oversight

1997 Defense Reform Bill: Observations on H.R. 1778

Published by the Government Accountability Office on 1997-06-17.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Committee on National Security, House of
                          Representatives




For Release on Delivery
Expected at
10:00 a.m., EDT
                          1997 DEFENSE REFORM
Tuesday,
June 17, 1997             BILL

                          Observations on H.R. 1778
                          Statement of Henry L. Hinton, Jr. Assistant Comptroller
                          General, National Security and International Affairs
                          Division




GAO/T-NSIAD-97-187
                   Mr. Chairman and Members of the Committee:

                   I am pleased to be here today to provide my observations on The Defense
                   Reform Act of 1997 (H.R. 1778). As requested, my statement discusses the
                   titles within the bill dealing with defense personnel, business practices,
                   and miscellaneous reforms. My observations on specific sections of the
                   bill focus on those where we have relevant ongoing or completed work.
                   Before providing the details of my statement, I would like to briefly
                   summarize some key points.


                   We strongly support the need to improve the Department of Defense’s
Results in Brief   (DOD) business practices and further reduce its support infrastructure. Our
                   work has shown significant opportunities remain to further streamline
                   operations, consolidate functions, eliminate duplication of effort, and
                   improve efficiency in the department. These opportunities must be fully
                   embraced if DOD is to achieve the level of savings it needs to meet other
                   priorities such as weapon system modernization and readiness within
                   expected budgets.

                   Despite spending reductions that have occurred, our review of DOD’s future
                   years funding plans through fiscal year 2001 indicates that overall support
                   infrastructure funding as a percentage of the budget is projected to remain
                   relatively constant in the range of 57-58 percent. DOD needs to achieve
                   significant savings in its support infrastructure to help increase funding for
                   weapon system modernization and meet its aim of increasing procurement
                   funding from $44.1 billion to $68.3 billion between fiscal year 1997 and
                   2002. DOD is relying on initiatives such as outsourcing and privatization,
                   acquisition reforms, organizational streamlining and consolidations,
                   management process reengineering, base realignments and closures,
                   personnel reductions, and inventory reductions to help produce savings in
                   its support areas. We strongly support these initiatives and encourage DOD
                   to aggressively pursue their implementation.

                   Opportunities to improve defense business practices are illustrated by our
                   February 1997 high-risk series of reports that include six areas (financial
                   management, information technology, weapon systems acquisition,
                   contract management, infrastructure, and inventory management) within
                   DOD.1 (See app. I for a list of our 1997 high-risk reports involving DOD.)
                   DOD’s inability to effectively address weaknesses in the high-risk areas has

                   1
                    In 1990, we began reviewing and reporting on high-risk areas throughout the federal government, and
                   in February 1997, we issued a series of reports providing the status of such areas. Of the 25 areas we
                   identified as high risk, 6 are within DOD.



                   Page 1                                            GAO/T-NSIAD-97-187 1997 Defense Reform Bill
    resulted in billions of dollars being wasted and places billions of dollars in
    future spending at similar risk. For example, our infrastructure report
    noted that DOD continues to operate and maintain excessive support
    infrastructure and waste billions of dollars annually on inefficient and
    unneeded activities. In order to effectively address the underlying causes
    of the high-risk areas, we believe that senior-level defense managers need
    to develop a strategic plan. Legislative initiatives such as H.R. 1778, and
    the Government Performance and Results Act, are important to
    stimulating long-term changes needed in DOD.

    Regarding H.R. 1778, the subject of today’s hearing, we generally agree
    with the aim of the titles relating to defense personnel reforms, defense
    business practice reforms, and additional miscellaneous defense reforms.
    My observations on specific sections of the titles are grouped into four
    categories. First, there are a number of sections where we have no basis
    upon which to comment and therefore present no observations. Second,
    for the majority of the sections where we offer a comment, we agree with
    the sections’ aims. Third, for some sections, we agree with the sections’
    aims and offer suggestions to enhance its effectiveness. Fourth, in two
    sections, we have a question about the sections and suggest the
    Committee may want to reconsider the sections.

•   Defense Personnel Reforms. There are opportunities to achieve savings by
    reducing personnel overhead in various DOD headquarters and support
    areas identified in the bill. Also, it is important that such reductions be
    well planned so that the remaining organizational structures are efficient
    and effective. In that regard, the plans DOD is required to prepare are
    extremely important.
•   Defense Business Practice Reforms. We support increased examination of
    the potential for outsourcing business activities. A primary reason for this
    support is the savings that can accrue from outsourcing’s emphasis on a
    competitive process involving public and private sector organizations and
    its emphasis on identifying the most efficient organization. Further, our
    work shows that there are inefficiencies in various defense activities
    addressed in the bill such as the U.S. Transportation Command, and that
    there are significant opportunities to change business practices in defense
    agencies as suggested by this title. We also offer several suggestions to
    enhance the effectiveness of certain sections. The suggestions relate to
    such things as the timing for completing certain actions and assuring
    competition between public and private sector activities.




    Page 2                                GAO/T-NSIAD-97-187 1997 Defense Reform Bill
                               We have a question about the section that removes the Defense
                               Automation and Printing Service’s surcharge billed to its military
                               customers. The requirement to remove the surcharge would be
                               inconsistent with working capital fund cost accounting principles.

                           •   Miscellaneous Additional Defense Reforms. For those sections where we
                               have some basis to comment, we generally agree with the sections’ aims.
                               We question part of the provision creating a board to coordinate audits
                               because it would authorize the Under Secretary of Defense
                               (Comptroller/Chief Financial Officer) to participate in jurisdictional
                               decisions among the service auditors and to resolve jurisdictional
                               disputes. This role raises questions regarding the independence of service
                               audit organizations.

                               Now, let me turn to the specifics of my statement.



                               There is a need to improve the economy and efficiency of DOD’s business
Significant                    practices and further reduce its support infrastructure. While DOD has
Opportunities Exist to         made progress in downsizing the defense support structure, it wastes
Improve Support                billions of dollars each year because of long-standing inefficiencies in its
                               support infrastructure and business practices. Such waste occurs because
Infrastructure and             DOD has been slow to take advantage of opportunities to improve business
Business Practices             systems and practices, make further reductions in support infrastructure,
                               and reduce costs by eliminating duplication and waste. Expenditures on
                               wasteful or inefficient activities divert defense funds from other defense
                               needs such as the modernization of weapon systems. Although DOD has
                               identified net support infrastructure savings as a funding source for
                               weapon systems modernization, it has not achieved the anticipated
                               savings. DOD’s inability to effectively address problems in six areas that we
                               have identified as high risk illustrates opportunities to make billions of
                               dollars available during future years defense budgets by reforming
                               business practices.


Support Infrastructure         DOD is faced with transforming its Cold War operating and support
Reductions Are Not Being       structure in much the same way it has been working to transform its
Achieved                       military force structure. Making this transition is a complex, difficult
                               challenge that will affect hundreds of thousands of civilian and military
                               personnel at U.S. activities. If DOD does not address this challenge now,
                               other needs will go unmet, while defense resources will be wasted or used



                               Page 3                               GAO/T-NSIAD-97-187 1997 Defense Reform Bill
                                   inefficiently. In our view, one dollar spent on inefficiency is one less dollar
                                   available to meet other DOD priorities.

                                   In recent years, DOD has substantially downsized its force structure.
                                   However, it has not achieved commensurate reductions in operations and
                                   support costs. For fiscal year 1997, DOD estimates that $146 billion, or
                                   almost two thirds of its budget, will be for operations and support
                                   activities. These activities, which DOD generally refers to as its support
                                   infrastructure, include maintaining installation facilities, providing nonunit
                                   training to the force, providing health care to military personnel and their
                                   families, repairing equipment, and buying and managing spare part
                                   inventories.

                                   DOD officials have repeatedly recognized the importance of using resources
                                   for the highest priority operational and investment needs rather than
                                   maintaining unneeded property, facilities, and overhead. However, DOD has
                                   found that making support infrastructure reductions is a difficult and
                                   painful process because achieving significant cost savings requires
                                   up-front investments, closure of installations, and elimination of military
                                   and civilian jobs. Service parochialism, a cultural resistance to change, and
                                   congressional and public concerns about the effects on local communities
                                   and economies as well as the impartiality of the decisions have historically
                                   hindered DOD’s ability to reduce support infrastructure. DOD has also
                                   recognized that opportunities to streamline and reengineer its business
                                   practices could result in substantial savings, but it has made limited
                                   progress in accomplishing this.

                                   Despite spending reductions that have occurred already, our review of
                                   DOD’s future years funding plans through fiscal year 2001 indicates that
                                   overall support infrastructure funding as a percentage of the budget is
                                   projected to remain relatively constant. (See table 1.)

Table 1: DOD’s Projected Funding
Through Fiscal Year 2001           Dollars in billions
                                                                                           Projected      Percentage of
                                                                  Total projected     infrastructure      budget that is
                                   Fiscal year                            budget      part of budget      infrastructure
                                   1997                                     $244               $146                  60
                                   1998                                      243                142                  58
                                   1999                                      243                141                  58
                                   2000                                      244                140                  57
                                   2001                                      246                141                  57
                                   Note: Constant 1997 dollars.




                                   Page 4                                    GAO/T-NSIAD-97-187 1997 Defense Reform Bill
                           While we have not completed an in-depth analysis of all the activity
                           categories of support infrastructure, our work has identified numerous
                           areas where support infrastructure can be eliminated, streamlined, or
                           reengineered to be made more efficient. For example, our work shows
                           that the defense traffic management processes are outdated, fragmented,
                           and inefficient, resulting in substantially higher transportation costs than
                           necessary. Our work also shows that DOD could achieve savings in the
                           military personnel accounts by replacing active duty military personnel,
                           who perform infrastructure functions, with less costly civilian personnel.


DOD High-Risk Areas        Our work on six high-risk defense areas illustrates the need for DOD to
Illustrate the Need for    improve the economy and efficiency of its operations. For example, we
Improvements in Business   recently testified before the Senate Committee on Governmental Affairs
                           about DOD programs and operations we identified as high risk because of
Practices                  their vulnerabilities to waste, fraud, abuse, and mismanagement.2 DOD’s
                           inability to effectively address the underlying causes of the high-risk areas
                           has resulted in billions of dollars being wasted and places billions of
                           dollars in future spending at similar risk. These causes include cultural
                           resistance to change and service parochialism, inadequate incentives for
                           seeking change, lack of comprehensive and reliable data, lack of
                           results-oriented goals and performance measures, and lack of
                           management accountability for correcting problems and following through
                           to confirm performance results. We concluded that effectively addressing
                           the high-risk areas will require congressional support and a commitment
                           by senior-level DOD mangers to a strategy that is based on the framework
                           provided by the Government Performance and Results Act and other
                           recent legislation.

                           The six high-risk areas are financial management, information technology,
                           weapon systems acquisition, contract management, infrastructure, and
                           inventory management. Over the last few years, we have made hundreds
                           of recommendations to improve the management of DOD operations and
                           programs that have not been implemented by DOD. (See Related GAO
                           Products at the end of this testimony.) DOD has taken corrective actions
                           and made progress in some areas. For example, in response to our
                           recommendations, DOD implemented certain commercial practices in its
                           inventory management area, such as direct vendor delivery for medical
                           and food items. However, problems remain. For example:



                           2
                            DOD High-Risk Areas: Eliminating Underlying Causes Will Avoid Billions of Dollars in Waste
                           (GAO/T-NSIAD/AIMD-97-143, May 1, 1997).



                           Page 5                                           GAO/T-NSIAD-97-187 1997 Defense Reform Bill
                      •   Due to its lingering financial management problems, which are among the
                          most severe in government, DOD does not have accurate information to use
                          in managing its budget of over $250 billion and reported $1 trillion in
                          assets.
                      •   DOD’s efforts to develop and modernize its computer systems and
                          networks have yielded poor returns in reducing its operating costs,
                          improving performance, and supporting sound financial management.
                      •   DOD could achieve further cost reductions by streamlining the command
                          structure of its forces; sharing medical facilities and services; reforming
                          acquisition processes; consolidating and eliminating research,
                          development, and training facilities; using simulators for training and
                          exercises; and reducing dependence on government-owned housing.


                          As requested, our observations are focused on the titles of the bill relating
Observations on the       to defense personnel reforms, defense business practice reforms, and
Defense Reform Act        miscellaneous additional defense reforms. We generally agree with the aim
of 1997                   of these titles. Our observations on specific sections are grouped into four
                          categories. First, there are a number of sections where we have no basis
                          upon which to comment and therefore present no observations. Second,
                          for the majority of the sections where we offer a comment, we agree with
                          the sections’ aims. Third, for some sections, we agree with the sections’
                          aims and offer suggestions to enhance its effectiveness. Fourth, in two
                          sections, we have questions about the sections and suggest the Committee
                          may want to reconsider them.


Defense Personnel         Title I of the bill calls for personnel reductions in several areas and
Reforms Are Needed        provides for changes in annuity computations of defense acquisition
                          personnel. We generally agree with the aim of the title in seeking to reduce
                          personnel. In those sections where we have relevant ongoing or completed
                          work, it shows inefficiencies in these areas that, if they were eliminated,
                          could result in personnel reductions. We have no basis on which to
                          comment on the level of personnel cuts called for by this title or changes
                          in annuity computations.3 Our specific observations regarding title I are as
                          follows:

                      •   Section 101: Reduction in personnel assigned to management headquarters
                          and headquarters support activities.



                          3
                           For sections 103 and 104, we have no basis upon which to comment and therefore present no
                          observations.



                          Page 6                                          GAO/T-NSIAD-97-187 1997 Defense Reform Bill
    We agree with the aim of section 101. We have no basis on which to
    comment on the level of personnel cuts called for by this section but our
    work on the U.S. Transportation Command shows that opportunities for
    reductions exist. DOD must ensure that headquarters functions are
    reengineered to meet the needs of a smaller, post-Cold War military force.
    The Secretary of Defense, in discussing the Quadrennial Defense Review,
    recognized that reductions in DOD headquarters were desirable and
    feasible. Given our work and the Secretary’s statement, we believe there
    are areas where some level of personnel reduction can be made. Our work
    has also shown that leading edge businesses tie personnel reductions to
    the reengineering of business processes. Therefore, as DOD develops its
    personnel reduction plan required by this section, it is important that it
    considers restructuring of headquarters’ organizations and support
    activities.

•   Section 102: Additional reduction in defense acquisition workforce.

    We agree with the aim of section 102. We have no basis to comment on the
    level of cuts called for in this section. In April 1997, we testified before a
    joint hearing of two Subcommittees of this Committee that DOD, in
    contemplating changes to its acquisition workforce, has not taken the
    opportunity to improve the acquisition process and the results it produces.4
     The section’s required January 1998 implementation report should
    address this issue.

    We would like to offer some additional observations based on work we
    have just begun at the request of this Committee. First, DOD is in the
    process of redefining its acquisition workforce. Any changes made after
    the October 1997 baseline established in the bill will make it difficult to
    track reductions over time. Second, acquisition workforce cuts will have a
    disproportionate effect if divided equally among the services. For example,
    the Air Force’s acquisition workforce contains a larger portion of military
    personnel and a much larger complement of support services contractors
    than the other services.

•   Section 105: Personnel reductions in the United States Transportation
    Command.




    4
     Defense Acquisition Organizations: Linking Workforce Reductions With Better Program Outcomes
    (GAO/T-NSIAD-97-140, Apr. 8, 1997).



    Page 7                                         GAO/T-NSIAD-97-187 1997 Defense Reform Bill
                                We agree with the aim of section 105. In February 1996, we reported that
                                the U.S. Transportation Command retained an outdated and inefficient
                                modally oriented organizational structure.5 While the Transportation
                                Command has initiatives underway to reengineer the defense
                                transportation system, for the most part, these initiatives have resulted in
                                changes within the component commands and do not address
                                organizational changes from an overall Transportation Command
                                perspective. We are reviewing this issue.



Defense Business Practice       Title II contains several sections designed to increase emphasis on
Reforms Are Needed              competitive procurement of services through outsourcing and other
                                miscellaneous reforms and business practices. We generally agree with the
                                aim of the title. Our work shows that opportunities exist to improve the
                                business practices addressed in this title. For several sections, we have
                                made suggestions to enhance the likely achievement of the sections’ aims.
                                We have questions about the section removing the Defense Automation
                                and Printing Service’s surcharge and suggest the Committee may want to
                                reconsider the section.6 Our specific observations are as follows:

                            •   Section 201: Competitive procurement of finance and accounting services.

                                We agree with the aim of section 201 and offer a suggestion to enhance its
                                effectiveness. The massive scope of DOD’s finance and accounting
                                operations, including that 80 percent of its financial data comes from DOD
                                component organizations, is unparalleled.

                                Our ongoing work shows that while many large companies have
                                considered outsourcing, they often decided not to outsource because few,
                                if any, vendors were yet capable of providing needed services. According
                                to one vendor, existing vendors’ capacity to take on large finance and
                                accounting servicing is a major issue. For example, one vendor stated that
                                a payroll the size of DOD’s civilian payroll would be too large to
                                immediately transfer to its payroll system. Most private sector
                                organizations we talked with had decided to reengineer their finance and
                                accounting functions to bring them more in-line with world-class



                                5
                                 Defense Transportation: Streamlining of the U.S. Transportation Command is Needed
                                (GAO/NSIAD-96-60, Feb. 22, 1996).
                                6
                                 For sections 205, 222, and 223, we have no basis upon which to comment and therefore present no
                                observations.



                                Page 8                                          GAO/T-NSIAD-97-187 1997 Defense Reform Bill
    organizations prior to deciding whether to outsource any finance and
    accounting services.

    Our ongoing work also shows that it may be three to five more years
    before the needed capacity will be in place in the private sector to
    effectively compete finance and accounting services. We suggest,
    therefore, that the Committee may want to consider revising the section to
    require a pilot test of one or a few relatively small DOD finance and
    accounting activities. The result of such a pilot test could be used to
    develop a strategic plan detailing what and how DOD’s finance and
    accounting operation can best be outsourced.

•   Section 202: Competitive procurement of services to dispose of surplus
    defense property.

    We agree with the aim of section 202. DOD has identified the Defense
    Reutilization and Marketing Service (DRMS) as a noncore, noninherent
    governmental function. Thus, we believe that the commercial sector may
    be able to establish the means to handle DRMS operations for the sale of
    surplus property with low risk. Our ongoing work has shown that DRMS
    intends to use the private sector to help perform its disposal function
    when it makes good business sense and sees itself becoming an
    administrator of contracts. As part of its initiatives to promote better
    business practices, DRMS plans to contract with the private sector to handle
    the sales of surplus property. As discussed in our 1994 report, this action is
    in line with DRMS’ efforts to reengineer its disposal operation.7

•   Section 203: Competitive procurement of functions performed by Defense
    Information Systems Agency.

    We agree with the aim of section 203.

•   Section 204: Competitive procurement of printing and duplication
    services.

    We have a question about section 204 and suggest that the Committee may
    want to reconsider this section. Our prior work shows that the usage of
    the surcharge appears to make sense because the cost incurred is passed




    7
     Commercial Practices: Opportunities Exist to Enhance DOD’s Sales of Surplus Aircraft Parts
    (GAO/NSIAD-94-189, Sept. 23, 1994).



    Page 9                                          GAO/T-NSIAD-97-187 1997 Defense Reform Bill
    onto the customer.8 This is in line with the working capital fund concept in
    that the prices should be set to cover the total costs of the work. If the
    surcharge were to be eliminated, the administrative cost may have to be
    passed on to all customers, rather than those particular customers with
    work performed by external sources.

•   Section 206: Increase use by Defense Agencies of contractors to perform
    commercial and industrial type functions.

    We agree with the aim of section 206 and offer a suggestion to enhance its
    effectiveness. We believe that clarification is needed regarding whether
    the aim is to emphasize outsourcing without allowing in-house operations
    to compete, as the current language suggests. Historically, government
    organizations have won many outsourcing competitions.

    Our work in examining DOD’s recently renewed emphasis on outsourcing
    showed that most of the renewed emphasis was occurring within the
    military services, with a focus on base operation support functions. We
    agree that the defense agencies should also be exploring the potential for
    outsourcing to the extent practical.

•   Section 211: Development of standard forms regarding performance work
    statement and request for proposals for conversion of certain operational
    functions of military installations.

    We agree with the aim of section 211. The section mandates the
    development and use of standardized performance work statements and
    requests for proposals for commercial activities and functions. These
    actions would apply in those instances where DOD activities have
    significant experience in defining requirements because 50 percent or
    more of such activities and functions are already contracted out.

    Our March 1997 report on outsourcing noted that the services have various
    initiatives underway to streamline the Office of Management and Budget
    Circular A-76 process, including using work statement templates and
    assembling A-76 teams of experts to conduct studies.9 We endorse the use
    of such standardized work statements and requests for proposals where
    they can appropriately capture the work to be done. However, we have not


    8
     Government Printing: Comparison of DOD and GPO Prices for Printing and Duplicating Work
    (GAO/NSIAD-95-65, Feb. 17, 1995).
    9
     Base Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing
    (GAO/NSIAD-97-86, Mar. 11, 1997).



    Page 10                                       GAO/T-NSIAD-97-187 1997 Defense Reform Bill
    completed sufficient study of this issue to allow us to conclude that
    standardized work statements could be used exclusively where more than
    50 percent of a commercial service or function has been outsourced in the
    past.

•   Section 212: Study and notification requirements for conversion of
    commercial and industrial type functions to contractor performance.

    We agree with the aim of section 212. It should be noted, however, that
    similar provisions typically have been viewed by DOD officials as inhibitors
    to greater emphasis on outsourcing. In our 1997 report on outsourcing, we
    noted that reporting requirements may restrict DOD’s use of new waiver
    authority contained in the Office of Management and Budget’s recently
    revised A-76 supplemental handbook.

•   Section 213: Collection and retention of cost information data on
    contracting out services and functions.

    We agree with the aim of section 213 and offer a suggestion to enhance its
    effectiveness. We believe that clarification of this section may be needed if
    the aim is to obtain net savings data. While this section focuses on cost
    data, our prior work found that questions more often existed about the
    extent of “savings” of contracted services over in-house operations.
    Long-term savings, rather than cost, are the data that have been difficult to
    obtain. Our 1997 report on outsourcing noted that the services are
    required to track savings for the first 3 years; however, the services’
    databases do not generally reflect savings actually attained beyond 3
    years. While data on continued savings over time are desirable, we also
    reported a number of factors that inhibited the ability to develop the data.
    Perhaps most significant is the fact noted by DOD officials that determining
    continuing savings is difficult because a common base line for comparison
    is typically lost over time as workload requirements change.

•   Section 221: Reduction in overhead costs of Inventory Control Points.

    We agree with the aim of section 221. Our work shows that one way to do
    this is through the consolidation of inventory control points. For example
    in November 1996, DOD reported to congressional committees that
    between $2.2 billion and $3.8 billion could be saved if the management of
    all DOD inventory control points were consolidated under the Defense
    Logistics Agency. The report acknowledged that there were some risks
    associated with such a consolidation, but that these risks could be



    Page 11                              GAO/T-NSIAD-97-187 1997 Defense Reform Bill
                               mitigated. The consolidation issue continues to be reviewed by DOD. Based
                               on ongoing work, we have no basis to disagree with DOD’s report.

                               Further, our work also shows other opportunities exist to reduce
                               inventory control points overhead costs by introducing more economical
                               buying practices such as the prime vendor concept the Defense Logistics
                               Agency is using to procure medical and food supplies.


Observations on                Title IV of the bill contains a variety of additional initiatives relating to
Miscellaneous Additional       defense activities. In the majority of these sections (sections 401, 402, 405,
Defense Reforms                406, and 408) we have no prior or ongoing work to serve as a basis for
                               comment. For those sections where we have some basis to comment, we
                               generally agree with the aim of the sections, except for the section related
                               to creating a board to coordinate audits. Our specific observations follow:

                           •   Section 403: Repeal of requirement for contractor guarantees on major
                               weapon systems.

                               We agree with the aim of section 403. In June 1996, we reported that while
                               warranties may have value to consumers in the commercial world, the
                               government does not need the insurance coverage provided by a warranty
                               for a weapon system and generally cannot share the expense of a warranty
                               with other consumers.10 Our work has shown that warranties are often
                               expensive with very little real payback.

                           •   Section 404: Requirement relating to micro-purchases of commercial
                               items.

                               We agree with the aim of section 404 and offer a suggestion to enhance its
                               effectiveness. We support efforts to streamline and simplify lower dollar
                               value procurement, particularly for commercial items, and we believe that
                               expanding the use of purchase cards can contribute greatly toward that
                               end. In August 1996, we reported that use of the purchase card had
                               reduced labor and payment processing costs for many agencies, often by
                               more than half.11 Despite increases in card use, we noted there was still
                               significant growth potential. Other studies had identified millions in
                               potential savings from increased purchase card use. We recommended


                               10
                                 Weapons Acquisition: Warranty Law Should Be Repealed (GAO/NSIAD-96-88, June 28, 1996).
                               11
                                Acquisition Reform: Purchase Card Use Cuts Procurement Costs, Improves Efficiency
                               (GAO/NSIAD-96-138 (Aug. 6, 1996).



                               Page 12                                        GAO/T-NSIAD-97-187 1997 Defense Reform Bill
    that the Federal Acquisition Regulation be revised to provide clear
    guidance on the appropriate uses of the purchase card.

    Section 404 would provide DOD the opportunity to realize significant
    savings from greater use of the card, as well as other preferred purchasing
    methods. We believe, however, that purchasing officials should be allowed
    to decide that a preferred method is not appropriate in a given
    procurement without having to clear that decision with senior agency
    officials. Having senior-level defense officials involved in procurements at
    or below $2,500 is an inefficient use of their time and is inconsistent with
    efforts to streamline these lower dollar value procurements.

•   Section 407: Coordination of the Department of Defense criminal
    investigations and audits.

    We have a question about the provision of section 407 to create a Board on
    Audits and suggest the Committee may want to reconsider this provision.
    We support coordination and cooperation among defense auditing
    organizations in order to avoid duplication of effort and maximize
    resources. We question, however, the need to create an audit board and
    suggest the Committee may want to reconsider this provision. We believe
    the proposed Board on Audits may impair the independence of the service
    auditors.

    There currently exist a number of mechanisms within DOD to promote
    coordination and cooperation among defense auditing organizations. For
    example, to provide overall direction to the Chief Financial Officers Act
    audits, the DOD Inspector General, service auditors, and DOD management
    participate in various committees and task forces, including an Executive
    Steering Committee and Integrated Audit Process Teams. At least with
    respect to the Chief Financial Officers Act audits, we are unaware of any
    current study questioning the effectiveness of those mechanisms.
    Accordingly, we cannot be certain that the proposed Board would be an
    improvement over those mechanisms.

    Government auditors’ independence is affected by their place within their
    respective agencies. Generally accepted government auditing standards
    stipulate that, to help achieve organizational independence, audit
    organizations should be accountable directly to the heads or deputy heads
    of their respective agencies. Section 407 may be inconsistent with this
    concept authorizing the Under Secretary of Defense (Comptroller/Chief
    Financial Officer) to participate in jurisdictional decisions among the



    Page 13                              GAO/T-NSIAD-97-187 1997 Defense Reform Bill
service auditors and to resolve jurisdictional disputes. This role raises
questions regarding the independence of service audit organizations.

We have no prior or ongoing work to serve as a basis for comment on the
provision of section 407 dealing with criminal investigations.


Mr. Chairman, this concludes my prepared remarks. I would be pleased to
answer questions at this time.




Page 14                               GAO/T-NSIAD-97-187 1997 Defense Reform Bill
Page 15   GAO/T-NSIAD-97-187 1997 Defense Reform Bill
Appendix I

1997 High-Risk Series Reports Involving
DOD

               Defense Financial Management (GAO/HR-97-3, Feb. 1997).

               Defense Contract Management (GAO/HR-97-4, Feb. 1997).

               Defense Inventory Management (GAO/HR-97-5, Feb. 1997).

               Defense Weapon Systems Acquisition (GAO/HR-97-6, Feb. 1997).

               Defense Infrastructure (GAO/HR-97-7, Feb. 1997).

               Information Management and Technology (GAO/HR-97-9, Feb. 1997).




               Page 16                              GAO/T-NSIAD-97-187 1997 Defense Reform Bill
Related GAO Products


              DOD High-Risk Areas: Eliminating Underlying Causes Will Avoid Billions of
              Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997).

              Contract Management: Fixing DOD’s Payment Problems Is Imperative
              (GAO/NSIAD-97-37, Apr. 10, 1997).

              Defense Acquisition Organizations: Linking Workforce Reductions With
              Better Program Outcomes (GAO/T-NSIAD-97-140, Apr. 8, 1997).

              Defense IRM: Investments at Risk for DOD Computer Centers
              (GAO/AIMD-97-39, Apr. 4, 1997).

              Defense Budget: Observations on Infrastructure Activities
              (GAO/NSIAD-97-127BR, Apr. 4, 1997).

              Defense Inventory Management: Problems, Progress, and Additional
              Actions Needed (GAO/T-NSIAD-97-109, Mar. 20, 1997).

              Base Operations: Challenges Confronting DOD as It Renews Emphasis on
              Outsourcing (GAO/NSIAD-97-86, Mar. 11, 1997).

              Defense Logistics: Much of the Inventory Exceeds Current Needs
              (GAO/NSIAD-97-71, Feb. 28, 1997).

              Defense Budget: Analysis of Operation and Maintenance Accounts for
              1985-2001 (GAO/NSIAD-97-73, Feb. 28, 1997).

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

              Air Force Depot Maintenance: Privatization-In-Place Plans Are Costly
              While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).

              Defense IRM: Strategy Needed for Logistics Information Technology
              Improvement Efforts (GAO/AIMD-97-6, Nov. 14, 1996).

              DOD  Force Mix Issues: Converting Some Support Officer Positions to
              Civilian Status Could Save Money (GAO/NSIAD-97-15, Oct. 23, 1996).

              Acquisition Reform: Implementation of Title V of the Federal Acquisition
              Streamlining Act of 1994 (GAO/NSIAD-97-22BR, Oct. 31, 1996).




              Page 17                             GAO/T-NSIAD-97-187 1997 Defense Reform Bill
Related GAO Products




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

Army Depot Maintenance: Privatization Without Further Downsizing
Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).

Navy Depot Maintenance: Cost and Savings Issues Related to
Privatizing-in-Place at the Louisville, Kentucky, Depot (GAO/NSIAD-96-202,
Sept. 18, 1996).

1997 DOD Budget: Potential Reductions to Operation and Maintenance
Program (GAO/NSIAD-96-220, Sept. 18, 1996).

Defense IRM: Critical Risks Facing New Materiel Management Strategy
(GAO/AIMD-96-109, Sept. 6, 1996).

Defense Transportation: Migration Systems Selected Without Adequate
Analysis (GAO/AIMD-96-81, Aug. 29, 1996).

Best Practices: Commercial Quality Assurance Practices Offer
Improvements for DOD (GAO/NSIAD-96-162, Aug. 26, 1996).

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

Acquisition Reform: Purchase Card Use Cuts Procurement Costs,
Improves Efficiency (GAO/NSIAD-96-138 (Aug. 6, 1996).

Inventory Management: Adopting Best Practices Could Enhance Navy
Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July 12, 1996).

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

Weapons Acquisition: Warranty Law Should Be Repealed (GAO/NSIAD-96-88,
June 28, 1996).

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




Page 18                               GAO/T-NSIAD-97-187 1997 Defense Reform Bill
Related GAO Products




Defense Infrastructure: Costs Projected to Increase Between 1997 and
2001 (GAO/NSIAD-96-174, May 31, 1996).

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

Military Bases: Opportunities for Savings in Installation Support Costs Are
Being Missed (GAO/NSIAD-96-108, Apr. 23, 1996).

Acquisition Reform: Efforts to Reduce the Cost to Manage and Oversee
DOD Contracts (GAO/NSIAD-96-106, Apr. 18, 1996).


Defense Depot Maintenance: Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996).

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

Military Bases: Closure and Realignment Savings Are Significant, But Not
Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996).

Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little
Savings for Modernization (GAO/NSIAD-96-131, Apr. 4, 1996).

CFO Act Financial Audits: Increased Attention Must Be Given to Preparing
Navy’s Financial Reports (GAO/AIMD-96-7, Mar. 27, 1996).

Defense Logistics: Requirement Determinations for Aviation Spare Parts
Need to Be Improved (GAO/NSIAD-96-70, Mar. 19, 1996).

Managing for Results: Achieving GPRA’s Objectives Require Strong
Congressional Role (GAO/T-GGD-96-79, Mar. 6, 1996).

Defense Transportation: Streamlining of the U.S. Transportation
Command Is Needed (GAO/NSIAD-96-60, Feb. 22, 1996).

Best Management Practices: Reengineering the Air Force’s Logistics
System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996).

Defense Acquisition Organization: Changes in Cost and Size Of Civilian
Workforce (GAO/NSIAD-96-46, Nov. 13, 1995).




Page 19                              GAO/T-NSIAD-97-187 1997 Defense Reform Bill
           Related GAO Products




           Inventory Management: DOD Can Build on Progress in Using Best Practices
           to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug. 4, 1995).

           Managing for Results: Status of the Government Performance and Results
           Act (GAO/T-GGD-95-193, June 27, 1995).

           Managing for Results: Critical Actions for Measuring Performance
           (GAO/T-GGD/AIMD-95-187, June 20, 1995).

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

           Defense Programs and Spending: Need for Reforms (GAO/T-NSIAD-95-149,
           Apr. 27, 1995).

           Military Bases: Analysis of DOD’s 1995 Process and Recommendations for
           Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995).

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

           Government Printing: Comparison of DOD and GPO Prices for Printing and
           Duplicating Work (GAO/NSIAD-95-65, Feb. 17, 1995).

           Defense Supply: Inventories Contain Nonessential and Excessive
           Insurance Stocks (GAO/NSIAD-95-1, Jan. 20, 1995).




(709275)   Page 20                            GAO/T-NSIAD-97-187 1997 Defense Reform Bill
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