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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sions.

We have made a number of recommendations to correct the defi-
ciencies that we have found. IRS and Customs have many efforts
underway, but many actions are not yet complete. Of the 44 rec-
ommendations we made to IRS last year, only 4 have been com-
pleted. Similarly, of the 54 recommendations we made to Customs,
11 have been completed.

While long-term efforts are valid and have good potential, many
of these problems can be addressed immediately by better manage-
ment and by placing a higher priority on enforcing existing policies.
For example, neither IRS or Customs completed routine reconcili-
ations of accounting data. This basic step would have significantly
reduced discrepancies and improved the reliability of reported in-
formation. Moreover, better training and supervision are essential.



8

Other problems require new controls that can be implemented
soon, some within a matter of months. For example, now that Cus-
toms has taken an inventory to improve the reliability of its seized
asset records, it is essential that it develop and implement proce-
dures to ensure that the records are kept current and accurate.
Also, Customs has taken significant steps recently since May to im-
prove its computer security, and other actions are expected to be
completed within 9 months.

In yet other cases, relatively short-term interim improvements,
such as minor systems enhancements and procedural modifications,
can be developed until longer-term system development efforts are
put in place. For example, IRS has for years been considering many
changes to the way it processes billions of dollars in Federal tax
deposit payments from businesses. While fundamental changes are
needed, a significant reduction in errors, we believe, could be
achieved in the interim by redesigning the tax deposit form to cap-
ture more complete data on payments.

There are other problems for which quick fixes are not apparent.
These require major systems modernization efforts. In addition,
both agencies need to continue to build more experienced and
qualified CFO organizations. Much can be accomplished quickly,
however, with a better focus on accounting fundamentals and a
sense of urgency to implement short-term corrective measures.

Mr. Chairman, this concludes my statement. I will be glad later
to respond to any questions you may have.

Chairman Glenn. Thank you very much. We will have all the
statements first.

Mr. Payne, assistant Inspector General for audit of the Depart-
ment of State?

TESTIMONY OF JOHN C. PAYNE, 1 ACTING INSPECTOR
GENERAL, DEPARTMENT OF STATE

Mr. Payne. Thank you, Mr. Chairman. As you suggested, I will
give a very brief summary of my prepared statement. Before I do,
I would like to acknowledge several of my colleagues, if I could,
who have been doing some very hard, very good work in financial
management over the last few years in an area that, as you men-
tioned, often doesn't draw the kind of attention that some of our
other work does. John Deering is the Division Director for the Fi-
nancial Management Audit Division, and Arnold Lee and Eileen
Angle are audit managers in that division.

As you mentioned, the Department has openly acknowledged se-
rious deficiencies in its financial management and internal control
systems, and is working to correct problems which have plagued it
for years, but the Department faces a serious challenge. It has 3
accounting systems, 4 disbursing systems, 3 payroll systems, and
more than 40 additional support and subsidiary systems. For more
than a decade, these systems have been criticized by my office and
the GAO and they are currently on the OMB's list of high-risk
areas.

Among other things, we have reported millions of dollars in dis-
bursements not properly recorded, and that the financial statement



1 The prepared statement of Mr. Payne appears on page 62.



covering about 60 percent of the Department's budget is
unauditable, as you mentioned. GAO has said that the Depart-
ment's systems are not integrated or adequately documented, are
inadequately controlled, and do not meet applicable accounting re-
quirements. While that may sound like a bleak assessment of the
Department's financial management, nonetheless we believe that
progress is being made.

The Department prepares three financial statements, one for the
International Boundary and Water Commission, one for the For-
eign Service Retirement and Disability Fund, and a rollup fund
which covers commercial activities, revolving, and trust funds.

As with other IG organizations, our approach to auditing finan-
cial statements has been to use a combination of in-house and CPA
firm staff under contract. The audits have been guided by the De-
partment's production of financial statements and the availability
of our resources. During the first year, which was fiscal 1992, we
audited only the fiscal 1991 working capital fund statement. The
Department obtained a waiver from OMB for the other statements.
In fiscal 1992 and 1993, we used OIG staff to audit the Foreign
Service Retirement and Disability Fund, and we contracted with a
CPA firm to audit the International Boundary and Water Commis-
sion statements.

The Department has not yet issued auditable financial state-
ments for the rollup fund due to the poor condition of its records,
lack of subsidiary records, and lack of supporting documentation.
As you mentioned, the fund covers about 60 percent of the Depart-
ment's $5 billion budget, and also includes almost all of the Depart-
ment's real and personal property. The fund is made up of eight
separate elements, ranging from small gift funds to the Depart-
ment's real property acquisition and construction appropriation.

The Department estimates, and we agree, that it will be at least
several years, probably fiscal 1996, before an auditable set of state-
ments is produced. Until that point is reached, we intend to use an
incremental approach for auditing the fund. This approach breaks
the fund into smaller segments instead of auditing the entire state-
ment. The segments selected for review are thoroughly examined
for accuracy, internal control weaknesses, and noncompliance with
laws and regulations. We have discussed this approach with this
Committee staff, with OMB's Office of Financial Management, and
the Department.

Since the passage of the CFO Act, through fiscal 1994 we will
have used about 17 staff years and spent about $530,000 in travel
and contract funds to audit the Department's financial statements.
We received no additional resources in either our fiscal 1993 or
1994 appropriation to perform this work. Therefore, we did not re-
quest any additional resources in our fiscal year 1995 budget sub-
mission.

We have been shifting, and will continue to shift resources from
our performance audits to meet the CFO Act requirements. How-
ever, when the Department is able to deliver reliable rollup fund
financial statements, additional resources will be necessary because
we estimate that over 20 percent of our current audit staff will be
needed to audit these statements.



10

Briefly, I would like to highlight our financial statement audit re-
sults. The International Boundary and Water Commission is re-
sponsible for maintaining the border between Mexico and the Unit-
ed States, administering water allocations, and resolving water and
air pollution issues along the border. It owns land, dams, water
and erosion control facilities and structures, and power generation
equipment. It has a staff of 280, assets of about $240 million, and
annual appropriations totaling about $25.5 million.

The first financial statements to be prepared and audits were for
fiscal 1992. A disclaimer of opinion was necessary because of the
lack of documentation to support the valuation of real and personal
property owned by the Commission, particularly property obtained
or constructed prior to the 1930's. Through the efforts of our office,
the Commission, the CPA firm, and OMB, a methodology was de-
veloped using historical documentation, such as old Congressional
budget submissions, to establish property values when original
records did not exist or could not be found. As a result, the Com-
mission received an unqualified opinion for its fiscal 1993 financial
statements in April 1994. This achievement was possible through
the efforts of our staffs working together to resolve the documenta-
tion problem.

The Foreign Service Retirement and Disability Fund is a $6.7
billion trust fund which finances the Foreign Service equivalents of
the Civil Service Retirement and the Federal Employees Retire-
ment Systems. We have completed two financial statement audits
of the Fund

. We first audited the statements for fiscal 1992, and issued a
disclaimer of opinion in May 1994 primarily because we could not
independently determine the accuracy of the amount reported as
investments with Treasury, which accounts for about 99 percent of
the assets of the Fund.

We could not accept the amount reported by Treasury because
Treasury's OIG had not performed an audit since 1989, and we
could not rely on the Department's records because it accepted
what was reported by Treasury rather than maintaining its own
records.

Since the final fiscal year 1993 financial statements will not be
issued until later this month, we have not yet issued our audit re-
port. However, we have completed our audit work and intend to
issue another disclaimer of opinion, again, because of our inability
to determine the accuracy of the reported balance with Treasury.

On a positive note, however, the Department is making signifi-
cant progress in addressing the lack of subsidiary records for the
Fund. If it can establish a subsidiary ledger for the investment ac-
count, and we believe it can, at least a qualified opinion may be
possible for the fiscal 1994 statements and perhaps in subsequent
years an unqualified opinion may be issued.

As we have mentioned, the Department has not yet produced
auditable statements on the rollup fund. We have been, and will
continue to audit major segments of this entity. The fiscal 1993 ac-
tivities we are auditing include the Working Capital Fund, the
International Center, the Foreign Service Separation Liability
Trust Fund, and the Repatriation Loan Program.



11

In addition to our CFO work, we have conducted other audits
which address financial management and have an impact on the
accuracy of the information in the Department's financial state-
ments. Examples of these audits include reviews of the domestic
vendor payment process, accounts receivables collections and re-
porting, and obligation and liquidation process.

We have worked closely with the Department to identify proce-
dures and processes that will improve the quality of the financial
statements. In particular, we have tried to focus on steps that can
be taken in the near term, such as developing and implementing
procedures to ensure that all transactions are recorded accurately
and promptly, developing subsidiary records to support general
ledger accounts, establishing interfaces with existing administra-
tive systems that contain financial data, and providing additional
training on preparation of financial statements. The Department
has acted to implement many of our suggestions.

One of the questions posed to us was whether there are modifica-
tions we would like to see to the CFO Act. In view of the strength
of your opening statement, I am reluctant to mention this, but I
will anyway. We would like to suggest two changes based on our
experience to provide additional flexibility to the auditors and the
program staff.

First, we would like to be able to allow more time for the Depart-
ment to correct serious problems between audits. Currently, our
audit for one fiscal year is being completed as the audit for the
next fiscal year is beginning. The Department does not have time
to fix the problems identified by the audit and we find ourselves
auditing the same problems that were identified in the previous
year.

The Department and the OIG could negotiate a mutually accept-
able time frame for when the corrective actions will be substan-
tially complete before starting the next audit. In some cases, it will
only take a short time to correct problems, while others may take
several years.

Our second suggestion is to allow the OIG to forgo an annual
audit once the audited entity has demonstrated a proven track
record of unqualified opinions. In our judgment, if an unqualified
opinion is given for at least two consecutive years, an audit could
be omitted during the next year.

A final comment concerns the proposal in the Federal Financial
Management Act of 1993, which you mentioned, which requires
agency- wide audited financial statements by March 1, 1997. Only
a comment on this. We believe the requirement is too ambitious for
the Department of State to meet. As we have described, the De-
partment's current financial management system is not capable of
producing all of the currently required financial statements, much
less more encompassing agency-wide statements. Currently, the
Department is developing a financial management system that
should allow the preparation of agency-wide statements. However,
this system is not expected to be in place until 1997.

Mr. Chairman, this concludes my statement. I will be happy at
the end of the discussion to try to answer any questions you may
have.

Chairman Glenn. Thank you very much.



12

We will have the other statement from Pat McFarland, Inspector
General, Office of Personnel Management.

TESTIMONY OF PATRICK E. McFARLAND, 1 INSPECTOR GEN-
ERAL, OFFICE OF PERSONNEL MANAGEMENT, ACCOM-
PANIED BY ROBERT OWENS, CHIEF, FINANCIAL OPER-
ATIONS AUDITS BRANCH, OFFICE OF PERSONNEL MANAGE-
MENT

Mr. McFarland. Mr. Chairman and members of the Committee,
my name is Patrick E. McFarland. I am the Inspector General of
the Office of Personnel Management. I appreciate this opportunity
to discuss the implementation of the Chief Financial Officers Act
of 1990 at OPM. On my left is Mr. Robert Owens. He is the Chief
of the Financial Operations Audits Branch. He has done an abso-
lutely outstanding, exemplary job for our organization.

This is the third year my office has audited OPM's financial
statements under the CFO Act. We have not yet been able to per-
form full-scope audits of all of OPM's financial statements. In an
attempt to meet the Act's requirements, we have eliminated a sig-
nificant number of performance audits from our agenda and trans-
ferred available audit staff to the financial statements audits. In
doing so, unfortunately, we have had to sacrifice audits of problem
areas discovered in our earlier financial statement work, areas in
which we believe our work has an enormous potential to benefit
the trust fund programs.

Even with resource constraints, we have made great progress
over the last 3 years. To date, my office has audited and reported
on many of the major trust fund statements. We have also issued
reports on the benefits program internal control structures related
to the statements we audited and on compliance with laws and reg-
ulations directly affecting the financial statements. In addition, we
have performed some limited procedures on the revolving fund and
salaries and expenses account statements.

Our work has provided significant benefits to OPM. We have,
among other things, developed recommendations to increase the ef-
fectiveness of program financial operations that should result in
meaningful cost savings and reduction of risk of loss of program as-
sets. We have also used the experience we have gained in prior au-
dits to expand our advisory role to financial managers.

Our major audit findings have related to internal control weak-
nesses, most of which are longstanding and do not easily lend
themselves to quick fixes. I acknowledge that OPM has many sig-
nificant constraints that adversely impact the ability to fully ad-
dress the weaknesses we have found. There is no question that the
agency is in a period of declining resources, which requires man-
agement to prioritize a number of critical competing demands. Nev-
ertheless, we view the reality of declining resources as an indicator
of the need for improved efficiency.

OPM managers have agreed with the majority of our findings
and have included several of our reported concerns as material
weaknesses in the 1993 report to the President on OPM's compli-
ance with the Federal Managers Financial Integrity Act.



1 The prepared statement of Mr. McFarland appears on page 70.



13

There are two areas of concern that have impacted substantially
every area we have audited and are fundamental to the agency's
problems — lack of systems of integration, and lack of documented
policies and procedures. OPM managers have acknowledged these
areas of concern and have set some long-term goals for improve-
ment. However, we have seen little progress since our first audit.
These two pervasive problems are central contributors to essen-
tially every other internal control weakness that we have found.

Some other major areas of internal control weakness include debt
management, which is an area of weakness that was noted by this
office long before we began the financial statement audit process,
controls over employee withholdings and Federal agency contribu-
tions to the trust funds, transactions and balances between the
three benefits programs, and EDP system controls. I have provided
a more detailed discussion of these issues in the statement I sub-
mitted for the record.

As a result of our audit findings over the last 3 years, we have
come to the opinion that OPM's Chief Financial Officer's role rel-
ative to the trust fund programs is not as strong as intended by
the CFO Act. In our opinion, many of the weaknesses noted in our
audits may have been discovered by the OCFO in the course of rou-
tine business and could be dealt with more effectively through a
CFO with agency- wide authority for all such matters.

The Act's history makes it clear that its primary intent is for
agencies to consolidate budget, accounting, and financial manage-
ment under the agency's CFO. This concept has been reinforced by
comments included in the National Performance Review Report on
Improving Financial Management issued in September of 1993.

We believe it is time for OPM to reevaluate the degree of author-
ity and responsibility delegated to its CFO. In August of 1993, we
issued a memorandum to Director King containing several specific
recommendations that we believe, if implemented, will create with-
in OPM the type of financial environment and leadership the CFO
Act intended. They also have the potential to streamline agency fi-
nancial operations.

I believe the CFO Act has had a profound effect on the way the
Federal Government conducts its financial business. We view the
Act's requirements for annual audits as central to financial man-
agement reform throughout the Federal community. Maximum
benefit from implementation of the Act's requirements is a long-
term process that we, like many other agencies, are still striving
to achieve.

As with any long-term process of reform, the need for sustained
commitment by all the participants is vital to success. In order to
realize the full benefits sought through the CFO Act reform effort,
the executive branch and the Congress must provide the resources
needed to accomplish long-term objectives. I believe the changes
currently proposed to improve the Act's effectiveness are positive
and I do not have any additional changes to suggest at this time.

This concludes my prepared testimony.

Chairman Glenn. Thank you all.

Mr. Dodaro, the written testimony of IRS and Customs suggest
these agencies have made considerable progress in fixing issues re-



14

lated to their audits. Do you agree with their assessments on their
programs?

Mr. DODARO. We think they have made progress in three impor-
tant areas, Mr. Chairman. One is in better estimating statistically
the amounts of accounts receivable, both those that are valid and
those that are collectible. We also think that they have made
progress in establishing inventories and doing the physical count so
they have something to compare with. This is particularly impor-
tant in both agencies. So we have seen signs of progress.

They are also beginning to realize the benefits of having an ac-
tive compliance measurement program, which is very important in
order to determine in order to determine exactly how compliance
levels are being accomplished to target their resources effectively.
So we have seen progress in those areas. However, as I pointed out
in our statement, there is a long way to go. There is a number of
other very significant areas that we think they need to provide at-
tention to.

Mr. Holloway. Senator Glenn, one thing I might add to that is
I would probably describe IRS' and Customs' progress as a view of
cautious optimism. I think, certainly, they have made some; I
think, certainly, there are a lot of plans. My sense is, though, that
some of the things in the respective testimonies speak more to
things that are to come than things that have actually occurred.

Part of that is the time it takes to fix some of it and part of it
is just trying to understand what they mean, and I think that you
may want to explore just how far along some of those things are
that are talked about.

Chairman Glenn. All right, good.

Mr. Dodaro, regarding Customs' accountability over seized as-
sets, that has been a problem for a number of years, and the ac-
counting for what happens with the seized assets, and so on. Are
there other issues that we have not discussed but that we should
be aware of in that area?

Mr. Dodaro. In terms of accounting for seized assets, I think the
biggest thing would be to continue requiring the inventories and to
make sure that it remains a high priority area. I think one of the
reasons you haven't seen a lot of progress over the years is that
it hasn't been adequately a high priority.

For example, when we noted the physical security problems over
the seized assets, Customs really didn't, I think, really believe how
bad it was, and they went around and looked at some of the facili-
ties and then determined and developed action plans for physical
safeguarding of materials. So I think having routine procedures in
place for weighing, for example, drugs when drugs are seized and
having good accounting records in place and having good physical
security is important because right now the risk environment for
those seized assets is not adequately controlled.

Chairman Glenn. As I recall from reading some of the material
before the hearing, I think you said that at 20 out of 21 places
where they have stored assets the security was poor or was com-
pletely inadequate. Was that correct?

Mr. Dodaro. That is correct, Senator. It took them some time to
go around to the facilities to determine whether they needed to
construct new facilities or upgrade existing facilities. They now



15

have a plan in place and we are hopeful that they will execute it
properly over the next year or so.

Chairman Glenn. How much was the cocaine that was stolen,
350 pounds — was that it — out of one spot; 300-and-some pounds?

Mr. DODARO. Yes. In one case, they lost about half of that.

Chairman Glenn. And how was that? Somebody came in
through the roof, you said, so that was an outside theft. It wasn't
an internal loss?

Mr. DODARO. I am not sure.

Chairman GLENN. They broke in through a roof.

Mr. HOLLOWAY. That is correct. I think when you start talking
about theft and security on the seized property, really, in a very
simple way what you had at Customs — and I think Commissioner
Weiss is to be commended in the way that he has brought the need
to upgrade things to the forefront as a result of these audits, but
it was clear that many of the field personnel did not seem to take
as serious an approach to controlling the drugs once they were
seized.

What we found, to speak directly to your point, is in one case
there was over 300 pounds that were stolen. In another case, there
was a pretty large amount that got lost as a result of a surveillance
operation. But I think a more crucial issue to Customs' own man-
agement deals with just controlling the inventory once they have
it.

One of the things that we found, and we reported it in our re-
port, is that there were over 20,000 pounds of drugs that basi-
cally — though explained for the most part as being the difference


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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 2 of 18)