Department of Agriculture
Status of Efforts to Address Major Financial Management Challenges Gao ID: GAO-03-871T June 10, 2003In January, we issued our Performance and Accountability Series on management challenges and program risks at major agencies, including the U.S. Department of Agriculture (USDA). The report for USDA focused on a number of major management challenges, including enhancing financial management, and continued the high risk designation for Forest Service financial management. For many years, USDA struggled to improve its financial management activities, but inadequate accounting systems and related procedures and controls hampered its ability to get a clean opinion on its financial statements. After eight consecutive disclaimers of opinion, USDA's Office of Inspector General issued an unqualified opinion on USDA's fiscal year 2002 financial statements and reported that significant progress had been made in improving overall financial management. For each of USDA's agencies that prepared separate financial statements for fiscal year 2002, the audit opinions were also positive. Specifically, unqualified audit opinions were issued on the financial statements of the Forest Service, Federal Crop Insurance Corporation/Risk Management Agency, Commodity Credit Corporation, the Rural Development mission area, and the Rural Telephone Bank. While we consider these clean opinions a positive step, some of these could not have been rendered without extraordinary efforts by the department and its auditors. Achieving financial accountability will require more than heroic efforts to obtain year-end numbers for financial statement purposes. Without reliable financial systems and sound internal controls, it is not possible to have sound data on a timely basis for decision making. Before USDA can achieve and sustain financial accountability, and thus be in a position to have reliable system-generated data as needed, it and its component agencies, particularly the Forest Service, must address a number of serious problems that USDA's Office of the Inspector General (OIG) or we have reported.
In the past, USDA had several persistent weaknesses in internal control and in accounting and financial reporting that contributed to the OIG's inability to render an opinion on the department's consolidated financial statements. The OIG reported, among other things, that USDA was unable to provide sufficient, competent evidential matter to support numerous material line items on its financial statements including accounts receivable, fund balance with the Department of the Treasury and property, plant, and equipment. The OIG also reported that USDA was unable to estimate and reestimate loan subsidy costs for its net credit program receivables, rendering it unable to implement the Federal Credit Reform Act of 1990, and related accounting standards. USDA has taken actions over the last several years to improve its financial management and to address the weaknesses identified by its OIG and us. For example, in fiscal year 2000, Food and Nutrition Service was, for the first time, able to estimate its gross accounts receivable and related estimate of uncollectible amounts resulting from over-issued benefits in its Food Stamp Program. Further, for the first time since credit reform agencies were able to estimate and reestimate loan subsidy costs for the department's net credit program receivables, which totaled about $74 billion as of September 30, 2001. Because of USDA's achievement in this area, along with that of other key lending agencies, this item was no longer a factor contributing to our disclaimer of opinion on the financial statements of the U.S. government.
GAO-03-871T, Department of Agriculture: Status of Efforts to Address Major Financial Management Challenges
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Testimony:
Before the Subcommittee on Government Efficiency and Financial
Management, Committee on Government Reform, House of Representatives:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 2:00 p.m., EST:
Tuesday, June 10, 2003:
DEPARTMENT OF AGRICULTURE:
Status of Efforts to Address Major Financial Management Challenges:
Statement of McCoy Williams:
Director, Financial Management and Assurance:
GAO-03-871T:
GAO Highlights:
Highlights of GAO-03-871T, a report to the Subcommittee on Government
Efficiency and Financial Management, Committee on Government Reform,
House of Representatives
Why GAO Did This Study:
In its 2003 performance and accountability report on the Department of
Agriculture (USDA), GAO identified challenges in, among other areas,
USDA and Forest Service financial management. The information GAO
presents in this testimony is intended to assist the Congress in
assessing USDA‘s progress in addressing and overcoming these challenges.
What GAO Found:
For many years, USDA struggled to improve its financial management
activities, but inadequate accounting systems and related procedures
and controls hampered its ability to get a clean opinion on its
financial statements. After eight consecutive disclaimers, USDA‘s
Office of Inspector General (OIG) issued an unqualified opinion on
USDA‘s fiscal year 2002 financial statements, reporting that
significant progress had been made in improving overall financial
management. The Forest Service received its first-ever unqualified
opinion on its fiscal year 2002 financial statements, which represents
noteworthy progress from prior years when the OIG was unable to
express an opinion.
To achieve its unqualified opinion, USDA made progress in its
financial accounting and reporting in areas such as estimating its
Food Stamp program receivables and markedly improved its
implementation of the Federal Credit Reform Act of 1990. The Forest
Service‘s top management dedicated considerable resources and focused
staff efforts to address accounting and reporting deficiencies that
had prevented a favorable opinion in the past.
While we consider obtaining a clean opinion a positive step, USDA and
the Forest Service need to continue their efforts to address material
internal control weaknesses that still exist. As provided in the
President‘s Management Agenda and by the Joint Financial Management
Improvement Program Principals, obtaining financial accountability
goes far beyond an unqualified opinion on financial statements and
includes measures such as financial management systems that routinely
provide timely, reliable, and useful financial information and no
material internal control weaknesses or material noncompliance with
laws and regulations and Federal Financial Management Improvement Act
of 1996 requirements. Therefore, before USDA and the Forest Service
can achieve and sustain financial accountability, they must address a
number of serious problems that USDA‘s OIG or we have reported.
What GAO Recommends:
GAO is not making new recommendations in this testimony, but past
reports have made specific recommendations aimed at addressing some of
these financial management challenges.
www.gao.gov/cgi-bin/getrpt?GAO-03-871T.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact McCoy Williams at (202) 512-6906 or
williamsm1@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the major financial management
challenges faced by the U.S. Department of Agriculture (USDA), its
progress in addressing them, and challenges that remain.
As you know, in January we issued our Performance and Accountability
Series on management challenges and program risks at major agencies,
including USDA.[Footnote 1] The report for USDA focused on a number of
major management challenges, including enhancing financial management,
and continued the high risk designation for Forest Service financial
management.
For many years, USDA struggled to improve its financial management
activities, but inadequate accounting systems and related procedures
and controls hampered its ability to get a clean opinion on its
financial statements. After eight consecutive disclaimers of
opinion,[Footnote 2] USDA's Office of Inspector General issued an
unqualified opinion on USDA's fiscal year 2002 financial statements and
reported that significant progress had been made in improving overall
financial management. For each of USDA's agencies that prepared
separate financial statements for fiscal year 2002, the audit opinions
were also positive. Specifically, unqualified audit opinions were
issued on the financial statements of the Forest Service, Federal Crop
Insurance Corporation/Risk Management Agency, Commodity Credit
Corporation, the Rural Development mission area, and the Rural
Telephone Bank. While we consider these clean opinions a positive step,
some of these could not have been rendered without extraordinary
efforts by the department and its auditors. Achieving financial
accountability will require more than heroic efforts to obtain year-end
numbers for financial statement purposes. Without reliable financial
systems and sound internal controls, it is not possible to have sound
data on a timely basis for decision making. Before USDA can achieve and
sustain financial accountability, and thus be in a position to have
reliable system-generated data as needed, it and its component
agencies, particularly the Forest Service, must address a number of
serious problems that USDA's OIG or we have reported.
Today I will focus my testimony on USDA's efforts to improve its
financial management and the Forest Service's progress toward achieving
financial accountability.
USDA's Financial Management:
In the past, USDA had several persistent weaknesses in internal control
and in accounting and financial reporting that contributed to the OIG's
inability to render an opinion on the department's consolidated
financial statements. The OIG reported, among other things, that USDA
was unable to:
* provide sufficient, competent evidential matter to support numerous
material line items on its financial statements including accounts
receivable, fund balance with the Department of the Treasury
(Treasury),[Footnote 3] and property, plant, and equipment; and:
* estimate and reestimate loan subsidy costs for its net credit program
receivables, rendering it unable to implement the Federal Credit Reform
Act of 1990 and related accounting standards.[Footnote 4]
The OIG also identified internal control weaknesses over USDA's
security controls for information technology and financial management
systems that do not always process and report departmentwide financial
information accurately. Further, the OIG reported that many USDA
financial management systems are not fully integrated with other USDA
systems. These are some of the factors that required extraordinary
effort to derive reliable financial information. Further, we reported
in December 2001 that USDA had not yet fully implemented certain key
provisions of the Debt Collection Improvement Act (DCIA) of
1996.[Footnote 5]
I will now elaborate on USDA's progress in correcting these problems
and what challenges still remain.
USDA has taken actions over the last several years to improve its
financial management and to address the weaknesses identified by its
OIG and us. For example, in fiscal year 2000, Food and Nutrition
Service was, for the first time, able to estimate its gross accounts
receivable and related estimate of uncollectible amounts resulting from
over-issued benefits in its Food Stamp Program. Further, for the first
time since credit reform reporting requirements were implemented in
1994, USDA's lending agencies were able to estimate and reestimate loan
subsidy costs for the department's net credit program receivables,
which totaled about $74 billion as of September 30, 2001. Because of
USDA's achievement in this area, along with that of other key lending
agencies, this item was no longer a factor contributing to our
disclaimer of opinion on the financial statements of the U.S.
government.[Footnote 6]
The OIG also noted that USDA made significant progress during fiscal
year 2002 in reconciling its Fund Balance accounts with Treasury's
accounts, thus enabling the OIG to validate this line item on USDA's
fiscal year 2002 financial statements. However, the OIG continued to
report this area as a material internal control weakness in fiscal year
2002 due to continuing deficiencies in USDA's reconciliation processes.
For example, USDA had a large backlog of unreconciled items that needed
to be researched and resolved. As a result, USDA adjusted its records
to agree with the Treasury without reconciling the differences. Over
$180 million (net) of year-end adjustments were not supported by
transaction-level details.
Further, USDA will need to continue its actions in addressing
weaknesses in its financial management information systems. In its
fiscal year 2002 audit report, the OIG stated that USDA made
significant improvements in its overall financial management, such as
implementation of a departmentwide standard accounting system, the
Foundation Financial Information System (FFIS). At the same time, USDA
must fundamentally improve its underlying internal controls, financial
management systems, and operations to allow for the routine production
of accurate, relevant, and timely data to support program management
and accountability. Specifically, the Federal Financial Management
Improvement Act (FFMIA) of 1996 requires agencies to institute
financial management systems that substantially comply with federal
financial systems requirements, applicable federal accounting
standards, and the federal government's Standard General Ledger (SGL).
Every year since FFMIA was enacted, the OIG has reported that USDA's
systems did not substantially comply with the act's requirements. The
OIG reported that the lack of compliance stems from USDA's many
disparate accounting systems that are not integrated; material internal
control weaknesses; and, as explained earlier, the inability to prepare
auditable financial statements on a routine basis. For example, USDA
and its agencies operate at least 80 program and administrative systems
that support financial management. The longstanding problems associated
with these legacy systems were caused, primarily, by the absence of
corporate level oversight and planning when these systems were
initially developed and upgraded. USDA needs to continue to address the
problems with its legacy systems to improve integration of the
financial management architecture, timely reconcile its property system
with the general ledger, and correct inconsistencies in its accounting
processes.
Additionally, the OIG continued to report that USDA's systems are not
designed to provide the reliable and timely cost information required
to comply with Statement of Federal Financial Accounting Standards No.
4, Managerial Cost Accounting Concepts and Standards. Specifically, the
OIG's review of user fees disclosed that two USDA agencies were not
including the full costs of their user fee programs when determining
fees and thus, were not recovering the full costs of performing
services for their individual programs.
Under the President's Management Agenda for improved financial
management performance, agencies are expected to improve the
timeliness, enhance the usefulness, and ensure the reliability of
financial information. The expected result is integrated financial and
performance management systems that routinely produce information that
is (1) timely, to measure and effect performance immediately, (2)
useful, to make more informed operational and investing decisions, and
(3) reliable, to ensure consistent and comparable trend analysis over
time and to facilitate better performance measurement and decision
making. This result is key to successfully achieving the goals set out
by the Congress in the Chief Financial Officers Act and other federal
financial management reform legislation.
In addition, the Joint Financial Management Improvement Program (JFMIP)
Principals have defined success measures for financial management
performance that go far beyond an unqualified audit opinion on
financial statements and include measures such as financial management
systems that routinely provide timely, reliable, and useful financial
information and no material internal control weaknesses or material
noncompliance with laws and regulations and FFMIA
requirements.[Footnote 7] They also significantly accelerated
financial statement reporting to improve timeliness for decision making
and to discourage costly efforts designed to obtain unqualified
opinions on financial statements without addressing underlying systems
challenges.
The OIG reported that the Office of the Chief Financial Officer has
developed plans to review USDA's legacy systems, and consolidate and
update the systems to meet present accounting standards and management
needs. Further, USDA's September 30, 2002, FFMIA Remediation Plan
discussed a number of remedial actions that the department expects to
complete by the end of fiscal year 2006.
Another financial management challenge for USDA is federal nontax
delinquent debt collection. USDA reported holding $6.9 billion of
federal nontax debt that was delinquent more than 180 days as of
September 30, 2002. The Debt Collection Improvement Act of 1996 (DCIA)
gave federal agencies a full array of tools to collect such delinquent
debt. Among other things, DCIA provides (1) a requirement for federal
agencies to refer eligible debts delinquent more than 180 days to the
Department of the Treasury for collection action, and (2) authorization
for agencies to administratively garnish the wages of delinquent
debtors.
In December 2001, we reported that two USDA agencies, Rural
Development's Rural Housing Service (RHS) and the Farm Service Agency
(FSA) had failed to make DCIA a priority since its enactment in
1996.[Footnote 8] Specifically, RHS had not implemented an effective
and complete process to refer debts to Treasury mainly because of
systems limitations, debt reporting problems, and lack of regulations
needed to refer losses resulting from claims paid under its guaranteed
single family housing loan program. FSA lacked effective procedures and
controls to identify and promptly refer eligible delinquent debts to
Treasury. Moreover, USDA had not utilized administrative wage
garnishment to collect delinquent nontax debts. Consequently,
opportunities for maximizing the collection of delinquent nontax debts
as contemplated by DCIA were being missed.
USDA officials made a commitment in December 2001 to substantially
improve the department's implementation of DCIA by December 2002. In
November 2002, we testified that USDA had made progress in addressing
previously identified problems.[Footnote 9] For example, RHS began
referring all reported eligible debt to Treasury. Further, FSA had
developed an action plan to improve its process and controls for
identifying and referring eligible debts to Treasury. However, at the
date of our testimony, challenges remained that will require sustained
commitment and priority from top management. For example, RHS still had
to complete regulations to refer losses related to its guaranteed
single family housing loans to Treasury and an automated process for
such referrals, and FSA needed to complete actions needed to ensure
that all of its eligible debt is promptly referred to Treasury. In
addition, USDA needed to complete regulations that are required to
implement administrative wage garnishment department wide and get all
of its component agencies to begin using this debt collection tool to
the fullest extent practicable. The OIG reported material noncompliance
with the DCIA in its fiscal year 2002 financial statement audit report,
reiterating the need for sustained commitment and priority by top
management.
Now I would like to discuss the progress that the Forest Service has
made toward achieving financial accountability and remaining
challenges.
Forest Service Financial Management:
An area of particular concern within USDA continues to be the Forest
Service. Historically, the Forest Service's financial management
systems have not generated timely and accurate financial information
for its annual audit and for effectively managing operations,
monitoring revenue and spending levels, and making informed decisions
about future funding needs for its program. In addition, the Forest
Service has had long-standing material weaknesses with regard to its
two major assets--fund balance with Treasury and property, plant, and
equipment. In 1999, we first designated financial management at the
Forest Service to be "high risk" on the basis of serious financial and
accounting weaknesses that had been identified, but not corrected, in
the agency's financial statements for a number of years.
The Forest Service received its first-ever unqualified opinion on its
fiscal year 2002 financial statements, which represents noteworthy
progress from prior years when the OIG was unable to express an
opinion. To achieve its unqualified opinion, the Forest Service's top
management dedicated considerable resources and focused staff efforts
to address accounting and reporting deficiencies that had prevented a
favorable opinion in the past. For example, during fiscal year 2002 the
Forest Service formed a reconciliation strike team to resolve long-
standing real and personal property accounting deficiencies. The
property, plant, and equipment reconciliation team analyzed transaction
data to identify inaccurate records and reconciled the general ledger
to its supporting detailed records. In addition, the strike team, in
cooperation with the USDA Office of the Chief Financial Officer, the
USDA OIG, and consultants, worked to ensure that property documentation
supported property records, inventories were complete, and property was
valued correctly. Further, the team worked with USDA on modifications
and enhancements to certain property feeder systems. Because the Forest
Service property comprises 80 percent of the $4.2 billion line item on
USDA's financial statements, the OIG was able to validate this number
for its fiscal year 2002 opinion.
However, material deficiencies in the controls related to the accurate
recording of property, plant, and equipment transactions remain. For
example, the financial statement auditor reported instances in which
recorded amounts did not agree with supporting documentation and
inappropriate payroll expenses were included in property values instead
of being recorded as expenses, resulting in an overstatement of
property and an understatement of expenses. Further, the Forest Service
did not have effective controls over the initial recording of
acquisition costs, in-service date, and useful life of property items.
Because the Forest Service did not require reviews of data input for
property transactions by a supervisor, another independent person, or
by automated system edit checks within property systems, certain
property items were not recorded properly.
While the Forest Service made significant progress in fiscal year 2002
to reconcile its fund balance with Treasury accounts, the financial
statement auditor noted significant control deficiencies in its
reconciliation processes. For example, the Forest Service needs to
research a large backlog of unreconciled items and take corrective
actions. In order to bring the Forest Service's fund balance with
Treasury accounts into balance with Treasury records as of September
30, 2002, the Forest Service recorded an adjustment of $107 million.
Although the Forest Service reached an important milestone by attaining
a clean audit opinion on its financial statements, it has not yet
proven it can sustain this outcome, and it has not reached the end
goal, as envisioned by the President's Management Agenda for improved
financial management and the JFMIP Principals, of routinely having
timely, accurate, and useful financial information. The Forest Service
continues to commit considerable resources to correcting its financial
management weaknesses; however, much work remains. In our January 2003
high-risk update, we again designated financial management at the
Forest Service as "high risk" on the basis of its serious internal
control weaknesses.[Footnote 10]
In closing, Mr. Chairman, I want to emphasize that USDA has made
significant progress in addressing its major challenges related to
financial management and continues to do so. At the same time, before
USDA is able to sustain financial accountability and produce relevant,
reliable, and timely information to effectively manage the department,
it and its component agencies, particularly the Forest Service, must
resolve some very difficult issues.
This concludes my statement. I would be happy to answer any questions
you or other members of the subcommittee may have.
Contact and Acknowledgments:
For information about this statement, please contact McCoy Williams,
Director, Financial Management and Assurance, at (202) 512-6906, or
Alana Stanfield, Assistant Director, at (202) 512-3197. You may also
reach them by e-mail at williamsm1@gao.gov or stanfielda@gao.gov.
Individuals who made key contributions to this testimony include Lisa
Crye and Jeff Isaacs.
FOOTNOTES
[1] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Agriculture, GAO-03-96 (Washington, D.C.:
January 2003).
[2] A disclaimer of opinion means that the auditor is unable to form an
opinion on the financial statements. A disclaimer results when a
pervasive material uncertainty exists or there is a significant
restriction on the scope of the audit.
[3] USDA records its budget authority in asset accounts called Fund
Balance with the Department of the Treasury and increases or decreases
these accounts as it collects or disburses funds.
[4] Accounting for Direct Loans and Loan Guarantees, Statement of
Federal Financial Accounting Standards (SFFAS) No. 2, as amended by
Amendments to Accounting Standards for Direct Loans and Loan
Guarantees, SFFAS No. 18.
[5] U.S. General Accounting Office, Debt Collection Improvement Act of
1996: Department of Agriculture Faces Challenges Implementing Certain
Key Provisions, GAO-02-277T (Washington, D.C.: Dec. 5, 2001).
[6] U.S. General Accounting Office, U.S. Government Financial
Statements: FY2001 Results Highlight the Continuing Need to Accelerate
Federal Financial Management Reform, GAO-02-599T (Washington, D.C.:
Apr. 9, 2002) and U.S. General Accounting Office, Fiscal Year 2002
U.S. Government Financial Statements: Sustained Leadership and
Oversight Needed for Effective Implementation of Financial Management
Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003).
[7] FFMIA requires auditors, as part of CFO Act agencies' financial
statement audits, to report whether agencies' financial management
systems substantially comply with (1) federal financial management
systems requirements, (2) applicable federal accounting standards (U.S.
generally accepted accounting principles), and (3) federal government's
SGL at the transaction level.
[8] U.S. General Accounting Office, Debt Collection Improvement Act of
1996: Department of Agriculture Faces Challenges Implementing Certain
Key Provisions, GAO-02-277T (Washington, D.C.: Dec. 5, 2001).
[9] U.S. General Accounting Office, Debt Collection: Agriculture Making
Progress in Addressing Key Challenges, GAO-03-202T (Washington, D.C.:
Nov. 13, 2002).
[10] U.S. General Accounting Office, High-Risk Series: An Update,
GAO-03-119 (Washington D.C.: January 2003).
