STATUS OF FINANCIAL MANAGEMENT AT THE

U.S. DEPARTMENT OF EDUCATION

HEARING
BEFORE THE

SUBCOMMITTEE ON SELECT EDUCATION

OF THE

COMMITTEE ON EDUCATION AND

THE WORKFORCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION

HEARING HELD IN WASHINGTON, DC, APRIL 10, 2002

Serial No. 107-56

Printed for the use of the Committee on Education

and the Workforce

82-131 pdf
For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800
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 ii

COMMITTEE ON EDUCATION AND THE WORKFORCE

JOHN A. BOEHNER, Ohio, Chairman

THOMAS E. PETRI, Wisconsin GEORGE MILLER, California

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan
CASS BALLENGER, North Carolina MAJOR R. OWENS, New York
PETER HOEKSTRA, Michigan DONALD M. PAYNE, New Jersey
HOWARD P. BUCK McKEON, California PATSY MINK, Hawaii
MICHAEL N. CASTLE, Delaware ROBERT E. ANDREWS, New Jersey
SAM JOHNSON, Texas TIM ROEMER, Indiana
JAMES C. GREENWOOD, Pennsylvania ROBERT C. BOBBY SCOTT, Virginia
LINDSEY O. GRAHAM, South Carolina LYNN C. WOOLSEY, California
MARK E. SOUDER, Indiana LYNN N. RIVERS, Michigan
CHARLIE W. NORWOOD, JR., Georgia RUBEN HINOJOSA, Texas
BOB SCHAFFER, Colorado CAROLYN McCARTHY, New York
FRED UPTON, Michigan JOHN F. TIERNEY, Massachusetts
VAN HILLEARY, Tennessee RON KIND, Wisconsin
VERNON J. EHLERS, Michigan LORETTA SANCHEZ, California
THOMAS G. TANCREDO, Colorado HAROLD E. FORD, JR., Tennessee
JIM DeMINT, South Carolina DENNIS KUCINICH, Ohio
JOHNNY ISAKSON, Georgia DAVID WU, Oregon
BOB GOODLATTE, Virginia RUSH D. HOLT, New Jersey
JUDY BIGGERT, Illinois HILDA L. SOLIS, California
TODD RUSSELL PLATTS, Pennsylvania SUSAN DAVIS, California
PATRICK J. TIBERI, Ohio BETTY McCOLLUM, Minnesota
RIC KELLER, Florida
TOM OSBORNE, Nebraska
JOHN ABNEY CULBERSON, Texas
VACANCY

Paula Nowakowski, Chief of Staff

John Lawrence, Minority Staff Director
__________

SUBCOMMITTEE ON SELECT EDUCATION

PETER HOEKSTRA, Michigan, Chairman

PATRICK TIBERI, Vice Chairman TIM ROEMER, Indiana

THOMAS E. PETRI, Wisconsin ROBERT C. SCOTT, Virginia
JAMES C. GREENWOOD, Pennsylvania RUSH D. HOLT, New Jersey
CHARLIE W. NORWOOD, JR., Georgia SUSAN DAVIS, California
BOB SCHAFFER, Colorado BETTY McCOLLUM, Minnesota
VAN HILLEARY, Tennessee LORETTA SANCHEZ, California
TODD RUSSELL PLATTS, Pennsylvania
 iii

TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................................................. i

OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA, SUBCOMMITTEE ON

SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S.
HOUSE OF REPRESENTATIVES, WASHINGTON, D.C.......................................................... 1

OPENING STATEMENT OF RANKING MINORITY MEMBER TIM ROEMER,

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE
WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. ..................... 3

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S. DEPARTMENT

OF EDUCATION, WASHINGTON, D.C. .................................................................................... 5

STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND

ASSURANCE, GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C. ......................... 10

STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S. DEPARTMENT OF

EDUCATION, WASHINGTON, D.C. ........................................................................................ 12

APPENDIX A -- OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA,

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE
WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. ................... 29

APPENDIX B -- OPENING STATEMENT OF RANKING MINORITY MEMBER TIM

ROEMER, SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION
AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. . 37

APPENDIX C -- STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S.

DEPARTMENT OF EDUCATION, WASHINGTON, D.C. ...................................................... 41

APPENDIX D -- STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL

MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING OFFICE,
WASHINGTON, D.C................................................................................................................... 59

APPENDIX E -- STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S.

DEPARTMENT OF EDUCATION, WASHINGTON, D.C. ...................................................... 73

TABLE OF INDEXES ................................................................................................................. 84

iv
 1

HEARING ON

THE STATUS OF FINANCIAL MANAGEMENT AT

THE U.S. DEPARTMENT OF EDUCATION

________________________________________________

WEDNESDAY, APRIL 10, 2002

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON SELECT EDUCATION,

COMMITTEE ON EDUCATION AND THE WORKFORCE,

WASHINGTON, D.C.

The subcommittee met, pursuant to notice, at 2:03 p.m. in Room 2175, Rayburn House
Office Building, Hon. Peter Hoekstra [chairman of the subcommittee], presiding.

Present: Representatives Hoekstra, Tiberi, Schaffer, Roemer, Holt, and Davis.

Staff Present: Cindy Herrle, Senior Budget Analyst; Patrick Lyden, Professional Staff
Member; Stephanie Milburn, Professional Staff Member; Deborah Samantar, Committee
Clerk/Intern Coordinator; Holli Traud, Legislative Assistant; Heather Valentine, Press Secretary;
James Kvaal, Minority Legislative Associate/Education; Maggie McDow, Minority

Legislative Associate/Education; and Joe Novotny, Minority Staff Assistant/Labor.

OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA,

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON
EDUCATION AND THE WORKFORCE, U.S. HOUSE OF
REPRESENTATIVES, WASHINGTON, D.C.

Chairman Hoekstra. A quorum being present, the Subcommittee on Select Education will come
to order.

We are meeting today to hear testimony on the status of the financial management of the
Department of Education. Under Rule 12(b), opening statements are limited to the chairman and
the ranking minority member of the subcommittee. Therefore, if other members have statements,
they may be included in the hearing record.
 2

With that, I also ask unanimous consent for the hearing record to remain open 14 days to
allow members' statements and other extraneous material reference during the hearing to be
submitted in the official record.

Without objection, so ordered.

Welcome back. I think you have all been here before. I was going to say, Bill, it might be
your first time in this capacity. It's your second time. This is the sixth in what has become a series
of hearings that we have held to examine the department's financial management practices.

We must be making progress, shown by the interest of our colleagues here today. It is not
quite as an exciting hearing or content as what we would have thought in the past, but I think that is
one of the reasons we have made some progress.

I believe we are going to have encouraging testimony from each of our witnesses which
will highlight some of the problems and the issues that we have had in the past, but that, in many of
those areas, we have either addressed the issues or we have made significant progress which is
leading us to the hope and the expectation that within the near future, we will be able to move
forward and, in tandem, be working on policy changes and have the basic foundation in place for a
solid financial and management control systems within the Department of Education.

I thank each of you for the contributions that you have made in enabling us to make that
progress and to get to those steps.

I am especially encouraged by the commitment made by the Secretary of Education,

Secretary Paige, in making this a priority and making it one of his key measurements as he goes
about implementing an agenda at the Department of Education.

I think that the focus, commitment and recognition that if he didn't, he would be up here on
a regular basis, with us asking the question why. However, he realized that that needed to be one
of his commitments, and I think it comes from his past professional experience heading up a large
urban school district, where accountability and financial management were an essential part.

So I he came there and we are thankful for that type of leadership and the team that he has
put in place. We are especially appreciative of the help of GAO in helping establish some
guidelines and some benchmarks and those types of things to kind of lead us and identify what the
problems, what the issues were, and some of the things that might need to be done to correct those.

Ms. Lewis, we are especially appreciative of the Inspector General's office. You have had a
lot of work over the last few years. Your staff this morning gave us, I think the good news is, that a
number of cases have been closed.

There have been a number of convictions, and the bad news is that we had to go through
that process, but it appears that in working with the Justice Department, the message has been
received that the Justice Department and the Inspector General's office are going to hold the people
within the Education Department accountable for their performance and the resources that are
 3

entrusted to them by the American people.

So I think the combination of the leadership within the department, the IG's office, and then
the contributions by GAO has enabled us to make the progress that we have made to date.

So thanks to each of you and I will be looking forward to hearing the progress reports from
each of you.

With that, I will yield to my ranking member, Mr. Roemer.

OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA, SUBCOMMITTEE ON

SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S.
HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. SEE APPENDIX A

OPENING STATEMENT OF RANKING MINORITY MEMBER TIM

ROEMER, SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON
EDUCATION AND THE WORKFORCE, U.S. HOUSE OF
REPRESENTATIVES, WASHINGTON, D.C.

Mr. Roemer. Thank you, Mr. Chairman. I ask unanimous consent that my entire statement be
entered in the record.

Chairman Hoekstra. Without objection, so ordered.

Mr. Roemer. Thank you, Mr. Chairman. Mr. Chairman, I will be brief in reading the statement. I
do want to welcome our witnesses before us, some which have testified two times, some probably a
half-dozen times.

Mr. Chairman, like you, I am very interested in ensuring that our tax dollars are being used wisely
and that the Department of Education's financial management practices are sound.

This is the sixth hearing that we have had on this in the last two years and I look forward to
the day when these hearings are no longer necessary.

I want to congratulate the department for working towards obtaining a clean audit and I
hope that next year it will indeed be a reality.

This was started by the Bush administration, the first Bush administration, almost 14 years
ago. Then Richard Riley and the Clinton administration took over and Deputy Secretary David
Kearns was in the early stages of making more needed changes. Secretary Riley made improving
financial management a high priority during his time as Secretary, and I am glad to see that
Secretary Paige shares this same level of commitment, and I am glad to see that President Bush
 4

makes this a priority.

The Clinton administration was committed to working towards a clean audit and ridding the
Department of Education of fraud and abuse. I am pleased with some of the positive steps that
have been taken.

The cohort default rate on student loans has declined for seven consecutive years and was at
a record low 6.9 percent at the beginning of this year. Collections on defaulted loans have more
than doubled from one billion in Fiscal Year 1993 to over $3 billion in Fiscal Year 1999.

Data improvement in the national student loan data system has prevented the disbursement
of as much as one billion in grants to ineligible students. But still more problems remain.

Mr. Hansen, I look forward to hearing about the improvements that you and Secretary Paige
have made so far. I hope that soon these financial management problems will be behind you, too,
so that you are freed up to work on important education policy areas, such as the Individuals with
Disabilities Act.

Mr. Chairman, thank you again for holding another hearing on this topic, and I look forward
to the day when, no offense intended, we don't see you before us six times in two years.

Thank you very much.

OPENING STATEMENT OF RANKING MINORITY MEMBER TIM ROEMER,

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE
WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. SEE
APPENDIX B

Chairman Hoekstra. Thank you, Mr. Roemer. Again, we have done this in a bipartisan way, in
trying to move and help the department move forward.

Let me introduce the witnesses, and then we have to go vote. But there is only one vote, so
we will be back relatively quickly.

We have with us again today Deputy Secretary Bill Hansen, the Chief Operating Officer
and the Principal Advisor to Secretary Paige on Programs, Policies, Management, and Budget
Matters.

There is a whole series of other things that Mr. Hansen has done prior to joining the
Education Department, which I will omit, that I am impressed by, but, Bill, it's good to have you
back.

We have Ms. Linda Calbom. She is the Director of the Division of Financial Management
and Assurance at the General Accounting Office. Linda, you have been here frequently. We are
 5

glad to have you back.

She is responsible for GAO's financial management work at many Federal agencies,
including HHS, SSA, Education, DOE, USDA, HUD, Transportation, Interior, and SBA, a certified
public accountant and certified government financial manager. Welcome back.

And we have Ms. Lorraine Lewis, the Inspector General of the U.S. Department of
Education, has also served as General Counsel at the Office of Personnel Management and with the
U.S. Senate Governmental Affairs Committee as General Counsel, Counsel, and Assistant Counsel,
a Bachelor's degree from Yale University and a juris doctorate degree from Harvard.

So welcome to you and we will hear your testimony as soon as we get back. That will be
about five to seven minutes, I would think. Thank you.

[Recess.]

Chairman Hoekstra. I think we're ready, Bill, to get started.

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S.

DEPARTMENT OF EDUCATION, WASHINGTON, D.C.

Mr. Hansen. Thank you, Mr. Chairman and members of the subcommittee. It is a pleasure to be
here again and also appreciate the comments that you made in introducing the work that we have
been about, and appreciate the leadership that the subcommittee has provided to us, as well as the
work of our Inspector General and GAO, in helping us identify the issues that we need to be
improving upon.

When I testified in July of last year, I reported that our immediate task was getting our arms
around the longstanding management problems.

We first had to identify where our weaknesses actually existed, and we did identify 661
outstanding audit improvement recommendations, and we have worked very aggressively to
implement corrective actions and to close out each and every one of these recommendations, which
I am pleased to say is done.

Moreover, we have identified an additional 93 audit recommendations since July and have
either implemented or developed a corrective action plan for each of them, as well.

We will continue to work closely with both the Inspector General and GAO to make sure
that we address any lingering management concerns and any new issues that will be arising as we
proceed into the future.

Our next task was outlined in October, when Secretary Paige and I released our Blueprint
for Management Excellence, which contained 140 concrete action improvement recommendations
targeted toward addressing the longer term and structural issues that hinder efficient and effective
 6

performance.

Since then, we have added 36 new action recommendations. These additional items are
aligned with the President's management agenda, which was released last fall and part of the budget
that was submitted in February, as well as the department's strategic plan, which was just released a
couple of weeks ago.

Since October, we have completed approximately 15 percent of these action items and are
making significant progress toward completing the others.

Our blueprint establishes a road map to realize further improvements and create
mechanisms for achieving accountability and high performance throughout the department.

These positive results were a direct result, also, of the creation of our Executive
Management Council, which I chair. This council represents pretty much our Board of Directors in
the Department of Education, with about four or five senior career individuals and four or five
political leaders that comprise the council.

I am also pleased to say that OMB agrees with our aggressive management approach, as it
is aligned with the President's management agenda. In fact, they recently opined that, and this is a
quote, ``Ed has developed robust plans to address longstanding problems pertaining to financial
management, high-risk in student financial aid programs, and IT security.''

The plans, of course, are not, by themselves, sufficient to ensure success. We must
continually monitor their implementation, make adjustments as needed, and devote the necessary
resources to ensure that we continue to improve performance and successfully address any
lingering problems we have not yet overcome. Simply put, we just have to do it. We are also
working in a public-private partnership. In accordance with the President's management agenda,
the department plans to publish a five-year human capital, strategic sourcing, and restructuring plan
in June of this year.

Employee teams are formulating plans, working with the advice and assistance of the
National Academy of Public Administration, the Private Sector Council, and the Council for
Excellence in Government.

The restructuring plan will address issues like maximizing workforce performance,
improving efficiencies in citizen access to our programs, and finding the right blend of department
employees and contractors to facilitate financial integrity and appropriate oversight of our
programs.

Our accountability team, I also testified in July that our biggest challenge was developing a
culture that emphasized individual responsibility and accountability.

In December, a team of employees from across the department completed a set of specific
actions with assigned ownership, clear timetables, and performance measures that will establish a
 7

mature culture of accountability within our agency.

These employees developed these actions based upon ideas and feedback obtained from our
fellow colleagues across the department.

We are also implementing a new appraisal process that emphasizes accountability. Every
senior officer, including myself, will sign a performance contract with Secretary Paige, holding us
accountable for results. Every manager and employee will also have a performance agreement that
reflects our goals and objectives and establishes clear individual job performance expectations.

On our financial statements, we recently received a qualified opinion from our 2001
financial statement audit. The results included one material weakness and three reportable
conditions. These results reflect noticeable improvement and significant process from last year's
three material weaknesses and two reportable conditions.

We are making steady progress toward our stated goal of obtaining our clean audit in fiscal
year 2002.

We did receive this qualified opinion for two primary reasons. First, we provided
insufficient evidence to support our general ledger balance adjustments, and, secondly, we did not
provide adequate documentation to support certain amounts in our consolidated balance sheets.

We made these adjustments to compensate for continued financial system and reporting
weaknesses during previous fiscal years. Although we have improved our account analysis and
reconciliation processes, our auditor did not feel that there was sufficient documentation to support
the accuracy or completeness of our corrections.

We have taken major steps to remedy our last material weakness by implementing a new
general ledger system, the Oracle Federal Financials, on January 22 of this year. We expect our
new accounting system to correct many deficiencies that resulted primarily from the lack of a fully
integrated financial management system.

This improves our chances of getting a clean audit in 2002 and will allow our managers to
obtain timely information they can use to make more productive program decisions.

We are currently reviewing our business procedures to ensure the integrity of our internal
controls, reconciliation processes, and account analysis procedures to take advantage of the new
system's capabilities.

Once the system and accounting processes are stabilized, we can fully address any
remaining problems with our older underlying data. I believe we will accomplish our goal in
getting a clean audit, but we still have much work to be done and a clean audit is actually a good
goal, but we want to make sure that we've got the right systems in place to effectively manage our
programs.
 8

Mr. Chairman, if I could just take one additional minute to mention our internal control
issues in responding to some of the issues that GAO has highlighted.

On the issue of inventory, we are continuing to re-engineer our asset management process
to implement proper internal controls. To improve our asset management policies and procedures,
we are centralizing inventory responsibility within our Office of Management, and documenting
our detailed property management procedures.

We are also incorporating contractor recommendations into our property management

procedures. We expect to issue these new policies and procedures in June 2002 and will hold our
employees accountable for following them.

We are also addressing specific issues that GAO raised, including recording our inventory
when initially purchased and appropriately securing and accounting for any items once they are
received.

We are increasing security to account for all of our inventory storage areas. We are testing
purchase orders and our principal office is to ensure that all received items are recorded as
inventory.

We are also taking appropriate steps to account for all the items that GAO was unable to
locate during its review. I would also like to note that after recently completing our own
reconciliation of physical inventory, we hired a contractor to conduct an independent inventory.

The contractor sampled 819 physical inventory items, representing 25 separate locations, a
broader universe than GAO used for its review.

Once completely verified by the contractors and ourselves, we had accounted for 99 percent
or all but five of the items.

We agree on an improper payment side of the equation with GAO that the Pell Grant and
loan disbursements made to students aged 70 years old and over may indicate potential ineligible
disbursements, when there is a higher than normal concentration of such disbursements.

We have installed several improvements to strengthen the integrity of these payments. For
example, we began a data matching process with the Social Security Administration's death records
and implemented our new recipient financial management system to increase our grant payment
controls.

Beginning in fiscal year 2002 and 2003, we will implement an edit to identify all applicants
that are 75 years and older.

In just December, a few months ago, we implemented a new process to identify and review
schools with abnormal concentrations of students with unique characteristics, such as age.
 9

On the purchase card issue, I also noted in my July testimony that we had taken several
important steps including significantly reducing spending limits and cutting up dozens of cards to
address insufficient internal controls on our purchase card program.

Since then, we have enacted important improvement measures. These include our new
electronic reconciliation and payment approval process and our recently updated directive that
strengthens policies and procedures by detailing cardholder and approving official responsibilities.

We have undertaken some very significant steps involving training, administering the span
of control, and developing sample methodologies and control systems to rectify this problem.

We, very frankly, must hold employees accountable for good government and for their
credit card misuse, and managers for enforcing our controls, and we recently conducted an internal
review of employee purchase card usage and we are going to review the actions of employees and
managers who do not follow appropriate policies and procedures.

Finally, on the student financial assistance programs, which Mr. Roemer mentioned, as
well, removing the student financial aid programs from off of GAO's list by fiscal year 2003 is a
top management priority of the secretary's.

Consequently, Secretary Paige met with the Comptroller General and we discussed the
major actions we need to complete and accomplish this goal.

GAO has outlined very specifically for us what we need to do. It includes strengthening
financial management, internal controls, implementing integrated information systems to
efficiently manage and control our programs, while administering high quality services, and
maintaining a balanced management approach that seeks to minimize default rates and non-
compliance, while promoting widespread program use.

Our new strategic plan also outlines our systems integration milestones in the student aid
office. The issues regarding improving customer service while maintaining accountability,
demonstrating a balanced school monitoring approach, providing a systematic income data match
with the IRS to improve student eligibility, partnering with guaranty agencies, lenders and schools
to improve default prevention, and improving default collections.

I would like to close by saying that the management improvements I have discussed today
will enable us to move toward our goal of becoming a model agency and have performance,
management, and program excellence.

Secretary Paige does want to do a good job. He wants to be the best in the entire
government, and that is the goal that we are working towards.

Mr. Chairman, that is my testimony, and I'd be open to answer any questions you may have.

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S. DEPARTMENT OF

EDUCATION, WASHINGTON, D.C. SEE APPENDIX C
 10

Chairman Hoekstra. Thank you. Without objection, I would like to submit your entire written
testimony for the record. Without objection, so ordered.

There are a number of things that you didn't go into in detail in your oral testimony. You
went over the part where, and maybe Ms. Lewis will get into these, you talked about the fraud
cases that were out there, with the indictments and the convictions that you have received.

So if that does not come up, we will cover that in the questioning, but I think significant
progress has been made in those areas, as well.

Linda?

STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL

MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING OFFICE,
WASHINGTON, D.C.

Ms. Calbom. Mr. Chairman and members of the subcommittee, I am pleased to be here today to
discuss the final results of our review of the Department of Education's disbursement processes.

My testimony summarizes our report that is being released today, and this report discusses
the internal control problems we found at the Department of Education, the resultant improper
payments, and we have made some recommendations for strengthening the department's internal
controls over disbursements.

As you well know, the department has a history of financial management problems. It
includes some very serious internal control weaknesses. The Inspector General and we have
reported on this over the last several years.

Given this history, you asked that we assess the adequacy of internal controls over their
disbursement processes. We looked at these processes between May 1998 and September 2000.

We focused on three areas, the grant and loan area, third-party drafts, and then, of course,
government purchase cards, and then we also took a look at the physical controls over the computer
equipment that was purchased with the third-party drafts, as well as the purchase cards.

I want to just briefly touch on our findings in each of those three areas, and, of course,
Deputy Secretary Hansen has talked about a lot of the actions that the department has taken to
address some of the issues that we found.

In the grant and loan area, we found that education lacked a key edit check and a follow-up
process that would help identify the schools that were disbursing Pell Grants to ineligible students.
 11

In our investigation, we found three schools that fraudulently disbursed about $2 million in
Pell Grants and another school that improperly disbursed about $1.4 million. There were 31 other
schools we identified that had similar types of characteristics. These disbursed about $1.6 million,
and, therefore, they warrant further investigation.

We were unable to determine the validity of other potentially fraudulent or otherwise

improper grant and loan payments that totaled $12 million, because the Department of Education
did not provide adequate supporting documentation.

We recognize these amounts are relatively small when you compare them to the total grants
that get disbursed on an annual basis, but they do represent an identified risk that could be easily
exploited. So we feel that it is important to follow up in this area, and I am happy to hear some of
the things that you are doing of late in response.

Our analysis of Education's third-party draft payment process disclosed significant internal
control weaknesses that increase the department's vulnerability to improper payments. When we
tested the third-party payment process, we found that Education employees circumvented a key
computer system application control that was designed to prevent duplicate payments.

And although segregation of duties is one of the most fundamental internal control
concepts, we identified some individuals at the department who could control the entire payment
process for third-party drafts.

And I'm sure as you recall, in a response to a letter from the subcommittee following the
April 3 hearing last year, the department took action to eliminate the use of these third-party drafts.

In our review of purchase cards, we found that the departments inconsistent and inadequate
authorization and review processes, combined with a lack of monitoring, to create an environment
where improper purchases could be made with little risk of detection.

Inadequate controls in this area resulted in fraudulent, improper, and questionable

purchases, totaling about $686,000.

For example, one employee made improper charges totaling $11,700 for herself and a co-
worker to attend college classes that were unrelated to their jobs at the department.

In another example, we identified almost $287,000 in questionable purchases for new

furniture and renovation costs related to office space that was soon to be vacated.

Further, the department could not provide any support for $152,000 of additional purchases
and did not know what was acquired with these funds.

The department also lacked adequate internal controls over computers acquired with
purchase cards and third-party drafts, which contributed to the loss of a 179 pieces of computer
equipment, valued at almost $212,000.
 12

Again, we found there was little or no segregation of duties in the office where most of the
missing equipment was purchased.

In addition, the department had not taken a comprehensive physical inventory of equipment
for at least two years and had not recorded almost $400,000 of computer purchases in its property
records.

These weaknesses created an environment in which computer equipment could be easily

lost or stolen without detection. The IG is investigating the disappearance of this equipment and as
Mr. Hansen indicated, again, I know there are some additional procedures that have been put in
place to enhance the physical controls over this equipment.

Mr. Chairman, I do want to give credit to the department for making a number of significant
changes to their policies and procedures in response to our findings and earlier recommendations
that we made to you, and, also, I know the letter that we provided regarding the high risk list.

There's obviously a move affront to change the culture at the department and this starts with
the tone at the top, and we are encouraged by what we see there.

While these changes are very positive, there are still some cases where the new policies and
procedures have not been effectively implemented and, therefore, there is some vulnerability that
remain.

The report we are issuing today makes recommendations that will help the department
further improve its controls to reduce its susceptibility to future improper payments.

That concludes my statement, Mr. Chairman.

STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND

ASSURANCE, GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C.SEE APPENDIX D

Chairman Hoekstra. Thank you. Lorraine?

STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S.

DEPARTMENT OF EDUCATION, WASHINGTON, D.C.

Ms. Lewis. Mr. Chairman and members of the subcommittee, thank you for the opportunity to
discuss the Office of Inspector General perspective on financial management at the Department of
Education. I will also update you on our internal controls work and some of our investigations.

While much work remains to be done, the department has made progress in financial
management. Examples of these improvements were noted in Ernst & Young's report on internal
 13

controls for the 2001 financial statement audit.

Secretary Paige's Blueprint for Management Excellence, in particular, represents a very

sound plan for action.

The report on internal controls contained one material weakness and three reportable
conditions. In 2000, there were three material weaknesses and two reportable conditions.

The department received a qualified opinion on all five of its financial statements this year,
as it did in 2000.

The department faces significant new challenges for next year's financial statement audit.
The audit will be due by February 1, one month earlier than in the past.

OMB will also require interim financial statements. In addition, the department will be
using a new system, Oracle Federal Financials, to prepare its 2002 financial statements. Our audits
of the implementation of Oracle did find some problems in testing, training, security, and certain
aspects of the development.

The department did not agree with all of our findings, but it has planned steps to address
shortcomings in the system.

We are particularly pleased that the department engaged an independent verification and
validation contractor contract, which is working side by side with the department now, to identify
any problems and recommend fixes.

Also, it is important for the department to focus on its interface between the department's
Oracle system and the systems that contain the critical financial statement from the Office of
Federal Student Aid.

We continue to examine the department's internal controls, a key factor in improving

financial management. The department needs to continue to establish and maintain strong internal
controls to safeguard its assets and to protect its programs and operations from waste, fraud, and
abuse.

GAO has performed valuable oversight work of the department's programs and operations
and has provided findings and recommendations, when implemented, should assist the department's
management improvement efforts.

The secretary has made a system of strong internal controls a top priority. He convened a
department-wide group to promote a culture of accountability and established an executive
management team to lead this effort. He has also continued in place the management improvement
team he established last year.

He has required all staff to complete on-line internal controls training by the end of this
month, and the Office of Inspector General has provided guidance to the department as it planned
 14

and prepared to provide internal controls training for its managers and supervisors, and that training
has already begun.

We are supporting this top-level effort to improve management by identifying any

inadequate internal controls that we have found based on our work in the department's operations
and programs.

We have appreciated the receptivity of the secretary, the deputy secretary, the executive
management team, and the management improvement team to our work. For example, we just
recently issued an audit of the department's travel card program and this audit took place while the
department itself was reviewing the travel card program, and many of the findings we made were
consistent with the findings the department made based on its own review.

In that audit, we found that employees using the travel card issued to them individually
made inappropriate purchases with this type of card. The billing for the card is made to the
individual who was responsible for paying back Bank of America.

It is not the department's responsibility to pay this bill for these individually issued cards.
We found cardholders had also made excessive withdrawals from the ATM machines.

For the individual transactions we reviewed, as I said, the department did not pay for the
inappropriate purchases or for the excessive ATM withdrawals. However, there were internal
control deficiencies we found in the travel card program, and the department has agreed with all of
our recommendations to improve internal controls and is planning corrective actions.

We also recently completed an audit of the purchase card program and we found some areas
needing attention. We recommended that the department reassess the number of cardholders
assigned to an approving official and conduct on-site reviews at locations where the purchase card
activity and approval are performed.

The department, again, agreed with our recommendations and is planning corrective action.

Our next audit will include transaction testing in principal offices to test adherence to the
department's new purchase card directive.

We have also developed a guide to assist other Inspectors General across the government in
reviewing purchase card use at their agencies.

Our investigations further assist the management improvement effort. These investigations
have led to arrests, guilty pleas, a conviction, and return of government funds to the department.
Since 1999, we have been conducting an investigation of a major fraud scheme involving a total of
19 people. Eight of these individuals worked for the department.

One employee, who oversaw a telecommunications contract, ordered computers,

televisions, other items for herself, family members, and friends. The scheme, as our statement
notes, led to more than $300,000 in property fraud and more than $700,000 in false overtime to the
 15

department.

Fifteen defendants have pled guilty in this case, including seven department employees.
One person went to trial and was found guilty on three charges. The remaining three defendants
are scheduled to go on trial later this year.

Our investigation of the diversion of impact aid funds led to approximately $1.7 million
being returned to the department. Since we last testified, two individuals in this case have been
arrested and we are working with the FBI to locate and arrest the third person. Three persons were
indicted in January.

This next matter is a new matter that we recently briefed you on, Mr. Chairman. Our
investigation of the Puerto Rico Department of Education led to indictments and arrests of 17
people, including the former Secretary of Education for Puerto Rico.

None of those indicted are U.S. Department of Education employees. The former secretary
and associate secretary of education from Puerto Rico have pled guilty already in this case.

Our work has led to 2.9 million in cash and property being returned to the U.S.
Government.

We look forward to continuing our work with Congress and the secretary and the deputy
secretary to ensure that the department's programs and operations serve the nation's students and
taxpayers with efficiency, effectiveness, and integrity, and I would be happy to answer any
questions.

STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S. DEPARTMENT OF

EDUCATION, WASHINGTON, D.C. SEE APPENDIX E

Chairman Hoekstra. Thank you very much. I appreciate that update, as well as the update that we
received today about the additional investigations that you can't talk about in public, and we will
obviously respect that confidentiality.

The cooperation and the effective working relationship it appears that you have developed
with Justice to get those kinds of not only indictments, but also the convictions. So congratulations
on that.

I'm trying to think of when we did the first hearings on this. We've done six in the last two
years, but we've had them before that, and I think that each time Mr. Roemer and I have started off
at just about the same position, saying we hope we're just about to the end of these hearings.

I think, Linda, in your testimony, you talk about, on page seven, the second complete
paragraph down, further, in July 2001, while we found evidence in the department's system that all
87 statistically sampled monthly statements had been reviewed by the cardholders' approving
official, 20 of the statements had inadequate or no support for items purchased, totaling $23,151.
 16

Based on our work, we estimate the most likely amount of unsupported or inadequately
supported purchases during these three months is $65,000.

The effectiveness of the department's new approval process has been minimized because
approving officials are not ensuring that adequate supporting documentation exists for all
purchases.

How comfortable are we or how comfortable are the three of you that we are reaching the
end of this process that we are really getting to the heart of the issues?

Because I think maybe before Mr. Holt joined the subcommittee, Mr. Roemer and I had
heard the rosy scenario a number of times and if I read this, it's kind of like, oh, man, you know, we
don't quite have it yet in this area, and if we don't quite have it, we're just setting ourselves up for
some more work by Ms. Lewis, which is we'd actually kind of like to put her out of work or lessen
her workload.

Who wants to start?

Ms. Calbom. I'll go ahead and start. I guess we feel that the department just has to do that last
little push. The things that are in place, I think, are good. It's just a matter of making sure that that
final follow-through occurs.

In this situation, we were glad to see that at least all the statements were approved, which is
much, much better than what we found before, and what they have now is a line-by-line approval.
Each transaction has to be approved.

But the problem is we received, in about 20 percent of the statements we looked at, there
was documentation missing. So that the person approving it, while they could see which vendor
the purchase was made from and what the dollar amount was, they wouldn't necessarily know what
was actually purchased.

So that's, again, much improvement, but that is really a key step in this whole process,
because as you know, with these purchase cards, that approval before payment is really the last and
final and almost kind of the only control. So it really needs to be airtight.

Chairman Hoekstra. Bill?

Mr. Hansen. Mr. Chairman, I would like to add that I think while we absolutely have the process
and the controls in place, as I said in my testimony, it's going to be execution and making sure that
the managers are reviewing each transaction appropriately, of course, follow-up.

I do believe that the system that we put into place is going to get us to the point where we
will be very, very secure about the integrity of the program.

We physically have to train people. We have to get this push down into each of the
managers and employees, anybody that holds a card, into their performance agreements. So that
 17

they understand if there is any misuse, it can have a dramatic impact upon their performance
evaluation, which could have an impact on their financial rewards or other things.

So it's going to be the execution. I think we've got the tools and the processes in place. I
am very pleased with the implementation to date, but we still have got to drive it down further and
make it effective across the board.

I failed to do this in my opening statement, but we do have two individuals with me today
that I have mentioned in passing to the subcommittee before, but two of the key members of our
senior team who, hopefully, if you ever have any more hearings, they might have the benefit of
being here.

Bill Leidinger is our new Assistant Secretary for Management, and Jack Martin, a Michigan
native, who is our new Chief Financial Officer. These two gentlemen bring collectively about 80
years, not to date their ages or anything.

Chairman Hoekstra. They started young.

Mr. Hansen. They bring private sector experience in dealing with very complex organizations and
also a lot of contracting work to the department, and we just are very pleased.

When we talk about forcing this down into the department, these gentlemen are going to be
responsible for making that happen, and they are both relatively new and have already had a huge
impact on making it happen.

Chairman Hoekstra. This is really kind of like your last opportunity to throw up your hands and
say we walked into such a mess, we can't get it done, and we couldn't get it done in a year and a
half.

Just take a look at the information that Lorraine has provided. You've have the
telecommunications fraud, you've have the impact aid fraud, you've have the purchase card fraud,
you've have the problem with the fraud in Puerto Rico, and each of those cases or at least, I guess,
in three of those cases, we've had people, a number of people pleading guilty, all of which of those
things are symptoms of the underlying problems that the department has to correct.

I don't know. Maybe Jack or Bill wants to say. I won't ask you.

Mr. Hansen. You are absolutely right. Most of these issues that we are talking about, with the
indictments and the court issues, all occurred previously with different systems, different control
mechanisms in place, and Secretary Paige will also be the first one to acknowledge that we own
this now and we are going to take responsibility for it, and that's also the reason we, frankly, are
about fixing it and making sure we don't have these problems going forward.

I will say, on some of these instances, like Puerto Rico, we can, I think, probably put just
about every internal control system into place that there is, but evil people are going to do evil
 18

things occasionally, and the important thing is to catch them when we can.

But there are a couple of these instances that I don't think any control system would have
prevented that type of activity from occurring.

Chairman Hoekstra. And I think we recognize that there is a distinct difference between evil
people doing evil things versus creating an environment where you foster or create the opportunity
for people to take advantage of a system.

Lorraine, did you want to add anything?

Ms. Lewis. One of the excellent parts of the new program is that there will be on-site monitoring.
The CFO office will be going to the principal offices and doing monitoring on-site of purchase card
transactions and as GAO's work has clearly indicated, whenever you have a monitor coming on-site
to test your transactions, that gets people's attention.

So that is a very key aspect of the part of the new directive that has come out of the
department, and I think that sends a very powerful signal to all the principal offices, all the
cardholders, and all the approving officials.

Chairman Hoekstra. The GAO also identified, either in this or a previous study, that the purchase
cards were used inappropriately to buy significant amounts of computer equipment.

Ms. Calbom. Yes. What we found there, we decided that we would start at the vendor and we got
serial numbers from the major vendor that the department uses, and then we went and we tried to
see if we could find those pieces of computer in the department's property records.

Chairman Hoekstra. These were purchases that were made by the purchase cards.

Ms. Calbom. Right.

Chairman Hoekstra. Which were not supposed to be allowed to buy computer equipment. Right?

Ms. Calbom. Exactly. See, we weren't even supposed to be using them in the first place; that is
correct. Right.

Chairman Hoekstra. Yes. And then there is the other question as to how much of that stuff is still
on-site, correct? Or how much you actually could find within the department.

Ms. Calbom. Yes. There are about, I think, a 179 pieces of equipment that we still weren't able to
find. From what we initially couldn't find, we found quite a bit of it.

Then when the department made their move, they had the contractor inventory the
equipment and they found some additional computers, but net-net, it ended up about a 179 pieces
of equipment that we still were unable to find that the department had actually paid for.
 19

Chairman Hoekstra. I've had one last question. If you take a look at it, you know who purchased
the stuff with a purchase card, right? Under the old process, if they made an inappropriate purchase
of computer or electronic equipment, that is documented that this person made that purchase, which
was against the regulations within the department.

Did your study take a look at what happened to the people who made the inappropriate
purchase? Was there a reprimand put into their file? Then, Bill, you could maybe answer, what
will happen to an employee who uses a card inappropriately in the future under the controls that
you have put it.

We'll begin with you, Linda.

Ms. Calbom. Those purchases actually are, I understand, under investigation right now. But in
some other cases, we did see some reprimands occur in some cases. In some cases, we didn't.

For instance, with the split purchases that we talk about, where people go over the 2,500-
dollar micro purchase limit, circumventing some of the competitive bidding requirements and
whatnot, in some cases, we found letters sent to the employees saying you shouldn't do this. In
other cases, we didn't.

So it was kind of inconsistent, and that is one of the key things that we feel needs to be
done, is that people do need to be held accountable. It sounds like the department is planning to
put some of those accountability type things in place.

Mr. Hansen. That is exactly right. The important way to put this into place is to drive it into our
performance agreements with each of our managers, as well as the employees. In particular, the
training that each of these individuals receives, they are made very much aware of the
repercussions that they will potentially face.

It obviously will depend on what the violation is, if it's a minor misstep or if it's really
trying to bypass the system. But the secretary just has an absolute zero tolerance for wrongdoing
and when people understand clearly what the standards are and what the thresholds are and it's in
their agreement and if they make a misstep.

We now are down to a very limited number of people that have purchase card capability,
and this will be a critical element, and every one of these individuals' plans, as well as their
supervisors, so they will all be held accountable through the performance evaluation, but also
through direct reprimand or whatever action is appropriate for any instance that might occur.

Chairman Hoekstra. Thank you. We appreciate the progress; appreciate the decisions and the
actions that you took on eliminating third-party drafts and those types of things.

With that, I will yield to my colleague, Mr. Holt.

Mr. Holt. Thank you, Mr. Chairman. I thank the witnesses for good testimony, but more
important, thank you for your efforts to make sure that the hard-earned taxpayer dollars from
 20

Michigan and from New Jersey are not wasted.

It is encouraging to hear, to the extent that you have put these things in perspective, the
scale of what you are talking about. Any dollar wasted, any hundreds of thousands of dollars
wasted are painful to people who have paid taxes that they have worked hard to earn that money.

But it is important, I think, to make sure that we keep this in the scale that there are tens of
billions of dollars of grants and loans and third-party drafts and so forth each year there.

And when the chairman says we may almost be at an end or previously we've said we may
almost be at an end, I don't doubt that, in a department of that scale, we will continue to find
problems, and if we want to be diligent in oversight here, this will not be at an end.

There will be ongoing oversight for decades to come, as long as we have programs of the
scale that we have and as long as there are some miscreants out there.

But I do want to make sure that this doesn't turn into partisan point making. It is easy to,
and well we shouldn't be too quick to condemn our predecessors, and I'm not saying that you have
been, or to pin medals on ourselves for accomplishment, and I'm not saying that you've done that,
either. But I just want to make sure that we don't, in the process, cast aspersions on the
hardworking, conscientious people in the Department of Education who were there in the 1980s
and 1990s and are there now in the 00s, no do I want us to cast aspersions on the programs of the
Department of Education.

What we are trying to do is make sure that they are run efficiently and that there is a culture
of accountability for every dollar that department spends.

Now, as I look at the auditor's report, which has not been discussed much here today, I find
that the qualified, so-called qualified opinion that the department received on the financial
statements, well, was about the same as what was received a couple of years ago.

So that it doesn't look like it is noticeably better in the period that I think the chairman was
criticizing. So we want to make sure that there is progress made.

As I look at the report, there are several specific questions. On page ten, Ernst & Young
notices a discrepancy of $300 million in how much the government is owed on guarantying student
loans.

They say, ``We also noted differences between the amount of the FFEL loans receivable
reported in the general ledger and the amounts reported by guaranty agencies. While much of the
difference may be appropriately accounted for in the allowance for a loss, a new unexplained
difference of approximately $300 million remained.''

What accounts for the missing $300 million and why, and this would be for you, Secretary
Hansen, why could the department not explain this difference to the satisfaction of the auditors?
 21

Mr. Hansen. Let me just also answer your first observation about history. One of the first things
Secretary Paige did when we came in, in fact, it was almost exactly a year ago this week, was
institute this management improvement team, and this management improvement team was a
network of about 12 of the top career individuals in the Department of Education.

We had nobody confirmed by the Senate this time last year, with the exception of the
secretary, and he very much did want to go in and find the best and the brightest managers in the
department and bring them together full-time to get our arms around the issues.

So we very much appreciate your comments about the quality team at the department, and I
think that is, frankly, the challenge of any administration.

One of my previous secretary bosses called us Christmas help, we're here for a season and
we're gone, and it is important for the career managers to make sure that they are part of the process
and developing the solutions to the problems.

On the audits, the guaranty agency issue, we are very much working. A lot of this is a
systems problem in terms of the way the data comes in from the guaranty agencies and how it's
reported and how it's accounted for.

I think it is very much agreed to that there are missing dollars here. It is an accounting
function and trying to align the reports up and how things were accounted for, and that is what we
are working on to get that corrected.

We have similarly had about a five billion dollar problem in the direct loan program of prior
year estimates that were over-estimated by about a billion dollars a year in each of the five previous
years, and had to work to come to an agreement with the auditors that that was not actual dollars.

It was an estimation issue that we had to work through, and that's the types of issues that we
are working through with the auditors.

Mr. Holt. Mr. Chairman, I do have another question. Should I proceed with that now?

Chairman Hoekstra. As long as it doesn't take too long.

Mr. Holt. I think the answer, the setup for the question will take a minute or so, but the answer, I
think, will be brief.

Deputy Secretary Hansen, back in 1998, Congress established a new type of government
entity to improve student aid management, this so-called Performance Based Organization, the
PBO.

The idea was to provide greater flexibility and independence in exchange for greater
accountability. The head of the PBO reports directly to the secretary and Congress explicitly gave
the PBO independent control of its budget, personnel, procurement, and administrative functions.
 22

Now, under your administration, it appears that the decisions of the PBO are being second-
guessed by a committee of education officials and the secretary's Management Blueprint appears to
offer what might be called micro management of the PBO, prescribing, as we count here, 70
specific actions mandated that the PBO take.

So this is moving away from this increased flexibility.

I guess the question that I have is a fairly specific one that could be answered fairly quickly,
I think. Are you repudiating the idea of a PBO?

Mr. Hansen. Actually, it's going to be a longer answer, absolutely not. When Congress created the
PBO in 1998, it was really done so because there were some major issues that were going on at the
time with some major shortcomings in the way in which the programs were being managed.

There were shutdowns of the consolidation loan program. There were major problems
getting the Federal application account. There are also contracts that account for about 750 million
a year that were to be integrated and to not have 12 different systems out there running, creating
duplication work for campuses, more complications for parents, and efficiency for taxpayers.

There is a stovepipe for Perkins loans, a stovepipe for Pell Grants, a stovepipe for National
Student Loan Data System, a stovepipe for direct loans, et cetera, and there was never one place
where you could go and find out which students have, if you put a social security number in, what
type of a loan or what type of a grant.

So that was the genesis for the PBO. Congress did two things when they created the PBO.
They gave the department broad authority to implement it. There was not a lot of mandate on how
to implement it. There was broad authority.

They gave it some independence in its contracting and hiring authority, but they did not
create an independent operation outside of the scope of the Department of Education.

The secretary of education was still accountable for the day-to-day activities, all the
program operations, all the Pell Grant issues we've been talking about today, the default issues
we've been talking about today.

The secretary of education is responsible and accountable for those activities. So this
notion that the PBO is somehow an island off on itself, not to be governed or under the
management of the Department of Education, is not what the statute intended.

It is very clear about statutory intent and the way in which it is implemented was done by
memorandum of understanding. It is an internal administrative decision on which authorities to put
over or under the umbrella of the PBO.

The previous administration made a decision, through five memorandums of understanding,

to give quite a bit of authority over to the PBO.
 23

This is a major piece of the operation of the Department of Education. I will just pull out
one example, and that's the financial management activities.

I don't think it's an efficient operation to necessarily have two different financial
management systems in the department when we are trying to get a clean audit. Frankly, we walked
into the office last year, both the CFO for the rest of the department, a separate CFO over at SFA,
was creating their own Oracle financial management systems.

They weren't talking to each other. This is not acceptable and this is, if anything, I think
you can talk to anybody in the department about how the coordination and cooperation is now
occurring and we are making much, much progress because we have people communicating in the
department now about the management improvement activities of the department, about the issues
that we are responsible for.

Mr. Holt. Thank you. Thank you, Mr. Chairman.

Chairman Hoekstra. Thank you. We didn't talk much about the audit for 2001. From my
perspective, it is one of the things I have given Bill the opportunity to do a number of times and he
refuses to take advantage of the opportunity.

But the audit for 2001, from my perspective, is really still the last statement of the financial
performance of the last Administration.

These individuals that are going to help Bill have just recently or relatively recently been
approved by the Senate, put on, brought in 2000. The audit for 2001 represents a good portion of
the work that was done before the new Administration ever came into office.

If any of the auditors will tell you anything, to get a clean audit, and this is why I still worry
about getting one for 2002, is garbage in, garbage out; that if you begin the year with poor data, it
is very difficult for an auditor, at the end of that year, to give you a clean audit, because they just
don't know what you started with.

I hope that we've have good information and that you're going to be able to address those,
but I think getting to a clean audit for 2002 is going to be a significant hurdle, and I'm glad this
team has taken that on as an objective.

But I think it's a tough hurdle to take, because I think they inherited a mess. The audit
reports speak for themselves.

Mr. Schaffer.

Mr. Schaffer. Thank you, Mr. Chairman. I have a number of questions. First, dealing with the 12
million that GAO could not determine in terms of the validity of grant loans, of loans and loan
payments and grants.
 24

Ms. Calbom, can you give us some examples of these payments?

Ms. Calbom. Yes. When we did our data mining and computer matching, we came up with a
population of potential improper payments. We gave those to the department and we asked them to
research those for us, get some documentation, and we did clear quite a few of the things that we
gave to them.

But as you said, we did have about $12 million in items we were not able to clear. I will
just give you a couple examples.

One, we've had a little over a million dollars where the social security number of the
individual was in the Social Security Administration's death records. The department now has a
death match that they do, but at that time, they didn't, at the time of our review. So that is one
instance that hasn't been cleared up yet.

Also, we had a little over $2 million in Pell Grant payments to individuals that are based,
again, on their birth dates in their applications indicated that they were younger than 12 years old,
and, obviously, we thought that was unusual.

Now, that being there is an error in the application or something, but, again, it's something
that needs to be followed up on.

We also have about three and a half million in Pell Grants to people that are 70 years old or
older. Again, there are some new matches to look at those. Of course, that's not to say that can't
happen, but there were a substantial number that you wouldn't expect.

And just one last example, we found about $1.6 million in loan payments to borrowers
whose Social Security numbers were not in SSA's records at all.

So those are the kinds of things we would like to see the department go ahead and continue
to follow up on, just so we can see where we stand on those things and we know where are risks are
as we implement our controls going forward.

Mr. Schaffer. So what happens when you find these cases? Do you trace these individual
recipients; try to find out what went wrong, what happened?

Ms. Calbom. What has to be done is you've got to go and go back and figure out, for instance, go
back to the application, figure out, okay, was there really just an error in this or is this really
somebody who is a child genius that's 12 years old that's going to college.

In some cases, you've got to go to the school to try to get documentation. I know the
department sent quite a number of requests to schools and didn't get any information back, which,
to me, is problematic in and of its self. If we're giving these schools grants, then it seems to me
they ought to be receptive to inquiry.
 25

Mr. Schaffer. Your report suggests that there are remaining concerns about an effective system to
trigger this unusual data. Can you elaborate on that?

Ms. Calbom. Yes. The department's new system they are going to put in is going to be helpful in
identifying patterns of unusual payments, such as the kinds of things that we looked at.

I know the department is interested in our procedures. We have already been sharing some
information on that.

The issue comes down to how much of this do you follow up on, because it's labor intensive
to follow up on it. We found, in the cases of discovered fraud, our Office of Special Investigations
actually went and interviewed the students on the campus, and that is how you determine, in that
case anyway, that is how we determined there was fraud, because there was actually some
falsification of records by the schools in the students' files, which made it look as if they were
eligible for the Pell Grants.

So the difficulty is it is time consuming to follow up on these things, and, again, we didn't
find that much of this type of fraud, considering how many dollars go through the system.

But one thing that was disturbing is two of the three schools we had investigated back in
1993 and it was the same type of a scheme going on, and, again, just the issue is once somebody is
able to do it, then others may follow.

So that is the concern.

Mr. Schaffer. Can you talk about the missing computer equipment, as well, 241 missing personal
computers and computer-related equipment, about $261,000? It says 179 pieces of equipment
remain missing.

Let's assume a certain amount of that is just outright stolen, but I guess I am more interested
in probably the majority of it, which is just misplaced or gone.

Can you tell me about those pieces of equipment that are just missing?

Ms. Calbom. We actually did an unannounced inventory to go try to find this equipment and my
folks, who are with me, behind me here, covered pretty much every square inch of the department.

They were, I guess, not escorted, but they had department people with them, and they really
did a head-to-toe search.

The equipment just doesn't seem to be there. Now, some of it, originally, I think we found,
initially, it looked there were 384 pieces of equipment that weren't in the inventory system. So we
went out and we tried to find those.
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We did find about 143 pieces of those. So we found a bunch of equipment that wasn't in the
department's system that should have been and it was there, physically there.

There were still, at that time, 241 pieces of equipment we couldn't find. The department
then contacted us later and said we found some more of this equipment.

They had located, they said, 86 pieces of equipment when they made their move and they
had a contractor do an inventory. They said would you come back in and look at it.

We came back in, but at that time that we came back in, we were only able to find 62
pieces.

So there is still something going on there. There was an explanation given, perhaps things
were surplus, but there were no records of that. So there is still some tightening up that needs to be
done on that.

The other concern that we found when we went back a couple times to look at the computer
equipment is we found brand new equipment still in the boxes that were in unlocked storage rooms
that were accessible. So there's still a physical control issue there that needs to be addressed.

Chairman Hoekstra. I don't think Mr. Tiberi has any questions.

Mr. Tiberi. No, Mr. Chairman.

Chairman Hoekstra. Thank you. I'd like to thank you for being here today. There probably will
be a seventh hearing in the series, but it may not be until there is some kind of intervening event,
whether Ms. Lewis discovers or the department discovers something else or whether we just come
and have a review of the audit for 2002.

That might be an appropriate time for an update, to give you a good ten, eleven months to
get the team in place and see where you can take it in eleven months and hopefully build on the
good work that I think all three of the groups here today are representing that they have done.

Just on behalf of this subcommittee, and I'm sure that I speak for Mr. Roemer, as well, your
willingness to work with us, and I think we can genuinely get to a point where we are on the verge
of getting a department that we feel good about in terms of the fundamentals.

It's not that we have said that there have been a disproportionate amount of fraud or waste
or theft within the department, but we want the department to be able to do the basics, and the
basics, one of the basics is providing a clean audit.

Most Fortune 500 companies do that on a regular basis. Most Fortune 1000 and other
companies do that on a very regular basis. There is no reason why that is a high hurdle for a
Federal agency to meet it.
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I would hope that that would be the minimal standard that a Federal agency would meet,
and then we can go on beyond that and talk about the actual performance and the impact that the
agency is having with the dollars that they are spending.

But I think all three of the groups and the organizations that you represent have done a lot
of good work in helping the department get there and have also helped the subcommittee to
navigate through this process, I think, in a bipartisan and a constructive process.

So with that, I thank you very much. The subcommittee will be adjourned. Thank you.

[Whereupon, at 3:27 p.m., the subcommittee was adjourned.]

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TABLE OF INDEXES

Chairman Hoekstra, 1, 3, 4, 5, 10, 12, 15, 16, 17, 18, 19, 21, 23, 26
Mr. Hansen, 4, 5, 16, 17, 19, 21, 22
Mr. Holt, 19, 21, 23
Mr. Roemer, 3
Mr. Schaffer, 23, 24, 25
Mr. Tiberi, 26
Ms. Calbom, 10, 16, 18, 19, 24, 25
Ms. Lewis, 2, 12, 18