oversight

Financial Management: Analysis of DOD's First Biennial Financial Management Improvement Plan

Published by the Government Accountability Office on 1999-01-29.

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

                 United States General Accounting Office

GAO              Report to Congressional Committees




January 1999
                 FINANCIAL
                 MANAGEMENT
                 Analysis of DOD’s First
                 Biennial Financial
                 Management
                 Improvement Plan




GAO/AIMD-99-44
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division

      B-281573

      January 29, 1999

      The Honorable John Warner
      Chairman
      The Honorable Carl Levin
      Ranking Minority Member
      Committee on Armed Services
      United States Senate

      The Honorable Floyd D. Spence
      Chairman
      The Honorable Ike Skelton
      Ranking Minority Member
      Committee on Armed Services
      House of Representatives

      Section 1008 of the National Defense Authorization Act for Fiscal Year
      1998 (Public Law 105-85) required that the Secretary of Defense submit to
      the Congress a biennial strategic plan for the improvement of financial
      management within the Department of Defense (DOD). The plan is to be
      submitted not later than September 30 of each even-numbered year and is
      to address all aspects of financial management within DOD, including the
      finance systems, accounting systems, and data feeder systems that support
      its financial functions. Each plan is to include a statement of the Secretary
      of Defense’s concept of operations for financial management. In addition,
      the act directed that the first plan include a discussion of 12 specific
      financial management topics. Section 912 of the Strom Thurmond National
      Defense Authorization Act for Fiscal Year 1999 (Public Law
      105-261) required GAO to analyze DOD’s Biennial Plan and discuss the extent
      to which it is a workable plan for addressing DOD’s financial management
      problems.

      DOD  submitted its Biennial Plan to the Congress on October 26, 1998.
      Volume I of the Biennial Plan includes three main sections: the concept of
      operations, the current environment, and the transition plan intended to
      describe the department’s goals for achieving the target financial
      management environment and to identify the strategies and corrective
      actions necessary to move through the transition. Volume II of the Plan
      provided information on the specific financial management improvement
      initiatives intended to implement the transition plan. To address the
      section 912 requirements, our objectives were to determine whether
      (1) the concept of operations included the critical elements necessary for




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                   producing sustainable financial management improvement over the long
                   term and (2) the transition plan provided a strategic-level “road map” from
                   the current environment to DOD’s planned future financial management
                   environment. This report also includes a discussion of additional technical
                   details that would be needed to determine whether implementation of the
                   department’s future financial management environment is practical,
                   cost-effective, and feasible.

                   We are continuing to review the 12 specific financial management areas
                   that DOD included in its first plan and will provide any observations
                   concerning DOD’s discussion of these topics at a later date. Further details
                   on our scope and methodology are in appendix I.


                   DOD’s   Biennial Plan represents a great deal of effort and provides a
Results in Brief   first-ever vision of the department’s future financial management
                   environment. In developing this overall concept of its envisioned financial
                   management environment, DOD has taken an important first step in
                   improving its financial management operations. The department’s Biennial
                   Plan also represents a significant landmark because it includes, for the
                   first time, a discussion of the importance of the programmatic functions of
                   personnel, acquisition, property management, and inventory management
                   to the department’s ability to support consistent, accurate information
                   flows to all information users. In addition, DOD’s Biennial Plan includes an
                   impressive array of initiatives intended to move the department from its
                   current state to its envisioned financial management environment.

                   If effectively implemented, the initiatives discussed should result in some
                   improvements in DOD’s financial management operations. However, the
                   department’s Biennial Plan lacks certain critical elements necessary for
                   producing sustainable financial management improvement over the long
                   term. Specifically, the Plan’s discussion of how DOD’s financial
                   management operations will work in the future—its concept of
                   operations—does not address (1) how its financial management
                   operations will effectively support not only financial reporting but also
                   asset accountability and control and (2) budget formulation.

                   In addition, the transition plan, while an ambitious statement of DOD’s
                   planned improvement efforts, has two important limitations: (1) links are
                   not provided between the envisioned future operations and the over 200
                   planned improvement initiatives to determine whether the proposed
                   transition will result in the target financial management environment and



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(2) actions to ensure feeder systems’ data integrity are not addressed—an
acknowledged major deficiency in the current environment. Without
identifying specific actions that will ensure feeder system data integrity, it
is unclear whether the department will be able to effectively carry out not
only its financial reporting, but also its other financial management
responsibilities.

Finally, additional detailed information would be necessary to determine
whether implementation of the department’s future financial management
environment is practical, cost-effective, and feasible. Such details are
appropriately not included in the strategic financial management
improvement plan that DOD was asked to provide. For example, a systems
architecture—consisting of information such as the portfolio of desired
systems, detailed information flows, and specific technical
requirements—would not be expected as part of a strategic improvement
plan. However, developing the architecture, and other additional detailed
information, would be the next step toward achieving the department’s
target financial management environment. DOD officials have stated that
they recognize that additional information will be necessary and that they
are developing further details on these issues.

In commenting on a draft of this report, the Under Secretary of Defense
(Comptroller) stated that DOD took issue with each of the report’s major
findings and with all of the recommendations. DOD stated that it
appreciated the recognition that the report provides regarding the
magnitude of the effort that the department expended in the preparation
of the report and the challenges that the department will face in
implementing its ambitious financial management reform initiatives.
However, DOD disagreed that the Biennial Plan lacked critical elements and
stated that parts of the report appear to reflect a lack of awareness of the
department’s actions for improving its financial management. In addition,
DOD stated that the draft report contained misleading statements and used
inflammatory language.

We disagree with DOD’s comments. The department’s comments reflect a
basic disagreement with us over the role and definition of financial
management and how this function should support various critical
program functions. Our views on the scope and requirements of
accounting, finance, and feeder systems are fully supported by the
mandates and goals of the CFO Act of 1990 and the Federal Financial
Management Improvement Act of 1996, as well as by OMB and JFMIP
guidance, reports, and pronouncements. As shown in the report, most of



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             our responses to DOD’s comments can be traced to this fundamental
             disagreement over the role of financial management in supporting the
             agency’s operations.


             The primary objective of the Chief Financial Officers (CFO) Act of 1990
Background   Public Law (101-576) is improving the financial management of federal
             agencies. Among the specific requirements of the CFO Act is that each
             agency CFO develop an integrated agency accounting and financial
             management system, including financial reporting and internal controls.
             Such systems are to comply with applicable principles and standards and
             provide complete, reliable, consistent, and timely information that is
             responsive to the agency’s financial information needs. DOD’s Financial
             Management Regulation1 also specifies that the department’s CFO is to
             develop and maintain an integrated DOD accounting and financial
             management system, including financial reporting and internal controls,
             that provides for the integration of accounting and budgeting information.
             In addition, the Joint Financial Management Improvement Program (JFMIP)2
             Framework for Federal Financial Management Systems states that the
             financial management system 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.

             Further, the Federal Financial Management Improvement Act (FFMIA) of
             1996 requires agencies to implement and maintain financial management
             systems that substantially comply with federal financial management
             systems requirements, applicable accounting standards, and the standard
             general ledger. The legislative history of FFMIA expressly refers to JFMIP
             requirements and Office of Management and Budget (OMB) Circular A-127
             as sources of the financial management systems requirements.

             JFMIP’s
                   Framework for Federal Financial Management Systems defined an
             agency’s financial management operations to encompass the relationships
             among the program delivery financing function, the budget
             formulation/transaction tracking function, and the financial accountability

             1
              DOD’s Financial Management Regulation (volume I, chapter 1).
             2
              JFMIP is a cooperative undertaking of the U.S. Department of the Treasury, the U.S. General
             Accounting Office, the Office of Management and Budget (OMB), and the Office of Personnel
             Management and was organized to improve governmentwide financial management. JFMIP’s
             Framework for Federal Financial Management Systems (January 1995) defines the scope of an
             agency’s financial management systems.



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                                    function. The integration of systems is a key element to achieving these
                                    functional relationships. OMB Circular A-127, Financial Management
                                    Systems, requires federal agencies to “. . . establish and maintain a single,
                                    integrated financial management system.”


Benefits of a Single                A single integrated financial management system ensures that adequate
Integrated Financial                financial controls are in place through the linkage of the budget
Management System                   formulation, financial accountability, and transaction processes. In
                                    addition, an integrated financial management system provides for
                                    improvements in efficiency, including reductions in the potential for errors
                                    and rework. Figure 1 is a simplified example of how a single integrated
                                    financial management system for asset acquisition can help achieve
                                    greater control and accountability.


Figure 1: Example of How Systems
Integration Helps Achieve Greater                 Contract Data                     Payment Data
Control

                                                   Acquisition                       Accounting




                                                                    Property
                                                                   Management

                                                                    Asset Data




                                    As shown in this example, integration would allow contract data to be
                                    entered initially by acquisition personnel when an asset was ordered. This
                                    information would be available to accounting personnel to record the
                                    obligation and property management to recognize that an asset is to be
                                    delivered. Upon asset receipt, property management personnel enter the
                                    asset in property management records. Those records are available for
                                    accounting personnel for payment purposes, for acquisition personnel to




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    monitor contract delivery, and for property management personnel to
    monitor program results and the use of budgetary resources. Under a
    single integrated financial management system, greater asset control and
    accountability is achieved because data associated with assets acquired
    are available simultaneously to accounting, property management, and
    acquisition personnel.

    Alternatively, in the absence of a single integrated system, OMB Circular
    A-127 permits a unified set of financial systems that are planned for and
    managed together, operated in an integrated fashion, and linked together
    electronically in an efficient and effective manner to provide agencywide
    financial system support necessary to carry out an agency’s mission and
    support its financial management needs. Under a unified integrated
    system, data reside in multiple systems that are linked by interfaces. Data
    integrity can be ensured by compensating controls, such as reconciliation.
    For example, if property management records do not include data on an
    asset for which the accounting records indicate payment has been made,
    the necessary steps can be taken to determine if the asset was in fact
    acquired and to determine its current location, or if the accounting records
    need to be corrected.

    DOD’s audited financial statements prepared under the CFO Act provide for
    an annual scorecard on the department’s progress in resolving its financial
    management deficiencies. To date, DOD has not passed this test of its
    ability to produce reliable financial information. The most recent audits of
    DOD’s financial statements identified pervasive weaknesses across virtually
    the full spectrum of the department’s systems and controls, including
    material weaknesses in DOD’s ability to

•   maintain accountability and control over virtually every category of
    physical assets, including military equipment;
•   account for the full cost of its operations and the extent of its liabilities;
    and
•   properly record and reconcile disbursements, which has resulted in
    numerous erroneous and several fraudulent payments.

    Correcting the department’s long-standing systems’ weaknesses will be
    critical if DOD is to resolve these serious financial management
    weaknesses. Until the department can successfully integrate its
    information systems, its ability to efficiently and effectively maintain
    accountability over its vast resources, prevent wasted resources, and
    achieve broader management reforms will continue to be impaired.



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Concept of Operations Key       Another key element of improving an agency’s financial management is the
to Improving Financial          development of a high-level description of how it carries out its financial
Management                      management responsibilities—a concept of operations. The importance of
                                this step was emphasized by the Congress in including this requirement in
                                DOD’s fiscal year 1998 authorization act.


                                A concept of operations defines how an entity’s operations are (or will be)
                                carried out. It includes a high-level description of the operations that must
                                be performed and who must perform them. As we noted in a June 1997
                                letter,3 for the concept of operations to be useful, it should encompass
                                (1) all of DOD financial management, not just the finance and accounting
                                functions performed by the Defense Finance and Accounting Service
                                (DFAS), and (2) both current and future financial management operations
                                to document how the department is working today and to obtain mutual
                                agreement from all parties on how DOD will conduct its financial
                                management operations in the future.


                                In developing its concept of operations as part of its Biennial Plan, DOD has
First Biennial Plan             taken an important step in improving its financial management operations.
Important Step                  DOD has reported, for the first time, the importance of the programmatic

Toward Improving                functions of personnel, acquisition, property management, and inventory
                                management to the department’s ability to support consistent, accurate
Financial                       information flows to all information users. Specifically, the department’s
Management                      Biennial Plan recognizes that approximately 80 percent of its financial
                                data is derived from program functions and identifies the integrity of these
                                data as critical to the success of the future financial improvement efforts.
                                Recognizing the root of the problem is the first step towards finding the
                                appropriate solution.

                                DOD’s  Biennial Plan is an ambitious undertaking. The 1998 authorizing
                                legislation requires that the department’s Biennial Plan address all aspects
                                of financial management. The Biennial Plan encompasses over 900 pages
                                of text and provides information on over 200 separate financial
                                management improvement initiatives. In addition, according to DOD, the
                                Biennial Plan incorporates the department’s response to the annual
                                financial reporting requirements specified in other regulatory legislation,
                                including the following:

                            •   the CFO Act requirement for a CFO Five Year Plan,

                                3
                                 Financial Management: Comments on DFAS’ Draft Federal Accounting Standards and Requirements
                                (GAO/AIMD-97-108R, June 16, 1997).



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                     •   the Federal Financial Management Improvement Act requirement for a
                         Remediation Plan for correcting systems deficiencies, and
                     •   the Federal Managers’ Financial Integrity Act requirement for a Statement
                         of Assurance for the agency’s financial management systems.

                         The DOD Inspector General, in the DOD financial statement audit report,
                         must provide his opinion on whether the Biennial Plan satisfies the FFMIA
                         requirements for a systems remediation plan. For the purposes of this
                         analysis, we did not evaluate whether the plan meets the other legislative
                         requirements.

                         Because of the range and amount of detailed information contained in the
                         department’s Biennial Plan, it is divided into two volumes. Volume I of the
                         Biennial Plan includes an executive summary followed by three main
                         sections on the concept of operations, the current environment, and the
                         transition plan intended to describe the department’s goals for achieving
                         the target financial management environment and to identify the strategies
                         and corrective actions necessary to move through the transition. A section
                         on the 12 specific topics that are required to be addressed is also included.
                         Volume II of the Plan provided information on the specific financial
                         management improvement initiatives that, according to the department,
                         are intended to implement the transition plan. The initiatives include
                         improvements to existing systems, development of new systems, and
                         studies to develop strategies and goals for specific problem areas.


                         In its Biennial Plan, DOD stated that the purpose of its concept of
DOD’s Concept of         operations was to describe how the department will structure and manage
Operations Missing       financial operations in the future to be in compliance with applicable
Key Elements             regulatory requirements.4 The Biennial Plan further stated that the
                         department will use this concept of operations to guide the evolution of its
                         financial management policies, systems, functions, and improvement
                         initiatives by specifying the target environment needed to meet regulatory
                         requirements and produce auditable financial statements.

                         However, the concept of operations does not address two critical elements
                         that are necessary for producing sustainable financial management
                         improvement over the long term. Specifically, the concept of operations
                         does not address (1) how its financial management operations effectively



                         4
                          The regulatory requirements DOD referred to were the CFO Act, the Federal Managers’ Financial
                         Integrity Act of 1982, and FFMIA.



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support not only financial reporting but also asset accountability and
control, and (2) budget formulation.

First, the department’s concept of operations does not clearly address the
department’s fundamental financial management responsibilities for asset
accountability and control. DOD’s concept of operations appears to focus
primarily on financial reporting and the information needed from the
program managers to prepare auditable financial statements. The flow of
information among functional areas, such as how acquisition will provide
information to property management is not clear. This flow of information
helps promote accountability. Maintaining financial accountability over
DOD’s assets is an area of continuing concern because, in the current
environment, the department must rely on fundamentally weak controls.
DOD currently obtains the data needed by the department’s accounting
personnel for financial reporting from its property management systems
after items are received and entered into those systems. There is no
reconciliation of that information with acquisition and payment data.
Without such reconciliations, DOD’s ability to maintain effective asset
accountability and control is impaired.

While acknowledging the importance of integration, the plan enumerates
the costs and disadvantages of integration. These include (1) data
structures would need to be standardized across integrated systems,
(2) maintenance of shared data must be timely and well executed since
many integrated systems may be affected, and (3) business processes,
procedures, and practices must be modified commensurate with the
integrated network. These could all be viewed as advantages of
integration, and including them as disadvantages sends mixed messages
on the department’s intentions to integrate its systems. Defining the
needed integrated relationships is vital to ensuring that adequate financial
controls not only facilitate financial reporting, but also help maintain
effective asset accountability. As stated, under an integrated system, DOD’s
accounting and logistic functions would obtain data on asset acquisitions
from the department’s acquisition community data. These data could then
be reconciled with subsequent logistics records as the assets are placed in
service at DOD locations around the world.

Second, the department’s concept of its financial operations does not
include the budget formulation processes. The DOD plan states that it
intentionally excluded budget formulation because it is performed as part
of the department’s Planning, Programming, and Budgeting System (PPBS).
However, budget formulation is one of the central processes involved in



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any agency’s financial management operations and must be included in the
department’s concept of operations to develop a fully integrated financial
management system.

One of the primary goals of the CFO Act is to better integrate budget and
accounting information. The CFO Act requires each agency CFO to monitor
budget execution and to develop and maintain systems which integrate
accounting and budget information. The integration of budget formulation
with budget execution and accounting is necessary to help ensure that
budgets consider financial implications and that policy decisions are based
on sound financial information. Furthermore, JFMIP’s Framework
document identified the integration of budgeting and accounting as the
first step to establishing a firm financial management information
foundation. Such integration would provide a record of historical costs
and performance data that is key to reliably estimating future costs.

Therefore, it is important for DOD to determine how actual cost and
financial management data from other systems will flow to PPBS, which
incorporates DOD’s budget formulation systems and processes, and be used
in the budget process. DOD stated in its Government Performance and
Results Act Annual Performance Plan for Fiscal Year 1999 that it will use
existing data systems and reports supporting the PPBS process to verify and
validate performance information.5 However, as discussed in a June 1998
report on the results of our review of DOD’s Annual Performance Plan for
Fiscal Year 1999, the DOD performance plan does not address known
system deficiencies.6 For example, we previously reported7 that the
weaknesses in the Army’s systems used to account for and control major
equipment items and real property, adversely affected its ability to make
reliable budget requests for procurement and real property maintenance.
However, because budget formulation is excluded from DOD’s concept of
operations, it does not discuss how PPBS will be supported by these
systems and how known deficiencies will be addressed.




5
 The Government Performance and Results Act of 1993 requires each agency to prepare an annual
performance plan covering each program activity set forth in the budget of the agency. The
performance plan is to include a description of how the agency will verify and validate the reported
information.
6
 Observations on DOD’s Annual Performance Plan (GAO/NSIAD-98-188R, June 5, 1998).
7
 Financial Management: Army Real Property Accounting and Reporting Weaknesses Impede
Management Decision-making (GAO/AIMD-94-9, November 2, 1993) and Army Logistics Systems:
Opportunities to Improve the Accuracy of the Army’s Major Equipment Item System
(GAO/AIMD-98-17, January 23, 1998).



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                            The transition plan, while an ambitious statement of DOD’s planned
Transition Plan Does        improvement efforts, has two important limitations: (1) clear links are not
Not Provide a Road          provided between the envisioned future operations and the numerous
Map From the Current        planned improvement initiatives to determine whether the proposed
                            transition will result in the target financial management environment and
Environment to              (2) actions to ensure feeder systems’ data integrity are not addressed.
DOD’s Future
Financial
Management System
Links Not Fully Described   A vital part of any transition plan is a description of how the specific
                            initiatives in the plan bridge the gap between the current environment and
                            the envisioned environment. Thus, describing how the current
                            environment operates is an important step in being able to choose and
                            implement the improvement initiatives. In other words, DOD needs to know
                            where it stands now to help it map out how it will get to its final
                            destination—improved financial management.

                            The plan’s discussion of the current environment included key information
                            such as (1) the roles and responsibilities of the Under Secretary of Defense
                            (Comptroller), DFAS, military departments, the defense agencies and the
                            DOD management oversight structure, (2) the operational structure of
                            finance and accounting including DFAS functions, the military departments’
                            and defense agencies’ finance and accounting functions, and the DOD
                            technical supporting structure, and (3) the status of impediments to
                            auditable financial statements, including inadequate program feeder and
                            core systems. In addition, Volume II of the department’s Biennial Plan
                            includes overview information on over 200 specific initiatives.

                            However, Volume II does not discuss how each of these discrete initiatives
                            will contribute to DOD’s ability to achieve its envisioned concept for its
                            financial management operations. In addition, the transition plan generally
                            does not provide a high-level description of how information currently
                            flows from one function to another. While DOD’s planned concept of
                            operations and transition plan are organized by function, information by
                            function on the current environment is generally not included. These
                            omissions make it difficult to track from the current environment to the
                            target financial management environment by function and to determine
                            how the many initiatives included in the transition plan will move the
                            department from the “as is” to the future. A clear link between the
                            department’s envisioned concept for its financial operations and each of




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its specific initiatives by function will be essential if DOD is to ensure that
each of these initiatives receives the proper priority attention and
resources.

However, based on information included in the various sections of the
Biennial Plan, we were able to identify one example of a specific function
for which DOD depicted how it was planning to move from the current
environment to the target environment. This type of high-level description
of how the department plans to move from its current “as is” to the
envisioned future financial environment could serve as a model for the
department’s other functional areas.

Specifically, the type of high-level “road map” provided in the plan for the
transition from the department’s “as is” contract payment function to its
envisioned operation of that function is illustrated by excerpts from the
plan shown in figures 2 through 4. Figure 2 illustrates the transition of the
contract payment function to the target procurement payment system.




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Figure 2: DOD’s Planned Transition to DPPS


                                         Mechanization of
                                      Contract Administration
    Sixteen                                  Services
    Existing
    Systems                               Standard Automated
                                          Material Management
                                                 System

                                               Automated Voucher
                                             Examination Disbursing
                                                    System

                                                Standard Automated
                                                Voucher Examination                                Defense
                                                      System                                     Procurement
                                                                                                   Payment
                                                    Defense Integrated                             System
                                                 Subsistence Management
                                                         Systems


                                                     Computerized Accounts
                                                        Payable System


                                                               Standard
                                                            Accounting and
                                                           Reporting System


                                                            Integrated Accounts
                                                              Payable System



                                         Source: DOD’s Biennial Plan.




                                         Figure 2 indicates that there are 16 existing systems supporting the
                                         contract payment function. The figure illustrates that DOD will move from
                                         the 16 existing systems to 8, and finally to a single contract payment
                                         system, the Defense Procurement Payment System (DPPS). Figure 3 shows
                                         DPPS as part of the target environment and illustrates how data from DPPS
                                         will become part of the DFAS database and will be available to run DFAS’
                                         accounting and finance applications.




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Figure 3: DOD’s Planned Financial and Accounting Systems Structure

                  Accounting     General
                  Applications   Defense Working Capital Fund
                                 Trust
                                 Foreign Military Sales

                                                                              Standard Processes
                    Finance      Civilian                                     Standard Data
                  Applications   Military                                     Standard Interfaces
                                 Contract                 Defense Finance                           Defense Finance
                                 Vendor                   and Accounting                            and Accounting
                                 Trans                     Service Data                              Service Data
                                 Disbursing
                                 Travel
                                 Debt                     Accounting Data
                                                                                                       Database


                                                            Finance Data                             Departmental Reporting
                                                                                                     Global Edit Tables
                                                                                                     Prevalidation
                                                                                                     Cash Accountability
                                                                                                     Cross Disbursing


                 Defense
               Procurement
              Payment System

                 Standard                                                                             Warehouse
                   Data
                Warehouse                                                                                             Analysis
                                                            Feeder Data
                                                        Financial Management

                                                            Acquisition

                  Standard                               Property Inventory
                Procurement                                      Medical
                   System                                                      Other
                                                                Logistics    Functional
                 Standard                                                   Applications
                   Data                                         Personnel
                Warehouse




                                              Source: DOD’s Biennial Plan.




                                              Figure 4, which is included in DOD’s concept of operations, provides a
                                              different view of the planned financial and accounting structure illustrated
                                              in figure 3. This is one instance in the plan where users can follow a
                                              specific function from the current environment through the DFAS’ planned
                                              financial and accounting system architecture to the DFAS’ Corporate
                                              Database as illustrated and discussed in the concept of operations.




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Figure 4: DFAS’ Corporate Database

                                                             Support
                                                            Functions                                             Budgetary
                                                                                                                  Functions
                                                                EFT
                                                             Registration        Global
     Transaction                                                                  Edit
                                                                                                    Funds
     Processing                                                                                  Distribution
      Functions                    Payroll                                                                                                       Data
                                                                                                                     Budget                    Warehouse
                                                                                                                     System

                     Receivables
                                                                                                                                  Data
                                                                                                                                Warehouse
                                                                                    Global
                                                                 EFT                 Edit
                 Payables
                                                                 Data                Data

                                                                                                              Funding
        Property                                                                                            Transaction                          Historical
                                                                                                                                                   Data


                                       Event
     Acquisition                     Recognition
                                                                            Corporate
                                                                            Database
     Inventory
                                                      Prevalidation                                                Summary
                                                                                                                     Dept.                         Defense
         Cost                                                                                                    Transactions                   Working Capital
      Management                                    Event                                                                                        Fund System
                                                 Translation

         Property                                                                                           US SGL                                 NAF
        Management                                                                          Detail                                                System
                                                                                          Tranaction


                  Personnel                                                                                                                 Base Level
                                                                                                                                             System

                             Inventory                                                                                          Departmental
                            Management                                                                                          Level System
                                             Cash                                                               Departmental
                                         Accountability                                                          Reporting
                                                                Trend                            Ad-Hoc
                                                               Analysis         Data             Query &
             Program                                                           Mining           Reporting                                Inventory
           Management                                                                                                                   Management
            Functions
                                                                            Reporting
                                                                            Functions



                                                          Source: DOD’s Biennial Plan.




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                          However, even for this one instance, the high-level information is lacking
                          some key details. For example, the plan does not identify the 16 existing
                          systems illustrated in figure 2, their owners, or where they operate.
                          Therefore, we could not determine whether these systems are included in
                          the inventory, although the plan acknowledges that it is critical that an
                          accurate inventory be maintained of all feeder systems required to provide
                          program data to DOD’s financial management systems. The plan indicates
                          that there are currently 109 finance and accounting systems and 83 feeder
                          systems for a total of 192 DOD financial management systems. The plan
                          states that the 109 finance and accounting systems will be reduced to 32
                          by fiscal year 2003. However, the transition plan does not provide a clear
                          description of what systems will be eliminated and how—even at a
                          high-level—nor does the plan discuss how the number of feeder systems
                          will be reduced.


Actions Not Defined for   DOD’s transition plan acknowledges that it relies on feeder systems’ data
Ensuring Data Integrity   accuracy to ensure that the data ultimately used for financial management
                          is accurate. Specifically, DOD stated:

                          “As an estimated 80 percent of the data needed for financial management come from
                          program systems, the use of modern, fully-integrated, and fully-interfaced program feeder
                          systems is necessary for the Department to be able to provide its managers with the
                          information they need to make informed decisions. The current use of a variety of
                          non-integrated databases precludes the easy or reliable interfacing of information from
                          program functional areas (i.e., personnel, acquisition, and logistics) with the Department’s
                          core finance and accounting systems.”


                          The department has also acknowledged problems with the accuracy of
                          data from these feeder systems. In addition, financial statement audit
                          reports have confirmed significant problems with the accuracy of the data
                          produced by the department’s supporting logistical, budgetary, and
                          program operating systems. However, the department’s transition plan
                          does not explicitly address how these acknowledged significant feeder
                          system data integrity problems will be resolved. Ideally, data should be
                          processed at the original point of entry in a manner to ensure that only
                          accurate, complete data are entered into all systems that subsequently
                          process that data. Without identifying specific actions that will ensure
                          feeder system data integrity, it is unclear whether the department will be
                          able to effectively carry out not only its financial reporting, but also its
                          other financial management responsibilities.




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                       Certain additional detailed information would be necessary to determine
Further Details Will   whether implementation of the department’s future financial management
Be Needed to           environment is “workable”—that is, whether the planned environment is
Evaluate the           practical, cost-effective, and feasible. Such details are not within the scope
                       of the high-level, strategic financial management improvement plan that
Workability of DOD’s   DOD was asked to provide and we were asked to analyze. The additional,
Planned Financial      detailed information that would be necessary includes the systems
                       architecture, which is comprised of logical and technical components. DOD
Management             officials have stated that they recognize that additional information will be
Environment            necessary and that they are developing further details on these issues.

                       The Congress and OMB have recognized the importance of a systems
                       architecture. For example, the Clinger-Cohen Act of 1996 requires that the
                       department-level Chief Information Officers develop, maintain, and
                       facilitate integrated system architectures. Also, in an October 25, 1996,
                       memorandum, “Funding Information Systems Investments,” the Director
                       of OMB stated that “investments in major information systems proposed for
                       funding in the President’s budget should be consistent with Federal,
                       agency, and bureau information architectures which: integrate agency
                       work processes and information flows with technology to achieve the
                       agency’s strategic goals . . .”

                       As we have described in other reports,8 the purpose of the logical
                       architecture is to ensure that the systems meet the business needs of an
                       organization. Therefore, the logical architecture should be further detailed
                       information fleshing out DOD’s concept for its financial management
                       operations. For example, while the concept of operations may describe, at
                       a high level, how acquisition must share information with accounting and
                       logistics, the logical model would, among other things, describe the
                       specific data and how the data will be manipulated. For each business
                       function required to carry out the mission, it defines the specific
                       information needed to perform the function, and describes the individual
                       systems that produce the information. In addition, an essential element of
                       the logical architecture is the definition of specific information flows.
                       After the logical architecture is defined, DOD will have an understanding of
                       both its portfolio of desired systems and how these systems will
                       collectively carry out the department’s objectives.

                       A technical architecture is necessary to detail specific information
                       technology and communications standards and approaches that will be

                       8
                        Strategic Information Planning: Framework for Designing and Developing System Architectures
                       (GAO/IMTEC-92-51, June 1992) and Air Traffic Control: Complete and Enforced Architecture Needed
                       for FAA Systems Modernization (GAO/AIMD-97-30, February 3, 1997).



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                      used to build systems, including those that address critical hardware,
                      software, communications, data management, security, and performance
                      characteristics. The purpose of a technical architecture is to ensure that
                      systems are interoperable, function together efficiently, and are
                      cost-effective over their life cycles.


                      Until DOD amends its Biennial Plan to incorporate budget formulation and
Conclusions           functional information sharing, the Congress will have little assurance that
                      DOD’s efforts to reform its acknowledged deficient financial operations are
                      likely to be successful. Ensuring that accounting data are used to
                      formulate budgets and that program information is shared among
                      functional areas is a fundamental concept that underpins an effective
                      financial management structure. Further, until DOD precisely documents its
                      current environment, clearly links its initiatives to bridge the gap between
                      its current environment and its concept of how it intends to operate in the
                      future, and develops initiatives to address feeder systems’ data accuracy
                      problems, the Congress cannot be sure that DOD has a workable, clear
                      transition plan to achieve its vision. Finally, further details will be needed
                      to assess whether implementation of DOD’s envisioned future concept for
                      its financial management operations is practical, cost-effective, and
                      feasible, including documentation of the logical and technical
                      architectures that will support its future concept of operations.


                      In order to help ensure that DOD’s first-ever Biennial Plan provides a sound
Recommendations       foundation for fundamentally reforming the department’s financial
                      management operations, we recommend that the Secretary of Defense
                      take the following immediate actions to develop and issue a supplemental
                      plan.

                  •   Revise the concept of operations to reflect, at a high level, the full range of
                      the department’s financial management operations, including its key asset
                      accountability and budget formulation responsibilities.
                  •   Describe how, at a high level, data will be shared among the various DOD
                      functional areas to ensure that the benefits of full systems integration will
                      be realized in accordance with relevant legislative requirements and JFMIP
                      guidance.
                  •   Clarify the role of each of the described initiatives in bridging the gap
                      between the current environment and the envisioned future concept of
                      operations.




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                     •   Identify the steps the department will take to ensure that it will build
                         reliability into the data provided by its feeder systems.


                         In commenting on a draft of this report, the Under Secretary of Defense
Agency Comments          (Comptroller) indicated that DOD took issue with each of the report’s major
and Our Evaluation       findings and with all of the recommendations. The department’s comments
                         reflect a basic disagreement with us over the role and definition of
                         financial management and how this function should support various
                         critical program functions. Our views on the scope and requirements of
                         accounting, finance, and feeder systems are fully supported by the
                         mandates and goals of the CFO Act of 1990 and the Federal Financial
                         Management Information Act of 1996, as well as by OMB and JFMIP
                         guidance, reports, and pronouncements.

                         In its overall comments on a draft of this report, DOD stated that it
                         appreciated the recognition that the report provides regarding the
                         magnitude of the effort that the department expended in the preparation
                         of the report and the challenges that the department will face in
                         implementing its ambitious financial management reform initiatives.
                         However, DOD disagreed that the Biennial Plan lacked critical elements and
                         stated that parts of the report appear to reflect a lack of awareness of the
                         Department’s actions for improving its financial management. In addition,
                         DOD stated that the draft report contained misleading statements and used
                         inflammatory language.

                         We disagree with DOD’s comments. As shown in the following discussion,
                         most of our responses to them can be traced to this fundamental
                         disagreement over the role of financial management in supporting the
                         agency’s operations. First, with respect to our concern that its plan lacks
                         critical elements relative to asset accountability and control, or to budget
                         formulation, DOD stated that the plan was explicitly limited to accounting
                         and finance functions and that the department considers both asset
                         accountability and budget formulation to be outside the scope of
                         accounting and finance functions. DOD’s response further stated that the
                         department does not perform accountability for its nonfinancial resources
                         through its finance and accounting systems and that to do so would,
                         among other things, require an investment of hundreds of millions,
                         perhaps billions, of dollars in new systems or system changes.




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Moreover, the Under Secretary of Defense (Comptroller) in his opening
statement stated that the plan “addresses both its financial systems and
program feeder systems that originate and provide the majority of the
financial source data.” The Biennial Plan itself explicitly refers to feeder
systems and includes initiatives that are intended to address the need for
feeder systems to be fully integrated with accounting and finance systems.
For example, the plan included information on initiatives to improve CBSX
and REMIS—two systems that provide data on mission critical assets of the
Army and Air Force, respectively. Because financial information in such
systems includes data on units and condition of assets, those feeder
systems must ensure data integrity and be easily reconciled with the
accounting and finance systems.

Our concern is that the Biennial Plan does not explain how the feeder
systems will meet accounting and internal control requirements, such as
those related to asset accountability and budget formulation. Among the
specific requirements of the CFO Act is that each agency CFO ensure that
agency accounting and financial management systems include adequate
financial reporting and internal controls. Such systems are to comply with
applicable principles and standards and provide complete, reliable,
consistent, and timely information that is responsive to the agency’s
financial information needs.

In addition, if the plan were limited to a narrow view of accounting and
finance functions, it could not be used to meet additional regulatory
requirements, as DOD intended. For example, FFMIA requires agencies to
implement and maintain financial management systems that substantially
comply with federal financial management systems requirements,
applicable accounting standards, and the standard general ledger. FFMIA
defines financial management systems to include the financial systems and
financial portions of mixed systems9 (feeder systems) necessary to
support financial management. OMB reinforced these concepts in its
June 1998 Federal Financial Management Status Report and Five-Year
Plan, where it stated a goal of providing high quality financial information
on federal government operations which fully supports financial and
performance reporting. Further, the Authorization Act that mandated the
plan explicitly required that it “address all aspects of financial
management within the Department of Defense, including the finance
systems, accounting systems, and data feeder systems of the Department
that support financial functions of the Department.”

9
 “Mixed system means an information system that supports both financial and nonfinancial functions
of the Federal Government or components thereof.” Federal Financial Management Improvement Act
of 1996, Sec. 806 (6).



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Further, our report outlines the potential benefits of modern systems in
helping to achieve accountability, including the integration of logistics,
accounting, and acquisition data. OMB Circular A-127, which prescribes
policies and standards to be followed by executive departments and
agencies in developing, operating, evaluating, and reporting on financial
management systems, describes a unified set of financial systems as those
that are “planned for and managed together, operated in an integrated
fashion, and linked together electronically in an efficient and effective
manner to provide agency-wide support necessary to carry out an agency’s
mission and support its financial management needs.” Thus, OMB requires
that a financial management improvement plan include efforts to address
asset accountability.

Moreover, by DOD’s own estimates, the logistics and other feeder systems
necessary to properly account for and to ensure accountability over assets
supply over 80 percent of the data used to support DOD’s financial
reporting and management. We agree fully with DOD’s comment that
commanders, not accountants, should remain responsible for the
department’s physical assets. Our point is that improved accuracy of
feeder system data, with the benefits of controls incorporated into sound
financial accounting and reporting, could assist commanders and program
managers in fulfilling their asset accountability responsibilities. Systems
improvements would not only help DOD comply with accounting and
reporting requirements, but would also help provide better information
and assurance to program managers to improve efficiency and strengthen
accountability.

Regarding the costs of new systems or systems changes to meet financial
management requirements, we asked DOD for support of its estimate of
“hundreds of millions, perhaps billions, of dollars,” but DOD indicated that
the number is not supported by a documented cost estimate; but rather an
informed approximation based on experience. In this regard, DOD is
already spending huge sums to upgrade its feeder systems as well as its
accounting and finance systems. For example, our analysis of DOD’s fiscal
year 1999 Information Technology Exhibits, which support the
department’s overall budget request, showed that DOD has requested a total
of about $6 billion for fiscal years 1998 and 1999 to develop new or modify
existing systems supporting functions that are likely to include feeder
systems. Our point is that these ongoing efforts, with their large
investments, should incorporate the requirements needed to achieve an
integrated financial management system that meets legislative mandates
and implementing guidance.



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With regard to budget formulation, we did not say or imply the process
used to formulate the budget was deficient or that any changes were
needed in PPBS. Our focus was on the need to have that process supported
by accurate and timely budget execution and accounting data. This will
only happen if the systems are originally designed to include the
requirement to link accounting data to support the budget formulation
process. Because budget formulation is excluded from DOD’s concept of
operations, the plan does not address how the Department’s Planning,
Programming, and Budgeting System will be supported by existing
systems, nor how known deficiencies in those systems will be addressed.

As stated in our report, such budgeting and accounting integration is
called for by the CFO Act, DOD’s regulations, JFMIP, and FFMIA. DOD’s
Financial Management Regulation mirrors the requirements in the CFO Act
by specifying that the department’s CFO is to develop and maintain an
integrated DOD accounting and financial management system, including
financial reporting and internal controls, that provides for the integration
of accounting and budgeting information. JFMIP’s Framework for Federal
Financial Management Systems states that the financial management
system 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. As stated
previously, FFMIA requires that agencies implement and maintain financial
management systems that substantially comply with federal financial
management systems requirements.

The integration of budgeting and accounting is also a key tenet of OMB’s
efforts to improve financial management across government. Specifically,
as part of its June 1998 Federal Financial Management Status Report and
Five-Year Plan, OMB set out a vision of an environment where “Program
and financial managers work in partnership to achieve the full integration
of financial (finance, budget, and cost), program, and oversight
information and processes.” Supporting its overall vision, OMB set out a
number of goals, including “Building a partnership to ensure the
functioning together of information resource management, program
management, and financial management, including budgeting.” DOD’s
approach, however, unless broadened, will unfortunately ensure
continued isolation of functional systems. The approach is inefficient,
does not effectively utilize advances in technology, and misses
opportunities to better support program managers.




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Second, DOD stated that it does not agree that the Biennial Plan is critically
flawed by the exclusion of a detailed discussion of the (1) links between
the over 200 planned improvements and the envisioned future operations
to determine whether the proposed transition plan will result in
achievement of the target financial management environment and
(2) actions to ensure feeder systems’ data integrity. DOD stated that many
of the initiatives are intended to improve the department’s financial
management in the interim period and others are geared more to the
implementation of new processes or systems to replace outdated
processes or noncompliant systems. The department stated that more
details on each of the individual initiatives are in other documents that
supported the initiative and should not be duplicated in the plan.

DOD’s  response to our draft report reinforces our point that the plan does
not present an easily understood explanation of the transition from its
current “as is” to the envisioned future financial environment. The catalog
of initiatives in the plan does not indicate which initiatives are intended to
be interim fixes and which are long-term efforts. The plan also does not
indicate how those that are interim initiatives will fit in with the long-term
initiatives. We have previously reported10 on this issue in regard to DOD’s
technological initiatives identified as key elements of its efforts to improve
the contract payment process. In that report, we stated that DOD had not
defined how its short- and long-term initiatives, which were independently
managed, would work in tandem. The relationship of such tasks or
initiatives needs to be articulated clearly to provide a useful strategic
vision. As we stated in our draft report, a vital part of any transition plan is
a description of how the specific initiatives in the plan bridge the gap
between the current environment and the envisioned environment.

Third, DOD stated that several characterizations in the report are
subjective, misleading, and unnecessarily inflammatory. All of the
statements DOD referred to are supported by the results of numerous audit
reports produced by us and the DOD audit community. For example, DOD
took exception to our statement that the most recent audits of DOD’s
financial statements identified material weaknesses in DOD’s ability to
maintain accountability and control over virtually every category of
physical assets, including military equipment. The DOD Inspector General
was unable to render an opinion on DOD’s consolidated financial
statements for fiscal years 1996 and 1997 as a result of these material



10
 Financial Management: Seven DOD Initiatives That Affect the Contract Payment Process
(GAO/AIMD-98-40, January 30, 1998).



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weaknesses. As we stated in our April 1998 testimony11 on DOD’s serious
financial management problems, material financial management
deficiencies identified at DOD, taken together, represent the single largest
obstacle that must be effectively addressed to achieve an unqualified
opinion on the U.S. government’s consolidated financial statements. No
major part of DOD has been able to pass the test of an independent audit. In
the area of critical military weapons systems, we testified that for fiscal
year 1997, the auditors found that DOD’s logistical systems could not be
relied upon to provide basic information, such as, for each asset category,
how many exist, where they are located, and their value. We considered
our draft report to be accurate, but we have carefully considered the
department’s comments regarding our characterizations and made
wording revisions where appropriate.

Finally, DOD’s comments are not fully responsive to our recommendations.
Overall, DOD indicated that it did not believe that a supplemental plan was
necessary because it was already working on detailed follow-on reports.
We agree with the department that financial management is an ongoing
process that requires continuous attention and updates. However, the
items that we identified in our draft report that are currently not covered
in the Biennial Plan are so critical to its viability that we continue to
believe that the plan should be amended, especially in light of the need for
the plan to support investments in systems initiatives.


We are sending copies of this report to the Secretary of Defense, the Under
Secretary of Defense (Comptroller), and the Director of the Defense
Finance and Accounting Service. We are also sending copies to the
Director of the Office of Management and Budget and interested
congressional committees and members. Copies will be available to others




11
 Department of Defense: Financial Audits Highlight Continuing Challenges to Correct Serious
Financial Management Problems (GAO/T-AIMD/NSIAD-98-158, April 16, 1998).



Page 24                                                     GAO/AIMD-99-44 DOD Biennial Plan
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upon request. If you or your offices have any questions concerning this
report, please contact me at (202) 512-9095. Major contributors to this
report are listed in appendix III.




Lisa G. Jacobson
Director, Defense Audits




Page 25                                      GAO/AIMD-99-44 DOD Biennial Plan
Contents



Letter                                                                                           1


Appendix I                                                                                      28
Objectives, Scope,
and Methodology
Appendix II                                                                                     30
Comments From the
Department of
Defense
Appendix III                                                                                    43
Major Contributors to
This Report
Figures                 Figure 1: Example of How Systems Integration Helps Achieve               5
                          Greater Control
                        Figure 2: DOD’s Planned Transition to DPPS                              13
                        Figure 3: DOD’s Planned Financial and Accounting Systems                14
                          Structure
                        Figure 4: DFAS’ Corporate Database                                      15




                        Abbreviations

                        CFO       chief financial officer
                        DFAS      Defense Finance and Accounting Service
                        DOD       Department of Defense
                        DPPS      Defense Procurement Payment System
                        FFMIA     Federal Financial Management Improvement Act
                        GAO       General Accounting Office
                        JFMIP     Joint Financial Management Improvement Program
                        OMB       Office of Management and Budget
                        PPBS      Planning, Programming, and Budgeting System


                        Page 26                                    GAO/AIMD-99-44 DOD Biennial Plan
Page 27   GAO/AIMD-99-44 DOD Biennial Plan
Appendix I

Objectives, Scope, and Methodology


                 To address the requirements of section 912 of the Strom Thurmond
                 National Defense Authorization Act for Fiscal Year 1999 (Public Law
                 105-261), our objectives were to determine (1) whether DOD’s concept of
                 operations included the critical elements necessary for producing
                 sustainable financial management improvement over the long term and
                 (2) whether the transition plan provided a “road map” from the current
                 environment to DOD’s planned future financial management environment.
                 This report also includes a discussion of additional technical details that
                 would be needed to determine whether implementation of the
                 department’s future financial management environment is practical,
                 cost-effective, and feasible.

                 To accomplish our objectives, we obtained the DOD Biennial Plan and
                 compared its contents to the requirements of the National Defense
                 Authorization Act of 1998 and to relevant laws, regulations and standards,
                 and policy guidance documents to determine the plan’s responsiveness to
                 the act’s requirements and the plan’s workability. Specifically, we analyzed
                 the plan’s description of the Secretary of Defense’s concept of how the
                 department carries out its financial management operations. This analysis
                 included whether the Secretary’s concept covered all aspects of integrated
                 financial management, including an integrated financial management
                 system as defined by

             •   The Chief Financial Officers Act of 1990,
             •   The Federal Financial Management Improvement Act of 1996,
             •   The Clinger-Cohen Act of 1996,
             •   The JFMIP Framework for Federal Financial Management Systems
                 (January 1995), and
             •   OMB Circular A-127, Financial Management Systems.


                 We also compared the Secretary’s concept for the department’s financial
                 management operations with the essential elements of a concept of
                 operations identified in our reports, Financial Management: Comments on
                 DFAS’ Draft Federal Accounting Standards and Requirements
                 (GAO/AIMD-97-108R, June 16, 1997) and Strategic Information Planning:
                 Framework for Designing and Developing System Architectures
                 (GAO/IMTEC-92-51, June 1992).

                 We conducted our review from October 1998 to December 1998 in
                 accordance with generally accepted government auditing standards.




                 Page 28                                       GAO/AIMD-99-44 DOD Biennial Plan
Appendix I
Objectives, Scope, and Methodology




We requested written comments on a draft of this report from the Under
Secretary of Defense (Comptroller). These comments are presented and
evaluated in the “Agency Comments and Our Evaluation” section and are
reprinted in appendix II.




Page 29                                    GAO/AIMD-99-44 DOD Biennial Plan
Appendix II

Comments From the Department of Defense


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 30   GAO/AIMD-99-44 DOD Biennial Plan
                 Appendix II
                 Comments From the Department of Defense




Now on p. 2.




See comment 1.




See comment 1.




                 Page 31                                   GAO/AIMD-99-44 DOD Biennial Plan
                 Appendix II
                 Comments From the Department of Defense




See comment 1.



See comment 2.




Now on p. 2.




See comment 1.

See comment 8.




See comment 3.




                 Page 32                                   GAO/AIMD-99-44 DOD Biennial Plan
                 Appendix II
                 Comments From the Department of Defense




Now on p. 6.




See comment 1.




See comment 4.




See comment 4.




                 Page 33                                   GAO/AIMD-99-44 DOD Biennial Plan
                 Appendix II
                 Comments From the Department of Defense




See comment 5.




Now on p. 16.




See comment 1.




See comment 6.




                 Page 34                                   GAO/AIMD-99-44 DOD Biennial Plan
                       Appendix II
                       Comments From the Department of Defense




Now on pp. 2 and 6 .



See comment 7.




See comment 7.




Now on p. 2.




See comment 8.




                       Page 35                                   GAO/AIMD-99-44 DOD Biennial Plan
                 Appendix II
                 Comments From the Department of Defense




See comment 1.


See comment 3.




See comment 1.




See comment 1.




                 Page 36                                   GAO/AIMD-99-44 DOD Biennial Plan
                 Appendix II
                 Comments From the Department of Defense




See comment 1.




See comment 9.




                 Page 37                                   GAO/AIMD-99-44 DOD Biennial Plan
                 Appendix II
                 Comments From the Department of Defense




See comment 1.




See comment 1.




See comment 6.




                 Page 38                                   GAO/AIMD-99-44 DOD Biennial Plan
               Appendix II
               Comments From the Department of Defense




               The following are GAO’s comments on the Department of Defense’s letter
               dated January 11, 1999.


               1. See the “Agency Comments and Our Evaluation” section of this report.
GAO Comments
               2. DOD’s comments misstate our position. We did not say or imply that the
               process used to formulate the budget was deficient. Our focus was on the
               need to have that process supported by accurate and timely budget
               execution and accounting data. We believe that DOD’s budget formulation
               process can only be as good as the information on which it is based. Audit
               reports by us and the DOD audit community have identified problems in the
               accuracy, reliability, and timeliness of that budgetary source information.
               For example, in our March 1998 report1 on the implications of Navy audit
               results, we stated that the financial reporting errors disclosed by the Naval
               Audit Service affect the budget process because the same incomplete
               inventory data are used both for the financial statements and as the
               starting point for the Navy’s process to develop budget requests for
               additional inventory. We have also reported2 that inaccurate management
               information in the Army’s Installation Facilities System resulted in
               unreliable budget requests. Further, this report stated that inadequate
               guidance and inconsistent reporting of information used in the budget
               development process added to the unreliability of the budget requests. In
               another example, we reported3 that errors in CBSX—the system that
               provides worldwide asset visibility over the Army’s reportable equipment
               items, including the Army’s most critical war fighting equipment—directly
               affect whether too few or too many of these critical items are procured.

               3. We could not find any explicit reference to a 1999 financial management
               improvement plan in the 1998 Biennial Plan. Further, we continue to
               believe that the 1998 plan was deficient in not addressing, at a high-level,
               how known data accuracy problems in feeder systems will be resolved.

               4. DOD’s inability to account for the full cost of its operations and the
               extent of its liabilities has been documented in numerous reports prepared
               by us and the DOD audit community. Further, DOD’s inability to ensure that

               1
               CFO Act Financial Audits: Programmatic and Budgetary Implications of Navy Financial Data
               Deficiencies (GAO/AIMD-98-56, March 16, 1998).
               2
               Financial Management: Army Real Property Accounting and Reporting Weaknesses Impede
               Management Decision-making (GAO/AIMD-94-9, November 2, 1993).
               3
                Army Logistics Systems: Opportunities to Improve the Accuracy of the Army’s Major Equipment Item
               System (GAO/AIMD-98-17, January 23, 1998).



               Page 39                                                    GAO/AIMD-99-44 DOD Biennial Plan
Appendix II
Comments From the Department of Defense




the financial resources entrusted to it are used for the purpose intended by
the Congress has been repeatedly documented in these reports, including
our recent report, Financial Management: Problems in Accounting for
Navy Transactions Impair Funds Control and Financial Reporting
(GAO/AIMD-99-19, January 19, 1999). In addition, the “new” accounting
requirements for the reporting of environmental and disposal liabilities
were issued in 1995 and became effective for fiscal year 1997. Moreover,
the Congress has required lifecycle environmental costs, including
disposal costs, for major defense acquisition programs in DOD’s fiscal year
1995 Authorization Act. As we reported in a series of recent reports4 (with
which the department concurred), DOD has the disposal cost information
available to make these estimates for major weapons systems and other
assets in a systematic manner, rather than on a case-by-case basis. To
date, however, the department has only developed draft policy guidance
for addressing these issues.

5. DOD’s problems in properly accounting for its disbursements remain a
serious problem, as we have reported in the past. For example, we
reported that DOD’s $18 billion total in problem disbursements as of
May 31, 1996, was understated by at least $25 billion. We concluded that
neither the Congress nor DOD management can rely on DOD’s reported
amount to determine the extent of problem disbursements or to monitor
progress made in resolving them. Further, without adequate
documentation to support its disbursements—one of the major factors
contributing to its inability to resolve its problem disbursements, DOD
cannot know the extent to which its payments are fraudulent and
improper. In addition, our recent report and testimony5 on several serious
fraud incidents detail the ongoing control weaknesses over the
department’s disbursement processes that contributed to the
embezzlement of millions of dollars from DOD.

6. As stated in our draft report, we believe that the Biennial Plan should
identify specific actions that will ensure feeder system data integrity,
rather than the specific details indicated in DOD’s response. As we stated,

4
 Financial Management: Accounting Implications of DOD’s Facilities Demolition Programs
(GAO/AIMD-98-194R, August 28, 1998); Financial Management: DOD’s Liability for Missile Disposal
Can Be Estimated (GAO/AIMD-98-50R, January 7, 1998); Financial Management: DOD’s Liability for the
Disposal of Conventional Ammunition Can Be Estimated (GAO/AIMD-98-32, December 19, 1997);
Financial Management: DOD’s Liability for Aircraft Disposal Can Be Estimated (GAO/AIMD-98-9,
November 20, 1997); and Financial Management: Factors to Consider in Estimating Environmental
Liabilities for Removing Hazardous Material in Nuclear Submarines and Ships (GAO/AIMD-97-135R,
August 7, 1997).
5
 Financial Management: Improvements Needed in Air Force Vendor Payment Systems and Controls
(GAO/AIMD-98-274, September 28, 1998), Financial Management: Improvements Needed in Air Force
Vendor Payment Systems and Controls (GAO/T-AIMD-98-308, September 28, 1998).



Page 40                                                    GAO/AIMD-99-44 DOD Biennial Plan
Appendix II
Comments From the Department of Defense




certain detailed information needed to determine whether the planned
environment is practical, cost-effective, and feasible are not within the
scope of the high-level strategic financial management plan that DOD was
asked to provide and we were asked to analyze.

7. In the Biennial Plan, the department itself acknowledged that improving
its financial management operations represents “a monumental challenge.”
As we stated in our April 1998 testimony,6 no major part of DOD has been
able to pass the test of an independent audit; auditors consistently have
issued disclaimers of opinion because of pervasive weaknesses in DOD’s
financial management operations. Such problems led us in 1995 to put DOD
financial management on our list of high-risk areas vulnerable to waste,
fraud, abuse, and mismanagement.7 This designation continued in our
recent high-risk update.8 While we consider our draft report to be
accurate, we have carefully considered the department’s comments
regarding our characterizations and made wording revisions where
appropriate.

Further, while DOD takes issue with focusing unwarranted negative
attention on problems, we believe that fully identifying the problem and its
context is the first and crucial step in properly implementing solutions that
will work. For example, we have previously reported9 that DOD did not
develop adequate information to effectively diagnose the causes of
problem disbursements, implement solutions, and evaluate progress.

8. We continue to believe that without addressing the critical flaws we
have identified, the improvements that can be achieved will be limited
relative to the department’s total financial management operations,
including asset accountability and budget formulation. While we consider
our draft report to be accurate, we have carefully considered the
department’s comments regarding our characterizations and made
wording revisions where appropriate.

9. The department’s description of the DFAS Corporate Database and
Corporate Data Warehouse does not explain, at a high-level, how


6
 Department of Defense: Financial Audits Highlight Continuing Challenges to Correct Serious
Financial Management Problems (GAO/T-AIMD/NSIAD-98-158, April 16, 1998).
7
 High-Risk Series: An Overview (GAO/HR-95-1, February 1995).
8
 High-Risk Series: An Update (GAO/HR-99-1, January 1999).
9
 Financial Management: Improved Management Needed for DOD Disbursement Process Reforms
(GAO/AIMD-97-45, March 31, 1997).



Page 41                                                      GAO/AIMD-99-44 DOD Biennial Plan
Appendix II
Comments From the Department of Defense




information will be shared between functional areas such as acquisition
and logistics. Such sharing is a critical element of a financial management
system.




Page 42                                       GAO/AIMD-99-44 DOD Biennial Plan
Appendix III

Major Contributors to This Report


                       Janett Smith, Assistant Director
Accounting and         Geoffrey Frank, Assistant Director
Information            John Martin, Assistant Director
Management Division,   Gary Davis, Senior Auditor
                       Tarunkant Mithani, Senior Auditor
Washington, D.C.       Francine DelVecchio, Communications Analyst


                       Robert Wagner, Senior Evaluator
Norfolk Field Office   Susan Mason, Evaluator




(918950)               Page 43                                  GAO/AIMD-99-44 DOD Biennial Plan
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