Financial Management: Education's Financial Management Problems Persist
(Testimony, 05/24/2000, GAO/T-AIMD-00-180).
Pursuant to a congressional request, GAO discussed the Department of
Education's financial management problems, focusing on: (1) Education's
fiscal year (fy) 1999 financial audit results; (2) the relationship
between the audit findings and the potential for waste, fraud, and
abuse, and (3) the results of GAO's review of the Department's grantback
account.
GAO noted that: (1) while Education's financial staff and its
contractors work very hard to prepare Education's FY 1999 financial
statement before the March 1, 2000, deadline, and the auditors' opinion
on the financial statements improved over that of FY 1998, serious
internal control and financial management systems weakness continued to
plague the agency; (2) for FY 1999, Education made significant efforts
to work around these weaknesses and produce financial statements; (3)
these efforts enabled its auditors to issue qualified opinions on four
of its five required financial statements and a disclaimer on the fifth
statement; (4) its auditors' qualified opinion states that except for
the effect of the matters to which the qualification relates, the
financial statements present fairly, in all material respects, financial
position, net costs, changes in net position, and budgetary resources in
conformity with generally accepted accounting principles; (5) in the
auditors' internal controls report, they reported four material internal
control weaknesses-three continuing from FY 1998 and one additional one
for FY 1999-and that long-standing internal control weaknesses persist;
(6) Education's auditors reported that it was not in compliance with
three laws-the Federal Financial Management Improvement Act, the
Clinger-Cohen Act and the Federal Credit Reform Act of 1990; (7) the
internal control weaknesses cited in the auditors' report need to be
addressed to reduce the potential for waste, fraud, and abuse in the
department; (8) for the grantback account, its auditors reported that
approximately 97 percent of the balance at September 30, 1998, was
composed of adjustments that had accumulated since FY 1993 for
reconciling differences of various appropriations that could not be
identified with any specific program; (9) the auditors also reported for
FY 1999 that Education could not readily determine to which
appropriations the adjustments balance belongs; and (10) Education had
taken or plans to take actions to address the grantback account issues.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-AIMD-00-180
TITLE: Financial Management: Education's Financial Management
Problems Persist
DATE: 05/24/2000
SUBJECT: Financial management systems
Auditing standards
Educational grants
Financial statement audits
Financial records
Accounting standards
IDENTIFIER: Federal Family Education Loan Program
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GAO/T-AIMD-00-180
* For Release on Delivery
Expected at
10 a.m.
Wednesday,
May 24, 2000
GAO/T-AIMD-00-180
financial management
Education's Financial Management Problems Persist
Statement of Gloria L. Jarmon
Director, Health, Education, and Human Services Accounting and Financial
Management Issues
Accounting and Information Management Division
and
Statement of Gary T. Engel
Associate Director, Governmentwide Accounting and Financial Management
Issues
Accounting and Information Management Division
Testimony
Before the Task Force on Education
Committee on the Budget
House of Representatives
United States General Accounting Office
GAO
Mr. Chairman and Members of the Task Force:
We are 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 results of our review of
the Department's grantback account. Much of the testimony today reflects our
March 1, 2000, testimony on these issues.
The Department's financial activity is 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 financial 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 reliable 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
foundation for generating accurate financial information 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' reports and workpapers. 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 in December, and again in March, 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 of financial management
staff, 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 did 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
data 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.
* 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, these results did
not change significantly in fiscal year 1999-20 of 23 agencies' systems
did not comply with FFMIA. 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 the
agencies to evaluate their progress in resolving 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
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 in February emphasizes the need for the Department to
focus on addressing its computer security vulnerabilities. In addition,
earlier this year, the White House 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. In the aftermath of the recent attack
by the "ILOVEYOU" virus, which disrupted operations at large
corporations, governments, and media organizations worldwide, we
recently testified about the need for federal agencies to promptly
implement a comprehensive set of security controls.
* 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. An alleged equipment theft is currently
under investigation by the OIG.
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, our audits as well as those by the
Department's IG have found instances in which students fraudulently obtained
grants and loans.
Review of the Grantback Account
Mr. Chairman, at your request and that of the Vice Chairman of the
Subcommittee on Oversight and Investigations of the House Committee on
Education and the Workforce, we reviewed Education's grantback account. We
briefed you and Education officials on our findings earlier this month and
plan to issue our detailed report in the near future. In our review of the
grantback account, we found that although the account was established for
grantback activities, Education also used it as a suspense account for
hundreds of millions of dollars of activity related to grant reconciliation
efforts. We also found that Education could not provide adequate
documentation to support the validity of certain adjustments related to the
reconciliation efforts and other activity in the grantback account. For
example, out of a sample of 92 grantback transactions totaling $128 million,
Education could not locate or provide any documentation to support the
validity of 39 of these transactions totaling $47 million. In addition, out
of 20 adjustment transactions we selected for testing, Education could not
provide adequate documentation to support the validity of 6 transactions.
Further, Education did not maintain adequate detailed records for certain
grantback account activity by the applicable fiscal year and appropriation.
Such detailed records are needed to have an adequate system of funds control
and help protect against Anti-Deficiency Act violations. For example, an
adjustment we tested totaling $111 million reduced the grantback account
balance and increased the balance of six appropriations to ensure that
projected negative balances for such appropriations did not occur. However,
Education could not provide any documentation to show that the increases to
the appropriation accounts to prevent the negative balances were valid. As a
result of financial management systems deficiencies, inadequate systems of
funds control, and manual internal control weaknesses, which we and other
auditors identified, there is increased risk of fraud, waste, and
mismanagement of grant funds, as well as increased risk of noncompliance
with the requirements of the Anti-Deficiency Act.
We noted in our briefing that Education had taken or plans to take actions
to address the grantback account issues. In addition, our briefing included
recommendations to Education to strengthen internal controls related to
documentation and policies and procedures for grant reconciliations and to
develop and implement a formal, detailed plan to eliminate the remaining
portion of the adjustments balance.
Mr. Chairman, this concludes our statement. We would be happy to answer any
questions you or other Members of the Task Force may have.
Contact and Acknowledgement
(916362)
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