BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON EDUCATION AND

THE WORKFORCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, MAY 5, 1999

Printed for the use of the Committee on Education

and the Workforce

STATEMENT OF CHAIRMAN PETER HOEKSTRA, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

STATEMENT OF RANKING MEMBER TIM ROEMER, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATION, COMMITTEE ON EDUCATION AND THE WORKFORCE *

STATEMENT OF HARRIS WOFFORD, CHIEF EXECUTIVE OFFICER, CORPORATION FOR NATIONAL SERVICE, WASHINGTON, DC, ACCOMPANIED BY WENDY ZENKER, CHIEF OPERATING OFFICER, CORPORATION FOR NATIONAL SERVICE, WASHINGTON, DC *

STATEMENT OF LUISE JORDAN, INSPECTOR GENERAL, CORPORATION FOR NATIONAL SERVICE, WASHINGTON, DC *

STATEMENT OF KARYN L. MOLNAR, PARTNER, KPMG LLP, WASHINGTON, DC *

APPENDIX A - WRITTEN STATEMENT OF CHAIRMAN PETER HOEKSTRA, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

APPENDIX B - WRITTEN STATEMENT OF RANKING MEMBER TIM ROEMER, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

APPENDIX C - WRITTEN STATEMENT OF HARRIS WOFFORD, CHIEF EXECUTIVE OFFICER, CORPORATION FOR NATIONAL SERVICE, WASHINGTON, DC *

APPENDIX D - WRITTEN STATEMENT OF LUISE JORDAN, INSPECTOR GENERAL, CORPORATION FOR NATIONAL SERVICE, WASHINGTON, DC, WITH AUDIT OF THE CORPORATION FOR NATIONAL SERVICE FISCAL YEAR 1998 FINANCIAL STATEMENTS, REPORT NUMBER 99-12, MARCH 24, 1999 *

APPENDIX E - WRITTEN STATEMENT OF KARYN L. MOLNAR, PARTNER, KPMG LLP, WASHINGTON, DC *

Table of Indexes *

House of Representatives

Subcommittee on Oversight and Investigations

Committee on Education and the Workforce

Washington, DC

The Subcommittee met, pursuant to call, at 10:15 a.m., in Room 2261, Rayburn House Office Building, Hon. Peter Hoekstra , Chairman of the Subcommittee presiding.

Present: Representatives Hoekstra, Schaffer, Roemer and Ford.

Staff Present: Robert Borden, Professional Staff Member; George Conant, Professional Staff Member; Jay Diskey, Communications Director; Patrick Lyden, Legislative Assistant; Deborah Samantar, Office Manager; Kevin Talley, Staff Director; Peter Warren, Professional Staff Member; Cheryl Johnson, Minority Counsel/Education and Oversight and Investigations; Sigrid Lott, Minority Legislative Assistant for

Congressman Ford; and David Clearly, Minority Legislative Assistant for Congressman Roemer.

Chairman Hoekstra. In light of the fact that there is no gavel, a quorum being present, the Subcommittee on Oversight and Investigations will come to order.

The Subcommittee is meeting today to hear testimony on the financial audit of the Corporation for National Service. Under rule 12(b) of the Committee rules, any oral opening statements at Hearings are limited to the Chairman and Ranking Minority Member. This will allow us to hear from our witnesses sooner and help witnesses keep to their schedules. Therefore, if other Members have statements, they can be included in the Hearing record. Without objection, all Members' statements will be inserted in the Hearing record

Chairman Hoekstra. Under rule 12(b) of the Committee rules, any oral opening statements at Hearings are limited to the Chairman and Ranking Minority Member. This will allow us to hear from our witnesses sooner and help witnesses keep to their schedules. Therefore, if other Members have statements, they can be included in the Hearing record. Without objection, all Members' statements will be inserted in the Hearing record.

Chairman Hoekstra. We are back. As Ms. Jordan said, it is our annual review and meeting, whether we need it or not. But the issue we are here to talk about today is not a new issue for the Corporation or this Subcommittee. Back when President Clinton proposed to create the AmeriCorps program and roll it in with existing service under the umbrella of the Corporation for National Service, I cast my vote with the President. I have been disappointed time and time again by the inability of the Corporation in general and in particular the AmeriCorps program to live up to the rhetoric and high expectations with which they were introduced. I am not talking in relationship to the service work that young people around the country are doing, but what I am disappointed in is how it has been handled back here in Washington.

President Clinton promised that the Corporation would be run like a private venture capital outfit, not like a typical federal bureaucracy. Many of us are still waiting for this to happen. On three previous occasions this Subcommittee has listened to testimony from auditors who explained to Members that the Corporation's financial books were in such disarray that they were literally unable to audit them. That sort of verdict, it goes without saying, would be the kiss of death for any private venture capital firm our any private sector firm. A financial audit does not reveal everything about how a Corporation is functioning, but the inability to receive an audit opinion speaks volumes.

At each of these previous Hearings, Corporation officials offered the same refrain: "Wait till next year." Next year we will have a clean audit. Next year we will have our financial house in order. Last time this Subcommittee convened to discuss the Corporation's audit status was in March of 1997. The Chief Financial Officer of the Corporation said that "we believe we can get all of our remaining material weaknesses under control by 1997 fiscal year end."

Well, fiscal year 1997 is history, and fiscal year 1998 has come and gone, and yet the fiscal year 1998 audit we will discuss today finds that six major material weaknesses identified in the Corporation's very first audit continue to exist today. This newest audit also found two additional material weaknesses not cited by auditors in the past.

It should be noted that the fiscal year 1998 audit did render an unqualified opinion on the Corporation's balance sheet. This is a step in the right direction. But when I see that all these material weaknesses continue to exist, I am skeptical that progress is occurring nearly as fast as taxpayers have a right to expect.

There is another item mentioned in the audit that concerns me greatly. This is the Corporation's year 2000 situation. Across the federal government, over 90 percent of mission-critical computer systems are now year 2000-compliant. In the near future, we are going to have an update presentation from the Departments of Education and Labor as to the progress that they are making, and as some may remember, it was about a year ago that we expressed serious reservations about the status of where the Education Department was and where they expected to be. We expect next week to get a report they have made significant progress towards becoming year 2000-compliant.

Last October, Wendy Zenker, the Corporation's Chief Operating Officer, told the Subcommittee that the Corporation had gotten off to a late start in addressing this issue and that she was particularly concerned about the accounting system. She said that she was about to enter an agreement with the National Science Foundation to move the Corporation's accounting data to an NSF hardware platform.

Well, that agreement apparently fell through shortly afterward, and the Corporation's most recent action plan states that implementation of the alternative plan for the accounting system has been postponed by a month, until the end of this July.

What is at stake? The auditor's report informs us that the Corporation's plan for transferring its accounting data to the new system could result in the loss of essential data. It could jeopardize the Corporation's fiscal year 1999 audit. The audit report also notes that the Corporation has no backup or contingency plan for its accounting system in the event of further unexpected difficulties or delays.

Today's Hearing, then, is intended to help us get to the bottom of the Corporation's financial management problems as well as its year 2000 readiness.

WRITTEN STATEMENT OF CHAIRMAN PETER HOEKSTRA, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATION, COMMITTEE ON EDUCATION AND THE WORKFORCE – SEE APPENDIX A

Chairman Hoekstra. Mr. Roemer.

Mr. Roemer. 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, sir. First of all, Mr. Chairman, I am grateful today for the opportunity to discuss the great organization and the wonderful things that the Corporation is doing across this great country. Every day participants in the AmeriCorps and Senior Corps are making a tremendous impact on the lives of their fellow citizens, and we can be proud of the impact that we are having across this great land.

Thank you, Senator Wofford, for joining us today. Your dedication, and your commitment to this organization is laudable. I agree that national service is extremely important to all of us here today and to our students across this country. Your leadership on this issue has won over many of your former critics, though not all, and I think we are all grateful for your passion and your dedication to this organization.

Since its founding, the Corporation has made a tremendous impact on our country. Participants in the programs operated by the Corporation are active in hundreds of communities, making a daily impact on the lives of people they work with. The Corporation calls on young people to become agents to foster growth and opportunities for all our communities. We have seen the Corporation provide opportunities to thousands of people to join in programs and activities that gave them the chance to give back to their own community. We have given them a chance to help knit our society together through the ability to do good things with and for each other. The Corporation is a potent agent of change providing leadership, innovation and valued service to our Nation. We owe Senator Wofford a great deal of thanks for his tireless efforts in leading the way for national service.

I also want to say on a personal note to Senator Wofford and to the Corporation how grateful I am for the support for Indiana programs; the ACE program, the environmental program, the program that helped the homeless in South Bend, and the cooperation and courtesy that your office has extended to these Indiana-based programs.

The debate about the existence of the Corporation has been settled. We support the existence of this Corporation. We know the Corporation has strong bipartisan support. We are here today to discuss the financial management of the Corporation.

I would mention as a side note that E.J. Dionne had a column the other day talking about John Kasich's change from being a critic of the Corporation to now being a supporter of what national service does across the country. Last year I joined with my colleagues Rob Andrews, a Democrat from New Jersey, and Chris Shays, a Republican from Connecticut, to introduce the bill with the First Lady to reauthorize AmeriCorps.

For the past few years, this Subcommittee has taken a close interest in the financial operation of the Corporation, and I respect the Chairman's interest in making sure that the Corporation is working well. We have learned that there are some problems with the financial management and some delays in fixing some of those problems. This is an issue of concern. We think we all agree that we need to make progress in resolving these problems rather quickly.

As the Chairman noted, this year the Corporation was able to receive an unqualified opinion on their statement of financial position. This is progress. I know that this progress and other things are going to be attained, and I hope that we can move quickly in solving these problems and solving some of the problems that have been pointed out with the audit.

Senator Wofford has also resolved to clearing these matters up as quickly as possible. This Subcommittee will continue to make sure that progress is made and that the outstanding financial management questions are resolved and the outstanding contributions that you make, Senator Wofford, through this organization continue to be available to the students across our country.

We will continue to support the Corporation and to make sure that the Corporation is able to continue to provide a leadership role in national service.

With that, Mr. Chairman, if I have any time, I yield it back.

WRITTEN STATEMENT OF RANKING MEMBER TIM ROEMER, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATION, COMMITTEE ON EDUCATION AND THE WORKFORCE – SEE APPENDIX B

Chairman Hoekstra. I was going to say, you mean your written statement was longer than that?

Mr. Roemer. I have plenty of accolades about what the Corporation is doing in Indiana, but I didn't want to bore you with all the details, Mr. Chairman.

Chairman Hoekstra. Great. Thank you. Let me introduce the panel for you today. We don't get instructions on how to vote. Why don't we go vote and then start with the panel. You are coming back?

Mr. Roemer. Yes.

Chairman Hoekstra. Excuse us.

Mr. Roemer. We will see who votes faster, too, Democrats or Republicans.

[Recess.]

Chairman Hoekstra. All right, the Subcommittee will reconvene.

Mr. Roemer. Mr. Chairman, do you want to hear my opening statement again?

Chairman Hoekstra. No, I thought it was so good the first time, and we have a gavel now.

We will hear from three witnesses today. Let me introduce them now. We will begin with Mr. Wofford, Chief Executive Officer of the Corporation for National Service. Mr. Wofford will explain the Corporation's most recent efforts to improve its financial management. Welcome back, Mr. Wofford.

We will have Ms. Jordan, the Inspector General of the Corporation for National Service. Ms. Jordan will discuss the results of the 1998 fiscal year audit and the state of the Corporation's financial management. Welcome back to you, Ms. Jordan.

We will also hear from Ms. Molnar, a partner at the accounting firm of KPMG. Ms. Molnar conducted the fiscal year 1998 audit for the Corporation. She will discuss how the audit was performed and help us to interpret its findings.

So, welcome. Thank you all. You all know the drill. You get 5 minutes. Your entire statement will be submitted for the record. I have a weak gavel, so if it takes a little bit more than 5 minutes, that is okay, but we would rather not have you go on as long as Mr. Roemer went on.

Mr. Roemer. Unless you have nice things to say about the Corporation.

Chairman Hoekstra. That is right.

Chairman Hoekstra. All right, we will begin with Mr. Wofford. Welcome back.

Mr. Wofford. Mr. Chairman and Congressman Roemer, Wendy Zenker, Chief Operating Officer of the Corporation is joining me today. Thank you.

Thank you for the good words about the service by thousands and thousands of AmeriCorps members and senior and RSVP volunteers in the country and in your districts. I appreciate also, Mr. Chairman, while I might have liked the Congressman's account of the full glass of service that the Corporation is doing, I appreciate your moderating any tendency I might have to see the glass more than half full by pointing to the part that is not full We have to get filled with the kind of efficiency and management controls that we all want.

Mr. Chairman, we know very well and appreciate the determination that you and the Committee have to see that the Corporation fulfills its responsibility as stewards of taxpayer dollars, and our obligation to administer the programs and finances efficiently. In the past, we have set ambitious goals, all of which we have not yet met. We haven't done it as fast as you wanted or as I wanted. However, there is nothing that I take more seriously than this responsibility to improve the management of the Corporation and to correct the weaknesses reported in the audit before you.

With the help of Congress and the support given last year by the Inspector General, we will be focusing our attention and resources on achieving solid and lasting solutions. That is our top priority.

First let me discuss our progress in obtaining an unqualified opinion on the Corporation's financial statements and our plans for the work that lies ahead.

As you know, prior to 1998, the Inspector General, as you pointed out, had found that the Corporation's books could not be audited. In July 1998, the Inspector General reviewed our progress and concluded that we could proceed with a partial audit for the fiscal year 1997. In October 1998, the Inspector General issued a qualified opinion on the Corporation's fiscal year 1997 statement of financial position. There were two qualifications and six material weaknesses.

Last month the Inspector General issued an unqualified opinion in the Corporation's fiscal year 1998 statement of financial position and a disclaimer on the other two statements. Thus, the Corporation has progressed from not being able to be audited to a qualified opinion and now an unqualified opinion on the statement of financial position. This is a major improvement. Most important, it puts us in a position to achieve our goal of an unqualified opinion on our fiscal year 1999 financial statements.

The recent audit identified eight material weaknesses. The Corporation has developed and is implementing a comprehensive action plan to correct those weaknesses. The action plan includes 203 specific tasks, which 103 we now believe are done. We are revising the plan to include corrective actions for the additional two material weaknesses identified in the in-depth audit and will be meeting with the Inspector General and with Ms. Molnar of KPMG to discuss these and other needed revisions.

The plan offers a clear path. Among the problems that plague us are outdated systems that the Corporation inherited from the predecessor agency. Improvements, I have learned, cannot happen overnight. Instead of trying to get quick fixes, we are seeking those lasting solutions to the financial and management problems. We selected and are implementing an accounting package called Momentum. Momentum will modernize our accounting operations, improve our funds control, and provide real-time, on-line access to data.

In order to make the transition to the new system less disruptive and be able to get an important part of our grant workload for the foster grandparents, senior companion and RSVP program out on time, we moved the implementation schedule back a month to July. We have a contingency plan should there be any unforeseen delays; however, we have a high degree of confidence that Momentum will work as planned.

Momentum is a software package developed by a leading software manufacturer, American Management Systems, AMS. It is year 2000-compliant and fully compliant with the Federal Government's financial system requirements. We know that Momentum works. It is currently used by other agencies successfully, and AMS has a history of successful performance.

Mr. Chairman, fully recognizing the seriousness of the issues we are discussing, I do want to emphasize for the Committee and the Congress the extraordinary success the Corporation has had in fulfilling the mission that Congress established. Six years ago Congress created a new agency and an extraordinary new decentralized structure for delivering national service resources to communities across the country. Carrying out this mission, the Corporation helps State and local programs engage more than 1 million Americans and citizen servers to meet community needs.

As you know, the Corporation provides grants and people power to thousands of nonprofit, educational and faith-based organizations working in education, after-school and community safety initiatives, public health and disaster relief. Those independent sector organizations provide administration and select the members and the volunteers in national service.

This partnership with the independent sector and, in AmeriCorps, with Governor appointed State commissions to which two-thirds of the grants go is the right structure for our mission and for our time. The success of this approach is borne out by independent evaluations that show the Corporation supported programs are making nonprofit organizations more productive, making communities stronger, and preparing young Americans for the future.

So even as we complete our job of improving internal systems and financial management, the Corporation is meeting the mandate Congress gave us to promote the patriotism of the home front and tap the power of citizen service to solve problems in our communities.

Mr. Chairman, I hope the Committee sees the distance the Corporation has come in improving financial management, understands our plan for the work to be done, and recognizes our commitment to completing the job. We will continue to report to Congress every 60 days as we implement the action plan. We need your support in making the Corporation the high-performing organization the country needs so that citizen service can be a greater force in our communities.

Thank you.

WRITTEN STATEMENT OF HARRIS WOFFORD, CHIEF EXECUTIVE OFFICER, CORPORATION FOR NATIONAL SERVICE, WASHINGTON, DC – SEE APPENDIX C

Chairman Hoekstra. Thank you, Mr. Wofford. Ms. Jordan.

Ms. Jordan. Thank you for this opportunity. Fear not, I am not going to read this report. It is far too long. Instead I want to present six points from the audit and provide information on the Corporation's progress.

First: Although the Corporation has made some progress toward producing financial reports which can be audited, serious financial management deficiencies remain uncorrected.

Second: Although the audit was intended to cover all of the statements, and although the audit was designed to include extensive audit procedures, KPMG was only able to issue a report on the balance sheet. The auditors were not able to render an opinion on the other statements.

The third issue is equally important. We are reporting eight areas of the Corporation's financial operations as materially weak. None of these material weaknesses are new.

Fourth: The deficiencies impact all of the Corporation's financial information, including the day-to-day information that the Corporation uses for decision making, budgetary information, and for its financial statements. The report indicates that the statements required corrections ranging from $1.4 million to $106 million. These were one-time corrections to certain information in the financial statements. Nothing else got fixed. Because the deficiencies have not been corrected, the reliability of other information remains questionable. The reliability of future information has not been improved.

Fifth: The Corporation's management control deficiencies extend beyond the financial statements. This report cites as a material weakness inadequate financial oversight of grantees and their sub-recipients. This is the network responsible for the majority of the Corporation's spending and its programs. In yet another report that we issued last September, we cited the Corporation's contracting and procurement processes as materially weak and vulnerable to fraud, waste and mismanagement.

In my sixth and last point on the audit, we also reported that the Corporation had failed to comply with Federal laws and regulations because it has not established an effective system to assess and report on its internal controls and because its information systems do not meet Federal standards.

The audit report contains 39 recommendations to guide the Corporation in correcting these eight areas. About half of the recommendations are new. The rest have been included in IG reports since March 1996 when we first reported these matters to you. In fact, over the past 3 years, we have made about 300 recommendations aimed at correcting financial management issues. More than 60 percent of these recommendations remain open.

The Corporation generally acknowledges the deficiencies and has initiated various strategies to correct them over the past years. The most recent action plan incorporates many of the open recommendations. As revised in February, it lists nine high-level management goals and numerous tasks related to 40 objectives.

However, our latest review indicates that as of April 21, 100 tasks are categorized as completed; however, to date, only 3 of the 40 objectives have been completed. There are no dramatic accomplishments. For many of the incomplete objectives, the remaining tasks are those that require the greatest amount of effort and those that are critical to accomplishing the goals. Therefore, although the Corporation can report progress in its action plan, in our view it is still too early to know whether and when the Corporation will effectively correct the deficiencies.

So, in closing, let me say that while there has been progress, additional improvements are essential. Yes, it is important that the Corporation's records are now able to be audited; however, while the auditors were able to issue an opinion on the balance sheet, the Corporation still has a great deal of work to do in order to receive an opinion on its full set of financial statements.

It is equally important to recognize that a clean opinion on the financial statements is but one objective of good financial management. The Corporation must strive for reliable information in all of its reports and reliable information to support its day-to-day management decisions.

Yes, it is imperative that the Corporation provide remedial attention to long-standing systems deficiencies now exacerbated by Y2K concerns. However, new automated systems will not fix problems resulting from a lack of clear policy guidance or a lack of accountability. Nor will the new systems improve long-standing weaknesses in program and contractor oversight. These are "people problems." The Corporation needs to address staffing issues ranging from the need for a Chief Financial Officer, to providing training for current employees, and to hiring a knowledgeable financial manager.

Therefore, because progress has, in fact, been slow, we continue to emphasis that correcting the Corporation's problems requires a serious and continuous commitment from senior management, a serious and continuous commitment of resources, and competent financial management and oversight.

WRITTEN STATEMENT OF LUISE JORDAN, INSPECTOR GENERAL, CORPORATION FOR NATIONAL SERVICE, WASHINGTON, DC, WITH AUDIT OF THE CORPORATION FOR NATIONAL SERVICE FISCAL YEAR 1998 FINANCIAL STATEMENTS, REPORT NUMBER 99-12, MARCH 24, 1999 – SEE APPENDIX D

Chairman Hoekstra. In 6-1/2 years I have never seen somebody speak their last word as the light went red. I think you were actually done with your statement.

Ms. Jordan. I have gotten better.

Mr. Roemer. I don't know how you can get any better than that.

Chairman Hoekstra. That is right. Ms. Molnar

Ms. Molnar. Thank you, Mr. Chairman, members of the Subcommittee. I also am pleased to be here today to testify regarding KPMG's audit of the 1998 financial statements of the Corporation for National and Community Service. Our audit was performed under the contract from the Office of the Inspector General and represents the first full-scope audit of the Corporation since its inception in 1994.

Our audit of the Corporation's 1998 financial statements was conducted in accordance with generally accepted government auditing standards. Those standards require that the audit be planned and performed to provide reasonable assurance that the financial statements are free of material misstatement.

Audit procedures are performed on a test basis to obtain evidence to support the amounts and disclosures in the financial statements. They are also performed to determine whether the accounting principles used are proper and significant estimates made by management are reasonable in the circumstances. We also perform procedures to determine if the information in the financial statements is presented in a meaningful manner for the intended users.

The nature, timing and extent of audit tests to be performed depends on how much reliance an auditor can place on the internal controls established by management. Internal controls are designed to provide reasonable assurance that transactions are executed in accordance with laws and regulations; that assets are safeguarded against loss from unauthorized acquisition, use or disposition; and that transactions are properly recorded, processed and summarized to permit the preparation of financial statements in accordance with generally accepted accounting principles.

If internal controls are effective, the amount of detail testing can be reduced. If they are not effective, extensive detail testing is required to become satisfied as to the fair presentation of the financial statement amounts.

Based on our knowledge of the Corporation's control environment and the results of our 1997 audit procedures, we determined that we could not rely on internal controls to reduce the extent of audit tests for the 1998 audit. Therefore, we performed very extensive detailed tests of the account balances in order to support our conclusion on the fair presentation of the 1998 financial statements. Our audit procedures identified numerous accounting errors, many of which were corrected by the Corporation. However, Corporation management was unable to find support for certain errors related to current and prior year activity or to provide us with an acceptable explanation.

After all identified adjustments were made to the 1998 financial statements, we were able to satisfy ourselves that the statement of financial position as of September 30, 1998, was materially correct. As a result, we issued an unqualified opinion on the statement of financial position. But we issued a disclaimer opinion on the related statements of operations and changes in net position and cash flows.

Our independent auditors' report also include eight reportable conditions mentioned by Ms. Jordan in her earlier testimony which we considered to be material weaknesses in internal controls. These are presented in detail in our report, along with our recommendations for improvement.

While all of these matters are serious and deserve management's prompt attention, we believe the most significant issues relate to deficiencies in financial management and reporting, the general control environment and the current financial systems. I will briefly discuss these three internal control weaknesses.

The Corporation's Chief Financial Officer resigned in the summer of 1998, and the deputy CFO resigned a few months later. As of the end of March 1999, the Corporation had not permanently filled either open position. Other turnover in key accounting personnel has occurred, and in August 1998, the new chief accounting officer joined the Corporation. This lack of consistent and knowledgeable financial leadership by people who had institutional knowledge significantly hindered the fiscal year 1998 financial reporting process.

The general control environment sets the tone of an organization and thereby influences the level of control consciousness and provides its discipline and structure. As noted earlier, the Corporation is operating with less than optimal personnel resources, which has contributed to the current weakness in the general control environment. Without a strong general control environment, internal control weaknesses will continue, increasing risks and inefficiencies and reducing the reliability of financial data.

Limitations on the financial system currently in use by the Corporation have hindered its ability to compile reliable and meaningful financial reports. The system does not provide the Corporation with an effective means for control of financial activity at the detail fund level, thus requiring the Corporation to manually accumulate and summarize this level of information for financial reporting purposes. In addition, as you noted, the general ledger is not year 2000-compliant.

The Corporation has recognized the shortcomings of its current system and is in the process of implementing a new financial system. However, the potential for errors to occur in the data conversion process and for other unforeseen circumstances to occur which could delay start-up of the new system, or result in failure altogether, is a significant risk for the Corporation.

In conclusion, I would like to note that the appointment of a knowledgeable Chief Financial Officer and the successful implementation of a new general ledger system will be of significant benefit in improving the overall financial management of the Corporation. However, little time remains before fiscal year 1999 comes to a close, and much still needs to be done. The Corporation cannot depend on these two events to solve all their problems. It will take the commitment and concerted effort of everyone, senior management, program and administrative staff, at service centers and headquarters, to get the job done.

I appreciate the opportunity to be here today and would be happy to answer any questions you have.

WRITTEN STATEMENT OF KARYN L. MOLNAR, PARTNER, KPMG LLP, WASHINGTON, DC – SEE APPENDIX E

Chairman Hoekstra. Thank you. This is still pretty ugly. I am glad for the progress, Harris, but I think over the years my level of or my response to this has been patience, anger, and I think I have moved to frustration. I am not sure what to do.

What was the authorization and the appropriations for the Corporation last year?

Mr. Wofford. $714 million. A little over $700 million.

Chairman Hoekstra. And over the life of the Corporation, since it was approved, what have been the total appropriations? Do you have an idea? We must be somewhere between, what, $3 and $4 billion?

Mr. Wofford. I am not sure it is quite that much. I can get you that figure momentarily, I think, from my colleagues in this room.

Chairman Hoekstra. We are now in the billions of dollars and $750 million last year. What Ms. Jordan and Ms. Molnar are telling us is that on an annual basis, or at least last year, it was an appropriation of over $700 million. I always get confused here talking about government years. Last year for us still means fiscal year 1998. We have a whole list of things that we have talked about over the last 3 years, and there is progress, but we haven't solved the problem.

Ms. Molnar, do you also do auditing? KPMG does auditing in the private sector as well, right?

Ms. Molnar. Yes, sir, that is correct.

Chairman Hoekstra. Are you fairly familiar with the other parts of the company and what they may do? How many $750 million corporations that are listed on the New York Stock Exchange or on NASDAQ last year did not have books that could be audited.?

Ms. Molnar. If they are listed on the stock exchange, I am sure they had books that could be audited.

Chairman Hoekstra. How many of them? There wouldn't be any that didn't have books that could be audited, and there wouldn't be any that over a period of 3 to 5 years every year could not be audited? This is a question I have asked before.

Ms. Molnar. I wouldn't think so.

Chairman Hoekstra. You know so. You are not under oath. We didn't swear you in. But my guess would be is we know that, right, that there are companies that do this and do this year in and year out?

Ms. Molnar. That is correct.

Chairman Hoekstra. Mr. Wofford, can you give us a 3-year rundown of CFOs at the Corporation? How long people have been in the job? How long the position has been vacant? Do we know that? Do you know that, Wendy?

Mr. Wofford. I can work back. The Chief Financial Officer was drafted from us, to move to the Internal Revenue Service last August, and she had been there approximately 2 years. When I came, Gary Kowalsik, I believe, was the acting Chief Financial Officer. That is able to be corrected. Am I correct? So that is the count of my tenure.

The same summer we lost our Chief Operating Officer to become the Secretary of the Army. In that case, we were very fortunate that with the help of OMB, one of the most outstanding people they could suggest to us, and someone who has proved to be that, Wendy Zenker, was rapidly made available and took charge of the audit process, working with me and our management team.

The process of filling a CFO position, which requires Senate confirmation, and before that White House nomination, and before that FBI vetting, and before that a selection process, is exceedingly frustratingly slow, from my point of view.

We have identified an outstanding candidate who is ready, willing and able to move in and take charge and work with the COO and me. That candidate is being vetted by the White House. We hope it is in the last stage of the process I just described. We hope very much that process will be completed very soon.

We fully agree, we need that CFO.

Chairman Hoekstra. In your statement, you indicated that meeting the ability to be audited or just the financial standards was one of the highest, if not the highest, priority at the Corporation. I believe that is consistent with the things that you and others from the Corporation have said previously.

You also indicated that the implementation of the new system had been delayed for a month; is that not correct?

Mr. Wofford. For good reasons, yes, sir.

Chairman Hoekstra. And the reasons were that there would not be any disruption in the grant process and those types of things; is that correct?

Mr. Wofford. Wendy Zenker might want to supplement that, but that is a key part of it.

Ms. Zenker. Yes. We had originally scheduled an implementation on June 30th. It turned out that to bring momentum up on June 30th would have required us to stop processing transactions into the old system in early June. We determined that we needed to get some grants out by the end of that month, so we have delayed it up to 30 days.

Chairman Hoekstra. Just please don't tell me that getting the financial accountability is your highest priority. That decision indicates to me that the highest priority is getting the money out and not getting the system up to speed. This has now gone on for way too long. You either have to be serious about getting this done and bite the bullet and say, we are going to delay grants, and we are going to get this thing financially accountable. Get it up to the standards that the law means, but don't come in and tell us it is your highest priority and then relay to us decisions that said, well, we delayed it for a month because we need to get grants out. The highest priority for you in that case was to get the grants out and not to address the concerns that you are facing here.

I am not going to go back. I have to believe there are other cases where you are making trade-offs, and to me it appears that, at least in that case, the trade-off is getting the money out and not necessarily getting the system up to speed.

Harris, you know how I feel about this. I mean, this is unacceptable. This keeps going on year after year after year, and there are thousands of companies and thousands of people in the real world that do this each and every day. It is either your highest priority, or it is a lagging kind of thing that it would be nice to have.

I can tell you, I believe that Congress is letting you get away with this, because this is not acceptable behavior. It is not acceptable for the Corporation, and it just does not meet the smell test.

Mr. Wofford. Mr. Chairman, when we discussed the decision to delay, the factors were a little more complicated than that. The transition to the new system is crucially important. We do have a contingency plan that will not lose data, and the shutdown does not mean that we are losing data, but it does mean that for that period of time, the new grants are not put into the data system.

I don't think your answer adequately reflected the discussion that you had as to why this extra time for testing was needed for making sure that that system was going to work. When we put the new data in it coincided with the value of getting the grants out to the senior programs.

Ms. Zenker. You are correct.

Mr. Wofford. If I remember the discussion, it was viewed as very prudent to provide extra time to see that the system was going to work.

Ms. Zenker. There were a series of factors that influenced our decision to delay a month. Getting nine grants out was one aspect. There were other concerns we had, both having to do with the data conversion plans, as well as the interfaces that are being programmed with external systems that we operate with. So there were a series of factors that influenced that. The grant process was one factor, but there are others.

Chairman Hoekstra. We will have more opportunity. Mr. Roemer

Mr. Roemer. Thank you, Mr. Chairman.

Certainly in my opening statement I said that we are getting beyond the question of whether or not AmeriCorps and all the good things that we do in AmeriCorps should exist. We build bipartisan support it seems every day and every week for supporting AmeriCorps. So I think we are getting beyond that question.

But that does not mean that we don't have some serious concerns and some serious questions raised by Ms. Jordan and Ms. Molnar today, and I am sure Senator Wofford takes these very seriously. We need to resolve these. We need to get these behind us so that we do not erode the building of partisan support that we have within Congress, both with Democrats and Republicans.

Ms. Molnar, let me ask you a couple of questions with respect to your report. You cited eight material weaknesses and you concentrated on three of them, financial management reporting, general control environment, and financial systems. If we were able to get a CFO to stay in place at AmeriCorps and a deputy CFO to stay in place at AmeriCorps for a significant amount of time, would these three material weaknesses be addressed in a more forthright and expedited manner? And how many of the eight do you think could be directly related to the stability of this CFO position and maintaining somebody in it?

Ms. Molnar. Well, I think the most important and first thing that should be fixed by the Corporation is to get the CFO and the deputy CFO in place, because it cannot be overemphasized how important strong financial management is. Once someone is in place for an extended period of time, as you mentioned, that can provide the guidance and the leadership and the oversight that is necessary to make sure that the financial management processes at the Corporation are corrected and maintained. To go forward, I do believe that the other material weaknesses are directly linked to having good strong financial management.

If there was strong financial management there, some of the other material weaknesses probably could have been avoided or would have been corrected much earlier. So I really think the most important thing is to get financial management in place that can focus on that aspect of the Corporation's operations and make sure that it is consistently going forward.

Mr. Roemer. So you think that with stability in that CFO and deputy CFO position, we could not only hopefully resolve those three key points that you pointed out, but possibly the eight material weaknesses altogether?

Ms. Molnar. I certainly think it is possible.

Mr. Roemer. You think also, according to your testimony, that a CFO and deputy CFO would be important in, and I am quoting you, showing their commitment and concerted effort from their level through senior staff, unquote. This goes to other levels of senior staff to show this commitment to the right financial practices. Is that correct as well?

Ms. Molnar. Yes, sir. I think commitment starts from the very top, and it provides a role model.

Mr. Roemer. Do you think that the Corporation's action plan demonstrates the right level of commitment?

Ms. Molnar. I certainly think that it shows that there is commitment on the part of senior management at this point to address the problems. There are a lot of action steps in there. As Ms. Jordan mentioned, though, there are a lot of the goals that have not been totally addressed yet. But certainly the action plan is a step in the right direction. It does show a commitment.

Mr. Roemer. If the Corporation were to act on all your recommendations, how long would it take to resolve these problems?

Ms. Molnar. That is very difficult to say. It is not going to happen overnight, that is true. It is going to take time. I really can't tell you.

Mr. Roemer. Senator, if you can, without divulging any sensitivities on this as to the name of your CFO. I know it is difficult to recruit people into government positions these days and to keep them, and during the last two years of an administration as well. How long do you think it will be before this position is confirmed and we have the clearances set by the FBI? Do we have any estimate for that?

Mr. Wofford. It is very hard to give an FBI estimate, but I think that there is a very good chance that within 6 weeks the candidate, and the intent to nominate could be made. I hope we will get agreement that the candidate could come and be a senior adviser to me while the process of confirmation goes forth. I think the Senate Labor Committee is aware of the need for the CFO, and I think they will move very fast on this.

Mr. Roemer. So we don't have any sense that they would delay a confirmation?

Mr. Wofford. I have every reason to think they and the Majority Leader will cooperate in moving it as fast as possible once the nomination is made.

Mr. Roemer. Do you intend to then hire the deputy CFO after that position is filled, or do you intend to move forward on that position now?

Mr. Wofford. I think there is a case not to preclude the determination of the new CFO by choosing the deputy CFO. Before coming before you, we may be able to get advice. That is an open question we are working on right now.

Mr. Roemer. And you are, I am sure, committed deeply to resolving these questions. How long do you think it will take for you to get to the bottom of these questions and resolve these?

Mr. Wofford. We are going to go all out in the remaining months of the fiscal year with the closest possible cooperation, collaboration, and advice that we can get from KPMG and from the Inspector General to try to succeed this fiscal year to achieve a clean opinion on all three statements. We think we are within striking distance of it.

We had times when we had high hopes, a couple of months ago, that we might achieve that this year, with the very extra in-depth audit that was going on by KPMG. We succeeded on one of the statements, not on the others. A lot of hard work and preparation was done. If we can keep that momentum, not the new financial system, but that momentum up to full speed until the end of this fiscal year, we are seeking to get those clean opinions.

Now, about half of the government agencies were required to do this kind of accounting, I think, in the year 1990. The first actual requirement date, I believe, was something like 1994.

It is important to put this in perspective. The shortcomings found by the first audit were the first efforts and were not primarily related to AmeriCorps or the new programs. AmeriCorps, I think, had been in operation for about 1 month of that period. The Corporation became an entity that combined the action agency with VISTA, the foster grandparents, senior companions, and RSVP programs. There were thousands and thousands in grants and contracts, and President Bush's Commission for National Service and the new Corporation combined into one entity. That entity chose to continue the action system, Federal Success and other programs, with both personnel and other systems of the action agency.

The first finding of not being able to be audited related primarily to the whole structure that was just being put together. Indeed, since then we have been frustrated in how soon we could get the new financial reporting system in. The Chairman has rightly reminded us in his statement, I believe, that we were on the track of one that did not work out just as Wendy Zenker took over. She then pursued with great success the right alternative that is now going in.

So it has been an exceedingly crucial and demanding process. I know you are disappointed with our progress, and the fact we haven't succeeded yet fully on all fronts is as disappointing to me as it is to you. But I can tell you that we are getting no comfort from the fact that there is something like half of the 24 government agencies that are dealing in different ways with this problem.

This is an extraordinarily decentralized system. There are no overnight solutions in getting 630 grantees and local organizations, to rapidly, responsively, and efficiently send in the reports of the time and the work of the AmeriCorps members they select and deploy. Some do it efficiently. Let us assume that the programs you listed, Notre Dame's Alliance for Catholic Education does it efficiently. Notre Dame has had grid accounting systems with the Federal Government and others. Some are small local nonprofits that never had this kind of experience. That is just the field part of one of our programs. The senior programs have thousands of these local agencies that are having to learn how to report into a Federal system. In fact, the Chairman has on occasion said that one of the problems of this whole idea is imposing Federal paperwork on little local nonprofits.

Mr. Roemer. I want to thank you for your testimony. I think we will get to another round. I just want to emphasize again that you have made great political strides forward in building bipartisan support for this program. You have made stunning successes in serving people in the community. But we need to see more progress on the financial end and the resolve and the commitment to get these problems settled and put behind us so we don't have people tagging the program based upon these unresolved financial situations.

With that, Mr. Chairman, thank you.

Chairman Hoekstra. Mr. Schaffer.

Mr. Schaffer. Thank you, Mr. Chairman. Senator, one of the things you mentioned in response to the Chairman's questions with respect to this transition, was the existence of a contingency plan. The audit was unable to identify one. I just wanted to explore a little further this difference of opinion about whether a contingency plan exists. Could you spend a little time describing it for us?

Mr. Wofford. Let me make one point, and then Wendy will detail it further.

We are not going to lose the data that is going into the Momentum. The first contingency is that data is going to be available. You may want to outline the other parts of what we are calling the contingency plan.

We have high confidence that Momentum, which has worked in other places, is going to work with us, but we are not going to be…..

Mr. Schaffer. I am sorry?

Mr. Wofford. We have high confidence that this new financial reporting system, Momentum, is going to work. It has worked in a number of other Federal agencies. It has a great record of success. But we are not going to be short of the ability to manually record the data and be ready if we have to.

Ms. Zenker. Our contingency plan at this point is, if we are unsuccessful bringing Momentum up in July as we plan, to continue to use the current system, Federal Success, through September 30, 1999. At that point for fiscal year 2000, we would manually load summary data into the new Momentum system and start processing detailed transactions for fiscal year 2000 in the new system.

The system we are purchasing and installing is a commercial off-the-shelf product. It is not a system we are custom designing. It is a system that we buy. It comes in a box in the simplest sense. It is a plug-in. It is never that simple, and it is not that simple. But we are not doing any custom design work on the Momentum package. It is a package that has been certified by the Joint Financial Management Improvement Program of the government. It met certain standards. We know it works and operates.

The question is our ability to get our old data into the new Momentum system. If by chance there are difficulties with that, and we are not able to be successful, and we don't anticipate we will not be successful, but if there are unforeseen difficulties, we would just continue to use Federal Success through the end of this fiscal year. On October 1 we would start using Momentum with summary-level information loaded into it, but using it for detailed transactions in fiscal year 2000, as we continue to deal with whatever difficulties may exist on data conversion.

Mr. Schaffer. I am no financial expert certainly in methods of controlling expenses in an agency like yours, but I will assume, though, that this Momentum program is predicated on some standard data being available in the first place. The end result is only as good as the input we have. From the audit that is presented before us, I am not sure that is a possibility. What confidence should we have that this transition is going to be as flawless as you anticipate and will warrant a lower level of concern about the need for a contingency plan then the concern that others may have?

Ms. Zenker. If I may. We have plans right now to do what we refer to as dry run conversions of our old data into our new system. We are going to be doing those dry run conversions in May and June. At that point in time, we will know that we can map transactions from the old system into the new system.

One of the things we have to do in July as well, is manually enter certain data that was badly recorded in the old system. One of the weaknesses that was identified in the audit was our failure to properly account for revenue from reimbursable agreements. It is one of the new material weaknesses.

We are going to have to, instead of moving that data from the old to the new system, actually turn around and reenter that data manually so we can properly put it in the right bucket, so to speak, so the data would be accurate.

Mr. Schaffer. Can you comment on the issue of the contingency plan, the importance of it and the whole idea of manually entering the data, and also the extent to which we should place a great deal of confidence that the transition will be seamless, Ms. Jordan?

Ms. Jordan. KPMG looked into the Corporation's plans as part of the audit work. They concluded it was a high risk. I understand the Corporation's plans, but it is a very compressed time frame to put up a new system, and I guess in my mind, a contingency plan is highly critical.

Now, you have heard Ms. Zenker talk about the plans that they have, and I have two observations. One, my understanding is that these are Y2K issues, and they are going to begin to be a factor as the Corporation awards new grants.

My second observation is that the manual entry of any data is difficult. The reimbursable agreements were not correctly recorded, so they are something that will have to have a high level of scrutiny by the Corporation to assure that they are entered into the system correctly, and then will function correctly within the system to produce results that are in accordance with generally accepted accounting principles.

So everything is high risk.

Mr. Schaffer. Thank you.

Chairman Hoekstra. Mr. Ford.

Mr. Ford. Thank you, Mr. Chairman. Thank you, Senator. I apologize for being late, sir, to you and all of your staff. You all do a good job, despite what some of my colleagues here might think.

I want to thank you for all of the good things you have done back in Tennessee and in my district with seniors and with children and particularly with those who come from this next generation who will be expected to lead and guide this country in meaningful ways. Your son is doing a great job over at OPIC as well.

One question I had, as you talked about some of the challenges that the Corporation has faced. One of the challenges, and perhaps Luise can address this, is you had to absorb older programs. We talk a lot about this being a new entity or a Corporation you can't conduct and run yourself as a business. I share the concern of the Chairman on this. You certainly want to work with them closely to see that we can do everything to help you get to this point.

Perhaps you have talked about this, but if you can talk for my benefit about the programs you had to absorb and how that might have slowed this sort of modernization. Many of us in this Committee and this Congress would like to see the application of modern business principles take hold in the Corporation.

Ms. Zenker. That is very much related to the conversation we are having on the financial systems. We are dealing with a very old system in technology terms, a 1986 accounting system, and that is something that we inherited from the old action agency.

Our efforts and the efforts to which we are devoting an enormous amount of our resources and talent within the agency is to bring up the new financial management system to deal with the deficiencies that exist in that old system and those old programs that were absorbed from the old action agency. That is one of our most significant challenges in trying to achieve a clean opinion on our audits and being able to present data in a way that the auditors can clearly understand what it is, why we did it, when we did it, so they can have good records and be able to provide good reports on our past practices.

Mr. Ford. With regards to some of the material weaknesses, I know we moved from #6 to #8. Just speak briefly, if you don't mind Mr. Chairman, about this completed audit in which you were fortunate to learn in a lot of ways where some of the weaknesses were. We moved from #6 to #8 material weaknesses. Can you just speak briefly about what is being done? Number one, I take it you appreciate now you have #8 as opposed to #6, and you are making huge efforts now to make those corrections. I know that is a concern I have and I imagine some of my colleagues on both sides of the aisle might have.

Mr. Wofford. The additional material weaknesses are not something that just happened as new things went wrong, but were discovered as the audit went into depth to get a clean opinion of problems that no one had assessed before, and we were fortunate that the in-depth audit disclosed those weaknesses. We are in the detailed process of adding them to our action plan to deal with those two weaknesses. I think before you came I made a point that has some pertinence in terms of perspective. I think the bulk of the material weaknesses were there right in the system when this Corporation began and was created to bring these various agencies together. The decision was made to go with the financial and reporting system of the action agency that we took over and inherited.

Federal Success, for example, was once a very successful system. By the time 1994-95 came along and the new requirement of reporting according to generally accepted accounting principles was rightly required of all government agencies, it wasn't adequate for that or for a lot of other things. That is part of the perspective that makes this transition so difficult. But we really believe we are within striking distance now of wrestling these problems to a lasting solution.

We will be reporting every 60 days in detail on what we are doing on each of these fronts under the action plan.

Mr. Ford. With regard to your balance sheet and your statement of financial position, is it safe to say you have made progress?

Mr. Wofford. It is true that as the Inspector General said, there is no dramatic progress that the action plan reports, but I think everyone that has looked at us and has been following us carefully and advising me has said that achieving an unqualified opinion on the balance sheet, or the statement of financial position, is a major step forward. It puts us in a position now if we finish the job, to go forward to a clean opinion instead of looking back, and having no base on which to build the other statements. We now have a solid base, if we finish the job.

I agree with the conclusion at the end of the statements of both the Inspector General and Ms. Molnar that we have got essential work to do, and we will do it. We have to do it, and we will do it.

Mr. Ford. We all agree we want to make the Corporation as efficient and high-performing as possible, Senator. I wish I could still call you Senator, I might add.

Mr. Wofford. I like my present title.

Mr. Ford. I know you do, but I liked you better as a Senator. What can we do as a Committee and a Congress to help all of us achieve this common goal? You obviously have a goal. You have spoken eloquently and effectively about that. What can we do as a Committee and a Congress? I know I have gone over my time. I hope the Chairman will let you answer.

Mr. Wofford. Mr. Chairman, I did express appreciation for the support given last year, and I hope further support will be given to the strengthening of our commitment of resources, adding to the resources in the whole financial management and control area. Congress gave us additional support for Y2K problems and for our own financial management problems, and we need some more of that support this year. That is being dealt with in detail in the appropriations Committees. But that is one thing.

The other is your oversight. I paid tribute to that in my first remarks that you, like the Inspector General, have to keep the focus on what has not been done. I, in turn, when I talk about what has been done, have to do so in my head and my heart, and with energy and my commitment to the organization, I never forget the things that we haven't done yet. So the oversight of this Committee is part of the process.

I appreciate the careful digging by the Committee into the problem is that is going on right now.

Mr. Ford. Thank you, Mr. Chairman, for letting me go over.

Chairman Hoekstra. I guess we all have different responses to this. In 1996, Mr. Wofford, you told us the task of selecting and implementing a new core accounting system "is one of the most important decisions the Corporation will make." That is a quote. We are committed to having a system in operation during 1998, and sooner if possible.

In July of 1997, we believe that we can get all of those remaining material weaknesses under control by 1997 fiscal calendar year end. We do know that it is an uphill battle to shoot for full financial statement audits, but we are not going to try to do any less than that.

When you have been here before, we have talked about action. We have talked about the "garbage in" type of process that you had from those old agencies and these types of things. But when you have been in front of this Committee in 1996 and 1997, you told us it was going to happen. The statements sound frighteningly close and similar to what you are saying today: "We are almost there."

You said that in 1996, a year and a half out. You are saying that again now: Wait until we get to the end of July or the end of maybe September, whatever.

I can tell you, you are not going to make it. I just sit back and I take a look at what you have told this Committee before, and you are not going to make it, because the Corporation doesn't have a Chief Financial Officer who is sitting in on the meetings and talking about the decisions as to whether you delay grants or whether you continue using the old system. You don't have a Deputy Financial Officer.

Who is making these financial decisions today? Who is giving you financial input?

Mr. Wofford. We have as the Chief Operating Officer someone who has taken command of this process in the Corporation in the last year with effectiveness and with the ability to build a financial team. It has been put together with our Chief Accounting Officer, who has been given new leadership, in a series of steps that we have taken.

Mr. Chairman, your question had two parts to it, with regard to the financial system being put into effect. We have discussed that and we have purchased he system that is being put into effect, and you are talking about a month. But we have that system. It is the system, when we were last reporting to you, that the Chief Financial Officer before this had chosen, and at the very end it was not possible. Ms. Zenker led the effort to rapidly find the system that was and begin putting it into effect.

On the other fronts, I don't have the occasion, the time here, and you don't have the time to hear the efforts on these problems one after another, about the reporting of the service by 40,000 AmeriCorps members, now more than 100,000 who have been in the trust. It actually took a crash program, over months and months to go back and find the documentation both from the field and from input, in order to correct the records and the reporting to get the organization in shape.

It is not fully in shape, but there has been a huge effort to successfully get the reporting system of the Trust in good shape. It is in one area after another that people have eaten their hearts out, worked and been up at night trying to get these things done.

Chairman Hoekstra. I bet they are working hard. It is their job.

Mr. Wofford. Right.

Chairman Hoekstra When people sign up for this program it is their job to know the money is in the National Trust. It is our responsibility as government officials and your responsibility administering these trusts to make sure the people identified in this National Trust are the ones that are actually performing the work.

No, I don't have the high degree of confidence that we are not going to be sitting here again in a year because we have gone through this before. This is at least the third time we have gone through this. We have heard pretty much the same excuses and the same explanations and the same promises every time we have gone through.

In 1996 the auditors reported there was a high potential for fraud at the Corporation. One individual was responsible for inputting all data into the VISTA payroll system. Ms. Jordan, does that condition still exist today?

Ms. Jordan. Yes, sir, it does, and the 1998 audit report focuses on it. First I have got to tell you there was no actual fraud found.

Chairman Hoekstra. I know.

Ms. Jordan. Nevertheless, it is a classic red-flag vulnerability. We reported the condition, and management agreed to fix it. Then when we did the audit in 1998, we found that in fact the condition had not been fixed.

Chairman Hoekstra. Is this brain surgery?

Ms. Jordan. All it required was bringing in another individual to be trained and having another individual knowledgeable and able to perform the same duties. The VMS system is a payroll system, and therefore one that is considered high risk because you can make expenditures from it. To have one person have all this authority is a red-flag condition. To have management not address it sends a message that even a simple fix is not going to be made, and that is not a good message.

Chairman Hoekstra. I couldn't agree with you more. This was identified in 1996 and it comes up again in this audit and has not been addressed. It is relatively simple. That is why when you sit here and the little things aren't happening, you worry about the big issues, and then you overlay Y2K on top of that, and I have a very low degree of confidence, because you connect that with no Chief Financial Officer.

Harris, you need somebody sitting next to you who is a Chief Financial Officer, who thinks like a financial officer each and every day and is inputting into your team. If you want an unqualified audit, these are the decisions you need to make and these are the trade-offs you need to make. Until you get that input into the Corporation, you are not going to make it. There is no way you are going to make it. Mr. Roemer.

Mr. Roemer. Certainly, Senator, in the efforts that you have ahead of you, we have seen this inherent tension in the way we have set up the Corporation. On the one hand, we don't want a centralized agency here in Washington, DC mandating all kinds of things to our states and our local grantees. On the other hand, one of the ways that I think we have gained the political support that we have for this program is that we have decentralized this to the grassroots. We have small grantees and tiny grantees all throughout the 50 states that sometimes have 140 volunteers, so to speak, in the service area, like the ACE program does. Sometimes there are grantees that have 4 or 5 people in them.

Now politically, that is the way we wanted to set it up. Financially, that creates some very difficult problems for us to track. Ms. Jordan I believe it is the grants management area that you pointed out where we have difficulty overseeing some of these small grantees and their operations.

How do we try to bring the two of you, Ms. Jordan and Senator, together to address this very difficult problem? I want it addressed. I don't want us sniping at each other. I don't want us sitting here a year from now saying we still haven't done it. How do we address this inherent tension in this decentralized grassroots small operation? How does the Corporation get these people to respond?

Do we send out a letter before we send the next round of grants out, saying you folks need to respond to us in a timely fashion with this financial data for our audits? I want to get to the bottom of this problem and find out how we resolve it. You can see how difficult it can be. We need to get it done.

Ms. Jordan. Is that a question for me?

Mr. Roemer. First for you, and then Senator Wofford.

Ms. Jordan. I have two observations. On the Corporation level where you want a flexible organization, you need highly competent financial people.

Mr. Roemer. The CFO is key and I agree with you.

Ms. Jordan. Not just the CFO, his staff.

Mr. Roemer. Both you and Ms. Molnar said that. I agree.

Ms. Jordan. The more flexibility you want, the higher competence you need in your financial people. On the grantee level it’s simple. Send them a letter. There are requirements to submit this information within 30 days. That is a standing requirement. But what happens is that nobody does anything if they don't submit it. So, you know what? Turn off the tap. Don't let them have any more money if they haven't submitted their report. It’s very simple. It works with teenagers. It probably would work with grantees.

Mr. Roemer. I am not sure we can treat them as teenagers, but I see your correlation there. Senator, how would you respond to that?

Mr. Wofford. Mr. Chairman, I essentially agree with both points.

Chairman Hoekstra. He is not the Chairman yet.

Mr. Wofford. I didn't mean to be looking at Congressman Roemer.

Mr. Roemer. He is just trying.

Mr. Ford. He is clairvoyant.

Mr. Wofford. I remembered I should be looking at the Chairman. So, to the Chairman, I want to point out that, one, we are quite prepared to do that in terms of closing off the tap.

Second, as part of this process we called, a large number of the State Commission leaders and the grantees together for a training conference on all of these problems and focused entirely on these problems last January? We had the Inspector General give the first major talk and to put the challenge as well as she has put it here, which she did. It was a very valuable session.

We have been working with the Chairs and the Executive Directors of the State Commissions who determine two-thirds of the AmeriCorp positions and grants. All three of your States, Tennessee, Michigan and Indiana, have outstanding State commissions. They make the grants. They administer those grants. They have to take a great responsibility with us to see that the agencies that they give AmeriCorps positions to do meet their responsibilities.

So, one, we have to improve the financial management team, with a CFO and Deputy CFO, and improve our grants management, which we are in the process of doing right now. In terms of our financial management team in Washington and effectiveness there, we have to work both with carrot and stick to get this decentralized system to see that their responsibility is equally as important as our responsibility is to run it well in Washington.

Mr. Roemer. Probably that demands tough love, Senator. We love them, we are tough on them, and say what Ms. Jordan said. If they can't respond, then we do the carrot and the stick and we threaten them with potentially cutting off some resources. I hope that my State of Indiana is cooperating with you in this area of getting you the needed information in time.

Mr. Wofford. The Michigan Chairman, Mr. Chairman, as you know is the First Lady in Michigan. She is a very active Chair of the Commission. It is an outstanding Commission. They do extraordinary work. It is part of what I meant by the system works. Their last report on their work this year is one of the best in the country, and I was just out there, both with Mrs. Zenker and with the Commission. They take this very, very seriously. They think they are on top of it, and most of the State Commissions are working very hard to see that they get their houses and their processes in order.

Mr. Roemer. Thank you again, Senator. I just want to say I hope your meetings with Ms. Jordan and Ms. Molnar continue, so the next time we have you up here for a Hearing, we can continue to celebrate many of the service successes of AmeriCorps and also celebrate the elimination of some of these material weaknesses that we have before us today. Let's keep working and building bipartisan support for this program and solving some of these financial difficulties. With that, I thank you.

Chairman Hoekstra. Thank you, I just want to respond. Accounting is not brain surgery. This is not all that tough. Excuse me, I don't want to belittle your profession. But I think of Mary Kay. I think of Amway, which has hundreds of thousands, if not millions of distributors and thousands of products. At the end of the year, they go through and they present qualified or unqualified audits. I don't know exactly how many employees GM has or how many cars or how many parts or all of what they produce, but there are a very, very large organization that does every day what we are just asking the Corporation to do.

I am a little concerned about what Ms. Zenker said about buying off-the-shelf and there is no customization. I have to believe somewhere along the line you are going to have a CFO that says what you do is different and is special. You are going to need some customization. We will find that out probably next year.

Mr. Roemer. If I can say one thing, Mr. Chairman, I think you made a good point about the CFOs and what Amway and what Mary Kay and so forth have in terms of resources. I would venture to guess that their CFOs don't have the disclosure requirements we have in the government, and their CFOs are probably paid a considerable amount more than what we can attract for our CFOs. That is not an excuse, Mr. Chairman.

I started off my questions with Senator Wofford saying we need stability in the CFO. How long before we get somebody nominated, how long before we are approved, how long before a deputy is put in place, who is going to hire the deputy, and when can we do it? I don't want to get sidetracked on this, because I think your point is a good one, but it is a point for a Gore administration or a Bush administration or whoever the next President is. We have more and more considerable problems hiring people into the public service for some of these important positions.

Chairman Hoekstra. Actually the answer to your question who the next President is, is K2K. With that, we will go to Mr. Ford.

Mr. Ford. I guess one last series of questions just for the Senator. We have heard this talk about the CFO, and I have to share their concerns. I know we talked a lot about it. But any sense of how much longer it might be? A search is on. I know it has been an intensive search.

Mr. Wofford. The candidate is being vetted. We hope within 6 weeks that the vetting at the White House will be complete. The Senate, I think, will move fast on the nomination as soon as it goes up. I hope the candidate will be able to be a senior adviser to me as soon as the essential vetting is finally completed.

Mr. Ford. The concerns have been expressed, and I share the concerns of everybody on the Committee. Do you think we will be able to fill some of the holes and plug the severe hole that the Chairman talked about?

Mr. Wofford. Yes.

Mr. Ford. I hope once you do make the recommendation, Mr. Chairman, we as a Committee may be able to send a letter over to the Senate Committee urging them to move as quickly as they possibly can to approve them.

Chairman Hoekstra. I would write a letter with Mr. Ford and Mr. Roemer to the White House saying they ought to vet this as quickly as possible and fill this position, if you are interested.

Mr. Ford. If that is something the Senator thinks might be helpful.

Mr. Wofford. I am not the one to lobby the White House. That is within your province. I am the one to do it with the White House, but not to tell you to do it.

Mr. Ford. I look forward to doing that with you Mr. Chairman as well as with Ranking Member Roemer if that is something you would be agreeable to.

Mr. Roemer. Why don't we talk to you after the Hearing and see if it would be helpful to get somebody in place and encourage the Senate, as Mr. Ford said, not to delay the nomination.

Mr. Wofford. I think I should add that I have good reason to believe that in terms of the security process, the White House has asked for the maximum speed. You don't necessarily always get it from the FBI.

Mr. Ford. Okay.

Mr. Wofford. From my old experience, not current.

Mr. Ford. You obviously have excellent relations on the Senate side. Anything we can do.

Mr. Wofford. I am sure Senator Jeffords of the Labor Committee and Senator Kennedy will respond rapidly. They are aware of these problems too. They will be interested in your opinions, and I have no doubt they will move promptly when an examination comes.

Mr. Ford. With that, I yield to Mr. Roemer.

Mr. Roemer. I have nothing else to say.

Mr. Ford. I yield back the balance, Mr. Chairman.

Chairman Hoekstra. Ms. Jordan or Ms. Molnar, can you give me a little bit of background as to what the material adjustments are that we are arranging? How does the process happen?

Ms. Molnar. As I mentioned earlier, an audit includes a lot of details as to various accounts and balances. Because the internal controls were poor, there were some mistakes made in the accounting throughout the year and in prior years, and those were identified during our audit.

To correct those errors, and they did range from small amounts to quite large amounts, as Ms. Jordan mentioned to you earlier, for every item where you had to increase a balance because of the double entry nature of accounting, there was another balance perhaps on the statement of financial position, or perhaps on the statement of operations, that would go in the opposite direction.

So while the amounts may have been very large individually, and even in the aggregate, when the sum whole is taken, it just resulted in corrected financial statements, and it resulted in a statement of financial position that was materially correct as of a point in time, that being September 30, 1998.

The problem in not being able to issue an opinion on the other statements was because the beginning numbers in prior years were not materially correct, and therefore the activity between those years could not be ultimately determined.

Chairman Hoekstra. Let me understand. What you are saying is in the statements there was a line that might have read 200 million, and really if you had an adjustment of 106 million, the number really should have been 94, or maybe should have been 306?

Ms. Molnar. Correct.

Chairman Hoekstra. Okay. That is a big number.

Ms. Molnar. That is a big number. That means that some other number was too small.

Chairman Hoekstra. What is that?

Ms. Molnar. It means some other number may have been too small.

Chairman Hoekstra. I am just saying you are moving 106 million around on the books because the accounting system in place during the process or during the 12 months of that year moved those numbers around in the appropriate way.

Ms. Molnar. Either that, or some accrual or adjustment made at the end of the year may have been calculated wrong. There are a number of reasons for the various errors we detected.

Chairman Hoekstra. I am looking at an organization that has around a $700 million budget on an annual basis, and you start moving around $106 million at any one time, which means that one number is 106 too high and another one is 106 too low That kind of worries me. I don't know if it worries Mr. Roemer or Mr. Ford, but that kind of movement around, yes, that does worry me.

If I were in the business world and my CFO came in and said the auditors came back and we have to move 106 million from the profit line over to cost of goods sold, and I am sorry I wasn't able to do that on the right accrual basis during the year. I think I would be a little unhappy, and that probably would have had a major impact on the kind of decisions I am making through the year.

I am assuming you do quarterly statements. Do you do quarterly statements?

Ms. Zenker. No, sir, we do not.

Chairman Hoekstra. You don't do quarterly statements. Oh. I guess that I won't assume that anymore.

Ms. Molnar. One thing I might say, as Ms. Jordan mentioned earlier, a number of these corrections were one-time corrections, and I believe that the Corporation and their people have learned from them, so hopefully they will not happen again.

Chairman Hoekstra. Only next year will we know if they are one-time corrections. You can't do quarterly statements?

Ms. Zenker. At this time, we don't do quarterly statements. There are very few agencies in government that do quarterly statements. We struggle to do an annual statement, to be perfectly honest with you.

Mr. Wofford. The new system would enable a quarterly statement.

Chairman Hoekstra. Careful, Harris, careful. Quit while you are ahead.

Mr. Wofford. It would have the capacity, if it is determined that where we are in this makes that a reasonable thing to do.

Chairman Hoekstra. Would it be advisable for us to ask government agencies to prepare quarterly statements?

Ms. Jordan. May I speak to that, since I have been part of this audit process since it began? I don't think most government agencies have the capacity to go through the financial statement preparation, as complex as it is every month. The issue is using the information to manage. If they used it to manage and make decisions on, it would inherently have the nature of staying more accurate.

Unfortunately, it is circular. Because the data isn't very good, they don't use it to manage. Because they don't use it to manage, the data doesn't get better. So the new system will give them better information. I say continually to Harris, at least once a month, start using some of this data to manage, because if you use it to make decisions, you will in fact have the propensity to keep it more accurate.

So I don't think an agency can easily do monthly, even quarterly financial statements, though I believe quarterly would be a good step.

Chairman Hoekstra. It is a fairly scary thought. Coming out of the business world, the numbers don't run the business, but they help you manage more effectively. Did you just say that the reason the information isn't any good is because they don't manage with it anyway? Can you say that again? I want to make sure we get this right.

Ms. Jordan. In my experience, what really drives a Federal agency is the use of its budgetary resources. When you have exceeded….

Chairman Hoekstra. I just wanted you to repeat the comment you use the information to manage your….

Ms. Jordan. It is not like the private sector where you are monitoring cost of units. Instead, it is a monitoring against budget thresholds. The expenditure caps are what governs. Therefore, when you are not using management information in the way you tend to use it, and want monthly reports and want to know where your earnings are and want budgetary variances explained, particularly in a manufacturing environment, which was yours, it is not like that in the Federal Government.

The information is used to control spending, but not in the way that it is in the private sector.

Chairman Hoekstra. You said it nicer the first time.

Ms. Jordan. Sorry.

Chairman Hoekstra. That is all right. We have it on the record. I will just have to go back and find it. I just hope what you said the first time doesn't apply to the other $1.7 trillion we spend every year. I have no more questions. Mr. Roemer?

Mr. Roemer. I have no further questions.

Chairman Hoekstra. Mr. Ford?

Mr. Ford. No.

Chairman Hoekstra. I thank the panel for being here. Mr. Wofford, we look forward to helping in any way we can to get you a CFO, and that the next time you come here, you can take a cake with candles on it, and we have clean books. But I may have a whole lot less hair by then. Ms. Jordan, if you have been with us through this stuff from the beginning, you may be gray by then. You are doing pretty well so far. Thanks for doing all the work you do. Thanks for testifying here today. The Subcommittee will be adjourned.

[Whereupon, at 12:10 p.m., the Subcommittee was adjourned.]