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to identify these and I think it would help for more continuity up here in the way we do policy.

I think, Mr. Chairman, that is all I want to ask for right now. Mr. HORN. I thank you very much. Let me ask, on this problem, what was the role of OMB, if any, in this? As I recall, the OMB is basically to issue standards across the Federal Government. How did they let Defense, with its 49 different accounting systems, and the IRS get so out of whack?

Mr. DODARO. Basically, over the years you had OMB put in place requirements and there are binders of circulars and they all have good well-intentioned requirements, but there was no requirement for the independent audit, and OMB is sitting there having very short-handed staff, had no ability to get any independent sources of information back as to whether people were complying with this circular or not.

I think they are also becoming concerned since these financial audits that the information they are receiving on simple budget execution data and funds control is not as good as what they originally thought.

So I think there was a lot of good faith on the part of OMB that people were complying and not until you really get to scrutiny of an independent financial audit have many of these things come to light. And I think that is the real difference and what it will really take.

I think for the first time, early next year, when you have the results for the first time across Government of audits of the 24 largest departments and agencies you will have a good governmentwide picture of the severity of financial management problems across the Government. Before this point in time you have only had just agencies that the Congress selected as pilots for us to go in and look at, so we have gotten quick snapshots of different parts of the government, but when you see it all put together, I think it will be quite disturbing.

Mr. HORN. Well, let me ask my last question on this. We might have others we send you, and you know the routine; if you could give us an answer, we would like to put them in the record. My last point would be this. You and your team of three others there that I am looking at, the four of you, you are familiar enough with IRS, where they are, what they have done, what they have not done. What I would like to know is, if tomorrow the Secretary of the Treasury called you and said, “Hey, have I got a deal for you. Why don't you come over here and straighten this mess out,” what is the first thing you would do if you took the job that they are not doing and they ought to be doing?

Mr. DODARO. The first thing I would do is to get all the people in the room who have a role to play in this and have an integrated plan developed to get at this that I felt was comfortable, No. 1.

No. 2, I would go out and procure for myself top-flight expert advice from the outside to come in and provide me with additional information in this area, particularly in the area of systems development, because I know the capability in the IRS to develop systems is not good.

Third, I would make sure I have got a good plan to increase my capability in my organization to either develop software itself or to procure software from the outside, which is not there. So I probably would hire and bring in somebody who could manage, contractors, technical contractors, to develop systems.

IRS’ problems will not be fixed, because of the volume of the transactions and the magnitude of their business, without modern systems, and their track record in developing those systems is poor and unless that is fixed, you are going to continue to have these problems and Band-Aid approaches.

So I would make sure I have got clear signals to all my managers, I would make sure I would get some expert advice, and I would bring in top-flight people who can develop and maintain state-of-the-art technology.

Mr. HORN. Ms. Guensberg, Mr. Holloway, have anything you want to add to that?

Mr. HOLLOWAY. The only thing I would amplify for emphasis’ sake-and I say this from my own experience in the private sector when I took a similar position in the private sector one of the things that was crucial to me being able to effectively do what they wanted me to do was knowing for certain that I had the authority to do what they wanted me to know, which meant to leverage and to impact people in what were the program aspects of our operation to get them to do what I needed them to do, because no matter how smart I might be or how effective my team might be, there would never be enough accountants and those types to do it all in an organization the size of IRS without clear priority support.

The difficulty is that is in the face of all of the program demands that are placed on an organization but they have to appreciate the criticality of the financial reporting and accounting. And unless you have that kind of leverage, where you know when you say something that people are going to respond and respond timely, it is not going to happen. And if it does, it is going to happen over a very long period of time.

Mr. HORN. Ms. Guensberg, do you want to add anything?

Ms. GUENSBERG. I guess the only thing I would add to that is to make sure that there are no gaps in the knowledge. I think Gene went a long way to talking about that in terms of getting people in who know how to design systems, but not only that, just where you are now.

IRS has worked, gotten some contractors in, to determine just how their own systems, or current systems, work, and I think that you have got to start from that basic knowledge so you can make good decisions. I just want to emphasize that.

Mr. HORN. I found as an executive that you hire consultants when you have not gone out to listen to people, and all consultants do is listen to people and the organization usually has a million good ideas for how you solve the problem if somebody only asked them.

I think the problem we have in Government, and private industry has just as many problems as we do, is nobody is listening to the person who says, “I could do that better," and get them all involved. And then you are absolutely right on the backup. When trouble comes, is the boss willing to say, "We want this done, folks, let's get all on board.” And I am not convinced that is happening. And I realize the IRS people are not about to tell me, either. I understand that. So that is why I am asking you those questions. I mean, you have been the consultants, in a way, that go in and people talk to you and tell you this and that and you have got a feel for it.

I thank you for your testimony. I assume some of you will stay and listen to the IRS testimony, because I would certainly like to have your thoughts after that, either privately, or on the record, or whatever. But I thank you for testifying. As usual, you have come up with a very thorough presentation and we appreciate it, so thanks for coming.

Mr. DODARO. Thank you very much.
Mr. HORN. We now have panel 2,

Mr. App, the Deputy Chief Financial Officer, Department of the Treasury, and Anthony Musick, the Chief Financial Officer for the Internal Revenue Service. We are delighted to have you with us. Gentlemen, you know the routine, also.

[Witnesses sworn]

Mr. HORN. Both witnesses have affirmed, and please proceed as to which one of you goes first. Mr. App, we are delighted to have you open. STATEMENTS OF STEVEN O. APP, DEPUTY CHIEF FINANCIAL

OFFICER, DEPARTMENT OF THE TREASURY; AND ANTHONY MUSICK, CHIEF FINANCIAL OFFICER, INTERNAL REVENUE SERVICE

Mr. APP. Mr. Chairman and members of the subcommittee, thank you for inviting me here today to discuss financial management in the Department and the Internal Revenue Service.

As the chief financial agent of the U.S. Government, achieving sound financial management practices across the Treasury Department is one of our top priorities. I would like to point out that much of what I am going to talk about today is contained in the Department's first accountability report that we produced for 1995, a year ahead of when it is required under the Government Management and Reform Act. This report contains for the first time in one place all of the key financial information for the Treasury Department and we believe that it is a complete and useful and an honest assessment of where we are.

In your letter of invitation you asked for several items to be discussed. My colleague, the IRS CFO, will talk about some of the IRS specifics. I will address two issues which I believe you are interested in from a departmental perspective. Those are the impact of the IRS' problems on departmental and governmentwide financial statements as well as our compliance on a department level with A127, the OMB guidance on financial management systems.

As the GAO folks have alluded to, because IRS collects 98 percent of the Government's revenues, it obviously has a major impact in terms of materiality on our financial statements. No entity can get a clean opinion on its financial statements if its revenues cannot be audited. So I will be clear. As long as the IRS revenues cannot be audited, neither the IRS, the Department, nor the governmentwide financial statements can get an unqualified audit opinion.

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:]

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