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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in estimates in weights, the truth of the matter is you don't really
know what actually happened to all of it. I mean, to have an inven-
tory of drugs when you make estimates, or the reason given as to
what happened to the difference being that an agent when it was
seized estimated it and you didn't count it, it would be like having
a store where you have no accurate inventory and then 1 day you
take an accurate inventory and you find out that your records are
off considerably and you start trying to figure out the reasons why.

Chairman GLENN. Has any sampling of those accounts been
done? You are talking about 20,000 pounds of seized drugs. Is that
it, 20,000 pounds?

Mr. HOLLOWAY. That is correct.

Chairman Glenn. Have we sampled that to know — is there any
estimate of how much of that is missing or unaccounted for now?

Mr. Holloway. Well, that is what I guess we are trying to say.
As a result of the inventory that Customs took on February 15,
what we found was a difference in what was inventoried and what
was on their records and what was supposed to have been there of
more than 20,000 pounds.

Chairman Glenn. The difference was 20,000 pounds?

Mr. Holloway. Right; there was a difference of 20,000 pounds.

Chairman Glenn. You are not talking about a total that their
original estimates were. This is a difference in account of 20,000
pounds, is that correct?

Mr. Dodaro. Right; that is correct.

Mr. Holloway. That is correct.


Mr. DODARO. That is correct, and what we are trying to advocate
is that they do these reconciliations more frequently, Senator, to
make sure that then if they find a discrepancy, they can inves-
tigate it in time.

Chairman Glenn. 20,000 pounds; a difference on what total?

Mr. Holloway. Well, you are talking about almost a 25-percent
variance. Basically, the total inventoried amount was 99,000
pounds, and we are talking about cocaine, hashish, heroin, mari-
juana, and opium. The amount in their records was 121,000
pounds. That is what their accounting records say should have
been there.

Chairman GLENN. Well, what you could lay your hands on?

Mr. Holloway. What you could lay your hands on was about
99,000 pounds.

Chairman Glenn. So we have 10 tons of drugs missing?

Mr. Holloway. You have got a lot of drugs missing, but I think
in fairness to Customs, their explanation for that was that agents
at the point the seizures occurred made estimates, and unfortu-
nately, for whatever the reasons were, their records didn't get up-
dated at whatever point the drugs were subsequently weighed. The
difficulty of that is when you start talking about quantities on that
order, it is difficult to really judge what actually occurred.

Chairman Glenn. I can understand that. If somebody is picking
up bags of drugs out in the field some place, there may be a vari-
ation in estimates. But, surely, when somebody checks it in, it
should be weighed and an accurate record kept. That is not being
done yet, is that right?

Mr. Dodaro. Right.

Mr. Holloway. I think what we basically found is that a lot of
times procedures were not followed. Procedures were in place and
they weren't always followed. Sometimes, there were justifiable
reasons, but even on the switching of weights, not that I profess
to be a drug expert, but certainly there are some drugs that don't —
how shall I say it — allow themselves for shrinkage. Whereas in a
case like marijuana elements could affect it and cause it to shrink
over time, when you start talking about something like cocaine,
and that is principally where the big differences were, at most, I
think most reasonable experts would suggest that you might pick
up weight, but you wouldn't lose weight.

Chairman Glenn. I don't want to take all of our hearing just on
this one item, but have they run checks to see whether they think
that missing 10 tons, or whatever it is, got back into the drug trade
or not, or whether this is just an accounting problem of it not being
weighed and properly put on the manifest?

Mr. Holloway. I think, Senator Glenn, that is the problem with
not knowing. You just don't know. I think certainly one could argue
that you could say, yes, that is what it is, but you could equally
argue that somebody took some of the drugs, and I suspect the
right answer is probably somewhere in the middle.

Chairman Glenn. Mr. Payne, your office didn't complete the fis-
cal 1992—1992 now, not 1993, but 1992— audit of State's Foreign
Service Retirement and Disability Fund until May of 1994, and
then you issued a disclaimer. You still haven't completed the fiscal
1993 audit for the Retirement Fund. That was supposed to be done


by the end of June. You mentioned some problems, and it is very
complex getting these things straightened out. Why is it taking so

Mr. Payne. Well, the basic problem, I guess, is the condition of
the subsidiary records that the Department maintained for the
fund were in such bad condition that we are trying to reconstruct,
or the Department is trying to reconstruct those records and get to
a point where those records can be relied on as an accurate rep-
resentation of the balance of the fund.

Again, the Department has made some progress in that area. We
think we can see the light at the end of the tunnel on the Foreign
Service Retirement and Disability Fund, but it has had to come a
long way. Basically, as I mentioned earlier, the Department was
just relying on the reported balance from Treasury and its subsidi-
ary records were not in the condition that we could rely on.

Chairman Glenn. Your testimony reveals that the Foreign Serv-
ice Retirement and Disability Fund is being used by the State De-
partment to pay for Foreign Service national buyouts and for sup-
plemental annuities to presumably retired Foreign Service national
personnel. Is that legal to do that?

Mr. Payne. No, sir, it was not appropriate to make those dis-
bursements from the Foreign Service Retirement and Disability

Chairman GLENN. Has that been corrected?

Mr. PAYNE. It is in the process of being — it has been stopped. It
is in the process of being corrected and the Foreign Service Retire-
ment and Disability Fund is being replenished from the salaries
and expenses accounts. This was a situation where apparently, for
convenience, the individual who was making the disbursements
used a procedure which he was aware of, which was with the For-
eign Service Retirement and Disability Fund instead of getting an-
other account and handling it in a proper way.

Chairman Glenn. How much money is involved with that? Do
you know?

Mr. Payne. Well, I believe there was somewhere in the neighbor-
hood of a little over $5 million originally, but I believe that has
been now corrected and the current amount is around $700,000, I

Chairman Glenn. So we are correcting the procedure. Is there
any way we get that erroneously paid money back?

Mr. Payne. Yes. We are replenishing the Foreign Service Retire-
ment and Disability Fund from other salaries and expenses appro-

Chairman Glenn. OK. I am not sure I agreed with your state-
ment before when you were making your formal statement that be-
cause we have problems with the accounting, we should go to ac-
counting every other year. I don't know how much stock you own
in major companies or mutual funds, but if their books were so
fouled up that they couldn't tell you what they had or what the ac-
counts were and so instead of correcting the problem they went to
every-other-year accounting, I don't think you would invest much
of your own personal money in those businesses.
Mr. Payne. I said I made that statement reluctantly. [Laughter.]


Chairman Glenn. If that was a suggestion as to how the agency
might operate, you might want to withdraw it reluctantly, also, be-
cause I just think we ought to correct this. It points up the prob-
lems that we have. Now, let me turn around and put my hat on
backwards and say part of that comes back to Congress, too, on
providing money enough to do the things that the CFOs and the
IGs have to do.

I am the biggest supporter of IGs and CFOs on Capitol Hill, I
can guarantee you, and we are fighting to keep money in. We are
fighting to keep money in for the IRS, not get the $400 million cut
that I think was very stupid that the conference committee was
working on, and things like that. So we are trying to support you
here on Capitol Hill. But on the other hand, we are certainly very
slow getting these things straightened out, slower than I think we
should be, and we have to show results for what we are sending

You wanted to make a comment?

Mr. Payne. Well, there were two parts to that. First of all, skip-
ping a year would be a process where if there are not those serious
problems that you mentioned with the lack of accountability — if we
get to the point where we are giving unqualified statements year
and after year and the records apparently are pretty clean, we be-
lieve one option might be to consider skipping a year, rolling 2
years or 3 years into one at some point down the road.

Admittedly, it is less convincing of an argument when there are
still major problems that are still being corrected, but we find our-
selves in the case of some of these major problems in the State De-
partment tramping over the same ground year after year while the
Department is trying to fix the problems and we are auditing the
problems again and reporting on them.

Mr. Dodaro. Senator, could I add something to that?

Chairman Glenn. Sure.

Mr. DODARO. We have had a lot of experience with financial au-
dits, some dating back to Government corporations that we have
been auditing for 30 years. I think the suggestions that Mr. Payne
has made would be a prescription for business as usual. Skipping
years, even with a series of unqualified opinions, circumstances
change and the agencies' control procedures become lax. I think
without the annual discipline imposed by a financial audit, we are
never going to see the Federal Government become the fiscal custo-
dian of the tax revenues that we all want it to be.

Mr. Holloway. To add to that, Senator, I think your point hits
to the heart of the matter and it becomes a question of accountabil-
ity. You know, back when the stock market crashed and all of the
Securities and Exchange Act laws were passed, they were passed
because there wasn't enough information out there for people to
make reasonable judgments about where to invest their money.

I think it would be a disastrous mistake to hold the Government,
who is the holder of all of our monies, less accountable than anyone
else, and I think that it is just a necessary thing and to really exer-
cise oversight you have got to have it.

Chairman Glenn. Good try, Mr. Payne, anyway. [Laughter.]

Mr. Payne. May I make one final comment in my defense?


Chairman Glenn. Are you sure you don't want to reconsider be-
fore you state it?

Mr. Payne. We are talking priorities. We are talking about using
some of our resources in some other aspects of the rollup fund, or
whatever. That is the only point I want to make. I am not in any
way trying to downgrade the importance or the significance of the
financial statements and the financial statement audits. We believe
in those; we think they are great tools for moving us toward better
financial management. I am not in any way trying to denigrate


Chairman Glenn. I understood that, and I understood you are
not trying to get anybody off the hook or trying to opt for a less
accountable system. I understood that. You have got limited re-
sources and what you have a problem with is you don't have an
auditable account, and yet you are going right back into the same
figures for the next year's report.

Either State has to really put some resources in to bring things
up to snuff, bring things up to accountability, or ask for more and
put it in next year's budget. The OMB budget, I am sure, for next
year is in its formative stages right now, and if you have problems
over there we ought to be making representations on your behalf
to get enough money to do the job. We will save far more than that
little additional cost. I can guarantee you that in the long run, all
of you, so now is the time to be getting those requests in for next

We have these hearings and we are getting into more and more
detail every year, and every year we say, well, we don't have re-
sources and we ought to prioritize. Well, that is up to you to
prioritize or ask for them. I know that Leon Panetta, now White
House Chief of Staff until recently head of OMB, is very sensitive
to this. I have already talked to Alice Rivlin, who is our new OMB
Director and will be before us for her new confirmation hearing in
a short time. I already have talked to her about the adequate re-
sources to do some of these things, so we are trying to back you
up here on whatever your requirements are. You certainly don't
have excess money over there and are not wasting money. You
don't have enough to do the job you are doing and we are trying
to help you in that area.

Mr. McFarland, GAO has indicated your office has not been able
to attain its goal of auditing health benefit carriers every 3 to 5
years. In fact, the audit cycle is closer to 11 years, as I understand
it. As a result, many carrier expenditures cannot be audited before
the carrier records are destroyed. It runs beyond the time they are
required to keep their records.

Are you losing a lot of money on that? Did I state it correctly?

Mr. McFarland. Yes, Mr. Chairman, you did. That is a material
weakness in our own shop that we have listed in conjunction and
concert with the GAO. The situation is this, primarily: we have
asked all along for resources to be able to do more audits on a more
regular basis because we do lose a lot of auditable years under the
present circumstances. We have been given resources to some de-
gree, but by the same token, as you are well aware, we have other
obligations, such as the administrative sanctions program which
we have taken over, where we had to use some of our employees


for that purpose. We have a financial operations audits branch
which has 10 people in it and shortly will have a couple more.

We have taken some of the resources that we would ordinarily
have attempted to use for the audit cycle in order to meet some of
the legislatively mandated requirements that our office has. So I
am not complaining. I am simply saying that we continue to ask
for resources. We think we have been very effective and efficient
in the resource allocation within our own office, but we have simply
reached a point where we can't transfer any particular person to
a certain responsibility because of the expertise needed. But we
think that we have done as adequate a job as possible to cover as
much of our responsibility as we have. That is absolutely a major
concern of ours, is the audit cycle.

Chairman Glenn. Is one problem in CFO at OPM that they have
never really fully staffed the CFO office? It has been a long time

Mr. McFarland. No, I don't believe that it is a particular prob-
lem with the staffing. I think it is the prioritizing of work within
the office of the Chief Financial Officer that is more pertinent to
our concern. Presently, they have approximately 50 employees. One
of its divisions works with the entitlement programs that we have
reported on primarily in our testimony; that is, the health benefits
program, the retirement programs, and the life insurance program.

Chairman Glenn. Well, OPM has never fully staffed its CFO of-
fice. The Deputy CFO position, which is actually the workhorse po-
sition, has always been filled in an acting capacity, and the CFO
position has been empty since December 1993. In a recent meeting,
you told us, I believe, that OPM had decided in March of 1994 to
not fill the CFO position and continue operating with an acting
CFO. However, after our hearing invitation was issued, OPM an-
nounced the selection of Mr. Seaux as the CFO effective 1 August.

When the CFO Act was passed, OPM chose to not give the CFO
direct authority over the Retirement and Insurance Group's budget
and the financial management functions, and that is big money.

Mr. McFarland. That is correct.

Chairman Glenn. There is like $150 billion, or something like
that, involved in that one, I think. Is that correct, or more than
that, maybe?

Mr. McFarland. Well, if we want to look at the total assets, we
are speaking $345 billion.

Chairman Glenn. Instead, what was done was a controller posi-
tion was established in the group with a dotted line arrangement
because the CFO staff has minimal oversight of the entitlement
programs and minimal involvement in the group's financial state-
ment preparation and financial systems development. As I under-
stand, the CFO received the Retirement and Insurance Group 1993
financial statements the same time the IG did. Clearly, the CFO
could not have been closely involved in the statement preparation.

Is OPM, in your opinion, now moving to really put an effective
CFO in, rather than giving lip service to it and leaving the old
lines of authority exactly where they were?

Mr. McFarland. Well, I certainly hope that the new person com-
ing in is going to be strong and aggressive. We will certainly do our
part to make sure that he has all of the tools that we can provide.


But I think everything that you said was absolutely correct. If any-
thing, I think that the lack of a deputy pretty much indicates what
has been the situation at OPM, and that is simply that that par-
ticular office has not had the strength, and has not had the author-
ity, by any stretch of the imagination that it should have had.

We find that the Retirement and Insurance Group, because of
the value of the role that they perform and the benefits that they
provide, is very strong in their influence, and I think that is prob-
ably the last thing that they have wanted to do — hopefully that is
going to change — is separate any of their functions and give up any

As you have noted, we recommended numerous times that this
authority be transferred, not necessarily people, but transferred in
the realm of systems, of total authority, of philosophy, and make
it happen rather than continue the Retirement and Insurance
Group doing their own thing and the Office of Chief Financial Offi-
cer having 4 people out of 50 to work with a program that is monu-

Chairman Glenn. It is monumental, it is huge. In another relat-
ed field, we have all sorts of proposals under the health reform pro-
posals here on the Hill now. One is take the Federal Employees
Health Benefits Program, FEHBP, and expand that to include non-
Federal workers in various ways. There are various plans as to
how that would be done.

I would presume that if you had to audit those accounts, too,
over there, or the CFO did and you had to monitor that, that would
be an enormous new job that would require additional people and
resources. Is that correct?

Mr. McFARLAND. Well, there is no question, Mr. Chairman, it
would be a tremendous job. There is no question, also, that it
would require more people, more money.

Chairman Glenn. Mr. Payne, you said it would be years before
you can audit the so-called rollup statement. That accounts for
about 60 percent of State's budget, is that right?

Mr. Payne. Yes, sir.

Chairman GLENN. That is your major account. I understand it is
easier to audit the smaller funds, but I am concerned that the large
accounts — for example, salaries and building maintenance ex-
penses — where the big problems are likely to be might be at risk
until fiscal 1997, which is what you have said is going to be the
target date, I believe, for getting that rollup account finished. Is
that right?

Mr. Payne. Yes, sir.

Chairman Glenn. Now, as I understand it, your office has dedi-
cated a fairly small number of staff, about 10 people, in 1993 to
perform the CFO audits, overall. Is that all you have available for
that? It seems to me that is a very small number of people for the
amount of work that is involved with these accounts.

Mr. Payne. Well, we have done the full audit of the International
Boundary and Water Commission and the Foreign Service Retire-
ment and Disability Fund accounts. The approach that we are tak-
ing with the rollup account is try to cycle through that account over
a period of years, concentrating on individual elements. Hopefully,
starting in 1994, we will be doing some of the larger elements that


you mentioned, like the property, and so forth. Our plan is to cycle
through some of the larger elements on a cyclical basis until such
time as the Department delivers a full auditable rollup statement.

Chairman Glenn. I will ask you about the same thing I was ask-
ing Mr. McFarland over here about. Has State had a problem real-
ly accepting the realities of the CFO Act and getting somebody in
there? For instance, for over YVi years, State has had either a va-
cancy in that CFO position or someone serving in an acting capac-
ity. The absence of a confirmed CFO is counterproductive to better
financial management. Not only that, but they are ignoring the re-
quirements of law if we don't get with this thing and start going
with it.

What is your opinion of that? Have they given enough attention
to the CFO Act? Are they taking it seriously now, I guess would
be the first question.

Mr. Payne. I think any time an office as important as the Chief
Financial Officer is allowed to remain vacant for an extended pe-
riod of time, it has to be detrimental to the operations of that of-
fice. We now have, I believe, a candidate who has been put forward
and has been accepted. I don't think there has been a vote yet, but
I think we are looking at having a CFO in place very shortly.

Organizationally, however, we do not believe there are any seri-
ous organizational impediments to the structure that is set up
within the State Department. The CFO has access to the Secretary
on financial matters and reports to the Under Secretary for Man-

There were some major realignments under the CFO Act when
the Act was passed, bringing some of the major financial manage-
ment activities under the CFO. They had not historically been
under the controller or the financial management group. We see
relatively few problems with the organizational structure and the
placement and the authority of the CFO.

Chairman Glenn. Are you satisfied with it now, because I know
you had been critical of that before? As I understand it, the recent
reorganization placed all accounting and payroll systems, including
overseas posts, under the CFO, and that is something you had rec-
ommended in the past, I believe. Are you satisfied with the reorga-
nization now?

Mr. Payne. Yes, sir. Until the reorganization, the major overseas
financial management activities — what State refers to as the re-
gional administrative management centers, and there are three,
one in Paris, one in Bangkok, and one in Mexico City. Those had
not been under the financial management organization, the control-
ler's organization, in the State Department, and it was a major dis-
connect. We had advocated that there be more alignment of those
capabilities under the financial management officials, and that was
accomplished under the CFO Act.

Chairman Glenn. They are making some progress, anyway.

Mr. Payne. Yes, sir.

Chairman Glenn. All right. Mr. McFarland, back to you again
just for a moment. As I understand it, the big trust funds are still
not under CFO control at OPM. Is that correct?

Mr. McFarland. That is correct.

Chairman Glenn. They are still being held out separately?


Mr. McFarland. That is correct, sir.

Chairman Glenn. You sent a letter, I believe, in August 1993,
almost a year ago, a memorandum to the OPM Director that rec-
ommended giving the CFO more authority and direct responsibility
for financial management. Have you received an answer to that let-

Mr. McFarland. Yes, we did receive an answer, and they gave
their reasons why they thought that it was imperative that those
functions remain within their control, and it is simply totally in
contrast to our feelings.

Chairman Glenn. What were the main reasons outside of just
not wanting to change? I understand that the toughest thing in the
Federal Government is getting anybody to change the way they
have been doing business in the past. That is what we are doing

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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 3 of 18)