United States General Accounting Office
GAO High-Risk Series
February 1997
Defense Financial
Management
GAO/HR-97-3
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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Contents
Overview 6
Background 11
Financial Audits 16
Provide Focus
and Improved
Basis for
Measuring
Progress
Related GAO 46
Products
1997 High-Risk 49
Series
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Overview
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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Overview
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
areas:
• the lack of an overall integrated financial
management system structure,
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Overview
• no reliable means of accumulating actual
cost data to account for and manage
resources,
• continuing problems in accurately
accounting for billions of dollars in
disbursements,
• 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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Overview
result, the importance of greater financial
accountability is now clearer throughout the
Department.
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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Overview
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
improvement.
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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Background
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
resources.
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.
1
High Risk Series: An Overview (GAO/HR-95-1, February 1995).
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Background
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.
Legislation
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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Background
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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Background
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
2
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
effective.
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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
Challenges
• Integrating accounting and financial
management systems
• Accumulating accurate cost
information
• 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
Department.
1
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
improvement.
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
incompatible.
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
2
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
system.
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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
inventory.
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
(CBSX).
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
3
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
appropriation.
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
operations.
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
progress.
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
Page 31 GAO/HR-97-3 Defense Financial Management
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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
states.
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
management.
Our reports issued over the past few years
also have included several other
Page 32 GAO/HR-97-3 Defense Financial Management
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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
Page 33 GAO/HR-97-3 Defense Financial Management
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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
Page 34 GAO/HR-97-3 Defense Financial Management
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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
Page 35 GAO/HR-97-3 Defense Financial Management
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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
costs.
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
Page 36 GAO/HR-97-3 Defense Financial Management
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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
Page 37 GAO/HR-97-3 Defense Financial Management
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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
Page 38 GAO/HR-97-3 Defense Financial Management
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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
plans.
The Department has struggled to put in place
the necessary support throughout its vast
financial operations to ensure disciplined
4
Because of the sensitivity of the issues involved, distribution of
this report was limited to recipients requiring this report for official
use.
Page 39 GAO/HR-97-3 Defense Financial Management
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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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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
directive.
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
procedures.
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,
1996).
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,
1995).
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,
1995).
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
(GAO/HR-97-6)
Defense Infrastructure (GAO/HR-97-7)
IRS Management (GAO/HR-97-8)
Information Management and Technology
(GAO/HR-97-9)
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
(GAO/HR-97-13)
Page 49 GAO/HR-97-3 Defense Financial Management
1997 High-Risk Series
Superfund Program Management
(GAO/HR-97-14)
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can be ordered using the order number
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Address Correction Requested
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)