| AUDIT OF IRS EXPOSES $86 BILLION IN PHONY "RECEIVABLES"! |
| IRS Shamed By The Truth! Forgot to keep a log of your business-related auto mileage? Misplaced some of your entertainment expemse receipts? Over valued your business property for depreciation purposes? Try telling that to the IRS auditor and see how far you get! Year after year, the IRS has paraded before Congress, begging for ever higher appropriations for it's massively expanding computer systems, all the while providing its own internally-generated (and accepted) figures. Until 1993, the IRS had never in its entire history been financially audited. On Wednesday, August 4, 1993, the General Accounting Office's (GAO) Charles A. Bowsher, Comptroller General of the United States, changed all that. Mr. Bowsher gave the following testimony before the Committee on Governmental Affairs, United States Senate. Portions of Mr. Bowsher's speech have been excerpted for brevity and certain phrases have been emphasized in bold for your closer consideration. The Controller Speaks Mr. Chairman and members of the committee, we are pleased to be here today to discuss the results of our recently completed financial statement audits at the Internal Revenue Service (IRS) and the Customs Service and the need to accelerate government-wide financial management reform through the full and effective implementation of the Chief Financial Officers' (CFO) Act of 1990. Our financial audits at IRS and Customs show that serious financial mangement problems exist at the Department of the Treasury. The Congress now has reliable estimates of IRS' receivables and the related collectible amount, which are ten of billions of dollars less than what had been repoeted by the agency in the past. For instance, IRS will need to overcome a problem whereby its system cannot provide details as to amounts of specific excise taxes collected. As a result, general tax revenues inappropriately subsidized excise tax trust funds, perhaps by billions of dollars. We were unable to express an opinion on the reliabiltiy of IRS' and Customs', fiscal year 1992 financial statements because critical supporting information for billions of dollars was either not available or was unreliable. Preparation of financial statements presented a substantial challenge to IRS and Customs. This undertaking was made especially difficult because their (IRS) existing systems were not designed to provide meaningful and reliable financial information needed to effectively manage and report on their operations. Compounding this problem, internal controls were not designed and implemented to effectively safeguard assets, proved a reasonable basis for determining material compliance with certain laws and regulations, and assure that there were no material misstatements in the financial statements. I will now highlight the results of our IRS and Customs audits. Serious weaknesses exist in IRS' financial management, operations and control. First, I would like to discuss some of the more severe problems we identified in our audit of IRS' financial statements. IRS Signigicantly Overstated Receivables After performing a detailed analysis of IRS, receivables as of June 30, 1991, we extimated that only $65 billion of about $105 billion in gross reported receivables that we reviewed were valid and that only $19 billion of the valid receivables were collectible [i.e., short 86 billion!]. At the time, IRS had reported that $66 billion of the $105 billion was collectible. historically, IRS reports have signigicantly overstated its receivables primarily because ITS included duplicate and insufficiently supported assessments that it had recorded as a part of efforts to identify and collect taxes due. While IRS may have a need to maintain such records for enforcement purposes, these and many erroneous assessments were not valid receivables for financial reporting purposes and should not have been included in the reported balances. In addition, IRS' estimates of the collectibility of its receivables have been unreliable because, in addition to including invalid receivables, IRS relied solely on collection experience and did not group assessments according to their collection risk or consider the taxpayer's current ability to pay. Important Revenue Information Unavailable Or Unreliable Although we were able to audit total revenue collections, we were not able to audit the components of revenue because IRS' systems could not provide the detailed transactions supporting the revenue balance, which is a serious limitation. IRS systems also did not maintain and, thus, could not report the amounts of specific excise and social security taxes collected. As a result, IRS could not provide Treasury the information needed to ditribute excise taxes among the general revenue fund and the various excise tax trust funds based on collections, as required by law. Similarly, IRS cannot determine the general revenue funds's subsidy to the social securtiy trust fund. As a result, IRS cannot provide information on the subsidy to congressional committees and others who may be interested in monitoring the financial condition of the social securtity program. Unreliable Records For Processing Data Properly Inventory records for IRS' automated data processing (ADP) property were unreliable for managing and reporting on computer hardware and software. IRS had not instituted basic procedures to ensure that this information was surrent and accurate. For example, a video display teminal costing $752 was valued in the ADP inventory records at $5.6 million, and telecommunications and electronic filing equipment, which IRS valued at a total of $84.2 million, was omitted altogether. Inadequatre Controls Over Taxpayer Data Though heavily dependent on automated systems to process and safeguard taxpayer data, IRS did not adequately control access authority given to computer support personnel or adequately monitor employee access to this information. Such weaknesses increase the risk of unintentional errors and fraud and may compromise the confidentiality of taxpayer information. For example, IRS' internal reviews found that some employees had used their access to monitor their own fraudulent returns, to issue fraudulent refunds, and to inappropriately browse taxpayer accounts. Inadequate Management Of Operating Funds For years, IRS' systems used to proces and account for spending of operating funds could not provide accuate and timely information needed to manage these funds. We were unable to audit approximately $4.3 billion, or 64 percent, of the reported spending of $6.7 billion from IRS operating appropriations becaue IRS cound not reconcile the total of detailed spending information in its outdated systems with summary amounts reported in such systems. We found, for instance, that IRS had several billion dollars in unresolved cumulative gross differences between its records and Treasury's cash records at the end of the fiscal year. Also as of September 30, 1992, IRS had not resolved $53 million in unmatched expenditures which were in a suspense account. To clear the account, IRS arbvitrarily charged the $53 million to three of its appropriations (each appropriation was allocated one-third of the amount), causing IRS' reports to show that it had exceeded the budget authority for one of its appropriations. However, to eliminate the appearance that it exceeded such authority for this appropriation, IRS recorded an unsupported receivable from another appropriation. As a result of these problems, IRS made improper payments, and reports used by its managers, Treasury, OMB, and the Congress to manage and oversee IRS' operations were unreliable. IRS' FMFIA Reporting IRS did not desclose the overall severity of its internal control and accounting system weaknesses in its fiscal year 1992 report to Treasury under the Federal Managers' Financial Integrity Act (FMFIA) of 1982. Without adequate disclosure the Congress and other users of the FMFIA report will not be aware of the extent of IRS' weaknessess and the efforts needed to correct them. We identified material weaknesses that IRS either did not include or, in our view, did not adequately disclose. For example, the serious problems we noted in the revenue area were largely undisclosed as were the problems in the management of operating funds. In addition, some previously identified material weaknesses that were reported as corrected still exist because IRS did not address the fundamental causes of those weaknesses or ensure that corrective actions were effective. IRS Actions To Improve Financial Management Prior to fiscal year 1989, IRS had put neither substantial effort nor resources into rectifying the poor state of its financial management operations and no one at IRS was responsible for ensuring the integrity and efficiency of financial management and accounting systems agency wide. Reaching For Financial Management Reform This leads me to the broader issue of ensuring successful government wide implementation of the CFO Act. As discussed in our December 1992 transition series report on Financial Management Issues (GAO/OCG-93-4TR), widespread financial management weaknesses are crippling the ability of our leaders to effectively run the federal government. Reducing the federal deficit requires monumentally difficult decisions. If our government is to make these decisions in an informed manner, it must have better financial information. Also, our citizens should be provided meaningful information that allows them to judge the performance of their government and controls that help guarantee fundamental accountability. Because credible financial data are not available today, public confidence in the federal government as a financial steward has been severely undermined. Ensuring Sustained High-Level Priority Attention To Resolve Problems Only through consistent and continuous attention from the highest levels of government and the Congress, including agency CFOs with requisite skells and experience and the needed powers and authority to get the job done, will we see the results that are possible. Without decisive action by the new administration and strong oversight and support by the Congress, efforts to reform financial management will flter. There must be a sense of urgency. Changing a government ulture that has not always seen financial management as important is difficult, especially if there is not a continuity of effort or if this change is not perceived as important. In my view, the success of financial management reform is critical to any effort to reinvent government. Agencies must give high-level attention to financial management improvements. Rebuilding Financial and Managemetn Infrastructures It is well acknowledged that current financial systems across government are in extremely poor condition, despite spending billions of dollars over the years on improvement efforts. IRS and Customs struggled in preparing reliable financial statements primarily because of severely weak systems. For example, the serous problems IRS faced in accounting for its receivables stemmed in large part from a system that was designed to capture information for enforcement and collection activities and was not properly tied to financial reporting. We have identified tens of billions of dollars of accounting errors that could have been avoided if there had been more discipline in following existing policies and procedures." (end) A Personal Suggestion Remember the Constitution was created for government to keep checks and balances. Thank you, Mr Bowsher. As a result of your hard work and candid testimony, Americans now know that the very same agency that will makie your life miserable over a lost receipt for $8.60 cannot account for $85 billion! So the next time you or a friend is summoned to an IRS audit, just tell the auditor..."I'm sorry, but my system is identical to your own...you see, it's simply not designed to provide 'meaningful and reliable financial information needed to effectively manage and report' on my operations...so you'll just have to trust my figures!" |
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