Auditing the Nation's Finances: Fiscal Year 1998 Results Highlight Major
Issues Needing Resolution (Testimony, 03/31/99, GAO/T-AIMD-99-131).
Pursuant to a legislative requirement, GAO discussed its report on the
U.S. government's financial statements for fiscal year 1998, focusing on
the importance of improving how federal departments and agencies manage
the finances of the national government.
GAO noted that: (1) significant financial systems weaknesses, problems
with fundamental recordkeeping and financial reporting, incomplete
documentation, and weak internal controls, including computer controls,
continue to prevent the government from accurately reporting a
significant portion of its assets, liabilities, and costs; (2)
widespread and serious computer control weaknesses affect virtually all
federal agencies and significantly contribute to many material
deficiencies; (3) the federal government does not have adequate systems
and controls to ensure the accuracy of information about the amount of
assets held to support its domestic and global operations; (4) as a
result, the government could not satisfactorily determine that all
assets were included in the financial statements, verify that reported
assets actually exist, or substantiate the amounts at which they were
valued; (5) most federal credit agencies responsible for federal lending
programs were unable to properly estimate the cost of these programs in
accordance with federal accounting standards and budgeting requirements;
(6) liabilities for remediation of environmental contamination and
disposal of hazardous waste, reported at $225-billion, were materially
understated by at least tens of billions of dollars primarily because no
estimate was reported for environmental and disposal liabilities
associated with certain major weapons systems; (7) adequate systems and
cost data were not available to accurately estimate the reported
$223-billion military postretirement health benefits liability included
in federal employee and veteran benefits payable; (8) some agencies do
not maintain adequate records or have systems to ensure that accurate
and complete data were used to estimate a reported $90 billion of
accounts payable and a reported $155 billion in other liabilities; (9)
the government was unable to support significant portions of the more
than $1.8 trillion reported as the total net cost of government
operations or determine the full extent of improper payments; (10) the
federal government cannot ensure that the information in the financial
statements of the U.S. government is properly and consistently compiled
in an accurate manner; and (11) continuing serious and widespread
computer security weaknesses are placing enormous amounts of federal
assets at risk of fraud and misuse, financial information at risk of
unauthorized modification or destruction, sensitive information at risk
of inappropriate disclosure, and critical operations at risk of
disruption.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-AIMD-99-131
TITLE: Auditing the Nation's Finances: Fiscal Year 1998 Results
Highlight Major Issues Needing Resolution
DATE: 03/31/99
SUBJECT: Financial statement audits
Financial management systems
Financial records
Reporting requirements
Federal agency accounting systems
Internal controls
Accounting procedures
Auditing standards
Government liability (legal)
Public administration
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AI99131T.book GAO United States General Accounting Office
Testimony Before the Subcommittee on Government Management,
Information and Technology, Committee on Government
Reform, House of Representatives For Release on Delivery Expected
at 10 a. m. Wednesday, March 31, 1999
AUDITING THE NATION'S FINANCES
Fiscal Year 1998 Results Highlight Major Issues Needing Resolution
Statement of David M. Walker Comptroller General of the United
States
GAO/T-AIMD-99-131
GAO/T-AIMD-99-131
Page 1 GAO/T-AIMD-99-131
Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today to discuss our report on the U. S. government's
financial statements for fiscal year 1998 and to underscore the
importance of improving how federal departments and agencies
manage the finances of our national government. Historically,
timely,
accurate and useful information has not been available across
government to ensure financial accountability and to help improve
the economy, efficiency, and effectiveness of government.
Fortunately, the Congress has legislated major reforms that if
successfully implemented, will help achieve these objectives and
build the necessary foundation to effectively run a performance-
based government. A critical reform component entails requiring
annual audited financial statements for 24 major federal
departments and agencies beginning with fiscal year 1996-- a best
practice in the private sector for decades and in state and local
governments for many years. Considerable effort is being
made by agencies to achieve this mandate, and steady improvements
in financial accountability are occurring. However, several major
agencies are not yet able to produce auditable financial
statements on a consistent basis, and major obstacles need to be
overcome. Similar challenges exist in producing reliable
statements for the entire U. S. government. Last year, in the
first- ever report on the U. S. government's financial statements,
1 we reported that because of the serious deficiencies
in the government's systems, recordkeeping, documentation,
financial reporting, and controls, amounts reported in the
financial statements and related notes do not provide a reliable
source of information for decisionmaking by the government or the
public. Our report on the U. S. government's financial statements
for fiscal year 1998 has reached the
same conclusion. 2 These deficiencies affect the reliability of
the financial statements and the government's ability to
accurately measure the full cost and financial performance of
programs and manage its operations.
1 Financial Audit: 1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, March 31, 1998) and U.
S. Government Financial Statements: Results of GAO's Fiscal Year
1997 Audit (GAO/T-AIMD-98-128, April 1, 1998).
2 Financial Audit: 1998 Financial Report of the United States
Government (GAO/AIMD-99-130, March 31, 1999).
Page 2 GAO/T-AIMD-99-131
The government must overcome significant challenges to improve
this situation. The historic, long- standing inattention to
financial management issues combined with the size and complexity
of government operations makes corrective actions difficult.
Moreover, the pace of improvement will be greatly influenced by
the progress government organizations are able to
make in modernizing their information systems and internal
controls, in revamping human capital practices to build greater
capacity, and in implementing change management to achieve the
discipline needed to follow sound financial management and
reporting practices. The executive branch recognizes the extent
and severity of existing deficiencies and that addressing them
will continue to require concerted improvement efforts across
government. In response to our March 1998 report, the President
required heads of agencies with significant financial management
deficiencies to submit corrective action plans to the Office of
Management and Budget (OMB). Further, the President has designated
financial management reform as a top management priority. We are
continuing to work with OMB, the Treasury, and agencies across
government to recommend the actions necessary for achieving
legislative reform goals. Additionally, working cooperatively with
the inspectors general, we are continuing to evaluate progress and
make specific suggestions for fixing weaknesses in recordkeeping,
financial reporting, and internal controls. With concerted effort,
the federal government can continue to make progress toward
achieving accountability and generating reliable financial and
management information on a regular basis.
My testimony will focus on outlining the findings of our report
on the financial statements of the
U. S. government for fiscal year 1998; underscoring the critical
need to fully implement legislative reforms; emphasizing that
unqualified clean opinions must be accompanied by
timely and reliable data, stronger controls, and better financial
and management information systems that will help to continuously
improve the economy, efficiency, and effectiveness of government;
highlighting the fact that human capital must become a more
critical part of the management reform agenda; and urging that
the focus be on accountability and not just accounting.
Page 3 GAO/T-AIMD-99-131
Results of GAO's Audit of U. S. Government's Financial Statements
for Fiscal Year 1998 Our report on the U. S. government's
financial statements for fiscal year 1998 states that overall,
significant financial systems weaknesses, problems with
fundamental recordkeeping and financial reporting, incomplete
documentation, and weak internal controls, including computer
controls, continue to prevent the government from accurately
reporting a significant portion of its assets, liabilities, and
costs. Major challenges include the federal government's inability
to properly account for and report (1) billions of dollars of
property, equipment, materials, and supplies and (2) certain
stewardship assets; properly estimate the cost of most major
federal credit programs and
the related loans receivable and loan guarantee liabilities;
estimate and reliably report material amounts of environmental and
disposal liabilities and related costs; determine the proper
amount of various reported liabilities, including postretirement
health benefits for military employees, accounts
payable, and other liabilities; accurately report major portions
of the net cost of government operations;
determine the full extent of improper payments that occur in
major programs and that are estimated to involve billions of
dollars annually; ensure that all disbursements are properly
recorded; and properly prepare the federal government's financial
statements,
including balancing the statements, accounting for billions of
dollars of transactions between governmental entities, and
properly and consistently compiling the information in the
financial statements.
In addition, we found that (1) widespread and serious computer
control weaknesses affect virtually all federal agencies and
significantly contribute to many of the material deficiencies
discussed above and (2) material control weaknesses affect the
government's tax collection activities. Major
issues identified by our work are discussed below. General
Property, Plant, and Equipment and Inventories and Related
Property
The federal government-- one of the world's largest holders of
physical assets-- does not have adequate systems and controls to
ensure the accuracy of information about the amount of assets held
to support its domestic and global operations. A majority of the
$466 billion of these reported assets is not adequately supported
by financial and/ or logistical records. Assets that are not
adequately supported include (1) buildings,
Page 4 GAO/T-AIMD-99-131
structures, facilities, and equipment, (2) various government-
owned assets that are in the hands of private sector contractors,
and (3) operating materials and supplies comprised largely of
ammunition, defense repairable items (such as navigational
computers, landing gear, and transmissions), and other military
supplies. Also, the government cannot ensure that all assets are
reported. Further, national defense asset unit information
reported as Stewardship Information was incomplete.
Because the government lacks complete and reliable information to
support its asset holdings, it could not satisfactorily determine
that all assets were included in the financial statements, verify
that reported assets actually exist, or substantiate the amounts
at which they were valued. For example, periodic physical counts
have shown that property records contain significant error rates.
Further, weak controls significantly impair the government's
ability to detect and investigate fraud or theft of assets. Also,
deferred maintenance information was not reported.
Accurate asset information is necessary for the government to (1)
know the assets it owns and their location and condition, (2)
safeguard its assets from physical deterioration, theft, or loss,
(3) account for acquisitions and
disposals of such assets, (4) prevent unnecessary storage and
maintenance costs or purchase of assets already on hand, and (5)
determine the full costs of government programs that use these
assets. Loans Receivable and Loan Guarantee Liabilities
Most federal credit agencies responsible for federal lending
programs were unable to properly estimate the cost of these
programs in accordance with federal accounting standards and
budgeting requirements. As of the end of fiscal year 1998, the
government reported $167 billion of loans receivable and $38
billion of liabilities for estimated losses related to estimated
future defaults of guaranteed loans. However, the net loan amounts
expected to be collected and guarantee amounts expected to be paid
could not be reasonably estimated because of a lack of adequate
historical data or other evidence. Reliable information about the
cost of credit programs is important in supporting annual budget
requests for these programs, making future budgetary decisions,
managing program costs, and measuring the performance of credit
activities. Federal credit programs include direct loans and loan
guarantees for farms, rural utilities, low and moderate income
housing, small businesses, veterans' mortgages, and student loans.
Page 5 GAO/T-AIMD-99-131
Environmental and Disposal Liabilities
Liabilities for remediation of environmental contamination and
disposal of hazardous waste, reported at $225 billion, were
materially understated by at least tens of billions of dollars
primarily because no estimate was reported for environmental and
disposal liabilities associated with certain major weapons
systems, such as aircraft, missiles, ships and submarines, and
with ammunition. Further, only a small portion of the total cost,
estimated to be over $10 billion, to remove unexploded ordnance
from
training ranges has been reported. Additionally, significant
portions of the government's reported liability for environmental
management and legacy waste related to nuclear weapons development
lacked adequate support, were not complete, and did not reflect
material changes in cleanup scope, costs, or schedules. Properly
stating these liabilities and improving internal controls
supporting the process for their estimation could assist in
determining priorities for cleanup and disposal activities and
allow for
appropriate consideration of future budgetary resources needed to
carry out these activities.
Liabilities Adequate systems and cost data were not available to
accurately estimate the reported $223 billion military
postretirement health benefits liability included in federal
employee and veteran benefits payable. Information used to develop
such estimates did not include the full cost of providing health
care benefits. Also, some agencies do not maintain adequate
records or have systems to ensure that accurate and complete data
were used to estimate a reported $90 billion of accounts payable
and a reported $155 billion in other liabilities. For example, a
liability was not reported for certain amounts owed to contractors
that, under the terms of the contracts, were held by the
government pending the acceptance of goods or services. Further,
the government was unable to provide adequate information to
determine whether commitments and contingencies were complete and
properly reported. These problems significantly affect the
determination
of the full cost of the government's current operations, the value
of its assets, and the extent of its liabilities. Cost of
Government Operations
The government was unable to support significant portions of the
more than $1. 8 trillion reported as the total net cost of
government operations. The previously discussed material
deficiencies in reporting assets and liabilities and the lack of
effective cash disbursement reconciliations, as discussed below,
affect reported net costs. Further, we were unable to determine
whether the amounts reported in the individual net cost
Page 6 GAO/T-AIMD-99-131
categories on the Statement of Net Cost and in the subfunction
detail in Supplemental Information were properly classified.
Accurate cost information is important to the federal government's
ability to control and reduce costs, assess performance, evaluate
programs, and set fees to
recover costs, where required. Improper Payments The government is
unable to determine the full extent of improper payments-- that
is, payments made for other than valid, authorized
purposes. Across government, improper payments occur in a variety
of programs and activities, including those related to contract
management, federal financial assistance, and tax refunds.
Reported estimates of improper payments total billions of dollars
annually. Such payments can
result from incomplete or inaccurate data used to make payment
decisions, insufficient monitoring and oversight, or other
deficiencies in agency information systems and weaknesses in
internal control. The risk of improper payments is increased in
programs involving (1) complex criteria for computing payments,
(2) a significant volume of transactions, or (3) an emphasis on
expediting payments. The reasons for improper payments range from
inadvertent errors to fraud and abuse.
The full extent of improper payments, however, is unknown because
many agencies have not estimated the magnitude of improper
payments in their programs, nor have they considered this issue in
their annual performance plans. The use of appropriate performance
measures relating to improper payments can provide management
focus on reducing related losses. For example, the Department of
Health and Human Services (HHS) has reported a national estimate
of improper payments in its Medicare fee- forservice benefits
since fiscal year 1996. For fiscal year 1998, the department
reported estimated improper payments of $12.6 billion, or more
than
7 percent, of Medicare fee- for- service benefits-- down from
about $20 billion, or 11 percent, reported for fiscal year 1997
and $23.2 billion, or 14 percent, for fiscal year 1996. Analysis
of improper Medicare payments helped lead to the implementation of
several initiatives intended to reduce
improper payments. Annual estimates of improper payments in future
audited financial statements will provide information on the
progress of these initiatives.
Cash Disbursement Activity Several major agencies are not
effectively reconciling cash disbursements. These reconciliations
are intended to be a key control to detect and correct errors and
other misstatements in financial records in a timely manner--
Page 7 GAO/T-AIMD-99-131
similar in concept to individuals reconciling personal checkbooks
with a bank's records each month. There continued to be billions
of dollars of unresolved gross differences between agencies' and
Treasury records of cash disbursements as of the end of fiscal
year 1998. As a result, the government is unable to ensure that
all disbursements are properly recorded. Improperly recorded
disbursements could result in misstatements in the (1) financial
statements and (2) certain data provided by agencies for inclusion
in the President's budget concerning fiscal year
1998 obligations and outlays. Preparation of Financial Statements
The government does not have sufficient systems, controls, or
procedures to properly prepare financial statements for the U. S.
government. Such deficiencies, described below, impair the
government's ability to (1) properly balance the government's
financial statements and account for billions of dollars of
transactions between governmental entities, (2) properly and
consistently compile the information in the financial statements,
and (3) effectively reconcile the results of operations reported
in the financial statements with budget results. Unreconciled
Transactions To make the financial statements balance, Treasury
recorded a net
$24 billion item on the Statement of Operations and Changes in Net
Position, which it labeled unreconciled transactions. Treasury
attributes this net out- of- balance amount to the government's
inability to properly identify and eliminate transactions between
federal government entities and to agency adjustments that
affected net position. Certain
intragovernmental accounts do not reconcile by a total of more
than $250 billion (e. g., intragovernmental receivables exceeded
intragovernmental payables by over $200 billion).
Agencies' accounts can be out of balance with each other, for
example, when one or the other of the affected agencies does not
properly record a transaction with another agency or the agencies
record the transactions in different accounting periods. These
out- of- balance conditions can be detected and corrected by
instituting procedures for reconciling transactions between
agencies on a regular basis and in a timely manner. Generally,
such reconciliations are not performed. These unreconciled
transactions result in material misstatements of assets,
liabilities, revenues, and/ or costs. Financial Statement
Compilation The federal government cannot ensure that the
information in the financial statements of the U. S. government is
properly and consistently compiled in
Page 8 GAO/T-AIMD-99-131
an accurate manner. To prepare the federal government's financial
statements, about 70 agencies submit data to Treasury on
approximately 2,000 separate reporting components, each having
many account balances. However, several major agencies were unable
to provide assurance that all agency amounts included in these
financial statements reconciled with their agency financial
statements. In addition, material adjustments and
reclassifications were required to (1) make the financial
statements more consistent with agency financial statements, (2)
correct identified inconsistencies in reporting similar
transactions, (3) conform footnote information to related
financial statement line items, and (4) record other audit
adjustments.
These problems are compounded by the substantial volume of
information submitted and limitations in the federal government's
general ledger account structure. As a result, additional
misclassifications and misstatements in the government's financial
statements could exist.
Reconciling the Results of Operation With Budget Results
The federal government did not have a process to obtain
information to effectively reconcile the reported $134 billion
excess of net cost over revenue and a reported unified budget
surplus of $69 billion. Consequently, it could not identify all of
the items needed to reconcile these amounts. Certain differences
are expected to occur because the financial statements of the U.
S. government are prepared on the accrual basis in accordance with
federal accounting standards, which is a different basis than the
budget. Under accrual accounting, transactions are reported when
the events giving rise to the transactions occur, rather than when
cash is received or paid. By contrast, federal budgetary reporting
is generally on the cash basis, in accordance with accepted budget
concepts and policies. Beginning in fiscal year 1998, major
agencies were required by federal accounting standards to
reconcile their reported net costs to budget information, which
could provide a basis for preparing the reconciliation in the 1998
Financial Report of the United States Government. However,
significant amounts reported in certain agency reconciliations,
including
unliquidated obligations and certain other budget information,
lacked adequate supporting information and may be unreliable. For
example, significant weaknesses in Department of Defense (DOD)
systems and controls resulted in reported obligations incurred
that may have exceeded available budget authority for certain
appropriations. Once the federal
government produces reliable financial statements, an effective
reconciliation could help provide additional assurance of the
reliability of budget results.
Page 9 GAO/T-AIMD-99-131
Need to Continue Reform Efforts In addition to financial
statements for the U. S. government, 24 major individual
departments and agencies across government have been required to
prepare annual audited financial statements, beginning with
fiscal year 1996. Eleven of these agencies received unqualified
audit opinions for fiscal year 1997-- up from 6 for fiscal year
1996. As of March 19, 1999, 15 of the 24 agencies had received
audit opinions or disclaimers on their fiscal year 1998 financial
statements. These included 7 unqualified opinions, 3 3 qualified
opinions, and 5 disclaimers.
While the results continue to be mixed, individual agencies are
now endeavoring to address financial management problems. Several
agencies that have received unqualified opinions on their
financial statements are
continuing to work on resolving significant weaknesses in
financial systems and internal controls. Producing audited
financial statements on time-- by the March 1 statutory deadline--
is still a challenge, but improvements were made this year by
certain agencies, such as the Department of Health and Human
Service. Also, the Social Security Administration continues to
demonstrate a best practice by producing its audited financial
statements and accountability report in November, less than 2
months after the close of the fiscal year.
We have designated as high risk the serious financial management
problems at certain agencies (the Department of Defense, IRS, the
Forest Service, and the Federal Aviation Administration). 4 All,
however, have concerted efforts underway to address their
deficiencies, and we will continue to work with them and the
cognizant inspectors general (IGs) to
advance recommendations and evaluate progress. 3 The Social
Security Administration, the Department of Labor, the General
Services Administration, the National Science Foundation, the
National Aeronautics and Space Administration, the Nuclear
Regulatory Commission, and the Federal Emergency Management
Agency.
4 High- Risk Series: An Update (GAO/HR-99-1, January 1999).
Page 10 GAO/T-AIMD-99-131
Clean Opinion Must Be Accompanied by Modern Systems and Better
Controls
Audited financial statements are essential to providing an annual
public scorecard on accountability. However, an unqualified audit
opinion, while certainly important, is not an end in itself. For
some agencies, the preparation of financial statements requires
considerable reliance on ad hoc programming and analysis of data
produced by inadequate systems that are not integrated or
reconciled and often require significant audit adjustments.
Efforts to obtain reliable year- end data that are not backed up
by fundamental improvements in underlying financial management
systems and operations to support ongoing program management and
accountability will not achieve the intended results of the Chief
Financial Officers Act over the long term.
For example, after several years of concerted effort by IRS and
GAO, for fiscal year 1997 we were for the first time able to
conclude that IRS' custodial financial statements, covering most
of the government's revenue, were reliable. Prior to fiscal year
1997, weaknesses in IRS' internal controls and financial
management systems prevented it from producing reliable year- end
financial information. Our ability to conclude that the fiscal
year 1997 custodial financial statements were reliable was a mark
of progress. For fiscal year 1998, IRS was able to reliably report
on the results of its custodial activities, including nearly $1.8
trillion of tax revenue, $151 billion of tax refunds, and $26
billion of net federal taxes receivable. 5 However, as in 1997,
this was accomplished only after IRS' extensive use of ad hoc
programming to extract data from its systems, followed by numerous
adjustments to these data totaling tens of billions of dollars to
produce final financial statements. IRS' controls and systems
remain plagued by weaknesses that affect its ability to, among
other things, report reliable financial information throughout the
year.
Improving Systems The central challenge in generating timely,
reliable data throughout the year is overhauling financial and
related management information systems. To help stimulate
attention to this challenge, the Congress passed the
Federal Financial Management Improvement Act (FFMIA) of 1996,
which requires auditors performing financial audits to report
whether agencies' financial management systems comply
substantially with federal accounting standards, financial systems
requirements, and the government's standard general ledger at the
transaction level. For fiscal
5 Financial Audit: IRS' Fiscal Year 1998 Financial Statements
(GAO/AIMD-99-75, March 1, 1999).
Page 11 GAO/T-AIMD-99-131
year 1997, agency financial auditors reported that 20 of 24 major
agency financial systems did not comply with the act's
requirements, indicating the systems' overall continuing poor
condition. 6 As we noted in our report on the government's
financial statements for fiscal year 1998, similar results are
expected for fiscal year 1998.
Most federal agencies' financial management systems do not meet
systems requirements and cannot provide reliable financial
information for managing day- to- day government operations and
holding managers
accountable. Therefore, it will take time and effort to raise
federal financial systems to the level of quality and reliability
envisioned in FFMIA. In addition, agencies face the Year 2000
computing challenge of ensuring that their systems function
properly at the turn of the century. This task is appropriately
taking priority and will likely temporarily sidetrack longer
term systems modernization. Over the longer term, agencies must
address their serious systems problems by applying the framework
outlined in the Clinger- Cohen Act and implementing guidance. This
includes adopting sound information technology investment and
control processes, designing well- developed architectures to
guide information flows and technical standards, and establishing
disciplined approaches for developing and acquiring computer
software. Strong partnerships between chief financial officers and
chief information officers are essential to achieve these goals.
Strengthening Computer Controls
Continuing serious and widespread computer security weaknesses are
placing enormous amounts of federal assets at risk of fraud and
misuse, financial information at risk of unauthorized modification
or destruction, sensitive information at risk of inappropriate
disclosure, and critical operations at risk of disruption.
Significant computer security weaknesses in systems that handle
the government's unclassified information have
been reported in each of the major federal agencies. The most
serious reported problem is inadequately restricted access to
sensitive data. Other types of weaknesses pertain to not (1)
adequately segregating duties to help ensure that people do not
conduct unauthorized actions without detection, (2) preventing
unauthorized software from being implemented,
and (3) mitigating and recovering from unplanned interruptions in
6 Financial Management: Federal Financial Management Improvement
Act Results for Fiscal Year 1997 (GAO/AIMD-98-268, September 30,
1998).
Page 12 GAO/T-AIMD-99-131
computer service. In today's highly computerized and
interconnected environment, such weaknesses are vulnerable to
exploitation by outside intruders as well as authorized users with
malicious intent. The consequences of computer security weaknesses
could be devastating and costly-- for instance, placing billions
of dollars of payments and collections at risk of fraud and
impairing military operations. Also, identified weaknesses at
federal entities such as IRS, the Department of Health and Human
Service's Health Care Financing Administration, SSA,
the Department of State, and the Department of Veterans Affairs
place tax, medical, and other sensitive records at risk of
unauthorized disclosure, modification, and destruction.
The government cannot estimate the full magnitude of actual damage
and loss resulting from federal computer security weaknesses
because it is likely that many such incidents are neither detected
nor reported.
However, GAO and agency reviews and documented incidents, such as
the following, illustrate the potential for negative impacts.
Attackers have accessed systems and stolen, modified, and
destroyed both data and software at DOD and shut down entire
systems. We have been successful, as part of computer security
reviews, in
readily gaining unauthorized access to systems that would allow
intruders to read, modify, or delete data for whatever purpose
they had in mind. Tests by agencies have revealed similar results.
SSA's IG has reported criminal convictions involving SSA
employees, most of which involved creating fictitious identities,
fraudulently selling SSA cards, misappropriating refunds, or
abusing access to confidential information.
IRS has identified incidents of employees browsing taxpayer data
and inappropriately using other systems containing taxpayer data.
GAO and the IGs have issued numerous reports that identify
information security weaknesses in the federal government and made
recommendations to address them. Also, GAO has reported
information
security as a high- risk area across government since February
1997. Agencies need to fully institute a framework for assessing
risk and ensuring
Page 13 GAO/T-AIMD-99-131
that necessary policies and controls are in place and remain
effective on an ongoing basis. 7 Human Capital Initiatives Must
Become a More Critical Part of Reform Agenda
An integral part of financial and information management reform
and, indeed, any management initiative is building, maintaining,
and marshaling the human capital needed to achieve results.
Leading organizations understand that effectively managing
employees-- or human capital-- is essential to reaching and
maintaining maximum performance.
Organizational success is possible only when the right employees
are on board and provided the training, tools, structure,
incentives, and accountability to work effectively.
Specifically, in relation to financial management, the Chief
Financial Officers (CFO) Act recognized the importance of
leadership in creating CFO positions throughout government and in
establishing a goal for improving the qualifications of financial
management personnel throughout government. While some attention
to delineating core competencies and training has occurred, a
great deal more needs to be done. We plan to give greater
attention to this area, with emphasis on
recommending ways to improve strategic approaches to human capital
planning, the acquisition and development of staff with skills to
meet critical needs, and the creation of performance- oriented
organizational cultures while protecting merit principles. 8
Strengthening Financial Management Key to Assuring Accountability
Without a firm foundation of reliable and timely financial and
management information, the many reforms underway across
government to move to a performance- based focus will never be
successfully fulfilled. For this reason, efforts to continue to
build the necessary fundamental foundation through lasting
financial management reform are so essential. Only by
generating reliable and useful information can the government
assure adequate accountability to taxpayers, manage for results,
and help decisionmakers make timely, well- informed judgments.
7 Information Security: Serious Weaknesses Place Critical Federal
Operations and Assets at Risk (GAO/AIMD-98-92, September 23, 1998)
and Information Security: Strengthened Management Needed to
Protect Critical Federal Operations and Assets (GAO/T-AIMD-98-312,
September 23, 1998).
8 Performance and Accountability Series: Major Management
Challenges and Program Risks: A Governmentwide Perspective
(GAO/OCG-99-1, January 1999).
Page 14 GAO/T-AIMD-99-131
Providing such data in meaningful, user- friendly reports is also
critical. Experimentation is now underway across government to
develop single accountability reports on individual departments
and agencies. These
reports will consolidate and integrate audited financial
statements and reporting under the Government Performance and
Results Act and other related laws, to (1) show the degree to
which an agency met its goals and at what costs and (2) aid the
reader in determining whether the agency was
well run. Accountability reports that present an agency's
financial condition and the results of its operations in an
integrated way hold great promise for enhancing the usefulness of
performance information. Such reports and independent audits will
help correct the problem of the lack of complete and reliable
information that has been a source of concern for
congressional and agency decisionmakers for decades. Reliable
accountability reports that include information on the full cost
and results of carrying out federal activities will greatly aid
decision- making for our national government.
Reliable financial information also is essential for analyzing the
government's financial condition and helping inform budget
deliberations by providing additional information beyond that
provided in the budget. The budget of the federal government is
primarily formulated on a cash basis, which also is generally the
basis for calculating the annual budget surplus or deficit. The
financial statements are prepared generally on the
accrual basis of accounting. The most significant difference
between the two bases is the timing of recognition and measurement
of revenues and costs. Accrual information can be used along with
budgetary information to provide a valuable perspective on the
costs of agency programs and the government's assets and long-
term commitments.
In closing, Mr. Chairman, I want to commend your Subcommittee for
its diligent oversight of actions to improve financial management
of government. Your hearings have helped underscore the critical
importance of the issue and the need to make greater progress. I
look forward to
working with you and other Members of the Congress, along with the
executive branch, in bringing about the type of quality financial
management envisioned by legislative goals and expected by the
American people.
I would be pleased to answer questions.
(919363) Lett er
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