oversight

Auditing the Nation's Finances: Fiscal Year 1998 Results Highlight Major Issues Needing Resolution

Published by the Government Accountability Office on 1999-03-31.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Government Management,
                          Information and Technology, Committee on Government
                          Reform, House of Representatives


For Release on Delivery
Expected at
10 a.m.
                          AUDITING THE NATION’S
Wednesday,
March 31, 1999            FINANCES

                          Fiscal Year 1998 Results
                          Highlight Major Issues
                          Needing Resolution
                          Statement of David M. Walker
                          Comptroller General of the United States




GAO/T-AIMD-99-131
Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our report on the U.S.
government’s financial statements for fiscal year 1998 and to underscore
the importance of improving how federal departments and agencies
manage the finances of our national government. Historically, timely,
accurate and useful information has not been available across government
to ensure financial accountability and to help improve the economy,
efficiency, and effectiveness of government. Fortunately, the Congress has
legislated major reforms that if successfully implemented, will help achieve
these objectives and build the necessary foundation to effectively run a
performance-based government.

A critical reform component entails requiring annual audited financial
statements for 24 major federal departments and agencies beginning with
fiscal year 1996--a best practice in the private sector for decades and in
state and local governments for many years. Considerable effort is being
made by agencies to achieve this mandate, and steady improvements in
financial accountability are occurring. However, several major agencies
are not yet able to produce auditable financial statements on a consistent
basis, and major obstacles need to be overcome.

Similar challenges exist in producing reliable statements for the entire U.S.
government. Last year, in the first-ever report on the U.S. government’s
financial statements,1 we reported that because of the serious deficiencies
in the government’s systems, recordkeeping, documentation, financial
reporting, and controls, amounts reported in the financial statements and
related notes do not provide a reliable source of information for decision-
making by the government or the public. Our report on the U.S.
government’s financial statements for fiscal year 1998 has reached the
same conclusion.2 These deficiencies affect the reliability of the financial
statements and the government’s ability to accurately measure the full cost
and financial performance of programs and manage its operations.




1Financial Audit: 1997 Consolidated Financial Statements of the United States Government (GAO/
AIMD-98-127, March 31, 1998) and U.S. Government Financial Statements: Results of GAO’s Fiscal Year
1997 Audit (GAO/T-AIMD-98-128, April 1, 1998).

2
  Financial Audit: 1998 Financial Report of the United States Government (GAO/AIMD-99-130,
March 31, 1999).




Page 1                                                                       GAO/T-AIMD-99-131
The government must overcome significant challenges to improve this
situation. The historic, long-standing inattention to financial management
issues combined with the size and complexity of government operations
makes corrective actions difficult. Moreover, the pace of improvement will
be greatly influenced by the progress government organizations are able to
make in modernizing their information systems and internal controls, in
revamping human capital practices to build greater capacity, and in
implementing change management to achieve the discipline needed to
follow sound financial management and reporting practices.

The executive branch recognizes the extent and severity of existing
deficiencies and that addressing them will continue to require concerted
improvement efforts across government. In response to our March 1998
report, the President required heads of agencies with significant financial
management deficiencies to submit corrective action plans to the Office of
Management and Budget (OMB). Further, the President has designated
financial management reform as a top management priority.

We are continuing to work with OMB, the Treasury, and agencies across
government to recommend the actions necessary for achieving legislative
reform goals. Additionally, working cooperatively with the inspectors
general, we are continuing to evaluate progress and make specific
suggestions for fixing weaknesses in recordkeeping, financial reporting,
and internal controls. With concerted effort, the federal government can
continue to make progress toward achieving accountability and generating
reliable financial and management information on a regular basis.

My testimony will focus on

• outlining the findings of our report on the financial statements of the
  U.S. government for fiscal year 1998;
• underscoring the critical need to fully implement legislative reforms;
• emphasizing that unqualified “clean” opinions must be accompanied by
  timely and reliable data, stronger controls, and better financial and
  management information systems that will help to continuously
  improve the economy, efficiency, and effectiveness of government;
• highlighting the fact that human capital must become a more critical
  part of the management reform agenda; and
• urging that the focus be on accountability and not just accounting.




Page 2                                                    GAO/T-AIMD-99-131
Results of GAO’s Audit         Our report on the U.S. government’s financial statements for fiscal year
                               1998 states that overall, significant financial systems weaknesses, problems
of U.S. Government’s           with fundamental recordkeeping and financial reporting, incomplete
Financial Statements           documentation, and weak internal controls, including computer controls,
                               continue to prevent the government from accurately reporting a significant
for Fiscal Year 1998           portion of its assets, liabilities, and costs.

                               Major challenges include the federal government’s inability to

                               • properly account for and report (1) billions of dollars of property,
                                 equipment, materials, and supplies and (2) certain stewardship assets;
                               • properly estimate the cost of most major federal credit programs and
                                 the related loans receivable and loan guarantee liabilities;
                               • estimate and reliably report material amounts of environmental and
                                 disposal liabilities and related costs;
                               • determine the proper amount of various reported liabilities, including
                                 postretirement health benefits for military employees, accounts
                                 payable, and other liabilities;
                               • accurately report major portions of the net cost of government
                                 operations;
                               • determine the full extent of improper payments that occur in major
                                 programs and that are estimated to involve billions of dollars annually;
                               • ensure that all disbursements are properly recorded; and
                               • properly prepare the federal government’s financial statements,
                                 including balancing the statements, accounting for billions of dollars of
                                 transactions between governmental entities, and properly and
                                 consistently compiling the information in the financial statements.

                               In addition, we found that (1) widespread and serious computer control
                               weaknesses affect virtually all federal agencies and significantly contribute
                               to many of the material deficiencies discussed above and (2) material
                               control weaknesses affect the government’s tax collection activities. Major
                               issues identified by our work are discussed below.


General Property, Plant, and   The federal government--one of the world’s largest holders of physical
Equipment and Inventories      assets--does not have adequate systems and controls to ensure the
                               accuracy of information about the amount of assets held to support its
and Related Property
                               domestic and global operations. A majority of the $466 billion of these
                               reported assets is not adequately supported by financial and/or logistical
                               records. Assets that are not adequately supported include (1) buildings,



                               Page 3                                                      GAO/T-AIMD-99-131
                            structures, facilities, and equipment, (2) various government-owned assets
                            that are in the hands of private sector contractors, and (3) operating
                            materials and supplies comprised largely of ammunition, defense
                            repairable items (such as navigational computers, landing gear, and
                            transmissions), and other military supplies. Also, the government cannot
                            ensure that all assets are reported. Further, national defense asset unit
                            information reported as Stewardship Information was incomplete.

                            Because the government lacks complete and reliable information to
                            support its asset holdings, it could not satisfactorily determine that all
                            assets were included in the financial statements, verify that reported assets
                            actually exist, or substantiate the amounts at which they were valued. For
                            example, periodic physical counts have shown that property records
                            contain significant error rates. Further, weak controls significantly impair
                            the government’s ability to detect and investigate fraud or theft of assets.
                            Also, deferred maintenance information was not reported.

                            Accurate asset information is necessary for the government to (1) know the
                            assets it owns and their location and condition, (2) safeguard its assets
                            from physical deterioration, theft, or loss, (3) account for acquisitions and
                            disposals of such assets, (4) prevent unnecessary storage and maintenance
                            costs or purchase of assets already on hand, and (5) determine the full
                            costs of government programs that use these assets.


Loans Receivable and Loan   Most federal credit agencies responsible for federal lending programs were
Guarantee Liabilities       unable to properly estimate the cost of these programs in accordance with
                            federal accounting standards and budgeting requirements. As of the end of
                            fiscal year 1998, the government reported $167 billion of loans receivable
                            and $38 billion of liabilities for estimated losses related to estimated future
                            defaults of guaranteed loans. However, the net loan amounts expected to
                            be collected and guarantee amounts expected to be paid could not be
                            reasonably estimated because of a lack of adequate historical data or other
                            evidence. Reliable information about the cost of credit programs is
                            important in supporting annual budget requests for these programs,
                            making future budgetary decisions, managing program costs, and
                            measuring the performance of credit activities. Federal credit programs
                            include direct loans and loan guarantees for farms, rural utilities, low and
                            moderate income housing, small businesses, veterans’ mortgages, and
                            student loans.




                            Page 4                                                       GAO/T-AIMD-99-131
Environmental and Disposal   Liabilities for remediation of environmental contamination and disposal of
Liabilities                  hazardous waste, reported at $225 billion, were materially understated by
                             at least tens of billions of dollars primarily because no estimate was
                             reported for environmental and disposal liabilities associated with certain
                             major weapons systems, such as aircraft, missiles, ships and submarines,
                             and with ammunition. Further, only a small portion of the total cost,
                             estimated to be over $10 billion, to remove unexploded ordnance from
                             training ranges has been reported. Additionally, significant portions of the
                             government’s reported liability for environmental management and legacy
                             waste related to nuclear weapons development lacked adequate support,
                             were not complete, and did not reflect material changes in cleanup scope,
                             costs, or schedules. Properly stating these liabilities and improving
                             internal controls supporting the process for their estimation could assist in
                             determining priorities for cleanup and disposal activities and allow for
                             appropriate consideration of future budgetary resources needed to carry
                             out these activities.


Liabilities                  Adequate systems and cost data were not available to accurately estimate
                             the reported $223 billion military postretirement health benefits liability
                             included in federal employee and veteran benefits payable. Information
                             used to develop such estimates did not include the full cost of providing
                             health care benefits. Also, some agencies do not maintain adequate
                             records or have systems to ensure that accurate and complete data were
                             used to estimate a reported $90 billion of accounts payable and a reported
                             $155 billion in other liabilities. For example, a liability was not reported for
                             certain amounts owed to contractors that, under the terms of the contracts,
                             were held by the government pending the acceptance of goods or services.
                             Further, the government was unable to provide adequate information to
                             determine whether commitments and contingencies were complete and
                             properly reported. These problems significantly affect the determination
                             of the full cost of the government’s current operations, the value of its
                             assets, and the extent of its liabilities.


Cost of Government           The government was unable to support significant portions of the more
Operations                   than $1.8 trillion reported as the total net cost of government operations.
                             The previously discussed material deficiencies in reporting assets and
                             liabilities and the lack of effective cash disbursement reconciliations, as
                             discussed below, affect reported net costs. Further, we were unable to
                             determine whether the amounts reported in the individual net cost



                             Page 5                                                        GAO/T-AIMD-99-131
                             categories on the Statement of Net Cost and in the subfunction detail in
                             Supplemental Information were properly classified. Accurate cost
                             information is important to the federal government’s ability to control and
                             reduce costs, assess performance, evaluate programs, and set fees to
                             recover costs, where required.


Improper Payments            The government is unable to determine the full extent of improper
                             payments--that is, payments made for other than valid, authorized
                             purposes. Across government, improper payments occur in a variety of
                             programs and activities, including those related to contract management,
                             federal financial assistance, and tax refunds. Reported estimates of
                             improper payments total billions of dollars annually. Such payments can
                             result from incomplete or inaccurate data used to make payment decisions,
                             insufficient monitoring and oversight, or other deficiencies in agency
                             information systems and weaknesses in internal control. The risk of
                             improper payments is increased in programs involving (1) complex criteria
                             for computing payments, (2) a significant volume of transactions, or (3) an
                             emphasis on expediting payments. The reasons for improper payments
                             range from inadvertent errors to fraud and abuse.

                             The full extent of improper payments, however, is unknown because many
                             agencies have not estimated the magnitude of improper payments in their
                             programs, nor have they considered this issue in their annual performance
                             plans. The use of appropriate performance measures relating to improper
                             payments can provide management focus on reducing related losses. For
                             example, the Department of Health and Human Services (HHS) has
                             reported a national estimate of improper payments in its Medicare fee-for-
                             service benefits since fiscal year 1996. For fiscal year 1998, the department
                             reported estimated improper payments of $12.6 billion, or more than
                             7 percent, of Medicare fee-for-service benefits--down from about
                             $20 billion, or 11 percent, reported for fiscal year 1997 and $23.2 billion, or
                             14 percent, for fiscal year 1996. Analysis of improper Medicare payments
                             helped lead to the implementation of several initiatives intended to reduce
                             improper payments. Annual estimates of improper payments in future
                             audited financial statements will provide information on the progress of
                             these initiatives.


Cash Disbursement Activity   Several major agencies are not effectively reconciling cash disbursements.
                             These reconciliations are intended to be a key control to detect and correct
                             errors and other misstatements in financial records in a timely manner--



                             Page 6                                                       GAO/T-AIMD-99-131
                                  similar in concept to individuals reconciling personal checkbooks with a
                                  bank’s records each month. There continued to be billions of dollars of
                                  unresolved gross differences between agencies’ and Treasury records of
                                  cash disbursements as of the end of fiscal year 1998. As a result, the
                                  government is unable to ensure that all disbursements are properly
                                  recorded. Improperly recorded disbursements could result in
                                  misstatements in the (1) financial statements and (2) certain data provided
                                  by agencies for inclusion in the President's budget concerning fiscal year
                                  1998 obligations and outlays.


Preparation of Financial          The government does not have sufficient systems, controls, or procedures
Statements                        to properly prepare financial statements for the U.S. government. Such
                                  deficiencies, described below, impair the government’s ability to
                                  (1) properly balance the government’s financial statements and account for
                                  billions of dollars of transactions between governmental entities,
                                  (2) properly and consistently compile the information in the financial
                                  statements, and (3) effectively reconcile the results of operations reported
                                  in the financial statements with budget results.

Unreconciled Transactions         To make the financial statements balance, Treasury recorded a net
                                  $24 billion item on the Statement of Operations and Changes in Net
                                  Position, which it labeled unreconciled transactions. Treasury attributes
                                  this net out-of-balance amount to the government’s inability to properly
                                  identify and eliminate transactions between federal government entities
                                  and to agency adjustments that affected net position. Certain
                                  intragovernmental accounts do not reconcile by a total of more than
                                  $250 billion (e.g., intragovernmental receivables exceeded
                                  intragovernmental payables by over $200 billion).

                                  Agencies’ accounts can be out of balance with each other, for example,
                                  when one or the other of the affected agencies does not properly record a
                                  transaction with another agency or the agencies record the transactions in
                                  different accounting periods. These out-of-balance conditions can be
                                  detected and corrected by instituting procedures for reconciling
                                  transactions between agencies on a regular basis and in a timely manner.
                                  Generally, such reconciliations are not performed. These unreconciled
                                  transactions result in material misstatements of assets, liabilities, revenues,
                                  and/or costs.

Financial Statement Compilation   The federal government cannot ensure that the information in the financial
                                  statements of the U.S. government is properly and consistently compiled in


                                  Page 7                                                       GAO/T-AIMD-99-131
                                an accurate manner. To prepare the federal government’s financial
                                statements, about 70 agencies submit data to Treasury on approximately
                                2,000 separate reporting components, each having many account balances.
                                However, several major agencies were unable to provide assurance that all
                                agency amounts included in these financial statements reconciled with
                                their agency financial statements. In addition, material adjustments and
                                reclassifications were required to (1) make the financial statements more
                                consistent with agency financial statements, (2) correct identified
                                inconsistencies in reporting similar transactions, (3) conform footnote
                                information to related financial statement line items, and (4) record other
                                audit adjustments.

                                These problems are compounded by the substantial volume of information
                                submitted and limitations in the federal government’s general ledger
                                account structure. As a result, additional misclassifications and
                                misstatements in the government’s financial statements could exist.

Reconciling the Results of      The federal government did not have a process to obtain information to
Operation With Budget Results   effectively reconcile the reported $134 billion excess of net cost over
                                revenue and a reported unified budget surplus of $69 billion. Consequently,
                                it could not identify all of the items needed to reconcile these amounts.
                                Certain differences are expected to occur because the financial statements
                                of the U.S. government are prepared on the accrual basis in accordance
                                with federal accounting standards, which is a different basis than the
                                budget. Under accrual accounting, transactions are reported when the
                                events giving rise to the transactions occur, rather than when cash is
                                received or paid. By contrast, federal budgetary reporting is generally on
                                the cash basis, in accordance with accepted budget concepts and policies.

                                Beginning in fiscal year 1998, major agencies were required by federal
                                accounting standards to reconcile their reported net costs to budget
                                information, which could provide a basis for preparing the reconciliation in
                                the 1998 Financial Report of the United States Government. However,
                                significant amounts reported in certain agency reconciliations, including
                                unliquidated obligations and certain other budget information, lacked
                                adequate supporting information and may be unreliable. For example,
                                significant weaknesses in Department of Defense (DOD) systems and
                                controls resulted in reported obligations incurred that may have exceeded
                                available budget authority for certain appropriations. Once the federal
                                government produces reliable financial statements, an effective
                                reconciliation could help provide additional assurance of the reliability of
                                budget results.



                                Page 8                                                     GAO/T-AIMD-99-131
Need to Continue   In addition to financial statements for the U.S. government, 24 major
                   individual departments and agencies across government have been
Reform Efforts     required to prepare annual audited financial statements, beginning with
                   fiscal year 1996. Eleven of these agencies received unqualified audit
                   opinions for fiscal year 1997--up from 6 for fiscal year 1996. As of March 19,
                   1999, 15 of the 24 agencies had received audit opinions or disclaimers on
                   their fiscal year 1998 financial statements. These included 7 unqualified
                   opinions,3 3 qualified opinions, and 5 disclaimers.

                   While the results continue to be mixed, individual agencies are now
                   endeavoring to address financial management problems. Several agencies
                   that have received unqualified opinions on their financial statements are
                   continuing to work on resolving significant weaknesses in financial
                   systems and internal controls.

                   Producing audited financial statements on time--by the March 1 statutory
                   deadline--is still a challenge, but improvements were made this year by
                   certain agencies, such as the Department of Health and Human Service.
                   Also, the Social Security Administration continues to demonstrate a best
                   practice by producing its audited financial statements and accountability
                   report in November, less than 2 months after the close of the fiscal year.

                   We have designated as high risk the serious financial management
                   problems at certain agencies (the Department of Defense, IRS, the Forest
                   Service, and the Federal Aviation Administration).4 All, however, have
                   concerted efforts underway to address their deficiencies, and we will
                   continue to work with them and the cognizant inspectors general (IGs) to
                   advance recommendations and evaluate progress.




                   3The Social Security Administration, the Department of Labor, the General Services Administration, the
                   National Science Foundation, the National Aeronautics and Space Administration, the Nuclear
                   Regulatory Commission, and the Federal Emergency Management Agency.

                   4
                       High-Risk Series: An Update (GAO/HR-99-1, January 1999).




                   Page 9                                                                         GAO/T-AIMD-99-131
Clean Opinion Must Be   Audited financial statements are essential to providing an annual public
                        scorecard on accountability. However, an unqualified audit opinion, while
Accompanied by          certainly important, is not an end in itself. For some agencies, the
Modern Systems and      preparation of financial statements requires considerable reliance on ad
                        hoc programming and analysis of data produced by inadequate systems
Better Controls         that are not integrated or reconciled and often require significant audit
                        adjustments. Efforts to obtain reliable year-end data that are not backed up
                        by fundamental improvements in underlying financial management
                        systems and operations to support ongoing program management and
                        accountability will not achieve the intended results of the Chief Financial
                        Officers Act over the long term.

                        For example, after several years of concerted effort by IRS and GAO, for
                        fiscal year 1997 we were for the first time able to conclude that IRS’
                        custodial financial statements, covering most of the government’s revenue,
                        were reliable. Prior to fiscal year 1997, weaknesses in IRS’ internal
                        controls and financial management systems prevented it from producing
                        reliable year-end financial information. Our ability to conclude that the
                        fiscal year 1997 custodial financial statements were reliable was a mark of
                        progress. For fiscal year 1998, IRS was able to reliably report on the results
                        of its custodial activities, including nearly $1.8 trillion of tax revenue,
                        $151 billion of tax refunds, and $26 billion of net federal taxes receivable.5
                        However, as in 1997, this was accomplished only after IRS’ extensive use of
                        ad hoc programming to extract data from its systems, followed by
                        numerous adjustments to these data totaling tens of billions of dollars to
                        produce final financial statements. IRS’ controls and systems remain
                        plagued by weaknesses that affect its ability to, among other things, report
                        reliable financial information throughout the year.


Improving Systems       The central challenge in generating timely, reliable data throughout the
                        year is overhauling financial and related management information systems.
                        To help stimulate attention to this challenge, the Congress passed the
                        Federal Financial Management Improvement Act (FFMIA) of 1996, which
                        requires auditors performing financial audits to report whether agencies’
                        financial management systems comply substantially with federal
                        accounting standards, financial systems requirements, and the
                        government's standard general ledger at the transaction level. For fiscal


                        5
                            Financial Audit: IRS' Fiscal Year 1998 Financial Statements (GAO/AIMD-99-75, March 1, 1999).




                        Page 10                                                                          GAO/T-AIMD-99-131
                         year 1997, agency financial auditors reported that 20 of 24 major agency
                         financial systems did not comply with the act’s requirements, indicating the
                         systems’ overall continuing poor condition.6 As we noted in our report on
                         the government’s financial statements for fiscal year 1998, similar results
                         are expected for fiscal year 1998.

                         Most federal agencies’ financial management systems do not meet systems
                         requirements and cannot provide reliable financial information for
                         managing day-to-day government operations and holding managers
                         accountable. Therefore, it will take time and effort to raise federal
                         financial systems to the level of quality and reliability envisioned in FFMIA.
                         In addition, agencies face the Year 2000 computing challenge of ensuring
                         that their systems function properly at the turn of the century. This task is
                         appropriately taking priority and will likely temporarily sidetrack longer
                         term systems modernization.

                         Over the longer term, agencies must address their serious systems
                         problems by applying the framework outlined in the Clinger-Cohen Act and
                         implementing guidance. This includes adopting sound information
                         technology investment and control processes, designing well-developed
                         architectures to guide information flows and technical standards, and
                         establishing disciplined approaches for developing and acquiring computer
                         software. Strong partnerships between chief financial officers and chief
                         information officers are essential to achieve these goals.


Strengthening Computer   Continuing serious and widespread computer security weaknesses are
Controls                 placing enormous amounts of federal assets at risk of fraud and misuse,
                         financial information at risk of unauthorized modification or destruction,
                         sensitive information at risk of inappropriate disclosure, and critical
                         operations at risk of disruption. Significant computer security weaknesses
                         in systems that handle the government's unclassified information have
                         been reported in each of the major federal agencies. The most serious
                         reported problem is inadequately restricted access to sensitive data. Other
                         types of weaknesses pertain to not (1) adequately segregating duties to
                         help ensure that people do not conduct unauthorized actions without
                         detection, (2) preventing unauthorized software from being implemented,
                         and (3) mitigating and recovering from unplanned interruptions in


                         6
                          Financial Management: Federal Financial Management Improvement Act Results for Fiscal Year 1997
                         (GAO/AIMD-98-268, September 30, 1998).




                         Page 11                                                                    GAO/T-AIMD-99-131
computer service. In today’s highly computerized and interconnected
environment, such weaknesses are vulnerable to exploitation by outside
intruders as well as authorized users with malicious intent.

The consequences of computer security weaknesses could be devastating
and costly--for instance, placing billions of dollars of payments and
collections at risk of fraud and impairing military operations. Also,
identified weaknesses at federal entities such as IRS, the Department of
Health and Human Service’s Health Care Financing Administration, SSA,
the Department of State, and the Department of Veterans Affairs place tax,
medical, and other sensitive records at risk of unauthorized disclosure,
modification, and destruction.

The government cannot estimate the full magnitude of actual damage and
loss resulting from federal computer security weaknesses because it is
likely that many such incidents are neither detected nor reported.
However, GAO and agency reviews and documented incidents, such as the
following, illustrate the potential for negative impacts.

• Attackers have accessed systems and stolen, modified, and destroyed
  both data and software at DOD and shut down entire systems.
• We have been successful, as part of computer security reviews, in
  readily gaining unauthorized access to systems that would allow
  intruders to read, modify, or delete data for whatever purpose they had
  in mind. Tests by agencies have revealed similar results.
• SSA’s IG has reported criminal convictions involving SSA employees,
  most of which involved creating fictitious identities, fraudulently selling
  SSA cards, misappropriating refunds, or abusing access to confidential
  information.
• IRS has identified incidents of employees browsing taxpayer data and
  inappropriately using other systems containing taxpayer data.

GAO and the IGs have issued numerous reports that identify information
security weaknesses in the federal government and made
recommendations to address them. Also, GAO has reported information
security as a high-risk area across government since February 1997.
Agencies need to fully institute a framework for assessing risk and ensuring




Page 12                                                     GAO/T-AIMD-99-131
                         that necessary policies and controls are in place and remain effective on an
                         ongoing basis.7



Human Capital            An integral part of financial and information management reform and,
                         indeed, any management initiative is building, maintaining, and marshaling
Initiatives Must         the human capital needed to achieve results. Leading organizations
Become a More Critical   understand that effectively managing employees--or human capital--is
                         essential to reaching and maintaining maximum performance.
Part of Reform Agenda    Organizational success is possible only when the right employees are on
                         board and provided the training, tools, structure, incentives, and
                         accountability to work effectively.

                         Specifically, in relation to financial management, the Chief Financial
                         Officers (CFO) Act recognized the importance of leadership in creating
                         CFO positions throughout government and in establishing a goal for
                         improving the qualifications of financial management personnel
                         throughout government. While some attention to delineating core
                         competencies and training has occurred, a great deal more needs to be
                         done. We plan to give greater attention to this area, with emphasis on
                         recommending ways to improve strategic approaches to human capital
                         planning, the acquisition and development of staff with skills to meet
                         critical needs, and the creation of performance-oriented organizational
                         cultures while protecting merit principles. 8



Strengthening            Without a firm foundation of reliable and timely financial and management
                         information, the many reforms underway across government to move to a
Financial Management     performance-based focus will never be successfully fulfilled. For this
Key to Assuring          reason, efforts to continue to build the necessary fundamental foundation
                         through lasting financial management reform are so essential. Only by
Accountability           generating reliable and useful information can the government assure
                         adequate accountability to taxpayers, manage for results, and help
                         decisionmakers make timely, well-informed judgments.


                         7Information Security: Serious Weaknesses Place Critical Federal Operations and Assets at Risk (GAO/
                         AIMD-98-92, September 23, 1998) and Information Security: Strengthened Management Needed to
                         Protect Critical Federal Operations and Assets (GAO/T-AIMD-98-312, September 23, 1998).

                         8
                          Performance and Accountability Series: Major Management Challenges and Program Risks: A
                         Governmentwide Perspective (GAO/OCG-99-1, January 1999).




                         Page 13                                                                      GAO/T-AIMD-99-131
                   Providing such data in meaningful, user-friendly reports is also critical.
                   Experimentation is now underway across government to develop single
                   accountability reports on individual departments and agencies. These
                   reports will consolidate and integrate audited financial statements and
                   reporting under the Government Performance and Results Act and other
                   related laws, to (1) show the degree to which an agency met its goals and at
                   what costs and (2) aid the reader in determining whether the agency was
                   well run.

                   Accountability reports that present an agency’s financial condition and the
                   results of its operations in an integrated way hold great promise for
                   enhancing the usefulness of performance information. Such reports and
                   independent audits will help correct the problem of the lack of complete
                   and reliable information that has been a source of concern for
                   congressional and agency decisionmakers for decades. Reliable
                   accountability reports that include information on the full cost and results
                   of carrying out federal activities will greatly aid decision-making for our
                   national government.

                   Reliable financial information also is essential for analyzing the
                   government’s financial condition and helping inform budget deliberations
                   by providing additional information beyond that provided in the budget.
                   The budget of the federal government is primarily formulated on a cash
                   basis, which also is generally the basis for calculating the annual budget
                   surplus or deficit. The financial statements are prepared generally on the
                   accrual basis of accounting. The most significant difference between the
                   two bases is the timing of recognition and measurement of revenues and
                   costs. Accrual information can be used along with budgetary information
                   to provide a valuable perspective on the costs of agency programs and the
                   government’s assets and long-term commitments.


                   In closing, Mr. Chairman, I want to commend your Subcommittee for its
                   diligent oversight of actions to improve financial management of
                   government. Your hearings have helped underscore the critical importance
                   of the issue and the need to make greater progress. I look forward to
                   working with you and other Members of the Congress, along with the
                   executive branch, in bringing about the type of quality financial
                   management envisioned by legislative goals and expected by the American
                   people.

                   I would be pleased to answer questions.



(919363)   Leter   Page 14                                                    GAO/T-AIMD-99-131
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