High-Risk Series: Defense Financial Management

Published by the Government Accountability Office on 1997-02-01.

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

                United States General Accounting Office

GAO             High-Risk Series

February 1997
                Defense Financial

GAO   United States
      General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States

      February 1997
      The President of the Senate
      The Speaker of the House of Representatives

      In 1990, the General Accounting Office began a special
      effort to review and report on the federal program areas
      its work identified as high risk because of vulnerabilities
      to waste, fraud, abuse, and mismanagement. This effort,
      which was supported by the Senate Committee on
      Governmental Affairs and the House Committee on
      Government Reform and Oversight, brought a
      much-needed focus on problems that were costing the
      government billions of dollars.

      In December 1992, GAO issued a series of reports on the
      fundamental causes of problems in high-risk areas, and in
      a second series in February 1995, it reported on the status
      of efforts to improve those areas. This, GAO’s third series
      of reports, provides the current status of designated
      high-risk areas.

      This report describes GAO’s concerns about the
      Department of Defense’s inability to put in place the
      financial management operations and controls required
      to produce the information it needs to ensure adequate
      accountability and support decision-making. It focuses on
      the need for the Department to transform candid
      acknowledgements of problems in six critical areas into
      comprehensive, realistic corrective actions.
Copies of this report series are being sent to the
President, the congressional leadership, all other
Members of the Congress, the Director of the Office of
Management and Budget, and the heads of major
departments and agencies.

James F. Hinchman
Acting Comptroller General
of the United States

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Overview                                                          6

Background                                                       11

Financial Audits                                                 16
Provide Focus
and Improved
Basis for
Related GAO                                                      46
1997 High-Risk                                                   49

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              The Department of Defense needs accurate
              financial information and appropriate
              internal controls to effectively manage the
              Department’s vast resources—over
              $1 trillion in assets, 3 million military and
              civilian personnel, and a budget of an
              estimated $250 billion for fiscal year 1997.
              However, long-standing, serious weaknesses
              in the Department’s financial operations
              continue not only to severely limit the
              reliability of DOD’s financial information, but
              also have resulted in wasted resources, and
              undermined the Department’s ability to carry
              out its stewardship responsibilities. GAO and
              DOD auditors doing financial audits under the
              Chief Financial Officers Act have made
              hundreds of recommendations to help
              resolve these weaknesses.

              The Department has candidly acknowledged
              its manifold weaknesses and has a number
              of initiatives underway to address them.
              However, much remains to be done, and full
              corrective action will take more sustained,
              concerted efforts by DOD top officials.

The Problem   Defense’s financial management systems,
              practices, and procedures continue to be
              hampered by significant weaknesses. The
              Department does not yet have adequate

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    financial management processes in place to
    produce the information it needs to ensure
    adequate accountability and to support its
    decision-making process. No military service
    or other major DOD component has been able
    to withstand the scrutiny of an independent
    financial statement audit. This situation is
    one of the worst in government and is the
    product of years of neglect.

    The Department has acknowledged that it is
    struggling to overcome decades-old financial
    management problems. Its annual reports to
    the President and the Congress have
    highlighted a series of financial management
    problems confronting DOD, including billions
    of dollars in disbursements not matched to
    specific obligations, overpayments to
    Defense contractors, Anti-Deficiency Act
    violations, and issuance of paychecks to
    soldiers after their discharge. The
    Department concluded that its systems and
    practices required a major overhaul.

    The financial management weaknesses that
    the Department must overcome fall into six

•   the lack of an overall integrated financial
    management system structure,

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                •   no reliable means of accumulating actual
                    cost data to account for and manage
                •   continuing problems in accurately
                    accounting for billions of dollars in
                •   the critical need to upgrade its financial
                    management workforce and organization,
                •   breakdowns in rudimentary required
                    financial control procedures, and
                •   antiquated bureaucratic practices that
                    underscore the need for progress in
                    reengineering business practices.

Progress Made       Since 1990, we and the DOD auditors have
                    made over 400 recommendations aimed at
                    correcting the Department’s most pressing
                    financial management weaknesses. The past
                    few years have been marked by DOD’s
                    financial management leadership, under the
                    direction of the Department’s Chief
                    Financial Officer (CFO), recognizing the
                    importance of tackling the broad range of
                    problems in this area. The Department’s
                    “blueprint” for reforming financial
                    management represents an important first
                    step towards resolving DOD’s long-standing
                    problems. Through his 5-Year Plan, the CFO
                    has also put in place a vision statement to
                    guide the Department’s reform efforts. As a

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                  result, the importance of greater financial
                  accountability is now clearer throughout the

                  To support its blueprint and CFO vision, the
                  Department has begun a number of
                  initiatives intended to address its
                  long-standing financial management
                  weaknesses. For example, DOD is working on
                  several fronts to resolve its problems in
                  accounting for disbursements. Other
                  initiatives include a set of projects intended
                  to standardize selected financial systems,
                  and another set of projects directed at
                  DOD-wide data standardization including
                  implementing the U.S. Government Standard
                  General Ledger, a basic requirement.

Outlook for the   DOD still has a long way to go to meet the
Future            challenges of managing its vast and complex
                  operations with greater accountability and
                  efficiency demanded by the Congress and
                  the American public. The reforms mandated
                  by the Chief Financial Officers Act of 1990,
                  as expanded by the Government
                  Management Reform Act of 1994, and the
                  Federal Financial Management Improvement
                  Act of 1996 serve as important catalysts for
                  focusing attention on the financial problems
                  facing the Department.

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The requirements for audited annual DOD
financial statements beginning with fiscal
year 1996 have generated increased pressure
on DOD management to fix its long-standing
financial problems. These audits have
already resulted in a number of specific
recommendations for interim improvements.
In addition, we have work ongoing or
planned to identify further opportunities for

Signs of DOD top leadership emphasis on and
commitment to resolving the Department’s
financial management problems are
encouraging. It is now critical that DOD take
the next steps in transforming these candid
acknowledgements of problems into
comprehensive, realistic action to effectively
bring about their resolution.

However, the Department must effectively
address challenges in the six critical areas
highlighted in audit reports—systems, cost
accounting, disbursements, personnel,
internal controls, and business processes—if
its envisioned financial management reforms
are to realize meaningful financial
management improvements. It will take a
focused, sustained effort for DOD to fully
resolve these challenges.

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             The massive scope of DOD’s operations is
             unparalleled in either the private or public
             sectors. The challenges that DOD faces in
             managing such a huge and complex
             organization are compounded by its
             long-standing financial management
             weaknesses. We added this area to our
             high-risk list in 1995.1 As the agency
             responsible for about 50 percent of the
             government’s discretionary spending, DOD’s
             financial management problems result in a
             lack of accountability over a substantial
             portion of the government’s resources.
             These problems have also led to inaccurate
             information being provided to the Congress
             and the inefficient use and waste of

             Correction of DOD’s widespread and severe
             financial management problems is also
             critical to the resolution of the department’s
             other high-risk areas included in this series.
             (See reports HR 97-4, 97-5, 97-6, and 97-7.)

             Resolving these long-standing problems with
             millions of dollars in erroneous contract
             payments, weapon system cost overruns,
             excessive inventories, and unwieldy
             infrastructures will be greatly aided by
             reliable financial management information.

              High Risk Series: An Overview (GAO/HR-95-1, February 1995).

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                For example, better information on the
                quantity and location of items would help
                prevent inventory managers from procuring
                additional items at one location that are
                already on hand at another DOD location.

Provides a
                Key Legislation for DOD’s
Framework for   Financial Reform Efforts
Improvement     Chief Financial Officers Act of 1990

                Government Management Reform
                Act of 1994 (GMRA)
                Federal Financial Management
                Improvement Act of 1996

                The CFO Act charges agency CFOs with
                (1) directing, managing, and providing policy
                guidance and oversight of all agency
                financial management personnel, activities,
                and operations, (2) developing and
                maintaining integrated accounting and
                financial management systems,
                (3) implementing agency asset management
                systems, including systems for cash
                management, (4) monitoring the financial
                execution of the agency budget in relation to
                actual expenditures, and (5) overseeing the
                recruitment, selection, and training of

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personnel to carry out agency financial
management functions.

GMRA made the CFO Act’s requirement of
annual audited financial statements
permanent and expanded it to include
virtually the entire executive branch. Under
this legislative mandate, DOD is to annually
prepare and have audited DOD-wide and
component—including Army, Navy, and Air
Force—financial statements, beginning with
fiscal year 1996. These audited statements
will provide for an annual public scorecard
to measure agencies’ progress in resolving
financial management deficiencies.

In addition, the Federal Financial
Management Improvement Act of 1996
provides a legislative mandate to implement
and maintain financial management systems
that substantially comply with federal
systems requirements, applicable federal
accounting standards, and the standard
general ledger. As discussed in the following
section, the act’s provisions will have a
significant impact on DOD because (1) few of
its systems meet federal financial
management systems requirements and
(2) DOD has not yet comprehensively
identified and assessed all of its financial
management systems.

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The act also noted that the Federal
Accounting Standards Advisory Board
(FASAB), established in 1990, has made
substantial progress toward developing and
recommending a comprehensive set of
accounting concepts and standards for the
federal government.2 The act states, “When
the accounting concepts and standards
developed by [FASAB] are incorporated into
Federal financial management systems,
agencies will be able to provide cost and
financial information that will assist the
Congress and financial managers to evaluate
the cost and performance of Federal
programs and activities. . . .”

If properly implemented, these standards
will provide the impetus not only for the
Department to improve its financial
management operations and reporting, but
also to strengthen its ability to meet critical
mission objectives because more accurate
information will be provided to
decisionmakers. However, to bring about the
kind of fundamental changes in financial
management envisioned by the Congress in
enacting these reforms will require a focused

 FASAB recommends accounting standards, and the Office of
Management and Budget (OMB), and Treasury, and GAO decide
whether to adopt the recommended standards; if they are adopted,
the standards are published by OMB and GAO and become

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effort to use the Department’s resources
efficiently and the full support of DOD’s
leadership. Only in this way will sorely
needed financial management improvements
be achieved in a reasonable time frame.

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             Financial audit reports have continued to
             provide a clearer picture of DOD’s financial
             position and provide a basis for measuring
             progress. These reports have highlighted
             significant deficiencies across the spectrum
             of DOD’s financial management and reporting
             operations. None of the financial statements
             prepared by the military services or major
             DOD components have yet been able to
             withstand the scrutiny of a financial
             statement audit. As a result of these
             deficiencies, the DOD Inspector General has
             stated that auditable financial statements for
             the Department would not be likely until the
             next century.

             While it may take several more years until
             the Department can expect an acceptable
             audit opinion, if used effectively, the results
             of the CFO Act financial statement audits can
             help focus reform efforts and establish
             priorities so that the time frame needed to
             correct DOD’s major problems can be
             minimized. The Congress and the American
             public should expect to see the problems
             identified by the auditors in these annual
             reports diminish over time.

             The deficiencies identified in auditors’
             reports have prevented DOD managers from
             obtaining reliable financial information

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needed for sound decision-making. These
reported deficiencies identified in the DOD
audit community1 reports and in our own
financial audits and reviews of Air Force,
Army, Navy, and the Defense Business
Operations Fund fell into six common areas.

Six Areas Presenting Greatest
• Integrating accounting and financial
management systems
• Accumulating accurate cost
• Resolving problem disbursements
• Upgrading financial management
workforce and organization
• Strengthening internal controls
• Reengineering business practices

Auditors’ reports have also pinpointed
actions to help resolve DOD’s continuing
problems in these areas. Since 1990, we and
the DOD auditors have made over 400
recommendations to help provide focus and
perspective on the most pressing financial
management weaknesses facing the

The DOD audit community includes not only the DOD Inspector
General, but the Army, Air Force, and Naval audit services.

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DOD’s  leadership has recognized the financial
management problems highlighted in the
audited financial statements and has taken
seriously the need to bring about their
resolution. The Department’s February 1995
“blueprint” for reforming its financial
management operations represents an
important first step towards resolving the
Department’s long-standing problems. The
action areas specified in the blueprint are
closely linked to the six problem areas
identified in recent financial audits and
reports. As a result, DOD financial managers
are beginning to act based on a better
understanding of the implications of the lack
of reliable financial information on their
overall accountability and the effective
management of critical mission operations.

However, the Department’s long-standing
weaknesses are the product of decades of
neglect. Identifying and implementing
solutions will require a sustained, long-term
commitment and focus on priorities.

To support its blueprint and CFO vision
statement, the Department has undertaken a
number of initiatives intended to improve
financial management. The following
sections outline DOD’s reform initiatives in
the six key problem areas identified by GAO

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                 and DOD auditors. We also (1) identify
                 additional actions the Department must
                 consider if it is to realize genuine reform and
                 meet the basic goals of the CFO Act and other
                 management mandates and (2) provide an
                 overview of our ongoing work in each of
                 these areas to identify future suggestions for

Integrate        Audit reports have repeatedly pointed out
Accounting and   that DOD’s existing accounting and financial
Financial        management systems are not integrated and
Management       lack a standard general ledger. An
Systems          integrated, general ledger controlled system
                 is necessary to provide oversight and control
                 to ensure accurate and complete accounting
                 for DOD’s resources. Under an integrated
                 system structure, DOD’s accounting, finance,
                 logistics, personnel, and budgetary systems
                 would be closely tied together. However, DOD
                 has acknowledged that its operations are
                 constrained by the military services
                 operating unique systems, many of which are

                 An example of the effect of DOD’s
                 nonintegrated systems is in the inventory
                 management area. Specifically, auditors
                 reported that, at least in part as a result of
                 the lack of integration between DOD’s

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accounting and logistics systems, DOD
purchased unneeded materials and DOD
management and oversight officials lacked
complete information on the costs incurred
to acquire and operate weapon systems.
Effectively addressing these systems
integration deficiencies will necessitate the
development of unified actions bringing
together the organizational support and
commitment of the Department’s logistics,
personnel, and budget components, as well
as its financial organizations.

In describing the goals of the Department’s
October 1995 5-Year Plan, the DOD CFO stated
that “In terms of payback for the
department, the most important goal is the
consolidation of, and improvements to, its
finance and accounting systems.” DOD has
recognized that of the 249 financial systems
included in its required annual reporting,
only 5 conformed with governmentwide
standards for financial systems. One of DOD’s
principal initiatives in this area has consisted
of identifying financial management systems
in the Department’s inventory, modifying
them to meet departmentwide requirements,

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and consolidating them as migration or
interim migration2 systems.

Auditors have made numerous specific
recommendations over the past few years to
improve DOD’s financial systems operations
and the reliability of the financial
information they produce. For example, as a
result of our review of the Navy’s financial
reporting, we recommended (1) the use of
standard data elements, such as object class
codes, because we found that existing
systems capabilities were not used to their
full potential in controlling, managing, and
reporting on the Navy’s operations and (2) a
series of actions needed to develop an
overall system architecture to effectively
guide the enhancement efforts for the
system selected to perform the Navy’s
general fund accounting.

DOD established a Defense Accounting
System Program Management Office (PMO) in
April 1996 to provide centralized
management control and oversight for all
Defense Finance and Accounting Service

 DOD’s system migration strategy involves, for each DOD function,
(1) selecting one of each military service’s systems currently in
operation (i.e., legacy systems), (2) implementing that system
across the service (i.e., an interim migratory system), (3) selecting
the “best” of the services’ systems to serve as the DOD system (i.e.,
a migratory system), and (4) enhancing the migration system until
it meets all applicable requirements to become DOD’s target

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(DFAS) accounting systems. The PMO is
intended to manage the reduction of existing
accounting systems in accordance with DFAS
goals and objectives. For example, the PMO is
overseeing modifications to the Army Corps
of Engineers Financial Management System
(CEFMS), which was selected to become the
general funds accounting migratory system
for the Army and Air Force.

We are encouraged that the Department has
established an office to help provide focus
for its system improvement efforts. We will
be looking closely at whether the strategy
pursued by the PMO will enable the
Department to put an integrated system
structure in place.

In addition to the specific recommendations
we made previously, we believe that efforts
to improve DOD’s financial systems must be
based on a comprehensive understanding of
all systems currently relied on to carry out
the Department’s financial operations—
including those managed by DFAS and those
operated by the military services. In
addition, a comprehensive inventory is
especially important in light of the enhanced
systems requirements included in the
Federal Financial Management Improvement
Act of 1996.

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We recently reported that DOD’s inventory of
financial management systems recognized in
its annual reporting did not include all DOD
systems used to carry out the Department’s
financial operations. DOD’s reporting
excluded hundreds of “mixed” financial
systems—systems including both financial
and programmatic elements—from the
inventory of the systems. Because many of
these mixed systems are relied on to record,
accumulate, classify, and report financial
information, it is critical that they are
recognized in the Department’s system

Once a complete inventory is established,
the Department will be better able to define
its target system architecture, including all
system interfaces and data flows. With this
target structure in place, DOD can more
effectively prioritize system improvements,
identify data requirements, and begin
integration. In this regard, we are currently
evaluating whether there are additional
actions DOD can take to improve its
capability to successfully develop
application software used in carrying out the
Department’s financial operations.

We are also assessing possible actions DOD
can take to improve its ability to produce

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                reliable information for the Department’s
                substantial investment in property and other
                equipment. For example, we have ongoing
                reviews of specific general ledger or mixed
                system applications such as the Defense
                Property Accountability System (DPAS), the
                Air Force’s Reliability and Maintainability
                Information System (REMIS), and the Army’s
                Continuing Balance System-Expanded

Accumulate      DOD  has acknowledged, and the CFO Act
Accurate Cost   financial statement audits have confirmed,
Data            fundamental problems with the
                Department’s ability to accumulate reliable
                cost information. The Department’s annual
                report to the President and the Congress in
                February 1996 acknowledged that inaccurate
                and incomplete cost accounting information
                was a Department-wide problem. Auditors’
                reports have confirmed that DOD does not
                have accurate cost data for almost all of its
                noncash assets, such as inventories,
                equipment, aircraft, and missiles, nor can the
                Department accumulate reliable information
                on the cost of its business activities and
                critical operations, such as the costs
                associated with maintaining its weapon
                systems in a high state of readiness.

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For example, our review of the Navy’s
financial operations disclosed that billions of
dollars associated with building aircraft and
missiles and modernizing weapons systems
were not included in the Navy’s financial
reports. It is critical that managers have
accurate information on actual operating
and capital costs to consider when making
decisions to replace or upgrade weapons
systems. In addition, in analyzing DOD’s most
recent round of base closure and
realignment recommendations, we found
that the quality of existing cost data limited
their usefulness. Specifically, the existing
data could not be relied on to provide
decisionmakers with the actual costs or
savings associated with alternative base
closure and realignment options.

Not unmindful of the need for such
information, the Department has taken
action intended to improve its financial
operations in this area. One of the major
initiatives the Department undertook to
improve its cost accounting capabilities was
the establishment of the Defense Business
Operations Fund.

This Fund, with estimated annual revenues
of about $75 billion, was established in
October 1991 by consolidating nine existing

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industrial and stock funds and five other
activities operated throughout DOD. The
Fund’s primary goal was to focus attention
on the total costs of carrying out certain
critical DOD business operations—many of
which are essential to maintaining weapon
system readiness—and to help manage those
costs more effectively. The Fund was
intended to operate on a break-even basis by
recovering the current costs incurred in
conducting its operations.

However, since its inception, the Fund was
plagued with implementation problems. We
made a number of recommendations
intended to help improve the Fund’s
operations and financial reporting.

In recognition of the Fund’s implementation
problems resulting from the lack of clear
delineation of responsibility for managing
Fund activities, in December 1996, the
Department’s CFO announced the Fund’s
elimination. In its place, he established four
working capital funds.3 The CFO has stressed
his intention that these working capital
funds retain the essential purposes for which
the Fund was established, such as increasing

 Working capital funds were established for the Army, Navy, and
Air Force. In addition, the CFO established a Defense-wide working
capital fund, and also stated that there may be a fifth working
capital fund established for the commissary area.

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                  visibility for the total cost of the
                  Department’s support structure.

                  However, these new working capital funds
                  have also inherited their predecessor’s
                  operational and financial reporting
                  problems. We will continue to monitor the
                  Department’s business activities carried out
                  through these working capital funds and
                  have efforts underway to identify
                  opportunities for improvements in the area
                  of pricing these funds’ goods and services.

Resolve Problem   Auditor reports have served to highlight the
Disbursements     scope and severity of the problems the
                  Department must resolve if it is to accurately
                  and promptly account for all its
                  disbursements. Auditors reported that
                  billions of dollars in disbursements could not
                  be promptly or accurately matched with
                  related obligations, and identified the
                  Department’s inability to ensure that
                  disbursements were charged to the correct

                  Until these problems are corrected, DOD’s
                  ability to detect and correct illegal acts, and
                  ensure that funds are spent as directed by
                  the Congress will continue to be impaired.
                  Because of the large amount of funds DOD

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obligates and disburses each year, resolving
its disbursement problems is critical to
improving its financial management

The Department has recognized this as a
major area of concern and is working hard to
reduce current problem disbursements. In
accordance with its blueprint, the
Department developed a prevalidation policy
and in July 1995, began matching
disbursements to obligations, prior to
payment, for payments of $5 million or more.
The threshold amount was reduced to
$1 million by October 1995 for all but DOD’s
primary location for contract payments.
However, even at this location, DOD recently
reduced the prevalidation threshold to
$4 million, and plans further reduction of
that threshold.

The Department has many other short-term
initiatives and long-term plans to reduce its
problem disbursements. The scope of these
efforts ranges from processing changes that
affect one type of payment at a single
location to complete system redesigns.

DOD’s short-term initiatives focus primarily
on stemming the tide of additional problem
disbursements, which appears to be a

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reasonable approach. However, the
Department also needs to supplement this
approach with an effort to determine what
factors are contributing most significantly to
the problem and the extent to which its
numerous initiatives will improve these
significant problem areas. In this way, DOD
can best ensure that its resources are
properly allocated to the initiatives with the
greatest potential payoff. For example, are
the resources allocated to preventing new
problem disbursements appropriate if they
take away from the resources that could be
used to resolve existing problem
transactions? DOD must be able to ensure
that such trade-offs are worthwhile and will
yield the most cost-effective and efficient
solutions on a project-by-project basis.

DOD’s long-term efforts to resolve problem
disbursements include greater use of
emerging technologies, such as shared data
warehousing and electronic data
management. DOD also has long-term plans to
develop the Defense Procurement Payment
System and the Standard Procurement
System. These efforts are all in the early
stages of development.

As of May 1996, DOD reported that its
problem disbursements totaled about

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$18 billion. DOD officials have stated that they
believe the Department has reduced its
problem disbursements. In particular, they
cited negative unliquidated obligations and
unmatched disbursements as areas in which
the Department has made substantial

However, our preliminary work on DOD’s
reporting of problem disbursement data
indicates that reported amounts are
substantially understated and raises
concerns over whether DOD has sufficient,
reliable information to determine the extent
to which disbursement problems have been
reduced. Also, lacking basic quantitative
data on the sources and causes of problem
disbursements, DOD cannot reliably
determine whether (1) its short-term
initiatives best utilize its resources to stem
the flow of problems and attain
accountability, (2) its long-term initiatives
are properly aimed at addressing the
problems, and (3) the scope and size of DOD’s
disbursement problems are being reduced.

We have several ongoing reviews directed at
identifying opportunities for additional
corrective actions. For example, we are
reviewing problem disbursement issues

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                involving progress payments, problem
                contracts, and transactions by others.

Upgrade         DOD  also faces a considerable challenge if it
Financial       is to meet the CFO Act objectives of putting in
Management      place a quality, professional financial
Workforce and   management workforce with clear
Organization    organizational, as well as individual,
                responsibilities and accountability. DOD has
                acknowledged that, no matter how skilled its
                financial personnel, its manifold financial
                failures reflect a large, complex, antiquated
                bureaucratic organization structure. For
                example, the Department has stated that a
                dozen organizations are involved in making a
                single progress payment on a complex
                weapon system.

                Auditors have reported that financial
                personnel deficiencies, such as the lack of
                accounting experience or competencies, and
                inadequate training, have diminished their
                effectiveness. For example, we recently
                found that at DFAS operating locations—the
                heart of DOD’s “Accounting Firm” with
                overall responsibility to account for the
                Department’s $250 billion annual
                budget—only about 58 percent of the key
                managers had more than the minimum
                number of accounting hours necessary to be

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classified as an accountant in the federal
government. In addition, only 6 of 107 key
managers were CPAs, and about 60 percent of
the 107 managers did not have enough hours
in accounting to sit for the CPA exam in many

As discussed in the following section, one of
the common problems found repeatedly
throughout prior financial audits has been
DFAS and military service personnel not
following rudimentary required control
procedures. Without focused efforts to
ensure that the Department has a skilled,
professional workforce in place, it is unlikely
that the needed improvements can be made
and sustained.

DOD  has not yet established any continuing
professional education requirements for its
financial workforce. Well-qualified personnel
with demonstrated knowledge and technical
skills acquired through a broad base of
experience and continuing professional
training will be essential if the Department is
to effectively keep pace with emerging
technologies and developments in financial

Our reports issued over the past few years
also have included several other

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    recommendations for actions that the
    Department could take to improve financial
    personnel and organization. Specifically:

•   In our May 1995 testimony, we
    recommended that DOD (1) determine the
    appropriate number of staff with the
    requisite skills to ensure that the
    Department’s blueprint for financial reform
    will be successfully implemented and
    (2) establish an independent, outside board
    of experts to provide counsel, oversight, and
    perspective to DOD’s reform efforts.
•   In our March 1996 report on the Navy, we
    concluded that greater emphasis was needed
    on determining the skills, experience, and
    number of personnel needed to effectively
    address the fundamental weaknesses we
    found. We recommended that staffing issues
    be addressed, such as filling financial
    management vacancies, upgrading the
    experience of financial managers, and using
    contractors, as necessary, to improve
    financial management operations. We
    pointed out that implementing these
    recommendations at the DFAS Cleveland
    Center—the DFAS location with overall
    responsibility for Navy’s accounting and
    financial reporting—was particularly
    important because of the substantial effort

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    that will be required to correct the serious
    deficiencies we found at that location.
•   In July 1996, we reported on opportunities to
    better focus hiring practices at DFAS
    operating locations. We suggested that DFAS
    enhance its hiring criteria to include
    (1) demonstrated experience in successfully
    implementing accounting or finance systems
    and (2) demonstrated technical competency
    in accounting.

    DFAS  has already acted on our
    recommendations to fill vacancies and
    obtain additional contractor support at its
    DFAS Cleveland location. DFAS has also
    recently begun developing several major
    programs to ensure the professionalism of
    its financial management workforce.

    First, DFAS is developing a program to
    improve the technical and managerial
    competencies for 5 percent of its workforce
    selected competitively on an annual basis.
    Under this program, individual development
    plans formulated for the program’s selectees
    will guide the attainment of identified
    training, education, and rotational
    assignments, or professional certifications,
    such as a Certified Public Accountant.
    Second, DFAS is developing a “Cornerstone
    Program,” which is intended to improve

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managerial competencies and broaden the
perspectives of all DFAS employees in GS
grades 12 through 15. Third, it is expanding
its existing Career Intern Program—the
primary source for hiring entry-level
personnel. This program focuses on
providing on-the-job training through a
series of rotational assignments.

To tie these programs together, DFAS is in the
process of developing a “DFAS Career
Development System” which will identify
competencies obtained through training,
education, organizational assignments, and
self-development initiatives. These actions, if
implemented promptly and effectively
should enhance the capabilities of the staff
and result in improved financial
management practices. Adequate priority
and resources must be dedicated to this area
to ensure that these plans become a reality.

DFAS has also moved to supplement its
financial management organization with
outside contractors. For example, DFAS
entered into a contract with a large
accounting firm to examine the
Department’s overall accounting structure,
and another to help guide and direct the
Department’s “catch up” efforts to prepare
credible Navy financial reports in the near

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                    term. To ensure that this contract support is
                    effective, DOD must ensure that its
                    contractors receive adequate information to
                    provide informed advice, and, of course,
                    must provide the necessary attention and
                    resources to assess and implement
                    contractors’ recommendations.

                    To further assist DOD in focusing its reform
                    efforts, our ongoing work in this area
                    includes a review of the qualifications and
                    experience of DOD financial management
                    personnel and a benchmarking study of the
                    qualifications and experience of private and
                    public sector financial management
                    personnel. We are also identifying leading
                    private and public sector organizations’ best
                    practices in financial management—that is,
                    changes in organizational practices,
                    processes, personnel or systems that have
                    led to greater productivity and reduced

Strengthen          The Department is also faced with a
Internal Controls   considerable challenge in its efforts to
                    strengthen internal controls. Currently,
                    required control procedures were either not
                    in place, or were not followed, for critical
                    reconciliations, physical counts of
                    inventories, documentation supporting

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reported amounts, and reviews and edits of
abnormal balances. In its February 1996
annual reporting required by the Federal
Managers’ Financial Integrity Act (FMFIA), the
Department acknowledged 33 material
weaknesses that crossed a broad spectrum
of its operations.

Adherence to these basic financial controls
is necessary to ensure that DOD’s assets are
properly safeguarded against unauthorized
acquisition, use, or disposition. In addition,
disciplined adherence to key internal control
policies and procedures could, in the short
term, help mitigate the weaknesses created
by DOD’s lack of an integrated financial
management system.

Audits identified many instances in which
the Department’s inability to ensure that
rudimentary control procedures were
followed adversely affected program
operations. For example, auditors reported
that additional validation of existing real
property records was required to support the
Department’s base closure and realignment
decisions and millions of dollars in
unauthorized military payroll payments were
made because required reconciliation
procedures were not followed. Audit reports
also disclosed that pervasive weaknesses in

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    the Department’s general computer controls
    placed DOD at risk of improper modification,
    theft, inappropriate disclosure, or
    destruction of sensitive personnel, payroll,
    disbursement, or inventory information.

    Strengthening the Department’s internal
    controls will be critical if it is to effectively
    control and account for DOD’s estimated
    $1 trillion investment in assets worldwide.
    The following were among the recent
    recommendations we made for improving
    the Department’s controls.

•   In our May 1995 testimony, we
    recommended that DOD clean up the existing
    data in the financial systems and place
    special emphasis on ensuring that basic
    accounting policies and procedures are
    followed to improve data accuracy in the
    current systems while new systems are
    under development.
•   In our March 1996 report, we recommended
    that DOD place high priority on implementing
    basic financial controls, such as conducting
    periodic physical inventories of equipment
    and property, reconciling accounts, and
    analyzing abnormal balances or fluctuations
    in accounts. In addition, we recommended
    that the Department improve the data in
    existing systems, and supplement existing

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    policies and procedures by better
    pinpointing individual accountability for
    carrying out assigned responsibilities.
•   We also issued a September 1996 report4 that
    recommended a series of actions needed to
    strengthen general computer controls over
    DOD’s processing of sensitive personnel,
    payroll, disbursement, and inventory data.
    Specifically, we recommended that the DOD
    Chief Information Officer develop and
    implement a comprehensive DOD-wide
    computer security management program.
    Further, we recommended that such policies
    and procedures should (1) limit computer
    system access authorizations to only those
    who need access to perform their work,
    (2) require that sensitive data files and
    critical production programs be identified
    and access to them be monitored,
    (3) strengthen security software standards in
    critical areas, (4) control physical security at
    computer facilities, and (5) provide for
    completing and testing disaster recovery

    The Department has struggled to put in place
    the necessary support throughout its vast
    financial operations to ensure disciplined

     Because of the sensitivity of the issues involved, distribution of
    this report was limited to recipients requiring this report for official

    Page 39            GAO/HR-97-3 Defense Financial Management
Financial Audits Provide Focus and
Improved Basis for Measuring Progress

adherence to rudimentary required controls
and, recently, to improve general computer
controls. We are concerned that the
Department’s annual reporting under FMFIA
may provide an overly optimistic impression
of the nature and extent of its control
weaknesses. Specifically, while
acknowledging material control weaknesses,
DOD’s most recent annual report concludes
that sufficient compensating controls are in
place. This assertion is not consistent with
the results of our financial audits.

Nonetheless, over the past few years, we
have seen encouraging signs that some of
DOD’s top leaders have made a commitment
to improving adherence to established
control procedures. For example, DOD
leadership directed that senior managers
throughout the Department play a more
active role in identifying, reporting, and
correcting poor controls.

Given the large worldwide network of
people and organizations relied on to carry
out the Department’s financial operations,
improvements in this area represent a
considerable challenge. In this regard, DOD is
incorporating DOD component regulations
into a single Department-wide DOD Financial
Management Regulation. This effort is

Page 40        GAO/HR-97-3 Defense Financial Management
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Improved Basis for Measuring Progress

intended to simplify control requirements by
eliminating over 70,000 pages of regulations.

In addition, in September 1995, the Director
of the Defense Finance and Accounting
Service issued “lessons learned” guidance to
his center directors requesting their personal
involvement in preventing a repetition of
previous years’ errors. We believe this
guidance gets to the heart of DOD’s financial
management problems and outlines control
techniques that, if implemented, could have
detected or prevented many of the
deficiencies auditors observed. The results
of the fiscal year 1996 audits, expected to be
issued in March 1997, will provide a
barometer to gauge the effectiveness of this

Continuing and building upon DOD leaders’
recent public statements emphasizing the
importance of following rudimentary
controls will be critical if the Department is
to realize meaningful, sustained
improvements in its financial operations.
Since it will be at least several more years
before planned system development and
improvement efforts are in place, it will be
imperative for the Department to place
special emphasis on improving controls in

Page 41        GAO/HR-97-3 Defense Financial Management
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             existing systems so that decisionmakers
             have credible financial data in the interim.

Reengineer   DOD’s financial management operations are
Business     plagued with duplicative processes and
Practices    business practices that are complex, slow,
             and error-prone. For example, we reported
             that before the Department decided to
             reengineer its travel processes, they were
             extremely complicated with over 700
             processing centers and 1,300 pages of
             regulations, and required the traveler to go
             through some 40 steps to get travel
             authorization and reimbursement.

             In describing conditions that led to its
             blueprint for reforming the Department’s
             financial management, DOD leadership
             provided an excellent overview of the
             challenges facing DOD in this area.
             Specifically, the overview acknowledged
             that the Department confronts decades-old
             problems deeply grounded in the
             bureaucratic history and operating practices
             of a complex, multifaceted organization, and
             that many of these practices were developed
             piecemeal over a period of decades and
             evolved to accommodate different
             organizations, each with its own policies and

             Page 42        GAO/HR-97-3 Defense Financial Management
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To its credit, DOD’s blueprint set out
reengineering the Department’s business
processes as one of the key elements of its
proposed financial reform. Also, the DOD
CFO’s October 1995 vision statement
recognized business process reengineering,
along with system standardization and
consolidation of operations, as the
underpinnings of financial management
improvement in the Department.

In DOD’s efforts to reengineer its travel
practices, the Department has taken a broad
approach to reengineering—one not
bounded by existing processes and
organizations. This approach, while not yet
completed, holds out the promise for
dramatic improvement over existing
practices, and potential savings of hundreds
of millions of dollars.

Unfortunately, other DOD initiatives intended
to “reengineer” other functional business
areas have focused largely on greater use of
technology within existing processes and
organizations. Consequently, while these
initiatives may improve existing practices,
they will have little chance of radically
improving the current processes that the
Department has acknowledged are
cumbersome and bureaucratic.

Page 43        GAO/HR-97-3 Defense Financial Management
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We have ongoing work to identify specific
actions to improve the likelihood of
successfully reengineering the Department’s
practices in the travel and disbursement
areas. Successfully reengineering the
Department’s business processes is critical if
DOD is to effectively address deep-rooted
organizational emphasis on maintaining
“business as usual” across the Department.

Page 44        GAO/HR-97-3 Defense Financial Management
Page 45   GAO/HR-97-3 Defense Financial Management
Related GAO Products

            Financial Management: DOD Inventory of
            Financial Management Systems Is
            Incomplete (GAO/AIMD-97-29, Jan. 31, 1997).

            DOD Accounting Systems: Efforts to Improve
            System for Navy Need Overall Structure
            (GAO/AIMD-96-99, Sept. 30, 1996).

            Navy Financial Management: Improved
            Management of Operating Materials and
            Supplies Could Yield Significant Savings
            (GAO/AIMD-96-94, Aug. 16, 1996).

            Correspondence to the Under Secretary of
            Defense (Comptroller) on financial
            management personnel qualifications
            (July 18, 1996).

            CFOAct Financial Audits: Navy Plant
            Property Accounting and Reporting Is
            Unreliable (GAO/AIMD-96-65, July 8, 1996).

            Financial Management: DOD Needs to Lower
            the Disbursement Prevalidation Threshold
            (GAO/AIMD-96-82, June 11, 1996).

            Information Security: Computer Attacks at
            Department of Defense Pose Increasing
            Risks (GAO/AIMD-96-84, May 22, 1996).

            Page 46      GAO/HR-97-3 Defense Financial Management
Related GAO Products

Navy Anti-Deficiency Act Training
(GAO/AIMD-96-53R, Apr. 12, 1996).

Defense Business Operations Fund: DOD Is
Experiencing Difficulty in Managing the
Fund’s Cash (GAO/AIMD-96-54, Apr. 10, 1996).

CFO Act Financial Audits: Increased
Attention Must Be Given to Preparing Navy’s
Financial Reports (GAO/AIMD-96-7, Mar. 27,

Financial Management: Challenges Facing
DOD in Meeting the Goals of the Chief
Financial Officers Act (GAO/T-AIMD-96-1,
Nov. 14, 1995).

Financial Management: Challenges
Confronting DOD’s Reform Initiatives
(GAO/T-AIMD-95-146, May 23, 1995).

Financial Management: Challenges
Confronting DOD’s Reform Initiatives
(GAO/T-AIMD-95-143, May 16, 1995).

Financial Management: Control Weaknesses
Increase Risk of Improper Navy Civilian
Payroll Payments (GAO/AIMD-95-73, May 8,

Page 47       GAO/HR-97-3 Defense Financial Management
Related GAO Products

Travel Process Reengineering: DOD Faces
Challenges in Using Industry Practices to
Reduce Costs (GAO/AIMD/NSIAD-95-90, Mar. 2,

Defense Business Operations Fund:
Management Issues Challenge Fund
Implementation (GAO/AIMD-95-79, Mar. 1, 1995).

Page 48       GAO/HR-97-3 Defense Financial Management
1997 High-Risk Series

             An Overview (GAO/HR-97-1)

             Quick Reference Guide (GAO/HR-97-2)

             Defense Financial Management (GAO/HR-97-3)

             Defense Contract Management (GAO/HR-97-4)

             Defense Inventory Management (GAO/HR-97-5)

             Defense Weapon Systems Acquisition

             Defense Infrastructure (GAO/HR-97-7)

             IRS Management (GAO/HR-97-8)

             Information Management and Technology

             Medicare (GAO/HR-97-10)

             Student Financial Aid (GAO/HR-97-11)

             Department of Housing and Urban
             Development (GAO/HR-97-12)

             Department of Energy Contract Management

             Page 49     GAO/HR-97-3 Defense Financial Management
1997 High-Risk Series

Superfund Program Management

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