TESTIMONY OF ROGER C. VIADERO
INSPECTOR GENERAL
OFFICE OF INSPECTOR GENERAL
U.S. DEPARTMENT OF AGRICULTURE
Before the
U.S. SENATE COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
on
FOREST SERVICE
FINANCIAL MANAGEMENT PRACTICES
September 23, 1998
Thank you, Mr. Chairman and members of the Committee. I am pleased
to be here to provide testimony about the Forest Service's financial management.
With me today is James Ebbitt, Assistant Inspector General for Audit.
Reliable financial data is essential to provide the basis for informed decision-making and program assessment. USDA has made significant strides in improving its financial management systems since the advent of the CFO Act in 1990, but much remains to be done, particularly with the Forest Service.
The Forest Service's financial statements are not reliable. Reliability is defined by the Financial Accounting Standards Board as "the quality of information that assures that information is reasonably free from error and faithfully represents what it purports to represent." Our annual financial statement audits, which we have performed since 1991, have only disclosed a limited correlation between the Forest Service's accounting numbers they report and the resources or events those numbers are to represent.
The weaknesses in the agency's financial management systems are long-standing and very significant. The deficiencies are prevalent throughout the accounting process, from the rudimentary recording of accounting transactions through to material internal control weaknesses at the National Finance Center (NFC).
Perhaps at the core of these weaknesses is the long-standing perception that management viewed itself in the role as the stewards of the nation's second largest aggregate land holding, and focused on all of the attendant resource issues to the detriment of financial management. However, financial data is also a resource and requires at least the same level of due diligence and caretaking as a stand of Douglas Fir or a riparian area. The accounting procedures to be used throughout the agency have been largely left to the discretion of the Forest Service Regions or even operating units. Many of the requirements that were established were so loose that the prospect of reliable records was rendered remote; in other instances, meaningful measures were prescribed, but not always complied with. This decentralized approach was not the sole cause of the inadequate accounting but most certainly has been a significant contributing factor. Since OIG's first financial statement audit in 1991 we have reported on the lack of reliable field level data. Without consistently and properly recorded individual transactions, summary financial information is meaningless. In the absence of necessary documentation, financial data is unverifiable. The so-called "audit trail" that allows auditors and managers to trace an accounting event from authorization to completion, has been nonexistent or severely lacking.
I will give you just a few examples of how porous accounting practices not only distort reported financial results but also greatly and unnecessarily increase the risks involved in safeguarding assets.
The Forest Service is the custodian of one of the largest assortment of physical assets in the Government. The total value of its land, roads, buildings, and equipment is currently reported by the Forest Service to be nearly $9 billion. Accordingly, managing these physical assets is obviously a matter that warrants the highest priority. Yet the Forest Service has not managed its property in that manner. Records have been so poorly maintained that it has been very difficult, if not impossible, to determine if all assets that should be at a location are, in fact, in place. For example, one year we found that the Forest Service reported to the General Services Administration that it had $9.2 billion in fixed assets while its own general ledger showed only $3.4 billion. The risk of dollar loss is immeasurable in that kind of environment because without reliable asset records you can't even begin to determine if losses have occurred or if assets have been properly deployed.
Without reliable records an entity's financial position cannot be known.
In 1995, for example, in an effort to clean up its records, one Region
increased the value of its roads by about $1 billion. Obviously the
roads had not been misplaced then relocated; rather an examination of prior
year expenditure reports disclosed innumerable miles of roads that had
never been recorded in the accounting records. A recent audit
report issued by the Office of Inspector General at the Department of Transportation
(DOT) stated that the
Forest Service responded to a national bridge inventory that it had about 3,000 bridges, whereas DOT believes the number to be twice that.
Accounts receivable have similarly been frequently distorted. For example, one of our recent financial statements audits found that the Forest Service had improperly recorded a $20 million tort claim stemming from a forest fire as an account receivable even though the probability of collection was nil. Accounts receivable are referred to as "liquid" assets in that they are expected to be turned into cash; inflating receivables distorts the agency's financial picture and can impair financing decisions by Congress because anticipated cash will not be available.
One of the most persistent problems that has plagued the Forest Service's financial management process concerns accounts payable. The Forest Service, at the operating level, has never been able to adequately distinguish between the recognition of the actual liability, the payable itself, which is to be established when the ordered goods or services are received, and an intermediary step in the process when funds are obligated but receipt is pending. Without getting into detail, governmental accounting principles require these actions to be treated very differently, impacting different types of accounts. We have found since the onset of our audits in 1991 that the Forest Service consistently confuses these two distinct actions, with error rates as high as 76 percent. This example reflects the institutionalized nature of the agency's accounting deficiencies. Since 1993, the Forest Service has computed its accounts payable balance statistically by identifying on its own the extent of errors likely to have occurred and projecting them over the universe of transactions, then adjusting the total. Instead of correcting the errors, the Forest Service tries to estimate how many were made.
The reliability of the Forest Service's financial data has been further
eroded by not properly matching debits with credits and by not having internal
controls in place to preclude or detect errors. For example, in 1993,
as part of the Exxon Valdez cleanup effort, the Forest Service collected
almost $9 million in reimbursements for its expenses and obligations.
The agency recorded this, however, as a negative adjustment to reimbursements
receivable. In other words, the records showed that the Forest Service
actually owed Exxon the $9 million. In another example, in 1992 we
found that portable radios, costing between $522 and $668 each, had been
entered into the personal property subsidiary accounting system by field
unit property clerks at acquisition values of between $94 thousand and
$91 million for each of at least 11 different radios. The aggregate
value as initially reported was $270 million at fiscal year end.
Forest Service officials could not explain why these amounts had been entered
incorrectly into the accounting system. Nonetheless, so obvious an
error should have been readily identified.
Another significant financial weakness that has impacted the Forest Service's operations is the matter of correlating financial activity with the budget process. In fairness to the Forest Service, it is not alone. OMB even deferred the requirement that agencies formally report on the reconciliation of the two from 1994 to 1997. Some of the Forest Service's processes are unique, however, and have made this essential accountability nearly impossible.
For example, we performed a review of deferred maintenance at the request of Congress. In its deliberations on the budget, Congress had asked the Forest Service to report on its backlog of unmet maintenance needs. The Forest Service responded that its backlog was about $7.5 billion. Although many of the outstanding maintenance requirements were no doubt routine in nature, like painting a building, others, such as bridge damage, potentially affect public health and safety and warrant prioritized funding considerations. We found, however, that the figure reported to Congress by the Forest Service was not supportable and represented a series of estimates based upon varying criteria. More importantly, perhaps, we also found that the Forest Service could not account for maintenance expenditures because appropriations were received along program lines, such as the "National Forest System" and not by functional activity, such as maintenance. Further, as funds work their way from the Washington Office to the specific targeted demands, such as repairing a bridge, they are absorbed throughout the process by the overhead needs of the Washington, Regional, and National Forest Offices. At the four forests we visited in this review, we found that overhead consumed between 32 and 50 percent of the funds available.
A method the Forest Service employs to charge expenses results potentially in a severe distortion of the deployment of funds when contrasted with Congressional intent. What I am referring to is the Forest Service's use of management codes to account for expenditures along program lines. The Forest Service uses over 100,000 management codes agencywide, most unique to the local levels. Each management code may consist of up to 99 lines of accounting which reflect, for example, the percentage of the distribution of project expenses to the various accounts. Management codes may be changed at any time without specific authorization, approval, or justification. Changing management codes results in the reallocation of incurred expenditures on a fiscal year basis. In other words, the capability exists, and is insulated from scrutiny because there is no audit trail, to move previously charged expenses from one budgetary account, where funds may have been exhausted, to another unrelated account which may be awash in funds. A recent consulting report prepared for the agency concluded that this raised "serious credibility issues within Forest Service financial management" and cites the perception of others that this process constitutes "cooking the books."
The adequacy of the agency's controls over this area is a longstanding issue. In June 1990, GAO issued a report entitled "Forest Service Is Not Consistently Implementing Charge-as- Worked Cost Reporting." The report stated, in part:
"Prior to 1988, the Forest Service emphasized the need to keep charges at or below budgeted amounts for each activity. As a result, managers often charged costs to the correct accounts only until the budgeted amounts were reached. They charged costs above budgeted amounts to other accounts that had available funds. Due to this practice, costs reported for specific budget line items often did not reflect actual expenditures for the associated activities. This inaccurate reporting of costs affected the accuracy of subsequent budgets because the planned line item amounts were based on prior years' budgeted amounts rather than actual costs."
In response to this condition, the then Chief issued direction that a "charge-as-worked" process for recording costs was to be implemented. The GAO report noted that this policy was not being consistently applied and recommended the establishment of detailed procedures and controls. Although the agency reported that this deficiency was rectified in 1995, our reviews disclosed that problems persisted. As a result, the agency reinstated this matter as a material management control weakness in its FY 1997 Federal Managers' Financial Integrity Act report.
The Forest Service has put forth several reasons why the capability to retroactively redistribute costs is necessary. One such reason is that it has numerous appropriation accounts and many of its activities are conducted in parallel with each other and may overlap. Accordingly, the flexibility afforded by updating management codes is warranted, per the agency, because priorities and conditions change which mandate a shift. We do not disagree with this position but note that internal budgets can be revised prospectively in response to unforeseen changes and prior activity can be modified via approved accounting adjustments. In addition, Forest Service instructions address this event in what is termed the "primary purpose principle basis." The agency established requirement is to "charge expenditures to fund/activity accounts on the basis of the principal purpose of the expenditure."
The Forest Service maintains that the capability is also needed because project plans are based upon budgets and actual funding may differ. For example, the amount of funds available may not be known until much of the fiscal year has lapsed because appropriations bills were not passed timely and/or the agency's Washington office was slow providing apportionment data to the field.
We obtained a listing from NFC that showed the last "effective" date of management code line changes (meaning the line may have been changed previously during the year) for FY 1997. The report showed that management codes were changed at least 269,000 times during the fiscal year. The last 4 months accounted for 53 percent of all effective dates with the final month, September, being 83 percent higher than the next highest month (which was the penultimate month, August). The timing of these changes epitomizes the potential risk and enforces the notion that the actions were undertaken to shift funding to those accounts which could absorb the charges from those where they had been incurred.
In response to our recent report, the Forest Service has agreed to sharply
curtail the use of management codes and to establish controls to govern
their use.
Let me now move to the Department's National Finance Center (NFC) located
in New Orleans. After the questionable accounting data has weaved
its way through the myriad of Forest Service manual and automated accounting
systems, it is fed into the Central Accounting System, or CAS. CAS
processes the data into the "BUDG" system for budgetary accounting purposes
and into the "LEDG" system for financial accounting. Although the
same information is input, it is categorized differently; management code
information, for example, is retained in BUDG, but not LEDG. Management
codes are initially processed by NFC by the first line of accounting only,
then "exploded" or distributed over the remaining lines of accounting.
Although the cause has never been established, the BUDG and LEDG systems'
results have been consistently out of balance. NFC has institutionalized
these errors, much as the Forest Service has with accounts payable, by
running automated adjustments to bring the two systems into balance without
establishing or analyzing the causes of the differences. In 1995,
for example, $55 million in adjustments to obligations had to be made.
Adjustments of this type are clearly not reconciliations but plugs.
Fund balances with Treasury also are plugged because NFC's true balances are not known. In 1997, for example, NFC adjusted its cash account by increasing disbursements by a net of about $1 billion and increasing its deposits by a net of about $175 million in order to agree with Treasury records. The reasons for the differences were not identified. CAS is poorly documented, provides for only summary, and not detailed, data and does not meet Governmentwide accounting requirements. CAS does not have an adequate audit trail and adjustments and so-called reconciliations are processed extensively and without adequate support. NFC is working to rectify these problems and has made progress identifying the systemic and other weaknesses which have caused this condition. Nonetheless, the CAS cannot produce auditable financial statements.
Major systems changes, of course, are huge and costly undertakings. As noted at NFC, the needs and problems of the Forest Service are not isolated. CAS processes data for over 30 other USDA agencies. But let me go back to the beginning regarding the problems, what has been initiated, and where the Forest Service and the Department stand. Forest Service management has had to restructure its thinking regarding financial management. Instead of an administrative nuisance which was given little priority, the agency, from top to bottom, has had to revamp its outlook and focus on the criticality of what financial information means, how it can be used to increase operational effectiveness and efficiency, and how it is essential to afford Congress the basis to make informed financing decisions.
A couple of years ago I met with the then Chief of the Forest Service, Jack Ward Thomas, and stressed these points. Mr. Thomas, a long time Forest Service resource manager and researcher, initiated the plans and mindset which have now been put into place as the result of our talk. I know the current Chief, Mike Dombeck, shares this view and recently testified before Congress that improvements are a top priority. The Forest Service has also now created and filled a Chief Financial Officer position which should greatly enhance the organizational structure.
Working in partnership with the Department's Office of Chief Financial Officer and my office, the Forest Service established an agencywide effort referred to as the "financial health initiative." Forest Service management has emphasized the importance of financial health to its line managers and developed core financial competency training for managers, financial staff, and others. Most staff have now received some training geared toward improving financial accountability. The Forest Service issued a financial health desk guide designed as a reference source for all staff to use in properly recording financial transactions. The desk guide provides uniform accounting instructions for accounts receivable, accounts payable, real and personal property, and other transactions.
The desk guide and training are intended to improve the quality of field level accounting data and compliance with Federal financial accounting standards. OIG has monitored field office efforts to improve data quality. Although units we reviewed have begun to implement national financial health plans, progress has not been adequate. The foremost failing has been that the desk guide has not been adhered to, thus perpetuating the lack of accountability. Further, although inventories of nonpooled assets are progressing, the valuation of those assets is frequently in error. In addition, the process of inventorying pooled assets, such as roads, which account for over $3 billion and nearly 40 percent of the value of all assets, has not yet been initiated.
The Department's remedial action plan revolves around the development of a new accounting system, called the Foundation Financial Information System, to replace the general ledger in CAS. The FFIS, as it is called, is supposed to bring USDA into compliance with Treasury, OMB, and Governmentwide accounting requirements. FFIS, which was originally proposed to be fully functional by October 1, 1998, has been plagued, however, by numerous problems and schedules have slipped. The central segment, or core, of the system is a commercial-off- the shelf product which has proven to work at other Departments. The Department, in consultation with the user agencies, opted to retain the legacy "feeder" systems at NFC, however, and interface them with the core package. We have monitored the evolution of the system and have reported concerns regarding the adequacy of the system's testing and the problems encountered by retaining the poorly documented legacy systems. Two Forest Service Regions and a Research Station began processing on FFIS on October 1, 1997. Significant problems have been encountered, however, and full implementation of the system has been deferred. The Office of Chief Information Officer recently contracted for an independent verification and validation of FFIS. The contractor's report indicated that further implementation of the system, as currently configured, bears great risk.
Among the current concerns in FFIS is the lack of a documented audit trail over the data processed by the front-end utilities, or feeder systems, that are interfaced with FFIS. As a result, transactions cannot be readily traced through from origination to final posting. In addition, because the edits in the feeder systems are not consistent with or identifiable by FFIS, records are suspensed. We found that security over suspended interfaced documents was inadequate to preclude alteration. Further, due to implementation problems stemming from the conversion of prior year's balances to the new system and incomplete accounting distribution, the Forest Service is not adequately cognizant of its status of funds. As a result, the potential for Antideficiency Act violations exists.
The contractor was also sharply critical of the Forest Service's management code explosion, referring to it as a "millstone around the neck of FFIS." The report noted that the process increased the difficulty in coding and testing and unduly saturated central processing unit time. The Forest Service, in response to our recent report, has agreed to eliminate the capability to redistribute expenses in FFIS. The Department is aggressively working to rectify all of the FFIS problems. A new management team has been brought in specifically to get FFIS functional as soon as possible.
Although the foundation has been laid, much work remains. The components that are needed to strengthen the Forest Service's financial management practices have been introduced; what awaits is the achievement of system functionality at NFC and the agency's fulfillment of the financial health initiative.