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A lot of emphasis, much like in times past when they developed those, has been placed on trying to enhance customer service and improve production, which are all very important things that need to be considered, but I think, likewise, as they go to develop whatever the new data base is going to look like, consideration needs to be given to some of the dilemmas that they are confronted with from a financial reporting and accounting perspective.

Mr. DODARO. Mr. Chairman, I think this is the second critical success factor. One is having a plan. The other factor is making it happen and making it reality and having follow-through. Followthrough has been a problem at IRS. It is largely still functionally aligned and a lot of people have different responsibilities for different areas.

Fixing some of their financial problems and their systems problems requires a broader approach in the organization and, as you well know from the jobs that you have had over the years, that is the hardest part, is to get a large organization to work together.

And Tony is going to need help from other parts of IRS, and this is where the role of the Deputy Commissioner and the Commissioner becomes important in that they need to followup and if things are not getting done, they either need to realign responsibilities or make it clear and directed to people that they need to cooperate with him to bring this to closure.

The third factor that I think is important, success factor, is continual congressional oversight. I mentioned the RTC earlier. One of the comments, as we were testifying years ago on RTC and why they could not get a clean opinion, and at the same time Congress was being asked to increase appropriations to bail out the savings and loan problems and giving those to the RTC, one congressional member said, “Why should we give the RTC any additional money if they cannnot account for the appropriations that we have given them before?

Congress put a lot of pressure to get the RTC cleaned up, because they were concerned with the difficulties that were ensuing by pumping a lot of money into the RTC to clean up the S&L crisis.

So continual congressional pressure, having follow-through by the agency managers in doing their job, and all rooted in a very good detailed plan, are the three keys of success.

Mr. HORN. Now, do you see in the CFO-Deputy CommissionerCommissioner relationship at IRS anything different than you see in other agencies as to the CFO's reporting? Is there something unique in IRS? In other words, are they taking it seriously at top management, of which the CFO is part?

Mr. DODARO. I think they are definitely committed to trying to fix the problem, but I think they need to exercise more discipline at the top. The same issue, I have made the same point about their tax system modernization program. Basically, IRS was allowing a lot of functional areas—you know, they are a large decentralized organization, the districts, the regions, the different functional areas, whether you are talking about processing returns or collecting revenue, were pretty much autonomous—and I think there still needs to be more of a cohesive management structure developed at the top of the IRS to integrate the CFO, to bring the new chief information officer that they have in place into that, and to make it a cohesive team with an overall architecture or blueprint for bringing about these reforms. They are not quite there yet, in my opinion.

Mr. HORN. And we will pursue that with the Chief Financial Officer when we get to it.

My last part of this series of questions is the degree to which money, additional authority, et cetera, are involved here. How much can be done under existing appropriations? Does IRS have the authority to move money around, reprogramming authority, within the agency, and do they have their own revenue sources they can tap for modernization or does that have to be a congressional appropriation?

Mr. DODARO. Most of the money, and I will ask Greg to add on to this, to run IRS' operations, including the modernization program, come from appropriated funds of the Congress. Actually, in our last tax system modernization report we issued in June we recommended that since the IRS had so many management and technical weaknesses in their capability to manage that program, that the funding be restricted and limited to tax system modernization, to only critical operation and maintenance problems, building their capability in small projects.

The IRS does have some reprogramming authority,I will ask Greg to talk about that—but the funding for their systems efforts comes from appropriations, the large bulk of it, and not from any other independent sources.

Mr. HORN. And they have spent the money we have appropriated when we have directed it for systems on systems? Because we have a few agencies, and IRS was one of them, that used the money simply to hire more people and did not follow Congress' direction.

Mr. DODARO. Yes, well, one of the problems we have had and we reported on in our financial audits was the inability to track the cost of the tax system modernization effort. We have had some problems exactly pinning that down in those areas and, also, not only what goes for new development under tax system modernization versus what is operation and maintenance of your existing systems—sometimes that goes back and forth as well. So we are trying to, as part of our audits, tie down how that money is actually expended.

Mr. HORN. OK, Mr. Holloway, do you want to comment on reprogramming, then Mr. Davis will take over.

Mr. HOLLOWAY. I think in the case of reprogramming, I think IRS has the capacity to reprogram as any other Federal agency would in terms of moving money around, but I think the context of your question, if I recall, dealt more with the impact of that with the presumption of adding more money to help cure the problems and fix the issues.

In the end, and I just wanted to amplify one of the things that Mr. Dodaro said, that it strikes me that one of the things that is going to be critical, while certainly the responsibility rests with the CFO, I have to reiterate the criticality of complete institutional support. No CFO, in the private sector or the public sector, will be able to effectively do their job if they do not have full and unwaivering support at the top that provokes support and cooperation throughout the organization.

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Mr. HORN. Does your experience with IRS lead you to believe they have the support at the top?

Mr. HOLLOWAY. My experience at IRS leads me to believe that from a full institutional perspective I am not sure that the breadth of support that needs to be there to always, at a priority level, push things through has always been present and consistent. Now, if that is a function of the top or just the difficulty of managing a large bureaucracy, I do not know.

Mr. HORN. Well, that is certainly my impression, and when you look at who gets appointed commissioner, with all due respect to the fine talents they bring as tax lawyers, or whatever, they have never run anything. They have never run any large agency.

What we need in a couple of these places are people that are skilled managers that can pull people together, can focus on the plan and, as you say, hold goals to know when we have achieved it and can back up a CFO who needs the help of some egomaniac that is parallel in the organization to him or her, as the case may be.

Mr. HOLLOWAY. I think you are exactly right in that interpretation, that that is what is necessary.

Mr. HORN. Well, Mr. Davis, the gentleman from Virginia. Mr. DAVIS. Thank you, Mr. Chairman. Mr. Dodaro, let me ask you, if you were auditing an agency's financial statements and had to report on whether the agency was or was not in compliance with the applicable Federal accounting standards and Federal financial management systems requirements, would you be able to do so?

Mr. DODARO. Yes, I believe so. I mean, we in the Federal Government now, through a joint arrangement with OMB, GAO, and the Treasury Department, have set up a Federal Accounting Standards Advisory Board and they have recommended new accounting standards for the Federal Government, which become effective in the next couple of years.

There are also some systems requirements that have been put in place. I think it would require, perhaps, some interpretations and

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Mr. DAVIS. But there is enough specific guidance when you take a look at the OMB circulars and the publications issued by the Joint Financial Management Improvement Program and so on to enable an auditor to make that determination?

Mr. DODARO. Yes, I believe it is a good starting point. I think there would be additional issues that we would have to discuss but I think the foundation, augmented by the new accounting standards that are being issued, I think that helps it quite a bit.

Mr. Davis. I think Mr. Horn got at this, but in your opinion do you think the Department of the Treasury and the IRS have developed an effective plan for implementing the Government Management Reform Act requirements in terms of the plan?

Mr. DODARO. Most of our focus to date has been at the IRS level. We are beginning a look at the Treasury Department level. I think they have begun planning on this effort. We are now looking at the Bureau of Public Debt and Treasury's Financial Management Service for the first time and we are developing opinions along those lines. I think they are beginning to focus on it, but I do believe that

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.

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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. ĎAVIS. 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

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