Financial Management: Continued Momentum Essential to Achieve CFO Act
Goals (Testimony, 12/14/95, GAO/T-AIMD-96-10).

This testimony discusses the steady progress being made to improve
financial management in the federal government through implementation of
the Chief Financial Officers Act of 1990. This landmark legislation was
enacted five years ago, but a great deal more perseverance will be
required to sustain the current momentum and successfully overcome
decades of serious neglect in fundamental financial management
operations and reporting methods. The Comptroller General focuses on the
following four implementation challenges: (1) Successfully implementing
the expanded requirements for audited financial statements to improve
the reliability of data for decision-making and strengthen the
efficiency of financial operations and controls. (2) Continuing to build
stronger financial management organizations by upgrading skill levels,
enhancing training, and ensuring that Chief Financial Officers have all
the necessary authority to achieve change. (3) Devising and applying
more effective solutions to overcome difficult problems plaguing
agencies' financial systems. (4) Designing comprehensive accountability
reports to allow more thorough and objective assessments of agencies'
performance and financial contributions, as well as to enhance the
budget preparation and deliberation process. The Comptroller General
also comments on amendments to the Single Audit Act being considered by
Congress.

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

 REPORTNUM:  T-AIMD-96-10
     TITLE:  Financial Management: Continued Momentum Essential to 
             Achieve CFO Act Goals
      DATE:  12/14/95
   SUBJECT:  Financial management
             Chief financial officers
             Financial statement audits
             Internal controls
             Auditing procedures
             Auditing standards
             Reporting requirements
             Federal agency accounting systems
             Data integrity
             Government collections
IDENTIFIER:  Superfund Trust Fund
             Highway Trust Fund
             Federal Family Education Loan Program
             Oil Spill Liability Trust Fund
             Joint Financial Management Improvement Program
             Social Security Trust Fund
             Medicare Program
             Hospital Insurance Trust Fund
             Supplementary Medical Insurance Trust Fund
             
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Cover
================================================================ COVER


Before the Committee on Governmental Affairs
United States Senate

For Release on Delivery
Expected at
9:30 a.m.
Thursday,
December 14, 1995

FINANCIAL MANAGEMENT - CONTINUED
MOMENTUM ESSENTIAL TO ACHIEVE CFO
ACT GOALS

Statement of Charles A.  Bowsher
Comptroller General of the United States

GAO/T-AIMD-96-10

GAO/AIMD-96-10T


(901687)


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


============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am very pleased to be here today to discuss the steady progress
being made to improve financial management in the federal government
through implementation of the Chief Financial Officers (CFO) Act of
1990.  This landmark legislation was enacted 5 years ago thanks to
the hard work of this Committee and its House counterpart.  But, as I
will outline today, a great deal more perseverance will be required
to sustain the current momentum and successfully overcome decades of
serious neglect in fundamental financial management operations and
reporting methods. 

To address these problems, the 1990 CFO Act spelled out an ambitious
agenda of long overdue reforms.  The CFO Act established a CFO
structure in 24 major agencies and the Office of Management and
Budget (OMB) to provide the necessary leadership and focus.  To help
instill greater accountability and fix pervasive and costly control
breakdowns, financial statements were required to be prepared and
audited, beginning with those for fiscal year 1991, for revolving and
trust funds and commercial activities.  For 10 agencies, audited
financial statements were required as part of a pilot program to test
this concept for an agency's entire operations.  Moreover, the CFO
Act set expectations for

  -- the deployment of modern systems to replace existing antiquated,
     often manual, processes;

  -- the development of better performance and cost measures; and

  -- the design of results-oriented reports on the government's
     financial condition and operating performance by integrating
     budget, accounting, and program information. 

Important progress is being achieved to bring about these sweeping
reforms and rectify the devastating legacy from inattention to
financial management.  OMB continues to play an important leadership
role and a cadre of qualified CFOs are now in place and are seeking
to make needed improvements.  Similarly, the Inspectors General (IG)
are embracing their new financial audit responsibilities. 
Additionally, much needed comprehensive accounting standards are
nearing completion, and efforts are underway to further strengthen
the quality of financial reporting.  In short, financial management
is finally becoming a top priority of federal managers. 

Moreover, the regular preparation of financial statements and
independent audit opinions required by the 1990 act are bringing
greater clarity and understanding to the scope and depth of problems
and needed solutions.  These annual public report cards are also
generating increased pressure to fix long-standing problems.  The
success of these efforts formed the basis for congressional action
last year to pass the Government Management Reform Act of 1994, which
expanded to all 24 CFO Act agencies the requirement for the
preparation and audit of financial statements for their entire
operations, beginning with those for fiscal year 1996.  This
essential expansion of the CFO Act's requirements provides a greater
impetus for accelerated governmentwide implementation of financial
management reform. 

Also the 1994 act requires the preparation and audit of consolidated
executive branch financial statements, beginning with those for
fiscal year 1997.  For the first time, the American public will have
an annual report card on the results of current operations and the
financial condition of its national government.  This, in conjunction
with the 24 CFO Act agencies' financial statements will set the
foundation for the federal government to have the same kind of
financial reporting as had already been required (1) by the
securities laws for the private sector, partly in response to the
stock market crash of 1929 and (2) by the Single Audit Act for state
and local governments, driven in part by financial crises such as
experienced by New York City in the early 1970s. 

Making these reforms a reality in the federal government, however,
remains a challenge for us all.  Today, I want to focus on the four
main implementation challenges to build upon the progress to date and
put lasting improvements in place.  They are: 

  -- first, successfully implementing the expanded requirements for
     audited financial statements to improve the reliability of data
     for decision-making and strengthen the efficiency of financial
     operations and controls;

  -- second, continuing to build stronger financial management
     organizations by upgrading skill levels, enhancing training, and
     ensuring that CFOs possess all the necessary authorities within
     their agencies to achieve change;

  -- third, devising and applying more effective solutions to address
     difficult problems plaguing agencies' underlying financial
     systems; and

  -- fourth, designing comprehensive accountability reports to permit
     more thorough and objective assessments of agencies' performance
     and financial conditions, as well as to enhance the budget
     preparation and deliberation process. 

In addition to achieving improvements in financial management at the
federal level, this Committee has spearheaded greater oversight of
hundreds of billions of dollars in federal spending at the state and
local levels through the passage of the Single Audit Act in 1984. 
This act helps provide accountability for federal payments and
instill fundamental elements of good financial management in state
and local governments.  The Committee in considering amendments to
the act, which I will also address, to improve the effectiveness of
the single audit process. 

I want to commend the Committee for holding this hearing; sustained
congressional attention to implementation of financial management
legislation will be important in instilling greater accountability
throughout the federal government and helping better control the cost
of its operations.  Thanks in large part to the legislative impetus
of the expanded CFO Act and the Government Performance and Results
Act--efforts led by this Committee--decisionmakers will ultimately
have available unprecedented, reliable information on both the
financial condition of programs and operations and the performance
and costs of these activities. 

Also, I will discuss the role this Committee could play in continuing
to build on the foundation established through these laws for
establishing a strong financial management organizational structure
and revolutionizing the type and quality of financial information for
decisionmaking.  I believe this Committee, with the support of GAO,
can work with the rest of the Congress to ensure that the wealth of
new information to be generated through these statutory requirements
will be provided to and used by appropriations, budget, and
authorizing committees of the Congress and to bring the CFO Act's
goals to fruition. 


   DATA RELIABILITY AND FINANCIAL
   OPERATIONS ARE BEGINNING TO
   IMPROVE
---------------------------------------------------------- Chapter 0:1

To date, CFO Act financial audits have resulted in greater data
reliability and improved financial operations.  Under the expanded
act, all 24 CFO Act agencies can begin to gain the benefits
demonstrated by those agencies that have already successfully
undergone full-scale financial audits.  This is absolutely critical
and will put the federal government on a par with the private sector
and state and local governments, which have already made the
necessary investment in financial management. 

There is widespread consensus that the preparation and audit of
financial statements has been the primary catalyst to increase the
reliability of financial data and improve financial operations. 
During the past 5 years, due to the CFO Act's requirement, we have
seen audit coverage substantially increase to almost half of the
government's annual gross budget authority.  Beginning with fiscal
year 1996, due to the expanded CFO Act, audit coverage will expand to
cover the entire operations of the 24 CFO Act agencies, which
currently account for virtually all of the government's outlays. 

Also, agencies are progressing in receiving unqualified audit
opinions.  In four cases, (the Social Security, General Services, and
National Aeronautics and Space Administrations and the Nuclear
Regulatory Commission) unqualified opinions were rendered on fiscal
year 1994 financial statements covering agencies' entire operations. 
These agencies, which covered about 23 percent of the government's
fiscal year 1994 outlays, have demonstrated that preparing auditable
financial statements is possible and, with priority and emphasis, can
be achieved by the remaining 20 CFO Act agencies as well. 

In addition, there has been significantly greater commitment by the
administration and agencies to effectively implement the CFO Act's
expanded financial statement preparation and audit requirements.  For
example, OMB made it clear from the outset that it would not grant
any waivers, although it has the authority to waive the requirement
for fiscal years 1996 and 1997; thus, helping to ensure greater
adherence to the statutory timetable.  Also, OMB, Treasury, and GAO
have been meeting with agency CFOs and IGs to build consensus, and we
have generally seen a good commitment being given to preparing and
auditing financial statements.  For instance, some agencies, such as
the Departments of Interior and Education, are on an accelerated
schedule to having agencywide financial statements 1 year before the
act requires.  Several CFOs and IGs have caveated their optimism,
however, by the prospects that funding constraints could hold for
dampening this momentum and hampering plans for meeting the act's
fiscal year 1996 requirement. 

It is essential that this time frame be met.  As we have discussed in
prior testimonies before the Congress, audited financial statements
have provided significantly more accurate and useful information on
the government's financial status and its operations.\1 Further, CFO
Act financial audits have provided a greater understanding of the
extent and nature of the financial control and systems problems
facing the government, and a better appreciation for the limited
extent to which the Congress and program managers can rely on the
information they receive.  Effective implementation of the CFO Act's
expanded requirement for audited financial information is essential
for more informed decision-making and better accountability in
virtually every major aspect of the government's operations, as the
following examples illustrate. 


--------------------
\1 These testimonies are listed in attachment I. 


      IMPROVING REVENUE COLLECTION
      OPERATIONS ESSENTIAL TO FUND
      THE GOVERNMENT
-------------------------------------------------------- Chapter 0:1.1

In fiscal year 1994, the federal government collected a reported over
$1.3 trillion in revenue, primarily from individual and corporate
income taxes and import duties, fines, and fees.  Reliable financial
data are necessary to ensure that the government assesses and
collects more of the revenue that is due from these sources.  This,
however, is not yet the case, as shown by our financial audits at the
Internal Revenue Service (IRS) and the U.S.  Customs Service. 


         THE INTERNAL REVENUE
         SERVICE
------------------------------------------------------ Chapter 0:1.1.1

The process of preparing and auditing financial statements for the
government's primary revenue collection agency has surfaced
significant problems affecting its operations and credibility.  For
example, through these audits, it came to light during our first
audit of IRS's financial statements--those for fiscal year 1992--that
IRS could not

  -- verify or reconcile its $1.3 trillion in reported revenues to
     its accounting records;

  -- substantiate amounts for various types of taxes reported, such
     as social security, income, and excise taxes, although the
     amounts of these taxes are to be separately maintained;

  -- reconcile its cash accounts with Treasury's;

  -- substantiate its billions of dollars of gross and net accounts
     receivables, and

  -- adequately account for its annual operating funds. 

To its credit, IRS has made a commitment to institute changes. 
Through the strong support of the Commissioner, the agency has made
important strides to address its far-reaching financial management
problems.  IRS successfully implemented a new administrative
accounting system in fiscal year 1993 that can better account for its
more than $7 billion in annual operating funds.  It entered into an
agreement with the Department of Agriculture's National Finance
Center and now has control over its $5 billion payroll operations,
which was lacking at the time of our first audit.  It has taken
physical inventories of its equipment and is beginning to get full
control over these assets.  IRS has ongoing efforts, including the
use of outside contractors, to resolve its cash reconciliation
problems and to strengthen its internal controls over payments. 

Finally, although necessary systems changes to bring revenue
accounting up to reasonable expectations have not been completed,
better estimates of collectible delinquent taxes are now being
developed as part of the financial statement preparation process so
that the Congress will have the information needed to better gauge
potential collectibility and to ask questions as to why amounts are
not collectible.  For example, the audit for fiscal year 1992
disclosed that IRS had $65 billion in delinquent taxes outstanding,
not the $110 billion IRS reported and, of the $65 billion, only $19
billion was estimated to be collectible.  This type of data would
provide a more reliable basis than has been available in the past on
the merits of adding collection personnel. 

The future holds even greater potential.  First, IRS is beginning to
address the systems issues that will enable it to reliably show by
type of tax how much has been actually received and who pays the tax. 
For example, excise taxes, such as petroleum companies and chemical
manufacturers, among others, pay to fund environmental cleanup
activities, are to be segregated by type and are used to achieve
specific policy goals.  But our financial audit showed that IRS's
accounting system does not have this capability.  Consequently,
whether it be the Superfund Trust Fund or the Highway Trust Fund, a
fund may be receiving more or less than it is due. 

Social security taxes are somewhat different in concept but the
problem is the same.  Under law, the Social Security Administration
(SSA) receives social security taxes based on wage information
reported by employers to IRS even if the taxes are ultimately not
paid.  This results in amounts going to the Social Security Fund from
other tax sources, and while the IRS knows that there is a
discrepancy, it cannot yet identify that amount so that
decisionmakers will know the cost of this policy.  As a result of the
financial audit, IRS is now working to address these problems. 

Future systems changes should also result in extending the
application of accrual accounting to the tax revenue stream so that
IRS and the Congress will have somewhat better information about the
taxes IRS should be collecting.  Further, because the CFO Act calls
for the development of better cost and performance data, IRS will
have an opportunity to better justify and manage tax compliance
initiatives.  For example, over the years, questions have been raised
over the amount of revenue to be generated from adding revenue agents
or initiating special compliance initiatives.  Such questions can
only be conclusively answered by improving the basic reliability of
IRS's underlying data. 


         THE U.S.  CUSTOMS SERVICE
------------------------------------------------------ Chapter 0:1.1.2

Financial audits of the Customs Service, the government's second most
important revenue collector, revealed problems similar to those at
IRS.  These problems impaired Customs' ability to effectively ensure
that carriers, importers, and their agents complied with laws
intended to ensure fair trade practices and protect the American
people from unsafe and illegal imported goods.  Further, these audits
found that Customs did not

  -- adequately ensure that all goods imported into the United States
     were properly identified and that the related duties, taxes, and
     fees on imports, reported to be over $21 billion for fiscal year
     1993, were properly assessed and collected;

  -- have adequate controls to detect and prevent excessive or
     duplicate refund payments;

  -- have adequate accountability over tons of illegal drugs and
     millions of dollars of cash and property seized or used in its
     enforcement efforts; and

  -- have adequate controls over the use and reporting of its
     operating funds. 

The Commissioner of Customs has expressed a strong commitment to
resolve these problems and recognizes that a significant and
sustained effort by Customs' management will be required.  Acting on
this commitment, Customs has developed and tested nationwide, a new
program to reliably measure the trade community's compliance with
trade laws.  This program is expected to achieve better overall
compliance with trade laws and tighter controls to ensure that the
government receives all of the import taxes, duties, and fees to
which it is entitled.  This information will also help Customs ensure
that it is making the best use of its limited inspection and audit
resources. 

Moreover, Customs has developed and applied methodologies for more
accurately reporting its collectible accounts receivable.  It also
reorganized its debt collection unit, formalized its collection
procedures, and aggressively pursued collection of old receivables. 
According to Customs, this effort resulted in collections of over $35
million.  Customs also began conducting nationwide physical
inventories of its seized assets to improve the safeguards over this
property and has taken steps, such as implementing basic
reconciliations of records, to ensure more adequate control over the
use and reporting of its operating funds. 


      PROVIDING ACCOUNTABILITY FOR
      NATIONAL DEFENSE
      EXPENDITURES
-------------------------------------------------------- Chapter 0:1.2

The Department of Defense (DOD) must have accurate financial
information and internal controls to manage the Department's vast
resources--over $1 trillion in assets, 3 million military and
civilian personnel, and a budget of over $250 billion for fiscal year
1995.  Effective financial management is critical to assuring that
these resources are productively employed in meeting our nation's
defense objectives. 

Unfortunately, DOD does not have effective financial management
operations and the seriousness of its financial management problems
caused us to add it to our high-risk list.  No single military
service or major component has been able to withstand the scrutiny of
a financial statement audit.  This failure has serious implications. 
Good financial management runs deeper than the ability to develop
accurate financial records.  It is being able to (1) provide managers
with visibility and control over inventories, (2) project material
needs, and (3) effectively balance scarce resources with critical
needs. 

The CFO Act audits have served as an important catalyst for
identifying and focusing management attention on the full extent and
scope of the financial problems facing the Department.  Since 1990,
we and the DOD auditors have made over 350 recommendations to help
resolve the financial management weaknesses identified throughout the
Department.  These audits have consistently identified fundamental
deficiencies in DOD's financial operations.  For example, these audit
have served to highlight that: 

  -- As of August 1995, DOD problem disbursements--those for which
     the Department can not match a disbursement with a related
     obligation--were reported to be $28 billion--and DOD continues
     to make hundreds of millions of dollars in overpayments to its
     contractors.  As a result, DOD can not ensure that it does not
     spend more than it is authorized--a basic fund control
     responsibility. 

  -- DOD does not have adequate records or controls over the
     multibillion dollar investment in government furnished property
     and equipment. 

  -- DOD has failed to properly report billions of dollars in
     potential future liabilities, such as environmental cleanup
     costs. 

Further, beginning for fiscal year 1996, the Navy general fund
operations will be subject to audit.  We reviewed the Navy's fiscal
year 1994 financial reports as a measure of the Navy's current
ability to prepare reliable financial statements.  In our pending
report, we conclude that, to an even greater extent than the other
military services, the Navy is plagued by troublesome financial
management deficiencies involving tens of billions of dollars. 

DOD has recognized the seriousness of its financial management
problems and the need to take action.  Secretary Perry and
Comptroller Hamre have been candid in their assessments of the status
of current processes and practices.  Further, the Department's
financial reform blueprint--presented in February 1995--offers a good
perspective of the corrective actions which must be taken.  We
believe this plan represents an important first step in committing
DOD to real action. 

As we testified earlier this year, however, very serious management
challenges face the Department as it moves to make the blueprint a
reality.\2 We recommended that DOD determine what skills are required
to ensure that the plan is developed and implemented and to establish
an independent, outside board of experts to provide counsel,
oversight, and perspective to reform efforts. 

We are also concerned about the pace of needed improvements at DOD. 
According to a recent DOD IG report, DOD's development of new
accounting systems will not be completed until the end of fiscal year
1998 and, consequently, DOD's IG will not be able to render audit
opinions on any of the military services' general fund operations
until March 2000 at the earliest. 

As we testified last month, given the serious and pervasive nature of
DOD's financial management problems, and the need for more immediate
progress, the Department needs to consider additional steps to (1)
establish a skilled financial management workforce, (2) ensure that
financial management systems are capable of producing accurate data,
and (3) build an effective financial management organization
structure with clear accountability.\3 We will continue to review
more detailed implementation plans intended to carry out DOD's
blueprint--including assessments of DOD's strategy and timing of
proposed actions--and to work with DOD on implementing recommended
improvements. 


--------------------
\2 Financial Management:  Challenges Confront DOD's Reform
Initiatives (GAO/T-AIMD-95-143, May 16, 1995) and Financial
Management:  Challenges Confront DOD's Reform Initiatives
(GAO/T-AIMD-95-146, May 23, 1995). 

\3 Financial Management:  Challenges Facing DOD in Meeting the Goals
of the Chief Financial Officers Act (GAO/T-AIMD-96-1, November 14,
1995). 


      INSTITUTING BETTER
      MANAGEMENT OF FEDERAL
      LENDING PROGRAMS
-------------------------------------------------------- Chapter 0:1.3

The federal government is the nation's largest single source of
credit.  It lends or guarantees hundreds of billions of dollars of
loans for a wide variety of programs, such as housing, farming,
education, and small business.  At September 30, 1994, the government
reported (1) $241 billion in nontax receivables, of which $49
billion, or over 20 percent, was reported to be delinquent and (2)
$694 billion in guarantees of outstanding loans for which it was
contingently liable.  There are four principal credit agencies:  the
Department of Agriculture, with 56 percent of the loans; the
Department of Housing and Urban Development (HUD), with 11 percent of
the loans and 55 percent of the guarantees; the Department of
Education, with 7 percent of the loans and 11 percent of the
guarantees; and the Department of Veterans Affairs, with 23 percent
of the guarantees. 

We have long been concerned about the quality and reliability of
financial information on credit programs.  Our audits, as well as
those by the IGs, have consistently disclosed serious weaknesses in
agency systems that account for and control receivables, and three of
the lending programs--(1) farm loans, (2) student financial aid, and
(3) housing guarantees--are on our high-risk list.  Agency managers
need accurate and reliable information on a day-to-day basis to
effectively manage multibillion dollar loan and loan guarantee
portfolios and to determine the value and collectibility of debts
owed the government.  For example, audits have disclosed weaknesses
in agency approaches to estimating losses on these loans and, in some
cases, have resulted in significant adjustments to the recorded loss
reserves. 

  -- In response to problems identified in the Federal Housing
     Administration's (FHA) fiscal year 1991 financial statement
     audit and to prepare for the fiscal year 1992 audit, FHA's
     management initiated a special study to better estimate loan
     loss reserves.  As a result, in fiscal year 1992, FHA's loan
     loss reserves for the multifamily General Insurance (GI) and the
     Special Risk Insurance (SRI) funds increased by $6.4 billion. 
     The GI reserve increased from $5.8 billion to $10.6 billion and
     the SRI reserve increased from $156 million to almost $1.9
     billion. 

  -- Financial audits of the Federal Family Education Loan Program
     identified that Education's estimates of the cost to the
     government of loan guarantees, estimated at $15.2 billion as of
     September 30, 1994, were derived using unreliable data. 
     Education is now working more closely with the guaranty agencies
     to understand and resolve some of the student loan data errors. 

As a result of these and other on-going financial audits, there now
exists a clearer picture of the government's performance and loss
estimates for lending programs.  The loss estimates will become more
accurate as agencies gain experience in implementing the Credit
Reform Act of 1990 and the related accounting standard for direct
loans and loan guarantees developed by the Federal Accounting
Standards Advisory Board (FASAB).  These efforts and the ongoing
audit process should result in appropriate systems and methodologies
being implemented to provide critical program cost and budget
information. 


      BRINGING OTHER KEY FEDERAL
      INVESTMENTS AND ACTIVITIES
      UNDER FINANCIAL AUDIT
      SCRUTINY
-------------------------------------------------------- Chapter 0:1.4

The expansion of the CFO Act's financial statement preparation and
audit requirement will bring a significant amount of the federal
budget under examination for the first time.  For example, the first
full audit of almost $300 billion of Medicare and Medicaid
expenditures, or about 19 percent of the federal government's
expenditures, will be performed.  This will be especially important,
given the role of Medicare and Medicaid spending in driving the
growth of federal expenditures in the foreseeable future. 

Moreover, some health care experts have estimated that as much as 10
percent of national health care spending is lost to waste, fraud, and
abuse.  Also, we and others have reported many prior problems with
these programs, and limited financial audits to date have shown a
lack of detailed supporting records.  For example, the Health Care
Financing Administration's fiscal year 1994 balance sheet audit
disclosed inadequate or no documentation supporting over $100 million
of Medicare receivables under contractor supervision, making
collectibility questionable. 

A full financial audit of these expenditures will provide a much
better understanding of the reliability of reported Medicare and
Medicaid payments, control weaknesses that permit waste, fraud, and
abuse to occur and needed corrective actions, and the impact of noted
problems on program operations. 

Another significant area to be audited is the federal government's
substantial environmental cleanup costs relating to federal
facilities that were contaminated with nuclear materials or other
hazardous substances.  OMB estimated in October 1995 that the federal
government's known environmental cleanup costs could range from $200
billion to $400 billion in the years ahead.  The agencies included in
this estimate are the Departments of Energy, Defense, Interior, and
Agriculture and NASA. 

The full magnitude of the government's environmental cleanup
liability is unknown.  For example, $200 billion to $350 billion of
the above amount was estimated for Energy alone; however, Energy's
estimate excludes certain costs, such as costs related to those items
for which technological solutions do not currently exist, such as
most groundwater contamination. 

The agencywide audits conducted under the expanded CFO Act
requirements will provide an indication of the reasonableness of
current agency estimates.  In addition, financial statement
disclosures will provide information on the nature, location, and
magnitude of the federal government's overall exposure for
environmental cleanup. 

In addition to these major investments, there are other key federal
investments that will come under scrutiny as well.  We are concerned,
however, that scrutiny for some of these investments may not occur
soon enough because a few agencies may slip in meeting the CFO Act's
time schedule.  For example: 

  -- The Federal Emergency Management Agency (FEMA), which in fiscal
     year 1992 through fiscal year 1994 made $7 billion in relief
     payments, will not be ready to have its Disaster Relief Fund's
     financial records and reports audited within the next year.  The
     fund's accounting records contain inaccurate data that have
     never been reconciled to supporting records, including
     unliquidated obligations of over $4 billion for disasters that
     date back to FEMA's inception in 1979.  To prepare for the
     audit, FEMA has, with contractor help, begun the necessary
     reconciliation.  FEMA has stated that it plans to have
     agencywide audited financial statements beginning with fiscal
     year 1998. 

  -- The Department of Transportation (DOT) had over $47 billion in
     fiscal year 1994 gross budget authority and is accountable for
     important aspects of ensuring the development and safety of the
     nation's highways, railroads, and airways, including those
     administered by the Federal Highway Administration, the Federal
     Aviation Administration, and the Coast Guard.  DOT has not yet
     prepared agencywide financial statements and does not plan to do
     so for fiscal year 1995.  Based on DOT's progress to date,
     without additional impetus, it is uncertain as to whether the
     Department will be ready to prepare reliable consolidated
     agencywide financial statements within the statutory time frame. 

  -- Under the requirements of the CFO Act, the Department of Justice
     (DOJ), which does not have many trust or revolving funds or
     commercial functions and was not part of the pilot program, was
     not required to audit many of its significant operations.  Of
     its $13.5 billion in gross budget authority, only 12 percent, or
     $1.6 billion was subjected to audit.  DOJ's major bureaus, such
     as the Federal Bureau of Investigation, Drug Enforcement
     Administration, Immigration and Naturalization Service, U.S. 
     Attorneys Office, and Marshals Service have not been audited,
     nor have financial statements been prepared for these entities. 
     DOJ is the only department that has requested a waiver from the
     preparation and audit of departmentwide financial statements for
     fiscal year 1996 under the expanded CFO Act requirements.  The
     Department has cited as the basis for its request the lack of
     experienced staff to prepare financial statements and the lack
     of funds to contract for the audits.  We believe DOJ needs to
     make a commitment to the audited financial statement
     requirements and view this as a priority because of both
     technical and cultural challenges that must be overcome. 


      ADDRESSING AND FIXING
      CONTROL WEAKNESSES
-------------------------------------------------------- Chapter 0:1.5

Financial audits are also continuing to find and propose corrective
actions to resolve long-standing material internal control weaknesses
at the agencies under audit.  These audits also continued to provide
a much needed discipline in pinpointing operational inefficiencies
and weaknesses, highlighting gaps in effectively safeguarding the
government's assets, and preventing possible illegal acts. 

Financial audits, for instance, identified information security
weaknesses that increased the risk that sensitive and critical
computerized data and computer programs will be inappropriately
modified, disclosed, or destroyed.  For example: 

  -- IRS continued to lack sufficient safeguards to prevent or detect
     unauthorized browsing of confidential taxpayer records;

  -- student loan data maintained by Education could have been
     modified for fraudulent purposes because users had the ability
     to override controls designed to prevent such actions;

  -- FHA had continuing weaknesses in systems, including those that
     process sensitive cash receipt and disbursement transactions;

  -- at the Customs Service, thousands of users had inappropriate
     access to critically sensitive programs and data files; and

  -- the Navy had significant weaknesses involving access to
     financial data and the adequacy of computer center plans for
     recovery if service is interrupted. 

Further, financial statement audits have continued to identify
potential and actual dollar savings.  These savings include the
recovery of millions of dollars in overpayments to DOD contractors,
the collection of receivables, the recoupment of payments incorrectly
made to government intermediaries and employees, and reductions in
the cost of operations that are excessive. 

Further, financial audits are disclosing areas where the government
may be paying more than it should or may not be collecting all that
it should.  For example: 

  -- Education did not have systems or procedures in place to ensure
     that individual billing reports submitted by guaranty agencies
     and lenders were reasonable.  For fiscal year 1994, these
     billings paid were estimated to be $2.5 billion. 

  -- The Coast Guard could not provide detailed supporting records
     for almost $100 million of accounts receivable reported for the
     Oil Spill Liability Trust Fund and the associated $65 million
     estimate for uncollectible accounts. 

Financial audits have also shown that agencies often do not follow
rudimentary bookkeeping practices, such as reconciling their
accounting records with Treasury accounts or their own subsidiary
ledgers.  These audits have identified hundreds of billions of
dollars of accounting errors--mistakes and omissions that can render
information provided to managers and the Congress virtually useless. 
This situation could be much improved if more rigor were applied in
following existing policies and procedures. 


      PREPARING AND AUDITING
      GOVERNMENTWIDE FINANCIAL
      STATEMENTS
-------------------------------------------------------- Chapter 0:1.6

Beginning with those for fiscal year 1997, Treasury will prepare
financial statements for the executive branch as a whole, and we will
audit these statements.  For the first time, the American public will
have an annual report card on the results of current operations and
the financial condition of its national government.  I am most
pleased that this requirement has finally become a reality.  My hope
is that the requirement for audited financial statements would be
extended to the legislative and judicial branches so that these could
be included in audited governmentwide consolidated financial reports
to the American taxpayers.  I am also pleased that the Federal
Reserve has contracted for financial audits over the next 5 years. 
My hope is that other independent agencies of the government would do
likewise. 

As the consolidated executive branch statements evolve and when the
quality of the underlying data can withstand the scrutiny of an
independent audit, they will not only be useful for decisionmakers
but will help engender public confidence that the federal government
can be an effective financial steward, fully accountable for the use
of tax dollars.  These statements should provide a clear picture of
the financial demands and commitments of the federal government, the
available resources, the execution of the budget, and the results,
both financial and performance, of current operations. 

We are working closely with OMB, Treasury, the agency CFOs, and the
IGs.  We have formed a series of task forces to address accounting
and auditing issues and are actively supporting the work of FASAB. 
This is a tremendous undertaking and will require all parties to work
together.  For our part, we are going to

  -- focus on performing the IRS financial statement audit for the
     fourth year and conducting the first-ever financial statement
     audit for the Bureau of Public Debt, which accounts for more
     than $3.4 trillion of federal debt held by the public and the
     related annual interest payments;

  -- undertake selective work at selected major agencies involving,
     for example, SSA's 75-year actuarial projections, DOD's mission
     assets (valued at over $1 trillion), the almost $200 billion
     Medicare program, and the almost $100 billion Medicaid program,
     and at these agencies, we will coordinate our efforts with the
     IGs; and

  -- work cooperatively with the IGs at the 24 CFO Act agencies as
     they audit other major key accounts. 

This will be a major challenge.  We are very much depending on the 24
CFO Act agency IGs to do their individual audits, and are concerned
about the extent to which budget constraints may affect their ability
to perform those audits properly and timely.  I am also concerned,
that GAO's downsizing has left us short of the accounting and
financial systems expertise needed in 1997 to conduct the
consolidated executive branch financial statement audit.  Even though
I have reassigned personnel within GAO to the maximum extent
possible, we are still short about 100 to 150 people who possess the
technical skills we need to do the job.  I expect this problem to be
even further exacerbated as we experience additional attrition in
these areas throughout 1996.  We plan to consult with the Congress
about this problem in the context of our fiscal year 1997 budget
submission. 


   CONTINUING TO BUILD EFFECTIVE
   FINANCIAL MANAGEMENT
   ORGANIZATIONS
---------------------------------------------------------- Chapter 0:2

The leadership envisioned by the CFO Act is beginning to take root. 
In general, we have found that OMB's Deputy Director for Management
and Controller and the agency CFOs and Deputy CFOs meet the
qualifications outlined by the CFO Act.  Also, the CFOs are active in
their agencies and as a group through the CFO Council, which the act
created, to provide the leadership foundation necessary to
effectively carry out their responsibilities. 

CFO Act agencies, however, need to ensure that CFOs possess all the
necessary authorities within their agencies to achieve change.  For
instance, because of the interdependency of the budget and accounting
functions, many agencies have included both budget formulation and
execution functions under the CFO's authority.  However, at a few
agencies, such as the Department of Agriculture, HUD, and the Agency
for International Development, CFOs do not have a full range of
budget responsibilities.  HUD's CFO, for instance, maintains records
of, and provides HUD's budget office with, information on obligations
and unexpended balances but is not involved in formulating the budget
or allocating and reallocating funds throughout the year.  At
Education and Labor, CFOs have responsibility for budget execution
but not for budget formulation.  We believe that each CFO Act agency
should recognize that both these functions can best be integrated
with the agency's other financial activities by delegating
responsibility for them to the CFO. 

Also, at many CFO Act agencies, financial management responsibility
rests with the CFO but is carried out by the financial leaders at the
agencies' components, which can create problems.  For instance, we
recently reported that the Department of Agriculture's CFO has
neither the authority within the Department nor the mechanism to
enforce compliance with its financial standards.\4 To overcome this
kind of situation, we believe it is important for CFOs to have a
strong role in and authority over component financial management
matters. 

Additionally, some CFOs have responsibility for operational
functions, such as procurement and grants management, in addition to
those directly related to agency financial management.  While
functions such as these can provide opportunities for much needed
integration of different functional areas, they also have the
potential to distract the CFOs from concentrating on financial
management issues throughout the agencies. 

Another serious problem the CFOs face in building an effective
supporting structure is attracting and retaining well qualified
financial management personnel and working to upgrade staff skills in
a constrained budget environment.  Financial audits have shown with
greater clarity the extent and nature of the government's financial
management personnel shortages and the importance of overcoming them. 

These audits have consistently disclosed agencies having
extraordinary financial management problems in even the fundamental
areas of making reconciliations, documenting adjustments, ensuring
that inventories are taken, and making supervisory reviews of
accounts and transactions.  Weaknesses such as these lead us to
believe that fundamental skill levels and training issues must be
addressed quickly. 

Moreover, implementing the CFO Act's objective of upgrading financial
operations, such as developing performance measurement systems and
integrating budget and accounting data, will require significantly
enhanced staff skills.  Focusing on these areas is difficult when
agencies' basic financial and control weaknesses remain unchecked. 
Top managers are, however, beginning to get a sense of the
extraordinary effort that will be needed to upgrade financial
management organizations and to fix known problems. 

In this regard, OMB's July 1995 Federal Financial Management Status
Report and Five-Year Plan addresses the need to develop a quality
financial management workforce by implementing methods to assist
agencies in recruiting and retaining qualified financial management
personnel.  CFOs, though, have a significant challenge in building
effective organizations to meet the CFO Act's challenges. 

To help in this area, in June 1992, the Association of Government
Accountants made 30 recommendations covering all facets of the
financial personnel challenge, from recruiting talented staff to
reducing turnover.  The CFO Council's Human Resources Committee is
working to implement these strategies through such activities as
coordinating efforts to provide low-cost, effective financial
management training and developing a plan for establishing core
competencies and standards for all CFO-related positions.\5

Investments must be made in training to ensure that financial
management personnel increase their professional skills to keep pace
with emerging technology and developments in financial management. 
However, financial management training is often a neglected aspect of
ensuring high-quality financial operations.  In our discussions with
the 24 CFO Act agencies, most said they had not established formal
training programs to enhance the skills and knowledge of financial
management staff. 

However, some agencies have acted.  The Department of Energy, for
example, has established a training program for financial managers
that all of its CFO offices are required to implement and that is
based on employees' individual development plans.  Also, the
Department of Education requires its financial personnel to complete
40 hours of continuing professional education annually. 

We have called for financial management personnel to be required to
participate in a minimum amount of continuing professional
education.\6 Government auditors are required to attend 80 hours of
continuing professional education every 2 years, and this requirement
has helped enhance audit quality and professionalism. 

We believe, though, that upgrading and training financial management
staff requires much greater short-term attention to identify more
specifically the extent of the skills gap and how it can be most
effectively narrowed or closed.  We plan to study this area in more
depth in the coming months and will report the results to the
Committee. 

In this regard, the Committee can be of assistance by challenging the
CFOs to clearly identify financial management skill shortages in
terms of personnel needs to effectively achieve the CFO Act's
financial management objectives.  Further, the Committee can
encourage agencies to get the resources and financial management
talent needed to make the needed improvements. 


--------------------
\4 USDA Financial Systems:  Additional Actions Needed to Resolve
Major Problems (GAO/AIMD-95-222, September 29, 1995). 

\5 Framework for Core Competencies for Financial Management Personnel
in the Federal Government (August 1995 (Draft)). 

\6 Financial Management Issues (GAO/OCG-93-4TR, December 1992). 


   BUILDING SOUND FINANCIAL
   MANAGEMENT SYSTEMS
---------------------------------------------------------- Chapter 0:3

Seriously inadequate financial management systems are currently the
greatest barrier to timely and meaningful financial reporting. 
Agency systems are old and do not meet users' needs.  In March 1995,
OMB reported that 39 percent of agency systems were originally
implemented over 10 years ago; 53 percent need to be replaced or
upgraded within the next 5 years. 

The CFO Council has designated financial management systems as its
number one priority.  The need for this emphasis is underscored by
the results of self-assessments by the 24 CFO Act agencies, which
showed that most agency systems are not capable of readily producing
annual financial statements and are not in compliance with current
system standards.  Equally as important, as a result, managers do not
have reliable, timely financial data throughout the year to help
manage effectively. 

The poor condition of agency financial systems is a symptom of a much
broader issue--the federal government's overall inability to
effectively manage investments in information technology (IT).  Many
projects have been poorly managed, cost much more than anticipated,
and have not provided intended benefits. 

There is a growing recognition that fundamental information
technology management problems need to be addressed, and a number of
initiatives are underway to do this.  For example, our May 1994
executive guide\7 on the best information management practices of
leading organizations has been enthusiastically received, and several
agencies are actively attempting to implement its tenets.  We
testified before this Committee on the key practices outlined in this
guide.\8

Also, we have developed several tools to assist agencies in taking a
strategic view of their information resource management practices and
maximizing their IT investments.  Our Strategic Information
Management (SIM) Self-Assessment Toolkit,\9 for example, has been
used by several agencies, including IRS and HUD, and has already
resulted in several million dollars in savings.  In August 1995, we
issued an exposure draft of our Business Process Reengineering
Assessment Guide, which is currently being pilot tested at several
agencies.  Additionally, we have worked with OMB in finalizing
Evaluating Information Technology Investments:  A Practical Guide,
which will provide agency managers a systematic and objective means
of assessing the risk and maximizing the return associated with
planned IT investments. 

Further, the Congress is taking steps to improve federal IT
management.  Earlier this year, the Congress amended the Paperwork
Reduction Act, which the President signed into law on May 22, 1995. 
The amendments should improve the management of IT resources and
institute stronger controls over investments.  Other legislative
proposals to strengthen leadership and accountability are being
considered, including establishing Chief Information Officers and
changing system planning and acquisition practices. 

There are also improvement efforts underway specifically aimed at
financial systems.  For example, in January 1995, the Joint Financial
Management Improvement Program (JFMIP) published a model for
establishing and maintaining integrated financial management systems. 
This document, entitled Framework for Federal Financial Management
Systems, is an important step in providing needed guidance. 

Additionally, OMB's July 1995 Federal Financial Management Status
Report and Five-Year Plan sets out broad objectives, tasks, and
milestones to help improve systems.  The plan, for example, addresses
making better use of off-the-shelf technology, cross servicing, and
outsourcing.  Overall, OMB's objectives have provided the right
emphasis and priority for financial systems improvements.  OMB and
the CFO Act agencies must now focus on specific implementing policies
and strategies. 

To help these efforts, we are preparing a methodology for reviewing
financial management systems.  This methodology also could provide a
starting point to help agencies develop systems requirements for
building integrated information systems to support their missions,
operations, and governmentwide reporting requirements.  We plan to
work with OMB and the CFO Council to move in this direction and will
report the results to the Committee next spring. 

Also, since the benefits of long-term efforts to improve agency
systems often require years to realize, agencies need to make their
existing systems work better in the interim.  An important aspect of
this is to ensure the validity of existing data and implement the
routine controls needed to keep these data reliable, such as
reconciliations to identify and resolve discrepancies.  Such efforts
will improve data reliability and help ensure that information
transferred to new systems is accurate. 


--------------------
\7 Executive Guide:  Improving Mission Performance Through Strategic
Information Management and Technology (GAO/AIMD-94-115, May 1994). 

\8 Government Reform:  Using Reengineering and Technology to Improve
Government Performance (GAO/T-OCG-95-2, February 2, 1995). 

\9 Strategic Information Management (SIM) Self-Assessment Toolkit
(Version 1.0, October 1994 Exposure Draft). 


   EFFORTS TO STRENGTHEN
   ACCOUNTABILITY REPORTING WILL
   GREATLY AID DECISIONMAKERS
---------------------------------------------------------- Chapter 0:4

One of the CFO Act's primary goals is to enhance the reporting of
reliable financial and performance data that are useful and
understandable to program managers and congressional decisionmakers. 
Prior to its enactment, despite good intentions and past efforts to
improve financial management systems, the government was not using
timely, reliable, and comprehensive financial information when making
decisions having a tremendous impact on the American public.  The
first important step was taken with the CFO Act requirement for the
preparation and audit of financial reports to achieve basic data
reliability.  Now, at least we will know when data are reliable and
when they are not. 

The next steps, which build on the foundation laid by the CFO Act,
will further enhance the usefulness of accountability reporting to
decisionmakers by integrating performance measures into the reports
and developing reports more specifically tailored to the government's
needs.  They include the efforts of the Federal Accounting Standards
Advisory Board (FASAB) to develop accounting standards and OMB's
efforts to implement the Government Performance and Results Act
(GPRA) and to develop streamlined Accountability Reports. 


      FASAB EFFORTS
-------------------------------------------------------- Chapter 0:4.1

As you may know, FASAB was established in October 1990 by the
Secretary of the Treasury, the Director of OMB, and myself to
consider and recommend accounting principles for the federal
government.  The nine-member Board is comprised of representatives
from the three principals, the Congressional Budget Office, the
Department of Defense, one civilian agency (presently from Energy),
and three representatives from the private sector, including the
Chairman, former Comptroller General Elmer B.  Staats.  FASAB
publishes recommended accounting standards after considering the
financial and budgetary information needs of the Congress, executive
agencies, other users of federal financial information and comments
from the public.  OMB, Treasury and GAO then decide whether to adopt
the recommended standards; if they do, the standard is published by
GAO and OMB and becomes effective. 

Early next year, FASAB will complete the federal government's first
set of comprehensive accounting standards developed under this
consensus approach, which has worked well.  While the development of
accounting standards as envisioned by FASAB and its three principals
is very important to strengthening accountability, the benefits will
come from their full implementation. 

It is our understanding that Senator Brown plans to introduce
legislation that would establish in law the FASAB process, which at
this time, is operating under a memorandum of understanding.  Among
the purposes cited in the legislation is to provide for uniform
adoption and application of accounting standards across government
and the establishment of systems that meet the requirements of the
CFO Act.  The legislation being considered calls for each federal
agency to give priority to funding and provide sufficient resources
to implement the act. 

Further, the proposed legislation would require an agency's CFO Act
auditor to report whether the agency's financial management system
complies substantially with the FASAB accounting standards and other
financial management system requirements.  We understand that Senator
Brown's proposal will also include mechanisms to highlight an
agency's compliance problem to the Congress and to work with OMB on
remedial actions to bring the agency's financial management systems
into compliance. 

We support the goals of Senator Brown's proposal, which make
permanent the work of FASAB and add additional emphasis on
implementing the accounting standards.  We will be glad to work with
the Committee as it considers this proposal. 

Key to the FASAB approach was extensive consultation with users of
financial statements early in their deliberations to ensure that the
standards will result in statements that are relevant to both the
budget allocation process as well as agencies' accountability for
resources.  Users were interested in getting answers to questions on
such topics as: 

  -- Budgetary integrity:  What legal authority was provided to
     finance government activities and was it used correctly? 

  -- Operating performance:  How much do programs cost and how were
     they financed?  What was achieved?  What are the government's
     assets and are they well managed?  What are its liabilities and
     how will they be paid for? 

  -- Stewardship:  Has the government's overall financial capacity to
     satisfy current and future needs and costs improved or
     deteriorated?  What are its future commitments and are they
     being provided for?  How will the government's programs affect
     the future growth potential of the economy? 

  -- Systems and control:  Does the government have sufficient
     controls over its programs so that it can detect and correct
     problems? 

Standards and reports addressing these objectives are being phased in
over time.  Since the enactment of the CFO Act, OMB's guidance on the
form and content of financial statements has stressed the use of
narrative "Overview" sections preceding the basic financial
statements as the best way for agencies to relate mission goals and
program performance measures to financial resources.  Each financial
statement includes an Overview describing the agency, its mission,
activities, accomplishments, and overall financial results and
condition.  The Overview also should discuss what, if anything, needs
to be done to improve either program or financial performance,
including an identification of programs or activities that may need
significant future funding. 

Agencies are beginning to produce reports that do this.  For example,
SSA's fiscal year 1994 financial statement Overview presented a
number of performance measures dealing with the adequacy of the trust
fund, service satisfaction, promptness in issuing earnings statements
and processing claims, and the adequacy of employee training. 

Linking the costs of achieving these performance levels is the next
challenge.  In this regard, FASAB's cost accounting standards--the
first set of standards to account for costs of federal government
programs--will require agencies to develop measures of the full costs
of carrying out a mission or producing products or services.  Thus,
decisionmakers would have information on the costs of all resources
used and the cost of support services provided by others to support
activities or programs--and could compare these costs to various
program performance. 


      GPRA IMPLEMENTATION
-------------------------------------------------------- Chapter 0:4.2

GPRA sets forth the major steps federal agencies need to take towards
a results-oriented management approach.  They are to (1) develop a
strategic plan, (2) establish performance measures to monitor
progress in meeting strategic goals, and (3) link performance
information to resource requirements through the budget.  GPRA
requires up to five performance budgeting pilots for fiscal years
1998 and 1999.  OMB will report the results of these pilots in 2001
and recommend whether performance budgets should be legislatively
required. 

Cultural changes in federal agencies are beginning as agency pilots
develop strategic plans and performance measures.  OMB also has
prompted progress by giving special emphasis in the fiscal year 1996
Circular A-11, Preparation and Submission of Budget Estimates, to
increasing the use of information on program performance in budget
justifications.  Moreover, OMB Director Rivlin instructed her agency
to use performance information in making budget recommendations.  In
preparation for the fiscal year 1997 budget cycle, OMB held
performance reviews in May with agencies on performance measures and
recently issued guidance on preparing and submitting strategic plans. 
Further progress in implementing GPRA will occur as performance
measures become more widespread and agencies begin to use audited
financial information in the budget process to validate and assess
agency performance. 

OMB is also making efforts to design new financial reports based on
FASAB's recommended standards that contain performance measures and
budget data to provide a much needed, additional perspective on the
government's actual performance and its long-term financial
prospects.  While there are a myriad of legislatively mandated
reporting requirements which could be presented in separate reports,
I think that decisionmakers would find that a single report relating
performance measures, costs, and the budget would be most useful. 
This reporting approach is consistent with the CFO Council's proposal
for an Accountability Report, which OMB is pursuing. 

The Government Management Reform Act of 1994 authorized OMB, upon
proper notification to the Congress, to consolidate and simplify
statutory financial management reports.  The CFO Council has proposed
two annual reports, a Planning and Budgeting Report and an
Accountability Report.  The two consolidated reports would be used to
present a comprehensive picture of an agency's future plans and
performance by addressing (1) how well the agency performed
(accountability) and (2) the road map for its future actions
(planning and budgeting). 

The consolidation of current reports into the Accountability Report
would eliminate the separate requirements under various separate
laws--such as GPRA, the Federal Managers' Financial Integrity Act,
the CFO Act, and the Prompt Payment Act.  The Planning and Budget
Report is intended to provide a comprehensive picture of an agency's
program and resource utilization plans within its strategic vision. 
It is supposed to link resources requested with planned actions. 

OMB is undertaking to have six agencies\10 produce, on a pilot basis,
Accountability Reports providing a comprehensive picture of each
agency's performance pursuant to its stated goals and objectives.  We
agree with the overall streamlined reporting concept and believe
that, to be most useful, the Accountability Report must include an
agency's financial statements and the related audit reports.  The
ultimate usefulness of the Accountability Report will hinge on its
specific content and the reliability of information presented.  In
this regard, OMB and the CFO Council will be more fully defining the
information to be included in the Accountability Reports during the
pilot phase.  We will work with OMB and agencies throughout the pilot
program.  The pilot concept has worked well in the past under the CFO
Act and GPRA. 


--------------------
\10 The six pilot agencies are the Departments of the Treasury and
Veterans Affairs; the General Services, Social Security, and National
Aeronautics and Space Administrations; and the Nuclear Regulatory
Commission. 


      PERFORMANCE, COSTS, AND THE
      BUDGET
-------------------------------------------------------- Chapter 0:4.3

Of course, the ultimate goal of more reliable and relevant financial
data is to promote more informed decision-making.  This requires that
financial data produced be understood and used by program managers
and budget decisionmakers.  The changes underway to financial
reporting have been undertaken with a goal of making financial data
more accessible to budget decisionmakers.  The budget community's
involvement in the FASAB standard-setting process and OMB's
accountability proposal have contributed to this.  The future
challenge is to further integrate financial reports with the budget
to enhance the quality and richness of the data considered in budget
deliberations.  As I will discuss below, improving the linkages
between accounting and budgeting also call for considering certain
changes in budgeting such as realigned account structures and the
selective use of accrual concepts. 

Perhaps the chief benefit of improving this linkage will be the
increased reliability of the data on which we base our management and
budgetary decisions.  From an agency perspective, having audited
information on the value of assets and liabilities, as well as the
full costs of program outputs, will permit more informed judgments in
strategic planning and program priority setting.  Coupled with
internal control assessments, such information will also enable
agencies to better target areas requiring greater management
attention or reform.  For example, as I discussed earlier, the IRS
financial audit revealed that the accounts receivable inventory was
largely uncollectible--important information that permits IRS to
better target its collection resources and permits more informed
appropriations decisions on the level of resources necessary to
collect these funds. 

From a budgetary decision-making perspective, the new financial
reports will improve the reliability of the budget numbers
undergirding decisions.  Budgeting is a forward-looking enterprise,
but it can clearly benefit from better information on actual
expenditures and revenue collection.  Numbers from the budget will be
included in basic financial statements and thus will be audited for
the first time. 

Having these numbers audited was one of the foremost desires of
budget decisionmakers consulted in FASAB's user needs study and stems
from their suspicion--well warranted I might add--that the unaudited
numbers may not always be correct.  For example, decisionmakers rely
on data based on IRS systems on the amounts of revenue collected for
each type of tax.  However, as highlighted earlier, our audit
revealed that the IRS's reported revenue of $1.3 trillion for fiscal
year 1994 could not be verified or reconciled to accounting records
maintained for individual taxpayers in the aggregate and amounts
reported for various types of taxes collected could not be
substantiated.  This means that the amount credited to the Social
Security Trust Fund is different than the amount of social security
taxes actually collected. 

Financial audit reports have also revealed important information on
the actual costs of credit programs which can inform future budgetary
decisions.  Specifically, the fiscal year 1994 financial audit
reports of the Farmers Home Administration, the Federal Housing
Administration, the Federal Family Education Loan Program, and the
Small Business Administration revealed that agencies' estimates of
the subsidy costs of their credit programs reflected in the budget
are not accurate.  Based on these audits, budget decisionmakers know
that they have reason to question the amount of future budget
requests for these programs. 

The new financial reports will also offer new perspectives and data
on the full costs of program outputs and agency operations that is
currently not reported in our cash-based budget.  Information on full
costs generated pursuant to the new FASAB standards would provide
decisionmakers a more complete picture of actual past program costs
and performance when they are considering the appropriate level of
future funding.  For example, the costs of providing Medicare are
spread among at least three budget accounts --the Federal Hospital
Insurance Trust Fund, the Federal Supplementary Medical Insurance
Trust Fund, and the Program Management account.  Financial reports
would pull all relevant costs together. 

The different account structures that are used for budget and
financial reporting are a continuing obstacle to using these reports
together and may prevent decisionmakers from fully benefiting from
the information in financial statements.  Unlike financial reporting,
which is striving to apply the full cost concept when reporting
costs, the budget account structure is not based on a single unifying
theme or concept.  As we reported recently, the current budget
account structure evolved over time in response to specific needs.\11

The budget contains over 1,300 accounts, with nearly 80 percent of
the government's resources clustered in less than 5 percent of the
accounts.  Some accounts are organized by the type of spending (such
as personnel compensation or equipment) while others are organized by
programs.  Accounts also vary in their coverage of cost, with some
including both program and operating spending while others separate
salaries and expenses from program subsidies.  Or, a given account
may include multiple programs and activities. 

When budget account structures are not aligned with the structures
used in financial reporting, additional analyses or crosswalks would
be needed so that the financial data could be considered in making
budget decisions.  If the Congress and the executive branch reexamine
the budget account structure, the question of trying to achieve a
better congruence between budget accounts and the accounting system
structure should be considered. 

In addition to providing a new, full cost perspective for programs
and activities, financial reporting has prompted improved ways of
thinking about costs in the budget.  For the most part, the budget
uses the cash basis, which recognizes transactions when cash is paid
or received.  Financial reporting uses the accrual basis, which
recognizes transactions when commitments are made, regardless of when
the cash flows. 

Cash-based budgeting is generally the best measure to reflect the
short-term economic impact of fiscal policy as well as the current
borrowing needs of the federal government.  And for many
transactions, such as salaries, costs recorded on a cash basis do not
differ appreciably from accrual. 

However, for a select number of programs, cash-based budgeting does
not adequately reflect the future costs of the government's
commitments or provide appropriate signals on emerging problems.  For
these programs, accrual-based reporting may improve budgetary
decision-making.  The accrual approach records the full cost to the
government of a decision--whether to be paid now or in the future. 
As a result, it prompts decisionmakers to recognize the cost
consequences of commitments made today. 

The credit arena is a good example of how financial reporting has
informed budget decision-making.  Beginning in fiscal year 1992,
accrual budgeting principles were applied to loans and loan guarantee
programs with the implementation of credit reform.  Cash treatment of
these programs sent misleading signals by recording costs only when
cash flowed in and out of the federal Treasury.  Under this approach,
loan guarantees, for example, were recorded as having no costs in the
year in which program commitments were authorized, regardless of
future costs flowing from this commitment.  By contrast, under credit
reform, the budget reflects the present value of subsidy costs to be
incurred over time up front at the time when commitments are made. 

It may be appropriate to extend the use of accrual budgeting to other
programs, such as federal insurance programs--an issue we are
currently studying at the request of the Chairman, House Budget
Committee.  For example, the cash position of the nation's deposit
insurance system proved to be a lagging indicator of the underlying
troubles faced by thrifts in the 1980s.  An accrual approach, should
it prove workable, would offer better information on the financial
condition of various federal insurance programs. 


--------------------
\11 Budget Account Structure:  A Descriptive Overview
(GAO/AIMD-95-179, September 1995). 


      PUTTING IT ALL TOGETHER
-------------------------------------------------------- Chapter 0:4.4

Mr.  Chairman, thanks in large part to the legislative impetus of the
CFO and GPRA Acts--efforts led by this Committee--decisionmakers will
ultimately have available unprecedented, reliable information on both
the financial condition of programs and operations as well as the
performance and costs of these activities.  While these initiatives
carry great potential, they require continued support by the agencies
and the Congress.  Consequently, this Committee's continued
leadership and oversight will be important to sustain these
initiatives and ensure their ultimate success. 

Generating new kinds of information, however valuable, can be a
difficult, intensive process calling for new skills and redeployment
of resources.  This is a particularly challenging task in our current
budgetary environment.  Fiscal constraints may make it difficult for
agencies to allocate sufficient resources to information gathering
and analysis while facing cuts in basic services.  However, such
information is vital to the downsizing process itself and can help us
sort out the kinds of services and operations that government should
be engaged in. 

Finding the most effective reporting and analytical approaches will
require a great deal of collaboration and communication. 
Appropriations, budget, and authorizing committees need to be full
partners in supporting the implementation of these initiatives.  This
Committee could be instrumental in fostering a constructive dialogue
and gaining their support, which is vital to obtaining the resources
and investment needed to carry out these efforts. 

This type of partnership is needed to better link financial and
performance data to the budget and program decision-making.  The
development of new information may for a time outpace the capacity of
the process to fully utilize it.  Just as federal accounting
standards are being tailored to better address the unique needs of
federal policymakers, the cost concepts used in budgeting, as well as
the budget presentations themselves, may warrant reconsideration. 
This calls for a concerted congressional effort to rethink how the
budget should be structured and presented to best take advantage of
this new information.  Again, the Committee could be instrumental in
bringing together key congressional stakeholders to consider
appropriate changes. 

Finally, the Committee can continue to support evolutionary
refinements to reporting approaches.  For example, the new financial
reports can be even more useful when they are streamlined, rather
than the present approach of generating separate reports.  I have
been stressing an approach in which performance measures and costs
are reported together and linked to budget data within a single
report.  This approach is consistent with the CFO Council's proposal
for an Accountability Report, which we support. 


   IMPROVING SINGLE AUDIT
   LEGISLATION
---------------------------------------------------------- Chapter 0:5

Mr.  Chairman, in addition to strengthening financial management at
the federal level this committee is also considering legislation to
improve the effectiveness of accountability for federal payments to
the state and local levels through the single audit process.  Single
audits are important accountability tools over the hundreds of
billions of dollars that the federal government provides to state and
local governments and nonprofit organizations. 

In June 1994, we reported\12 to the Committee on the Single Audit
Act's important role.  It has helped institutionalize fundamental
elements of good financial management in state and local governments,
such as preparing financial statements in accordance with generally
accepted accounting principles, obtaining annual independent
comprehensive audits, assessing internal controls and compliance with
laws and regulations, monitoring subrecipients, tracking federal
funds, and resolving audit findings. 

In addition, the single audit process is an effective way of
promoting accountability over federal assistance because it provides
a structured approach to achieve audit coverage over the thousands of
state and local governments and nonprofit organizations that receive
federal financial assistance.  Moreover, particularly in the case of
block grants--where the federal financial role diminishes and
management and outcomes of federal assistance programs depend heavily
on the overall state or local government controls--the single audit
process provides accountability by focusing the auditor on the
controls affecting the integrated federal and state funding streams. 

Mr.  Chairman, let me emphasize that block grants need not mean the
absence of federal accountability provisions.  Our extensive studies
of the block grant experience in the 1980s led us to conclude that
reasonable financial and program accountability provisions can help
sustain block grants as a stable source of intergovernmental aid.  Of
course the definition of what is reasonable can be controversial. 
Overly-intrusive accountability provisions can threaten to overturn
the efficiencies gained from flexible funding, while overly-limited
provisions can undermine continued congressional support for the
programs by depriving the Congress of information on how the funds
are used and what results are achieved. 

Clearly, block grants call for a careful balancing of state and
federal concerns.  It is in this context that the Single Audit Act
can play an especially helpful role in promoting financial
accountability for the proper stewardship of federal funds.  The
act's focus on overall state controls applied to state entities
supported with federal and state funding is very consistent with the
block grant approach where states are encouraged to manage federal
and state funds on an integrated basis to support state priorities. 
It also gives state officials an annual report card on the financial
management of their own entities. 

While strongly supporting the single audit concept, we have
identified opportunities to strengthen the single audit process while
at the same time reducing the burden on state and local governments
and nonprofit organizations.  The legislation this committee is
considering to amend the Single Audit Act would strengthen the single
audit process in several key areas. 

First, the bill would expand the Single Audit Act to include
nonprofit organizations.  The act currently applies only to state and
local governments while nonprofit entities are administratively
covered under an OMB Circular.  Expanding the Single Audit Act to
include nonprofit organizations establishes uniform single audit
requirements for state and local governments and nonprofit
organizations, which would accomplish what this committee
contemplated when the act was debated. 

Second, the dollar threshold that establishes which nonfederal
entities must have audits under the act would be raised.  Raising the
minimum threshold from $25,000 to $300,000 would exempt thousands of
entities from federally mandated audits while still covering 95
percent of federal assistance to state and local governments. 

Third, programs would be selected for testing based on risk. 
Currently, the act requires auditors to select and test programs
based solely on the amount of federal financial assistance the
programs receive.  Adopting a risk-based approach would increase the
effectiveness of the single audit process. 

Fourth, the single audit reports would be more useful.  Program
managers we contacted did not find current reporting to be user
friendly, principally because of the number of auditor's reports. 
Single audit reports often include seven separate reports from the
auditor.  The proposed legislation would require auditors to include
a summary of the results of the work.  OMB adopted this approach
several years ago at the federal level by including in financial
statement audit reports under the CFO Act a new Overview section
highlighting key results.  We found that it was extremely helpful in
providing insights to report users. 

Fifth, reducing the reporting time frame from the currently allowed
13 months to 9 months would significantly improve the timeliness of
the reports.  Timeliness alone does not determine the value of a
report.  But, the lack of timeliness can seriously degrade the value
of a report.  We understand that some auditors have concerns about
meeting a shorter time frame.  However, we believe that oversight of
the hundreds of billions of federal dollars covered by the single
audit process is degraded by reports that are issued more than a year
after the end of the period audited.  Over time, I hope that it will
be the rule, rather than the exception, for the audit reports to be
submitted in less than 9 months. 

Sixth, the legislative proposal would provide greater flexibility
than the current act allows in carrying out this important oversight
activity.  The proposed legislation does so by providing the OMB
Director authority to adjust some aspects of the single audit process
to mesh with changing circumstances.  For example, the OMB Director
could authorize pilot projects to test alternative ways of achieving
the goals of the legislation.  The authorities provided the Director
should not increase the burden on nonfederal entities.  Rather, it is
designed to make the Single Audit Act process adaptable to changing
circumstances while continuing to promote sound financial management
and provide effective oversight over federal resources. 

The 10 years of experience under the Single Audit Act has shown that
the single audit process is a highly effective way to provide
accountability for federal awards to state and local governments. 
The proposed amendments would strengthen this important
accountability tool and reduce the burden on thousands of entities. 
We fully support their enactment. 


--------------------
\12 Single Audit:  Refinements Can Improve Usefulness
(GAO/AIMD-94-133, June 21, 1994). 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my statement.  I would be happy to now
respond to any questions. 


RECENT GAO TESTIMONY ON THE
BENEFITS ON PREPARING AND AUDITING
AGENCYWIDE FINANCIAL STATEMENTS
=========================================================== Appendix I

Financial Management:  Momentum Must Be Sustained to Achieve the
Reform Goals of the Chief Financial Officers Act (GAO/T-AIMD-95-204,
July 25, 1995). 

Financial Management:  CFO Act Is Achieving Meaningful Progress
(GAO/T-AIMD-94-149, June 21, 1994). 

Improving Government:  GAO's Views on H.R.  3400 Management
Initiatives (GAO/T-AIMD/GGD-94-97, February 23, 1994). 

Improving Government:  Actions Needed to Sustain and Enhance
Management Reforms (GAO/T-OCG-94-1, January 27, 1994). 


*** End of document. ***