This report presents the results of our review of the Department of Health and Human Services' (HHS) financial management environment and the Department's effectiveness in accounting for and controlling funds and other resources and reporting on its operations. We found that key accounting and related internal control systems currently operated by HHS have serious weaknesses which adversely affect the Department's ability to effectively manage its multibillion-dollar operations. Also, many of its financial reports are unreliable and cannot be derived from the accounting systems.

HHS has shown a commitment to strengthen financial management and has developed a new plan aimed at improving its accounting systems and correcting its long-standing problems. GAO believes the plan is properly focused and is a good foundation for action. Top management's continued commitment is essential if this plan is to succeed and the Department's financial system environment is to improve.

This report contains recommendations to you. The head of a federal agency is required by 31
U.S.C. 720 to submit a written statement on actions taken on these recommendations to the
Senate Committee on Governmental Affairs and the House Committee on Government
Operations not later than 60 days after the date of this letter and to the House and Senate
Committees on Appropriations with the agency's first request for appropriations made more
than 60 days after the date of the report.

We are sending copies of this report to the Director of the Office of Management and Budget, the Secretary of the Treasury, and other interested parties. Copies will also be made available to others upon request.

Sincerely yours,

Frederick D. Wolf

Director

The Department of Health and Human Services (HHS), with funding of about $425 billion for fiscal year 1988, accounts for approximately 37 percent of the President's federal budget authority request. To accurately account for such large sums requires effective systems of accounting and internal controls to monitor outlays and ensure that government assets are adequately safeguarded.

This report describes the Department's financial management environment and its effectiveness in accounting for and controlling funds and other resources and accurately reporting its operations.

HHS is the largest civil federal agency. About 95 percent of its funds are for entitlement programs such as Social Security, Medicare, and Medicaid. The remaining 5 percent cover discretionary programs, such as direct loans, loan guarantees, and cancer research.

HHS' programs fall into three categories:

retirement, disability, and medical insurance benefit payment programs; public assistance and medical payment benefit programs for the economically disadvantaged; and

medical research (for food, drug, and cosmetic regulation) and various human development initiatives.

The money to pay for these programs comes primarily from

(1) employer and employee payroll tax deductions, and (2) funds appropriated from the general fund by the Congress.

Key accounting and related internal control systems currently operated by HHS have serious weaknesses which have adversely affected the Department's ability to effectively manage its multibillion-dollar programs and operations. Billions in appropriated funds and other financial resources are not adequately accounted for, and many of the Department's financial reports are unreliable and cannot be derived from the accounting systems. The Department has long recognized these problems, but past corrective actions have not been successful.

HHS has shown a commitment to strengthen financial management. HHS has developed a new financial management plan aimed at improving its accounting systems and correcting its long-standing probleins. GAO believes the plan is properly focused and is a good foundation for action.