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Testimony: 

Before the Subcommittee on Federal Financial Management, Government 
Information, Federal Services, and International Security, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 3:00 p.m. EST: 

March 1, 2007: 

Federal Financial Management: 

Critical Accountability and Fiscal Stewardship Challenges Facing Our 
Nation: 

Statement of David M. Walker: 
Comptroller General of the United States: 

GAO-07-542T: 

GAO Highlights: 

Highlights of GAO-07-542T, a testimony before the Subcommittee on 
Federal Financial Management, Government Information, Federal Services, 
and International Security, Committee on Homeland Security and 
Governmental Affairs, U.S. Senate 

Why GAO Did This Study: 

The foundation laid by the Chief Financial Officers Act of 1990 and 
other management reform legislation provided a much needed statutory 
basis to improve the accountability of government programs and 
operations. Such reforms were intended to produce reliable, timely, and 
useful financial information to help manage day-to- day operations and 
exercise oversight and promote fiscal stewardship. 

This testimony, based on GAO's prior work, addresses (1) the progress 
made and challenges remaining to improve federal financial management 
practices, and (2) the serious challenges posed by the government's 
deteriorating long-range fiscal condition and my views on a possible 
way forward. 

What GAO Found: 

Since the enactment of key financial management reforms, the federal 
government has made substantial progress in improving financial 
management activities and practices. Federal financial systems 
requirements have been developed, and internal control has been 
strengthened. Nonetheless, the federal government still has a long way 
to go to address the six principal challenges to fully realizing strong 
federal financial management: (1) transforming financial management and 
business practices at DOD, (2) improving agency financial and 
performance reporting, (3) modernizing financial management systems, 
(4) addressing key remaining internal control weaknesses, (5) building 
a financial management workforce for the future, and (6) strengthening 
consolidated financial reporting. 

From a broad financial management perspective, the federal government's 
financial condition and fiscal outlook are worse than many understand. 
We are currently experiencing strong economic growth and yet running 
large on-budget (operating) deficits that are largely unrelated to the 
Global War on Terrorism. The federal government faces large and growing 
structural deficits in future years due primarily to known demographic 
trends and rising health care costs. As shown in the chart below, if it 
is assumed that recent tax reductions are made permanent and 
discretionary spending keeps pace with the growth of our economy, GAO's 
long-term simulations suggest that by 2040, federal revenues may be 
adequate to pay little more than interest on debt held by the public 
and some Social Security benefits. Neither slowing the discretionary 
spending growth nor allowing certain tax provisions to expire—nor both 
together—would eliminate the imbalance. 

Figure: Potential Fiscal Outcomes under Alternative Simulation: 
Discretionary Spending Grows with GDP after 2007 and All Expiring Tax 
Provisions Are Extended: 

[See PDF for Image] 

Source: GAO' January 2007 analysis. 

Note: The Alternative Minimum Tax (AMT) exemption amount is retained at 
the 2006 level through 2017 and expiring tax provisions are extended. 
After 2017, revenue as a share of GDP is held constant—implicitly 
assuming that action is taken to offset increased revenue from real 
bracket creep, the AMT, and tax-deferred retirement accounts. 

[End of figure] 

What GAO Recommends: 

GAO has made numerous recommendations over the years to federal 
agencies aimed at addressing financial management weaknesses. Regarding 
the government's fiscal imbalance, this testimony reiterates a possible 
way forward based on a multipronged approach of increased financial 
reporting transparency; reinstituted budget controls; strengthened 
oversight; and reprioritized programs, policies, and activities. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-542T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Jeffrey C. Steinhoff or 
McCoy Williams at (202) 512-2600. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to testify on the progress made towards a 
results-oriented, accountable, and relevant government and the 
challenges that must be addressed to provide accountability and 
exercise stewardship. The foundation laid by the Chief Financial 
Officers (CFO) Act of 1990[Footnote 1] and other management reform 
legislation provides a basis to improve the accountability of 
government programs and operations as well as to routinely produce 
valuable cost and operating performance information. While certain 
material weaknesses in internal control and in selected accounting and 
financial reporting practices continue to prevent GAO from being able 
to issue an opinion on the consolidated financial statements of the 
U.S. government, the federal government has come a long way since 
enactment of the CFO Act. At the same time, there is a continuing need 
to address persistent, long-standing accountability problems and to 
take financial management to the next level. This will be important as 
the federal government faces difficult fiscal challenges that will 
require reliable cost and performance information to support timely 
decisions on spending and, at the same time, pressures to address 
fraud, waste, abuse, and mismanagement will only intensify. 

From a broad financial management perspective, the federal government's 
deteriorating long-range financial condition and long-term fiscal 
imbalance are matters of increasing concern. We face large and growing 
structural deficits due primarily to known demographic trends and 
rising health care costs. There is a need to engage in a fundamental 
review, reprioritization, and reengineering of the base of government. 
Understanding and addressing the federal government's financial 
condition and long-term fiscal imbalance are critical to maintain 
fiscal flexibility so that we can respond to emerging social, economic, 
and security challenges. 

Your decision to begin this Congress with a hearing on these important 
issues demonstrates the seriousness with which this Subcommittee views 
the financial management challenges facing the federal government and 
your commitment to address them. Today I would like to: 

* outline progress made to date and the key challenges in improving 
federal financial management practices, and: 

* highlight the challenges posed by the government's fiscal condition 
and my views on a possible way forward. 

Our prior work on which this testimony is based was performed in 
accordance with generally accepted government auditing standards. 

Summary: 

Since the enactment of key financial management reforms, the federal 
government has made substantial progress in strengthening financial 
management. Since passage of the CFO Act, all of the administrations 
have made financial management reform a priority. Improving financial 
management has been one of the cornerstones of the President's 
Management Agenda from the outset of the current administration, and 
the Executive Branch Management Scorecard, which tracks the status of 
progress at agencies, has been an effective tool to drive improvement. 
We have seen a cultural change in how financial management is viewed 
and carried out in most agencies and a recognition of the value and 
need for good financial management throughout government, which was not 
the case in 1990 when the Congress passed the CFO Act. Financial 
management systems have been improved. Internal control has been 
strengthened, and the Office of Management and Budget (OMB) has 
increased emphasis on establishing, assessing, correcting, and 
reporting on internal control. Generally accepted government accounting 
standards have been developed. For fiscal year 2006, 19 of 24 CFO Act 
agencies received clean audit opinions on their financial statements, 
up from just 6 for fiscal year 1996. Audited financial statements for 
federal agencies were issued just 1½ months after the close of this 
fiscal year as opposed to 5 months, which was the case just a few years 
ago. 

A number of challenges remain to fully realizing the world-class 
financial management anticipated by the Congress through the enactment 
of financial management reform legislation. It will be critical that 
the federal government meet these challenges so that reliable, useful, 
and timely financial information is available not only for day-to-day 
management, decision making, and oversight, but also to provide the key 
cost and performance data needed to help address our nation's looming 
fiscal crisis. I see six principal challenges, which I will highlight 
in my testimony today against the backdrop of our nation's 
deteriorating long-range financial condition and long-term fiscal 
imbalance. 

* There is a need to transform financial management and business 
practices at the Department of Defense (DOD) that adversely affect the 
department's and the federal government's ability to control costs; 
ensure basic accountability; anticipate future costs and claims on the 
budget; measure performance; maintain funds control; prevent fraud, 
waste, and abuse; and address pressing and persistent management 
problems. Of the 27 areas on GAO's high-risk list, 15 relate wholly or 
partially to DOD. The problems at DOD are deeply rooted and I do not 
anticipate they will be resolved in the near future, but meaningful 
progress should be expected. Today, we see a commitment from top DOD 
management, and actions are under way, such as the Financial 
Improvement and Audit Readiness (FIAR) plan, to address serious 
problems. In our view, DOD needs to (1) develop and implement a viable 
strategic plan with goals, objectives, key milestones, and measures to 
monitor and report on progress in transforming its key business 
operations, and (2) establish a chief management officer to oversee its 
overall business transformation efforts. 

* Improvements in financial and performance reporting practices are 
needed so that for the remaining 23 CFO Act agencies, unqualified 
opinions on financial statements become routine. In particular, the 
Department of Homeland Security (DHS)--an agency whose implementation 
and transformation we have designated as high risk since its inception-
-faces significant challenges to achieve this milestone. Developing and 
implementing corrective action plans to improve the underlying 
financial management systems and internal control will be necessary to 
address financial reporting problems. 

* Financial management systems must be modernized to provide the 
complete range of information needed for accountability, performance 
reporting, and decision making. While the problems are much more severe 
at some agencies than others, overall, agencies' current financial 
systems do not meet basic statutory systems requirements and, more 
importantly, do not provide timely, reliable, and useful information 
for day-to-day management. Our work has shown that best practices in 
systems implementation that can reduce risk are not being consistently 
applied when agencies undertake a major financial management system 
modernization effort. Full adoption of these best practices is equally 
important as OMB moves forward on its initiative to migrate agencies to 
shared service providers. 

* The federal government continues to face a myriad of material 
weaknesses and reportable conditions in internal control related to 
property, plant, and equipment; inventories and related property; 
liabilities and commitments and contingencies; and disbursement 
activities, just to mention a few of the problem areas. Particularly 
problematic to the U.S. government's consolidated financial statements 
is the lack of internal control to adequately account for and reconcile 
intragovernmental activity and balances. Agencies need to tackle long- 
standing internal control weaknesses by fully embracing the assessment, 
reporting, and corrective action approach called for in OMB's revised 
Circular No. A-123 and following intragovernmental procedures developed 
by OMB and the Department of the Treasury (Treasury). Another key 
problem area is the tens of billions of dollars federal agencies waste 
on improper payments.[Footnote 2] Adopting our specific recommendations 
to improve reporting under the Improper Payments Information Act of 
2002[Footnote 3] is important to fully understand the nature and extent 
of this problem. 

* The federal financial workforce that supports the business needs of 
today is not well positioned to support the needs of tomorrow. The lack 
of a sufficient number of staff with the requisite knowledge, skills, 
and experience has hampered financial management operations at key 
agencies such as DOD and DHS. At Treasury, during our work on the U.S. 
government consolidated financial statements, we found that there were 
not enough personnel with specialized financial reporting experience to 
help ensure reliable financial reporting by the reporting date. 
Building a sufficient and sustainable financial management workforce 
for the future to support program managers and decision makers will 
require a workforce transformation strategy developed in partnership 
between agency CFOs and Chief Human Capital Officers, working with OMB 
and the Office of Personnel Management (OPM). To sustain financial 
management reform given the leadership changes that occur at the end of 
any administration, establishing management accountability at an 
appropriate level with significant authority, experience, and tenure to 
provide sustained leadership is needed to achieve successful and 
sustainable transformation. Establishing such positions at selected 
agencies, such as DOD and DHS, will be a critical success factor. 

* Three major impediments--that have existed for the entire 10-year 
period GAO has been required to perform this annual audit--continue to 
prevent us from rendering an opinion on the U.S. government's 
consolidated financial statements: (1) the deeply rooted, long- 
standing, and pervasive financial management problems in DOD; (2) the 
federal government's inability to adequately account for and reconcile 
significant amounts in intragovernmental activity and balances between 
federal agencies; and (3) the federal government's ineffective process 
for preparing the consolidated financial statements. As I previously 
discussed, addressing the first two impediments will be difficult 
challenges. Resolving the weaknesses in the systems, controls, and 
procedures for preparing the consolidated financial statements will 
require a strong commitment from Treasury and OMB. Notwithstanding the 
difficulties to overcome current challenges, we should consider the 
need for further revisions to the current federal financial reporting 
model to recognize the unique needs of the federal government, which 
would affect both consolidated and agency financial reporting. While 
the current reporting model recognizes some of these needs, a broad 
reconsideration of issues such as the kind of information that may be 
relevant and useful for a sovereign nation, could stimulate needed 
discussion and lead to reporting enhancements that might help the 
Congress deliberate strategies to address our growing long-term fiscal 
imbalance. In this regard, we support the current efforts of the 
Federal Accounting Standards Advisory Board (FASAB) to begin a project 
on fiscal sustainability reporting. We also support a Statement of 
Fiscal Sustainability that clearly shows the extent to which future 
revenues are sufficient to support the federal government's growing 
entitlement and other spending. We believe that such reporting needs to 
reflect the significant commitments associated with the Social Security 
and Medicare programs while recognizing a liability for the net assets 
(principally investments in special U.S. Treasury securities) of the 
"trust funds." We also believe that any such statements need to 
consider the intergenerational implications of our current fiscal path. 
Other areas to reconsider might include the reporting of key outcome- 
based performance information, as well as the role of a balance sheet 
in the federal government reporting model. In addition, we support the 
preparation and publication of an easily understandable summary annual 
report that includes in a clear, concise, and transparent manner, key 
financial and performance information embodied in the Financial Report 
of the United States Government. 

Addressing the six principal financial management challenges I just 
discussed will help ensure that the financial and performance data 
provided to decision makers are reliable, useful, and timely. Having 
such information will be critical to deal with our nation's significant 
challenges regarding the long-term fiscal imbalance of the government-
-that is, the sustainability of the federal government's programs, 
commitments, and responsibilities in relation to the resources expected 
to be available. I recently provided all members of the new Congress 
with a package of materials to help them understand the facts, why we 
should start sooner rather than later, and what types of changes need 
to be considered.[Footnote 4] More troubling than the persistent short- 
term budget deficits, long-range fiscal simulations by GAO and others 
show that over the long term, we face large and growing structural 
deficits in future years due primarily to known demographic trends and 
rising health care costs. The federal government's fiscal exposures now 
total over $50 trillion, representing close to four times gross 
domestic product (GDP) in fiscal year 2006 and up from about $20 
trillion or two times GDP in 2000. We all know that it is hard to make 
sense of what "trillions" means. One way to think about it is: if we 
wanted to put aside today enough to cover these promises, it would take 
about $440,000 per American household, up from $190,000 in 2000. 
Clearly, despite recent progress on our short-term deficits, we have 
been moving in the wrong direction in connection with our long-range 
imbalance in recent years. 

As members of this Subcommittee know, continuing on our current fiscal 
path would gradually erode, if not suddenly damage, our economy, our 
standard of living, and ultimately even our domestic tranquility and 
national security. Many of the federal government's current policies, 
programs, functions, and activities are based on conditions that 
existed decades ago, are not results-based, and are not well aligned 
with 21st century realities. Our report, 21st Century Challenges: 
Reexamining the Base of the Federal Government[Footnote 5] provided a 
suggested list of specific federal activities for reexamination, and 
perspectives on various strategies, processes, and approaches for 
congressional consideration that could be used in reexamining the 
federal base. I have proposed a number of ideas for improving the 
transparency of long-term costs and the attention paid to these costs 
before decisions are made. For example, in addition to the Statement of 
Fiscal Sustainability I just described, a portfolio of outcome-based 
key national indicators could also be a useful tool to help measure 
progress, assess trends, and communicate complex issues. The Congress 
should consider supporting a public/private partnership approach to 
making key national indicators a reality. 

Progress Made and the Key Challenges that Remain in Improving Federal 
Financial Management Practices: 

The federal government has made substantial progress in financial 
management. If I were to summarize in just a few words the environment 
in 2007 as compared to prior to enactment of key financial management 
laws, financial management has gone from the backroom to the boardroom. 
There has been a cultural change in how financial management is viewed 
and carried out in the agencies and a recognition of the value and need 
for good financial management throughout government, which was not the 
case in 1990 when the Congress passed the CFO Act. Financial management 
systems and internal control have been strengthened. Generally accepted 
government accounting standards have been developed. For fiscal year 
2006, 19 of 24 CFO Act agencies received clean audit opinions on their 
financial statements, up from just 6 for fiscal year 1996. While there 
has been marked progress in federal financial management, a number of 
challenges still remain, including transforming financial management 
and business practices at DOD, modernizing financial management 
systems, and building a financial management workforce for the future. 
Fully meeting these challenges will enable the federal government to 
provide the world-class financial management anticipated by the CFO Act 
and other management reform legislation. 

Progress Made since Passage of Key Federal Financial Management 
Legislation: 

First, I would like to briefly highlight the legislative framework that 
governs federal financial management. The Congress has long recognized 
the importance of the federal government implementing strong financial 
management practices. Towards this end, the Congress has passed a 
series of management reform legislation aimed at improving and 
providing a strong foundation for federal financial management. This 
series of legislation started with the Federal Managers' Financial 
Integrity Act of 1982 (FMFIA),[Footnote 6] which the Congress passed to 
strengthen internal control and accounting systems throughout the 
federal government, among other purposes. In accordance with FMFIA, GAO 
has issued Standards for Internal Control in the Federal 
Government,[Footnote 7] which provides the standards that are directed 
at helping agency managers implement effective internal control, an 
integral part of improving financial management systems. 

While agencies had achieved some early success in identifying and 
correcting material internal control and accounting system weaknesses, 
their efforts to implement FMFIA had not produced the intended results. 
Therefore, the Congress passed additional management reform legislation 
to improve the general and financial management of the federal 
government. This legislation includes the (1) CFO Act of 1990, (2) 
Government Performance and Results Act of 1993 (GPRA),[Footnote 8] (3) 
Government Management Reform Act of 1994 (GMRA),[Footnote 9] (4) 
Federal Financial Management Improvement Act of 1996 (FFMIA),[Footnote 
10] (5) Clinger-Cohen Act of 1996,[Footnote 11] (6) Accountability of 
Tax Dollars Act of 2002 (ATDA),[Footnote 12] and (7) Improper Payments 
Information Act of 2002 (IPIA).[Footnote 13] 

The CFO Act is the most comprehensive and far-reaching financial 
management improvement act since the Budget and Accounting Procedures 
Act of 1950. The CFO Act established a leadership structure, provided 
for long-range planning, required audited financial statements and 
modern financial systems, and strengthened accountability reporting for 
certain agencies. Three years later, the Congress enacted GPRA, which 
required certain agencies to develop strategic plans, set performance 
goals, and report annually on actual performance compared to goals. 
GPRA's emphasis on performance management complements the concepts in 
the CFO Act. GPRA was followed by GMRA, which made permanent the pilot 
program in the CFO Act for annual audited agency-level financial 
statements, expanded this requirement to all CFO Act agencies, and 
established a requirement for the preparation and audit of 
governmentwide consolidated financial statements. In 1996, FFMIA built 
on the foundation laid by the CFO Act by reflecting the need for CFO 
Act agencies to have systems that can generate reliable, useful, and 
timely information with which to make fully informed decisions and to 
ensure accountability on an ongoing basis. The Clinger-Cohen Act of 
1996 (also known as the Information Technology Management Reform Act of 
1996) sets forth a variety of initiatives to support better decision 
making for capital investments in information technology, which has led 
to the development of the Federal Enterprise Architecture and better- 
informed capital investment and control processes within agencies and 
across government. ATDA required most executive agencies that were not 
otherwise required by statute or exempted by OMB, to prepare annual 
audited financial statements and to submit such statements to the 
Congress and the Director of OMB. Finally, IPIA has increased 
visibility over improper payments by requiring executive agency heads, 
based on guidance from the OMB,[Footnote 14] to identify programs and 
activities susceptible to significant improper payments,[Footnote 15] 
estimate amounts improperly paid, and report on the amounts of improper 
payments and their actions to reduce them. The combination of reforms 
ushered in by these laws, if successfully implemented, provides a solid 
foundation to improve the accountability of government programs and 
operations as well as to routinely produce valuable cost and operating 
performance information. 

The five key financial management improvements that we have noted from 
a governmentwide perspective are as follows. 

* Achieving Cultural Change--We have seen true cultural change in how 
financial management is viewed. This has been accomplished through a 
lot of hard work by OMB and the agencies and continued strong support 
and oversight by the Congress. At the top level, federal financial 
management reform has gained momentum through the committed support of 
top federal leaders. For example, improved financial performance is one 
of the governmentwide initiatives in the President's Management Agenda 
(PMA). Under this initiative, agency CFOs share responsibility--both 
individually and through the efforts of the CFO Council--for improving 
the financial performance of the government. The Executive Branch 
Management Scorecard, developed as part of the PMA, has been an 
effective tool to monitor progress and help drive much needed 
improvements. 

* Establishing a Governmentwide Leadership Structure--The Joint 
Financial Management Improvement Program (JFMIP)[Footnote 16] 
Principals--the Secretary of the Treasury, the Director of OMB, the 
Director of OPM, and myself, the Comptroller General--have provided 
leadership by holding periodic meetings that have resulted in 
unprecedented substantive deliberations and agreements focused on key 
reform issues such as improving accounting for and reporting on social 
insurance, accelerating issuance of audited agency financial 
statements, and advocating audit committees. GAO has led by example in 
this regard, by establishing an audit advisory committee to help us in 
overseeing the effectiveness of our current financial reporting and 
audit processes. 

As established by the CFO Act, the Office of Federal Financial 
Management (OFFM), the OMB organization with governmentwide 
responsibility for federal financial management for executive agencies, 
has demonstrated leadership by undertaking a number of initiatives 
related to improving financial management capabilities ranging from 
requiring the use of commercial off-the-shelf financial systems to the 
promotion of cost accounting to improve the availability of management 
information for decision making. In addition to assessing the status of 
agencies' progress in improving financial performance for the PMA, OFFM 
has also issued bulletins, circulars, and other guidance to provide a 
broad-based foundation for transforming agencies' financial management 
operations. 

* Strengthening Internal Control--In December 2004, OMB revised its 
Circular No. A-123, Management's Responsibility for Internal Control, 
to provide guidance to federal managers on improving the accountability 
and effectiveness of federal programs and operations by establishing, 
assessing, correcting, and reporting on management controls. Requiring 
federal managers, at the executive level, to focus on internal control 
demonstrates a renewed emphasis on identifying and addressing internal 
control weaknesses. As we testified[Footnote 17] in 2005, many internal 
control problems have been identified and fixed, especially at the 
lower levels where internal control assessments were performed and 
managers could take focused actions to fix relatively simple problems. 
As a recent case in point, based on our 2006 assessment of high-risk 
programs,[Footnote 18] two programs previously designated as high risk, 
largely due to financial management weaknesses, were removed from the 
list. 

Agencies have also made progress in implementing processes and controls 
to identify, estimate, and reduce improper payments. After passage of 
IPIA, OMB established Eliminating Improper Payments in 2005 as a new 
program-specific initiative under the PMA. This separate PMA program 
initiative was established in this manner to ensure that agency 
managers are held accountable for meeting the goals of IPIA and are, 
therefore, dedicating the necessary attention and resources to meeting 
IPIA requirements. OMB also issued guidance in August 2006 to help 
clarify and update requirements to support governmentwide IPIA 
compliance.[Footnote 19] 

* Improving Financial Management Systems and Operations--Since 
enactment of financial management reform legislation, federal financial 
management systems requirements have been developed for the core 
financial system; managerial cost system; and other administrative and 
programmatic systems, such as grants, property, revenue, travel, and 
loans, which are part of an overall financial management system. After 
the realignment of the JFMIP Program Management Office, OFFM has 
continued the practice of issuing these requirements. Beginning in 
1999, OMB required agencies to purchase commercial off-the-shelf 
software that had been tested and certified by the federal government 
against the systems requirements that I just mentioned. With these 
requirements, the federal government has better defined the 
functionality needed in its financial management systems, which has 
helped the vendor community understand federal agencies' needs. 

OMB continues to move forward on initiatives that support the PMA with 
the further development of the financial management line of business to 
promote leveraging shared service solutions to enhance the government's 
performance and services. The financial management line of business 
initiative is modeled after the consolidation of agencies processing 
payroll, which were dramatically reduced from 22 to 4 systems. OMB, in 
conjunction with an interagency task force, estimated that these 
efforts could save billions of taxpayer dollars. Ultimately, this 
initiative is expected to (1) reduce the number of systems that each 
individual agency must support, (2) promote standardization, and (3) 
reduce the duplication of efforts. 

* Preparing Auditable Financial Statements--Unqualified audit opinions 
for CFO Act agencies' financial statements have grown from 6 in fiscal 
year 1996 to 19 in fiscal year 2006. Improvements in timeliness have 
been even more dramatic over the years. Agencies were able to issue 
their audited financial statements within the accelerated reporting 
time frame--all 24 CFO Act agencies issued their audited financial 
statements by the November 15, 2006, deadline,[Footnote 20] set by OMB, 
just 45 days after the close of the fiscal year. Just a few years ago, 
most considered this accelerated time frame unrealistic and 
unachievable. 

Another definitive example of progress made to date is the 
establishment of the Federal Accounting Standards Advisory Board 
(FASAB). In conjunction with the passage of the CFO Act, the OMB 
Director, Secretary of the Treasury, and the Comptroller General 
established FASAB to develop accounting standards and principles for 
the newly required financial statements. The concepts and standards are 
the basis for OMB's guidance to agencies on the form and content of 
their financial statements and for the government's consolidated 
financial statements. FASAB is comprised of a 10-member advisory board 
of 4 knowledgeable individuals from government and 6 nonfederal members 
selected from the general financial community, the accounting and 
auditing community, and academia to promulgate proposed accounting 
standards designed to meet the needs of federal agencies and other 
users of federal financial information. The mission of FASAB is to 
develop accounting standards after considering the financial and 
budgetary information needs of congressional oversight groups, 
executive agencies, and other users. These accounting and reporting 
standards are essential for public accountability and for an efficient 
and effective functioning of our democratic system of government. The 
standards developed by FASAB have been recognized by the American 
Institute of Certified Public Accountants as generally accepted 
accounting standards for federal entities. 

Financial Management Challenges Facing the Federal Government: 

While there has been marked progress in federal financial management, a 
number of challenges still remain. The principal challenges remaining 
are (1) transforming financial management and business practices at 
DOD, (2) improving financial and performance reporting, (3) modernizing 
financial management systems, (4) tackling long-standing internal 
control weaknesses, (5) building a financial management workforce for 
the future, and (6) strengthening consolidated financial reporting. 
Fully meeting these challenges will enable the federal government to 
provide the world-class financial management anticipated by the CFO Act 
and other management reform legislation. While there continues to be 
much focus on the agency and governmentwide audit opinions, getting a 
clean audit opinion, though important in itself, is not the end goal. 
The end goal is the establishment of a fully functioning CFO operation 
that includes (1) modern financial management systems that provide 
reliable, timely, and useful information to support day-to-day decision 
making and oversight, and for the systematic measurement of 
performance; (2) sound internal controls that safeguard assets and help 
ensure proper accountability; and (3) a cadre of highly qualified CFOs 
and supporting staff. 

Transforming DOD's Financial and Business Management Practices: 

DOD's long-standing financial and business management difficulties are 
pervasive, complex, and deeply rooted in virtually all business 
operations throughout the department. Resolution of these serious 
problems is essential to improving financial management governmentwide 
and achieving an opinion on the U.S. government's consolidated 
financial statements. Of the 27 areas on GAO's high-risk list,[Footnote 
21] DOD has 8 of its own high-risk areas and shares responsibility for 
7 governmentwide high-risk areas. These weaknesses adversely affect the 
department's and the federal government's ability to control costs; 
ensure basic accountability; anticipate future costs and claims on the 
budget; measure performance; maintain funds control; prevent fraud, 
waste, and abuse; and address pressing management problems. 
Additionally, the department invests billions of dollars each year to 
operate, maintain, and modernize its business systems. But despite this 
significant annual investment, the department has been continually 
confronted with the difficult task of implementing business systems on 
time, within budget, and with the promised capability. 

We also have concerns about the reasonableness, reliability, and 
transparency of DOD's budget requests, especially the supplemental 
budget requests the department has submitted to the Congress in recent 
years. Reasonableness and reliability are critical factors not only for 
financial information, but also for budget data. As I 
testified[Footnote 22] last year, our prior work found numerous 
problems with DOD's processes for recording and reporting costs for the 
Global War on Terrorism (GWOT), the funding for which has been provided 
through regular appropriations as well as supplemental appropriations. 
These problems included long-standing deficiencies in DOD's financial 
management systems and business processes, the use of estimates instead 
of actual cost data, and the lack of adequate supporting documentation. 
As a result, neither DOD nor the Congress have reliable information on 
GWOT costs or the use of appropriated funds and also lack historical 
data useful in considering future funding needs. 

The nature and severity of DOD's financial management, business 
operations, and system deficiencies not only affect financial 
reporting, but also impede the ability of DOD managers to receive the 
full range of information needed to effectively manage day-to-day 
operations. Such weaknesses have adversely affected the ability of DOD 
to control costs, ensure basic accountability, and prevent fraud. The 
following examples illustrate DOD's continuing problems. 

* We found that hundreds of separated battle-injured soldiers were 
pursued for collection of military debts incurred through no fault of 
their own, including 74 soldiers whose debts had been reported to 
credit bureaus, private collection agencies, and the Treasury Offset 
Program at the time we initiated our audit.[Footnote 23] Overpayment of 
pay and allowances (entitlements), pay calculation errors, and 
erroneous leave payments caused 73 percent of the reported debts. 

* Over the past several years, we have reported[Footnote 24] on 
significant pay problems experienced by mobilized Army National Guard 
and Army Reserve (Army Guard and Reserve) soldiers in the wake of the 
September 11, 2001, terrorist attacks. These reports included examples 
of hundreds of soldiers receiving inaccurate and untimely payroll 
payments due to a paper-intensive, error-prone pay process and the lack 
of integrated pay and personnel systems. In response to our reports, 
DOD has taken some action to improve controls designed to pay Army 
Guard and Reserve soldiers accurately and on time, especially those who 
had become sick or injured in the line of duty. 

* In March 2006, we reported[Footnote 25] that DOD's policies and 
procedures for determining, reporting, and documenting cost estimates 
associated with environmental cleanup or containment activities were 
not consistently followed. Further, none of the military services had 
adequate controls in place to help ensure that all identified 
contaminated sites were included in their environmental liability cost 
estimates. These weaknesses not only affected the reliability of DOD's 
environmental liability estimate, but also that of the federal 
government as a whole. 

* In May 2005, we reported[Footnote 26] that DOD did not have 
management controls in place to assure that excess inventory was 
reutilized to the maximum extent possible. We found significant waste 
and inefficiency because new, unused, and excellent condition items 
were transferred and donated outside of DOD, sold for pennies on the 
dollar, or destroyed. Root causes for the waste and inefficiency 
included (1) unreliable excess property inventory data; (2) inadequate 
oversight and physical inventory control; and (3) outdated, 
nonintegrated excess inventory and supply management systems. 

The department is provided billions of dollars annually to operate, 
maintain, and modernize its stovepiped, duplicative, legacy business 
systems. Despite this significant investment, the department is 
severely challenged in implementing business systems on time, within 
budget, and with the promised capability. Many of the problems related 
to DOD's inability to effectively implement its business systems can be 
attributed to its failure to implement the disciplined 
processes[Footnote 27] necessary to reduce the risks associated with 
these projects to acceptable levels.[Footnote 28] Disciplined processes 
have been shown to reduce the risks associated with software 
development and acquisition efforts and are fundamental to successful 
systems acquisition. The weaknesses that we found in DOD business 
systems implementations such as the Defense Travel System,[Footnote 29] 
the Logistics Modernization Program,[Footnote 30] and the Navy's 
Enterprise Resource Planning (ERP) efforts[Footnote 31] illustrate the 
types of system acquisition and investment management controls that 
need to be effectively implemented in order for a given investment to 
be successfully acquired and deployed. 

Meeting the Challenge of Transforming DOD Financial and Business 
Management Practices. Successful reform of DOD's fundamentally flawed 
financial and business management operations must simultaneously focus 
on its systems, processes, and people. DOD's top management has 
demonstrated a commitment to transforming the department and has 
launched key initiatives to improve its financial management processes 
and related business systems such as the Financial Improvement and 
Audit Readiness (FIAR) Plan. However, DOD still lacks two key elements 
that are needed to ensure a successful and sustainable transformation 
effort. 

* As we have previously recommended, DOD should develop and implement 
an integrated and strategic business transformation plan. Since 1999, 
we have recommended the need for a comprehensive, integrated strategy 
and action plan for reforming DOD's major business operations and 
support activities.[Footnote 32] Critical to the success of DOD's 
ongoing transformation efforts will be top management attention and 
structures that focus on transformation from a broad perspective and a 
clear, comprehensive, integrated, and enterprisewide plan that, at a 
summary level, addresses all of the department's major business areas. 

* Because of the complexity and long-term nature of DOD's business 
transformation efforts, we again reiterate the need for a chief 
management officer (CMO) to provide sustained leadership and maintain 
momentum, as we have previously testified.[Footnote 33] The National 
Defense Authorization Act for Fiscal Year 2006[Footnote 34] directs the 
department to study the feasibility of a CMO position in DOD. In this 
regard, the Institute for Defense Analysis issued its report in 
December 2006 and, among other things, called upon the Congress to 
establish a Deputy CMO (level III official) at the department. Further, 
in May 2006, the Defense Business Board recommended, among other 
things, the creation of a Principal Under Secretary of Defense, as a 
level II official with a 5-year term appointment, to serve as CMO. I 
strongly support a level II official and believe that someone at this 
level is needed to be successful given the magnitude of the challenge 
and the need to effect change across the department. It is important to 
note that a CMO would not assume the responsibilities of the 
undersecretaries of defense, the service secretaries, or other DOD 
officials for the day-to-day management of the department. Rather, the 
CMO would be responsible and accountable for planning, integrating, and 
executing the overall business transformation effort. The reason I am 
so passionate about the need for a CMO at DOD is that progress at DOD 
has historically been painfully slow. A host of well-intended past 
improvement initiatives has largely failed. I am concerned that without 
a CMO who is responsible and accountable for demonstrable results and 
sustained success, history will continue to repeat itself. 

Improving Agency Financial and Performance Reporting: 

In the area of agency financial and performance reporting, I see 
obtaining unqualified opinions on financial statements at all CFO Act 
agencies as the primary challenge. While significant progress has been 
made by many CFO Act agencies to prepare timely annual financial 
statements that can pass the scrutiny of a financial audit, several 
agencies continue to struggle to reach this milestone. For fiscal year 
2006, five CFO Act agencies--DOD, DHS,[Footnote 35] National 
Aeronautics and Space Administration (NASA), and the Departments of 
Energy[Footnote 36] and Transportation--failed to meet this basic 
requirement. Problems at NASA and the Department of Energy stem from 
deficiencies in those agencies' implementation of new financial 
management systems, among other things. The Department of 
Transportation auditors cited significant problems with a key 
accounting practice at the Federal Aviation Administration as the 
underlying cause for qualifying their opinion on the department's 
financial statements. As I previously discussed, the problems faced by 
DOD are so pervasive that in accordance with section 1008 of the fiscal 
year 2002 National Defense Authorization Act,[Footnote 37] for the 
sixth year, DOD acknowledged that its systems could not support 
material amounts on DOD's fiscal year 2006 financial statements and 
accordingly, the auditors did not perform auditing procedures and 
disclaimed an opinion. At DHS, the auditors recognized that the 
department has not yet established the infrastructure and internal 
control necessary and disclaimed an opinion on its financial 
statements. Problems at these agencies also significantly impact our 
ability to provide an opinion on the U.S. government's consolidated 
financial statements. 

Meeting the Challenge of Improved Financial and Performance Reporting. 
Addressing the financial and performance reporting weaknesses that 
impede CFO Act agencies from obtaining unqualified or clean opinions on 
the respective agency financial statements will vary depending upon the 
circumstances at the agency. Developing and implementing corrective 
action plans to address the identified problems are time-honored 
methods for resolving such problems. For example, the DOD Comptroller 
launched the FIAR Plan to guide improvements to address financial 
management deficiencies and achieve clean financial statement audit 
opinions. This plan incorporates our prior recommendations and ties 
planned improvement activities at the component and department levels 
together with accountable personnel, milestones, and required 
resources. We view the incremental line item approach, integration 
plans, and oversight structure outlined in the FIAR plan for examining 
DOD's operations and preparing for an audit as a significant 
improvement over prior financial improvement initiatives. However, we 
continue to stress that the effectiveness of DOD's FIAR plan will 
ultimately be measured by the department's ability to provide timely, 
reliable, and useful information for day-to-day management and decision 
making. 

Modernizing Financial Management Systems: 

Since the passage of the CFO Act and FFMIA, there has been progress in 
achieving the financial systems requirements of these landmark laws. 
While improvements have been made throughout government, much work 
remains to fulfill the underlying goals of the CFO Act and FFMIA. In 
fiscal year 1997, 20 agencies were reported as having systems that were 
not in substantial compliance with at least one of the three FFMIA 
systems requirements,[Footnote 38] while in fiscal year 2006, auditors 
for 17 of the CFO Act agencies reported that the agencies' financial 
management systems did not substantially comply with at least one of 
the three FFMIA requirements. The major barrier to achieving compliance 
with FFMIA continues to be the inability of agencies to meet federal 
financial management systems requirements, which involve not only core 
financial systems, but also administrative and programmatic systems. 
While the problems are much more severe at some agencies than at others 
and progress has been made in addressing financial management systems' 
weaknesses, the lack of substantial compliance with the three 
requirements of FFMIA, and the associated deficiencies, indicates that 
the financial management systems of many agencies are still not able to 
routinely produce reliable, useful, and timely financial information. 
Consequently, the federal government's access to relevant, timely, and 
reliable data to effectively manage and oversee its major programs, 
which is the ultimate objective, was and continues to be restricted. 

What is most important is that the problem has been recognized. Across 
government, agencies have efforts under way to implement new financial 
management systems or to upgrade existing systems. Agencies expect that 
the new systems will provide reliable, useful, and timely data to 
support day-to-day managerial decision making and assist taxpayer and 
congressional oversight. Whether in government or the private sector, 
implementing and upgrading information systems is a difficult job and 
brings a degree of new risk. Organizations that follow and effectively 
implement accepted best practices in systems development and 
implementation (commonly referred to as disciplined processes) can 
manage and reduce these risks to acceptable levels. For example, as 
part of our work at DOD,[Footnote 39] NASA,[Footnote 40] and other 
agencies that have experienced significant problems in implementing new 
financial management systems, we have consistently found that these 
agencies were not following the necessary disciplined processes, human 
capital practices, and information technology management practices for 
efficient and effective development and implementation of such systems. 

Challenges also exist in implementing OMB's financial management line 
of business initiative that is aimed at significantly improving the 
financial data government managers need to make timely and successful 
decisions and reduce the cost of government operations. For example, as 
we reported in March 2006,[Footnote 41] the requirements for agencies 
and private sector firms to become shared service providers and the 
services they must provide have not been adequately documented or 
effectively communicated to agencies and the private sector. We made 
several recommendations that focused on reducing the risk of this 
important initiative. During 2006, OMB addressed some of the weaknesses 
by issuing an initial version of migration planning guidance and 
publishing competition guidance for shared service providers and 
agencies. However, as OMB acknowledged in the Federal Financial 
Management Report 2007, it has not yet developed several critical 
elements needed to minimize risk, provide assurance, and develop 
understandings with software vendors, shared service providers, and 
agencies on topics such as standard business processes and common 
accounting codes. Further, a governmentwide concept of operations has 
not been developed that would identify interrelationships among federal 
financial systems and which financial management systems should be 
operated at an agency level and which should be operated at a 
governmentwide level and how those would integrate. In addition, 
processes have not been put in place to facilitate agency decisions on 
selecting a provider or focusing investment decisions on the benefits 
of standard processes and shared service providers. 

Meeting the Challenge of Modernizing Financial Systems. As the federal 
government moves forward with ambitious financial management system 
modernization efforts that identify opportunities to eliminate 
redundant systems and enhance information reliability and availability, 
adherence to disciplined processes, sound human capital practices, and 
proven information technology management practices is crucial to reduce 
risks to acceptable levels. 

* To help address the underlying problems agencies face in implementing 
financial management systems that will help them adhere to the 
requirements of the CFO Act and FFMIA, we have made numerous specific 
recommendations to agencies to address the specific shortcomings we 
identified. For example, at NASA we made a total of 45 recommendations 
aimed at addressing weaknesses we identified in NASA's acquisition and 
implementation strategy for a new integrated financial management 
system. 

* The key to avoiding these long-standing problems is to provide 
specific guidance to agencies that incorporate the best practices 
identified by the Software Engineering Institute, the Institute of 
Electrical and Electronic Engineers, and other experts. Toward this 
end, we have recommended that OMB develop such guidance to help 
minimize the waste of scarce resources from modernization failures. 

* We have also made a number of recommendations to OMB to help it 
provide a solid foundation for the financial management line of 
business initiative. OMB has projects under way to develop standard 
business processes, a common accounting code, and specific measures to 
assess the performance of the shared service providers to help address 
some shortcomings we identified. While all of these projects are 
important, developing a concept of operations is an important step 
because it lays the foundation for many subsequent decisions. 

Addressing Long-standing Internal Control Weaknesses: 

While continuing progress has been made in strengthening internal 
control, at the same time, the federal government faces numerous 
internal control problems, some of which are long-standing and are well-
documented at the agency level and governmentwide. As we have reported 
for a number of years in our audit reports on the U.S. government's 
consolidated financial statements, the federal government continues to 
have material weaknesses and reportable conditions in internal control 
related to property, plant, and equipment; inventories and related 
property; liabilities and commitments and contingencies; cost of 
government operations; and disbursement activities, just to mention a 
few of the problem areas. Particularly problematic to the U.S. 
government's consolidated financial statements is the lack of internal 
controls to adequately account for and reconcile intragovernmental 
activity and balances between federal agencies. Although OMB and 
Treasury require the CFOs of 35 executive departments and agencies to 
reconcile intragovernmental activity and balances on a quarterly basis, 
and report annually to GAO and others on reconciliation efforts at the 
end of the fiscal year, a substantial number of agencies did not 
adequately perform these reconciliations. To help address this problem, 
OMB worked with Treasury and the CFO Council to revise the business 
rules for intragovernmental transactions. Because these new rules 
became effective on October 1, 2006, it is too soon to tell if they 
will have the desired effect of strengthening internal controls. 
Resolving the intragovernmental transactions problem remains a 
difficult challenge and will require a strong commitment by agencies to 
fully implement the recently issued business rules and continued strong 
leadership by OMB. 

As we testified[Footnote 42] in February 2005, we support OMB's efforts 
to revitalize internal control assessments and reporting through the 
December 2004 revisions to Circular No. A-123. These revisions 
recognize that effective internal control is critical to improving 
federal agencies' effectiveness and accountability and to achieving the 
goals established by the Congress. They also considered the internal 
control standards issued by GAO,[Footnote 43] which provide an overall 
framework for establishing and maintaining internal control and for 
identifying and addressing major performance and management challenges 
and areas at greatest risk of fraud, waste, abuse, and mismanagement. 
OMB reported in its Federal Financial Management Report 2007, that CFO 
Act agencies identified new financial reporting material weaknesses 
under this revised guidance, which is an important first step. As 
agencies expand their assessments and all agencies complete a full- 
scope assessment of internal control over financial reporting, they 
will develop a better understanding of the full nature and extent of 
material weaknesses. 

Effective internal control, as envisioned in the revised Circular No. A-
123, inherently includes a successful strategy for addressing improper 
payments. Attacking improper payment problems requires a strategy 
appropriate to the organization involved and its particular risks. We 
have found that entities using successful strategies to address their 
improper payment problems shared a common focus of improving the 
internal control system--the first line of defense in safeguarding 
assets and preventing and detecting errors and fraud. The Congress 
acted strongly to address the improper payment problem by passing IPIA 
and in fiscal year 2005, OMB began to separately track the elimination 
of improper payments under the PMA. As I pointed out in 
testimony[Footnote 44] before this Subcommittee in December 2006, while 
agencies are making progress in reporting under IPIA, three major 
challenges remain in meeting the goals of the act. First, the existing 
reporting was incomplete because some agencies still had not instituted 
systematic methods to review all programs and some program estimates 
were not based on a valid statistical sampling methodology as required. 
Second, 10 risk-susceptible programs with outlays totaling over $234 
billion in fiscal year 2005 had not provided improper payment 
estimates. Finally, OMB's implementing guidance includes specific 
criteria that limit the disclosure and transparency of agencies' 
improper payments. 

Meeting the Challenge of Addressing Internal Control Weaknesses. 
Actions can be taken on several fronts to help resolve internal control 
weaknesses. 

* As pointed out in our February 2005 testimony on internal 
controls,[Footnote 45] there are six issues critical to effectively 
implementing the changes to Circular No. A-123--specifically, the need 
for: (1) development of supplemental guidance and implementation tools 
to help ensure that agency efforts are properly focused and meaningful; 
(2) vigilance over the broader range of controls covering program 
objectives; (3) strong support from managers throughout the agency, and 
at all levels; (4) risk-based assessments and an appropriate balance 
between the costs and benefits of controls; (5) management testing of 
controls in operation to assess if they are designed adequately and 
operating effectively, and to assist in formulating corrective actions; 
and (6) management accountability for control breakdowns. 

* Addressing the multitude of problems in financial reporting internal 
controls, including reconciling intragovernmental activity and 
balances, that have been identified to date will require a significant 
effort over a long time. Many of these problems have been around for 
years and have proven resistant to actions to resolve them. Continuous 
monitoring by top agency management and OMB along with oversight by the 
Congress will be critical to successfully resolving these material 
weaknesses and enhancing financial management. 

* The ultimate success of efforts to reduce improper payments depends, 
in part, on each agency's continuing diligence and commitment to 
meeting the requirements of IPIA and the related OMB guidance. Full and 
reasonable disclosure of the extent of the problems could be enhanced 
by modifying the act's underlying criteria used to identify which 
programs and activities are susceptible to significant improper 
payments and we asked[Footnote 46] the Congress to consider amending 
IPIA to do so. We also recommended that OMB's implementing guidance be 
strengthened in several areas. 

Building a Financial Management Workforce for the Future: 

The financial management workforce plays a critical role in government 
because the scale and complexity of federal activities requiring 
financial management and control are monumental. The federal government 
has always faced the challenge of sustaining the momentum of 
transformation because of the limited tenure of key administration 
officials. The current administration's PMA has served as a driver for 
governmentwide financial management improvements. It has been clear 
from the outset that the current administration is serious about 
improved financial management. We have been fortunate that, since the 
passage of the CFO Act, all three administrations have been supportive 
of financial management reform initiatives. And, as I discussed 
earlier, we have seen a positive cultural shift in the way the federal 
government conducts business. Given the long-term nature of the 
comprehensive changes needed and challenges still remaining to fully 
realize the goals of the CFO Act, it is unlikely they will all occur 
before the end of the current administration's term. Therefore, 
sustaining a commitment to transformation in future administrations 
will be critical to ensure that key management reforms, such as the CFO 
Act, are fully attained. 

Changing the way business is done in a large, diverse, and complex 
organization like the federal government is not an easy undertaking. 
According to a survey of federal CFOs,[Footnote 47] federal finance 
organizations of the future will have fewer people, with a greater 
percentage of analysts, as opposed to accounting technicians. However, 
today most functions within federal finance organizations are focused 
primarily on (1) establishing and administering financial management 
policy; (2) tracking, monitoring, and reconciling account balances; and 
(3) ensuring compliance with laws and regulations. While they recognize 
the need for change, according to the CFOs surveyed, many questions 
remain unanswered regarding how best to facilitate such changes. 

When it comes to world-class financial management, our study[Footnote 
48] of nine leading private and public sector financial organizations 
found that leading financial organizations often had the same or 
similar core functions (i.e., budgeting, treasury management, general 
accounting, and payroll) as the federal government. However, the way 
these functions were put into operation varied depending on individual 
entity needs. Leading organizations reduced the number of resources 
required to perform routine financial management activities by (1) 
consolidating activities at a shared service center and (2) eliminating 
or streamlining duplicative or inefficient processes. Their goal was 
not only to reduce the cost of finance but also to organize finance to 
add value by reallocating finance resources to more productive and 
results-oriented activities like measuring financial performance, 
developing managerial cost information, and integrating financial 
systems. 

The federal financial workforce that supports the business needs of 
today is not well-positioned to support the needs of tomorrow. A JFMIP 
study[Footnote 49] indicated that a significant majority of the federal 
financial management workforce performs transaction support functions 
of a clerical and technical nature. These skills do not support the 
vision of tomorrow's business which will depend on an analytic 
financial management workforce providing decision support. A 2005 
survey of senior level federal CFO executives[Footnote 50] noted that 
the respondents still believed that mid-and lower-level personnel lack 
the skills needed for modern financial management. The 2005 survey 
indicated that the federal CFO community thought that overly complex 
civil service rules made it difficult to recruit entry-level talent and 
nearly impossible to hire middle managers from outside the government. 
Our work has shown that staffing shortages, particularly at key 
agencies such as DOD, DHS, and Treasury can adversely impact financial 
management operations. For example, as part of our work on the U.S. 
government's consolidated financial statements, we found that personnel 
at Treasury's Financial Management Service had excessive workloads that 
required an extraordinary amount of effort and dedication to compile 
the consolidated financial statements and that there were not enough 
personnel with specialized financial reporting experience to help 
ensure reliable financial reporting by the reporting date.[Footnote 51] 

Meeting the Challenge of Building the Financial Management Workforce. 
We have previously identified several factors that are critical to 
resolving financial management human capital issues. 

* Part of the commitment to transformation is the establishment of 
skilled and sustained leadership through the creation of a chief 
management officer (CMO) at selected federal agencies. The CMO would 
serve as the strategic, enterprisewide integrator of efforts to 
transform agency business operations, including financial management. 
While we have called for the creation of such a position specifically 
at DOD and DHS, in July 2006, a major global consulting firm 
recommended that the concept of a chief operating officer be instituted 
in many federal agencies as the means to help achieve the 
transformation that many agencies have undertaken.[Footnote 52] 

* Building a world-class financial workforce will require a workforce 
transformation strategy devised in partnership between CFOs and agency 
human resource departments, now established in law as Chief Human 
Capital Officers, working with OMB and OPM. Agency financial management 
leadership must identify current and future required competencies and 
compare them to an inventory of skills, knowledge, and current 
abilities of current employees. Then they must strategically manage to 
fill gaps and minimize overages through informed hiring, development, 
and separation strategies. This is similar to the approach that we 
identified when we designated strategic human capital management as a 
high-risk area in 2001.[Footnote 53] Achieving a successful financial 
management vision of the future will be directly determined by the 
workforce that supports it. In our view, adequate succession planning 
to ensure these positions and other key senior-level financial 
management positions are promptly filled with highly qualified staff 
will be a key success factor to help transform federal financial 
management. 

Strengthening Consolidated Financial Reporting: 

As you know, GAO is responsible for auditing the consolidated financial 
statements included in the Financial Report of the United States 
Government (Financial Report), but we have been unable to express an 
opinion on them for the 10th year in a row because the federal 
government could not demonstrate the reliability of significant 
portions of the financial statements, especially in connection with 
major financial management challenges that I discussed earlier 
regarding DOD. The lack of effective internal controls to adequately 
account for and reconcile intragovernmental activity and balances is 
another primary challenge that impedes our ability to provide an 
opinion on the consolidated financial statements. The third major 
impediment that prevents us from rendering an opinion on the 
consolidated financial statements is the federal government's 
ineffective process for preparing the consolidated financial 
statements. As I previously discussed, addressing the first two 
impediments will be difficult challenges. Resolving the weaknesses in 
the systems, controls, and procedures for preparing the consolidated 
financial statements is also a formidable challenge. 

While further progress was demonstrated in fiscal year 2006, the 
federal government continued to have inadequate systems, controls, and 
procedures to ensure that the consolidated financial statements are 
consistent with the underlying audited agency financial statements, 
balanced, and in conformity with U.S. generally accepted accounting 
principles. Most of the issues we identified in fiscal year 2006 
existed in fiscal year 2005, and many have existed for a number of 
years. In addition, Treasury could not provide the final fiscal year 
2006 consolidated financial statements and supporting documentation in 
time for us to complete all of our planned auditing procedures. During 
our fiscal year 2006 audit, we found the following: 

* Treasury showed progress by demonstrating that amounts in the 
Statement of Social Insurance were consistent with the underlying 
federal agencies' audited financial statements and that the Balance 
Sheet and the Statement of Net Cost were consistent with federal 
agencies' financial statements prior to eliminating intragovernmental 
activity and balances. However, Treasury's process for compiling the 
consolidated financial statements did not ensure that the information 
in the remaining three 2006 principal financial statements and notes 
were fully consistent with the underlying information in federal 
agencies' audited financial statements and other financial data. 

* To make the fiscal years 2006 and 2005 consolidated financial 
statements balance, Treasury recorded net decreases of $11 billion and 
$4.1 billion, respectively, to net operating cost on the Statement of 
Operations and Changes in Net Position, which it labeled "Other - 
Unmatched transactions and balances."[Footnote 54] An additional net 
$10.4 billion and $3.2 billion of unmatched transactions were recorded 
in the Statement of Net Cost for fiscal years 2006 and 2005, 
respectively. Treasury is unable to fully identify and quantify all 
components of these unreconciled activities. 

* The federal government did not have an adequate process to fully 
identify and report items needed to reconcile the operating results, 
which for fiscal year 2006 showed a net operating cost of $449.5 
billion, to the budget results, which for the same period showed a 
unified budget deficit of $247.7 billion. 

We also noted other deficiencies related to the adequacy of required 
disclosures and whether amounts reported are complete. Treasury 
continued to make progress in addressing certain other internal control 
weaknesses in its process for preparing the consolidated financial 
statements. However, internal control weaknesses continued to exist 
involving a lack of (1) appropriate documentation of certain policies 
and procedures for preparing the consolidated financial statements, (2) 
adequate supporting documentation for certain adjustments made to the 
consolidated financial statements, and (3) effective management 
reviews. 

As in previous years, Treasury did not have adequate systems and 
personnel to address the magnitude of the fiscal year 2006 financial 
reporting challenges it faced, such as (1) the Governmentwide Financial 
Report System (GFRS) undergoing further development[Footnote 55] and 
not yet being fully operational, and (2) weaknesses in Treasury's 
process for preparing the consolidated financial statements noted 
above. One of the underlying causes of these weaknesses, as I discussed 
earlier, is the lack of sufficient personnel with specialized financial 
reporting experience to help ensure reliable financial reporting by the 
reporting date. 

Meeting the Challenge of Strengthening Consolidated Financial 
Reporting. During fiscal year 2006, Treasury, in coordination with OMB, 
developed and began implementing corrective action plans and milestones 
for short-term and long-range solutions for certain internal control 
weaknesses we have previously reported regarding the process for 
preparing the consolidated financial statements. In April 2006, we 
reported[Footnote 56] in greater detail on these issues and provided 
recommendations to OMB and Treasury. Resolving some of these internal 
control weaknesses will require a strong commitment from Treasury and 
OMB as they execute and implement their corrective action plans. 

Overcoming current challenges will be difficult, but after a decade of 
reporting at the governmentwide level perhaps now is an appropriate 
time to step back and consider the need for further revisions to the 
current federal financial reporting model, which would affect both 
consolidated and agency financial reporting. While the current 
reporting model recognizes some of the unique needs of the federal 
government, a broad reconsideration of the federal financial reporting 
model could address the following types of questions. 

* What kind of information is most relevant and useful for a sovereign 
nation? 

* Do traditional financial statements convey information in a 
transparent manner? 

* What is the role of the balance sheet in the federal government 
reporting model? 

* How should items that are unique to the federal government, such as 
social insurance commitments and the power to tax, be reported? 

Engaging in a reevaluation of this nature could stimulate discussion 
that would bring about a new way of thinking about the federal 
government's financial and performance reporting needs. To understand 
various perceptions and needs of stakeholders for federal financial 
reporting, a wide variety of stakeholders from the public and private 
sector should be consulted. Ultimately, the goal of such a reevaluation 
would be reporting enhancements that can help the Congress deliberate 
strategies to address the federal government's challenges, including 
those of our growing long-term fiscal imbalance. 

More specifically, we continue to support several specific improvements 
to federal financial reporting. For example, the federal government's 
financial reporting should be expanded to disclose the reasons for 
significant changes during the year in scheduled social insurance 
benefits and funding. It should also include a Statement of Fiscal 
Sustainability--providing a long-term look at the sustainability of 
current federal fiscal policy in the context of all major federal 
spending programs and tax policies. The reporting on fiscal 
sustainability should include additional information that will assist 
in understanding the sustainability of current social insurance and 
other federal programs, including key measures of fiscal sustainability 
and intergenerational equity,[Footnote 57] projected annual cash flows, 
and changes in fiscal sustainability during the reporting period. We 
believe that such reporting needs to reflect the significant 
commitments associated with the Social Security and Medicare programs 
while recognizing a liability for the net assets (principally 
investments in special U.S. Treasury securities) of the "trust funds." 
We support the current efforts of the Federal Accounting Standards 
Advisory Board (FASAB) to begin a project on fiscal sustainability 
reporting. In addition, an easily understandable summary annual report 
should be prepared and published that includes in a clear, concise, and 
transparent manner, key financial and performance information embodied 
in the Financial Report. Later in this statement, I offer other 
suggestions for improved reporting that will help in this regard. 

Fiscal Stewardship Is an Increasingly Critical Challenge: 

Successfully addressing the six primary challenges I just described 
will undoubtedly help strengthen the federal government's financial and 
performance reporting and resolve many accountability and stewardship 
challenges. This will become increasingly important, because as I 
stated in our audit report included in the Financial Report, testified 
before the Congress, and emphasized in numerous speeches, the nation's 
current fiscal path is unsustainable and tough choices by the President 
and the Congress are necessary to address the nation's large and 
growing long-term fiscal imbalance. 

The federal government's financial condition and fiscal outlook are 
worse than many may understand. We are currently experiencing strong 
economic growth and yet running large on-budget (operating) deficits 
that are largely unrelated to the Global War on Terrorism. Despite an 
increase in revenues in fiscal year 2006 of about $255 billion, the 
federal government reported that its costs exceeded its revenues by 
$450 billion (i.e., net operating cost) and that its cash outlays 
exceeded its cash receipts by $248 billion (i.e., unified budget 
deficit). Further, as of September 30, 2006, the U.S. government 
reported that it owed (i.e., liabilities) more than it owned (i.e., 
assets) by almost $9 trillion. In addition, the present value of the 
federal government's major reported long-term "fiscal exposures"-- 
liabilities (e.g., debt), contingencies (e.g., insurance), and social 
insurance and other commitments and promises (e.g., Social Security, 
Medicare)--rose from about $20 trillion to over $50 trillion in the 
last 6 years. 

The federal government faces large and growing structural deficits in 
the future due primarily to known demographic trends and rising health 
care costs. These structural deficits--which are virtually certain 
given the design of our current programs and policies--will mean 
escalating and ultimately unsustainable federal deficits and debt 
levels. Based on various measures--and using reasonable assumptions-- 
the federal government's current fiscal policy is unsustainable. 

The Long-Term Fiscal Outlook: 

In addition to considering the federal government's current financial 
condition, it is critical to look at other measures of the long-term 
fiscal outlook of the federal government. An evaluation of the nation's 
long-term fiscal outlook should include not only liabilities included 
in the Financial Report but also the implicit promises embedded in 
current policy and the timing of these longer-term obligations and 
commitments in relation to the resources available under various 
assumptions. 

Over the next few decades, the nation's fiscal outlook will be shaped 
largely by known demographic trends and rising health care costs. As 
the baby-boom generation retires, federal spending on current 
retirement and health care programs--Social Security, Medicare, and 
Medicaid--will grow dramatically. A range of other federal fiscal 
commitments, some explicit and some representing implicit public 
expectations, also bind the nation's fiscal future. Absent policy 
changes, a growing imbalance between expected federal spending and tax 
revenues will mean escalating and ultimately unsustainable federal 
deficits and debt levels. 

There are various ways to consider and assess the long-term fiscal 
outlook, including: 

* the Statement of Social Insurance, 

* major reported long-term fiscal exposures, and: 

* long-term fiscal simulations. 

Statement of Social Insurance. The Statement of Social Insurance in the 
Financial Report displays the present value of projected revenues and 
expenditures for scheduled benefits of certain benefit programs that 
are referred to as social insurance (e.g., Social Security, Medicare). 
For Social Security and Medicare alone, projected expenditures for 
scheduled benefits for the next 75 years exceed earmarked revenues 
(e.g., dedicated payroll taxes, premiums, and existing government bonds 
in the trust funds) for the same period by approximately $39 trillion 
in present value terms. Stated differently, one would need 
approximately $39 trillion invested today to deliver on the currently 
promised benefits for the next 75 years. Table 1 shows a simplified 
version of the Statement of Social Insurance by its primary components. 

Table 1: Simplified Statement of Social Insurance as of January 1, 
2006: 

Dollars in trillions. 

Present value of future revenue (earmarked contributions, taxes, and 
premiums); 
Social security: $32; 
Medicare Hospital Insurance (Part A): $11; 
Medicare Supplementary Medical Insurance-Part B: $5; 
Medicare Supplementary Medical Insurance-Part D: $2; 
Total: $50. 

Present value of expenditures for scheduled future expenditures in 
excess of future revenue[A]; 
Social security: (39); 
Medicare Hospital Insurance (Part A): (22); 
Medicare Supplementary Medical Insurance-Part B: (18); 
Medicare Supplementary Medical Insurance-Part D: (10); 
Total: (89). 

Present value of future expenditures in excess of future revenue[B]; 
Social security: ($7); 
Medicare Hospital Insurance (Part A): ($11); 
Medicare Supplementary Medical Insurance-Part B: ($13); 
Medicare Supplementary Medical Insurance-Part D: ($8); 
Total: ($39). 

Source: The Department of the Treasury. 

[A] These amounts include administrative expenses for the programs. 

[B] Under current law, Social Security and Federal Hospital Insurance 
(Medicare Part A) payments are limited to amounts available to the 
respective trust funds. 

Note: Data are from the fiscal year 2006 Financial Report. 

[End of table] 

Major Reported Long-Term Fiscal Exposures. GAO developed the concept of 
"fiscal exposures" to provide a framework for considering the wide 
range of responsibilities, programs, and activities that explicitly or 
implicitly expose the federal government to future spending. 

The concept of fiscal exposures is meant to provide a broader 
perspective on long-term costs. Major reported long-term fiscal 
exposures in fiscal year 2006 with a present value totaling over $50 
trillion consisted of $10 trillion of liabilities reported on the 
Balance Sheet, $1 trillion of other commitments and contingencies, and 
the $39 trillion of social insurance responsibilities, the last two of 
which are reported elsewhere in the Financial Report. This $50 trillion 
compares to about $20 trillion in fiscal year 2000. 

These large numbers are difficult to comprehend. Table 2 seeks to 
translate them into several figures and ratios that are more 
understandable. 

Table 2: Understanding the Size of Major Reported Fiscal Exposures: 

Major Fiscal exposures; 
2000: $20.4 trillion; 
2006: $50.5 trillion; 
Percentage increase: 147%. 

Major Fiscal exposures: Total household net worth; 
2000: $42.0 trillion; 
2006: $53.3 trillion; 
Percentage increase: 27%. 

Major Fiscal exposures: Total household net worth: Ratio of fiscal 
exposures to net worth; 
2000: 49 percent; 
2006: 95 percent; 
Percentage increase: 94%. 

Major Fiscal exposures: Burden: Per person; 
2000: $70,000; 
2006: $170,000; 
Percentage increase: 132%. 

Major Fiscal exposures: Burden: Per full-time worker; 
2000: $165,000; 
2006: $400,000; 
Percentage increase: 143%. 

Major Fiscal exposures: Burden: Per household; 
2000: $190,000; 
2006: $440,000; 
Percentage increase: 134%. 

Major Fiscal exposures: Income: Median household Income; 
2000: $41,990; 
2006: $46,326; 
Percentage increase: 10%. 

Major Fiscal exposures: Income: Disposable personal income per capita; 
2000: $25,127; 
2006: $31,519; 
Percentage increase: 25%.

Major Fiscal exposures: Ratio of household burden to median income; 
2000: 4.5; 
2006: 9.5; 
Percentage increase: 112%.  

Sources: GAO analysis of data from the Department of the Treasury, 
Federal Reserve Board, U.S. Census Bureau, and Bureau of Economic 
Analysis. 

Note: Percentage increases reflect actual data and may differ from 
calculation of rounded numbers presented in table. 

[End of table] 

Long-Term Fiscal Simulations. Another way to assess the U.S. 
government's long-term fiscal outlook and the sustainability of federal 
programs is to run simulations of future revenues and costs for all 
federal programs, based on a continuation of current or proposed 
policy. The simulations GAO has published since 1992 are designed to do 
that. As shown in figure 1, GAO's long-term simulations--which are 
neither forecasts nor predictions--continue to show ever-increasing 
long-term deficits resulting in a federal debt level that ultimately 
spirals out of control. The timing of deficits and the resulting debt 
buildup varies depending on the assumptions used, but under either 
optimistic ("Baseline extended") or more realistic assumptions, the 
federal government's current fiscal policy is unsustainable. 

Figure 3: Unified Surpluses and Deficits as a Share of GDP under 
Alternative Fiscal Policy Simulations: 

[See PDF for image] 

Source: GAO's January 2007 analysis. 

[End of figure] 

Over the long term, the nation's growing fiscal imbalance stems 
primarily from the aging of the population and rising health care 
costs. Absent significant changes on the spending or revenue sides of 
the budget or both, these long-term deficits will encumber a growing 
share of federal resources and test the capacity of current and future 
generations to afford both today's and tomorrow's commitments. 
Continuing on this unsustainable path will gradually erode, if not 
suddenly damage, our economy, our standard of living, and ultimately 
our domestic tranquility and national security. 

If, for example, as shown in figure 2, it is assumed that recent tax 
reductions are made permanent and discretionary spending keeps pace 
with the growth of our economy, our long-term simulations suggest that 
by 2040 federal revenues may be adequate to pay little more than 
interest on debt held by the public and some Social Security benefits. 
Neither slowing the growth in discretionary spending nor allowing the 
tax provisions, including the tax cuts enacted in 2001 and 2003, to 
expire--nor both together--would eliminate the imbalance. 

Figure 4: Potential Fiscal Outcomes under Alternative Simulation: 
Discretionary Spending Grows with GDP after 2007 and All Expiring Tax 
Provisions Are Extended: 

[See PDF for image] 

Source: GAO's January 2007 analysis. 

Note: Alternative Minimum Tax (AMT) exemption amount is retained at the 
2006 level through 2017 and expiring tax provisions are extended. After 
2017, revenue as a share of GDP is held constant--implicitly assuming 
that action is taken to offset increased revenue from real bracket 
creep, the AMT, and tax-deferred retirement accounts. 

[End of figure] 

At some point, action will need to be taken to change the nation's 
fiscal course. The sooner appropriate actions are taken, the sooner the 
miracle of compounding will begin to work for the federal budget rather 
than against it. Conversely, the longer that action to deal with the 
nation's long-term fiscal outlook is delayed, the greater the risk that 
the eventual changes will be disruptive and destabilizing. Acting 
sooner rather than later will give us more time to phase in gradual 
changes, while also providing more time for those likely to be most 
affected to make compensatory changes. 

The "fiscal gap" is a quantitative measure of long-term fiscal 
imbalance. Under GAO's more realistic simulation, assuming debt held by 
the public remains at the current share of the economy (i.e., GDP), 
closing the fiscal gap would require spending cuts or tax increases 
equal to 8 percent of the entire economy each year over the next 75 
years, or a total of about $61 trillion in present value terms. To put 
this in perspective, closing the gap would require an immediate and 
permanent increase in federal tax revenues of more than 40 percent or 
an equivalent reduction in federal program spending (i.e., in all 
spending except for interest on the debt held by the public, which 
cannot be directly controlled). 

A Possible Way Forward: 

Although the long-term fiscal outlook is driven primarily by rising 
health care costs and known demographics, we cannot ignore other 
government programs and activities. There is a need to engage in a 
fundamental review, reprioritization, and reengineering of the base of 
government. Aligning the federal government to meet the challenges and 
capitalize on the opportunities of the 21st century will require a 
fundamental review of what the federal government does, how it does it, 
and how it is financed. Many of the federal government's current 
policies, programs, functions, and activities are based on conditions 
that existed decades ago, are not results-based, and are not well 
aligned with 21st century realities. We need to address the growing 
costs of the major entitlement programs and also review and reexamine 
all other major programs, policies, and activities on both the spending 
and the revenue side of the budget. Programs that run through the tax 
code--sometimes referred to as tax expenditures[Footnote 58]--must be 
reexamined along with those that run through the spending side. As we 
move forward, the federal government needs to start making tough 
choices in setting priorities and linking resources and activities to 
results. Meeting our nation's large, growing, and structural fiscal 
imbalance will require a multipronged approach: 

* increasing transparency and enhancing the relevancy of key financial, 
performance, and budget reporting and estimates to highlight our long- 
term fiscal challenges; 

* reinstituting and strengthening budget controls for both spending and 
tax policies to deal with both near-term and longer-term deficits; 

* strengthening oversight of programs and activities, including 
creating approaches to better facilitate the discussion of integrated 
solutions to crosscutting issues; and: 

* reengineering and reprioritizing the federal government's existing 
programs, policies, and activities to address 21st century challenges 
and capitalize on related opportunities. 

In my January 2007 testimony,[Footnote 59] I proposed a number of ideas 
for consideration to improve the transparency of long-term costs. In 
November 2006, I provided the congressional leadership with 
recommendations, based on the work of GAO, for consideration for the 
agenda of the 110th Congress.[Footnote 60] These recommendations 
focused on three areas: (1) targets for near-term oversight, (2) 
policies and programs that are in need of fundamental reform and 
reengineering, and (3) governance issues. One of the areas I pointed 
out that warranted congressional attention was the development of a 
portfolio of outcome-based key national indicators (e.g., economic, 
security, social, environmental) to help measure progress toward 
national outcomes, assess conditions and trends, and help communicate 
complex issues. The Congress could take a leadership role in 
highlighting the need for a U.S. national indicator system to inform 
strategic planning, enhance performance and accountability reporting, 
inform congressional oversight and decision making, and stimulate 
greater citizen engagement. In my view, this should include 
consideration of a public/private partnership to help make this key 
concept a reality sooner rather than later. 

In order to effectively address our long-term fiscal imbalance, 
fundamental reform of existing entitlement programs is essential. 
However, entitlement reform alone will not get the job done. We also 
need to reprioritize and constrain other federal government spending 
and generate more revenues--hopefully through a reformed tax system. 
GAO's 21st Century Challenges: Reexamining the Base of the Federal 
Government[Footnote 61] contains a suggested list of specific federal 
activities for reexamination, illustrative reexamination questions, and 
perspectives on various strategies, processes, and approaches for 
congressional consideration stemming from our audit and evaluation work 
that can be used in reexamining the federal base. Answers to these 
questions may draw on the work of GAO and others; however, only elected 
officials can and should decide which issues to address as well as how 
and when to address them. Addressing these problems will require tough 
choices, and our fiscal clock is ticking. As a result, the time to 
start is now, to help save our future. 

Concluding Remarks: 

In closing, given the federal government's current financial condition 
and growing long-term fiscal imbalance, the need for the Congress and 
the President to have timely, reliable, and useful financial and 
performance information is greater than ever. Sound decisions on the 
current results and future direction of vital federal government 
programs and policies are more difficult without such information. 
Until the problems discussed in this testimony are effectively 
addressed, they will continue to have adverse implications for the 
federal government and the taxpayers. 

Since enactment of federal financial management reform legislation, we 
have seen continuous movement toward the ultimate goals of 
accountability laid out in the different financial management statutes. 
While early on some were skeptical, these laws have dramatically 
changed how financial management is carried out and the value placed on 
good financial management across government. Across government, 
financial management improvement initiatives are underway, and if 
effectively implemented, have the potential to greatly improve the 
quality of financial management information as well as the efficiency 
and effectiveness of agency operations. By the end of my term as 
Comptroller General, I would like to see the civilian CFO Act agencies 
routinely producing not only annual financial statements that can pass 
the scrutiny of a financial audit, but also quarterly financial 
statements and other meaningful financial and performance data to help 
guide decision makers on a day-to-day basis. For DOD, my expectations 
are not as high given the current status of DOD's financial management 
practices, yet it is realistic for at least major portions of DOD's 
financial information to become auditable by the end of my term. 
Moreover, progress on developing meaningful financial and performance 
reporting on the federal government will be a key area that I will 
continue to champion. I am determined to do whatever I can to help 
ensure that we are not the first generation to leave our children and 
grandchildren a legacy of failed fiscal stewardship and the hardships 
that would bring. 

Finally, I want to emphasize the value of sustained congressional 
interest in these issues, as demonstrated by this Subcommittee's 
leadership. It will be key that going forward, the appropriations, 
budget, authorizing, and oversight committees hold agency top 
leadership accountable for resolving the remaining problems and that 
they support improvement efforts that address the challenges for the 
future I highlighted today. The federal government has made tremendous 
progress, and sustained congressional attention has been and will 
continue to be a critical factor to ensuring achievement of the goals 
and objectives of management reform legislation. 

Mr. Chairman, this completes my prepared statement and I want to thank 
you for the opportunity to participate in this hearing and for the 
strong support of this Subcommittee in addressing the need for 
financial management reform and accountability. I would be happy to 
respond to any questions you or other members of the Subcommittee may 
have at this time. 

Contacts and Acknowledgments: 

For information about this statement, please contact Jeffrey C. 
Steinhoff, Managing Director, Financial Management and Assurance, at 
(202) 512-2600 or McCoy Williams, Director, Financial Management and 
Assurance, at (202) 512-9095 or williamsm1@gao.gov. Individuals who 
made key contributions to this testimony include Felicia Brooks, Robert 
Dacey, Kay Daly, Francine DelVecchio, Gary Engel, Susan Irving, Jay 
McTigue, Diane Morris, and Paula Rascona. Numerous other individuals 
made contributions to the GAO reports cited in this testimony. 

FOOTNOTES 

[1] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990). 

[2] The Improper Payments Information Act of 2002 (Public Law 107-300) 
defines improper payments as any payment that should not have been made 
or that was made in an incorrect amount (including overpayments and 
underpayments) under statutory, contractual, administrative, or other 
legally applicable requirements. It includes any payment to an 
ineligible recipient, any payment for an ineligible service, any 
duplicate payment, payments for services not received, and any payment 
that does not account for credit for applicable discounts. 

[3] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

[4] GAO, Fiscal Stewardship: A Critical Challenge Facing Our Nation, 
GAO-07-362SP (Washington, D.C.: January 2007); The Nation's Long-Term 
Fiscal Outlook: September 2006 Update, GAO-06-1077R (Washington, D.C.); 
Understanding the Similarities and Differences between Accrual and Cash 
Deficits, GAO-07-117SP (Washington, D.C.: December 2006) and its 
supplement, Accrual and Cash Deficits: Update for Fiscal Year 2006, GAO-
07-341SP (Washington, D.C.); Understanding the Primary Components of 
the Annual Financial Report of the United States, GAO-05-958SP 
(Washington, D.C.: September 2005); and Statement of the Comptroller 
General of the United States transmitting GAO's report on the U.S. 
government's consolidated financial statements for fiscal years 2006 
and 2005. 

[5] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

[6] FMFIA is codified at 31 U.S.C. § 3512(c), (d). 

[7] GAO, Standards for Internal Control in the Federal Government, GAO/ 
AIMD-00.21.3.1 (Washington, D.C.: November 1999). 

[8] Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). 

[9] Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994). 

[10] Pub. L. No. 104-208, div. A., sec. 101(f), title VIII, 110 Stat. 
3009, 3009-389 (Sept. 30, 1996). 

[11] Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996). 

[12] Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002). 

[13] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

[14] OMB Memorandum M-03-13, "Improper Payments Information Act of 2002 
(Public Law 107-300)" (May 21, 2003), and OMB Circular No. A-136, 
Financial Reporting Requirements, § II.5.6 (July 24, 2006). OMB 
recently issued revised guidance for fiscal year 2006 reporting in OMB 
Memorandum M-06-23, "Issuance of Appendix C to OMB Circular No. A-123" 
(Aug. 10, 2006). 

[15] OMB's guidance defines significant improper payments as those in 
any particular program that exceed both 2.5 percent of program payments 
and $10 million annually. 

[16] JFMIP was originally formed under the authority of the Budget and 
Accounting Procedures Act of 1950 and was a joint and cooperative 
undertaking of the Government Accountability Office, the Department of 
the Treasury, OMB, and OPM, working in cooperation with each other to 
improve financial management practices in the federal government. A 
JFMIP Program Management Office developed federal financial management 
systems requirements, and tested core federal financial management 
systems. In a December 2004 memorandum, OMB announced a realignment of 
JFMIP's responsibilities for financial management policy and oversight 
in the federal government. 

[17] GAO, Financial Management: Effective Internal Control is Key to 
Accountability, GAO-05-321T (Washington, D.C.: Feb. 16, 2005). 

[18] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: 
January 2007). 

[19] OMB, Issuance of Appendix C to OMB Circular A-123, M-06-23, August 
10, 2006. 

[20] The independent auditors for the Department of State's fiscal year 
2006 financial statements issued a disclaimer of opinion on November 
14, 2006, because the department could not provide evidential matter in 
a timely manner to meet the November 15, 2006, reporting deadline. 
After receiving adequate documentation to support the amounts on the 
financial statements, the auditors issued an unqualified opinion on the 
Department of State's fiscal year 2006 financial statements on December 
12, 2006. 

[21] GAO-07-310. 

[22] GAO, Global War on Terrorism: Observations on Funding, Costs, and 
Future Commitments, GAO-06-885T (Washington, D.C.: July 18, 2006). 

[23] GAO, Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have 
Struggled to Resolve Military Debts, GAO-06-494 (Washington, D.C.: Apr. 
27, 2006). 

[24] GAO, Military Pay: Inadequate Controls for Stopping Overpayments 
of Hostile Fire and Hardship Duty Pay to Over 200 Sick or Injured Army 
National Guard and Army Reserve Soldiers Assigned to Fort Bragg, GAO- 
06-384R (Washington, D.C.: Apr. 27, 2006); Military Pay: Gaps in Pay 
and Benefits Create Financial Hardships for Injured Army National Guard 
and Reserve Soldiers, GAO-05-125 and GAO-05-322T (Washington, D.C.: 
Feb. 17, 2005); Army National Guard: Inefficient, Error-Prone Process 
Results in Travel Reimbursement Problems for Mobilized Soldiers, GAO- 
05-79 (Washington, D.C.: Jan. 31, 2005) and GAO-05-400T (Washington, 
D.C.: Mar. 16, 2005); Military Pay: Army Reserve Soldiers Mobilized to 
Active Duty Experienced Significant Pay Problems, GAO-04-911 
(Washington, D.C.: Aug. 20, 2004) and GAO-04-990T (Washington, D.C.: 
July 20, 2004); and Military Pay: Army National Guard Personnel 
Mobilized to Active Duty Experienced Significant Pay Problems, GAO-04- 
413T (Washington, D.C.: Jan. 28, 2004) and GAO-04-89 (Washington, D.C.: 
Nov. 13, 2003). 

[25] GAO, Environmental Liabilities: Long-Term Fiscal Planning Hampered 
by Control Weaknesses and Uncertainties in the Federal Government's 
Estimates, GAO-06-427 (Washington, D.C.: Mar. 31, 2006). 

[26] GAO, DOD Excess Property: Management Control Breakdowns Result in 
Substantial Waste and Inefficiency, GAO-05-277 (Washington, D.C.: May 
13, 2005). 

[27] Disciplined processes include a wide range of activities, 
including project planning and management, requirements management, 
risk management, quality assurance, and testing. 

[28] Acceptable levels refer to the fact that any systems acquisition 
effort will have risks and will suffer the adverse consequences 
associated with defects in the processes. However, effective 
implementation of disciplined processes reduces the possibility of the 
potential risks actually occurring and prevents significant defects 
from materially affecting the cost, timeliness, and performance of the 
project. 

[29] GAO, Defense Travel System: Reported Savings Questionable and 
Implementation Challenges Remain, GAO-06-980 (Washington, D.C.: Sept. 
26, 2006). 

[30] GAO, Army Depot Maintenance: Ineffective Oversight of Depot 
Maintenance Operations and System Implementation Efforts, GAO-05-441 
(Washington, D.C.: June 30, 2005). 

[31] GAO, DOD Business Systems Modernization: Navy ERP Adherence to 
Best Business Practices Critical to Avoid Past Failures, GAO-05-858 
(Washington, D.C.: Sept. 29, 2005). 

[32] GAO, Defense Reform Initiative: Organization, Status, and 
Challenges, GAO/NSIAD-99-87 (Washington, D.C.: Apr. 21, 1999). 

[33] GAO, Department of Defense: Long-standing Problems Continue to 
Impede Financial and Business Management Transformation, GAO-04-907T 
(Washington, D.C.: July 7, 2004); Department of Defense: Financial and 
Business Management Transformation Hindered by Long-standing Problems, 
GAO-04-941T (Washington, D.C.: July 8, 2004); Department of Defense: 
Further Actions Are Needed to Effectively Address Business Management 
Problems and Overcome Key Business Transformation Challenges, GAO-05- 
140T (Washington, D.C.: Nov. 18, 2004); DOD's High-Risk Areas: 
Successful Business Transformation Requires Sound Strategic Planning 
and Sustained Leadership, GAO-05-520T (Washington, D.C.: Apr. 13, 
2005); and Department of Defense: Sustained Leadership Is Critical to 
Effective Financial and Business Management Transformation, GAO-06- 
1006T (Washington, D.C.: Aug. 3, 2006). 

[34] National Defense Authorization Act for Fiscal Year 2006, Pub. L. 
No. 109-163, § 907, 119 Stat. 3136, 3403 (Jan. 6, 2006). 

[35] For fiscal year 2006, only the Consolidated Balance Sheet and 
Statement of Custodial Activity were subjected to audit, and the 
auditor was unable to express an opinion on these two financial 
statements. 

[36] For fiscal year 2006, only the Consolidated Balance Sheet of the 
Department of Energy was subjected to audit, and the auditor qualified 
its opinion on this statement. 

[37] Pub. L. No. 107-107, 115 Stat. 1012, 1206 (Dec. 28, 2001). 

[38] FFMIA requires CFO Act agencies financial management systems to 
comply substantially with (1) federal financial management systems 
requirements, (2) applicable federal accounting standards, and (3) the 
U.S. government standard general ledger at the transaction level. 

[39] GAO, DOD Business Systems Modernization: Navy ERP Adherence to 
Best Business Practices Critical to Avoid Past Failures, GAO-05-858 
(Washington, D.C.: Sept. 29, 2005); Army Depot Maintenance: Ineffective 
Oversight of Depot Maintenance Operations and System Implementation 
Efforts, GAO-05-441 (Washington, D.C.: Jun. 30, 2005); and DOD Systems 
Modernization: Management of Integrated Military Human Capital Program 
Needs Additional Improvements, GAO-05-189 (Washington, D.C.: Feb. 11, 
2005). 

[40] GAO, Business Modernization: Some Progress Made toward 
Implementing GAO Recommendations Related to NASA's Integrated Financial 
Management Program, GAO-05-799R (Washington, D.C.: Sept. 9, 2005); 
National Aeronautics and Space Administration: Significant Actions 
Needed to Address Long-standing Financial Management Problems, GAO-04- 
754T (Washington, D.C.: May 19, 2004); and Business Modernization: 
NASA's Challenges in Managing Its Integrated Financial Management 
Program, GAO-04-255 (Washington, D.C.: Nov. 21, 2003). 

[41] GAO, Financial Management Systems: Additional Efforts Needed to 
Address Key Causes of Modernization Failures, GAO-06-184 (Washington, 
D.C.: Mar. 15, 2006). 

[42] GAO, Financial Management: Effective Internal Control is Key to 
Accountability, GAO-05-321T (Washington, D.C.: Feb. 16, 2005). 

[43] GAO/AIMD-00-21.3.1. 

[44] GAO, Improper Payments: Incomplete Reporting under the Improper 
Payments Information Act Masks the Extent of the Problem, GAO-07-254T 
(Washington, D.C.: Dec. 5, 2006). 

[45] GAO-05-321T. 

[46] GAO, Improper Payments: Agencies' Fiscal Year 2005 Reporting under 
the Improper Payments Information Act Remains Incomplete, GAO-07-92 
(Washington, D.C.: Nov. 14, 2006). 

[47] Grant Thornton LLP and the Association of Government Accountants, 
CFO Survey: Preparing for Tomorrow's Way of Doing Business (Alexandria, 
Va.: March 1998). 

[48] GAO, Executive Guide: Creating Value Through World-class Financial 
Management, GAO/AIMD-00-134 (Washington, D.C.: April 2000). Appendix II 
includes a synopsis of the key concepts discussed in the study. 

[49] JFMIP, Building a World Class Financial Workforce, The Federal 
Financial Management Workforce of the Future (Washington, D.C.: 
September 2003). 

[50] Grant Thornton LLP and the Association of Government Accountants, 
CFO Survey: Integrating Internal Control with Performance Management 
(Alexandria, Va.: 2005). 

[51] See GAO's audit report on its audit of the federal government's 
fiscal year 2006 financial statements that was incorporated in the 2006 
Financial Report of the U.S. Government published by Treasury. 

[52] T. Danker, T. Dohrmann, N. Killefer, and L. Mendonca, How can 
American government meet its productivity challenge? (Washington, D.C.: 
McKinsey & Company, 2006). 

[53] GAO-05-207. 

[54] Although Treasury was unable to determine how much of the 
unmatched transactions and balances, if any, relate to operations, it 
reported this amount as a component of net operating cost in the 
accompanying consolidated financial statements. 

[55] GFRS uses a closing package methodology that has been developed to 
capture each federal agency's information and link the agencies' 
audited financial statements to the governmentwide consolidated 
financial statements. See GAO, Financial Management Systems: Lack of 
Disciplined Processes Puts Effective Implementation of Treasury's 
Governmentwide Financial Report System at Risk, GAO-06-413 (Washington, 
D.C.: Apr. 21, 2006). 

[56] GAO, Financial Audit: Significant Internal Control Weaknesses 
Remain in Preparing the Consolidated Financial Statements of the U.S. 
Government, GAO-06-415 (Washington, D.C.: Apr. 21, 2006). 

[57] Intergenerational equity assesses the extent to which different 
age groups may be required to assume financial burdens to sustain 
federal responsibilities. 

[58] In addition to the reported net cost, the federal government 
foregoes tax revenues as a result of preferential provisions, such as 
tax exclusions, credits, and deductions. These revenue losses are 
referred to as tax expenditures. 

[59] GAO, Long-term Budget Outlook: Saving Our Future Requires Tough 
Choices Today, GAO-07-342T (Washington, D.C.: Jan. 11, 2007). 

[60] GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07- 
235R (Washington, D.C.: Nov. 17, 2006). 

[61] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

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