Testimony of Linda M. Springer
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Controller, Office of Federal Financial Management Office of Management and Budget before the
Select Committee on Homeland Security October 8, 2003 Thank you, Mr. Chairman, for the opportunity to appear before you today to testify on accounting and financial controls system at the Department of Homeland Security (DHS). As you know, the enactment of the Homeland Security Act of 2002 (P.L. 107-296) represents an historic moment of almost unprecedented action by the Federal Government to fundamentally transform how the nation will protect itself from terrorism. Rarely in our country’s past has such a large and complex reorganization of government entities occurred with such a singular and urgent purpose. The government is undertaking a unique effort to transform a distinct group of agencies with multiple missions, values, and cultures into a strong and effective cabinet department. This unique opportunity comes with many challenges, including those related to the new department’s stewardship obligation to use tax dollars appropriately and to ensure accountability to the President, the Congress, and the American people. However, with great challenge comes great opportunity—both the opportunity to reengineer and develop seamless systems and processes that support day-to-day operations and the opportunity to provide analysis and insight about the financial implications of program decisions that will ultimately assist this Administration, the Congress, and other decision-makers in evaluating the value and cost of federal programs. Overview of DHS Financial Management The creation of the Department of Homeland Security marks one of the largest and most complex mergers ever undertaken by the Federal Government. As with any merger, some of the new Department’s efforts must focus on the most immediate challenges. Other efforts, however, by their nature will take several years to successfully develop and implement. For instance, cost control and asset management, coupled with the need to successfully blend individuals from departments and agencies with different cultures, values, and missions, are critical to its effectiveness and efficiency. In the face of the many challenges involved with its creation, DHS has demonstrated a strong commitment to financial excellence and should be recognized for its efforts during the past year. Although the creation of DHS began just seven months ago, it is off to a good start with regard to its financial management. DHS has shown commitment to preparing audited financial statements in its first year of existence to demonstrate accountability to the Congress and the American people, even though the Accountability of Tax Dollars Act of 2002 allows the Department to request a waiver from this requirement. This commitment, coupled with the preparation of quarterly financial statements, shows the Department’s determination to be fiscally responsible from its inception, accounting for all transferred assets, liabilities, and operations. DHS’ goal is to obtain an unqualified (clean) opinion for fiscal year 2003 and, if events permit, to issue its performance and accountability report on an accelerated timeframe. An early challenge DHS must overcome is to obtain a clean audit opinion on its financial statements, which will demonstrate tangible evidence of its efforts to create a premier financial management organization. Reaching that goal, however, will require a cooperative effort among the 22 entities that were transferred to the Department mid-year. Many issues have been raised regarding the proper accounting treatment of the new Department’s financial activity and its presentation in the financial statements that must be addressed. OMB has worked, and continues to work, with DHS to resolve these issues in a timely manner. Undoubtedly, new issues will surface, but we look forward to working with DHS to address them together. DHS must also begin to address the longstanding weaknesses inherited from its components, such as weak financial accounting and reporting processes, inadequate information technology (IT) systems functionality and security controls, ineffective real and personal property processes, and insufficient internal controls over duties and taxes. The Department has inventoried these weaknesses and developed corrective action plans, although these weaknesses are not yet resolved. DHS has already taken steps to integrate the diverse financial and performance information systems. It has identified the financial management systems to which the smaller component agencies may migrate beginning October 1. However, this step is just the first of many in a long process to streamline the Department’s systems. The Chief Financial Officer (CFO) must also identify the Department’s IT assets and then, in conjunction with each program, determine what IT assets are needed to meet mission requirements. The CFO must work with the Chief Information Officer (CIO) to identify a financial management system or systems to meet user needs, whether it be commercial-off-the-shelf, internally developed, or a hybrid of the two. Establishing Sound Financial Management and Business Processes The push to create a citizen-centered, results-oriented government has been exacerbated by the demands on available resources. It is necessary for financial managers to provide its management, this Administration, the Congress and other decision-makers with quality, timely information and analysis that better informs about the financial implications of program decisions and the impact of those decisions on agency performance goals and objectives. It is the responsibility of DHS management to put a process in place that sets performance measures consistent with its strategies, as well as sets goals for achieving its missions and objectives. OMB’s PART assessment supplements the Department’s performance reviews in the context of the budget process. In addition, DHS management must hold the agency fully accountable in order to attain sound financial management. OMB, along with the Office of the Inspector General (OIG), has the role of overseeing this process. OMB looks forward to continuing to work with the Department to ensure that DHS works to achieve sound financial management practices. OMB believes that DHS must focus its attention on four critical areas:
Ensuring Top Leadership. Leadership is critical to establishing sound financial management within the Department. The merger of 22 disparate entities into a single financial organization must begin with a clear vision of performance and expectations that is communicated throughout the organization at all levels. To be successful, DHS’ top leadership must make attaining that vision a priority, and the message must be reinforced in both words and actions. Creating the Financial Organization. A premier financial organization must recognize that it exists to provide quality, timely and relevant information about the financial implications of program decisions and the impact of those decisions on agency performance goals and objectives. To accomplish this purpose, leading financial organizations must serve their customers both internally and externally, aligning their mission and organizational structure to better support the entity’s mission and objectives. DHS should take all necessary steps toward creating a financial team that supports the overall missions, goals, and objectives of the Department. Seamless Financial Systems and Business Processes. Building a premier financial organization will also require DHS to establish seamless financial systems and business processes to enable it to successfully fulfill its mission and achieve its goals and objectives. At the earliest opportunity, DHS must determine the essential system and process infrastructure that it requires throughout the organization. This infrastructure must also be flexible enough to support information needs at the detailed program level. Providing Meaningful Information. In seeking to create a premier financial organization, DHS must also pursue means that will permit it to routinely generate reliable cost and performance information analysis. Such analytics combined with other value-added activities will support the agency’s mission and goals. This capability is a requirement for “getting to green” on the Improved Financial Performance initiative of the President’s Management Agenda, and it gets to the heart of first-class financial management. The creation of DHS provides an opportunity to reengineer much of the management reporting formats produced by its components to meet the needs of its users. As DHS looks to develop a new strategic plan that will outline its goals and objectives, its financial organization should design reporting formats that are aligned to measure performance in executing its strategy. H.R. 2886, “Department of
Homeland Security Financial OMB has high expectations of solid financial management practices for this new Department, especially in light of its unique role and function within the Federal Government. To that end, OMB appreciates your consideration of H.R. 2886, the “Department of Homeland Security Financial Accountability Act,” and we look forward to discussing several issues of this legislation with you. Fiscal Year 2003 Financial Reporting and Audit. The original version of H.R. 2886 contained a provision that lifted the requirement of DHS to prepare and submit audited financial statements for any fiscal year before fiscal year 2004. However, much work has been done, and continues to be done, toward the completion of the fiscal year 2003 financial statement process at DHS. Thus, OMB is pleased that the amended H.R. 2886 does not include this provision, and we commend DHS for its recognition of the value that is provided in this initial year by preparing and undergoing an audit of financial statements. Internal Control Audit Opinion. The amended H.R. 2886 contains a requirement for DHS to “include in each performance and accountability report an audit opinion of the Department's internal controls over its financial reporting,” beginning with its fiscal year 2005 report. Additionally, the amended H.R. 2886 would also require that a study regarding the potential costs and benefits of requiring this audit opinion be jointly performed and submitted by the CFO Council (CFOC) and the President’s Council on Integrity and Efficiency (PCIE), as well as analyzed by the Comptroller General of the General Accounting Office (GAO). The Administration acknowledges that obtaining an audit opinion on internal control is a potentially useful, yet very significant, undertaking. While we agree that an opinion level internal control audit could have merit, a review of this magnitude will require the allocation of additional resources and sufficient time to coordinate among agency Chief Financial Officers, Inspectors General, and independent public auditors. Additionally, this provision, if enacted, has the potential of imposing a more stringent requirement on DHS than other Federal departments and agencies. It is our understanding that this internal control audit opinion requirement is partly intended to hold Federal agencies to the same standards for financial accountability as the private sector. At the present time, however, no other sectors are required to obtain an audit opinion on internal control. While SEC registrants will be subjected in the future to such a requirement under Section 404 of the Sarbanes-Oxley Act (enacted July 2002), the effective date has been delayed as a result of public comments. This deferral recognized several different concerns, which would also apply to federal agencies. OMB is pleased that the amended version of H.R. 2886 includes a provision requiring a cost-benefit study. However, we are concerned that the internal control audit opinion requirement for DHS would take effect with the fiscal year 2005 report, despite any potential determinations by the joint CFOC/PCIE study and the subsequent GAO analysis that such a requirement is not beneficial. Thus, OMB supports delaying the requirement of an internal control audit opinion until after the results of the cost-benefit study can be carefully analyzed. Applying the CFO Act to DHS. It is OMB’s position that the substantive provisions of the CFO Act should apply to the new Department of Homeland Security as they do every other major Department and agency of the Federal Government. However, the CFO Act specifies an organizational structure – direct reporting of the CFO to the agency head – that is inconsistent with the structure Congress endorsed when it passed the Homeland Security Act of 2002. The Homeland Security Act enacted the President’s proposal to consolidate management responsibilities at the new Department under the Under Secretary for Management. The Administration believes that with a strong and competent leader in the position of Under Secretary for Management, sound management policies and practices receive maximum standing within the agency. I hope we can work together to apply the substantive provisions of the CFO Act to the new Department of Homeland Security, while remaining faithful to the President’s original proposal to create the new Department, as well as the Homeland Security Act of 2002. Conclusion OMB believes that DHS, in its short life, has demonstrated a commitment to sound financial management. Similar to the Committee, OMB has a strong interest in preventing potential waste, fraud, and abuse at DHS and at all federal agencies, and we look forward to working with the Department to ensure that its accounting and financial controls system are as effective and efficient as possible. Thank you, Mr. Chairman. I look forward to answering your questions.
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