Auditing the Nation's Finances: Fiscal Year 1999 Results Continue to
Highlight Major Issues Needing Resolution (Testimony, 03/31/2000,
GAO/T-AIMD-00-137).

GAO discussed the results of its report on the U.S. government's
financial statements for fiscal year (FY) 1999.

GAO noted that: (1) significant financial systems weaknesses, problems
with fundamental recordkeeping and financial reporting, incomplete
documentation, and weak internal controls continue to prevent the
government from accurately reporting a significant portion of its
assets, liabilities, and costs; (2) major challenges include the federal
government's inability to: (a) properly account for and report material
amounts of property, equipment, materials, and supplies and certain
stewardship assets, primarily at the Department of Defense (DOD); (b)
properly estimate the cost of certain major federal credit programs and
the related loans receivable and loan guarantee liabilities, primarily
at the Department of Agriculture; (c) estimate and reliably report
material amounts of environmental and disposal liabilities and related
costs, primarily at DOD; (d) determine the proper amount of various
reported liabilities, including postretirement health benefits for
military employees and accounts payable and other liabilities for
certain agencies; (e) accurately report major portions of the net cost
of government operations; (f) ensure that all disbursements are properly
recorded; and (g) properly prepare the federal government's financial
statements, including balancing the statements, accounting for
substantial amounts of transactions between governmental entities,
properly and consistently compiling the information in the financial
statements, and reconciling the results of operations to budget results;
(3) in addition, GAO found that: (a) the government is unable to
determine the full extent of improper payments--estimated to total
billions of dollars annually--and therefore cannot develop effective
strategies to reduce them; (b) serious, long-standing computer security
weaknesses expose the government's financial and other sensitive
information to inappropriate disclosure, destruction, modification, and
fraud, and critical operations to disruption; and (c) material control
weaknesses affect the government's tax collection activities; and (4)
the financial management systems of almost all agencies were again found
not to be in substantial compliance with the requirements of the Federal
Financial Management Improvement Act of 1996.

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

 REPORTNUM:  T-AIMD-00-137
     TITLE:  Auditing the Nation's Finances: Fiscal Year 1999 Results
	     Continue to Highlight Major Issues Needing Resolution
      DATE:  03/31/2000
   SUBJECT:  Financial statements
	     Financial statement audits
	     Internal controls
	     Financial management
	     Federal agency accounting systems
	     Reporting requirements
	     Loan accounting systems
	     Financial management systems
	     Erroneous payments
	     Computer security
IDENTIFIER:  Medicare Program
	     Social Security Program
	     U.S. Government Standard General Ledger

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United States General Accounting Office

GAO/T-AIMD-00-137

Testimony

Before the Subcommittee on Government Management,
Information and Technology, Committee on Government
Reform, House of Representatives

For Release on Delivery

 Expected at
10 a.m.
Friday
March 31, 2000

AUDITING THE NATION'S FINANCES

Fiscal Year 1999 Results
Continue to Highlight Major Issues Needing Resolution

Statement of David M. Walker
Comptroller General of the United States

GAO/T-AIMD-00-137

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our report on the U.S. government's
financial statements for fiscal year 1999. Today's hearing comes at an
especially appropriate juncture. First, we are nearing the 10th anniversary
of the Chief Financial Officers Act's passage, which has provided the
underpinning for financial management reform necessary to help improve the
economy, efficiency, and effectiveness of government. Also, since the
critical transition period to agency-level audited financial statements
began in 1996, agencies have gained valuable experience in preparing
financial statements, which is beginning to pay off. Then too, the lessons
agencies have learned from successfully meeting the Year 2000 computing
challenge are fresh in the minds of those who must now focus greater
attention to achieve financial and other management improvements.

In passing the CFO Act and other financial management legislation, such as
the Government Management Reform Act and the Federal Financial Management
Improvement Act (FFMIA), the Congress sought to overcome the historical lack
of reliable, useful, and timely information to assure financial
accountability for the federal government. Without such information on the
full costs of programs, the government cannot adequately ensure
accountability, measure and control costs, manage for results, nor make
timely and fully informed decisions about allocating limited resources.

A critical financial management reform component established by the Congress
entails requirements for annual audited financial statements for 24 major
federal departments and agencies beginning with fiscal year 1996. We have
seen a steady increase in the number of agencies that have obtained
unqualified opinions on their financial statements and in agencies'
timeliness in issuing them. Thus far, 13 of 24 major agencies have received
unqualified opinions on their fiscal year 1999 financial statements-for
fiscal year 1996, only 6 agencies achieved that goal. However, further
progress remains to be accomplished at the 4 agencies which received
qualified opinions and the 5 agencies which received disclaimers thus far
for fiscal year 1999. Also, for fiscal year 1999, 5 agencies were late in
issuing their financial statements, compared with 11 agencies that were late
in issuing financial statements for fiscal year 1997.

Further, several agencies, most notably the Social Security Administration
(SSA), have made good progress toward achieving financial management reform
goals. For the past 2 years, SSA issued its audited financial statements,
for which it received an unqualified audit opinion, in November, only 6
weeks after the close of the fiscal year and over 3 months before the March
1 statutory deadline. Others have resolved certain previously reported
financial statement deficiencies. For example, the Department of Energy
resolved its previously reported deficiency related to its environmental and
disposal liability associated with nuclear weapons.

In addition, in October 1999, the American Institute of Certified Public
Accountants recognized federal accounting standards as a generally accepted
basis of accounting, which represents a major milestone for the federal
government. This is an important step in the process of improving the
reliability and credibility of federal financial information in the eyes of
the public.

At the same time, several major departments are not yet able to produce
auditable financial statements on a consistent basis. The most significant
in this regard is the Department of Defense (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 seen increased attention to begin to address many of the issues. DOD
recognizes the seriousness of its problems and has a number of improvement
initiatives under way. We have designated as high risk financial management
at IRS, the Forest Service, and the Federal Aviation Administration. As I
will highlight today, challenges also continue in producing reliable
statements for the entire U.S. government.

For the last 2 years, we reported that because of the serious deficiencies
in the government's systems, recordkeeping, documentation, financial
reporting, and controls, amounts reported in the U.S. government's financial
statements and related notes may not provide a reliable source of
information for decision-making by the government or the public. Our report
on the U.S. government's financial statements for fiscal year 1999 has
reached the same conclusion. These deficiencies also affect the reliability
of information contained in the accompanying Management's Discussion and
Analysis and any other financial management information-including
information used to manage the government day-to-day and certain budget
information reported by agencies-which is taken from the same data source as
the financial statements.

The executive branch recognizes that, because of the extent and severity of
the financial management deficiencies, addressing them will require
concerted improvement efforts across government. Annual financial audits
represent an important means to assure continued progress in connection with
improving federal financial management. Further, the President has
designated financial management improvement as a priority management
objective and efforts are underway across government to address pervasive,
generally long-standing financial management problems.

However, while clean audit opinions are essential to providing an annual
public scorecard, they do not guarantee that agencies have the financial
systems needed to dependably produce reliable financial information. Modern
systems and good controls are essential to reach the end goal of reliable,
useful, and timely financial information to support ongoing management and
accountability. Some agencies have only been able to obtain unqualified
audit opinions through heroic efforts, which include using consultants,
statistical sampling, and other ad hoc procedures to derive numbers as of a
single point in time-the end of the fiscal year. These efforts are often
completed months after the end of the fiscal year. The fundamental problem
is that their financial systems cannot routinely provide this information.

Agency financial systems overall are in poor condition and cannot provide
reliable financial information for managing day-to-day government operations
and holding managers accountable. Thus far, for fiscal year 1999, agency
financial auditors have reported that 19 of 22 major agencies' financial
systems did not comply with FFMIA, which requires agency financial
management systems to comply substantially with federal accounting standards
and financial systems and other requirements. Systems for the remaining two
major agencies that have not yet issued audited fiscal year 1999 financial
statements did not comply with the act's requirements for fiscal years 1998
and 1997.

Over the longer-term, improving financial systems will involve harnessing
technology and applying the information technology management framework
outlined in the Clinger-Cohen Act. A crucial aspect of this will be to
strengthen internal control, particularly computer controls. Continuing
serious and widespread computer security weaknesses, which we have also
designated as a high-risk area, are placing enormous amounts of federal
assets at risk of inadvertent or deliberate misuse, financial information at
risk of unauthorized modification or destruction, sensitive information at
risk of inappropriate disclosure, and critical operations at risk of
disruption.

Another integral part of financial management reform is revamping human
capital practices to build greater capacity and implementing change
management to achieve the discipline needed to follow sound financial
management and reporting practices. While some attention to delineating core
competencies and training has occurred, a great deal more needs to be done
to improve financial management human capital practices. We have outlined
some of these steps in our executive guide for creating value through
world-class financial management.

The leadership and partnerships established to successfully address the Year
2000 computing problem provide lessons learned that can also be used to
address financial management reform across government. These lessons include
providing high-level congressional and executive branch leadership,
understanding the importance of addressing the issues, providing standard
guidance, employing a constructive engagement approach, facilitating
progress and monitoring performance, and implementing fundamental
improvements. It will be especially important to prepare for a new
administration next year and to put in place the mechanisms to sustain
current improvement efforts. This would include a governmentwide plan,
together with milestones, for addressing major weaknesses, as well as
agency-level plans.

The audit community-the Inspectors General and GAO-must play a constructive
role in recommending workable solutions to problems. Working cooperatively
with the Inspectors General, we are continuing to evaluate progress and make
specific suggestions for fixing weaknesses in recordkeeping, financial
reporting, and internal controls. We are also continuing to work with the
Office of Management and Budget (OMB), the Treasury, and agencies across
government to recommend the actions necessary for achieving legislative
reform goals. With concerted effort, the federal government can continue to
make progress toward achieving accountability and generating reliable
financial and management information on a regular basis. Ultimately,
providing such data in meaningful, user-friendly reports is key to assuring
adequate accountability to taxpayers, managing for results, and helping
decisionmakers make timely well-informed judgments.

The remainder of my testimony will focus on these matters and the findings
of our report on the financial statements of the U.S. government for fiscal
year 1999. But first, I would first like to discuss important financial
information relating to the Social Security and Medicare programs, which are
two important programs having major budget implications.

The U.S. government's fiscal year 1999 Financial Report and, therefore, our
report on our audit of these financial statements, include certain
information concerning the Social Security and Medicare (Part A) trust
funds, such as projected contributions and expenditures, dates when
expenditures are expected to exceed contributions, and dates when such funds
are expected to be exhausted. Such information is as of January 1, 1999, for
Social Security and as of September 30, 1999, for Medicare (Part A), the
most recent information publicly reported by the government.

Yesterday, the government issued updated information as of January 1, 2000,
for both programs. The government's issuance of dated information in this
Financial Report at about the same time that it issues more current
information may cause confusion to the Congress and the public. This can
serve to reduce confidence in and the credibility of the government's annual
financial report. This is especially true when there are significant
differences between the trustees' new projections and those included in the
annual report. As a result, steps should be taken, in future years, to
ensure that the government's Financial Report contains up-to-date
information as of no earlier than the end of the most recent fiscal year in
these important federal programs. Because current information on the
solvency of the Social Security and Medicare programs is critical to
assessing the financial condition of the nation, aiding in budget
deliberations, and fostering public debate, we will include the updated
information on these two important federal

programs in a report that will also contain the Fiscal Year 1999 Financial
Report of the United States Government.

Because of its importance, I would like to summarize the new Social Security
and Medicare information and the differences from the information contained
in the stewardship information accompanying the financial statements. This
information is presented in the following figure.

                                          Trustees'
                         Trust Fund                        Financial Report
                                          Report
                         Social Security  2015             2014
 First Year Outgo
 Exceeds Tax Income      --OASI           2016             Not Reported
 Excluding Interest
                         --DI             2007             Not Reported
                         Medicare - Part
                         A                2010             Not Reported

                         Social Security  2037             2034
 Year Trust Fund Is
 Exhausted               --OASI           2039             2036
                         --DI             2023             2020
                         Medicare - Part
                         A                2023             2015

                         Social Security  Not Reported     $2,935 billion
 Present Value of
 Additional Resources    --OASI           Not Reported     2,413 billion
 Needed
                         --DI             Not Reported     522 billion
                         Medicare - Part
                         A                Not Reported     $2,935 billion

 Actuarial Deficit as a   Social Security  1.89%           Not Reported
 Percentage of Taxable
 Payroll Over the 75 Year --OASI           1.53%           Not Reported
 Projection Period
                          --DI             0.37%           Not Reported
                          Medicare - Part
                          A                1.21 %          Not Reported

                          Social Security  6.18 %          Not Reported
 Actuarial Deficit as a
 Percentage of Taxable    --OASI           5.40 %          Not Reported
 Payroll in Year 75
                          --DI             0.78 %          Not Reported
                          Medicare - Part
                          A                3.28%           Not Reported

Key:

OASI - Federal Old-Age Survivors Trust Fund

DI - Federal Disability Insurance Trust Fund

I will now discuss the findings of the audit of the U.S. government's fiscal
year 1999 Financial Report.

Results of GAO's Audit of U.S. Government's

Financial Statements for Fiscal Year 1999

Our report on the U.S. government's financial statements for fiscal year
1999 states that certain significant financial systems weaknesses, problems
with fundamental recordkeeping and financial reporting, incomplete
documentation, and weak internal control, including computer controls,
continue to prevent the government from accurately reporting a significant
portion of its assets, liabilities, and costs.

Major challenges included the federal government's inability to

   * properly account for and report (1) material amounts of property,
     equipment, materials, and supplies and (2) certain stewardship assets,
     primarily at the Department of Defense;

   * properly estimate the cost of certain major federal credit programs and
     the related loans receivable and loan guarantee liabilities, primarily
     at the Department of Agriculture;

   * estimate and reliably report material amounts of environmental and
     disposal liabilities and related costs, primarily at the Department of
     Defense;

   * determine the proper amount of various reported liabilities, including
     postretirement health benefits for military employees and accounts
     payable and other liabilities for certain agencies;

   * accurately report major portions of the net cost of government
     operations;

   * ensure that all disbursements are properly recorded; and

   * properly prepare the federal government's financial statements,
     including balancing the statements, accounting for substantial amounts
     of transactions between governmental entities, properly and
     consistently compiling the information in the financial statements, and
     reconciling the results of operations to budget results.

In addition, we found that (1) the government is unable to determine the
full extent of improper payments-estimated to total billions of dollars
annually-and therefore cannot develop effective strategies to reduce them,
(2) serious, long-standing computer security weaknesses expose the
government's financial and other sensitive information to inappropriate
disclosure, destruction, modification, and fraud, and critical operations to
disruption, and (3) material control weaknesses affect the government's tax
collection activities. Further, the financial management systems of almost
all agencies were again found not to be in substantial compliance with the
requirements of the Federal Financial Management Improvement Act of 1996.

Major issues identified by our work are discussed below.

Property, Plant, and Equipment and Inventories and Related Property

The federal government--one of the world's largest holders of physical
assets-does not have adequate systems and controls to ensure the accuracy of
information about the amount of assets held to support its domestic and
global operations. A majority of the $472 billion of these reported assets
is not adequately supported by financial and/or logistical records. Assets
that are not adequately supported include: (1) buildings, structures,
facilities, and equipment, (2) various government-owned assets that are in
the hands of private sector contractors, and (3) operating materials and
supplies comprised largely of ammunition, defense repairable items, and
other military supplies. Also, the government cannot ensure that all assets
are reported. For example, no Department of Defense (DOD) contractor-held
personal property was reported. Further, national defense asset unit
information reported as Stewardship Information was incomplete because (1)
it did not include major national defense support equipment, such as
uninstalled engines and communications equipment, and (2) amounts were
reported in units, rather than in dollars as required by current generally
accepted accounting principles. DOD, the largest holder of these assets, has
acknowledged the challenges it faces to implement effective systems and
accurately record data to properly account for and report its physical
assets and has a number of initiatives underway that are intended to address
this problem. These initiatives are expected to span several years.

Because the government lacks complete and reliable information to support
its asset holdings, it could not satisfactorily determine that all assets
were included in the financial statements, verify that reported assets
actually exist, or substantiate the amounts at which they were valued. For
example, periodic physical counts have shown that inventory records contain
significant error rates. Further, weak controls significantly impair the
government's ability to detect and investigate fraud or theft of assets.

Accurate asset information is necessary for the government to (1) know the
assets it owns and their location and condition, (2) safeguard its assets
from physical deterioration, theft, or loss, (3) account for acquisitions
and disposals of such assets, (4) prevent unnecessary storage and
maintenance costs or purchase of assets already on hand, and (5) determine
the full costs of government programs that use these assets.

Loans Receivable and Loan Guarantee Liabilities

As of the end of fiscal year 1999, the government reported $184 billion of
loans receivable and $35 billion of liabilities for estimated losses related
to estimated future defaults of guaranteed loans. Certain federal credit
agencies, responsible for significant portions of the government's lending
programs, were unable to properly estimate the cost of these programs in
accordance with generally accepted accounting principles and budgeting
requirements. As an example, the Department of Agriculture, which represents
a significant portion of loans receivable, could not estimate the net loan
amounts expected to be collected because it does not maintain some of the
key historical data needed to predict borrower behavior, such as the amount
and timing of future defaults and prepayments. Agriculture's lack of
historical data is largely the result of system inadequacies. Certain
affected agencies are in the process of implementing action plans intended
to develop reliable loan and loan guarantee information. Reliable
information about the cost of credit programs is important in supporting
annual budget requests for these programs, making future budgetary
decisions, managing program costs, and measuring the performance of credit
activities. Federal credit programs include direct loans and loan guarantees
for farms, rural utilities, low and moderate income housing, small
businesses, veterans' mortgages, and student loans.

Environmental and Disposal Liabilities

Significant portions of the liability for remediation of environmental
contamination and disposal of hazardous waste, reported at $313 billion,
lacked adequate support and may not be complete. For example, the estimated
cost to remove unexploded ordnance and residual contaminants from training
ranges, amounting to over 40 percent of DOD's recorded liability, is not
adequately supported. Also, the cost of significant estimated liabilities
associated with certain major weapons systems and training ranges, initially
recorded in fiscal year 1999, was reported as a current year cost, rather
than as a prior period adjustment as required by generally accepted
accounting principles.

Properly stating environmental and disposal liabilities and improving
internal control supporting the process for their estimation could assist in
determining priorities for cleanup and disposal activities and allow for
appropriate consideration of future budgetary resources needed to carry out
these activities. DOD, which has significant exposure for environmental and
disposal liabilities, improved its initial estimate in fiscal year 1999 by
including additional categories of liabilities, such as nuclear weapons
systems. Also, DOD has a project in progress that is intended to better
identify and document all additional environmental and disposal liabilities.
*** End of document. ***