Mr. Chairman and members of the Subcommittee, thank you for inviting me here today to discuss financial management in the Department and in the Internal Revenue Service. To paraphrase Secretary Rubin, “As the chief financial agent of the United States Government, Treasury is obligated to manage the resources given to us by the taxpayers with responsibility, accountability, and clarity." Accordingly, achieving sound financial management practices across the Department needs to be, and is, one of our top priorities. These hearings benefit everyone by focusing on the progress we have made and the challenges that still remain.

First, I would like to point out that much of what will be discussed here today is contained in the Department's Accountability Report for 1995. Treasury is one of the six agencies participating in the Accountability Report project under the Government Management Reform Act of 1994. We have furnished your staff with an advance copy of our 1995 report, and final printed copies will be available in several weeks.

In your letter of invitation, you described several specific arcas that you would like addressed today. IRS' CFO, Anthony Musick, will specifically cover most of these areas as they pertain to IRS, so I will use my time to address two of the issues I believe you are interested in from a Departmental perspective.

Impact of IRS' problems on the Departmental and governmentwide financial statements

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Because IRS collects about 98% of the government's revenues, it obviously has a major impact in terms of materiality on our financial statements at the IRS, Departmental, and governmentwide levels. And, no entity can get a clean opinion on its financial statements if its revenues cannot be audited.

Thus, so long as IRS' revenues cannot be audited, neither IRS', nor the Department's, as well as the governmentwide financial statements will be able to receive an unqualified audit opinion.

Like you, we are well aware of the need to resolve these problems, and have continued to provide assistance to IRS in achieving its goals. The primary Departmental role is to work with all concerned parties to achieve our mutual goals. This means making sure that reasonable plans are in place, keeping close tabs on progress in adhering to the plans, and helping to resolve obstacles that arise.

Deputy Secretary Summers has stressed the need for the Department, the Inspector General, and the General Accounting Office to continue working closely with IRS to achieve a clean audit opinion. Further, he has stressed the importance of obtaining clean audit opinions to all Treasury bureau heads.

This past June, the Department participated with the IRS, GAO, and the Treasury IG in an offsite planning session for the audit of IRS' 1996 financial statements. We think this meeting was very productive. It resulted in a detailed plan and schedule for the 1996 effort, and allowed for a

common understanding to be reached on several issues that had been problematic in the past. And, all parties expressed optimism that real progress could be achieved toward obtaining an opinion on IRS' 1996 financial statements.

To continue our efforts to facilitate progress, Departmental officials will participate in a meeting with IRS and GAO on October 3, 1996, to assess the progress being made on the 1996 audit and determine any adjustments that need to be made to the audit plan. We will continue to be closely involved throughout the 1996 audit process, and beyond.

Compliance with the requirements of OMB Circular A-127, Financial Management Systems

One of the key elements in obtaining clean audit opinions, and also in providing sound day to day management information, is having good systems that comply with the financial management systems requirements defined within OMB Circular A-127 (Financial Management Systems). The Department has made good progress over the past few years in migrating towards standard off-the-shelf software packages for its core accounting systems. The Chief Financial Officers Act, the Federal Managers' Financial Integrity Act, and the Government Management Reform Act have all proven highly beneficial in this regard. Most of our bureaus now use these standard software packages, which are on the GSA approved schedule, for their primary accounting systems. We are also nearing completion of a major revision of the Department's Accounting Principles and Standards Manual, which will incorporate the requirements contained in Federal Accounting Standards Advisory Board pronouncements. While many of the Board's requirements are not effective until 1997 and beyond, we believe we are currently complying with those standards currently in effect.

However, there are notable exceptions that preclude us from being fully compliant with A-127 requirements across the Department. For example, the Mint is in the process of replacing its cumbersome accounting system with a fully integrated cost management system. (While the Mint received an unqualified opinion on its 1994 and 1995 financial statements, this required lots of intensive manual effort.) And, as Mr. Musick will describe, the IRS revenue accounting system does not yet utilize the U.S. Standard General Ledger chart of accounts.

The Department's revenue accounting problems have been well-documented by our revenue collecting bureaus (IRS, Customs, the Mint, and ATF), the GAO, our Inspector General, and independent accounting firms. In fact, the major audit findings from the FY 1995 CFO Act financial statement audits, which are also reported in our 1995 Federal Managers' Financial Integrity Act Report, identify material weaknesses in the accounting systems at these revenue collecting bureaus.

Of course, IRS' revenue accounting problems get the most attention because of IRS' sheer size ($1.3 trillion collected in 1995) and its interaction with the taxpaying public. Coupled with the complexity of its operations, and the material impact of IRS on the Departmental and

Governmentwide financial statements, resolving IRS's problems warrant a continued high level of Departmental involvement.

Concluding remarks

Since the passage of the CFO Act of 1990, we have made steady progress in obtaining unqualified opinions on our bureaus' financial statements. For 1993, 8 of 12 entities audited pursuant to the CFO Act received unqualified opinions; for 1995, that number had improved to 10 out of 13.

Of course, our two largest challenges in this regard are obtaining audit opinions on the revenues of the IRS and the Customs Service. We have plans in place to meet these challenges, and the Department will continue to work closely with both bureaus to keep those plans on track.

Before Mr. Musick gets into IRS' progress and future plans, I would like to conclude by noting that we are addressing short term solutions that, while resource intensive, should allow us to obtain clean audit opinions. At the same time, we are pursuing long term solutions that will improve the efficiency of day to day financial management across the Department.

As you are aware, the IRS' financial management systems are outdated and need to be replaced with state of the art systems, which will improve both internal and external financial information. This is a significant ongoing IRS effort in which we are using the GAO's recommendations as the basis for financial systems improvements.

That concludes my prepared remarks. I would be happy to respond to any questions you may have now, although you may prefer to wait until after you have heard Mr. Musick's statement to ask us questions. Thank you.

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 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 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.