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we are going to need to have more concerted attention to fix some of the problems that are going to be encountered.

I guess what I am saying is I think their attention is increasing, but probably not at the level it really needs to be in order to fix some of the problems.

Mr. HOLLOWAY. I think the other thing, if I can just amplify for a second, the ultimate proof, if you will, is the outcome you get. I think while an auditor's opinion is certainly not an end-all, it is certainly an indicator of the effectiveness of a plan or the progress against that plan.

One of the things a disclaimer of opinion infers is the fact that you did not have the ability to determine whether or not what was reported was correct. That would suggest, if that persisted too long, that-it would either call into question the quality of the plan or the effectiveness of its implementation.

So I think when you look at Treasury—and I think one of the reasons GMRA is so important and congressional oversight is so important is that you have an opportunity annually to look at do they have an effective plan and are they progressing? And that opinion will be one indicator of that and that opinion is based on their level of compliance with standards.

Mr. DODARO. I think one of the biggest issues right now with the Government Management Reform Act—with the new accounting standards, we have all the management tools in place to make improvements—the real question is are there incentives enough to make the changes and to make them fast enough?

That is going to be one that is going to revolve largely around congressional oversight. If this matters and it is clearly made an important priority and the Congress holds people accountable for making that progress, then I think you will see some changes.

Mr. DAVIS. Well, that was really getting to my next question, which I kind of scribbled out. Are there additional actions Congress could take at this point to ensure the IRS financial management problems are resolved, or do you think holding this hearing at this point is enough and we may want to revisit as they work their way through this over the next year?

Mr. DODARO. I think regular oversight hearings are imperative to making progress. If the Congress does not send a message that this is important to us, not only this committee, which has jurisdiction over the CFO Act, but equally as importantly, the appropriations committees and the authorizing committees for the agencies, that is what will get the attention of the departments and agencies to make progress.

And there have to be some consequences for not making that progress. One of the things is there is nothing in the CFO Act now that says, if you get a disclaimer or if you do not get an opinion, there is any penalty to that that encourages you to do that, and right now all we have in order to increase leverage is the public report card that comes out of the audit opinion, because that creates—if you get a bad report card, it creates attention.

Mr. DAVIS. You know, Professor Horn is known to give report cards. (Laughter.]

He may want to come out with his own on this.

Mr. HORN. As my colleague knows, recently we gave only four out of 24 agencies A's and we gave about two or three B's and two C's and the rest were D's and F's. Some of my best friends were heading those agencies.

Mr. DAVIS. IRS did OK, as I recall.

Mr. DODARO. Actually, that report card on the year 2000, I can tell you, from being in the trenches with some of those agency officials, has made a difference. I mean, people are mumbling, “Gee, we got an F here, we had better do something."

Mr. HOLLOWAY. That is one of the important features of GMRA, because I do not want us to get lost even in this hearing on just IRS. I think some of the problems that they have been confronted with you are going to see across Government. I do not think IRS is the oddball; I think they are more the rule than the exception and, if anything, while I am sure this scrutiny has created some pain for IRS, I think it will go a long way to get them ahead of the curve of what you are going to find in other agencies as the reporting under the GMRA starts to surface.

Mr. DAVIS. Let me ask another/kind of switch gears a little. I understand that in fiscal year 1993 the IRS began its report as part of its audited financial statements and accounts receivable amount based on a statistical estimate. The GAO reported that this amount is acceptable only for periodically reporting an approximate financial statement amount at a designated date. The IRS is unable to account for changes in accounts receivable from year to year and cannot provide detailed information on the composition or aging of accounts receivables. It seems to have no detailed subsidiary record of accounts receivable, nor does it have a short-term strategy to identify all those who legitimately owe it money.

Are all of these circumstances still the same? When has the IRS told you that it will correct these situations?

Mr. HOLLOWAY. I think Mr. Dodaro alluded to this earlier. This is one of the concerns in the revenue area. The short answer to that is yes, they still do not have a subsidiary record and, without that subsidiary record-and I want to be clear about this, because in typical accounting you have a maintained subsidiary record of accounts receivable that you would track, all of the collections and new receivables related to that through. That is not what IRS does. A big part of that is just systems design flaw. What they effectively have to do is run a software program to extract receivables at any given point in time, which gives you no capacity to track the activity in an effective way from period to period, which then makes it difficult to gauge what your performance has been in trying to collect against those receivables, even identify what they are.

That is why I think, as you start moving to TSM or whatever new systems you look at, one of the critical components needs to be the capacity to track who owes you money on a real-time basis and then to measure your performance against collecting that money.

Mr. DAVIS. I always say it is not all IRS' fault. I mean, Congress has switched gears sometimes over what strategy we are giving the IRS, the amounts of money and the programs and the way they are doing to do it, too, in fairness to them-I am sure they will testify on that. But it would help to have, as we talked before, a strategy to identify these and I think it would help for more continuity up here in the way we do policy.

I think, Mr. Chairman, that is all I want to ask for right now. Mr. HORN. I thank you very much. Let me ask, on this problem, what was the role of OMB, if any, in this? As I recall, the OMB is basically to issue standards across the Federal Government. How did they let Defense, with its 49 different accounting systems, and the IRS get so out of whack?

Mr. DODARO. Basically, over the years you had OMB put in place requirements and there are binders of circulars and they all have good well-intentioned requirements, but there was no requirement for the independent audit, and OMB is sitting there having very short-handed staff, had no ability to get any independent sources of information back as to whether people were complying with this circular or not.

I think they are also becoming concerned since these financial audits that the information they are receiving on simple budget execution data and funds control is not as good as what they originally thought.

So I think there was a lot of good faith on the part of OMB that people were complying and not until you really get to scrutiny of an independent financial audit have many of these things come to light. And I think that is the real difference and what it will really take.

I think for the first time, early next year, when you have the results for the first time across Government of audits of the 24 largest departments and agencies you will have a good governmentwide picture of the severity of financial management problems across the Government. Before this point in time you have only had just agencies that the Congress selected as pilots for us to go in and look at, so we have gotten quick snapshots of different parts of the government, but when you see it all put together, I think it will be quite disturbing.

Mr. HORN. Well, let me ask my last question on this. We might have others we send you, and you know the routine; if you could give us an answer, we would like to put them in the record. My last point would be this. You and your team of three others there that I am looking at, the four of you, you are familiar enough with IRS, where they are, what they have done, what they have not done. What I would like to know is, if tomorrow the Secretary of the Treasury called you and said, "Hey, have I got a deal for you. Why don't you come over here and straighten this mess out,” what is the first thing you would do if you took the job that they are not doing and they ought to be doing?

Mř. DODARO. The first thing I would do is to get all the people in the room who have a role to play in this and have an integrated plan developed to get at this that I felt was comfortable, No. 1.

No. 2, I would go out and procure for myself top-flight expert advice from the outside to come in and provide me with additional information in this area, particularly in the area of systems development, because I know the capability in the IRS to develop systems is not good.

Third, I would make sure I have got a good plan to increase my capability in my organization to either develop software itself or to procure software from the outside, which is not there. So I probably would hire and bring in somebody who could manage, contractors, technical contractors, to develop systems.

[graphic]

IRS problems will not be fixed, because of the volume of the transactions and the magnitude of their business, without modern systems, and their track record in developing those systems is poor, and unless that is fixed, you are going to continue to have these problems and Band-Aid approaches.

So I would make sure I have got clear signals to all my managers, I would make sure I would get some expert advice, and I would bring in top-flight people who can develop and maintain state-of-the-art technology.

Mr. HORN. Ms. Guensberg, Mr. Holloway, have anything you want to add to that?

Mr. HOLLOWAY. The only thing I would amplify for emphasis' sake and I say this from my own experience in the private sector when I took a similar position in the private sector—one of the things that was crucial to me being able to effectively do what they wanted me to do was knowing for certain that I had the authority to do what they wanted me to know, which meant to leverage and to impact people in what were the program aspects of our operation to get them to do what I needed them to do, because no matter how smart I might be or how effective my team might be, there would never be enough accountants and those types to do it all in an organization the size of IRS without clear priority support.

The difficulty is that is in the face of all of the program demands that are placed on an organization but they have to appreciate the criticality of the financial reporting and accounting. And unless you have that kind of leverage, where you know when you say something that people are going to respond and respond timely, it is not going to happen. And if it does, it is going to happen over a very long period of time.

Mr. HORN. Ms. Guensberg, do you want to add anything?

Ms. GUENSBERG. I guess the only thing I would add to that is to make sure that there are no gaps in the knowledge. I think Gene went a long way to talking about that in terms of getting people in who know how to design systems, but not only that, just where you are now.

IRS has worked, gotten some contractors in, to determine just how their own systems, or current systems, work, and I think that you have got to start from that basic knowledge so you can make good decisions. I just want to emphasize that.

Mr. HORN. I found as an executive that you hire consultants when you have not gone out to listen to people, and all consultants do is listen to people and the organization usually has a million good ideas for how you solve the problem if somebody only asked them.

I think the problem we have in Government, and private industry has just as many problems as we do, is nobody is listening to the person who says, “I could do that better," and get them all involved. And then you are absolutely right on the backup. When trouble comes, is the boss willing to say, “We want this done, folks, let's get all on board.” And I am not convinced that is happening. And I realize the IRS people are not about to tell me, either. I understand that. So that is why I am asking you those questions. I mean, you have been the consultants, in a way, that go in and people talk to you and tell you this and that and you have got a feel for it.

I thank you for your testimony. I assume some of you will stay and listen to the IRS testimony, because I would certainly like to have your thoughts after that, either privately, or on the record, or whatever. But I thank you for testifying. As usual, you have come up with a very thorough presentation and we appreciate it, so thanks for coming. Mr. DODARO. Thank you very much.

Mr. HORN. We now have panel 2, Mr. App, the Deputy Chief Financial Officer, Department of the Treasury, and Anthony Musick, the Chief Financial Officer for the Internal Revenue Service. We are delighted to have you with us. Gentlemen, you know the routine, also.

(Witnesses sworn] Mr. HORN. Both witnesses have affirmed, and please proceed as to which one of you goes first. Mr. App, we are delighted to have you open. STATEMENTS OF STEVEN O. APP, DEPUTY CHIEF FINANCIAL

OFFICER, DEPARTMENT OF THE TREASURY; AND ANTHONY MUSICK, CHIEF FINANCIAL OFFICER, INTERNAL REVENUE SERVICE

Mr. APP. Mr. Chairman and members of the subcommittee, thank you for inviting me here today to discuss financial management in the Department and the Internal Revenue Service.

As the chief financial agent of the U.S. Government, achieving sound financial management practices across the Treasury Department is one of our top priorities. I would like to point out that much of what I am going to talk about today is contained in the Department's first accountability report that we produced for 1995, a year ahead of when it is required under the Government Management and Reform Act. This report contains for the first time in one place all of the key financial information for the Treasury Department and we believe that it is a complete and useful and an honest assessment of where we are.

In your letter of invitation you asked for several items to be discussed. My colleague, the IRS CFO, will talk about some of the IRS specifics. I will address two issues which I believe you are interested in from a departmental perspective. Those are the impact of the IRS' problems on departmental and governmentwide financial statements as well as our compliance on a department level with A127, the OMB guidance on financial management systems.

As the GAO folks have alluded to, because IRS collects 98 percent of the Government's revenues, it obviously has a major impact in terms of materiality on our financial statements. No entity can get a clean opinion on its financial statements if its revenues cannot be audited. So I will be clear. As long as the IRS revenues cannot be audited, neither the IRS, the Department, nor the governmentwide financial statements can get an unqualified audit opin

ion.

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