oversight

Department of Defense: Status of Financial Management Weaknesses and Progress Toward Reform

Published by the Government Accountability Office on 2003-06-25.

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

                            United States General Accounting Office

GAO                         Testimony
                            Before the Subcommittee on Government Efficiency and
                            Financial Management, Commitee on Government Reform,
                            House of Representatives


For Release on Delivery
Expected at 2:30 p.m. EST
Wednesday, June 25, 2003
                            DEPARTMENT OF
                            DEFENSE
                            Status of Financial
                            Management Weaknesses
                            and Progress Toward
                            Reform
                            Statement of Gregory D. Kutz, Director
                            Financial Management and Assurance




GAO-03-931T
                            A
                                                June 25, 2003


                                                DEPARTMENT OF DEFENSE

                                                Status of Financial Management
Highlights of GAO-03-931T, a testimony to
the Subcommittee on Government
                                                Weaknesses and Progress Toward
Efficiency and Financial Management,
Committee on Government Reform,
                                                Reform
House of Representatives




As seen again in Iraq, the                      Overhauling DOD’s financial management represents a major challenge that
excellence of our military forces is            goes far beyond financial accounting to the very fiber of the department’s
unparalleled. This same level of                range of business operations and management culture. Of the 25 areas on
excellence is not yet evident in the            GAO’s governmentwide “high risk” list, 6 are DOD program areas, and the
Department of Defense’s (DOD)                   department shares responsibility for 3 other high-risk areas that are
financial management and other
business areas, impeding DOD’s
                                                governmentwide in scope. Key financial management weaknesses include
ability to provide complete,                    the lack of effective and efficient asset management and accountability;
reliable, and timely information to             unreliable estimates of environmental and disposal liabilities; lack of
the Congress, DOD managers, and                 accurate budget and cost information; nonintegrated and proliferating
other decision makers. The                      financial management systems; and fundamental flaws in DOD’s overall
Subcommittee asked GAO to testify               control environment.
on the status of DOD’s financial
management and business process                 GAO has identified four underlying causes for DOD’s inability to resolve its
reform efforts. Specifically, GAO               long-standing financial management problems:
was asked to provide an overview
of the long-standing financial                  •   a lack of sustained top-level leadership and management accountability
management weaknesses facing
DOD and a summary of the
                                                    for correcting problems;
underlying causes of DOD’s                      •   deeply embedded cultural resistance to change, including military
financial management challenges.                    service parochialism and stovepiped operations;
In addition, GAO’s testimony                    •   a lack of results-oriented goals and performance measures and
focused on (1) key actions                          monitoring; and
necessary to correct DOD’s                      •   inadequate incentives for seeking change.
financial management problems
and (2) the progress DOD is                     The following are elements that GAO has identified as key to a successful
making toward business process                  approach to financial management and business process reform:
reform.
                                                •   addressing financial management challenges as part of a comprehensive,
                                                    integrated, DOD-wide business reform;
                                                •   providing for sustained leadership by the Secretary of Defense and
                                                    resource control to implement needed financial management reforms;
                                                •   establishing clear lines of responsibility, authority, and accountability for
                                                    such reform tied to the Secretary;
                                                •   incorporating results-oriented performance measures and monitoring
                                                    tied to financial management reforms;
                                                •   providing appropriate incentives or consequences for action or inaction;
                                                •   establishing and implementing an enterprise architecture to guide and
                                                    direct financial management modernization investments; and
                                                •   ensuring effective executive and congressional oversight and monitoring.

                                                DOD has taken positive steps in many of these key areas. For example, the
                                                Secretary of Defense has included improving DOD’s financial management
                                                as one of his top 10 priorities, and DOD has already taken a number of
www.gao.gov/cgi-bin/getrpt?GAO-03-931T.
                                                actions under its Business Transformation Program, including its efforts to
To view the full product, including the scope   develop an enterprise architecture to guide operational and technological
and methodology, click on the link above.       changes. However, these are beginning steps and formidable challenges
For more information, contact Gregory D.
Kutz at (202) 512-9095 or kutzg@gao.gov.
                                                remain in each of the key reform areas.
Dear Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to discuss the status of financial management
and business process reform efforts at the Department of Defense (DOD).
DOD faces financial and related management problems that are pervasive,
complex, long standing, and deeply rooted in virtually all business
operations throughout the department. These problems have impeded the
department’s ability to provide complete, reliable, and timely business
operations information to the Congress, DOD managers, and other decision
makers. In addition, DOD’s financial management weaknesses have
resulted in the failure of the department, its military services, and its major
components from passing the test of an independent financial audit and are
a significant obstacle to achieving an unqualified opinion on the U.S.
government’s consolidated financial statements. Overhauling DOD’s
financial management represents a major challenge that goes far beyond
financial accounting to the very fiber of the department’s range of business
operations and management culture. Of the 25 areas on GAO’s
governmentwide “high risk” list, 6 are DOD program areas, and the
department shares responsibility for 3 other high-risk areas that are
government wide in scope.1 Central to effectively addressing DOD’s
financial management problems will be understanding that these 9 areas
are interrelated and cannot be addressed in an isolated, stovepiped, or
piecemeal fashion. While Secretary of Defense Rumsfeld has initiated a
program to transform DOD’s business processes, including establishing a
new management structure to oversee reform efforts, DOD has not yet
developed an overarching plan tying key reform efforts together in an
integrated program.

DOD’s size, structure, and diversity of activities increase the difficulty and
complexity of reform efforts. For example, DOD is the nation’s largest
employer, with

• 1.4 million men and women currently on active duty,

• 1.2 million serving in the Reserve and Guard components, and


1
 U.S. General Accounting Office, High-Risk Series: An Update, GAO-03-119 (Washington,
D.C.: January 2003). The nine interrelated high-risk areas that represent the greatest
challenge to DOD’s development of world-class business operations to support its forces
are: contract management, financial management, human capital, information security,
infrastructure management, inventory management, real property, systems modernization,
and weapon system acquisition.




Page 1                                                                     GAO-03-931T
• 675,000 civilians.

DOD operates more than 600,000 individual buildings and structures
located at more than 6,000 different locations and using more than 30
million acres. For fiscal year 2002, DOD expended approximately $371
billion to operate and maintain about 250,000 vehicles, over 15,000 aircraft,
more than 1,000 oceangoing vessels, and some 550 public utility systems.2

DOD’s financial management problems are the result of long-standing
deficiencies related to its systems, processes, and people. Therefore, to be
successful, reform efforts will need to address all three factors. In
recognition of the far-reaching nature of DOD’s financial management
problems, on September 10, 2001, Secretary Rumsfeld announced a broad,
top-priority initiative intended to “transform the way the department works
and what it works on.” This new broad-based business transformation
initiative, led by DOD’s Senior Executive Council and the Business
Initiative Council, incorporates a number of defense reform initiatives
begun under previous administrations but also encompasses additional
fundamental business reform proposals. In announcing his initiative,
Secretary Rumsfeld recognized that transformation would be difficult and
expected that needed changes would take 8 or more years to complete.

As we have seen again in Iraq, the excellence of our military forces is
unparalleled. This same level of excellence is not yet evident in the
department’s financial management and other business areas. This is
particularly problematic because effective financial and related
management operations are critical to achieving the department’s mission
in a reasonably economical, efficient, and effective manner and to
providing reliable, timely financial information on a routine basis to
support management decision making at all levels throughout DOD.
Transforming DOD’s business operations would free up resources that
could be used to enhance readiness, improve the quality of life for our
troops and their families, and reduce the gap between “wants” and
available funding in connection with major weapon systems. In fact,
Secretary Rumsfeld has estimated that successful business process reform
could save DOD 5 percent of its budget or $20 billion a year.




2
 Department of Defense, Performance and Accountability Report: Fiscal Year 2002
(Washington, D.C.: January 2003).




Page 2                                                                   GAO-03-931T
                       Today, I will focus mainly on the key actions necessary to correct DOD’s
                       financial management problems and the progress DOD is making toward
                       business process reform. But first, I want to provide you with an overview
                       of the long-standing financial management weaknesses facing DOD—as
                       highlighted by the results of audit work performed over the past few
                       years—and a summary of the underlying causes of DOD’s financial
                       management challenges. My statement is based on previous GAO reports
                       as well as on our review of DOD Inspector General (IG) reports and recent
                       DOD reports and studies.



Long-standing          DOD continues to confront pervasive, decades-old financial management
                       problems related to its systems, processes (including internal controls),
Financial Management   and people (human capital). These problems have (1) resulted in a lack of
Weaknesses             reliable information needed to make sound decisions and report the status
                       of DOD’s activities through financial and other reports, (2) hindered its
                       operational efficiency, (3) impacted mission performance, and (4) left the
                       department vulnerable to fraud, waste, and abuse.

                       DOD’s serious financial management and related business systems
                       problems led us in 1995 to put both DOD financial management and
                       systems modernization on our list of high-risk3 areas in the federal
                       government, a designation that continues today.4 As discussed in the
                       results of our audit of the fiscal year 2002 Financial Statements of the U.S.
                       Government,5 DOD’s financial management deficiencies, taken together,
                       continue to represent one of the largest obstacles to achieving an
                       unqualified opinion on the U.S. government’s consolidated financial
                       statements. To date, none of the military services or major DOD
                       components has passed the test of an independent financial audit because


                       3
                         GAO has designated government operations and programs as “high risk” because of either
                       their greater vulnerabilities to waste, abuse, and mismanagement or major challenges
                       associated with their economy, efficiency, or effectiveness.
                       4
                        U.S. General Accounting Office, High-Risk Series: An Overview, GAO/HR-95-1
                       (Washington, D.C.: February 1995); High-Risk Series: Defense Financial Management,
                       GAO/HR-97-3 (Washington, D.C.: February 1997); High-Risk Series: An Update, GAO-01-263
                       (Washington, D.C.: January 2001); and High-Risk Series: An Update, GAO-03-119
                       (Washington, D.C.: January 2003).
                       5
                         U.S. General Accounting Office, Fiscal Year 2002 U.S. Government Financial Statements:
                       Sustained Leadership and Oversight Needed for Effective Implementation of Financial
                       Management Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003).




                       Page 3                                                                     GAO-03-931T
of pervasive weaknesses in financial management systems, processes, and
controls. These weaknesses not only hamper the department’s ability to
produce timely and accurate financial management information but also
impact mission performance and make mission costs unnecessarily high.
Ineffective asset accountability and the lack of effective controls continue
to adversely affect visibility over its estimated $1 trillion investment in
inventories and property, plant, and equipment (including weapon systems
and other property). Such information is key to meeting military objectives
and readiness goals. Further, unreliable cost and budget information
related to a reported $700 billion of liabilities, particularly $59 billion of
reported environmental liabilities, and about $380 billion of reported costs
negatively affects DOD’s ability to effectively project funding needs,
maintain adequate funds control, reduce costs, and measure performance.
DOD has invested, and continues to invest, significant resources—in terms
of dollars, time, and people—in its systems without demonstrated
improvement in its business operations and adequate management and
oversight, thereby continuing to perpetuate a proliferation of systems that
do not adequately address the department’s needs. Finally, DOD’s weak
overall control environment has left the department vulnerable to fraud,
waste, and abuse. As the results of the department’s fiscal year 2002
financial audit and other audit work demonstrate, DOD continues to
confront serious weaknesses in these areas.




Page 4                                                             GAO-03-931T
Asset Management and   Of the $776 billion of inventory and related property and general property,
Accountability         plant, and equipment (PP&E)6 assets reported by federal entities for fiscal
                       year 2002, DOD is responsible for about half—approximately $146 billion in
                       inventory and related property and $226 billion of general PP&E,
                       comprised of $162 billion in real property (land, buildings, facilities, capital
                       leases, and improvements to those assets); $37 billion in personal property
                       (such as vehicles, equipment, telecommunications systems, computers,
                       and software); and $27 billion in construction-in-progress, the largest
                       amount of which belongs to the Corps of Engineers. While DOD is not
                       presently required to report dollar values for its weapons systems and
                       support PP&E used in the performance of military missions, such reporting
                       will be required beginning October 1, 2002.7 The amount subject to
                       reporting will likely be significant considering that DOD has estimated an
                       acquisition cost of over $64 billion for only three of its major weapons
                       systems acquisition programs.

                       Effective and efficient asset management and accountability is crucial to
                       DOD’s defense of our national interests. While the department has
                       undertaken several initiatives over the years to improve its asset
                       management and accountability systems, processes, and controls, material
                       weaknesses persist. As a result, DOD lacks reliable information about the
                       quantity, location, condition, and value of inventory and property—
                       including military equipment—critical to the department’s ability to
                       effectively meet military objectives and readiness goals. Ineffective and
                       inefficient asset management and accountability leave the department
                       vulnerable to fraud, waste, and abuse. Over the past 2 years, the DOD
                       Inspector General (IG) and we have issued numerous reports detailing
                       problems with asset management and accountability, including the
                       following examples.




                       6
                        Statement of Federal Financial Accounting Standards No. 6 states that general PP&E is any
                       property, plant, and equipment used in providing goods and services.
                       7
                        Statement of Federal Financial Accounting Standards No. 23, Eliminating the Category
                       National Defense Property, Plant and Equipment, was issued on May 8, 2003, and is
                       effective for periods beginning after September 30, 2002.




                       Page 5                                                                       GAO-03-931T
• DOD and its military services and units did not know how many Joint
  Service Lightweight Integrated Suit Technology (JSLIST)8—commonly
  referred to as “chem-bio suits”— they had, their condition, and where
  they were located.9 This lack of visibility was due to several factors,
  including the use of nonstandard, nonintegrated, stovepiped systems.
  Nonintegrated systems are unable to share data across business
  applications and therefore, multiple manual data entries must be made
  into numerous stand-alone systems, which result in errors, add
  significantly to administrative costs, and generally exacerbate asset
  visibility problems. The methods used to control and maintain visibility
  over JSLIST ranged from stand-alone automated systems, to
  spreadsheet applications, to pen and paper, to nothing at all. For
  JSLIST, the result was that DOD was excessing and selling these suits on
  the Internet for pennies on the dollar, while at the same time procuring
  hundreds of thousands of new garments annually. Similarly, a few years
  ago, the Defense Logistics Agency (DLA) had problems identifying and
  removing from its inventory defective Battle Dress Overgarments
  (BDO)—the JSLIST predecessor. As a result, some of the defective suits
  were shipped to U.S. forces in high-threat areas. In a June 2000
  testimony, the DOD IG pointed out that a physical count of BDOs could
  not locate 420,000 protective suits that were recorded in DLA’s
  accountability database.




8
  JSLIST is a universal, lightweight, two-piece garment (coat and trousers) that when
combined with footwear, gloves, and protective mask and breathing device, forms the war
fighter’s protective ensemble. Together the ensemble is to provide maximum protection to
the war fighter against chemical and biological contaminants without negatively impacting
the ability to perform mission tasks.
9
 U.S. General Accounting Office, DOD Management: Examples of Inefficient and
Ineffective Business Processes, GAO-02-873T (Washington, D.C.: June 25, 2002).




Page 6                                                                       GAO-03-931T
                             • DOD lacked effective processes and controls to ensure that easily
                               pilferable and sensitive items were properly recorded and safeguarded.
                               For example, we found that the military services failed to record all of
                               the pilferable and sensitive items acquired through purchase card
                               transactions, including the Navy’s failure to record a $757,000 purchase
                               comprised of 430 computers, 213 flat panel monitors, and other
                               computer hardware and software.10 The Navy was unable to provide us
                               with evidence confirming the location of 187 of those computers and 87
                               of the flat panel monitors. Similarly, in our recent review11 of property
                               controls at three military treatment facilities, we found that items such
                               as a laptop computer, a Sony monitor, and a sterilizer were not recorded
                               in the property records. We also found that numerous recorded items
                               could not be located. Most of these were lower priced (under $5,000) or
                               pilferable items such as a personal digital assistant, a cellular telephone,
                               computer monitors, color printers, a handheld radio, and various pieces
                               of medical equipment such as a stretcher, electric beds, and intravenous
                               pumps.



Environmental and Disposal   Under federal, state, and international law, DOD faces a major funding
Liabilities                  requirement associated with environmental cleanup and disposal resulting
                             from prior and current operations and from the production of weapons
                             systems. In its fiscal year 2002 financial statements, DOD reported an
                             estimated liability of $59 billion to manage and clean up or contain a
                             diverse population of environmental contamination comprised of

                             • $22 billion for closed and open sites where past and current waste
                               disposal practices, leaks, spills, and other activities have created a risk
                               to public health or the environment;

                             • $14 billion for closed, transferring, and active military ranges where
                               contamination and unexploded ordnance create environmental hazards;
                               and




                             10
                               U.S. General Accounting Office, Purchase Cards: Navy Is Vulnerable to Fraud and Abuse
                             but Is Taking Action to Resolve Control Weaknesses, GAO-02-1041 (Washington, D.C.: Sept.
                             27, 2002).
                             11
                              U.S. General Accounting Office, Military Treatment Facilities: Internal Control
                             Activities Need Improvement, GAO-03-168 (Washington, D.C.: Oct. 25, 2002).




                             Page 7                                                                      GAO-03-931T
                  • $23 billion for cleanup, demilitarization, and disposal of nuclear and
                    non-nuclear weapons systems, chemical weapons, and munitions.

                  DOD’s reported cost represents the current value of estimated future cash
                  outlays that will need to be paid from appropriations; therefore, the
                  Congress needs reliable information in order to plan how much and when
                  to provide funding for cleanup activities. In past years, we and the DOD IG
                  have repeatedly reported that the environmental liability amounts
                  presented in DOD’s financial statements were not reliable because the
                  department did not have (1) sufficient guidance for identifying and
                  categorizing cleanup activities whose costs must be included in the liability
                  calculation, (2) complete inventories of the sites and weapons systems that
                  will require cleanup or containment, and (3) valid cost estimating models
                  that produce consistent and supportable liability estimates. These
                  deficiencies were not systems related but rather resulted from inadequate
                  policies and processes and a lack of leadership.

                  We have also issued individual reports on several environmental cleanup
                  categories, including training ranges and on-going operations.12 In those
                  reports, we specifically cite weaknesses related to DOD’s lack of complete
                  site inventories, which means that the department’s reported liability
                  amount is likely understated. In line with our findings, the Air Force has
                  recently confirmed that it is investigating possible radioactive waste buried
                  at more than 80 former and current air bases around the country.
                  According to the Air Force, it lost track of the waste burial sites because of
                  poor record keeping and is now trying to identify and inspect the lands for
                  safety concerns. Costs for cleaning up these sites are not currently
                  included in the Air Force’s reported liability amounts. In addition,
                  incomplete identification of cleanup sites on installations that are currently
                  being used by the military could have negative consequences for future
                  base reutilization, alignment, and closure decisions.



Budget and Cost   DOD’s appropriation for fiscal year 2002 represented 18 percent of the total
Information       U.S. budget and 48 percent of discretionary funds. For fiscal year 2002,
                  DOD reported disbursing $347 billion to, among other things, make


                  12
                    U.S. General Accounting Office, Environmental Liabilities: DOD Training Range
                  Cleanup Cost Estimates Are Likely Understated, GAO-01-479 (Washington, D.C.: Apr. 11,
                  2001) and Environmental Liabilities: Cleanup Costs From Certain DOD Operations Are
                  Not Being Reported, GAO-02-117 (Washington, D.C.: Dec. 14, 2001).




                  Page 8                                                                    GAO-03-931T
payments to 5.7 million military and civilian personnel and annuitants,
process and pay 11.2 million contractor invoices, and make 7.3 million
travel payments. The magnitude of the dollars and number of transactions
involved makes it imperative that DOD maintain accurate fund balances
and properly account for costs; however, DOD financial management
systems and processes continue to be significant impediments to reporting
complete and accurate information with respect to budgetary and
disbursement activities.

Weaknesses in DOD’s accounting for its funds include (1) the inability to
reconcile its balances to Treasury’s, a process similar in concept to
individuals reconciling their checkbooks with their bank statements,
(2) payment recording errors, including disbursements that are not
properly matched to specific obligations recorded in the department’s
records, and (3) limited ability to track the use of funds appropriated for
contingency purposes. For example,

• For fiscal year 2002, we found that DOD had at least $7.5 billion in
  unexplained differences between Treasury and DOD fund activity
  records. Many of these differences represent disbursements made and
  reported to Treasury that had not yet been properly matched to
  obligations and recorded in DOD accounting records. In addition to
  these unreconciled amounts, DOD identified and reported an additional
  $3.6 billion in payment recording errors. These include disbursements
  that DOD has specifically identified as containing erroneous or missing
  information and that cannot be properly recorded and charged against
  the correct, valid fund account. DOD records many of these payment
  problems in suspense accounts and made $1.6 billion in unsupported
  adjustments to its fund balances at the end of fiscal year 2002 to account
  for a portion of these payment recording errors. These adjustments did
  not resolve the related errors.

• In June 2001, we reported that DOD’s financial systems could not
  adequately track and report on whether the $1.1 billion in earmarked
  funds that the Congress provided to DOD for spare parts and associated
  logistical support were actually used for their intended purpose.13 The
  vast majority of the funds—92 percent—were transferred to the military
  services operation and maintenance accounts. Once transferred, the


13
 U.S. General Accounting Office, Defense Inventory: Information on the Use of Spare
Parts Funding Is Lacking, GAO-01-472 (Washington, D.C.: June 11, 2001).




Page 9                                                                    GAO-03-931T
     department could not separately track the use of the funds. As a result,
     DOD lost its ability to assure the Congress that the funds it received for
     spare parts purchases were used for, and only for, the designated
     purpose.

• In April 2003, we reported14 that DOD was not able to separately track
  Emergency Response Funds provided under appropriations in fiscal
  years 2002 and 2003 ($20.5 billion). These funds were commingled in
  DOD’s regular appropriations accounts with funds appropriated for
  other purposes. Because DOD’s accounting system only captures data
  on total obligations and does not distinguish among original sources of
  funds, DOD is not able to identify those obligations that are funded from
  emergency response funds.

• In December 2000, we reported15 that our review of DOD functions that
  were studied over the past 5 years for potential outsourcing under OMB
  Circular A-76 showed that while DOD reported that savings had
  occurred as a result of these studies, we could not determine the precise
  amount of any such savings because the department lacked actual cost
  data. Further, in March 2002, we testified16 that while significant savings
  were being achieved, it has been difficult to determine the magnitude of
  those savings.

DOD’s continuing inability to capture and report the full cost of its
programs represents one of the most significant impediments facing the
department. DOD does not have the systems and processes in place to
capture the required cost information from the hundreds of millions of
transactions it processes each year. Lacking complete and accurate overall
life-cycle cost information for weapon systems impairs DOD’s and
congressional decision makers’ ability to make fully informed judgments
about which weapons, or how many, to buy. DOD has acknowledged that
the lack of a cost accounting system is its largest impediment to controlling
and managing weapon systems costs.


14
  U.S. General Accounting Office, Defense Budget: Tracking of Emergency Response Funds
for the War on Terrorism, GAO-03-346 (Washington, D.C.: Apr. 30, 2003).
15
 U.S. General Accounting Office, DOD Competitive Sourcing: Results of A-76 Studies
Over the Past 5 Years, GAO-01-20 (Washington, D.C.: Dec. 7, 2000).
16
 U.S. General Accounting Office, Competitive Sourcing: Challenges in Expanding A-76
Governmentwide, GAO-02-498T (Washington, D.C.: Mar. 6, 2002).




Page 10                                                                  GAO-03-931T
                       An April 2001 report on the results of an independent study of DOD’s
                       financial operations commissioned by the Secretary of Defense concluded
                       that DOD lacked the ability to routinely generate cost-based metrics to link
                       financial management to DOD’s goals.17 For example, DOD’s reporting
                       under the Government Performance and Results Act of 1993 (GPRA)18
                       often did not address the cost-based efficiency aspect of performance,
                       making it difficult for DOD to fully assess the efficiency of its performance.
                       DOD’s most recent performance plan (fiscal year 2001) included 45
                       unclassified metrics but only a few of those contained efficiency measures
                       based on costs.



Financial Management   For fiscal year 2003, DOD estimated that it would spend approximately $18
Systems                billion19 to operate, maintain, and develop business systems. Of that
                       amount, $5.2 billion relates directly to business systems and the remaining
                       $12.8 billion relates to the infrastructure that supports the systems. While
                       funding system development and modernization activities is crucial, it is
                       only part of the solution needed to improve DOD’s current business
                       systems and operating environment. Key ingredients to successful systems
                       development and modernization include effective management and
                       oversight of ongoing and planned investments.

                       However, in February 2003,20 we reported that DOD had yet to establish the
                       necessary departmental investment governance structure and process
                       controls needed to adequately align ongoing investments with its
                       architectural goals and direction. An effective governance structure should
                       include




                       17
                         Department of Defense, Transforming Department of Defense Financial Management:
                       A Strategy for Change (Washington, D.C.: Apr. 13, 2001).
                       18
                         Government Performance and Results Act of 1993, Pub. L. 103-62, 107 Stat. 285, Aug. 3,
                       1993. Pertinent performance planning and reporting requirements have been codified, as
                       amended, at 31 U.S.C. sections 1115 and 1116.
                       19
                         U.S. General Accounting Office, DOD Business Systems Modernization: Continued
                       Investment in Key Accounting Systems Needs to be Justified, GAO-03-465 (Washington,
                       D.C.: Mar. 28, 2003).
                       20
                         U.S. General Accounting Office, DOD Business Systems Modernization: Improvements
                       to Enterprise Architecture Development and Implementation Efforts Needed, GAO-03-458
                       (Washington, D.C.: Feb. 28, 2003).




                       Page 11                                                                      GAO-03-931T
• a hierarchy of investment review boards composed of representatives
  from across the department who are assigned investment selection and
  control responsibilities based on project threshold criteria;

• a standard set of investment review and decision-making criteria for use
  by all boards, including criteria to ensure compliance and consistency
  with its newly developed enterprise architecture or “blueprint for
  reform”; and

• a specified, near term date by which ongoing investments have to be
  subject to this standard investment review process, and by which
  decisions should be made as to whether to proceed with each
  investment.

DOD’s lack of effective oversight and process controls over IT investments
perpetuates the existence of an incompatible, duplicative, and overly costly
systems environment, which undermines its ability to optimally support
mission performance. For example,

• In March 2003, we reported21 that DOD did not effectively manage and
  oversee its planned investment of over $1 billion in four Defense
  Finance and Accounting Service (DFAS) systems modernization efforts.
  DOD invested approximately $316 million in these projects without first
  demonstrating that they would markedly improve the information
  needed for decision-making and financial reporting purposes. The DOD
  Comptroller terminated one of the four projects we reviewed after an
  investment of over $126 million, citing poor program performance and
  increasing costs. Investments in the other three projects continue
  despite the absence of the requisite analyses of costs, benefits, and risks
  to demonstrate that the projects will produce value commensurate with
  the cost being incurred.

• In March 2002, the DOD IG reported that DOD’s Joint Total Asset
  Visibility Program (JTAV) system provided incomplete asset visibility to
  military commanders in chief (CINCs) and joint task force
  commanders.22 Required capabilities were not developed before the


21
     GAO-03-465.
22
  DOD Inspector General, Information Technology: Effectiveness of the Joint Total Asset
Visibility Program; Audit Report D-2002-057 (Arlington, Va.; Mar. 11, 2002).




Page 12                                                                    GAO-03-931T
     program was placed into service, including asset and personnel visibility
     for the warfighter, accurate and timely source data, and data links to
     critical data in other DOD systems. As a result, CINCs and joint task
     force commanders did not have access, through the program, to all
     required data on the location, movement, status, and identity of military
     units, personnel, equipment, and supplies as intended.

• In June 2002, DOD reported23 that shortcomings in existing
  nonintegrated personnel and pay systems caused delays in military
  payroll payments (some as much as 6 or more months after the event
  occurred) and resulted in errors (both under- and overpayments). DOD
  estimated that system input errors ranged from 5 to 15 percent and that
  these errors necessitated complex retroactive computations, data
  reconciliation and corrections, losses due to overpayments, debt
  processing, and costs to recoup overpayments.

• As of October 2002, DOD reported that its current business systems
  environment consisted of 1,731 systems and system acquisition projects
  (a number that has since risen to about 2,300 as DOD has identified
  additional systems). DOD reported that it had 374 systems to support
  civilian and military personnel matters, 335 systems to support finance
  and accounting functions, and 310 systems that produce information for
  management decision making.

As we have previously reported,24 these numerous systems have evolved
into the overly complex and error-prone operation that exists today,
including (1) little standardization across DOD components, (2) multiple
systems performing the same tasks, (3) the same data stored in multiple
systems, (4) manual data entry into multiple systems, and (5) a large
number of data transactions and interfaces that combine to exacerbate the
problems of data integrity. While the department recognizes the
uncontrolled proliferation of systems and the need to eliminate as many
systems as possible and to integrate and standardize those that remain,
DOD components continue to receive and control their own IT investment
funding.


23
 Department of Defense, Report to Congress: Defense Integrated Military Human
Resources System (Personnel and Pay), June 2002.
24
  U.S. General Accounting Office, DOD Financial Management: Important Steps
Underway But Reform Will Require a Long-term Commitment, GAO-02-784T (Washington,
D.C.: June 4, 2002).




Page 13                                                                GAO-03-931T
Weak Control   Fundamental flaws in DOD’s systems, processes, and overall control
               environment leave the department at risk of fraud, waste, and abuse. Over
Environment    the past few years, we have reported numerous instances of breakdowns
               in—or lack of—internal control that have had serious economic and legal
               consequences for the department, including

               • government travel card delinquency rates for the Army and the Navy
                 that were nearly double those of federal civilian agencies;25

               • pervasive purchase and travel card control breakdowns that resulted in
                 numerous instances of potentially fraudulent, improper, and abusive
                 transactions and increased DOD’s vulnerability to theft and misuse of
                 government property;26

               • inadequate management and reporting on the funding associated with
                 the Air Force’s contracted depot maintenance that resulted in
                 understating the dollar value of year-end carryover work by tens of
                 millions of dollars;27

               • adjustments to DOD’s closed appropriations that resulted in about $615
                 million in adjustments that should not have been made, including $146
                 million that was illegal;28



               25
                 U.S. General Accounting Office, Travel Cards: Control Weaknesses Leave Navy
               Vulnerable to Fraud and Abuse, GAO-03-147 (Washington, D.C.: Dec. 23, 2002); Air Force
               Management Has Reduced Delinquencies, but Improvements in Controls Are Needed,
               GAO-03-298 (Washington, D.C.: Dec. 20, 2002); Travel Cards: Control Weaknesses Leave
               Army Vulnerable to Potential Fraud and Abuse, GAO-03-169 (Washington, D.C.: Oct. 11,
               2002).
               26
                 U.S. General Accounting Office, Purchase Cards: Control Weaknesses Leave the Air Force
               Vulnerable to Fraud, Waste, and Abuse, GAO-03-292 (Washington, D.C.: Dec. 20, 2002);
               Purchase Cards: Navy Is Vulnerable to Fraud and Abuse but Is Taking Action to Resolve
               Control Weaknesses, GAO-02-1041 (Washington, D.C.: Sept. 27, 2002); Purchase Cards:
               Control Weaknesses Leave Army Vulnerable to Fraud, Waste, and Abuse, GAO-02-732
               (Washington, D.C.: June 27, 2002); Purchase Cards: Control Weaknesses Leave Two Navy
               Units Vulnerable to Fraud and Abuse, GAO-02-32 (Washington, D.C.: Nov. 30, 2001).
               27
                 U.S. General Accounting Office, Air Force Depot Maintenance: Management
               Improvements Needed for Backlog of Funded Contract Maintenance Work, GAO-02-623
               (Washington, D.C.: June 20, 2002).
               28
                U.S. General Accounting Office, Canceled DOD Appropriations: $615 Million of Illegal or
               Otherwise Improper Adjustments, GAO-01-697 (Washington, D.C.: July 26, 2001).




               Page 14                                                                    GAO-03-931T
                        • hundreds of millions of dollars of over- and underpayments to
                          contractors;29 and

                        • lost opportunities to collect millions of dollars of reimbursements for
                          services performed in military treatment facilities because not all
                          patients with third party insurance coverage were identified or because
                          those insurers were not billed.

                        In general, DOD does not have the necessary control processes and
                        procedures in place to identify problem situations like the ones listed
                        above. However, DOD usually takes action to try to correct and then
                        prevent these problems once they have been identified by auditors.



Underlying Causes of    In the past, DOD initiated a number of departmentwide reform initiatives to
                        improve its financial operations as well as other key business support
Financial and Related   processes. While these initiatives produced some incremental
Business Process        improvements, they did not result in the fundamental reform necessary to
                        resolve these long-standing management challenges. For example, in 1989,
Reform Challenges       DOD began the Corporate Information Management (CIM) initiative, which
                        was expected to save billions of dollars by streamlining operations and
                        implementing standard information systems across the department to
                        support common business operations. DOD intended CIM to reform all of
                        its functional areas—including finance, procurement, material
                        management, and human resources—through the consolidation,
                        standardization, and integration of its numerous, duplicative information
                        systems. DOD spent billions of dollars on this initiative with little sound
                        analytical justification. Rather than relying on a rigorous decision-making
                        process for information technology investments, as used in leading private
                        and public organizations we studied, DOD made systems decisions without
                        (1) appropriately analyzing cost, benefits, and technical risks,
                        (2) establishing realistic project schedules, or (3) considering how business
                        process improvements could affect information technology investments.
                        For one effort alone, DOD spent about $700 million trying to develop and
                        implement a single system for the material management business area—
                        but this effort proved unsuccessful. After 8 years and about $20 billion in



                        29
                          U.S. General Accounting Office, DOD Contract Management: Overpayments Continue
                        and Management and Accounting Issues Remain, GAO-02-635 (Washington, D.C.: May 30,
                        2002).




                        Page 15                                                               GAO-03-931T
                         expenditures, DOD abandoned the CIM initiative. However, some of the
                         conditions that led to its defeat remain today.

                         We first identified underlying causes for the department’s inability to
                         resolve its long-standing financial management problems, as well as the
                         other areas of its operations most vulnerable to waste, fraud, abuse, and
                         mismanagement, in our May 1997 testimony.30 We have continued to
                         highlight in various testimonies what we believe are the underlying reasons
                         for the department’s inability to fundamentally reform its business
                         operations. There are four underlying causes:

                         • a lack of sustained top-level leadership and management accountability
                           for correcting problems;

                         • deeply embedded cultural resistance to change, including military
                           service parochialism and stovepiped operations;

                         • a lack of results-oriented goals and performance measures and
                           monitoring; and

                         • inadequate incentives for seeking change.



Lack of Leadership and   Historically, DOD has not routinely assigned accountability for
Accountability           performance to specific organizations or individuals who have sufficient
                         authority to accomplish desired goals. For example, under the Chief
                         Financial Officers Act (CFO) of 1990,31 it is the responsibility of the agency
                         CFO to establish the mission and vision for the agency’s future financial
                         management and to direct, manage, and provide oversight of financial
                         management operations. However, at DOD, the Comptroller—who is by
                         statute the department’s CFO—has direct responsibility for only an
                         estimated 20 percent of the data relied on to carry out the department’s
                         financial management operations. The other 80 percent comes from DOD’s
                         other business operations. In addition, DOD’s past experience has
                         suggested that top management has not had a proactive, consistent, and

                         30
                          U.S. General Accounting Office, DOD High-Risk Areas: Eliminating Underlying Causes
                         Will Avoid Billions of Dollars in Waste, GAO/T-NSIAD/AIMD-97-143 (Washington, D.C.:
                         May 1, 1997).
                         31
                          Chief Financial Officers Act of 1990, Pub. L. 101-576, 104 Stat. 2842, Nov. 15, 1990 (codified
                         as amended in scattered sections of 31 U.S.C.).




                         Page 16                                                                          GAO-03-931T
                          continuing role in building capacity, integrating daily operations for
                          achieving performance goals, and creating incentives. Major improvement
                          initiatives must have the direct, active support and involvement of the
                          Secretary and Deputy Secretary of Defense to ensure that daily activities
                          throughout the department remain focused on achieving shared,
                          agencywide outcomes and success. Furthermore, sustaining top
                          management commitment to performance goals is a particular challenge
                          for DOD because the average 1.7-year tenure of the department’s top
                          political appointees has served to hinder long-term planning and follow-
                          through. Based on our survey of best practices of world-class financial
                          management organizations,32 strong executive leadership is essential to
                          (1) making financial management an entitywide priority, (2) redefining the
                          role of finance, (3) providing meaningful information to decision makers,
                          and (4) building a team of people that delivers results.



Cultural Resistance and   Cultural resistance to change, military service parochialism, and
Parochialism              stovepiped operations have also played a significant role in impeding
                          previous attempts to implement broad-based management reforms at DOD.
                          The department has acknowledged that it confronts decades-old problems
                          deeply grounded in the bureaucratic history and operating practices of a
                          complex, multifaceted organization. For example, the effectiveness of the
                          Defense Management Council, established in 1997 to help break down
                          organizational stovepipes and overcome cultural resistance to change, was
                          impaired because members were not able to put their individual military
                          services’ or DOD agencies’ interests aside to focus on departmentwide
                          approaches to long-standing problems.33 DOD’s stovepiped approach is
                          most evident in its current financial management systems environment,
                          which DOD recently estimated to include approximately 2,300 systems and
                          system development projects—many of which were developed in
                          piecemeal fashion and evolved to accommodate different organizations,
                          each with its own policies and procedures.




                          32
                            U.S. General Accounting Office, Executive Guide: Creating Value Through World-class
                          Financial Management, GAO/AIMD-00-134 (Washington, D.C.: Apr. 1, 2000).
                          33
                           U.S. General Accounting Office, Defense Management: Actions Needed to Sustain Reform
                          Initiatives and Achieve Greater Results, GAO/NSIAD-00-72 (Washington, D.C.: July 25,
                          2000).




                          Page 17                                                                   GAO-03-931T
Unclear Goals and        Lack of clear, linked goals and performance measures has handicapped
Performance Measures     DOD’s past reform efforts. As a result, DOD managers lack straightforward
                         road maps showing how their work contributes to attaining the
                         department’s strategic goals, and they risk operating autonomously rather
                         than collectively. According to its fiscal year 2002 Performance and
                         Accountability report, DOD is still in the process of developing measurable
                         annual performance goals and objectives.

                         In our assessment of DOD’s Fiscal Year 2000 Financial Management
                         Improvement Plan34—its most recent plan—we found that it presented the
                         military services’ and DOD components’ individual improvement initiatives
                         for reforming financial management but did not clearly articulate how their
                         individual efforts would result in a collective, integrated DOD-wide
                         approach to financial management improvement. In addition, the product
                         did not include performance measures that could be used to assess DOD’s
                         progress in resolving its financial management problems. As a result, the
                         product was more a compilation of a data call than a strategic plan.
                         Furthermore, while DOD plans to invest billions of dollars in modernizing
                         its financial management systems, it currently does not have effective
                         management governance and controls in place to guide and direct these
                         investments. We will discuss DOD’s work to develop an initial business
                         enterprise architecture later in our testimony.



Lack of Incentives for   The final underlying cause of the department’s long-standing inability to
Change                   carry out needed fundamental reform has been the lack of incentives for
                         making more than incremental change to existing “business-as-usual”
                         processes, systems, and structures. Traditionally, DOD has focused on
                         justifying its need for more funding rather than on the outcomes its
                         programs have produced. DOD generally measures its performance by the
                         amount of money spent, people employed, or number of tasks completed.
                         Incentives for its decision makers to implement changed behavior have
                         been minimal or nonexistent. Secretary Rumsfeld perhaps said it best in
                         announcing his planned transformation at DOD: “There will be real
                         consequences from, and real resistance to, fundamental change.”




                         34
                           U.S. General Accounting Office, Financial Management: DOD Improvement Plan Needs
                         Strategic Focus, GAO-01-764 (Washington, D.C.: Aug. 15, 2001).




                         Page 18                                                               GAO-03-931T
                       The lack of incentive has been most evident in the department’s acquisition
                       area. In DOD’s culture, the success of a manager’s career has depended
                       more on moving programs and operations through the DOD process than
                       on achieving better program outcomes. The fact that a given program may
                       have cost more than estimated, taken longer to complete, and not
                       generated results or performed as promised was secondary to fielding a
                       new program. To effect real change, actions are needed to (1) break down
                       parochialism and reward behaviors that meet DOD-wide and congressional
                       goals, (2) develop incentives that motivate decision makers to initiate and
                       implement efforts that are consistent with better program outcomes,
                       including saying “no” or pulling the plug on a system or program that is
                       failing, and (3) facilitate a congressional focus on results-oriented
                       management, particularly with respect to resource-allocation decisions.



Keys to Fundamental    Successful reform of DOD’s fundamentally flawed financial management
                       operations must simultaneously focus on its systems, processes, and
Financial Management   people. While DOD has made some encouraging progress in addressing
Reform and Progress    specific challenges, it is still in the very early stages of a departmentwide
                       reform that will take many years to accomplish. As a result, it is not
to Date                possible to predict when—or even whether—the effort will be successful.

                       Our experience has shown there are several key elements that collectively
                       would enable the department to effectively address the underlying causes
                       of its inability to resolve its long-standing financial management problems.
                       For the most part, these elements, which should not be viewed as
                       independent actions but rather a set of interrelated and interdependent
                       actions, are consistent with those discussed in the department’s April 2001
                       financial management transformation report.35 These elements, which we
                       believe are key to any successful approach to financial management
                       reform, include

                       • addressing the department’s financial management challenges as part of
                         a comprehensive, integrated, DOD-wide business reform;

                       • providing for sustained leadership by the Secretary of Defense and
                         resource control to implement needed financial management reforms;


                       35
                        Department of Defense, Transforming Department of Defense Financial Management: A
                       Strategy for Change, (Washington, D.C.: Apr. 13, 2001).




                       Page 19                                                               GAO-03-931T
                             • establishing clear lines of responsibility, authority, and accountability
                               for such reform tied to the Secretary;

                             • incorporating results-oriented performance measures and monitoring
                               tied to financial management reforms;

                             • providing appropriate incentives or consequences for action or inaction;

                             • establishing and implementing an enterprise architecture to guide and
                               direct financial management modernization investments; and

                             • ensuring effective executive and congressional oversight and
                               monitoring.

                             While DOD still has a long way to go, it has made serious efforts to address
                             many of the key areas over the past 2 years. We will discuss each of the
                             areas and provide examples of improvement actions—long-term and/or
                             short-term—where relevant. Both long-term actions focused on the
                             Secretary’s envisioned business transformation and short-term actions
                             focused on improvements within existing systems and processes are
                             critical to forward movement.



Integrated Business Reform   As we previously reported,36 establishing the right goal is essential for
Strategy                     success. Central to effectively addressing DOD’s financial management
                             problems will be the recognition that they cannot be addressed in an
                             isolated fashion separate from the other high-risk areas and management
                             challenges facing the department. Further, successfully reforming the
                             department’s operations—which consist of people, business processes, and
                             technology—will be critical if DOD is to effectively address the deep-
                             rooted organizational emphasis on maintaining business-as-usual across
                             the department. DOD has recently taken important steps to begin
                             improving its people, processes, and systems.

                             We have reported37 that many of DOD’s financial management
                             shortcomings were attributable in part to human capital issues. In April
                             2002, DOD published a departmentwide strategic plan for its civilian
                             employees, which sets forth its vision to “design, develop and implement

                             36
                              U.S. General Accounting Office, Department of Defense: Progress in Financial
                             Management Reform, GAO/T-AIMD/NSIAD-00-163 (Washington, D.C.: May 9, 2000).




                             Page 20                                                                 GAO-03-931T
human resources policies, strategies, systems, and tools to ensure a
mission-ready civilian workforce that is motivated to excel.” Although a
positive step, the plan needs further refinement to achieve the Secretary of
Defense’s transformation initiatives, including (1) integration of
component-level plans with the department-level plan, (2) development of
key elements, such as results-oriented performance measures, and
(3) integration with military personnel planning and sourcing decisions.38
Recently, DOD proposed a National Security Personnel System that would
provide for wide-ranging changes in DOD’s civilian personnel pay and
performance management. While we strongly support the concept of
modernizing and making more flexible federal human capital policies, we
have warned that the appropriate infrastructure and adequate safeguards
need to be in place for successful implementation and to prevent abuse.39
In addition, in its fiscal year 2003 Defense Authorization Act, DOD sought
and obtained authorization to prescribe certification and credential
standards for its professional accounting positions and is currently drafting
the relevant regulations. These are important steps in DOD’s plans to
develop a human capital investment strategy and plan.

The department recently renamed its Financial Management Modernization
Program to the Business Management Modernization Program, a move that
recognizes that financial management is a crosscutting issue that affects
virtually all DOD business areas. For example, improving its financial
management operations so that they can produce timely, reliable, and
useful cost information is essential to effectively measure its progress
towards achieving many key outcomes and goals across virtually the entire
spectrum of DOD’s business areas. At the same time, the department’s
financial management problems—and, most importantly, the keys to their
resolution—are deeply rooted in and dependent upon developing solutions
to a wide variety of management problems across DOD’s various
organizations and business areas. In line with this, DOD has designated



37
 U.S. General Accounting Office, Major Management Challenges and Program Risks:
Department of Defense, GAO-01-244 (Washington, D.C.: Jan.1, 2001).
38
  U.S. General Accounting Office, DOD Personnel: DOD Actions Needed to Strengthen
Civilian Human Capital Strategic Planning and Integration with Military Personnel and
Sourcing Decisions, GAO-03-475 (Washington, D.C.: Mar. 28, 2003).
39
  U.S. General Accounting Office, Human Capital: DOD’s Civilian Personnel Strategic
Management and the Proposed National Security Personnel System, GAO-03-493T
(Washington, D.C.: May 12, 2003).




Page 21                                                                   GAO-03-931T
owners of seven key department business lines,40 or domains, to transform
the department’s business operations and implement its enterprise
architecture.

As we mentioned earlier, and it deserves emphasis, the department has
reported that an estimated 80 percent of the data needed for sound
financial management comes not from the Comptroller’s operations but
from its other business operations, such as its acquisition and logistics
communities. DOD’s vast array of costly, nonintegrated, duplicative, and
inefficient financial management systems reflects its lack of an integrated
approach to addressing management challenges. DOD has acknowledged
that one of the reasons for the lack of clarity in its reporting under the
Government Performance and Results Act has been that most of the
program outcomes the department is striving to achieve are interrelated,
while its management systems are not integrated. In fact, DOD is
redefining its performance metrics and program outcomes as they relate to
four risk areas: (1) force management, (2) operations, (3) future challenges,
and (4) institutional.

Secretary of Defense Rumsfeld recognized the far-reaching nature of DOD’s
financial management problems and, on September 10, 2001, he announced
a broad, top-priority initiative intended to “transform the way the
department works and what it works on.” This new broad-based business
transformation program incorporates a number of defense reform
initiatives begun under previous administrations but also encompasses
additional fundamental business reform proposals. However, like defense
reform initiatives begun under the previous administration, the
transformation program has not yet developed an overarching plan tying all
the individual reform efforts together. The development of an overarching
plan could take on increased importance, particularly where initiatives are
interrelated and up-front investments are required.

DOD has already taken a number of actions under its business
transformation program. In this context, the Secretary established a
number of top-level councils, committees, and boards, including the Senior
Executive Council, the Business Initiative Council, and the Defense


40
 DOD’s seven business process areas include: (1) acquisition/procurement, (2) finance,
accounting operations, and financial management, (3) human resource management,
(4) logistics, (5) strategic planning and budgeting, (6) installations and environment, and
(7) technical infrastructure.




Page 22                                                                         GAO-03-931T
                           Business Practice Implementation Board. The Senior Executive Council
                           was established to help guide efforts across the department to improve its
                           business practices. This council—chaired by the Secretary of Defense, and
                           with membership to include the Deputy Secretary, the military service
                           secretaries, and the Under Secretary of Defense for Acquisition,
                           Technology and Logistics (AT&L)—was established to function as the
                           “board of directors” for the department. The Business Initiative Council—
                           comprised of senior DOD and military service officials and headed by the
                           Under Secretary of Defense for Acquisition, Technology and Logistics—
                           was established to encourage the military services to explore new money-
                           saving business practices to help offset funding requirements for
                           transformation and other initiatives. The Defense Business Practice
                           Implementation Board is an advisory board whose mission is to make
                           recommendations to the Senior Executive Committee on strategies for
                           implementing best business practices in matters relating to management,
                           acquisition, production, logistics, personnel leadership, and the defense
                           industrial base.

                           Our research of successful public and private sector organizations shows
                           that such entities, comprised of enterprisewide executive leadership,
                           provide valuable guidance and direction when pursuing integrated
                           solutions to corporate problems. Inclusion of the department’s top
                           leadership could help to break down the cultural barriers to change and
                           result in an integrated DOD approach for business reform.



Sustained Leadership and   The department’s successful Year 2000 effort illustrated, and our survey of
Resource Control           leading financial management organizations41 captured, the importance of
                           strong leadership from top management. As we have stated many times
                           before, strong, sustained executive leadership is critical to changing a
                           deeply rooted corporate culture—such as the existing “business-as-usual”
                           culture at DOD—and to successfully implementing financial management
                           reform. For example, in the case of the Year 2000 computer challenge, the
                           personal, active involvement of the Deputy Secretary of Defense played a
                           key role in building entitywide support and focus. Given the long-standing
                           and deeply entrenched nature of the department’s financial management
                           problems—combined with the numerous competing DOD organizations,




                           41
                                GAO/AIMD-00-134.




                           Page 23                                                         GAO-03-931T
each operating with varying, often parochial views and incentives—such
visible, sustained top-level leadership will be critical.

In discussing their April 2001 report to the Secretary of Defense on
transforming financial management,42 the authors stated that, “unlike
previous failed attempts to improve DOD’s financial practices, there is a
new push by DOD leadership to make this issue a priority.” To demonstrate
his commitment towards reforming the department, Secretary Rumsfeld
designated improving financial management operations, which included
not only finance and accounting but also such business areas as logistics,
acquisition, and personnel management, as 1 of the department’s top 10
priorities for reform.43 While the commitment of the Secretary is vital to
the success of any DOD-wide reform effort, strong, sustained executive
leadership—over a number of years and administrations—will be key to
changing a deeply rooted culture and to truly transforming DOD’s business
systems and operations so that the department can meet the mandate of
the CFO Act and achieve the President’s Management Agenda goal of
improved financial management performance.

Additionally, the tenure of the department’s top political appointees has
generally been short in duration and as a result, it is sometimes difficult to
maintain the focus and momentum that are needed to resolve the
management challenges facing DOD. This is particularly evident with the
postwar reconstruction of Iraq along with DOD’s substantial commitment
to the continuing war on terrorism. The resolution of the array of
interrelated business system management challenges that DOD faces is
likely to span several administrations. As we have proposed in previous
congressional testimonies,44 one option to address the continuity issue
would be the establishment of the position of chief operating or


42
 Department of Defense, Transforming Department of Defense Financial Management: A
Strategy for Change (Washington, D.C.: Apr. 13, 2001).
43
 The Secretary’s top ten priorities: successfully pursue the global war on terrorism,
strengthen joint warfighting capabilities, transform the joint force, optimize intelligence
capabilities, improve force manning, new concepts of global engagement, counter the
proliferation of weapons of mass destruction, homeland security, streamline DOD business
processes, and improve interagency processes, focus, and integration.
44
 U.S. General Accounting Office, DOD Financial Management: Integrated Approach,
Accountability, Transparency, and Incentives Are Keys to Effective Reform, GAO-02-497T
(Washington, D.C.: Mar. 6, 2002); U.S. General Accounting Office, DOD Financial
Management: Important Steps Underway But Reform Will Require a Long-term
Commitment, GAO-02-784T (Washington, D.C.: June 4, 2002).




Page 24                                                                       GAO-03-931T
                     management officer. This position could be filled by an individual
                     appointed for a set term of 5 to 7 years with the potential for
                     reappointment. Such an individual should have a proven track record as a
                     business process change agent for large, diverse organizations—
                     experience necessary to spearhead business process transformation across
                     the department and serve as an integrator for business reform.



Clear Lines of       Another key to reform is the establishment of clear lines of responsibility,
Responsibility and   decision-making authority, and resource control for actions across the
                     department tied to the Secretary. As we previously reported,45 such an
Accountability
                     accountability structure should emanate from the highest levels and
                     include the secretary of each of the military services as well as heads of the
                     department’s various major business areas.

                     The Secretary of Defense has taken action to vest responsibility and
                     accountability for financial management modernization with the DOD
                     Comptroller. In October 2001, the DOD Comptroller established the
                     Financial Management Modernization Executive46 and Steering
                     Committees as the governing bodies that oversee the activities related to
                     the modernization effort. The Executive Committee is to advise the DOD
                     Comptroller on the modernization effort and provide strategic direction,
                     whereas the Steering Committee is to advise the Executive Committee on
                     the program’s performance and provide guidance to the program
                     management office.



Results-oriented     As discussed in our January 2003 report on DOD’s major performance and
Performance          accountability challenges,47 establishing a results orientation is another key
                     element of any approach to reform. Such an orientation should draw upon
                     results that could be achieved through commercial best practices,
                     including outsourcing and shared servicing concepts. Personnel


                     45
                          GAO/NSIAD-00-72 and GAO-03-458.
                     46
                      Effective December 28, 2001, Sec. 1009 of the Floyd D. Spence National Defense
                     Authorization Act for Fiscal Year 2001, Pub. L. No. 107-107, 115 Stat. 1012, 1206 (codified at
                     10 U.S.C. Sec. 185), required the Secretary of Defense to establish a Financial Management
                     Modernization Executive Committee.
                     47
                      U.S. General Accounting Office, Major Management Challenges and Program Risks:
                     Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 1, 2003).




                     Page 25                                                                          GAO-03-931T
throughout the department must share the common goal of establishing
financial management operations that not only produce financial
statements that can withstand the test of an audit but more importantly,
routinely generate useful, reliable, and timely financial information for day-
to-day management purposes. To its credit, DOD has initiated a number of
improvement actions to address accountability and financial information
deficiencies.

• In its most recent performance and accountability report, DOD stated
  that it had (1) validated cost-estimating models used in calculating
  environmental liability costs, (2) developed a methodology for
  estimating liabilities associated with nuclear powered ships and
  submarines, and (3) issued improved guidance—for all areas except
  ongoing operations—to help components compile complete, accurate,
  and fully substantiated environmental liability data. In addition, DOD
  claimed that it is developing and maintaining supporting documentation
  and audit trails for 30,000 closed contamination sites, including open
  and closed installations and base reutilization and alignment sites.

• Through training and implementation of more efficient and effective
  processes, DOD is improving its fund accounting and disbursement
  activities. During fiscal year 2002, DOD improved its disbursement
  activity reporting and its procedures for reconciling its fund balance
  records with similar information maintained by the Department of
  Treasury. As a result, the number and amount of disbursement
  disparities between DOD’s records and Treasury’s records decreased
  from the previous year. DOD is taking the necessary first steps to
  identifying and eliminating payment recording problems.

• DOD’s major components must now prepare quarterly financial
  statements along with extensive footnotes that explain any improper
  balances or significant variances from previous year quarterly
  statements. In addition, the midyear and end-of-year financial
  statements must be briefed to the DOD Comptroller by the service
  Assistant Secretary for Financial Management or the head of the
  defense agency. We have observed several of the midyear briefings and
  have noted that the practice of preparing and explaining interim
  financial statements is instilling discipline into DOD’s financial reporting
  processes, which will help improve the reliability of DOD’s financial
  data.




Page 26                                                            GAO-03-931T
• DOD has begun to develop methodologies for valuing and depreciating
  the cost of its weapons systems and other equipment used to support its
  military operations. The department completed a similar effort to
  obtain a baseline for the majority of its real property assets in fiscal year
  1999. These valuation efforts represent important steps toward
  obtaining cost data for management decision making and financial
  reporting. However, in order for the department to reap the full benefits
  of these and similar efforts, it must develop and implement efficient and
  effective systems, processes, and controls—consistent with its
  enterprise architecture—to sustain the calculated baselines and capture
  subsequent additions, modifications, and deletions of property assets.

Since the Secretary has established an overall business process
transformation goal that will require a number of years to achieve, going
forward it is especially critical for managers throughout the department to
focus on specific metrics that, over time, collectively will translate to
achieving this overall goal. It is important for the department to refocus its
annual accountability reporting on this overall goal of fundamentally
transforming the department’s financial management systems and related
business processes to include appropriate interim annual measures for
tracking progress toward this goal.

In the short term, it is important to focus on actions that can be taken using
existing systems and processes. It is critical to establish interim measures
to both track performance against the department’s overall transformation
goals and facilitate near-term successes using existing systems and
processes. The department has established an initial set of metrics
intended to evaluate financial performance and it has seen improvements.
For example,

• With respect to closed appropriation accounts, during the first 6 months
  of fiscal year 2002, DOD reported a reduction in the dollar value of
  adjustments to closed appropriation accounts of about 80 percent from
  the same 6-month period in fiscal year 2001.

• For DOD individually billed travel cards, the delinquency rate dropped
  from 8.9 percent in March 2002 to 5.7 percent in March 2003.

• From March 2001 through March 2003, DOD reduced its commercial pay
  backlogs (payment delinquencies) by 46 percent and its payment
  recording errors by 43 percent.




Page 27                                                             GAO-03-931T
                 While DOD’s metrics show significant improvements from 2001 to today,
                 statistics for the last few months show that progress has slowed or even
                 taken a step backward for payment recording errors and commercial pay
                 backlogs. Our report on DOD’s metrics program48 included a caution that,
                 without modern integrated systems and the streamlined processes they
                 engender, reported progress may not be sustainable if workload is
                 increased. It could be that DOD is experiencing problems accounting for
                 the additional volume of transactions resulting from contingency funding
                 and increased appropriations amounts.

                 We note that DOD is still formulating departmentwide performance goals
                 and measures to align with the outcomes described in its strategic plan—
                 the September 2001 Quadrennial Defense Review. We agree with the
                 department’s efforts to expand the use of appropriate metrics to guide its
                 financial management reform efforts. However, it is important for DOD to
                 synchronize its development of these metrics with it efforts to develop
                 departmentwide goals and measures, including nonfinancial metrics, to
                 ensure consistency.



Incentives and   Another key to breaking down the parochial interests and stovepiped
Consequences     approaches that have plagued previous reform efforts is establishing
                 mechanisms to reward organizations and individuals for behaviors that
                 comply with DOD-wide and congressional goals. Such mechanisms should
                 be geared to providing appropriate incentives and penalties to motivate
                 decision makers to initiate and implement efforts that result in
                 fundamentally reformed financial management and other business support
                 operations.

                 In addition, such incentives and consequences are essential if DOD is to
                 break down the parochial interests that have plagued previous reform
                 efforts. Incentives driving traditional ways of doing business, for example,
                 must be changed, and cultural resistance to new approaches must be
                 overcome. Simply put, DOD must convince people throughout the
                 department that they must change from business-as-usual systems and
                 practices or they are likely to face serious consequences, organizationally
                 and personally.



                 48
                  U.S. General Accounting Office, Financial Management: DOD’s Metrics Program
                 Provides Focus for Improving Performance, GAO-03-457 (Washington, D.C.: Mar. 28, 2003).




                 Page 28                                                                   GAO-03-931T
                          If people are to be held more accountable for achieving desired outcomes,
                          then DOD must make sure that such outcomes are in fact, achievable.
                          Along these lines, DOD has taken a positive step to reform its acquisition
                          process by revising part of its acquisition regulations related to weapons
                          systems. The revisions have focused primarily on (1) making sure
                          technologies are demonstrated to a high level of maturity before beginning
                          a weapon system program and (2) taking an evolutionary, or phased,
                          approach to developing a system. Separating technology development
                          from a weapons system development program would help curb incentives
                          to over-promise the capabilities of a new weapon system and to rely on
                          immature technologies. Also, an evolutionary approach to developing
                          requirements and making improvements to a system’s capabilities is
                          different from the historical approach of trying to deliver all desired
                          capabilities in one “big bang.” In addition, it has been reported that DOD
                          plans to begin using program cost estimates from the Office of the
                          Secretary of Defense’s Cost Analysis Improvement Group, rather than
                          those prepared by the military services, which may lead to more realistic
                          cost estimates when pricing programs.



Enterprise Architecture   Enterprise architecture development, implementation, and maintenance
                          are a basic tenet of effective IT management. Used in concert with other IT
                          management controls, an architecture can increase the chances for optimal
                          mission performance. We have found that attempting to modernize
                          operations and systems without an architecture leads to operational and
                          systems duplication, lack of integration, and unnecessary expense. Our
                          best practices research of successful public and private sector
                          organizations has similarly identified enterprise architectures as essential
                          to effective business and technology transformation.49

                          Following our May 2001 report,50 the Secretary of Defense directed the
                          development and implementation of a departmentwide enterprise
                          architecture, and established a program to accomplish this. In doing so,
                          the Secretary assigned responsibility for the program to the DOD


                          49
                             U.S. General Accounting Office, Executive Guide: Improving Mission Performance
                          through Strategic Information Management and Technology, GAO/AIMD-94-115
                          (Washington, D.C.: May 1, 1994).
                          50
                           U.S. General Accounting Office, Information Technology: Architecture Needed to Guide
                          Modernization of DOD’s Financial Operations, GAO-01-525 (Washington, D.C.: May 17,
                          2001).




                          Page 29                                                                   GAO-03-931T
Comptroller, in coordination with the Under Secretary of Defense for AT&L
and the DOD Chief Information Officer. To assist in overseeing and guiding
the program, the DOD Comptroller established the Financial Management
Modernization Executive Committee to oversee the architecture and
systems modernization efforts, and the Financial Management
Modernization Steering Committee to advise and guide the program.
Efforts began in earnest in April 2002 when DOD hired a contractor to
develop the department’s enterprise architecture.

The Clinger-Cohen Act of 199651 requires major departments and agencies
to develop, implement, and maintain an integrated architecture. As we
previously reported,52 such an architecture can help ensure that the
department invests only in integrated business system solutions and,
conversely, will help move resources away from non-value-added legacy
business systems and nonintegrated business system development efforts.
Without a complete enterprise architecture to guide information
technology investments, and adequate oversight of IT investments to
ensure compliance, DOD runs the serious risk that its investments will
perpetuate the existing systems environment that suffers from systems
duplication, limited interoperability, and unnecessarily costly operations
and maintenance.

The fiscal year 2003 National Defense Authorization Act (the Act),53
enacted on December 2, 2002, required DOD to develop by May 1, 2003, a
financial management enterprise architecture and a transition plan for
implementing the architecture that meet certain requirements. The Act
also requires DOD to control expenditures for financial system
improvements while the architecture and transition plan are being
developed and after they are completed. According to DOD, the
Comptroller approved the initial version of the department’s business
enterprise architecture in May 2003. Developing and implementing a
business enterprise architecture for an organization as large and complex
as DOD is a formidable challenge but it is key to achieving the Secretary’s
vision of relevant, reliable, and timely financial information needed to


51
 Clinger-Cohen Act of 1996, Pub. L. 104-106, Div. E, 110 Stat. 679, Feb. 10, 1996 (codified as
amended at scattered sections of the U.S.C.).
52
     GAO/T-AIMD/NSIAD-00-163.
53
 Bob Stump National Defense Authorization Act for Fiscal Year 2003, Pub. L. 107-314, Sec.
1004, 116 Stat. 2458, 2629, Dec. 2, 2002.




Page 30                                                                          GAO-03-931T
support the department’s vast operations. We plan to report on DOD’s
progress in developing its architecture and its transition efforts in the near
future.

As part of its ongoing business system modernization effort and consistent
with our past recommendations,54 DOD is creating a repository of
information about its existing systems environment. To accomplish this,
DOD initiated an extensive effort to document its business systems
currently relied upon to carry out financial management operations
throughout the department. To date, the department has identified
approximately 2,300 systems that support its business operations. In
developing its systems inventory, DOD has recognized that financial
management is broader than just accounting and finance systems. Rather,
it includes the department’s acquisition, budget formulation, inventory
management, logistics, personnel, and property management systems.

DOD is investing billions of dollars in financial management solutions and
business process reform. In moving forward with the implementation of its
business enterprise architecture, DOD needs to ensure that the multitude
of systems efforts currently underway are designed as an integral part of
the architecture. The effort to implement the architecture will be further
complicated as the department strives to develop multiple architectures
across its various business areas and organizational components. In this
regard, it is critical that DOD has the management structure and processes
in place to effectively control the estimated $19 billion that will be spent on
its business systems in fiscal year 2004. However, as we have previously
reported,55 the department has yet to establish the requisite investment
governance structure and process controls needed to adequately align
ongoing investments with its architectural goals and direction. To its
credit, the department has recognized that it cannot continue with the
proliferation of duplicative, nonstandard, and nonintegrated systems and is
in the process of developing policies and procedures to obtain better
visibility and accountability over its IT business system investments. A key
to success will be DOD’s ability to effectively manage and oversee its
investments in systems. DOD can ill afford to invest billions of dollars in


54
  U.S. General Accounting Office, Financial Management: Analysis of DOD’s Inventory of
Financial Management Systems Is Incomplete, GAO/AIMD-97-39 (Washington, D.C.; Jan.
29, 1997); Financial Management: DOD Improvement Plan Needs Strategic Focus, GAO-
01-764 (Washington, D.C.: Aug. 17, 2001).
55
     GAO-03-458.




Page 31                                                                   GAO-03-931T
                           systems that are not capable of providing DOD management and the
                           Congress with more accurate, timely, and reliable information on the
                           results of the department’s business operations.



Monitoring and Oversight   Ensuring effective monitoring and oversight of progress will also be key to
                           bringing about effective implementation of the department’s financial
                           management and related business process reform. We have previously
                           testified56 that periodic reporting of status information to department top
                           management, the Office of Management and Budget, the Congress, and the
                           audit community is another key lesson learned from the department’s
                           successful effort to address its Year 2000 challenge.

                           Previous submissions of the department’s Financial Management
                           Improvement Plan have simply been compilations of data call information
                           on the stovepiped approaches to financial management improvements
                           received from the various DOD components. It is our understanding that
                           DOD plans to change its approach and anchor the plan in the enterprise
                           architecture. If the department’s future plans are upgraded to provide a
                           departmentwide strategic view of the financial management challenges
                           facing the department, along with planned corrective actions and
                           milestones, these plans can serve as an effective tool not only to help guide
                           and direct the department’s financial management reform efforts, but also
                           to help maintain oversight of the department’s financial management
                           operations. Going forward, this Subcommittee’s oversight hearings, as well
                           as the active interest and involvement of the defense appropriations and
                           authorization committees, will continue to be key to effectively achieving
                           and sustaining DOD’s financial management and related business process
                           reform milestones and goals.


                           In conclusion, we support Secretary Rumsfeld’s vision for transforming the
                           department’s financial and business related operations. The continued
                           leadership and support of the Secretary and other DOD top executives will
                           be essential to successfully change the DOD culture that has over time
                           perpetuated the status quo and been resistant to a transformation of the
                           magnitude envisioned by the Secretary. As noted throughout this
                           testimony, DOD is taking steps to begin transformation; however, the


                           56
                                GAO-01-244.




                           Page 32                                                           GAO-03-931T
                  events of September 11, 2001, the continuing war on terrorism, and the
                  reconstruction of Iraq may dilute the focused attention and sustained
                  action that are necessary to fully realize the Secretary’s transformation
                  goal, a situation that is understandable given the circumstances. At the
                  same time, with waste and inefficiencies potentially costing $20 billion or
                  more annually, true reform is needed to restore public confidence that
                  taxpayer dollars are well spent in meeting our national defense objectives.

                  Mr. Chairman, this concludes my statement. I would be pleased to answer
                  any questions you or other members of the Subcommittee may have at this
                  time.



Contacts and      For further information about this testimony, please contact Gregory D.
                  Kutz at (202) 512-9095 or kutzg@gao.gov or Molly Boyle at (202) 512-9524
Acknowledgments   or boylem@gao.gov. Other key contributors to this testimony include
                  Evelyn Logue and Cherry Clipper.




(192096)          Page 33                                                         GAO-03-931T
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