Statement of Linda M. Springer

Statement of The Honorable Linda M. Springer
Controller, Office of Federal Financial Management
Office of Management and Budget

before the
Subcommittee on Financial Management, the Budget, and
International Security
Committee on Governmental Affairs
United States Senate

July 8, 2004

The Federal Government’s 2003 Financial Statement:
Improving Accountability of American Taxpayers’ Dollars

Thank you, Mr. Chairman and Members of the Subcommittee.

I am happy to be with you today to discuss the Financial Report of the United States Government (the Financial Report) for fiscal year (FY) 2003 and other related financial management issues. I look forward to sharing with you some of the significant progress made by Federal agencies during the past year that underlies the Financial Report and positions us for the future.

Agency Accomplishments and Progress

In the area of Federal financial reporting, there were several notable agency accomplishments in the past fiscal year. For instance, during fiscal 2003,

a record 18 of the 24 (75%) major agencies and departments completed their Performance and Accountability Reports (PARs) by the end of December, compared to only two agencies in fiscal year 2002;
of the above 18 agencies, eight accelerated the submission of their PARs to mid-November of 2003, a year ahead of the 2004 requirement, all with unqualified audit opinions;
20 of the 23 Chief Financial Officer (CFO) Act agencies received an unqualified opinion on their financial statements;
agencies completed quarterly financial statements for the first time ever;
the Department of Homeland Security (DHS), created five months into the fiscal year, elected to forgo its first-year waiver and prepare audited financial statements;
DHS received a qualified opinion on its Balance Sheet and Custodial Activity Statement;
the United States Agency for International Development (USAID) received an unqualified opinion on all of its audited financial statements for the first time in its history and met the mid-November reporting date;
the Department of Defense’s (DoD) Medicare-Eligible Retiree Health Care Fund financial statements received a qualified opinion in its first year and the National Reconnaissance Office received an unqualified opinion on its statements;
the Small Business Administration (SBA) developed or significantly revised credit models for five of its financial assistance programs during the course of the year;
the total number of material weaknesses reported by auditors was reduced by 18% in 2003;
the total number of Federal Manager’s Financial Integrity Act (FMFIA) material weaknesses was reduced by 38% in 2003;
new financial management systems went live in many agencies, including four between the close of the fiscal year and the end of December.

While we are pleased with the above achievements made by agencies during the past fiscal year, we are not satisfied. Much work remains to be done – such as attaining unqualified audit opinions and resolving all material weaknesses at agencies. Additionally, and just as important, we must raise agencies to the level of first class financial management practices, where financial performance information is used in day-to-day decision making. Although we are not yet there, agencies are moving in the right direction and are positioning themselves to reach their goals.

Auditor’s Opinion and Material Weaknesses

The General Accounting Office (GAO) issued a disclaimer of opinion on the 2003 Financial Report. In making this determination, GAO continued to identify three main impediments to rendering an opinion: financial management problems at the Department of Defense (DoD), deficiencies in accounting for intragovernmental transactions, and ineffective processes for preparing the consolidated financial statements. The Office of Management and Budget (OMB) concurs with these observations. Efforts have been underway this fiscal year to address these issues as noted in the auditor’s report.

Getting an opinion, qualified initially, on the government-wide financial statements remains our goal. OMB is working closely with the Department of the Treasury (Treasury) to create a closer link between audited agency financial statements and the government-wide statements reflected in the Financial Report. Beginning with fiscal year 2004, a new process will be implemented to better align the agency statements with the government-wide report.

Weaknesses at DoD are being addressed. Progress is being made, but it is important to recognize that long-standing issues in a department having over 300 sub-entities are not easily remediated. In many cases, elimination of DoD material weaknesses is dependent upon the new financial management systems implementation. OMB meets periodically with both the DoD CFO and its Inspector General (IG) to review plans for each area of concern and to monitor progress.

The inability to balance significant amounts of intragovernmental transactions is being addressed on several fronts by OMB and Treasury. Process enhancements, such as more frequent reporting and reconciliation, and new tools will support our efforts to eliminate reporting errors.

GAO’s report comments on timeliness issues at the agency level that impacted its audit scope. It should be understood that this was the direct result of variations in the degree to which agencies were able to accelerate from the official 2003 fiscal year reporting date of January 30, 2004. Moving forward from this transitional year, we will turn to the single Performance and Accountability Report due date of November 15.

Financial Reporting Acceleration

The mandatory financial reporting date of November 15 will require much work from the agencies this fiscal year. However, this accelerated deadline is certainly an attainable goal, as shown by the large number of major agencies (75%) that were able to report their financial statements by the end of December last year. In those cases, strong agency senior leadership, careful planning, innovative thinking, and focused efforts were all necessary elements for success.

This fiscal year, we are regularly meeting with the CFO Offices of all major agencies as they work toward the mandatory November deadline. Clearly, some agencies have more obstacles and challenges to overcome than others. However, all agencies are expected to take the necessary steps for meeting the accelerated date. Some best practices being implemented by agencies include:

Disciplined processes and audit schedule;
Aggressive tracking and resolving risk areas;
Reengineering of financial reporting and audit processes;
Early and frequent communication with auditors; and
Focused financial management priorities.

We look forward to continuing to work with the agency CFOs in meeting the November 15 financial reporting deadline.

Federal Accounting Standards

During the 2003 fiscal year, the Federal Accounting Standards Advisory Board (FASAB) issued Statement of Federal Financial Accounting Standard (SFFAS) No. 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services Assessment. Among the provisions of this standard is the requirement that the Statement of Social Insurance, which is currently reported in the stewardship section of the Financial Report, become a basic financial statement with full audit scrutiny. This Statement provides estimates for important components of the Social Security and Medicare programs and is accompanied by an expansive discussion of underlying assumptions and sensitivity analyses. This requirement will enhance the significance and the prominence of what is one of the most extensively presented components of the current Financial Report.

Improving Internal Control

The internal control environment of any entity is an area of focus for both management as well as its auditor. The agencies of the Federal Government are no exception. There are several existing laws governing the agencies in assessing and representing the quality of their internal control. For example, agency heads are required to provide reasonable assurance of compliance with the Federal Manager’s Financial Integrity Act (FMFIA) with respect to both management control and financial management systems. Agency heads are also required to certify that their systems satisfy specified requirements under the Federal Financial Management Improvement Act (FFMIA). Additionally, the Federal Information Security Management Act (FISMA) provides for government-wide management and oversight of information security risks and agency information security programs. As such, FISMA requirements provide an additional standard for financial systems control.

Not all Federal agencies are able to provide these assurances; however, all continue to make progress in eliminating barriers to compliance. Because financial systems are a major part of the universe to which these statutes apply, it is entirely possible that positive assurance from the collective group of agencies will emerge over a period of years due to the time required for new system design, development and implementation.

Both OMB and the CFO Council are keenly aware of the internal control challenges and related new assurance requirements that have been reported in the private sector. We are actively engaged with the Inspector General community in reviewing these requirements and their potential applicability to Federal Government agencies.

CFO Council and Committees

Much progress has been made through the OMB partnership with the CFO Council over the past fiscal year. Consisting of the CFOs and Deputy CFOs of the 23 major Federal departments and agencies, the Council recently reassessed its working committees, as well as refreshed and updated its targeted focus. Existing committees such as the Financial Reporting Acceleration and Improper Payments Committees have been, and continue to be, very influential in providing forums for sharing best practices and influencing OMB guidance. New committees, such as the Financial Management Policies and Practices group, are actively engaged in studying emerging issues. CFO Council Committees will continue to partner with representatives of other groups, such as the President’s Council on Integrity and Efficiency (PCIE) and the Chief Information Officers (CIO) Council.

Eliminating Improper Payments

Let me first say that eliminating improper payments by the Federal Government has been, and continues to be, a major management focus of this Administration. It is our goal to ensure that every dollar spent by the Federal Government is a dollar that is spent wisely and for the purpose for which it is intended. Given the Federal Government’s current budget in excess of $2 trillion annually and the many important competing priorities and programs, our mission is more important now than ever before.

Specifically, it is our job to make certain that government agencies review their payments and assess whether a risk of improper payment exists. If such a risk does exist, then corrective action must be taken to ensure that the improper payment does not occur again. We anticipate that ongoing agency efforts will ultimately lead to a review of every single dollar that the government spends to ensure that taxpayer money is spent for the purpose for which it was intended.

Since the President’s Management Agenda (PMA) was first announced in 2001, the elimination of improper payments has been a key component of the Improved Financial Performance initiative. Initially, the effort to eliminate improper payments focused on Federal agencies having programs making annual payments in excess of $2 billion. These agencies were directed to follow the necessary requirements set out in Section 57 of OMB Circular A-11 and report on the programs in their annual budget submissions. Collectively, the Section 57 programs comprised about $1 trillion in government spending – nearly half of all annual government expenditures. We estimate that improper payments exceed $35 billion a year out of the $1 trillion in spending by these programs.

When the Improper Payments Information Act of 2002 (IPIA or the Act) was passed, we appreciated the Congress’ concurrence with our concern and its efforts to create a review process that would identify and eliminate erroneous payments throughout all major Federal programs and activities. In May of 2003, OMB issued guidance to agencies regarding how to go about complying with the requirements of the new law. As part of IPIA implementation, Federal agencies have established specific milestones to: 1) develop program inventories; 2) perform risk assessments to determine which programs are risk susceptible; 3) statistically sample those programs determined to be high risk; 4) create corrective action plans; and 5) establish baseline error rates and improvement targets for future reporting.

In the last year, we have met with the Offices of the CFO and the IG at each major agency, on more than one occasion, to ensure that the plans to meet the requirements of the IPIA are being developed and implemented. At these meetings, we finalized the agency plans to comply with the IPIA and directed the agencies to set specific target dates for completing the required steps to ensure that results are achieved on a timely basis. We now have specific dates in which the key milestones are expected to be completed, and we will track each agency’s progress in meeting these deadlines over the course of the coming months.

All agencies are required to report their activities relating to the elimination of improper payments in their 2004 PARs, which are to be issued this November. During these next five months and beyond, we will be working with the agencies to make certain that progress is made, target dates are met, milestones are completed, and results are achieved.

Outlook for the Future

Our outlook for improving the quality and timeliness of financial reporting to the American citizen is positive. Many challenges remain, but others that appeared similarly insurmountable just a few years ago are being solved. For example, who would have thought that the Administration’s goal of shortening the time for agencies to prepare audited financial statements from five months to 45 days after the end of the year would be attained by a third of the major agencies a year in advance of the deadline?

It is often said that such achievements can only be accomplished by heroic efforts. Hard work is always a factor, but these results are a tribute to detailed planning, effective management and excellent execution.

While the acceleration targets are critical, they are not our ultimate objective. The discipline and improved control needed to accelerate financial reports are only the foundation for ensuring the availability of useful financial information. The incorporation of timely and accurate financial information into management decision-making and operational assessment continues to be our main goal. Progress toward this goal was made during fiscal year 2003, as shown by the addition of two agencies (the Environmental Protection Agency and the Social Security Administration) that achieved green status under the PMA Improved Financial Performance initiative. They were joined by the Department of Education in the first quarter of fiscal 2004.

We look forward to continued execution of our role in leading the Federal financial management community and reporting additional progress across the financial management spectrum to you in the months ahead.

In closing, it is my opinion that the Federal Government should be held to as high, if not higher, a standard of financial management as the private sector. American citizens do not have the option of “taking their business” elsewhere – they cannot elect to stop new investments (tax payments) until the company (Federal Government) improves its financial management practices. Accordingly, I believe it is incumbent upon every financial professional in the government to execute his or her duties according to the standards of excellence consistent with this stewardship responsibility. That is what we strive to do. And that is what we will continue to do.

Thank you for listening. I am happy to entertain your questions.