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statement audit have created significant challenges for us as a large, mature

organization.

Financial Statement Audit - A Major Challenge

As you are aware, prior to enactment of the 1990 CFO Act, the IRS was not

required to prepare financial statements or to have financial audits. When the GAO

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 system problems, our size alone has made it difficult to obtain a

clean opinion quickly. As the primary collector of the nation's revenues, we collect over

$1 trillion, and GAO has verified that this has been properly deposited in the Treasury.

This is no small accomplishment for an organization that also handles over one billion

information documents per year, processes more than 200 million returns, issues more

than 90 million refunds, and deals with over 12,000 financial institutions and 12 Federal

Reserve Banks in some 600 locations. Any complex system will produce some errors,

and ours does, but we make great efforts to detect and correct them promptly.

We are quite concerned that the IRS has not “passed” its financial audit. But it is

important to understand, as is explained in the GAO report, that the GAO is unable to

reconcile amounts reported in the financial statements to the detailed accounting

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records. It does not mean that the money the IRS is supposed to be collecting or

spending has simply disappeared -- or somehow been misappropriated. This has not

occurred.

Results of FY 1995 Audit

The IRS' first financial statement audit by the GAO was for FY1992. Since that

time, as I mentioned earlier, we have made some significant improvements. The GAO

has recognized the progress we have made since 1992 in implementing a new

administrative accounting system, in transferring our payroll processing to the

Department of Agriculture's National Finance Center, and in improving the accounting

for federal revenues. They also provided us with 59 recommendations for

improvements that are needed throughout our financial management operations.

Even though we have received a disclaimer each year, I think it is misleading to

characterize our financial management problems as ones that "remain uncorrected."

We have not been ignoring them. In the FY1995 audit report, GAO noted that progress

had been made, but that many of our corrective actions were not completed at the

conclusion of the audit. Our corrective actions are being taken in close coordination

with GAO, and they will continue to monitor our progress and advise us on the results.

For example, in June, I met for three days with GAO and Treasury Inspector

General representatives to review the FY1995 audit of the financial statements and

plan for the FY1996 audit. We discussed short-term and long-term strategies for

resolving our audit issues and identified detailed actions which were incorporated into

our action plan. We plan to hold follow-up meetings with GAO to ensure that the

FY1996 audit stays on schedule and that issues raised are resolved promptly.

We believe it is very important to work closely with the auditors, whether they are

the GAO, the IG, or a public accounting firm. As I have stated, we have not been

standing still. Over the past four fiscal years, GAO has been unable to attest to the

amounts reported on the IRS financial statements; however, in fiscal year 1992 we had

eight separate administrative systems that didn't talk to each other, the revenue system

flows had not been totally documented, and we did not have a definition of accounts

receivable. We now have five basic issues we are working on with the GAO -- I will

address each of these later in my testimony.

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: (1)

administrative and (2) 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. To recognize the distinction between these two

systems is important to understand the GAO's audit findings and what we are doing to

improve both systems to comply with the CFO Act.

Improvements in Administrative Accounting

We are very proud of the significant improvements we have made in our

administrative accounting system. Just five years ago, we had eight separate systems

that were not linked to each other. Now we have a single corporate data base for our

approximately $7 billion in appropriated funds. This system provides an integrated,

auditable, comprehensive accounting and budgeting system that fully complies with the

Joint Financial Management Improvement Program (JFMIP) core requirements,

including the U. S. Standard General Ledger (SGL), and other government-wide

standards that apply to automated financial systems. It collects, processes, maintains,

transmits, and reports data about financial events; supports financial planning and

budgeting activities; accumulates and reports cost information; and supports the

preparation of financial statements. In addition, in the last several years we have made

other measurable improvements. For instance:

As stated, we implemented our integrated financial system. We also transferred payroll to the National Finance Center, and integrated other administrative systems to capture data at the source and transmit this data electronically to our corporate financial database.

Our travel vouchers have been automated nationwide. The traveler keys the
travel information into the system, certifies the electronic voucher, and sends it to
the supervisor. Once the supervisor approves the voucher, the traveler will
receive payment in 5 to 7 days. Over 80% of our travel vouchers were
processed this way in FY 1995.

We implemented commitment accounting procedures, so that we will have timely information about how money is being spent and so that we can manage our expenditures more carefully.

We linked the procurement system with the administrative accounting system to enable obligations to be transferred electronically.

Since the first audit in 1992, I believe we have made significant improvements,

resulting in GAO's FY1994 and FY1995 audit reports focussing on just two

administrative accounting issues -- failure to reconcile our accounts with Treasury and

the lack of receipt and acceptance documentation for some 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 interagency payments. We are currently reviewing this process to determine

the issues that we have to address and identify those that may be Government wide;

therefore, the solution may require the assistance of GSA and GPO, as well as other

Federal agencies.

We have reconciled our cash balances to Treasury's records through FY1995

and we are current on our FY1996 reconciliations. Furthermore, we will ensure that

these balances are reconciled on a monthly basis. However, we still have transactions

in a budget clearing account and in suspense accounts that will be resolved during our

year-end processing.

Accounting for the Revenue that the IRS Collects

The Revenue Accounting Control System (RACS), which was implemented

during 1984, was not designed to provide the detailed information required by the CFO

Act for financial statement presentation. It also does not use the Standard General

Ledger because it was designed in 1984 to ensure that cash is deposited in the bank

and that the transactions are properly posted to a taxpayer's account. It does this very

well. However, we also believe that the system meets all the Treasury Financial

Manual reporting requirements and provides data to meet the Federal Accounting

Standards Advisory Board (FASAB) reporting requirements.

Most of the problems raised by GAO concern the substantiating of data with the

revenue collected. Because summary data is posted to RACS, it could not be

reconciled on a transaction-by-transaction basis with our Master file accounts.

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