Cumulatively, these weaknesses and the efforts  needed to resolve them to achieve sound financial management and  business processes are an important reason for amending the CFO Act to  include DHS and measuring DHS’s financial management systems and  internal control against the same important financial reform legislation and  performance expectations as other federal departments and agencies. In fiscal  year 2002 FEMA’s auditors reported six material internal control  weaknesses and that FEMA’s financial management systems were not in  substantial compliance with the requirements of FFMIA. In addition, like INS, Customs faces additional  financial management challenges because it was split into various  components. Steps for Establishing Sound Financial Management and Business Processes

Successful financial management of DHS will depend on the department  producing financial information that provides useful information for  executive decision making. After  studying the financial management practices and improvement efforts of  nine leading private and public sector finance organizations, we identified  several success factors, practices, and outcomes associated with world- class financial management. First and foremost, establishing the following goals is key to developing a  world-class finance organization with sound financial management and  business processes: (1) make financial management an entitywide priority,  (2) redefine the role of the finance organization, (3) provide meaningful  information to decision makers, and (4) build a team that delivers results. As you know, DHS is  not currently subject to the provisions of the CFO Act, and thus has no  legal requirement to comply with its provisions. DHS should  adopt these success factors in building a financial management team that  delivers results. Though creating and maintaining these  structures will be demanding and time consuming, it is necessary to  effectively implement the national homeland security strategy. We  are committed to working in a coordinated effort with the Congress, DHS,  and its auditors to provide advice to DHS on developing a sound financial  management structure that will facilitate, and not hamper, its mission of  securing the homeland. We believe that passage of H.R. 2886 will further  assist DHS in meeting this goal. Comments on H.R. 2886 as introduced on July 24, 2003 would  amend the CFO Act to (1) add DHS as a CFO Act agency and remove FEMA  as a CFO Act agency, (2) require DHS to obtain an audit opinion on its  internal controls, and (3) require DHS to include program performance  information in its performance and accountability reports. In addition, H.R. 2886 as introduced would have provided a waiver allowing DHS to forego a  financial statement audit for fiscal year 2003. We understand an agreement  has been reached to remove this waiver from the proposed legislation. The waiver option is, therefore, no  longer needed, and we support dropping the provision from H.R. 2886. Inclusion of DHS as a CFO Act Agency

We supported passage of the CFO Act in 1990 and continue to strongly  support its objectives of (1) giving the Congress and agency decision  makers reliable financial, cost, and performance information both annually  and, most important, as needed throughout the year to assist in managing  programs and making difficult spending decisions, (2) dramatically  improving financial management systems, controls, and operations to  eliminate fraud, waste, abuse, and mismanagement and properly safeguard  and manage the government’s assets, and (3) establishing effective  financial organizational structures to provide strong leadership. Appointment of the CFO by  the President, subject to Senate confirmation, is one way to help ensure  that the goals of the CFO Act are met and that has proven itself over time. Under the  Accountability of Tax Dollars Act of 2002, DHS, as an executive branch  agency with budget authority greater than $25 million, would be required to  obtain annual financial statement audits; however, its auditors would not  have to report on compliance with FFMIA. Auditor reporting on internal control is a critical component of monitoring  the effectiveness of an organization’s accountability. GAO strongly believes  that this is especially important for very large, complex, or challenged  entities. We fully support having DHS, as well as all CFO Act agencies, obtain an  opinion on its internal control. We strongly encourage DHS to  consolidate this information in its accountability report beginning with  fiscal year 2003. High-Risk Series: An Update. Major Management Challenges and Program Risks: Department of  Homeland Security. Homeland Security: Critical Design and Implementation Issues. Executive Guide: Creating Value Through World-class Financial  Management. GAO/AMID-00-134.
Why GAO Did This Study

Based on its budget, the Department of Homeland Security (DHS) is the largest entity in the federal government that is not subject to the Chief Financial Officers (CFO) Act of 1990. The department, with an estimated $39 billion in assets, an almost $40 billion fiscal year 2004 budget request, and more than 170,000 employees, does not have a presidentially appointed CFO subject to Senate confirmation and is not required to comply with the Federal Financial Management Improvement Act (FFMIA) of 1996. In addition, we designated implementation and transformation of DHS as high risk based on three factors: (1) the implementation and transformation of DHS is an enormous undertaking that will take time to achieve in an effective and efficient manner, (2) components to be merged into DHS already face a wide array of existing challenges, and (3) failure to effectively carry out its mission would expose the nation to potentially very serious consequences. In light of these conditions, Congress asked GAO to testify on the financial management challenges facing DHS, steps for establishing sound financial management and business processes at DHS, and GAO's comments on H.R. 2886, The Department of Homeland Security Financial Accountability Act.

What GAO Found

The Homeland Security Act of 2002 brought together 22 agencies to create a new cabinet-level department focusing on reducing U.S. vulnerability to terrorist attacks, and minimizing damages and assisting in recovery from attacks that do occur. Meeting this mission will require a results-oriented environment with a strong financial management infrastructure. Creating strong financial management at DHS is particularly challenging because most of the entities brought together to form the department have their own financial management systems, processes, and in some cases, deficiencies. Four of the seven major agencies that transferred to DHS reported 18 material weaknesses in internal control for fiscal year 2002 and five of the seven major agencies had financial management systems that were not in substantial compliance with FFMIA. For DHS to develop a strong financial management infrastructure, it will need to address these and many other financial management issues. Through the study of several leading private and public sector finance organizations (Creating Value Through World-class Financial Management, GAO/AIMD-00-134), GAO has identified success factors, practices, and outcomes associated with world-class financial management. Four steps DHS can take to begin developing sound financial management and business processes are to: (1) make financial management an entity-wide priority, (2) redefine the role of the finance organization, (3) provide meaningful information to decision makers; and (4) build a team that delivers results. H.R. 2886 can help facilitate the creation of a first-rate financial management architecture at DHS by providing the necessary tools and setting high expectations. The bill would (1) make DHS a CFO Act agency, (2) require DHS to obtain an opinion on its internal controls, and (3) require DHS to include program performance information in its performance and accountability reports. GAO fully supports the objectives of the CFO Act to provide reliable financial information and improve financial management systems and controls and believes DHS should be included under the act and therefore also subject to FFMIA. Further, GAO strongly believes that auditor reporting on internal control can be a critical component of monitoring the effectiveness and accountability of an organization and supports DHS, as well as other CFO Act agencies, obtaining such opinions. In addition, GAO supports agencies including program performance information in their performance and accountability reports and strongly encourages DHS to report this information voluntarily. Finally, as introduced, H.R. 2886 provided a waiver allowing DHS to forego a financial statement audit for fiscal year 2003. We understand an agreement has been reached to remove this waiver from the proposed legislation. DHS has committed to a 2003 financial statement audit, which is already underway. GAO supports dropping this provision from H.R. 2886.