistically
              such inspections should be        based examination programs,
              randomly selected to ensure that  referred to as compliance
              they are representative of all    measurement programs (CMP), for
              carriers.                         commodity imports by the 4-
                                                digit Harmonized Tariff Schedule
                                                and by carrier manifests. The
                                                commodity import CMP is designed
                                                to quantify the lost duties,
                                                taxes and fees due to
                                                noncompliance ("revenue gap")
                                                and assess trade law compliance.
                                                Based on the results of this
                                                CMP, Customs projected revenue
                                                undercollections of $218 million
                                                and $274 million; and
                                                overcollections of $83 and $101
                                                million for fiscal year 1995 and
                                                fiscal year 1996, respectively.
                                                The carrier manifest CMP
                                                measures the accuracy of
                                                reporting by carriers of cargo
                                                arriving in the United States.

                                                Customs uses the results of its
                                                CMPs to identify low compliance
                                                areas, track improvement in key
                                                sectors, identify revenue gap
                                                commodities, and measure
                                                improvements resulting from
                                                interventions.

AIMD-94-38    Continued.                        Customs strategy for
                                                implementing GAO's
                                                recommendations related to trade
                                                compliance has primarily been
                                                based on an assessment of (1)
                                                level of risk and (2) Customs'
                                                ability to achieve results. As
                                                such, Customs began its CMP
                                                project at ports of entry since
                                                they deemed this area to be at
                                                high risk for lost revenue.
                                                Customs has made significant
                                                strides in defining the "revenue
                                                gap," via its CMP program for
                                                ports of entry, however, these
                                                CMPs only provide a measurement
                                                of compliance with Customs laws
                                                and regulations. These programs
                                                cannot yet identify individual
                                                importers who are not complying,
                                                and subsequently quantify and
                                                collect, the related duties,
                                                taxes and fees associated with
                                                these imports. Customs has
                                                efforts underway, such as the
                                                Private Focus Industries (PFIs),
                                                which focus on special areas of
                                                noncompliance, however, future
                                                efforts should encompass methods
                                                for collecting lost revenue.

AIMD-94-38    Continued.                        Customs established an In-bond
                                                Task Force to address the
              The Commissioner of Customs       problems associated with the in-
              should monitor implementation of  bond program. This task force,
              the new procedures for            comprised of Customs personnel,
              accounting for in-bond transfers  trade representatives, and
              to ensure that they address the   oversight agencies, developed
              weaknesses that have been         proposals and changes to the in-
              identified. In conjunction with   bond system.
              this effort, the Commissioner
              should provide personnel          According to Customs, the new
              involved in maintaining data on   in-bond proposal incorporates
              in-bond transfers with clear and  the rules of compliance
              detailed guidance and adequate    measurement and post-audit
              training on complying with the    techniques to close the
              new procedures.                   potential revenue gap. The new
                                                proposal also provides Customs
                                                with an electronic risk
                                                assessment by processing in-
                                                bond information through
                                                electronic selectivity filters
                                                prior to cargo arrival at the
                                                first port in the United States.
                                                This process lets Customs decide
                                                whether or not to authorize the
                                                in-bond movement.

                                                Under the new program, beginning
                                                in December 1997, items shipped
                                                in-bond will be subject to
                                                selectivity for examination.
                                                Customs expects 95% of cargo to
                                                move without exam or post-
                                                audit; but the remaining 5% will
                                                be examined, at the port of
                                                unlading (origin) and/or the
                                                port of destination. In
                                                addition, Customs plans to
                                                implement, in fiscal year 1997,
                                                a post-audit compliance program.

AIMD-94-38    Continued.                        As part of Customs' proposed
                                                changes to its in-bond program,
                                                in-bond documentation will be
                                                entered into ACS only once, at
                                                the port of departure. This will
                                                eliminate entry of documentation
                                                at the port of destination. The
                                                in-bond entry will be closed
                                                upon reaching its destination.

                                                Also, during fiscal year 1996,
                                                Customs reported that it
                                                initially implemented the
                                                electronic link for input of in-
                                                bond data by importers/brokers
                                                in its Automated Broker
                                                Interface, which allows
                                                automated brokers and importers
                                                to initiate in-bond movements
                                                electronically. However, there
                                                were initial problems with the
                                                interface and the link is now
                                                projected to be fully
                                                operational in July 1997. The
                                                OIG reported in its audit report
                                                that Customs eventually expects
                                                manually filed in-bonds to be
                                                tracked in the same module used
                                                for electronically filed in-
                                                bond shipments which they
                                                believe should allow Customs
                                                better control over all in-bond
                                                shipments.

AIMD-94-38    The Commissioner of Customs       Customs plans to perform a
              should direct the Assistant       compliance measurement test to
              Commissioner for Inspection and   determine the necessity for
              Control, in conjunction with the  perpetual inventory records of
              Chief Financial Officer, to       goods held in bonded warehouses.
              require district offices to       A pre-pilot test at five bonded
              maintain perpetual inventory      warehouses was conducted in 1994
              records of goods held in bonded   and pilots continued in 1995.
              warehouses and foreign trade      The OIG reported in its March
              zones (FTZs) that they are        1997 report that Customs also
              responsible for overseeing.       developed a CMP schedule to
                                                begin in fiscal year 1997 for
                                                bonded warehouses, but Customs
                                                still needs to formulate CMPs
                                                for foreign trade zones. As part
                                                of the program, Customs will
                                                statistically select a sample of
                                                open and closed bonded warehouse
                                                entries to compare against the
                                                bonded warehouse operator's
                                                records. Customs officials
                                                stated that such a program for
                                                FTZs is more complex due to the
                                                difficulty of tracing the goods
                                                entered into and withdrawn from
                                                FTZs since most are
                                                manufacturing operations that
                                                incorporate imported components
                                                into larger items that are
                                                eventually withdrawn and either
                                                entered into U.S. commerce or
                                                exported. In addition, since
                                                Customs does not maintain
                                                centralized accountability for
                                                entries relating to dutiable
                                                goods entered into commerce
                                                through FTZs, Customs officials
                                                stated that it will be difficult
                                                to establish a complete universe
                                                of such entries to enable a
                                                statistical sample to be
                                                selected and examined.

AIMD-94-38    The Commissioner of Customs       Customs has deferred action of
              should direct the Assistant       this recommendation pending the
              Commissioner for Inspection and   results of the CMP for bonded
              Control, in conjunction with the  warehouses.
              Chief Financial Officer, to
              enhance ACS so that the district
              offices could use this system to
              maintain perpetual records of
              merchandise quantities at each
              warehouse and FTZ.

AIMD-94-38    The Commissioner of Customs       In March 1997, the OIG
              should direct the Assistant       reaffirmed that material
              Commissioner for Commercial       weaknesses exist in this area
              Operations, in conjunction with   but reported varying degrees of
              the Chief Financial Officer, to   progress in correcting the
              develop a means of automatically  weaknesses. For instance, the
              entering information needed to    OIG reports that, beginning in
              verify drawback claims into ACS   fiscal year 1995, Customs
              so that liquidators can use the   programmed its revenue
              system to automatically verify    accounting system (ACS) to
              drawback claims.                  detect drawback claims that
                                                exceeded the related amount of
                                                duty and taxes paid, in total,
                                                on import entries filed in
                                                fiscal year 1995 and after.
                                                However, since claimants can
                                                file drawback claims up to eight
                                                years after an entry is filed,
                                                the risk, while reduced, of
                                                paying duplicate or excessive
                                                duties stemming from entries
                                                submitted prior to fiscal year
                                                1995, still exists. Customs
                                                officials estimate that most
                                                drawback claims are filed within
                                                three to five years of the date
                                                an entry was submitted. Further,
                                                the OIG reports that Customs
                                                continues to lack standard
                                                procedures to ensure that
                                                drawback claims are liquidated
                                                in a consistent manner with
                                                documentation supporting the
                                                basis for approval. In the
                                                interim, Customs drawback
                                                offices were instructed to
                                                annotate applicable
                                                documentation reviewed as part
                                                of the drawback liquidation
                                                process.

AIMD-94-38    The Commissioner of Customs       Customs officials state that the
              should direct the Assistant       Automated Commercial Environment
              Commissioner for Commercial       (ACE) will include a profile on
              Operations, in conjunction with   each claimant, including
              the Chief Financial Officer, to   information, such as whether the
              enhance ACS so that historical    claimant is approved to receive
              information on drawback           accelerated drawbacks, that will
              claimants such as accelerated     be accessible online by Customs
              claim privileges, excessive       drawback specialists. In
              claims previously filed, overdue  addition, ACE is expected to
              receivables, and regulatory       electronically reference the
              audit results are available to    claimant profile for approved
              liquidators in a national         privileges or adverse
              database.                         information.

AIMD-94-38    The Commissioner of Customs       See previous response.
              should direct the Assistant
              Commissioner for Commercial
              Operations, in conjunction with
              the Chief Financial Officer, to
              require that liquidators review
              this database to ensure that
              special privileges such as
              accelerated drawback payments
              are granted only to claimants
              who have consistently complied
              with Customs claim filing
              requirements.

AFMD-92-      Congress may wish to consider     To date, legislation has not
30,           enacting legislation to allow     been enacted to authorize
Aug. 25,      Customs to use administrative     Customs to use administrative
1992          offsets.                          offsets for collection of
                                                duties, taxes and fees.
--------------------------------------------------------------------------------
              Recommendations
              related to ensuring
              that core financial
              systems provide
              reliable information
GAO report    for managing            Status of implementation and what remains
number        operations              to be done
------------  ----------------------  ------------------------------------------
AIMD-94-5     To help strengthen the  In November 1996, Customs began phasing in
Nov. 8, 1993  accuracy of the         a comprehensive financial management and
              accounts receivable     seized property tracking system, SEACATS,
              balance reported in     for its fines, penalties, forfeitures and
              Customs' financial      property seizure activities. Customs
              statements, the         reported that the procedural changes to
              Commissioner of         ensure timely and accurate updates were
              Customs should direct   being implemented.
              the Chief Financial
              Officer to require
              Customs personnel to
              review fines and
              penalties assessments
              recorded in ACS and
              correct any
              inaccuracies before
              transfer to the
              redesigned system.

AIMD-94-5     Customs should develop  Beginning in October 1998, Customs plans
              and maintain an         to implement in stages a new comprehensive
              integrated accounting   system (ACE) to replace the current ACS.
              system that can         Customs plans for ACE to be based on
              capture accurate and    account transactions and not individual
              reliable information    import transactions. Customs also intends
              on all types of         for ACE to include an automated,
              assessments (including  centralized accounts receivable subsidiary
              duties, taxes, fines,   ledger, which Customs expects will meet
              and penalties) from     all financial reporting requirements. GAO
              assessment through      previously reported that Customs was ill-
              collection of any       prepared to develop ACE because the agency
              related amounts. Also   was not effectively applying critical
              the integration of the  management practices that help
              property and            organizations mitigate the risks
              accounting systems      associated with modernizing automated
              should be completed as  systems and better position themselves to
              planned.                achieve success. Customs has efforts
                                      underway to address this issue.

                                      The OIG reported in March 1997 that, in
                                      addition to short term changes in
                                      procedures, Customs has developed a long-
                                      term Information Strategy Plan to serve as
                                      a guide for integrating financial systems.
                                      Customs plans to perform a series of
                                      business area analyses to identify
                                      specific integration projects and time
                                      frames for implementation.
--------------------------------------------------------------------------------
(Due to its sensitive nature, additional information is being
provided separately for limited official use only.)


   ONGOING AUDIT WORK
---------------------------------------------------------- Chapter 8:4

As authorized by the CFO Act, GAO performed pilot audits of Customs'
fiscal years 1992 and 1993 financial statements.  In an effort to
gain financial statement audit experience and position themselves to
perform the financial statement audits required by the act, OIG
auditors participated in the fiscal year 1993 financial audit of
Customs.  Since 1994, the Treasury Office of Inspector General has
audited Customs' financial statements.  As part of the financial
statement audit, the OIG assesses Customs' internal control
structure, reports on internal control weaknesses, and makes
recommendations to correct such weaknesses.  As part of this process,
the OIG investigates and reports on the progress made on outstanding
recommendations that it has made.  The OIG will update the status of
its recommendations in future OIG reports on Customs' financial
statements.  GAO will review OIG's work as part of its efforts to
provide an opinion on the government's consolidated financial
condition. 



                          KEY AGENCY CONTACTS

Department of the Treasury          Contact
----------------------------------  ----------------------------------
United States Customs Service       Vincette L. Goerl
                                    Chief Financial Officer
                                    (202) 927-0600

                                    Bob Biancucci
                                    Acting Director
                                    (202) 927-0281

                                    Tom Banner
                                    Director of Cargo and Entry
                                    Operations
                                    (202) 927-0300

                                    Kevin Fox
                                    Director of Analytical
                                    Development
                                    (202) 927-1880

                                    Louis E. Samenfink
                                    Director, Seizures and Penalties
                                    Division
                                    (202) 927-3119

                                    William Riley
                                    Director, Office of Planning
                                    (202) 927-7700

                                    Tom Bavosso
                                    Supervisory ACS Specialist
                                    (703) 440-6479

Office of Inspector General         Bill Pugh
                                    Deputy Assistant Director for
                                    Audit
                                    (202) 927-5768

                                    Marla Freedman
                                    Director, Financial Statement
                                    Audits
                                    (202) 927-6516
----------------------------------------------------------------------

   GAO CONTACT
---------------------------------------------------------- Chapter 8:5

Gary Engel
Associate Director, Governmentwide Audits
(202) 512-8815


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 8:6

Financial Audits:  CFO Implementation at IRS and Customs
(GAO/T-AIMD-94-164, July 28, 1994). 

Financial Audit:  Examination of Customs' Fiscal Year 1993 Financial
Statements (GAO/AIMD-94-119, June 15, 1994). 

Financial Management:  Control Weaknesses Limited Customs' Ability to
Ensure That Duties Were Properly Assessed (GAO/AIMD-94-38, Mar.  7,
1994). 

Financial Management:  Customs Did Not Adequately Account for or
Control Its Accounts Receivable (GAO/AIMD-94-5, Nov.  8, 1993). 

Financial Audit:  Examination of Customs' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-3, June 30, 1993). 


FARM LOAN PROGRAMS
============================================================ Chapter 9


   OVERVIEW
---------------------------------------------------------- Chapter 9:1

The U.S.  Department of Agriculture's (USDA) farm loan programs
provide financial assistance to farmers and ranchers who are unable
to obtain commercial credit at reasonable rates and terms.\1 In
operating the farm loan programs, USDA faces conflicting objectives: 
providing temporary credit to high-risk farm borrowers until they are
able to secure commercial credit, while at the same time ensuring
that the taxpayers' investment is protected. 

USDA's farm loan programs have been on GAO's high-risk list since its
inception in 1990.  In December 1992, we highlighted the poor
financial condition of USDA's farm loan portfolio.  We pointed out
that even after forgiving or writing off billions of dollars of
unpaid debt, much of the portfolio continued to be held by delinquent
borrowers.  Furthermore, we reported that USDA had become a
permanent, rather than a temporary, source of credit for many
borrowers.  We identified three factors contributing to these
problems:  (1) field office lending officials were not always
implementing lending and servicing standards designed to safeguard
federal financial interests, (2) some of the loan-making,
loan-servicing, and property management policies were fundamentally
weak and increased the government's vulnerability to loss, and (3)
the Congress had not provided clear direction on the basic purposes
of the farm loan programs. 

In our February 1995 high-risk series, we noted that some progress
had been made in addressing two causes of the loan programs'
problems.  First, USDA had improved compliance with certain lending
and servicing standards by increasing the training of its field
officials.  Second, the Congress had clarified certain aspects of the
Department's basic lending mission by requiring it to focus on
assisting beginning farmers.  However, we also reported that no
actions had been taken to strengthen weak loan and property
management policies and that the Congress needed to further clarify
the agency's role. 

Since our February 1995 report, the Congress has enacted legislation
that, if properly implemented, should significantly reduce the
financial risks associated with the farm lending programs. 
Specifically, title VI of the Federal Agriculture Improvement and
Reform (FAIR) Act of 1996 (P.L.  104-127, Apr.  4, 1996) made
fundamental changes to the programs' loan-making, loan-servicing, and
property management policies.  The changes included

  -- prohibiting delinquent borrowers from obtaining additional
     direct farm operating loans,

  -- generally prohibiting borrowers who cause USDA to incur loan
     losses from obtaining additional direct or guaranteed farm
     loans, except annual operating loans,

  -- limiting the number of times delinquent borrowers can receive
     debt forgiveness, and

  -- requiring certain delinquent borrowers to pay a portion of the
     interest due to USDA as a condition for having the terms of
     their loans rewritten. 

In addition to substantially strengthening lending and property
management policies, the FAIR Act provided direction for many other
aspects of USDA's basic lending mission.  For example, it emphasized
that farm loan assistance is temporary and, consistent with that
policy, promoted borrowers' graduation from direct loans to
commercial loans guaranteed by the federal government.  The act
further reinforced the importance that the Congress placed on using
the lending programs to assist beginning farmers and ranchers over
other groups of potential beneficiaries. 

Overall, the extensive reforms mandated by the FAIR Act, combined
with USDA's actions to improve compliance with program standards,
should reduce the farm lending programs' vulnerability to loss. 


--------------------
\1 Within USDA, farm loans are administered by the Farm Service
Agency (FSA); prior to the Department's October 1994 reorganization,
the loans were administered by the Farmers Home Administration. 


   FINANCIAL CONDITION OF THE FARM
   LOAN PORTFOLIO AT THE END OF
   FISCAL YEAR 1996
---------------------------------------------------------- Chapter 9:2

The impact of the FAIR Act's reforms on the financial condition of
USDA's farm loan portfolio may not be seen for several years.  As of
September 30, 1996, the direct farm loan portfolio continued to
contain large amounts of financially risky debt.  However, the amount
of debt at risk has decreased from prior years.  In addition, there
was less risk of losses associated with guaranteed loans than there
was with direct loans.  Specifically: 

  -- As of September 30, 1996, $3.6 billion, or about 34 percent of
     the total outstanding principal on direct loans ($10.5 billion),
     was owed by delinquent borrowers.  This level of delinquency is
     an improvement from the $4.6 billion owed by delinquent
     borrowers, or about 41 percent of the total outstanding
     principal ($11.4 billion), at the end of fiscal year 1995. 

  -- Much of the decrease in direct loan delinquencies, however, is
     attributable to debt relief provided to delinquent borrowers. 
     Specifically, USDA forgave $1.1 billion through various
     mechanisms for servicing delinquent direct loans during fiscal
     year 1996. 

  -- As of September 30, 1996, $280 million, or 4.4 percent of the
     total outstanding principal on guaranteed loans ($6.4 billion),
     was owed by delinquent borrowers.  This compares with $218
     million owed by delinquent borrowers, or 3.7 percent of the
     total outstanding principal ($5.9 billion), at the end of fiscal
     year 1995. 

  -- Much of the increase in guaranteed loan delinquencies is
     concentrated in a few states. 


   OPEN GAO RECOMMENDATIONS
---------------------------------------------------------- Chapter 9:3

We have no major open recommendations to the Congress because the
changes in title VI of the FAIR Act substantially addressed the
problems that we have reported on in the past.  While it is too early
to gauge the impact of these legislative changes on the financial
condition of the portfolio, we believe that, if properly implemented,
they will go a long way to reducing the risk associated with the farm
loan programs and to improving their operations. 


   OTHER INFORMATION
---------------------------------------------------------- Chapter 9:4

The Senate Committee on Agriculture, Nutrition, and Forestry and the
House Committee on Agriculture, which have authorizing jurisdiction
over USDA's farm loan programs, have been the primary congressional
committees interested in our farm loan work.  In addition, the
Subcommittee on Agriculture, Rural Development, and Related Agencies
of the Senate Committee on Appropriations, and the Subcommittee on
Agriculture, Rural Development, Food and Drug Administration, and
Related Agencies of the House Committee on Appropriations have also
expressed interest in farm loans. 


   ONGOING AUDIT WORK
---------------------------------------------------------- Chapter 9:5

GAO has no ongoing work focusing on USDA's farm loan programs. 
However, USDA is still in the process of implementing the FAIR Act's
mandated reforms, and their impact on the loan portfolio's financial
condition will not be known for some time.  We plan to continue
monitoring USDA's implementation of these reforms, as well as the
status of financial audits being performed under the Chief Financial
Officers Act. 


   KEY GAO CONTACT
---------------------------------------------------------- Chapter 9:6

Robert A.  Robinson Director, Food and Agriculture Issues (202)
512-5138


   RELATED GAO PRODUCTS
---------------------------------------------------------- Chapter 9:7

Farm Service Agency:  Update on the Farm Loan Portfolio
(GAO/RCED-97-35, Jan.  3, 1997). 

Emergency Disaster Farm Loans:  Government's Financial Risk Could Be
Reduced (GAO/RCED-96-80, Mar.  29, 1996). 

Consolidated Farm Service Agency:  Update on the Farm Loan Portfolio
(GAO/RCED-95-223FS, July 14, 1995). 

High-Risk Series:  Farm Loan Programs (GAO/HR-95-9, Feb.  1995). 

Farmers Home Administration:  The Guaranteed Farm Loan Program Could
Be Managed More Effectively (GAO/RCED-95-9, Nov.  16, 1994). 

Debt Settlements:  FmHA Can Do More to Collect on Loans and Avoid
Losses (GAO/RCED-95-11, Oct.  18, 1994). 

Farmers Home Administration:  Billions of Dollars in Farm Loans Are
at Risk (GAO/RCED-92-86, Apr.  3, 1992). 


NATIONAL WEATHER SERVICE'S
MODERNIZATION
=========================================================== Chapter 10


   OVERVIEW
--------------------------------------------------------- Chapter 10:1

GAO first designated the National Weather Service's (NWS) program to
modernize its weather observing, information processing, and
communications systems as a high-risk area in 1995.\1 We did this
because of its estimated $4.5 billion cost, its complexity, its
criticality to NWS' mission of helping to protect life and property
through early forecasting and warnings of potentially dangerous
weather, and its past problems.  As reported in our February 1997
high-risk report series, while the modernization has greatly improved
forecasts and warnings, it has also experienced cost increases and
schedule delays.\2

We have recently testified on the continuing problems facing the
modernization, and suggested actions that NWS needs to take to
address outstanding risks.\3 We will continue to identify the root
causes of the modernization's problems, recommend actions to correct
the problems, and monitor implementation of these recommendations. 
When the underlying management weaknesses have been corrected, the
NWS modernization will no longer be categorized as a high-risk area. 


--------------------
\1 High-Risk Series:  An Overview (GAO/HR-95-1, Feb.  1995). 

\2 High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, Feb.  1997). 

\3 Weather Service Modernization:  Risks Remain That Full Systems
Potential Will Not Be Achieved (GAO/T-AIMD-97-85 April 24, 1997). 


   NWS MODERNIZATION:  A BRIEF
   HISTORY AND DESCRIPTION
--------------------------------------------------------- Chapter 10:2

NWS uses a variety of systems and manual processes to collect,
process, and disseminate weather data to and among its network of
field offices and regional and national centers.  Prior to the
modernization, these systems and processes were largely outdated. 
Radar equipment dated back to the 1950s, and much of the current
information processing, display, and data communications system has
been in use since the 1970s. 

To enhance its ability to deliver weather services, NWS determined
some 15 years ago to use the power of technology to "do more with
less." To reach the goal of better forecasting and earlier warnings
with a smaller, downsized operation, the Weather Service has been
acquiring new observing systems--including radars, satellites, and
ground-based sensors--as well as powerful forecaster workstations. 
The goals of the modernization are to (1) achieve more uniform
weather services nationwide, (2) improve forecasting, (3) provide
more reliable detection and prediction of severe weather and
flooding, (4) permit more cost-effective operations, and (5) achieve
higher productivity. 

Modernization--particularly with the new radars and satellites--has
enabled the Weather Service to generate better data and has greatly
improved forecasts and warnings.  These can be related directly to
saving lives and reducing the effects of natural disasters.  For
example, lead times of warnings for severe storms and tornadoes
improved by about 5 minutes between 1986 and 1996, which is
significant. 

Notwithstanding such successes, however, each of the four major
programs that make up the modernization has experienced cost
increases and schedule delays.  Some of these increases and delays
can be attributed to changes in requirements; others were caused by
program management and development problems.  Also, in terms of
staffing, the sizable reductions promised as a result of the
modernization will not be realized.  While NWS originally planned to
reduce staff by 21 percent, the goal had been scaled back to 8
percent.  NWS attributes the reduced goal primarily to the need for
more staff than originally envisioned to operate new systems, and to
other unanticipated requirements. 


   COST AND SERVICE DELIVERY
   IMPLICATIONS
--------------------------------------------------------- Chapter 10:3

NWS estimates that the total cost of the modernization will be about
$4.5 billion, when completed in 2002.  At that time, the last of five
satellites for identifying and tracking severe weather events, such
as hurricanes, would have been launched.  Additional funds will be
necessary to maintain these systems and invest in even more systems
beyond 2002.  The cost implications to public and private sector
operations of just an isolated NWS interruption can be significant. 
In light of NWS' mission of forecasting and providing early warnings
of dangerous weather, it must not only modernize its systems, but it
must do so effectively and efficiently.  To do less not only risks
the funds being spent on modernized systems, but also the delivery of
vital government services. 


   KEY OPEN RECOMMENDATIONS
--------------------------------------------------------- Chapter 10:4

Our work shows that NWS has addressed some of our recommendations. 
However, other key ones remain open.  (See following table for
summary information on these recommendations.) For example, we
recommended in March 1994 that NWS develop a systems architecture to
guide its current and future systems development.  NWS agreed that
such a technical blueprint is necessary, and is currently working on
one.  However, more than 3 years after our recommendation, NWS still
has not developed an overall architecture.  Until such an
architecture is developed and enforced, the modernization will likely
continue to be subject to higher costs and reduced performance. 

We have also made several recommendations that we feel will
strengthen the Weather Service's ability to acquire the Advanced
Weather Interactive Processing System (AWIPS), the linchpin of the
NWS modernization.  Operating under a $550-million funding cap, the
system is expected to be fully deployed in 1999.  In 1996, we
recommended that NWS ensure that each software version is fully
tested and all material defects are corrected before beginning
software development associated with the next version.  In addition,
we recommended that NWS establish a software quality assurance
program to increase the probability of delivering promised AWIPS
capability on time and within budget.  We also recommended that NWS
obtain an independent assessment of the cost to develop and deploy
AWIPS.  Progress to date in these areas has, however, been uneven,
and we remain concerned about AWIPS development risks--risks that
threaten the system's ability to be completed on time, within budget,
and with the functional capability that AWIPS must be able to
provide.  Until AWIPS is deployed and functioning properly, NWS will
not be able to take full advantage of the nearly $4 billion
investment it has made in the other components of the modernization. 

While we see clear benefits in the National Weather Service
modernization--improved forecasts and warnings--we also see risks. 
These risks can only be reduced through development and enforcement
of a systems modernization architecture, careful implementation of
planned mitigation techniques in the case of AWIPS, and management
commitment to early planning of the modernization program. 

GAO Report                    Key Recommendation                                           Status     NWS Response                            GAO's Position
----------------------------  -----------------------------------------------------------  ---------  --------------------------------------  --------------------------------------
Weather Satellites: Planning  NOAA should ensure that the National Environmental           Open       NOAA has not yet officially responded
for the Geostationary         Satellite, Data, and Information Service (NESDIS) (1)                   to this recommendation.
Satellite Program Needs More  clarifies official criteria for activating replacement
Attention, (GAO/AIMD-97-37,   spacecraft in the event of a failure of an operational GOES
March 13, 1997).              satellite or any of its instruments or subsystems, and (2)
                              reexamines the agency's strategy for anticipating possible
                              launch failures and considers scheduling backups for all
                              future failures.

                              NOAA should prepare a formal analysis of the costs and       Open       NOAA has not yet officially responded
                              benefits of several alternatives for the timing, funding,               to this recommendation.
                              and scope of the follow-on GOES program, including the
                              possibility of starting the program as early as fiscal 1998
                              and the potential need to fund some types of technology
                              development apart from the operational satellite program.
                              This analysis should be provided to the Congress for its
                              use in considering options for the future of the GOES
                              program.

Weather Forecasting: Systems  NOAA should direct NWS to develop a systems architecture     Open       The NWS modernization systems manager   GAO will follow-up on NWS efforts to
Architecture Needed for       and this architecture should include all weather                        has been directed to develop a systems  develop a system architecture to guide
National Weather Service      forecasting and warning subsystems and be used as a guide               architecture, and a system              it in future systems development.
Modernization, GAO/           in current and future subsystems development.                           architecture document is reportedly in
AIMD-94-28, March 11, 1994).                                                                          draft. This systems architecture is
                                                                                                      scheduled to be finalized in 1997.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

   WHAT NEEDS TO BE DONE
--------------------------------------------------------- Chapter 10:5

Effectively managing a large modernization program such as the NWS
modernization program requires disciplined investment management
processes, mature system and software development and acquisition
processes, reliable data upon which to base important decisions, and
a well-defined architecture, or blueprint, to guide and constrain
system development and evolution.  Our work in evaluating the
modernization has been and continues to be directed at determining
how well NWS is meeting these and other important requirements. 



                KEY CONGRESSIONAL CONTACTS WITH INTEREST
                     IN NATIONAL WEATHER SERVICE'S
                          MODERNIZATION ISSUES

Committee                           Key staff
----------------------------------  ----------------------------------
House Committee on Science,         Steve Eule (Majority)
Subcommittee on Energy and          (202) 225-7504
Environment
                                    Dr. William Smith (Minority)
                                    (202) 225-7504

Senate Committee on Governmental    Michael Rubin (Majority)
Affairs, Subcommittee on Oversight  (202) 224-3682
of Government Management,
Restructuring and the District of
Columbia

Individual Requestors:

Sen. Kay Bailey Hutchison           Amy Henderson
                                    (202) 224-1443

Sen. Bob Graham                     Melissa White
                                    (202) 224-3041

Sen. Connie Mack                    C.K. Lee
                                    (202) 224-5274

Sen. Thad Cochran                   Betsy Harkins
                                    (202) 224-6408

Rep. E. Clay Shaw                   George Cox
                                    (202) 225-3026

Rep. Phil English                   Bob Holste
                                    (202) 225-5406
----------------------------------------------------------------------

   ONGOING GAO WORK
--------------------------------------------------------- Chapter 10:6

We have two ongoing assignments focusing on aspects of NWS
modernization, one on NWS system capabilities and a second on NWS
staff reductions. 



                          KEY AGENCY CONTACTS

Agency                              Contact
----------------------------------  ----------------------------------
National Oceanic and Atmospheric    Dr. James Baker
Administration                      Under Secretary for Oceans and
                                    Atmosphere
                                    (202) 482-3436

National Weather Service            Elbert W. Friday
                                    Assistant Administrator
                                    (301) 713-0689

                                    Dr. Susan Zevin
                                    Deputy Assistant Administrator
                                    (301) 713-0711
----------------------------------------------------------------------

   KEY GAO CONTACTS
--------------------------------------------------------- Chapter 10:7

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

L.  Nye Stevens
Director for Federal Management Issues
(202) 512-8676


   RELATED GAO PRODUCTS
--------------------------------------------------------- Chapter 10:8

Weather Service Modernization:  Risks Remain that Full Systems
Potential Will Not Be Achieved (GAO/T-AIMD-97-85, Apr.  24, 1997). 

National Oceanic and Atmospheric Administration:  Weather Service
Modernization and NOAA Corps Issues (GAO/T-AIMD/GGD-97-63, Mar.  13,
1997). 

Weather Satellites:  Planning for the Geostationary Operational
Environmental Satellite Program Needs More Attention (GAO/AIMD-97-37,
Mar.  13, 1997). 

High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, Feb.  1997). 

NOAA Satellites (GAO/AIMD-96-141R, Sept.  13, 1996). 

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

Weather Forecasting:  NWS Has Not Demonstrated that New Processing
System Will Improve Mission Effectiveness (GAO/AIMD-96-29, Feb.  29,
1996). 

Weather Forecasting:  New Processing System Faces Uncertainties and
Risks (GAO/T-AIMD-96-47, Feb.  29, 1996). 

Weather Forecasting:  Radars Far Superior to Predecessors but
Location and Availability Questions Remain (GAO/T-AIMD-96-2, Oct. 
17, 1995). 

Weather Service Modernization Staffing (GAO/AIMD-95-239R, Sept.  26,
1995). 

Weather Forecasting:  Radar Availability Requirements Not Being Met
(GAO/AIMD-95-132, May 31, 1995). 

Weather Forecasting:  Unmet Needs and Unknown Costs Warrant
Reassessment of Observing System Plans (GAO/AIMD-95-81, Apr.  21,
1995). 

Weather Service Modernization Questions (GAO/AIMD-95-106R, Mar.  10,
1995). 

Weather Service Modernization:  Despite Progress Significant Problems
and Risks Remain (GAO/T-AIMD-95-87, Feb.  21, 1995). 

Meteorological Satellites (GAO/NSIAD-95-87R, Feb.  6, 1995). 

High-Risk Series:  An Overview (GAO/HR-95-1, Feb.  1995). 

Weather Forecasting:  Improvements Needed in Laboratory Software
Development Processes (GAO/AIMD-95-24, Dec.  14, 1994). 

Weather Forecasting:  Systems Architecture Needed for National
Weather Service Modernization (GAO/AIMD-94-28, Mar.  11, 1994). 

Weather Forecasting:  Important Issues on Automated Weather
Processing System Need Resolution (GAO/IMTEC-93-12BR, Jan.  6, 1993). 

Weather Satellites:  Action Needed To Resolve Status of the U.S. 
Geostationary Satellite Program (GAO/NSIAD-91-252, July 24, 1991). 

Weather Satellites:  Cost Growth and Development Delays Jeopardize
U.S.  Forecasting Ability (GAO/NSIAD-89-169, June 30, 1989). 


ASSET FORFEITURE PROGRAMS
=========================================================== Chapter 11


   OVERVIEW
--------------------------------------------------------- Chapter 11:1

Federal asset forfeiture programs at the U.S.  Treasury Department
(U.S.  Customs Service)\1 and Justice Department were part of our
original high-risk list in 1990 because the programs--with
inventories valued at about $2 billion in 1995--did not adequately
focus on managing the items seized.  We reported in December 1992
that the existence of major operational problems, related to the
management and disposition of seized and forfeited property, had been
identified and that corrective actions were being initiated.  In our
February 1995 high-risk report, we reported that, although much had
been accomplished and some management and systems changes had
improved program operations, some significant problems with seized
property management remained.  For example, as identified in our
fiscal years 1992 and 1993 financial audits, there were serious
weaknesses in Customs' key internal controls systems that affected
Customs' ability to control, manage, and report results of its
seizure efforts.  Since our 1995 report, Customs has initiated
several actions to address these problems, including continuing to
upgrade existing security storage facilities and developing a new
seized property inventory system, which Customs anticipates will be
implemented in phases.  Significant progress is anticipated in fiscal
year 1997.  In addition, the Treasury Forfeiture Fund's auditors
rendered unqualified opinions on the Fund's fiscal year 1996 and 1995
financial statements. 

Our February 1997 high-risk series also addressed the issue of the
consolidation of postseizure management and disposition of seized
properties.  Legislation enacted in 1988 required Justice and Customs
to develop a plan to consolidate postseizure administration of
certain properties.\2 In June 1991, we recommended that Justice and
Customs consolidate the postseizure management and disposition of all
noncash seized properties.  In our February 1995 high-risk report, we
reported that, although a small pilot project for consolidation was
in effect from October 1992 through September 1993, Justice and
Treasury had not made significant progress towards consolidation of
property management functions. 


--------------------
\1 Congress established the Department of the Treasury Forfeiture
Fund in October 1992 to supersede the Customs Fund.  Customs is
responsible for managing property seized by Treasury law enforcement
agencies. 

\2 The Anti-Drug Abuse Act of 1988, P.L.  100-690, 21 U.S.C.  887
(1988). 


   RESOURCES AT RISK AND POTENTIAL
   SAVINGS
--------------------------------------------------------- Chapter 11:2

We have identified millions of dollars in assets, and large amounts
of illegal drugs, vulnerable to theft and misappropriation and have
estimated potential cost savings in the asset forfeiture program. 

Despite significant improvement efforts, weaknesses in key internal
controls and systems have affected Customs' ability to maintain
adequate accountability and stewardship over seized property. 
Specifically, poor physical security at some of Customs' storage
locations, problems with the implementation of Customs' new seized
property tracking system, and system security weaknesses relating to
the systems Customs uses to account for seized property and law
enforcement operations, have placed millions of dollars in assets and
large amounts of illegal drugs at risk.  However, the Treasury OIG's
audit of Customs' fiscal year 1996 financial statements did not
indicate any significant loss of seized property. 

With respect to the consolidation of Justice and Treasury postseizure
management and disposition of all noncash seized property, our June
1991 report on the asset forfeiture program estimated that program
administration costs could be reduced 11 percent annually if Justice
and the U.S.  Customs Service consolidated the postseizure management
and disposition of such items.  We estimated the savings on the basis
of fewer positions being needed if both programs were combined into
one.  We also reported that consolidation would likely result in
lower contractor costs due to economies of scale.  Independently
operating in the same areas may result in higher prices paid for
services than under a consolidated program, which may be able to
obtain lower vendor prices because of a higher volume of activity. 
We found this to be true in six locations.\3

In November 1994, the Marshals Service\4 reported the costs and
proceeds associated with the assets in the pilot project conducted
during fiscal year 1993.  However, the report did not contain a
comparison of what costs would have been had the assets not been
consolidated.  Hence, there was no way to determine the effectiveness
of the pilot project. 


--------------------
\3 San Diego and Calexico/El Centro, California; Yuma, Arizona; and
McAllen, Laredo, and El Paso, Texas. 

\4 The Marshals Service is responsible for holding and maintaining
real and tangible personal property seized by participating agencies
within Justice's asset forfeiture program. 


   KEY OPEN GAO RECOMMENDATIONS
   AND IMPLEMENTATION STATUS
--------------------------------------------------------- Chapter 11:3

We have made several recommendations relating to improving Customs'
accountability and stewardship over property seized.  Specifically,
we have recommended that Customs improve the (1) physical security at
its locations used to store seized property, (2) reliability of the
information maintained in its seized property tracking system, and
(3) controls over access to critical and sensitive data and computer
programs maintained in its systems that account for seized property
and law enforcement operations.  In addition, we recommended that
Justice and Treasury consolidate the management and disposition of
all noncash seized properties. 

In response to our recommendation relating to physical security, in
1994, Customs formed a task force to address security at its seized
asset storage facilities.  The task force sent out questionnaires to
over 260 locations with storage facilities for seized property and
physically inspected about 34 locations.  It identified numerous
locations that needed improved security. 

Customs stated that, to date, it has built 6 new storage facilities,
one as recently as February 1997, in locations that were determined
to be the most vulnerable.  In addition, funding has been received
for the construction of 2 additional storage facilities, one of which
is in the process of being constructed.  Customs also improved
security at 28 other locations by installing various security
devices, such as dual access entry into its vaults, motion sensors,
door contact alarms, and surveillance cameras.  Further, Customs
headquarters has issued 5 policy statements designed to direct the
improvement of the physical security of seized property during the
processing of seizure activities. 

According to Customs officials, Customs used funds obtained from the
Treasury Forfeiture Fund in fiscal year 1995 to procure sufficient
security devices to upgrade up to 200 locations.  However, this
equipment has not yet been placed in operation because no funding for
installation has been received since 1995.  In addition, a Customs
official told us that four storage facilities, which are to be
located in remote areas where significant amounts of illegal drugs
are routinely seized, are in the pre-construction phase, but funding
for construction has not been provided. 

Regarding the reliability of the information maintained in its seized
property tracking system, Customs has undertaken several improvement
efforts, including conducting annual nationwide physical inventories
of its seized property and implementing additional policies and
procedures.  According to Treasury Office of Inspector General
(Treasury OIG)\5 officials, these efforts have resulted in
significant improvements in the reliability of the quantities and
values recorded in Customs' seized property records. 

In addition, according to Customs, it has developed, and is
implementing in phases, a new Seized Assets and Case Tracking System
(SEACATS).  This system, whose initial functions were implemented in
November 1996, is intended to be a comprehensive financial management
and seized property tracking system for Customs' fines, penalty, and
property seizure activities.  SEACATS is expected to provide
interfaces to Customs' Automated Commercial System, the general
ledger, the contractor systems, and the law enforcement system, and
to include appropriate audit trails for changes to seized property
data.  However, Customs has experienced significant problems with
SEACATS since its initial implementation.  In particular, problems
with converting data from the old systems to SEACATS have posed great
difficulties.  Customs anticipates that the implementation problems
will be fully corrected no later than the end of fiscal year 1997. 

In response to our recommendation for improved controls over access
to critical and sensitive data and computer programs maintained in
Customs' systems that account for seized property and law enforcement
operations, Customs has designed additional security features in
SEACATS.  Specifically, according to Customs officials, seven
systems' databases were merged to form the SEACATS database, and no
changes could be made to the old systems' databases after SEACATS was
implemented.  Since November 12, 1996, all "new" seized property has
been entered into SEACATS.  In addition, Customs officials told us
that security profiles have been developed for SEACATS users, and
access is given only to those functions needed according to the job
responsibility.  Further, a user identification and password along
with a discretionary access control capability have been established
to protect data from unauthorized and inappropriate access. 
Moreover, with every update to SEACATS, an audit record is created
showing who accessed the file, the time, and the terminal used. 

Despite these significant improvement efforts, weaknesses in computer
security controls still exist.  Specifically, the Treasury OIG's
fiscal year 1996 review of electronic data processing controls for
the computer application system for law enforcement activities showed
that this system continued to be vulnerable to unauthorized access. 
Since the law enforcement system is a source of key data relating to
seizure activity recorded in SEACATS, this vulnerability could affect
the reliability of information in SEACATS.  In addition, a review of
electronic data processing controls for SEACATS has not yet been
performed by the Treasury OIG. 

Regarding our recommendation that Justice and Treasury consolidate
the management and disposition of all noncash seized properties, as
of May 7, 1997, representatives of both Justice and Treasury
indicated there were no plans for such consolidation. 


--------------------
\5 The Treasury OIG has performed the financial statement audit of
Customs, under the Chief Financial Officers Act, for fiscal years
1994, 1995, and 1996.  The Customs seizure activities and related
controls continue to be reviewed as a part of that audit. 


   WHY RECOMMENDATIONS HAVE NOT
   BEEN IMPLEMENTED AND WHAT
   REMAINS TO BE DONE
--------------------------------------------------------- Chapter 11:4

Customs officials have stated that, due to a lack of funding for its
proposals to improve security at its existing facilities and to
construct new facilities, they have not been able to complete all of
the planned actions to their storage locations.  The task force
formed to address physical security of seized property submitted
budget requests to the Treasury Forfeiture Fund in both fiscal years
1996 and 1997; however, its requests were denied.  Customs also
requested funding from its Office of Finance.  However, no funding
was provided for these planned actions.  Customs is currently in the
process of developing a budget request for fiscal year 1998 that it
plans to submit to the Treasury Forfeiture Fund. 

The Treasury Forfeiture Fund allocates money to the various Treasury
law enforcement agencies involved in seizure activities on the basis
of an assessment of their need and projected receipts of the current
year.  According to Treasury Forfeiture Fund officials, Customs'
request for funding was denied primarily for two reasons.  First, in
fiscal year 1996, forfeiture fund receipts were significantly lower
than projected, which resulted in decreasing funds for all the
Treasury law enforcement agencies.  Second, building construction and
improvement requests cannot be evaluated without a reasonable plan
for all projects, and the amount of information submitted by Customs
with its building request was deemed insufficient by the Treasury
Forfeiture Fund.  Customs officials told us that in November 1996,
Customs had provided a seizure vault briefing to Treasury Forfeiture
Fund officials citing cost estimates, construction blueprints,
detailed vault sizes, and a video of existing vaults.  Within the
next few months, a conference between Treasury Forfeiture Fund and
Customs officials will be held to address the issue involving
submission of detailed plans for construction and improvement
projects. 

As previously stated, Customs' significant problems in the
implementation of SEACATS were primarily due to invalid conversion
criteria, which created incorrect data in the system.  The amount of
time it has taken to address these problems is a product of both the
significant volume of records involved and ensuring that corrections
being made would not cause problems in other areas. 

Because of the critical and sensitive data maintained in Customs'
commercial trade systems and the problems faced with the
implementation of SEACATS, Customs placed a priority on first
correcting the computer security weaknesses relating to its
commercial systems.  Customs plans to fully address the computer
security issues pertaining to computer programs for the law
enforcement system when the problems with SEACATS are more fully
corrected, and the remaining issues will be addressed in fiscal year
1998 as part of the TECS\6 year 2000 project. 

Regarding Justice's and Treasury's reasons for not implementing our
consolidation recommendation, Justice and Treasury explained that
property management and disposition have not been consolidated
because (1) doing so appears contrary to current policy as
established by the Congress, and (2) the savings estimates we used to
support our recommendation in 1991 are not valid today. 
Specifically, officials said that, in 1988, the Congress enacted
section 887 of title 21, United States Code, that provided for
development and maintenance of a joint plan for postseizure
administration of property seized under title 21.  From 1988 to 1992,
a series of reports and hearings, as well as our field work in 1990,
documented serious problems with asset management and disposal by the
Customs Service.  They noted that by June 1991, when we recommended
that postseizure administration of all noncash assets be consolidated
under the Marshals Service, the federal asset forfeiture program was
more consolidated.\7 Justice and Treasury officials stated that, in
October 1992, the Congress appeared to reject our recommendation. 
The officials said that through creation of a separate Treasury
Forfeiture Fund, the Congress directed that the Justice and Treasury
programs were to be managed and administered separately.\8 Officials
said that with separate financial, management, and contract
structures, consolidation will be more difficult and costly in
today's environment than in 1991. 

Further, Treasury and Justice officials said that major changes in
the program since 1991 include (1) revisions to Treasury's national
seized property contract, (2) lessons learned on how to avoid
problems that increase property management and disposal costs for
both funds, and (3) increased cooperation between Justice and
Treasury.  They added that changes mean that further consolidation
will not produce significant savings. 

We continue to believe that consolidation of the asset management and
disposition functions is still required despite the passage of the
1992 act.  The 1988 statute clearly requires the Attorney General and
the Secretary of the Treasury to develop and maintain a joint plan. 
The statute permits the parties to determine what action should be
taken to carry out the statutory mandate.  More recently, the House
Appropriations Committee stated in its July 19, 1995, report that
"the consolidation of asset management and disposition functions of
Justice and Treasury could address duplication and provide cost
savings to the management and disposal process." The report added
that the Committee expects Justice to review the feasibility of
consolidating contract vendors for both the Marshals Service and
Treasury agencies.\9

We still see areas of possible duplication between the two funds and
programs and accordingly believe consolidation has the potential to
produce savings.  Both agencies seize similar types of property that
are generally located in the same geographic areas.  However, under
the current operating structure, each agency maintains a separate and
distinct program for managing and disposing of its property. 
Justice, through the Marshals Service, contracts directly with
multiple vendors for management services.  Treasury, through the
Customs Service, has a single nationwide contractor that provides
custodial services either directly or through subcontracts with other
vendors.  While we recognize that our estimates of savings resulting
from consolidation were based on our 1991 report and that some
circumstances may have changed, Justice and Treasury officials have
not provided data to support their assertion that consolidation in
the current environment would not produce the savings that we
estimated in 1991.  Accordingly, we continue to believe that Justice
and Treasury should aggressively pursue consolidation of their asset
management and disposition functions until an analysis shows that
consolidation would not be cost effective. 


--------------------
\6 TECS is the Treasury Enforcement Communication System. 

\7 At the time of this recommendation, three Treasury bureaus already
participated in the Justice fund.  The Marshals Service administered
property seized by these bureaus for forfeiture in judicial cases. 
Pursuant to 19 U.S.C.  1613b, the Customs Service managed the Customs
Forfeiture Fund for itself and the Coast Guard. 

\8 See 31 U.S.C.  9703.  As a result, all properties seized by the
three Treasury bureaus previously participating in the Justice fund
were transferred to and consolidated with the Customs Service's
property management and disposal program. 

\9 Departments of Commerce, Justice, and State, The Judiciary, and
Related Agencies Appropriations Bill, Fiscal Year 1996, H.R.  Rep. 
No.  104-196, 104th Cong., 1st Session 20 (1995). 


   CONGRESSIONAL CONTACTS WITH
   INTEREST IN ASSET FORFEITURE
   ISSUES
--------------------------------------------------------- Chapter 11:5

Congressman Michael Forbes (R-NY) has requested information from the
Department of Justice regarding the consolidation issue. 


   ONGOING AUDIT WORK
--------------------------------------------------------- Chapter 11:6

Annual financial statement audits of the U.S.  Customs Service's and
Department of Justice's financial statements are to be performed by
the Treasury OIG and Justice OIG, respectively, pursuant to the Chief
Financial Officers Act of 1990, as amended.  GAO will be reviewing
this work. 



                          KEY AGENCY CONTACTS

Agency                          Contact
------------------------------  --------------------------------------
Department of Justice           Janis A. Sposato
                                Deputy Assistant Attorney General
                                Law and Policy
                                (202) 514-3101

                                Michael Perez
                                Director, Asset Forfeiture Management
                                (202) 616-8000

Department of the Treasury      Kenneth Massey
                                Assistant Director, Policy and
                                Operations
                                (202) 622-2573

                                Jan Blanton
                                Director, Executive Office for Asset
                                Forfeiture
                                (202) 622-9600

Office of the Inspector         Michael VanDuesen
General                         Contracting Officer's Technical
                                Representative for audit of the
                                Treasury Forfeiture Fund Financial
                                Statements
                                (202) 927-5096

                                Marla Freedman
                                Director, Financial Statement Audits
                                (202) 927-6516

                                Joseph Lawson
                                Director Office of Information
                                Technology
                                (202) 927-6345

U.S. Customs Service            Louis E. Samenfink
                                Director, Seizures and Penalties
                                Division
                                (202) 927-3119

                                Ellen Mulvenna
                                SEACATS Project Manager
                                (703) 913-4950 Extension 6060
----------------------------------------------------------------------

   KEY GAO CONTACT
--------------------------------------------------------- Chapter 11:7

Norman J.  Rabkin
Director, Administration of Justice Issues
(202) 512-3610


   RELATED GAO PRODUCTS
--------------------------------------------------------- Chapter 11:8

High-Risk Series:  Quick Reference Guide (GAO/HR-97-2, Feb.  1997). 

Pre-seizure Planning (GAO/GGD-97-19R, Nov.  20, 1996). 

Asset Forfeiture:  Historical Perspective on Asset Forfeiture Issues
(GAO/T-GGD-96-40, Mar.  19, 1996). 

High-Risk Series:  Asset Forfeiture Programs (GAO/HR-95-7, Feb. 
1995). 

High-Risk Series:  Asset Forfeiture Programs (GAO/HR-93-17, Dec.  6,
1992). 

Asset Forfeiture:  Noncash Property Should Be Consolidated Under the
Marshals Service (GAO/GGD-91-97, June 28, 1991). 


*** End of document. ***