Financial Management Reform

Published by the Government Accountability Office on 1990-09-17.

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

                    United States General   Accounting    OfTice

For Release          Financial    Management     Reform
on Delivery
Expected at
9:30 a.m.
September 17,

                     Statement  of
                     Charles A. Bowsher. Comptroller               General
                     of the United States
                     Before the
                     Committee on Government Operations
                     United States House of Representatives

           Mr.     Chairman            and Members of                    the Committee:

           I am pleased                to once again                   appear         before          this         Committee          to
discuss           the urgent            need to strengthen                           federal          financial
management              and the draft                    legislation             developed              by Chairman
Conyers,           the Financial                 Management               Reform         Act of             1990,       and
legislation              introduced              by Representative                       Horton,                 the   Federal
Management              Reform         Act     of        1990,     H.R.5492.

           Recent        events         have provided                    ample        reason          for         change.          The
mention           of    last      year's         Department               of     Housing             and Urban
Development               (HUD) scandal                   conjures         up an image of gross
financial              mismanagement.                     I mention            HUD because                  it     captured         the
public's           attention,            but        it      is not       a member of an exclusive                                  club.
Unfortunately,                 most        agencies              could     qualify             for     membership              based
upon their              outdated           financial              management             systems                 and practices
and breakdowns                 of      internal             controls,            which         we highlighted                  in our
November           1989 report,                Financial               Integrity            Act:            Inadequate
Controls           Result         in    Ineffective                Federal            Programs              and Billions              in
Losses           (GAO/AFMD-90-10).                        The problems                are      not      limited             to a few
agencies           or a few programs;                        rather,           all     of      the major               agencies
have      serious          internal            control            and accounting                   deficiencies.

           Earlier         this        year,        we and the             Office           of Management                    and
Budget           (OMB) provided                you information                       on areas           likely          to result
in material              losses         to the            government.                 These          "high-risk"              areas
clearly          show that             federal            financial            management              is         fraught      with
Problems --the             lack          of control            over      assets,               inability            to collect
receivables,              lax         contract           and grant           management,                warehouses
bulging         with      unneeded              inventories,             and improper                   claim           payments--
many of which              have been subject                      to congressional                         scrutiny            and
public       concern            for      years.

          Allowing         long-standing                    internal           control            and accounting
problems         to continue                  reinforces          a negative                   public       perception                of
government             and is a clear                    signal       that      financial               management                  does
not     have a high              priority.                However,           the        twin     monsters--massive
budget       deficits            and the huge national                          debt--bring                 a sense of
urgency         to our financial                    management               crisis.

          We and others                 have discussed                 these            issues       before.              And the
discussions             over          time      have nurtured                a consensus                that        major
financial         management                  reform        is needed.              We cannot               afford            for     the
world's         largest         economic            enterprise               to be operated                      with     a
woefully         inadequate                  financial        management                 system.            Managers                should
not     be stuck          in a morass               of financial                data       with         little           relevant,
timely,         and comprehensive                        information            to assist               them in making
decisions.             Congressional                     authorization,                  appropriations,                      and
oversight          activities                 need not be constrained                            by poor            quality
data.        In 1990,            the      federal          government              is     operating               with        1950s
vintage         accounting              systems           and concepts              that         just       do not            get     the
job     done.


           For a number of years,                  I have strongly                  advocated               the
establishment            of a centralized                leadership               position          to direct              the
government's           financial         management             activities--a                chief          financial
officer,        or CFO.         During      that     time,           others        have joined               in
calling       for     a chief       financial        officer.                YOU might            say that           we
have moved now to a chorus                       calling          for      centralized             financial
management           leadership.          That,      in        itself,        represents             progress.
Chairman        Conyers'        draft     and Representative                       Horton's          bill         each
address       the     need for       leadership            by providing               for     a legislatively
established           CFO in OMB, although                     the       organizational              structures
differ       in the bills.

           The current       debate       centers          on the          location          of    rather          than
the      need for      a chief       financial         officer.               Consensus            now exists               for
legislatively            establishing            a position               to provide          the      long-term
financial           management       leadership,               which       was not          the case           2 years

           In the past,         I have taken           the        position          that      the CFO should
be independent            and report            to the         President           or be located                  within
the      Department       of the        Treasury,          rather          than     OMB.          As I testified
before       this     Committee         in September              1988,l       my concern             has been

1Federal   Financial               Management        Reform              (GAO/T-AFMD-88-18,                   September
22, 1988).
that      OMB exists            first          and foremost             to serve              the     President        by
helping        define,         develop,              and implement                  the    policy       agenda with
which       he or she was elected.                             Other     responsibilities                     are
inherently           of secondary                importance             and unlikely                  to receive           long-
term      attention           and commitment.                    I believed                  that    major
improvements             would          probably          not    occur         if     left          to OMB, based on
OMB's historical                    record       in dealing             with         long-term          management
issues       and the backseat                    the management                     side      of OMB had typically
taken       relative          to the budget                side.

          The importance                 of effective              financial               management           to the
financial           well-being             of the government                        necessitates             a position            of
authority           which      is not           weighed         down by ancillary                      duties       that
divert       attention              from       the    effort       needed            to plan         and implement                the
overhaul           of the      ailing           federal         financial             management             structure.
Also,       the position                must have adequate                     resources--people                    and
money --to         carry       out       its     duties.           Otherwise,                 the government               will
find      itself       with         a CFO in name only.

         Because         OMB has shown a recent                          willingness                 to tackle        the
challenge           of financial                management             reform         and has indicated                    it     is
serious        about        this,        I would          accept        the     CFO being              in OMB as an
alternative,             subject           to the         following            essential             conditions.
1.   The CFO position                          must be legislatively                       established.
     Otherwise,              it         will     be left         to the       discretion             of each
     succeeding              administration                     whether       to maintain             or abandon               the

2.   The person              selected              must be qualified                   in terms        of financial
     management              education              and practical               experience.               This      is not
     going      to be an easy job;                           therefore,             personal         expertise           for
     the CFO is crucial.                             Both       the bills           deal     adequately           with
     this      need.

3.   The CFO must be equal                            in rank           to the       head of the budget                     side
     of OMB,           have a sufficiently                            high    organizational                 stature           to
     command authority                          and respect             throughout           government,            and
     have continuity.                           Chairman         Conyers'           and Representative
     Horton's          proposals                 differ         as to how the CFO would                         be set         up.
     Basically,          both              provide        for        an executive            level     III       official
     to carry          out         the CFO duties.                     Chairman        Conyers'           proposal
     calls      for     a term                 of office,            which    I believe            is needed           to
     ensure       continuity.

     If      the CFO is placed                       in OMB, I favor                 a three-deputy
     structure,              all         at executive                level    II:          a deputy       for     budget,
     a deputy          for         management,               and a CFO.              This      structure,           which

     is provided                  for      in S.2840            and is       now being          considered             by the
     Senate       Governmental                     Affairs           Committee,            would     send a clear

     signal        throughout           government             of    the      importance             of financial
     management            while      at    the    same time               recognizing              the     importance
     of OMB's other                functions.             We support               strengthening               OMB's
     entire       management            capacity.

4.   The CFO must have adequate                           personnel            and other              resources         to
     plan      and direct            the    financial           management                 improvement
     program.          Chairman            Conyers'           and Representative                     Horton's
     bills      each provide               an Office           of Federal             Financial             Management
     in OMB to assist                 the CFO.            Concern           over      the adequacy               of
     resources         for     financial           management               functions              was one reason
     for      my earlier           opposition           to placing             the CFO in OMB.                    The
     question        in my view             is whether              over     the      long-term             OMB will
     Provide        this      new office           with        adequate            staff          and other
     resources         in view          of the      strong           tendency          to keep OMB's size
     to a minimum.

     TO deal       with       that      concern,          which       realistically                  I believe
     will      continue        to be a problem                  at    OMB, I prefer                  the
     establishment             of an Office               of Federal            Financial              Management
     in the       Department            of the      Treasury.                This      office          would
     Provide        technical           assistance             to the        agencies,              monitor
     agencies'        activities,                and assist           the CFO.               It     would      give     the
     CFO access            to additional            staff           resources          for         planning       and
     controlling             the     financial        management               improvements,                  while     at
     the      same time        leaving           the day-to-day                financial             management

          functions         in Treasury.                 Treasury            already        has lead
          responsibility             for      agency           financial             management           systems
          improvements,             credit          management,              debt       collection              and cash
          management.              And the mission                  of Treasury's                Financial
          Management         Service           is directly                 related       to appropriate
          objectives         for     the CFO.                An Office          of Federal            Financial
          Management         could         build       on Treasury's                  resources           currently            in


          Establishing             agency          CFOs is an integral                    part       of    the        reform
process       because       these          individuals              will       form      the     network          needed        to
undertake          governmentwide                  financial         management             reform         efforts
while      minimizing         duplication                of effort             and maximizing                   the     sharing
Of successes.              Both Chairman                Conyers'             draft       and Representative
Horton's        bill     would       provide           for      agency         CFO positions,                   which      I
believe       are essential.

          Chairman       Conyers'            version           provides         for      presidential
appointment            of CFOs in all                 14 departments                  and in      13 agencies.
Additionally,            Deputy        CFO positions                 would           be filled        by career
reserved        Senior      Executive               Service         employees.              Representative
Horton's        bill     provides            for     Presidential               appointment               for     the CFO
positions          in the     14 departments                    and 4 defense               agencies             and agency
head appointment              of the          remaining             9 agencies'             CFOS.          Both        bills

call      for      qualified           persons           to fill           the        positions           and are directed
at continuity                 and top management                        visibility,              which      are     key

          Another          option        is     for      the agency               CFOs to hold              career
reserved           positions           in the          Senior           Executive          Service.           Placement               of
career          civil      servants           in these            key positions                  would      guard      against
the      frustrating             and costly              practice            of       revising       approaches              to
financial               management           issues          each time            a new political                  officer          is
appointed.                Political           appointees                generally          spend          18 to 24 months
on the          job--     a clearly           insufficient                 tenure         to guide          major
financial               management           system          improvement               projects.            But time          in
office          is not        the     only      issue.            It     is my sense               that     over      the     years
many of the               appointed           financial            management              officials          may have
come to the               job    lacking          the needed               financial             management
qualifications                  and experience.                        The combination               of these          two
factors          makes the challenge                         of improving               financial          management               all
the more difficult.


          Government             officials             did     not       suddenly          come to the
realization               in 1990 that                financial            management              improvements              were
needed.            Improvement               efforts          have been ongoing                     in some form              for
years;          initiatives            have come and gone.                             The government               has not

succeeded,             but      it    wasn't          totally            for      a lack        of money.                  In large
part,         the    scarcity              of central           direction,                the    lack          of leadership
at      the    working          level,         and the absence                     of a clear             plan        have
allowed         chronic          problems             to persist.

          Federal           agencies           have spent                a lot         of money over                 many years
on ad hoc improvements                          that       have collectively                          fallen         far     short       of
the mark.              The government                  requires                a vision         of the          financial
management             needs         for     the      1990s and beyond.                         This      vision            must be
grounded            in a long-range                 plan        developed              by the CFO and mirrored
in corresponding                     agency        level        plans.

          Roth Chairman                    Conyers'        draft          and Representative                         Horton's
bill      direct        the CFO to develop                       and maintain                   a S-year
governmentwide                  financial           management                  plan     which,         among other
things,         would        describe           the      current               state     of financial
management,             provide             a strategy             for         improving         agency          financial
systems,            and identify              the      personnel                and system             requirements                 to
achieve         improvements.                   In the past,                    I have        likened           the        S-year
plan      to an architect's                     drawings            which          guide        the     job      of building
a modern            financial              management           system           and describe                  the    finished
product.             The existence                 of a long-range                     plan      will      help            government
agencies            share       system        development                 efforts,          make greater                    use of
cross-servicing                  arrangements,                  and provide                continuity                of
improvement             efforts.
          Instituting               improvements         will     not      be free         of charge.                 Major
investments               will      be needed         to make comprehensive                   financial
management            reform            a reality.       But,     I believe           strongly           that         the
money invested                   will     be returned          many times           over    in terms            of
better          quality          information;          more informed              decisions;            and reduced
instances           of fraud,             waste,      and abuse.           The most obvious                    cost     will
be for          the automated               systems     that     support          the operations                of
government.                However,             the government       has spent             billions            of
dollars          in the past              for     ad hoc efforts           that      have not           gotten         the
job    done;        with         a CFO at         the helm,      guiding          governmentwide                system
improvements,                we will            spend our money more wisely                      with      a
commensurate               higher         return      on that     investment.

          Other       equally            important      investments           must be made in the
people        to direct             and operate         these     financial           management
activities.                The government              must compete           for     the     top       college
graduates           and provide                 them a career      path       that      is professionally
and financially                   rewarding.           Investments          must      be made to ensure
that      the     employees             maintain,       and even increase,                  their
professional               skills         to help      the government               keep pace with
emerging          technology              and developments           in the          financial           management


          Representative                 Horton's            bill        calls      for     the      14 executive
departments             and 8 major                agencies            to prepare           financial           statements
and to undergo               annual          financial               audits.           Chairman         Conyers'          draft
proposal         limits          financial           statements                 and audits           to agency
revolving          and trust             funds       and to those                  agency       components             which
perform         substantial              commercial                 functions.

          It    is no secret               that      I    strongly              believe       in the         benefits            of
preparing         and auditing                financial                statements           which       cover      all      the
operations          and activities                   of the departments                       and major           agencies.
Therefore,          I     support         the       thrust           of Representative                  Horton's          bill
in     this     regard.           Preparing              and auditing               financial           statements
should         be a priority               in the         financial              management           improvement
process         and that          it     would       be a mistake                  to narrowly           limit,          delay,
or constrain              this         requirement             in any way.

          I recognize             there       are differences                     of      opinion       about      when an
agency         should      begin         to prepare                 financial          statements.              Some think
that      agencies         should          first         improve          their        systems        and then           begin
to produce          financial              statements.                   At one time,               I held      this      view.
Hut experience,                  such as the              financial              disaster         and recovery              of
New York City,               has shown that                    just       focusing          on the       Systems          is
not     the     answer.           Putting           pressure             on agencies            to produce

financial            statements              provides           an inducement                    for      them to improve
their       systems          and train             their        staff.

          Questions             have also            been raised                about           the usefulness                of
audited          statements             at     the    federal            level.            I feel          very       strongly
that      they        are useful             today         and will            become even more useful                             as we
gain      valuable           experience              using          them at         the         federal      level.            I
envision            financial           audit        reports          that        will      display          cost       trends,
include          financial           indicators               for     government                 programs         and
operations,               and provide              the basis             for      future          appropriation
requests.              we are        now completing                   a financial                 audit      of the
Department             of Veterans              Affairs             (VA) which             exemplifies                the
reporting            of     this     type        of information.

          Our soon-to-be                 issued            report        on the          VA financial                 statement
audit       will       include,          for       the      first        time,       an extensive                 discussion
and analysis                of an agency's                  financial             position             and operations.
For example,                our analysis              of VA showed that,                          while      veterans
benefit          costs       have stayed              constant            at about               $15.5      billion          to $16
billion        a year,             such benefits               could           increase           significantly                in the
future        due to a recent                   court         ruling.             The financial                audit         report
will      note       that       there        are     $5 billion                in accrued              expenses;            most
notably            substantial           future          appropriations,                    amounting             to possibly
$2.5      billion,           will       be required                 to finance            losses          already           incurred
but     payable           during        future        years          by the        veterans             housing         credit
assistance             program.              The financial                audit          will       show that           the

Present        value          of contingent              liabilities                for      veterans            compensation
and pension              benefits           totaled          about       $135 billion.                     Further,          the
report       will        highlight           that      VA has serious                     problems             collecting            its
receivables              and has provided                    a reserve          for         doubtful            accounts            of
$3.2      billion            as of September                 30,     1989.          This         type      of     information
serves       as an early              warning          to decision              makers.

          Financial             statements            do not         only      provide             bad news.           On the
bright       side,           the   financial           audit         shows that              VA's       life       insurance
program           is    in relatively               good shape with                   adequate             reserves          for
future       benefits.               Its     net      operating             costs         have remained
relatively              stable,       rising          slightly           in nominal                dollars,         but
decreasing              about      5.3 percent               annually          over         the     last        4 years        in
1986 constant                 dollars.

          Financial             statements            that     can withstand                     the    scrutiny            of an
audit       are        the    capstone         of an agency's                  financial               management
improvement              process.            Audited          financial             statements                 can be viewed
as a report              card      on agency           financial              management               which       points          out
deficient              systems,       helps         quantify            the    extent            of problems,               and
highlights              what needs           to be done to                  improve          the       systems.             Until
an agency              can produce           financial              statements              that       comply       with
federal       accounting              standards,              its       systems           will      be deficient;                  the
information              derived           from     those        systems        that         goes to            the Congress

and others              will  be misleading;                   and the government  will be
needlessly              exposed to the risk                    of fraud,  waste, and abuse.

           Unfortunately,             preparing          financial            statements            at the         federal
level       has not        been the          routine       process           that     it    should        be.       The
financial         management           systems          that      should        provide        the     information
to prepare          financial          statements              and,    more         importantly,           to manage
federal        resources,            are     often      unreliable            and incomplete.
Fundamental             internal       controls          are missing,                ineffective,           or not
being       followed.

           Our financial             statement          audits        have disclosed                account
balances         that      are materially               misleading,             loans       and accounts
receivable          that     will      never         be collected,             unreported            liabilities
for     guarantees          and insurance,               and undeterminable                    values       of other
assets       and liabilities.                    For the most part,                   the    reported
problems,         which      total         in the       tens      of billions              of dollars,           stem
from weak systems                  and controls.

           Let me cite          two recent             examples.             At the Department                  of the
Air     Force,     as part          of the        first-ever           financial            audit     of a
military         service,          we conducted           the most comprehensive                          review      of
financial         management           operations              ever    undertaken.2                 We reported
critical         weaknesses           measured          in billions            of dollars            in accounting
for     inventories          and weapons               systems.         We identified                the    lack      of
reliable         and adequate              financial           management           systems         and
information             to direct          Air   Force         activities,            such as inventory

2Financial   Audit:                 Air Force Does Not Effectively                              Account          for
Billions   of Dollars                ot Resources (GAO/AFMD-90-23,                              February           23,
1990) .
procurement.                 We pointed             out     the negative                 impact       of these
problems           on the Air           Force's           ability           to operate             in a cost-
effective           manner.           We noted            that        the    failure            to properly           account
for      tens      of billions              of dollars            of resources                  opens the door              to
mismanagement,                fraud,         waste,        and abuse.

          This      audit          of Air      Force's           fiscal       year        1988 financial
statements              resulted        in     26 recommendations                        that      covered       most
facets          of the       Air     Force's         financial              management             operations.              In
August          1990,     the Air           Force      finalized             a comprehensive                 action         plan
to    implement           our recommendations                       which       includes            both     short-         and
long-term           corrective              actions.             We plan        to       follow      up on the Air
Force's          corrective           actions          to ascertain                the     progress          and
improvements              made.

          Also,         in response            to our         report         on the Air             Force     financial
audit,       the      Department             of Defense             reviewed             the     Departments           of the
Army and the              Navy to see if                  similar           problems            existed.         Defense's
review          identified           numerous          conditions             in these            services         that
Paralleled              the deficiencies                  we reported              for     Air      Force.         While         the
Department            of Defense             has a number of comprehensive,                                  long-range
plans       to deal          with     these         and other             issues         on a departmentwide
basis,          we believe           our continued                emphasis           on financial             audits--
currently           ongoing          at Army,          with       Navy to follow--will                       raise         other

issues       and,        equally        importantly,                will      focus        on the kinds               of

actions        needed         to bring            about       meaningful             improvements               in
financial           management             as quickly           as possible.

          In this        regard,           we recently           concluded             work          on our         1989
financial           audit      of Air            Force      components.               As a result               of that
audit       work,      the Air            Force      has agreed           to make adjustments                          totaling
about       $75 billion              to    its     fiscal       year      1989 Treasury                     reports         and
resubmit         the     reports           to the         Department            of    the     Treasury.

         The financial                audit        of the       Federal          Housing             Administration
(FHA) for           fiscal          year      1988 provided,              for        the     first          time,      an
accurate        picture             of the        financial         state        of affairs                 of the
government's            largest            guaranteed           loan      program.3                  The audit,             done
by an independent                    public        accounting           firm         under      contract              to GAOl
established            the     true        magnitude           of program             losses          for     fiscal         year
1988 at about                $4.2     billion       --nearly           five      times        more than               reported
by the        agency--        and laid            out    the    serious          financial             management
problems        facing         the        FHA.      The losses            alarmed            the Congress               which,
for     the    first         time,        had reliable           information                 on the magnitude                     and
the     seriousness            of the            problems       facing         FHA.

         I see greater                concern           expressed         by agency             heads about                 the
lack     of complete,                reliable,           and timely             financial             information             to
manage and control                    their        operations.                In the wake of                  the      HUD

3Financial           Audit:    Federal  Housing Administration                                     Fund's              1988
Financial           Statements    (GAO/AFMD-90-23, February                                     9, 1990).
scandal,            Secretary        Kemp has called                      for          a financial             audit        of the
entire        Department.               I also            see more focus                      from    OMB and the
Congress            on high      risk         areas        throughout                  the     government--areas                     ripe
for      mismanagement,              waste,           fraud,         and abuse--and                       an ever-
increasing            recognition              of     the        importance               of audited               financial

          OMB has established                        an initial             governmentwide                     goal        of
having        the     14 executive              departments,                    the       Environmental                  Protection
Agency,           and the National                  Air     and Space Administration                                  prepare
financial           statements           by fiscal                year      1994 and have them audited.
Ten of        the     16 agencies              are        targeted             for      fiscal        year         1991.        On
September            10,     1990,      the     President              sent            to the        Congress            requests
for      fiscal       year      1991 budget                amendments                  that       reallocated              funds      to
reform        the     federal        financial              management                  systems.             Included           were
amendments            to permit          agencies                to reallocate                    funds      for      financial
statement           audits      in fiscal                 year     1991.

          The President's                action            sends       an unmistakably                       clear        message
to the       executive          branch          that        the     administration                        supports          the
concept           of preparing           and auditing                    financial                statements.
Ultimately,            we would          expect            financial                 audits        of all          the
departments            and major          agencies.                 We will               work       with     OMB and the
agencies           as they      begin          the     process            of         instilling             greater
discipline            and enhanced              accountability                        in government                 financial
operations            through        annually              audited         financial                 statements.

          Establishment               of an advisory                  audit         committee         for     each
department            and major           agency,          which       is now not             provided             for      in
either       Chairman           Conyers'           draft      or Representative                   Horton's                bill,
would       further          strengthen            this      process.               An audit      committee,
including          members from                outside        of government,                  would         help         the
agency       head and the CFO in overseeing                                   the     audit     plan,         reviewing
the      selection           process        and criteria               for      any outside             auditor             if     the
agency       Inspector           General           or GAO is not                the    auditor,          monitoring
the      audit     work       and results,                and reviewing               the auditor's                 opinion
and the          audited        financial           statements,               as well         as the         agency's
Financial           Integrity            Act    reports.              Existence             of an audit             committee
could       improve          management's             receptivity               to auditors'                findings              and
reinforce          the       auditors'          independence.                   The audit         committee
concept,          while       widely        used in the               private         sector      for        many years?
is gaining            acceptance            by government:                   a number of states,
including          New York and California,                            now have audit              committees.


          In addition            to audited               financial           statements,          a legislative
requirement            for      an annual           report        from        the     agency      head to the
President,            the Congress,                and the CFO will                   further      strengthen
accountability                by providing                a comprehensive                source         of
information            on agency            financial           operations.                  I envision             that          the
agency       head's          annual       report          would       include         the     agency's             financial
statements            and the auditor's                    opinion,           as well         as a discussion                      and

analysis        of the       agency's          financial            position         and operations.
Other       important       information            would          be included,            such as the
auditor's        reports       on internal             controls             and on compliance                  with
laws      and regulations.               In addition,                it     would      summarize          the
agency's        reports       submitted          under        the Federal             Managers'           Financial
Integrity        Act      and the      results         and status              of corrective              actions
taken       to address        material          internal            control         and accounting

          Information         in the       agency       head's             annual      report      could         form
the basis        for      OMB management              reviews             as part     of the annual               budget
process;        help      define     the    agenda          for      annual         congressional
hearings        by the authorization,                   appropriations,                  and oversight
committees;            and strengthen            disclosure                to the     public.            Such annual
attention        and pressure            on financial                management          issues          should       help
correct       long-standing            internal            control          weaknesses           and improve
agency       financial        operations.


          Financial        statements           are    linked             to the     underlying           accounting
standards        which      govern       the     recording                and summarizing            of       financial
information.              Accounting        standards              promote          uniformity           in
recording        and reporting             financial              activities          and,       thus,        promote
useful       financial        comparisons             among entities.                   An underlying

accounting            principle                 is    that      like      events        and circumstances                     are     to
be treated            similarly.                     This     is crucial
because        it     guards             against            individual          managers           portraying              their
financial            situation                 in a more favorable                     light       than      is deserved.

           Legislation                 enacted         by the Congress                  in      1950 made GAO legally
responsible               for         establishing              federal         accounting             standards            since
1950.         During            the ensuing                 40 years,         we have been mindful                         of the
need to ensure                   that      the        standards           keep pace with                developments                 in
the      accounting              profession                 as well       as changes              in the          governmental
environment.                    We are          now taking             additional              steps    to fulfill             those

          We have reached                       tentative          agreement            with       the Director               of the
Office        of Management                    and Budget              and the         Secretary           of the         Treasury
to establish               a Federal                 Government           Accounting             Standards           Advisory
Board        which        will         be a fundamental                   element         of a revised               standard-
setting        process.                 The board,             which         we are       hopeful          will      be
operating            in    the near              future,         will        include           representatives                from
GAO, OMB, Treasury,                        the Congressional                     Budget          Office,           a defense
agency,        and a civilian                        agency,      and three             nonfederal            members.              The

new process               will         formalize             our efforts            to obtain           comments on
proposed        accounting                 standards             from        interested            and affected
parties.             And,        it     will         increase          the    openness           of    the process             and
facilitate            coordination                    among the Comptroller                        General,          the
Director            of OMB, and Secretary                          of     the    Treasury.

          These steps             will      help       ensure         the     relevance              and the
acceptance           of accounting                 standards           for         the    federal        government            and
will      improve          the      financial          reporting             on governmental                activities.
We will         periodically              advise        the     Congress             about          our work
involving          accounting             standards.


         Mr.     Chairman,            I appreciate              the     leadership                  and support
provided         by you and Representative                             Horton            in seeking         legislative
remedies          to restore             confidence            and-credibility                      in federal
financial          management.

         Overall,           I favor         the     legislation               introduced              in the        Senate,
S.2840,         which       I believe           best     addresses             the        critical         elements           for
reform.           From an organizational                        standpoint,                   the    governmentwide
CFO can provide                  the overall            leadership             needed           to develop            and
implement          a comprehensive,                    governmentwide                    financial         management
improvement             plan.         The agency              CFOs can         centralize               financial
management          authority             and responsibilities                           at    a senior         level
within       agencies            so that        financial             systems,            practices,            and
reporting          can be orchestrated                        to best         meet        the       agencies'         needs.

          Legislatively               mandating          the annual                 preparation            and audit           of
agency         financial          statements            for     all     executive               departments             and
major       agencies         will        help     ensure        that         the     financial           systems        are

working,        the     government's           assets             are    safeguarded,            and reliable
information            is being      provided               to program          managers.           It     will      do so
by focusing            a high     level      of agency               attention          on improving              systems
and controls            to produce          reliable              financial        statements.                 Finally,
requiring        annual         agency      head reports                 should        provide      a foundation
for     the    recognition          of financial                  management           problems          and

         The government            must be willing                      to make systems             and
personnel        investments              or face           collapse          of the     government's
financial        management          structure.                   We must change            the way people
look     at financial            management             and finally             deal     with     problems           that
have plagued            the     federal      government                 for    years.       CFO legislation,
which       includes      the elements              I have outlined                    today,     is crucial               to
meaningful         reform,        and I urge                its    passage.


         Mr.    Chairman,         this      concludes              my formal           statement.                 I will
be pleased         to answer         any questions                   that      you or other          members of
the Committee            may have.