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Mr. HORN. Well, if you can wait, we would like to get Mr. Musick and then get all of us in the dialog. Mr. Musick.

Mr. MUSICK. Thank you, Mr. Chairman. I am pleased to be here today to discuss the progress the Internal Revenue Service has made in improving financial management as a result of our financial statement audits and the progress the Service has made toward correcting the five major problems cited by the GAO as significant reasons preventing them from attesting to the IRS' financial statements.

The IRS is one of the pilot agencies under the CFO Act of 1990 that has both made progress and faced unexpected challenges in meeting financial audit requirements. The process of preparing financial statements and having them audited imposes a critically important discipline on us.

As you are aware, prior to the enactment of the CFO Act, we were not required to prepare financial statements or to have financial audits. When the GÃO began auditing our financial statements in 1992, we were not working with systems designed to provide data in accordance with the CFO Act.

Our revenue and administrative accounting systems were designed many years ago to complement our processing systems. These systems were designed with strong controls but did not provide the information necessary to report on our financial position. In addition to our systems problems, our size alone has made it difficult to quickly obtain a clean opinion. We collect over $1 trillion, handle over 1 billion information documents, process more than 200 million returns, deal with 12,000 financial institutions, and 12 Federal reserve banks in some 600 locations. Any complex system will produce errors, and ours does. We make every effort to detect and correct them promptly.

We are quite concerned that the Service has not received an unqualified opinion on its financial statements, but that does not mean the money the IRS is collecting or spending has simply disappeared or somehow been misappropriated. This has not occurred. Nor do I believe that we are letting audit or financial problems go uncorrected.

To better understand what we are doing to comply with the CFO Act, it is important to keep in mind that the Service has two sets of financial statements, one administrative and two custodial, and has two separate financial processes to track funds: the administrative system that handles our appropriated funds; and our revenue system that tracks tax collections. This distinction is important when reviewing the GAO audit findings and what we are doing to improve both systems to comply with the CFO Act.

Just 5 years ago we had eight separate administrative systems that were not linked to each other. Now we have a single corporate data base for our some $7 billion in appropriated funds. This system fully complies with the joint Financial Management Improvement Program core requirements, including the U.S. standard general ledger and other governmentwide standards.

In addition, in the last several years we made other measurable improvements. For instance, we transferred payroll to the National Finance Center and interfaced this with our accounting system. Our travel vouchers are automated and last year 80 percent of the travel vouchers were filed electronically and people were paid within 5 to 7 days after their supervisor approved the voucher electronically.

We implemented commitment accounting procedures, so that we would have timely information about how money is being spent and so that we can manage our expenditures more carefully, and we have linked other administrative systems, like the procurement system, which allows us to transfer obligations electronically.

Since the first audit in 1992, I believe we've made significant improvements, resulting in GAO's FY 1994 and 1995 audit reports focusing on two administrative accounting issues: failure to reconcile our cash accounts with Treasury and the lack of receipt and acceptance documentation for some of the non-payroll payments to other Federal agencies, such as rent payments to GSA, and printing payments to GPO.

The overriding problem with both cash reconciliation and receipt and acceptance relates to inter-agency payments. We are currently reviewing this process to determine the issue and how to address those within the organization and also to identify what may be governmentwide problems.

Second, we have reconciled our cash balances to Treasury records through fiscal year 1995, and we are current through 1996. Furthermore, we will ensure that these balances are reconciled on a monthly basis. I might add, when I was here last time I told you that this was inexcusable and we would correct it, and we have corrected the issue with cash.

The three revenue issues identified by GAO relate to design of our system, and that is the revenue accounting and control system, and to accounts receivable. The revenue system was implemented during 1984 and was not designed to provide the detailed information required by the CFO Act for financial statement presentation.

It was designed to ensure that cash is deposited in the bank and that the transactions are properly posted to taxpayers' accounts. It does that very well. The problems with the revenue system have related to its inability to provide detailed transaction data. Because summary data is posted to the system, it could not be reconciled on a transaction-by-transaction basis with our master file accounts.

While we can and do reconcile gross amounts collected, we have been unable to give the auditors the information that they would like to have to tie individual transactions to their source. For fiscal year 1995 we began, in cooperation with the GAO, the extensive analysis and documentation of all revenue transaction flows and source documentation. Detailed flow charts were prepared to document revenue flows between the revenue system and supporting feeder systems.

As a result of this, we began to extract detailed information from the master file to prepare our financial statements and to provide an audit trail. This same process will be used in preparing our fiscal year 1996 financial statements. We are also discussing a shortterm solution that would use the standard general ledger purchase for the administrative system to capture and map detailed revenue transaction data from the master file.

Another revenue-related area that has caused concern is converting our inventory of assessments to an accounts-receivable number.

Like businesses, the IRS has accounts receivable. Unlike private businesses, however, our customers are not purchasing products and their credit-worthiness is not determined prior to a transaction. In short, we do not choose our customers. Furthermore, the law prescribes we keep the accounts on the books for 10 years.

To overcome these problems for the financial reporting purposes, the GAO and IRS have agreed to a common definition on how to classify the inventory. Starting with the 1995 statements, we classified the inventory as, one, financial receivables. These were amounts the taxpayers have agreed to pay or courts have set and we believe that they are collectible.

Second is financial writeoffs, which are financial receivables that have subsequently been determined to have no further collection potential and, third, compliance assessments. These are amounts the taxpayers have not agreed to or on which the courts have not acted. We hope this methodology will go a long way to resolving some of our accounts-receivable issues.

Finally, the GAO has also made 59 supporting recommendations through their financial statement audits for the last 4 fiscal years. Of the 59 recommendations, the IRS and GAO agree that we have implemented and thus closed 17 of them. Of the remaining 42, the IRS believes that we have met the requirements to close another 22. However, before we actually close these, we will work with the GAO to get agreement.

I have tried to describe to you the priority and significance that we attach to our financial management responsibilities under the Chief Financial Officers Act. The audits are a tremendous amount of work both for IRS and GAO, but they are also a tremendous help. We believe we are closer to getting an unqualified opinion on our financial statements but we are not there yet.

It is my hope that the IRS in the near future will be looked upon as an example of how the CFO Act has improved the credibility of the Government in the eyes of the public. Mr. Chairman, this concludes my remarks. I would be happy to answer any questions.

[The prepared statement of Mr. Musick follows:)





SEPTEMBER 19, 1996

Mr. Chairman and Distinguished Members of the Subcommittee: Good morning.

I am pleased to be here today to discuss the progress the Internal Revenue Service

has made in improving financial management as a result of our financial statement

audits and the progress the Service has made toward correcting the five major

problems cited by the General Accounting Office (GAO) as the significant reasons

preventing it from attesting to the IRS financial statements.

IRS Commissioner Richardson testified before you in March of this year on how

we are fulfilling our responsibility for implementing the Chief Financial Officers Act of

1990. At that time, she emphasized our total corporate commitment to getting a clean

audit opinion from the General Accounting Office by improving financial management in

the Service. Today, I appreciate the opportunity to discuss the progress we have made

and the cooperative effort we have under way with the GAO.

As a certified public accountant, and with a background as an auditor with a

public accounting firm, the Environmental Protection Agency, and the GAO, I believe

can offer a good perspective on the problems, and opportunities, that are presented by

a financial audit of any Government agency. I have seen some significant changes in

financial management at IRS -- and will discuss some of those in a few minutes -- but,

notwithstanding these positive improvements, I recognize that there is still much to do.

We have a detailed action plan that addresses corrective actions and tracks the

progress toward correcting deficiencies, implementing identified recommendations, and accomplishing other initiatives aimed toward improving the Service's financial


Chief Financial Officers' Act of 1990

The IRS, as one of the pilot agencies under the Chief Financial Officers' Act of

1990, has both made progress and faced unexpected challenges in meeting financial

audit requirements. In this regard, our experience is similar to that of most of the other

pilot agencies: only two have received unqualified opinions on their FY1995 statements.

However, we are using the CFO Act and the financial statement audit as our blueprint

for financial management improvements. The process of preparing financial statements

and having them audited imposes a critically important discipline on us -- a discipline

that can only benefit the taxpayers of the United States. It is only appropriate that we

be held to the same standards to which we hold taxpayers.

Since the CFO Act became effective, we have made significant improvements in

our financial management systems, and now have a new administrative accounting

system. We are also working on short-term solutions and long-term redesigns that will

modernize our revenue accounting system and ensure that it provides information that

is needed for the financial statement audit. However, the CFO Act and the financial

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