oversight

High-Risk Series: An Overview

Published by the Government Accountability Office on 1997-02-01.

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

                United States General Accounting Office

GAO             High-Risk Series




February 1997
                An Overview




GAO/HR-97-1
GAO   United States
      General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States



      February 1997
      The President of the Senate
      The Speaker of the House of Representatives

      In 1990, the General Accounting Office began a special
      effort to review and report on the federal program areas
      its work identified as high risk because of vulnerabilities
      to waste, fraud, abuse, and mismanagement. This effort,
      which was supported by the Senate Committee on
      Governmental Affairs and the House Committee on
      Government Reform and Oversight, brought a
      much-needed focus on problems that were costing the
      government billions of dollars.

      In December 1992, GAO issued a series of reports on the
      fundamental causes of problems in high-risk areas, and in
      a second series in February 1995, it reported on the status
      of efforts to improve those areas. This, GAO’s third series
      of reports, provides the current status of designated
      high-risk areas.

      Overall, legislative and agency actions have resulted in
      progress toward resolving many previously identified
      high-risk problems. Such actions have established a solid
      foundation to help ensure greater progress, but much
      remains to be done to fully implement the corrective
      actions needed to remove the high-risk designation from
      the areas we have identified. Effective and sustained
      follow-through by agency managers, along with continued
oversight by the Congress, is essential to further
headway.

In addition to this overview, the series includes the Quick
Reference Guide (GAO/HR-97-2), which provides information
on the 25 high-risk areas currently included in GAO’s
high-risk program. For each area, the guide summarizes
the problems and progress, identifies a key GAO contact
person, and provides a list of related GAO products. The
series also includes 12 separate reports detailing
continuing significant issues and resolution actions
needed in 19 of the high-risk areas.

Copies of this report series are being sent to the
President, the congressional leadership, all other
Members of the Congress, the Director of the Office of
Management and Budget, and the heads of major
departments and agencies.




James F. Hinchman
Acting Comptroller General
of the United States




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Contents



Executive                                      6
Summary
Resolving the                                 29
High-Risk Areas:
Current Status of
Improvement
Efforts
Using Legislative                             87
Foundation to
Monitor
High-Risk Areas
and Effectively
Operate
Programs
Key Contacts for                            101
Newly Designated
High-Risk Areas
1997 High-Risk                              103
Series




                    Page 4   GAO/HR-97-1 Overview
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Executive Summary



           Over the past 7 years, we have called
           attention to critical government operations
           that are highly vulnerable to waste, fraud,
           abuse, and mismanagement. Persistent and
           long-standing high-risk areas result in the
           government needlessly losing billions of
           dollars and missing huge opportunities to
           achieve its objectives at less cost and with
           better service delivery. To help improve this
           situation, we have made hundreds of
           recommendations to get at the heart of
           high-risk problem areas, which have at their
           core a lack of fundamental accountability.

           Overall, agencies are taking high-risk
           problems seriously, trying to correct them,
           and making progress in many areas. The
           Congress has also acted to address problems
           affecting high-risk areas through oversight
           hearings and specific legislative initiatives,
           such as the Health Insurance Portability and
           Accountability Act of 1996 to protect
           Medicare from exploitation and Title VI of
           the Federal Agriculture Improvement and
           Reform Act of 1996 to reduce the financial
           risk associated with farm lending programs.

           Landmark legislation in the 1990s also
           established broad management reforms,
           which, if implemented successfully, will help
           resolve high-risk problems and provide


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Executive Summary




greater accountability in many government
programs and operations, including financial
management, information technology,
acquisition of goods and services, and debt
collection. The administration has embraced
these management reforms and has made
implementation of them a priority. Among
these laws are (1) the expanded Chief
Financial Officers (CFO) Act of 1990 to
prepare financial statements that can pass
the test of an independent audit and provide
decisionmakers reliable financial
information, (2) the 1993 Government
Performance and Results Act to measure
performance and focus on results, and
(3) the 1995 Paperwork Reduction Act and
the 1996 Clinger-Cohen Act to make wiser
investments in information technology.

Full and effective implementation of
legislative mandates, our suggestions, and
corrective measures by agencies, however,
has not yet been achieved because the
high-risk areas involve long-standing
problems that are difficult to correct. As a
result, while agencies are making progress,
these problems must be more fully resolved
before we can remove their high-risk
designation. To ensure that this occurs,
sustained management attention and
congressional oversight are necessary. We


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                  Executive Summary




                  will continue to closely monitor agencies’
                  progress in resolving high-risk areas.


Categories of     This report highlights progress agencies
High-Risk Focus   have made to improve high-risk areas in six
                  broad categories, covering serious and
                  widespread weaknesses that have been the
                  focus of our program for several years.
                  These categories affect almost all of the
                  government’s annual $1.4 trillion revenue
                  collection efforts and hundreds of billions of
                  dollars of annual federal expenditures.




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Executive Summary




     Six Categories of High-Risk Focus

   1. Providing for Accountability and Cost-
      effective Management of Defense
      Programs

   2. Ensuring All Revenues Are Collected
      and Accounted For

   3. Obtaining an Adequate Return on
      Multibillion Dollar Investments in
      Information Technology

   4. Controlling Fraud, Waste, and Abuse
      in Benefit Programs

   5. Minimizing Loan Program Losses

   6. Improving Management of Federal
      Contracts at Civilian Agencies




In addition to these broad categories, we
have identified planning for the 2000
Decennial Census as a high-risk area.




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                     Executive Summary




Providing for        The Department of Defense (DOD) has had
Accountability and   some success in addressing its inventory
Cost-Effective       management problems, is working to reform
Management of        its weapon systems acquisition process, and
Defense Programs
                     has recognized the need for infrastructure
                     reductions. However, much remains to be
                     done to resolve DOD’s five high-risk areas.

                     First, DOD’s lingering financial management
                     problems—among the most severe in
                     government—leave the Department without
                     accurate information with which to manage
                     its vast resources, which in fiscal year 1996
                     included a budget of over $250 billion and
                     over $1 trillion in assets worldwide.
                     Financial audits have highlighted significant
                     deficiencies in every aspect of DOD’s financial
                     management and reporting, resulting in
                     failure of any major DOD component to
                     receive a positive audit opinion. The
                     deficiencies identified prevent DOD managers
                     from obtaining the reliable financial
                     information needed to make sound decisions
                     on alternate uses for both current and future
                     resources. DOD’s financial management
                     leaders have recognized the importance of
                     tackling these problems and have many
                     initiatives underway to address widespread
                     financial management problems. Fixing
                     DOD’s financial management problems is also




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Executive Summary




critical to the resolution of the Department’s
other high-risk areas. See page 33.

Also, because of fundamental control
deficiencies in contract and inventory
management systems and procedures, DOD is
vulnerable to billions of dollars being wasted
on excess supplies and millions of dollars in
contractor overpayments. Improvements are
necessary to maintain appropriate controls
over DOD’s centrally managed inventories
valued at $69.6 billion in fiscal year 1995 and
contracts now costing about $110 billion
annually. See pages 35 and 36.

In addition, despite DOD’s past and current
efforts to reform its acquisition system,
wasteful practices still add billions of dollars
to defense weapon systems acquisition
costs, which are about $79 billion annually.
DOD continues to (1) generate and support
acquisition of new weapon systems that will
not satisfy the most critical weapon
requirements at minimal cost and (2) commit
more procurement funds to programs than
can reasonably be expected to be available
in future defense budgets. Many new
weapon systems cost more and do less than
anticipated, and schedules are often delayed.
Moreover, the need for some of these costly
weapons, particularly since the collapse of


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                Executive Summary




                the Soviet Union, is questionable. See page
                38.

                Finally, over the last 7 to 10 years, DOD has
                reduced operations and support costs, which
                will amount to about $146 billion this year.
                However, billions of dollars are wasted
                annually on inefficient and unneeded DOD
                activities. Consequently, this year, we have
                added a new high-risk area covering DOD’s
                efforts to reduce its infrastructure. DOD has,
                in recent years, undergone substantial
                downsizing in force structure. However,
                commensurate reductions in operations and
                support costs have not been achieved.
                Reducing the cost of excess infrastructure
                activities is critical to maintaining high levels
                of military capacities. Expenditures on
                wasteful or inefficient activities divert
                limited defense funds from pressing defense
                needs such as the modernization of weapon
                systems. See page 39.


Ensuring All    In 1995, the Internal Revenue Service (IRS)
Revenues Are    reported collecting $1.4 trillion from
Collected and   taxpayers, disbursing $122 billion in tax
Accounted For   refunds, and managing an estimated
                accounts receivable inventory of $113 billion
                in delinquent taxes.



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Executive Summary




The reliability of such financial information
is critical to effectively manage the
collection of revenue to fund the
government’s operations. However, our
audits of IRS’ financial statements have
identified many significant weaknesses in
accurately accounting for revenue and
accounts receivable, as well as for funds
provided to carry out IRS’ operations. IRS has
made progress in improving payroll
processing and accounting for administrative
operations and is working on solutions to
revenue and accounts receivable accounting
problems. However, much remains to be
done, and effective management
follow-through is essential to achieving fully
the goals of the CFO Act. See page 43.

Also, IRS is hampered in efficiently and
effectively managing its huge inventory of
accounts receivable due to inadequate
management information. The root cause
here is IRS’ antiquated information systems
and outdated business processes, which
handle over a billion tax returns and related
documents annually. See page 45.

IRSis attempting to overhaul its information
systems and tax processing operations
through its Tax Systems Modernization (TSM)
effort. IRS reports that it has already spent or


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Executive Summary




obligated over $3 billion on TSM. IRS and the
Department of the Treasury have taken
several steps to address modernization
problems, but much more progress is needed
to fully resolve serious underlying
management and technical weaknesses. See
page 49.

Further, IRS’ efforts to reduce filing fraud
have resulted in some success, especially
through more rigid screening in the
electronic filing program, but this continues
to be a high-risk area for which IRS needs
better management information. IRS’ goal is
to increase electronic filings, which would
strengthen its fraud detection capabilities.
But to achieve its electronic filing goal, IRS
must identify those groups of taxpayers who
offer the greatest opportunity for filing
electronically and develop strategies focused
on eliminating or alleviating impediments
that have inhibited those groups from
participating in the program. See page 47.

Also, the Customs Service has made
progress in addressing major weaknesses in
its financial management and internal
control systems. However, audits of
Customs’ financial statements continue to
show significant problems in these areas.
These problems diminish Customs’ ability to


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Executive Summary




reasonably ensure that (1) duties, taxes, and
fees on imports are properly assessed and
collected and refunds of such amounts are
valid, (2) sensitive data maintained in
automated systems are adequately protected
from unauthorized access and modification,
and (3) core financial systems provide
reliable information for managing
operations.

We have made numerous recommendations
to Customs to address its financial
management weaknesses and have assisted
in developing corrective actions. It will be
important for top management at Customs to
provide continuing support to ensure that its
planned financial management
improvements are properly implemented.
See page 51.

Also, the Departments of Justice and
Treasury have made many improvements in
their asset forfeiture programs over the
years. However, significant enhancements to
internal controls and property management
are still needed in order to effectively reduce
the vulnerability to theft and
misappropriation of seized property,
including tons of illegal drugs and millions of
dollars of cash and real property. See page
53.


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                          Executive Summary




Obtaining an              In the past 6 years, federal agencies have
Adequate Return on        spent about $145 billion on information
Multibillion Dollar       systems, which are now integral to nearly
Investments in            every aspect of the federal government’s
Information
                          operations. Yet, despite years of experience
Technology
                          in developing and acquiring systems,
                          agencies across government continue to
                          have chronic problems harnessing the full
                          potential of information technology to
                          improve performance, cut costs, and/or
                          enhance responsiveness to the public.

                          In addition to IRS’ TSM, the information
                          systems modernization efforts of the
                          following three agencies in particular are at
                          high risk of being late, running over cost, and
                          falling short of promised benefits:

                      •   The Federal Aviation Administration’s (FAA)
                          $34-billion air traffic control modernization
                          has historically experienced cost overruns,
                          schedule delays, and performance shortfalls.
                          While FAA has had success on a recent small,
                          well defined effort to replace one aging
                          system, the underlying causes of its past
                          problems in modernizing larger, more
                          complex air traffic control (ATC) systems
                          remain and must be addressed for the
                          modernization to succeed. We recently
                          identified and made recommendations to
                          correct several of these root causes,


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    Executive Summary




    including (1) strengthening project cost
    estimating and accounting practices and
    (2) defining and enforcing an ATC-wide
    systems architecture, and we have work
    under way to identify other improvements
    that could help to resolve the
    modernization’s long-standing problems. See
    page 55.

•   DOD continues to spend billions of dollars to
    streamline operations and implement
    standard information systems under the
    umbrella of its Corporate Information
    Management (CIM) initiative. Until its new
    process for controlling system investments is
    implemented, however, the Department
    cannot realize the savings goals expected
    from this initiative. See page 57.

•   The success of the National Weather
    Service’s (NWS) $4.5 billion modernization
    effort hinges on how quickly the Service
    addresses problems with the existing
    system’s operational effectiveness and
    efficient maintenance and on how well it
    develops and deploys the remaining system.
    NWS has acknowledged that a technical
    blueprint is needed and is currently
    developing one. See page 59.




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Executive Summary




Also, a newly designated high-risk area
involves information systems security
weaknesses across government. These
weaknesses pose high risk of unauthorized
access and disclosure or malicious use of
sensitive data. Many federal operations that
rely on computer networks are attractive
targets for individuals or organizations with
malicious intentions. Examples include law
enforcement, import entry processing, and
various financial transactions. Most notable,
Defense systems may have experienced as
many as 250,000 attacks from hackers during
1995 alone, with about 64 percent of those
being successful and most going undetected.

Since June 1993, we have issued over 30
reports describing serious information
security weaknesses at major federal
agencies. In September 1996, we reported
that, during the previous 2 years, serious
information security control weaknesses had
been reported for 10 of the 15 largest federal
agencies. We have made dozens of
recommendations to individual agencies for
improvement and they have acted on many
of them. See page 61.

We are also adding to our high-risk program
this year another serious governmentwide
issue, the “Year 2000 Problem.” This problem


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                      Executive Summary




                      poses the high risk that computer systems
                      throughout government will fail to run or
                      malfunction because computer equipment
                      and software were not designed to
                      accommodate the change of date at the new
                      millennium.

                      For example, IRS’ tax systems could be
                      unable to process returns, which in turn
                      could jeopardize the collection of revenue
                      and the entire tax processing system.
                      Federal systems used to track student
                      education loans could produce erroneous
                      information on their status, such as
                      indicating that an unpaid loan has been
                      satisfied. Or the Social Security
                      Administration’s disability insurance process
                      could experience major disruptions because
                      the interface with various state systems fails,
                      thereby causing delays and interruptions in
                      disability payments to citizens. See page 62.


Controlling Fraud,    The Congress and the President have been
Waste, and Abuse in   seeking to introduce changes to Medicare to
Benefit Programs      help control program costs, which were
                      $197 billion in fiscal year 1996. At the same
                      time, they are concerned that the Medicare
                      program loses significant amounts due to
                      persistent fraudulent and wasteful claims
                      and abusive billings. The Congress has


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Executive Summary




passed legislation to protect Medicare from
exploitation by adding funding to bolster
program safeguard efforts and making the
penalties for Medicare fraud more severe.
Effective implementation of this legislation
and other agency actions are key to
mitigating many of the inherent
vulnerabilities that make Medicare, the
nation’s second largest social program, a
perpetually attractive target for exploitation.
See page 65.

The Supplemental Security Income (SSI)
program is another new high-risk area. SSI,
which provided about $22 billion in federal
benefits to recipients between January 1,
1996, and October 31, 1996, is at high risk of
overpayments, which have grown to over
$1 billion annually. One root cause of these
overpayments is the difficulty the Social
Security Administration has in corroborating
financial eligibility information that program
beneficiaries self report and that affects their
benefit levels. Determining whether a
claimant’s impairment qualifies an individual
for disability benefits can often be difficult
as well, especially in cases involving
applicants with mental impairments and
other hard-to-diagnose conditions. See page
68.



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                      Executive Summary




Minimizing Loan       The federal government is accountable for
Program Losses        effectively managing hundreds of billions of
                      dollars in direct loans and loan guarantees
                      for a variety of programs involving, for
                      example, farmers, students, and home
                      buyers.

                      In 1995, the federal government reported
                      disbursing $19 billion in new direct loans
                      and guaranteeing $123 billion in non-federal
                      lending. As of September 30, 1995, total
                      federal credit assistance outstanding was
                      reported to be over $941 billion, consisting
                      of (1) $204 billion in loans receivables held
                      by federal agencies, including $160 billion in
                      direct loans and $44 billion in defaulted
                      guaranteed loans that are now receivables of
                      the federal government, and (2) $737 billion
                      in loans guaranteed by the federal
                      government.

                      Since our high-risk program began 7 years
                      ago, we have called attention to difficulties
                      major lending agencies have experienced in
                      managing federal credit programs and the
                      resulting exposure to large losses.

                  •   The Department of Education has achieved
                      some results in implementing legislative
                      initiatives by the Congress to address many
                      of the underlying problems with the student


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    Executive Summary




    financial aid programs’ structure and
    management. In fiscal year 1995, the federal
    government paid out over $2.5 billion to
    make good its guarantee on defaulted
    student loans—an amount that represents an
    improvement over the last several years. The
    Department has taken many administrative
    actions to correct problems and improve
    program controls, but it must overcome
    management and oversight problems that
    have contributed to abuses by some
    participating schools. See page 73.

•   The Department of Housing and Urban
    Development (HUD) is responsible for
    managing more than $400 billion in insured
    loans; $435 billion in outstanding securities;
    and, in fiscal year 1995, over $31.8 billion in
    discretionary budget outlays. However,
    effectively carrying out these responsibilities
    is hampered by HUD’s weak internal controls,
    inadequate information and financial
    management systems, and an ineffective
    organization structure. HUD has undertaken
    some improvement efforts to correct these
    problems through such means as
    implementing a new management planning
    and control program. However, HUD’s
    improvement efforts are far from fruition.
    See page 76.



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                           Executive Summary




                       •   Since our last high-risk report series, the
                           Congress has enacted legislation to make
                           fundamental changes in the farm loan
                           programs’ loan-making, loan-servicing, and
                           property management policies. The
                           Department of Agriculture is in the process
                           of implementing the new legislative
                           mandates and other administrative reforms
                           to resolve farm loan program risks. The
                           impact of these actions on the $17 billion
                           farm loan portfolio’s financial condition will
                           not be known for some time. See page 72.

                           The Debt Collection Improvement Act of
                           1996 also was enacted to expand and
                           strengthen agencies’ debt collection
                           practices and authorities. Implementing the
                           act’s provisions can improve agencies’
                           lending program performance.


Improving                  With government downsizing, civilian
Management of              agencies will continue to rely heavily on
Federal Contracts at       contractors to operate programs. While this
Civilian Agencies          approach can help to achieve program goals
                           with a reduced workforce, it can also result
                           in increased vulnerability to risks, such as
                           schedule slippages, cost growth, and
                           contractor overpayments, as we have seen
                           with the weak contract management



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    Executive Summary




    practices of some of the government’s
    largest contracting agencies.

•   Most of the Department of Energy’s (DOE)
    $17.5 billion in annual contract obligations is
    for its management and operating contracts.
    DOE has made headway to overcome its
    history of weak contractor management
    through a major contract reform effort that
    has included developing an extensive array
    of policies and procedures. Although the
    Department recently adopted a policy
    favoring competition in the award of these
    contracts, in actual practice most contracts
    continue to be made noncompetitively. See
    page 79.

•   The National Aeronautics and Space
    Administration (NASA) has made
    considerable progress in better managing
    and overseeing contracts, for which it
    spends about $13 billion a year. The
    improvements have included establishing a
    process for collecting better information for
    managing contractor performance and
    placing greater emphasis on contract cost
    control and contractor performance. Our
    most recent work, however, identified
    additional problems in contract management
    and opportunities for improving
    procurement oversight. See page 81.


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                       Executive Summary




                   •   For the past several years, the
                       Environmental Protection Agency (EPA) has
                       focused attention on strengthening its
                       management and oversight of Superfund
                       contractors. Nonetheless, EPA remains
                       vulnerable to contractor overpayments. At
                       the same time, the magnitude of the nation’s
                       hazardous waste problem, estimated to cost
                       hundreds of billions of dollars, calls for the
                       efficient use of available funds to protect
                       public health and the environment. See page
                       82.


Planning for the       A new high-risk area involves the need for
2000 Decennial         agreement between the administration and
Census                 the Congress on an approach that will both
                       minimize risk of an unsatisfactory 2000
                       Decennial Census and keep the cost of doing
                       it within reasonable bounds. The longer the
                       delay in securing agreement over design and
                       funding, the more difficult it will be to
                       execute an effective census, and the more
                       likely it will be that the government will have
                       spent billions of dollars and still have
                       demonstrably inaccurate results.

                       The country can ill afford an unsatisfactory
                       census at the turn of the century, especially
                       if it comes at a substantially higher cost than
                       previous censuses. The census results are


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                       Executive Summary




                       critical to apportioning seats in the House of
                       Representatives; they are also used to
                       allocate billions of dollars in federal funding
                       for numerous programs and to guide the
                       plans for decisions of government, business,
                       education, and health institutions in the
                       multibillion dollar investments they make.
                       See page 84.


Shifting the           As countless studies by GAO have long noted
Focus to               and this high-risk series of reports
Accountability         demonstrates, federal agencies often fail to
and Managing for       appropriately manage their finances, identify
Results                clearly what they intend to accomplish, or do
                       the job effectively with a minimum of waste.
                       After decades of seeing high-risk problems
                       and management weaknesses recur in
                       agency after agency, the Congress moved to
                       address this situation governmentwide
                       through broad management reforms,
                       including the following:

                   •   The Chief Financial Officers Act of 1990, as
                       expanded in 1994, began requiring annual
                       audited financial statements for all major
                       government entities, starting with fiscal year
                       1996.

                   •   Under the Government Performance and
                       Results Act of 1993, the focus of federal


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    Executive Summary




    agencies turns away from such traditional
    concerns as staffing and activity levels and
    toward a single overriding issue: results.

•   The Paperwork Reduction Act of 1995 and
    the Clinger-Cohen Act of 1996 require,
    among other things, that agencies set goals,
    measure performance, and report on
    progress in improving the efficiency and
    effectiveness of operations through the use
    of information technology.

•   The Federal Acquisition Streamlining Act of
    1994 and sections of the Clinger-Cohen Act
    have provided agencies with tools for
    streamlining and simplifying their processes
    for acquiring goods and services.

    The Office of Management and Budget (OMB)
    has emphasized requirements called for by
    this legislative foundation. For example, OMB
    has not granted any agencies waivers in
    meeting the CFO Act’s audited financial
    statement requirements and has accelerated
    aspects of GPRA’s implementation. Agencies
    are now implementing these new laws, with
    some positive results already.

    Through legislation such as this, the
    Congress has provided an excellent
    framework for monitoring agencies’ progress


    Page 27                      GAO/HR-97-1 Overview
Executive Summary




in and holding managers accountable for
identifying and resolving high-risk problems.
Also, GAO has long supported annual
congressional hearings that focus on
agencies’ accountability for correcting
high-risk problems and implementing broad
management reforms.

These issues are discussed in more detail
beginning on page 87.




Page 28                     GAO/HR-97-1 Overview
Resolving the High-Risk Areas: Current
Status of Improvement Efforts


             The creation of our high-risk program in
             1990 was preceded by more than a decade of
             seemingly endless accounts of control
             breakdowns and program failures. In 1982,
             the Congress passed the Federal Managers’
             Financial Integrity Act, which required
             federal managers to evaluate their internal
             control and accounting systems and to
             correct problems. Since then, the largest
             federal agencies have identified thousands of
             internal control and accounting systems
             weaknesses and reported progress in
             resolving them.

             Over the past 7 years, a substantial part of
             our audit efforts have identified areas that
             place the federal government at substantial
             risk of loss from programs that are
             ineffectively managed and poorly controlled.
             We have also monitored agencies’ efforts to
             overcome high-risk areas through
             administrative measures and actions by the
             Congress.

             Currently, our high-risk program focuses on
             six broad categories that encompass
             high-risk areas involving billions of dollars in
             taxpayers’ money.




             Page 29                       GAO/HR-97-1 Overview
Resolving the High-Risk Areas: Current
Status of Improvement Efforts




      Six Categories of High-Risk Focus

   Providing for Accountability and Cost-
    effective Management of Defense
    Programs

   Ensuring All Revenues Are Collected and
    Accounted For

   Obtaining an Adequate Return on
    Multibillion Dollar Investments in
    Information Technology

   Controlling Fraud, Waste, and Abuse in
    Benefit Programs

   Minimizing Loan Program Losses

   Improving Management of Federal
    Contracts at Civilian Agencies




Separate from these categories, another
high-risk area involves avoiding an
expensive and flawed census in 2000.

Agencies have made progress in designing
corrective actions and are in different stages


Page 30                             GAO/HR-97-1 Overview
Resolving the High-Risk Areas: Current
Status of Improvement Efforts




of implementing them. The Congress has
helped as well through its oversight process
and by legislation to address several specific
high-risk problems and provide broad
management reforms.

While improvements have been made in a
number of areas, high-risk problems must be
more fully resolved before we can remove
their high-risk designation.

Additionally, as of February 1997, we are
designating five new areas as high risk.




              New High-Risk Areas
                 February 1997

   Defense Infrastructure
   Information Security
   The Year 2000 Problem
   Supplemental Security Income
   The 2000 Decennial Census




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                 The following sections discuss the current
                 status of agencies’ efforts to resolve the 20
                 high-risk areas identified in our 1995 report
                 series and introduce the 5 newly identified
                 areas. Concerted effort to continue to reduce
                 these significant risks will be required, and
                 we will continue to focus on all 25 of these
                 areas.

Providing for    DOD is responsible for over $1 trillion in
Accountability   assets worldwide and 3 million military and
and              civilian personnel. With a budget of over
Cost-Effective   $250 billion in fiscal year 1996, DOD is
Management of    accountable for about half of the
                 government’s discretionary spending.
Defense
                 However, the lack of useful and reliable
Programs         financial information and weaknesses in
                 fundamental management systems and
                 practices seriously impair DOD’s
                 accountability for its vast resources.

                 DOD is also faced with transforming its Cold
                 War operating and support structure in much
                 the same way it has been working to
                 transform its military force structure.
                 Making this transition is a complex, difficult
                 challenge that will affect hundreds of
                 thousands of civilian and military personnel.
                 If DOD does not address this challenge now,
                 however, pressing needs will go unmet while



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             scarce defense resources will be wasted or
             used inefficiently.




                           High-Risk Defense
                          Management Problems

                Financial Management
                Contract Management
                Inventory Management
                Weapon Systems Acquisition
                Defense Infrastructure (added in 1997)




Financial    While many improvement efforts are under
Management   way, DOD does not yet have adequate
             financial management processes in place to
             produce the information it needs for making
             decisions affecting its operations and
             accountability. No military service or other
             major DOD component has been able to
             withstand the scrutiny of an independent
             financial statement audit. This situation is
             one of the worst in the federal sector and is
             the product of many years of neglect.




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    Weaknesses permeate critical DOD financial
    management areas and include the following
    problems:

•   the lack of an overall integrated financial
    management system structure,
•   no reliable means of accumulating accurate
    cost information,
•   continuing problems in accurately
    accounting for billions of dollars in
    disbursements,
•   breakdowns in rudimentary required
    financial control procedures,
•   the critical need to upgrade its financial
    management workforce competencies, and
•   antiquated bureaucratic business practices
    that underscore the need for reengineering
    business practices.

    DOD’s financial management leaders have
    recognized the importance of tackling these
    problems, have expressed a commitment to
    financial management reform, and have
    many initiatives underway to address
    long-standing financial management
    weaknesses. However, DOD faces
    fundamental challenges in critical areas if its
    envisioned financial management reforms
    are to realize meaningful, sustained
    improvements.



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                 As part of our high-risk series, we are issuing
                 a separate report on Defense Financial
                 Management problems, progress, and
                 needed improvements (GAO/HR-97-3).


Contract         As DOD seeks to streamline its contracting
Management       and acquisition processes—including
                 contract administration and audit—to adjust
                 to reduced staffing levels, new business
                 process techniques will be key to
                 accomplishing effective and efficient
                 oversight in the future.

                 To maintain appropriate controls over
                 contract expenditures, DOD will need to do
                 the following:

             •   Improve and simplify its contract payment
                 system, which is essential to achieving
                 effective control over DOD’s payment
                 process. Otherwise, DOD continues to risk
                 overpaying contractors millions of dollars.
                 DOD is aware of the seriousness of its
                 payment problems and is taking steps to
                 address them.

             •   Further strengthen its oversight of
                 contractor cost-estimating systems, which
                 are critical to ensuring sound price
                 proposals and reducing the risk that the


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                 government will pay excessive prices. Sound
                 cost estimating systems also permit less
                 government oversight and management
                 attention. While DOD has improved its
                 oversight of contractors’ cost-estimating
                 systems, poor cost-estimating systems
                 remain an area of concern at some
                 contractor locations.

             •   Strengthen the administration of DOD’s
                 Voluntary Disclosure Program, including
                 improving coordination between DOD and the
                 Department of Justice. DOD’s Voluntary
                 Disclosure Program is intended to encourage
                 defense contractors to voluntarily disclose
                 potential civil or criminal fraud to the
                 government. Our work has shown that
                 contractor participation in the program has
                 been relatively small and the dollar
                 recoveries modest.

                 Defense Contract Management problems
                 are further discussed in a separate high-risk
                 series report (GAO-HR-97-4).

Inventory        Because DOD’s culture believed it was better
Management       to overbuy items than to manage with just
                 the amount of stock needed, about half of its
                 current inventory of spare parts, clothing,
                 medical supplies, and other secondary
                 inventory items does not need to be on hand


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to support war reserves or current operating
requirements.

Since our 1995 high-risk report, DOD has had
some success in addressing its inventory
management problems and is in the midst of
changing its inventory management culture.
Also, with reduced force levels and
implementation of some of our
recommendations, DOD has reduced its
centrally managed inventory by about
$23 billion, from about $93 billion in
September 1989 to about $70 billion in
September 1995. DOD has implemented
certain commercial practices, but only in a
very limited manner. DOD has made little
progress in developing the management
tools needed to help solve its long-term
inventory management problems. It has not
achieved the desired benefits from the
Defense Business Operations Fund, and the
Corporate Information Management
initiative has not produced the economies
and efficiencies anticipated.

Consequently, it has become increasingly
difficult for inventory managers to manage
DOD’s multibillion dollar inventory supply
systems efficiently and effectively. In the
short term, DOD needs to emphasize the
efficient operation of its existing inventory


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                 systems and make greater use of proven
                 commercial practices. In the long-term, DOD
                 must establish goals, objectives, and
                 milestones for changing its culture and
                 adopting new management tools and
                 practices.

                 Additional information on these matters is
                 presented in a separate high-risk series
                 report on Defense Inventory Management
                 (GAO/HR-97-5).


Weapon Systems   Even though DOD spends about $79 billion
Acquisition      annually to research, develop, and acquire
                 weapon systems, it has a history of
                 establishing questionable requirements for
                 weapon systems; projecting unrealistic cost,
                 schedule, and performance estimates; and
                 beginning production before adequate
                 testing has been completed. DOD’s leadership
                 has emphasized a commitment to reform its
                 weapon systems acquisition process and
                 become a smarter buyer by pursuing a
                 number of positive initiatives to reinvent and
                 improve the cost-effectiveness of its
                 acquisition processes. In addition, the
                 Congress has passed a series of legislative
                 reforms for the weapon systems acquisition
                 process.



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                 The ultimate effectiveness of DOD’s current
                 initiatives to reduce the costs and improve
                 the outcomes of its weapon systems
                 acquisition processes cannot yet be fully
                 assessed because they are in various stages
                 of implementation. But the fundamental
                 reforms needed to correct weapon systems
                 acquisition problems, such as successfully
                 completing testing before beginning
                 production, have not yet been formulated,
                 much less instituted.

                 Progress and remaining problems in
                 Defense Weapon Systems Acquisition
                 are discussed in a separate report being
                 issued as part of this high-risk series
                 (GAO/HR-97-6).


Defense          This year, we have added to our high-risk
Infrastructure   areas Defense’s efforts to reduce its
                 infrastructure. For fiscal year 1997, DOD
                 estimates that about $146 billion, or
                 two-thirds, of its budget will be for
                 operations and support activities. These
                 activities, which DOD generally refers to as its
                 support infrastructure, include maintaining
                 installation facilities, providing nonunit
                 training to the force, providing health care to
                 military personnel and their families,



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repairing mission-essential equipment, and
buying and managing spare part inventories.

DOD recognizes the need for infrastructure
reductions. DOD’s laboratory infrastructure is
estimated to have an excess capacity of
35 percent. Its overhead costs for
transportation services are 2 to 3 times the
basic cost of transportation. In addition,
funds are being spent to operate and
maintain aging and underutilized buildings,
roads, and other infrastructure that will
likely be declared excess by DOD in the near
future.

Defense must use resources for the highest
priority operational and investment needs
rather than maintaining unneeded property,
facilities, and overhead. DOD has programs to
identify potential infrastructure reductions
in many areas. However, breaking down
cultural resistance to change, overcoming
service parochialism, and setting forth a
clear framework for a reduced Defense
infrastructure are key to avoiding waste and
inefficiency.

To do this, the Secretary of Defense and the
military service Secretaries need to give
greater structure to their efforts by
developing an overall strategic plan. The


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                plan needs to establish time frames and
                identify organizations and personnel
                responsible for accomplishing fiscal and
                operational goals. In developing the plan,
                DOD should consider using a variety of means
                to achieve reductions, including such things
                as consolidations, privatization, outsourcing,
                reengineering, and interservice agreements.
                It should also consider the need and timing
                for future base realignment and closure
                actions.

                Additional information about Defense
                Infrastructure problems can be found in a
                separate high-risk series report (GAO/HR-97-7).


Ensuring All    To ensure its ability to efficiently and fairly
Revenues Are    administer the nation’s tax system, IRS has
Collected and   articulated a business vision for the future.
Accounted For   This vision calls for reducing the volume of
                paper returns, providing better customer
                service, and improving compliance by
                modernizing its operations.

                Since developing its business vision in 1992,
                IRS has made some progress in modernizing
                its operations; however, the gap between IRS’
                current level of performance and that
                proposed in its vision is great. Specifically,
                the efficient administration of the nation’s


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tax system is undermined by problems in
four areas of IRS’ operations: financial
management, accounts receivable, filing
fraud, and tax systems modernization.

These issues are highlighted below and
discussed further in a separate high-risk
series report, IRS Management (GAO/HR-97-8).

Also, the Customs Service has made
progress in resolving its high-risk problems
and the Departments of Justice and the
Treasury have improved the management of
asset forfeiture programs. Nonetheless,
Customs continues to have significant
financial management weaknesses and
additional improvements are necessary to
adequately control asset forfeitures.




               High-Risk Revenue
               Collection Problems

   IRS Financial Management
   IRS Receivables
   Filing Fraud
   Tax Systems Modernization
   Customs Service Financial Management
   Asset Forfeiture Programs



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IRS Financial   IRS needs to make substantial improvements
Management      in its accounting and financial reporting to
                comply fully with the CFO Act’s requirements.
                Our audits under the act have described IRS’
                difficulties in (1) properly accounting for its
                reported $1.4 trillion in tax revenues, in total
                and by reported type of tax, (2) reliably
                determining the amount of accounts
                receivable owed for unpaid taxes,
                (3) regularly reconciling its Fund Balance
                with Treasury accounts, and (4) either
                routinely providing support for receipt of the
                goods and services it purchases or, where
                supported, accurately recording the
                purchased item in the proper period.

                IRS has made some progress in addressing
                these issues. This is particularly notable in
                IRS’ administrative accounting operations,
                which track its over $7 billion appropriation
                to fund agency activities. For example, IRS
                recently reported that it has identified
                substantially all of the reconciling items for
                its Fund Balance with Treasury accounts. It
                has also successfully transferred its payroll
                processing to the Department of
                Agriculture’s National Finance Center and
                has begun designing short and long-term
                strategies to fix the problems that contribute
                to its nonpayroll expenses being



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unsupported or reported in the wrong
period.

Further, in the revenue accounting area, IRS
has designed an interim approach to capture
the detailed support for revenue and
accounts receivable until longer term
solutions can be identified and implemented.
The issues with IRS’ revenue accounting
operations are complex, and the remedies
needed are multifaceted and encompass
organizational, managerial, technological,
and procedural improvements. IRS’ revenue
accounting problems are especially affected
and complicated by antiquated automated
data processing systems that must be
substantially modified to meet financial
reporting requirements ushered in by the CFO
Act.

Follow-through by IRS is essential to ensure
that its financial management improvement
plans are effectively carried out. Solving
these problems is essential to providing
reliable financial information and ensuring
taxpayers that their federal tax dollars are
properly accounted for in accordance with
federal accounting standards. The accuracy
of IRS’ financial statements is also key to
both IRS and the Congress for (1) ensuring
adequate accountability for IRS programs,


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                      (2) assessing the impact of tax policies, and
                      (3) measuring IRS’ performance and cost
                      effectiveness in carrying out its numerous
                      tax enforcement, customer service, and
                      collection activities.


IRS Receivables       In fiscal year 1996, IRS reported it had
                      collected almost $30 billion in delinquent
                      taxes—more than in any previous year. Also,
                      the Congress has recently taken actions that
                      could help to reduce the amount of
                      delinquent taxes in the future by requiring
                      more electronic deposits of employment
                      taxes, expanding voluntary withholding, and
                      authorizing IRS to test the use of private debt
                      collectors.

                      However, fundamental problems continue to
                      hamper IRS’ efforts to efficiently and
                      effectively manage and collect its reported
                      $216 billion inventory of tax debts.

                  •   The outdated equipment and processes used
                      to match tax returns and related information
                      documents can require several years to
                      identify potential delinquencies before
                      initiating collection actions.

                  •   Information systems problems prevent IRS
                      from effectively measuring the results of


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•   improvement efforts, determining the best
    collection actions to take for specific
    taxpayers, identifying the most effective
    collection tools and techniques, and devising
    programs needed to prevent delinquencies
    from occurring.

    IRS has undertaken many initiatives to deal
    with its accounts receivable problems—such
    as (1) correcting errors in its tax receivable
    masterfile, (2) developing more information
    with which it can better define the inventory
    of tax debts, characteristics of delinquent
    taxpayers, and appropriate collection
    techniques, (3) attempting to speed up
    aspects of the collection process, and
    (4) automating many of the processes
    carried out by collection employees in field
    offices.

    These efforts appear to have had some
    impact on collections and the tax debt
    inventory, but many are long-term in nature
    and demonstrable results may not be
    available for several years. Overall, IRS needs
    a comprehensive collection strategy that
    involves setting priorities, modernizing
    outdated equipment and processes, and
    establishing goals, timetables, and systems
    to measure progress.



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Filing Fraud   Through the early 1990s, the number of
               fraudulent returns that IRS detected spiraled
               upward, reaching a peak in 1994 of over
               75,000 returns involving $160 million. After
               being urged to take immediate action by us,
               the Congress, and a Treasury task force, IRS
               introduced new controls and expanded
               existing controls in an attempt to reduce its
               exposure to filing fraud.

               Those controls were focused on
               (1) deterring the filing of fraudulent returns
               by more rigidly screening applicants to the
               electronic filing program and verifying
               electronic returns at the point of receipt and
               (2) identifying questionable returns after
               they have been filed by automating fraud
               research and detection techniques and more
               aggressively verifying social security
               numbers.

               IRS’efforts produced some positive results.
               For example, in 1995, IRS (1) identified
               problems with over 4 million social security
               numbers on returns filed electronically and
               (2) detected invalid social security numbers
               on paper returns that resulted in over
               $800 million in reduced refunds or additional
               taxes. Unfortunately, IRS identified many
               more problems than it was able to deal with



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and ended up releasing about 2 million
refunds without resolving the problems.

The number of fraudulent returns identified
by IRS has declined since 1994. However, IRS
does not have sufficient information to
determine whether the decline is the result
of fewer staff assigned to the program,
changes in the program’s operating and
reporting procedures, or a general decline in
the incidence of fraud.

To control filing fraud, it is critically
important for IRS to (1) optimize controls,
such as upfront filters that are intended to
deter the filing of fraudulent returns, and
(2) maximize the effectiveness of available
staff. Modernization is the key to achieving
these objectives, and electronic filing is the
cornerstone of that modernization. IRS’
business vision calls for increasing the
number of electronic returns to 80 million by
2001. However, recent filing trends indicate
that IRS will fall far short of that goal. To
achieve its goal, IRS must identify those
groups of taxpayers who offer the greatest
opportunity for filing electronically and
develop strategies focused on eliminating or
alleviating impediments that have inhibited
those groups from participating in the
program.


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Tax Systems     Over the last decade, IRS has been attempting
Modernization   to overhaul its timeworn, paper-intensive
                approach to tax return processing. In 1995,
                we identified serious management and
                technical weaknesses in the modernization
                program which jeopardize its successful
                completion,1 recommended many actions to
                fix the problems, and added IRS’
                modernization to our high risk list. Since
                then, IRS and Treasury have together taken
                several steps to implement our
                recommendations, but much remains to be
                done. At stake is the over $3 billion that IRS
                has spent or obligated on this modernization
                since 1986, as well as any additional funds
                that IRS plans to spend on modernization.

                In May 1996, Treasury reported to the House
                and Senate Appropriations Committees on
                steps under way and planned to exert
                greater management oversight over IRS’
                modernization efforts.2 For example, it
                established a Modernization Management
                Board as the primary review and
                decision-making body for modernization and
                for policy and strategic direction. In

                1
                 Tax Systems Modernization: Management and Technical
                Weaknesses Must Be Corrected If Modernization Is to Succeed
                (GAO/AIMD-95-156, July 26, 1995).
                2
                Report to House and Senate Appropriations Committees: Progress
                Report on IRS’s Management and Implementation of Tax Systems
                Modernization, Department of the Treasury, May 6, 1996.

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addition, Treasury scaled back the overall
size of the modernization by approximately
$2 billion and is working with IRS to obtain
additional contractor help to accomplish the
modernization. Pursuant to congressional
direction, we assessed IRS’ actions to correct
its management and technical weaknesses,
as delineated in Treasury’s report on tax
systems modernization. We reported in June
and September 1996 that IRS had initiated
many activities to improve its modernization
efforts, but had not yet fully implemented
any of our recommendations.

To help oversee IRS’ modernization, the
Congress is taking oversight actions as well.
For example, it directed IRS to (1) submit a
schedule for transferring a majority of its
modernization development and deployment
to contractors and (2) establish a schedule
for implementing GAO’s recommendations. It
also directed the Secretary of the Treasury
to (1) provide quarterly reports on the status
of IRS’ corrective actions and modernization
spending and (2) submit a technical
architecture for the modernization that has
been approved by Treasury’s Modernization
Management Board.

IRShas continued to take steps to address
our recommendations and respond to


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                  congressional direction. For example, IRS
                  created an investment review board to
                  select, control, and evaluate its information
                  technology investments. Thus far, the board
                  has reevaluated and terminated selected
                  major modernization development projects,
                  such as the Document Processing System.
                  IRS also provided a November 26, 1996,
                  report to the Congress that set forth IRS’
                  schedule for shifting modernization
                  development and deployment to contractors.
                  While we recognize IRS and Treasury actions
                  to address these problems, we remain
                  concerned. Much remains to be done to fully
                  implement essential improvements. IRS
                  needs to continue to make concerted,
                  sustained efforts to fully implement our
                  recommendations and respond effectively to
                  the requirements outlined by the Congress. It
                  will take both management commitment and
                  technical discipline for IRS to do this
                  effectively.


Customs Service   Customs has taken several actions to
Financial         address significant weaknesses in its
Management        financial management and internal control
                  systems. These actions include, for example,
                  statistically sampling compliance of
                  commercial importations through ports of
                  entry to better focus enforcement efforts and


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to project and report lost duties, taxes, and
fees due to noncompliance.

However, Customs still has not fully
corrected significant problems in these
areas, which continue to be identified during
audits of Customs’ financial statements
under the CFO Act. These problems diminish
Customs’ ability to reasonably ensure that
(1) duties, taxes, and fees on imports are
properly assessed and collected and refunds
of such amounts are valid, (2) sensitive data
maintained in automated systems are
adequately protected from unauthorized
access and modification, and (3) core
financial systems provide reliable
information for managing operations.

We have made numerous recommendations
to Customs to address its financial
management weaknesses and have assisted
in developing corrective actions. It will be
important for top management at Customs to
provide continuing support to ensure that its
planned financial management
improvements are properly implemented.

Customs Service Financial Management
is further discussed in the Quick Reference
Guide (GAO/HR-97-2).



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Asset Forfeiture   Over the years, the Departments of Justice
Programs           and Treasury have made many
                   improvements to their asset forfeiture
                   programs, which had inventories valued at
                   about $2 billion in 1995. However, significant
                   enhancements to internal controls and
                   property management are still needed in
                   order to effectively reduce the vulnerability
                   to theft and misappropriation of seized
                   property, including tons of illegal drugs and
                   millions of dollars of cash and real property.
                   In addition, Justice and Treasury should
                   aggressively pursue options for efficiency
                   gains through consolidation of their
                   programs for managing and disposing of
                   seized assets.

                   The Quick Reference Guide
                   (GAO/HR-97-2) provides additional information
                   on the risks associated with Asset
                   Forfeiture Programs.


Obtaining an       During the past 6 years, agencies have spent
Adequate Return    over $145 billion building up their
on Multibillion    information technology infrastructure—all
Dollar             too often with disappointing results. Many
Investments in     system development efforts suffer from
                   multimillion dollar cost overruns, schedule
Information
                   slippages measured in years, and/or marginal
Technology         benefits in terms of improving mission


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performance, cutting costs, and enhancing
responsiveness to the public. A case in point
is the IRS tax systems modernization
previously discussed.

The federal government’s poor return on
information technology investments also has
left the Congress and executive branch
severely handicapped by the lack of reliable
data for measuring the costs and results of
agency operations and making well-informed
decisions. Recognizing the urgent need for
improvement, the 104th Congress passed
landmark reforms in information technology
management. The 1995 Paperwork
Reduction Act and the 1996 Clinger-Cohen
Act require agencies to implement a
framework of modern technology
management.

These legislative initiatives are discussed
later in this overview and in a separate
report on Information Management and
Technology, issued as part of this series
(GAO/HR-97-9). That report also discusses
high-risk information system modernization
efforts and governmentwide information
security and technology issues, which are
highlighted in the following discussion.




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                                    High-Risk Information
                                    Technology Initiatives

                          Tax Systems Modernization
                          Air Traffic Control Modernization
                          Defense's Corporate Information
                           Management Initiative
                          National Weather Service Modernization
                          Information Security (added in 1997)
                          The Year 2000 Problem (added in 1997)



Air Traffic Control   Over the past 15 years, the Federal Aviation
Modernization         Administration’s (FAA) ambitious air traffic
                      control modernization, which is expected to
                      cost $34 billion through the year 2003, has
                      experienced cost overruns, schedule delays,
                      and performance shortfalls. These problems
                      led FAA in 1994 to restructure the $7.6 billion
                      former centerpiece of the
                      modernization—the Advanced Automation
                      System. The acquisition of that system failed
                      because FAA did not recognize the technical
                      complexity of the effort, realistically
                      estimate the resources required, adequately
                      oversee its contractors’ activities, or
                      effectively control system requirements.3


                      3
                      Advanced Automation System: Implications of Problems and
                      Recent Changes (GAO/T-RCED-94-188, April 13, 1994).

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FAA has made some progress since then.
However, much remains to be accomplished.
For example, systems comprising the
modernization have long proceeded without
a complete systems architecture—or
blueprint—to guide them, leading to
unnecessarily higher spending to buy,
integrate, and maintain hardware and
software.4 We have recommended that FAA
develop and enforce a complete systems
architecture, and implement a management
structure for doing so that is similar to the
Chief Information Officer provisions of the
Clinger-Cohen Act of 1996.

Also, FAA’s poor cost estimating processes
and cost accounting practices leave it at risk
of making ill-informed decisions on critical
multimillion, even billion, dollar air traffic
control systems.5 We recommended that FAA
institutionalize defined processes for
estimating the costs of projects and develop
and implement a managerial cost accounting
capability.



4
 Air Traffic Control: Complete and Enforced Architecture Needed
for FAA Systems Modernization (GAO/AIMD-97-30, February 3,
1997).
5
 Air Traffic Control: Improved Cost Information Needed to Make
Billion Dollar Modernization Investment Decisions
(GAO/AIMD-97-20, January 22, 1997).

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                      Additionally, FAA’s organizational culture,
                      which does not reflect a strong enough
                      commitment to mission focus,
                      accountability, coordination, and
                      adaptability, has contributed to its
                      modernization difficulties.6 We
                      recommended that FAA develop a
                      comprehensive strategy for addressing this
                      issue.


Defense’s Corporate   Defense started the Corporate Information
Information           Management (CIM) initiative in 1989 with the
Management            expectation of saving billions of dollars by
Initiative            streamlining operations and implementing
                      standard information systems supporting
                      such important business areas as supply
                      distribution, materiel management,
                      personnel, finance, and transportation.
                      However, 8 years after beginning CIM, and
                      after spending a reported $20 billion,
                      Defense’s savings goal has not been met
                      because the Department has not yet
                      implemented sound management practices.

                      We have made numerous recommendations
                      for improving the Department’s management
                      of CIM, such as (1) better linking system
                      modernization projects to business process

                      6
                      Aviation Acquisition: A Comprehensive Strategy is Needed for
                      Cultural Change at FAA (GAO/RCED-96-159, August 22, 1996).

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improvement efforts, (2) establishing plans,
performance measures, and clearly defined
roles and responsibilities for
implementation, and (3) improving controls
over information technology investments.7
But Defense has yet to successfully
implement these recommendations.

Not surprisingly, the results of Defense’s
major technology investments have been
meager and some investments are likely to
result in a negative return on investment. For
example, after spending over $700 million,
Defense has abandoned its system
modernization strategy for materiel
management. For depot maintenance,
Defense expects to spend over $1 billion to
develop a standard system that by its own
estimates will achieve less than 2.3 percent
in reduced operational costs over a 10-year
period.

The Department estimates that it will spend
more than an additional $11 billion on
system modernization projects between now
and 2000. As part of its Clinger-Cohen Act
implementation efforts, the Department is
establishing a framework to use its planning,


7
 See, for example, Defense Management: Stronger Support Needed
for Corporate Information Management Initiative to Succeed
(GAO/AIMD/NSIAD-94-101, April 12, 1994).

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                   programming, and budgeting system to
                   better manage this investment.

                   While this is a step in the right direction,
                   these corrective actions are just the
                   beginning. This investment remains at risk
                   until Defense makes well-informed business
                   decisions based on an accurate picture of
                   the costs of technology investments and
                   their related benefits and an appreciation for
                   how they fit into the Department’s long- and
                   short-term goals.


National Weather   Although the development and deployment
Service            of the observing systems associated with the
Modernization      National Weather Service’s (NWS)
                   modernization, which has been underway for
                   15 years at a cost of about $4.5 billion, are
                   nearing completion, unresolved issues still
                   remain. These issues concern the observing
                   systems’ operational effectiveness and
                   efficient maintenance, as well as the
                   development and deployment of remaining
                   modernization component systems.

                   For example, the new radars are not always
                   up and running when severe weather is
                   threatening and the ground-based sensors
                   fall short of performance and user
                   expectations, particularly when the weather


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is active.8 Further, the centerpiece of the
modernization—the forecaster workstations
that will integrate observing systems’ data
and support forecaster decision-making—is
far from providing all the promised
capabilities and has been delayed and
become more expensive because of design
problems and management shortcomings. In
1996, we made several recommendations
that, if implemented, will strengthen NWS’
ability to acquire these workstations.9

As we reported in our 1995 high-risk series,
the modernization and evolution of this
major systems initiative has long begged for
a comprehensive systems architecture to
guide the effort. NWS has acknowledged that
a technical blueprint is needed and is
currently developing one. However, NWS will
continue to incur higher systems
development and maintenance costs and
experience reduced performance until the
systems architecture is developed and
enforced.



8
See, for example, Weather Forecasting: Radar Availability
Requirements Not Being Met (GAO/AIMD-95-132, May 31, 1995) and
Weather Forecasting: Unmet Needs and Unknown Costs Warrant
Reassessment of Observing System Plans (GAO/AIMD-95-81,
April 21, 1995).
9
 Weather Forecasting: Recommendations to Address New Weather
Processing Systems Development Risks (GAO/AIMD-96-74, May 13,
1996).
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Information Security   Information security is a newly designated
                       high-risk area. Malicious attacks on
                       computer systems are an increasing threat to
                       our national welfare. The federal
                       government’s system interconnectivity and
                       linkage to the Internet, combined with poor
                       security management, is putting billions of
                       dollars worth of assets at risk of loss and
                       vast amounts of sensitive data at risk of
                       unauthorized disclosure. Increasing reliance
                       on networked systems and electronic
                       records has elevated concerns about the
                       possibility of serious disruption to critical
                       federal operations, such as law enforcement,
                       import entry processing, various financial
                       transactions, payroll, defense operational
                       plans, electronic benefit payments, and
                       electronically submitted Medicare claims.

                       Information security problems are
                       widespread. In May 1996, we reported that
                       the Department of Defense’s systems may
                       have experienced as many as 250,000 attacks
                       by hackers during fiscal year 1995, about
                       64 percent of the attacks were successful at
                       gaining access, and only a small percentage
                       of the attacks were detected.10 Also, in
                       September 1996, we reported that, during the
                       previous 2 years, serious information

                       10
                        Information Security: Computer Attacks at Department of
                       Defense Pose Increasing Risks (GAO/AIMD-96-84, May 22, 1996).

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                security control weaknesses had been
                reported for 10 of the 15 largest federal
                agencies.11

                We have repeatedly made dozens of
                recommendations to agencies to improve
                information security and some agencies have
                acted to eliminate specific control
                weaknesses. However, stronger central
                leadership is also necessary by OMB, which
                has an important role in promoting
                awareness of information security problems
                and monitoring agency information security
                practices.


The Year 2000   At 12:01 on New Year’s morning of the year
Problem         2000, many computer systems could either
                fail to run or malfunction, thereby producing
                inaccurate results, because computer
                equipment and software were not designed
                to accommodate the change of date to a new
                millennium. Simply put, the systems will not
                know whether it is the year 2000 or 1900, for
                example, since they are designed to operate
                with the year designated as only two digits,
                in this case “00.” We are adding this problem
                as a new high-risk area because, unless it is
                resolved in time, widespread operational and


                11
                 Information Security: Opportunities for Improved OMB Oversight
                of Agency Practices (GAO/AIMD-96-110, September 24, 1996).

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financial impacts could affect federal, state,
and local governments, foreign governments,
and private sector organizations worldwide.

For example, IRS’ tax systems could be
unable to process returns, which in turn
could jeopardize the collection of revenue
and the entire tax processing system.
Federal systems used to track student
education loans could produce erroneous
information on them, such as indicating that
an unpaid loan had been satisfied. Or the
Social Security Administration’s disability
insurance process could experience major
disruptions because the interface with
various state systems fails, thereby causing
delays and interruptions in disability
payments to citizens.

While this issue will reach a crescendo at the
turn of the century, date-related problems
have been manifesting themselves for some
years, and more problems are beginning to
show up as the new century approaches.
With every federal agency at risk of system
failures and the year 2000 fast approaching,
federal agencies must immediately assess
their Year 2000 risk exposure, and plan and
budget for achieving Year 2000 compliance
for all of their mission-critical systems.
Correcting this problem in federal agencies


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                    will involve extensive, resource-intensive
                    efforts due to factors such as the large scale
                    of their systems and the numerous
                    dependencies and interactions with systems
                    of both private sector organizations and
                    state agencies. We are working with the
                    Congress and the executive branch to assess
                    progress in resolving the Year 2000 problem.


Controlling         A broad segment of the nation’s
Fraud, Waste, and   citizens—including the elderly, blind, and
Abuse in Benefit    disabled—benefit from government
Programs            programs such as Medicare and
                    Supplemental Security Income (SSI).
                    Unfortunately, these programs experience
                    billions of dollars in losses annually because
                    of fraudulent claims and payments to those
                    who are ineligible. With greater control,
                    these losses could be lessened, thereby
                    reducing already enormous program costs.




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                     High-Risk Benefit Programs

              Medicare
              Supplemental Security Income (added
               in 1997)




Medicare   The continuing need to control claims fraud
           and abuse in the Medicare program, one of
           the largest entitlements in the federal
           budget, is heightened by two factors. First,
           although growth in Medicare costs, which
           were $197 billion in fiscal year 1996, has
           moderated somewhat during the last 2 years,
           many believe even this lower growth rate
           cannot be sustained. Second, the Medicare
           trust fund that pays for hospital and other
           institutional services is expected to be
           depleted within the next 5 years.

           No one can determine with precision how
           much Medicare loses each year to fraudulent
           and abusive claims, but losses could be from
           $6 billion to as much as $20 billion in fiscal
           year 1996. Reducing unnecessary or


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inappropriate Medicare payments would
result in large savings and help dampen the
growth in Medicare costs.

The Health Care Financing Administration
(HCFA), which runs the Medicare program,
has begun to acquire a new claims
processing system, the Medicare Transaction
System (MTS), to provide, among other
things, better protection from fraud and
abuse. In the past, we have reported on risks
associated with this project, including a plan
to implement the system in a single stage,
rather than incrementally; difficulty in
defining requirements; inadequate
investment analysis; and significant schedule
problems. HCFA has responded to these
concerns by changing its single-stage
approach to one under which the system will
be implemented incrementally, and is
working to resolve other reported problems.
We plan to monitor these efforts.

HCFA’s  interim processing environment
includes consolidation of existing systems
and processing sites. While this is essential,
it adds another element of complexity and
risk to Medicare claims processing. The
success of this overall improvement
initiative will depend upon close
management attention to the interim


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transition period and addressing reported
problems with MTS requirements definition,
scheduling, and cost.

Also, since our first series of high-risk
reports, HCFA has made some regulatory and
administrative changes aimed at curbing
fraudulent and unnecessary payments.
However, in recent years, sizeable cuts in the
budget for program safeguards, where most
of the funding for the fight against abusive
billing is centered, have diminished efforts to
thwart improper billing practices. In
addition, Medicare’s fast-growing managed
care program suffers from excessive
payments and weak oversight of Medicare
health maintenance organizations (HMOs).

The government has made important strides
to protect Medicare from exploitation.
Recent legislation—the Health Insurance
Portability and Accountability Act of
1996—will add funding to bolster program
safeguard efforts. The legislation also makes
more severe the penalties for Medicare fraud
and enhances HCFA’s efforts to oversee
Medicare HMOs.

In other actions, the Department of Health
and Human Services Inspector General and
other federal and state agencies are fighting


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                  Medicare fraud in five states in an effort
                  called Operation Restore Trust. After the
                  first year of operation, the effort yielded
                  more than $40 million in recoveries of
                  payments for claims that were not allowed
                  under Medicare rules.

                  Medicare high-risk issues are discussed in
                  more detail in a separate report issued as
                  part of this series (GAO/HR-97-10).


Supplemental      The SSI program, which is operated by the
Security Income   Social Security Administration (SSA) and
                  pays cash benefits to the low-income aged,
                  blind, and disabled, has grown in size and
                  complexity since its inception in 1974.
                  During the first 10 months of 1996, about
                  6.6 million SSI beneficiaries received about
                  $22 billion in federal benefits.

                  This year, we have included the SSI program
                  as a high-risk area because overpayments
                  have grown to over $1 billion per year, which
                  is about 5 percent of total benefit payments.
                  Also, criticisms have been raised regarding
                  SSA’s ability to effectively manage SSI
                  workloads and internal control weaknesses
                  that leave the program susceptible to fraud,
                  waste, and abuse.



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Our reports have highlighted several
long-standing SSI program problem areas.
These involve (1) determining initial and
continuing financial eligibility for
beneficiaries, (2) determining disability
eligibility and performing continuing
disability reviews, and (3) inadequate
return-to-work assistance for recipients who
may be assimilated back into the workforce.

For example, in August 1996, we reported
that about 3,000 current and former
prisoners in 13 county and local jail systems
had been erroneously paid $5 million in SSI
benefits, primarily because SSA lacked timely
and complete information. Also, the
subjective nature of certain disability criteria
limits SSA’s ability to ensure reasonable
consistency in administering the program.

To address SSI program problems, SSA has
initiated a major redesign of the disability
claims and appeals process, which will be
implemented over the next several years.
Additionally, the Congress recently passed
legislation to tighten eligibility criteria for
children and immigrants, remove substance
abusers from the SSI rolls, and strengthen
existing laws aimed at preventing SSI
payments to individuals in correctional
institutions. The legislation also requires SSA


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                  to conduct more reviews of SSI recipients to
                  ensure that they remain eligible. It is too
                  early to determine how these changes will
                  affect the SSI program’s vulnerability to
                  inappropriate expenditures.

                  The magnitude of the SSI program and its
                  demonstrated vulnerability to fraud, waste,
                  abuse, and mismanagement call for decisive
                  management action to address long-standing
                  problems. Redesign of the disability claims
                  process must remain an agency priority, and
                  SSA must also establish effective program
                  policy, management accountability, and
                  internal controls to protect taxpayers’
                  dollars and assure timely and accurate
                  decisions for SSI claimants.

                  Additional information on the
                  Supplemental Security Income Program
                  problems and improvements can be found in
                  the Quick Reference Guide (GAO/HR-97-2).


Minimizing Loan   The federal government is responsible for
Program Losses    collecting billions of dollars from lending
                  programs. At the end of fiscal year 1995, the
                  federal government had a reported
                  $204 billion in loan receivables, including at
                  least $38 billion in delinquencies, and an
                  additional $737 billion in loan guarantees.


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This portfolio represents a wide variety of
credit programs involving housing, farming,
education, small business, and other
activities.

While the nature of these programs results in
some expected losses, agencies are required
to mitigate them through effective credit
management and prudent debt collection
procedures. But, historically, GAO and others
have reported that agencies have not always
properly managed their lending programs.

To help in this area, the 104th Congress
passed the Debt Collection Improvement Act
of 1996 to expand and strengthen federal
agency debt collection practices and
authorities. While this important new
legislation can provide a much needed new
impetus to improve lending program
performance, it will take time to implement,
and additional attention by agency
management and actions by the Congress
are necessary as well.




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                                High-Risk Loan Programs

                        Farm Loan Programs
                        Student Financial Aid Programs
                        HUD




Farm Loan Programs   In February 1995, we noted that some
                     progress had been made in addressing two
                     of the causes of the U.S. Department of
                     Agriculture’s (USDA) farm loan programs’
                     problems. We reported that addressing the
                     remaining problems would require
                     strengthening weak loan and property
                     management policies and further
                     clarification of the agency’s role by the
                     Congress.

                     Since then, the Congress enacted Title VI of
                     the Federal Agriculture Improvement and
                     Reform Act of 1996, which made
                     fundamental changes in the programs’
                     loan-making, loan-servicing, and property
                     management policies. For example, the
                     changes would prohibit delinquent


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                    borrowers from obtaining additional direct
                    farm operating loans and limit the number of
                    times delinquent borrowers can receive debt
                    forgiveness.

                    If implemented properly, this legislation
                    should significantly reduce the financial risk
                    associated with the farm lending programs,
                    and combined with USDA’s actions to improve
                    compliance with program standards, should
                    reduce the farm lending programs’
                    vulnerability to loss. However, USDA is still in
                    the process of implementing the mandated
                    reforms and their impact on the loan
                    portfolio’s financial condition will not be
                    known for some time.

                    Additional information on problems and
                    improvements involving Farm Loan
                    Programs can be found in the Quick
                    Reference Guide (GAO/HR-97-2).


Student Financial   We previously reported that while federal
Aid Programs        student aid programs have succeeded in
                    giving students access to money for
                    postsecondary education, the Department of
                    Education has been less successful at
                    protecting the financial interests of the U.S.
                    taxpayers. We also expressed concern that
                    Education’s long-standing management


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problems could hamper its implementation
and administration of the Ford Direct Loan
Program.

In our previous high-risk reports, we
discussed legislative initiatives by the
Congress to address many of the underlying
problems with the student financial aid
programs’ structure and management. These
reports also discussed numerous
administrative actions taken by Education to
correct the problems and improve program
controls.

The Department has generally been
responsive to recommendations for
improvements and some results have been
achieved. For example, Federal Family
Education Loan Program default costs
declined slightly, from $2.7 billion in fiscal
year 1992 to $2.5 billion in fiscal year 1995.
In January 1997, the Department announced
that default costs continued to decline
through fiscal year 1996. Also, collections on
defaulted loans increased from $1 billion in
fiscal year 1992 to $2 billion in fiscal year
1995.

Nonetheless, the financial risk to taxpayers
from student financial aid program
vulnerabilities remains substantial. For


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example, inadequate Department oversight
has contributed to abuses on the part of
some schools participating in federal student
aid programs. These abuses included
instances in which schools received Pell
grant funds for students who never applied
for the grants or never enrolled in or
attended the schools. In another instance, a
chain of proprietary schools falsified student
records and misrepresented the quality of its
educational programs in order to increase its
revenues from students receiving Pell grants.

The student financial aid programs’
procedural and structural problems remain.
Some of these arose from the statutory
design of the programs and will remain
unless the design is changed through
congressional actions. Others can be
mitigated through more effective
management by the Department. The
Department has taken corrective actions in
responding to many of our recommendations
and those made by others. However,
overseeing the student aid programs’
complex and cumbersome structure and
processes presents a continuing
management challenge to the Department.

Additional information on Education’s
Student Financial Aid issues can be found


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                    in a separate report being issued as part of
                    this series (GAO/HR-97-11).


Department of       One of the nation’s largest financial
Housing and Urban   institutions, HUD is responsible for managing
Development         more than $400 billion in insured loans,
                    $485 billion in outstanding securities, and
                    about $180 billion in prior years’ budget
                    authority for which it has future financial
                    commitments. Because of these
                    responsibilities and the large discretionary
                    budget outlays for HUD’s programs, which
                    were about $31.8 billion in fiscal year 1995, it
                    is imperative that the deficiencies hampering
                    HUD’s leadership in effectively managing the
                    agency be resolved.

                    HUD’s management deficiencies involve
                    (1) weak internal controls, (2) inadequate
                    information and financial management
                    systems, (3) an ineffective organizational
                    structure, and (4) an insufficient mix of staff
                    with the proper skills. These problems are
                    not new—we reported them in 1995 and they
                    were a major factor contributing to the
                    incidents of fraud, waste, abuse, and
                    mismanagement reported in the late 1980s.
                    Fundamental control weaknesses also
                    contributed to the HUD Inspector General’s
                    inability to give an opinion on the


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Department’s fiscal year 1995 financial
statements.

HUD has made some progress in overhauling
its operations to correct these problem
areas. For example, HUD has (1) implemented
a new management planning and control
program intended to identify and rank the
major risks in each program and devise
strategies to abate those risks,
(2) implemented portions of new systems,
(3) eliminated the regional office structure
and transferred direct authority for staff and
resources to the assistant secretaries, and
(4) stepped up staff training. Also, HUD has
continued efforts to reinvent and reengineer
its current wide array of programs.

However, these efforts are far from reaching
fruition and long-standing, fundamental
problems remain. HUD’s programs will
remain high-risk until the agency completes
more of its planned corrective actions and
until the administration and the Congress
reach closure on a restructuring that focuses
HUD’s mission and consolidates, reengineers,
and/or reduces HUD’s programs. What is
needed is for the administration and the
Congress to agree on the future direction of
federal housing and community development
policy and put in place the organizational


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                    and program delivery structures that are best
                    suited to carry out that policy—a process
                    that will involve inherent tradeoffs in the
                    needs of those seeking HUD’s assistance and
                    with other demands on the total federal
                    budget.

                    Additional information on the Department
                    of Housing and Urban Development
                    improvement efforts can be found in a
                    separate report being issued as part of this
                    series (GAO/HR-97-12).


Improving           Civilian agencies rely on the private sector
Management of       as a means to carry out their programs
Federal Contracts   through contracts involving goods and
at Civilian         services costing tens of billions of dollars a
Agencies            year. While this approach can be used to
                    reduce the workforce, it is critical that the
                    government gets what it pays for under these
                    contracts and that the contractors’ work is
                    done at reasonable cost. But this is not
                    always the case, due to problems with the
                    oversight and control of contractor
                    operations.




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                          High-Risk Contracting Areas

                   Department of Energy
                   NASA
                   Superfund




Department of   Through a major contract reform effort, DOE
Energy          has made headway to overcome its history
                of weak contractor management. As the
                federal government’s largest civilian
                contracting agency, in fiscal year 1995, DOE
                spent about $17.5 billion to, among other
                things, maintain its weapons complex, fund
                its national laboratories, and clean up its
                legacy of environmental contamination.

                We designated DOE’s contracting as a
                high-risk area in 1990 because its extensive
                reliance on contracting and its history of
                inadequate oversight of contractors failed to
                protect the government from fraud, waste,
                and abuse. Since then we have issued a
                series of reports and testimonies that have
                identified some of the costly effects of DOE’s


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contracting practices, contributed to the
Congress’ budget deliberations, and
provided an impetus for DOE to reform its
contracting.

In 1994, a DOE contract reform team made
sweeping recommendations aimed at the
Department’s weak contract practices. In
response, DOE has made progress in
developing an extensive array of policies and
procedures, such as publishing a new
regulation adopting a standard of full and
open competition for the award of its
management and operating contracts. DOE’s
proposed contract reforms are
unprecedented in scope and provide a
comprehensive plan to address DOE’s past
contracting problems, but competition is not
yet the practice.

Implementing the reforms will require a
period of years as current contracts are
either competitively awarded or
noncompetitively renewed with reform
provisions incorporated into the contracts.
Continued high-level monitoring and
oversight by DOE will be needed so that DOE
does not lose its momentum and priority in
implementing contract reform.




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       Additional information on the Department
       of Energy Contract Management
       problems and improvement initiatives can be
       found in a separate report being issued as
       part of this series (GAO/HR-97-13).


NASA   NASA has made considerable progress in
       improving its contract and procurement
       operations which in recent years have
       totalled about $13 billion a year, about
       90 percent of NASA’s annual budget. For
       example, NASA has established a process for
       collecting better information for managing
       contractor performance, placed greater
       emphasis on contract cost control and
       contractor performance, and improved its
       use of contract audit services.

       Efforts such as these have achieved results
       in a number of areas, and NASA has
       demonstrated that it can take timely action
       once a potential problem has surfaced. For
       instance, NASA lowered the value of contract
       changes for which prices had not yet been
       negotiated from $6.6 billion in December
       1991 to less than $500 million in September
       1996. Also, the number of unresolved audits
       by the Defense Contract Audit Agency was
       reduced to 13 in June 1996 from 92 in 1994.



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            As one of the largest civilian contracting
            agencies, NASA will inevitably experience
            periodic problems in procurement activity,
            as shown by our recent work that identified
            additional contract management problems
            and opportunities to improve procurement
            oversight. For instance, in July 1996, we
            reported on problems in controlling costs in
            the International Space Station Program,
            which accounts for over 10 percent of NASA’s
            annual procurement funding.

            While NASA’s efforts are encouraging, the
            agency must be able to identify contract
            management problems early so they can be
            evaluated, monitored, and corrected before
            they become systemic. NASA’s approach to
            periodically assessing its management of
            procurement functions could benefit from
            additional agencywide guidance to help
            ensure more consistent and thorough
            coverage of the procurement cycle.

            Additional information on NASA Contract
            Management is in the Quick Reference
            Guide (GAO/HR-97-2).


Superfund   Cleaning up the nation’s hazardous waste
            problems has proved to be far more
            complicated and costly than anticipated


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when the Superfund program was started at
the Environmental Protection Agency (EPA)
in 1980. Recent estimates show that cleaning
them up could amount to over $300 billion in
federal costs and many billions more in
private expenditures.

While about half of the Superfund program’s
budget annually goes to contractors, EPA has
had long-standing problems in controlling
contractors’ charges. We have repeatedly
reported that EPA has not overseen its
cost-reimbursable contracts as necessary to
prevent contractors from overcharging the
government. EPA has focused attention on
strengthening its management of Superfund
contracts for the past several years,
continued to exercise oversight, such as
conducting reviews of its regions’
performance in this area, and made other
improvements.

Nonetheless, Superfund contracting
problems persist. EPA’s regions are still too
dependent upon contractors’ own cost
proposals to establish the price of
cost-reimbursable work, and EPA continues
to pay its cleanup contractors a high
percentage of total contract costs to cover
administrative expenses rather than ensuring
that the maximum amount of available


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                   monies is going toward the actual cleanup
                   work. Also, little progress has been made in
                   improving the timeliness of audits to verify
                   the accuracy of billions of dollars in
                   Superfund contract charges. The backlog has
                   remained steady at about 500 unfulfilled
                   requests for audits.

                   Consequently, the agency remains
                   vulnerable to overpaying its contractors and
                   not achieving the maximum cleanup work
                   with its limited resources. EPA needs to
                   better estimate the costs of contractors’
                   work, use the estimates to negotiate
                   reasonable costs, provide contractors with
                   appropriate incentives to hold down their
                   administrative expenses, and increase the
                   timeliness of contract audits.

                   Additional information on EPA’s Superfund
                   Program Management improvement
                   initiatives and remaining problems is
                   provided in a separate report issued as part
                   of this high-risk series (GAO/HR-97-14).


Planning for the   Another newly designated high-risk area
2000 Decennial     involves the risk to the nation of an
Census             unsatisfactory or costly census in 2000.
                   Public cooperation is key to the decennial
                   census, but over the years, voluntary


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cooperation has eroded. By 1990, the most
expensive census in history produced results
that were less accurate than those of the
preceding census.

In anticipation of the need to deal with an
even larger nonresponse workload than in
1990, the Census Bureau has designed
statistical sampling and estimation
procedures that should be more accurate
and cost-effective than visiting every
nonresponding household. But the Bureau
has so far failed to demonstrate convincingly
to the Congress exactly what effects these
procedures would have, and the Congress
has concerns over the proposed approach.
As a result, the Congress, which under the
Constitution and court decisions has the
authority to determine the manner in which
the census will be taken, could choose to
preclude the Bureau from moving forward
with its sampling plan.

The administration has done little to plan for
the possibility that greater amounts of
funding than now anticipated may be
necessary to cover added personnel,
facilities, and equipment costs if sampling
and estimation are not used. Careful advance
planning and higher priority is necessary to
avoid the risk of a very expensive and


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seriously flawed census in 2000. Given the
dependence of many decisions affecting
governments, businesses, and citizens on the
results of the census, the country can
ill-afford an unsatisfactory census at the turn
of the century, especially if it comes at a
substantially higher cost than previous
censuses.

The problems that could impede effectively
planning for the 2000 Decennial Census
are discussed further in the Quick Reference
Guide (GAO/HR-97-2).




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                Resolving specific high-risk problems and
                implementing broader management reforms
                will require a concerted effort by agency
                managers. In this regard, the Congress has
                held oversight hearings and established the
                legislative framework necessary to achieve
                better financial, information, and acquisition
                management and measure the results of
                program operations. This framework will
                help agencies identify and monitor high-risk
                areas and operate programs more effectively
                and will assist the Congress in overseeing
                agencies’ efforts to achieve these results.

            •   The expanded Chief Financial Officers (CFO)
                Act of 1990 provides the framework for
                identifying and correcting financial
                management weaknesses and reliably
                reporting on the results of financial
                operations.

            •   The Government Performance and Results
                Act (GPRA) of 1993 emphasizes managing for
                results and pinpointing opportunities for
                improved performance and increased
                accountability.

            •   The Paperwork Reduction Act of 1995 and
                the Clinger-Cohen Act of 1996 (1) explicitly
                focus on the application of information
                resources in supporting agency missions and


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                  improving agency performance and (2) set
                  forth requirements for improving the
                  efficiency and effectiveness of operations
                  and the delivery of services to the public
                  through the effective use of information
                  technology.

              •   The Federal Acquisition Streamlining Act
                  (FASA) of 1994 and sections of the
                  Clinger-Cohen Act have provided agencies
                  the tools for streamlining and simplifying
                  their processes for acquiring goods and
                  services.

Improving         Timely, reliable, useful, and consistent
Financial         financial information is central to better
Information       managing government programs, providing
                  accountability, and addressing high-risk
                  problems. As a number of high-risk areas
                  show, federal financial management suffers
                  from decades of neglect and failed attempts
                  to improve financial management and
                  modernize outdated financial systems. As a
                  result, financial information has not been
                  reliable enough to use in federal
                  decision-making or to provide the requisite
                  public accountability. Good information on
                  the full costs of federal operations is
                  frequently absent or extremely difficult to
                  reconstruct, and complete, useful financial
                  reporting is not yet in place.


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    The landmark CFO Act spelled out a long
    overdue and ambitious agenda to help
    resolve these types of financial management
    deficiencies. The act established a CFO
    structure in 24 major agencies and 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 a 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 and steady progress is being made
    under the act to bring about sweeping


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reforms and rectify the devastating legacy
from inattention to financial management.
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.

The success of these efforts formed the basis
for congressional action in 1994 to pass the
Government Management Reform Act,
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. Together, these agencies account
for virtually the entire federal budget. This
essential expansion of the CFO Act’s
requirements provides a greater impetus for
accelerated governmentwide
implementation of financial management
reform.

Also, the 1994 expansion to the CFO Act
requires the preparation and audit of
consolidated governmentwide 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


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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 kind of financial
reporting already required by (1) the
securities laws for the private sector, partly
in response to the stock market crash of
1929 and (2) the Single Audit Act for state
and local governments, driven in part by
financial crises such as that experienced by
New York City in the early 1970s.

In addition, the Federal Financial
Management Improvement Act of 1996
requires agencies to comply with federal
accounting standards, federal financial
systems requirements, and the U.S.
government’s standard general ledger. This
legislation also requires (1) auditors
performing financial audits under the CFO
Act to report whether agencies’ financial
management systems comply with these
requirements and (2) agency heads to
establish remediation plans if an agency’s
financial management systems do not
comply.

The requirements of these laws underscore
the importance to improved federal financial
management of efforts by the Federal


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Accounting Standards Advisory Board
(FASAB) to recommend federal accounting
standards and the Joint Financial
Management Improvement Program (JFMIP)
to develop uniform financial systems
requirements. FASAB and JFMIP are joint
activities of the Secretary of the Treasury,
the Director of OMB, and the Comptroller
General to foster better financial
management governmentwide.

Since passage of the CFO Act, we and the
Inspector General (IG) community have been
laying the groundwork by performing
financial statement audits of major
Departments and agencies throughout
government. We have worked in tandem
with agency CFOs and IGs, OMB, and Treasury
over several years to be a catalyst for the
preparation and audit of agencywide
financial statements across government. To
successfully meet the CFO Act’s
requirements, it will be essential for the
federal financial management and audit
communities to give priority to meeting the
act’s time frame for preparing audited
financial statements.

As auditor for the governmentwide financial
statements, we plan to ensure in-depth audit
coverage of (1) the four agencies (the


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               Departments of the Treasury, Defense, and
               Health and Human Services and the Social
               Security Administration) which are likely to
               have the greatest impact on the
               governmentwide financial statements and
               (2) the remaining 20 CFO Act agencies and
               other federal entities that will be included in
               the consolidated statements.

               Making CFO Act reforms a reality in the
               federal government remains a challenge and
               a great deal more perseverance will be
               required to sustain the current momentum
               and successfully overcome decades of
               serious neglect in fundamental finance
               management operations and reporting
               methods. But fully and effectively
               implementing the CFO Act is a very important
               effort because it is key to better
               accountability, implementing broader
               management reforms, and supporting the
               goals of GPRA. CFO Act audited financial
               statements will interpret, analyze, and
               provide the nation’s leaders, agency
               managers, and the public at large with a
               wealth of relevant information on the
               government’s true financial status.


Managing for   Traditionally, federal agencies have used
Results        either the amount of money directed toward


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    their programs, the level of staff deployed, or
    even the number of tasks completed as some
    of the measures of their performance. But at
    a time when the value of many federal
    programs is undergoing intense public
    scrutiny, an agency that reports only these
    measures has not answered the defining
    question of whether these programs have
    produced real results.

    Under GPRA, every major federal agency must
    now ask itself basic questions: What is our
    mission? What are our goals and how will we
    achieve them? How can we measure our
    performance? How will we use that
    information to make improvements?

    GPRA requires agencies to set goals, measure
    performance, and report on their
    accomplishments.

•   No later than September 30, 1997, executive
    agencies are to issue to the Congress, OMB,
    and the public strategic plans covering a
    period of at least 5 years. These plans are to
    be updated every 3 years.

•   Beginning with fiscal year 1999, executive
    agencies are to develop annual performance




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    plans that link the strategic goals with daily
    activities. These plans are to be developed as
    part of the President’s budget.

•   Executive agencies are to develop annual
    performance reports and submit them to the
    President and appropriate congressional
    committees. The first reports will cover
    fiscal year 1999.

    This will not be an easy transition, nor will it
    be quick. And for some agencies, GPRA will
    be difficult to apply. The challenges they
    face in establishing outcome-oriented goals
    and measures and managing on the basis of
    them were experienced by agencies
    participating in a pilot program authorized
    by the act. But GPRA has the potential for
    adding greatly to government
    performance—a particularly vital goal at a
    time when resources are limited and public
    demand is high.

    To help the Congress and federal managers
    put GPRA into effect, we have identified key
    steps that agencies need to take toward its
    implementation, along with a set of practices
    that can help make that implementation a
    success.1 We learned of these practices from
    organizations that have successfully taken
    1
     Executive Guide: Effectively Implementing the Government
    Performance and Results Act (GAO/GGD-96-118, June 1996).

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              initiatives similar to the ones required by the
              act. The key steps and practices drawn from
              the organizations we studied provide a
              useful framework for federal agencies
              working to implement GPRA.


Managing      High-risk system development problems are
Information   common across government and have been
Technology    for many years. A broad solution is needed
Better        to help agencies prevent these problems and
              maximize the benefits of technology for
              improving performance and reducing costs.
              Similarly, there is a need to strengthen
              federal agencies’ ability to effectively
              address emerging technology issues and
              problems on a governmentwide basis.

              To improve this situation, we have worked
              closely with the Congress since our 1995
              high-risk report to fundamentally revamp
              and modernize federal information
              management practices. Our study of leading
              public and private sector organizations
              showed how they applied an integrated set
              of management practices to create the
              information technology infrastructure they
              needed to dramatically improve their
              performance and achieve mission goals.2

              2
               Executive Guide: Improving Mission Performance Through
              Strategic Information Management and Technology—Learning
              from Leading Organizations (GAO/AIMD-94-115, May 1994).

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These practices provide federal agencies
with essential lessons in how to overcome
the root causes of their chronic information
management problems.

The 104th Congress used these lessons to
create the first significant reform in
information technology management in over
a decade: the 1995 Paperwork Reduction Act
and the Clinger-Cohen Act of 1996. These
laws require agencies to implement a
framework of modern technology
management—one that is based on practices
followed by leading public and private sector
organizations that have successfully used
technology to dramatically improve
performance and meet strategic goals.

These laws emphasize involving senior
executives in information management
decisions, establishing senior-level Chief
Information Officers, tightening controls
over technology spending, redesigning
inefficient work processes, and using
performance measures to assess
technology’s contribution to achieving
mission results for the American people.

These management practices provide a
proven, practical means of addressing the
federal government’s information problems,


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               maximizing benefits from technology
               spending, and controlling the risks of system
               development efforts. The challenge now is
               for agencies to apply this framework to their
               own technology efforts, particularly those at
               high risk of failure.

               Effectively implementing these reforms will
               require agencies to put a strong Chief
               Information Officer leadership structure in
               place and to institutionalize processes to
               select, control, and evaluate technology
               projects. Oversight by the Congress will be
               important to monitor progress by agencies
               and OMB in implementing these practices and
               promoting effective governmentwide
               technology investment reforms.


Streamlining   In recent years, the Congress has become
Procurement    increasingly concerned that the acquisition
               system used by federal agencies has been
               wasteful, adding billions to the cost of
               obtaining goods and services. Numerous
               statutes and regulations, each intended to
               promote valid objectives, had resulted over
               time in a complex system that burdened
               both contracting officials and prospective
               vendors. In enacting FASA, the Congress
               sought to ease that burden and to provide
               the tools for improving the process.


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FASA established a simplified acquisition
threshold of $100,000, and provided for
significant simplification of procurements at
or below that amount. It encouraged the
acquisition of commercial items by
exempting such purchases from a number of
requirements. The act also provided for the
development of a Federal Acquisition
Computer Network that, if implementation
problems are addressed, would facilitate the
procurement of goods and services
electronically.3 The Clinger-Cohen Act
provided for further simplification of the
procurement process, particularly for
commercial items.

In addition, Title V of FASA requires federal
agencies to establish cost, schedule, and
performance goals for acquisition programs
and report annually on the progress in
meeting those goals. The Department of
Defense is required to report on progress in
reducing the time for incorporating new
technology into weapon systems. Title V also
requires the development of results-oriented
acquisition process guidelines.




3
 Acquisition Reform: Obstacles to Implementing the Federal
Acquisition Computer Network (GAO/NSIAD-97-26, January 3,
1997).

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Congressional          Continued annual oversight by appropriate
Oversight Is Key       congressional committees will be important
                       to ensure that agencies effectively
                       implement these laws and achieve their
                       goals, which can result in better

                   •   data to help make spending decisions,
                   •   assessments of the performance and cost of
                       federal activities and operations,
                   •   management of the federal government’s
                       enormous investment in information
                       technology, and
                   •   federal procurement processes.




                       Page 100                          GAO/HR-97-1 Overview
Key Contacts for Newly Designated
High-Risk Areas


Defense          David R. Warren, Director
Infrastructure   Defense Management Issues
                 National Security and International Affairs
                   Division
                 (202) 512-8412


Information      Jack L. Brock, Director
Security         Information Resources Management
                 Accounting and Information Management
                   Division
                 (202) 512-6240


The Year 2000    William S. Franklin, Director
Problem          Information Resources Management
                 Accounting and Information Management
                   Division
                 (202) 512-6499

                 Joel C. Willemssen, Director
                 Information Resources Management
                 Accounting and Information Management
                   Division
                 (202) 512-6408




                 Page 101                    GAO/HR-97-1 Overview
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Supplemental      Jane L. Ross, Director
Security Income   Income Security Issues
                  Health, Education and Human Services
                    Division
                  (202) 512-7215


2000 Decennial    Bernard L. Ungar, Associate Director
Census            Federal Management and Workforce Issues
                  General Government Division
                  (202) 512-4232




                  Page 102                            GAO/HR-97-1 Overview
1997 High-Risk Series



             An Overview (GAO/HR-97-1)

             Quick Reference Guide (GAO/HR-97-2)

             Defense Financial Management (GAO/HR-97-3)

             Defense Contract Management (GAO/HR-97-4)

             Defense Inventory Management (GAO/HR-97-5)

             Defense Weapon Systems Acquisition
             (GAO/HR-97-6)

             Defense Infrastructure (GAO/HR-97-7)

             IRS   Management (GAO/HR-97-8)

             Information Management and Technology
             (GAO/HR-97-9)

             Medicare (GAO/HR-97-10)

             Student Financial Aid (GAO/HR-97-11)

             Department of Housing and Urban
             Development (GAO/HR-97-12)

             Department of Energy Contract Management
             (GAO/HR-97-13)




             Page 103                     GAO/HR-97-1 Overview
1997 High-Risk Series




Superfund Program Management
(GAO/HR-97-14)




The entire series of 14 high-risk reports
can be ordered by using the order
number GAO/HR-97-20SET.



Page 104                  GAO/HR-97-1 Overview
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