Department of Education
Status of Efforts to Address Major Management Challenges Gao ID: GAO-03-531T March 12, 2003In its 2003 performance and accountability report on the Department of Education, GAO identified challenges in, among other areas, student financial aid programs and financial management. The information GAO presents in this testimony is intended to assist Congress in assessing Education's progress in addressing and overcoming these challenges.
Education has taken steps to address its continuing challenges of reducing vulnerabilities in its student aid programs and improving its financial management, such as establishing a senior management team to address management problems, including financial management, throughout the agency. And, while Education has made significant progress, weaknesses remain that will require the continued commitment and vigilance of Education's management to resolve. Reduce vulnerability of student aid programs to fraud, waste, abuse, and mismanagement: Education has made considerable changes to address the ongoing challenges in administering its student aid programs. However, Education needs to continue to address systems integration issues, reduce fraud and error in student aid application and disbursement processes, collect on student loan defaults, and improve its human capital management. Improve financial management: Education has implemented many actions to address its financial management weaknesses. Significant progress was made recently when Education received an unqualified--or "clean"--opinion on its financial statements for fiscal year 2002. While this is an important milestone for the department, internal control and systems weaknesses remain that impede Education's ability to produce timely, accurate, and useful financial information for its managers and stakeholders.
GAO-03-531T, Department of Education: Status of Efforts to Address Major Management Challenges
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Testimony :
Before the Subcommittee on Select Education, Committee on Education and
the Workforce, House of Representatives:
For Release on Delivery
Expected at 2 p.m., EST
Wednesday,
March 12, 2003:
DEPARTMENT OF EDUCATION:
Status of Efforts to Address Major Management Challenges:
Statement of Linda Calbom
Director, Financial Management and Assurance:
GAO-03-531T:
GAO Highlights:
Highlights of GAO-03-531T, a testimony before the Subcommittee on
Select Education, Committee on Education and the Workforce, House
of Representatives:
Why GAO Did This Study:
In its 2003 performance and accountability report on the
Department of Education, GAO identified challenges in, among other
areas, student financial aid programs and financial management.
The information GAO presents in this testimony is intended to assist
Congress in assessing Education‘s progress in addressing and overcoming
these challenges.
What GAO Found:
Education has taken steps to address its continuing challenges of
reducing vulnerabilities in its student aid programs and improving its
financial management, such as establishing a senior management team to
address management problems, including financial management,
throughout the agency. And, while Education has made significant
progress, weaknesses remain that will require the continued commitment
and vigilance of Education‘s management to resolve.
* Reduce vulnerability of student aid programs to fraud, waste, abuse,
and mismanagement. Education has made considerable changes to address
the ongoing challenges in administering its student aid programs.
However, Education needs to continue to address systems integration
issues, reduce fraud and error in student aid application and
disbursement processes, collect on student loan defaults, and improve
its human capital management.
* Improve financial management. Education has implemented many
actions to address its financial management weaknesses. Significant
progress was made recently when Education received an unqualified”or
’clean“”opinion on its financial statements for fiscal year 2002.
While this is an important milestone for the department, internal
control and systems weaknesses remain that impede Education‘s ability
to produce timely, accurate, and useful financial information for its
managers and stakeholders.
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 major management challenges.
www.gao.gov/cgi-bin/getrpt?GAO-03-531T.
To view the full testimony, click on the link above. For more
information, contact Linda Calbom at (202) 512-9508 or calboml@gao.gov.
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the major management
challenges faced by the Department of Education, its progress in
addressing them, and challenges that remain.
As you know, this January, we issued our Performance and Accountability
Series on management challenges and program risks at major agencies,
including the Department of Education.[Footnote 1] The report for
Education focused on a number of management challenges and continued
the high risk designation for student aid programs. You asked me to
focus my testimony on two areas in that report. These are Education‘s
efforts to (1) reduce fraud, waste, abuse, and mismanagement in its
student aid programs while continuing to ensure access to postsecondary
education and (2) improve its financial management to help build a high
performing agency. Education has taken steps to meet these challenges,
such as establishing a senior management team to address management
problems, including financial management, throughout the agency. And,
while Education has made significant progress, including receiving a
clean opinion on its fiscal year 2002 financial statements, weaknesses
remain that will require the continued commitment and vigilance of
Education‘s management to resolve. I will discuss Education‘s student
aid programs and financial management in turn.
Student Aid Programs:
Ensuring access to postsecondary education while reducing vulnerability
of aid programs to fraud, waste, abuse, and mismanagement is one of the
key management challenges Education faces. Education helps millions of
students enroll in higher education programs by providing for more than
$50 billion in grants and loans annually. The department is responsible
for ensuring that these programs are efficiently managed, establishing
procedures to ensure that loans are repaid, and preventing fraud and
abuse. Since 1990, we have identified Education‘s grant and loan
programs as high risk for fraud, waste, abuse, and mismanagement.
Both Education and Congress have made changes to address management
challenges in the student financial aid programs. Congress established
Education‘s Office of Federal Student Aid (FSA) as a performance-based
organization in 1998. Its purpose is to increase accountability of
officials, provide greater flexibility in management, integrate
information systems, reduce costs, and develop and maintain a system
that contains complete, accurate and timely data that can ensure
program integrity. In 2001, Education established a Management
Improvement Team (MIT) of senior managers to formulate strategies to
address key management problems throughout the department. According to
Education, MIT has developed a system to identify, track, and resolve
audit and management issues both agencywide and in the student
financial aid programs.
Education has faced challenges in four areas related to its grant and
loan programs. These are (1) financial aid system integration issues,
(2) fraud and error in student aid application and disbursement
processes,
(3) defaulted student loans, and (4) human capital management. I would
now like to briefly discuss each of these challenges.
Education has spent millions of dollars to integrate and modernize its
many financial aid systems in an effort to provide more information and
better service to students, parents, institutions, and lenders.
Effectively and efficiently investing in information technology
requires, among other things, an institutional blueprint that defines
in both business and technical terms the organization‘s current and
target operating environments and provides a transition road map.
Because Education did not have this blueprint, commonly called an
enterprise architecture, we recommended in 1997 that the department
develop an architecture and establish standard reporting formats and
data definitions.[Footnote 2] In September 2002, Education‘s Office of
the Inspector General (OIG) reported that the department had made
progress in taking specific actions to lay the groundwork for an
enterprise architecture. Still, critical elements need to be completed,
including integrating separate architectures into a departmentwide
architecture and fully implementing common identifiers for students and
institutions to use in departmentwide system applications. Education is
planning to brief us shortly about the department‘s enterprise
architecture and progress it has made. Also, in April 2002, we
recommended that FSA and the department develop and include clear
goals, strategies, and measures to better demonstrate its progress in
implementing plans for integrating its financial aid systems in FSA‘s
performance plans and subsequent performance reports.[Footnote 3]
With respect to modernization plans, we reported in November 2001 that
FSA selected a viable, industry-accepted means of integrating its
existing data on student loans and grants.[Footnote 4] FSA has made
progress in implementing this approach for its Common Origination and
Disbursement process, which includes the implementation of a common
record that institutions can use to submit student financial aid for
Pell Grant and Direct Loan programs. The ultimate success of this
process, however, hinges on addressing serious postimplementation
operational problems and helping thousands of schools implement the
common record. Further, as we reported in December 2002,[Footnote 5]
FSA has not completed a number of elements that are important to
managing any information technology investment. These include
determining whether expected benefits are being achieved and tracking
lessons learned related to schools‘ implementation of the common
record. We have recommended that FSA develop metrics, baseline data,
and a tracking process for certain benefits expected from the system,
and that they develop and implement a process for capturing and
disseminating lessons learned to schools that have not yet implemented
the common record. FSA has begun to act on both of these issues.
Education has also faced challenges in ensuring that information
reported on student aid applications is correct and that adequate
internal controls are in place to prevent improper payments of grants
and loans. The department has taken steps, in two pilot programs with
the Internal Revenue Service (IRS), to match income reported on student
aid applications with federal tax returns.[Footnote 6] To continue this
income match and implement it on a broader scale, legislation to allow
the IRS to release the information is necessary. Education has worked
with the Department of the Treasury and the Office of Management and
Budget to ask that the Congress enact such legislation. The department
also verifies income information by asking 30 percent of applicants to
provide copies of their tax returns to their student financial aid
offices. In addition to strengthening its controls over student aid
applications, we found that Education also needed to address
institutions that were disbursing grants to ineligible
students.[Footnote 7] The department has taken steps to analyze student
data to identify high concentrations of students over 65 and eligible
noncitizens at individual institutions to determine whether problems
exist that warrant further review. These actions are encouraging, and
if properly implemented, should improve controls over these payments.
A continuing challenge for Education and FSA is preventing and
collecting defaulted student loans. While the national student loan
default rate has decreased from 11.6 percent in fiscal year 1993 to 5.9
percent in fiscal year 2000, the cumulative amount of defaulted student
loans has increased by almost $10 billion over the same period.
Education and FSA have implemented several default management
strategies, such as establishing electronic debiting as a repayment
option, and working with some guaranty agencies to set up alternatives
to service and process claims for defaulted loans. Our analysis of
FSA‘s internal documents indicated that for fiscal years 2000 through
2002, FSA met or exceeded many of the goals related to these
strategies. However, neither Congress nor the public can determine
whether FSA‘s default management goals have been met because Education
did not prepare performance reports that conform to the requirements in
the Higher Education Act. FSA‘s report to Congress on its performance
in fiscal years 2000 and 2001 was not timely nor did it indicate
whether or not FSA met established performance goals. We have
recommended that Education and FSA prepare and issue reports to
Congress on FSA‘s performance that are timely and clearly identify
whether performance goals were met.[Footnote 8]
Like other federal agencies, Education must address serious human
capital issues, such as succession planning, because about one-third of
Education‘s workforce is eligible to retire. In June 2001, we
recommended that the department develop human capital goals and
measures for its performance plans.[Footnote 9] In April 2002, we
recommended that the department and FSA coordinate closely to develop
and implement a comprehensive human capital strategy.[Footnote 10]
Education added a specific objective to its strategic plan, and in
2002, issued a comprehensive 5-year human capital plan that
incorporates FSA. This plan outlines steps and time frames for
improving human capital management and specifies four critical areas
where improvements should be made: (1) top leadership commitment,
(2) performance management, (3) workforce skills enhancement, and
(4) leadership and succession planning. It will be important that
Education focus continually on implementation of the plan to achieve
results.
Now, Mr. Chairman, I would like to discuss Education‘s financial
management challenges and the progress they have made in addressing
them.
Financial Management:
Weaknesses in Education‘s financial management and information systems
have limited its ability to achieve one of its key goals--improving
financial management to help build a high-performing agency.
Significant progress towards this goal was made recently when Education
received an unqualified--or ’clean“--opinion on its financial
statements. Prior to this, with the exception of 1997, Education had
not received a clean opinion since its first agencywide audit in 1995.
While this is an important milestone for the department, significant
management weaknesses remain that must be addressed for Education to
meet its goal in this area.
Beginning with the department‘s first agencywide audit in 1995,
Education‘s auditors have repeatedly identified significant financial
management weaknesses. These weaknesses included Education‘s inability
to provide the auditors with sufficient evidence to satisfy themselves
about the accuracy or completeness of certain amounts included in the
financial statements, including billions of dollars of adjustments to
amounts reported in previous years‘ financial statements. According to
Education‘s auditor, these adjustments were to correct ’unnatural
account balances“ or otherwise adjust balances to the amount
management‘s analysis supported. The auditor reported that in many
cases, the cause of the incorrect balances could not be definitively
determined, and the adjusting entry prepared by management was a
reasoned judgment of how to correct its accounts. Education‘s auditors
have also consistently reported major internal control weaknesses
related to financial management systems and financial reporting. These
weaknesses included (1) the absence of a fully integrated financial
management system, (2) deficiencies in financial management practices
that require extensive analysis of accounts to resolve errors through
manual adjustments, (3) the lack of a rigorous review of interim
financial data for timely identification and correction of errors, (4)
the inability to accumulate, analyze, and present reliable financial
information in the form of financial statements, (5) the dependence on
a variety of stopgap measures to prepare financial statements, (6) the
insufficiency of compensating controls, such as top-level reviews to
address and to seek to compensate for systemic control weaknesses, and
(7) the lack of a review to identify and quantify improper payments.
Education‘s auditors also reported that internal controls needed
strengthening in numerous areas relating to Education‘s investment of
millions of dollars in property and equipment.
Education has taken actions over the last several years to improve its
financial management and to address the weaknesses identified. For
example, during 2001, Education‘s MIT developed specific actions to
address issues raised in previous financial statement audits. According
to a MIT report on its accomplishments, Education began performing
certain critical reconciliations on a monthly basis and began preparing
interim financial statements, which helped identify areas needing
further study. Education also improved its internal controls over
property and equipment, and its auditor did not report this area as a
weakness in fiscal year 2002. In addition, according to Education‘s
auditor, during fiscal year 2002, the department implemented a new
general ledger software package and FSA implemented a new financial
management system to support their management information reporting
needs. The auditor also reported that the department implemented
several processes during fiscal year 2002 to improve its financial
management, including:
* convening the Accounting Integrity Board, the Audit Steering
Committee, and the Accounting Assurance Group to plan, implement and
manage quality accounting change control;
* establishing the Financial Statement Committee and continuing the
Financial Statement Preparation Team and other special task force teams
all of which are designed to improve the financial statement processes;
and:
* developing and implementing reconciliation work plans, policies and
procedures, specialized teams and regular management reviews of the
final work products as well as management review for process
improvement.
While Education has made progress in addressing many of its weaknesses,
in fiscal year 2002, the auditors again reported that significant
financial management issues continued to impair the department‘s
ability to accumulate, analyze, and present reliable financial
information. These problems, in part, resulted from inadequate internal
controls over Education‘s financial management systems and financial
reporting process. The auditor also reported that weaknesses in the
department‘s ability to report accurate financial information on a
timely basis were due to deficiencies in certain of the department‘s
financial management practices, including inadequate reconciliations
and account analysis early in fiscal year 2002. The auditor added that
issues associated with the transition to a new financial management
system in fiscal year 2002 also contributed to the department‘s
difficulties in these areas. While the auditor reported that it noted
improvements in the latter part of the fiscal year, it reported that it
continues to believe that the department needs to place additional
focus on reconciliation procedures, account analysis, and financial
reporting. Until these issues are fully resolved, Education‘s ability
to produce timely, accurate, and useful financial information for its
managers and stakeholders will be greatly impeded. In addition,
beginning with fiscal year 2004, Education and other major government
agencies will be required to produce audited financial statements
within 45 days after the end of the fiscal year compared to 120 days
for fiscal years 2002 and 2003. Education will need to continue to
focus strongly on resolution of its financial management deficiencies
in order to be in a position to meet these new reporting deadlines.
As we testified before this Subcommittee in April 2002, we identified
other internal control weaknesses that make Education vulnerable to
improper payments and lost assets.[Footnote 11] In our testimony and
related report,[Footnote 12] we stated that for May 1998 through
September 2000, weak internal controls over the (1) grants and loan
disbursement process failed to detect certain improper payments, (2)
third party draft processes increased Education‘s vulnerability to
improper payments, and (3) government purchase cards resulted in some
fraudulent, improper, and questionable purchases. We also reported that
Education lacked adequate internal controls over computers acquired
with purchase cards and third party drafts. Among other things, we
found that computer purchases valued at almost $400,000 were not
recorded in Education‘s property records, and $200,000 of that computer
equipment could not be located.
In response to our work, Education made several changes to its policies
and procedures to improve internal controls and program integrity.
These changes were a step in the right direction; but in many cases,
our follow-up work indicated that they had not been effectively
implemented. In March 2002, we reported that vulnerabilities remained
in all areas we reviewed, except for third party drafts, which were
discontinued altogether.[Footnote 13] For example, we reported that
Education developed a new approval process for its purchase card
program; however, our testing of 3 months of purchase card statements
under the new process found that over 20 percent lacked proper support
for the items purchased. In October 2002, Education told us that new
policies and procedures were implemented and aimed at reducing the
department‘s vulnerability to future improper use of purchase cards.
These new policies and procedures relate to reviewing and approving
purchase card transactions and providing related training. Further, the
department told us that misuse of purchase and travel cards is now
specifically included in the department‘s Table of Penalties with the
desired effect of reducing misuse and abuse of government issued credit
cards. Education also told us that it recognizes that reviewing and
improving internal controls is an ongoing task and that it intends to
remain vigilant in this area. These are positive steps that should help
reduce the instances of improper purchases.
Finally, Education will need to continue its actions in addressing
weaknesses in its financial management information systems. The Federal
Financial Management Improvement Act (FFMIA) of 1996 requires agencies
to institute financial management systems that substantially comply
with federal financial management systems requirements, applicable
accounting standards, and the federal government‘s Standard General
Ledger. Every year since FFMIA was enacted, Education‘s auditors have
reported that Education‘s systems did not substantially comply with the
act‘s requirements. In previous years, the auditors reported that
without a fully integrated financial management system, deficiencies in
the general ledger system, deficiencies in the manual adjustment
process, and the need to strengthen other financial management controls
such as reconciliation processes, collectively impair Education‘s
ability to accumulate, analyze, and present reliable financial
information. In addition, according to Education‘s auditor, although
the department implemented a new financial management system during
fiscal year 2002, issues associated with the transition to the new
system contributed to difficulties in providing reliable, timely
information for managing current operations and timely reporting of
financial information to central agencies; therefore, Education still
did not substantially comply with FFMIA‘s requirements.
Education also needs to address identified computer security weaknesses
in its financial management and other information systems. In September
2001, we reported that Education had made progress in correcting
certain information system control weaknesses.[Footnote 14] At the same
time, we identified weaknesses in Education‘s systems that place
critical financial and sensitive grant information at risk of
unauthorized access and disclosure, and key operations at risk of
disruption. We recommended that Education correct certain information
system control weaknesses and fully implement a comprehensive
departmentwide computer security management program. In response,
Education stated that it had developed a corrective action plan and is
taking steps to further strengthen and develop a more comprehensive
information security program. In addition, Education‘s auditor reported
that for fiscal year 2002, the department made progress in
strengthening controls over its information technology processes, but
needs to continue efforts to develop, implement, and maintain an
agencywide risk-based information security plan, programs, and
practices to provide security throughout the life cycle of all systems.
:
In closing, Chairman, I want to reiterate that Education is taking
actions and making substantial progress in addressing major challenges
related to its student aid programs and financial management. At the
same time, some very difficult issues remain that must be resolved
before Education is able to produce relevant, reliable, and timely
information to efficiently and effectively manage the department and
provide full accountability to its stakeholders.
Mr. Chairman, 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 Linda Calbom,
Director, Financial Management and Assurance, at (202) 512-9508, or
Robert Owens, Assistant Director, at (202) 512-8579. You may also reach
them by E-mail at calboml@gao.gov or owensr@gao.gov. Individuals who
made key contributions to this testimony include Lisa Crye and Diane
Morris. Numerous other individuals made contributions to the work
supporting this testimony.
(190091):
FOOTNOTES
[1] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Education, GAO-03-99 (Washington, D.C.:
Jan. 2003).
[2] U.S. General Accounting Office, Student Financial Aid Information:
Systems Architecture Needed to Improve Programs‘ Efficiency, AIMD-97-
122 (Washington, D.C.: July 29, 1997).
[3] U.S. General Accounting Office, Federal Student Aid: Additional
Management Improvements Would Clarify Strategic Direction and Enhance
Accountability, GAO-02-255 (Washington, D.C.: April 30, 2002).
[4] U.S. General Accounting Office, Student Financial Aid: Use of
Middleware for Systems Integration Holds Promise, GAO-02-7 (Washington,
D.C.: Nov. 30, 2001).
[5] U.S. General Accounting Office, Federal Student Aid: Progress in
Integrating Pell Grant and Direct Loan Systems and Processes, but
Critical Work Remains, GAO-03-241 (Washington, D.C.: Dec. 31, 2002).
[6] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Education, GAO-01-245 (Washington, D.C.:
Jan. 2001).
[7] U.S. General Accounting Office, Education Financial Management:
Weak Internal Controls Led to Instances of Fraud and Other Improper
Payments, GAO-02-406 (Washington, D.C.: Mar. 28, 2002).
[8] U.S. General Accounting Office, Federal Student Aid: Timely
Performance Plans and Reports Would Help Guide and Assess Achievement
of Default Management Goals, GAO-03-348 (Washington, D.C.: Feb. 14,
2003).
[9] U.S. General Accounting Office, Department of Education: Status of
Achieving Key Outcomes and Addressing Major Management Challenges, GAO-
01-827 (Washington, D.C.: June 29, 2001).
[10] GAO-02-255, 26.
[11] U.S. General Accounting Office, Education Financial Management:
Weak Internal Controls Led to Instances of Fraud and Other Improper
Payments, GAO-02-513T (Washington, D.C.: April 10, 2002).
[12] GAO-02-406.
[13] GAO-02-406, 30.
[14] U.S. General Accounting Office, Education Information Security:
Improvements Made, but Control Weaknesses Remain, GAO-01-1067
(Washington, D.C.: Sept. 12, 2001).
