oversight

Department of Education: Status of Efforts to Address Major Management Challenges

Published by the Government Accountability Office on 2003-03-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Select Education, Committee
                          on Education and the Workforce, House of Representatives




For Release on Delivery
Expected at 2 p.m., EST
Wednesday,
                          DEPARTMENT OF
March 12, 2003
                          EDUCATION
                          Status of Efforts to
                          Address Major
                          Management Challenges
                          Statement of Linda Calbom
                          Director, Financial Management and Assurance




GAO-03-531T
                          A
                                                March 12, 2003


                                                DEPARTMENT OF EDUCATION

                                                Status of Efforts to Address Major
Highlights of GAO-03-531T, a testimony          Management Challenges
before the Subcommittee on Select
Education, Committee on Education and
the Workforce, House of Representatives




In its 2003 performance and                     Education has taken steps to address its continuing challenges of reducing
accountability report on the                    vulnerabilities in its student aid programs and improving its financial
Department of Education, GAO                    management, such as establishing a senior management team to address
identified challenges in, among                 management problems, including financial management, throughout the
other areas, student financial aid              agency. And, while Education has made significant progress, weaknesses
programs and financial
management. The information
                                                remain that will require the continued commitment and vigilance of
GAO presents in this testimony is               Education’s management to resolve.
intended to assist Congress in
assessing Education’s progress in                   •   Reduce vulnerability of student aid programs to fraud, waste,
addressing and overcoming these                         abuse, and mismanagement. Education has made considerable
challenges.                                             changes to address the ongoing challenges in administering its
                                                        student aid programs. However, Education needs to continue to
                                                        address systems integration issues, reduce fraud and error in student
                                                        aid application and disbursement processes, collect on student loan
                                                        defaults, and improve its human capital management.
GAO is not making new
recommendations in this                             •   Improve financial management. Education has implemented
testimony, but past reports have                        many actions to address its financial management weaknesses.
made specific recommendations                           Significant progress was made recently when Education received an
aimed at addressing some of these                       unqualified—or “clean”—opinion on its financial statements for
major management challenges.                            fiscal year 2002. While this is an important milestone for the
                                                        department, internal control and systems weaknesses remain that
                                                        impede Education’s ability to produce timely, accurate, and useful
                                                        financial information for its managers and stakeholders.

                                                                        History of Financial Management Weaknesses

                                                                                              Material internal   Noncompliance with
                                                        Fiscal          Audit                 control             federal systems
                                                                               a                                               b
                                                        year            opinion               weaknesses          requirements
                                                        1995            Disclaimer                          Yes                N/A
                                                        1996            Disclaimer                          Yes                N/A
                                                        1997            Unqualified                         Yes                Yes
                                                        1998            Disclaimer                          Yes                Yes
                                                        1999            Qualified                           Yes                Yes
                                                        2000            Qualified                           Yes                Yes
                                                        2001            Qualified                           Yes                Yes
                                                        2002            Unqualified                         Yes                Yes
                                                        Source: Auditors’ reports for fiscal years 1995-2002.

                                                        a
                                                         Auditors issue unqualified opinions when the financial statements are presented fairly, in
                                                        all material respects. Qualified opinions are issued when the financial statements are
www.gao.gov/cgi-bin/getrpt?GAO-03-531T.                 presented fairly, with exceptions that are specifically disclosed and described.
                                                        Disclaimers of opinion are rendered when auditors cannot satisfy themselves as to
To view the full testimony, click on the link           whether the financial statements are presented fairly.
                                                        b
above. For more information, contact Linda               These requirements became effective for fiscal year 1997.
Calbom at (202) 512-9508 or
calboml@gao.gov.
                       Mr. Chairman and Members of the Subcommittee:

                       I am pleased to be here today to discuss the major management challenges
                       faced by the Department of Education, its progress in addressing them, and
                       challenges that remain.

                       As you know, this January, we issued our Performance and Accountability
                       Series on management challenges and program risks at major agencies,
                       including the Department of Education.1 The report for Education focused
                       on a number of management challenges and continued the high risk
                       designation for student aid programs. You asked me to focus my testimony
                       on two areas in that report. These are Education’s efforts to (1) reduce
                       fraud, waste, abuse, and mismanagement in its student aid programs while
                       continuing to ensure access to postsecondary education and (2) improve
                       its financial management to help build a high performing agency.
                       Education has taken steps to meet these challenges, such as establishing a
                       senior management team to address management problems, including
                       financial management, throughout the agency. And, while Education has
                       made significant progress, including receiving a clean opinion on its fiscal
                       year 2002 financial statements, weaknesses remain that will require the
                       continued commitment and vigilance of Education’s management to
                       resolve. I will discuss Education’s student aid programs and financial
                       management in turn.



Student Aid Programs   Ensuring access to postsecondary education while reducing vulnerability
                       of aid programs to fraud, waste, abuse, and mismanagement is one of the
                       key management challenges Education faces. Education helps millions of
                       students enroll in higher education programs by providing for more than
                       $50 billion in grants and loans annually. The department is responsible for
                       ensuring that these programs are efficiently managed, establishing
                       procedures to ensure that loans are repaid, and preventing fraud and abuse.
                       Since 1990, we have identified Education’s grant and loan programs as high
                       risk for fraud, waste, abuse, and mismanagement.

                       Both Education and Congress have made changes to address management
                       challenges in the student financial aid programs. Congress established
                       Education’s Office of Federal Student Aid (FSA) as a performance-based

                       1
                        U.S. General Accounting Office, Major Management Challenges and Program Risks:
                       Department of Education, GAO-03-99 (Washington, D.C.: Jan. 2003).




                       Page 1                                                                  GAO-03-531T
organization in 1998. Its purpose is to increase accountability of officials,
provide greater flexibility in management, integrate information systems,
reduce costs, and develop and maintain a system that contains complete,
accurate and timely data that can ensure program integrity. In 2001,
Education established a Management Improvement Team (MIT) of senior
managers to formulate strategies to address key management problems
throughout the department. According to Education, MIT has developed a
system to identify, track, and resolve audit and management issues both
agencywide and in the student financial aid programs.

Education has faced challenges in four areas related to its grant and loan
programs. These are (1) financial aid system integration issues, (2) fraud
and error in student aid application and disbursement processes,
(3) defaulted student loans, and (4) human capital management. I would
now like to briefly discuss each of these challenges.




Page 2                                                            GAO-03-531T
Education has spent millions of dollars to integrate and modernize its many
financial aid systems in an effort to provide more information and better
service to students, parents, institutions, and lenders. Effectively and
efficiently investing in information technology requires, among other
things, an institutional blueprint that defines in both business and technical
terms the organization’s current and target operating environments and
provides a transition road map. Because Education did not have this
blueprint, commonly called an enterprise architecture, we recommended in
1997 that the department develop an architecture and establish standard
reporting formats and data definitions.2 In September 2002, Education’s
Office of the Inspector General (OIG) reported that the department had
made progress in taking specific actions to lay the groundwork for an
enterprise architecture. Still, critical elements need to be completed,
including integrating separate architectures into a departmentwide
architecture and fully implementing common identifiers for students and
institutions to use in departmentwide system applications. Education is
planning to brief us shortly about the department’s enterprise architecture
and progress it has made. Also, in April 2002, we recommended that FSA
and the department develop and include clear goals, strategies, and
measures to better demonstrate its progress in implementing plans for
integrating its financial aid systems in FSA’s performance plans and
subsequent performance reports.3




2
 U.S. General Accounting Office, Student Financial Aid Information: Systems
Architecture Needed to Improve Programs’ Efficiency, AIMD-97-122 (Washington, D.C.:
July 29, 1997).
3
 U.S. General Accounting Office, Federal Student Aid: Additional Management
Improvements Would Clarify Strategic Direction and Enhance Accountability, GAO-02-
255 (Washington, D.C.: April 30, 2002).




Page 3                                                                    GAO-03-531T
With respect to modernization plans, we reported in November 2001 that
FSA selected a viable, industry-accepted means of integrating its existing
data on student loans and grants.4 FSA has made progress in implementing
this approach for its Common Origination and Disbursement process,
which includes the implementation of a common record that institutions
can use to submit student financial aid for Pell Grant and Direct Loan
programs. The ultimate success of this process, however, hinges on
addressing serious postimplementation operational problems and helping
thousands of schools implement the common record. Further, as we
reported in December 2002,5 FSA has not completed a number of elements
that are important to managing any information technology investment.
These include determining whether expected benefits are being achieved
and tracking lessons learned related to schools’ implementation of the
common record. We have recommended that FSA develop metrics,
baseline data, and a tracking process for certain benefits expected from the
system, and that they develop and implement a process for capturing and
disseminating lessons learned to schools that have not yet implemented the
common record. FSA has begun to act on both of these issues.




4
 U.S. General Accounting Office, Student Financial Aid: Use of Middleware for Systems
Integration Holds Promise, GAO-02-7 (Washington, D.C.: Nov. 30, 2001).
5
 U.S. General Accounting Office, Federal Student Aid: Progress in Integrating Pell Grant
and Direct Loan Systems and Processes, but Critical Work Remains, GAO-03-241
(Washington, D.C.: Dec. 31, 2002).




Page 4                                                                      GAO-03-531T
Education has also faced challenges in ensuring that information reported
on student aid applications is correct and that adequate internal controls
are in place to prevent improper payments of grants and loans. The
department has taken steps, in two pilot programs with the Internal
Revenue Service (IRS), to match income reported on student aid
applications with federal tax returns.6 To continue this income match and
implement it on a broader scale, legislation to allow the IRS to release the
information is necessary. Education has worked with the Department of
the Treasury and the Office of Management and Budget to ask that the
Congress enact such legislation. The department also verifies income
information by asking 30 percent of applicants to provide copies of their
tax returns to their student financial aid offices. In addition to
strengthening its controls over student aid applications, we found that
Education also needed to address institutions that were disbursing grants
to ineligible students.7 The department has taken steps to analyze student
data to identify high concentrations of students over 65 and eligible
noncitizens at individual institutions to determine whether problems exist
that warrant further review. These actions are encouraging, and if properly
implemented, should improve controls over these payments.




6
 U.S. General Accounting Office, Major Management Challenges and Program Risks:
Department of Education, GAO-01-245 (Washington, D.C.: Jan. 2001).
7
 U.S. General Accounting Office, Education Financial Management: Weak Internal
Controls Led to Instances of Fraud and Other Improper Payments, GAO-02-406
(Washington, D.C.: Mar. 28, 2002).




Page 5                                                                  GAO-03-531T
A continuing challenge for Education and FSA is preventing and collecting
defaulted student loans. While the national student loan default rate has
decreased from 11.6 percent in fiscal year 1993 to 5.9 percent in fiscal year
2000, the cumulative amount of defaulted student loans has increased by
almost $10 billion over the same period. Education and FSA have
implemented several default management strategies, such as establishing
electronic debiting as a repayment option, and working with some guaranty
agencies to set up alternatives to service and process claims for defaulted
loans. Our analysis of FSA’s internal documents indicated that for fiscal
years 2000 through 2002, FSA met or exceeded many of the goals related to
these strategies. However, neither Congress nor the public can determine
whether FSA’s default management goals have been met because
Education did not prepare performance reports that conform to the
requirements in the Higher Education Act. FSA’s report to Congress on its
performance in fiscal years 2000 and 2001 was not timely nor did it indicate
whether or not FSA met established performance goals. We have
recommended that Education and FSA prepare and issue reports to
Congress on FSA’s performance that are timely and clearly identify whether
performance goals were met.8

Like other federal agencies, Education must address serious human capital
issues, such as succession planning, because about one-third of
Education’s workforce is eligible to retire. In June 2001, we recommended
that the department develop human capital goals and measures for its
performance plans.9 In April 2002, we recommended that the department
and FSA coordinate closely to develop and implement a comprehensive
human capital strategy.10 Education added a specific objective to its
strategic plan, and in 2002, issued a comprehensive 5-year human capital
plan that incorporates FSA. This plan outlines steps and time frames for
improving human capital management and specifies four critical areas
where improvements should be made: (1) top leadership commitment,
(2) performance management, (3) workforce skills enhancement, and



8
 U.S. General Accounting Office, Federal Student Aid: Timely Performance Plans and
Reports Would Help Guide and Assess Achievement of Default Management Goals, GAO-
03-348 (Washington, D.C.: Feb. 14, 2003).
9
 U.S. General Accounting Office, Department of Education: Status of Achieving Key
Outcomes and Addressing Major Management Challenges, GAO-01-827 (Washington, D.C.:
June 29, 2001).
10
     GAO-02-255, 26.




Page 6                                                                 GAO-03-531T
                       (4) leadership and succession planning. It will be important that Education
                       focus continually on implementation of the plan to achieve results.

                       Now, Mr. Chairman, I would like to discuss Education’s financial
                       management challenges and the progress they have made in addressing
                       them.



Financial Management   Weaknesses in Education’s financial management and information systems
                       have limited its ability to achieve one of its key goals—improving financial
                       management to help build a high-performing agency. Significant progress
                       towards this goal was made recently when Education received an
                       unqualified—or “clean”—opinion on its financial statements. Prior to this,
                       with the exception of 1997, Education had not received a clean opinion
                       since its first agencywide audit in 1995. While this is an important
                       milestone for the department, significant management weaknesses remain
                       that must be addressed for Education to meet its goal in this area.

                       Beginning with the department’s first agencywide audit in 1995,
                       Education’s auditors have repeatedly identified significant financial
                       management weaknesses. These weaknesses included Education’s
                       inability to provide the auditors with sufficient evidence to satisfy
                       themselves about the accuracy or completeness of certain amounts
                       included in the financial statements, including billions of dollars of
                       adjustments to amounts reported in previous years’ financial statements.
                       According to Education’s auditor, these adjustments were to correct
                       “unnatural account balances” or otherwise adjust balances to the amount
                       management’s analysis supported. The auditor reported that in many
                       cases, the cause of the incorrect balances could not be definitively
                       determined, and the adjusting entry prepared by management was a
                       reasoned judgment of how to correct its accounts. Education’s auditors
                       have also consistently reported major internal control weaknesses related
                       to financial management systems and financial reporting. These
                       weaknesses included (1) the absence of a fully integrated financial
                       management system, (2) deficiencies in financial management practices
                       that require extensive analysis of accounts to resolve errors through
                       manual adjustments, (3) the lack of a rigorous review of interim financial
                       data for timely identification and correction of errors, (4) the inability to
                       accumulate, analyze, and present reliable financial information in the form
                       of financial statements, (5) the dependence on a variety of stopgap
                       measures to prepare financial statements, (6) the insufficiency of
                       compensating controls, such as top-level reviews to address and to seek to



                       Page 7                                                            GAO-03-531T
compensate for systemic control weaknesses, and (7) the lack of a review
to identify and quantify improper payments. Education’s auditors also
reported that internal controls needed strengthening in numerous areas
relating to Education’s investment of millions of dollars in property and
equipment.

Education has taken actions over the last several years to improve its
financial management and to address the weaknesses identified. For
example, during 2001, Education’s MIT developed specific actions to
address issues raised in previous financial statement audits. According to a
MIT report on its accomplishments, Education began performing certain
critical reconciliations on a monthly basis and began preparing interim
financial statements, which helped identify areas needing further study.
Education also improved its internal controls over property and equipment,
and its auditor did not report this area as a weakness in fiscal year 2002. In
addition, according to Education’s auditor, during fiscal year 2002, the
department implemented a new general ledger software package and FSA
implemented a new financial management system to support their
management information reporting needs. The auditor also reported that
the department implemented several processes during fiscal year 2002 to
improve its financial management, including

• convening the Accounting Integrity Board, the Audit Steering
  Committee, and the Accounting Assurance Group to plan, implement
  and manage quality accounting change control;

• establishing the Financial Statement Committee and continuing the
  Financial Statement Preparation Team and other special task force
  teams all of which are designed to improve the financial statement
  processes; and

• developing and implementing reconciliation work plans, policies and
  procedures, specialized teams and regular management reviews of the
  final work products as well as management review for process
  improvement.

While Education has made progress in addressing many of its weaknesses,
in fiscal year 2002, the auditors again reported that significant financial
management issues continued to impair the department’s ability to
accumulate, analyze, and present reliable financial information. These
problems, in part, resulted from inadequate internal controls over
Education’s financial management systems and financial reporting process.



Page 8                                                             GAO-03-531T
The auditor also reported that weaknesses in the department’s ability to
report accurate financial information on a timely basis were due to
deficiencies in certain of the department’s financial management practices,
including inadequate reconciliations and account analysis early in fiscal
year 2002. The auditor added that issues associated with the transition to a
new financial management system in fiscal year 2002 also contributed to
the department’s difficulties in these areas. While the auditor reported that
it noted improvements in the latter part of the fiscal year, it reported that it
continues to believe that the department needs to place additional focus on
reconciliation procedures, account analysis, and financial reporting. Until
these issues are fully resolved, Education’s ability to produce timely,
accurate, and useful financial information for its managers and
stakeholders will be greatly impeded. In addition, beginning with fiscal
year 2004, Education and other major government agencies will be required
to produce audited financial statements within 45 days after the end of the
fiscal year compared to 120 days for fiscal years 2002 and 2003. Education
will need to continue to focus strongly on resolution of its financial
management deficiencies in order to be in a position to meet these new
reporting deadlines.

As we testified before this Subcommittee in April 2002, we identified other
internal control weaknesses that make Education vulnerable to improper
payments and lost assets.11 In our testimony and related report, 12 we stated
that for May 1998 through September 2000, weak internal controls over the
(1) grants and loan disbursement process failed to detect certain improper
payments, (2) third party draft processes increased Education’s
vulnerability to improper payments, and (3) government purchase cards
resulted in some fraudulent, improper, and questionable purchases. We
also reported that Education lacked adequate internal controls over
computers acquired with purchase cards and third party drafts. Among
other things, we found that computer purchases valued at almost $400,000
were not recorded in Education’s property records, and $200,000 of that
computer equipment could not be located.




11
 U.S. General Accounting Office, Education Financial Management: Weak Internal
Controls Led to Instances of Fraud and Other Improper Payments, GAO-02-513T
(Washington, D.C.: April 10, 2002).
12
     GAO-02-406.




Page 9                                                                 GAO-03-531T
In response to our work, Education made several changes to its policies
and procedures to improve internal controls and program integrity. These
changes were a step in the right direction; but in many cases, our follow-up
work indicated that they had not been effectively implemented. In March
2002, we reported that vulnerabilities remained in all areas we reviewed,
except for third party drafts, which were discontinued altogether.13 For
example, we reported that Education developed a new approval process
for its purchase card program; however, our testing of 3 months of
purchase card statements under the new process found that over 20
percent lacked proper support for the items purchased. In October 2002,
Education told us that new policies and procedures were implemented and
aimed at reducing the department’s vulnerability to future improper use of
purchase cards. These new policies and procedures relate to reviewing
and approving purchase card transactions and providing related training.
Further, the department told us that misuse of purchase and travel cards is
now specifically included in the department’s Table of Penalties with the
desired effect of reducing misuse and abuse of government issued credit
cards. Education also told us that it recognizes that reviewing and
improving internal controls is an ongoing task and that it intends to remain
vigilant in this area. These are positive steps that should help reduce the
instances of improper purchases.

Finally, Education will need to continue its actions in addressing
weaknesses in its financial management information systems. The Federal
Financial Management Improvement Act (FFMIA) of 1996 requires
agencies to institute financial management systems that substantially
comply with federal financial management systems requirements,
applicable accounting standards, and the federal government’s Standard
General Ledger. Every year since FFMIA was enacted, Education’s
auditors have reported that Education’s systems did not substantially
comply with the act’s requirements. In previous years, the auditors
reported that without a fully integrated financial management system,
deficiencies in the general ledger system, deficiencies in the manual
adjustment process, and the need to strengthen other financial
management controls such as reconciliation processes, collectively impair
Education’s ability to accumulate, analyze, and present reliable financial
information. In addition, according to Education’s auditor, although the
department implemented a new financial management system during fiscal
year 2002, issues associated with the transition to the new system


13
     GAO-02-406, 30.




Page 10                                                          GAO-03-531T
contributed to difficulties in providing reliable, timely information for
managing current operations and timely reporting of financial information
to central agencies; therefore, Education still did not substantially comply
with FFMIA’s requirements.

Education also needs to address identified computer security weaknesses
in its financial management and other information systems. In September
2001, we reported that Education had made progress in correcting certain
information system control weaknesses.14 At the same time, we identified
weaknesses in Education’s systems that place critical financial and
sensitive grant information at risk of unauthorized access and disclosure,
and key operations at risk of disruption. We recommended that Education
correct certain information system control weaknesses and fully
implement a comprehensive departmentwide computer security
management program. In response, Education stated that it had developed
a corrective action plan and is taking steps to further strengthen and
develop a more comprehensive information security program. In addition,
Education’s auditor reported that for fiscal year 2002, the department made
progress in strengthening controls over its information technology
processes, but needs to continue efforts to develop, implement, and
maintain an agencywide risk-based information security plan, programs,
and practices to provide security throughout the life cycle of all systems.


In closing, Chairman, I want to reiterate that Education is taking actions
and making substantial progress in addressing major challenges related to
its student aid programs and financial management. At the same time,
some very difficult issues remain that must be resolved before Education is
able to produce relevant, reliable, and timely information to efficiently and
effectively manage the department and provide full accountability to its
stakeholders.

Mr. Chairman, this concludes my statement. I would be happy to answer
any questions you or other members of the Subcommittee may have.




14
 U.S. General Accounting Office, Education Information Security: Improvements Made,
but Control Weaknesses Remain, GAO-01-1067 (Washington, D.C.: Sept. 12, 2001).




Page 11                                                                GAO-03-531T
Contact and       For information about this statement, please contact Linda Calbom,
                  Director, Financial Management and Assurance, at (202) 512-9508, or
Acknowledgments   Robert Owens, Assistant Director, at (202) 512-8579. You may also reach
                  them by E-mail at calboml@gao.gov or owensr@gao.gov. Individuals who
                  made key contributions to this testimony include Lisa Crye and Diane
                  Morris. Numerous other individuals made contributions to the work
                  supporting this testimony.




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