Like businesses, the IRS has accounts receivable. Unlike private businesses, however, our customers are not purchasing products and their credit-worthiness is not determined prior to a transaction. In short, we do not choose our customers. Furthermore, the law prescribes we keep the accounts on the books for 10 years. To overcome these problems for the financial reporting purposes, the GAO and IRS have agreed to a common definition on how to classify the inventory. Starting with the 1995 statements, we classified the inventory as, one, financial receivables. These were amounts the taxpayers have agreed to pay or courts have set and we believe that they are collectible. Second is financial writeoffs, which are financial receivables that have subsequently been determined to have no further collection potential and, third, compliance assessments. These are amounts the taxpayers have not agreed to or on which the courts have not acted. We hope this methodology will go a long way to resolving some of our accounts-receivable issues. Finally, the GAO has also made 59 supporting recommendations through their financial statement audits for the last 4 fiscal years. Of the 59 recommendations, the IRS and GAO agree that we have implemented and thus closed 17 of them. Of the remaining 42, the IRS believes that we have met the requirements to close another 22. However, before we actually close these, we will work with the GAO to get agreement. I have tried to describe to you the priority and significance that we attach to our financial management responsibilities under the Chief Financial Officers Act. The audits are a tremendous amount of work both for IRS and GAO, but they are also a tremendous help. We believe we are closer to getting an unqualified opinion on our financial statements but we are not there yet. It is my hope that the IRS in the near future will be looked upon as an example of how the CFO Act has improved the credibility of the Government in the eyes of the public. Mr. Chairman, this concludes my remarks. I would be happy to answer any questions. [The prepared statement of Mr. Musick follows:] STATEMENT OF CHIEF FINANCIAL OFFICER OF THE INTERNAL REVENUE SERVICE BEFORE THE SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, SEPTEMBER 19, 1996 Mr. Chairman and Distinguished Members of the Subcommittee: Good morning. 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 General Accounting Office (GAO) as the significant reasons preventing it from attesting to the IRS financial statements. IRS Commissioner Richardson testified before you in March of this year on how we are fulfilling our responsibility for implementing the Chief Financial Officers Act of 1990. At that time, she emphasized our total corporate commitment to getting a clean audit opinion from the General Accounting Office by improving financial management in the Service. Today, I appreciate the opportunity to discuss the progress we have made and the cooperative effort we have under way with the GAO. As a certified public accountant, and with a background as an auditor with a public accounting firm, the Environmental Protection Agency, and the GAO, I believe I can offer a good perspective on the problems, and opportunities, that are presented by a financial audit of any Government agency. I have seen some significant changes in financial management at IRS -- and will discuss some of those in a few minutes -- but, notwithstanding these positive improvements, I recognize that there is still much to do. We have a detailed action plan that addresses corrective actions and tracks the progress toward correcting deficiencies, implementing identified recommendations, and accomplishing other initiatives aimed toward improving the Service's financial operations. Chief Financial Officers' Act of 1990 The IRS, as one of the pilot agencies under the Chief Financial Officers' Act of 1990, has both made progress and faced unexpected challenges in meeting financial audit requirements. In this regard, our experience is similar to that of most of the other pilot agencies: only two have received unqualified opinions on their FY1995 statements. However, we are using the CFO Act and the financial statement audit as our blueprint for financial management improvements. The process of preparing financial statements and having them audited imposes a critically important discipline on us a discipline that can only benefit the taxpayers of the United States. It is only appropriate that we be held to the same standards to which we hold taxpayers. Since the CFO Act became effective, we have made significant improvements in our financial management systems, and now have a new administrative accounting system. We are also working on short-term solutions and long-term redesigns that will modernize our revenue accounting system and ensure that it provides information that is needed for the financial statement audit. However, the CFO Act and the financial 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 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 |