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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with the CFO Act, is really changing some things where there has
been inadequate financial management in the past.

Mr. McFarland. Exactly.

Chairman Glenn. What reasons were there for keeping it there
and not keeping it under the purview of the new CFO?

Mr. McFarland. Well, I think their answer to that, as you men-
tioned earlier, was the dotted line that was there. But as far as I
was concerned, or am concerned, it is primarily there in name only.
A good indication of the effect of the office of the Chief Financial
Officer is that most of the preparation for the 1991, 1992 and
1993 — the majority of preparation for the financial statement was
really done by the Retirement and Insurance Group. It was not
done by the Chief Financial Officer.

As the years went on, they did get more involved, such as in
1993. There is no question they are involved, but the extent to
which they are involved is absolutely minimal. Their primary rea-
sons, I think, go back to the fact that their claim was that the CFO
Act, in effect, did not mandate that all of these things take place.
As they referred to it, they assumed we had a hierarchal proposal
whereby it had to be a certain arrangement, and we did not pro-
pose that at all. We simply said give the authority to the Chief Fi-
nancial Officer and then tailor OPM's operation through any orga-
nizational change that is needed, but that simply has not hap-

Chairman Glenn. I am not too impressed, usually, with dotted
line on organizational charts. I don't know what legend they were
using when they put this together, but usually the dotted lines in-
dicate no authority. It is only a liaison or it is an advisory capacity,
or something like that. We certainly intended for the CFO to be put
in more than that status.

Senator Cochran.


Senator Cochran. I just have a very short statement to make
and to basically express the appreciation that I feel for the efforts
you are making to try to elevate the competence, if not the excel-
lence, of financial management throughout the Federal agencies
and departments. I think the Department of Defense story that has
been revealed in hearings before this Committee illustrates how
progress can be made, and change and reform can produce good re-


suits. The other departments and agencies we will talk about
today, I hope, will show us that progress is also being made else-
where in the Government in this area.

I think the Chief Financial Officers Act was a milestone in this
area, and the hearings have recognized the importance this Com-
mittee places on implementing that Act and making work. I am
hopeful that other agencies besides the two the GAO indicates have
made good progress — the Internal Revenue Service and Customs —
will follow those examples, and I hope our future hearings will
show that there are other successes that can be identified in other
agencies and departments of our Government. I am pleased to be
here today to say that, Mr. Chairman, and to commend you for
your efforts in this area.

Chairman Glenn. Thank you. I appreciate that.

Mr. Dodaro, would you comment on computer security? That
seems to come up in every one of these things as to what we are
doing and whether there is fraud as a result of illegal computer ac-
cess into these systems. It is something we have got to nip in the
bud as we move into design of new systems and move into new au-
thority for the CFOs, and so on.

We had it come up with the IRS in our hearing the other day
with some of the browsing and some actual fraudulent returns.
While the browsing got a lot of the public attention because that
is very titillating to think somebody is into your personal account —
a window peeping into your account, or whatever, but we have
really got to deal with this computer security system in all the de-
partments. That has come as an item with State, it has come up
as an item with OPM. Do you have any general comments or ways
to deal with this thing, or what you could suggest?

IRS has taken a very active role in this, and I was very com-
plimentary and feel very complimentary to Commissioner Richard-
son for what she is doing. She is on top of it, trying to move rapidly
in that area.

But on this computer security thing, would you comment on what
the status is and what you think we can do about it?

Mr. Dodaro. I think, Senator, it is a very serious issue in a num-
ber of agencies, and it has popped up, as you have noted. I think
part of the problem is that the computing environment is changing.
We are moving more to personal computers and not main frame
computers, where the controls are a little bit easier to put in place.

I think the agencies haven't given it sufficient thought in plan-
ning new modernization efforts. It typically takes a back seat to
production emphasis to try to get turn-around times with people.
I think that it hasn't been given adequate scrutiny. I think the au-
dits that we have been doing and other people have been doing are
bringing to light for the first time some problems that were totally
unaware to the agencies.

I know this was the case in the Customs Service. We met person-
ally with the Customs Commissioner, and initially they were very
shocked that they had this type of problem. So I think part of the
problem is a changing in the computing environment; not enough
priority, not enough management attention on it. I think security
issues haven't been a sufficient focus for management within the


We are planning to do much more work in this area. I think it
is going to be a growing concern across the Government as we try
to make information data bases more accessible to the public and
have exchange of information. So I think you put your finger on a
very important issue. I share your concern and we are going to de-
vote more of our resources to further exploring recommendations in
that area.

Chairman Glenn. OK, that is good. I won't ask for individual
comments. We are beginning to run a little short on time here.

Mr. Dodaro, in a different area, the accounts receivable that is
collectible by IRS — I mentioned in my opening statement that in
1991 that was estimated to be $18 billion. Now, that has gone up
to about $29 billion.

Do you have any suggestions of how IRS can better leverage its
resources so we can go after that $29 billion? That is a lot of money
and it is sitting out there collectible. This isn't the $130 or $140
that is the total owed, and a lot of it is involved with bankruptcies
and things like that. We were using the $18.6 figure last year.
That had gone up to $21, and now the latest figure we get just in
the last few days is we estimate it at $29 billion out there. Any
suggestions that you can give to her?

Mr. DODARO. Yes. What we have been working with them on is
trying to get reliable estimates, which they now have, so we have
a better idea collectively of how much money is out there. As you
indicated, it is up to $29 billion. What they haven't done yet is pro-
vide the detailed subsidiary records to be able to go back and find
out where that $29 billion really is and develop an effective strat-
egy for collecting it.

We have been very, very disappointed that IRS hasn't moved out
more in this area. It is something that we have brought to their
attention when we did the work 2 years ago and that we see some
movement in estimating better, but not developing the detailed
records necessary to effect the type of collection that you are talk-
ing about. So our recommendation is to get the detailed records
better in shape.

Chairman GLENN. A different estimate is that in your testimony
you said that $127 billion is in the so-called tax gap. That is dif-
ferent than exactly what is owed, but that is based on 1982 infor-
mation. Is that still valid at all or worth even making a note of,
because that is 12 years back?

Mr. Dodaro. Well, we think IRS, and we have made the same
point with Customs, needs more recent complete data to measure
compliance activities. You really don't have a good basis for assess-
ing how well your compliance activities are being conducted, nor do
we have a good basis for assessing IRS' and Customs' performance
in that regard. So we think that the age of the data is a big issue
that needs to be dealt with. There are plenty of statistical sampling
procedures that could be put in place to do this on an ongoing
basis. Customs and IRS are planning to do that. We are going to
encourage it and follow up to make sure that they continue to move
out in that activity.

Chairman Glenn. Mr. McFarland, you contracted out the audit
of actuarial estimates for the 1993 audits to a public accounting
firm with considerable expertise in that area. The auditor identi-


fied $54 billion worth of adjustments that need to be made to the
retirement fund liability calculation. This total fund, as I under-
stand it, is somewhere around $700 billion. But $54 billion, even
on a $700 billion base, is an awful lot of corrections. Why such
large adjustments; why are they necessary, just because we haven't
had good figures before, or what?

Mr. McFarland. Well, I think this goes a little to the heart of
the matter, Mr. Chairman, this particular case going back to 1992.
When we determined that it was $54 billion, we did bring that, of
course, to the attention of OPM. The feeling at that time was — and
I say this with some hesitancy inasmuch as I can't speak for what
I think their feelings were — but I will do my best, as I perceived
it — and that was that when we brought this to their attention we
saw this as just an oversight, an unbelievable mistake that could
be corrected. The feeling at OPM at that time was, we will correct
it, but we will correct it later because it is going to cause us a lot
of problems to correct it now.

Chairman Glenn. Has it not been corrected yet?

Mr. McFarland. It has been corrected. It was corrected shortly
thereafter, but the point that I am trying to make is that if we had
more strength in the Chief Financial Officer program area, we
wouldn't be relying that heavily on a particular program area that
is doing their customer service along with their financial manage-

The feeling that they would correct it later continued up until
the day when Mr. Owens' people stayed late — the night before our
opinion was due — just to make sure that we would get the latest
information — otherwise, we were going to give an adverse opinion.
I sent a memorandum to the director and it became apparent to
me, again from my perception, that had I not done that, probably
the program offices would not have discussed it with him. Once he
had my note, all of a sudden he became aware that we had the pos-
sibility of a $54 billion overstatement of liability. Shortly there-
after, in concert with the Office of the Chief Financial Officer, that
was corrected.

Chairman Glenn. How do you get $54 billion off? How did that
occur and over what period of time?

Mr. McFarland. Well, it occurred simply because the calcula-
tions that were used for the retirement program — they did not base
the calculations on the average salary for the high 3 years, but
rather on a particular year.

Chairman Glenn. Now, we are going to have to follow up on
this, obviously, and so are you going to have to contract that out
again to an independent agency or do you have resources to make
that estimate yourself in-house?

Mr. McFarland. No, we do not have resources to make that

Chairman Glenn. Do you plan to contract that out again?

Mr. MCFARLAND. Well, we planned to, but that is one of the
things we have had to give up this coming year.

Chairman Glenn. Yes, I know, and that is because of some of
the activities of this Committee. Some of the members of this Com-
mittee have gone into some of the contracting-out things and found
a lot of abuses in that area, too, so they have tightened up some
on this. I am sort of middle ground on this. I think we did need


to tighten up some on contracting out. On the other hand, if we
have to do that to get the information, then I am all for it. So I
am sort of caught in the middle here on this Committee on that.

Mr. McFarland. Well, we certainly feel it is absolutely impera-
tive that we have the actuarial service. We do not in our particular
organization have the expertise to do that. We do need to contract
out for it, but this coming year we are planning on giving that up.

Mr. Holloway. Senator Glenn, could I backtrack just to one
thing you mentioned because I think it really merits some consider-

Chairman Glenn. Yes.

Mr. Holloway. We talked a little bit about the progress IRS has
made in its computer area and I think it is certainly to be com-
mended, but I would certainly encourage you also to point to Cus-
toms as a place where they have really gotten after it. I think Com-
missioner Weiss and his team have done a tremendous job to shore
up the security issues that we raised at Customs, and I would not
want that overlooked. In terms of zealously going after something,
I would certainly encourage you to point to them and their efforts
in trying to do some of the fixes that they are trying to put in place
over there.

Chairman Glenn. We have backed every fix, I think, that there
is to back, and we can't always get the money for it. We got addi-
tional people at IRS 1 year and we did a lot of things in this area,
and so we have tried to work with them on this because I think
it is key to getting control of the whole situation.

Mr. McFarland, your audit report also indicates that OPM
doesn't have current documented policies and procedures. The last
time the job descriptions and SOPs, standard operating procedures,
were updated was some 15 years ago. Maybe they are completely
adequate. I don't know, but in looking at them, do you feel they
have to be upgraded or are they adequate the way they are?

Mr. McFarland. No, they are not the least bit adequate the way
they are. Some of them are as old as 15 years, and that is part and
parcel of the problem. That and the nonintegrated systems are the
primary concerns that we have.

Chairman Glenn. Senator Cochran, do you have any questions?

Senator Cochran. I just am encouraged by the conclusion in a
staff memorandum that we have here where it is observed that
both management and the inspector general need to focus more re-
sources on CFO financial management issues in order to make
meaningful progress over the next few years, but the underlying
conclusion also is that progress is being made. Customs, as Mr.
Holloway points out, has made some significant progress, and so
has IRS, in spite of the fact that there are still a lot of problems
and there are some glaring difficulties that we face as well.

But I think the encouraging thing is that the law that has set
forth the goals that we should reach is sound, and we need to con-
tinue to look to that for guidance and try to make sure through
oversight hearings of this kind that we mean business, that we are
not going to tolerate OPM or anybody else ignoring the importance
of compliance with the law. I think that ought to come through
loud and clear this morning as well.


Chairman Glenn. I concur with that completely, and I think I
will just telegraph my punch in advance on this. We passed this
in 1990. We have had these several years to get things in place —
CFO, the Financial Integrity Act, and all the rest of these things.
The CFO Act was passed in 1990, and I think now it is time for
us to start writing letters and expect replies back as to where are
the problems that we have seen in various departments in imple-
menting this, or lack of attention to them, and we want an answer
back as to exactly what is planned to come into compliance with
the law. It is that simple.

We want to see a plan for each agency that does not have a CFO
in place the way we envisioned it. We continue to rely to a large
extent on the IGs, with their reporting responsibilities not only to
their agency or department heads, but also to appropriate commit-
tees here on Capitol Hill.

We have the tools out there now to make a more efficient Gov-
ernment. Nobody believes that; they think efficiency in Govern-
ment is an oxymoron statement going in, and it is not. We take
that seriously, and you people are helping us carry this thing out
and I think it is time we started writing very pointed letters. We
have the backing of the White House through OMB backing us up
on these things. They are committed to that, and so I think we will
start pushing in that direction, too, in addition to just the hearings
we have.

We do have another panel. I appreciate your being here. We may
have additional questions for you after we have reviewed the
record. We would appreciate your early reply. Thank you very
much, gentlemen.

Our next panel is Morgan Kinghorn, the Chief Financial Officer
of the IRS; Vincette Goerl, Chief Financial Officer, U.S. Customs
Service; Larry Eisenhart, Acting Chief Financial Officer, Depart-
ment of State; and William E. Flynn III, Assistant Director for Fi-
nancial Control and Management, Retirement and Insurance
Group of OPM.

We welcome all of you to our hearing this morning. Mr.
Kinghorn, if you would lead off, we would appreciate it. We appre-
ciate your being here this morning, all of you. Without objection,
all of your statements will be included in the record as though de-
livered, and we look forward to your comments. Thank you.


Mr. Kinghorn. Thank you, Mr. Chairman, Mr. Cochran. Good
morning. I appreciate the opportunity to be with you today to dis-
cuss the Chief Financial Officers Act of 1990 and its contribution
to improved financial management, and the actions that we at IRS
are taking to continue successful implementation of the objectives
of the Act.

As a pilot agency under the CFO Act, IRS has had a unique op-
portunity over the last 3 years to closely examine its financial man-
agement structure and performance. The passage of the Act there-
fore provided further impetus for us to put forth our best efforts

1 The prepared statement of Mr. Kinghorn appears on page 74.


to improve financial management and provide full accountability to
the President, Congress, and the American people.

Mr. Chairman, I really do applaud your efforts to win passage of
this Act and maintain strong congressional oversight of its imple-
mentation. I have been called a grunt before, but never by a com-
mittee chairman, but I will wear it with a great deal of honor in
this case. This is extremely tough work.

The CFO Act requires Federal agencies to acknowledge account-
ability for the way we run our public enterprises. That accountabil-
ity, however, depends on whether we have information at hand for
our leaders to make informed decisions. Federal managers will not
be able to manage costs, adequately measure their performance, or
find ways to improve the way they do business if accurate, timely
information is not a routine product of our financial systems. That
is, I believe, the very heart of the CFO Act.

We at IRS are using the Act, the financial statement process,
and the CFO audit as our blueprint for financial management im-
provements. The process of preparing financial statements and
having them audited imposes a critically important discipline on
us, discipline that focuses our attention on the underlying informa-
tion that is our operational framework.

In light of current and future demands on the Service and the
directions and objectives described in our IRS Business Vision, cre-
ating a CFO organization devoted entirely to financial management
is only one part of the Service's new organizational structure, but
I believe a very critical addition. As CFO, I act as the principal ad-
viser to the Commissioner and Deputy Commissioner on all finan-
cial management issues, and for the first time finance is an equal
business partner with program executives.

In working to aggressively improve financial management, we at
the IRS have developed systems and procedures that are the back-
bone of clear, concise financial information, and we have under-
taken these activities within the important framework of the De-
partment's effort to standardize financial systems across the De-

But beyond making sure that systems and procedures are in
place to deliver on our promises, a major point of concentration in
the last year has been the people side of the equation. In an effort
to drive home the fact that financial management is not something
that resides only in headquarters, we have now named controllers
in all IRS regions and will name controllers in all other major of-
fices over the next 4 months who will become part of their business
team in the field and ensure that sound financial information and
analysis are the basis of all management decisions.

Financial management is not extraneous to our business. It is,
in fact, a critical component. In fact, we now have financial state-
ments down to the district and operational level for every major op-
erating entity in the Service. So making financial managers a visi-
ble part of the business team will help the entire organization
make that connection.

These actions reflect our sustained commitment to the objectives
of the Act, and we also recognize we have very major improvements
to make. As you are aware, Mr. Chairman, GAO recently issued its
second audit report, and as was true in 1992, GAO was again able

81-860 - 95 - 2


to say that the more than $1 trillion on revenue collected from
American taxpayers was properly deposited in the Treasury. GAO
also gave us credit for significant improvements in our operations.
This is no small accomplishment for an organization that processes
over 200 million returns, handles over 1 billion information docu-
ments, and issues more than 80 million refunds.

We feel we have come a long way since the first audit was is-
sued, and the most important signs of specific improvement actions
are that we implemented a single Nationwide financial system
which enables GAO to audit our administrative operations, a tre-
mendous improvement over 1992 when only 33 percent of our oper-
ating funds could be audited because financial data coming out of
the old system simply was not adequate to meet the standards of
the new Act. Now, 100 percent of our operating funds are

IRS was able to extract billions of detailed financial transactions
for GAO to test the master files which contain the records of all
taxpayers, and we have now balanced to the penny both the indi-
vidual and business master files. That was an enormous undertak-
ing to bring out detailed financial transaction material.

IRS and GAO agreed on the true collectible amounts of accounts
receivable, thus better valuing that critical asset and allowing our
agency to better manage that asset to collect those resources. We
have transferred responsibility for revenue accounting and report-
ing of accounts receivable to my office.

We established a Senior Council for Management Improvement
to, in effect, provide control and oversight of all GAO internal audit
and FMFIA issues in the organization. We obtained payroll serv-
ices from the Department of Agriculture's national Finance Center,
and GAO concluded that all IRS employees were paid the correct
amount and found no material reconciliation issues in payroll, not
an insignificant finding given that payroll is about 75 percent of
our budget.

We continued the development of piloting of our cost manage-
ment system that will enable us to look at IRS business processes
and array the cost of those processes in a way that allows man-
agers to make informed decisions, including the improvement of
those business processes. We improved prompt pay actions. The
GAO sample found no duplicate payments this year. The incidence
of late payments dropped, and we also brought up a new central
payment facility to further improve those operations. We completed
successfully our first inventory of computer assets and redesigned
the computer inventory system.

These improvements were the result of a great deal of hard work
on the part of IRS employees in both the program offices as well
as the financial arena. During the 1993 audit, we did work closely
with the GAO audit team and our internal auditors who were part
of that team. As the auditors found problems, they recommended

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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 4 of 18)