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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ations of the agency, I am accountable to the CFO for those issues.
The type of issue that — in fact, if I might kill two birds with one
stone, let me talk for a moment about the $54 billion error that Mr.
McFarland talked about with respect to the Retirement and Dis-
ability Fund and speak to how that issue was resolved within the
agency.

First of all, the $54 billion came up as a result of the inspector
general's audit of the actuarial liability of the fund. I am speaking
from memory and I will check my facts when I get back, but if I
recall correctly, the $54 billion was split into two pieces. One piece,
totaling approximately $17 billion, dealt with the manner in which
our actuaries projected payments to be made from the fund based
on either the final salary of employees as a calculated assumption
or the average salary of employees as a calculated assumption.

The fact of the matter is that, as disclosed sin the text of the re-
port, we used the salary when final we should have used the aver-
age, and that resulted in our overstating our actuarial liability by
that amount. As soon as that matter was brought to our attention
by the certified public accounting firm that was conducting the



46

audit of the actuarial liability, we agreed and corrected that
amount.

Chairman GLENN. OK.

Mr. Flynn. The $17 billion remaining in that $54 billion discus-
sion had to do with the assumptions about long-term interest rates
used to estimate the liabilities of the fund. Those long-term interest
rates, among other things, are reviewed periodically by a board of
actuaries, a group of independent actuaries who serve OPM and
who from time to time review the operations of the fund, look at
economic activity, and make some recommendations about the as-
sumptions upon which the fund and its liabilities are calculated.

They recommended that the long-term interest rate used in fore-
casting the fund's liabilities be increased. The difference between
the interest rate we were using and the board of actuaries' rec-
ommendation produced a $37 billion decrease in the long-term li-
ability. We were of the view that the board's recommendation to
the Associate Director for Retirement and Insurance was just that,
a recommendation.

The certified public accountant felt that it had more than just
the force of a recommendation, but was a decided action, and for
that reason we should restate our actuarial liability. We disagreed.
We met with the Chief Financial Officer, and there then ensued a
meeting between the Chief Financial Officer and the Associate Di-
rector where the decision was made to restate the actuarial liabil-
ity by decreasing it by approximately $37 billion.

I know that is a long answer and I apologize for that, but the
point that I want to come back to is that we have very carefully
constructed this so that while I work for the Associate Director,
when it comes to matters of finance I work for the CFO under the
policies and procedures that he lays out. I can give you some other
examples, if you would like, of how that plays in the office.

Chairman Glenn. Well, I am not sure I understand completely.
I understand your explanation of the amounts and why there were
errors or miscalculations in these other accounts, but the way the
CFO Act was written, all accounts are supposed to come under the
CFO and I am not sure I still understand this dotted-line business
or what authority you had to keep anything out from under the
CFO Act.

Mr. Flynn. Perhaps it is a failure of my trying to lay out the
way in which we act in the Office of Personnel Management. I
think the important point to make here is that the CFO has re-
sponsibility for all the financial activities of the agency and looks
to me for help in the Retirement and Insurance Group area.

When it comes to the inclusion of financial information in the
agency's financial statements, those statements are produced to-
gether. When it comes to working with the inspector general on the
audit timetable and on the plan for the production of statements,
we have done that together. When it comes to the development of
performance measures, I served on an interagency steering group
and had a representative from the CFO's office with me as we de-
veloped Government-wide performance measures for employee ben-
efit program types of functions.

I guess what I am trying to convey is that the important thing
is performance and accountability, and I think we have very care-



47

fully approached this and tried to do that in a way that meets the
CFO Act, but that at the same time doesn't diminish our ability to
carry out this program.

Chairman Glenn. I am not sure I get it yet. Does the CFO have
direct authority or does the CFO not have direct authority? It has
got to be one way or the other. Does the CFO have authority? If
he disagrees with something, does he have to get together with you
and take it to Mr. King? The Act says he will have authority, and
I still get the impression that you are sort of talking around me
here a little bit with these different arrangements, and so on. If
that is the way it is, then it is not in accordance with the law. He
either has authority or he doesn't.

The IG has said that he doesn't think he has the authority. You
are telling me that you work these things out sort of together and
it is in the best interests of whatever, but the law says that he is
supposed to have authority. Does he or does he not?

Mr. FLYNN. Senator Glenn, the best way I can answer this is
that I believe that he does, and I know that he has overruled me
on any number of occasions where we have differed.

Chairman Glenn. You are saying, then, that you recognize that
he has the authority in all these accounts, all of them under OPM.
Is that correct?

Mr. Flynn. Yes, Senator, that is my understanding.

Chairman Glenn. Does your wiring diagram over there reflect
this? Does your organizational chart show that to be the case or are
we still sort of hesitant about this thing? You said originally that
if you had a disagreement, you would have to go to the boss or
somebody and get this taken care of. I understand that. That al-
ways occurs in any agency where you have a disagreement with
one person or another, but the authority set up under the law is
the CFO is supposed to have the authority and all the accounts are
supposed to be there.

Mr. Flynn. Yes, sir.

Chairman Glenn. Is that the way it is set up?

Mr. Flynn. Well, let me be very clear. I mean, if you look at the
organization chart, you do see this dotted line, but the intent of the
agency is to have the CFO act with full authority in matters affect-
ing the financial activities of the agency.

Chairman Glenn. Then why a dotted line? He either has author-
ity or he doesn't. That is the point.

Mr. Flynn. Yes, sir.

Chairman Glenn. I am not sure we are connecting here yet, but
I am not going to belabor it too much further because it is noon
now and we have got to move on a little bit. I think we will have
to talk about this thing further and maybe get together with Mr.
King or something here because we want to make sure this is car-
ried out.

We haven't made exceptions for other people; we haven't made
exceptions for State or Customs or anybody else. It is supposed to
work a certain way, and that was very carefully considered. It is
working in other areas. I know these are big funds, but we have
got big funds over in — look at what happens to the comptroller over
in the Department of Defense. We are talking about hundreds and
hundreds of billions of dollars over there, and they all come under



48

the CFO's cognizance over there. So I don't see exactly why we
are — it either comes under him or it doesn't, and it is very clear.

Mr. Flynn. I agree with you completely. I might make one very
brief comment. The organization that we have is not different from
other Federal agencies or organizations. It was looked at very care-
fully by the Office of Management and Budget when we proposed
it and was approved. We may want to talk further and I would be
happy to do that.

Chairman GLENN. OK. I am sure we will. Thank you.

Computer security — is anybody having a problem with that, and
do you have any plans in that area? I brought that up before. You
were all in the room and you heard that before. This concerns me.
I am afraid that in the next few years we may have some computer
disasters here as the hackers and everybody else are able to access
computer systems. I don't know quite what we do about this, but
I know we have already got problems in some areas.

Do you have any thoughts on that briefly? We are running out
of time. Mr. Kinghorn, start off.

Mr. Kinghorn. Mr. Chairman, I think last week the Commis-
sioner probably covered that fairly in-depth. On the broader ques-
tion of general computer security, we have an executive in the or-
ganization whose responsibility is focused on that issue, and I
think we provided for the record last week a fairly detailed com-
puter security issue. But, clearly, across Government from my per-
spective when I was in OMB it is a major issue everywhere.

Chairman Glenn. Does anybody else have comments on any-
thing you are doing that other people should know about here to
help them out, too?

Ms. Goerl. Yes, sir. I would just emphasize again that in my ex-
perience with this area it is oftentimes the last thing to think
about and the first thing corrected when it is raised. The issue is
continual review and attention to it at all times. In the Customs
area, we were quite dismayed to learn of the issues that were
raised about ADP security, but very quickly corrected them and the
longstanding ones will be corrected within a few months. So we un-
derstand the importance and we will continue to have vigilance
around it.

Chairman Glenn. Mr. Flynn, would you comment?

Mr. Flynn. Just to add, Senator, that it is a very serious matter
that we are addressing.

Chairman Glenn. Mr. Eisenhart, any ideas?

Mr. Eisenhart. Computer security is definitely an issue and I
just want to say that a lot of times when we try and move out very
quickly to solve problems, one of the things that everybody has to
recognize is that sometimes some of the other tasks, like computer
security, do take some time in order to put that into your financial
systems, et cetera, and that that part has to be mapped out in ad-
vance of implementation of systems.

Chairman Glenn. Ms. Goerl, it is my understanding that some
92 percent, I believe is the figure, of things get released out of Cus-
toms without really being looked into. Is that an approximately cor-
rect figure?

Ms. Goerl. Well, that is the current process that we have his-
torically reviewed for trade compliance. As I mentioned earlier, we



49

have a new compliance measurement system that we are piloting
that would be extended, and this is our year in which we extend
the data base to set the base for our future review of the compli-
ance area. All 1,200 of the harmonized tariff schedules will be in
that pilot this year and we expect to implement our new compli-
ance trade system that will cover

Chairman Glenn. What does that mean? Are you going to sam-
ple things more, or what do you do? Do you get paperwork, or com-
puterizing the records, or how are you doing this?

Ms. Goerl. We are doing several things. One, we are compiling
more data to have statistically sound data to measure compliance
with, to randomly select, and to see whether we are getting the ap-
propriate amount of duty and taxes. It will be expanded because
with the computer technology, the review, and with the targeting
system that we will employ, we will be able to determine if we need
to have further compliance and review in selected areas. So I be-
lieve it will be much more extensive, and we expect that to be im-
plemented in 1996 fully.

Chairman Glenn. Mr. Kinghorn, I am going to come back to one
you heard earlier here, also, and I talked to Commissioner Richard-
son when we had our hearing last week on this, too, but the figure
has gone up since last week on the collectibles by IRS. The amount
of accounts receivable that is collectible, not just the overall owed
that is up $130, $140 billion, but a lot of that is in bankrupt situa-
tions and things like that — the estimate has gone up in the last few
days of the collectibles by IRS. It has now gone from $18 billion in
1991 up to $29 billion.

How are we going to leverage that down some? How are we going
to collect that stuff? Do you need more people, do we need to get
the TSM system in more rapidly, all of the above, or what?

Mr. KINGHORN. You have pretty well answered the question
there. [Laughter.!

We have been working with GAO for the last 3 years in coming
up with an accurate net number, and that net number really, to
us and to you, should mean the number we need to manage and
it is now $29 billion. It has clearly grown. I can't speak for 1991.
It has grown over the 1992 audit numbers. Some of that is due, I
think, to the difference in sampling methodology that we have
agreed to do with GAO.

There are two programmatic reasons it may have grown. One is
the increase in installment agreements, which, in effect, is good
news. We, in effect, now have installment agreements with tax-
payers and offers-in-compromise, both of which were taxes we prob-
ably would never have gotten. So, in effect, those have increased
the number. The real issue here, though, is we know a great deal
more about that inventory than we knew 5 years ago when I think
you first addressed it and it came out as a high-risk list.

One of the solutions is, in effect, TSM, and I hate to keep saying
that, but it is true. The key to TSM is the ability for us to match
information on the tax forms, instead of 18 months after the fact,
within 1 or 2 or 3 months. We know the major factor in the ac-
counts receivable inventory is time. The longer they go, the less
likely it is we collect. So TSM is — and there is nothing much else
we can do without that technology to bring that up quicker.



50

On the collection side and trying to do it in the short term, as
you know, we have a compliance initiative for 1995 which looks
very positive, $405 million-plus, and that will not only go after the
accounts receivable inventory, but also work at the area of the tax
gap, which is the other account you mentioned.

One piece of good news, if it holds up, is I just looked at the fi-
nancial data yesterday and to this point, compared to last year, we
are $100 million up in collections. If that holds or increases, that
will reverse the trend of the last 2 years where collections have
been going down. So if that continues, at least the trend in collect-
ing funds throughout the country is increasing and will reverse the
downward trend of the last 2 years.

Chairman Glenn. I don't know whether you were here when I
commented earlier briefly. I had the opportunity the other day to
talk to Ms. Rivlin, who is the acting OMB head now and is the des-
ignee for that spot. She will be having confirmation hearings, and
I talked to her the other day right after our hearings here that of
all the places I hoped we did not get into budget-cutting and cut
back on people and resources, it is in this area because we are
going to get far more back if this system gets in earlier than any-
thing we spend on it at the outset.

We are trying to back you up on what you need over there. I de-
plored the conference committee that was going to cut $400 million
out of those funds the other day because it isn't in effect now.
Whatever happened in the past, we have to make that system
work.

Mr. KlNGHORN. And we appreciate the support. OMB was very
supportive of it, and you give us a dollar and we can return at least
5 to 1 on that dollar.

Chairman Glenn. I told her last week when that system was
first announced back many years ago, I would say, well, how soon
can we get it in, and they said 7 years. I deplored that 7 years.
Then we came to the next year's hearings and I never saw such
a floating target in my life because the next year I would say, how
soon are we going to get this in, and they said 7 years. We went
through this about 3 years in a row. It was a moving target out
there. I never had such trouble drawing a bead on anything in my
life as I did trying to get that thing pinned down.

Well, I would say we are making progress because the other day
in her testimony she said that they estimate it may take 6 years,
so at least we are making progress. [Laughter.]

I hope we can shorten that up considerably.

Mr. KlNGHORN. I think we can.

Chairman Glenn. And if you need more from us on this, let me
know. You can't just throw money at something like this and make
the computers appear. I know that. It is a long effort getting them
all put into position and getting them working.

I don't have any more questions now. It has been a long hearing
this morning. We will back to you with some questions. We would
appreciate your answering the questions as expeditiously as pos-
sible so we can include them as part of our record. Thank you for
being here this morning and thank you for your testimony.

We have statements from Senators Roth and Pryor which we will
include in the record at this point.



51

PREPARED STATEMENT OF SENATOR ROTH

Today's hearing examines the efforts being made to improve the financial manage-
ment systems of several agencies — the Internal Revenue Service, the Customs Serv-
ice, the Department of State, and the Office of Personnel Management. Much of the
effort being made is in direct response to the requirements of the Chief Financial
Officers Act, enacted by this Committee in 1990.

As I believe we will hear this morning, the degree of enthusiasm with which dif-
ferent agencies have embraced implementation of that new law varies considerably.
This begins with the level of seriousness attached to their creation of their CFO po-
sition, and the responsibilities given that office. Not all agencies seem to share this
Committee's sense of urgency in shaping up federal managerial and financial con-
trols. -

Returning to a theme I have stressed on several occasions, this problem — the lack
of sufficient urgency in instituting effective financial controls — may stem in part,
like many other problems in federal management, from a lack of personal account-
ability. If no one is held directly accountable, in some meaningful way, for prevent-
ing a problem in the first place, or for correcting one that occurs, we can be sure
these problems will continue to echo through the pages of Inspector General and
GAO reports.

I know that much of this effort at improved financial accountability is new to the
Federal Government. I know that it is not easy to accomplish. I know it will take
time. But what I would also like to know is when can we expect to see real results,
particularly in the way of clean audit opinions? When will GAO and the I.G.'s no
longer say that inadequate controls are in place? And who will be held accountable,
and in what way, if that date arrives without such assurances from the auditors?

Mr. Chairman, I share your frustration in the inordinately long time it seems to
take to make these improvements, that are so fundamental to our proper steward-
ship of the public purse. Let us hope that the stories of those agencies making sig-
nificant progress will serve as an inspiration to those lagging behind.

PREPARED STATEMENT OF SENATOR PRYOR

Thank you Mr. Chairman and good morning. I want to thank you for your con-
tinuing efforts in the area of financial management. I would like to begin this morn-
ing by reviewing OPM efforts to comply with the Chief Financial Officers Act. The
Chief Financial Officers Act was approved with the intent of streamlining agency
financial management through the appointment of a chief financial officer (CFO)
whose purpose was to improve agency coordination of financial statements. The Of-
fice of Personnel Management (OPM), according to GAO, has unfortunately lagged
behind most agencies in achieving this goal. It has been 3 years since the Chief Fi-
nancial Officers Act was passed and yet, the OPM CFO position will not be filled
until August 1 of this year. In addition, the Deputy CFO position, which is consid-
ered vital to implementation of reform, has also yet to be permanently filled.

It is essential to have a coordinated effort in order to structure agencies whose
budgets run into the billions. Yet, the OPM IG has stated that the financial struc-
ture at OPM is far from coordinated. Instead, the retirement and insurance groups
continue to operate as separate entities from the CFO. I am concerned that it will
be harder for OPM to address problems with antiquated or non-integrated financial
information systems when it is unable to give responsibility and control for financial
management to its CFO.

The lack of resources hinders many of the necessary improvements in agency fi-
nancial accountability. However, steps must be taken. A CFO and a deputy CFO
must be appointed in order to coordinate agency financial management in dealing
with recent RIFs due to shortfalls in the OPM revolving fund. Compliance with the
CFO is an essential step in ensuring such unexpected shortfalls do not occur again.
But the case remains that OPM has neglected the most basic goals of the Chief Fi-
nancial Officer's Act. Many questions need to be asked. Why has OPM taken 3 years
to appoint a CFO? Has this minimal effort affected shortfalls such as the revolving
fund? Even with the scheduled appointment of a CFO, why have the retirement and
insurance funds yet to provide a plan for coordination of financial management ac-
countability with this CFO office?

Last September, Vice President Gore and the National Performance Review reit-
erated the importance of the goals that the Chief Financial Officers Act pointed to
over 3 years ago. OPM has begun to comply. It is my hope that OPM will continue
to move forward with a coordinated effort to focus its resources on financial account-
ability and not to continue neglecting problems that have the least costly and yet
most attainable solutions. Mr. Chairman, again I applaud your efforts in this area,
and I look forward to the testimony this morning.



52



Chairman GLENN. The Committee will stand adjourned.
[Whereupon, at 12:13 p.m., the Committee was adjourned.]



APPENDIX



PREPARED STATEMENT OF GENE L. DODARO

Mr. Chairman and Members of the Committee:

We are pleased to appear today to discuss the progress of the Internal Revenue
Service (IRS) and the Customs Service in complying with the financial reporting and
other requirements of the Chief Financial Officers (CFO) Act of 1990. I will discuss

— the results of our attempts to audit IRS' and Customs' fiscal year 1993 financial

statements,
— the short-term actions needed by IRS and Customs to continue their progress

in resolving serious financial management problems, and
— IRS' and Customs' efforts to establish the financial management organizations

and systems called for by the CFO Act.

Audit Results

For fiscal year 1993, we were again unable to provide opinions on IRS' and Cus-
toms' financial statements because of financial management problems that have not
yet been resolved. Although we have not yet been able to provide an opinion, signifi-
cant improvements in financial management operations are occurring at these agen-
cies prompted by the CFO Act. CFO audits also have provided insights that have
assisted both agencies in focusing their efforts to develop more effective financial
management systems and internal controls. Ultimately, improvements in these
areas will enhance IRS' and Customs' ability to accomplish their missions more ef-
fectively and efficiently.

Major strides include the following:

— Customs has begun a program to reliably measure the trade community's com-
pliance with trade laws based on inspections of statistically valid random sam-
ples of imported goods and related import documents. After testing a limited
number of goods in fiscal year 1993, Customs expanded the scope of the pro-
gram during fiscal year 1994, and even broader national coverage is planned
for fiscal 1995.

— Both IRS and Customs developed and applied methodologies for more accu-
rately reporting their collectible accounts receivable, which totaled $29 billion
and $900 million, respectively, as of the end of fiscal year 1993. In addition,
Customs reorganized its debt collection unit, formalized its collection proce-


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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 7 of 18)