Financial Management: Financial Management Weaknesses at the Department
of Education (Testimony, 12/06/1999, GAO/T-AIMD-00-50).
GAO discussed its review of the independent auditors' reports on the
Department of Education's financial statements covering fiscal year (FY)
1998, focusing on: (1) weaknesses in the financial reporting process;
(2) inadequate reconciliations of financial accounting records; and (3)
inadequate controls over information systems.
GAO noted that: (1) the independent auditors found that the Department
does not have adequate internal controls over its financial reporting
process to provide reasonable assurance that its principal financial
statements are reliable; (2) as a result, Education: (a) was unable to
prepare reliable statements; and (b) could not support material amounts
reported on its financial statements, including obligations, grant
expenditures, and net position; (3) these limitations in the financial
reporting process of the Department's new accounting system contributed
to the disclaimer of opinion on its FY 1998 financial statements; (5)
the system's reported weaknesses included its inability to perform an
automated year-end closing process and directly produce consolidated
financial statements as would normally be expected from such systems;
(6) Department officials stated that they have recognized the
seriousness of these problems and are working with a contractor to
resolve them; (7) independent auditors reported that Education did not
properly or promptly reconcile its financial accounting records during
FY 1998; (8) the independent auditors also determined that the
transactions Education reported to the Treasury routinely differed from
those reported in Education's general ledger throughout FY 1998; (9) the
auditors found that Education made large adjustments, which it did not
research or support, merely to force the records into agreement; (10) in
addition, Education did not reconcile its general ledger balance with
its subsidiary debt collection system; (11) instead, Education made
unsupported adjustments to the general ledger to align these records
with amounts reported in its debt collection system; (12) many of these
differences result from a lack of supporting documentation for
proprietary accounts and budgetary balances, the failure to regularly
perform formal reconciliations, and the serious problems with
Education's accounting system; (13) errors in these accounts may also
affect the accuracy of various Education financial reports, including
budget execution reports and information reported to the Congress; (14)
in connection with their review of Education's FY 1998 financial
statements, the independent auditors also conducted a review of
information systems controls over Education's accounting and financial
reporting systems; and (15) continued weaknesses in these information
system control areas place critical Education operations at risk of
unauthorized access and disruption.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-AIMD-00-50
TITLE: Financial Management: Financial Management Weaknesses at
the Department of Education
DATE: 12/06/1999
SUBJECT: Financial statement audits
Financial management systems
Internal controls
Auditing standards
Reporting requirements
Federal agency accounting systems
Financial records
Noncompliance
Accounting procedures
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ai00050t
For Release on Delivery Expected at 12: 30 p. m. Monday, December 6, 1999
GAO/T-AIMD-00-50
FINANCIAL MANAGEMENT
Financial Management Weaknesses at the Department of Education Statement of Gloria 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
Page 1 GAO/ T- AIMD- 00- 50
Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss our review of the independent auditors' reports 1 on the Department of Education's financial statements covering fiscal year 1998. The Department's financial statements are important to the federal government because Education is the primary agency responsible for overseeing the more than $73 billion annual federal investment in support of educational programs for U. S. citizens and eligible non- citizens. The Department is also responsible for tracking approximately 93 million student loans and 15 million grants as well as collecting more than $150 billion owed by students. In fiscal year 1998, more than 8.5 million students received over $48 billion in federal student financial aid through programs administered by Education.
As you know, audit results of agency financial statements are key indicators of the quality of the underlying agency financial data and the related systems used to compile that information. In March of this year, we reported on the results of our financial statement review of the fiscal year 1998 consolidated financial statements of the U. S. government. 2 Because of serious deficiencies in the government's systems, recordkeeping, documentation, financial reporting, and controls, we found that amounts reported in the governmentwide financial statements do not provide a reliable source of information for decision- making by the government or the public.
Similar outcomes were identified at Education. The results of the effort to audit the fiscal year 1998 financial statements for Education reveal that serious internal control and financial management system issues continue to plague the agency. 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. Education's independent auditors were unable to express an opinion (called a disclaimer of opinion) on Education's fiscal year 1998 consolidated financial statements. The reasons cited for the disclaimer for fiscal year 1998, also described as material internal control
1 Department of Education, Fiscal Year 1998 Consolidated Financial Statements, Ernst & Young LLP, November 1999.
2 Financial Audit: 1998 Financial Report of the United States Government (GAO/ AIMD- 99- 130, March 31, 1999).
Page 2 GAO/ T- AIMD- 00- 50
weaknesses in the report, 3 were (1) weaknesses in the financial reporting process and (2) inadequate reconciliations of financial accounting records. In addition, the independent auditors cited inadequate controls over information systems as a third material internal control weakness. 4 These deficiencies prevented the independent auditors from being able to form an opinion on the reliability of the financial statements and represent material weaknesses in internal control. Similar deficiencies concerning financial reporting, reconciliations, and systems controls were reported by Education's Inspector General (IG) for fiscal year 1997. 5 In addition, vulnerabilities in the Department's student financial assistance programs have led us since 1990 to designate this a high- risk 6 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.
Federal decisionmakers need reliable and timely financial information to ensure adequate accountability, manage for results, and make timely and well- informed decisions. However, historically, such information has not been available across the government. Agencies' independent auditor reports, IG reports, as well as our own work, have identified persistent limitations in the availability of quality financial data for decision- making. Major reforms, such as the Chief Financial Officers (CFO) Act of 1990, and later the Government Management Reform Act of 1994 and the Federal Financial Management Improvement Act of 1996 (FFMIA), set expectations for federal agencies to develop and deploy more modern financial management systems to routinely produce sound cost information.
3 A material internal control weakness is a reportable condition that precludes the entity's internal controls from providing reasonable assurance that material misstatements in the financial statements or material noncompliance with applicable laws or regulations will be prevented or detected on a timely basis.
4 In addition to these material internal control weaknesses, the independent auditors also reported four reportable conditions. Reportable conditions are matters coming to the auditors' attention that, in their judgment, should be communicated because they represent significant deficiencies in the design or operation of internal controls that could adversely affect the organization's ability to meet the objectives of reliable financial reporting and compliance with applicable laws and regulations.
5 U. S. Department of Education, Office of Inspector General Audit of Fiscal Year 1997 Consolidated Financial Statements, June 15, 1998. 6 High- Risk Series: An Update (GAO/ HR- 99- 1, January 1999). Background
Page 3 GAO/ T- AIMD- 00- 50
Toward that end, 24 CFO Act agencies have been required to annually prepare financial statements and have them audited beginning with those for fiscal year 1996. These audits have shown that many agencies face major challenges in generating reliable year- end financial information. Of the 24 CFO Act agencies, 12 agencies received unqualified audit opinions on their fiscal year 1998 financial statements, indicating that their financial statements were reliable in all material respects; 4 agencies received qualified opinions, indicating that at least one significant item on the financial statements was unreliable; 6 agencies, including Education, received disclaimers of opinion, meaning that the auditors were unable to determine on an overall basis if the financial statements were reliable; and 2 agencies received mixed opinions. 7 Education, the last CFO Act agency to issue its fiscal year 1998 financial statements, released them on November 18, 1999, over 8 months later than the March 1, 1999, due date for audited statements.
For some agencies, like Education, the preparation of financial statements requires considerable reliance on ad hoc programming and analysis of data produced by inadequate financial management systems that are not integrated or reconciled. These systems problems often require significant adjustments to the financial statements. While obtaining unqualified or clean opinions on federal financial statements is an important objective, it is not an end in and of itself. The key is to take steps to continuously improve underlying financial and management information systems and internal controls as a means to ensure accountability, increase the economy, improve the efficiency, and enhance the effectiveness of government. The ultimate goal is for these systems to generate timely, accurate, and useful information on an ongoing basis, not just as of the end of the fiscal year.
More fundamentally, FFMIA requires that agency financial management systems substantially comply with (1) financial management systems requirements, 8 (2) federal accounting standards, and (3) the U. S. Government Standard General Ledger 9 at the transaction level. Of the 24
7 One of these agencies received an unqualified opinion on its balance sheet and a disclaimer on the rest of its statements. The other agency did not prepare consolidated statements and received unqualified opinions on three of its components and disclaimers on the remaining two of its components.
8 The financial management systems requirements have been developed by the Joint Financial Management Improvement Program, which is a joint and cooperative undertaking of the Department of the Treasury, Office of Management and Budget (OMB), GAO, and the Office of Personnel Management.
9 The Standard General Ledger provides a standard chart of accounts and standardized transactions that agencies are to use in all their financial systems.
Page 4 GAO/ T- AIMD- 00- 50
CFO Act agencies, financial management systems for 21 agencies, including Education, were found by auditors to be in substantial noncompliance with FFMIA's requirements during fiscal year 1998.
Education's fiscal year 1998 audit effort was conducted by Ernst & Young LLP, independent auditors contracted for by the Education Inspector General. We reviewed the independent auditors' reports during the last half of November 1999 and their workpapers on information systems. However, we did not review key workpapers supporting other material internal control weaknesses because they have not yet been made available to us. 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.
The independent auditors found that the Department does not have adequate internal controls over its financial reporting process to provide reasonable assurance that its principal financial statements are reliable. As a result, Education (1) was unable to prepare reliable statements and (2) could not support material amounts reported on its financial statements, including obligations, grant expenditures, and net position. These limitations in the financial reporting process of the Department's new accounting system 10 contributed to the disclaimer of opinion on its fiscal year 1998 financial statements. The system's reported weaknesses included its inability 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 extensive and complex analyses and ad hoc procedures to prepare financial statements for fiscal year 1998. These system limitations contributed to the delay in Education submitting financial statements to the auditors and OMB.
The amounts produced by these efforts involved over 700 adjustments to develop the balances for the financial statements. The auditors reported that one of these adjustments, erroneously posted for $550 million, would have resulted in a net difference in expenditures of $1.1 billion if not corrected. In another instance, a $400 million adjustment made by the Department was deemed to be unnecessary and needed to be reversed. The Department's inability to prepare reliable, year- end financial
10 ED operated under a new accounting system Education's Central Automated Processing System (EDCAPS) in fiscal year 1998. Education's Reporting
Controls Are Inadequate and Its Financial Management Systems Do Not Comply With FFMIA
Page 5 GAO/ T- AIMD- 00- 50
statements after extraordinary efforts is evidence that Education cannot provide reliable information about its operations on a day- to- day basis. Thus, decisionmakers, such as agency management and the Congress, cannot be assured that the information they are using is reliable. Department officials stated that they have recognized the seriousness of these problems and are working with a contractor to resolve them.
For fiscal year 1998, the independent auditors found that Education was not in compliance with FFMIA because it lacked adequate financial management systems, reports, and oversight to prepare timely and accurate financial statements. The independent auditors also reported that the Department did not comply with all of the requirements included in the Chief Financial Officers Act of 1990, as expanded by the Government Management Reform Act of 1994. Specifically, the Department did not submit fiscal year 1998 audited financial statements to OMB by March 1, 1999, the statutory deadline.
The independent auditors reported that Education did not properly or promptly reconcile its financial accounting records during fiscal year 1998. An adequate reconciliation provides assurance that processed transactions are properly and promptly recorded in accounting records and financial statements, which in turn facilitates management's ability to routinely analyze its financial condition and results of operations and to use that data in the course of daily operations. However, the Department did not adequately perform reconciliations and could not provide sufficient documentation to support its financial transactions.
For example, as indicated in fiscal year 1997 and again in fiscal year 1998, Education has not been able to identify and resolve differences between its accounting records and cash transactions reported by the Treasury for several years. Such reconciliations are required by Treasury policy and are analogous to companies or individuals reconciling their checkbooks to monthly bank statements. In fiscal year 1998, Education reported about $45 billion in Fund Balance with Treasury accounts, but the independent auditors could not determine whether the amount was correct.
For the grantback account, 11 which is part of Education's Fund Balance with Treasury, Education's new accounting system showed a balance of almost $400 million, some portion of which Education owed the Treasury,
11 The grantback account holds funds paid to recipients under a grant or cooperative agreement that were recovered from a recipient following a determination of a violation of law or of the grant or cooperative agreement. A portion of these funds is to be returned to the recipient when the violation has been corrected. Any amounts not returned to the grantee should revert to the Treasury. Education's Financial
Accounting Records Were Not Reconciled Properly or Promptly
Page 6 GAO/ T- AIMD- 00- 50
as of September 30, 1998. Of this balance, over $386 million represented several adjustments that had been accumulating since fiscal year 1993 that Education could not identify with any specific program or reconcile. When Education attempted to resolve the differences and determine what amount it should return to the Treasury, its estimates ranged from about $15.4 million to over $221 million. According to Department officials, Education is in the process of resolving these differences.
The independent auditors also determined that the transactions Education reported to the Treasury routinely differed from those reported in Education's general ledger throughout fiscal year 1998. The auditors found that Education made large adjustments, which it did not research or support, merely to force the records into agreement. In addition, Education did not reconcile its general ledger balance with its subsidiary debt collection system. Instead, Education made unsupported adjustments to the general ledger to align these records with amounts reported in its debt collection system. Furthermore, Education did not reconcile between the loans reported by its guaranty agencies 12 as assigned 13 to Education and those recorded in its debt collection system. As a result, Education could not be assured that amounts reported for assigned loans receivable were accurate. Such practices are severely at odds with established financial management practices and reporting standards.
Many of these differences result from a lack of supporting documentation for proprietary accounts (such as cash) and budgetary balances, the failure to regularly perform formal reconciliations, and the serious problems with Education's accounting system. The lack of timely, thorough reconciliations makes it difficult if not impossible for Education to determine if operating funds have been properly spent or if reported amounts for operating expenses, assets, and liabilities are reliable. Without performing such reconciliations, Education has no assurance that its financial accounting records are accurate. The lack of appropriate reconciliations also affects Education's ability to ensure that it complies with the laws governing the use of its budget authority. Errors in these accounts may also affect the accuracy of various Education financial reports, including budget execution reports and information reported to the Congress.
12 These agencies act as intermediaries between the government and the lender. They are responsible for reviewing student applications and approving loans, reviewing and paying claims to lenders when defaults occur, and collecting on defaulted loans.
13 Under the Federal Family Education Loan Program, when the guaranty agencies have exhausted their collection efforts or a loan meets specific Education criteria (34 CFR 682. 409), all rights and title of the loan are permanently assigned to Education.
Page 7 GAO/ T- AIMD- 00- 50
In connection with their review of Education's fiscal year 1998 financial statements, the independent auditors also conducted a review of information systems controls over Education's accounting and financial reporting systems. 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, weaknesses in information systems controls could render Education unable to perform these vital functions or place Education's sensitive grant and loan data at risk of loss or misuse.
The independent auditors reported information systems controls as a material internal control weakness in Education's fiscal year 1998 financial statement report. Specifically, the independent auditors reported deficiencies in (1) authorizing and revalidating user access to Education's systems and effectively managing user identification and passwords, (2) providing adequate physical security for its computer facility, (3) monitoring and reviewing access to sensitive computer resources, (4) documenting the approach and methodology for the design and maintenance of information technology architecture, and (5) developing and testing disaster recovery plans to ensure the continuity of critical system operations in the event of disaster.
Continued weaknesses in these information system control areas place critical Education operations, such as financial management and sensitive loan and grant systems, at increased risk of unauthorized access and disruption. In addition, sensitive financial transaction data are vulnerable to inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction, possibly occurring without detection. For example, given the high volume of transactions that flow through Education's Grant Administration and Payment System (GAPS) over $20 billion a year these weaknesses in the information systems controls increase the risk of misuse or loss of grant data. Effective information systems controls contribute greatly to the reduction of such risks.
The need to strengthen information system security in both the government and the private sector has been recognized over the past several years by a number of entities. Since 1994, we have issued dozens of reports on individual agency computer security weaknesses and made scores of related recommendations. In September 1996, we reported that poor information security was a widespread federal problem. 14
14 Information Security: Opportunities for Improved OMB Oversight of Agency Practices (GAO/ AIMD- 96- 110, September 24, 1996). Information Systems
Controls Are Inadequate
Page 8 GAO/ T- AIMD- 00- 50
Subsequently, in February 1997, in a series of reports to the Congress, we designated information security as a new governmentwide high- risk area. 15 More recently, we reported 16 that the nation's computer- based critical infrastructures are at increasing risk of severe disruption from varying sources. We also reported on cooperative efforts underway across federal agencies and among public and private sector entities and other nations to address this substantial risk.
Education continues to be plagued by serious internal control and system deficiencies that hinder its ability to achieve lasting financial management improvements. While Education has planned and begun implementing many actions to resolve its financial management problems, it is too early to tell whether they will be successful. We recognize that Education's newly acquired financial management system does not meet current systems and financial reporting needs, that its financial management problems did not occur overnight, and that the task ahead of Education to fully correct these deficiencies will take a great deal of commitment and effort. We do, however, believe that serious internal control issues can be addressed in the near term through continued dedicated effort on the part of Education's management. It is critical that Education rise to the challenges posed by these financial management issues, because its success in achieving all aspects of its strategic objectives depends in part upon reliable financial management information and effective internal controls. It is also important to recognize that several of the financial management issues that have been raised in reports emanating from reviews of Education's financial statements directly or indirectly affect Education's ability to meet its obligations to its loan and grant recipients and responsibilities under law.
Mr. Chairman, this concludes my testimony. I would be happy to answer any questions you or other Members of the Subcommittee may have.
15 High- Risk Series: Information Management and Technology (GAO/ HR- 97- 9, February 1997). 16 Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO/ AIMD- 00- 1, October 1, 1999). Significant Efforts Will
Be Needed To Resolve Education's Financial Management Issues
Page 9 GAO/ T- AIMD- 00- 50
For information about this statement, please contact Gloria Jarmon at (202) 512- 4476 or at jarmong. aimd@ gao. gov. Individuals making key contributions to this statement included Chinero Thomas, Cheryl Driscoll, Anh Dang, and Meg Mills.
(916316) Contact And
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ai00050t For Release on Delivery Expected at 12: 30 p. m. Monday,
December 6, 1999 GAO/T-AIMD-00-50 FINANCIAL MANAGEMENT
Financial Management Weaknesses at the Department of Education
Statement of Gloria 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 Page 1 GAO/T-AIMD-00-50 Mr. Chairman and
Members of the Subcommittee: I am pleased to be here today to
discuss our review of the independent auditors' reports 1 on the
Department of Education's financial statements covering fiscal
year 1998. The Department's financial statements are important to
the federal government because Education is the primary agency
responsible for overseeing the more than $73 billion annual
federal investment in support of educational programs for U. S.
citizens and eligible non- citizens. The Department is also
responsible for tracking approximately 93 million student loans
and 15 million grants as well as collecting more than $150 billion
owed by students. In fiscal year 1998, more than 8.5 million
students received over $48 billion in federal student financial
aid through programs administered by Education. As you know, audit
results of agency financial statements are key indicators of the
quality of the underlying agency financial data and the related
systems used to compile that information. In March of this year,
we reported on the results of our financial statement review of
the fiscal year 1998 consolidated financial statements of the U.
S. government. 2 Because of serious deficiencies in the
government's systems, recordkeeping, documentation, financial
reporting, and controls, we found that amounts reported in the
governmentwide financial statements do not provide a reliable
source of information for decision- making by the government or
the public. Similar outcomes were identified at Education. The
results of the effort to audit the fiscal year 1998 financial
statements for Education reveal that serious internal control and
financial management system issues continue to plague the agency.
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. Education's
independent auditors were unable to express an opinion (called a
disclaimer of opinion) on Education's fiscal year 1998
consolidated financial statements. The reasons cited for the
disclaimer for fiscal year 1998, also described as material
internal control 1 Department of Education, Fiscal Year 1998
Consolidated Financial Statements, Ernst & Young LLP, November
1999. 2 Financial Audit: 1998 Financial Report of the United
States Government (GAO/AIMD-99-130, March 31, 1999). Page 2 GAO/T-
AIMD-00-50 weaknesses in the report, 3 were (1) weaknesses in the
financial reporting process and (2) inadequate reconciliations of
financial accounting records. In addition, the independent
auditors cited inadequate controls over information systems as a
third material internal control weakness. 4 These deficiencies
prevented the independent auditors from being able to form an
opinion on the reliability of the financial statements and
represent material weaknesses in internal control. Similar
deficiencies concerning financial reporting, reconciliations, and
systems controls were reported by Education's Inspector General
(IG) for fiscal year 1997. 5 In addition, vulnerabilities in the
Department's student financial assistance programs have led us
since 1990 to designate this a high- risk 6 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. Federal decisionmakers need reliable and timely financial
information to ensure adequate accountability, manage for results,
and make timely and well- informed decisions. However,
historically, such information has not been available across the
government. Agencies' independent auditor reports, IG reports, as
well as our own work, have identified persistent limitations in
the availability of quality financial data for decision- making.
Major reforms, such as the Chief Financial Officers (CFO) Act of
1990, and later the Government Management Reform Act of 1994 and
the Federal Financial Management Improvement Act of 1996 (FFMIA),
set expectations for federal agencies to develop and deploy more
modern financial management systems to routinely produce sound
cost information. 3 A material internal control weakness is a
reportable condition that precludes the entity's internal controls
from providing reasonable assurance that material misstatements in
the financial statements or material noncompliance with applicable
laws or regulations will be prevented or detected on a timely
basis. 4 In addition to these material internal control
weaknesses, the independent auditors also reported four reportable
conditions. Reportable conditions are matters coming to the
auditors' attention that, in their judgment, should be
communicated because they represent significant deficiencies in
the design or operation of internal controls that could adversely
affect the organization's ability to meet the objectives of
reliable financial reporting and compliance with applicable laws
and regulations. 5 U. S. Department of Education, Office of
Inspector General Audit of Fiscal Year 1997 Consolidated Financial
Statements, June 15, 1998. 6 High- Risk Series: An Update (GAO/HR-
99-1, January 1999). Background Page 3 GAO/T-AIMD-00-50 Toward
that end, 24 CFO Act agencies have been required to annually
prepare financial statements and have them audited beginning with
those for fiscal year 1996. These audits have shown that many
agencies face major challenges in generating reliable year- end
financial information. Of the 24 CFO Act agencies, 12 agencies
received unqualified audit opinions on their fiscal year 1998
financial statements, indicating that their financial statements
were reliable in all material respects; 4 agencies received
qualified opinions, indicating that at least one significant item
on the financial statements was unreliable; 6 agencies, including
Education, received disclaimers of opinion, meaning that the
auditors were unable to determine on an overall basis if the
financial statements were reliable; and 2 agencies received mixed
opinions. 7 Education, the last CFO Act agency to issue its fiscal
year 1998 financial statements, released them on November 18,
1999, over 8 months later than the March 1, 1999, due date for
audited statements. For some agencies, like Education, the
preparation of financial statements requires considerable reliance
on ad hoc programming and analysis of data produced by inadequate
financial management systems that are not integrated or
reconciled. These systems problems often require significant
adjustments to the financial statements. While obtaining
unqualified or clean opinions on federal financial statements is
an important objective, it is not an end in and of itself. The key
is to take steps to continuously improve underlying financial and
management information systems and internal controls as a means to
ensure accountability, increase the economy, improve the
efficiency, and enhance the effectiveness of government. The
ultimate goal is for these systems to generate timely, accurate,
and useful information on an ongoing basis, not just as of the end
of the fiscal year. More fundamentally, FFMIA requires that agency
financial management systems substantially comply with (1)
financial management systems requirements, 8 (2) federal
accounting standards, and (3) the U. S. Government Standard
General Ledger 9 at the transaction level. Of the 24 7 One of
these agencies received an unqualified opinion on its balance
sheet and a disclaimer on the rest of its statements. The other
agency did not prepare consolidated statements and received
unqualified opinions on three of its components and disclaimers on
the remaining two of its components. 8 The financial management
systems requirements have been developed by the Joint Financial
Management Improvement Program, which is a joint and cooperative
undertaking of the Department of the Treasury, Office of
Management and Budget (OMB), GAO, and the Office of Personnel
Management. 9 The Standard General Ledger provides a standard
chart of accounts and standardized transactions that agencies are
to use in all their financial systems. Page 4 GAO/T-AIMD-00-50 CFO
Act agencies, financial management systems for 21 agencies,
including Education, were found by auditors to be in substantial
noncompliance with FFMIA's requirements during fiscal year 1998.
Education's fiscal year 1998 audit effort was conducted by Ernst &
Young LLP, independent auditors contracted for by the Education
Inspector General. We reviewed the independent auditors' reports
during the last half of November 1999 and their workpapers on
information systems. However, we did not review key workpapers
supporting other material internal control weaknesses because they
have not yet been made available to us. 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. The independent auditors found that
the Department does not have adequate internal controls over its
financial reporting process to provide reasonable assurance that
its principal financial statements are reliable. As a result,
Education (1) was unable to prepare reliable statements and (2)
could not support material amounts reported on its financial
statements, including obligations, grant expenditures, and net
position. These limitations in the financial reporting process of
the Department's new accounting system 10 contributed to the
disclaimer of opinion on its fiscal year 1998 financial
statements. The system's reported weaknesses included its
inability 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 extensive and complex
analyses and ad hoc procedures to prepare financial statements for
fiscal year 1998. These system limitations contributed to the
delay in Education submitting financial statements to the auditors
and OMB. The amounts produced by these efforts involved over 700
adjustments to develop the balances for the financial statements.
The auditors reported that one of these adjustments, erroneously
posted for $550 million, would have resulted in a net difference
in expenditures of $1.1 billion if not corrected. In another
instance, a $400 million adjustment made by the Department was
deemed to be unnecessary and needed to be reversed. The
Department's inability to prepare reliable, year- end financial 10
ED operated under a new accounting system Education's Central
Automated Processing System (EDCAPS) in fiscal year 1998.
Education's Reporting Controls Are Inadequate and Its Financial
Management Systems Do Not Comply With FFMIA Page 5 GAO/T-AIMD-00-
50 statements after extraordinary efforts is evidence that
Education cannot provide reliable information about its operations
on a day- to- day basis. Thus, decisionmakers, such as agency
management and the Congress, cannot be assured that the
information they are using is reliable. Department officials
stated that they have recognized the seriousness of these problems
and are working with a contractor to resolve them. For fiscal year
1998, the independent auditors found that Education was not in
compliance with FFMIA because it lacked adequate financial
management systems, reports, and oversight to prepare timely and
accurate financial statements. The independent auditors also
reported that the Department did not comply with all of the
requirements included in the Chief Financial Officers Act of 1990,
as expanded by the Government Management Reform Act of 1994.
Specifically, the Department did not submit fiscal year 1998
audited financial statements to OMB by March 1, 1999, the
statutory deadline. The independent auditors reported that
Education did not properly or promptly reconcile its financial
accounting records during fiscal year 1998. An adequate
reconciliation provides assurance that processed transactions are
properly and promptly recorded in accounting records and financial
statements, which in turn facilitates management's ability to
routinely analyze its financial condition and results of
operations and to use that data in the course of daily operations.
However, the Department did not adequately perform reconciliations
and could not provide sufficient documentation to support its
financial transactions. For example, as indicated in fiscal year
1997 and again in fiscal year 1998, Education has not been able to
identify and resolve differences between its accounting records
and cash transactions reported by the Treasury for several years.
Such reconciliations are required by Treasury policy and are
analogous to companies or individuals reconciling their checkbooks
to monthly bank statements. In fiscal year 1998, Education
reported about $45 billion in Fund Balance with Treasury accounts,
but the independent auditors could not determine whether the
amount was correct. For the grantback account, 11 which is part of
Education's Fund Balance with Treasury, Education's new accounting
system showed a balance of almost $400 million, some portion of
which Education owed the Treasury, 11 The grantback account holds
funds paid to recipients under a grant or cooperative agreement
that were recovered from a recipient following a determination of
a violation of law or of the grant or cooperative agreement. A
portion of these funds is to be returned to the recipient when the
violation has been corrected. Any amounts not returned to the
grantee should revert to the Treasury. Education's Financial
Accounting Records Were Not Reconciled Properly or Promptly Page 6
GAO/T-AIMD-00-50 as of September 30, 1998. Of this balance, over
$386 million represented several adjustments that had been
accumulating since fiscal year 1993 that Education could not
identify with any specific program or reconcile. When Education
attempted to resolve the differences and determine what amount it
should return to the Treasury, its estimates ranged from about
$15.4 million to over $221 million. According to Department
officials, Education is in the process of resolving these
differences. The independent auditors also determined that the
transactions Education reported to the Treasury routinely differed
from those reported in Education's general ledger throughout
fiscal year 1998. The auditors found that Education made large
adjustments, which it did not research or support, merely to force
the records into agreement. In addition, Education did not
reconcile its general ledger balance with its subsidiary debt
collection system. Instead, Education made unsupported adjustments
to the general ledger to align these records with amounts reported
in its debt collection system. Furthermore, Education did not
reconcile between the loans reported by its guaranty agencies 12
as assigned 13 to Education and those recorded in its debt
collection system. As a result, Education could not be assured
that amounts reported for assigned loans receivable were accurate.
Such practices are severely at odds with established financial
management practices and reporting standards. Many of these
differences result from a lack of supporting documentation for
proprietary accounts (such as cash) and budgetary balances, the
failure to regularly perform formal reconciliations, and the
serious problems with Education's accounting system. The lack of
timely, thorough reconciliations makes it difficult if not
impossible for Education to determine if operating funds have been
properly spent or if reported amounts for operating expenses,
assets, and liabilities are reliable. Without performing such
reconciliations, Education has no assurance that its financial
accounting records are accurate. The lack of appropriate
reconciliations also affects Education's ability to ensure that it
complies with the laws governing the use of its budget authority.
Errors in these accounts may also affect the accuracy of various
Education financial reports, including budget execution reports
and information reported to the Congress. 12 These agencies act as
intermediaries between the government and the lender. They are
responsible for reviewing student applications and approving
loans, reviewing and paying claims to lenders when defaults occur,
and collecting on defaulted loans. 13 Under the Federal Family
Education Loan Program, when the guaranty agencies have exhausted
their collection efforts or a loan meets specific Education
criteria (34 CFR 682. 409), all rights and title of the loan are
permanently assigned to Education. Page 7 GAO/T-AIMD-00-50 In
connection with their review of Education's fiscal year 1998
financial statements, the independent auditors also conducted a
review of information systems controls over Education's accounting
and financial reporting systems. 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, weaknesses in information systems
controls could render Education unable to perform these vital
functions or place Education's sensitive grant and loan data at
risk of loss or misuse. The independent auditors reported
information systems controls as a material internal control
weakness in Education's fiscal year 1998 financial statement
report. Specifically, the independent auditors reported
deficiencies in (1) authorizing and revalidating user access to
Education's systems and effectively managing user identification
and passwords, (2) providing adequate physical security for its
computer facility, (3) monitoring and reviewing access to
sensitive computer resources, (4) documenting the approach and
methodology for the design and maintenance of information
technology architecture, and (5) developing and testing disaster
recovery plans to ensure the continuity of critical system
operations in the event of disaster. Continued weaknesses in these
information system control areas place critical Education
operations, such as financial management and sensitive loan and
grant systems, at increased risk of unauthorized access and
disruption. In addition, sensitive financial transaction data are
vulnerable to inadvertent or deliberate misuse, fraudulent use,
improper disclosure, or destruction, possibly occurring without
detection. For example, given the high volume of transactions that
flow through Education's Grant Administration and Payment System
(GAPS) over $20 billion a year these weaknesses in the information
systems controls increase the risk of misuse or loss of grant
data. Effective information systems controls contribute greatly to
the reduction of such risks. The need to strengthen information
system security in both the government and the private sector has
been recognized over the past several years by a number of
entities. Since 1994, we have issued dozens of reports on
individual agency computer security weaknesses and made scores of
related recommendations. In September 1996, we reported that poor
information security was a widespread federal problem. 14 14
Information Security: Opportunities for Improved OMB Oversight of
Agency Practices (GAO/AIMD-96-110, September 24, 1996).
Information Systems Controls Are Inadequate Page 8 GAO/T-AIMD-00-
50 Subsequently, in February 1997, in a series of reports to the
Congress, we designated information security as a new
governmentwide high- risk area. 15 More recently, we reported 16
that the nation's computer- based critical infrastructures are at
increasing risk of severe disruption from varying sources. We also
reported on cooperative efforts underway across federal agencies
and among public and private sector entities and other nations to
address this substantial risk. Education continues to be plagued
by serious internal control and system deficiencies that hinder
its ability to achieve lasting financial management improvements.
While Education has planned and begun implementing many actions to
resolve its financial management problems, it is too early to tell
whether they will be successful. We recognize that Education's
newly acquired financial management system does not meet current
systems and financial reporting needs, that its financial
management problems did not occur overnight, and that the task
ahead of Education to fully correct these deficiencies will take a
great deal of commitment and effort. We do, however, believe that
serious internal control issues can be addressed in the near term
through continued dedicated effort on the part of Education's
management. It is critical that Education rise to the challenges
posed by these financial management issues, because its success in
achieving all aspects of its strategic objectives depends in part
upon reliable financial management information and effective
internal controls. It is also important to recognize that several
of the financial management issues that have been raised in
reports emanating from reviews of Education's financial statements
directly or indirectly affect Education's ability to meet its
obligations to its loan and grant recipients and responsibilities
under law. Mr. Chairman, this concludes my testimony. I would be
happy to answer any questions you or other Members of the
Subcommittee may have. 15 High- Risk Series: Information
Management and Technology (GAO/HR-97-9, February 1997). 16
Critical Infrastructure Protection: Comprehensive Strategy Can
Draw on Year 2000 Experiences (GAO/AIMD-00-1, October 1, 1999).
Significant Efforts Will Be Needed To Resolve Education's
Financial Management Issues Page 9 GAO/T-AIMD-00-50 For
information about this statement, please contact Gloria Jarmon at
(202) 512- 4476 or at jarmong. aimd@ gao. gov. Individuals making
key contributions to this statement included Chinero Thomas,
Cheryl Driscoll, Anh Dang, and Meg Mills. (916316) Contact And
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