High-Risk Series: An Update (Letter Report, 01/01/99, GAO/HR-99-1).

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

GAO noted that: (1) in GAO's 1997 update for the 105th Congress, GAO
reported that progress had been made in addressing the 20 high-risk
areas being tracked at that time; (2) GAO cautioned, however, that much
more effort was needed to fully implement real solutions to these
serious and long-standing problems; (3) also in 1997, GAO added five
areas--the year 2000 computing challenge and information security as
governmentwide risks, the Supplemental Security Income program, defense
infrastructure, and the 2000 Decennial Census; (4) since 1997, agencies
have focused on developing action plans and are trying to resolve
weaknesses; Congress has heightened its attention by reviewing agencies'
progress and taking legislative action; (5) because of sustained,
tangible improvements in one area--the Customs Service's financial
management--GAO is removing its high-risk designation, making this the
sixth area to come off the high-risk list since GAO began this effort in
1990; (6) in the remaining areas, more needs to be done to achieve real
and sustained improvements; (7) in many cases, agencies have agreed with
GAO recommendations but have not yet fully implemented them; (8) also,
many good plans have been conceived but the more difficult
implementation task of successfully translating those plans into
day-to-day management reality lies ahead; (9) it will take time to fully
resolve most high-risk areas because they are deep-rooted, difficult
problems in very large programs and organizations; (10) continued
perseverance in addressing the 26 areas that are the current focus of
GAO's high-risk initiative will ultimately yield significant benefits;
(11) collectively, these areas affect almost all of the government's
annual $1.7 trillion in revenue and span critical government programs
and operations from certain benefit programs to large lending
operations, major military and civilian agency contracting, and defense
infrastructure; and (12) lasting solutions to high-risk problems offer
the potential to save billions of dollars, dramatically improve services
to the American public, and strengthen confidence in the accountability
and performance of the national government.

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

 REPORTNUM:  HR-99-1
     TITLE:  High-Risk Series: An Update
      DATE:  01/01/99
   SUBJECT:  Financial management
             Risk management
             Accountability
             Information resources management
             Cost control
             ADP procurement
             Computer security
             Strategic planning
             Y2K
IDENTIFIER:  Supplemental Security Income Program
             Y2K
             Medicare Program
             Medicaid Program
             2000 Decennial Census
             Civilian Health and Medical Program of the Department of 
             Veterans Affairs
             Superfund Program
             NWS Next Generation Weather Radar
             NWS Automated Surface Observing System
             NWS Advanced Weather Interactive Processing System
             NOAA Geostationary Operational Environmental Satellite
             Earned Income Tax Credit
             Federal Family Education Loan Program
             Treasury Asset Forfeiture Fund
             C-17 Aircraft
             Black Hawk Helicopter
             DOD Future Years Defense Program
             DOD TRICARE Program
             EIC
             FAA Air Traffic Control Modernization Program
             SSI
             HUD 2020 Management Reform Plan
             GAO High Risk Series
             
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Cover
================================================================ COVER



January 1999

HIGH-RISK SERIES
- AN UPDATE


GAO/HR-99-1

High-Risk Update


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

  AID - x
  AWIPS - x
  CFO - x
  CIO - x
  DOD - x
  DOE - x
  DOT - x
  DRI - x
  EIC - x
  EPA - x
  FAA - x
  FEMA - x
  GAO - x
  GSA - x
  HHS - x
  HCFA - x
  HUD - x
  IG - x
  IRS - x
  NASA - x
  NRC - x
  NSF - x
  NWS - x
  OIG - x
  OMB - x
  OPM - x
  SBA - x
  SSA - x
  SSI - x
  SSN - x
  TRICARE - x
  USDA - x
  VA - x
  Y2K - x

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



January 1999

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

Since 1990, GAO has periodically reported on government operations
that we have identified as "high risk" because of their greater
vulnerabilities to waste, fraud, abuse, and mismanagement.  This
effort, which was supported by the Senate Committee on Governmental
Affairs and the House Committee on Government Reform, brought a
much-needed focus on problems that are costing the government
billions of dollars.  To help, GAO has made hundreds of
recommendations to improve these high-risk operations. 

Overall, agencies are taking these problems seriously and making
progress in trying to correct them.  The Congress has acted to
address individual high-risk areas through hearings and legislation. 
Moreover, these high-risk problems contributed to the Congress
enacting a series of governmentwide reforms to strengthen financial
management, improve information technology practices, and instill a
more results-oriented government. 

GAO's high-risk status reports are now provided at the start of each
new Congress.  This update should help the 106th Congress in crafting
its oversight and legislative agenda.  While progress has been made
in correcting high-risk problems, sustained attention by the Congress
in overseeing agency efforts is needed to make further headway in
producing lasting solutions. 

Over time, as high-risk operations have been corrected and other
risks have emerged, we have removed areas from the list and added new
ones to keep the Congress current on areas needing attention.  The
appendixes to this report show this chronology, provide our current
high-risk list, and identify GAO staff who can provide additional
information. 

The determinations of which government operations are considered
"high risk" in our 1999 update report were made using the same
methodologies and criteria as prior reports.  This was done in order
to assure consistency in approach between update reports and minimize
related "expectation gaps" on the part of the departments and
agencies being reviewed.  An increasing amount of information is
becoming available as a result of implementation of various federal
management reform initiatives, such as the Results Act and the Chief
Financial Officers Act.  This information makes it possible and
appropriate to periodically reassess the methodologies and criteria
used to determine which operations, functions, and entities are
considered "high risk."

GAO plans to undertake a comprehensive review and reassessment of
this area, employing matrix management and other concepts, for use in
our next update report scheduled for 2001.  In conducting this review
and reassessment, and consistent with our normal practices, we will
consult with key stakeholders, including congressional and agency
representatives, before finalizing our approach.  This effort will
likely result in new ways of determining and presenting risk,
especially in connection with selected functions (e.g., strategic
planning, organizational alignment, human capital strategies,
contract management) as well as at the overall department and agency
level.  At the same time, the ultimate determination of what is
considered "high risk" will continue to involve the independent,
professional, and objective judgment of GAO professionals. 

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

David M.  Walker
Comptroller General
of the United States


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

In our 1997 update for the 105th Congress, we reported that progress
had been made in addressing the 20 high-risk areas being tracked at
that time.  We cautioned, however, that much more effort was needed
to fully implement real solutions to these serious and long-standing
problems.  Also in 1997, we added five areas--the Year 2000 computing
challenge and information security as governmentwide risks, the
Supplemental Security Income program, defense infrastructure, and the
2000 Decennial Census. 

Since 1997, agencies have focused on developing action plans and are
trying to resolve weaknesses; the Congress has heightened its
attention by reviewing agencies' progress and taking legislative
action.  Because of sustained, tangible improvement in one area--the
U.S.  Customs Service's financial management--we are removing its
high-risk designation, making this the sixth area to come off the
high-risk list since GAO began this effort in 1990.\1

In the remaining areas, more needs to be done to achieve real and
sustained improvements.  In many cases, agencies have agreed with GAO
recommendations but have not yet fully implemented them.  Also, many
good plans have been conceived but the more difficult implementation
task of successfully translating those plans into day-to-day
management reality lies ahead.  It will take time to fully resolve
most high-risk areas because they are deep-rooted, difficult problems
in very large programs and organizations. 

Continued perseverance in addressing the 26 areas that are the
current focus of our high-risk initiative will ultimately yield
significant benefits.  Collectively, these areas affect almost all of
the government's annual $1.7 trillion in revenue and span critical
government programs and operations from certain benefit programs to
large lending operations, major military and civilian agency
contracting, and defense infrastructure.  Lasting solutions to
high-risk problems offer the potential to save billions of dollars,
dramatically improve services to the American public, and strengthen
confidence in the accountability and performance of our national
government. 


--------------------
\1 Prior areas removed include (1) the Bank Insurance Fund, (2) the
Pension Benefit Guaranty Corporation, (3) the Resolution Trust
Corporation, (4) State Department Management of Overseas Real
Property, and (5) Federal Transit Administration Grant Management
(GAO/HR-95-1, February 1995). 


   ADDRESSING URGENT YEAR 2000
   COMPUTING CHALLENGE
---------------------------------------------------------- Chapter 0:1

Resolving the Year 2000 computing problem is the most pervasive,
time-critical risk facing the federal government today due to its
widespread dependence on large-scale, complex computer systems to
deliver vital public services and carry out its massive operations. 
Unless adequate actions are taken, key federal operations--national
defense, benefit payments, air traffic management, and more--could be
seriously disrupted.  Our purpose in designating this area high-risk
in 1997 was to stimulate greater attention to assessing the
government's exposure to Year 2000 risks and to strengthening
planning for achieving Year 2000 compliance for mission-critical
systems. 

Over the past 2 years, the government has revamped and intensified
its approach to this problem.  Due to growing recognition of the
challenges involved and encouragement from the Congress, in February
1998, the President established a Year 2000 Council and agencies have
been much more aggressive in tackling the problem.  Also, both the
House and Senate have been relentless in assessing the state of
readiness in government and the private sector through many hearings
as well as passing emergency funding and legislation to promote
sharing of information on Year 2000 issues. 

Preparedness has improved markedly, but significant challenges remain
and time is running out.  Critical testing activities need to be
thoroughly completed and effective business continuity and
contingency plans must be crafted and in place throughout government. 
To help agencies mitigate their Year 2000 risks, we produced a series
of Year 2000 guides and issued over 70 reports detailing specific
recommendations related to Year 2000 readiness of the government as a
whole and of a wide range of individual agencies. 

Moreover, the nation faces significant Year 2000 challenges which
span all spectrums of our national economy as well as globally. 
Accordingly, the President's Year 2000 Council has been reaching out
to the private sector, state and local governments, and other
countries to increase awareness.  Consistent with our
recommendations, the Council has recently begun to assess the
readiness of various sectors, including power, water,
telecommunications, health care, and emergency services. 

However, at this juncture, a comprehensive picture of the nation's
readiness remains incomplete.  A great deal more needs to be
done--both domestically and internationally--to effectively determine
readiness and prepare necessary contingency plans.  Such actions are
imperative to ensure that technology-dependent services and
operations operate reliably after the turn of the century and that
disruptions are minimized.  (See page 33.)


   RESOLVING SERIOUS INFORMATION
   SECURITY WEAKNESSES
---------------------------------------------------------- Chapter 0:2

Information security has become a concern in virtually every aspect
of our lives as we move toward a society that is increasingly
supported by computer technology and interconnected on a global
scale.  We designated information security as a governmentwide risk
in 1997 because growing evidence indicated that controls over
computerized operations were not effective and there was compelling
information that risks were increasing.  Since then, greatly
increased recognition of the importance of information security has
led to significant actions, including a Presidential directive
requiring each major department and agency to develop a plan for
protecting critical infrastructures.  A series of Senate hearings has
also highlighted these risks and the need for greater action. 

Continuing computer security weaknesses put critical federal
operations and assets at great risk.  Such problems are disturbing
because they make it easier for individuals and groups with malicious
intentions to intrude into inadequately protected systems and use
such access to obtain sensitive information, commit fraud, or disrupt
operations.  In today's environment, these threats include a range of
military enemies, criminals, and terrorists who have the capability
to severely disrupt or damage the systems and infrastructures upon
which our government depends.  Accordingly, much more needs to be
done to ensure that systems and data supporting essential federal
operations are adequately protected. 

To help further strengthen computer security practices, we issued a
framework--based on best practices of leading organizations known for
excellent security practices--for managing risks through an ongoing
cycle of activities coordinated by a central focal point.  While
agencies have responded to numerous recommendations included in our
reports and those of the Inspectors General, agencies need to put in
place comprehensive security programs based on best practices. 
Strong governmentwide leadership also is important to ensure that
executives understand their risks, monitor agency performance, and
resolve issues affecting multiple agencies.  (See page 55.)


   ENSURING MAJOR TECHNOLOGY
   INVESTMENTS IMPROVE SERVICES
---------------------------------------------------------- Chapter 0:3

Successfully applying modern technology is central to improving
government operations and generating better service to the American
people.  Many efforts to achieve such goals have been plagued by huge
cost overruns; schedule slippages measured in years; and marginal
benefits in improving mission performance, cutting costs, and
enhancing responsiveness.  In 1995, we designated four troubled
multibillion dollar modernizations as high risk; their ultimate
success is key to the government's future ability to deliver critical
services--safe and efficient air travel, modern tax processing and
customer service operations, and improved weather forecasting--and
the improvement of systems that support national defense operations. 

  -- Over the past 17 years, the Federal Aviation Administration's
     (FAA) $42 billion air traffic control modernization program has
     experienced cost overruns, schedule delays, and performance
     shortfalls.  Our work has pinpointed solutions to some of the
     root causes of these problems, and FAA has initiated efforts to
     resolve them.  However, FAA's reforms are not yet complete and
     several major projects continue to face challenges that could
     affect their cost, schedule, and performance. 

  -- The Internal Revenue Service (IRS) has spent over $3 billion
     during the last decade attempting to modernize its outdated,
     paper-intensive approach to tax return processing.  Our reviews
     over the past few years identified serious management and
     technical weaknesses with IRS' modernization, and we made
     recommendations to help IRS, among other things, build the
     capability necessary to successfully modernize its systems.  IRS
     has agreed to implement our recommendations and is working to
     build its capability before it begins modernizing tax processing
     systems. 

  -- In the 1980s, the National Weather Service (NWS) began a
     nationwide modernization program to upgrade weather observing
     systems to achieve more uniform weather services across the
     nation, improve forecasts, provide better prediction of severe
     weather and flooding, and achieve higher productivity.  Although
     NWS is nearing completion of its modernization, we are concerned
     about its ability to deliver on the final and most critical
     piece of the modernization--the Advanced Weather Interactive
     Processing System--which is to provide the workstations that
     integrate observing systems data and support forecaster
     decision-making.  The Advanced Weather Interactive Processing
     System has been delayed and become more expensive because of
     design problems and management shortcomings.  NWS reports that
     it is making considerable progress in developing and testing
     these workstations, but concerns about cost, schedule, and
     technical risks remain. 

  -- The Department of Defense (DOD) has an $18 billion investment to
     replace almost 2,000 inefficient, duplicative systems with more
     cost-effective systems.  This effort--while necessary--is
     plagued with poor management controls and too little assurance
     that the investment will achieve the department's technology
     objectives. 

In summary, we have made comprehensive recommendations for each of
these efforts that, if implemented, would fundamentally improve
project management, introduce needed engineering rigor, and promote
disciplined decisions on project funding.  These four agencies are
making needed improvements, but most of our recommendations have not
yet been fully implemented.  Consequently, serious risks remain. 
(See page 66.)


   PROVIDING BASIC FINANCIAL
   ACCOUNTABILITY
---------------------------------------------------------- Chapter 0:4

The requirements of the Chief Financial Officers Act, as expanded by
the Government Management Reform Act, are prompting steady
improvements in financial accountability across government.  However,
progress is very uneven; several major departments are not yet able
to produce auditable financial statements consistently.  Also, our
first ever audit of the U.S.  government's financial statements
framed the most serious challenges facing the government in
accurately reporting a large portion of its assets, liabilities, and
costs.  Such deficiencies precluded us from being able to form an
opinion on the reliability of the government's consolidated financial
statements. 

The President reacted strongly, requiring agency heads to submit
plans to the Office of Management and Budget (OMB) to correct
deficiencies.  Financial management reform was designated a top
management priority of the executive branch, behind the Year 2000
computing problem.  The House of Representatives also passed a
resolution urging quick resolution of these problems.  We are working
with OMB, the Department of the Treasury, and agencies across
government to provide recommendations for fixing the major
deficiencies cited in our audit.  A high-risk designation is intended
to highlight individual departments and agencies that are material to
the government's financial statements and have been unable to meet
the most basic mandate to produce auditable financial statements for
their own operations.\2

The most significant in this regard is DOD, which represents a large
percentage of the government's assets, liabilities, and net costs. 
None of the military services or the department as a whole has yet
been able to produce auditable financial statements.  We designated
DOD financial management to be a high-risk area in 1995, and it
remains so today, although we have noticed increased attention to
rectify this situation.  (See page 89.)

Two other large organizations also have been unable to produce
auditable statements for their entire operations--the Department of
Agriculture (USDA) and the Department of Transportation (DOT). 
Unlike DOD, however, significant parts of these organizations have
been able to produce auditable statements while other major
components have not.  Consequently, we are adding the most
problematic parts of these departments to the high-risk
list--financial management of the Forest Service at USDA and
financial management of the Federal Aviation Administration at DOT. 
(See pages 94 and 98.)

Another major focus of the government's financial management entails
its revenue collection operations.  As a result, we have looked
closely at IRS and the Customs Service.  IRS has made progress
recently and was able for the first time to obtain an unqualified
opinion on its financial statements for fiscal year 1997--after five
previous attempts did not yield auditable statements.  This outcome
was achieved, however, through material audit adjustments, and
serious internal control weaknesses over refunds, receipts, and
unpaid tax assessments remain.  Until IRS can demonstrate a
consistent ability to produce auditable statements, meet key new
accounting and reporting requirements, and make greater and sustained
progress in addressing significant material weaknesses, we consider
its revenue accounting to still be high risk, especially since it
collected over $1.7 trillion in revenue in fiscal year
1998--virtually all of the government's revenue.  (See pages 102 and
107.)

The Customs Service has made major strides since we began to focus on
its financial management as a high-risk area.  Customs has made
several important improvements in its ability to assess and collect
duties and excise taxes and has received unqualified opinions on its
financial statements for the past 2 fiscal years.  Therefore, we no
longer consider Customs financial management high risk, although we
will continue to monitor its progress.  (See page 112.)


--------------------
\2 Other departments and agencies also still need to improve their
financial management operations.  Challenges facing them in this area
are discussed in our series of reports on major performance and
accountability issues facing each agency.  Major Management
Challenges and Program Risks:  A Governmentwide Perspective
(GAO/OCG-99-1, January 1999). 


   REDUCING INORDINATE PROGRAM
   MANAGEMENT RISKS
---------------------------------------------------------- Chapter 0:5

We have identified several government programs that are not managed
effectively or that experience chronic waste and inefficiency.  These
problems result in inordinate risks--the loss of billions of dollars
annually due to improper payments in certain benefit programs,
difficulty in controlling tax filing fraud, inefficient and weak
lending programs, and challenges in reducing defense infrastructure
costs.  Consequently, fixing the underlying weaknesses in high-risk
program management areas can significantly reduce government costs
and improve services. 

For example, the Department of Health and Human Services' (HHS)
Health Care Financing Administration (HCFA) had not developed its own
process for estimating the national error rate for fee-for-service
payments.  For fiscal year 1997, the HHS Inspector General estimated
that about 11 percent of all Medicare fee-for-service payments for
claims, or about $20 billion, did not comply with Medicare laws and
regulations.  In 1996, the Congress gave HHS new authority and began
increasing resources to help prevent fraud, abuse, and mispayments. 
However, HCFA's deployment of these tools has lagged.  In addition,
HCFA has had to give priority to preparing its systems for the year
2000, which has halted the implementation of streamlined claims
processing systems and new payment methodologies designed to curb
excess spending.  (See page 116.)

Also, the Supplemental Security Income (SSI) program continues to be
hampered by long-standing problems such as program abuses and
mismanagement, increasing overpayments, and the Social Security
Administration's (SSA) inability to recover outstanding SSI debt. 
During fiscal year 1998, current and former recipients owed SSA more
than $3.3 billion, including $1.2 billion in newly detected
overpayments for the year.  SSA has initiatives planned to improve
SSI's overall payment accuracy, increase continuing disability
reviews, combat program fraud, and improve debt collection.  SSA now
needs to implement its plans in these areas and continually improve
its payment controls and debt collection activities.  (See page 119.)

Another high-risk area involves the filing of fraudulent refund
claims by taxpayers and/or tax return preparers.  Since 1995, IRS has
taken several steps to reduce its exposure to filing fraud such as
(1) better screening electronic tax submissions, (2) strengthening
processes for checking the applications from tax preparers who apply
to participate in the electronic filing program, (3) revising
computer formulas to score tax returns for fraud potential, and (4)
enhancing procedures to deal with paper returns involving missing or
incorrect Social Security numbers.  Also, the Congress passed
legislation giving IRS new enforcement tools and additional funding
specifically designated for activities related to Earned Income
Credit, which involves most of the fraudulent refund claims. 

In April 1997, IRS released the results of its study of Earned Income
Credit noncompliance on tax returns filed in 1995 (i.e., tax year
1994 returns), which showed that of the $17.2 billion in such claims,
about $4.4 billion (25.8 percent) was estimated to be overclaims. 
How much of this $4.4 billion involved fraud, as opposed to less
serious noncompliance, is unknown.  The returns included in IRS'
study were filed before IRS was given increased authority to deal
with missing or invalid Social Security numbers.  Even after
adjusting for the potential effect of that increased authority,
however, IRS determined that the rate of Earned Income Credit
noncompliance would still be over 20 percent.  While IRS has begun
implementing a 5-year Earned Income Credit compliance initiative, its
effect on reducing the incidences of Earned Income Credit
noncompliance is not yet known.  (See page 121.)

DOD is seeking ways to address inefficiencies in its mission support
operations through a variety of approaches, including consolidations,
competing support services sourcing, and public-private partnership
arrangements.  Faced with a limited budget, these inefficiencies, if
not addressed, will consume money that could be made available to
meet other defense priorities, such as force modernization and
readiness needs.  For example, significant cost savings can be
achieved through infrastructure reductions, but doing so is difficult
because it requires up-front investments, the closure of
installations, and the elimination of military and civilian jobs. 
While DOD's infrastructure reduction initiatives are steps in the
right direction, they do not provide a comprehensive plan that
focuses on long-range strategies for facilities revitalization,
replacement, and maintenance.  Further, we have identified
significant efficiencies that could be achieved by eliminating,
streamlining, or reengineering infrastructure activities involving
acquisition infrastructure, central logistics, installation support,
central training, force management, and medical facilities and
services.  (See page 125.)

At the Department of Housing and Urban Development (HUD), four
serious, long-standing departmentwide management deficiencies, taken
together, place the integrity and accountability of the department's
programs at high risk.  With close oversight by the Congress, HUD is
making significant changes and has made credible progress since 1997
in laying the framework for improving its management.  Given the
severity of the management deficiencies that we and others (e.g.,
HUD's Inspector General, external auditors) have observed, it would
not be realistic to expect that HUD would have substantially
implemented its reform efforts and demonstrated success in resolving
its management deficiencies in the 2 years since we issued our last
report.  To resolve its management deficiencies, HUD needs to ensure
that the actions being taken eliminate the remaining major internal
control weaknesses, improve information and financial systems, and
strengthen staff resources and skills.  (See page 128.)

Two other lending operations are at risk--student financial aid
programs and farm loan programs.  The Department of Education's
student financial aid programs are inherently vulnerable to waste,
fraud, abuse, and mismanagement, putting a premium on effective
management.  We have found, however, that the department's
administration of these programs had contributed to exposure to
mismanagement and abuses.  For example, audits have found instances
in which students fraudulently obtained grants and loans, schools
were inappropriately recertified to continue participating in federal
student aid programs, and state-designated guaranty agencies misused
federal funds in their custody.  Also, in fiscal year 1997, the
federal government paid over $3.3 billion to make good its guarantee
on defaulted student loans.  The Congress and the department have
acted to address a number of program management and oversight issues,
but problems continue--especially with regard to the reliability of
financial and other management information for overseeing student
financial aid programs.  (See page 133.)

The financial condition of USDA's farm loan portfolio has improved
since we designated farm loan programs high-risk.  The value of farm
loans held by delinquent borrowers has been reduced from a reported
$4.6 billion, or 40.7 percent of USDA's total outstanding direct farm
loan principal, in 1995 to a reported $2.7 billion, or 28.2 percent,
in 1997.  However, USDA continues to carry a high level of delinquent
debt and to write off large amounts of unpaid loans held by problem
borrowers.  Moreover, these delinquencies may increase because of the
droughts and low prices for major crops and livestock in 1998.  USDA
and the Congress need to continue to monitor the effects of recent
lending and servicing reforms intended to improve the financial
integrity of farm loan programs.  (See page 136.)

In another program area--asset forfeiture programs--the federal
government faces difficult problems managing a reported $1.8 billion
in property seized by the Departments of Justice and the Treasury. 
Many improvements have been made in this area since 1990, but Justice
has reported that its asset forfeiture systems continue to be
inadequate to keep track of these assets and the Treasury has
reported weaknesses in the accountability and reporting over seized
and forfeited property.  In September 1998, the Justice Inspector
General reported that at most of the Immigration and Naturalization
Service Border Patrol stations his staff visited, they found problems
with the management of seized drugs.  Further, Justice and the
Treasury continue to operate two similar but separate seized asset
management and disposal programs, even though program consolidation
could offer options for cost reductions and efficiency gains.  (See
page 139.)

Lastly, major challenges and uncertainties have led us to conclude
that there is a high risk that the 2000 census will be less accurate
and more costly than previous ones.  The Congress and the
administration have yet to agree on the final design of the census
because of congressional concerns over the legal and methodological
issues surrounding the planned use of sampling and statistical
estimation.  Also, federal courts have recently ruled that sampling
is illegal for purposes of apportionment; the administration has
appealed the rulings to the Supreme Court.  Irrespective of how the
controversy over the use of sampling and statistical estimation is
resolved later this year, the Department of Commerce's Bureau of the
Census will have little time remaining to make final census design
changes and implement those changes in time for the census in 2000. 
In that regard, our work has shown that the bureau faces a number of
formidable challenges to a cost-effective, accurate, and complete
census no matter which design is chosen.  The bureau can take actions
to mitigate the risk of an unsuccessful census, such as ensuring that
its evaluation of the dress rehearsal for the 2000 census is
rigorously analyzed and used to refine operations, help set
priorities, and allocate resources.  (See page 142.)


   MANAGING LARGE PROCUREMENT
   OPERATIONS MORE EFFICIENTLY
---------------------------------------------------------- Chapter 0:6

Our work has shown that some of the government's largest procurement
operations are not always run efficiently.  We have recommended ways
to operate them better and thus, help to ensure that the government
gets what it pays for under its contracts and that contractors' work
is done at a reasonable cost.  At DOD, our high-risk procurement
management work focuses on three areas--inventory management, weapons
systems acquisition, and contract management.  At civilian agencies,
our focus has been on the contract management practices at three
agencies--the Department of Energy (DOE), the Environmental
Protection Agency (EPA) for Superfund, and the National Aeronautics
and Space Administration (NASA). 

In 1990, we identified DOD's management of secondary inventories
(spare and repair parts, clothing, medical supplies, and other items)
as high risk because levels of inventory were too high and management
systems and procedures were ineffective.  While some improvements
have been made, these general conditions still exist.  Since 1991, we
have identified significant opportunities for DOD to test and adopt,
where feasible, best inventory management practices used in the
private sector to improve logistics operations and lower costs. 
Recent legislation calls for the implementation of best commercial
practices in DOD's acquisition and distribution of inventory items,
and in November 1997, DOD announced an initiative to reengineer
support activities and business practices by incorporating many
business practices that private sector companies have used.  Unless
DOD acts more aggressively to correct systemic problems, its
inventory management problems will continue well into the next
century.  (See page 147.)

Further, DOD spends about $85 billion annually to research, develop,
and acquire weapon systems.  Although DOD has many acquisition reform
initiatives in process, pervasive problems persist regarding (1)
questionable requirements and solutions that are not the most
cost-effective available, (2) unrealistic cost, schedule, and
performance estimates, (3) questionable program affordability, and
(4) the use of high-risk acquisition strategies.  Overall,
acquisition reforms and commercial practices can produce better
outcomes on DOD acquisitions when they help a program succeed in its
environment.  Thus, the way to get lasting reform is to realign the
incentives of the weapon acquisition process with desired program
outcomes.  Changing these incentives--that is, redefining program
success--will take the efforts of the Congress as well as DOD and the
military services.  (See page 150.)

Also, DOD spends over $100 billion a year contracting for goods and
services.  Over the last few years, several broad-based changes have
been made to DOD contracting processes to improve the way DOD relates
to its contractors and the rules governing their relationships.  And
the changes are by no means complete.  DOD faces a number of areas
where risks appear particularly acute, including the need for DOD to
(1) achieve effective control over its payment process--or risk
erroneously paying contractors millions of dollars and (2) strengthen
the quality of its analyses for commercial purchases--or, for
example, continue to pay higher prices for commercial spare parts
than necessary.  Acquisition reform, with its emphasis on widespread
reengineering of fundamental processes, continues to receive
attention at the highest levels in DOD.  (See page 155.)

Turning to the government's largest civilian contracting agency, in
fiscal year 1997, DOE obligated about $16.2 billion, or about 91
percent of its obligations, to contracts.  We have reported on
weaknesses in DOE's contracting practices, including noncompetitive
awards and lax oversight of costs and activities.  Since we
designated DOE's contracting as a high-risk area in 1990, DOE has put
in place a framework for contract reform.  For example, DOE has
increased its use of competition in awarding contracts for managing
and operating its facilities and has begun incorporating
performance-based incentives in its management and operating
contracts to better link a contractor's fees to the satisfactory
accomplishment of specific tasks.  While reforms such as these are
generally steps in the right direction, DOE has had some problems in
implementing them, and in some instances, their effectiveness will
not be known for several years.  (See page 158.)

Another civilian agency, EPA, has had long-standing challenges with
controlling the costs of the contractors it uses to clean up sites or
to monitor private party cleanups for EPA.  Since 1990, when we
designated Superfund contract management as high risk, EPA has
increased its use of independent government cost estimates to set
better contract prices for the government, but some estimates are
still of questionable quality.  In addition, according to EPA
officials, the agency has improved the timeliness of contractor
audits and has almost eliminated the backlog of these audits. 
However, EPA continues to experience high program support costs
related to contractors.  These continuing concerns suggest that EPA
may need to evaluate whether it needs to overhaul some of its
contracting practices.  (See page 163.)

Further, NASA, which now spends over $12 billion annually for goods
and services--mostly on contracts with businesses and other
organizations--has progressed in correcting contract management
weaknesses.  For example, NASA is implementing a new system for
measuring procurement performance and conducting evaluations of its
field centers' procurement activities based on international quality
standards.  NASA continues to develop a new integrated financial
management system--which offers the promise of providing reliable and
timely information, such as the status of procurement requests and
contracts--but agencywide implementation of the system has been
delayed from July 1, 1999, to June 1, 2000.  Until the financial
management system is developed and operational, performance
assessments relying on cost data may be incomplete.  (See page 166.)


-------------------------------------------------------- Chapter 0:6.1

To ensure that progress continues in addressing high-risk problems,
sustained management attention and congressional oversight are
necessary.  We will continue to closely monitor agencies' progress in
resolving high-risk areas and advance additional recommendations for
improvements. 


ADDRESSING URGENT YEAR 2000
COMPUTING CHALLENGE
============================================================ Chapter 1

A critical and sweeping management task facing public and private
organizations is successfully addressing the tremendous challenges
imposed by the Year 2000 (Y2K) computing problem.\1 It represents an
enormous undertaking for the federal government due to its widespread
dependence on large scale, complex computer systems to deliver vital
public services and carry out its massive operations.  Unless
adequately confronted, the Year 2000 computing problem could lead to
serious disruptions in key federal operations ranging from national
defense to benefit payments to air traffic management. 

Consequently, in February 1997, we designated the Year 2000 computing
problem as a high-risk area.  Our purpose was to stimulate greater
attention to assessing the government's exposure to Year 2000 risks
and to strengthening planning for achieving Year 2000 compliance for
mission-critical systems.  Fortunately, the past 2 years have
witnessed marked improvement in preparedness as the government has
revamped and intensified its approach to this problem. 

Significant challenges remain, however, and time is running out.  In
particular, complete and thorough Year 2000 testing is essential to
provide reasonable assurance that new or modified systems process
dates correctly and will not jeopardize an organization's ability to
perform core business operations.  Moreover, adequate business
continuity and contingency plans throughout government must be
successfully completed. 

The scope of the Year 2000 problem extends well beyond federal
operations--it spans all spectrums of our national economy as well as
globally.  Accordingly, the President's Year 2000 Council has been
reaching out to the private sector, state and local governments, and
other countries to increase awareness.  Working with these entities,
the Council has recently begun to assess the readiness of various
sectors, including power, water, telecommunications, health care, and
emergency services. 

However, at this juncture, a comprehensive picture of the nation's
readiness remains incomplete.  A great deal more needs to be
done--both domestically and internationally--to effectively determine
readiness and prepare necessary contingency plans.  Such actions are
imperative to ensure that technology-dependent services and
operations continue to operate reliably after the turn of the century
and that disruptions are minimized. 


--------------------
\1 For the past several decades, computer systems have typically used
two digits to represent the year, such as "98" for 1998, in order to
conserve electronic data storage and reduce operating costs.  In this
format, however, 2000 is indistinguishable from 1900 because both are
represented as "00." As a result, if not modified, systems or
applications that use dates or perform date- or time-sensitive
calculations may generate incorrect results beyond 1999. 


   FEDERAL GOVERNMENT HAS ENHANCED
   ITS APPROACH
---------------------------------------------------------- Chapter 1:1

Since February 1997, action to address the Year 2000 threat has
intensified.  In response to a growing recognition of the challenge
and urging from congressional leaders and others, the administration
strengthened the government's Year 2000 preparation, and expanded its
outlook beyond federal agencies.  In February 1998, the President
took a major step in establishing the President's Council on Year
2000 Conversion.  He established a goal that no system critical to
the federal government's mission experience disruption because of the
Year 2000 problem and charged agency heads with ensuring that the
Year 2000 problem receives the highest priority attention. 

The President tasked the Chair of the Council with being chief
spokesperson on Year 2000 issues in national and international
forums; overseeing Year 2000 activities of federal agencies;
providing Year 2000 policy coordination of executive branch
activities with state, local, and tribal governments; and promoting
appropriate federal roles with respect to private-sector activities. 
Among the initiatives the Chair has implemented in carrying out these
responsibilities are attending monthly meetings with senior managers
of agencies that are not making sufficient progress; establishing
numerous workgroups to increase awareness of, and gain cooperation
in, addressing the Y2K problem in various economic sectors; and
emphasizing the importance of federal/state data exchanges. 

OMB, for its part, has tightened requirements on agency reporting of
Year 2000 progress.  It now requires that, beyond the original 24
major departments and agencies that are reporting, 9 additional
agencies (such as the Tennessee Valley Authority and the Postal
Service) report quarterly on their Year 2000 progress, and that
additional information be reported from all agencies.  OMB has
clarified instructions on agencies preparing business continuity and
contingency plans.  Quarterly, OMB also places each of the 24
agencies into one of three tiers, determined by its judgment of
whether the agency has reported sufficient evidence of progress. 

Several agencies have reported substantial progress in repairing or
replacing systems to be Year 2000 compliant.  In December 1998, for
example, the President announced that all of SSA's mission-critical
systems were compliant.  In October 1997, we reported that SSA had
made significant progress in assessing and renovating
mission-critical mainframe software, although certain areas of risk
remained.\2 Accordingly, we made several recommendations to address
these risks, including the development of business continuity and
contingency plans.  SSA agreed and, in July 1998, we reported that
actions to implement these recommendations had either been taken or
were underway.\3

Many congressional committees have played a central role in
addressing the Year 2000 challenge by holding agencies accountable
for demonstrating progress and by heightening public appreciation of
the problem.  The Senate formed a Special Committee on the Year 2000
Technology Problem, which held hearings on the readiness of key
economic sectors, including power, health care, telecommunications,
transportation, financial services, emergency services, and general
business.  The House called on the Subcommittee on Government
Management, Information and Technology of the Committee on Government
Reform; and the Subcommittee on Technology of the Committee on
Science to co-chair the House's Year 2000 oversight.  These
committees and others have held many hearings to obtain information
on the readiness of federal agencies, states, localities, and other
important nonfederal entities, such as the securities industry. 

The Congress also passed Year 2000 legislation.  In October 1998 it
passed--and the President signed--the Year 2000 Information and
Readiness Disclosure Act.  Its purposes include (1) promoting the
free disclosure and exchange of information related to Year 2000
readiness and (2) lessening the burdens on interstate commerce by
establishing certain uniform legal principles in connection with the
disclosure and exchange of information related to Year 2000
readiness.  In addition, the Congress passed (and the President
signed) the Omnibus Consolidated and Emergency Supplemental
Appropriations Act, 1999, which included $3.35 billion in contingent
emergency funding for Year 2000 conversion activities. 


--------------------
\2 Social Security Administration:  Significant Progress Made in Year
2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). 

\3 Social Security Administration:  Subcommittee Questions Concerning
Information Technology Challenges Facing the Commissioner
(GAO/AIMD-98-235R, July 10, 1998). 


   GAO'S EFFORTS TO HELP MEET THE
   CHALLENGE
---------------------------------------------------------- Chapter 1:2

To help agencies mitigate their Year 2000 risks, we produced a series
of Year 2000 guides.  The first of these, on enterprise readiness,
provides a systematic, step-by-step approach for agency planning and
management of its Year 2000 program.\4 The second guide, on business
continuity and contingency planning, provides a structured approach
to helping agencies ensure minimum levels of services through proper
planning.\5 Our third guide, on testing, sets forth a disciplined
approach to Year 2000 testing.\6 Federal agencies and other
organizations have used these guides to help organize and manage
their Year 2000 programs. 

We also have issued over 70 reports detailing specific findings and
made over 100 recommendations related to the Year 2000 readiness of
the government as a whole and of a wide range of individual
agencies.\7 These recommendations have been almost universally
embraced. 

Our recommendations have centered on the following: 

  -- Project planning.  We have recommended better organizational
     planning and management oversight--including systems
     inventorying and analysis--in a number of programs and entities. 

  -- Priority-setting.  With over 2,600 mission-critical systems
     still needing to be made Year 2000 compliant, it is important to
     establish priorities.  Resources need to be focused on those
     business processes and supporting systems that could threaten
     national security, the economy, the health and safety of
     Americans, or their financial well-being. 

  -- Data exchanges.  To remediate their data exchanges, agencies
     must (1) identify data exchanges that are not Year 2000
     compliant, (2) reach agreement with exchange partners (such as
     states) on the date format to be used, (3) determine if data
     bridges and filters are needed and, if so, reach agreement on
     their development,\8 (4) develop and test such bridges and
     filters, and (5) test and implement new exchange formats. 

  -- Testing.  Agencies should perform thorough testing of their
     systems, including end-to-end testing of multiple systems
     supporting a major business function. 

  -- Business continuity and contingency planning.  Given the
     interdependencies among agencies, their business partners, and
     the public infrastructure, it is imperative that contingency
     plans be developed for all critical core business processes and
     supporting systems, regardless of whether these systems are
     owned by the agency. 


--------------------
\4 Year 2000 Computing Crisis:  An Assessment Guide
(GAO/AIMD-10.1.14, issued as an exposure draft in February 1997 and
in final form in September 1997). 

\5 Year 2000 Computing Crisis:  Business Continuity and Contingency
Planning (GAO/AIMD-10.1.19, issued as an exposure draft in March 1998
and in final form in August 1998). 

\6 Year 2000 Computing Crisis:  A Testing Guide (GAO/AIMD-10.1.21,
issued as an exposure draft in June 1998 and in final form in
November 1998). 

\7 See GAO's World Wide Web page at www.gao.gov/y2kr.htm for a list
of reports and testimony on the Year 2000 problem. 

\8 A bridge is used to convert two-digit years to four-digit years or
to convert four-digit years to two-digit years.  A filter is used to
screen and identify incoming noncompliant data to prevent it from
corrupting data in the receiving system. 


   SERIOUS RISKS REMAIN
---------------------------------------------------------- Chapter 1:3

While considerable effort has been put forth, the change to the new
century will still present great challenges.  Our reviews of federal
Year 2000 programs have found uneven progress; some major agencies
are significantly behind schedule and are at high risk that they will
not correct all of their mission-critical systems in time.  As
remaining time diminishes, it becomes increasingly difficult to
ensure that all mission-critical systems will be compliant in time. 

Figure 1 shows OMB's assessment of agencies' Y2K progress based on
their November 1998 quarterly reports. 

   Figure 1:  OMB's Assessment of
   Agencies' Y2K Progress
   (November 1998)

   (See figure in printed
   edition.)

We have made detailed recommendations to agencies responsible for
some of the government's most essential services.  For example: 

  -- DOD and the military services face the threat of significant
     problems.\9 In April 1998, we reported that the department
     lacked complete and reliable information on systems, interfaces,
     other equipment needing repair, and the cost of its correction
     efforts.\10 We found that these and other problems seriously
     threatened the department's chances of successfully meeting the
     Year 2000 deadline for its mission-critical systems.  Further,
     taken together, the problems in Defense's Year 2000 program made
     failure of at least some mission-critical systems and the
     operation they support almost certain unless corrective actions
     were taken.  We have recommended numerous improvements for
     critical matters such as data exchanges, testing, and
     contingency planning; DOD concurred with these recommendations
     and agreed to implement them. 

  -- We previously reported\11 that the Health Care Financing
     Administration (HCFA) had made improvements in its Year 2000
     management but HCFA and its contractors were severely behind
     schedule in repairing, testing, and implementing the
     mission-critical systems supporting Medicare.  Given the
     magnitude of the tasks, and the risks and limited time
     remaining, we concluded in September 1998 that it was highly
     unlikely that all of the Medicare systems would be compliant in
     time to ensure the delivery of uninterrupted benefits and
     services.  To improve prospects for minimizing disruptions, we
     recommended that HCFA (1) rank its remaining Year 2000 work on
     the basis of an integrated project schedule, (2) ensure that all
     critical tasks are prioritized and completed in time to prevent
     unnecessary delays, (3) define the scope of an end-to-end test
     of the claims process and develop plans and a schedule for
     conducting such a test, (4) develop a risk management process,
     and (5) accelerate the development of business continuity and
     contingency plans.  HCFA has agreed to implement these
     recommendations. 

  -- As we reported in August 1998,\12 FAA had made progress in
     managing its Year 2000 problem and had completed critical steps
     in defining which systems needed to be corrected and how to
     accomplish this.  The agency had acted upon several of our
     recommendations from earlier in the year, including finalizing a
     Year 2000 strategy and setting priorities.\13 However, with less
     than 17 months to go, FAA still had to correct, test, and
     implement many of its mission-critical systems.  Accordingly,
     FAA must determine how to ensure continuity of critical
     operations in the event that some systems fail. 

Such examples underscore the difficulties confronting agencies to
make up for time lost; Year 2000 testing alone is consuming between
50 and 70 percent of a project's time and resources.  Thorough
testing is essential to provide reasonable assurance that new or
modified systems process dates correctly and will not jeopardize an
organization's ability to perform core business functions after the
change of century. 

Even for agencies that are making progress, other critical issues
must be successfully resolved; these include data exchanges,
telecommunications, and embedded systems.\14 First, should the
government's hundreds of thousands of data exchanges not be Year 2000
compliant, data either will not be successfully exchanged or invalid
data could cause the receiving computer systems to malfunction or
produce inaccurate computations.  Second, the government depends
heavily on the telecommunications infrastructure; reliable services
are made possible by a complex web of highly interconnected networks
supported by national and local carriers and service providers,
equipment manufacturers and suppliers, and customers.  Third, the
year 2000 could cause problems for the many embedded computer systems
used to control, monitor, or assist in operations. 

If issues such as these are not adequately addressed, the impact of
Year 2000 failures could disrupt vital government operations. 
Moreover, federal agencies depend on data provided by their business
partners as well as on services provided by the public infrastructure
(power, water, transportation, and voice and data
telecommunications).  One weak link anywhere in the chain of critical
dependencies can cause a cascading effect of major shutdowns of
business operations.  Consequently, it is imperative that contingency
plans be developed for all critical core business processes and
supporting systems, regardless of whether these systems are owned by
the agency.  Without such plans, when unpredicted failures occur,
agencies will lack well-defined responses, and may not have enough
time to develop and test alternatives. 


--------------------
\9 Defense Computers:  Year 2000 Computer Problems Put Navy
Operations At Risk (GAO/AIMD-98-150, June 30, 1998), Defense
Computers:  Army Needs to Greatly Strengthen Its Year 2000 Program
(GAO/AIMD-98-53, May 29, 1998), Defense Computers:  Year 2000
Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30,
1998), and Defense Computers:  Air Force Needs to Strengthen Year
2000 Oversight (GAO/AIMD-98-35, January 16, 1998). 

\10 GAO/AIMD-98-72, April 30, 1998. 

\11 Medicare Computer Systems:  Year 2000 Challenges Put Benefits and
Services in Jeopardy (GAO/AIMD-98-284, September 28, 1998). 

\12 FAA Systems:  Serious Challenges Remain in Resolving Year 2000
and Computer Security Problems (GAO/T-AIMD-98-251, August 6, 1998). 

\13 FAA Computer Systems:  Limited Progress on Year 2000 Issue
Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998) and
Year 2000 Computing Crisis:  FAA Must Act Quickly to Prevent Systems
Failures (GAO/T-AIMD-98-63, February 4, 1998). 

\14 Embedded systems are special-purpose computers built into other
devices.  Examples include systems in elevators, heating and air
conditioning units, and biomedical devices, such as cardiac
defibrillators and cardiac monitoring systems, which can record,
process, analyze, display, and/or transmit medical data.  (See Year
2000 Computing Crisis:  Compliance Status of Many Biomedical
Equipment Items Still Unknown (GAO/AIMD-98-240, September 18, 1998).)


   THE NATION AS A WHOLE FACES
   SIGNIFICANT YEAR 2000
   CHALLENGES
---------------------------------------------------------- Chapter 1:4

Our nation's reliance on the complex array of public and private
enterprises having scores of system interdependencies at all levels,
accentuates the potential repercussions a single failure could cause. 
It is essential that the Year 2000 issues be adequately addressed in
arenas beyond the federal government:  state and local governments,
the public infrastructure, and other key economic sectors. 

State and local governments are responsible for the implementation of
many national programs--such as food stamps and Medicaid--while also
providing vital local and regional services.  Accordingly, Year
2000-induced failures could result in payment delays felt at the
local level, or in the interruption of key public services such as
law enforcement, traffic management, and emergency and health
services.  For example, our survey of the state systems used in
federal welfare programs revealed that the majority of them were not
yet Year 2000 compliant.\15 Failure to complete Year 2000 conversion
could result in billions of dollars in benefits payments not being
delivered.  In an attempt to prevent this for Medicaid systems, HCFA
has recently hired a contractor to independently verify and validate
state systems. 

The public infrastructure, including critical areas such as power,
water, and telecommunications, is particularly important because
most, if not all, major enterprises rely on these essential elements
for daily functioning.  Other key economic sectors include health,
safety, and emergency services; banking and finance; transportation;
and manufacturing and small business. 

These sectors are critical, yet the nation has not had a complete
picture of their readiness.  Accordingly, in our April 1998
report,\16 we recommended that the President's Council on Year 2000
Conversion develop such a comprehensive picture, to include
identifying and assessing risks to the nation's key economic
sectors--including risks posed by international links.  We also
recommended that the Council use a sector-based approach to
establishing the effective public-private partnerships necessary to
address this issue. 

The Council adopted a sector-based focus and has been initiating
outreach activities since it became operational last spring.  More
recently, in October 1998, the Chair directed the Council's sector
working groups to begin assessing their sectors.  The Chair, in turn,
plans to issue periodic public reports summarizing these
assessments.\17 These assessments will be used to help prepare
contingency plans and aid in crisis management, in which the Council
will respond to disruptions that may arise in critical services. 
Completing these activities is absolutely vital to adequately
understanding the full range of national and international risks. 

International concerns are underscored by a September 1998 report by
the Organization for Economic Co-operation and Development.\18 This
report stated that (1) while awareness is increasing, the amount of
remediation still required is daunting, (2) significant negative
economic impact is likely in the short term, although much
uncertainty exists about the extent of Year 2000-induced disruptions,
(3) governments face a major public management challenge requiring
acceleration of their own preparations and stronger leadership, and
(4) stronger international cooperation is essential, especially in
conjunction with cross-border testing. 

In addition to addressing domestic Y2K issues, the United States has
attempted to promote international dialog on the Y2K problem.  In
June 1998, the United Nations General Assembly adopted a resolution
on the global implications of the Year 2000 issue.  The resolution
recognized that effective operation of governments, companies, and
other organizations was threatened by the Year 2000 issue and
coordinated efforts were required to address it.  The resolution went
on to request that all member countries attach a high priority to
raising the level of awareness and to consider appointing a
nationwide coordinator to tackle the problem. 

The Chair of the President's Council also has met with the United
Nations and other international bodies, and helped organize a
significant December 1998 National Y2K Coordinators' meeting attended
by over 120 countries, hosted by the United Nations' Working Group on
Informatics.  This meeting should help encourage the establishment of
regional coordinating mechanisms and foster greater international
dialog on the Year 2000 issue. 

Further, we have discussed the Year 2000 issue with the leadership of
audit organizations from around the world at a recent international
conference.  Subsequently, we wrote to these leaders to draw greater
attention to, and to share with them our recent publications on, this
issue. 

In summary, considerable progress has been made on the Year 2000
problem, yet a great deal remains to be accomplished.  It is critical
that priorities continue to be set, rigorous testing be completed,
and thorough business continuity and contingency plans be prepared. 
Further, aggressive and sustained efforts to assess and mitigate
national and international Y2K risks in the public infrastructure and
key economic sectors are needed.  Federal leadership, effective
public-private partnerships, and international cooperation are all
essential to successfully meeting the Year 2000 challenge.  We plan
to continue evaluating the effectiveness of these efforts and offer
suggestions for mitigating the risk of serious disruptions. 


--------------------
\15 Year 2000 Computing Crisis:  Readiness of State Automated Systems
to Support Federal Welfare Programs (GAO/AIMD-99-28, November 6,
1998).  The survey was conducted in July and August 1998 and included
the following welfare programs:  Medicaid; Temporary Assistance for
Needy Families; Women, Infants, and Children; food stamps; child
support enforcement; child care; and child welfare.  Forty-nine
states, the District of Columbia, and three territories responded to
our survey. 

\16 Year 2000 Computing Crisis:  Potential for Widespread Disruption
Calls for Strong Leadership and Partnerships (GAO/AIMD-98-85, April
30, 1998). 

\17 The first such report issued on January 7, 1999, summarizes
information collected to date and notes that many organizations are
still working to gather vital survey data on Year 2000 readiness. 

\18 The Organization for Economic Co-operation and Development
surveyed its member countries and reviewed existing studies and media
reports on the Year 2000 problem and issued a report on its findings,
The Year 2000 Problem:  Impacts and Actions (September 1998).  The
organization's 29 member countries are Australia, Austria, Belgium,
Canada, Czech Republic, Denmark, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, New Zealand, Norway, Poland, Portugal, Spain,
Sweden, Switzerland, Turkey, the United Kingdom, and the United
States. 


RESOLVING SERIOUS INFORMATION
SECURITY WEAKNESSES
============================================================ Chapter 2

We designated information security as a governmentwide high-risk area
in February 1997 for two basic reasons.  First, growing evidence
indicated that controls over computerized operations were not
effective.  In September 1996, we reported that serious security
weaknesses were identified at 10 of the largest 15 federal agencies
and summarized many recommendations made for needed improvements. 
Due to the problem's pervasive nature, we also recommended that OMB
be more active in overseeing agency practices, in part through its
role as chair of the then newly established Chief Information
Officers (CIO) Council.\1

Second, there was compelling information that risks were increasing. 
Tests at DOD indicated that the number of attacks on its computer
systems was increasing and that many attacks were not being
detected.\2 In addition, federal agencies, like many private sector
organizations, were becoming increasingly dependent on vulnerable
interconnected computer systems and on the Internet, a trend that
continues to accelerate today. 


--------------------
\1 Information Security:  Opportunities for Improved OMB Oversight of
Agency Practices (GAO/AIMD-96-110, September 24, 1996). 

\2 Information Security:  Computer Attacks at Department of Defense
Pose Increasing Risks (GAO/AIMD-96-84, May 22, 1996). 


   IMPORTANT ACTIONS TAKEN
---------------------------------------------------------- Chapter 2:1

Since February 1997, greatly increased recognition of the importance
of addressing information security problems has led to significant
actions. 

  -- In October 1997, our concerns regarding federal information
     security were corroborated by the President's Commission on
     Critical Infrastructure Protection.\3 Its report described the
     potentially devastating implications of poor information
     security from a national perspective, recognized that the
     federal government must "lead by example," and included
     recommendations for improving systems security. 

  -- In late 1997, the CIO Council designated information security a
     priority area and established a Security Committee.  During
     1998, the committee sponsored a security awareness seminar and
     developed plans for improving incident response services. 

  -- In May 1998, Presidential Decision Directive 63 was issued,
     which established entities within the National Security Council,
     the Department of Commerce, and the Federal Bureau of
     Investigation to address critical infrastructure issues.  It
     required each major department and agency to develop a plan for
     protecting its own critical infrastructure.  Other provisions
     include (1) enhanced analysis of information on threats, (2)
     assessments of government systems' susceptibility to
     exploitation, and (3) incorporation of infrastructure assurance
     functions in agency strategic planning and performance
     measurement frameworks. 

  -- During 1997 and 1998, the Congress held important hearings on
     information security that served to clarify issues and set
     expectations for implementation of needed reforms. 


--------------------
\3 Critical Foundations:  Protecting America's Infrastructures,
October 1997. 


   CONTINUING WEAKNESSES
   UNDERSCORE NEED FOR FURTHER
   ACTIONS
---------------------------------------------------------- Chapter 2:2

Much more needs to be done to ensure that systems and data supporting
critical federal operations are adequately protected.  Our views were
outlined in a recent report entitled Information Security:  Serious
Weaknesses Place Critical Federal Operations and Assets at Risk
(GAO/AIMD-98-92, September 23, 1998).  That report described
information security problems across government.  Such weaknesses are
disturbing because they make it easier for individuals and groups
with malicious intentions to intrude into inadequately protected
systems and use such access to obtain sensitive information, commit
fraud, or disrupt operations. 

Examples follow: 

  -- In November 1997, the SSA Inspector General reported that
     security weaknesses subjected sensitive information to potential
     unauthorized access, modification, or disclosure.\4 He reported
     that 29 convictions involving agency employees were obtained
     during fiscal year 1997, most of which involved creating
     fictitious identities, fraudulently selling social security
     cards, misappropriating funds, or abusing access to confidential
     information.  During fiscal year 1998, improvements were noted,
     but auditors recommended that SSA (1) further strengthen
     controls to protect its information, (2) accelerate efforts to
     improve and fully test plans for maintaining continuity of
     operations, and (3) improve controls over separation of
     duties.\5

  -- In May 1998, we reported that (1) the Department of State's
     information systems and the sensitive data they maintain were
     vulnerable to access, change, disclosure, and disruption by
     unauthorized individuals\6 and (2) weak computer security
     practices at FAA jeopardize flight safety.\7 In addition to
     recommendations to correct individual deficiencies, we
     recommended that each of these agencies strengthen its
     management structures for planning and implementing information
     security program. 

  -- In September 1998, we reported that weaknesses at the Department
     of Veterans Affairs placed critical operations, such as
     healthcare delivery, benefit payments, and life insurance
     services, at risk of misuse and disruption.  We recommended that
     the department's CIO correct all identified weaknesses and
     implement a comprehensive computer security planning and
     management program.\8

  -- In September 1998, we reported that, during our review of two
     cases of Air Force vendor payment fraud, computer security
     weaknesses continued to make the Air Force vulnerable to such
     incidents.  We recommended strengthening operating system
     controls and assessing the need for stronger controls over user
     identifications and passwords.\9

  -- In October 1998, we reported that weaknesses at Treasury's
     Financial Management Service placed billions of dollars of
     payments and collections at risk of fraud.  We recommended that
     the service assign responsibility and accountability for
     correcting each identified weakness to designated individuals
     and implement an effective entitywide security program.\10

  -- For the last 7 years, the USDA Inspector General reported
     serious computer control weaknesses at the National Finance
     Center, which annually makes over $21 billion in payroll
     disbursements to about 434,000 employees and about $15 billion
     in other payments.  The Inspector General reported that the
     center had not ensured that (1) systems security adequately
     prevented misuse or unauthorized modifications, (2) access to
     data was needed or appropriate, and (3) modifications made to
     software programs were properly authorized and tested.  USDA has
     actions planned to correct these serious weaknesses. 

Although the nature of agency operations and the related risks vary,
there are striking similarities in control weaknesses reported.  The
most widely reported has been poor control over access to sensitive
data and systems, such as providing overly broad access privileges to
very large user groups, allowing shared passwords and user accounts,
and inadequate monitoring of users' activities.  Other types of
weaknesses pertain to (1) mitigating and recovering from unplanned
interruptions in computer service, (2) adequately segregating duties
to help ensure that people do not conduct unauthorized actions
without detection, and (3) preventing unauthorized software from
being implemented. 


--------------------
\4 Social Security Accountability Report for Fiscal Year 1997, SSA
Pub.  No.  31-231, November 1997. 

\5 Social Security Accountability Report for Fiscal Year 1998, SSA
Pub.  No.  31-231, November 1998. 

\6 Computer Security:  Pervasive, Serious Weaknesses Jeopardize State
Department Operations (GAO/AIMD-98-145, May 18, 1998). 

\7 Air Traffic Control:  Weak Computer Security Practices Jeopardize
Flight Safety (GAO/AIMD-98-155, May 18, 1998). 

\8 VA Information Systems:  Computer Control Weaknesses Increase Risk
of Fraud, Misuse and Improper Disclosure (GAO/AIMD-98-175, September
23, 1998). 

\9 Financial Management:  Improvements Needed in Air Force Vendor
Payment Systems and Controls (GAO/AIMD-98-274, September 28, 1998). 

\10 Financial Management Service:  Areas for Improvement in Computer
Controls (GAO/AIMD-99-10, October 20, 1998). 


   BEST PRACTICES HELP SHAPE A
   BLUEPRINT FOR ACTION
---------------------------------------------------------- Chapter 2:3

To help further strengthen computer security practices, we issued an
executive guide in May 1998 entitled Information Security Management: 
Learning From Leading Organizations (GAO/AIMD-98-68).  It describes a
framework for managing risks through an ongoing cycle of activities
coordinated by a central focal point, as shown in figure 2.  The
guide, which is based on the best practices of organizations noted
for superior security programs, has been endorsed by the Chief
Information Officers Council, and distributed to all major agency
heads, Chief Information Officers, and Inspectors General. 

   Figure 2:  The Risk Management
   Cycle

   (See figure in printed
   edition.)


   FURTHER ACTIONS NEEDED
---------------------------------------------------------- Chapter 2:4

Security risks to government computer systems are significant, and
they are growing.  Although efforts have been initiated, improving
information security will require a more concerted effort at
individual agencies and at the governmentwide level. 

First, agencies need to more proactively manage risks.  Over the last
2 years, agencies have responded to scores of our recommendations and
those of the Inspectors General.  However, agencies have reacted to
individual audit findings, with not enough attention to the systemic
problems.  Agencies need to implement comprehensive security programs
based on best practices.  Second, governmentwide leadership is
important to ensure that executives understand their risks, monitor
agency performance, and resolve issues affecting multiple agencies. 

As these efforts progress, it is important that a comprehensive
strategy emerge.  As we recently recommended to the Director of OMB
and the Assistant to the President for National Security Affairs,
such a strategy should\11

  -- clearly delineate the roles of federal organizations with
     responsibilities for information security;

  -- rank the greatest risks;

  -- promote proven security tools and best practices;

  -- ensure the adequacy of workforce skills;

  -- provide for evaluating systems on a regular basis; and

  -- identify long-term goals, as well as time frames, priorities,
     and annual performance goals. 

OMB, the CIO Council, and the National Security Council are working
collaboratively on a plan to (1) assess agencies' security postures,
(2) implement best practices, and (3) establish a process of
continued maintenance.  Further, those involved in implementing
Presidential Decision Directive 63 and Year 2000 conversion efforts
are coordinating their efforts. 

The Year 2000 computing challenge is a vivid example of the need to
protect critical systems; it illustrates the government's widespread
dependence on systems and their vulnerability to disruption.  During
the Year 2000 conversion period, it is important that agencies be
especially attuned to security issues.  Most are under severe time
constraints to make an unprecedented number of software changes. 
Consequently, there is a danger that already weak controls will be
further compromised if agencies bypass or truncate security in an
effort to speed the software modification process.  This increases
the risk that erroneous or malicious code will be implemented and
that inadequately tested systems will be rushed into use. 

The threat of disruption, however, will not end with the advent of
the new millennium.  There is a long-term danger of attack from
malicious individuals or groups; it is imperative that the
government's long-term solutions be designed to address this security
risk.  We will closely monitor this critical area and continue to
advance constructive suggestions for improvements. 


--------------------
\11 Information Security:  Serious Weaknesses Place Critical Federal
Operations and Assets at Risk (GAO/AIMD-98-92, September 23, 1998). 


ENSURING MAJOR TECHNOLOGY
INVESTMENTS IMPROVE SERVICES
============================================================ Chapter 3

Successfully applying modern technology is central to improving
government operations and generating better service to the American
people.  Many efforts to achieve such goals have been plagued by huge
cost overruns; schedule slippages measured in years; and/or marginal
benefits in improving mission performance, cutting costs, and
enhancing responsiveness.  In 1995, we designated four troubled
multibillion dollar modernizations as high risk; their ultimate
success is key to the government's future ability to deliver critical
services--safe and efficient air travel, modern tax processing and
customer service operations, and improved weather forecasting--and in
improving systems that support national defense operations. 

Since 1995, we have made comprehensive recommendations for each of
these efforts that, if implemented, would fundamentally improve
project management, introduce needed engineering rigor, and promote
disciplined decisions on project funding.  Agencies are acting to
make needed improvements, but most of our recommendations have not
yet been fully implemented.  Consequently, serious risks remain. 



   (See figure in printed
   edition.)


   AIR TRAFFIC CONTROL
   MODERNIZATION
---------------------------------------------------------- Chapter 3:1

Faced with rapidly growing traffic volume and aging equipment, the
FAA initiated an ambitious air traffic control modernization program
in 1981.  This effort involves acquiring new air traffic control
facilities, as well as a vast network of radar, automated data
processing, navigation, and communications equipment, with an
expected total cost of $42 billion through fiscal year 2004.  The
Congress had appropriated over $25 billion by fiscal year 1998, and
FAA estimates that it will need $17 billion more for fiscal years
1999 through 2004. 

Over the past 17 years, the modernization program has experienced
cost overruns, schedule delays, and performance shortfalls of large
proportions.  Our work has pinpointed solutions to address root
causes of such problems. 

  -- In March 1997, we recommended that FAA improve its software
     acquisition capabilities by institutionalizing mature
     processes.\1 FAA's processes for acquiring software, the most
     costly and complex component of air traffic control systems, are
     ad hoc, sometimes chaotic, and not repeatable across projects. 
     As a result, FAA is at great risk of not delivering promised
     software capabilities on time and within budget. 

  -- In February 1997, we recommended that FAA develop and enforce a
     systems architecture.\2 Many systems have been developed without
     the benefit of a complete systems architecture, or overall
     blueprint, to guide the program.  This has resulted in
     unnecessarily higher spending to buy, integrate, and maintain
     hardware and software. 

  -- In January 1997, we recommended that FAA institutionalize
     defined processes for estimating the projects' costs and
     implement a cost accounting capability.\3 FAA lacks the reliable
     estimating and cost-accounting practices needed to effectively
     manage information technology investments.  This leaves FAA at
     risk of making ill-informed decisions on critical multimillion,
     even billion, dollar air traffic control systems. 

  -- Given the importance and the magnitude of information technology
     at FAA, we have recommended on multiple occasions that FAA
     establish an effective Chief Information Officer (CIO)
     management structure.  Such a structure, similar to the
     department-level CIOs prescribed by the Clinger-Cohen Act, would
     have a CIO who is solely responsible for the management of
     information technology and reports directly to the head of the
     agency. 

  -- In August 1996, we recommended that FAA develop a comprehensive
     strategy for addressing an organizational culture that has
     impaired the acquisition process.\4

Employees have acted in ways that did not reflect a strong enough
commitment to mission focus, accountability, coordination, and
adaptability. 

In responding to our recommendations, FAA has started developing a
complete air traffic control systems architecture, establishing
defined cost-estimating processes, acquiring a cost-accounting
system, and improving its software acquisition capability.  Most
recently, FAA has committed to hiring a CIO who would report directly
to FAA's Administrator. 

Moreover, in restructuring the modernization program, FAA--in
consultation with the aviation community--is developing a phased
approach, including a new way of managing air traffic known as "free
flight."\5 Free flight would allow pilots more flexibility in
choosing routes and is expected to help improve aviation safety and
efficiency.  The agency, however, faces many challenges in
implementing free flight cost effectively.  These include developing
detailed plans in collaboration with the aviation community and
addressing outstanding issues related to the development and
deployment of technology. 

While improvements have been initiated, FAA's reform efforts are not
yet completed, and several major projects continue to face challenges
that could affect their cost, schedule, and performance.  See Major
Management Challenges and Program Risks:  Department of
Transportation (GAO/OCG-99-13, January 1999) for additional
information on FAA's air traffic control modernization. 


--------------------
\1 Air Traffic Control:  Immature Software Acquisition Processes
Increase FAA System Acquisition Risks (GAO/AIMD-97-47, March 21,
1997). 

\2 Air Traffic Control:  Complete and Enforced Architecture Needed
for FAA Systems Modernization (GAO/AIMD-97-30, February 3, 1997). 

\3 Air Traffic Control:  Improved Cost Information Needed to Make
Billion Dollar Modernization Investment Decisions (GAO/AIMD-97-20,
January 22, 1997). 

\4 Aviation Acquisition:  A Comprehensive Strategy Is Needed for
Cultural Change at FAA (GAO/RCED-96-159, August 22, 1996). 

\5 National Airspace System:  FAA Has Implemented Some Free Flight
Initiatives, But Challenges Remain (GAO/RCED-98-246, September 28,
1998). 


   TAX SYSTEMS MODERNIZATION
---------------------------------------------------------- Chapter 3:2

IRS has spent over $3 billion during the last decade attempting to
modernize its outdated, paper-intensive approach to tax return
processing.  Our reviews over the past few years identified serious
management and technical weaknesses with IRS' modernization, and we
made recommendations to help IRS, among other things, build the
capability necessary to successfully modernize its systems.  IRS has
agreed to implement our recommendations and is working to build its
capability before it begins modernizing tax processing systems. 

In 1995, we identified serious management and technical weaknesses in
IRS' modernization that jeopardized its successful completion; more
than a dozen recommendations were made.\6 In 1996, the Congress
limited IRS information technology spending to certain cost-effective
categories until it had successfully implemented our
recommendations.\7 IRS has continued to act in this regard.  For
example: 

  -- IRS hired a CIO and created an investment review board to
     select, control, and evaluate information technology
     investments.  Together, they reviewed and terminated marginal
     systems development projects. 

  -- In May 1997, IRS provided the first two levels of a four-level
     modernization blueprint to the Congress. 

  -- In December 1998, IRS engaged a prime systems modernization
     integration contractor to overhaul its systems over the next 10
     to 15 years. 

IRS' 1997 blueprint was a good first step and provides a solid
foundation from which to define the level of detail and precision
needed to build a modernized system.\8 However, until these levels
are complete, IRS will not have fully addressed our recommendations
calling for disciplined processes and a complete information system
architecture. 

The IRS Commissioner agreed with our findings and the Congress
limited IRS' ability to obligate information technology investment
funds until certain conditions were met.  These include that IRS
submit to the Congress for approval an expenditure plan that (1)
implements the blueprint, (2) meets the requirements of OMB's system
investment guidelines, (3) is reviewed and approved by OMB and
Treasury's IRS Management Board, and (4) is reviewed by us. 

Additional information on IRS' readiness and capability to
effectively modernize its systems is presented in Major Management
Challenges and Program Risks:  Department of the Treasury
(GAO/OCG-99-14, January 1999). 


--------------------
\6 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156,
July 26, 1995). 

\7 Tax Systems Modernization:  Actions Underway But Management and
Technical Weaknesses Not Yet Corrected (GAO/T-AIMD-96-165, September
10, 1996). 

\8 Tax Systems Modernization:  Blueprint Is a Good Start But Not Yet
Sufficiently Complete to Build or Acquire Systems
(GAO/AIMD/GGD-98-54, February 24, 1998). 


   NATIONAL WEATHER SERVICE
   MODERNIZATION
---------------------------------------------------------- Chapter 3:3

The National Weather Service (NWS) began a nationwide program in the
1980s to upgrade observing systems, such as satellites and radars, to
achieve more uniform weather services across the nation, improve
forecasts, provide better prediction of severe weather and flooding,
and achieve higher productivity.  NWS' modernization includes four
major programs:  the Next Generation Weather Radar, the Next
Generation Geostationary Operational Environmental Satellite, the
Automated Surface Observing System, and the Advanced Weather
Interactive Processing System (AWIPS). 

In 1997, we reported that although the deployment of the observing
systems were nearing completion, unresolved issues concerning the
systems' operational effectiveness and efficient maintenance
remained.  To illustrate, we reported that the new radars were not
always up and running when severe weather was threatening, and the
ground-based sensors fell short of performance and user expectations. 
We recommended that NWS correct shortfalls in radar performance and
define and prioritize all ground-based sensor corrections needed to
meet user needs.\9 NWS addressed some of these performance concerns,
but others remain.  We recently reported that a radar located in
Southern California was not consistently meeting availability
requirements and recommended that NWS correct the problems.  NWS
concurred and mentioned several planned activities to improve radar
availability.\10

Although NWS is nearing completion of its modernization, we remain
concerned about its lack of an overall architecture and ability to
deliver the final piece of the modernization--AWIPS.  NWS has
acknowledged that a technical blueprint is needed to guide the
effort; however, it has made little progress in developing the
architecture.  In the meantime, NWS will continue to incur higher
costs and experience reduced performance.\11

The centerpiece of the modernization, AWIPS--the forecaster
workstations that are to integrate observing systems' data and
support forecaster decisionmaking--is far from providing all the
promised capabilities.  It has been delayed and become more expensive
because of design problems and management shortcomings.  AWIPS is now
scheduled to be deployed in June 1999, but with less than full
functionality.  Until this system is deployed and functioning
properly, NWS will not be able to take full advantage of the total
$4.5 billion investment it has made in the modernization. 

For the past several years, we have reported that serious risks
continue to be associated with AWIPS' costs, schedule, development,
and maintenance.\12 In 1996, we made several recommendations to (1)
improve NWS' process to test software and establish a software
quality assurance program, (2) obtain an independent cost estimate
since NWS does not have reliable project cost information, and (3)
validate all workstation requirements on the basis of mission
impact.\13

NWS officials have acted on all these recommendations.  They said
they are continuing to strengthen their software development and
testing processes, and an independent cost estimate and requirements
validation review were completed in February and August 1998,
respectively.  These reviews concluded that AWIPS costs will increase
at least $20 million and that some requirements should not be
pursued. 

NWS reports that it is making considerable progress on the
development and testing of the forecaster workstations.  However, we
continue to be concerned about cost, schedule, and technical risks
associated with the workstations.  The NWS modernization is further
discussed in Major Management Challenges and Program Risks: 
Department of Commerce (GAO/OCG-99-3, January 1999). 


--------------------
\9 Weather Forecasting:  Radar Availability Requirements Not Being
Met (GAO/AIMD-95-132, May 31, 1995) and Weather Forecasting:  Unmet
Needs and Unknown Costs Warrant Reassessment of Observing System
Plans (GAO/AIMD-95-81, April 21, 1995). 

\10 National Weather Service:  Sulphur Mountain Radar Performance
(GAO/AIMD-99-7, October 16, 1998). 

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

\12 National Weather Service:  Budget Events and Continuing Risks of
Systems Modernization (GAO/T-AIMD-98-97, March 4, 1998) and Weather
Service Modernization:  Risks Remain That Full Systems Potential Will
Not Be Achieved (GAO/T-AIMD-97-85, April 24, 1997). 

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


   DOD SYSTEMS DEVELOPMENT AND
   MODERNIZATION EFFORTS
---------------------------------------------------------- Chapter 3:4

DOD has taken steps to implement legislative requirements to
institute modern information technology management practices. 
However, it faces a major challenge in changing its current
organizational structure and culture.  This impedes oversight and
coordination of information resources from a departmentwide
perspective.  In previous reports, we have designated DOD's
information technology project management as high risk.  In those
reports, these efforts were referred to as the "Corporate Information
Management Initiative," a term that is no longer widely used in DOD. 

A prime example of DOD's poor management of information technology is
its $18 billion system migration effort to replace almost 2,000
duplicative and inefficient systems.  One functional area of the
migration effort, which we reported on in 1996, spent over $700
million pursuing a substantially flawed effort--which was later
abandoned--without rigorous department-level oversight.\14 In October
1997, we reported that the department had little assurance that the
migration systems being developed would help achieve DOD's technology
goals. 

Effective information technology project planning and oversight are
especially important as DOD moves to coordinate its thousands of
decentralized command, control, communications, intelligence,
surveillance, and reconnaissance systems in order to ensure
information superiority over our nation's enemies.  To this end, we
made a number of recommendations that would establish and enforce
processes to thoroughly examine alternatives and develop business
cases before investing in new systems.  Further, we recommended that
system investments be consistent with department technical standards
and that controls and performance measures be established to allow
management "visibility" over system development efforts.  The
department generally agreed with these recommendations and is now
finalizing a plan that will show how it intends to comply with new
federal information technology management requirements. 

DOD's systems development and modernization efforts are discussed in
Major Management Challenges and Program Risks:  Department of Defense
(GAO/OCG-99-4, January 1999). 


--------------------
\14 Defense IRM:  Poor Implementation of Management Controls Has Put
Migration Strategy At Risk (GAO/AIMD-98-5, October 20, 1997). 


   OTHER MODERNIZATION EFFORTS
   BEAR WATCHING
---------------------------------------------------------- Chapter 3:5

Unfortunately, these four high-risk modernizations are not the only
indications of the difficulties facing agencies across government in
successfully harnessing modern information technology.  Our initial
designation of these major modernizations as high risk in early 1995,
along with our research on best practices of leading organizations in
managing information technology,\15 helped create a consensus between
the Congress and the executive branch to pass major management
reforms.  These included the Paperwork Reduction Act of 1995 and the
Clinger-Cohen Act of 1996, which set forth requirements for improving
government operations through more effective use of information
technology.  Requirements include establishing Chief Information
Officers and using proven modern investment and management practices. 

The status of these reforms is outlined in our report Major
Management Challenges and Program Risks:  A Governmentwide
Perspective (GAO/OCG-99-1, January 1999).  It is important to note
that such reforms are in their early stages of implementation and
have been complicated by the urgent need to address Year 2000 issues. 
Consequently, we are not designating any new modernizations as high
risk at this time.  However, going forward, there are planned
modernizations that bear watching in such departments as Agriculture,
State, Interior, and Treasury and in the Agency for International
Development.  These issues are highlighted in the series of
management booklets on individual agencies that is being issued
concurrently with this high-risk update. 


--------------------
\15 Executive Guide:  Improving Mission Performance Through Strategic
Information Management and Technology--Learning From Leading
Organizations (GAO/AIMD-94-115, May 1994), Assessing Risks and
Returns:  A Guide for Evaluating Federal Agencies' IT Investment
Decision-making (GAO/AIMD-10.1.13, February 1997), Business Process
Reengineering Assessment Guide (GAO/AIMD-10.1.15, April 1997),
Executive Guide:  Measuring Performance and Demonstrating Results of
Information Technology Investments (GAO/AIMD-98-89, March 1998),
Executive Guide:  Information Security Management:  Learning From
Leading Organizations (GAO/AIMD-98-68, May 1998), and Executive
Guide:  Leading Practices in Capital Decision-making (GAO/AIMD-99-32,
December 1998). 


PROVIDING BASIC FINANCIAL
ACCOUNTABILITY
============================================================ Chapter 4

Our early high-risk reports describing the serious consequences of
financial management deficiencies helped highlight the need for major
reforms, which the Congress passed in the 1990 Chief Financial
Officers (CFO) Act, as expanded by the 1994 Government Management
Reform Act.  These laws called for strengthening financial
accountability and producing more reliable cost and performance
information on federal operations.  Two of the most basic mandates
are that (1) major departments and agencies now produce annual
financial statements subject to independent audit beginning with
those for fiscal year 1996 and (2) the Secretary of the Treasury, in
cooperation with the Director of OMB, prepare financial statements
for the U.S.  government, starting with those for fiscal year 1997,
that are audited by GAO. 

These requirements are prompting steady improvements in financial
accountability, as discussed more fully in our overview document on
the status of management reforms in government.\1 However, progress
is very uneven.  As figure 3 shows, 11 of the 24 CFO Act departments
and agencies received unqualified opinions on their fiscal year 1997
financial statements.  However, several major departments are not yet
able to produce auditable financial statements consistently. 

Audited financial statements are essential to identifying any serious
financial management problems that might exist, to helping ensure
accountability, and to providing an annual public scorecard on
accountability.  An unqualified audit opinion on those statements,
however, while certainly important, is not an end in itself.  The CFO
Act is focused on providing accurate, timely, relevant financial
information needed for management decisionmaking and accountability,
on a systematic basis, throughout the year.  Efforts to obtain
reliable year-end data that are not backed up by fundamental
improvements in underlying financial management systems and
operations that enable the routine production of accurate, relevant,
timely data to support ongoing program management and accountability
will not achieve the intended results of the CFO Act over the
long-term. 

   Figure 3:  The 24 CFO Agencies'
   Fiscal Year 1997 Financial
   Statement Audit Opinions

   (See figure in printed
   edition.)

Our first ever audit of the U.S.  government's financial statements
framed the most serious challenges across government.  In summary,
significant financial systems weaknesses, problems with fundamental
recordkeeping, incomplete documentation, and weak internal controls,
including computer controls, prevented the government, as a whole,
from accurately reporting a large portion of its assets, liabilities,
and costs.  Such deficiencies also precluded us from being able to
form an opinion on the reliability of the government's financial
statements. 

The President reacted strongly, requiring agency heads to submit
plans to OMB to correct deficiencies.  Financial management reform
was designated a top management priority of the executive branch,
behind the Year 2000 computing problem.  The House of Representatives
also passed a resolution urging quick resolution of these problems. 

We are working with OMB, the Treasury, and agencies across government
to provide recommendations for fixing the major deficiencies cited in
our audit.  The most serious situations are candidates for high-risk
designations.  A high-risk designation is intended to highlight
individual departments and agencies that are material to the
government's financial statements and have been unable to produce
auditable financial statements for their own operations.\2

The most significant in this regard is DOD, which represents a large
percentage of the government's assets, liabilities, and net costs. 
None of the military services or the department as a whole have yet
been able to produce auditable financial statements.  We designated
DOD financial management to be a high-risk area in 1995 and it
remains so today, although we have seen increased attention to
rectify this situation. 

Two other large organizations also have been unable to produce
auditable statements for their entire operations--USDA and DOT. 
Unlike DOD, however, significant parts of these organizations have
been able to produce auditable statements while other major
components have not.  Consequently, we are adding the most
problematic parts of these departments to the high-risk
list--financial management at the Forest Service at USDA and
financial management at the Federal Aviation Administration at DOT. 

Another major focus of the government's financial management entails
its revenue collection operations.  As a result, we have looked
closely at IRS and the Customs Service, which together account for
virtually all the government's revenue.  We have designated both
areas high risk in the past. 

IRS has made progress recently and was able for the first time to
obtain an unqualified opinion on its financial statements for fiscal
year 1997, after five previous attempts did not yield auditable
statements.  However, achieving this outcome took extraordinary
effort, including material audit adjustments, and several serious
weaknesses remain regarding refunds, receipts, and unpaid tax
assessments.  Also, important new accounting and reporting
requirements became effective for fiscal year 1998 and these will
present new challenges for IRS.  Until IRS can demonstrate a
consistent ability to produce auditable statements, meet the new
requirements, and make greater progress in addressing significant
material weaknesses, we still consider its revenue accounting to be
high risk, especially given the fact that it collected over $1.7
trillion in revenue in fiscal year 1998--virtually all of the
government's revenue. 

The Customs Service has made major financial management strides,
including several important improvements in its ability to assess and
collect duties and excise taxes and receiving unqualified opinions on
its financial statements for the past 2 fiscal years.  Therefore, we
no longer consider Customs financial management high risk; thus, we
are removing the high-risk designation, although we will continue to
monitor Customs' progress. 



   (See figure in printed
   edition.)


--------------------
\1 Major Management Challenges and Program Risks:  A Governmentwide
Perspective (GAO/OCG-99-1, January 1999). 

\2 Other departments and agencies also still need to improve their
financial management operations.  Challenges facing them in this area
are discussed in our series of reports on agencies' performance and
accountability.  (See GAO/OCG-99-1 through GAO/OCG-99-21, January
1999.)


   DOD FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 4:1

DOD is responsible for hundreds of billions of dollars of assets
worldwide and, with a budget of an estimated $250 billion annually,
it is accountable for about half of the government's discretionary
spending.  However, long-standing weaknesses in DOD's financial
management operations undermine DOD's ability to efficiently manage
its vast operations, limit the reliability of financial information
provided to the Congress, and continue to result in wasted resources. 
Since 1995, we have monitored DOD's efforts as it has struggled to
resolve the many problems brought about by decades of inattention to
sound financial management practices. 

Examples follow: 

  -- DOD has not properly accounted for and reported billions of
     dollars of property, equipment, inventory, and supplies.\3 For
     example, recorded information on the number and location of
     several military equipment items--such as F-4 engines and
     service craft--was not reliable and on-hand quantities of
     inventories differed by 23 percent from inventory records at
     selected major storage locations.\4

  -- DOD has not properly accounted for billions of dollars of basic
     transactions.  For example, DOD was unable to reconcile at least
     $4 billion in differences between checks issued by DOD and
     reported to the Treasury Department.  In addition, DOD reported
     an estimated $22 billion in disbursements that it has been
     unable to match with corresponding obligations.\5

  -- DOD has not accurately reported the net costs of its operations
     and has acknowledged its fundamental problems in accumulating
     reliable cost information.  DOD's 1998 Annual Report to the
     President and the Congress cited the lack of a widespread,
     robust cost accounting system as the single largest impediment
     to controlling and managing weapon system life-cycle costs. 

  -- DOD has not ensured that all disbursements were properly
     recorded and reconciled.  For example, we recently reported that
     weak controls led to two fraud cases involving nearly $1 million
     in embezzled Air Force vendor payments and that similar control
     weaknesses continue to leave Air Force funds vulnerable to
     additional fraudulent and improper vendor payments.\6

  -- DOD has not adequately determined its liability associated with
     the future cost of post-retirement health benefits for military
     employees, reported in the neighborhood of $220 billion.\7

  -- DOD has not estimated and reported on material environmental and
     disposal liabilities.  While DOD reported nearly $40 billion in
     estimated environmental cleanup and disposal liabilities for
     fiscal year 1997, it excluded costs associated with military
     weapon systems or training ranges--which are likely to be an
     additional tens of billions of dollars.\8

To achieve the wide-ranging reforms necessary to address its
long-standing financial management deficiencies, we have made
numerous recommendations to DOD regarding its need to upgrade the
skills of its financial personnel and successfully overcome serious
design flaws in its financial systems. 

DOD's financial operations involve about 32,000 financial management
personnel.  Our survey of over 1,400 key DOD financial
managers--individuals often serving in comptroller, deputy
comptroller, or budget officer positions--showed that over half (53
percent) had received no financial or accounting-related training
during 1995 and 1996.  These personnel will be challenged to lead
DOD's reform efforts to produce reliable financial data based on more
comprehensive accounting standards and systems requirements
throughout a large and complex organization with acknowledged
difficult financial deficiencies.  We made recommendations directed
at developing and implementing a formalized, structured training
program for financial personnel throughout the department.  The
department's response to our report expressed agreement with our
overall conclusion regarding providing a strong emphasis on training
as a means of upgrading workforce accounting knowledge.\9

Until DOD has developed integrated financial management systems, its
operations will continue to be burdened by costly, error-prone
systems that do not provide financial controls to ensure that DOD's
assets are safeguarded, its resources are appropriately accounted
for, or the cost of its activities are accurately measured.  Concern
continues over whether DOD has (1) comprehensively identified all the
systems it relies on to carry out its financial management
operations, (2) corrected weaknesses that would allow both hackers
and hundreds of thousands of legitimate users with valid access
privileges to modify, steal, or inappropriately disclose, and destroy
sensitive DOD data, and (3) effectively documented how it conducts
its financial management operations now and plans to in the
future.\10

DOD has many well-intentioned planned and ongoing improvement
efforts.  DOD is developing a detailed action plan, in collaboration
with OMB and the audit community, to identify short-term initiatives
to address financial reporting deficiencies.  Further, the National
Defense Authorization Act of 1998 requires DOD to develop a
broad-based plan for improving its financial operations.  In
response, in late October 1998, DOD issued its first Biennial
Financial Management Improvement Plan.  DOD's plan represents an
important step in improving the department's financial management
operations.  The plan, however, needs to be supplemented with
additional elements in order to address all of the needed aspects of
long-term financial management performance improvement. 

See Major Management Challenges and Program Risks:  Department of
Defense (GAO/OCG-99-4, January 1999) for additional information on
DOD's financial management weaknesses. 


--------------------
\3 Department of Defense:  Financial Audits Highlight Continuing
Challenges to Correct Serious Financial Management Problems
(GAO/T-AIMD/NSIAD-98-158, April 16, 1998). 

\4 Financial Audit:  DOD Mission Asset Existence Verification
(GAO/AIMD-98-196R, May 29, 1998). 

\5 GAO/T-AIMD/NSIAD-98-158, April 16, 1998. 

\6 Financial Management:  Improvements Needed in Air Force Vendor
Payment Systems and Controls (GAO/AIMD-98-274, September 28, 1998). 

\7 GAO/T-AIMD/NSIAD-98-158, April 16, 1998. 

\8 GAO/T-AIMD/NSIAD-98-158, April 16, 1998. 

\9 Financial Management:  Training of DOD Financial Managers Could Be
Enhanced (GAO/AIMD-98-126, June 24, 1998). 

\10 GAO/T-AIMD/NSIAD-98-158, April 16, 1998. 


   FOREST SERVICE FINANCIAL
   MANAGEMENT
---------------------------------------------------------- Chapter 4:2

Since its first audit of the Forest Service's financial statements,
which covered fiscal year 1991, the USDA Inspector General (IG) has
found serious accounting and financial reporting weaknesses.  These
include pervasive errors in the field-level data supporting land,
buildings, equipment, accounts receivable, and accounts payable
accounts.  Thus, when the IG issued an adverse audit opinion in July
1996, concluding that the Forest Service's financial statements for
fiscal year 1995 were unreliable, the findings represented a
continuing pattern of unfavorable conclusions about the Forest
Service's financial statements. 

Due to the severity of the accounting and reporting deficiencies, the
Forest Service did not prepare financial statements for fiscal year
1996, but chose instead to focus on trying to resolve these problems. 
The Forest Service's goal was to correct some of the deficiencies
during fiscal year 1997 and to achieve financial
accountability--which the agency defines as an unqualified audit
opinion--by the end of fiscal year 1999. 

The IG's audit of Forest Service fiscal year 1997 financial
statements disclosed continuing major weaknesses in accounting and
reporting, particularly for real property (land, buildings, and
roads), accounts receivable, and accounts payable.  Errors were also
detected in the Forest Service's records when it attempted to
reconcile its fund balance with the Department of the Treasury's
records.  As a result, the IG was unable to determine the reliability
of the Forest Service's fiscal year 1997 financial statements and,
therefore, issued a disclaimer of opinion. 

For example, the IG could not verify the balance for the Forest
Service's reported $8.2 billion in real property because inventories
and valuations of these assets had not been completed at the time of
the audit.\11 The IG also could not verify the accuracy of the
reported $119 million in accounts receivable because the Forest
Service did not maintain centralized records of individual accounts. 
Also, the IG reported that adjustments to accounts receivable
totaling about $166 million could not be verified because the
automated data files documenting the adjustments had been recorded
over and, therefore, were no longer available.  Similarly, the Forest
Service continued to lack a system that provided detailed accounts
payable balances, and relied instead on its obligations system to
estimate accounts payable at year-end.  This precluded the agency
from knowing costs it had incurred and amounts owed to others at any
given point throughout the year.  These weaknesses mean that Forest
Service managers' ability to effectively manage operations, monitor
revenue and spending levels, and make informed decisions about future
funding needs will continue to be hampered until corrective measures
are completed. 

The aforementioned problems were exacerbated by problems with the
Forest Service's partial implementation of its new financial
accounting system.  This system was unable to produce certain
critical budgetary and accounting reports that track obligations,
assets, liabilities, revenues, and costs for the units that converted
to the new system.\12 Since January of 1998, we, the IG, and an
outside consultant hired by Forest Service have identified serious
problems with the implementation process for the new system.  These
problems were caused by, among other things, not simplifying the
Forest Service's business processes before the system was
implemented, adding feeder systems, implementing the system before it
was fully tested, and inadequate oversight and management control
over the project. 

Although major barriers to financial accountability still remain, the
Forest Service has begun and/or completed several actions, that, if
successfully carried through, represent important steps towards
achieving financial accountability.  For example, the Forest Service
has substantially completed equipment inventories and is in the
process of correcting the erroneous data recorded in its old
accounting system.  In addition, the Forest Service has issued an
accounting desk guide for all staff that provides uniform accounting
instructions.  This guide, if consistently used, should help improve
the accuracy of data entered into the new system.  Further, Forest
Service management continues to emphasize the importance of financial
accountability to its line managers, has established a team to
improve selected financial processes, and has obtained advice from
outside consultants on how to improve its financial operations. 

While the Forest Service has committed considerable resources and
progressed in addressing some of its long-standing financial
management deficiencies, much work remains.  Also, the problems
encountered in implementing the new accounting system have been a
major setback.  Because of the serious nature of these long-standing
problems, we are designating Forest Service financial management a
high-risk area.  Also see Major Management Challenges and Program
Risks:  Department of Agriculture (GAO/OCG-99-2, January 1999). 


--------------------
\11 Forest Service:  Barriers to Financial Accountability Remain
(GAO/AIMD-99-1, October 2, 1998). 

\12 Forest Service:  Status of Progress Toward Financial
Accountability (GAO/AIMD-98-84, February 27, 1998). 


   FEDERAL AVIATION ADMINISTRATION
   FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 4:3

Financial management weaknesses continue to render FAA vulnerable to
waste, fraud, and abuse; undermine its ability to manage its
operations; and limit the reliability of financial information
provided to the Congress.  Since 1994, the Department of
Transportation's Office of the Inspector General has undertaken
audits of FAA's financial statements and has consistently reported
that it has been unable to determine whether the financial
information presented is reliable. 

In the fiscal year 1997 audit report, the Inspector General was
unable to express an opinion on the reliability of FAA's financial
statements because property, plant, and equipment--reported at about
$12 billion--and inventory and related property--reported at $764
million--could not be verified.  Deficiencies included (1) FAA's lack
of comprehensive inventory counts, (2) inaccurate general ledger
balances and subsidiary records, (3) inadequate supporting
documentation, and (4) unreconciled discrepancies between general
ledger balances maintained in FAA's accounting system and its
subsidiary records. 

We have reported that problems in accounting for property, plant, and
equipment affect FAA's ability to properly manage these assets and
may result in operating inefficiencies.\13

For example, mission-critical equipment, such as radars and other air
traffic control equipment, may be difficult to locate when needed,
which could exacerbate an emergency situation.  Also, theft could go
undetected, and funds could be spent unnecessarily to acquire
equipment that is already on hand.  The lack of accurate inventory
information may result in program officials' inability to make
prudent business decisions and safeguard assets adequately and may
also impair operational effectiveness.  For example, inaccurate
inventory information may result in a shortage of, or the inability
to locate, essential parts necessary to repair mission-critical
systems.  Further, funding requests may not be based on actual needs,
unnecessary purchases may be made, and inventory may be overstocked
or hoarded due to availability concerns. 

Many problems in the property, plant, and equipment and inventory
accounts result from the lack of a reliable system for accumulating
project cost accounting information.  The lack of cost accounting
information also limits FAA's ability to (1) make effective decisions
about resource needs and adequately control major projects, such as
the $42 billion air traffic control modernization program, (2)
estimate future costs for purposes of preparing and reviewing
budgets, (3) control and reduce costs in order to increase efficiency
and avoid waste, (4) develop a system of user fees based on the cost
of services provided, and (5) meaningfully evaluate performance
measures in terms of efficiency and cost-effectiveness. 

On September 30, 1998, DOT submitted a plan to OMB to resolve its
financial reporting deficiencies including FAA's property, plant, and
equipment and inventory deficiencies.  In addition, FAA has efforts
underway to implement its cost accounting system, but plans for full
implementation have slipped from October 1, 1998, to March 31, 1999. 
This new date has been described by the Inspector General as very
ambitious.  Until FAA implements effective policies and procedures to
provide accountability over inventory and property, plant, and
equipment, including implementing a reliable cost accounting system,
it remains vulnerable to significant mismanagement of appropriated
funds used to acquire these assets.  Therefore, we are adding FAA's
financial management to our high-risk list.  These problems also are
among those discussed in Major Management Challenges and Program
Risks:  Department of Transportation (GAO/OCG-99-13, January 1999). 


--------------------
\13 Financial Management:  Federal Aviation Administration Lacked
Accountability for Major Assets (GAO/AIMD-98-62, February 18, 1998). 


   IRS FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 4:4

In fiscal year 1997, IRS received an unqualified opinion on its
custodial financial statements for the first time since we began
auditing them in fiscal year 1992.\14 This achievement was largely
attributable to IRS' efforts to reconcile tax receipt and refund
activity between its systems and those of Treasury's Financial
Management Service.  However, IRS had to use extensive ad hoc
procedures to enable it to prepare auditable financial statements
because of its inability to rely on the general ledger system to
support its financial statements.  To compensate, IRS uses
specialized computer programs to extract information from its master
files--its only detailed database of taxpayer information--to derive
amounts to be reported in the financial statements.  However, the
amounts produced by this approach needed material audit adjustments
to produce reliable financial statements. 

In our audit report on IRS' fiscal year 1997 financial statements, we
cited long-standing material weaknesses that prevented IRS from
routinely generating timely and reliable information as a tool for
managing its operations or as a basis for preparing financial
statements.\15 These weaknesses also expose the federal government
and taxpayers to financial loss and create an undue burden for
taxpayers.  IRS' primary internal control weaknesses relate to tax
receipts, taxpayer data, tax refunds, and unpaid tax assessments.  We
have issued reports providing IRS with numerous recommendations for
both short- and long-term corrective actions to address these
weaknesses. 

IRS generally agreed with our recommendations and has initiated
corrective actions.  However, many initiatives, which include IRS'
systems modernization effort and plans to improve its financial
reporting capabilities are long term and, according to IRS, may take
10 years or more of sustained effort to fully implement.  Some other
issues can be resolved in the next few years by improving policies,
procedures, and internal controls, as discussed below.  These
weaknesses underscore the extent to which IRS still has extensive
work ahead to resolve its financial management and internal control
deficiencies.  IRS' financial management, therefore, continues to be
a high-risk area. 


--------------------
\14 The custodial financial statements did not report on activities
related to IRS' administrative costs funded by appropriations and
reimbursements from other agencies, state and local governments, and
the public.  These activities were reported separately in IRS'
administrative financial statements, which were audited by the
Treasury Office of Inspector General. 

\15 Financial Audit:  Examination of IRS' Fiscal Year 1997 Custodial
Financial Statements (GAO/AIMD-98-77, February 26, 1998). 


      INTERNAL CONTROL WEAKNESSES
      WITH REGARD TO TAX RECEIPTS
      AND TAXPAYER DATA
-------------------------------------------------------- Chapter 4:4.1

IRS' controls over tax receipts and taxpayer data do not adequately
reduce the vulnerability to theft and inappropriate disclosure.  For
example, receipts were left in unrestricted areas accessible to
individuals not authorized to handle receipts.  In addition,
employees were hired and worked in positions requiring the handling
of cash, checks, or sensitive taxpayer information before IRS
received the results of their background or fingerprint checks.  Of
the 80 thefts IRS investigated at service centers from January 1995
through July 1997, 12 (15 percent) were committed by individuals who
had previous arrest records or convictions that were not identified
before their employment.  In addition, we found that single, unarmed
couriers were used to transport IRS deposits totaling hundreds of
millions of dollars to the depository institutions during the peak
filing season.  One courier left a deposit totaling more than $200
million unattended in an open vehicle while he returned to the
service center.  At one district office, IRS relied upon a bicycle
messenger to deliver daily deposits ranging from more than $1 million
during the nonpeak season to more than $100 million during the peak
season. 

Although receipts and taxpayer information will always be vulnerable
to theft, IRS has a responsibility to protect the government and
taxpayers from such losses.  In November 1998, we made
recommendations to (1) prohibit new employees from being assigned to
process receipts until fingerprint checks are received and reviewed
by management, (2) enhance physical security over receipts and
taxpayer data on hand, and (3) improve the level of security over
receipts and taxpayer data in transit to depository institutions.\16
IRS generally agreed and has indicated plans to address our
recommendations. 


--------------------
\16 Internal Revenue Service:  Physical Security Over Taxpayer
Receipts and Data Needs Improvement (GAO/AIMD-99-15, November 30,
1998). 


      INTERNAL CONTROL WEAKNESSES
      WITH REGARD TO TAX REFUNDS
-------------------------------------------------------- Chapter 4:4.2

IRS' internal controls for the issuance of tax refunds need
strengthening.  Because of weaknesses in its internal controls over
issuing tax refunds, IRS sometimes issued refunds that were based on
erroneous or fraudulent refund claims filed by taxpayers, tax
preparers, or IRS employees, or were disbursed in incorrect amounts
due to discrepancies between tax returns and corresponding other
third-party documentation that IRS did not catch due to significant
delays in its procedure for comparing these documents.  IRS also
lacked adequate internal controls to prevent duplicate refunds from
being issued.  In addition, the Earned Income Credit program is
subject to high rates of invalid or overstated claims, as discussed
further later in the IRS tax filing fraud section of this report. 


      INTERNAL CONTROL WEAKNESSES
      OVER UNPAID TAX ASSESSMENTS
-------------------------------------------------------- Chapter 4:4.3

IRS does not have a detailed listing that tracks and accumulates
unpaid tax assessments on an ongoing basis.\17 The lack of a
subsidiary ledger impairs IRS' ability to effectively manage its
unpaid assessments.  This weakness has resulted in IRS
inappropriately directing collection efforts against taxpayers after
amounts owed had been paid.  In one case, three taxpayers had
multimillion dollar tax liabilities and liens placed against their
property, although the taxes had actually been paid and two of the
individuals were owed refunds.  In addition, IRS must rely on
computer programs to extract data from its master files to prepare
its financial statements, a process that necessitated tens of
billions of dollars in adjustments to correct misclassifications and
eliminate duplicate transactions in fiscal year 1997.  IRS also lacks
adequate documentation to support its unpaid assessments.  For
example, the estate case files we reviewed generally did not include
audited financial statements or an independent appraisal of the
estate's assets--information that would greatly assist in determining
collectibility and underreporting.  Such weaknesses inhibit focusing
on those accounts with the greatest degree of collection potential. 

IRS financial management issues are discussed in more detail in Major
Management Challenges and Program Risks:  Department of the Treasury
(GAO/OCG-99-14, January 1999). 


--------------------
\17 Internal Revenue Service:  Immediate and Long-Term Actions Needed
to Improve Financial Management (GAO/AIMD-99-16, October 30, 1998). 


   IRS RECEIVABLES
---------------------------------------------------------- Chapter 4:5

While IRS collected over $1.7 trillion in tax revenue in fiscal year
1998, it has not been able to collect a significant portion of the
amount of taxes due the government.\18 This problem has been
compounded by serious system deficiencies and the lack of sound,
reliable information, which impede IRS' efforts to collect unpaid tax
assessments. 

As of September 30, 1997, IRS had identified $214 billion in unpaid
tax assessments.  These assessments, which have historically been
referred to as IRS' accounts receivable, consist of (1) $90 billion
in taxes due from taxpayers for which IRS can support the existence
of a federal tax receivable through taxpayer agreement or a favorable
court ruling,\19 (2) $48 billion in compliance assessments for which
neither a taxpayer nor a court has affirmed that the amounts are
owed, and (3) $76 billion in write-offs, which represent unpaid
assessments for which IRS does not expect further collection because
of factors such as the taxpayer's death, bankruptcy, or insolvency. 

Under federal accounting standards, only the $90 billion in unpaid
assessments that IRS can support by taxpayer agreement or favorable
court ruling represent federal taxes receivable.  For the first time
since we began auditing IRS, the agency has reported a reasonable
estimate of the amount of federal taxes receivable it expects to
ultimately collect.  This amount, $28 billion as of September 30,
1997, represents just 31 percent of the total of federal taxes
receivable, and just 13 percent of the total balance of unpaid
assessments. 

Our work has shown that this low level of expected collectibility is
a reasonable estimate given the composition of IRS' unpaid
assessments.  The $76 billion in write-offs are amounts primarily due
from bankrupt and insolvent taxpayers, including billions in
delinquent taxes that are owed by failed financial institutions and
thus have virtually no hope of collection.  The $48 billion in
compliance assessments are primarily amounts that are owed by
individuals and businesses for income and payroll taxes.  However,
IRS' future prospects of collecting these amounts are low because (1)
these taxpayers have not acknowledged the debt and (2) in many
instances, these amounts are derived through IRS' various compliance
and enforcement programs and may not ultimately represent the amounts
actually owed by the taxpayer. 

Of the $90 billion in taxes receivable, our work has shown that $62
billion (68 percent) is also not likely to be collectible.  This
amount is owed primarily by taxpayers (1) experiencing financial
hardships, (2) undergoing bankruptcy, or (3) unwilling to pay some or
all of the amounts they owe.  Only $28 billion of the $90 billion of
taxes receivable represents amounts where collection is likely based
on the financial status and willingness by the taxpayers to pay some
or all of the amounts they owe. 

Striving to close the gap between the amount of tax revenue owed the
government and the amount likely to be collected is a major challenge
for IRS.  However, IRS' long-standing systems deficiencies make this
challenge even more difficult.  IRS has continually tried to manage
its federal taxes receivable and other unpaid assessments with
systems that are unable to provide timely, useful, and reliable
information on the status of taxpayers' accounts.  Consequently, IRS
does not have the complete and reliable information it needs to
effectively focus collection efforts on accounts with the greatest
collection potential.  This is critical given the fact that 87
percent of IRS' estimated unpaid assessments, including the $62
billion in federal taxes receivable, have little or no potential for
collection. 

Additionally, because IRS' systems are not integrated, they create
high rates of error in taxpayers' accounts and, in some cases, create
unnecessary taxpayer burden.  This burden results in cost to both the
taxpayer and IRS in resolving the errors caused by these system
deficiencies.  System weaknesses and the lack of adequate data also
affect IRS' ability to identify delinquencies so it can target its
compliance and enforcement initiatives.  These deficiencies impede
IRS' efforts to detect noncompliant taxpayers earlier, increasing the
likelihood that such amounts, if and when detected, will yield little
collection. 

We have provided IRS a series of long- and short-term recommendations
to assist it in addressing the serious financial management issues
associated with federal taxes receivable and other unpaid
assessments.\20 However, these issues and their implications continue
to expose the federal government to significant loss of tax revenue,
as discussed in Major Management Challenges and Program Risks: 
Department of the Treasury (GAO/OCG-99-14, January 1999). 


--------------------
\18 Internal Revenue Service:  Composition and Collectibility of
Unpaid Assessments (GAO/AIMD-99-12, October 29, 1998). 

\19 When Statement of Federal Financial Accounting Standards No.  7
became effective for fiscal year 1998, these transactions were
redefined and are now appropriately referred to as federal taxes
receivable. 

\20 GAO/AIMD-99-16, October 30, 1998. 


   CUSTOMS SERVICE FINANCIAL
   MANAGEMENT HIGH-RISK
   DESIGNATION REMOVED
---------------------------------------------------------- Chapter 4:6

The U.S.  Customs Service has demonstrated a consistent ability to
develop and implement actions to address the problems that originally
contributed to its designation as a high-risk area.  In 1995, we
began focusing on Customs' efforts to implement our recommendations
to help promote better financial management, especially strengthening
controls over assessing and collecting revenues.  The Customs Service
has made considerable progress in addressing its financial management
weaknesses and has demonstrated its ability to receive unqualified
audit opinions on its financial statements for the past 2 fiscal
years--1996 and 1997.  The Results Caucus commissioned by the House
leadership has provided added attention to resolving problems in this
and other high-risk areas. 

Over the past several years, Customs has continually shown a
commitment to improving its financial management and has implemented
significant corrective actions.  Such actions include

  -- statistically sampling compliance of commercial importations
     through ports of entry, which helps Customs to better focus its
     enforcement efforts and project the level of the trade
     community's noncompliance with trade laws and the associated
     loss of revenue;

  -- programming the Automated Commercial System in fiscal year 1995
     to identify any drawback claims\21 that exceeded the total
     amount of duty and tax paid on related import entries, which
     improved Customs' ability to detect and prevent any duplicate or
     excessive drawbacks; and

  -- aggressively pursuing collection of delinquent receivables,
     which has resulted in collections of over $37 million. 

In addition, Customs has several initiatives currently underway to
further improve its controls over assessing and collecting revenues. 
For example, in September 1998, Customs began implementing a
nationwide in-bond shipments Compliance Measurement Program which is
intended to provide some assurance of compliance over in-bond
shipments through random examinations of such items.\22 The program
involved system changes for in-bond shipments, as well as adding
compliance measurement inspections for randomly selected in-bond
shipments.  Additionally, according to Customs officials, Customs
plans to implement a Compliance Measurement Program for foreign trade
zones,\23 and is reviewing drawbacks and drawback claims for quality
assurance. 

Given the significant improvement efforts, including those related to
assessing and collecting revenues, we are removing our high-risk
designation for Customs financial management.  However, Customs needs
to continue to improve controls primarily related to accessing
sensitive data maintained in its automated systems, maintaining
complete and reliable information in its core financial systems, and
addressing system architecture issues that hinder development of
Customs' Automated Commercial Environment system.  We will continue
to monitor Customs' efforts to address these matters, which are
further discussed in Major Management Challenges and Program Risks: 
Department of the Treasury (GAO/OCG-99-14, January 1999). 


--------------------
\21 Drawbacks are refunds of duties and taxes paid on imported goods
that are subsequently exported or destroyed. 

\22 In-bond shipment refers to goods authorized, by law, to move
within the United States prior to release or export without
appraisement or classification. 

\23 Foreign trade zones are geographic areas, designated in
accordance with the Foreign Trade Zone Act of 1934, as amended, where
merchants may bring domestic or foreign merchandise for storage,
exhibition, manipulation, manufacturing, assembly, or other
processing, without subjecting it to formal Customs entry procedures
and payment of duties.  Foreign goods held in foreign trade zones are
not assessed duties, taxes, and fees until the goods are released
into the commerce of the United States. 


REDUCING INORDINATE PROGRAM
MANAGEMENT RISKS
============================================================ Chapter 5

Our work has identified several programs that need to be managed more
effectively or that suffer from chronic waste and inefficiency.  The
high-risk areas we have identified span a range of government
operations, including certain benefit programs that lose billions of
dollars annually in improper payments, IRS' difficulty in controlling
tax filing fraud, inefficient and weak lending programs, and the
challenges DOD faces in reducing infrastructure costs.  They also
include HUD because of four serious, long-standing management
deficiencies in internal controls, information and financial
management systems, organizational structure, and staffing, which
taken together, place the integrity and accountability of HUD's
programs at risk.  Effectively addressing the underlying causes of
program management weaknesses offers tremendous opportunities to
reduce government cost and improve services. 



   (See figure in printed
   edition.)


   MEDICARE
---------------------------------------------------------- Chapter 5:1

With annual payments totaling about
$200 billion and responsibility for financing health services
delivered by hundreds of thousands of providers on behalf of tens of
millions of beneficiaries, Medicare is inherently vulnerable to
fraud, waste, and abuse.  For example, the Department of Health and
Human Services' (HHS) Health Care Financing Administration (HCFA) had
not developed its own process for estimating the national error rate
for fee-for-service payments.  For fiscal year 1997, the HHS
Inspector General estimated that about 11 percent of all Medicare
fee-for-service payments for claims, or about $20 billion, did not
comply with Medicare laws and regulations. 

While the Congress has given HHS new resources and authorities to
improve oversight of Medicare, HCFA's deployment of these tools has
lagged.  Specifically: 

  -- HCFA has been slow to distribute funding and implement new
     authority to help prevent fraud, abuse, and mispayments in the
     Medicare program.  HCFA has not yet implemented a specialty
     contract for claims review or other program safeguard activities
     due to design issues.  Furthermore, when implemented, the
     contract will likely have a more limited scope and provide fewer
     benefits than originally envisioned.\1

  -- The implementation of new methods to determine provider
     payment--intended to curb rapid spending increases for certain
     services in the Medicare program--has stalled.  HCFA needs to
     give first priority to year 2000 data systems changes.  Other
     computer systems changes--such as those needed to implement new
     payment methods for home health services and outpatient
     care--are on hold.  In addition, the new methods being
     implemented to pay skilled nursing facilities have design flaws. 
     These flaws, coupled with the use of unaudited cost data, may
     have led HCFA to set payment rates too high.\2

  -- Implementation problems threaten the success of HCFA's
     Medicare+Choice program, which is designed to widen beneficiary
     and health plan participation in Medicare managed care. 
     Medicare's payment rates may be overcompensating some plans and
     HCFA is having difficulty collecting the information needed to
     adjust those rates.  HCFA's current financial oversight of
     managed care plans is inadequate.  The Balanced Budget Act of
     1997 required plan audits every 3 years to ensure that plans are
     not collecting excessive profits, but HCFA will not begin these
     audits until 2000.  Moreover, HCFA is facing faltering plan
     participation and difficulties implementing its beneficiary
     information campaign.\3

  -- Efforts to streamline the Medicare claims processing system have
     halted so that resources can be focused on critical Year 2000
     work.  This has dealt a major setback to HCFA's attempt to
     increase the efficiency of its claims processing, better manage
     contractors, improve customer service, and help reduce fraud and
     abuse.\4

Additional information on the challenges in maintaining Medicare
program integrity are discussed in Major Management Challenges and
Program Risks:  Department of Health and Human Services
(GAO/OCG-99-7, January 1999). 


--------------------
\1 Medicare:  HCFA's Use of Anti-Fraud-and-Abuse Funding and
Authorities (GAO/HEHS-98-160, June 1, 1998). 

\2 Balanced Budget Act:  Implementation of Key Medicare Mandates Must
Evolve to Fulfill Congressional Objectives (GAO/T-HEHS-98-214, July
16, 1998). 

\3 Medicare Managed Care:  Payment Rates, Local Fee-for-Service
Spending, and Other Factors Affect Plans' Benefit Packages
(GAO/HEHS-99-9R, October 9, 1998). 

\4 Medicare Computer Systems:  Year 2000 Challenges Put Benefits and
Services in Jeopardy (GAO/AIMD-98-284, September 28, 1998). 


   SUPPLEMENTAL SECURITY INCOME
---------------------------------------------------------- Chapter 5:2

Since the Social Security Administration (SSA) assumed responsibility
in 1974 for the Supplemental Security Income (SSI) program, SSA
officials have been challenged to serve the diverse needs of program
recipients while still protecting the program's overall financial
health and integrity.  Long-standing problems, such as program abuses
and mismanagement, increasing SSI overpayments, and SSA's inability
to recover outstanding SSI debt, have continued and have contributed
to recent congressional criticism of SSA's ability to effectively
manage this program and ensure program integrity. 

During fiscal year 1998, for example, current and former recipients
owed SSA more than $3.3 billion, including $1.2 billion in newly
detected overpayments for the year.  Based on prior experience, SSA
is likely to collect less than 15 percent of the outstanding debt in
a given year. 

In September 1998, we reported that SSI's problems are attributable
to two underlying causes:  an organizational culture that places a
greater priority on processing and paying claims than on controlling
program expenditures and a management approach characterized by SSA's
reluctance to fulfill its policy development and planning role in
advance of major program crises.\5

A recently issued SSI management report, in which SSA discussed the
need to take aggressive action to improve overall payment accuracy,
increase continuing disability reviews, combat program fraud, and
improve debt collection, established goals to measure the anticipated
yearly impact of its planned initiatives in each of these areas.  The
agency now intends to begin planning how it will implement these
goals in day-to-day operations. 

To remove the SSI program from our high-risk list, however, SSA must
produce and use research information on the program, be more
responsive in suggesting legislative changes, and improve program
policies.  The agency should also continually search for ways to
improve its payment controls and debt collection activities. 

The SSI program's vulnerabilities and their root causes and solutions
are discussed at greater length in Major Management Challenges and
Program Risks:  Social Security Administration (GAO/OCG-99-20,
January 1999). 


--------------------
\5 Supplemental Security Income:  Action Needed on Long-Standing
Problems Affecting Program Integrity (GAO/HEHS-98-158, September 14,
1998). 


   IRS TAX FILING FRAUD
---------------------------------------------------------- Chapter 5:3

Filing fraud refers to the filing of fraudulent refund claims by
taxpayers and/or tax return preparers.  Since we first identified
filing fraud as a high-risk area in February 1995, IRS has taken
several steps in an attempt to reduce its exposure to filing fraud. 
For example, IRS has

  -- expanded the number of upfront filters in the electronic filing
     system designed to screen electronic submissions for problems,
     such as missing or incorrect Social Security numbers (SSN), to
     prevent returns with those problems from being filed
     electronically;

  -- strengthened the process for checking the suitability of persons
     applying to participate in the electronic filing program as
     return preparers or transmitters by requiring fingerprint and
     credit checks; and

  -- revised the computerized formulas used to score all tax returns
     as to their fraud potential, upgraded the Electronic Fraud
     Detection System to give staff in the Questionable Refund
     Program better research capabilities, and placed an increased
     emphasis on validating SSNs on filed paper returns. 

A significant change in IRS' return processing procedures in 1997
significantly enhanced its ability to deal with paper returns
involving missing or incorrect SSNs.\6 That year, as legislatively
authorized, IRS began treating missing or incorrect SSNs as math
errors, similar to the way it had historically handled computational
errors.  That meant that IRS could adjust refunds claimed by persons
filing paper returns if required SSNs were missing or incorrect. 
Before 1997, IRS could not make adjustments to a refund involving a
missing or incorrect SSN until it had gone through more
time-consuming and labor-intensive examination procedures.  As we
reported in 1996, those procedures limited the number of cases IRS
could work and resulted in millions of questionable refunds being
issued. 

Most of the fraudulent refund claims identified by IRS involved the
Earned Income Credit (EIC)--a refundable tax credit available to
low-income, working taxpayers.  In April 1997, IRS released the
results of its study of EIC noncompliance on tax returns filed in
1995 (i.e., tax year 1994 returns).  That study showed that of the
$17.2 billion in EIC claims on tax year 1994 returns, about $4.4
billion (25.8 percent) was estimated to be overclaims.  How much of
this $4.4 billion involved fraud, as opposed to less serious
noncompliance, is unknown.  The returns included in IRS' study were
filed before IRS was given increased authority to deal with missing
or invalid SSNs.  Even after adjusting for the potential effect of
that increased authority, however, IRS determined that the rate of
EIC noncompliance would still be over 20 percent. 

In response to IRS' findings, the Congress passed legislation that
gave IRS (1) new enforcement tools and (2) additional funding
specifically designated for EIC-related activities.  With those new
tools and funds, IRS, in 1998, began implementing a 5-year EIC
compliance initiative that involved several components directed at
issues that were identified by IRS' study as major sources of EIC
noncompliance.  For example, IRS initiated enforcement efforts that
focused on (1) cases where an EIC-qualifying child's SSN was used on
more than one tax return for the same tax year and (2) returns filed
by certain EIC claimants who claimed the head-of-household filing
status.  IRS also began a study of noncompliance among EIC claimants
who report income from self-employment, increased staffing in the
Questionable Refund Program, and issued procedures requiring tax
return preparers to exercise due diligence in preparing returns
involving EIC claims. 

As we reported in July 1998, most of IRS' efforts under the EIC
compliance initiative had not progressed far enough at the time we
completed our audit work for us to judge their effectiveness.\7 To
help assess the overall effectiveness of its efforts, IRS plans to do
annual studies of EIC compliance starting with a baseline study of
returns filed in 1998 (i.e., tax year 1997 returns), which is
currently under way.  Using the results of that baseline study and
subsequent years' studies, IRS plans to measure the rate of
compliance and improvement in that rate over time.  Those studies
should eventually provide the necessary data to assess the impact of
IRS' efforts on reducing the incidence of noncompliance associated
with the EIC. 

IRS tax filing fraud is among the management problems discussed in
Major Management Challenges and Program Risks:  Department of the
Treasury (GAO/OCG-99-14, January 1999). 


--------------------
\6 Tax Administration:  IRS' 1997 Tax Filing Season (GAO/GGD-98-33,
December 29, 1997). 

\7 Earned Income Credit:  IRS' Tax Year 1994 Compliance Study and
Recent Efforts to Reduce Noncompliance (GAO/GGD-98-150, July 28,
1998). 


   DOD INFRASTRUCTURE
---------------------------------------------------------- Chapter 5:4

DOD has found that infrastructure reductions are difficult and
painful because achieving significant cost savings requires up-front
investments, the closure of installations, and the elimination of
military and civilian jobs.  DOD's ability to reduce infrastructure
has been affected by service parochialism, a cultural resistance to
change, and congressional and public concern about the effects and
impartiality of decisions.  For fiscal year 1998, DOD estimated that
about $147 billion, or 58 percent of its budget, would still be
needed for infrastructure requirements, which included installation
support, training, medical care, logistics, force management,
acquisition infrastructure, and personnel. 

The Secretary of Defense's November 1997 Defense Reform Initiative
(DRI) Report emphasizes the need to reduce excess Cold War
infrastructure to free up resources for force modernization. 
Specific initiatives cited in the report included privatizing
military housing and utility systems, emphasizing demolition of
excess buildings, consolidating and regionalizing many defense
support agencies, and requesting legislative authority to conduct two
additional base realignment and closure rounds.  Other initiatives
include partnering with the private sector at depot maintenance
activities and potentially other facilities to more efficiently use
resources. 

In responding to Section 2824 of the Fiscal Year 1998 Defense
Authorization Act, DOD emphasized the problem of continuing excess
infrastructure in its April 1998 report to the Congress concerning
base realignment and closure issues.  More recently, in our November
1998 report on Army industrial facilities, we noted the continuing
existence of significant excess capacity in the Army's maintenance
depots and manufacturing arsenals.\8

While the Defense reform initiatives are steps in the right direction
and have brought high-level attention to the need for infrastructure
reductions, collectively they do not provide a comprehensive
long-range plan for facilities infrastructure.  We have cited the
need for such a plan but have noted that DOD's past plans were not
focused on long-term comprehensive strategies for facilities
revitalization, replacement, and maintenance and were not tied to
measurable goals to be accomplished over specified time frames or
linked to funding. 

We have not completed an in-depth analysis of all the categories of
infrastructure, but we have identified numerous areas in which
infrastructure activities can be eliminated, streamlined, or
reengineered to be made more efficient.  Significant efficiencies
could be achieved in the areas of acquisition infrastructure, central
logistics, installation support, central training, force management,
and medical facilities and services. 

Reducing DOD's infrastructure is among the management problems DOD
faces and that are discussed in Major Management Challenges and
Program Risks:  Department of Defense (GAO/OCG-99-4, January 1999). 


--------------------
\8 Army Industrial Facilities:  Workforce Requirements and Related
Issues Affecting Depots and Arsenals (GAO/NSIAD-99-31, November 30,
1998). 


   HUD PROGRAMS
---------------------------------------------------------- Chapter 5:5

The Department of Housing and Urban Development (HUD) (1) makes
housing affordable by insuring loans for multifamily rental housing
properties, (2) provides rental assistance for about 4.5 million
lower-income residents, (3) helps revitalize over 4,000 localities
through community development programs, and (4) encourages
homeownership by providing mortgage insurance to about 7 million
homeowners who might not have been able to qualify for nonfederally
supported loans.  HUD is one of the nation's largest financial
institutions, with significant commitments, obligations, and
exposure.  As of September 30, 1997, HUD was responsible for managing
about $454 billion in insured mortgages and $531 billion in
guarantees of mortgage-backed securities, and, for fiscal year 1999,
it has $24.3 billion in budget authority. 

We designated HUD as a high-risk area in 1994 because of four
serious, long-standing departmentwide management deficiencies and
reported on these deficiencies and HUD's progress in resolving them
in our 1995 and 1997 updates.\9 Taken together, these deficiencies
placed the integrity and accountability of HUD's programs at high
risk.  Specifically, internal control weaknesses, such as a lack of
necessary data and management processes, were a major factor leading
to the HUD scandals of the late 1980s.  Second, poorly integrated,
ineffective, and generally unreliable information and financial
management systems did not meet the needs of program managers and
weakened their ability to provide management control over housing and
community development programs.  Third, HUD had organizational
deficiencies, such as overlapping and ill-defined responsibilities
and authorities between its headquarters and field organizations and
a fundamental lack of management accountability and responsibility. 
Finally, an insufficient mix of staff with the proper skills hampered
the effective monitoring and oversight of HUD's programs and the
timely updating of procedures. 

Resolving these management deficiencies is particularly critical for
HUD because its housing and community development programs rely
extensively on the integrity of thousands of diverse individuals and
entities, such as cities, public housing authorities, mortgage
lenders, contractors, and property owners, over whom it does not have
direct control. 

HUD continues to make credible progress in overhauling its operations
to correct its management deficiencies.  Among other things, HUD has

  -- improved its financial reporting and received qualified opinions
     from its Office of Inspector General on its fiscal years 1996
     and 1997 financial statements following a report by the Office
     of Inspector General that it was unable to express an opinion on
     the reliability of its fiscal year 1995 financial statements;

  -- deployed components for improving its information and financial
     management systems;

  -- reorganized its resources by function and established various
     consolidated or centralized entities for single-family insurance
     operations, payment of rental assistance, assessments of HUD
     owned or supported rental properties, and enforcement
     activities; and

  -- refocused and begun retraining its workforce. 

A major contributor to this progress is the June 1997 "HUD 2020
Management Reform Plan," a set of proposals intended to, among other
things, correct the management deficiencies that we and others (e.g.,
HUD's Inspector General, external auditors) identified.  The plan
calls for reducing the number of programs, reducing staffing levels,
retraining the majority of the staff and separating service from
compliance functions, reorganizing the 81 field offices,
consolidating processes and functions within and across program areas
into specialized centers, and modernizing and integrating the
financial and management information systems.  In addition, HUD has
linked its management reform efforts to the strategic and annual
plans developed under the Government Performance and Results Act of
1993, so that its success in achieving strategic objectives and
meeting annual performance goals depends on the success of these
efforts. 

We continue to believe, as we reported in 1995 and 1997, that these
management deficiencies, taken together, place the integrity and
accountability of HUD's programs at high risk.  To resolve these
management deficiencies, the agency needs to ensure that the actions
being taken eliminate the remaining major internal control
weaknesses; strengthen the management and oversight of the efforts to
integrate information and financial systems and correct systems'
weaknesses; ensure that the field offices have enough staff to carry
out the work assigned, including the monitoring of programs and
activities and the assessment of outcomes; and ensure that all staff
have the skills needed to perform their functions. 

Given the severity of the management deficiencies that we and others
have observed, it would not be realistic to expect that HUD would
have substantially implemented its reform efforts and demonstrated
success in resolving its management deficiencies in the 2 years since
we issued our last report.  Nevertheless, with close oversight by the
Congress, HUD is making significant changes and has made credible
progress since 1997 in laying the framework for improving its
management.  HUD's Secretary and leadership team have given top
priority to addressing these management deficiencies.  This top
management attention is critical and must be sustained in order to
achieve real and lasting change.  Importantly, given the nature and
extent of the challenges facing the department, it will take time to
implement and assess the impact of any related reforms.  While major
reforms are under way, several are in the early stages of
implementation, and it is too soon to tell whether or not they will
resolve the major deficiencies that we and others have identified. 
Therefore, in our opinion, the integrity and accountability of HUD's
programs remain at high risk, as also presented in Major Management
Challenges and Program Risks:  Department of Housing and Urban
Development (GAO/OCG-99-8, January 1999). 


--------------------
\9 High-Risk Series:  Department of Housing and Urban Development
(GAO/HR-95-11, February 1995 and GAO/HR-97-12, February 1997). 


   STUDENT FINANCIAL AID PROGRAMS
---------------------------------------------------------- Chapter 5:6

The Department of Education is responsible for more than $150 billion
in outstanding student loans, and its data systems track
approximately 93 million student loans and 15 million grants.  In
fiscal year 1998, more than 8.5 million students received over $48
billion in federal student financial aid through programs
administered by the Department of Education. 

These programs have a number of features that make them inherently
vulnerable to waste, fraud, abuse, and mismanagement.  For example,
they provide grants and federally backed loans to high-risk
population, much of which are low-income students who are not credit
worthy and would not otherwise have access to the funds necessary to
enter the college or university of their choice.  The programs
operate independently with different rules, processes, and data
systems, and they have many participants including millions of
students; thousands of schools; and thousands of lenders, guaranty
agencies, third-party servicers, and contractors. 

For example, the Federal Family Education Loan Program (formerly
known as the Guaranteed Student Loan Program) is particularly
vulnerable because of its size ($20 billion in loans in fiscal year
1998) and large number of participants.  In addition, the federal
government bears most of the risk when students default on their
loans.  In fiscal year 1997, the federal government paid out over
$3.3 billion to make good its guarantee on defaulted student loans. 

The department's administration of these programs has also
contributed to federal exposure to mismanagement and abuses.  Audits
by us and the department's Office of Inspector General have found
instances in which students fraudulently obtained grants and loans,
schools were inappropriately recertified to continue participating in
federal student aid programs, and state-designated guaranty agencies
misused federal funds in their custody. 

Progress has been made on many of the issues contributing to this
high-risk area.  For example, in the 1998 amendments to title IV of
the Higher Education Act of 1965, as amended, the Congress instructed
Education and IRS to cooperate in verifying students' income to
prevent fraud.  The 1998 amendments also strengthened the controls
over guaranty agencies' use of the federal funds they hold in
reserve.  The department has also improved the process by which it
recertifies schools for participation in student aid programs and
increased its management and oversight of the consolidation of
student loans.\10

The Congress and the department have taken actions to address a
number of program management and oversight issues.  But Education
continues to experience problems in its management of student
financial aid programs.  Education's information management systems
often lack accurate, complete, and timely data for its managers to
manage and oversee the student aid programs.\11 Also, the department
lacks the financial information necessary to effectively budget for
and manage its student aid programs or to accurately estimate the
government's liabilities in a timely manner. 

Additional detailed information on these matters can be found in
Major Management Challenges and Program Risks:  Department of
Education (GAO/OCG-99-5, January 1999). 


--------------------
\10 Student Loans:  Improvements in the Direct Loan Consolidation
Process (GAO/HEHS-99-19R, November 10, 1998). 

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


   FARM LOAN PROGRAMS
---------------------------------------------------------- Chapter 5:7

The Department of Agriculture's (USDA) farm loan programs are
intended to provide temporary financial assistance to farmers and
ranchers who are unable to obtain commercial credit at reasonable
rates and terms.  In operating the farm loan programs, USDA faces the
conflicting tasks of providing temporary credit to high-risk
borrowers so they can stay in farming until they are able to secure
commercial credit and of ensuring that the taxpayers' investment is
protected.  The unpaid principal on USDA's active direct farm loan
portfolio totaled about $9.7 billion at the end of fiscal year 1997. 

In 1990, we placed USDA's farm loan programs on our high-risk list
because the programs (1) had an exceptionally high rate of defaults
and (2) had become a continual source of subsidized credit for nearly
half of the borrowers under these programs.  In 1996, the Congress
made fundamental changes to the programs, such as prohibiting
delinquent borrowers from obtaining direct operating loans and
limiting the number of times delinquent borrowers can receive debt
forgiveness.  In our 1997 high-risk series, we reported that these
changes, if implemented properly, would significantly reduce the
financial risk associated with the farm lending programs. 

In 1998, we reported that the value of farm loans held by delinquent
borrowers decreased from a reported $4.6 billion, or 40.7 percent, of
USDA's total outstanding direct farm loan principal in 1995 to a
reported $2.7 billion, or 28.2 percent, in 1997.\12 Despite the
indications of improvement in the farm loan portfolio's financial
condition, the farm loan programs remain "high risk" for several
reasons.  First, USDA continues to carry a high level of delinquent
debt and to write off large amounts of unpaid loans held by problem
borrowers.  Moreover, these delinquencies may increase because of the
droughts and low prices for major crops and livestock in 1998. 
Second, the Omnibus Consolidated and Emergency Supplemental
Appropriations Act, 1999 (Public Law 105-277, October 21, 1998) eased
some of the lending reforms initiated under the 1996 Farm Bill.  For
example, it expanded exceptions to the Farm Bill's general
prohibition against providing additional loans to borrowers who had
prior loan losses.  Finally, both we and USDA's Inspector General
have reported on continuing management problems with farm loan
programs.  For example, in May 1998, we reported that USDA still has
problems in complying with some of its own loan servicing standards. 
Similarly, in December 1998, USDA's Inspector General identified
USDA's farm loan programs as one of the department's key problem
areas and plans to expand its reviews of USDA's loan-making and
loan-servicing actions. 

USDA and the Congress need to continue to monitor the effects of
recent lending and servicing reforms intended to improve the
financial integrity of the farm loan programs.  These matters are
also presented in Major Management Challenges and Program Risks: 
Department of Agriculture (GAO/OCG-99-2, January 1999). 


--------------------
\12 Farm Service Agency:  Information on Farm Loans and Losses
(GAO/RCED-99-18, November 27, 1998). 


   ASSET FORFEITURE PROGRAMS
---------------------------------------------------------- Chapter 5:8

Since 1990, we have monitored the asset forfeiture programs operated
by the Department of Justice and the Department of the Treasury.\13
Many improvements in property management have been made to these
programs, which had assets totaling about $1.8 billion as of
September 30, 1997.  For example, in 1998, we reviewed the U.S. 
Marshals Service's controls over certain seized property in four
locations and found no material weaknesses or deficiencies in the
controls we tested.  Nevertheless, the programs continue to have
significant weaknesses. 

Justice has acknowledged that its asset forfeiture information
systems had been inadequate for tracking the life cycle of an asset
from its seizure through its ultimate disposition.\14 In addition,
auditors have found that controls were not operating effectively and
timely oversight was not performed with respect to monitoring and
reporting changes in seized/forfeited cash and property.\15

Also, in September 1998, Justice's Inspector General reported that at
most of the Immigration and Naturalization Service Border Patrol
stations they visited, they found problems with the management of
seized drugs.\16 For example, the Border Patrol (1) failed to store
seized drugs in a secure manner, (2) lacked adherence to proper chain
of custody procedures, and (3) did not always have an individual
specifically designated as responsible for the evidence.  These types
of problems increase the risk of loss of seized drugs and
contamination of evidence. 

Treasury and its auditors have also reported weaknesses in the
accountability and reporting over seized and forfeited property.  For
instance, Treasury has reported material weaknesses related to seized
property in its fiscal year 1997 Accountability Report.\17

Also, for fiscal year 1997, the Treasury Forfeiture Fund auditors
have reported, among other weaknesses, that the Seized Assets and
Case Tracking System did not contain accurate and sufficient data
that could be relied upon to prepare the analysis of changes in
forfeited and seized currency and property without substantial manual
intervention and reconciliation.\18

Justice and the Treasury continue to operate two similar but separate
seized asset management and disposal programs without plans for
consolidation despite legislation requiring them to develop a plan to
consolidate postseizure administration of certain properties.\19 We
have recommended consolidating the management and disposition of all
noncash seized property in order to reduce administration costs.  We
encourage both departments to pursue options for efficiency gains
through program consolidation. 

Asset forfeiture program issues are presented in Major Management
Challenges and Program Risks:  Department of Justice (GAO/OCG-99-10,
January 1999) and Major Management Challenges and Program Risks: 
Department of the Treasury (GAO/OCG-99-14, January 1999). 


--------------------
\13 High-Risk Program:  Information on Selected High-Risk Areas
(GAO/HR-97-30, May 16, 1997) and Asset Forfeiture:  Historical
Perspective on Asset Forfeiture Issues (GAO/T-GGD-96-40, March 19,
1996). 

\14 Management Control Report:  Department of Justice Report by the
Attorney General on Management Controls 1997 (December 31, 1997). 

\15 Audit Report:  Asset Forfeiture Program Annual Financial
Statement Fiscal Year 1997 (98-24), September 1998, prepared by the
Department of Justice Office of Inspector General, Audit Division. 

\16 Inspection Report:  Border Patrol Drug Interdiction Activities on
the Southwest Border (I-98-20), September 1998, prepared by the
Department of Justice Office of Inspector General, Inspections
Division. 

\17 Department of the Treasury Accountability Report, Fiscal Year
1997 (March 1998). 

\18 Audit Report:  Treasury Forfeiture Fund, Audited Fiscal Years
1997 and 1996 Financial Statements (OIG-98-072), April 3, 1998,
prepared by the Department of the Treasury Office of Inspector
General. 

\19 The Anti-Drug Abuse Act of 1988, Public Law No.  100-690, 21
U.S.C.  887 (1988). 


   THE 2000 CENSUS
---------------------------------------------------------- Chapter 5:9

The decennial census is the nation's most comprehensive and expensive
statistical data-gathering program.  Accurate results are critical
because, as required by the Constitution, decennial census data are
used to reapportion seats in the House of Representatives and, thus,
the allocation of political power in our democracy.  Countless
decisions affecting governments, businesses, and private citizens
also depend on census data. 

The Department of Commerce's Bureau of the Census has made progress
in addressing some of the problems that occurred during the 1990
Census.  Nevertheless, it still faces a number of challenges and
uncertainties in its efforts to conduct an accurate and
cost-effective decennial census in 2000.  For example, the Congress
and the administration have yet to agree on the final design of the
census because of congressional concerns over the legal and
methodological issues surrounding the bureau's planned use of
sampling and statistical estimation.  In August and September 1998,
federal courts ruled sampling illegal for purposes of apportionment
in two separate cases.\20 The administration has appealed the rulings
to the Supreme Court, and oral arguments were held on November 30,
1998. 

Irrespective of how the controversy over the use of sampling and
statistical estimation is resolved later this year, the bureau will
have little time remaining to make final census design changes and
implement those changes in time for the census in 2000.  In that
regard, our work has shown that the bureau faces a number of
formidable challenges to a cost-effective, accurate, and complete
census no matter which design is chosen.  As we reported in our
earlier work, they include the following:  Mail response rates remain
problematic, scanning equipment used to electronically record
responses from census questionnaires experienced system crashes due
to software flaws, and local partnerships--a key component of the
bureau's outreach and promotion strategy--had limited success.\21
Further, demographic, attitudinal, and other factors that adversely
affected the cost and accuracy of the 1990 Census, such as concerns
over privacy, may present an even greater challenge for the bureau in
2000. 

These major challenges and uncertainties have led us to conclude that
there is a high risk that the 2000 Census will be less accurate and
more costly than previous censuses.  Although it may be too late in
the census cycle to substantively redesign key census-taking
operations, our work suggests that at least two actions could help
mitigate the risk of an unsuccessful census. 

  -- To help ensure that key census-taking activities are
     operationally feasible, the bureau should ensure that its
     evaluation of the dress rehearsal is based on rigorous analysis
     and is issued promptly.  Moreover, the bureau should ensure that
     the results are used to refine operations, help set priorities,
     and allocate resources as the bureau enters the final
     preparations for the 2000 Census. 

  -- Consistent with our past recommendation, to alleviate
     congressional concerns over the design of the census,
     particularly its planned use of statistical sampling and
     estimation, the bureau should provide the Congress and other
     stakeholders detailed data on the expected effects of the
     bureau's planned initiatives on costs, accuracy, and other
     variables. 

Further information on the 2000 Census is presented in Major
Management Challenges and Program Risks:  Department of Commerce
(GAO/OCG-99-3, January 1999). 


--------------------
\20 U.S.  House of Representatives v.  U.S.  Department of Commerce,
11 F.Supp.  2d 76 (D.D.C.  1998) and Glavin v.  Clinton, 19 F.  Supp. 
2d 543 (E.D.  Va.  1998). 

\21 See for example, 2000 Census:  Preparations for Dress Rehearsal
Leave Many Unanswered Questions (GAO/GGD-98-74, March 26, 1998) and
Decennial Census:  Preliminary Observations on the Results to Date of
the Dress Rehearsal and the Census Bureau's Readiness for 2000
(GAO/T-GGD-98-178, July 30, 1998). 


MANAGING LARGE PROCUREMENT
OPERATIONS MORE EFFICIENTLY
============================================================ Chapter 6

The federal government procures tens of billions of dollars annually
in goods and services ranging from huge defense weapon systems and
space exploration equipment to supplies and materials supporting
operating forces around the world.  Our work has shown that some of
the government's largest procurement operations are not always run
efficiently, and we have recommended ways to operate them better. 

The federal government's reliance on the private sector as a means to
carry out programs through contracts can reduce the workforce. 
However, it is critical that the government gets what it pays for
under these contracts and that the contractors' work is done at
reasonable cost.  The effective oversight of contracts and control of
contractor operations is essential in order to achieve these
objectives. 



   (See figure in printed
   edition.)


   DOD INVENTORY MANAGEMENT
---------------------------------------------------------- Chapter 6:1

DOD has had inventory management problems for decades.  In 1990, we
identified DOD's management of secondary inventories (spare and
repair parts, clothing, medical supplies, and other items to support
the operating forces) as a high-risk area because levels of inventory
were too high and management systems and procedures were ineffective. 
While some improvements have been made, these general conditions
still exist. 

  -- In 1995, we reported that DOD's strategic plans for logistics
     called for improving asset visibility in such areas as
     in-transit assets, retail-level stocks, and automated systems. 
     DOD will not completely implement its current plan until 2004. 
     The lack of adequate visibility over operating materials and
     supplies substantially increases the risk that millions of
     dollars will be spent unnecessarily.  For example, the Navy's
     fiscal year 1996 financial statements did not include
     information on $7.8 billion in inventories onboard ships and at
     Marine Corps activities. 

  -- DOD has not taken sufficient steps to ensure the accuracy of
     inventory requirements to preclude the acquisition of unneeded
     items.  For example, in April 1998, we reported that the Navy
     could have eliminated about $13 million of planned program
     requirements for 68 of 200 items reviewed because the
     requirements were also included in the reorder-level
     requirement.  While we could not precisely quantify the overall
     extent of the problem, this double counting could be indicative
     of a larger problem because the Navy has a total of about $3.3
     billion of planned program requirements that affect purchase
     decisions.\1

  -- In February 1998, we reported that DOD did not have receipts for
     about 60 percent of its 21 million shipments to end users in
     fiscal year 1997.  Later work showed that over the last 3 years,
     the Navy alone reportedly wrote off as lost over $3 billion in
     in-transit inventory. 

  -- The vulnerability to waste, fraud, and abuse also extends to
     DOD's disposal of surplus property.  In October 1997, we
     reported that DOD destroyed and sold as scrap some usable
     aircraft parts in new or repairable condition that possibly
     could have been sold intact at higher than scrap prices.  In
     contrast, in August 1998, we reported that DOD inadvertently
     sold surplus parts with military technology intact.  In these
     cases, management controls were insufficient to preclude these
     conditions.\2

Since 1991, we have issued 11 reports that identify significant
opportunities for DOD to test and adopt, where feasible, best
inventory management practices used in the private sector to improve
logistics operations and lower costs.  Recently, the Congress enacted
legislation requiring the Defense Logistics Agency and the services
to develop and submit schedules for implementing best commercial
practices in its acquisition and distribution of inventory items. 
The legislation calls for the implementation of best practice
initiatives to be completed within the next 3 years in the case of
the Defense Logistics Agency and 5 years for the services.  In
November 1997, the Secretary of Defense announced the Defense Reform
Initiative, which seeks to reengineer DOD support activities and
business practices by incorporating many business practices that
private sector companies have used. 

In the short term, DOD still needs to emphasize the efficient
operation of its existing inventory systems.  In the long term, DOD
must establish goals, objectives, and milestones for changing its
culture and adopting new management tools and practices.  Unless DOD
takes more aggressive actions to correct systemic problems, its
inventory management problems will continue well into the next
century. 

Our report, Major Management Challenges and Program Risks: 
Department of Defense (GAO/OCG-99-4, January 1999), further
highlights DOD's inventory management problems. 


--------------------
\1 Navy Inventory Management:  Improvements Needed to Prevent Excess
Purchases (GAO/NSIAD-98-86, April 30, 1998). 

\2 Defense Inventory:  Action Needed to Avoid Inappropriate Sales of
Surplus Parts (GAO/NSIAD-98-182, August 3, 1998). 


   WEAPON SYSTEMS ACQUISITION
---------------------------------------------------------- Chapter 6:2

DOD spends about $85 billion annually to research, develop, and
acquire weapon systems.  Although DOD has many acquisition reform
initiatives in process, pervasive problems persist regarding (1)
questionable requirements and solutions that are not the most
cost-effective available, (2) unrealistic cost, schedule, and
performance estimates, (3) questionable program affordability, and
(4) the use of high-risk acquisition strategies. 

We have found that while the services conduct considerable analyses
in justifying major acquisitions, these analyses can be narrowly
focused, without full consideration of alternative solutions,
including the joint acquisition of systems with the other services. 
In addition, because DOD does not routinely develop information on
joint mission needs and aggregate capabilities, it has little
assurance that decisions to buy, modify, or retire systems are sound. 
For example

  -- DOD could have met its strategic airlift requirements and
     achieved a significant life-cycle cost savings by buying fewer
     C-17s than planned and

  -- by increasing the total annual buy of Blackhawk helicopter
     derivatives for Marine Corps and other requirements, DOD could
     save over $700 million in research and development and
     procurement costs. 

Further, we continue to report on examples where program projections
appear to be overly optimistic and risks excessive in light of the
current budget and security environment.  For example, it is doubtful
that in restructuring the F-22 program, the Air Force can offset the
$13 billion projected increase in production costs because many of
the cost-cutting initiatives it identified were not well defined.\3

Additionally, each year for the past several years, we have reported
that DOD's Future Years Defense Program could not be executed with
available funds.  We concluded that DOD's tendency to overestimate
the funding that would be available in the future, coupled with the
tendency to underestimate program costs, had resulted in the advent
of more programs than could be executed as planned.  We continue to
find and report on numerous problems with DOD's budgeting and
spending practices for weapon system acquisitions.  For example, in
analyzing the 1998 Future Years Defense Program, we found that
funding for infrastructure activities was projected to increase while
procurement funding was projected to be lower than anticipated. 
Nonetheless, DOD is pursuing a number of major system acquisition
programs on the assumption that infrastructure savings will
materialize.\4

We have also reported on the high-risk practice of beginning
production of a weapon system before development, testing, and
evaluation are complete.  DOD still begins production of many major
and nonmajor weapons without first providing that the systems will
meet critical performance requirements.  For example, DOD's approval
of the Joint Surveillance Target Attack Radar System's (JSTARS) full
rate production was premature and risky because the system's
operational effectiveness and suitability for combat were not yet
demonstrated and plans to address deficiencies and reduce program
costs were not completed.  In another case, the plan to develop and
deploy a National Missile Defense system in only 6 years is fraught
with risks, including possible schedule slippages and technical
problems stemming from limited testing. 

DOD continues to implement a variety of acquisition reform
initiatives and is reporting some success in terms of cost savings or
avoidance and other benefits.  We support DOD's efforts to reform its
acquisition processes.  However, we have concerns about the extent to
which cost reductions from acquisition reform will be available to
fund DOD's modernization program in the near term.  We have reported
that a large portion of the estimated cost reductions already
identified has been used to meet needs within programs generating the
reductions or has been offset by cost increases elsewhere in the
programs.\5

The need for such offsets is partly due to optimistic planning.  Such
planning provides an unclear picture of defense priorities because
tough decisions and trade-offs are avoided.  In order for DOD to have
an efficient and effective program and for the Congress to properly
exercise its oversight responsibilities, it is critical that DOD
present realistic assumptions and plans in its future budgets. 

DOD and the Congress need to take much stronger actions to
effectively control the lure of optimistic planning, particularly as
DOD (1) generates and supports the acquisition of new weapon systems
that do not necessarily satisfy the most critical weapon requirements
at minimal cost and (2) commits more procurement funds to programs
than can reasonably be expected to be available in future defense
budgets.  Although many recommendations from a variety of sources
have addressed these long-standing issues, DOD has taken little or no
effective action on them. 

Acquisition reforms and commercial practices can produce better
outcomes on DOD acquisitions when they help a program succeed in its
environment.  Thus, the way to get lasting reform is to realign the
incentives of the weapon acquisition process with desired program
outcomes.  Changing these incentives--that is, redefining program
success--will take the efforts of the Congress as well as DOD and the
services. 

The issues involving DOD's weapon systems acquisition are also
included in Major Management Challenges and Program Risks: 
Department of Defense (GAO/OCG-99-4, January 1999). 


--------------------
\3 Tactical Aircraft:  Restructuring of the Air Force F-22 Fighter
Program (GAO/NSIAD-97-156, June 4, 1997). 

\4 Future Years Defense Program:  Substantial Risks Remain in DOD's
1999-2003 Plan (GAO/NSIAD-98-204, July 31, 1998). 

\5 Acquisition Reform:  Effect on Weapon System Funding
(GAO/NSIAD-98-31, October 29, 1997). 


   DOD CONTRACT MANAGEMENT
---------------------------------------------------------- Chapter 6:3

DOD spends in excess of $100 billion a year contracting for goods and
services.  Over the last few years, several broad-based changes have
been made to DOD contracting processes to improve the way DOD relates
to its contractors and the rules governing their relationships. 
These changes are by no means complete.  Acquisition reform, with its
emphasis on widespread reengineering of fundamental processes,
continues to receive attention at the highest levels in DOD.  DOD
faces a number of areas where risks appear particularly acute. 

  -- The need for DOD to achieve effective control over its payment
     process remains an imperative.  If it does not, DOD continues to
     risk erroneously paying contractors millions of dollars and
     perpetuating other financial management and accounting control
     problems.  Weak systems and controls also leave DOD vulnerable
     to fraud and improper payment.\6 A demonstration program to
     evaluate the feasibility of using private contractors to
     identify overpayments made to vendors has identified about $19
     million in overpayments.\7 While DOD is taking steps to improve
     its payment process and controls, it will likely take an
     extended period to get its payment problems under control. 

  -- We and the DOD Inspector General have found that DOD needs to
     strengthen the quality of its analyses for commercial purchases. 
     The Inspector General found that DOD had not formulated good
     procurement and management strategies for commercial parts in
     the acquisition reform environment.  As a result, DOD was paying
     higher prices for commercial spare parts than necessary.  Our
     work also identified cases in which limited analysis of
     commercially offered prices resulted in significantly higher
     prices than previously paid.\8 DOD is taking steps to improve
     its workforce training in commercial buying and pricing. 

  -- DOD's implementation of health care management programs,
     particularly the TRICARE Program, further illustrates DOD's
     difficulty in managing contracts.  TRICARE's implementation,
     entailing the award of seven competitively bid, 5-year
     contracts, has been fraught with problems.  All seven contracts,
     totaling about $15 billion, were protested.  As a result, DOD
     and the competitors incurred added costs, and the program was
     significantly delayed.  Three of the protests were sustained,
     resulting in further delays.  We also identified problems with
     the change order process, including the protracted settlement of
     the orders.  As of November 1998, over 350 change orders to the
     TRICARE contracts had not been settled.  DOD has set out to
     develop and introduce a more simplified procurement approach. 
     Whether DOD can successfully develop and launch the new method,
     and whether what it designs will reduce the current volume of
     contract changes or control health care costs, remains to be
     seen.\9

See Major Management Challenges and Program Risks:  Department of
Defense (GAO/OCG-99-4, January 1999) for additional information
related to DOD contract management weaknesses. 


--------------------
\6 Financial Management:  Improvements Needed in Air Force Vendor
Payment Systems and Controls (GAO/AIMD-98-274, September 28, 1998). 

\7 Contract Management:  Recovery Auditing Offers Potential to
Identify Overpayments (GAO/NSIAD-99-12, December 3, 1998). 

\8 Defense Acquisitions:  Improved Program Outcomes Are Possible
(GAO/T-NSIAD-98-123, March 18, 1998). 

\9 Defense Health Care:  Operational Difficulties and System
Uncertainties Pose Continuing Challenges for TRICARE
(GAO/T-HEHS-98-100, February 26, 1998). 


   DEPARTMENT OF ENERGY CONTRACT
   MANAGEMENT
---------------------------------------------------------- Chapter 6:4

The Department of Energy (DOE) is the largest civilian contracting
agency in the federal government.  In fiscal year 1997, it obligated
about $16.2 billion, or about 91 percent of its obligations, to
contracts.  We have reported on weaknesses in DOE's contracting
practices, including noncompetitive awards and lax oversight of costs
and activities. 

In 1990, we designated DOE's contracting as a high-risk area.  Three
years later, the Secretary of Energy established a Contract Reform
Team, which reviewed DOE's contracting practices and, in February
1994, published a report with 48 recommendations to make contacting
work better and cost less.  Among these were recommendations to award
contracts competitively, incorporate performance-based incentives,
and increase the use of fixed-price contracts.  While DOE was
reviewing its contracting practices, it was also developing its
strategic plans.  Together, the contract reform and strategic
planning initiatives helped to shape the framework for contract
reform that DOE has since put in place.  While these reforms are
generally steps in the right direction, DOE has had some problems in
implementing them, and, in some instances, their effectiveness will
not be known for several years. 

For example, since 1996, DOE has increased its use of competition in
awarding contracts for managing and operating its facilities, but it
could do more, particularly at its national laboratories.  For fiscal
year 1996 through fiscal year 1998, DOE reported that it had awarded
14 of 26 such contracts (54 percent) competitively and extended the
other 12 noncompetitively.  However, as we reported in 1996, only
about half of the funds spent by management and operating contractors
at the national laboratories went for research and development; the
remainder went for other work, such as environmental restoration.  At
other facilities, DOE awards contracts for environmental restoration
work competitively.  In our view, DOE could improve its contacts with
the national laboratories by separating and competitively awarding
the portion of the work that is not related to research.\10

In 1994, DOE began incorporating performance-based incentives in its
management and operating contracts to better link contractor's fees
to the satisfactory accomplishment of specific tasks.  In 1997 and
1998, DOE's Inspector General found problems in the department's
implementation of these incentives, and, in 1997, a departmentwide
assessment identified other concerns, such as limited guidance on
developing and administering the incentives.  Our July 1998 report
indicated that DOE had taken steps to correct these problems,
including issuing guidance, conducting training, and incorporating
lessons learned into the fiscal year 1998 incentives.  However, it
was too early to assess the effectiveness of these incentives because
DOE's technical, financial, and contracting personnel had not yet
completed their reviews.\11

To control costs and shift risks from the government to contractors,
DOE has begun to use fixed-price contracts for environmental cleanups
in place of the cost-reimbursement contracts that the department
routinely used in the past.  Under this "privatization" initiative,
DOE planned to pay its contractors a fixed amount for acceptable
goods and services, regardless of the costs they incurred, and shift
most financial risks to the contractors.  While DOE has used
fixed-price contracts for some well-defined projects, such as
cleaning up some contaminated soils and decontaminating workers'
uniforms, it has not met its initial goals for more complex
environmental cleanups.\12 For example: 

  -- Pit 9, a project to clean up radioactive wastes at the Idaho
     National Engineering and Environmental Laboratory, incurred
     nearly $200 million in cost overruns.  The project, which we
     characterized as a failure, was at least 26 months behind
     schedule when we reported on it in July 1997.  Issues
     surrounding the project, such as the type and amount of waste to
     be cleaned up and who will pay for the increased costs, are
     currently in litigation.\13

  -- At the Hanford site in Richland, Washington, DOE planned to make
     the contractor fully responsible for the financial risk
     associated with constructing a facility to treat highly
     radioactive waste, currently stored in leaking underground
     tanks.  However, because lenders told DOE that the contractor
     would not be able to obtain affordable financing without
     government backing, DOE agreed to pay much of the project debt
     if the contractor defaulted on its loans.  The extent of the
     liability retained by the contractor remains uncertain.  While
     this financial approach appears reasonable for this project, DOE
     faces a financial risk not initially contemplated that could be
     in the billions of dollars.\14

These practices increase the government's costs and expose DOE to
billions of dollars of financial risk.  Information about these risks
is presented in Major Management Challenges and Program Risks: 
Department of Energy (GAO/OCG-99-6, January 1999). 


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

\11 Department of Energy:  Lessons Learned Incorporated Into
Performance-Based Incentive Contracts (GAO/RCED-98-223, July 29,
1998). 

\12 Department of Energy:  Alternative Financing and Contracting
Strategies for Cleanup Projects (GAO/RCED-98-169, May 29, 1998). 

\13 Nuclear Waste:  Department of Energy's Project to Clean Up Pit 9
at Idaho Falls Is Experiencing Problems (GAO/RCED-97-180, July 28,
1997). 

\14 Nuclear Waste:  Department of Energy's Hanford Tank Waste
Project--Schedule, Cost, and Management Issues (GAO/RCED-99-13,
October 8, 1998). 


   SUPERFUND CONTRACT MANAGEMENT
---------------------------------------------------------- Chapter 6:5

The Environmental Protection Agency (EPA) has had long-standing
challenges with controlling the costs of the contractors it uses to
clean up sites or to monitor private party cleanups for EPA.  In the
past, we found that EPA (1) relied too heavily on the contractors'
own cost proposals to determine the final price for cleanup
activities performed by the contractors, (2) had made little progress
in improving the timeliness of contractor audits, increasing the risk
for fraud, waste, and abuse by contractors, and (3) continued to pay
contractors a high rate to cover their administrative support costs. 
Since then, EPA has increased its use of independent government cost
estimates to set better contract prices for the government, but some
estimates are still of questionable quality.  In addition, according
to EPA officials, the agency has improved the timeliness of
contractor audits and has almost eliminated the backlog of these
audits.  However, program support costs remain high. 

In our previous reviews of these issues, we found that EPA was not
preparing independent cost estimates and that most of the final
prices awarded for work closely matched the contractor's--not
EPA's--estimate.  In our ongoing work, we found that EPA has made
substantial improvements in these areas.  Of the 35 contractor work
assignments that we reviewed in three of EPA's regions, the agency
generated independent cost estimates for each of them.  Furthermore,
in about half of the cases, the final price awarded for the work
closely matched EPA's independent cost estimate, which, according to
EPA's criteria, suggests that the estimates were fairly accurate. 

However, additional improvements are needed.  In nearly half of the
cases, the final price varied significantly from the cost estimates. 
The final prices were below the estimates in 5 cases by as much as 36
percent, and were higher than the estimates in 12 cases by as much as
101 percent.  EPA estimators often left critical work steps out of
their estimates, and about half of EPA's program contract management
staff for these cases questioned their own ability to generate
accurate estimates because of their lack of experience and historical
data on actual cleanup costs as a reference point for their
estimates.  EPA acknowledges these problems and has designed a set of
corrective measures to address them.  As of November 1998, the agency
was in the first steps of implementing these measures--assessing each
region's cost-estimating practices. 

EPA continues to experience high program support costs related to
contractors.  In our ongoing review of these Superfund program
management issues, we found that the program support costs for 9 of
13 contracts exceeded EPA's goal of 11 percent.  Program support
costs ranged from 19 to 92 percent when we included initial contract
start-up costs, such as setting up local offices and designing
computer programs to accommodate EPA's financial reporting
requirements.  The costs of the remaining four contracts ranged from
about 6 to 10 percent.  A major reason for continued high support
costs is that EPA has more contract capacity in place than work
available for the contractors, even though the agency has
significantly reduced the number of new contracts. 

These continuing concerns suggest that EPA may need to evaluate
whether it needs to overhaul some of its contracting practices. 
Superfund contract management problems are discussed in Major
Management Challenges and Program Risks:  Environmental Protection
Agency (GAO/OCG-99-17, January 1999). 


   NASA CONTRACT MANAGEMENT
---------------------------------------------------------- Chapter 6:6

NASA now spends over $12 billion annually for goods and services,
mostly on contracts with businesses and other organizations.  In
1990, we identified NASA's contract management as an area at high
risk.  In 1992, we reported that the agency had ineffective systems
and processes for overseeing contractors' activities and that NASA
field centers had failed to comply with contract management
requirements. 

In July 1998, we reported that NASA was developing systems to provide
it with the oversight and information needed to improve its contract
management.\15 However, we found the following. 

  -- NASA had delayed agencywide implementation of its integrated
     financial management system from July 1, 1999, to June 1, 2000. 
     The system, which is intended to fix problems associated with
     NASA's nonstandard, nonintegrated systems, offers the promise of
     providing reliable and timely information--such as the status of
     procurement requests and contracts. 

  -- NASA had not implemented its new system for measuring
     procurement performance.  In March 1997, we reported on NASA's
     need to produce accurate and reliable procurement-related
     information.\16 NASA had started a procurement quality
     assessment initiative involving the development of measurable
     performance metrics, the benchmarking of these metrics, and the
     development of procurement customer surveys.  This initiative is
     intended to provide information to help procurement managers
     measure and improve the performance of their organizations. 

  -- NASA had not yet completed an initiative to evaluate its field
     centers' procurement activities based on international quality
     standards and its own procurement surveys.  NASA's procurement
     evaluations will include (1) external evaluations of NASA field
     centers' compliance with quality contract management standards
     and (2) internal surveys of the centers' procurement management
     activities. 

Since the July report, NASA has made progress in correcting
weaknesses in contract management.  NASA is currently implementing
its new system for measuring procurement performance.  By the end of
fiscal year 1999, NASA plans for all field centers to be certified
that their procurement activities meet the international quality
standards.  On September 30, 1998, NASA issued guidance to the
centers' procurement officers for internal semiannual random
procurement surveys. 

However, a critical component of evaluating NASA's ability to manage
contacts is the establishment of a financial management system and
its integration with full cost accounting.  Until the financial
management system is developed and operational, performance
assessments relying on cost data may be incomplete.  Because
implementation of the financial management system has been delayed,
we believe that NASA's contract management should remain a high-risk
area.  The current status of NASA's efforts to improve contract
management is highlighted in Major Management Challenges and Program
Risks:  National Aeronautics and Space Administration (GAO/OCG-99-18,
January 1999). 


--------------------
\15 NASA Procurement:  Status of Efforts to Improve Oversight
(GAO/NSIAD-98-198R, July 13, 1998). 

\16 NASA Procurement:  Contract Management Oversight
(GAO/NSIAD-97-114R, March 18, 1997). 


CHRONOLOGY OF HIGH-RISK
DESIGNATIONS
=========================================================== Appendix I



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


KEY CONTACTS FOR HIGH-RISK AREAS
========================================================== Appendix II


   ADDRESSING URGENT YEAR 2000
   COMPUTING CHALLENGE
-------------------------------------------------------- Appendix II:1

Joel C.  Willemssen, Director
Civil Agencies Information Systems
Accounting and Information Management Division
(202) 512-6408
[email protected]


   RESOLVING SERIOUS INFORMATION
   SECURITY WEAKNESSES
-------------------------------------------------------- Appendix II:2

Jack L.  Brock, Jr., Director
Governmentwide and Defense Information Systems
Accounting and Information Management Division
(202) 512-6240
[email protected]


   AIR TRAFFIC CONTROL
   MODERNIZATION
-------------------------------------------------------- Appendix II:3

Joel C.  Willemssen, Director
Civil Agencies Information Systems
Accounting and Information Management Division
(202) 512-6408
[email protected]

John H.  Anderson, Director
Transportation Issues
Resources, Community, and Economic Development Division
(202) 512-2834
[email protected]


   TAX SYSTEMS MODERNIZATION
-------------------------------------------------------- Appendix II:4

Jack L.  Brock, Jr., Director
Governmentwide and Defense Information Systems
Accounting and Information Management Division
(202) 512-6240
[email protected]


   NATIONAL WEATHER SERVICE
   MODERNIZATION
-------------------------------------------------------- Appendix II:5

Joel C.  Willemssen, Director
Civil Agencies Information Systems
Accounting and Information Management Division
(202) 512-6408
[email protected]


   DOD SYSTEMS DEVELOPMENT AND
   MODERNIZATION EFFORTS
-------------------------------------------------------- Appendix II:6

Jack L.  Brock, Jr., Director
Governmentwide and Defense Information Systems
Accounting and Information Management Division
(202) 512-6240
[email protected]



   DOD FINANCIAL MANAGEMENT
-------------------------------------------------------- Appendix II:7

Lisa G.  Jacobson, Director
Defense Audits
Accounting and Information Management Division
(202) 512-9095
[email protected]


   FOREST SERVICE FINANCIAL
   MANAGEMENT
-------------------------------------------------------- Appendix II:8

Linda M.  Calbom, Director
Resources, Community, and Economic Development Accounting and
 Financial Management Issues
Accounting and Information Management Division
(202) 512-9508
[email protected]


   FAA FINANCIAL MANAGEMENT
-------------------------------------------------------- Appendix II:9

Linda M.  Calbom, Director
Resources, Community, and Economic Development Accounting and
 Financial Management Issues
Accounting and Information Management Division
(202) 512-9508
[email protected]



   IRS FINANCIAL MANAGEMENT
------------------------------------------------------- Appendix II:10

Gregory D.  Kutz, Associate Director
Governmentwide Accounting and Financial Management Issues
Accounting and Information Management Division
(202) 512-9505
[email protected]


   IRS RECEIVABLES
------------------------------------------------------- Appendix II:11

James R.  White, Director
Tax Policy and Administration Issues
General Government Division
(202) 512-9110
[email protected]

Gregory D.  Kutz, Associate Director
Governmentwide Accounting and Financial Management Issues
Accounting and Information Management Division
(202) 512-9505
[email protected]


   MEDICARE
------------------------------------------------------- Appendix II:12

William J.  Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division
(202) 512-7114
[email protected]


   SUPPLEMENTAL SECURITY INCOME
------------------------------------------------------- Appendix II:13

Cynthia M.  Fagnoni, Director
Income Security Issues
Health, Education, and Human Services Division
(202) 512-7215
[email protected]


   IRS TAX FILING FRAUD
------------------------------------------------------- Appendix II:14

James R.  White, Director
Tax Policy and Administration Issues
General Government Division
(202) 512-9110
[email protected]


   DEFENSE INFRASTRUCTURE
   MANAGEMENT
------------------------------------------------------- Appendix II:15

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


   HUD PROGRAMS
------------------------------------------------------- Appendix II:16

Judy A.  England-Joseph, Director
Housing and Community Development Issues
Resources, Community, and Economic Development Division
(202) 512-7631
[email protected]


   STUDENT FINANCIAL AID PROGRAMS
------------------------------------------------------- Appendix II:17

Carlotta C.  Joyner, Director
Education and Employment Issues
Health, Education, and Human Services Division
(202) 512-7014
[email protected]


   FARM LOAN PROGRAMS
------------------------------------------------------- Appendix II:18

Larry Dyckman, Director
Food and Agriculture Issues
Resources, Community, and Economic Development Division
(202) 512-5138
[email protected]


   ASSET FORFEITURE PROGRAMS
------------------------------------------------------- Appendix II:19

Norman J.  Rabkin, Director
Administration of Justice Issues
General Government Division
(202) 512-8777
[email protected]


   THE 2000 CENSUS
------------------------------------------------------- Appendix II:20

J.  Christopher Mihm, Associate Director
Federal Management and Workforce Issues
General Government Division
(202) 512-8676
[email protected]


   DOD INVENTORY MANAGEMENT
------------------------------------------------------- Appendix II:21

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


   DOD WEAPON SYSTEMS ACQUISITION
------------------------------------------------------- Appendix II:22

Louis J.  Rodrigues, Director
Defense Acquisition Issues
National Security and International Affairs Division
(202) 512-4841
[email protected]


   DOD CONTRACT MANAGEMENT
------------------------------------------------------- Appendix II:23

Louis J.  Rodrigues, Director
Defense Acquisition Issues
National Security and International Affairs Division
(202) 512-4841
[email protected]


   DEPARTMENT OF ENERGY CONTRACT
   MANAGEMENT
------------------------------------------------------- Appendix II:24

Victor S.  Rezendes, Director
Energy, Resources, and Science Issues
Resources, Community, and Economic Development Division
(202) 512-3841
[email protected]


   SUPERFUND CONTRACT MANAGEMENT
------------------------------------------------------- Appendix II:25

Peter F.  Guerrero, Director
Environmental Protection Issues
Resources, Community, and Economic Development Division
(202) 512-6111
[email protected]


   NASA CONTRACT MANAGEMENT
------------------------------------------------------- Appendix II:26

Louis J.  Rodrigues, Director
Defense Acquisition Issues
National Security and International Affairs Division
(202) 512-4841
[email protected]

Allen Li, Associate Director
Defense Acquisition Issues
National Security and International Affairs Division
(202) 512-4841
[email protected]


   OVERALL GAO HIGH-RISK PROGRAM
------------------------------------------------------- Appendix II:27

George H.  Stalcup, Associate Director Defense Audits
Accounting and Information Management Division
(202) 512-9095
[email protected]

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