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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. EDT: 

Thursday, June 28, 2007: 

Homeland Security: 

Transforming Departmentwide Financial Management Systems Remains a 
Challenge: 

Statement of McCoy Williams: 
Director, Financial Management and Assurance Keith Rhodes: 

Chief Technologist, Applied Research and Methods: 
Center for Technology and Engineering: 

GAO-07-1041T: 

GAO Highlights: 

Highlights of GAO-07-1041T, 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: 

Since 2003, when the Department of Homeland Security (DHS) began 
operations, it has faced the difficult challenge of bringing together 
22 diverse agencies and developing an integrated financial management 
system to provide reliable, timely, and useful financial information. 
GAO’s 2007 report, Homeland Security: Departmentwide Integrated 
Financial Management Systems Remain a Challenge, GAO-07-536, emphasized 
the key issues related to DHS attempting to transform its financial 
management systems. 

For today’s hearing, this testimony, based on GAO’s recent report, (1) 
summarizes DHS’s financial system transformation efforts, (2) points 
out key financial system transformation challenges at DHS, and (3) 
highlights the building blocks that DHS should consider to form the 
foundation for successful financial management system transformation 
efforts. 

What GAO Found: 

DHS began implementation of the Electronically Managing Enterprise 
Resources for Government Effectiveness and Efficiency (eMerge2) program 
in January 2004 to integrate financial management systems across the 
entire department and to address the multitude of financial management 
weaknesses DHS inherited. In December 2005, the DHS Chief Financial 
Officer (CFO) decided not to exercise the next contract option with the 
systems integrator, and by September 2006, DHS’s new CFO stated that 
eMerge2 was officially “dead.” DHS officials have stated that about $52 
million was spent on this project before it was halted but could not 
provide documentation to support this amount. DHS’s decision to end the 
project before spending an estimated $229 million was prudent; however, 
the agency has made little progress since that time and as a result has 
missed an invaluable opportunity to address existing financial 
management problems. 

While DHS officials have recognized the need for an integrated 
financial management system, the department has not yet developed an 
overall transformation strategy that includes financial management 
policies and procedures, standard business processes, a human capital 
strategy, and effective internal controls. DHS officials have 
acknowledged that the Internal Controls Over Financial Reporting 
Playbook issued in March 2007 has a policy and process focus and does 
not comprise a strategy for financial systems modernization. DHS’s 
recently developed high-level financial management systems strategy, 
the Transformation and Systems Consolidation, focuses on leveraging 
existing systems investments across DHS components and is still in the 
early stages of development. More detailed implementation strategies 
will be necessary to fully address financial management system 
integration efforts. 

Consolidating financial management systems for an entity as large and 
diverse as DHS poses significant management challenges. DHS also has an 
opportunity to reap substantial benefits by reengineering business 
processes and standardizing those processes in terms of both 
productivity gains and staff portability across the various components. 
Based on industry best practices, GAO has identified four key building 
blocks that will be critical to DHS’s ability to successfully complete 
its financial management transformation: 
* developing a concept of operations, 
* defining standard business processes, 
* developing a migration and/or implementation strategy for DHS 
components, and 
* defining and effectively implementing disciplined processes necessary 
to properly manage the specific projects. Fully embracing these four 
building blocks and human capital best practices will be critical to 
the success of any future financial management plan or strategy that 
addresses implementing and/or migrating to an integrated departmentwide 
financial management system at DHS. 

What GAO Recommends: 

Though there are no recommendations in this statement, in its related 
report (GAO-07-536), GAO made six recommendations focused on the need 
for DHS to define a departmentwide financial management strategy and 
embrace best practices, including human capital practices, to foster 
its systems integration effort. DHS concurred with GAO’s 
recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1041T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact McCoy Williams at (202) 
512-9095 or Keith Rhodes at (202) 512-6412. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

It is a pleasure to be here today to participate in this hearing on the 
Department of Homeland Security's (DHS) ongoing efforts to effectively 
modernize its financial management systems. Modern financial management 
systems are a critical component to instituting strong financial 
management as called for by the Chief Financial Officers (CFO) Act of 
1990,[Footnote 1] the Federal Financial Management Improvement Act of 
1996,[Footnote 2] and other legislation. Hearings such as this one 
today can be very useful to foster meaningful financial management 
reform. 

Over the years, we have reported on various agencies' financial 
management system implementation failures. As we testified[Footnote 3] 
in March 2006, agencies continue to struggle with developing and 
implementing integrated financial management systems that achieve 
expected functionality within cost and timeliness goals. Our recent 
report,[Footnote 4] which was prepared at the request of this 
subcommittee, discusses in detail some of the most significant problems 
and observations we identified with DHS's financial management system 
modernization efforts. Since 2003, GAO has designated implementing and 
transforming DHS as high risk[Footnote 5] because the agency has yet to 
implement a corrective action plan that includes a comprehensive 
transformation strategy, and because its management systems-- 
especially related to financial, information, acquisition, and human 
capital management--are not yet integrated and wholly operational. 
Today, we would like to provide our perspectives on the importance of 
DHS following best practices in developing and implementing its 
financial management systems. Specifically, we would like to: 

* summarize DHS's financial management systems transformation efforts, 

* point out key financial management system transformation challenges 
at DHS, and: 

* highlight the building blocks that form the foundation for successful 
financial management system transformation efforts. 

Our statement is based upon our recently issued report,[Footnote 6] as 
well as our previous reports and testimonies, which were performed in 
accordance with U.S. generally accepted government auditing standards. 

Background: 

Since DHS began operations in March 2003, as mandated by the Homeland 
Security Act of 2002,[Footnote 7] it has faced the daunting task of 
bringing together 22 diverse agencies and developing an integrated 
financial management system. DHS inherited many financial management 
weaknesses and vulnerabilities from the 22 agencies. Auditors had 
identified 30 reportable conditions,[Footnote 8] 18 of which were 
considered material internal control weaknesses[Footnote 9] in the 
components prior to the transfer to DHS. In fiscal year 2003, the DHS 
financial statement auditors reported 14 reportable conditions, of 
which 7 were considered to be material weaknesses. While incremental 
progress has been made, the material internal control weaknesses and 
financial reporting problems continued in fiscal year 2006. In fiscal 
year 2006, while the total number of reportable conditions decreased to 
12, the number of material weaknesses increased to 10. Some of the more 
recent material weaknesses identified by the auditors include problems 
with fund balance with treasury, budgetary accounting, and 
intergovernmental balances. 

In early March 2007, DHS officials issued the Internal Controls Over 
Financial Reporting (ICOFR) Playbook, a high-level plan with a stated 
purpose of addressing the existing internal control weaknesses. DHS 
officials have reported that the ICOFR Playbook draws from internal 
control best practices to establish a management control program that 
measures performance and provides accountability for improvement. DHS 
officials expect the ICOFR Playbook to guide DHS for the next several 
years through fundamental financial management improvement across the 
spectrum of financial activities supporting the agency's mission. 

eMerge2 Project Was Unsuccessful: 

DHS began implementation of the Electronically Managing Enterprise 
Resources for Government Effectiveness and Efficiency (eMerge2) program 
in January 2004 to integrate financial management systems across the 
entire department and to address the department's financial management 
weaknesses. eMerge2 was expected to establish the strategic direction 
for migration, modernization, and integration of DHS financial, 
accounting, procurement, personnel, asset management, and travel 
systems, processes, and policies. In February 2005, the DHS CFO 
conducted a review of the eMerge2 effort. DHS chose not to exercise the 
next contract option, and DHS's contract with Bearing Point, Inc. 
(Bearing Point), the systems integrator, to acquire and implement 
eMerge2 expired in December 2005. 

In March 2006, DHS's Deputy CFO testified[Footnote 10] that eMerge2 was 
taking a new direction in that the department was going to perform an 
assessment of existing financial management systems at the component 
level to determine whether internal resources could be leveraged. DHS 
officials also reported that they were going to review the Office of 
Management and Budget's (OMB) Financial Management Line of Business 
initiative to assess whether migration to a shared service provider was 
a feasible option. In March 2006, we testified[Footnote 11] that DHS 
was at an important crossroads in implementing a financial management 
system, and we discussed the necessary building blocks that form the 
foundation for successful financial management system implementation 
efforts. 

Finally, in September 2006, the newly appointed CFO stated that eMerge2 
was officially "dead." See figure 1 for a summary of the eMerge2 
timeline. DHS officials have stated that approximately $52 million was 
spent on the eMerge2 project before it was halted in December 2005. DHS 
could not provide any documentation to support these reported costs. 
DHS's decision to end the project before spending an estimated $229 
million on a financial management system that would not provide the 
expected system functionality and desired performance was prudent, and 
we support the decision to cut its losses. However, the agency has made 
little progress since that time and has missed an invaluable 
opportunity to address existing financial management problems. 

Figure 1: Timeline of Key eMerge2 Events: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Financial Management Systems Transformation Efforts Are Incomplete: 

While DHS officials have recognized the need for an integrated 
financial management system, the department has not developed an 
overall financial management transformation strategy that includes 
financial management policies and procedures, standard business 
processes, a human capital strategy, and effective internal controls. 
DHS officials have acknowledged that the ICOFR Playbook has a policy 
and process focus and does not comprise a strategy for financial 
systems modernization. DHS's high-level financial management systems 
strategy, Transformation and Systems Consolidation (TASC), focuses on 
leveraging existing systems investments across DHS components, and is 
still in the early stages of development. More detailed implementation 
strategies will be necessary to fully address financial management 
system integration efforts. 

DHS recently provided us with its high-level strategy--TASC--which 
calls for DHS to consolidate its financial management systems into one 
of two models: the Transportation Security Administration (TSA) systems 
model or the U.S. Customs and Border Protection (CBP) systems model, 
which the department refers to as shared baselines. Some of the main 
objectives of this strategy are to realize cost savings and operational 
efficiencies, reduce the number of financial systems, and ensure that 
internal controls are embedded in these financial systems. DHS and OMB 
officials told us that OMB approved DHS's decision to rely on its in- 
house core financial management operations. 

Our concern is that the components where the proposed shared baselines 
are currently in use have numerous financial management weaknesses and 
consequently do not appear to be good candidates to be the models for 
an entity with an annual budget in excess of $40 billion. For example, 
the financial statement auditors for TSA reported[Footnote 12] that 
TSA--which is serviced by the Coast Guard--was unable to provide 
sufficient evidential matter or make knowledgeable representations to 
support fiscal year 2005 and 2006 transactions and account balances, 
particularly for budgetary accounting and undelivered orders and 
property, plant, and equipment, among others. While DHS officials have 
stated that TSA's audit shortcomings were centered on policies and 
procedures and are not systems-oriented problems, our analysis of the 
auditor's report indicated that the problems were broad based. As DHS 
has recognized, success in financial management rests upon a 
comprehensive framework of people, policies, processes, systems, and 
assurance. Accordingly, it is imperative that DHS fully understands the 
policy and procedures weaknesses at TSA in order to prevent such 
weaknesses from affecting subsequent users. 

In addition, the TASC strategy document and other draft documents DHS 
recently provided to us are incomplete. The documents provide a high- 
level perspective of the systems comprising the TSA shared baseline and 
broad time frames for migrating various DHS components. Much more 
detailed planning is needed to ensure that DHS has a solid foundation 
and road map for this transformation effort. For example, it is not 
clear which DHS component is expected to host[Footnote 13] the TSA 
shared baseline and what other services will be provided. Issues 
related to how this change will affect DHS's human capital are not yet 
addressed. Further, the TASC strategy does not address the CBP baseline 
nor, most importantly, how these various systems will ultimately be 
unified for departmentwide information needs. Much more detail is 
needed to provide a financial management strategy or plan for 
integrating and modernizing DHS's financial management systems. 

Moreover, we would like to highlight the need for a close 
interrelationship between TASC and the ICOFR Playbook. The ICOFR 
Playbook calls for policies and procedures to be developed in a variety 
of financial management areas, such as intragovernmental transactions; 
legal and other liabilities; budgetary accounting; property, plant, and 
equipment; and operating materials and supplies. It is important that 
these policies and procedures be embedded in the financial systems that 
are discussed in TASC so that rework is minimized. While the ICOFR 
Playbook in particular continues to focus primarily on getting a 
"clean" audit opinion on DHS's annual financial statements, getting a 
"clean" audit opinion, although important, is not the end goal. The end 
goal is to establish a fully functioning CFO operation that includes 
(1) modern financial 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) a cadre of highly 
qualified senior-level and supporting staff; and (3) sound internal 
controls that safeguard assets and ensure proper accountability. 
Ultimately, DHS must be able to provide reliable, useful, and timely 
financial management information so that DHS leadership and the 
Congress are well positioned to make fully informed decisions to secure 
America's homeland. 

Four Key Building Blocks and Effective Human Capital Management Must 
Drive DHS's Financial Management Transformation Efforts: 

Mr. Chairman, at this time I would like to point out that based on 
industry best practices, we have identified four key building blocks 
that will be critical to DHS's ability to successfully complete its 
financial transformation. Our March 2006 testimony[Footnote 14] and, 
more recently, our report for this subcommittee,[Footnote 15] pointed 
out that careful consideration of these four concepts, each one 
building upon the next, will be integral to the success of DHS's 
strategy. The four concepts are (1) developing a concept of operations, 
(2) defining standard business processes, (3) developing a migration 
and/or implementation strategy for DHS components, and (4) defining and 
effectively implementing disciplined processes necessary to properly 
manage the specific projects. Fully embracing these four building 
blocks and human capital best practices will be critical to the success 
of any future financial management system plan or strategy for 
transforming departmentwide financial management systems at DHS. We 
have continued to refine these key issues to ensure they remain closely 
aligned with DHS's stated approach--most recently, the department's 
TASC strategy. 

DHS also has an opportunity to reap substantial benefits by 
reengineering business processes and standardizing those processes to 
realize productivity gains and staff portability across the various 
components. In addition, identifying staff with the requisite skills to 
implement such systems and identifying gaps in needed staff skills and 
filling them are necessary to successfully implementing and operating a 
new financial management system. Any DHS financial management system 
transformation plan or strategy will be inherently complex and 
challenging, making the adoption of best practices even more important 
for this undertaking. Table 1 highlights the key issues to be 
considered for each of the four areas. 

Table 1: Key Issues for DHS to Consider Based on the Four Building 
Blocks: 

Building block: Concept of operations: Describe systems characteristics 
for a proposed system from a user's perspective; 
Key issues: 
* Define how DHS's day-to-day financial management operations are and 
will be carried out to meet mission needs; 
* Clarify which component and departmentwide systems are considered 
financial management systems; 
* Include a transition strategy that is useful for developing an 
understanding of how and when changes will occur; 
* Develop an approach for obtaining reliable information on the costs 
of its financial management systems investments; 
* Link DHS's concept of operations to its enterprise architecture. 

Building block: Standard business process: Identify preferred business 
processes to standardize applications and training and portability of 
staff; 
Key issues: 
* Assign responsibility for developing departmentwide standard business 
processes that meet the needs of its component agencies; 
* Develop an approach to encourage agencies to adopt new processes 
rather than selecting other methods that simply automate old ways of 
doing business; 
* Provide a foundation for component efforts to describe the business 
processes needed for unique missions, or develop subprocesses to 
support those at the departmentwide level. 

Building block: Strategy for implementing the shared baseline approach: 
Utilize a detailed plan to consolidate financial management operations; 
Key issues: 
* Develop specific criteria for requiring component agencies to migrate 
to one of the shared baselines rather than attempting to develop and 
implement their own stovepiped business systems; 
* Provide the necessary information for a component agency to make a 
selection of a shared baseline system; 
* Define and instill new values, norms, and behaviors within component 
agencies that support new ways of doing work and overcoming resistance 
to change; 
* Build consensus among customers and stakeholders on specific changes 
designed to better meet their needs; 
* Plan, test, and implement all aspects of the transition from one 
organizational structure and business process to another. 

Building block: Disciplined processes: Reduce development time and 
enhance effectiveness by adopting industry standards and best 
practices; 
Key issues: 
* Incorporate industry standards and best practices into DHS-wide 
guidance related to financial management systems implementation 
efforts; 
* Take actions to reduce risks and costs associated with data 
conversion and interface efforts; 
* Adopt an oversight process to ensure that modernization efforts 
effectively implement the prescribed policies and procedures. 

Source: GAO. 

[End of table] 

As we previously stated, effective human capital management is critical 
to the success of any transformation effort. We reported in our 
Executive Guide: Creating Value Through World-class Financial 
Management[Footnote 16] that having staff with the appropriate skills 
is key to achieving financial management improvements, and managing an 
organization's employees is essential to achieving results. Strategic 
human capital management for financial management projects includes 
organizational planning, staff acquisition, and team development. The 
independent public accountants who conducted DHS's fiscal year 2006 
audit have stated that many of the department's difficulties in 
financial management and reporting can be attributed to the original 
stand-up of a large, new, and complex executive branch agency without 
adequate organizational expertise in financial management and 
accounting. Moreover, DHS's Resource Management Transformation Office 
officials have stated that because of staffing shortages, outside 
contractors are currently performing some of the financial management 
activities or duties that internal DHS staff would normally perform. 
Some of the most pressing human capital challenges at DHS include (1) 
successfully completing its ongoing transformation; (2) forging a 
unified results-oriented culture across the department; (3) obtaining, 
developing, providing incentives to, and retaining needed talent; and 
(4) most importantly, maintaining leadership at the top, to include a 
chief operating officer or chief management officer. 

Having adequate and sufficient human resources with the requisite 
training and experience to successfully implement a financial 
management system is a critical success factor. Strategic human capital 
planning is necessary for all stages of a financial systems 
implementation. Agencies across the federal government face the 
challenge of sustaining the momentum of transformation because of the 
limited tenure of key administration officials. Managing the 
transformation of financial management systems at an organization the 
size and complexity of DHS requires comprehensive coordinated planning 
and integration of key management functions across all components of 
the department. 

In our related report, released today, we made six recommendations 
focused on the need for DHS to develop a financial management plan or 
strategy and to fully adopt the building blocks and human capital 
practices that are vital to minimizing the risk related to modernizing 
its financial management systems. In written comments on a draft of 
this report, DHS concurred with our recommendations and described the 
approach and steps that are planned to improve DHS's financial 
management systems. 

Concluding Observations: 

GAO and others have found that the key to implementing systems that 
meet cost, schedule, and performance objectives is to have effectively 
implemented the disciplined processes necessary to reduce risks to 
acceptable levels. Ending eMerge2 was a prudent decision; however, we 
are concerned that DHS still lacks a clearly defined financial 
management strategy or financial management system implementation 
effort to even begin to address the integration and transformation 
issues highlighted in our most recent high-risk report. 

Given that DHS is one of the largest and most complex executive branch 
agencies in the federal government, developing, operating, maintaining, 
and transforming its financial management systems represent a 
monumental challenge. This challenge is compounded by the relatively 
recent creation of DHS and the poor condition of the range of legacy 
financial and related business systems it inherited. Critical success 
factors for DHS's transformation efforts will include using the four 
building blocks and human capital best practices to provide reasonable 
assurance that the risks associated with implementing a departmentwide 
integrated financial management system are minimized. If properly 
implemented, the recommendations included in our related report 
released today, which are based on best practices, will help reduce the 
risk associated with a project of this magnitude and importance to an 
acceptable level. Otherwise, DHS runs the risk of repeating the failure 
of eMerge2. At the request of this subcommittee, this testimony 
summarizes the results of our first review of DHS's financial 
management transformation efforts. We look forward to continuing to 
work with you as we continue to monitor DHS's efforts to transform its 
financial management systems. As DHS moves forward, your subcommittee's 
continuing efforts to oversee the status of this transformation will be 
critical to its success. 

Mr. Chairman, this concludes our prepared statement. We will 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 McCoy Williams, 
Director, Financial Management and Assurance, at (202) 512-9095 or 
williamsm1@gao.gov, or Keith A. Rhodes, Chief Technologist, Applied 
Research and Methods, Center for Engineering and Technology, at (202) 
512-6412 or rhodesk@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this testimony. Individuals who made key contributions to this 
testimony include Kay Daly, Assistant Director; Chris Martin, Senior 
Level Technologist; Felicia Brooks; Francine Delvecchio; and Chanetta 
Reed. 

FOOTNOTES 

[1] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990). The Department 
of Homeland Security Financial Accountability Act of 2004, Pub. L. No. 
108-330 § 3, 118 Stat. 1275, 1276 (Oct. 16, 2004), added DHS to the 
list of CFO Act agencies. 

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

[3] GAO, Financial Management Systems: DHS Has an Opportunity to 
Incorporate Best Practices in Modernization Efforts, GAO-06-553T 
(Washington, D.C.: Mar. 29, 2006). 

[4] GAO, Homeland Security: Departmentwide Integrated Financial 
Management Systems Remain a Challenge, GAO-07-536 (Washington, D.C.: 
June 21, 2007). 

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

[6] GAO-07-536. 

[7] Pub. L. No. 107-296, 116 Stat. 2135 (Nov. 25, 2002). 

[8] Under standards issued by the American Institute of Certified 
Public Accountants (AICPA), reportable conditions are matters coming to 
the auditors' attention relating to significant deficiencies in the 
design or operation of internal controls that, in the auditors' 
judgment, could adversely affect the department's ability to record, 
process, summarize, and report financial data consistent with the 
assertions of management in the financial statements. The AICPA 
recently revised its guidance for audits of financial statements 
beginning on or after December 15, 2006, to replace the term 
"reportable condition" with "significant deficiency." 

[9] A material weakness was previously defined as a reportable 
condition in which the design or operation of one or more of the 
internal control components does not reduce to a relatively low level 
the risk that misstatements caused by error or fraud in amounts that 
would be material in relation to the financial statements being audited 
may occur and not be detected within a timely period by employees in 
the normal course of performing their assigned functions. The new 
definition of a material weakness is a significant deficiency, or 
combination of significant deficiencies, that results in more than a 
remote likelihood that a material misstatement of the financial 
statements will not be prevented or detected. According to AICPA 
guidance, this change is effective for audits of financial statements 
beginning on or after December 15, 2006. 

[10] Department of Homeland Security, March 29, 2006, testimony before 
the House Government Reform Subcommittee on Government Management, 
Finance, and Accountability and the House Homeland Security 
Subcommittee on Management, Integration, and Oversight. 

[11] GAO-06-553T. 

[12] Department of Homeland Security, Performance and Accountability 
Report Fiscal Year 2006 (Washington, D.C.: November 2006). 

[13] Information technology hosting involves providing secure facility 
space, networks, and hardware to host software applications and 
providing the necessary personnel to operate this secure environment. 

[14] GAO-06-553T. 

[15] GAO-07-536. 

[16] GAO/AIMD-00-134.

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