Like you, we are very well aware of the need to resolve these problems and have continued to provide assistance to IRS at the Department level in achieving these goals. Our primary role at the Department level is to work with all concerned parties to achieve our mutual goals.

What this means is making sure that reasonable plans are in place, keeping close tabs on the progress in adhering to those plans, and helping to resolve any obstacles that arise. Both the Deputy Secretary as well as the CFO, George Muñoz, have stressed continuously throughout the Department, with the Inspector General, and with GAO that we need to work together to help IRS achieve a clean audit opinion.

This past June, I believe the Department has made some significant progress. We participated in an offsite meeting with GAO, with our IG's, myself, Tony, and other folks, and we developed a very detailed plan over 3 days to address the 1996 audit issues. We think this meeting was very productive and set the stage, dealing with several issues that have been problematic. I would say that all parties expressed some optimism that real progress can be made toward obtaining an opinion on the IRS financial statements.

To facilitate progress in this area, we plan to have several meetings where IRS, GAO, and Department officials will be present over the next couple of months to make sure that we adhere to the plan and make sure that progress is being made and try to resolve any issues that are outstanding.

The second issue in terms of compliance with A127, as we all have heard, good clean financial systems are what we need to produce clean audit opinions. The Department has made good progress over the past years, as you heard from the GAO folks, again, in migrating toward standard off-the-shelf software for its core accounting systems.

Most of the bureaus now use standard software packages off the GSA schedule. In addition, we are developing Departmentwide accounting principles and standards that incorporate the latest Federal Accounting Standards Advisory Board pronouncements. Of the current rules that are in effect, we feel that we are in compliance and, as the FASAB standards come on line in 1997 and 1998, we will also be in compliance.

I do want to point out that there are some notable exceptions that preclude us from being fully compliant with A127 requirements for the Department. Some examples are at the mint we are replacing a cumbersome accounting system with a fully integrated cost-management system. Now, at the mint for the past 2 years they have still achieved an unqualified audit opinion, but it has been because of very labor-intensive work that will be minimized as we put in this new system. So despite the fact that we have some systems problems at the mint, we were still able to get unqualified opinions.

The IRS revenue accounting system still does not use the standard general ledger, which Tony will talk about, and we have documented pretty well in various different sources as well as in our accountability report, right up front in the executive summary, that the revenue systems throughout the Treasury Department still need some work.

Let me just conclude by saying since the passage of the CFO Act the Department has made steady progress across the Department in obtaining unqualified opinions on the Bureau of Financial Statements. Briefly, in 1993, 8 of our 12 entities that were audited received unqualified opinions; 2 years later that number is improved to 10 out of 13.

To also address a point that GAO made to show that there is progress, GAO mentioned that they had worked with the Customs Bureau and has turned that over to our Inspector General. This year, for the first time, in 1995, Customs made some significant progress. They got a qualified opinion on their balance sheet; they still have a disclaimer on their statement of operations. So that is some progress there as well.

I would just like to conclude by noting that we are trying to address these issues with some short-term solutions, like I mentioned at the mint. These short-term solutions do tend to be resource-intensive but, hopefully, they will pave the way for longer term solutions and better systems that will improve the efficiency of collecting and reporting on this financial information.

Again, we are working closely with GAO. The Department is working to sort of oversee this process with the IRS, and I would be happy to respond to any questions now or after Mr. Musick testifies. Thank you.

[The prepared statement of Mr. App follows:]

Mr. Chairman and members of the Subcommittee, thank you for inviting me here today to discuss financial management in the Department and in the Internal Revenue Service. To paraphrase Secretary Rubin, "As the chief financial agent of the United States Government, Treasury is obligated to manage the resources given to us by the taxpayers with responsibility, accountability, and clarity." Accordingly, achieving sound financial management practices across the Department needs to be, and is, one of our top priorities. These hearings benefit everyone by focusing on the progress we have made and the challenges that still remain.

First, I would like to point out that much of what will be discussed here today is contained in the Department's Accountability Report for 1995. Treasury is one of the six agencies participating in the Accountability Report project under the Government Management Reform Act of 1994. We have furnished your staff with an advance copy of our 1995 report, and final printed copies will be available in several weeks.

In your letter of invitation, you described several specific arcas that you would like addressed today. IRS' CFO, Anthony Musick, will specifically cover most of these areas as they pertain to IRS, so I will use my time to address two of the issues I believe you are interested in from a Departmental perspective.

Impact of IRS' problems on the Departmental and governmentwide financial statements

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Because IRS collects about 98% of the government's revenues, it obviously has a major impact in terms of materiality on our financial statements at the IRS, Departmental, and governmentwide levels. And, no entity can get a clean opinion on its financial statements if its revenues cannot be audited.

Thus, so long as IRS' revenues cannot be audited, neither IRS', nor the Department's, as well as the governmentwide financial statements will be able to receive an unqualified audit opinion.

Like you, we are well aware of the need to resolve these problems, and have continued to provide assistance to IRS in achieving its goals. The primary Departmental role is to work with all concerned parties to achieve our mutual goals. This means making sure that reasonable plans are in place, keeping close tabs on progress in adhering to the plans, and helping to resolve obstacles that arise.

Deputy Secretary Summers has stressed the need for the Department, the Inspector General, and the General Accounting Office to continue working closely with IRS to achieve a clean audit opinion. Further, he has stressed the importance of obtaining clean audit opinions to all Treasury bureau heads.

This past June, the Department participated with the IRS, GAO, and the Treasury IG in an offsite planning session for the audit of IRS' 1996 financial statements. We think this meeting was very productive. It resulted in a detailed plan and schedule for the 1996 effort, and allowed for a

common understanding to be reached on several issues that had been problematic in the past. And, all parties expressed optimism that real progress could be achieved toward obtaining an opinion on IRS' 1996 financial statements.

To continue our efforts to facilitate progress, Departmental officials will participate in a meeting with IRS and GAO on October 3, 1996, to assess the progress being made on the 1996 audit and determine any adjustments that need to be made to the audit plan. We will continue to be closely involved throughout the 1996 audit process, and beyond.

Compliance with the requirements of OMB Circular A-127, Financial Management Systems

One of the key elements in obtaining clean audit opinions, and also in providing sound day to day management information, is having good systems that comply with the financial management systems requirements defined within OMB Circular A-127 (Financial Management Systems). The Department has made good progress over the past few years in migrating towards standard off-the-shelf software packages for its core accounting systems. The Chief Financial Officers Act, the Federal Managers' Financial Integrity Act, and the Government Management Reform Act have all proven highly beneficial in this regard. Most of our bureaus now use these standard software packages, which are on the GSA approved schedule, for their primary accounting systems. We are also nearing completion of a major revision of the Department's Accounting Principles and Standards Manual, which will incorporate the requirements contained in Federal Accounting Standards Advisory Board pronouncements. While many of the Board's requirements are not effective until 1997 and beyond, we believe we are currently complying with those standards currently in effect.

However, there are notable exceptions that preclude us from being fully compliant with A-127 requirements across the Department. For example, the Mint is in the process of replacing its cumbersome accounting system with a fully integrated cost management system. (While the Mint received an unqualified opinion on its 1994 and 1995 financial statements, this required lots of intensive manual effort.) And, as Mr. Musick will describe, the IRS revenue accounting system does not yet utilize the U.S. Standard General Ledger chart of accounts.

The Department's revenue accounting problems have been well-documented by our revenue collecting bureaus (IRS, Customs, the Mint, and ATF), the GAO, our Inspector General, and independent accounting firms. In fact, the major audit findings from the FY 1995 CFO Act financial statement audits, which are also reported in our 1995 Federal Managers' Financial Integrity Act Report, identify material weaknesses in the accounting systems at these revenue collecting bureaus.

Of course, IRS' revenue accounting problems get the most attention because of IRS' sheer size ($1.3 trillion collected in 1995) and its interaction with the taxpaying public. Coupled with the complexity of its operations, and the material impact of IRS on the Departmental and

Governmentwide financial statements, resolving IRS's problems warrant a continued high level of Departmental involvement.

Concluding remarks

Since the passage of the CFO Act of 1990, we have made steady progress in obtaining unqualified opinions on our bureaus' financial statements. For 1993, 8 of 12 entities audited pursuant to the CFO Act received unqualified opinions; for 1995, that number had improved to 10 out of 13.

Of course, our two largest challenges in this regard are obtaining audit opinions on the revenues of the IRS and the Customs Service. We have plans in place to meet these challenges, and the Department will continue to work closely with both bureaus to keep those plans on track.

Before Mr. Musick gets into IRS' progress and future plans, I would like to conclude by noting that we are addressing short term solutions that, while resource intensive, should allow us to obtain clean audit opinions. At the same time, we are pursuing long term solutions that will improve the efficiency of day to day financial management across the Department.

As you are aware, the IRS' financial management systems are outdated and need to be replaced with state of the art systems, which will improve both internal and external financial information. This is a significant ongoing IRS effort in which we are using the GAO's recommendations as the basis for financial systems improvements.

That concludes my prepared remarks. I would be happy to respond to any questions you may have now, although you may prefer to wait until after you have heard Mr. Musick's statement to ask us questions. Thank you.