High-Risk Areas: Update on Progress and Remaining Challenges

Published by the Government Accountability Office on 1997-02-13.

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 and Oversight, House of Representatives

For Release on Delivery
Expected at
9:30 a.m.
                          HIGH-RISK AREAS
February 13, 1997

                          Update on Progress and
                          Remaining Challenges
                          Statement of Gene L. Dodaro
                          Assistant Comptroller General
                          Accounting and Information Management Division

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss major government programs
and operations we have identified as high risk because of vulnerabilities to
waste, fraud, abuse, and mismanagement. In 1990, we began a special
effort to review and report on such activities, and yesterday we issued a
series of reports providing the current status of the 20 high-risk areas we
have been monitoring since our last major progress report 2 years ago.

Over the past 7 years, we have called attention to critical government
operations that are high risk. To help improve this situation, we have made
hundreds of recommendations to get at the heart of these problem areas,
which have at their core a lack of fundamental accountability.

Today, we will highlight the legislative and agency actions that have
resulted in progress toward fixing these problems. Such actions have
established a solid foundation to help ensure greater progress, but much
remains to be done to fully implement the corrective actions needed to
remove the high-risk designation from these areas.

In addition, we will discuss five new areas that we have just designated as
high risk. These new areas have been added because they are serious,
growing problems and provide opportunities to achieve significant savings
and better service to the public.

Without additional attention to resolve problems in the 25 areas that are
the current focus of our high-risk initiative, the government will continue
to miss huge opportunities to save billions of dollars, make better
investments to reap the benefits of information technology, improve
performance and provide better service, and more effectively manage the
cost of government programs. Effective and sustained follow-through by
agency managers is essential to make further headway and achieve greater
benefits. Continued oversight by the Congress, such as this hearing by the
Subcommittee, will add essential impetus to ensuring progress as well.

Landmark legislation passed by the Congress in the 1990s has established
broad management reforms, which, with successful implementation, will
help resolve high-risk problems and provide greater accountability in
many government programs and operations:

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                        •   The expanded Chief Financial Officers (CFO) Act of 1990 requires agencies
                            to prepare financial statements that can pass the test of an independent
                            audit and provide decisionmakers reliable financial information.
                        •   The 1993 Government Performance and Results Act requires agencies to
                            measure performance and focus on results.
                        •   The 1995 Paperwork Reduction Act and the 1996 Clinger-Cohen Act
                            provide a basis for agencies to make wiser investments in information
                        •   The Debt Collection Improvement Act of 1996 strengthens federal
                            agencies’ debt collection practices and authorities.

                            Overall, agencies are taking high-risk problems seriously, trying to correct
Progress in Resolving       them, and making progress in many areas. The Congress has also acted to
High-Risk Program           address several problems affecting these high-risk areas through oversight
Areas                       hearings and specific legislative initiatives. Full and effective
                            implementation of legislative mandates, our suggestions, and corrective
                            measures by agencies, however, has not yet been achieved because the
                            high-risk areas involve long-standing problems that are difficult to correct.

                            The following discussion provides a quick synopsis of progress and
                            remaining challenges related to many high-risk areas. Detailed information
                            on the current status of all 25 high-risk areas, which are listed in appendix
                            I, is available in our overview report, quick reference guide, and individual
                            reports included in our set of 1997 high-risk reports. Reports included in
                            this series are listed at the end of this testimony.

Providing for               Our high-risk initiative has monitored five areas that affect accountability
Accountability and          and cost-effective management of Department of Defense (DOD) programs:
Cost-Effective              financial management, contract management, inventory management,
                            weapon systems acquisition, and the Corporate Information Management
Management of Defense       (CIM) initiative. These areas are key to effectively managing DOD’s vast
Programs                    resources, including a budget of over $250 billion in fiscal year 1996 and
                            over $1 trillion in assets worldwide. While improvement activities have
                            been started, DOD’s high-risk problems are especially serious and much
                            remains to be done to resolve them.

                            First, DOD’s lingering financial management problems are among the most
                            severe in government. For example, the Department has acknowledged
                            over 30 material weaknesses that cross the spectrum of its financial
                            operations, including continuing problems in accurately accounting for

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billions of dollars in problem disbursements. Also, DOD has reported that of
its nearly 250 financial systems only 5 conform fully with governmentwide
financial systems standards. Further, financial audits have highlighted
significant deficiencies in every aspect of DOD’s financial management and
reporting, resulting in the failure of any major DOD component to receive a
positive audit opinion. Since 1990, auditors have made over 400
recommendations aimed at helping to correct these weaknesses.

Deficiencies such as these prevent DOD managers from obtaining the
reliable financial information needed to make sound decisions on alternate
uses for both current and future resources. DOD’s financial management
leaders have recognized the importance of tackling these problems and
have many initiatives under way to address widespread financial
management problems. Fixing DOD’s financial management problems is
also critical to the resolution of the Department’s other high-risk areas.

In addition, as DOD seeks to streamline its contracting and acquisition
processes—including contract administration and audit—to adjust to
reduced staffing levels, new business process techniques will be key to
accomplishing effective and efficient oversight in the future. DOD contracts
now cost about $110 billion annually. Without an improved and simplified
contract payment system, DOD continues to risk overpaying contractors
millions of dollars. DOD is aware of the seriousness of its payment
problems and is taking steps to address them. Also, DOD needs to further
strengthen its oversight of contractor cost-estimating systems, which are
critical to ensuring sound price proposals and reducing the risk that the
government will pay excessive prices. While DOD has improved its
oversight of contractors’ cost-estimating systems, poor cost-estimating
systems remain an area of concern at some contractor locations.

Further, about half of DOD’s centrally managed inventory of spare parts,
clothing, medical supplies, and other secondary inventory items, which
totaled about $70 billion in September 1995, does not need to be on hand
to support war reserves or current operating requirements. DOD has had
some success in addressing its inventory management problems and is in
the midst of changing a culture that believed it was better to overbuy items
than to manage with just the amount of stock needed. Also, with reduced
force levels and the implementation of some of our recommendations, DOD
has reduced its centrally managed inventory by about $20 billion. DOD has
implemented certain commercial best practices, but only in a very limited
manner and has made little progress in developing the management tools
needed to help solve its long-term inventory management problems.

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                     Consequently, inventory managers continue to have difficulty managing
                     DOD’s multibillion dollar inventory supply systems efficiently and

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

                     Finally, DOD started the CIM initiative in 1989 with the expectation of saving
                     billions of dollars by streamlining operations and implementing standard
                     information systems supporting such important business areas as supply
                     distribution, material management, personnel, finance, and transportation.
                     However, 8 years after beginning CIM, and after spending a reported
                     $20 billion, DOD’s savings goal has not been met because the Department
                     has not yet implemented sound management practices. Not surprising, the
                     results of DOD’s major technology investments have been meager and some
                     investments are likely to result in a negative return on investment.

                     The Department estimates that it will spend more than an additional
                     $11 billion on system modernization projects between now and the year
                     2000. As part of its Clinger-Cohen Act implementation efforts, the
                     Department is establishing a framework to use its planning, programming,
                     and budgeting system to better manage this investment. While this
                     framework is a step in the right direction, these corrective actions are just
                     the beginning.

Improving Internal   At the Internal Revenue Service (IRS) we have monitored four high-risk
Revenue Service      areas that affect IRS’ ability to ensure that all revenues are collected and
Management and       accounted for: financial management, accounts receivable, filing fraud,
                     and tax systems modernization (TSM). In 1995, IRS reported collecting $1.4
Operations           trillion from taxpayers, disbursing $122 billion in tax refunds, and
                     managing an estimated accounts receivable inventory of $113 billion in
                     delinquent taxes.

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

In addition, IRS is hampered in efficiently and effectively managing its huge
inventory of accounts receivable due to inadequate management
information. The root cause here is IRS’ antiquated information systems
and outdated business processes, which handle over a billion tax returns
and related documents annually. IRS has undertaken many initiatives to
deal with its accounts receivable problems, including correcting errors in
its tax receivable masterfile and attempting to speed up aspects of the
collection process. Efforts such as these appear to have had some impact
on collections and the tax debt inventory, but many of the efforts are
long-term in nature and demonstrable results may not be available for
several years.

Further, IRS’ efforts to reduce filing fraud have resulted in some success,
especially through more rigid screening in the electronic filing program,
but this continues to be a high-risk area. IRS’ goal is to increase electronic
filings, which would strengthen its fraud detection capabilities. But to
achieve its electronic filing goal, IRS must (1) identify those groups of
taxpayers who offer the greatest opportunity for filing electronically and
(2) develop strategies focused on eliminating or alleviating impediments
that have inhibited those groups from participating in the program.

In attempting to overhaul its timeworn, paper-intensive approach to tax
return processing, IRS has spent or obligated over $3 billion on its TSM
efforts. This program has encountered severe difficulties. Currently,
funding for the initiative has been curtailed, and IRS and the Department of
the Treasury are taking several steps to address modernization problems
and implement our recommendations. However, much more progress is
needed to fully resolve serious underlying management and technical

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Controlling Fraud, Waste,   Also, Medicare—the nation’s second largest social program—is inherently
and Abuse in Medicare       vulnerable to and a perpetually attractive target for exploitation. The
Claims                      Congress and the President have been seeking to introduce changes to
                            Medicare to help control program costs, which were $197 billion in fiscal
                            year 1996. At the same time, they are concerned that the Medicare
                            program loses significant amounts due to persistent fraudulent and
                            wasteful claims and abusive billings. The Congress has passed the Health
                            Insurance Portability and Accountability Act of 1996 to protect Medicare
                            from exploitation by adding funding to bolster program safeguard efforts
                            and making the penalties for Medicare fraud more severe. Effective
                            implementation of this legislation and other agency actions is key to
                            mitigating many of Medicare’s vulnerabilities to fraud and abuse.

                            Also, the Health Care Financing Administration (HCFA), which runs the
                            Medicare program, has begun to acquire a new claims processing system,
                            the Medicare Transaction System (MTS), to provide, among other things,
                            better protection from fraud and abuse. In the past, we have reported on
                            risks associated with this project, including HCFA’s plan to implement the
                            system in a single stage rather than incrementally, difficulty in defining
                            requirements, inadequate investment analysis, and significant schedule
                            problems. HCFA has responded to these concerns by (1) changing its
                            single-stage approach to one under which the system will be implemented
                            incrementally and (2) working to resolve other reported problems.

Minimizing Loan Program     Since our high-risk program began 7 years ago, we have called attention to
Losses                      difficulties major lending agencies—the Departments of Housing and
                            Urban Development (HUD), Education, and Agriculture—have experienced
                            in managing federal credit programs and the government’s resulting
                            exposure to large losses. As of September 30, 1995, total federal credit
                            assistance outstanding was reported to be over $941 billion, consisting of
                            (1) $204 billion in loans receivables held by federal agencies, including
                            $160 billion in direct loans and $44 billion in defaulted guaranteed loans
                            that are now receivables of the federal government, and (2) $737 billion in
                            loans guaranteed by the federal government.

                            HUD  is responsible for managing more than $400 billion in insured loans;
                            $435 billion in outstanding securities; and, in fiscal year 1995, over
                            $31.8 billion in discretionary budget outlays. However, effectively carrying
                            out these responsibilities is hampered by HUD’s weak internal controls,
                            inadequate information and financial management systems, an ineffective
                            organization structure, and an insufficient mix of staff with the proper

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skills. These problems are not new—we reported them in 1995 and they
were a major factor contributing to the incidents of fraud, waste, abuse,
and mismanagement reported in the late 1980s.

HUD  has undertaken some improvement efforts to correct these problems
through such means as implementing a new management planning and
control program. However, HUD’s improvement efforts are far from
fruition, and long-standing, fundamental problems remain. HUD’s program
will remain high risk until the agency completes more of its planned
corrective actions and the administration and the Congress reach closure
on a restructuring that (1) focuses HUD’s mission and (2) consolidates,
reengineers, and/or reduces HUD’s programs. What is needed is for the
administration and the Congress to agree on the future direction of federal
housing and community development policy and put in place the
organizational and program delivery structures that are best suited to
carry out that policy.

Actions by the Department of Education, combined with legislative
changes, have achieved some results in addressing many of the underlying
problems with the student financial aid programs’ structure and
management. In fiscal year 1995, the federal government paid out over
$2.5 billion to make good its guarantee on defaulted student loans—an
amount that represents an improvement over the last several years. The
Department has taken many administrative actions to correct problems
and improve program controls, but it must overcome management and
oversight problems that have contributed to abuses by some participating

Since our last high-risk report series in 1995, the Congress has enacted
legislation—Title VI of the Federal Agriculture Improvement and Reform
Act of 1996—to make fundamental changes in the farm loan programs’
loan-making, loan-servicing, and property management policies. The
Department of Agriculture is in the process of implementing the new
legislative mandates and other administrative reforms to resolve farm loan
program risks. The impact of these actions on the $17 billion farm loan
portfolio’s financial condition will not be known for some time.

The Debt Collection Improvement Act of 1996 also was enacted to expand
and strengthen agencies’ debt collection practices and authorities. This
important new legislation can provide a much needed new impetus to
improve lending program performance, but it will take time to implement

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                          the act. Additional agency attention to improve lending management and
                          actions by the Congress are necessary as well.

Improving Management of   With government downsizing, civilian agencies will continue to rely
Federal Contracts at      heavily on contractors to operate programs. While this approach can help
Civilian Agencies         to achieve program goals with a reduced workforce, it can also result in
                          increased vulnerability to risks, such as schedule slippages, cost growth,
                          and contractor overpayments. Our high-risk program has followed efforts
                          to resolve contract management weaknesses undertaken by several of the
                          government’s largest civilian contracting agencies—the Department of
                          Energy (DOE), the National Aeronautics and Space Administration (NASA),
                          and the Environmental Protection Agency (EPA) for the Superfund.

                          Most of DOE’s $17.5 billion in 1995 contract obligations was for its
                          management and operating contracts. DOE has made headway in
                          overcoming its history of weak contractor management through a major
                          contract reform effort that has included developing an extensive array of
                          policies and procedures. Although the Department recently adopted a
                          policy favoring competition in the award of these contracts, in actual
                          practice most contracts continue to be made noncompetitively.

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

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

                          In addition to the 20 areas we previously designated high risk, we are
New High-Risk Areas       adding 5 new ones. We are alerting the Congress to these new areas
Have Emerged              because they involve serious problems: fraud and abuse in benefit claims,
                          widespread computer security weaknesses, inefficient Department of

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Defense operation and support activities, the possibility of disastrous
computer disruptions in service to the public, and the potential for a
costly, unsatisfactory 2000 Decennial Census.

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

Second, information systems security weaknesses across government have
now been designated high risk. These weaknesses pose high risk of
unauthorized access and disclosure or malicious use of sensitive data.
Many federal operations that rely on computer networks are attractive
targets for individuals or organizations with malicious intention. Examples
of such operations include law enforcement, import entry processing and
various financial transactions. Most notably, DOD’s systems may have
experienced as many as 250,000 attacks from hackers during 1995 alone,
with about 64 percent of them being successful and most going
undetected. Since June 1993, we have issued over 30 reports describing
serious information security weaknesses at major federal agencies. In
September 1996, we reported that during the previous 2 years, serious
information security control weaknesses had been reported for 10 of the
15 largest federal agencies. We have made dozens of recommendations to
individual agencies and the Office of Management and Budget for
improvement, and they have started acting on many of them.

Third, DOD’s efforts to reduce its infrastructure will now be monitored as
part of our high-risk efforts. Over the last 7 to 10 years, DOD has reduced
operations and support costs, which will amount to about $146 billion this
year. However, billions of dollars are wasted annually on inefficient and
unneeded DOD activities. DOD has, in recent years, undergone substantial
downsizing in force structure. However, commensurate reductions in
operations and support costs have not been achieved. Reducing the cost of
excess infrastructure activities is critical to maintaining high levels of
military capacities. Expenditures on wasteful or inefficient activities divert

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                        limited defense funds from pressing defense needs, such as the
                        modernization of weapon systems.

                        Fourth, we have designated another serious governmentwide computer
                        information systems issue, the Year 2000 Problem, as a new high-risk area.
                        This problem poses the high risk that computer systems throughout
                        government will fail to run or malfunction because computer equipment
                        and software were not designed to accommodate the change of date at the
                        new millennium. For example, IRS’ tax systems could be unable to process
                        returns, which in turn could jeopardize the collection of revenue and the
                        entire tax processing system. Federal systems used to track student
                        education loans could produce erroneous information on their status, such
                        as indicating that an unpaid loan has been satisfied. Or the Social Security
                        Administration’s disability insurance process could experience major
                        disruptions because the interface with various state systems fails, thereby
                        causing delays and interruptions in disability payments to citizens.

                        The fifth new high-risk area involves the need for agreement between the
                        administration and the Congress on an approach that will both minimize
                        the risk of an unsatisfactory 2000 Decennial Census and keep the cost of
                        doing it within reasonable bounds. The longer the delay in securing
                        agreement over design and funding, the more difficult it will be to execute
                        an effective census, and the more likely it will be that the government will
                        have spent billions of dollars and still have demonstrably inaccurate
                        results. The country can ill afford an unsatisfactory census at the turn of
                        the century, especially if it comes at a substantially higher cost than
                        previous censuses. The census results are critical to apportioning seats in
                        the House of Representatives; they are also used to allocate billions of
                        dollars in federal funds for numerous programs and to guide the plans for
                        decisions of government, business, education, and health institutions in
                        the multibillion dollar investments they make.

                        Shifting to the future, the government can gain major benefits by focusing
Focusing Attention on   on the resolution of high-risk problems and fully and effectively
High-Risk Areas         implementing the legislative foundation established for broader
                        management reforms. As countless studies we have performed have long
                        noted and our high-risk series of reports demonstrates, federal agencies
                        often fail to appropriately manage their finances, identify clearly what they
                        intend to accomplish, or do the job effectively with a minimum of waste.
                        Left unresolved, persistent and long-standing high-risk areas will result in
                        the government continuing to needlessly lose billions of dollars and

                        Page 10                                                        GAO/T-HR-97-22
                            missing huge opportunities to achieve its objectives at less cost and with
                            better service delivery.

Achieving Substantial       The 25 areas that are the focus of our high-risk program cover almost all of
Savings and Other           the government’s annual $1.4-trillion revenue collection efforts and
Monetary Benefits           hundreds of billions of dollars in annual federal expenditures.
                            Consequently, further progress to fully and effectively implement actions
                            to resolve high-risk problems can result in substantial savings, for
                            example, by

                        •   reducing Medicare losses due to fraudulent and abusive claims, which
                            could be from $6 billion to as much as $20 billion based on 1996 outlays;
                        •   decreasing SSI overpayments, which have grown to over $1 billion a year;
                        •   cutting back further on unneeded centrally managed defense inventories,
                            which DOD succeeded in reducing by $23 billion during the 6-year period
                            from 1989 to 1995;
                        •   implementing better practices for acquiring weapon systems and reducing
                            defense infrastructure, which are two areas that each experience billions
                            of dollars in unneeded costs annually; and
                        •   adopting improved contract management practices, as NASA is doing with
                            considerable progress. For instance, NASA lowered the value of contract
                            changes for which prices had not yet been negotiated from $6.6 billion in
                            December 1991 to less than $500 million in September 1996.

                            In addition, overcoming several high-risk problems has great potential for
                            increased collections or other monetary gains to the government. For
                            instance, these benefits are possible by

                        •   further preventing or deterring tax filing fraud, which involved over 62,000
                            fraudulent returns with refunds of almost $132 million in 1995;
                        •   reducing the growing inventory of tax assessments, which was $216 billion
                            at the end of fiscal year 1996;
                        •   ensuring that duties, taxes, and fees on importations are properly assessed
                            and collected by the Customs Service and that refunds of such amounts
                            are valid; and
                        •   continuing to implement improved credit management practices. For
                            example, the Department of Education has increased collections on
                            defaulted loans from $1 billion in fiscal year 1992 to $2 billion in fiscal year

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Making Better Investments    Information technology is now integral to nearly every aspect of federal
to Reap Potential Benefits   government operations and thus, is pivotal to the government’s interaction
From Information             with the public and critical to public health and safety issues. In the past 6
                             years, federal agencies have spent about $145 billion on information
Technology                   systems. Yet, despite years of experience in developing and acquiring
                             systems, agencies across government continue to have chronic problems
                             harnessing the full potential of information technology to improve
                             performance, cut costs, and/or enhance responsiveness to the public.

                             We have already discussed in this testimony the high risks associated with
                             two multibillion dollar information systems modernizations—IRS’ tax
                             systems modernization and DOD’s corporate information management
                             initiative. In addition, the information systems modernization efforts of
                             other agencies are at risk of being late, running over cost, and falling short
                             of promised benefits. Our high-risk initiative includes two of these
                             modernizations—those at the Federal Aviation Administration (FAA) and
                             the National Weather Service (NWS).

                             FAA’s $34-billion air traffic control (ATC) modernization has historically
                             experienced cost overruns, schedule delays, and performance shortfalls.
                             While FAA has had success on a recent small, well defined effort to replace
                             one aging system, the underlying causes of its past problems in
                             modernizing larger, more complex ATC systems remain and must be
                             addressed for the modernization to succeed. We recently identified and
                             made recommendations to correct several of these root causes, including
                             (1) strengthening project cost estimating and accounting practices and
                             (2) defining and enforcing an ATC-wide system architecture, and we have
                             work under way to identify other improvements that could help to resolve
                             the modernization’s long-standing problems.

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

                             To improve situations such as these and stop bad information technology
                             investments, we have worked closely with the Congress to fundamentally
                             revamp and modernize federal information management practices. Our
                             study of leading public and private sector organizations showed how they
                             applied an integrated set of management practices to create the
                             information technology infrastructure they needed to dramatically

                             Page 12                                                         GAO/T-HR-97-22
                            improve their performance and achieve mission goals.1 These practices
                            provide federal agencies with essential lessons in how to overcome the
                            root causes of their chronic information management problems.

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

                            These laws emphasize involving senior executives in information
                            management decisions, establishing senior-level Chief Information
                            Officers, tightening controls over technology spending, redesigning
                            inefficient work processes, and using performance measures to assess
                            technology’s contribution to achieving mission results. These management
                            practices provide a proven, practical means of addressing the federal
                            government’s information problems, maximizing benefits from technology
                            spending, and controlling the risks of systems development efforts. The
                            challenge now is for agencies to apply this framework to their own
                            technology efforts, particularly those at high risk of failure.

Improving Performance       Traditionally, federal agencies have used either the amount of money
and Providing Better        directed toward their programs, the level of staff deployed, or even the
Service                     number of tasks completed as some of the measures of their performance.
                            But at a time when the value of many federal programs is undergoing
                            intense public scrutiny, an agency that reports only these measures has
                            not answered the defining question of whether these programs have
                            produced real results.

                            For high-risk areas, measuring performance and focusing on results is key
                            to pinpointing opportunities for improved performance and increased
                            accountability. For instance, performance measures would be useful for

                        •   guiding management of defense inventory levels to prevent the
                            procurement of billions of dollars of centrally managed inventory items
                            that may not be needed;

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

                            Page 13                                                                       GAO/T-HR-97-22
                       •   reaching agreement with the Congress on and monitoring acceptable
                           levels of errors in benefit programs, which may never be totally eliminated
                           but can be much better controlled;
                       •   monitoring loan loss levels and delinquency rates for the government’s
                           direct loan and loan guarantee programs—multibillion dollar operations in
                           which loses for a variety of programs involving farmers, students, and
                           home buyers are expected but can be minimized with greater oversight;
                       •   assessing the results of tax enforcement initiatives, delinquent tax
                           collection activities, and filing fraud reduction efforts.

                           Yesterday, we testified before the Committee on using the Government
                           Performance and Results Act of 1993 (GPRA) to assist congressional and
                           executive branch decision-making. Under GPRA, every major federal
                           agency must now ask itself basic questions about performance to be
                           measured and how performance information can be used to make

                           GPRA  requires agencies to set goals, measure performance, and report on
                           their accomplishments. This will not be an easy transition, nor will it be
                           quick. GPRA will be more difficult for some agencies to apply than for
                           others. But GPRA has the potential for adding greatly to government
                           performance—a particularly vital goal at a time when resources are
                           limited and public demand is high. To help the Congress and federal
                           managers put GPRA into effect, we have identified key steps that agencies
                           need to take toward its implementation, along with a set of practices that
                           can help make that implementation a success.2

Managing the Cost of       Reliable financial information is key to better managing government
Government Programs        programs, providing accountability, and addressing high-risk problems.
More Effectively           The government’s financial systems are all too often unable to perform the
                           most rudimentary bookkeeping for organizations, many of which are
                           oftentimes much larger than many of the nation’s largest private
                           corporations. Federal financial management suffers from decades of
                           neglect and failed attempts to improve financial management and
                           modernize outdated financial systems. This situation is illustrated in a
                           number of high-risk areas, including

                       •   the weaknesses that permeate critical DOD financial management areas,

                            Executive Guide: Effectively Implementing the Government Performance and Results Act
                           (GAO/GGD-96-118, June 1996).

                           Page 14                                                                        GAO/T-HR-97-22
•   the substantial improvements that are needed in IRS’ accounting and
    financial reporting,
•   the significant problems that continue to be identified during audits of the
    Customs Service’s financial statements, and
•   the fundamental control weaknesses that resulted in the HUD Inspector
    General being unable to give an opinion on the Department’s fiscal year
    1995 financial statements.

    As a result of situations such as these, financial information has not been
    reliable enough to use in federal decision-making or to provide the
    requisite public accountability. Good information on the full costs of
    federal operations is frequently absent or extremely difficult to
    reconstruct, and complete, useful financial reporting is not yet in place.

    The landmark Chief Financial Officers (CFO) Act spelled out a long
    overdue and ambitious agenda to help resolve these types of financial
    management deficiencies. Important and steady progress is being made
    under the act to bring about sweeping reforms and rectify the devastating
    legacy from inattention to financial management. Moreover, the regular
    preparation of financial statements and independent audit opinions
    required by the 1990 act, as expanded by the Government Management
    Reform Act of 1994, are bringing greater clarity and understanding to the
    scope and depth of problems and needed solutions.

    Under the expanded CFO Act, the 24 largest agencies are required to
    prepare and have audited financial statements for their entire operations,
    beginning with those for fiscal year 1996. Together, these agencies account
    for virtually the entire federal budget. Also, the 1994 expansion of the act
    requires the preparation and audit of consolidated governmentwide
    financial statements, beginning with those for fiscal year 1997.

    Making CFO Act reforms a reality in the federal government remains a
    challenge and a great deal more perseverance will be required to sustain
    the current momentum and successfully overcome decades of serious
    neglect in fundamental financial management operations and reporting
    methods. But fully and effectively implementing the CFO Act is a very
    important effort because it is a key to achieving better accountability;
    implementing broader management reforms, such as GPRA; and providing
    the nation’s leaders and the public with a wealth of relevant information
    on the government’s true financial status.

    Page 15                                                        GAO/T-HR-97-22
We will continue to identify ways for agencies to more effectively manage
and control high-risk areas and to make recommendations for
improvements that can be implemented to overcome the root causes of
these problems. Also, we have long supported annual congressional
hearings that focus on agencies’ accountability for correcting high-risk
problems and implementing broad management reforms.

Mr. Chairman, this concludes my statement. I would be happy to now
respond to any questions.

Page 16                                                     GAO/T-HR-97-22
Attachment I

Areas Designated High Risk

                       Financial management
Providing for          Contract management
Accountability and     Inventory management
Cost-Effective         Weapon systems acquisition
                       Defense infrastructure (added in 1997)
Management of
Defense Programs
                       IRS financial management
Ensuring All           IRS receivables
Revenues Are           Filing fraud
Collected and          Tax Systems Modernization
                       Customs Service financial management
Accounted for          Asset forfeiture programs

                       Tax Systems Modernization
Obtaining an           Air traffic control modernization
Adequate Return on     Defense’s Corporate Information Management initiative
Multibillion Dollar    National Weather Service modernization
                       Information security (added in 1997)
Investments in         The Year 2000 Problem (added in 1997)
Controlling Fraud,     Supplemental Security Income (added in 1997)
Waste, and Abuse in
Benefit Programs
Minimizing Loan        Farm loan programs
Program Losses         Student financial aid programs

                       Department of Energy
Improving              NASA
Management of          Superfund
Federal Contracts at
Civilian Agencies

                       Page 17                                                 GAO/T-HR-97-22
Attachment I
Areas Designated High Risk

Also, planning for the 2000 Decennial Census was designated high risk in
February 1997.

Page 18                                                     GAO/T-HR-97-22
Attachment II

1997 High-Risk Series

                An Overview (GAO/HR-97-1)

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

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

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

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

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

                Defense Infrastructure (GAO/HR-97-7)

                IRS   Management (GAO/HR-97-8)

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

                Medicare (GAO/HR-97-10)

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

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

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

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

                The entire series of 14 high-risk reports is numbered GAO/HR-97-20SET.

(918898)        Page 19                                                        GAO/T-HR-97-22
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