United States. Congress. Senate. Committee on Gove.

Financial problems : are the agencies getting better? : hearing before the Committee on Governmental Affairs, United States Senate, One Hundred Third Congress, second session, July 28, 1994 online

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S. Hrg. 103-932

FINANCIAL PROBLEMS:
ARE THE AGENCIES GETTING BETTER?



Y 4. G 74/9: S. HRG. 103-932

Financial Problens: Are the ftgencie..



HEARING

BEFORE THE

COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE

ONE HUNDRED THIRD CONGRESS

SECOND SESSION



JULY 28, 1994



Printed for the use of the Committee on Governmental Affairs




i



^ 4



■:



U.S. GOVERNMENT PRINTING OFFICE
81-860 cc WASHINGTON : 1995



For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046662-8




S. Hrg. 103-932

FINANCIAL PROBLEMS:
ARE THE AGENCIES GETTING BETTER?



Y 4. G 74/9 :S. HRG. 103-932

Financial Problens: Are the Agencie...



HEARING

BEFORE THE

COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE

ONE HUNDRED THIRD CONGRESS

SECOND SESSION



JULY 28, 1994



Printed for the use of the Committee on Governmental Affairs




.






Ms 4



U.S. GOVERNMENT PRINTING OFFICE
81-860 cc WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-046662-8



COMMITTEE ON GOVERNMENTAL AFFAIRS

JOHN GLENN, Ohio, Chairman

SAM NUNN, Georgia WILLIAM V. ROTH, Jr., Delaware

CARL LEVIN, Michigan TED STEVENS, Alaska

JIM SASSER, Tennessee WILLIAM S. COHEN, Maine

DAVID PRYOR, Arkansas THAD COCHRAN, Mississippi

JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona

DANIEL K. AKAKA, Hawaii ROBERT F. BENNETT, Utah
BYRON L. DORGAN, North Dakota

Leonard Weiss, Staff Director

Mark Goldstein, Professional Staff Member

Franklin G. Polk, Minority Staff Director and Chief Counsel

Michal Sue Prosser, Chief Clerk

(ID



CONTENTS



Opening statements: Pa e e

Senator Glenn 1

Senator Cochran 23

Prepared statements:

Senator Roth 51

Senator Pryor 51

WITNESSES

Thursday, July 28, 1994

Gene L. Dodaro, Assistant Comptroller General, Accounting and Information
Management Division, U.S. General Accounting Office, accompanied by

Greg Holloway, Director, Civil Audits, U.S. General Accounting Office 5

John C. Payne, Acting Inspector General, Department of State 8

Patrick E. McFarland, Inspector General, Office of Personnel Management,
accompanied by Robert Owens, Chief, Financial Operations Audits Branch,

Office of Personnel Management 12

C. Morgan Kinghorn, Chief Financial Officer, Internal Revenue Service 28

Vincette L. Goerl, Chief Financial Officer, U.S. Customs Service 32

Larry J. Eisenhart, Deputy Chief Financial Officer, Department of State 35

William E. Flynn III, Assistant Director for Financial Control and Manage-
ment, Retirement and Insurance Group, Office of Personnel Management ... 39

Alphabetical List of Witnesses

Dodaro, Gene L.:

Testimony 5

Prepared statement 53

Eisenhart, Larry J.:

Testimony ^5

Prepared statement °0

Flynn, William E. Ill:

Testimony 39

Prepared statement °4

Goerl, Vincette L.:

Testimony ^2

Prepared statement '"

Kinghorn, C. Morgan:

Testimony 28

Prepared statement '4

McFarland, Patrick E.:

Testimony 12

Prepared statement ™

Payne, John C:

Testimony °

Prepared statement 62

(III)



IV

Page

APPENDIX

Prepared statements of witnesses in order of appearance 53

Written questions and the responses:
Chairman Glenn to:

Mr. Dodaro, General Accounting Office 85

Mr. McFarland, Office of Personnel Management 89

Mr. Kinghorn, Internal Revenue Service 91

Mr. Goerl, U.S. Customs Service 96

Mr. Eisenhart, Department of State 103

Mr. Flynn, Office of Personnel Management 107



FINANCIAL PROBLEMS: ARE THE AGENCIES

GETTING BETTER?



THURSDAY, JULY 28, 1994

U.S. Senate,
Committee on Governmental Affairs,

Washington, DC.

The Committee met, pursuant to notice, at 9:33 a.m., in room
SD-342, Dirksen Senate Office Building, Hon. John Glenn, Chair-
man of the Committee, presiding.

Present: Senators Glenn and Cochran.

OPENING STATEMENT OF CHAIRMAN GLENN

Chairman Glenn. The hearing will be in order.

Good morning. Today, the Committee on Governmental Affairs
meets to discuss the financial management of domestic agencies.
As we have said before at the beginning of some of these meetings,
just that statement alone, financial management of domestic agen-
cies, is almost enough to drive the press and a lot of people out of
the room to begin with because it is not as exciting as $10,000 cof-
fee pots and $640 toilet seats and $200 screwdrivers that draw a
lot of attention when they are brought out.

What we are trying to address is the functioning within agencies
that leads to that sort of thing, and try and address some of the
root causes. Pursuant to that, we have passed a number of laws
here and had legislation in the past which I will address here with
an opening statement very briefly.

It is another in our long list of hearings on what we call the
grunt work of Government. It is a lot of the stuff that doesn't get
all the attention some of the other things get, but it is really cru-
cial if we are to get better financial management in Government.

During the past several years, this Committee has spent consid-
erable time examining the financial management practices of the
Department of Defense. We have been pleased to see that contin-
ued oversight has begun to pay off. Through hard work and com-
mitted leadership, we believe the Pentagon finally is making
progress in strengthening financial stewardship. We have had sev-
eral hearings. I think those of you that have attended some of
those hearings would agree that we are beginning to see some
progress in that area, and we are proud of that.

In the coming years, this Committee also expects to pay a lot of
attention to financial management in the domestic agencies. We
passed the Chief Financial Officers Act of 1990, which Comptroller
General Bowsher said was the best step forward in financial man-
agement in the last 40 years in Government. We passed that so

(1)



Congress and the American people could determine whether or not
their tax dollars were being well spent. For the first time, we re-
quired audits; hard to believe, the first time in Government that
agencies and departments have been required at the end of the
year to audit and have auditable statements of your tax dollars.

The CFO Act, along with such other laws as the Inspector Gen-
eral Act, the Financial Integrity Act, and the Government Perform-
ance and Results Act, has become a pillar of better management
that ultimately will make Government work better and cost less.
If I didn't really believe that we could make that happen, I
wouldn't be spending all the time that I and this Committee have
spent on these subjects.

It is clear that domestic agencies share a common trait with the
Defense Department. Almost all of them have significant problems
with financial systems and processes, and have left Federal funds
vulnerable to fraud, waste, and mismanagement. In almost any de-
partment you care to mention, inadequate and antiquated systems
and insufficient attention to internal controls and standard proce-
dures prevent the Government from fulfilling its financial and pro-
gram obligations. As a result, our agencies are largely unable to as-
sure the public that their funds are well spent and accounted for,
and are unable to meet audit standards.

At the same time, I don't want to paint a completely bleak pic-
ture. Like the Defense Department, a number of domestic agencies
have made progress in improving financial management, and it is
quite evident that year-end financial statement audits are forcing
on agencies the discipline that is necessary to change their old cul-
tures of neglect and to take the strong actions needed to instill fis-
cal responsibility and accountability. This not only has saved the
Government money and improved how it manages and accounts for
its funds, but will over time also redeem Government's credibility
in the eyes of the public.

Our hearing this morning looks at the financial management
progress being made in four agencies — IRS, the Internal Revenue
Service; the Customs Service; the State Department; and the Office
of Personnel Management. Two of these agencies, IRS and Cus-
toms, were selected as pilot projects under the CFO Act and, as a
result, have produced financial statements that cover their entire
agency.

On the other hand, State and OPM have produced statements so
far for only their trust and revolving funds and their commercial
activities. So it is our hope that all major Federal departments will
soon be producing agency-wide financial statements. That is why I
have pushed to pass Senate bill S. 2170, which expands the CFO
Act requirements and makes them permanent.

I want to congratulate the agencies that are appearing before the
Committee today. Financial management improvement is a long-
term, vital effort that takes more than lip service. I think that the
agencies represented here are at least on the road to success. We
are not there yet by a long shot, but at least we have started.
Nonetheless, it should surprise no one that some agencies have
found this road a bit bumpy and their progress is by no means uni-
form.



The IRS should be commended for pursuing strong actions based
on last year's financial audit by the General Accounting Office.
They have made progress in fixing financial management problems
and in putting their books in order so that hopefully, soon, GAO
or the IG will be able to render an opinion.

Nonetheless, I am concerned about certain issues that remain
longstanding problems for IRS. These include accounts receivables,
where IRS can go out right now and collect money owed the Gov-
ernment; they have the ability to do it. Collectible accounts, not
just the $130 or $135 billion owed overall to IRS, many of those
accounts of which are bankrupt firms or bankrupt individuals, but
collectible accounts receivable have jumped from $18 billion in
1991 to an estimated $29 billion in 1993. That is where people are
still solvent, they should have paid their bills, they are ignoring the
Government, they are not treating everyone else fairly, and we
need to make sure, especially in this time of tight budgets, that we
are getting everything that is rightfully owned the Government.

As we learned last week at our hearing on IRS browsing, com-
puter security remains a formidable challenge for the agency, also.
IRS is the contact point with Government for every single Amer-
ican. The one thing you don't get away with, usually, anyway, un-
less you are some sort of crook, is ignoring your responsibilities to
pay your income taxes. So it is a contact point every year with the
Federal Government, and we must have an impeccable operation
there. It should set an example for other agencies and we want
that to happen.

Turning to Customs, I think that we have not seen as much
progress as we had hoped for after last year's audit by GAO. But
the agency has a new CFO who is testifying before the Committee
this morning, and we do have high expectations that Customs will
now move forward very quickly with financial management im-
provements. I think that is very important.

Among other things, the agency is unable to assure Congress and
the American public that it is collecting all the revenue due the
Government from imports mainly because Customs doesn't really
know everything about what is being imported into this country.
Indeed, GAO warns that the Government is losing an unknown
amount of money every year because of Customs' flawed import in-
spection program.

At the same time, the Committee is concerned that Customs has
not made much progress in accounting for seized assets and for en-
suring that dangerous drugs are adequately safeguarded. Despite
years of criticism in this area, Customs still cannot account for all
the drugs that it is supposed to have in its possession, and the
safeguarding of drugs has been so poor that in one instance more
than 350 pounds of cocaine were stolen from a Customs warehouse.
Neither the drugs nor the culprits have ever been found.

Unfortunately, we are less convinced that the State Department
and the Office of Personnel Management are sufficiently committed
to financial stewardship and to the CFO Act, the Chief Financial
Officers Act. The State Department issued its fiscal 1992 financial
statements just last month. I want to repeat that. The fiscal 1992
financial statements just got out last month. They are over a year
late, and the Department is not doing much better for fiscal 1993.



One of its two audited financial statements, due by law this past
June 30, has not been issued. State's third required statement, cov-
ering nearly 60 percent of the budget, will not be auditable before
fiscal 1996, it is estimated.

We are somehow supposed to be setting an example in Govern-
ment for how the rest of the country operates and how other de-
partments operate, and so on. They won't even be auditable before
fiscal 1996. Meanwhile, a host of long-term financial management
problems require immediate, sustained attention. State needs to
make drastic improvements in its poor computer systems, its over-
seas cash disbursements, and its accounting for property and in-
ventory. You know, just putting in for more dollars every year to
OMB and having it passed over here through a new appropria-
tion — sending more dollars is not the answer. We would like to
have some elementary accounting of the dollars that we have al-
ready sent so we know what is happening.

We hear that we can't do everything overseas, we can't do every-
thing that is required with the money that we have. At the same
time, we can't say when State can even tell us how much they have
and how it is being spent now. So we don't want vague estimates;
we want auditable accounts. We have seen some lip service paid in
this area, but that is about it as far as we are concerned.

OPM is also not making the progress we expect of agencies under
the CFO Act. The Office of Personnel Management has never had
a Deputy CFO, except in an acting capacity. Nor has the agency,
according to its own inspector general, adhered to the CFO Act by
providing the Chief Financial Officer the authority needed to do the
job.

We are concerned that material weaknesses under the Financial
Integrity Act continue to be uncovered by the inspector general in
the context of financial audits. We also are troubled by apparent
computer security weaknesses that could permit unauthorized ac-
cess, manipulation, or destruction of important information on Fed-
eral retirees and their benefits, leading to a potential for fraud,
waste, and abuse.

The agencies whose financial statements we are examining this
morning are not alone in exhibiting the sorts of problems that I
have just mentioned. These are issues with which the entire Fed-
eral Government is grappling and they will take years to fix. We
didn't pick these agencies out because they are better or worse
than anyone else. We picked them out to audit as part of our ongo-
ing look at all the agencies and departments of Government, and
we will get to the others in due time, but they should be aware
that GAO is going to look at their accounts, also.

What we have turned up so far, though, is not very encouraging
that taxpayer dollars are being prudently monitored to make sure
they are being spent properly. We have seen progress, as I said
earlier, in the Department of Defense after several years of work-
ing with them, and that is the biggest single account, of course, but
we want the same kind of improvement to be exhibited in other
agencies, also.

We are pleased that the agencies here this morning are willing
to acknowledge their problems and to take corrective action seri-
ously. We look forward to working with them to improve their



stewardship over Federal funds and to realize the intent of the
CFO Act to improve the Government's management.

Finally, let me introduce our witnesses here this morning. On
our first panel we have Gene Dodaro, the Assistant Comptroller
General of the General Accounting Office, who directed the audits
of the IRS and Customs; John Payne, the Assistant Inspector Gen-
eral for Audit of the State Department; Patrick E. McFarland, the
Inspector General of OPM. That is all on our first panel.

Our second panel includes Morgan Kinghorn, the CFO of IRS;
Vincette Goerl, the CFO of the Customs Service; Larry Eisenhart,
the Acting CFO of the State Department; and William E. Flynn III,
Assistant Director for Financial Control and Management of the
Retirement and Insurance Group at OPM and, until last month,
the head of that group's Financial Control and Management Divi-
sion.

So we welcome all of you this morning and, Mr. Dodaro, if you
would lead off this morning, we would appreciate it. If you have
lengthier statements and wish to give an abridged version of them,
a shortened version, that will be fine. All of witnesses' lengthy
statements this morning will be included in the record as though
delivered.

Mr. Dodaro, if you will lead off, we would appreciate it.

TESTIMONY OF GENE L. DODARO, 1 ASSISTANT COMPTROLLER
GENERAL, ACCOUNTING AND INFORMATION MANAGEMENT
DIVISION, U.S. GENERAL ACCOUNTING OFFICE, ACCOM-
PANIED BY GREG HOLLOWAY, DIRECTOR, CDTIL AUDITS, U.S.
GENERAL ACCOUNTING OFFICE

Mr. DODARO. Thank you, Mr. Chairman, and good morning. We
are pleased to be here today to discuss the progress of the Internal
Revenue Service and the Customs Service in implementing the
Chief Financial Officers Act. With me, to my right, is Mr. Greg
Holloway, our director in charge of this work.

I will highlight the results of our fiscal 1993 audits and discuss
the short-term actions needed by IRS and Customs to continue
making progress in addressing serious financial management prob-
lems.

For fiscal year 1993, we were again unable to provide opinions
on IRS and Customs financial statements because of serious prob-
lems that have not yet been resolved. However, we did find that
the CFO Act has prompted significant improvements of financial
management operations at both agencies, as you mentioned in your
opening statement.

For example, Customs has begun a program of random inspec-
tions to reliably measure compliance with trade laws. After testing
a limited number of goods in 1993, Customs expanded the program
during 1994 and plans national coverage for 1995. Both IRS and
Customs developed methodologies for more accurately reporting
their collectible accounts receivable, which totaled $29 billion and
$900 million, respectively, at the end of 1993.

In addition, Customs collected about $32 million of old receiv-
ables as a result of improved debt collection procedures that ema-



1 The prepared statement of Mr. Dodaro appears on page 53.



nated from our audit. Customs conducted the first Nationwide
physical inventory of its seized assets, which include thousands of
pounds of drugs and millions in cash. IRS and Customs also con-
ducted physical inventories of their fixed assets, which should pro-
vide better accountability and make sure that those assets are
more efficiently measured. This progress was achieved, in part, be-
cause IRS and Customs both demonstrated a sincere commitment
toward developing reliable information.

Despite these efforts, serious accounting and internal control de-
ficiencies remain. These problems diminished IRS' and Customs'
ability to carry out their revenue collection and compliance mis-
sions efficiently and effectively. Neither IRS or Customs, for exam-
ple, could reasonably ensure that all revenues due to the Federal
Government were identified so that collection could be pursued. Al-
though the two agencies had implemented programs for estimating
compliance with trade and tax laws, IRS relied on data that was
too old to be meaningful and the Customs program covered only a
limited segment of trade activity during 1993.

Programs to reliably estimate compliance are needed because the
volume of tax returns and import shipments is too great to exam-
ine each return or shipment to be individually audited and in-
spected. By determining compliance levels, each agency can better
decide how to make use of its 72 resources and implement the most
cost-effective controls. Neither IRS or Customs had yet imple-
mented controls that adequately ensure that all revenue is col-
lected, all refunds are appropriate, and that erroneous or fraudu-
lent information is detected.

Some of our major findings are as follows. First, due to limita-
tions in IRS' ability to match tax return data with information pro-
vided by third parties, it is not identifying many erroneous or
fraudulent tax returns and is experiencing significant delays in
identifying others. Such delays diminish the likelihood that IRS
will fully collect all amounts owed by taxpayers.

Second, IRS controls over the Federal tax deposit payments,
which is the source of most of the Government's revenues, did not
ensure that these payments were properly applied to the appro-
priate taxpayer accounts. In fiscal year 1993, IRS corrected about
2 million misapplied tax deposit payments totaling $30 billion.
Such errors can result in inaccurate distribution of funds, unneces-
sary contact with the taxpayer, and time-consuming resolution ef-
forts.

Third, IRS did not have adequate procedures to effectively iden-
tify erroneous or fraudulent claims for earned income credits,
which totaled over $9 billion for fiscal year 1993. IRS estimates
that as much as 25 percent of these credits filed in fiscal year 1994
will be improper due to taxpayer error or fraud.

Fourth, Customs could not reasonably ensure that all import du-
ties were declared on import documents and that only those goods
approved for release were entered into U.S. commerce. Customs
had no agency-wide requirements for observing the unloading of
carriers and determining that related documents were complete.
Customs also did not adequately monitor the goods that were
moved to other ports prior to their release or export.



Fifth, IRS continued to improperly calculate interest on taxpayer
accounts not subject to automatic calculation. Interest was cal-
culated improperly for a third of such transactions that we tested.

Sixth, neither IRS or Customs could reasonably ensure that all
refunds were proper. For example, IRS sent a manual refund for
over $2.3 million that incorrectly included approximately $400,000
because IRS entered the interest amount incorrectly. Customs also
could not reasonably detect and prevent duplicate and excessive re-
funds of duties referred to as drawbacks. This occurred because
Customs' automated system could not link drawback claims to re-
lated import entries and maintain a cumulative record of the
amount of duties that were refunded and goods exported or de-
stroyed for each entry. As a result, Customs processed thousands
of claims totaling $482 million using cumbersome and inadequate
manual procedures.

In addition to deficiencies affecting revenue collections, IRS and
Customs also do not yet have reliable controls to protect and ac-
count for their assets. For example, in February 1994 Customs
inventoried its seized assets and identified many significant errors,
including records showing that over 51,000 pounds of cocaine and
over 65,000 pounds of marijuana could not be initially located. Ad-
ditionally, thousands of pounds of drugs held had not been recorded
in the inventory records.

Customs also needs to continue strengthening security at facili-
ties that store seized assets. In fiscal year 1993, despite improve-
ments, we still identified fiscal safeguard weaknesses at 20 of the
21 facilities we visited. Further, we found that drugs used in un-
dercover operations were sometimes lost due to inadequate surveil-
lance procedures, and that losses from undercover operations were
not routinely accounted for and reported. For example, one region
did not properly account for a 660-pound cocaine seizure that was
being used in an undercover operation, half of which was ulti-
mately lost.

Also, neither IRS or Customs adequately protected sensitive com-
puterized information. This includes taxpayer records, import in-
spection criteria, and law enforcement data. Neither agency had
adequately restricted access to data files or implemented proce-
dures for monitoring users' activities. Such weaknesses are ex-
tremely serious because they clearly jeopardize the security and re-
liability of the operations that are central to IRS and Customs mis-


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Online LibraryUnited States. Congress. Senate. Committee on GoveFinancial problems : are the agencies getting better? : hearing before the Committee on Governmental Affairs, United States Senate, One Hundred Third Congress, second session, July 28, 1994 → online text (page 1 of 18)