Thank you, Mr. Chairman.

I am honored to be with you so soon after my most recent testimony on the President’s Management Agenda. Today I am here at your invitation to discuss in greater detail the state of financial management in the Federal Government. I am pleased with the steps we have taken in recent months to reinvigorate the government’s efforts to improve the quality of financial information available to agencies, the Administration, the Congress, and, most importantly, the American people. But, as you know, Mr. Chairman, the challenges we face are formidable.

Problems with Financial Management in the Government

I am sorry to say that we were again unable to receive a clean opinion on the government’s financial statements. I will, of course, leave a detailed discussion of the reasons for his disclaimer of opinion to the Comptroller General. Once again, however, poor financial management at the Department of Defense was the largest impediment to an opinion on the consolidated financial statements. In addition, the government remains unable to account for billions of dollars of transactions among Federal Government entities.

Although we made great progress with the Departments of Transportation and Justice moving from qualified to clean opinions in FY 2001, we had deterioration in two: the National Aeronautics and Space Administration (NASA) and the Federal Emergency Management Agency (FEMA). We believe the Forest Service is now the only major remaining problem area holding back the Department of Agriculture from a clean opinion.

The barriers to clean opinions aren’t our only problems, of course. As your oversight has pointed out, an opinion on a financial statement, even a clean one, tells us little about whether an agency produces timely or reliable financial information on a regular, recurring basis or whether it uses that information to make more informed decisions about agency or program management. For most agencies the answer to that question is they can’t.

Progress in the Government’s Financial Management

As Comptroller General Walker noted in his March 29th transmittal letter for the Federal Government’s financial statements, “Progress is being made in addressing impediments to an opinion on the United States Government’s consolidated financial statements.” As just noted, the Departments of Justice and Transportation joined 16 other major agencies that received clean opinions on their financial statements for FY 2001. In addition, the Department of Agriculture and the Agency for International Development both showed substantial improvement in producing their financial statements over previous years. For the first time ever, three of five components of the Department of Agriculture obtained clean opinions. This is also the first year the Agency for International Development was able to conduct a complete financial statement audit; three of the five principal financial statements received qualified opinions, rather than disclaimers.

Also of note, the Department of Education this year has only one material weakness, down from three in FY 2000. And it is my belief that major reform efforts at the Department of Defense are making progress in developing and consolidating financial architectures and systems. But government-wide, we still have too many material weaknesses for the 24 CFO Act agencies. Agency accountability reports show that there are approximately 60 material weaknesses throughout the Federal Government. We take material weaknesses seriously. They must be addressed.

The President’s Management Agenda

Our efforts to improve the way the government manages its finances should not be perceived as business as usual. Improved Financial Performance is one of the five major government-wide components of the President’s Management Agenda. The criteria we will use to measure agencies in improving financial performance include not just getting clean opinions on agency financial statements, but also ensuring that financial management systems meet Federal requirements, integrating financial and performance management systems to support day-to-day agency operations, ensuring that agencies do not suffer from repeated material weaknesses, and, of course, that they have no Anti-deficiency Act violations.

Another aspect of the President’s initiative to improve financial performance is our effort to reduce erroneous payments. The government makes billions of dollars in erroneous payments each year, but we have no systematic effort to measure the extent of this problem. Until now. We are insisting that agencies estimate the extent of their erroneous payments and set goals and develop plans to reduce them. As stewards of the American people’s tax dollars, we have a responsibility to ensure that Federal dollars are spent as effectively and efficiently as possible. Our plan for improved financial performance will help us do that.

Improved Financial Performance – Management Scorecard

When I last testified before this Subcommittee, I briefed you on the Scorecard we were using to assess the status of agency efforts to address the government-wide initiatives on the President’s Management Agenda. And I told you that the scores are almost uniformly poor. This includes the scores for financial management. There is only one green score, for financial management at the National Science Foundation. Four other agencies received yellow for financial management. One of the yellows was NASA, which as a result of its disclaimer of opinion on its FY 2001 financial statement, will now move to red. Other grades will change as we continue to assess progress toward the standards we have set.

Actions the Government is Taking

You can see some of the benefits of the changes we have made reflected in the quality of the reports agencies have submitted. All agencies produced their audited financial statements by the reporting deadline of February 27th. For the first time, agency reports, as well as the government-wide statements, included comparative reporting. This allows the reader to view financial information in the context of the previous year.

Accelerated Reporting

While there has been improvement, it is important to keep in mind that we are here today in April to discuss the release of the Government’s Consolidated Financial Report for the fiscal year that ended almost seven months ago. No one could call this financial information timely. For FY 2002, combined performance and accountability reports are required and must be submitted to OMB and the Congress by February 1, 2003. We are further accelerating the deadline for financial reporting so that by FY 2004 agencies will submit audited financial statements by November 15 and we will produce a Consolidated Financial Report on December 15, in time for the Administration and Congress to use the information to make budgetary decisions.

Interim Reporting

To meet this accelerated timetable, agencies will be unable to rely on the current, ad hoc way in which many of them put together the information necessary to produce audited financial statements. The earlier dates will require agencies to fundamentally rethink the systems they now rely on to produce financial information. They will be forced to have in place substantially different systems and controls, ones that produce reliable financial information on a regular basis. In part to prompt agencies to address the requirements soon to come with accelerated reporting, we have instituted interim financial reporting. For the six-month period ending March 31, 2002, agencies must submit financial statements to OMB by May 31. In FY 2003, unaudited financial statements will be prepared and submitted to OMB on a quarterly basis. The preparation of interim financial statements will surface important challenges that, as they are resolved, will better position agencies to meet the tightened year-end deadlines that will take effect for FY 2004.

Accounting Standards

Reflecting our desire for increased transparency in government accounting, we are reconstituting the membership of the Federal Accounting Standards Advisory Board, the advisory committee that sets accounting standards and principles for the United States Government. Instead of the 6 to 3 ratio of Federal to non-Federal members, the board will now be made up of 6 members from outside the Federal Government and 3 from within the Federal Government. This new emphasis on outside members will bring fresh, more independent scrutiny to the accounting and financial reporting standards to which we hold ourselves. And with greater transparency comes accountability and credibility.

Chief Financial Officers Council Restructuring

We have taken steps to reorganize the CFO Council into committees with missions related to the five government-wide initiatives of the President’s Management Agenda. Because the interests of the CFO Council lie chiefly with issues of financial management, there are two committees of the CFO Council that will address the initiative of the President’s Management Agenda dealing with improved financial performance, Financial Statement Acceleration and Erroneous Payments. I note that the Erroneous Payments Committee is conducting an initiative jointly with the President’s Council on Integrity and Efficiency, the council of Inspectors General, to assist agencies in identifying and reducing erroneous payments. Other committees dealing with the remaining government-wide initiatives of the President’s Management Agenda include Human Capital, Systems/E-Government, and Budget and Performance.

These are the steps we are taking to address many of the problems you have identified throughout your congressional career, Mr. Chairman. As you can see, we are focusing on the problem regularly and consistently. With your help, we can make real progress in the near term.

Budgeting for Results

Consistent with our emphasis on increased transparency, the President’s FY 2003 Budget proposes to charge all employee costs, including those related to retirement, to the programs themselves. By recording the accruing costs as employees earn benefits, managers can get a better sense of the true costs of operations. The proposal would bring budgeting for Federal employees in the Civil Service Retirement System (and several smaller retirement systems) in line with budgeting for employees in the Federal Employees Retirement System and the Military Retirement System. The proposal would have no effect on total budget outlays.

We have proposed the necessary statutory changes to ensure that appropriations charge employee costs to the agency accounts where the individuals are employed. This is part of the Managerial Flexibility Act, which the President sent to Congress on October 1, 2001. Like the changes to the President’s budget, this proposal would have no effect on the amount of money we allocate for employee benefits, nor would it lessen any payment to retirees. Federal employees have earned the benefits we are talking about. The President’s proposal simply makes a change in the way those benefits are accounted for so that we can get a more accurate sense of the full cost of government programs.

The accounting changes called for in the Managerial Flexibility Act have been supported by a broad coalition in the government accounting world. As the Joint Financial Management Improvement Program (JFMIP) recently stated, “A key element of financial planning and evaluations is clear measurement of the full costs of agencies’ activities during each fiscal year. Including these costs in data used for budgetary decision-making would enhance both the planning process and the evaluation of the cost of operations. It would also provide for enhanced consistency and transparency relating to presentation of this information and greater accountability for results." The American Institute of Certified Public Accountants has stated similar support: "We support providing for the full costs of agencies’ activities, including Federal employee retirement costs, in individual agency budgets. This would enhance the evaluation of the true costs of operations within each Federal agency, and more closely align the Federal government’s budgetary process with its financial accounting and reporting processes." The 18,000 member Association of Government Accountants (AGA) has indicated: “AGA supports the integration of accounting and budgeting concepts proposed by OMB with respect to Federal post-employment benefits."

This accounting proposal is consistent with our efforts to provide increased transparency over the government’s finances. The accrual-based financial statements, which generally provide a more comprehensive picture of government operations and obligations than traditional budget information alone, show that for the first time, future employee and veterans benefits payable in the amount of $3.4 trillion exceed the debt held by the public of $3.3 trillion. As our obligation to Federal employees grows, greater transparency will help us ensure that our responsibilities are met.

The time is right for this full cost accounting improvement, especially given the heightened sensitivity to the need for accuracy and transparency in accounting. We welcome this strong support from the professional community, which adds momentum to making this improvement this year. I hope, Mr. Chairman, that we can count on your leadership and strong support for this common sense change in the law.

Thank you.