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                                                  Union Calendar No. 95

106th Congress, 1st Session -  -  -  -  -  -  -  - House Report 106-170
_______________________________________________________________________

 
 MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR 
                     EFFECTIVE FINANCIAL MANAGEMENT

                               __________

                             SECOND REPORT

                                 by the

                     COMMITTEE ON GOVERNMENT REFORM

                             together with

                             MINORITY VIEWS

                                     


                                     

     Available via the World Wide Web: http://www.house.gov/reform

  June 7, 1999.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
56-866 CC                  WASHINGTON : 1999

                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
 Bonnie Heald, Director of Communications and Professional Staff Member
            J. Lawrence Malenich, Professional Staff Member
                          Mason Alinger, Clerk
                     Faith Weiss, Minority Counsel
                         LETTER OF TRANSMITTAL

                              ----------                              

                                  House of Representatives,
                                      Washington, DC, June 7, 1999.
Hon. J. Dennis Hastert,
Speaker of the House of Representatives,
Washington, DC.
    Dear Mr. Speaker: By direction of the Committee on 
Government Reform, I submit herewith the committee's second 
report to the 106th Congress. The committee's report is based 
on a study conducted by its Subcommittee on Government 
Management, Information, and Technology.
                                                Dan Burton,
                                                          Chairman.

                                 (iii)

                                     


                            C O N T E N T S

                               __________
                                                                   Page
  I. Summary of oversight findings and recommendations................1
        A. Introduction..........................................     1
        B. Overview of investigation.............................     3
        C. Findings..............................................     4
              1. Material deficiencies in financial information..     4
              2. Material control weaknesses in financial systems     5
              3. Noncompliance with laws and regulations.........     6
              4. Year 2000 challenge.............................     6
        D. Recommendations.......................................     7
              1. Continued oversight.............................     7
              2. Incentives......................................     8
              3. Strengthen oversight role of Inspectors General.     8
              4. Strengthen President's role.....................     9
 II. Report on the committee's oversight review......................10
        A. Background............................................    10
              1. Need for effective financial management.........    10
              2. Federal financial management legislation........    10
              3. Importance of effective internal controls.......    15
        B. Results of the governmentwide and related agency 
            audits...............................................    17
              1. Oversight hearings held by subcommittee.........    17
              2. Financial management grades.....................    22
III. Conclusions.....................................................25

                               APPENDIXES

Appendix A.--Basis for agency financial management grades........    27
Appendix B.--Major Federal financial management legislation......    29
Appendix C.--Federal Financial Management Improvement Act........    34
Appendix D.--List of witnesses...................................    40

                                 VIEWS

Minority views of Hon. Henry A. Waxman, Hon. Jim Turner, Hon. Tom 
  Lantos, Hon. Robert E. Wise, Jr., Hon. Major R. Owens, Hon. 
  Edolphus Towns, Hon. Paul E. Kanjorski, Hon. Patsy T. Mink, 
  Hon. Carolyn B. Maloney, Hon. Eleanor Holmes Norton, Hon. Chaka 
  Fattah, Hon. Elijah E. Cummings, Hon. Dennis J. Kucinich, Hon. 
  Rod R. Blagojevich, Hon. Danny K. Davis, Hon. John F. Tierney, 
  Hon. Thomas H. Allen, Hon. Harold E. Ford, Jr., and Hon. Janice 
  D. Schakowsky..................................................    42

                                  (v)

  
                             ABBREVIATIONS

                               __________


BAPA                                Budget and Accounting Procedures Act
                                     of 1950
CFO                                 Chief Financial Officer
DOD                                 Department of Defense
FASAB                               Federal Accounting Standards
                                     Advisory Board
FFMIA                               Federal Financial Management
                                     Improvement Act of 1996
FMFIA                               Federal Managers' Financial
                                     Integrity Act of 1982
GAGAS                               Generally Accepted Government
                                     Auditing Standards
GAO                                 General Accounting Office
GMRA                                Government Management Reform Act of
                                     1994
GPRA                                Government Performance and Results
                                     Act of 1993
HCFA                                Health Care Financing Administration
HHS                                 Department of Health and Human
                                     Services
IRS                                 Internal Revenue Service
OMB                                 Office of Management and Budget
SFFAC                               Statement of Federal Financial
                                     Accounting Concepts
SFFAS                               Statement of Federal Financial
                                     Accounting Standards
SGL                                 Standard General Ledger
SSA                                 Social Security Administration


                                 (vii)

  
                                                  Union Calendar No. 95
106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    106-170

======================================================================


 MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR 
                     EFFECTIVE FINANCIAL MANAGEMENT

                                _______
                                

  June 7, 1999.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______


   Mr. Burton, from the Committee on Government Reform submitted the 
                               following

                             SECOND REPORT

    On May 19, 1999, the Committee on Government Reform 
approved and adopted a report entitled ``Making the Federal 
Government Accountable: Enforcing the Mandate for Effective 
Financial Management.'' The chairman was directed to transmit a 
copy to the Speaker of the House.

          I. Summary of Oversight Findings and Recommendations


                            a. introduction


    The Committee on Government Reform (the ``committee'') has 
primary legislative and oversight jurisdiction with respect to 
``Government management and accounting measures generally,'' as 
well as ``overall economy, efficiency, and management of 
Government operations and activities, including Federal 
procurement.'' \1\ The committee also has the responsibility:
---------------------------------------------------------------------------
    \1\ Clause 1(h) (4) and (6) rule X of the Rules of the House of 
Representatives, 106th Congress.

        [T]o determine whether laws and programs addressing 
        subjects within the jurisdiction of [the] committee are 
        being implemented and carried out in accordance with 
        the intent of Congress [through the] review and study 
        on a continuing basis the application, administration, 
        execution, and effectiveness of laws and programs 
        addressing subjects within its jurisdiction. [The 
        committee shall review and study] any conditions or 
        circumstances that may indicate the necessity or 
        desirability of enacting new or additional legislation 
        addressing subjects within its jurisdiction.\2\
---------------------------------------------------------------------------
    \2\ Ibid., Clause 2(b)(1) (A) and (C).

Pursuant to this authority, the Subcommittee on Government 
Management, Information, and Technology (the ``subcommittee'') 
convened six oversight hearings to explore:
         the implementation of laws related to Federal 
        financial management in executive departments and 
        agencies and, in particular, the second year of full 
        implementation of the Chief Financial Officers Act of 
        1990 (CFO Act), as expanded by the Government 
        Management Reform Act of 1994 (GMRA) and as amended by 
        the Federal Financial Management Improvement Act of 
        1996 (FFMIA);
         the extent to which Federal executive 
        departments and agencies have successfully applied the 
        requirements of these laws;
         the need for congressional action to improve 
        financial management in the Federal Government; and
         options for congressional actions that would 
        effectively bring about such improvement.
    Billions of taxpayer-provided dollars are being lost each 
year to fraud, waste, abuse, and mismanagement in hundreds of 
programs within the Federal Government. Audits continue to show 
that most agencies have significant weaknesses in controls and 
systems. As a result of these weaknesses, Federal 
decisionmakers do not have reliable and timely performance and 
financial information to ensure adequate accountability, manage 
for results, and make timely and well-informed judgments.
    In the late 1980s, Congress recognized that one of the root 
causes of this loss was that the Federal Government's financial 
management leadership, policies, systems, and practices were in 
a state of disarray. Financial systems and practices were 
obsolete and ineffective. They failed to provide complete, 
consistent, reliable, and timely information to congressional 
decisionmakers and agency management.
    In response, Congress passed a series of laws designed to 
improve financial management practices and to ensure that tax 
dollars are spent for the purposes that Congress intends. Each 
executive agency covered by the CFO Act--or specified by the 
Office of Management and Budget [OMB]--is required to prepare 
and have audited a financial statement covering all accounts 
and associated activities of each office, bureau, and activity 
within the agency. Furthermore, consolidated governmentwide 
financial statements must be prepared and audited annually. In 
addition, Federal agencies are required to conform to 
promulgated Federal Government accounting and systems 
standards, and to use the Federal standard general ledger.
    Despite the passage and implementation of these laws, there 
has been limited progress. Much remains to be done before the 
Federal Government's financial management systems and practices 
provide reliable, timely financial information on a regular 
basis.


                      b. overview of investigation


    March 31, 1998 marked a significant milestone in the 
implementation of financial management reform legislation. The 
Chief Financial Officers Act of 1990, Public Law 101-576, as 
expanded by the Government Management Reform Act of 1994, 
Public Law 103-356, required--for the first time--the 
preparation and audit of consolidated financial statements of 
the Federal Government for fiscal year 1997, and each year 
thereafter.\3\ GMRA required that the General Accounting Office 
[GAO] issue an audit report no later than March 31 of each year 
on the consolidated financial statements for the preceding 
fiscal year.
---------------------------------------------------------------------------
    \3\ The consolidated financial statements of the U.S. Government 
for fiscal years 1997 and 1998 cover the executive branch as well as 
parts of the legislative and judicial branches of the Federal 
Government. Government-sponsored enterprises and the Federal Reserve 
System are excluded.
---------------------------------------------------------------------------
    The GMRA also required that, starting March 1, 1997, and 
each year thereafter, all 24 Federal agencies that are subject 
to the requirements of the CFO Act must submit audited 
financial statements to the Director of OMB.\4\ These 24 
agencies were responsible for approximately 97 percent of the 
total Federal outlays during fiscal year 1997.
---------------------------------------------------------------------------
    \4\ The 24 Federal agencies covered by the requirements of the CFO 
Act are the following 14 Cabinet Departments: Agriculture, Commerce, 
Defense, Education, Energy, Health and Human Services, Housing and 
Urban Development, Interior, Justice, Labor, State, Transportation, 
Treasury, and Veterans Affairs; and various independent agencies, 
including: Environmental Protection, National Aeronautics and Space, 
International Development, Federal Emergency Management, General 
Services, National Science, the Nuclear Regulatory Commission, 
Personnel Management, the Small Business, and Social Security.
---------------------------------------------------------------------------
    Fiscal year 1997 also marked the first year of 
implementation of the Federal Financial Management Improvement 
Act of 1996, Public Law 104-208. The purpose of FFMIA is to 
ensure that agency financial management systems comply with 
Federal financial management system requirements, applicable 
Federal accounting standards, and the U.S. Government Standard 
General Ledger (standard general ledger) \5\ in order to 
provide uniform, reliable, and useful financial information. 
FFMIA required that beginning with the fiscal year ending on 
September 30, 1997, auditors for each of the 24 major 
departments and agencies named in the CFO Act must report, as 
part of their annual audits, whether the agencies' financial 
systems comply substantially with Federal financial systems 
requirements,\6\ applicable Federal accounting standards,\7\ 
and the standard general ledger at the transaction level. FFMIA 
also required the GAO to report on agency implementation of 
FFMIA by October 1, 1997, and each year thereafter.
---------------------------------------------------------------------------
    \5\ The U.S. Government Standard General Ledger provides a standard 
chart of accounts and standardized transactions that agencies are to 
use in all their financial systems.
    \6\ OMB Circular No. A-127, ``Financial Management Systems,'' July 
1993, prescribes the financial management systems policies and 
standards for executive agencies to follow in developing, operating, 
evaluating, and reporting on financial management systems. Circular A-
127 references the series of publications entitled Federal Financial 
Management Systems requirements, issued by the Joint Financial 
Management Improvement Program, as the primary source of Governmentwide 
requirements for financial management systems.
    \7\ The Comptroller General of the United States and the Director 
of the Office of Management and Budget issued a comprehensive set of 
accounting standards that became fully effective in fiscal year 1998.
---------------------------------------------------------------------------
    It is imperative that these acts are implemented 
successfully. They form the basis for the data used in 
measuring program performance under the Government Performance 
and Results Act, Public Law 103-62 (Results Act). Thus, at a 
minimum, strong congressional oversight is needed to achieve 
the primary goal of all these laws: a Federal Government that 
is accountable to the American taxpayers.


                              c. findings


    The fiscal year 1998 annual audit reports for the 24 
Federal departments and agencies, required under the CFO Act, 
as expanded by GMRA, were due to be filed with the OMB on March 
1, 1999. In addition, the GAO issued a second annual audit 
report on the consolidated financial statements of the Federal 
Government on March 31, 1999. Based on the investigation and 
oversight hearings conducted by the subcommittee and the 
governmentwide audit conducted by the GAO, the committee finds 
as follows:
1. Material deficiencies in Federal financial information continue
    Similar to the previous year, the GAO was unable to render 
an opinion on the 1998 consolidated financial statements of the 
Federal Government. In addition, the GAO report \8\ articulated 
the broad array of financial management problems faced by the 
Federal Government. It again confirmed that at least tens of 
billions of taxpayer dollars are being lost each year to fraud, 
waste, abuse, and mismanagement in hundreds of Federal 
programs. Government financial management remains in disarray. 
Its financial systems and practices are obsolete and 
ineffective, and they do not provide complete, consistent, 
reliable, and timely information to the President, 
congressional decisionmakers, and department and agency 
management.
---------------------------------------------------------------------------
    \8\ ``Financial Audit: 1998 Financial Report of the United States 
Government,'' GAO/AIMD-99-130, Mar. 31, 1999.
---------------------------------------------------------------------------
    The GAO report provided a synopsis of significant 
weaknesses found in financial systems, problems with 
fundamental recordkeeping, incomplete documentation, and weak 
internal controls, including computer controls. These 
weaknesses prevent the Federal Government from accurately 
reporting a large portion of its assets, liabilities, and 
costs. According to the GAO, ``these deficiencies affect the 
reliability of the consolidated financial statements and much 
of the underlying financial information.'' And, more important, 
these problems ``. . . also affect the Federal Government's 
ability to accurately measure the full cost and financial 
performance of programs and effectively and efficiently manage 
its operations.'' \9\
---------------------------------------------------------------------------
    \9\ Ibid., p. 1.
---------------------------------------------------------------------------
    Major problems prevented the GAO from being able to form an 
opinion on the reliability of the governmentwide financial 
statements. These problems included the Federal Government's 
inability to:
         account for and report on billions of dollars 
        worth of property, equipment, materials, supplies and 
        stewardship assets;
         estimate the cost of most Federal credit 
        programs and related loans receivable, and loan 
        guarantee liabilities;
         estimate and reliably report material amounts 
        of environmental and disposal liabilities, and their 
        related costs;
         determine the amount of various reported 
        liabilities, including post-retirement health benefits 
        for military employees, accounts payable, and other 
        liabilities;
         accurately report major portions of the net 
        costs of Government operations;
         determine the full extent of improper payments 
        that occur in major programs, which are estimated to 
        involve billions of dollars annually;
         ensure that all disbursements are properly 
        recorded; and
         prepare the Federal Government's financial 
        statements, including balancing statements that involve 
        billions of dollars in transactions between 
        governmental entities, and properly and consistently 
        compile the information in the financial statements.
    The oversight hearings held by the subcommittee on 
financial management at key executive branch agencies explored 
specific problems and potential solutions specific to each 
agency. Based on the Inspectors General 1998 financial audit 
reports of the 18 CFO Act departments and agencies that had 
filed their reports as of the date of this report, only 8 could 
prepare financial statements that were reliable in all material 
respects based on the results of independent audits.\10\
---------------------------------------------------------------------------
    \10\ As of the date of this report, 6 of the 24 agencies required 
to issue audited financial statements by Mar. 1, 1999, had not done so.
---------------------------------------------------------------------------
2. Material control weaknesses continue to exist in Federal financial 
        systems
    The General Accounting Office reported several pervasive 
material weaknesses in internal controls across the Federal 
Government.\11\ These material weaknesses contributed to the 
deficiencies described above. In addition, these weaknesses 
have resulted in the Federal Government's inability to 
safeguard Federal assets from unauthorized acquisition, use, or 
disposition; to ensure that transactions are executed in 
accordance with the laws governing use of budget authority and 
other laws and regulations; or to ensure the reliability of 
financial statements.
---------------------------------------------------------------------------
    \11\ A material weakness, as defined by the American Institute of 
Certified Public Accountants in its Statements of Auditing Standards 
and in the Comptroller General's Government Auditing Standards, is a 
condition in which the design or operation of one or more of the 
internal control components does not reduce to a relatively low level 
the risk that errors or irregularities in amounts that would be 
material to the financial statements may occur and not be detected 
promptly by employees in the normal course of performing their duties.
---------------------------------------------------------------------------
    Specifically, the GAO found widespread computer control 
weaknesses and material weaknesses in controls related to the 
Federal Government's tax-collection activities. The GAO stated 
in its report that ``serious computer security weaknesses 
expose the Government's financial and other sensitive 
information to inappropriate disclosure, destruction, 
modification, and fraud.''
    With respect to tax collection activities, the GAO reported 
that ``the Federal Government continues to have material 
weaknesses in controls related to its tax-collection activities 
that affect its ability to efficiently and effectively account 
for and collect the Government's revenue.'' The GAO further 
reported that ``serious financial management system 
deficiencies affect the Federal Government's ability to 
effectively manage its taxes receivable and unpaid 
assessments.\12\ The lack of appropriate subsidiary systems to 
track the status of taxpayer accounts affects the Government's 
ability to make informed decisions about collection efforts. 
This weakness has resulted in the Government pursuing 
collection efforts against individual taxpayers who had already 
paid their taxes in full. The Federal Government also continues 
to be vulnerable to loss of tax revenue due to weaknesses in 
preventive controls over disbursements of tax refunds. The 
Government does not perform sufficient up-front verification 
procedures to ensure the validity of amounts claimed by 
taxpayers as overpayments prior to making disbursements for 
refunds.'' \13\
---------------------------------------------------------------------------
    \12\ Other unpaid assessments consist of amounts for which (1) 
neither the taxpayer nor a court has affirmed that the amounts are owed 
and (2) the Government does not expect further collections due to 
factors such as the taxpayer's death, bankruptcy, or insolvency.
    \13\ ``Financial Audit: 1998 Financial Report of the United States 
Government,'' GAO/AIMD-99-130, Mar. 31, 1999, p. 32.
---------------------------------------------------------------------------
    The prevalence of weak internal controls in Federal 
Government systems is exemplified by the fact that only 5 of 
the 18 CFO Act agencies that filed reports did not have 
material weaknesses found by auditors during the course of 
their audits of fiscal year 1998 financial statements.
3. A pervasive noncompliance with laws and regulations continues
    Also contributing to the Federal Government's financial 
management problems were instances of material noncompliance 
with laws and regulations. The GAO reported that ``tests for 
compliance with selected provisions of laws and regulations 
related to financial reporting disclosed that . . . the Federal 
Government makes improper payments on major programs such as 
Medicare.'' Further, most agencies were not in compliance with 
FFMIA, which requires auditors to report whether agencies' 
financial management systems comply substantially with Federal 
accounting standards, financial systems requirements, and the 
Government's standard general ledger at the transaction level.
    The GAO also reported that ``the majority of Federal 
agencies' financial management systems do not meet systems 
requirements. They cannot provide reliable financial 
information for managing day-to-day Government operations or 
hold managers accountable. For many agencies, the preparation 
of financial statements requires considerable reliance on ad 
hoc programming and analyses of data produced by inadequate 
financial systems that are not integrated, reconciled, and 
often require significant adjustments.''
    ``For example, the DOD Inspector General reported that the 
Defense Department recorded more than $1.5 trillion in 
adjustments to component financial statements that were not 
supported by adequate audit trails or sufficient evidence to 
determine their validity.'' \14\ Auditors reported that only 3 
of the 18 agencies that had filed their 1998 audited financial 
statements complied with FFMIA requirements.
---------------------------------------------------------------------------
    \14\ Ibid., pps. 33-34.
---------------------------------------------------------------------------
4. Year 2000 computing challenge still poses a significant threat to 
        Federal financial systems
    A final factor affecting financial management in the 
Federal Government was the year 2000 computing crisis.\15\ This 
critical issue has been the subject of extensive oversight by 
the subcommittee. According to the GAO, ``while much has been 
accomplished in addressing the Year 2000 challenge, risks 
remain. Our reviews of Federal Year 2000 programs have found 
uneven progress; some major agencies are behind schedule. 
Complete and thorough Year 2000 testing is essential to 
providing reasonable assurance that new or modified systems 
will be able to process dates correctly and not jeopardize 
agencies' ability to perform core business operations. 
Moreover, adequate business continuity and contingency plans 
must be successfully completed throughout Government.'' \16\
---------------------------------------------------------------------------
    \15\ For the past several decades, information systems have 
typically used two digits to represent the year, such as ``98'' for 
1998, in order to conserve electronic data storage and reduce operating 
costs. In this format, however, the year 2000 is indistinguishable from 
the year 1900 because both are represented as ``00.'' As a result, if 
not modified, computer systems or applications that use dates or 
perform date- or time-sensitive calculations may generate incorrect 
results beyond 1999.
    \16\ ``Financial Audit: 1998 Financial Report of the United States 
Government,'' GAO/AIMD-99-130, Mar. 31, 1999, p. 35.
---------------------------------------------------------------------------


                           d. recommendations


    Based on the foregoing findings, the committee recommends 
the following:
1. Continuation of regular congressional and Presidential oversight
    Strong oversight is one of Congress's most effective tools 
in the effort to ensure that executive departments and agencies 
implement necessary reforms. To build upon this, Congress needs 
to mandate formal oversight hearings to review the status of 
agency financial management and actions to resolve related 
problems.
    Each department or agency should provide a detailed, annual 
status report on its financial management operations. When 
appropriate, each department or agency should be regularly 
reviewed by its relevant oversight, authorization, and 
appropriations subcommittees regarding its financial management 
processes. These hearings should be held annually, 
semiannually, or quarterly, depending on the severity of the 
financial problems within the agency or department.
    Agencies with serious financial management problems are 
required by the Federal Financial Management Improvement Act of 
1996 to prepare a ``remediation plan.'' This plan should be a 
detailed guide for agency management and staff that includes 
procedures for resolving any reported problems the agency is 
having in adhering to Federal Government accounting and systems 
standards and the implementation of the Government standard 
general ledger. The GAO is currently making its initial 
evaluations of the agency remediation plans. Those evaluations 
will be included in a report to be released on or before 
October 1, 1999.
    Congressional oversight hearings need to include a 
discussion of the agency's plan, and the progress being made 
toward resolving outstanding problems with various financial 
systems and practices. Oversight hearings should also include 
the department or agency's Inspector General who is responsible 
for reporting on the agency's compliance with the Federal 
Financial Management Improvement Act of 1996.
    As previously recommended, the agency remediation plans 
must provide a detailed description of planned actions with 
clear and reasonable milestones, including the names of staff 
members responsible for resolving particular issues. The plan 
should be approved by the agency head and relevant agency 
officials, such as the Chief Financial Officer, the Chief 
Information Officer, and the Inspector General. A draft of the 
approved plan should be sent to the Comptroller General who 
would coordinate the agency's actions and related milestones in 
the remediation effort. A draft of the plan should also be 
available to relevant congressional committees, and the 
Director of the Office of Management and Budget. These parties 
must meet regularly, monitoring the agency's progress toward 
meeting the objectives of the plan. This would assist Congress 
in effectively monitoring agency actions and taking corrective 
actions as necessary.
2. Provide incentives for implementing effective financial management
    It is clear that congressional oversight alone cannot 
effect the necessary change in financial management practices 
at all departments and agencies. The committee again notes that 
incentives are needed to prompt agencies to resolve their 
outstanding financial management problems. If an agency is 
unable or unwilling to effect these crucial changes, Congress 
has the authority to provide the needed incentives for change. 
They include: (1) redirecting a percentage of the agency's 
appropriated program or administrative funding toward 
correcting financial management problems; (2) restricting a 
percentage of the agency's appropriated funds until the 
problems are corrected; or (3) reducing various amounts of 
appropriated funds until the agency has completed its 
remediation efforts.
    These actions are intended to provide an incentive for the 
agency to resolve its financial management problems 
expeditiously.
3. Strengthen the ability of Inspectors General to carry out their 
        financial management oversight responsibilities
    Inspectors General are responsible for conducting audits of 
agency and department programs and operations. Their audit 
function in the executive branch is crucial. Agency audits 
provide information to executive branch managers and Congress 
that are necessary to uncover and resolve problems that impede 
effective financial management. To ensure that Inspectors 
General can provide quality audit services, it is imperative 
that Congress take steps to ensure that Inspectors General are 
highly qualified and have the necessary resources to oversee 
agency financial management.
    The Office of the Inspector General must ensure that all 
candidates for Inspector General positions are qualified to 
perform financial statement audits or specific segments of 
audits requiring specific expertise. These qualifications 
should be determined through a review by an external party and 
may be incorporated into the peer review process.
    As the committee suggested last year, when appointments for 
the Inspector General office are being considered, a board, 
which includes representatives of the President's Council on 
Integrity and Efficiency [PCIE], should review the 
qualifications of the Inspector General candidate before the 
nomination is forwarded to the Senate for confirmation.
4. Strengthen the President's role as Chief Executive Officer of the 
        executive branch by establishing an Office of Management
    Management of the executive branch of the Federal 
Government should be a Presidential priority. Among the 
President's many roles is the responsibility to serve as Chief 
Executive Officer of the Federal Government. Many broad 
objectives--including effectively managing Federal Government 
finances--are intended to make the Federal Government work 
better, but they depend on the commitment of the President and 
his staff in the Executive Office of the President. By 
approaching the Federal Government almost exclusively from a 
budgetary or policy perspective, Presidents limit their 
capacity to reform management within the Federal Government.
    If the financial management function is to be strengthened, 
the President needs management experts. That is also true of 
various other management functions. In the past, the 
Subcommittee on Government Management, Information, and 
Technology has recommended legislation that would form an 
Office of Management, separate and distinct from the Office of 
the Budget. It continues to recommend such an office. This 
office could help the President and his Cabinet focus on the 
critical management challenges facing the Federal Government.
    Cabinet officers are not always nominated for their 
managerial skills. They need assistance. Congress has provided 
some of that assistance by mandating the roles of Chief 
Financial Officer and Chief Information Officer. However, in a 
number of departments and agencies, these dual roles have been 
assigned to one person. That is not what Congress sought. The 
financial and information management functions are so complex 
that each one requires the full-time attention of a senior 
management official.


            summary of overall findings and recommendations


Findings
    1. Material deficiencies continue to exist in Federal 
financial information.
    2. Material control weaknesses in financial systems 
continue.
    3. Some agencies have again failed to comply with the laws 
and regulations governing Federal financial accountability.
    4. The year 2000 computer problem poses a threat to Federal 
financial systems.
Recommendations
    1. There is a continuing need for regular congressional and 
Presidential oversight.
    2. Financial incentives need to be provided that will 
prompt agencies and departments to resolve their financial 
management problems.
    3. The ability of Inspectors General to carry out their 
financial management oversight responsibilities must be 
strengthened.
    4. The President's role as Chief Executive Officer of the 
executive branch should be strengthened by establishing an 
Office of Management.

             II. Report on the Committee's Oversight Review


                             a. background

        I think it an object of great importance . . . to 
        simplify our system of finance, and bring it within the 
        comprehension of every member of Congress . . . the 
        whole system [has been] involved in an impenetrable 
        fog. There is a point . . . on which I should wish to 
        keep my eye . . . a simplification of the form of 
        accounts . . . so as to bring everything to a single 
        centre[;] we might hope to see the finances of the 
        Union as clear and intelligible as a merchant's books, 
        so that every member of Congress, and every man of any 
        mind in the Union, should be able to comprehend them to 
        investigate abuses, and consequently to control 
        them.\17\ --Thomas Jefferson, April 1, 1802
---------------------------------------------------------------------------
    \17\ Thomas Jefferson in a letter to the Secretary of the Treasury, 
Albert Gallatin, Apr. 1, 1802, The Writings of Thomas Jefferson, Edited 
by Andrew A. Lipscomb, (Washington, DC, 1905.) Vol. 10, pps. 306-309.

1. The need for effective Federal financial management
    Nearly 200 years ago, President Thomas Jefferson recognized 
the need for effective financial management in the Federal 
Government. President Jefferson's insight on this subject is 
still relevant today.
    Federal financial management continues in a state of 
disarray. Billions of taxpayers' dollars are being lost each 
year to fraud, waste, abuse, and mismanagement in hundreds of 
Federal programs. Financial systems and practices are obsolete 
and ineffective, and do not provide complete, consistent, 
reliable, and timely information to congressional 
decisionmakers and agency management. The source of these 
losses could be identified and significantly reduced by 
improved management practices.
2. Federal financial management legislation
    In response to this problem, Congress passed a series of 
laws designed to ensure that agency management problems would 
be fixed. The Chief Financial Officers Act, as expanded by the 
Government Management Reform Act of 1994 and amended by the 
Federal Financial Management Improvement Act of 1996, 
represents the most comprehensive financial management reform 
legislation in the last 40 years. Other significant legislation 
affecting Federal financial management includes: the Budget and 
Accounting Procedures Act of 1950 [BAPA]; the Inspector General 
Act of 1978, as amended by the Inspector General Act Amendments 
of 1988 [IG Act]; the Federal Managers' Financial Integrity Act 
of 1982 [FMFIA]; the Debt Collection Act of 1982, as amended, 
and the Debt Collection Improvement Act of 1996. The key 
financial management provisions of each of these laws are 
described in detail in Appendix B of this report.
            Audited financial statements
    The Chief Financial Officers Act established a pilot 
program that required 10 agencies to prepare financial 
statements and have those statements audited. This pilot 
program demonstrated the benefits of requiring Federal agencies 
to prepare audited financial statements. Based on the pilot 
program's success in uncovering financial managment problems in 
these agencies, Congress expanded the CFO Act with the passage 
of the Government Management Reform Act of 1994.
    The Government Management Reform Act [GMRA] is intended to 
provide a more effective, efficient, and responsive Government. 
To that end, it specifically requires that each executive 
department and agency prepare and have audited a financial 
statement covering all accounts and associated activities of 
each office, bureau, and activity within the agency. The 
Director of the Office of Management and Budget is responsible 
for setting the form and content of the financial statements 
against which the auditor must measure an agency's financial 
statements. The guidance provided by the OMB incorporates the 
standards recommended by the Federal Accounting Standards 
Advisory Board. These audited statements are to be sent to the 
Director of the OMB no later than March 1 of the year following 
the fiscal year for which the statements are prepared.
    In addition, GMRA required that a set of consolidated 
governmentwide financial statements be prepared for fiscal year 
1997 and each year thereafter by the Secretary of the Treasury 
in coordination with the Director of the OMB. The financial 
statements are to be audited by the Comptroller General of the 
United States and forwarded to Congress by March 31 of the 
following year.
            Federal accounting and auditing standards
    The Budget and Accounting Procedures Act of 1950 was 
enacted as a result of recommendations by the Hoover 
Commission.\18\ The commission suggested sweeping reforms that 
were intended to modernize and simplify governmental accounting 
and auditing methods and procedures. Congress agreed and 
directed the Comptroller General to ``prescribe the principles, 
standards, and related requirements for accounting to be 
observed by each Executive agency.'' \19\ In response, the 
Comptroller General issued accounting principles to be followed 
by executive agencies in the General Accounting Officer's 
Policy and Procedures Manual for Guidance of Federal Agencies.
---------------------------------------------------------------------------
    \18\ The Commission on the Organization of the Executive Branch of 
Government, chaired by former President Herbert Hoover and commonly 
known as the ``Hoover Commission,'' was formed in 1947. The 
Commission's first report, issued in 1949, contained recommendations 
regarding accounting and budget matters, many of which were enacted in 
the Budget and Accounting Procedures Act of 1950.
    \19\ The Budget and Accounting Procedures Act of 1950 (ch. 946, 64 
Stat. 832, pt. II, sec. 112(a)).
---------------------------------------------------------------------------
    Those standards were modeled, to a large degree, after 
private sector practices. They were the primary source of 
accounting guidance for Federal agencies from the 1950s until 
they were superseded by the Statements of Federal Financial 
Accounting Standards.
    The passage of the CFO Act in 1990 and its requirement for 
audited financial statements focused attention on the 
accounting standards to which these Federal agencies were to be 
held. Consequently, the Office of Management and Budget 
objected to the Comptroller General setting such policy since 
the Comptroller General's Office and its General Accounting 
Office are part of the legislative branch.
    To resolve this constitutional dispute and improve 
adherence to a set of comprehensive accounting standards, the 
Comptroller General, along with the Director of the Office of 
Management and Budget and the Secretary of the Treasury, agreed 
to establish an independent board that would recommend 
accounting principles. This board, known as the Federal 
Accounting Standards Advisory Board [FASAB], was established in 
October 1990 as a deliberative body to consider and recommend 
accounting standards and principles for the Federal Government. 
To avoid constitutional intrusion by the legislative branch, as 
represented by the Comptroller General, two of the board's 
members represent the executive branch and one represents the 
legislative branch.
    The recommendations of the FASAB must be approved by the 
Comptroller General, the Director of Management and Budget, and 
the Secretary of the Treasury who are referred to as the 
board's principals. The approved standards, as adopted by the 
board's principals, are then issued by the Comptroller General 
and the Director of OMB as Statements of Federal Accounting 
Standards. These Statements of Federal Accounting Standards are 
the body of standards that constitutes generally accepted 
accounting principles for the Federal Government.
    The FASAB is responsible for recommending accounting 
standards, referred to as Statements of Federal Financial 
Accounting Standards [SFFAS], after considering the financial 
and budgetary information needs of Congress and executive 
agencies, as well as other users of Federal financial 
information.\20\ While financial statements of private entities 
are principally intended to provide investors (shareholders, 
bankers, etc.) with information on the profitability of the 
entity, accounting and financial reporting in the Federal 
Government focuses on the Government's duty to be publicly 
accountable.
---------------------------------------------------------------------------
    \20\ Federal Accounting Standards Advisory Board, Statement of 
Federal Financial Accounting Concepts No. 1, Objectives of Federal 
Financial Reporting, ch. 1, pars. 23-30; Sept. 2, 1993.
---------------------------------------------------------------------------
    Federal financial reporting is intended to be used to 
assess the Government's accountability, efficiency and 
effectiveness, and to provide information on the economic and 
social consequences of the allocations and various uses of 
Federal resources. Accounting standards for the Federal 
Government should result not only in understandable, relevant, 
and reliable financial information, but should also foster 
effective accounting systems and internal controls that will 
help provide reasonable assurance that governmental activities 
are conducted economically, efficiently, and effectively, and 
in compliance with applicable laws and regulations.
    The FASAB completed the development of the original set of 
eight accounting standards for the Federal Government in 1996. 
Since that date, four additional standards have been adopted. 
As of the date of this report, there are three recommended 
standards, referred to as Statements of Recommended Accounting 
Standards [SRAS], waiting for final approval. The existing 
standards have been augmented by two Statements of Federal 
Financial Accounting Concepts [SFFAC]. Also, the FASAB 
currently has four exposure drafts and one invitation for views 
on suggested standards outstanding, and has issued five 
interpretations of standards. The following table lists the 
documents issued by the FASAB. It is expected that the FASAB 
will continue to recommend statements on specialized topics and 
revise existing statements as necessary.

    Accounting Concepts and Standards Documents Issued by the Federal
               Accounting Standards Advisory Board [FASAB]
------------------------------------------------------------------------
          Title of Document           Date of Issuance   Effective Date
------------------------------------------------------------------------
SFFAC 1: Objectives of Federal        September 2,      Not Applicable
 Financial Reporting                   1993
------------------------------------------------------------------------
SFFAC 2: Entity and Display           June 6, 1995      Not Applicable
------------------------------------------------------------------------
SFFAS 1: Accounting for Selected      March 30, 1993    October 1, 1993
 Assets and Liabilities
------------------------------------------------------------------------
SFFAS 2: Accounting for Direct Loans  August 23, 1993   October 1, 1993
 and Loan Guarantees
------------------------------------------------------------------------
SFFAS 3: Accounting for Inventory     October 27, 1993  October 1, 1993
 and Related Property
------------------------------------------------------------------------
SFFAS 4: Managerial Cost Accounting   July 31, 1995     October 1, 1997
 Concepts and Standards
------------------------------------------------------------------------
SFFAS 5: Accounting for Liabilities   December 20,      October 1, 1996
 of the Federal Government             1995
------------------------------------------------------------------------
SFFAS 6: Accounting for Property,     November 30,      October 1, 1997
 Plant and Equipment                   1995
------------------------------------------------------------------------
SFFAS 7: Accounting for Revenue and   May 10, 1996      October 1, 1997
 Other Financial Sources
------------------------------------------------------------------------
SFFAS 8: Supplementary Stewardship    June 11, 1996     October 1, 1997
 Reporting
------------------------------------------------------------------------
SFFAS 9: Deferral of Implementation   November 3, 1997  October 1, 1997
 Date for SFFAS 4
------------------------------------------------------------------------
SRAS 10: Accounting for Internal Use  Not Applicable    Not Applicable
 Software
------------------------------------------------------------------------
SFFAS 11: Amendments to Accounting    December 15,      October 1, 1998
 for PP&E--Definitions;                 1998
------------------------------------------------------------------------
SFFAS 12: Recognition of Contingent   February 5, 1999  October 1, 1997
 Liabilities from Litigation
------------------------------------------------------------------------
SFFAS 13: Deferral of Paragraph       February 5, 1999  October 1, 1998
 65.2--Material Revenue-Related
 Transactions Disclosures--Amending
 SFFAS 7
------------------------------------------------------------------------
SRAS 14: Amendments to Deferred       Not Applicable    Not Applicable
 Maintenance Reporting
------------------------------------------------------------------------
SRAS 15: Management Discussion and    Not Applicable    Not Applicable
 Analysis
------------------------------------------------------------------------
Exposure Draft: Governmentwide        June 1997         Not Applicable
 Supplementary Stewardship Reporting
------------------------------------------------------------------------
Exposure Draft: Accounting for        February 1998     Not Applicable
 Social Insurance
------------------------------------------------------------------------
Exposure Draft: Amendments to         February 1998     Not Applicable
 Accounting for Property, Plant, and
 Equipment
------------------------------------------------------------------------
Exposure Draft: Amendments to         March 1999        Not Applicable
 Accounting for Direct Loans and
 Loans Guarantees
------------------------------------------------------------------------
Invitation for Views: Accounting for  July 1996         Not Applicable
 the Cost of Capital by Federal
 Entities
------------------------------------------------------------------------
Interpretation 1: Reporting on        March 12, 1997    Effective upon
 Indian Trust Funds                                      implementation
                                                         of SFFAS 7
------------------------------------------------------------------------
Interpretation 2: Accounting for      March 12, 1997    Effective upon
 Treasury Judgment Fund Transactions                     implementation
                                                         of SFFAS 4 and
                                                         5
------------------------------------------------------------------------
Interpretation 3: Measurement Date    August 29, 1997   Reporting
 for Pension and Retirement Health                       periods ending
 Care Liabilities                                        on or after
                                                         September 30,
                                                         1997
------------------------------------------------------------------------
Interpretation 4: Accounting for      December 19,      Reporting
 Pension Payments In Excess of         1997              periods ending
 Pension Expense                                         on or after
                                                         September 30,
                                                         1997
------------------------------------------------------------------------
Interpretation 5: Recognition by      December 3, 1998  Effective upon
 Recipient Entities of Receivable                        implementation
 Non-exchange Revenue                                    of SFFAS 7
------------------------------------------------------------------------

3. The Importance of Effective Internal Controls
    Federal financial management legislation--the Federal 
Managers' Financial Integrity and Federal Financial Management 
Improvement Acts, in particular--placed great emphasis on the 
importance of effective internal controls. Their importance 
cannot be overstated, especially in the large, complex 
operating environment of the executive branch of the Federal 
Government. Effective internal controls are the first line of 
defense against fraud, waste, abuse, and mismanagement, and 
help to ensure that an entity's mission is achieved in the most 
effective and efficient manner. The subject of internal 
controls generally surfaces--as has been the case in 
subcommittee hearings--after improprieties or inefficiencies 
are found. However, as has been previously noted, good managers 
continually seek new ways to improve operations through 
effective internal controls.
    Internal controls can be simply defined as the methods by 
which an organization governs its activities to accomplish its 
mission effectively and efficiently. More specifically, 
internal controls are concerned with stewardship and 
accountability for the resources consumed in the process of 
accomplishing an entity's mission with effective results. The 
GAO has defined internal controls in its Standards for Internal 
Controls in the Federal Government as follows:

        The plan of organization and methods and procedures 
        adopted by management to ensure that resource use is 
        consistent with laws, regulations, and policies; that 
        resources are safeguarded against waste, loss, and 
        misuse; and that reliable data are obtained, 
        maintained, and fairly disclosed in reports.

    Internal controls should not be looked upon as separate, 
specialized systems within an agency. Rather, they should be 
recognized as an integral part of each system that management 
uses to regulate and guide its operations. Internal controls 
are synonymous with management controls in that the broad 
objectives of internal controls cover all aspects of agency 
operations. Although ultimate responsibility for good internal 
controls rests with management, all employees have a role in 
the effective operation of internal controls set by management.
    The committee again stresses that it is important to 
recognize that internal controls can be designed to provide 
reasonable, not absolute, assurance that an organization's 
activities are being accomplished in accordance with its 
objectives.
    In its Statement of Auditing Standards No. 55,\21\ the 
American Institute of Certified Public Accountants identified 
internal control limitations, such as the possibility of errors 
arising from such causes as misunderstanding instructions, 
mistakes in judgment, and personal carelessness. Also, many 
control procedures depend on the segregation of duties. The 
effectiveness of these procedures can be circumvented by 
collusion. Similarly, management authorizations may be 
ineffective against errors or fraud perpetrated by management. 
In addition, the standard of reasonable assurance recognizes 
that the cost of internal controls should not exceed the 
benefit derived. Reasonable assurance equates to a satisfactory 
level of confidence under given considerations of costs, 
benefits, and risks.
---------------------------------------------------------------------------
    \21\ Codification of Statements on Auditing Standards (Including 
Statements on Standards for Attestation Engagements), Nos. 1 to 82, 
American Institute of Certified Public Accountants, as of Jan. 1, 1997.
---------------------------------------------------------------------------
    The full cost of fraud, waste, abuse, and mismanagement 
cannot always be known in advance or measured in terms of 
dollars. If improper activities are allowed to continue, public 
confidence is eroded in the Government's ability to manage its 
programs effectively and honestly. Such erosion to any degree 
cannot be measured in dollars. The trust of the citizenry in 
its Government is a priceless relationship.
    Management executives at most Federal agencies are faced 
with tight budgets and, thus, limited in human, information, 
and financial resources. In such an environment, especially 
given the diverse and complex nature of Federal operations, 
weak control environments can provide fertile ground for fraud, 
waste, abuse, and mismanagement.
    Effective financial management practices and timely, 
reliable financial information enable senior management to make 
decisions that will result in effective and efficient 
operations. This belief is reflected in the Government 
Performance and Results Act passed by Congress in 1993. The act 
sought to ``. . . improve the confidence of the American people 
in the capacity of the Federal Government, by systematically 
holding Federal agencies accountable for achieving program 
results.'' The act was also designed to aid the legislative 
branch and improve congressional decisionmaking by providing 
``more objective information on achieving statutory objectives, 
and on the relative effectiveness and efficiency of Federal 
programs and spending.'' Without reliable and timely financial 
information, neither agency decisionmakers nor Congress can 
determine the real costs and benefits of Federal programs. 
Thus, it is imperative that Federal agencies and departments 
produce reliable financial information in a timely and 
efficient manner.


 b. results of the fiscal year 1998 governmentwide financial statement 
                    audit and related agency audits


1. Oversight hearings held by the subcommittee
    On March 31, 1999, the General Accounting Office released 
its audit report on the financial status of the Federal 
Government required under the Chief Financial Officers Act of 
1990 as expanded by the Government Management Reform Act of 
1994 and amended by the Federal Financial Management 
Improvement Act of 1996. This second annual report again 
provided a concise description of the myriad problems faced by 
the executive branch. The subcommittee held a hearing on March 
31, 1999 to examine the results of this audit.
    The subcommittee hearings focused on the status of 
financial management at the Internal Revenue Service, the 
Federal Aviation Administration, the Department of Justice, the 
Health Care Financing Administration, and the Department of 
Defense. Collectively, these agencies account for more than 98 
percent of the Federal Government's annual revenue and a 
majority of the costs (excluding interest on the national debt 
held by the public and the Social Security program). In 
addition, the Department of Defense accounts for a significant 
portion of the assets held by the Federal Government. 
Consequently, these agencies play a significant role in the 
production of governmentwide statements, and significantly 
affect the audit results. All of these agencies have 
experienced problems with their financial management, and have 
had varying degrees of success in resolving those problems. 
Each agency and department is required to issue a separate 
audited financial statement. The subcommittee held hearings to 
explore specific issues at each of these agencies.
    These hearings held by the Subcommittee on Government 
Management, Information, and Technology:
         explored the results of the financial audits 
        for the second year of full implementation of the GMRA 
        throughout the Federal Government, and in particular at 
        the five agencies noted above;
         considered the need for congressional action 
        to improve financial management in the executive 
        branch; and
         reviewed options for possible congressional 
        actions needed to ensure the successful implementation 
        of Federal financial management reforms.
            Internal Revenue Service [IRS]
    The IRS collects more than 95 percent of the Federal 
Government's $1.7 trillion in annual revenue. In fiscal year 
1998, the IRS issued its first set of financial statements 
covering both its custodial and administrative activities. 
Prior to 1998, the IRS had issued two sets of financial 
statements; one set for its custodial operations--the revenues 
collected, refunds paid, and related taxes receivable and 
payable--and another for its appropriated funds. The IRS's 
financial data were then incorporated into the agencywide 
statements prepared by the Department of the Treasury.
    The IRS is responsible for enforcing tax laws in a fair and 
equitable manner, but the agency has long been criticized for 
the perceived abuse of its broad enforcement powers. In 
response to this criticism, Congress established the Commission 
on the Restructuring of the IRS. Led by Representative Rob 
Portman of Ohio and Senator Bob Kerrey of Nebraska, the 
bipartisan commission released a comprehensive report in June 
1997, proposing several changes in the IRS's management. The 
Commission's recommendations were the basis of H.R. 2676, the 
Internal Revenue Service Restructuring and Reform Act of 1997, 
which was signed into law by the President on July 22, 1998. 
The underlying theme of the act is one of creating a cultural 
change within the IRS. In the broadest terms, the act shifts 
the emphasis within the IRS from its self-defined role as an 
enforcement agency to a role more closely resembling a 
financial service organization.
    Also at congressional urging, the Clinton administration 
appointed a new commissioner with extensive experience in 
managing large organizations. Charles O. Rossotti, founder of a 
firm in the management systems and technology industry, was 
appointed Commissioner of the IRS in September 1997. Since his 
appointment, Commissioner Rossotti has proposed a sweeping 
reorganization of the IRS that exceeds the changes mandated in 
the legislation. Testifying before the subcommittee, 
Commissioner Rossotti stated that he plans on ``shifting the 
entire focus of the agency from one which focuses solely on 
conducting our own internal operations to one which puts far 
more emphasis on trying to see things from the point of view of 
taxpayers and emphasizing service and fairness to taxpayers.''
    For the second consecutive year, the IRS was able to 
reliably report on its financial activity covering the 
collection and refunds of taxes in 1998. This achievement, 
however, required extensive, costly, and time-consuming ad hoc 
procedures to overcome pervasive internal controls and systems 
weaknesses. The ability to provide reliable year-end data is an 
important first step for the IRS, but it is not an end in 
itself. The GAO audit report stated that the ``IRS continues to 
face significant financial and other management challenges and 
risks.'' \22\ These weaknesses must be addressed before the IRS 
can make any significant improvement in the area of financial 
management.
---------------------------------------------------------------------------
    \22\ ``Financial Audit: IRS' Fiscal Year 1998 Financial 
Statements,'' GAO/AIMD-99-75, p. 6.
---------------------------------------------------------------------------
    The IRS was unable to report on its administrative 
activities in fiscal year 1998. The GAO report found that 
``pervasive weaknesses in the design and operation of IRS's 
financial management systems, accounting procedures, 
documentation, recordkeeping, and internal controls prevented 
IRS from reliably reporting on the results'' of these 
activities.
    The subcommittee's oversight hearing on March 1, 1999 
highlighted the need for better computer systems to improve the 
IRS's debt management. At the time of the hearing, the IRS 
estimated that it collects only 11 percent of the $222 billion 
in debts the agency claims are owed by delinquent taxpayers. 
The hearing also illustrated the need for better controls over 
refunds. According to the GAO, the IRS doesn't have the 
preventive controls it needs to reduce the amount of 
inappropriate payments being disbursed for tax refunds.
            Department of Defense [DOD]
    The General Accounting Office, the Defense Inspector 
General, and the department's audit agencies have long reported 
problems in the DOD's financial management systems and 
practices. Each year, numerous reports are issued with 
virtually the same problems as the prior years. The DOD's 
reported financial management problems include: inadequate 
control over assets such as real property, capital leases, 
construction in progress, and inventories; the understatement 
of costs associated with environmental clean-ups; liabilities, 
including military retiree benefits, that are not covered by 
current budgetary resources; and instances of noncompliance 
with laws and regulations. Because of these problems, the 
Inspector General was unable to render an opinion on the DOD's 
financial statements for fiscal year 1998. The GAO disclaimed 
an opinion on the Consolidated Governmentwide Financial 
Statements of the Federal Government, largely due to the 
Defense Department's inability to provide complete and 
verifiable information on its finances.
    The issues that need to be resolved cross operational lines 
within the DOD and the military services. Thus, action is 
needed from the top levels of DOD management to ensure that 
these long-standing problems are resolved.
    On May 4, 1999, the subcommittee examined the results of 
the fiscal year 1998 audits of the DOD, and the status of the 
Department's plans to address its long-standing and severe 
problems. The GAO and DOD's Acting Inspector General 
highlighted the most serious financial management weaknesses at 
the Department. The subcommittee heard that the DOD remains 
unable to:
         account for and properly report on billions of 
        dollars worth of inventory and property, plants, 
        equipment, and national defense assets, primarily 
        weapons systems and support equipment;
         estimate and report material amounts of 
        environmental and disposal liabilities, and their 
        related costs;
         determine the liability associated with post-
        retirement health benefits for military employees;
         report the net costs of its operations;
         produce accurate budget data; and
         determine the full extent of improper 
        payments.
    These weaknesses in the DOD's financial management 
operations continue to result in wasted resources. Furthermore, 
they undermine the DOD's ability to manage an estimated $250 
billion budget and $1 trillion in assets, all of which limit 
the reliability of financial information provided to Congress.
    During 1998, the Department of Defense adressed these 
weaknesses more seriously than in previous years. The GAO 
testified before the subcommittee on March 4, stating that 
``while in the past we have questioned the department's 
commitment to fixing these long-standing problems, DOD has 
started to devote additional resources to correct its financial 
management weaknesses. The atmosphere of `business as usual' at 
DOD has changed to one of marked effort at real reform.'' The 
GAO went on to say, ``this commitment is imperative, as it will 
take considerable effort, time, and sustained top management 
attention to turn reform efforts into day-to-day management 
reality.''
            Health Care Financing Administration [HCFA]
    HCFA accounts for more than 18 percent of all Federal 
budget outlays, and pays for one-third of the health-care costs 
throughout the United States. The growth of HCFA's Medicare and 
Medicaid payments has exceeded the growth in the Consumer Price 
Index for medical goods and services. Yet the agency is unable 
to provide timely or reliable financial information. The GAO 
has cited HCFA's Medicare program as a high-risk area for 
fraud, waste, and abuse.\23\
---------------------------------------------------------------------------
    \23\ High Risk Series: GAO/HR-99-1, January 1999.
---------------------------------------------------------------------------
    HCFA's fiscal year 1998 financial statements received a 
qualified opinion. The Inspector General of HHS was unable to 
find sufficient documentation to complete the Medicare accounts 
receivable. HCFA released its audited financial statements for 
fiscal year 1998 at the subcommittee's March 26, 1999 hearing.
    Based on the last 2 years of audit results, the hearing 
focused on actions HCFA is taking to resolve its financial 
management problems, including excessive Medicare payments. 
There has been marked improvement in the agency's annual 
overpayments, but the amounts are still unacceptable. The 
estimated amount of overpayments for Medicare dropped from 
$23.2 billion in 1996 to $20.6 billion in 1997 and $12.6 
billion in 1998. The 1998 amount represents approximately 7.1 
percent of the total Medicare fee-for-service benefit payments 
made that year.
    The subcommittee found that, while progress has been made, 
much more is needed to ensure that the Medicare and Medicaid 
programs--critical to the security of 73 million elderly and 
impoverished Americans--are fiscally sound.
    Specific issues disclosed in the auditor's report on the 
1998 financial statements included the following:
         Medicare contractors did not maintain the 
        support needed to determine the accuracy of reported 
        collections of accounts receivable. Auditors were 
        unable to determine if records maintained by the 
        contractors included all the amounts owed to HCFA.
         Medicare contractors did not adequately 
        control cash, including collection of outstanding 
        accounts receivable. During 1998, Medicare contractors 
        reported more than $7.5 billion in collections. 
        Auditors reported serious breakdowns in controls in 
        this area, including the fact that, in many cases, 
        Medicare contractors failed to prepare bank 
        reconciliations in a timely manner. When 
        reconciliations were prepared, they were not adequately 
        documented. In addition, at one location visited by 
        auditors the same individual was responsible for 
        receiving and endorsing incoming checks, preparing and 
        recording deposits, and performing bank 
        reconciliations. This situation greatly increases the 
        risk that the money collected by this contractor could 
        be misappropriated. The segregation of these duties is 
        a common internal control adhered to by even the 
        smallest private entities.
            Department of Justice
    The Department of Justice, under the direction of the 
Attorney General, is charged with protecting society against 
criminals and subversion, and upholding the civil rights of all 
Americans. In addition, the department is responsible for 
ensuring healthy competition among businesses, safeguarding the 
consumer, enforcing environmental, drug, immigration, and 
naturalization laws, and representing the American people in 
all legal matters involving departments and agencies within the 
executive branch of Government.
    In 1998, the Department of Justice was again unable to 
provide reliable financial information to decisionmakers. For 
the third consecutive year, auditors were unable to render an 
opinion on Justice's financial statements. In addition, 
auditors reported significant weaknesses in internal controls 
and cases in which the law-enforcement department failed to 
comply with financial laws and regulations.
    At the subcommittee's hearing on March 18, 1999, we learned 
that the weaknesses reported in the Department's consolidated 
financial statements were also prevalent in most of the 
Department's component entities. The audit report stated that 
weaknesses exist in the controls over computer security at the 
U.S. Marshals Service, the Federal Bureau of Investigation, the 
Drug Enforcement Administration, and the Immigration and 
Naturalization Service.
            Federal Aviation Administration
    The Federal Aviation Administration [FAA] operates the 
Nation's air traffic control system and regulates aviation 
safety, security, and the U.S. commercial space industry. In 
its position on the front line of aviation safety, the FAA 
works with the air transportation industry, other agencies at 
the Federal, State, and local level, and with its international 
counterparts.
    Due to long-standing and unresolved problems, the GAO 
designated financial management at the FAA as a high-risk area 
in its January 1999 report. The GAO report stated that 
``financial management weaknesses continue to render FAA 
vulnerable to waste, fraud, and abuse; undermine its ability to 
manage its operations; and limit the reliability of financial 
information provided to the Congress.'' \24\
---------------------------------------------------------------------------
    \24\ High Risk Series: GAO/HR-99-1, January 1999.
---------------------------------------------------------------------------
    The subcommittee examined these weaknesses at a hearing on 
March 18, 1999. Because of the results of the Department's 1998 
financial statement audit, the subcommittee also discussed the 
findings with the Inspector General of the Department of 
Transportation. The Inspector General was unable to render an 
opinion on the 1998 financial statements. In addition, the 
Inspector General reported significant weaknesses in the FAA's 
internal controls. These weaknesses included more than $9 
billion in property, plant and equipment that could not be 
verified. The FAA also could not reliably report on the costs 
of its operations. The combination of poor accounting and 
control over assets and costs are especially troubling, 
considering that the agency has an air traffic control 
modernization plan that is projected to cost more than $42 
billion by the year 2004.
    In 1981, the FAA had initiated an earlier air traffic 
control modernization program. This effort involved acquiring 
new air traffic control facilities and a vast network of radar, 
automated data processing navigation, and communications 
equipment. The program, which was poorly managed, was shutdown, 
costing taxpayers $4 billion for a system that didn't work. The 
FAA's current modernization program has been put on the GAO 
high-risk list, due in large part to the agency's financial 
management problems, such as poor cost-accounting practices and 
lack of accountability over acquisitions.
2. Federal department and agency financial management grades
    On March 31, 1999, the subcommittee released its second 
annual report card measuring the effectiveness of financial 
management in the 24 Cabinet departments and independent 
agencies with audited financial statements. The grades were 
based on the results of the audits prepared by the agencies' 
Inspectors General, independent public accountants, and the 
General Accounting Office. The report card is a gauge for 
Congress to see where attention is needed to prod agencies 
toward getting their financial affairs in order.
    The National Aeronautics and Space Administration and the 
National Science Foundation demonstrated they could effectively 
manage their finances. Both agencies received ``A's.''
    The General Services Administration, the Department of 
Labor, and the Social Security Administration all earned 
commendable ``B's.''
    These agencies were the exception rather than the rule; 7 
of the 24 agencies--29 percent--had not filed reports by the 
subcommittee's March 31 hearing, 1 month after their March 1 
reporting deadline established by the Government Management 
Reform Act of 1994, and 6 months after the close of the 
Government's fiscal year. As of the publication of this report, 
six agencies--the Department of Commerce, the Department of 
Education, the Environmental Protection Agency, the Department 
of the Interior, the Small Business Administration and the 
Department of State--had not submitted financial statements.
    Six other agencies could not pass muster and earned a 
failing grade of ``F.'' They are: the Agency for International 
Development, the Department of Agriculture, the Department of 
Defense, the Department of Justice, the Department of 
Transportation, and the Office of Personnel Management.
    These audits were required by the Government Management 
Reform Act of 1994, which intended to provide a more effective, 
efficient, and responsive Federal Government. To that end, the 
act specifically requires that consolidated governmentwide 
financial statements be prepared and audited, and that each 
executive branch agency prepare and have audited a financial 
statement covering all accounts and associated activities of 
each office, bureau, and activity within the agency. The grades 
are as follows:

                  Federal Financial Management Status Report--Federal Departments and Agencies
----------------------------------------------------------------------------------------------------------------
                                      Reliable
                                     Financial        Effective    Compliance with
        Department/Agency           Information       Internal         Laws and     Grade FY  Grade FY  Grade FY
                                  (yes/qualified/   Control (yes/    Regulations       96        97        98
                                        no)              no)           (yes/no)
----------------------------------------------------------------------------------------------------------------
National Aeronautics and Space    YES              YES             YES              A         A         A
 Administration
----------------------------------------------------------------------------------------------------------------
National Science Foundation       YES              YES             YES              D         B+        A
================================================================================================================
General Services Administration   YES              YES             NO               D+        B-        B-
----------------------------------------------------------------------------------------------------------------
Department of Labor               YES              YES             NO               D         B-        B-
----------------------------------------------------------------------------------------------------------------
Social Security Administration    YES              YES             NO               A         B-        B-
================================================================================================================
Department of Energy              Qualified        NO              YES              A         A         C
================================================================================================================
Federal Emergency Management      YES              NO              NO               F         D-        D+
 Agency
----------------------------------------------------------------------------------------------------------------
Department of Housing and Urban   YES              NO              NO               D-        D-        D+
 Development
----------------------------------------------------------------------------------------------------------------
Nuclear Regulatory Commission     YES              NO              NO               A         B-        D+
----------------------------------------------------------------------------------------------------------------
Health and Human Services         Qualified        NO              NO               F         D-        D-
----------------------------------------------------------------------------------------------------------------
Department of the Treasury        Qualified        NO              NO               F         D-        D-
----------------------------------------------------------------------------------------------------------------
Department of Veterans Affairs    Qualified        NO              NO               F         D-        D-
================================================================================================================
Agency for International          NO               NO              NO               F         F         F
 Development
----------------------------------------------------------------------------------------------------------------
Department of Agriculture         NO               NO              NO               F         F         F
----------------------------------------------------------------------------------------------------------------
Department of Defense             NO               NO              NO               F         F         F
----------------------------------------------------------------------------------------------------------------
Department of Transportation      NO               NO              NO               F         F         F
----------------------------------------------------------------------------------------------------------------
Department of Justice             NO               NO              NO               F         F         F
----------------------------------------------------------------------------------------------------------------
Office of Personnel Management    NO               NO              NO               F         F         F
----------------------------------------------------------------------------------------------------------------
Department of Commerce            No Report        No Report       No Report        F         F         F *
----------------------------------------------------------------------------------------------------------------
Department of Education           No Report        No Report       No Report        D+        D+        F *
----------------------------------------------------------------------------------------------------------------
Environmental Protection Agency   No Report        No Report       No Report        C         D+        F *
----------------------------------------------------------------------------------------------------------------
Department of the Interior        No Report        No Report       No Report        D+        B-        F *
----------------------------------------------------------------------------------------------------------------
Small Business Administration     No Report        No Report       No Report        B-        D+        F *
----------------------------------------------------------------------------------------------------------------
Department of State               No report        No report       No report        D-        D-        F *
----------------------------------------------------------------------------------------------------------------
* Indicates that the Agency did not submit its FY98 financial statements report as of the date of this report.

                            III. Conclusions

    Poor financial management has been a long-recognized 
problem within the Federal Government. Congress has developed a 
strong legislative framework that if properly implemented, 
would significantly improve the Government's financial 
management. This, in turn, would lead to more efficient and 
effective Government operations, and more informed 
decisionmaking. Despite these efforts, however, many executive 
branch departments and agencies have been overly slow in 
implementing the financial management legislation.
    Some progress was made during the Government's 1998 fiscal 
year. Nevertheless, most Federal agencies still cannot account 
for billions of dollars in Federal spending in an accurate and 
timely manner.
    Subcommittee hearings over the last 2 months and the 1998 
audit reports raise serious questions about the soundness of 
the Government's fundamental financial information.
    To make informed decisions, Congress, the President, and 
his Cabinet must have reliable data on a timely basis. Without 
such information, both the quality of Government services and 
the fiscal health of this Nation are at risk.
    The Federal Government must get its financial house in 
order. The Chief Financial Officers Act of 1990, as expanded by 
the Government Management Reform Act of 1994 and amended by the 
Federal Financial Management Improvement Act of 1996, provides 
the foundation for the successful implementation of the 
Government Performance and Results Act of 1993. However, 
further legislation is now necessary to penalize recalcitrant 
agencies and departments that fail to comply with Federal 
financial management laws. Furthermore, the President needs the 
appropriate staff to focus on management problems within the 
executive branch of the Government. An Office of Management 
whose Director reports to the President would enable the 
President, his Cabinet officers, and agency administrators to 
focus on improved financial management, as well as improved 
general management and information management.
    Without such a governmentwide management structure, other 
departments and agencies will not learn from past management 
failures, such as the computer debacles of the early 1990s. The 
Federal Aviation Administration's $4 billion was matched by a 
similar failure when the Internal Revenue Service sought to 
improve its information systems. Together, these programs cost 
taxpayers $8 billion before they were stopped.
    Congress and the President must ensure that Federal 
agencies and departments place adequate attention to financial 
management. The framework is in place for these Federal 
departments and agencies to step up to their fundamental 
responsibility: to be financially accountable to the American 
taxpayer.

        APPENDIX A--Basis For Agency Financial Management Grades

                                ------                                


    The grades for each of the 24 departments and agencies are 
based on the results of the financial statement audits. These 
audits were performed by the agency's Inspector General, an 
independent public accounting firm, and the General Accounting 
Office. All auditors were required to follow generally accepted 
Government auditing standards [GAGAS]. These standards 
incorporate the American Institute of Certified Public 
Accountant's Statements on Auditing Standards, the same 
standards required for audits of private sector entities. 
However, GAGAS adds certain requirements beyond the Statements 
on Auditing Standards. Most notably, GAGAS has additional 
reporting requirements beyond an opinion on the financial 
statements.
    Three reports are required at the completion of each audit 
of Government entities under GAGAS and as incorporated in OMB 
Bulletin 93-06, Audit Requirements for Federal Financial 
Statements.\25\ These reports are an opinion of the financial 
statements, a report on internal controls structure, and a 
report on compliance with laws and regulations.
---------------------------------------------------------------------------
    \25\ OMB Bulletin 93-06, Audit Requirements for Federal Financial 
Statements, establishes requirements and guidance for auditors to 
follow in auditing Federal financial statements.
---------------------------------------------------------------------------
    The opinion provides the auditor's assessment of the 
reliability of the information contained in the financial 
statements. There are four types of opinions that the auditor 
can render--Unqualified, Qualified, Adverse, or Disclaimer. An 
unqualified opinion signifies that the information in the 
financial statements was reliable in all material respects. A 
qualified opinion signifies that, except for specified 
information in the financial statements, the information is 
reliable. An adverse opinion means the statements are not 
reliable. Last, a disclaimer of opinion signifies that the 
auditor was unable to determine if material information in the 
statements was reliable.
    The report on internal controls provides an assessment by 
the auditors of the effectiveness of internal controls. The 
report is required to identify any instances of material 
weaknesses or reportable conditions in internal controls that 
surfaced during the course of the audit. The American Institute 
of Certified Public Accountants defines a material weakness in 
internal controls as ``. . . a condition in which the design or 
operation of one or more of the internal control components 
does not reduce to a relatively low level the risk that errors 
or irregularities in amounts that would be material in relation 
to the financial statements being audited may occur and not be 
detected within a timely period by employees in the normal 
course of performing assigned functions.'' \26\
---------------------------------------------------------------------------
    \26\ Codification of Statements on Auditing Standards (Including 
Statements on Standards for Attestation Engagements), Nos. 1 to 82, 
American Institute of Certified Public Accountants, as of Jan. 1, 1997; 
AU sec. 325.15.
---------------------------------------------------------------------------
    The report on compliance with the laws and regulations 
provides the auditor's assessment of instances in which the 
agency did not follow or conform materially to requirements of 
the laws and regulations deemed material to the financial 
operations of that agency. The Office of Management and Budget 
also provides guidance to the auditors in OMB Bulletin 93-06 
regarding which general laws and regulations need to be 
considered during the audit.
    Starting in fiscal year 1997, an agency's adherence to the 
Federal Financial Management Improvement Act of 1996 [FFMIA] 
requirements must be assessed in the report on compliance with 
laws and regulations, in accordance with OMB guidance.\27\ 
FFMIA specifically requires that agencies conform to 
promulgated Federal Government accounting and systems 
standards, and use the Government standard general ledger. Many 
agencies did not materially conform to the requirements of 
FFMIA.
---------------------------------------------------------------------------
    \27\ OMB issued a memorandum dated Sept. 9, 1997, for agencies and 
auditors to use in assessing compliance with FFMIA. This interim 
guidance was to be followed in audits of Federal financial statements 
for fiscal year 1997.
---------------------------------------------------------------------------
    The subcommittee reviewed each financial report on an 
absolute scale and assessed grades on a 4 point scale with 
``A'' = 4, ``B'' = 3, ``C'' = 2, ``D'' = 1, and ``F'' = 0. In 
the financial information category, when an unqualified opinion 
was rendered by the auditor, an ``A'' (4 points) was given; a 
qualified opinion received a ``C'' (2 points) and a disclaimer 
received an ``F'' (0 points). There were no adverse opinions 
rendered in fiscal years 1996, 1997 or 1998, however, an 
adverse opinion would have also received an ``F.''
    If no material weaknesses in internal controls were 
reported, the agency received an ``A'' (4 points). Conversely, 
if material weaknesses were reported, the agency received an 
``F'' (0 points) in this category.
    Similarly, if the auditor reported that the agency had no 
known instances of non-compliance with laws and regulations an 
``A'' (4 points) was awarded. If material non-compliances were 
reported, an ``F'' (0 points) was given.
    These grades were then averaged (with equal weight) to 
determine the overall grade for the agency.
    If no report was completed or provided prior to March 31, 
1999, the agency was initially assessed as ``incomplete.'' When 
reports became available, the agency's grade was determined. 
The grades included in this report are based on audit reports 
issued as of the publication of this report. By law, agencies 
are required to submit audited financial statements for the 
fiscal year to the Director of OMB by March 1 of the succeeding 
year. This date is 5 months after the close of the Federal 
Government's fiscal year on September 30.

       APPENDIX B--Major Federal Financial Management Legislation

                                ------                                



----------------------------------------------------------------------------------------------------------------
            Public Law                                 Key Financial Management Provisions \1\
----------------------------------------------------------------------------------------------------------------
Budget and Accounting Procedures
 Act of 1950
                                     The Budget and Accounting Procedures Act of 1950 provided that the
(Chapter 946, 64 Stat. 832)          maintenance of accounting systems and producing of financial reports with
                                     respect to the operations of executive agencies be the responsibility of
                                     the executive branch and that the auditing for the Government be conducted
                                     by the Comptroller General to determine the extent to which accounting and
                                     related financial reporting fulfill the purposes specified, financial
                                     transactions have been consummated in accordance with laws, regulations, or
                                     other requirements, and adequate internal financial control over operations
                                     is exercised.
                                     The Comptroller General was given the responsibility of prescribing
                                     accounting and auditing principles and standards to be followed in the
                                     preparation of financial reports by executive agencies and by the GAO in
                                     the audit of the financial transactions of each executive, legislative, and
                                     judicial agency.
----------------------------------------------------------------------------------------------------------------
Inspector General Act of 1978, as
 amended by the Inspector General
 Act Amendments of 1988
                                     The Inspector General Act (IG Act) requires that Inspectors General
(Public Laws 95-452 and 100-504)     perform audits in accordance with generally accepted government auditing
                                     standards.
                                     The Chief Financial Officers Act of 1990, as expanded by the
                                     Government Management Reform Act, and amended by the Federal Financial
                                     Management Improvement Act, has demanded shifts in the focus of the
                                     Inspectors' General work.
----------------------------------------------------------------------------------------------------------------
Federal Managers' Financial
 Integrity Act of 1982
                                     The Federal Managers' Financial Integrity Act of 1982 [FMFIA]
(Public Law 97-255)                  required that internal accounting and administrative controls of each
                                     executive agency be established in accordance with standards prescribed by
                                     the Comptroller General, and shall provide reasonable assurance that:
                                     obligations and costs are in compliance with applicable law; assets are
                                     safeguarded from waste, loss, unauthorized use, or misappropriation; and
                                     revenues and expenditures applicable to agency operations are properly
                                     recorded and accounted for.
                                     The head of each agency is required to report to the President and
                                     Congress whether the agency's systems of internal accounting and
                                     administrative control fully comply with the Comptroller General's
                                     requirements. For all material weaknesses, the agency head must describe in
                                     the report the plan and schedule for correcting any such weaknesses.
----------------------------------------------------------------------------------------------------------------
Debt Collection Act of 1982, as
 amended, and Debt Collection
 Improvement Act of 1996
                                     The Debt Collection Act, as amended, provides greater powers to
(Public Laws 97-365 and 104-134,     Federal agencies in collecting debts owed to the Federal Government
 sec. 31001)                         including: reporting a delinquent debtor to a consumer reporting agency;
                                     offsetting the salary of Federal employees who are delinquent in the
                                     payment of debts; disclosing to a Federal lending agency that an applicant
                                     has a tax delinquency and deny such individual credit; disclosing a
                                     taxpayer's address to an agency to use for purposes of collecting
                                     delinquent debt; administratively offsetting all Federal payments,
                                     including tax refunds; garnishing wages; and charging of interest and
                                     penalties on any debt.
                                     Agencies are required to report to the Director of the Office of
                                     Management and Budget and the Secretary of the Treasury at least once a
                                     year information regarding its debt collection activities. Further, the
                                     Secretary of the Treasury must report that information to Congress annually
                                     and provide a one-time report, not later than April 1999, to Congress on
                                     the collection services provided by it and other entities collecting on
                                     behalf of Federal agencies.
----------------------------------------------------------------------------------------------------------------
                                     Agencies are required to make Federal payments to individuals by
                                     electronic fund transfer, except for tax refunds.
                                     Agencies, except for the IRS, can contract with a collection
                                     service to pursue outstanding debts of the agency or to sell debt over 90
                                     days delinquent.
                                     Agencies are required to collect the taxpayer identification number
                                     of any individual or entity doing business with the Government.
----------------------------------------------------------------------------------------------------------------
Chief Financial Officers Act of
 1990
                                     The Chief Financial Officers Act of 1990 (CFO Act) creates a new
(Public Law 101-576)                 leadership structure for Federal financial management, including the
                                     creation of a Deputy Director of Management, a Controller who advises the
                                     Deputy Director, and an Office of Federal Financial Management within the
                                     Office of Management and Budget. The Deputy Director is responsible for
                                     providing financial management leadership including the establishment and
                                     oversight of Federal financial policies and practices.
                                     The Office of Management and Budget is required by the CFO Act to
                                     prepare and submit to Congress a governmentwide 5-year financial management
                                     plan. The plan describes the planned activities of OMB and agency's CFO
                                     over the next 5 years to improve financial management.
                                     The CFO Act also requires that 24 agencies have Chief Financial
                                     Officers and Deputy Chief Financial Officers and lays out their authorities
                                     and functions. It also stipulates the qualifications and responsibilities
                                     for each of the positions.
----------------------------------------------------------------------------------------------------------------
Government Management Reform Act
 of 1994
                                     The Government Management Reform Act of 1994 [GMRA] expands
(Public Law 103-356) \2\             requirements for executive branch agencies contained in section 303(a) of
                                     the CFO Act.
                                     GMRA requires all 24 agencies covered under the CFO Act to have
                                     agencywide audited financial statements, beginning with fiscal year 1996.
                                     Those statements, due March 1, 1997, and each year thereafter, must cover
                                     all accounts and associated activities.
----------------------------------------------------------------------------------------------------------------
                                     GMRA provides that, for each audited financial statement required
                                     from the agency, the auditor (the Inspector General, independent public
                                     accountant, or the GAO) must submit a report on the audit to the head of
                                     the agency. This report is to be prepared in accordance with generally
                                     accepted Government auditing standards.
                                     GMRA requires that a consolidated financial statement for all
                                     accounts and associated activities of the executive branch be prepared by
                                     the Secretary of the Treasury, in coordination with the Director of the
                                     Office of Management and Budget, for fiscal year 1997 and each year
                                     thereafter. Such statements are to be audited by the Comptroller General.
                                     The audited financial statements must be submitted to the President and
                                     Congress by March 31, 1998.
----------------------------------------------------------------------------------------------------------------
Federal Financial Management
 Improvement Act of 1996
                                     The Federal Financial Management Improvement Act of 1996 [FFMIA]
(Title VIII of Public Law 104-208)   requires that agencies conform to promulgated Federal Government accounting
                                     and systems standards, and use the U.S. Government Standard General Ledger.
                                     FFMIA requires auditors performing financial audits to report
                                     whether agencies' financial management systems comply substantially with
                                     Federal accounting standards, financial systems requirements, and the
                                     Government's Standard General Ledger at the transaction level.
                                     For agencies that are not in material compliance with the standards
                                     described above, the head of the agency, in consultation with the Director
                                     of the Office of Management and Budget, must prepare a remediation plan
                                     that addresses the problems. This plan shall include resources, remedies,
                                     and intermediate target dates necessary to bring the agency's financial
                                     management systems into substantial compliance. The remediation plan shall
                                     bring the agency's financial management systems into substantial compliance
                                     within 3 years after the date a determination is made by the auditors that
                                     the agency is not in compliance.
----------------------------------------------------------------------------------------------------------------
                                     The Director of the Office of Management and Budget is required to
                                     report to Congress, not later than March 31 of each year, regarding
                                     implementation of FFMIA.
                                     The Comptroller General is required to report to Congress, no later
                                     than October 1 of each year, concerning compliance with the requirements of
                                     FFMIA and the adequacy of applicable accounting standards of the Federal
                                     Government.
----------------------------------------------------------------------------------------------------------------
\1\ These laws, except FFMIA, are compiled in Laws Related to Federal Financial Management, House Report 104-
  745. FFMIA is included in Appendix C to this report.
\2\ The section of GMRA that deals with financial management is also referred to as the ``Federal Financial
  Management Act of 1994.''


     APPENDIX C--Public Law 104-208, Title VIII--Federal Financial 
                       Management Improvement Act

                                ------                                


          TITLE VIII--FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT

SEC. 801. SHORT TITLE.

      This title may be cited as the ``Federal Financial 
Management Improvement Act of 1996.''

SEC. 802. FINDINGS AND PURPOSES.

      (a) Findings.--The Congress finds the following:
            (1) Much effort has been devoted to strengthening 
        Federal internal accounting controls in the past. 
        Although progress has been made in recent years, 
        Federal accounting standards have not been uniformly 
        implemented in financial management systems for 
        agencies.
            (2) Federal financial management continues to be 
        seriously deficient, and Federal financial management 
        and fiscal practices have failed to--
                    (A) identify costs fully;
                    (B) reflect the total liabilities of 
                congressional actions; and
                    (C) accurately report the financial 
                condition of the Federal Government.
            (3) Current Federal accounting practices do not 
        accurately report financial results of the Federal 
        Government or the full costs of programs and 
        activities. The continued use of these practices 
        undermines the Government's ability to provide credible 
        and reliable financial data and encourages already 
        widespread Government waste, and will not assist in 
        achieving a balanced budget.
            (4) Waste and inefficiency in the Federal 
        Government undermine the confidence of the American 
        people in the government and reduce the federal 
        Government's ability to address vital public needs 
        adequately.
            (5) To rebuild the accountability and credibility 
        of the Federal Government, and restore public 
        confidence in the Federal Government, agencies must 
        incorporate accounting standards and reporting 
        objectives established for the Federal Government into 
        their financial management systems so that all the 
        assets and liabilities, revenues, and expenditures or 
        expenses, and the full costs of programs and activities 
        of the Federal Government can be consistently and 
        accurately recorded, monitored, and uniformly reported 
        throughout the Federal Government.
            (6) Since its establishment in October 1990, the 
        Federal Accounting Standards Advisory Board 
        (hereinafter referred to as the ``FASAB'') has made 
        substantial progress toward developing and recommending 
        a comprehensive set of accounting concepts and 
        standards for the Federal Government. When the 
        accounting concepts and standards developed by FASB are 
        incorporated into Federal financial management systems, 
        agencies will be able to provide cost and financial 
        information that will assist the Congress and financial 
        managers to evaluate the cost and performance of 
        Federal programs and activities, and will therefore 
        provide important information that has been lacking, 
        but is needed for improved decision making by financial 
        managers and the Congress.
            (7) The development of financial management systems 
        with the capacity to support these standards and 
        concepts will, over the long term, improve Federal 
        financial management.
      (b) Purpose.--The purposes of this Act are to--
            (1) provide for consistency of accounting by an 
        agency from one fiscal year to the next, and uniform 
        accounting standards throughout the Federal Government;
            (2) require Federal financial management systems to 
        support full disclosure of Federal financial data, 
        including the full costs of Federal programs and 
        activities, to the citizens, the Congress, the 
        President, and agency management, so that programs and 
        activities can be considered based on their full costs 
        and merits;
            (3) increase the accountability and credibility of 
        federal financial management;
            (4) improve performance, productivity and 
        efficiency of Federal Government financial management;
            (5) establish financial management systems to 
        support controlling the cost of Federal Government;
            (6) build upon and complement the Chief Financial 
        Officers Act of 1990 (Public Law 101-576; 104 Stat. 
        2838), the Government Performance and Results Act of 
        1993 (Public Law 103-62; 107 Stat. 285) and the 
        Government Management Reform Act of 1994 (Public Law 
        103-356; 108 Stat. 3410); and
            (7) increase the capability of agencies to monitor 
        execution of the budget by more readily permitting 
        reports that compare spending of resources to results 
        of activities.

SEC. 803 IMPLEMENTATION OF FEDERAL FINANCIAL MANAGEMENT IMPROVEMENTS.

      (a) In General.--Each agency shall implement and maintain 
financial management systems that comply substantially with 
Federal financial management systems requirements, applicable 
Federal accounting standards, and the United States Government 
Standard General Ledger at the transaction level.
      (b) Audit Compliance Finding.--
            (1) In general.--Each audit required by section 
        3521(e) of title 31, United States Code, shall report 
        whether the agency financial management systems comply 
        with the requirements of subsection (a).
            (2) Content of Reports.--When the person performing 
        the audit required by section 3521(e) of title 31, 
        United States Code, reports that the agency financial 
        management systems do not comply with the requirements 
        of subsection (a), the person performing the audit 
        shall include in the report on the audit--
                    (A) the entity or organization responsible 
                for the financial management systems that have 
                been found not to comply with the requirements 
                of subsection (a);
                    (B) all facts pertaining to the failure to 
                comply with the requirements of subsection (a), 
                including--
                            (i) the nature and extent of the 
                        noncompliance including areas in which 
                        there is substantial but not full 
                        compliance;
                            (ii) the primary reason or cause of 
                        the noncompliance;
                            (iii) the entity or organization 
                        responsible for the non-compliance; and
                            (iv) any relevant comments from any 
                        responsible officer or employee; and
                    (C) a statement with respect to the 
                recommended remedial actions and the time 
                frames to implement such actions.
      (c) Compliance Implementation.--
            (1) Determination.--No later than the date 
        described under paragraph (2), the Head of an agency 
        shall determine whether the financial management 
        systems of the agency comply with the requirements of 
        subsection (a). Such determination shall be based on--
                    (A) a review of the report on the 
                applicable agency-wide audited financial 
                statement;
                    (B) any other information the Head of the 
                agency considers relevant and appropriate.
            (2) Date of determination.--The determination under 
        paragraph (1) shall be made no later than 120 days 
        after the earlier of--
                    (A) the date of the receipt of an agency-
                wide audited financial statement; or
                    (B) the last day of the fiscal year 
                following the year covered by such statement.
            (3) Remediation plan.--
                    (A) If the Head of an agency determines 
                that the agency's financial management systems 
                do not comply with the requirements of 
                subsection (a), the head of the agency, in 
                consultation with the Director, shall establish 
                a remediation plan that shall include 
                resources, remedies, and intermediate target 
                dates necessary to bring the agency's financial 
                management systems into substantial compliance.
                    (B) If the determination of the head of the 
                agency differs from the audit compliance 
                findings required in subsection (b), the 
                Director shall review such determinations and 
                provide a report on the findings to the 
                appropriate committees of the Congress.
            (4) Time period for compliance.--A remediation plan 
        shall bring the agency's financial management systems 
        into substantial compliance no later than 3 years after 
        the date a determination is made under paragraph (1), 
        unless the agency, with concurrence of the Director--
                    (A) determines that the agency's financial 
                management systems cannot comply with the 
                requirements of subsection (a) within 3 years;
                    (B) specifies the most feasible date for 
                bringing the agency's financial management 
                systems into compliance with the requirements 
                of subsection (a); and
                    (C) designates an official of the agency 
                who shall be responsible for bringing the 
                agency's financial management systems into 
                compliance with the requirements of subsection 
                (a) by the date specified under subparagraph 
                (B).

SEC. 804. REPORTING REQUIREMENTS.

      (a) Reports by the Director.--No later than March 31 of 
each year, the Director shall submit a report to the Congress 
regarding implementation of this Act. The Director may include 
the report in the financial management status report and the 5-
year financial management plan submitted under section 
3512(a)(1) of title 31, United States Code.
      (b) Reports by the Inspector General.--Each Inspector 
General who prepares a report under section 5(a) of the 
Inspector General Act of 1978 (5 U.S.C. App.) shall report to 
Congress instances and reasons when an agency has not met the 
intermediate target dates established in the remediation plan 
required under section 3(c). Specifically the report shall 
include--
            (1) the entity or organization responsible for the 
        non-compliance;
            (2) the facts pertaining to the failure to comply 
        with the requirements of subsection (a), including the 
        nature and extent of the non-compliance, the primary 
        reason or cause for the failure to comply, and any 
        extenuating circumstances; and
            (3) a statement of the remedial actions needed to 
        comply.
      (c) Reports by the Comptroller General.--No later than 
October 1, 1997, and October 1, of each year thereafter, the 
Comptroller General of the United States shall report to the 
appropriate committees of the Congress concerning--
            (1) compliance with the requirements of section 
        3(a) of this Act, including whether the financial 
        statements of the Federal Government have been prepared 
        in accordance with applicable accounting standards; and
            (2) the adequacy of applicable accounting standards 
        for the Federal Government.

SEC. 805. CONFORMING AMENDMENTS.

      (a) Audits by Agencies.--Section 3521(f)(1) of title 31, 
United States Code, is amended in the first sentence by 
inserting ``and the Controller of the Office of Federal 
Financial Management'' before the period.
      (b) Financial Management Status Report.--Section 
3512(a)(2) of title 31, United States Code, is amended by--
            (1) in subparagraph (D) by striking ``and' after 
        the semicolon;
            (2) by redesignating subparagraph (E) as 
        subparagraph (F); and
            (3) by inserting after subparagraph (D) the 
        following:
                    ``(E) a listing of agencies whose financial 
                management systems do not comply substantially 
                with the requirements of Section 3(a) the 
                Federal Financial Management Improvement Act of 
                1996, and a summary statement of the efforts 
                underway to remedy the noncompliance; and''
      (c) Inspector General Act of 1978.--Section 5(a) of the 
Inspector General Act of 1978 is amended--
            (1) in paragraph (11) by striking ``and'' after the 
        semicolon;
            (2) in paragraph (12) by striking the period and 
        inserting ``; and''; and
            (3) by adding at the end the following new 
        paragraph:
            ``(13) the information described under section   
        05(b) of the Federal Financial Management Improvement 
        Act of 1996.''

SEC. 806. DEFINITIONS.

      For purposes of this title:
            (1) Agency.--The term ``agency'' means a department 
        or agency of the United States Government as defined in 
        section 901(b) of title 31, United States Code.
            (2) Director.--The term ``Director'' means the 
        Director of the Office of Management and Budget.
            (3) Federal Accounting Standards.--The term 
        ``Federal accounting standards'' means applicable 
        accounting principles, standards, and requirements 
        consistent with section 902(a)(3)(A) of title 31, 
        United States Code.
            (4) Financial management systems.--The term 
        ``financial management systems'' includes the financial 
        systems and the financial portions of mixed systems 
        necessary to support financial management, including 
        automated and manual processes, procedures, controls, 
        data, hardware, software, and support personnel 
        dedicated to the operation and maintenance of system 
        functions.
            (5) Financial system.--The term ``financial 
        system'' includes an information system, comprised of 
        one or more applications, that is used for--
                    (A) collecting, processing, maintaining, 
                transmitting, or reporting data about financial 
                events;
                    (B) supporting financial planning or 
                budgeting activities;
                    (C) accumulating and reporting costs 
                information; or
                    (D) supporting the preparation of financial 
                statements.
                    (6) Mixed system.--The term ``mixed 
                system'' means an information system that 
                supports both financial and nonfinancial 
                functions of the Federal Government or 
                components thereof.

SEC. 807. EFFECTIVE DATE.

      This title shall take effect for the fiscal year ending 
September 30, 1997.

SEC. 808. REVISION OF SHORT TITLES.

      (a) Section 4001 of Public Law 104-106 (110 Stat. 642; 41 
U.S.C. 251 note) is amended to read as follows:

``SEC. 4001. SHORT TITLE.

      ``This division and division E may be cited as the 
`Clinger-Cohen Act of 1996'.''.
      (b) Section 5001 of Public Law 104-106 (110 Stat. 679; 40 
U.S.C. 1401 note) is amended to read as follows:

``SEC. 5001. SHORT TITLE.

      ``This division and division D may be cited as the 
`Clinger-Cohen Act of 1996'.''
      (c) Any reference in any law, regulation, document, 
record, or other paper of the United States to the Federal 
Acquisition Reform Act of 1996 or to the Information Technology 
Management Reform Act of 1996 shall be considered to be a 
reference to the Clinger-Cohen Act of 1996.
      This Act may be cited as the ``Treasury, Postal Service, 
and General Government Appropriations Act, 1997''.

                     APPENDIX D--Index of Witnesses

                                ------                                


    APP, Steven, Deputy Chief Financial Officer, Department of 
Treasury, March 1, 1999.
    BROMWICH, Michael, Inspector General, Department of 
Justice, March 18, 1999.
    BROWN, June Gibbs, Inspector General, Department of Health 
and Human Services, March 26, 1999.
    CALBOM, Linda, Director, RCED Accounting and Financial 
Management, U.S. General Accounting Office, March 18, 1999.
    COLGATE, Stephen, Assistant Attorney General for 
Administration, Department of Justice, March 18, 1999.
    CUNNINGHAME, Donna, Chief Financial Officer, Internal 
Revenue Service, March 1, 1999.
    DESEVE, G. Edward, Deputy Director for Management, Office 
of Management and Budget, March 31, 1999.
    DODARO, Gene, Assistant Comptroller General for Accounting 
and Information Management, U.S. General Accounting Office, 
March 31, May 4, 1999.
    HAMMOND, Donald V., Fiscal Assistant Secretary, Department 
of Treasury, March 31, 1999.
    HASH, Michael M., Deputy Administrator, Health Care 
Financing Administration, Department of Health and Human 
Services, March 26, 1999.
    HAWKINS, Joan B., Assistant Director, Governmentwide 
Accounting and Information Management, U.S. General Accounting 
Office, March 1, 1999.
    JACOBSON, Lisa, Director of Defense Audits, Accounting and 
Information Management Division, U.S. General Accounting 
Office, May 4, 1999.
    KESSINGER, Marilyn, Director of Financial Statement Audits, 
Office of Inspector General, Department of Justice, March 18, 
1999.
    KLEINBERG, David, Deputy Chief Financial Officer, 
Department of Transportation, March 18, 1999.
    KUTZ, Gregory D., Associate Director, Governmentwide 
Accounting and Information Management Division, U.S. General 
Accounting Office, March 1, 1999.
    LEE, Diedre A., Administrator, Office of Federal 
Procurement Policy, Office of Management and Budget, March 31, 
1999, April 15, 1999.
    LIEBERMAN, Robert, Assistant Inspector General for Audit, 
Department of Defense, May 4, 1999.
    LYNN, William, Under Secretary of Defense, Chief Financial 
Officer, Department of Defense, May 4, 1999.
    MANCUSO, Donald, Acting Inspector General, Department of 
Defense, May 4, 1999.
    MECHE, John, Deputy Assistant Inspector General for 
Financial, Economic, and Information Technology, Department of 
Transportation, March 18, 1999.
    ROSSOTTI, Charles, Commissioner, Internal Revenue Service, 
Department of the Treasury, April 15, 1999.
    SCHELLENBERG, Carl, Chief Financial Officer, Federal 
Aviation Administration, March 18, 1999.
    SEBASTIAN, Steven J., Assistant Director, Governmentwide 
Accounting and Information Management, U.S. General Accounting 
Office, March 1, 1999.
    STEVENS, Nye, Director, Federal Management and Workforce 
Issues, U.S. General Accounting Office, April 15, 1999.
    TOYE, Nelson, Deputy Chief Financial Officer, Department of 
Defense, May 4, 1999.
    VENGRIN, Joseph, Assistant Inspector General for Audit 
Operations and Financial Statement Activity, Department of 
Health and Human Services, March 26, 1999.
    WALKER, David M., Comptroller General of the United States, 
U.S. General Accounting Office, March 31, 1999.
    WHITE, James, Director, Tax Policy and Administration 
Issues, U.S. General Accounting Office, April 15, 1999.

MINORITY VIEWS OF HON. HENRY A. WAXMAN, HON. JIM TURNER, HON. TOM 
  LANTOS, HON. ROBERT E. WISE, JR., HON. MAJOR R. OWENS, HON. EDOLPHUS 
  TOWNS, HON. PAUL E. KANJORSKI, HON. PATSY T. MINK, HON. CAROLYN B. 
  MALONEY, HON. ELEANOR HOLMES NORTON, HON. CHAKA FATTAH, HON. ELIJAH E. 
  CUMMINGS, HON. DENNIS J. KUCINICH, HON. ROD R. BLAGOJEVICH, HON. DANNY 
  K. DAVIS, HON. JOHN F. TIERNEY, HON. THOMAS H. ALLEN, HON. HAROLD E. 
  FORD, JR., AND HON. JANICE D. SCHAKOWSKY

    The Subcommittee on Government Management, Information, and 
Technology held a series of oversight hearings on financial 
management and reviewed the audits of several important Federal 
agencies, including the Internal Revenue Service, the Federal 
Aviation Administration, the Health Care Financing 
Administration, and the Departments of Justice and Defense. 
Audits of these agencies, and others, demonstrate that not all 
components of the Federal Government can produce reliable and 
timely financial information on a continuing basis. These 
audits also provide useful information on whether the 
government is managing its financial responsibilities well.
    Last year, President Clinton challenged Federal agencies to 
ensure that the Federal Government receives an unqualified 
audit opinion on its fiscal year 1999 consolidated financial 
statements. Attempts to achieve this ambitious goal have 
resulted in significant attention to financial reforms and 
improvements at agencies like the Department of Defense, which 
has some of the greatest deficiencies in its financial 
management systems.
    Modernization of financial management systems that are 
outdated and inadequate for fulfilling current audit 
requirements will take years. Congress passed a crucial 
financial management reform law in 1990, which required 
financial audits of certain Federal agencies for the first 
time. Since that time, Congress has enacted a number of other 
financial management laws that together provide a strong 
legislative framework to assure financial accountability in the 
Federal Government. The current system provides the opportunity 
to identify and resolve the most significant financial problems 
existing in the Federal Government.
    It may take some time before every agency can produce the 
timely, reliable financial information that it must produce 
under the current requirements; however, Federal agencies are 
headed in the correct direction. Many Federal agencies have 
made steady progress improving their financial management 
recently.
    While many of the report's findings and recommendations are 
valid, we reluctantly oppose this financial management report. 
Unfortunately, the majority report has turned financial 
management into a partisan issue by grading agencies in a 
manner that unfairly portrays the state of agencies' financial 
affairs. While the majority believes that these grades provide 
a ``gauge for Congress to see where attention is needed,'' 
these grades are misleading and partisan by their nature.
    The majority assigned numerous D's and F's to Federal 
agencies to convey the impression that the administration is 
failing to take financial management seriously. In fact, just 
the opposite is true. This administration has done more than 
any other to improve the financial accountability of the 
Federal Government. The Clinton administration is resolving 
financial management problems that have existed for decades. 
The Comptroller General noted on March 31, 1999, that it is 
clear that the President was making financial management a 
priority and setting goals for clean audit opinions at Federal 
agencies and that the Office of Management and Budget has been 
actively following agency progress. He concludes that progress 
is being made and ``steady improvements in financial 
accountability are occurring.''
    The partisan nature of the grades is apparent when one 
compares what the majority says about the administration with 
what the majority says about financial management in the House 
of Representatives. Republicans say that the grades show ``very 
little improvement'' in the Federal agencies and that if these 
agencies were schoolchildren ``and that was their report card, 
they would be grounded.'' At the same time, they praise the 
House of Representatives for conducting the first audit of the 
House in 1995.
    Yet, under the majority's own grading system, the results 
from the last House audit--which indicate the unreliability of 
some of the House accounts, internal control weaknesses, and 
noncompliance with House rules--would have received an overall 
grade of a D-. Under this year's newest criteria, which is 
timeliness, the House would have received an F.
    This example illustrates the problems with the grading 
scheme, because the House did not deserve a D- or an F for last 
year's financial audit, given its progress in financial 
management. As the Inspector General for the House of 
Representatives stated about the House's audit last year, 
``It's definitely improving and is almost there.'' Similarly, 
the low grades received by the Federal agencies unfairly skew 
perception of the progress being made by the administration. 
The majority simply refuses to credit the administration with 
progress--awarding more low grades this year than last year.
    Second, we question the recommendation that Federal 
agencies be financially penalized if they fail to produce 
timely and reliable financial information. Positive incentives 
for agencies to implement reforms in their financial systems 
would be helpful. However, depriving agencies of their needed 
funds may hinder substantial financial reforms. Faced with a 
potential loss of appropriations, agencies may be inclined to 
implement ``band-aid'' repairs to their financial systems 
rather than making the appropriate long-term system 
modifications. Moreover, it will be difficult to assess when an 
agency's reforms are adequate. Some agencies simply have much 
further to go, and some have fewer resources to allocate. The 
majority's own faulty grades demonstrate how difficult it is to 
assess financial progress fairly.
    Finally, we also question whether there is a need for a 
statutorily-mandated Office of Management within the executive 
branch. It is unclear whether creating a new management agency 
will improve government management or whether separating 
management functions from budget functions will backfire and 
result in less attention being placed on management reform at 
Federal agencies. Presidents can create organizations within 
the executive branch that focus on management reform. For 
example, the Clinton administration has achieved a number of 
fundamental government management reforms and brought 
innovative ideas to the Federal Government through the National 
Partnership for Reinventing Government. In addition, a number 
of high-level interagency working groups focused on improving 
government management have taken hold, such as the Chief 
Financial Officers Council and the Chief Information Officers 
Council. Alternative approaches to improving management should 
be encouraged and explored. An Office of Management is just one 
approach.
                                   Hon. Henry A. Waxman.
                                   Hon. Jim Turner.
                                   Hon. Tom Lantos.
                                   Hon. Robert E. Wise, Jr.
                                   Hon. Major R. Owens.
                                   Hon. Edolphus Towns.
                                   Hon. Paul E. Kanjorski.
                                   Hon. Patsy T. Mink.
                                   Hon. Carolyn B. Maloney.
                                   Hon. Eleanor Holmes Norton.
                                   Hon. Chaka Fattah.
                                   Hon. Elijah E. Cummings.
                                   Hon. Dennis J. Kucinich.
                                   Hon. Rod R. Blagojevich.
                                   Hon. Danny K. Davis.
                                   Hon. John F. Tierney.
                                   Hon. Thomas H. Allen.
                                   Hon. Harold E. Ford, Jr.
                                   Hon. Janice D. Schakowsky.