Financial Management: Education Faces Challenges in Achieving Financial
Management Reform (Testimony, 03/01/2000, GAO/T-AIMD-00-106).

Pursuant to a congressional request, GAO discussed challenges the
Department of Education faces in achieving Financial management reform,
focusing on: (1) the Department of Education's fiscal year (FY) 1999
financial audit results in the context of related work GAO has
performed; (2) the relationship between the audit findings and the
potential for waste, fraud, and abuse; and (3) the status of GAO's
ongoing study of the department's grantback account.

GAO noted that: (1) the Department of Education was not expected to
receive a clean or unqualified opinion on its FY 1999 financial
statement audits due to Office of Management and Budget on March 1,
because of its financial management weaknesses; (2) as reported in
December, the department issued its FY 1998 financial statements over 8
months late and was one of six Chief Financial Officer's Act agencies
that received disclaimers--meaning that the auditors were unable to
express an opinion--on their financial statements for that year; (3)
while Education's financial staff and its contractor have worked very
hard over the past few months to prepare Education's FY 1999 financial
statements, and the auditors' opinion on that financial statements has
improved over that of FY 1998, serious internal controls and financial
management weaknesses continue to plaque the agency; (4) for FY 1999,
Education made significant efforts to work around these weaknesses and
produce financial statements; (5) these efforts enabled its auditors to
issue qualified opinions on four of its five required financial
statements and a disclaimer on the fifth statement; (6) the department
also receives annually from its auditors a report on internal controls;
(7) this report is significant for highlighting the agency's internal
control weaknesses that increase its risk of mismanagement that can
sometimes result in waste, fraud, and abuse; (8) the third report that
the auditors issue annually is a report on agency compliance with laws
and regulations; (9) specifically, the department's auditors reported
that it was not in full compliance with three laws; (10) Education
continues to be plagued by serious internal control system deficiencies
that hinder its ability to achieve lasting financial management
improvements; (11) the internal control weaknesses discussed above and
in more detail in the auditors' report need to be addressed to reduce
the potential for waste, fraud, and abuse in the department; (12) the
grantback account holds funds recovered from grant recipients following
an audit determination that the recipients made an expenditure of funds
that was not allowable or failed to account properly for the funds; (13)
for the grantback account, which is part of Education's Fund Balance
with Treasury, its auditors reported that Education cannot readily
determine to which appropriations the excess funds belong; and (14) the
auditors reported that Education is working with Treasury to determine
the appropriate accounting for the remaining funds.

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

 REPORTNUM:  T-AIMD-00-106
     TITLE:  Financial Management: Education Faces Challenges in
	     Achieving Financial Management Reform
      DATE:  03/01/2000
   SUBJECT:  Financial statement audits
	     Financial management systems
	     Internal controls
	     Auditing standards
	     Reporting requirements
	     Federal agency accounting systems
	     Financial records
	     Noncompliance
	     Accounting procedures
	     Risk management
IDENTIFIER:  Federal Family Education Loan Program

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   * For Release on Delivery
     Expected at
     10:30 a.m.

Wednesday,

March 1, 2000

GAO/T-AIMD-00-106

financial management

Education Faces Challenges in Achieving Financial Management Reform

        Statement of Gloria L. Jarmon

Director, Health, Education, and Human Services Accounting and Financial
Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Oversight and Investigations, Committee on
Education and the Workforce, House of Representatives

United States General Accounting Office

GAO

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss (1) the Department of Education's
fiscal year 1999 financial audit results in the context of related work we
have performed, (2) the relationship between the audit findings and the
potential for waste, fraud, and abuse, and (3) the status of our ongoing
study of the Department's grantback account.

The Department's financial statements are important to the federal
government because Education is the primary agency responsible for
overseeing the more than $75 billion annual federal investment in support of
educational programs for U.S. citizens and eligible noncitizens. The
Department is also responsible for collecting about $175 billion owed by
students. In fiscal year 1999, more than 8.1 million students received over
$53 billion in federal student financial aid through programs administered
by Education.

The Department's stewardship over these assets has been under question as
the agency has experienced persistent financial management weaknesses.
Beginning with its first agencywide audit effort in fiscal year 1995,
Education's auditors have each year reported largely the same serious
internal control weaknesses, which have affected the Department's ability to
provide financial information to decision makers both inside and outside the
agency.

Background

Over the past 10 years, dramatic changes have occurred in federal financial
management in response to the most comprehensive management reform
legislation of the past 40 years. The combination of reforms ushered in by
(1) the Chief Financial Officers (CFO) Act of 1990, (2) the Government
Management Reform Act of 1994, (3) the Federal Financial Management
Improvement Act (FFMIA) of 1996, (4) the Government Performance and Results
Act (GPRA) of 1993, and (5) the Clinger-Cohen Act of 1996 will, if
successfully implemented, provide the necessary foundation to run an
effective, results-oriented government. Efforts to continue to build the
necessary fundamental foundation through lasting financial management reform
are essential. Only by generating reliable and useful information can the
government ensure adequate accountability to taxpayers, manage for results,
and help decision makers make timely, well-informed judgments.

Education's fiscal year 1999 audit was conducted by Ernst & Young LLP,
independent auditors contracted for by the Education Inspector General. We
reviewed the independent auditors' draft reports and workpapers during the
latter part of February 2000. We shared a draft of this statement with
Education officials, who provided technical comments. We have incorporated
their comments where appropriate. Our work was conducted in accordance with
generally accepted government auditing standards.

Fiscal Year 1999 Audit Results

As reported to you in December, the Department issued its fiscal year 1998
financial statements over 8 months late and was one of six CFO Act agencies
that received disclaimers-meaning that the auditors were unable to express
an opinion-on their financial statements for that fiscal year. Pervasive
weaknesses in the design and operation of Education's financial management
systems, accounting procedures, documentation, recordkeeping, and internal
controls, including computer security controls, prevented Education from
reliably reporting on the results of its operations for fiscal year 1998.

Report on the Financial Statements

   * The Department had significant systems weaknesses during fiscal year
     1999 affecting its financial management systems. The new accounting
     system, implemented in fiscal year 1998, had several limitations,
     including an inability to perform a year-end closing process or produce
     automated consolidated financial statements. Through its efforts and
     those of its contractors, Education was able to partially compensate
     for, but did not correct, certain aspects of the material weaknesses in
     its financial reporting process. In addition, during fiscal year 1999,
     Education experienced significant turnover in financial management,
     which also contributed to the overall weakness in financial reporting.
   * Education was unable to provide adequate support for about $800 million
     reported in the September 30, 1999, net position balance in its
     financial statements, and the auditors were unable to perform other
     audit procedures to satisfy themselves that this amount was correct.
   * Education processed many transactions from prior fiscal years as fiscal
     year 1999 transactions and manually adjusted its records in an effort
     to reflect the transactions in the proper period; however, the auditors
     could not determine if these adjustments for certain costs and
     obligations were correct.
   * The auditors were unable to determine whether beginning balances for
     accounts payable and related accruals were accurate.

In addition, as in the prior year, the auditors did not issue an opinion
(referred to as a disclaimer of an opinion) on the Department's Statement of
Financing. The Statement of Financing provides a reconciliation or
"translation" from the budget to the financial statements. The statement is
intended to help those who work with the budget to understand the financial
statements and the cost information they provide. The auditors stated that
the reason for this disclaimer was that the Department did not perform
adequate reconciliations and present support for amounts on the Statement of
Financing in a timely manner.

To the extent that Education was able to improve the opinion it received on
its financial statements for fiscal year 1999, it was generally the result
of (1) time-consuming manual procedures, (2) various automated tools to
"work around" the system's inability to close the books and generate
financial statements, and (3) significant reliance on external consultants
to assist in the preparation of additional reconciliations and the financial
statements. This approach does not produce the timely and reliable financial
and performance information Education needs for decision making on an
ongoing basis, which is the desired result of the CFO Act.

Report on Internal Controls

The specific material internal control weaknesses cited by the independent
auditors for fiscal year 1999 were (1) weaknesses in the financial reporting
process, (2) inadequate reconciliations of financial accounting records, and
(3) inadequate controls over information systems. The independent auditors
also identified a new material internal control weakness related to
accounting for certain loan transactions. Summaries of the material internal
control weaknesses follow:

   * As in prior years, Education does not have adequate internal controls
     over its financial reporting process. Its general ledger system was not
     able to perform an automated year-end closing process and directly
     produce consolidated financial statements as would normally be expected
     from such systems. Because of these weaknesses, Education had to resort
     to a costly, labor-intensive, and time-consuming process involving
     manual and automated procedures to prepare financial statements for
     fiscal year 1999. In addition, Education had to rely heavily on
     contractor services to help perform reconciliations among the various
     sources used. In one instance, Education reported a balance of
     approximately $7.5 billion for its cumulative results of operations.
     However, the majority of this amount, which pertains to the Federal
     Family Education Loan Program (FFELP), should have been reported as a
     payable to Treasury rather than as cumulative results of operations. As
     a result of the independent auditors' work, an adjustment was made to
     reclassify the $7.5 billion to the proper account. When such errors
     occur and are not detected by the Department's controls, there are
     increased risks that the Department could retain funds inappropriately
     that should be returned to Treasury.
   * Education again did not properly or promptly reconcile its financial
     accounting records during fiscal year 1999 and could not provide
     sufficient documentation to support some of its financial transactions.
     Weaknesses in the Department's internal controls over the
     reconciliation process prevented timely detection and correction of
     errors in its underlying accounting records. In some instances,
     Education adjusted its general ledger to reflect the balance per the
     subsidiary records, without sufficiently researching the cause for
     differences. Also, as indicated in prior audits, Education has not been
     able to identify and resolve differences between its accounting records
     and cash transactions reported by the Treasury. For example, for fiscal
     year 1999, Education adjusted its Fund Balance with Treasury, due to a
     difference between its general ledger and the Treasury, by a net amount
     of about $244 million. Reconciling agencies' accounting records with
     relevant Treasury records is required by Treasury policy and is
     analogous to individuals reconciling their checkbooks to monthly bank
     statements.
   * During fiscal year 1999, Education did not properly account for its
     funds disbursed under FFELP. Specifically, it did not return about $2.7
     billion in net collections specific to its liquidating account to
     Treasury as required by the Credit Reform Act of 1990. The liquidating
     account is used to record transactions for loans originated prior to
     fiscal year 1992. Any unobligated balances in this account at fiscal
     year end are unavailable for obligations in subsequent fiscal years and
     must be transferred to the general fund. Further, Education did not
     sufficiently analyze the balances reflected on the financial statements
     to ensure that the FFELP balances agreed with relevant balances in the
     Department's budgetary accounts. The auditors stated that this
     situation resulted in an unexplained difference of about $700 million
     between the FFELP Fund Balance with Treasury account and related
     budgetary accounts as of September 30, 1999. By not properly accounting
     for and analyzing its FFELP transactions as required by the Federal
     Credit Reform Act of 1990, Education cannot be assured that its
     financial or budgetary reports are accurate. Further, not returning the
     required amounts to Treasury-$2.7 billion in this instance-raised the
     possibility that the Department might inappropriately use the
     collections.
   * Education had information systems control deficiencies in
     (1) implementing user management controls, such as procedures for
     requesting, authorizing, and revalidating access to computing
     resources, (2) monitoring and reviewing access to sensitive computer
     resources,
     (3) documenting the approach and methodology for the design and
     maintenance of its information technology architecture, and
     (4) developing and testing a comprehensive disaster recovery plan to
     ensure the continuity of critical system operations in the event of
     disaster. The Department places significant reliance on its financial
     management systems to perform basic functions, such as making payments
     to grantees and maintaining budget controls. Consequently, continued
     weaknesses in information systems controls increase the risk of
     unauthorized access or disruption in services and make Education's
     sensitive grant and loan data vulnerable to inadvertent or deliberate
     misuse, fraudulent use, improper disclosure, or destruction, which
     could occur without being detected.

Our work in this area has shown that other agencies have improved their
financial audit report results but are also facing material internal control
weaknesses. A number of other agencies have focused their efforts primarily
on trying to develop short-term stop-gap measures designed to produce
year-end balances rather than on the fundamental solutions that are needed
to address the management challenges they face. As a result, these agencies
continue to experience pervasive material weaknesses in the design and
operation of their financial management and related operational systems,
accounting procedures, documentation, recordkeeping, and internal controls,
including computer security controls. Consequently, these agencies rely on
costly, time-consuming ad hoc procedures to determine year-end balances.
This approach does not produce the timely and reliable financial and
performance information needed for decision making on an ongoing basis. This
approach is also inherently incapable of addressing the underlying financial
management and operational issues that adversely affect these agencies'
ability to fulfill their missions.

Report on Compliance With Laws and Regulations

   * For fiscal year 1999, the independent auditors found that Education was
     again not in compliance with FFMIA because it lacked adequate,
     integrated financial management systems, reports, and oversight to
     prepare timely and accurate financial statements. The Department was 1
     of 21 CFO Act agencies whose financial systems did not comply with the
     requirements of FFMIA in fiscal year 1998. Because many agencies have
     significant financial management systems weaknesses, we are not
     expecting significant changes in these results in the fiscal year 1999
     audits; however, it is imperative that these problems be resolved so
     that agencies can produce needed financial information on a day-to-day
     basis in a timely and accurate manner. FFMIA requires that agency
     financial management systems substantially comply with (1) federal
     financial management systems requirements, (2) federal accounting
     standards, and (3) the U.S. Government Standard General Ledger at the
     transaction level. We are working with OMB and agencies to monitor
     their efforts to resolve these significant weaknesses.
   * The Department had neither fully implemented a capital planning and
     investment process nor performed an assessment of the information
     resource management knowledge and skills of agency personnel, including
     a plan to correct identified deficiencies, as required by the
     Clinger-Cohen Act of 1996. A key goal of the Clinger-Cohen Act is that
     agencies should have processes and information in place to help ensure
     that information technology (IT) projects are being implemented at
     acceptable costs and within reasonable and expected time frames and
     that they are contributing to tangible, observable improvements in
     mission performance. By not fully implementing the plans called for
     under the act, Education was not maximizing the value and assessing and
     managing the risks of its IT investments.
   * The Department did not transfer its excess funds related to FFELP,
     specifically the $2.7 billion of net collections previously mentioned,
     to Treasury as required by the Federal Credit Reform Act of 1990.

Potential for Fraud, Waste, and Abuse

   * The material internal control weakness related to financial reporting
     highlights the fact that managers do not receive accurate and timely
     financial information, such as information on disbursements made and
     amounts collected, that could be used to identify unusual activity and
     other anomalies.
   * Some of the known duplicate payments mentioned by the auditors in their
     report on internal controls could have been identified earlier if
     proper reconciliations had been performed. The auditors stated that the
     Department has procedures in place that should detect duplicate
     payments and correct them within a reasonable time frame. We have not
     yet reviewed these procedures.
   * The auditors stated that because the Department has not developed
     formal policies and procedures to reconcile grant expenditures between
     its payments system and its general ledger system, there is increased
     risk that material errors or irregularities could occur and not be
     detected on a timely basis. This is significant because the volume of
     grant transactions is over $30 billion per year.
   * The information systems weaknesses highlight some of the computer
     security vulnerabilities, such as the lack of an effective process to
     monitor security violations on all critical systems of the Department.
     Information systems control weaknesses increase the risk of
     unauthorized access or disruption in services and make Education's
     sensitive grant and loan data vulnerable to inadvertent or deliberate
     misuse, fraudulent use, improper disclosure, or destruction, which
     could occur without being detected. A report issued by the Department's
     Inspector General last week emphasizes the need for the Department to
     focus on addressing its computer security vulnerabilities. In addition,
     the White House recently recognized the importance of strengthening the
     nation's defenses against threats to public and private sector
     information systems that are critical to the country's economic and
     social welfare when it issued its National Plan for Information Systems
     Protection.
   * The auditors reported that Education had not taken a complete,
     comprehensive physical inventory of property and equipment for at least
     the past 2 years. Comprehensive inventories improve accountability for
     safeguarding the government's assets, such as computer software and
     hardware, and establish accurate property records. Without such an
     inventory, property or equipment could be stolen or lost without
     detection or resources could be wasted by purchasing duplicate
     equipment already on hand.

In addition, vulnerabilities in the Department's student financial
assistance programs have led us since 1990 to designate this a high-risk
area for waste, fraud, abuse, and mismanagement. As we reported in our
high-risk series update in January 1999, audits by GAO and the Department's
IG have found instances in which students fraudulently obtained grants and
loans. Also, the problems identified by the auditors in fiscal year 1999
related to the need to improve the accounting for FFELP raise additional
concerns about the vulnerability of the funds associated with this program.

Review of the Grantback Account

Mr. Chairman, at the Subcommittee's request, we have work ongoing on this
issue. We are awaiting answers from Education to a number of key questions
as well as documentation to support the transactions. The documentation
provided to us thus far often did not adequately support the transactions in
the account.

Mr. Chairman, this concludes my statement. I would be happy to answer any
questions you or other Members of the Subcommittee may have.

Contact and Acknowledgements

(916328)

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