oversight

Financial Management: DOD Inventory of Financial Management Systems Is Incomplete

Published by the Government Accountability Office on 1997-01-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Deputy Secretary of
                 Defense



January 1997
                 FINANCIAL
                 MANAGEMENT
                 DOD Inventory of
                 Financial Management
                 Systems Is Incomplete




GAO/AIMD-97-29
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Accounting and Information
                   Management Division

                   B-275789

                   January 31, 1997

                   The Honorable John P. White
                   The Deputy Secretary of Defense

                   Dear Mr. White:

                   In conjunction with our responsibilities under the Government
                   Management Reform Act of 1994 to audit the consolidated
                   governmentwide financial statements, we are reviewing the Department of
                   Defense’s (DOD) financial management systems. This report discusses the
                   results of the portion of our initial work that evaluated the accuracy and
                   completeness of DOD’s inventory of financial management systems. An
                   accurate inventory is a critical step in DOD’s efforts to develop reliable
                   financial management systems and resolve its long-standing financial
                   management problems. DOD’s ability to produce accurate, auditable
                   financial statements and other reliable management reports as required by
                   the Chief Financial Officers (CFO) Act of 1990, as expanded by the
                   Government Management Reform Act of 1994, has been hampered by the
                   lack of integrated financial systems that link accounting, budgeting, and
                   program information.

                   This report is addressed to you because of your role as the chairman of
                   DOD’s Senior Financial Management Oversight Council,1 which was
                   established to ensure the involvement of senior DOD leaders in the financial
                   reform process. We believe that the Council could appropriately address
                   the cross-cutting issues raised in this report.


                   DOD  does not have a comprehensive inventory of the systems it relies on to
Results in Brief   record, accumulate, classify, and report financial information. The number
                   of systems included in DOD’s inventory was limited because the regulations
                   and guidance from the Defense Finance and Accounting Service (DFAS) did
                   not properly define financial management systems. Office of Management
                   and Budget (OMB) Circular A-127, Joint Financial Management
                   Improvement Program (JFMIP) system requirements, and the recently

                   1
                    According to its charter, the Council meets on a regular basis to address financial management
                   deficiencies, approve plans for proactive solutions to financial management weaknesses and
                   deficiencies, assign responsibility for correcting financial management problems, and monitor
                   progress in reforming DOD’s financial management. The Council’s high-level membership includes the
                   Secretaries of the military departments, Vice Chairman of the Joint Chiefs of Staff, Under Secretary of
                   Defense (Acquisition and Technology), Under Secretary of Defense (Comptroller), Chief Financial
                   Officer, DOD General Counsel, Assistant Secretary of Defense (Command, Control, Communications
                   and Intelligence), Director of the Defense Performance Review, and Under Secretary of Defense for
                   Policy.



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                  enacted Federal Financial Management Improvement Act of 1996 define
                  financial management systems to include the financial systems and the
                  financial portions of mixed systems necessary to support financial
                  management. A mixed system is defined as an information system that
                  supports both financial and nonfinancial functions of the federal
                  government or its components.

                  DOD considers mixed systems that are generally not within the CFO
                  (Comptroller) organization (such as acquisition, logistics, and personnel
                  systems) to be nonfinancial and therefore does not include them in its
                  inventory. Although we did not identify all of the systems that should have
                  been included, several of the excluded systems account for billions of
                  dollars of assets and clearly meet the required definition of financial
                  management systems.


                  In performing our evaluation of the accuracy and completeness of DOD’s
Scope and         reported inventory of financial management systems, we
Methodology
              •   reviewed DOD guidance related to classifying its systems as financial,
                  mixed financial, and nonfinancial;
              •   determined whether systems categorized as nonfinancial contained
                  information needed to produce DOD financial statements and other
                  financial reports;
              •   compared DOD’s financial management systems inventory to other DOD
                  systems inventories to determine whether categories of systems not
                  included in financial management systems inventories and reports were
                  properly categorized as nonfinancial (however, we did not test the
                  accuracy of these inventories);
              •   interviewed appropriate DOD, OMB, and DFAS staff to obtain information
                  regarding the categorizing and reporting of financial management systems;
              •   reviewed federal financial management system guidance and applicable
                  laws, the Joint Financial Management Improvement Program’s (JFMIP)
                  Framework for Federal Financial Management Systems, and OMB Circulars
                  A-123, A-127, and A-130; and
              •   reviewed military service audits to identify systems used to prepare
                  financial statements.

                  We performed our work from December 1995 to November 1996 in the
                  Washington, D.C., area in accordance with generally accepted government
                  auditing standards. We requested agency comments from the Secretary of
                  Defense or his designee. The Deputy Chief Financial Officer provided us



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                        with written comments that are discussed in the “Agency Comments and
                        Our Evaluation” section of this report and reprinted in appendix II.


                        Legislative and other requirements to which DOD is subject recognize the
Requirements for        significance of developing a complete financial management systems
Identifying Financial   inventory. The intent of these requirements, as indicated in the policy
Management Systems      statement found in section 6 of OMB Circular A-127, is to ensure that
                        financial management systems provide complete, reliable, and timely
                        information to enable government entities to carry out their fiduciary
                        responsibilities; deter fraud, waste, and abuse; and facilitate efficient and
                        effective delivery of programs through relating financial consequences to
                        program performance. Further details on federal financial management
                        systems requirements can be found in appendix I.

                        The Chief Financial Officers (CFO) Act of 1990 gives agency CFOs the
                        responsibility for developing and maintaining integrated accounting and
                        financial management systems. In addition, the act requires that the
                        agency CFO provide policy guidance and oversight of agency financial
                        management personnel, activities, and operations, including the
                        implementation of agency asset management systems such as those for
                        property and inventory management. OMB implementing guidance states
                        that the CFO is to approve the design for information systems that provide,
                        at least in part, financial and/or program performance data used in
                        financial statements, solely to ensure that CFO needs are met.

                        In addition, CFOs are required to prepare and annually revise agency plans
                        to implement OMB’s 5-year financial management plan for the federal
                        government. Agency 5-year plans are to include information such as the
                        agency’s strategy for developing and integrating agency accounting,
                        financial information, and other financial management systems.

                        A recent congressional initiative in this area is the Federal Financial
                        Management Improvement Act of 1996, which provides a legislative
                        mandate to implement and maintain financial management systems that
                        substantially comply with federal financial management systems
                        requirements, applicable federal accounting standards, and the U.S.
                        Standard General Ledger. The legislative history of the act expressly refers
                        to JFMIP requirements and OMB Circular A-127 as sources of the financial
                        management systems requirements. If the head of an agency determines
                        that the agency’s financial management systems do not comply with the
                        requirements of the act, a remediation plan must be established that



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    includes resources, remedies, and intermediate target dates necessary to
    bring the agency’s financial management systems into substantial
    compliance.

    The act defines financial management systems to include the financial
    systems and the financial portions of mixed systems necessary to support
    financial management, including automated and manual processes,
    procedures, controls, data, hardware, software, and support personnel
    dedicated to the operation and maintenance of system functions. A mixed
    system is defined as an information system that supports both financial
    and nonfinancial functions of the federal government or its components.

    Additional key financial management systems requirements include the
    following.

•   JFMIP’s Framework for Federal Financial Management Systems provides a
    model for the development of an integrated financial management system.
•   Circular A-127 requires that executive agencies develop and maintain an
    agencywide inventory of financial management systems and ensure that
    appropriate assessments of these systems are conducted. Circular A-127
    applies to financial management systems, which include financial and
    mixed systems. The circular also requires that agencies establish and
    maintain a single, integrated financial management system. According to
    the circular, a single, integrated financial management system refers to a
    unified set of financial systems and the financial portions of mixed
    systems encompassing the software, hardware, personnel, processes
    (manual and automated), procedures, controls, and data necessary to
    carry out financial management functions, manage financial operations of
    the agency, and report on the agency’s financial status to central agencies,
    the Congress, and the public.
•   The Paperwork Reduction Act establishes a broad mandate for agencies to
    perform their information resources management activities in an efficient,
    effective, and economical manner. Consistent with the act, Circular A-130
    states that the head of each agency shall maintain an inventory of the
    agency’s major information systems.
•   OMB requires that executive agencies, under section 4 of the Federal
    Managers’ Financial Integrity Act (FMFIA), produce an annual statement on
    whether their financial management systems conform with
    governmentwide principles, standards, and requirements.




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                          DFAS  maintains a DOD inventory of financial systems in the Systems
DOD’s Inventory of        Inventory Data Base (SID). Using SID, DOD reported 249 systems in its fiscal
Financial                 year 1995 annual financial management systems inventory to OMB.
Management Systems        However, this does not include many systems that DOD relies on to
                          produce financial management information and reports. A complete
Is Not Complete           inventory is a critical step in DOD’s efforts to correct its long-standing
                          financial systems deficiencies and develop a reliable, integrated financial
                          management system. These deficiencies have been a major factor
                          contributing to DOD’s inability to fulfill its stewardship responsibilities for
                          its resources, including maintaining control over specific assets, such as
                          shipboard supplies and weapons systems, and over its expenditures, such
                          as payroll and contract payments. In addition, the DOD Inspector General
                          (IG) recently reported2 that (1) the overarching deficiency that prevented
                          auditors from rendering audit opinions on fiscal year 1995 DOD general
                          fund financial statements was the lack of adequate accounting systems
                          and (2) disclaimers of opinion can most likely be expected until the next
                          century.

                          The number of reported systems has been limited because both DOD
                          regulations and DFAS guidance did not properly define financial
                          management systems, as required. Although we did not identify all of the
                          systems that should have been included, several of the excluded systems
                          account for billions of dollars of DOD assets and are clearly mixed systems
                          that meet the OMB and JFMIP definition of financial management systems.


DOD Definition Excludes   DOD  Financial Management Regulation (DOD 7000.14-R, Volume 1) does not
Mixed Systems             include all mixed systems in its definition of financial management
                          systems, as required. Instead, the regulation states that “feeder systems ...
                          [that] are the initial record of financial data for processing by accounting
                          systems” are not within the scope of financial management systems
                          reporting. The regulation provides the following specific examples of
                          feeder systems: (1) logistics and inventory systems that provide
                          acquisition cost, location, and quantity information, (2) personnel systems
                          that provide grade and entitlements information, and (3) timekeeping
                          systems that provide attendance and leave information.

                          DFAS repeats DOD’s limited definition of financial management systems in
                          its annual guidance to Defense components for conducting financial
                          management systems reviews. The feeder systems generally excluded by

                          2
                           Major Deficiencies Preventing Auditors From Rendering Audit Opinions on FY 1995 DOD General
                          Fund Financial Statements (Report No. 97-026, Nov. 19, 1996).



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DOD are typical of systems used to track financial events and are
specifically mentioned in the JFMIP Framework document as critical to an
integrated financial management system.

An integrated system under general ledger control is necessary to provide
oversight and control to ensure accurate and complete accounting for
DOD’s resources. To be truly effective, DOD’s integrated financial
management system must link program delivery to the systems that
process and track financial events. This linkage is crucial to support the
information needs of management, central agencies, and the Congress.
Integrated systems help to provide the overall discipline needed to ensure
the accuracy and completeness of the information that is used to support
DOD’s stewardship responsibilities for the vast resources entrusted to it.


Audit reports have disclosed numerous problems resulting from the lack
of an integrated financial management system that directly affect the
military services’ ability to achieve mission objectives. For example, in our
review of the Department of the Navy’s inventory management, we
reported3 that Navy’s item managers could not keep track of the
$5.7 billion in operating materials and supplies on board ships and at 17
redistribution sites. The Atlantic and Pacific Fleets and other Navy
components are pursuing separate, nonintegrated systems projects in an
attempt to improve visibility and thus management of their operating
materials and supplies.

In another example, at the end of fiscal year 1995, DOD reported that it had
inventory valued at almost $70 billion, and we estimate that about half of
the inventory includes items that are not needed to support DOD war
reserves or current operating requirements. Since 1990, GAO has designated
DOD inventory management a high-risk area, with billions of dollars being
wasted on excess supplies. The lack of integrated financial management
systems and the lack of accurate reliable data to support the quantity,
condition, and value of items have been major contributing factors to
DOD’s inability to account for and control its inventory.4


In addition, we previously reported5 that thousands of soldiers on Army’s
payroll could not be matched with Army personnel records, and Army had

3
 Navy Financial Management: Improved Management of Operating Materials and Supplies Could Yield
Significant Savings (GAO/AIMD-96-94, August 16, 1996).
4
 Defense Inventory Management (GAO/HR-95-5, February 1995).
5
 Financial Management: Defense’s Systems for Army Military Payroll Is Unreliable (GAO/AIMD-93-32,
Sept. 30, 1993).



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                       no assurance that these individuals should have been paid. In fact, we
                       found that DFAS paid $6.1 million to 2,279 soldiers who should not have
                       been paid. In response to our recommendation that steps be taken to
                       integrate its payroll and personnel systems, DOD stated that neither the DOD
                       CFO nor the DFAS Director alone had sufficient authority to ensure that
                       specific steps were taken toward the integration or interface of payroll and
                       personnel systems.

                       Since financial transactions are initiated in systems such as acquisition,
                       logistics, and personnel, the DOD Comptroller is a stakeholder in them and
                       has oversight responsibilities in accordance with the CFO Act.
                       Furthermore, these systems are covered under the newly enacted Federal
                       Financial Management Improvement Act of 1996. We believe that the
                       Senior Financial Management Oversight Council could appropriately
                       address issues dealing with systems that have multiple stakeholders that
                       cross departmental boundaries.


Key Systems Excluded   We compared DOD’s inventory of financial management systems to the
From Inventory         systems inventories contained in the Defense Information Systems
                       Agency’s (DISA) Defense Integration Support Tools (DIST) database.6 As of
                       April 1996, DIST contained 8,624 information systems which were
                       segregated by category. DIST labeled 9317 of the systems as financial, 682
                       more than the 249 systems included in the DOD inventory. While DOD
                       officials have indicated that the DIST listing may be incomplete or systems
                       may be incorrectly identified as supporting financial management, the
                       large discrepancy indicates that additional financial management systems
                       likely exist.

                       Most acquisition, personnel, property, and time and attendance systems
                       were not included in the DIST financial systems category. For example, the
                       DIST database did not identify as financial systems the Defense Civilian
                       Personnel Data System, used for civilian personnel management, or the
                       Civil Engineering Material Acquisition System, an inventory management
                       system. These systems were also excluded from the DOD inventory. We


                       6
                        According to a November 5, 1996, memorandum from the Under Secretary of Defense (Comptroller)
                       and the Assistant Secretary of Defense (Command, Control, Communications, and Intelligence), the
                       DIST is the backbone tool for managing the Department’s information technology investment
                       strategies and for identifying functional information systems interfaces and data exchange
                       requirements.
                       7
                        We noted that some of the systems classified as financial appeared more than once under the financial
                       classification. A total of 1,081 systems were listed in the financial category. We eliminated the apparent
                       duplicates, reducing the number to 931 financial systems.



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    performed a limited search on the entire DIST database for the key words
    acquisition, personnel, property, and time and attendance and identified
    282 systems that contained one or more of these words in their system
    name and therefore appeared to meet the OMB and JFMIP definitions of
    financial management systems; however, only 43 of those systems were
    classified in the DIST as financial and only 6 were reported in the DOD
    financial management systems inventory.

    Several systems that were not included in DOD’s inventory provide critical
    information for use in formulating the financial statements of the military
    services. These systems clearly meet the OMB and JFMIP definition for
    financial management systems. For example, DOD’s list of 249 financial
    management systems did not include the following key systems, which
    account for billions of dollars of DOD assets and were identified in recent
    financial statement audit reports or other financial reporting.

•   Continuing Balance System - Expanded (CBSX). Army uses CBSX to report
    the year-end value of retail equipment on hand and in transit for active
    Army and Army Reserve activities. In its fiscal year 1995 financial
    statements, Army reported about $82.6 billion of equipment on hand and
    about $500 million of assets in transit.
•   Reliability and Maintainability Information System (REMIS). REMIS is an Air
    Force system designed to track inventory, status, and utilization of
    aircraft, as well as compute their value. For fiscal year 1995, Air Force
    used REMIS to report on over 9,450 aircraft and 4,500 guided and ballistic
    missiles valued at $144.6 billion.
•   Support Equipment Resources Management Information System (SERMIS).
    This system is Navy’s automated source of information on naval aviation
    support equipment assets currently in use. SERMIS maintains financial and
    management information on support equipment valued at $5.3 billion in
    fiscal year 1995.
•   Standard Installation/Division Personnel System (SIDPERS). SIDPERS is the
    personnel system operated by Army installation and field commanders for
    active duty personnel. This system is used to report data to the Total Army
    Personnel Data Base which in turn reports five pay events to DFAS for
    about 493,000 personnel. Army plans to fully implement a version of
    SIDPERS within the next 2 years which will interface directly with DFAS and
    account for 88 pay events. Despite their importance to the payroll process,
    neither SIDPERS nor the Total Army Personnel Data Base have been
    identified as financial management systems.




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                         A comprehensive inventory of the financial management systems used to
Conclusions              record, accumulate, classify, and report DOD’s financial management
                         information is a critical step if DOD is to (1) effectively manage its existing
                         systems, (2) prioritize and coordinate efforts to correct its long-standing
                         financial systems deficiencies, and (3) develop a reliable, integrated
                         financial management system. DOD’s severe systems deficiencies have been
                         a major factor contributing to its inability to meet its stewardship
                         responsibilities for the vast resources entrusted to it. Finally, until a
                         complete inventory of financial management systems is developed, DOD
                         will not be able to fulfill the requirements of the financial management
                         improvement initiatives enacted by the Congress.


                         As part of DOD’s long-term systems improvement strategy, we recommend
Recommendations          that

                     •   you direct that the Under Secretary of Defense (Comptroller) revise the
                         Department of Defense Financial Management Regulation, DOD 7000.14-R,
                         Volume 1, to include all mixed systems in its definition of financial
                         management systems;
                     •   the Senior Financial Management Oversight Council oversee the
                         development of an inventory of all financial management systems, using
                         the revised definition; and
                     •   systems identified be incorporated in the DOD Chief Financial Officer
                         Financial Management 5-Year Plan, DFAS Chief Financial Officer Financial
                         Management 5-Year Plan, and FMFIA section 4 reporting.


                         In written comments on a draft of this report, DOD’s Deputy Chief Financial
Agency Comments          Officer stated that DOD concurred or partially concurred with all of our
and Our Evaluation       recommendations. In response to our first recommendation that DOD
                         revise its financial management regulations to include all mixed systems in
                         its definition of financial management systems, DOD stated that it will use
                         the definition provided in OMB Circular A-127 as a base for the revised
                         definition. DOD further stated that it will also include other relevant
                         statutory and regulatory requirements in the revised definition. We want to
                         reiterate our position that the OMB requirements be fully implemented.
                         Since 1984, OMB’s Circular A-127 and all subsequent guidance have
                         included a definition of financial management systems that includes
                         personnel, property, procurement, and inventory. These are the types of
                         systems that DOD has specifically excluded from its reporting. The most
                         recent guidance, issued by OMB in 1993, classifies these types of systems as



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mixed systems. Also, the recently enacted Federal Financial Management
Improvement Act of 1996 uses the same definitions for financial
management systems and mixed systems as OMB Circular A-127. We
provided OMB officials with a copy of our draft report, and they concurred
with the representations of OMB Circular A-127 requirements included in
our report.

DOD partially concurred with our recommendation that the DOD Senior
Financial Management Oversight Council oversee the development of the
financial management systems inventory. DOD agreed that oversight was
necessary but stated that the Council was not the appropriate body.
Rather, DOD indicated that this responsibility will remain with the Chief
Financial Officer and DFAS, with assistance from the DOD components. In
light of the serious deficiencies in DOD’s financial management, DOD must
address its financial management systems problems immediately. In our
view, timely resolution of this issue can only be accomplished with the
involvement of top-level management throughout the affected components
of DOD, such as those responsible for logistics, acquisition, and personnel.
We continue to believe that the Council’s oversight, together with
participation of the CFO and DFAS, is necessary to ensure that the inventory
is completed as soon as possible.

We support DOD’s efforts to review the DIST database to determine if any of
the systems should be included. For this effort to succeed, DOD must adopt
a definition of financial management systems that is consistent with OMB
Circular A-127 and the Federal Financial Management Improvement Act.

In response to our recommendation that the financial management
systems identified be incorporated in the DOD Chief Financial Officer
Financial Management 5-Year Plan, DFAS Chief Financial Officer Financial
Management 5-Year Plan, and FMFIA section 4 reporting, DOD stated that it
has and will continue to report on its financial systems. However, until DOD
changes its definition of financial management systems in acccordance
with OMB guidance and the provisions of the Federal Financial
Management Improvement Act, its reporting will continue to be
incomplete. DOD needs to identify all of the systems it relies on to manage
its vast resources as a critical step in its efforts to develop reliable
financial management systems and resolve its long-standing financial
management problems.

Although DOD generally concurred with the report’s recommendations, DOD
stated that some of the issues addressed in the report were significantly



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inaccurate. Specifically, DOD took issue with the report in its treatment of
three areas.

First, DOD asserted that its System Inventory Database provides a
comprehensive inventory of financial management systems. Our report
recognizes that DOD has an inventory maintained in the Systems Inventory
Database. However, our report points out that DOD’s inventory is not a
comprehensive inventory of all DOD financial management systems. The
report states that the number of reported systems has been limited
because both DOD regulations and DFAS guidance did not properly define
financial management systems. Most personnel, property, procurement,
and inventory systems have been excluded from DOD’s reporting. Our
report includes examples of systems not included in DOD’s inventory that
account for billions of dollars of DOD assets. These systems meet OMB’s
definition of a mixed system and must be included in a comprehensive
inventory if DOD is to develop a reliable, integrated financial management
system.

Second, DOD stated that DIST is not a database that is used for baselining
financial systems and that the database does not contain a process or
procedure for classifying or certifying systems as financial systems. As
stated in the report, although the DIST listing may be incomplete or systems
may be incorrectly identified as supporting financial management, the
large disparity between the number of systems identified in DIST and SID
indicates that additional financial management systems likely exist.

Third, DOD stated that it is complying with the provisions of OMB Circular
A-127. Our report recognizes that DOD has an established process intended
to meet OMB requirements. However, because DOD has not adopted the OMB
definition for financial management systems, its inventory and reporting
have not been comprehensive.


We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services, the House
Committee on National Security, the Senate Committee on Governmental
Affairs, the House Committee on Government Reform and Oversight, and
the Director of the Office of Management and Budget. We are also sending
copies to the Secretary of Defense and the Under Secretary of Defense
(Comptroller). Copies will also be made available to others upon request.




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Please contact me at (202) 512-9095 if you have any questions on this
report. Major contributors to this report are listed in appendix III.

Sincerely yours,




Lisa G. Jacobson
Director, Defense Financial Audits




Page 12                    GAO/AIMD-97-29 Financial Management Systems Inventory
Page 13   GAO/AIMD-97-29 Financial Management Systems Inventory
Appendix I

Financial Management Systems
Requirements

                      The following are the specific requirements for financial management
                      systems to which DOD, as an executive agency, is subject.


                      The CFO Act specifies that the responsibilities of an agency CFO are to
Chief Financial       include
Officers Act
                  •   developing and maintaining integrated accounting and financial
                      management systems;
                  •   directing, managing, and providing policy guidance and oversight of all
                      agency financial management personnel, activities, and operations; and
                  •   approving and managing financial management systems design and
                      enhancement projects.

                      On February 27, 1991, OMB issued guidance (M-91-07) for preparing
                      organization plans required by the CFO Act. The guidance details the
                      authorities, functions, and responsibilities that a CFO is to have to comply
                      with the act. Specifically, the guidance states that the organization plans
                      should provide the CFO with authority

                  •   to manage directly and/or monitor, evaluate, and approve the design,
                      budget, development, implementation, operation, and enhancement of
                      agencywide and agency component accounting, financial, and asset
                      management systems;
                  •   to clear the design for other information systems that provide, at least in
                      part, financial and/or program performance data used in financial
                      statements, solely to ensure that CFO needs are met;
                  •   to ensure that program information systems provide financial and
                      programmatic data (including program performance measures) on a
                      reliable, consistent, and timely basis to agency financial management
                      systems; and
                  •   to evaluate, where appropriate, the installation and operation of such
                      systems.

                      In addition, the CFO Act requires OMB to prepare annually and submit to the
                      Congress a governmentwide 5-year financial management plan that
                      describes planned OMB and agency activities for the next 5 fiscal years to
                      improve the financial management of the federal government. Further, the
                      act requires agency CFOs to prepare and annually revise agency plans to
                      implement OMB’s 5-year plan. Each 5-year plan is to include information
                      such as the following:




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                       Appendix I
                       Financial Management Systems
                       Requirements




                   •   a description of the existing financial management structure and any
                       changes needed to establish an integrated financial management system;
                   •   a strategy for developing and integrating individual agency accounting,
                       financial information, and other financial management systems; and
                   •   proposals to eliminate duplicate and other unnecessary systems and
                       projects to bring existing systems into compliance with applicable
                       standards and requirements.


                       DOD  is subject to section 4 of FMFIA; OMB requires executive agencies under
OMB Requirements       section 4 to produce an annual statement on whether its financial
                       management systems conform with governmentwide principles, standards,
                       and requirements. Governmentwide systems requirements, developed by
                       OMB in consultation with the Comptroller General, are presented in section
                       7 of OMB Circular A-127, “Financial Management Systems Requirements.”

                       Circular A-127 requires that executive agencies, including DOD, develop
                       and maintain an agencywide inventory of financial management systems
                       and ensure that appropriate assessments are conducted of these systems.
                       In addition, DOD must consider the results of its FMFIA reviews when it
                       develops its financial management systems plans.

                       Requirements for reporting the results of FMFIA section 4 systems
                       assessments are found in OMB Circular A-123, “Management Accountability
                       and Control.” Executive agencies, including DOD, must produce an annual
                       statement on whether the agency’s financial management systems
                       conform with governmentwide requirements found in Circular A-127. If
                       the agency does not conform with these requirements, the statement must
                       discuss the agency’s plans for bringing its systems into compliance. If the
                       agency head judges any financial management systems weakness to be
                       material, the issue must be included in the annual FMFIA report. The FMFIA
                       report is to be transmitted to the President, the President of the Senate,
                       the Speaker of the House of Representatives, the Director of OMB, and key
                       congressional committees and subcommittees.

                       Circular A-127 applies to financial management systems, which include
                       financial and mixed systems. In determining which systems are subject to
                       these requirements, the Circular categorizes and defines information
                       systems in the following manner.

                   •   A financial system (1) collects, processes, maintains, transmits, and
                       reports data about financial events, (2) supports financial planning or



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                        Appendix I
                        Financial Management Systems
                        Requirements




                        budgeting activities, (3) accumulates and reports cost information, or
                        (4) supports the preparation of financial statements.
                    •   A mixed system supports both financial and nonfinancial functions.
                    •   A nonfinancial system supports nonfinancial functions and any financial
                        data included in the system are insignificant to agency financial
                        management and/or not required for the preparation of financial
                        statements.

                        Circular A-127 also requires that DOD establish and maintain a single,
                        integrated financial management system. According to the Circular, a
                        single, integrated financial management system refers to a unified set of
                        financial systems and the financial portions of mixed systems
                        encompassing the software, hardware, personnel, processes (manual and
                        automated), procedures, controls, and data necessary to carry out
                        financial management functions, manage financial operations of the
                        agency, and report on the agency’s financial status to central agencies, the
                        Congress, and the public. Unified means that the systems are planned for
                        and managed together, operated in an integrated fashion, and linked
                        together electronically to provide the agencywide financial system support
                        necessary to carry out the agency’s mission and support the agency’s
                        financial management needs.

                        In addition, Circular A-130 provides governmentwide information
                        resources management policies as required by the Paperwork Reduction
                        Act of 1980, as amended. The Paperwork Reduction Act establishes a
                        broad mandate for agencies to perform their information resources
                        management activities in an efficient, effective, and economical manner.
                        Consistent with the act, Circular A-130 states that the head of each agency
                        shall maintain an inventory of the agency’s major information systems.


                        Developing and maintaining a complete inventory of DOD’s information
Clinger-Cohen Act       resources is essential to implementing a strategic information resources
                        management process, as required by the Paperwork Reduction Act and the
                        recently enacted Clinger-Cohen Act of 1996. The Clinger-Cohen Act calls
                        for agency heads, under the supervision of OMB’s Director, to design and
                        implement a process for maximizing the value and assessing and managing
                        the risks of their information technology acquisitions, including
                        establishing minimum criteria on whether to undertake an investment in
                        information systems. This process is to be integrated with the processes
                        for making budget, financial, and program management decisions with the
                        agency. In addition, the act states that the head of each executive agency,



                        Page 16                        GAO/AIMD-97-29 Financial Management Systems Inventory
                           Appendix I
                           Financial Management Systems
                           Requirements




                           in consultation with the Chief Information Officer and the Chief Financial
                           Officer, is responsible for establishing policies and procedures that ensure
                           that the accounting, financial, and asset management systems and other
                           information systems of the agency are designed, developed, maintained,
                           and used effectively to provide financial or program performance data for
                           financial statements.


                           JFMIP’sFramework for Federal Financial Management Systems provides a
JFMIP’s Model for          model for the development of an integrated financial management system.
Integrated Financial       This document points out the importance of financial management
Management Systems         systems in the overall effort to improve government.

                           “These systems should not only support the basic accounting functions for accurately
                           recording and reporting financial transactions but must also be the vehicle for integrated
                           budget, financial, and performance information that managers use to make decisions on
                           their programs....Without meaningful financial information and supporting systems, neither
                           the President, the Congress, nor the program managers can effectively carry out their
                           stewardship responsibilities.”


                           According to the Framework, an integrated system includes, among
                           others, the following financial management system types:

                       •   a core financial system that supports general ledger management, funds
                           management, payment management, receipt management, and cost
                           management;
                       •   a personnel/payroll system;
                       •   an inventory system;
                       •   a property management system;
                       •   an acquisition system;
                       •   a budget formulation system; and
                       •   a managerial cost accounting system.

                           To function as a single, integrated system, the types of systems listed
                           above must have these physical characteristics: common data elements,
                           common transaction processing, consistent internal controls, and efficient
                           transaction entry.




                           Page 17                         GAO/AIMD-97-29 Financial Management Systems Inventory
Appendix II

Comments From the Department of Defense




See comment 1.




See comment 1.




                 Page 18   GAO/AIMD-97-29 Financial Management Systems Inventory
                 Appendix II
                 Comments From the Department of Defense




See comment 1.




See comment 2.


See comment 3.




                 Page 19                      GAO/AIMD-97-29 Financial Management Systems Inventory
                 Appendix II
                 Comments From the Department of Defense




See comment 1.




See comment 1.




                 Page 20                      GAO/AIMD-97-29 Financial Management Systems Inventory
                 Appendix II
                 Comments From the Department of Defense




See comment 1.




                 Page 21                      GAO/AIMD-97-29 Financial Management Systems Inventory
Appendix II
Comments From the Department of Defense




The following are GAO’s comments on the Department of Defense’s letter
dated January 24, 1997.

1. See the “Agency Comments and Our Evaluation” section of this report.

2. In a follow-up discussion on DOD’s statement that the additional 682 DIST
systems have failed to satisfactorily complete the required process and
qualify as legitimate financial management systems, DOD officials stated
that these systems have not yet undergone the required process. As stated
in DOD’s response to our second recommendation, DOD plans to review the
DIST database to determine if any of these systems should be included in its
SID.


3. In a January 10, 1997, discussion on a draft of this report, DOD officials
stated that the Department defines a mixed system as an integrated system
that performs both financial and program functions. For example, they
told us that the Marine Corps Total Force System meets DOD’s definition
because it is an integrated payroll and personnel system that shares the
same database for both functions. In our discussions, DOD officials
indicated that a personnel system that provided data to a separate payroll
system with which it was not physically integrated would not meet its
definition of a mixed system and therefore would be excluded from its
inventory of financial management systems. However, neither Circular
A-127 nor the Federal Financial Management Reform Act uses integration
as a criterion in its definition of financial management systems.




Page 22                      GAO/AIMD-97-29 Financial Management Systems Inventory
Appendix III

Major Contributors to This Report


                       Molly Boyle, Assistant Director
Accounting and         Janett Smith, Assistant Director
Information            James Ariail, Senior Auditor
Management Division,   Francine DelVecchio, Communications Analyst

Washington, D.C.
                       Barbara House, Senior Evaluator
Los Angeles Regional
Office
                       Lynn Filla Clark, Senior Evaluator
Chicago Regional       Neal Gottlieb, Senior Evaluator
Office                 Stewart Seman, Senior Evaluator
                       Lenny Moore, Evaluator




(918886)               Page 23                    GAO/AIMD-97-29 Financial Management Systems Inventory
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