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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including the real property values. In 1996, we will concentrate on
the salaries and expenses and diplomatic and consular programs.
Our goal is to have auditable statements for fiscal year 1997.

In the past, the Department has identified and reported 42 mate-
rial weaknesses and nonconformances in its core and subsidiary ac-
counting systems alone. The Department was burdened with man-
aging six different and poorly integrated financial accounting sys-
tems throughout the world in support of its domestic and overseas
posts. We need to replace a multitude of obsolete and inadequate
systems with a single integrated financial management system.

Work on this key initiative is progressing steadily. The strategic
plan for integration was finished in May 1993. Requirements anal-
ysis is complete for the core systems. Assuming the necessary re-
sources can continue to be made available in these tight budgetary
times, we expect initial operating capability in overseas operations
in late 1995 or early 1996, initial post installations in late 1996,
and full worldwide operation by 1999. The biggest effort in there
is the full integration of the accounting system with all its subsidi-
ary systems.

It is a big challenge and a long-term effort. Nonetheless, we are
committed and are making short-term progress and are even more


excited about the foundation being laid for future improvements.
We believe working with the office of inspector general has been in-
valuable and we have formed a partnership that has the IG and
management working together in a very productive environment to
improve financial accountability and responsibility in meeting the
Department's mission.

I will be more than happy to answer any questions the Commit-
tee might have.

Chairman Glenn. Thank you very much.

One more witness before we get to questions, Mr. William Flynn,
Assistant Director for Financial Control and Management of the
Retirement and Insurance Group of OPM.

Mr. Flynn.


Mr. FLYNN. Mr. Chairman, thank you for inviting me this morn-
ing. In the interest of time, I will make a brief statement. You have
the prepared remarks that I submitted to the Committee.

Chairman Glenn. All of the statements will be included in the

Mr. Flynn. I am currently the Assistant Director for Financial
Control and Management in OPM's Retirement and Insurance
Group and, in that capacity, function essentially as the controller
for OPM's Government-wide employee benefit programs. Each
month, we provide benefits and services to almost 3 million Federal
employees, over 2 million retirees and annuitants, and approxi-
mately 9 million people who represent enrollees and their depend-
ents in the Federal Employees Health Benefits Program. As you
heard earlier this morning, we manage trust funds whose net as-
sets total approximately $320 billion, and we issue payments annu-
ally in the neighborhood of $50 billion.

I mention that simply to point out the fact that the Retirement
and Insurance Group within OPM is a vast financial services orga-
nization. As we carry out our activities, we do so using three
funds— the Civil Service Retirement and Disability Fund, which is
essentially the pension fund; the Federal Employees Health Bene-
fits Fund, which, as its name implies, handles health benefits; and
the Federal Employees' Group Life Insurance Fund.

I have been in this position for a little over 2 years, and in each
of those years and the year prior, 1991, 1992, and 1993, the finan-
cial statements for each of those three trust funds were audited by
OPM's inspector general. The 1993 audit conducted by the inspec-
tor general issued for the retirement program a clean opinion; for
the health benefits program, an opinion that was qualified in one
respect dealing with the treatment of the net assets of certain car-
riers who participate in that program; and in the group life insur-
ance program, a single qualification dealing with some departures
from generally accepted accounting principles in the financial re-
port submitted by the major insurance carrier. I would be happy

J The prepared statement of Mr. Flynn appears on page 84.


to speak perhaps later on each of those qualifications, if you would
like, Senator.

The point that I would like to make is that with the exception
of those two limited qualifications, the inspector general was able
to render an opinion on our statements, and I think that is an im-
portant point to be mentioned here. It means that those of us in
the Office of Personnel Management, from the Director and the
Chief Financial Officer on down, and others, are able to use the in-
formation that we present in those reports for purposes of manag-
ing the program, for purposes of making decisions about the pro-
gram's health and vitality, and for purposes of making decisions
about areas where we need to improve. It also means that mem-
bers of this Committee and others in the legislative branch can
again, mindful of those qualifications, rely on the information we
provide for purposes of oversight, legislation, and related matters.

Just to underscore that more broadly for anyone who is inter-
ested — and I am sure you know, Senator, there are many millions
of Federal employees who are interested — it gives them an indica-
tion not only in terms of the financial data presented, but the per-
formance measures and related supplemental information, about
how we are doing managing the funds that we have been entrusted
to administer on their behalf.

The inspector general in his 1993 report and his testimony and
in his responses to questions here this morning has pointed out a
number of areas where he believes the Retirement and Insurance
Group of OPM needs to improve. As Mr. McFarland indicated, we
are largely in agreement with each of those areas and, as Mr.
McFarland has also indicated, we have made some progress in
many of them. More is needed, and I would be the first to admit

We are continuing to work to improve some of these areas, and
again I would be happy to answer specific questions that you may
have about them as we go forward this morning. Because there has
been a great deal of discussion this morning about the relationship
that the Retirement and Insurance Group has with the Office of
Personnel Management's Chief Financial Officer, I would like to
touch on that briefly and then respond to further questions as we
go on.

Though I have not spoken with him directly about this, I am
sure that Director King would want, if he were here today, to say
to you that when it comes to accountability and performance relat-
ed to financial management in the Office of Personnel Manage-
ment, he first and foremost has that responsibility.

When it comes to the financial activities, the financial policies,
the financial operations, the disclosures, the statements, all of the
financial activities of the agency, he looks, and would ask you to
look to his new Chief Financial Officer, Gil Seaux, for performance
and accountability in those areas.

When it comes to those matters with respect to the Retirement
and Insurance Group, he would ask you to look to me, as a subordi-
nate to the Chief Financial Officer in those matters, for perform-
ance and accountability in that area. I say that in very measured
terms, Senator, because much discussion this morning has been


had about the apparent liaison relationship that I maintain with
the Chief Financial Officer.

That relationship, I believe, is quite substantive. It involves mat-
ters of policy, involves matters of operations and, where the Chief
Financial Officer and I disagree on things, involves bringing the
matter to the attention of the Director and presenting positions
and letting that matter be decided. Again, you may have some
more questions you would like to ask in that regard, and I would
be happy to answer them.

Let me simply close by saying that I think if one were to look
at any organization, as you mentioned in your comments earlier
this morning, Mr. Chairman, one could always find room for im-
provement. That is certainly the case at OPM. It is certainly the
case that we are dedicated to making the improvements we can in
a prioritized way, given our ability to do so. And to do that in a
coordinated manner with the Chief Financial Officer so that the fi-
nancial activities of the agency are integrated and are presented in
a unified, understandable way so that we and you and others can
have some greater measure of confidence in the activities that we
carry out.

I would be happy to answer any questions you may have.

Chairman Glenn. Thank you very much.

Ms. Goerl, in this area we have had a long-time problem with
confiscated material and what happens to it, the keeping of it, safe
keeping, the auditing of it, so we know exactly what we have. I am
very concerned over this loss of drugs in undercover operations and
the recent incidents in Los Angeles and Miami.

You indicated that there is a new program going into effect, I be-
lieve, is that correct?

Ms. Goerl. Yes, sir.

Chairman Glenn. You are auditing these and going to run totals
on it. I know that where someone breaks into a warehouse or some-
thing, well, maybe that is something that we can work on, but that
is not something under control of a policy, I guess, but would you
expand on that a little bit?

For instance, we have not had procedures requiring drug losses
in operations to be reported, even; as I understand it, not even to
the Commissioner. So I guess the question is, does the agency
know how much has been lost in the past 2 years or 5 years, or
do we have any estimates at all?

Ms. Goerl. Well, I cannot speak to the losses over the last cou-
ple of years or the reconciliation of that, but I can provide you in-
formation for the record. But what I can speak to is the fact that
we just in this last couple of weeks had a report from a seized
property task force that reported to the Commissioner on a series
of very specific recommendations to improve the whole accountabil-
ity and the management of seized property in the agency.

Those areas address such things as security of that property so
as to avoid in the future such thefts as were referred to earlier, as
well as pretty detailed policies and a great deal of followup planned
training for the chain of custody and management of those drugs
or other seized property from the time of seizure through disposal
or through the court cases that eventually follow. That attention,
I assure you, is of supreme importance to the Commissioner and


the rest of the senior management. Together with the additional
100-percent inventory we plan in September, I believe we will
begin to correct those problems and will assure a much better re-
sult on our 1994 audit, and certainly in 1995.

Chairman Glenn. Would you want to give us a statement for the
record on that because we are very concerned about this and I
think we would like to have a statement for the record on this, if
you would.

Ms. Goerl. It is my pleasure. We will.

Chairman Glenn. Thank you.

[The information referred to follows:]


Our records indicate that there were no losses of drugs from our inventory other
than those contained in the GAO reports in the past 2 to 5 years. Except for the
major theft of narcotics from one of our warehouses in El Paso Texas, there have
been no other major individual losses, in excess of 10 pounds. These thieves have
been apprehended and are being prosecuted. Although this is a very isolated inci-
dent, Customs is taking every precaution to strengthen our physical security to en-
sure that a similar situation will not reoccur.

The February 1994 inventory was a major step in bringing us closer to providing
the security and audit accountability that will set the standard for all agencies. This
inventory highlighted the weaknesses in the process involved in the safekeeping of
seized goods. Inventory discrepancies account for the vast majority of the findings
in the GAO report. The chart on page 34 of the GAO report depicts the net changes
in our inventory counts between what our automated tracking system recorded as
the narcotic weights and what was recorded on our paper documents and actually
found in the Customs vaults. The 21,483 pounds referenced was not missing but is
an example of our past inability to properly maintain our automated files.

When drugs are first seized, the seizing officer estimates the weight and estab-
lishes a control number for the seizure. An automated record with all relevant sei-
zure data is immediately created and downloaded into our inventory system. When
the narcotics are delivered to our storage vaults, and or delivered to DEA for sam-
pling, they are accurately weighted on scales. In several of our storage locations, the
accurate scale weights were never input into the automated system, therefore the
automated system carried only the original estimated weight going into the inven-

This difference also includes discrepancies in the same cities, where the narcotics
had been destroyed or transferred to other law enforcement entities, but the auto-
mated systems had not been updated.

As part of the inventory procedures, Customs personnel checked their paper files
and established the correct scale weights and location for all narcotics seizures. The
21,438 pound difference represents the difference between the original estimates
and the actual recorded scale weights, as well as narcotics properly disposed of but
not recorded in our automated systems. Later in the GAO report it states that a
check of our files "resulted in all but 86 pounds of drugs being accounted for by Cus-
toms." This 86 pounds is actually a very low percentage of the total 436,000 pounds
accounted for during the inventory. The majority of this 86 pounds resulted from
poorly documented destruction in which the original signature on the destruction or-
ders could not be traced to specific seizures.

To correct this Customs has raised the priority of maintaining our automated sys-
tems. Although our personnel are always overworked, the question of where did we
place our priorities is a different one. In the past our priority always was to secure
and maintain the seized asset, and properly process the legal and administrative
case. During the inventory I believe that we demonstrated that the property that
we have in our custody is well maintained. Out of over 27,600 assets approximately
70 were recorded as missing during the inventory and the majority of these were
small low value items which were most likely disposed of without properly following
the documentation procedures. Customs has increased our training, and is holding
managers accountable to not only maintain the property and to process the case,
but to also maintain all of our automated systems in a timely and accurate manner.

Customs has conducted several inventories over the past years. This inventory is
the first all out floor to record reconciliation of all of our assets. Customs is the first
agency to attempt such an inventory tracing all property back to the original esti-


mates of the seizing officer. We have now instituted programs to continue this prac-
tice and we look forward to a successful inventory this fall.

We are implementing a comprehensive plan to insure physical security and sys-
tem accuracy. Customs has taken corrective actions on a broad scale to insure the
physical security of seized goods and the accuracy of our records. Over the last year
Customs has taken aggressive actions to address physical security concerns in its
seized property storage facilities nationwide. A task force led by Customs Office of
Internal Affairs was established in the fall of 1993 to identify problem areas and
establish plans for corrective actions. In all, 121 sites were surveyed to insure that
security standards were being met for alarm systems, alarm transmission methods,
supervision of alarm transmission, construction of facility walls, false ceilings, door
and window openings, and skylight or roof openings. Of the 121 sites surveyed, 24
sites having the most significant security concerns were identified, and targeted for
corrective actions. Two of the 24 sites were closed and are no longer being used to
store seized goods. Phase II of the Task Force action plan will involve upgrading
existing security at the remaining sites in fiscal year 1995.

A second major step was the creation of a multifunctional Seized Property Task
Force, comprised of mid and senior managers from both field and Headquarters en-
tities. Their recently completed report included findings and recommendations for
correcting problems identified with Customs Seized Property Program, including our
inability to safeguard seized property and to maintain accurate financial data. The
Seizures and Penalties Division is currently developing an action plan to implement
the recommendations for the report and anticipate that corrective actions will be in
place during fiscal year 1995.

Chairman GLENN. Mr. Eisenhart, we have had a problem hitting
the guidelines. You have indicated some of the difficulties, world-
wide operations, and so on. The 1992 statements were submitted
a year late. Your estimates now run out to 1997 before we are
going to get auditable accounts in all areas, apparently, and you in-
dicated something beyond that, I believe. Do you just not have the
resources to do this on an any more current basis, or what is the

Mr. Eisenhart. I think that one is our systems, No. 1, do not
provide the necessary data or integration with the various elements
within the State Department. In order to accomplish that, which is
the underlying basis and cause of our, I think, auditability, that by
itself takes time.

Chairman Glenn. It does, but is there an acceptance now that
the CFO Act is for real and it has got to be implemented? I guess
that is the basic question.

Mr. Eisenhart. Absolutely, and what we are trying to do is take
interim steps prior to the completion of the systems. So as we move
through the Department and all of its subsidiaries of real property,
personal property, inventories, et cetera, we will deal with those
with documented procedures and practices as we finish the auto-

That is how come we think that while the automation will not
be complete until 1999, we believe that we can produce the state-
ments by 1997. I hate to say this, but it is just the sheer volume
of trying to go through practically all of our subsidiaries and all of
the records for years and years and years.

Chairman Glenn. Well, it is, but once you get through with that,
will it be put on a basis, then, where it is auditable and reportable
on a current basis?

Mr. Eisenhart. Yes.

Chairman Glenn. Mr. Kinghorn and Ms. Goerl, both, what in-
terim actions can IRS and Customs take to shorten up on some of
these time periods? What interim actions short term can we take


rather than waiting for the long-term things of, for instance, IRS
tax system modernization, the TSM, and so on? Commissioner
Richardson has addressed that to some extent, but I was curious
if you could fill us in a little bit on what short-term efforts are
being made to correct some of the inadequacies.

Mr. KlNGHORN. I will start on that one, Mr. Chairman. I think
I mentioned some of the short-term fixes that we have already
made. The most fundamental one was bringing up a financial sys-
tem in a fairly short period of time, but some of the other areas,
for instance, in accounts receivable you mentioned, we will be im-
plementing in the next year something we call the ADRI EXPERT
system. That will enable us to pull out of that data base more use-
ful information, hopefully down to very specific detail that will
allow us to understand better what is coming into those accounts.

On the FTD issue you mentioned earlier, with Treasury's help we
have already, in effect, implemented something called TAXLINK,
and we expect, I think, in the next month or so to have something
go out through the Financial Management Service for the next se-
ries, a replacement system where we will be able to link the pay-
ment and the return, something called the Federal Tax Payment

In the proposals, we have asked people to give us the ability for
the private sector, in effect, who would manage this, to link to-
gether and give us information on type of tax. On seized assets, for
instance, we will have a system in place. We are not going to wait
4 to 5 years for that. So I think beyond what the Commissioner
mentioned to you last week on return filing fraud and the major
things we are doing there for the short term, I think we have taken
a lot of interim steps and I think they are very effective.

Chairman Glenn. Ms. Goerl.

Ms. GOERL. Yes, sir. I mentioned some of them before about our
short-term actions. Many of them, I think, are simply compliance
with our current procedures and policies that are in place that we
are finding many of our Customs staff are not paying as close at-
tention to, and we are reinforcing those through additional letters
and issuance of policy, and also a major effort this past year of
bringing to the attention of our senior management the weaknesses
in those areas where we need to give attention to internal controls.

In addition, in my own area we have quickly put together every-
thing that we believe we can do in the short term before the begin-
ning of the fiscal year that will lay in place everything, short sys-
tem fixes, to policy changes, to operational management and clari-
fication of accounts, that will be in place by the beginning of the
fiscal year that we believe will make significant changes in terms
of the reconciliation of accounts and more ease in the way in which
we develop and produce our financial statements.

So in a wide number of areas, we just simply lack some interim
steps to bring attention to them. Another example is the under-
cover financial system, taking care of how we manage our under-
cover funds. We are working very closely with the Assistant Com-
missioner for Enforcement to ensure that we have interim proc-
esses in place by the beginning of the fiscal year to assure the in-
tegrity of those funds as they are used over the next year.


Chairman Glenn. Mr. Eisenhart, the reason I asked the ques-
tion I did about the dedication to the CFO Act and whether it is
being accepted for real over there is because it hasn't been consist-
ently or fully staffed. Since 1990, State has had one CFO, two act-
ing CFO's, and one Deputy CFO. Right after we discussed this
hearing with State's CFO organization, State announced the nomi-
nation of its Acting CFO, Richard Green, to be CFO.

Now, maybe that was coincidental, but that is not a very good
record of consistency, and of all the places in Government where
we need somebody that is a consistent force in each one of these
departments or agencies, it is the CFO. We can't just have turn-
overs and shifting responsibilities and really carry out what is in-
tended or let them do what has to be done. So that is the reason
I asked the question I did previously. We expect the CFO Act to
be addressed.

Mr. Flynn, the IG has stated that OPM's current CFO structure
doesn't comply with the intent of the CFO Act and that the trust
funds should be brought under the CFO's direct authority. Now,
you addressed that a moment ago and I wasn't very encouraged by
what you said, quite frankly, because as I understood what you
said, you said basically you remain in charge of it and if there is
a disagreement with the CFO, he is not in line authority above
you; that you would both go together and take it to Mr. King. That
doesn't put the authority under the CFO, which is required by law.
How do you justify that?

Mr. Flynn. Let me try and clarify that just a bit, if I might, Sen-
ator. As the Assistant Director for Financial Control and Manage-
ment, my everyday supervisor is the Associate Director for Retire-
ment and Insurance. When the CFO Act was implemented in the
Office of Personnel Management, there was a very careful delinea-
tion of the accountability and responsibility that needed to be exer-
cised by the CFO for all of the agency's activities.

This dotted line that we have talked about before was estab-
lished so that when it comes to matters affecting the financial oper-

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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 6 of 18)