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ATTACHMENT I

ATTACHMENT I

RECENT GAO REPORTS AND TESTIMONIES
RELATED TO IRS' FINANCIAL MANAGEMENT AND TSM PROBLEMS

FINANCIAL AUDIT REPORTS

Financial Audit: Examination of IRS' Fiscal Year 1992 Financial Statements (GAO/AIMD-93-2, June 30, 1993)

Financial Audit: Examination of IRS' Fiscal Year 1993 Financial Statements (GAO/AIMD-94-120, June 15, 1994)

Financial Audit: Examination of IRS' Fiscal Year 1994 Financial Statements (GAO/AIMD-95-141, August 4, 1995)

Financial Audit: Examination of IRS' Fiscal Year 1995 Financial Statements (GAO/AIMD-96-101, July 11, 1996)

REPORTS AND TESTIMONIES RELATED TO IRS FINANCIAL AUDITS AND TSM

IRS Operations: Significant Challenges in Financial Management and Systems Modernization (GAO/T-AIMD-96-56, March 6, 1996)

Tax Systems Modernization: Management and Technical Weaknesses Must Be Overcome To Achieve Success (GAO/T-AIMD-96-75, March 26, 1996)

Tax Systems Modernization: Progress in Achieving IRS' Business
Vision (GAO/T-GGD-96-123, May 9, 1996)

Letter to the Chairman, Committee on Governmental Affairs, U.S.
Senate, on security weaknesses at IRS' Cyberfile Data Center
(AIMD-96-85R, May 9, 1996)

Financial Audit: Actions Needed to Improve IRS Financial
Management (GAO/T-AIMD-96-96, June 6, 1996)

Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996)

Tax Systems Modernization: Cyberfile Proiect Was Poorly Planned and Managed (GAO/AIMD-96-140, August 26, 1996)

Internal Revenue Service: Business Operations Need Continued
Improvement (GAO/AIMD/GGD-96-152, September 9, 1996)

Internal Revenue Service: Critical Need to continue_Improving Core Business Practices (GAO/T-AIMD/GGD-96-188, September 10, 1996)

(901722)

Mr. HORN. We are going to follow the 5-minute rule on questions. Mrs. Maloney and I will alternate so that we all have a crack at it and we might alternate 20 times, for all I know.

Mrs. MALONEY. I have to be on the floor. Mr. HORN. Oh, you have to? Mrs. MALONEY. If you will excuse me, I have been called to the floor for the debate.

Mr. HORN. You speak for me, too, over there. I should be there, too, fighting that battle. Well, thank you for coming.

Mrs. MALONEY. Mr. Chairman, I just want to say for the record how much I have enjoyed working with you this year. I believe this is the last hearing? You have got another one coming?

Mr. HORN. We might have a couple after the election. Either you will be chairman or I will be chairman.

Mrs. MALONEY. In this session?
Mr. HORN. Yes.

Gene, what I am curious about on this plan—you are absolutely right and I am sure we will discuss it more with representatives of the IRS—but of the 59 recommendations, obviously, when you make them, these are not incrementally or sequentially to be followed.

Mr. DODARO. Right.

Mr. HORN. Has a plan been developed of what the big picture is so we can deal with that?

Have we separated the minutiae that would be nice to have down from the basic goal achiever that will get us there? Where are we on that? What are we talking about?

Mr. DODARO. I think we are at different places, Mr. Chairman. I think on the administrative accounting area we have got a good plan that will get us there and it is just a matter of execution. This is on the reconciling the cash accounts with Treasury and having documentation for receiving goods and services other than payroll, which are computers, hardware, and other services from Government agencies. I think we are close there and I think it is just a matter of putting in the discipline to get the documentation and to get the transactions recorded properly and follow the right procedures.

In the revenue area, I do not think we have clearly—the Service has yet a clear vision of how to fix that problem long term. They are developing solutions in that area and I think that I am encouraged by the fact that they are beginning to talk about it, but I do not think we are there yet in the revenue arena. That is tied up in their ability to develop systems generally. I do think that we are not going to be able to solve that problem with one silver bullet, so I think making incremental progress is important. I think a lot of the data is in the current revenue systems, but there is such poor documentation of that system that they are having difficulty reconciling the amounts. And as you know, Mr. Chairman, you have held hearings on the year 2000 problem, about the problems that can be created by the lack of documentation, and it is also characteristic of organizations. We are going to have a continuing dialog with them on that, but I would say the fix is in place for the revenue area are going to take us only a certain percentage of the way.

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I might also add that this last year we verified IRS had completed 17 of our recommendations, which was up. If you recall, in the March hearing it was 13. They believe they have other recommendations completed and we are in the process of verifying that in the 1996 audit. But I think the vision in the revenue area still needs workave you

Mr. HORN. Have you been through this type of experience with other Federal agencies where GAO has established a relationship of, one, going in and looking, making some recommendations, then sitting down with them as to how, based on what you have seen in the private sector, public sector, these could be implemented? Is there any other agency where you have had that similar relationship?

Mr. DODARO. Oh, yes.
Mr. HORN. What are they?

Mr. DODARO. We have had—well, for example, in the Government corporations area we had responsibility for auditing the Resolution Trust Corporation. We just completed our last audit as that organization has gone out of business and transferred those responsibilities to FDIC.

We worked with RTC from the standpoint-in the beginning we were at the point we are at IRS of having disclaimers and eventually working with them, fixing their control problems, putting in good systems and discipline. We were able to have a clean opinion on RTC.

The same with the Pension Benefit Guarantee Corporation. Over a number of years we were able to work with them as well. We have been working with FDIC for a number of years. In the Government corporations we have had the requirement for a financial audit in place for a number of years and GAO has had that responsibility, so we worked very closely, and it takes a number of years but, with concerted effort, it can be done.

We have also started now with the CFO requirements. We were working with the Customs Service initially for a couple of years. We have turned that audit over now to the Treasury Inspector General, but we are still providing some technical assistance. We did early audits in trying to work with the Education Department in the student loan insurance area. We have started, as we have talked in this committee, over at the Defense Department. I cannot report the same progress there.

Mr. HORN. You have not found the $25 billion yet?
Mr. DODARO. No, no.
Mr. HORN. That they tell me isn't stolen, but they cannot find it.
Mr. DODARO. Well, and it keeps changing.

But we have examples, clearly, in the Government corporation areas and in some of the Federal agencies where, working over time and there are examples of other agencies where the IG’s are doing the same thing.

Mr. HORN. OK, so you have had that experience. Now, what I want to know is what were the keys to success in those other agencies? Are there similar factors in IRS and if IRS does not have them, what is it that they are lacking that these other agencies have had to make the transition a success?

MrHORN. Thatell, and it kearly, in thecies where, the IĞ's

Mr. DODARO. The critical factors of success, in my opinion, are, No. 1, having a detailed action plan that is credible, has very explicit milestones, and can be used to track progress both on the part of the managers within the agency as well as the Congress.

In the early years, as I mentioned in my statement, I was very troubled by the fact that IRS, I believe, underestimated the severity of their problems and underestimated what it was going to take to fix the problems in the correct manner.

And even when we were doing the audit for fiscal year 1994, I wrote a letter to the commissioner, basically saying that I was concerned that we did not have a plan in place. It was not until early spring in this past year where we have gotten a plan was developed and we have worked with IRS to refine that plan. So I think for the first time we have a credible plan to address some of the issues, albeit some of them still short term, but at least it is progress and I think we are moving in the right direction.

Mr. HORN. OK, and has IRS fixed the responsibility for implementation on that plan on one person or how are they administering it?

Mr. DODARO. Basically, responsibility rests with the Chief Financial Officer, the CFO, Tony Musick.

One area that I am a little concerned about is that Tony has to deal with other people in the IRS to get some of the changes put in place. For example, while the CFO has total responsibility over the administrative accounting operations, that person does not have responsibility over the revenue accounting function. Now, we at GAO made a recommendation over the years to give more responsibility for revenue accounting to the Chief Financial Officer.

Mr. HORN. Yes, but whose choice is that? When Congress said, “Establish a Chief Financial Officer,” they did not say, "you simply handle supervision of administrative accounting but if you have another type of accounting, such as revenue accounting, sorry, you do not handle that?” Aren't we holding them responsible for all fiscal matters within that agency?

Mr. DODARO. Yes, and the legislation was not as specific on this point. We do have a little bit of an unusual situation at IRS in that you have large custodial, governmentwide responsibilities there for revenue collection as well as internally. And there is no one organizational solution.

The biggest problem is that the revenue accounting systems were not developed with sufficient input from the financial people at IRS so that they have good controls in place and could be used for financial reporting purposes. Revenue systems were largely developed by people who have responsibility for processing the tax returns and they were more interested in making sure that refunds got out quickly and they could track physically the returns as they come through the system.

Mr. HOLLOWAY. And just to amplify on what he said, I think that is a very important nuance that really needs to be looked at in the context of the tax system modernization effort, because as they move to redesign their data bases I think it is important that one of the functional requirements that need to be looked at and considered and incorporated are the financial accounting and reporting needs.

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