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Before the Subcommittee on Government Efficiency and Financial 
Management, Committee on Government Reform, House of Representatives:

United States General Accounting Office:


For Release on Delivery Expected at 2 p.m., EST:

Tuesday, June 10, 2003:

Department of education:

Status of Efforts to Address Major Management Challenges:

Statement of Linda Calbom:

Director, Financial Management and Assurance:


GAO Highlights:

Highlights of GAO-03-872T, a testimony before the Subcommittee on 
Government Efficiency and Financial Management, Committee on 
Government Reform, House of Representatives 

Why GAO Did This Study:

In its 2003 performance and accountability report on the 
Department of Education, GAO identified challenges in, among other 
areas, student financial aid programs and financial management.  The 
information GAO presents in this testimony is intended to assist 
Congress in assessing Education’s progress in addressing and 
overcoming these challenges.

What GAO Found:

Education has taken steps to address its continuing challenges of 
reducing vulnerabilities in its student aid programs and improving its 
financial management, such as establishing a senior management team to 
address management problems, including financial management, 
throughout the agency.  And, while Education has made significant 
progress, weaknesses remain that will require the continued commitment 
and vigilance of Education’s management to resolve.

* Reduce vulnerability of student aid programs to fraud, waste, abuse, 
and mismanagement.  Education has made considerable changes to address 
the ongoing challenges in administering its student aid programs.  
However, Education needs to continue to address systems integration 
issues, reduce fraud and error in student aid application and 
disbursement processes, collect on student loan defaults, and improve 
its human capital management.

* Improve financial management.  Education has implemented many 
actions to address its financial management weaknesses.  Significant 
progress was made earlier this year when Education received an 
unqualified—or “clean”—opinion on its financial statements for fiscal 
year 2002.  While this is an important milestone for the department, 
internal control and systems weaknesses remain that impede Education’s 
ability to produce timely, accurate, and useful financial information 
for its managers and stakeholders. 

What GAO Recommends:

GAO is not making new recommendations in this testimony, but past 
reports have made specific recommendations aimed at addressing some of 
these major management challenges.

To view the full testimony, click on the link above.  For more 
information, contact Linda Calbom at (202) 512-9508 or

[End of section]

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the major management 
challenges faced by the Department of Education, its progress in 
addressing them, and challenges that remain.

As you know, this January, we issued our Performance and Accountability 
Series on management challenges and program risks at major agencies, 
including the Department of Education.[Footnote 1] The report for 
Education focused on a number of management challenges and continued 
the high risk designation for student aid programs. You asked me to 
focus my testimony on two areas in that report. These are Education's 
efforts to (1) reduce fraud, waste, abuse, and mismanagement in its 
student aid programs while continuing to ensure access to postsecondary 
education and (2) improve its financial management to help build a 
high-performing agency. Education has taken steps to meet these 
challenges, such as establishing a senior management team to address 
management problems, including financial management, throughout the 
agency. And, while Education has made significant progress, including 
receiving a clean opinion on its fiscal year 2002 financial statements, 
weaknesses remain that will require the continued commitment and 
vigilance of Education's management to resolve. I will discuss 
Education's student aid programs and financial management in turn.

Student Aid Programs:

Ensuring access to postsecondary education while reducing vulnerability 
of student financial aid programs to fraud, waste, abuse, and 
mismanagement is one of the key management challenges Education faces. 
Education helps millions of students enroll in higher education 
programs by providing for more than $50 billion in grants and loans 
annually. The department is responsible for ensuring that these 
programs are efficiently managed, establishing procedures to ensure 
that loans are repaid, and preventing fraud and abuse. Since 1990, we 
have identified Education's grant and loan programs as high risk for 
fraud, waste, abuse, and mismanagement.

Both Education and Congress have made changes to address management 
challenges in the student financial aid programs. Congress established 
Education's Office of Federal Student Aid (FSA) as a performance-based 
organization in 1998. Its purpose is to increase accountability of 
officials, provide greater flexibility in management, integrate 
information systems, reduce costs, and develop and maintain a system 
that contains complete, accurate and timely data that can ensure 
program integrity. In 2001, Education established a Management 
Improvement Team (MIT) of senior managers to formulate strategies to 
address key management problems throughout the department. According to 
Education, MIT has developed a system to identify, track, and resolve 
audit and management issues both agencywide and in the student 
financial aid programs.

Education has faced challenges in four areas related to its grant and 
loan programs. These are (1) financial aid system integration issues, 
(2) fraud and error in student aid application and disbursement 
processes, (3) defaulted student loans, and (4) human capital 
management. I would now like to briefly discuss each of these 

Education has spent millions of dollars to integrate and modernize its 
many financial aid systems in an effort to provide more information and 
better service to students, parents, institutions, and lenders. 
Effectively and efficiently investing in information technology 
requires, among other things, an institutional blueprint that defines 
in both business and technical terms the organization's current and 
target operating environments and provides a transition road map. 
Because Education did not have this blueprint, commonly called an 
enterprise architecture, we recommended in 1997 that the department 
develop an architecture and establish standard reporting formats and 
data definitions.[Footnote 2] In September 2002, Education's Office of 
the Inspector General (OIG) reported that the department had made 
progress in taking specific actions to lay the groundwork for an 
enterprise architecture. Still, critical elements need to be completed, 
including integrating separate architectures into a departmentwide 
architecture and fully implementing common identifiers for students and 
institutions to use in departmentwide system applications. As part of 
our review of the progress federal agencies have made to effectively 
develop, implement, and maintain their enterprise architectures, we are 
currently evaluating the management of Education's enterprise 
architecture efforts.

With respect to modernization plans, we reported in November 2001 that 
FSA selected a viable, industry-accepted means of integrating its 
existing data on student loans and grants.[Footnote 3] FSA has made 
progress in implementing this approach for its Common Origination and 
Disbursement process, which includes the implementation of a common 
record that institutions can use to submit student financial aid data 
for Pell Grant and Direct Loan programs. The ultimate success of this 
process, however, hinges on addressing serious postimplementation 
operational problems and helping thousands of schools implement the 
common record. Further, as we reported in December 2002,[Footnote 4] 
FSA has not completed a number of elements that are important for 
managing any information technology investment. These include 
determining whether expected benefits are being achieved and tracking 
lessons learned related to schools' implementation of the common 
record. We have recommended that FSA develop metrics, baseline data, 
and a tracking process for certain benefits expected from the system, 
and that it develop and implement a process for capturing and 
disseminating lessons learned to schools that have not yet implemented 
the common record. FSA has begun acting on both of these issues.

Education has also faced challenges in ensuring that information 
reported on student aid applications is correct and that adequate 
internal controls are in place to prevent improper payments of grants 
and loans. The department has taken steps, in two pilot programs with 
the Internal Revenue Service (IRS), to match income reported on student 
aid applications with federal tax returns.[Footnote 5] To continue this 
income match and implement it on a broader scale, legislation to allow 
IRS to release the information is necessary. Education has worked with 
the Department of the Treasury and the Office of Management and Budget 
to ask that Congress enact such legislation. The department also 
verifies income information by asking 30 percent of applicants to 
provide copies of their tax returns to their student financial aid 
offices. In addition to strengthening its controls over student aid 
applications, we found that Education also needed to address 
institutions that were disbursing grants to ineligible 
students.[Footnote 6] The department has taken steps to analyze student 
data to identify high concentrations of students over age 65 and 
eligible noncitizens at individual institutions to determine whether 
problems exist that warrant further review. These actions are 
encouraging, and if properly implemented, should improve controls over 
these payments.

A continuing challenge for Education and FSA is preventing and 
collecting defaulted student loans. While the national student loan 
default rate has decreased from 11.6 percent in fiscal year 1993 to 5.9 
percent in fiscal year 2000, the cumulative amount of defaulted student 
loans has increased by almost $10 billion over the same period. 
Education and FSA have implemented several default management 
strategies, such as establishing electronic debiting as a repayment 
option, and working with some guaranty agencies to set up alternatives 
to service and process claims for defaulted loans. Our analysis of 
FSA's internal documents indicated that for fiscal years 2000 through 
2002, FSA met or exceeded many of the goals related to these 
strategies. However, neither Congress nor the public can determine 
whether FSA's default management goals have been met because Education 
did not prepare performance reports that conform to the requirements in 
the Higher Education Act.[Footnote 7] FSA's report to Congress on its 
performance in fiscal years 2000 and 2001 was not timely nor did it 
indicate whether FSA met established performance goals. We have 
recommended that Education and FSA prepare and issue reports to 
Congress on FSA's performance that are timely and clearly identify 
whether performance goals were met.[Footnote 8]

Like other federal agencies, Education must address serious human 
capital issues, such as succession planning, because about one-third of 
Education's workforce is eligible to retire. In June 2001, we 
recommended that the department develop human capital goals and 
measures for its performance plans.[Footnote 9] In April 2002, we 
recommended that the department and FSA coordinate closely to develop 
and implement a comprehensive human capital strategy.[Footnote 10] 
Education added a specific objective to its strategic plan, and in 
2002, issued a comprehensive 5-year human capital plan that 
incorporates FSA. This plan outlines steps and time frames for 
improving human capital management and specifies four critical areas 
where improvements should be made: (1) top leadership commitment, (2) 
performance management, (3) workforce skills enhancement, and (4) 
leadership and succession planning. It will be important that Education 
focus continually on implementation of the plan to achieve results.

Now, Mr. Chairman, I would like to discuss Education's financial 
management challenges and the progress Education has made in addressing 

Financial Management:

Weaknesses in Education's financial management and information systems 
have limited its ability to achieve one of its key goals--improving 
financial management to help build a high-performing agency. 
Significant progress towards this goal was made earlier this year when 
Education received an unqualified--or "clean"--opinion on its financial 
statements. Prior to this, with the exception of 1997, Education had 
not received a clean opinion since its first agencywide audit in 1995. 
While this is an important milestone for the department, significant 
management weaknesses remain that must be addressed for Education to 
meet its goal in this area.

Beginning with the department's first agencywide audit in 1995, 
Education's auditors have repeatedly identified significant financial 
management weaknesses. These weaknesses included Education's inability 
to provide the auditors with sufficient evidence to satisfy themselves 
about the accuracy or completeness of certain amounts included in the 
financial statements, including billions of dollars of adjustments to 
amounts reported in previous years' financial statements. According to 
Education's auditor, these adjustments were to correct "unnatural 
account balances" or otherwise adjust balances to the amount 
management's analysis supported. The auditor reported that in many 
cases, the cause of the incorrect balances could not be definitively 
determined, and the adjusting entry prepared by management was a 
reasoned judgment of how to correct its accounts. Education's auditors 
have also consistently reported major internal control weaknesses 
related to financial management systems and financial reporting. These 
weaknesses included (1) the absence of a fully integrated financial 
management system, (2) deficiencies in financial management practices 
that require extensive analysis of accounts to resolve errors through 
manual adjustments, (3) the lack of a rigorous review of interim 
financial data for timely identification and correction of errors, (4) 
the inability to accumulate, analyze, and present reliable financial 
information in the form of financial statements, (5) the dependence on 
a variety of stopgap measures to prepare financial statements, (6) the 
insufficiency of compensating controls, such as top-level reviews to 
address and try to compensate for systemic control weaknesses, and (7) 
the lack of a review to identify and quantify improper payments. 
Education's auditors also reported that internal controls needed 
strengthening in numerous areas relating to Education's investment of 
millions of dollars in property and equipment.

Education has taken actions over the last several years to improve its 
financial management and to address the weaknesses identified. For 
example, during 2001, Education's MIT developed specific actions to 
address issues raised in previous financial statement audits. According 
to a MIT report on its accomplishments, Education began performing 
certain critical reconciliations monthly and began preparing interim 
financial statements, which helped identify areas needing further 
study. Education also improved its internal controls over property and 
equipment, and its auditor did not report this area as a weakness in 
fiscal year 2002. In addition, according to Education's auditor, during 
fiscal year 2002, the department implemented a new general ledger 
software package and FSA implemented a new financial management system 
to support management information reporting needs. The auditor also 
reported that the department implemented several processes during 
fiscal year 2002 to improve its financial management, including:

* convening the Accounting Integrity Board, the Audit Steering 
Committee, and the Accounting Assurance Group to plan, implement and 
manage quality accounting change control;

* establishing the Financial Statement Committee and continuing the 
Financial Statement Preparation Team and other special task force teams 
all of which are designed to improve the financial statement processes; 

* developing and implementing reconciliation work plans, policies, and 
procedures; specialized teams; regular management reviews of the final 
work products; and management review for process improvement.

While Education has made progress in addressing many of its weaknesses, 
in fiscal year 2002, the auditor again reported that significant 
financial management issues continued to impair the department's 
ability to accumulate, analyze, and present reliable financial 
information. These problems, in part, resulted from inadequate internal 
controls over Education's financial management systems and financial 
reporting process. The auditor also reported that weaknesses in the 
department's ability to report accurate financial information on a 
timely basis were due to deficiencies in certain of the department's 
financial management practices, including inadequate reconciliations 
and account analysis early in fiscal year 2002. The auditor added that 
issues associated with the transition to a new financial management 
system in fiscal year 2002 also contributed to the department's 
difficulties in these areas. While the auditor reported that it noted 
improvements in the latter part of the fiscal year, it reported that it 
continues to believe that the department needs to focus more on 
reconciliation procedures, account analysis, and financial reporting. 
Until these issues are fully resolved, Education's ability to produce 
timely, accurate, and useful financial information for its managers and 
stakeholders will be greatly impeded. In addition, beginning with 
fiscal year 2004, Education and other major government agencies will be 
required to produce audited financial statements within 45 days after 
the end of the fiscal year compared to 120 days for fiscal years 2002 
and 2003. According to Education's Fiscal Year 2004 Annual Plan, the 
department plans to implement this accelerated reporting date for its 
fiscal year 2003 financial statements--a year earlier than required. 
This action will be a good "test" of Education's new financial system 
and other financial management reforms.

As we testified before the Subcommittee on Select Education in April 
2002, we identified other internal control weaknesses that make 
Education vulnerable to improper payments and lost assets.[Footnote 11] 
In our testimony and related report, [Footnote 12] we stated that for 
May 1998 through September 2000, weak internal controls over the (1) 
grants and loan disbursement process failed to detect certain improper 
payments, (2) third party draft processes increased Education's 
vulnerability to improper payments, and (3) government purchase cards 
resulted in some fraudulent, improper, and questionable purchases. We 
also reported that Education lacked adequate internal controls over 
computers acquired with purchase cards and third party drafts. Among 
other things, we found that computer purchases valued at almost 
$400,000 were not recorded in Education's property records, and 
$200,000 of that computer equipment could not be located.

In response to our work, Education made several changes to its policies 
and procedures to improve internal controls and program integrity. 
These changes were a step in the right direction; but in many cases, 
our follow-up work indicated that they had not been effectively 
implemented. In March 2002, we reported that vulnerabilities remained 
in all areas we reviewed, except for third party drafts, which were 
discontinued altogether.[Footnote 13] For example, we reported that 
Education developed a new approval process for its purchase card 
program; however, our testing of 3 months of purchase card statements 
under the new process found that over 20 percent lacked proper support 
for the items purchased. In October 2002, Education told us that new 
policies and procedures were implemented and aimed at reducing the 
department's vulnerability to future improper use of purchase cards. 
These new policies and procedures relate to reviewing and approving 
purchase card transactions and providing related training. Further, the 
department told us that misuse of purchase and travel cards is now 
specifically included in the department's Table of Penalties with the 
desired effect of reducing misuse and abuse of government issued credit 
cards. Education also told us that it recognizes that reviewing and 
improving internal controls is an ongoing task and that it intends to 
remain vigilant in this area. These are positive steps that should help 
reduce the instances of improper purchases.

Finally, Education will need to continue its actions in addressing 
weaknesses in its financial management information systems. The Federal 
Financial Management Improvement Act (FFMIA) of 1996 requires agencies 
to institute financial management systems that substantially comply 
with federal financial management systems requirements, applicable 
accounting standards, and the U.S. Government Standard General Ledger. 
Every year since FFMIA was enacted, Education's auditors have reported 
that Education's systems did not substantially comply with the act's 
requirements. In previous years, the auditors reported that without a 
fully integrated financial management system, deficiencies in the 
general ledger system, deficiencies in the manual adjustment process, 
and the need to strengthen other financial management controls such as 
reconciliation processes, collectively impair Education's ability to 
accumulate, analyze, and present reliable financial information. In 
addition, according to Education's auditor, although the department 
implemented a new financial management system during fiscal year 2002, 
issues associated with the transition to the new system contributed to 
difficulties in providing reliable, timely information for managing 
current operations and timely reporting of financial information to 
central agencies; therefore, Education still did not substantially 
comply with FFMIA's requirements.

Education also needs to address identified computer security weaknesses 
in its financial management and other information systems. In September 
2001, we reported that Education had made progress in correcting 
certain information system control weaknesses.[Footnote 14] At the same 
time, we identified weaknesses in Education's systems that place 
critical financial and sensitive grant information at risk of 
unauthorized access and disclosure, and key operations at risk of 
disruption. We recommended that Education correct certain information 
system control weaknesses and fully implement a comprehensive 
departmentwide computer security management program. In response, 
Education stated that it had developed a corrective action plan and is 
taking steps to further strengthen and develop a more comprehensive 
information security program. In addition, Education's auditor reported 
that for fiscal year 2002, the department made progress in 
strengthening controls over its information technology processes but 
needs to continue efforts to develop, implement, and maintain an 
agencywide risk-based information security plan, programs, and 
practices to provide security throughout the life cycle of all systems.

In closing, Mr. Chairman, I want to reiterate that Education is taking 
actions and making substantial progress in addressing major challenges 
related to its student aid programs and financial management. At the 
same time, some difficult issues remain that must be resolved before 
Education is able to produce relevant, reliable, and timely information 
to efficiently and effectively manage the department and provide full 
accountability to its stakeholders.

Mr. Chairman, this concludes my statement. I would be happy to answer 
any questions you or other members of the Subcommittee may have.

Contact and Acknowledgments:

For information about this statement, please contact Linda Calbom, 
Director, Financial Management and Assurance, at (202) 512-9508, or 
Robert Owens, Assistant Director, at (202) 512-8579. You may also reach 
them by E-mail at or Individuals who 
made key contributions to this testimony include Lisa Crye and Diane 
Morris. Numerous other individuals made contributions to the work 
supporting this testimony.


[1] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Education, GAO-03-99 (Washington, D.C.: 
January 2003).

[2] U.S. General Accounting Office, Student Financial Aid Information: 
Systems Architecture Needed to Improve Programs' Efficiency, AIMD-97-
122 (Washington, D.C.: July 29, 1997).

[3] U.S. General Accounting Office, Student Financial Aid: Use of 
Middleware for Systems Integration Holds Promise, GAO-02-7 (Washington, 
D.C.: Nov. 30, 2001).

[4] U.S. General Accounting Office, Federal Student Aid: Progress in 
Integrating Pell Grant and Direct Loan Systems and Processes, but 
Critical Work Remains, GAO-03-241 (Washington, D.C.: Dec. 31, 2002).

[5] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Education, GAO-01-245 (Washington, D.C.: 
Jan. 2001).

[6] U.S. General Accounting Office, Education Financial Management: 
Weak Internal Controls Led to Instances of Fraud and Other Improper 
Payments, GAO-02-406 (Washington, D.C.: Mar. 28, 2002).

[7] The requirements are in the amendments to the Higher Education Act 
that established FSA as a performance-based organization. Pub. L. No. 
105-244, Title I, § 101(a), 112 Stat. 1581, 1604-1610 (1998).

[8] U.S. General Accounting Office, Federal Student Aid: Timely 
Performance Plans and Reports Would Help Guide and Assess Achievement 
of Default Management Goals, GAO-03-348 (Washington, D.C.: Feb. 14, 

[9] U.S. General Accounting Office, Department of Education: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges, 
GAO-01-827 (Washington, D.C.: June 29, 2001).

[10] U.S. General Accounting Office, Federal Student Aid: Additional 
Management Improvements Would Clarify Strategic Direction and Enhance 
Accountability, GAO-02-255 (Washington, D.C.: April 30, 2002).

[11] U.S. General Accounting Office, Education Financial Management: 
Weak Internal Controls Led to Instances of Fraud and Other Improper 
Payments, GAO-02-513T (Washington, D.C.: Apr. 10, 2002).

[12] GAO-02-406.

[13] GAO-02-406, 30.

[14] U.S. General Accounting Office, Education Information Security: 
Improvements Made, but Control Weaknesses Remain, GAO-01-1067 
(Washington, D.C.: Sept. 12, 2001).