Introduction

Chapter 3 discusses the Department's efforts to improve its accounting systems and the need for top management's continued commitment to improve financial management.

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HHS continues to face widespread financial management system weaknesses which impair its ability to meet the objectives of good management and accountability. The Department's accounting systems do not provide complete and accurate financial information on the results of its program and administrative operations. These complex, serious, and long-standing problems adversely affect the Department's ability to accurately account for, control, and manage billions of dollars of resources. One major difficulty involves a failure to comply with established accounting policies and procedures. Furthermore, two unsuccessful attempts to implement departmentwide system enhancement initiatives have prolonged the problems.

The Department has generally acknowledged the serious problems in its accounting systems. In an effort to address this issue, the Department has, in conjunction with the operating divisions, revised its approach to modernizing its accounting operations and correcting its accounting system problems with the development of the Phoenix Project Plan. Chapter 3 discusses the Department's current efforts to improve its accounting systems.

Top management must stress to the operating divisions the need to comply with established accounting policies and procedures, such as performing periodic reconciliations between its accounting records and internal and external financial reports. Correcting the Department's accounting system problems will require a strong management commitment that is sustained across succeeding administrations.

ancial Management cem Requirements

The Accounting and Auditing Act of 1950 makes the head of each executive agency responsible for establishing and maintaining adequate accounting and internal control systems. These systems are required to meet the accounting principles, standards, and related requirements prescribed by the Comptroller General. In addition, the Federal Managers' Financial Integrity Act of 1982, which reaffirms the concepts first embodied in the Accounting and Auditing Act of 1950, also focuses on the need to strengthen accounting and internal control systems. Specifically, the act requires that agency internal control systems be periodically evaluated and that the heads of executive agencies report annually to the President and the Congress on the status of their internal control and accounting systems.

Accounting system standards are published in the GAO Policy and Procedures Manual for Guidance of Federal Agencies. (See footnote 3 on

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page 10.) According to these standards, agency accounting systems must be an integral part of the agency's total financial management system and must provide sufficient discipline, effective internal controls, and reliable and useful information.

As described in the standards, an accounting system is that part of the overall financial management system which provides the total structure of methods and procedures used to record, classify, and report information on the financial position and operations of a governmental unit or any of its funds, balanced account groups, or organizational components. It includes the manual and automated procedures and processes from the point a transaction is authorized (initiated) to the issuance of financial statements and management information reports containing the data in detail or summary form.

Over the years, we and the HHS Inspector General have issued numerous reports on the serious weaknesses in the Department's internal control and accounting systems. These weaknesses adversely affect the Department's ability to effectively manage its multibillion-dollar programs and administrative operations. The following are some examples of the problems that have been identified:

In our April 1984 report,' which comprehensively looked at HHS' finan-
cial management systems, we (1) found that the Department's disburse-
ment systems for six benefit programs, with annual outlays exceeding
$200 billion, did not appear adequate to ensure the propriety of pay-
ments made, and (2) noted that the personal property systems appeared
generally inadequate to ensure complete, accurate, and timely account-
ing for and control over the Department's investment in personal prop-
erty. Additionally, many of the Department's financial management
systems were not designed and operated to efficiently and effectively
use available computer hardware and software resources.

In 1987, we completed a comprehensive review of the management of
SSA, and reported that its financial management activities are frag-
mented and given a low priority.2 Acting upon the recommendations in
our report, SSA appointed a Chief Financial Officer and centralized all
finance activities within the Office of the Chief Financial Officer.

Financial Management Profile: Department of Health and Human Services (GAO/AFMD-84-15,
April 9, 1984).

2Social Security Administration: Stable Leadership and Better Management Needed To Improve Effectiveness (GAO/HRD-87-39, March 18, 1987).

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Because of substantial financial system weaknesses, SSA did not know if its records of individual workers' wages were accurate. Such errors have resulted in overpaying some social security recipients while underpaying others. As discussed in our previously cited report (GAO/HRD-87-39), SSA estimated that it overpaid about $2 billion in 1984, but expected only a net recovery of about $870 million, or 44 percent. In commenting on this report, HHS noted that actual SSA Statistics for 1984 showed $1.1 billion in recoveries-a net recovery of 58 percent. Regarding underpayments, SSA and the Internal Revenue Service have struggled for years to reconcile differences in their employee earnings files. In a September 1987 report,3 we said that for 1978 through 1984, SSA credited workers with $58.5 billion less in earnings than did the Internal Revenue Service. We recommended that the Secretaries of HHS and Treasury direct the Commissioners of Social Security and Internal Revenue to work together in developing an action plan to reconcile the differences in earnings totals and to prevent their occurrence or reduce their frequency.

In our April 1987 report, we noted that while SSA had made some progress and improvements by acquiring computer equipment and expanding the data communications network, it had not met the objectives of modernizing its software and implementing an integrated data base. We pointed out that the overall modernization effort has proven too large and complex for SSA to carry out-a concern that we had already raised in 1982. To address those concerns, we recommended that SSA redirect this effort by (1) revising the systems modernization plan to define system deficiencies, (2) identifying methods for correcting those deficiencies, and (3) reducing the modernization effort's scope to address the most critical systems deficiencies, especially software design.

In 1986 and 1987, the HHS Inspector General issued several reports identifying serious system weaknesses in SSA's accounts receivable subsidiary systems. These included the understating of accounts receivable due to (1) weak procedural controls over certain benefit overpayments, and (2) a system deficiency which allowed the cashing of duplicate benefit checks to go undetected. In commenting on our draft report, HHS stated that SSA has developed and is implementing an action plan to correct these deficiencies.

3Social Security: More Must Be Done to Credit Earnings to Individuals' Accounts (GAO/HRD-87-52, September 18, 1987).

ADP Systems: SSA's Modernization Efforts Need Redirection (GAO/IMTEC-87-16, April 10, 1987).

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In our February 1988 report,5 we pointed out that the Health Resources
and Services Administration is experiencing problems in collecting delin-
quent receivables arising from its scholarship and guaranteed loan pro-
grams because of an inadequate debt management system, failure to
follow established debt collection procedures, and staff shortages. Prob-
lems in the Health Resources and Services Administration's credit man-
agement and debt collection have been highlighted in the past by GAO
and HHS Inspector General audit reports and a Public Health Service
management review. For example, in 1982, we reported that HHS' fail-
ure to adequately manage the school-administered programs resulted in
high delinquency rates.

In our December 1987 report, we noted that while HHS' grants payment
operations had improved considerably since the Payment Management
System was implemented, some problems remained in accounting for
and controlling these payments. Specifically, (1) the Payment Manage-
ment System did not account for substantial amounts of receivables due
from grant recipients, (2) cash advances to some grant recipients are
charged to HHS appropriations based on estimates that are not subse-
quently adjusted, and (3) returning unused grant funds to the govern-
ment is unnecessarily delayed because controls are not in place to
ensure timely grant closeout. These problems were previously identified
in our 1979 report.8

Pursuant to the Federal Managers' Financial Integrity Act, the Department has reported serious internal control and accounting system weaknesses over the years in the areas of grants management, property, debt collection, and fund control.

ccounting Systems re Unreliable

Our current review identified continuing problems with the Department's ability to effectively manage its program and administrative operations because of serious weaknesses in its accounting systems. Key

"Debt Collection: More Aggressive Action Needed To Collect Debts Owed By Health Professionals (GAO/AFMD-88-23, February 2, 1988).

"Actions Underway To Reduce Delinquencies In the Health Professions and Nursing Student Loan Programs (GAO/AFMD-83-7, December 1, 1982).

Accounting Systems: HHS Grant Payment Operation Has Improved and Additional Corrective
Actions Are Underway (GAO/AFMD-88-18, December 30, 1987).

SHEW Must Improve Control Over Billions in Cash Advances (FGMSD- 80-6, December 28, 1979).