[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]





      FINANCIAL MANAGEMENT: TIME TO REFORM THE PROMPT PAYMENT ACT?

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                  VETERANS AFFAIRS, AND INTERNATIONAL
                               RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 16, 1999

                               __________

                           Serial No. 106-28

                               __________

       Printed for the use of the Committee on Government Reform


     Available via the World Wide Web: http://www.house.gov/reform

                                 ______

                   U.S. GOVERNMENT PRINTING OFFICE
59-451                     WASHINGTON : 1999


                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

Subcommittee on National Security, Veterans Affairs, and International 
                               Relations

                CHRISTOPHER SHAYS, Connecticut, Chairman
MARK E. SOUDER, Indiana              ROD R. BLAGOJEVICH, Illinois
ILEANA ROS-LEHTINEN, Florida         TOM LANTOS, California
JOHN M. McHUGH, New York             ROBERT E. WISE, Jr., West Virginia
JOHN L. MICA, Florida                JOHN F. TIERNEY, Massachusetts
DAVID M. McINTOSH, Indiana           THOMAS H. ALLEN, Maine
MARSHALL ``MARK'' SANFORD, South     EDOLPHUS TOWNS, New York
    Carolina                         BERNARD SANDERS, Vermont 
LEE TERRY, Nebraska                      (Independent)
JUDY BIGGERT, Illinois               JANICE D. SCHAKOWSKY, Illinois
HELEN CHENOWETH, Idaho

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
         Lawrence J. Halloran, Staff Director and Chief Counsel
                  J. Vincent Chase, Chief Investigator
                           Jason Chung, Clerk
                    David Rapallo, Minority Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 16, 1999....................................     1
Statement of:
    Bloom, Thomas, Director, Defense Finance and Accounting 
      Service, U.S. Department of Defense, accompanied by Gregory 
      P. Bitz, Director of Finance, Defense Finance and 
      Accounting Service; Robert J. Lieberman, Assistant 
      Inspector General, U.S. Department of Defense; F. Jay Lane, 
      Director, Office of Inspector General, Finance and 
      Accounting Directorate, U.S. Department of Defense; David 
      E. Cooper, Associate Director, National Security and 
      International Relations Division, U.S. General Accounting 
      Office; and William T. Woods, Assistant General Counsel, 
      National Security and International Relations Division, 
      U.S. General Accounting Office.............................     2
    McInerney, Thomas G., Lieutenant General, USAF (retired), 
      president and CEO, Business Executives for National 
      Security, accompanied by Erik Pages, vice president for 
      Policy and Programs, Business Executives for National 
      Security; Paul J. Dinkins, executive vice president, the 
      Profit Recovery Group; Jack Kenny, director of Operations, 
      Government Audits, the Profit Recovery Group; and Rodney W. 
      Mateer, partner, Deloite and Touche, Professional Services 
      Council....................................................    80
Letters, statements, etc., submitted for the record by:
    Bloom, Thomas, Director, Defense Finance and Accounting 
      Service, U.S. Department of Defense, prepared statement of.     6
    Cooper, David E., Associate Director, National Security and 
      International Relations Division, U.S. General Accounting 
      Office, prepared statement of..............................    37
    Dinkins, Paul J., executive vice president, the Profit 
      Recovery Group, prepared statement of......................    96
    Lieberman, Robert J., Assistant Inspector General, U.S. 
      Department of Defense:
        Information concerning Prompt Payment Act................    78
        Letter dated July 2, 1999................................    57
        Prepared statement of....................................    16
    Mateer, Rodney W., partner, Deloite and Touche, Professional 
      Services Council, prepared statement of....................   110
    McInerney, Thomas G., Lieutenant General, USAF (retired), 
      president and CEO, Business Executives for National 
      Security, prepared statement of............................    83
    Woods, William T., Assistant General Counsel, National 
      Security and International Relations Division, U.S. General 
      Accounting Office, letter dated August 2, 1999.............    76

 
      FINANCIAL MANAGEMENT: TIME TO REFORM THE PROMPT PAYMENT ACT?

                              ----------                              


                        WEDNESDAY, JUNE 16, 1999

                  House of Representatives,
       Subcommittee on National Security, Veterans 
              Affairs, and International Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:01 a.m., in 
room 2247, Rayburn House Office Building, Hon. Christopher 
Shays (chairman of the subcommittee) presiding.
    Present: Representative Shays, Souder, and Terry.
    Staff present: Larry Halloran, staff director and chief 
counsel; J. Vincent Chase, chief investigator; Bob Newman, 
professional staff meber; Jason Chung, clerk; and David 
Rapallo, minority counsel.
    Mr. Shays. I would like to call this hearing to order.
    In January, the General Accounting Office [GAO], reported 
that serious financial management weaknesses continue to plague 
Department of Defense [DOD], stewardship of $1 trillion in 
assets and $250 billion in annual spending. Despite ongoing 
reform efforts and some improvements to financial systems, 
erroneous, fraudulent, and improper payments persist. While not 
always asked to do so, contractors returned almost $1 billion 
in overpayments from DOD every year.
    Today we focus on one aspect of the complex, erratic 
disbursement process, compliance of the Prompt Payment Act. 
Designed to bring predictability, and a modest measure of speed 
to a largely paper-based Federal payment regime, the act 
appears to be showing signs of age. In the decade since the act 
was last amended, narrow interpretations and rigid applications 
of key provisions have hampered the Department's ability to pay 
bills on time, pay them accurately, capture available 
discounts, and embrace commercial best practices.
    As a result, the volume of late payments by DOD seems stuck 
at 7 percent of the 12 million invoices paid each month by the 
Defense Finance and Accounting Services [DFAS]. The current $1 
threshold for separate interest payments under the act requires 
DFAS to process tens of thousands of checks worth less than the 
time and effort it takes to print them.
    Still, from fiscal year 1995 through March of this year, 
DFAS paid $139 million in interest and penalties under the 
Prompt Payment Act. While that figure may be only three one-
hundredths of 1 percent of total disbursements during that 
period, today it would buy five F-16's for the Air Force, 140 
new Army trucks, and more than 400 Navy Tomahawk missiles.
    Without question, more careful attention to the bottom line 
can have a direct and substantial impact on the front line.
    Our witnesses this morning will help us examine how the 
Prompt Payment Act may be amended or reinterpreted to enhance 
rather than impede the DOD efforts to modernize payment 
processing and adopt successful commercial business practices.
    I would like to welcome our witnesses and announce who they 
are. Speaking first, Mr. Thomas Bloom, Director, Defense 
Finance Accounting Service, U.S. Department of Defense, 
accompanied by Mr. Gregory P. Bitz, Director of Finance, 
Defense Finance and Accounting Services [DFAS].
    We also have Mr. Robert J. Lieberman, Assistant Inspector 
General, U.S. Department of Defense, accompanied by Mr. F.J. 
Lane, Director, Office of Inspector General, Finance and 
Accounting Directorate.
    And third, we have Mr. David E. Cooper, National Security 
and International Affairs Division, U.S. Accounting Office, 
accompanied by Mr. William P. Woods, Assistant General Counsel, 
National Security and International Relations Division.
    As is our practice, we would invite all six of you to 
stand. Is there anyone else that might respond to a question? 
If so, I would like them to stand, and we would swear them in, 
too.
    OK. This is for the first panel. If you would raise your 
right hands?
    [Witnesses sworn.]
    Mr. Shays. Thank you. Note for the record that all our 
witnesses have responded in the affirmative.
    We are going to take testimony from three witnesses, but 
all will be welcome to respond to questions. And we will put on 
the light, but--and we will let it go. It is a 5-minute timer. 
If you go over we will reset it for an additional 5 minutes. We 
would hope that you would finish before the second 5 minutes.
    And we will start with you, Mr. Bloom.

   STATEMENTS OF THOMAS BLOOM, DIRECTOR, DEFENSE FINANCE AND 
ACCOUNTING SERVICE, U.S. DEPARTMENT OF DEFENSE, ACCOMPANIED BY 
   GREGORY P. BITZ, DIRECTOR OF FINANCE, DEFENSE FINANCE AND 
 ACCOUNTING SERVICE; ROBERT J. LIEBERMAN, ASSISTANT INSPECTOR 
  GENERAL, U.S. DEPARTMENT OF DEFENSE; F. JAY LANE, DIRECTOR, 
      OFFICE OF INSPECTOR GENERAL, FINANCE AND ACCOUNTING 
   DIRECTORATE, U.S. DEPARTMENT OF DEFENSE; DAVID E. COOPER, 
    ASSOCIATE DIRECTOR, NATIONAL SECURITY AND INTERNATIONAL 
RELATIONS DIVISION, U.S. GENERAL ACCOUNTING OFFICE; AND WILLIAM 
  T. WOODS, ASSISTANT GENERAL COUNSEL, NATIONAL SECURITY AND 
   INTERNATIONAL RELATIONS DIVISION, U.S. GENERAL ACCOUNTING 
                             OFFICE

    Mr. Bloom. Thank you, Mr. Chairman. I am pleased to be here 
today representing the Department of Defense and to talk about 
the Department's financial operations, the Defense Finance and 
Accounting Service, and, in particular, the Prompt Payment Act 
and other issues related to the payment process.
    Today is actually my 17th working day as the Director of 
DFAS. So I am actually looking forward to this as a great 
learning experience for me as well as the committee. 
[Laughter.]
    And as a former IG and a former independent auditor, I have 
a full appreciation for what the GAO and the IG community have 
to say and appreciate their remarks also.
    Mr. Shays. Well, let me just say, I like that attitude, 
one, and, second, it is very convenient for us and helpful for 
us to be able to have you from the Department to be able to 
testify with the Inspector General's Office and the General 
Accounting Office. It makes it easier for us to do our job, and 
so we thank your willingness to do it that way and not demand 
that you have a single chair at one table.
    Mr. Bloom. Happy to do that.
    First, let me provide some background. The Defense Finance 
and Accounting Service was created in 1991 to improve the 
quality and to reduce the cost of financial operations within 
the Department of Defense. These financial operations are so 
vast that DFAS is the largest entity of its kind in the world.
    We make monthly payments totaling more than $24 billion. 
That is more than $1 billion a day. We make almost 9 million 
payroll payments every month. We make over a million payments a 
month to businesses and process a million travel, 
transportation, and miscellaneous payments every month. And we 
account for the expenditures of every dollar for each defense 
entity.
    To achieve higher quality and lower cost financial 
operations, we consolidated over 330 finance offices in the 
United States into 26, a reduction of over 90 percent. We 
completed that consolidation last year, 2 years ahead of 
schedule, and we are saving DOD and the taxpayer $120 million a 
year in operating costs as a result.
    We have reduced our staff from 31,000 to 20,000, more than 
a third. And we expect to reduce it by another 4,000 in the 
near future. When we were created in 1991, we inherited over 
300 finance and accounting systems owned and developed by the 
military services and defense agencies. These systems did not 
talk to each other, and they did not meet the requirements of 
the Chief Financial Officers Act.
    We have eliminated 200 of these systems, a two-thirds 
reduction. The number of systems we have now is less than many 
of the Fortune 500 companies. And we expect in the near future 
to eliminate another 70.
    We already have introduced standard systems in most of our 
pay areas and soon will have standard practices in other 
accounting areas. All of our critical systems are Y2K 
compliant.
    Our operations cost our customers less than one-half of 1 
percent of their budget, a level that compares favorably with 
the private sector.
    We pay 99 percent of our payroll on time and 98 percent of 
it accurately. And given the complexity of the payroll 
entitlements that apply to military and civilian personnel we 
believe this is a significant accomplishment.
    But good as these numbers are, I am committed to improving 
them. We will work closely with the private sector to be sure 
that we adopt the best practices and use state-of-the-art 
technology. In fact, about one-fifth of our work already is 
contracted out to the private sector, and we are involved in a 
number of cost comparison competitions that the private sector 
could win.
    We have a rigorous benchmarking program to compare 
ourselves against public and private finance and accounting 
operations, both domestic and foreign, and we use the results 
of such studies to guide us in our planning.
    I would caution, however, that outsourcing is not always a 
panacea, as you may well remember, and I remember from my 
Department of Education days as the IG there. I would hope the 
subcommittee would treat with some skepticism the claims that 
you will hear that major corporations in America outsource 
their finance and accounting operations. Today, none of the top 
10 in the Fortune 500 currently outsource these operations due 
to complexity.
    Let me turn now to our processes for paying contractor-
vendors. Timely and accurate payments are imperative for 
ensuring we have goods and services available when and where we 
need them. Sometimes, rarely, we are late with our payments, 
and we have to pay interest and, even more rarely, a penalty. 
In fiscal year 1998, our interest payments amounted to less 
than three-one-hundredths of 1 percent of our total payments to 
contractors and vendors, still a significant number, as the 
chairman pointed out.
    Why do we sometimes make payments late? There are two main 
reasons. First, though we are rapidly adopting electronic 
commerce business practices throughout the Department, we still 
process a great deal of paper. In order to make a payment, we 
must have several crucial documents in our hand. When those 
documents are paper rather than electronic, the mail and paper 
handling sometimes results in a delay.
    Second, when we pre-validate our payments to make sure that 
we have the money on hand in exactly the right pot and in the 
right amounts, we sometimes require more time than allowed by 
the Prompt Payment Act to determine that amounts are correctly 
obligated by our customers.
    In other words, to avoid making an improper payment, we 
spend whatever time it takes working with the various military 
services and DOD components to make sure we get it right.
    Sometimes, again rarely, we overpay our contractors and 
vendors. We estimate that our overpayments total less than 
seven one-hundredths of a percent of the total amount paid in 
fiscal year 1998. Paradoxically, taking the time to ensure that 
we do not make an overpayment can result in our making a late 
payment and paying interest.
    The advent of new payments systems that take full advantage 
of the benefits of electronic commerce will put an end to these 
problems. We expect that next generation of systems to be 
available within the next 2 years and are working hard to 
implement them.
    Thus, we think we are able to comply with both the spirit 
and the letter of the Prompt Payment Act. And we don't think 
that major revision of it is necessary. We believe that though 
it was last amended more than a decade ago, well before 
electronic commerce became as commonplace as it is today, its 
provisions, if interpreted properly, do not unduly hamper us. 
In fact, the Office of Management and Budget is updating the 
circular that guides Federal agencies in carrying out the 
provisions of the statute to ensure we are able to take full 
benefit of electronic commerce and at the same time fully 
comply with the Prompt Payment Act.
    I understand that the subcommittee is also interested in 
recovery auditing. This practice, common in the private sector, 
seeks to recover overpayments to contractors. DOD recently 
conducted its own pilot program in recovery auditing. Of the 
$29 million identified in potential overpayments, the 
Department has collected about $2.5 million. Nearly $20 million 
is currently disputed by the contractors, and we are working 
out those disputes.
    The remaining $6.5 million is deemed uncollectible. Still 
preliminary indications are that the amounts recovered exceed 
the cost of the program. We would like to explore the further 
potential of this area.
    Mr. Chairman, this concludes my formal statement. And Mr. 
Bitz and I would be happy to entertain any questions.
    [The prepared statement of Mr. Bloom follows:]

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    Mr. Shays. Thank you very much.
    I just would like to recognize the presence of Lee Terry 
from Nebraska. Do you have any statement you would like to 
make?
    [Mr. Terry shakes head indicating no.]
    Mr. Shays. OK, it is nice to have you here.
    And I would take this opportunity to ask unanimous consent 
that all members of the subcommittee be permitted to place an 
opening statement in the record and that the record remain open 
for 3 days for that purpose. And without objection, so ordered.
    And I ask further unanimous consent that all witnesses be 
permitted to include their written statement in the record. And 
without objection, so ordered.
    At this time, we will invite Mr. Lieberman to address us.
    Mr. Lieberman. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today to talk about DOD financial 
management. As you know from previous testimony to this 
committee by the IG and from the IG's semi-annual reports to 
the Congress, we have long agreed with GAO's assessment of DOD 
financial management as being a principal high-risk area in the 
Federal Government.
    We have been working very hard with DFAS throughout the 
decade of the nineties to improve the situation. And I think a 
fair accounting of where we are would indicate that a lot of 
progress has been made. But serious problems remain.
    The financial reporting problems, the inability to generate 
auditable financial statements, tend to get the most play in 
the media, but certainly our problems with the payment 
processes are at least equally important, and I think it is 
very appropriate for a congressional subcommittee to focus on 
the subject.
    My statement contains some of the general background about 
DFAS. I don't want to repeat that. Mr. Bloom has just made the 
point that it is a tremendously large and complex operation. 
That is an important factor to keep in mind when we are talking 
about something such as changing the provisions of the Prompt 
Payment Act. We should not do something that makes the 
disbursement process more complicated or retards the progress 
that is being made toward improving its efficiency.
    I hate to spoil Tom by agreeing with him in our first side-
to-side discussion of a DOD financial subject here. But I agree 
generally with his feeling that the Prompt Payment Act does not 
need major revision. This is not to say that some updating and 
clarification would not be appropriate.
    Certainly the requirement to pay interest payments as 
little as $1 needs to be revisited, because we are talking 
about thousands of payments in the magnitude of $1 to $5. And 
they are taking up the time of DFAS personnel that could be 
better used for other purposes.
    DFAS is not doing as well in terms of bill-paying 
timeliness as it should and could. I think the best metric of 
the relative efficiency of the process in terms of the payment 
deadline is how many invoices are paid on time and how many are 
not. If I recall the numbers correctly, in fiscal year 1998, 
DFAS paid against approximately 18.1 million invoices, and 1.2 
million of those invoices were not paid on time.
    There was a 17 to 1 ratio of on time versus not on time, 
but still a pretty healthy number of transactions were not paid 
within the generally prescribed 30-day time limit for payment.
    Now, this is not to say that the law is too tough and we 
should allow more than 30 days for payment. I agree very much 
with the general observation that DFAS is now putting in the 
systems and the processes that will enable it to dramatically 
improve its timeliness record in the future.
    So even though we have paid a healthy sum in terms of 
interest penalties in the last fiscal year, I don't think that 
the process is out of control. And prospects for near-term 
improvement are very good. I think DFAS should be held to the 
expectation that we will see fewer delayed payments and fewer 
interest penalties in the future.
    I would like also to comment that a change to the Prompt 
Payment Act that would complicate the disbursement process 
would probably aggravate some of the other chronic problems 
that plague DOD at the present time. One of the best known of 
those, that we have done recent audit work on, is so-called 
problem disbursements or unmatched disbursements. This has been 
compared to the inability to balance one's checkbook against 
one's bank statements.
    It is a little bit more complex than that. Basically, it 
reflects the fact that we are still transitioning out of a 
rather Rube Goldberg arrangement for doing disbursement 
accounting, where we have the paying going on in one activity 
and the accounting going on in another. Over the years, we have 
developed a process which was extremely inefficient, remains 
inefficient to this day, and results in any given time is 
having about $10 billion worth of disbursements that we can't 
match to proper obligations.
    We should achieve victory over that problem within the next 
2 or 3 years, provided that the systems that are now being 
developed are fielded on time and live up to expectations.
    But right now it is a real problem. It ties up money that 
the Department needs for other purposes; it makes us vulnerable 
to Anti-Deficiency Act violations; and it makes us unable to 
readily detect fraud, overpayment, and other errors.
    In my written statement, I mention several other payment 
problems that we have, that we shouldn't lose sight of. Our pay 
systems are lucrative targets for hackers who wish to break 
into them and either steal money or disrupt DOD financial 
operations. We need to pay particular attention to the security 
of our financial systems.
    Mr. Bloom mentioned the year 2000 problem. DFAS has been 
working at it very hard, but that is a serious near-term 
concern that we have to deal with. The overpayment problem 
remains very much a major concern for the Department. We tend 
to talk about the payments to contractors from Columbus Center, 
which handles most of our large contracts. We also have to keep 
in mind that there are lots of small payments being made in 
other activities.
    I am particularly concerned about the transportation area, 
where we have thousands and thousands of invoices being paid 
annually. Each one may be very small, but we have indications 
of a lot of fraud going on in that area. There are active 
criminal investigations now, which I think will prove the 
point.
    These are areas that are amenable to technological 
solutions, or at least technology will help to improve the 
efficiency of the process. But management emphasis is extremely 
important, and I am pleased to be able to report to you that 
DFAS management has been very responsive to the IG in terms of 
taking an active interest in improving DFAS anti-fraud 
protections, including DFAS ability to detect fraud and then 
help us investigate and bring these people to justice.
    So we think the future for DFAS is reasonably bright. The 
agency had a very difficult startup period. It was put together 
in a top-down decisionmaking process. The parts of the puzzle 
didn't want to be in the puzzle. The military departments did 
not want to give up their own financial operations. DFAS had to 
live through an extremely turbulent period, and I think it has 
now settled into an organizational structure that makes sense 
and has the right system improvements in process.
    I believe that, probably not next year but 2 years from 
now, you can have a hearing and talk about DOD financial 
management problems and you would probably be looking at a much 
shorter list.
    Thank you.
    [The prepared statement of Mr. Lieberman follows:]

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    Mr. Shays. Thank you, Mr. Lieberman.
    Mr. Cooper.
    But before I ask you to address us, I just would want to 
recognize the presence of our vice chairman, Mark Souder. And, 
Mark, do you have any comments you want to make or should we--
--
    Mr. Souder. No.
    Mr. Shays. Thank you.
    Mr. Souder. I'm catching up on the testimony.
    Mr. Shays. I am almost tempted to have someone tell a joke 
in the middle of this. This is a very dry subject. [Laughter.]
    Mr. Cooper. I think I can start with one. [Laughter.]
    Mr. Shays. OK.
    Mr. Cooper. Mr. Chairman, it is a pleasure to be here this 
morning. We have followed DOD payment problems for the last 5 
years, and I might just start by saying how this came to our 
attention.
    We were doing some work back in the 1980's with concerns 
about $600 toilet seats and $400 hammers and things like that, 
and we had a team down in a contractor's plant in Texas. And 
one of the contractor employees came up to us and asked, ``What 
can we do about all these extra checks we are getting from 
DFAS?'' They asked for our help to bring this problem to 
someone's attention, and we have tried to highlight the problem 
in our high-risk series that you referred to in your opening 
statement.
    And I am encouraged that DFAS has a number of efforts 
underway to correct the problems, but it will be a while before 
we see some real improvements.
    But, anyway, I would like to first talk a little bit about 
the problems that we have seen. We have issued a number of 
reports over the last several years that show that contractors 
are returning very significant amounts of money to DOD. In 
fact, during the 5-year period ending--the 5-year period 
covering 1994 to 1998, almost $5 billion was returned to the 
Columbus Center.
    While that is encouraging, we have also found through our 
audits that all contractors don't necessarily return the moneys 
they have been overpaid. We found one contractor that was 
overpaid $7.5 million, kept that overpayment for almost 8 years 
before it was returned. And it happened then only because we 
visited the contractor and asked about it.
    We have just recently finished some additional work, 
visiting 13 contractor locations. At four of those contractor 
segments, they were retaining about $1.1 million of 
overpayments. And what is discouraging about that is that those 
four contractors each told us that their policy was to keep 
that money until the Government asked for it through a demand 
letter. That is a formal request for those moneys to be 
returned.
    In fact, there is really no requirement, either regulatory 
or statutory, for contractors to return overpayments when they 
receive them. And more discouraging, no one really knows the 
magnitude of the moneys that have not been returned. We have 
attempted to look at that a few times and have been frustrated 
in our efforts to get a handle on that problem.
    We have also reported that DOD wastes million of dollars 
annually because it is paying its bills late. We have already 
heard some of that from the other witnesses. I have visited the 
contract entitlement director in DFAS earlier this month to get 
some updated information on late payments. During the first 
half of this fiscal year, more than 31,000 late interest checks 
have been written by that directorate totaling almost $16 
million in late interest.
    We have also heard from the other witnesses the payment 
process is a very complicated one, that solutions won't be 
easy. DOD is taking a number of initiatives to improve their 
systems, integrating their systems, improving their technology, 
training their employees, and we hope those actions will bring 
about some improvements.
    Let me quickly just speak about recovery auditing for a 
second. We were directed to do an audit of the DOD 
demonstration program on recovery auditing. We found it had a 
lot of potential to help identify and recover overpayments. 
There is a bill before the Congress now to expand that to other 
Federal agencies. We think that is a good bill and it could go 
toward improving recovering overpayments.
    We do caution, though, that in implementing recovery 
auditing, if that be the case, that agencies carefully consider 
the extent to which recovery auditing applies to their type of 
operations and assess the cost benefits of undertaking moderate 
internal recovery efforts before they turn to an outside group 
to do that.
    Regarding the Prompt Payment Act, it may be time to 
increase the minimum threshold for the interest payments. It is 
currently set at $1. We have already heard from the other 
witnesses that many of the checks that DOD issues on late 
payments are for very small amounts. In fact, when I was in 
Columbus, I was provided some information that shows there were 
31,000 checks issued the first 6 months of this fiscal year. 
Nearly 41 percent of those checks were for interest payments of 
less than $25. And that represents less than 1 percent of the 
dollars that are being paid.
    The DFAS officials conservatively estimate that it costs 
them $24 for each check they issue. And my math shows the 
taxpayers paid about $303,000 to issued interest payments 
totaling $114,000. That is probably not a good use of our 
taxpayers money.
    Mr. Shays. Want to just give that number again?
    Mr. Cooper. It costs about $303,000 to issue those checks 
for $25 or less in interest, and the total interest for all of 
those checks amounted to only $114,000. So it is costing more 
than double the amount of interest we are paying to process the 
checks.
    Now given the cost of processing, the administrative costs 
of processing an interest-payment check, it might be cost-
effective to increase the minimum dollar threshold.
    That completes my statement. I will be glad to answer any 
questions you or the other Members might have.
    [The prepared statement of Mr. Cooper follows:]

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    Mr. Shays. Thank you very much.
    First, I want to say Mr. Bloom, the nice thing about you 
starting in this position is that you can kind of look at it 
fresh, and you don't have to defend something that you did. But 
I also know you want to be fair to the Department and your unit 
within the Department. So you are going to want to make it 
clear what you think is wrong and what's right.
    And I do agree that, from a percentage standpoint, it's 
tiny percents, but given the magnitude of the Department of 
Defense, the numbers are huge.
    It is unsettling for me to think that there would be, in 
some cases, voluntary return and in other cases at request, but 
total $1 billion a year. I mean, that just boggles my mind to 
think of that--$1 billion gets returned, because I just know 
human nature. And it is very difficult to just voluntarily 
return money that was sent to you. Kind of think of it as a 
gift, and you think, well, we will just wait until they ask for 
it. So it makes you wonder how much more is actually being 
overpaid. Mr. Cooper, so that is one area of concern.
    Another one is, obviously, late payments and the penalties. 
The third is the issue of checks, and it just seems to me like 
we could all agree pretty quickly that number should be 
increased.
    I am going to expose my ignorance here by first asking: 
These are checks for interest payments? Explain that to me, if 
you would, Mr. Bloom.
    Mr. Bloom. In every case where we haven't met the 30-day 
deadline, we owe the interest. And the current procedure is 
that we issue a separate check for that amount.
    Mr. Shays. And this is Government law that requires it?
    Mr. Bloom. It is Government law that we pay the interest.
    Mr. Shays. So there is nothing that prevents us. And then 
tell me what the negative would be on it to take a threshold of 
$5 or maybe even more. Or $25. Would you show the numbers again 
on that--all right.
    And so I would ask each of you what you would recommend. 
For instance, is this from a statement--OK.
    From our briefing memo, this is DFAS's Columbus contract 
entitlement interest payments. And it shows that from $10 to 
$25, that constitutes 1.2 percent of the total interest but it 
represents--so it was 1.2 percent of the total interest that 
was required to be paid, but it represents 18 percent of the 
total payments. And I make an assumption that that is basically 
at cost or more. Because you are basically at $24.
    So I guess what I would like you to do, I would like each 
of you to think about what you would recommend. I'll come back 
to you because I don't want a quick answer. What would that 
threshold be? Would it be $1, $5, $10, $15, $20, so on?
    Mr. Bitz. Mr. Chairman.
    Mr. Shays. Yes.
    Mr. Bitz. Excuse me. If I can make a clarification?
    Mr. Shays. Sure.
    Mr. Bitz. The GAO report is addressing our Columbus 
operation, and the system there is called MOCAS, and it does 
produce separate payments. But all of our other vendor-paying 
contractor systems that are at our other 25 locations, the 
payment of the interest is in the normal payment. So if we owe 
them an EFT or a check for an invoice for $1,000, the interest 
will just be added when that payment is computed. It is only 
our Columbus Center where it is a separate transaction.
    Mr. Shays. Why?
    Mr. Bitz. The system is 30 years old, sir, and it is being 
replaced within the next 3 years. It's a very old system.
    Mr. Shays. So, what we looked at was a system that wasn't 
as typical as most of the systems?
    Mr. Bitz. Correct, sir.
    Mr. Shays. Anybody else want to comment on that?
    Mr. Lieberman. Well, it is the biggest system.
    Mr. Cooper. Yes. It is the largest payment system, and it 
pays the most late interest. So it is important that you fix 
that problem. [Laughter.]
    Mr. Shays. And that is called ``the rest of the story.'' 
[Laughter.]
    No, it is important to point that out. But it is important.
    Let me just ask another question, and then let me get to 
the other committee members.
    Mr. Cooper, in your statement on page 8, you say--I am just 
taking a certain part--DOD is enhancing its current 
technologies to further automate the payment process. What 
improvements might be implemented in the short term to reduce 
payment process complexities and the number of late payments?
    Mr. Cooper. We have made recommendations in the past. There 
are a lot of different factors that are causing the overpayment 
problem. One of the issues that I talk about in the statement 
is the long line of accounting classification numbers that are 
used to record the payments.
    And going back to something the DFAS witness talked about 
is DOD has been trying to move to integrate its various 
systems. You have a payment system at one location, an 
accounting system at another location, and the procurement 
people at a different location. And all of these people are 
generating the paper that was referred to earlier that you use 
to make payments.
    And a lot of times there are errors made in the paperwork. 
The accounting line has 51 digits on it, and it is very easy to 
get those digits transposed or recorded incorrectly. When the 
payment people who are trying to write the checks are sitting 
there trying to match a disbursement with the accounting 
classifications and the obligations data, it almost has to be 
done manually. It can't be done automatically.
    And there are just any number of errors that are made in 
all of this. So I mean that is a long way of saying, where the 
action needs to be taken is, and DOD is headed in that 
direction in many cases, is in fixing the technology, the 
systems. We need systems that talk to each other. We need 
systems that share the same data so that everyone can have the 
same data in front of them.
    And they are moving in that direction. It will be a few 
more years before we see that. I think some training of the 
people would help. We have seen some errors that just are 
really mind-boggling.
    I mean, contractors will send in an invoice for $5 million, 
and marked on the invoice is a statement saying that we have 
already been paid progress payments of $3.8, and they ask for 
the net amount. Well, we have seen time after time the full 
amount of the invoice paid.
    Mr. Shays. But wouldn't they be able--wouldn't DOD be able 
to check its own records to determine what's been paid? It 
shouldn't rely on what's on the statement.
    Mr. Cooper. Well, unfortunately, right now, DOD is relying 
very much on the contractors to return the money. What we have 
suggested--in fact, we are starting another effort very 
shortly--going out to the contractors and asking for a 
reconciliation. We think that is a fairly easy thing to do. 
DFAS tried it once and they only got a 20 percent response from 
the contractors they went to.
    And I might just add--and you will hear more about this 
later--but in the recovery auditing process, a reconciliation 
or request for the contractor to reconcile his accounts and 
provide that information to the Government is a pretty normal 
step to take. DOD could easily do that to identify more of 
these overpayments.
    Mr. Shays. I said one question, but you really answered the 
long term. I gather from your point there is no short term?
    Mr. Cooper. There is no short term.
    Mr. Shays. The answer to the first question is no. And you 
have given me the answer to my second question, which was what 
long-term steps.
    Just because I don't want to forget it, and it was the 
issue on which you said you were frustrated early in your 
statement, I was very tempted to--you said you wanted to do 
something, but you were frustrated and didn't know what----
    Mr. Cooper. We were frustrated in trying to identify the 
amount of overpayments that are with contractors today.
    Mr. Shays. How frustrating, because you didn't get 
cooperation, frustrating because it is hard to determine 
because of the record?
    Mr. Cooper. It is a very difficult task. I mean, there are 
literally thousands and thousands of contractors that do 
business with DOD. One of the problems with the records is just 
identifying where these contractors are, getting a good address 
and----
    Mr. Shays. What that raises, though, to me is that there 
are going to be mistakes made as you talk about the various--
you know, they can record the data incorrectly. But it strikes 
me that if you are frustrated because it is hard to determine, 
that this system opens itself to a tremendous amount of fraud.
    Mr. Cooper. It has that potential, and I think the IG has 
seen some of that. We have done some work showing that some Air 
Force vendors had committed fraud against DOD. Yes, it is a 
ripe opportunity for a lot of waste and abuse.
    Mr. Shays. Let me just, before going to Mr. Terry--any of 
you want to comment--Mr. Lieberman, Mr. Bloom, Mr. Lane, or Mr. 
Woods--on what I just asked Mr. Cooper?
    Mr. Lieberman. I agree with Dave's comments. I think that 
one of the very most important challenges facing DFAS is to 
improve all of the internal controls that would apply in the 
vendor-payment process. To some extent, the new systems will 
eliminate some of this manual processing that is very 
inefficient now and will improve the recordkeeping.
    We don't have good audit trails. I understand what GAO is 
saying when they say it is very difficult to reconstruct what 
exactly has transpired, and we don't know how much overpaying 
is going on.
    Mr. Shays. But it shouldn't be difficult to reconstruct. 
Correct? I mean----
    Mr. Lieberman. That is right.
    Mr. Shays. That is not what we should expect?
    Mr. Lieberman. Absolutely not. In an acceptable internal-
control environment, you wouldn't have this confusion and this 
vulnerability. So this is an area that needs to be worked 
intensively. And frankly, I think it is probably more important 
to get on top of this particular problem than it is to be able 
to comply with the CFO Act, which I suppose is heresy in some 
quarters.
    But we are not, for instance, doing enough auditing to help 
DFAS identify exactly what these control weaknesses are and to 
monitor their progress because we are drawn away from the 
finance side of the operation to audit the accounting records, 
specifically the annual statement that is required by the CFO 
Act. And we really have no choice in the matter.
    Now if there were an unlimited number of auditors 
available, we could do both, but there aren't. So we have to do 
what is mandated by law.
    And I have to tell you, candidly, that our audit coverage 
of these financial operations is just completely inadequate, 
even though we are doing our best to cope.
    Mr. Lane has done a terrific job in stretching very limited 
resources to do what we can. But this is a continuing problem, 
and it has aggravated the situation in DFAS.
    Mr. Shays. I think it is important, given that you made 
that statement, to tell us in a written letter what you would 
need in order to do that. In other words, what you are saying 
is that the CFO requirements have diverted your attention from 
other areas. And we need to know what you would logically need. 
Maybe you could give me three different grades, and I could 
argue that this happens.
    Mr. Lieberman. Be happy to.
    Mr. Shays. And the staff will followup on this.
    [The information referred to follows:]

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    Mr. Shays. Mr. Bloom, any comment? And then, I am sorry, my 
one last question was a joke. I had 10 questions. [Laughter.]
    Mr. Bloom. As a lawyer, I am used to that.
    Mr. Shays. Well, I don't like to be like that.
    Mr. Bloom. We do agree that this is a significant 
situation. And actually, when I was briefed on this last week 
or so, I was very uncomfortable to hear that the solution 
really is a system that may be 2 or 3 years away. That is what 
we are faced with. We are being as diligent as we can. We are 
going to be more diligent. We agree it is a significant 
problem. We may not agree with all the numbers, but certainly 
the magnitude is that it is a significant problem.
    Mr. Shays. Well, Mr. Bloom, you are a young man. So you can 
wait a few years. My request would be that you not be reluctant 
to share with the committee information you have, because we 
are not a committee that will take it and have a press release 
and throw stones at you. But we would like very much to deal 
with this issue.
    Mr. Terry.
    Mr. Terry. Thank you, Mr. Chairman.
    I just need to get a feel for this, so I probably won't ask 
as deep and probing a questions as the chairman.
    Mr. Bloom, I have a personal history, with outsourcing and 
privatization. I think that this is an asset and should be 
pursued. You mentioned during your statement, and it piqued my 
attention, about outsourcing.
    First of all, what is being outsourced? I heard a number 
like one-fifth or 25 percent--20 percent. But I didn't know 
what was being outsourced. And 20 percent of what?
    Mr. Bloom. It is 20 percent of our budget, the DFAS budget.
    Mr. Terry. Oh. So of the dollars, 20 percent of the overall 
dollars are outsourced. And what are the specifics of the 
outsourcing?
    Mr. Bitz. Sir, we are currently performing A-76 studies of 
our civilian pay business area, our retired and annuitant pay 
business area, and our transportation accounting business area. 
We will be bringing forward to the Department some additional 
business areas in the next year, also to be considered for A-76 
or outsourcing studies.
    We are not directly outsourcing any of our activities at 
this time, but we do have a significant contractor support in 
our automation areas, our systems development areas, and in 
some of our specialty areas such as conducting studies and in 
some our auditing areas checking our activity-based costing and 
our efforts to do business process re-engineering.
    Mr. Terry. Now I am more confused. But this is an area I 
don't want to get bogged in. There are just so many other 
questions. Let me just followup on one more thing.
    Are you telling really that there is no total area that is 
privatized or outsourced? It is just some outsourced support 
within each of the departments?
    Mr. Bitz. Currently. But we do have three items on the 
street, Congressman, that we are looking at moving the entire 
business area if private industry wins.
    Mr. Terry. And what's the timetable?
    Mr. Bitz. We are closing the packages at this time. All 
three are looking to come due right after January 2000. They 
would have come due on a normal 2-year time cycle during the 
holiday period this year, but because they are payment areas, 
we thought that might be disruptive and cause us to miss 
payments to our civilians and our retirees. So we basically got 
a 2-month extension to have it come due in January.
    Mr. Terry. What does ``come due'' mean?
    Mr. Bitz. There is a process where we bid our best 
processes and the private industry bids their best package 
against it, and the winner gets the business area.
    Mr. Terry. All right. Managed competition.
    Mr. Bitz. Yes, sir.
    Mr. Terry. Mr. Cooper, you mentioned some facts and figures 
that also piqued my interest, and that was in the comparison of 
the costs to process the interest check in relationship to the 
percentage of checks that were cut for a lesser amount--equal 
or lesser amount.
    You stated that 41 percent of the checks--I assume that 
what you are saying, is that 41 percent of all of the interest 
checks were less than $25?
    Mr. Cooper. That is right. In the first half of this fiscal 
year, DFAS, the entitlement directorate, issued 31,000 checks; 
41 percent of those were for $25 or less. And the value, the 
total dollar value of that interest was 0.68 percent of the 
total interest paid during that time.
    Mr. Terry. And I do agree that is an important figure to 
bring up and discuss. I see it at two different levels. The 
first question is, is the minimum dollar amount too low? Do we 
need to reassess that? But, also, I have got to tell you that 
it costs $24 to process a penalty check, 45 minutes of time in 
manpower involved to me seems absurdly high.
    How does it benchmark to the private sector? How does it 
compare? And what type of protocol is even used to raise the 
red flags in the system?
    Mr. Cooper. I can't comment on how it compares to the 
private sector. I think it is significantly higher. But one of 
the problems--and I think some of the other witnesses alluded 
to it--the system is so antiquated there--they call it a MOCAS 
system--so antiquated that, when they make a payment and if it 
is late, you would normally just add the interest to that 
payment, issue one check. Well, today they are having to issue 
two checks, one for the late interest, one for the actual 
payment. And that problem is not going to go away for a few 
years. And that is adding to that inefficiency.
    Mr. Terry. Do you suggest that in the short term we 
increase the amount of the minimum from $25 to $50 or 
something?
    Mr. Cooper. Well, current threshold is $1.
    Mr. Terry. Right.
    Mr. Cooper. $25 I don't think would be a bad number to use.
    Mr. Terry. Good point.
    Mr. Cooper. As I mentioned, it was only $114,000 of the 
total of $16 million. So it is a very small portion of the 
total.
    Mr. Terry. Mr. Bloom and Lieberman, would you like to 
comment on that?
    Mr. Bloom. On the threshold?
    Mr. Terry. Threshold.
    Mr. Bloom. I would be comfortable with $25 as the minimum 
because for the vendors there is also a cost. We send them a 
check; there is a cost for them to process that and post it to 
their books. And while I don't want to say that $24 isn't a lot 
of money, because it may be to certain vendors, but it would 
seem that a number like $25 is certainly in the ballpark.
    Mr. Terry. All right. Mr. Lieberman, would you like to 
comment?
    Mr. Shays. You have had time to think about this. Now 
don't--[laughter.]
    Mr. Lieberman. I wish I were confident that we knew how 
much it costs to process the check.
    Mr. Cooper. That $24 is probably a very conservative 
number.
    Mr. Lieberman. Yes, we could certainly live with $25. I 
think that would probably eliminate several thousand 
transactions. And anything we can do to just reduce workload in 
these centers is going to make them more efficient.
    Mr. Shays. Would the gentleman yield?
    Mr. Souder. I would like to ask a supplement to that, which 
is, presumably the point of dollar payments wasn't the 
financial damage; it was to try to encourage people to do it on 
time. Has it actually increased the number of payments going on 
time? And when you say moving it to $25, presumably, it would 
be right away? Or is there another tinkering process with this 
that you would have 30 days out?
    Mr. Terry. For example, 30 days to 45 days?
    Mr. Souder. Do we have any data whether it actually 
increased the rate of response?
    Mr. Bitz. Congressman, the number of late payments has 
decreased each of the last 3 years, the actual number of late 
payments. The dollar amount of interest last year increased 
significantly, but the number of claimants went down. There are 
a lot of causes, from significant systems issues over more than 
a couple months, making Y2K changes; we couldn't post records; 
bills were allowed to accumulate. And we did our best to catch 
up and we think we have done that.
    I need to ask, though, if I can correct something earlier. 
Again, the $24 a check is related to one system, and that 
system makes a lot of payments. But it is still only about 10 
percent of all of our payments. All of our other systems, the 
interest is in the original payments, and those payments 
average around $1.80 to $2.20, counting on the system. We don't 
pay $24 to make every check or every EFT in the Department of 
Defense. It is just one big antiquated system that makes the 
biggest payments, but it doesn't make the most.
    Mr. Shays. Would the gentleman, Mr. Terry, yield for just a 
second?
    Mr. Terry. I yield.
    Mr. Shays. Would another possibility be that we just allow 
the interest rate to accumulate? In other words--pardon me? I 
am being corrected here. Not the rate but the amount? So maybe 
over 3 months there might be a penalty, or would the interest 
just accumulate?
    Mr. Souder. But it is still $1. It would be a check for $1.
    Mr. Shays. Yes, because I make an assumption that you are 
not going to make the same mistake again and not pay. Right? 
[Laughter.]
    And have another interest payment.
    Well, it is interesting. But there is some consensus that 
the dollar rate is too low.
    Do you have--Mr. Souder, you may have the floor, if you 
like.
    Mr. Souder. You've got momentum.
    One of the things that it is hard for me to understand, it 
seems like we could have had a consensus on the $1 in the 
beginning. And I am trying to figure out how we wound up with 
the $1. My question, which I assume was to try to--I grew up in 
a small retail store, and it sounds to me like simultaneously 
some of the things used by the Department of Defense aren't 
that dissimilar to what we used in a little tiny retail 
operation, and other things that we did in a little retail 
operation aren't being used.
    For example, you have the bills and you know when they are 
due and the date is flagged right before that. The question is, 
why 3 days before the bill is due does it get delayed? And 
isn't there kind of like a red flag in the system that says 
this is about to become due?
    Mr. Bitz. Yes, sir. Again, I would like to take a second to 
differentiate between vendor payment systems and the contractor 
payment system that they are talking about. In our vendor 
payment systems--Indianapolis, Omaha, and those locations--the 
system itself ages the transaction and tells us that we are 
missing a document, one of the three components to make the 
payment.
    And we send out notices, whether it be the receiving report 
or acceptance document. If we have all three items in, it 
prepares it for disbursement and then it warehouses it, waiting 
for the cash management date to occur. What will happen is, 
since we are still paper-based on receiving reports and some 
other elements, the No. 1 cause is still that we have not 
received a document from somewhere in the world saying the item 
was received. And we can't match that up to the other two parts 
that are usually timely, which is the contract and the invoice 
from the vendor.
    In the contract payment system, besides being very old, it 
also has multiple categories of types of payments that are 
available, progress payments, down payments, partial payments. 
And the system doesn't know what it is flagging. So they were 
never able to build an accurate flag to say, we are still 
missing one of the three parts to do that.
    Mr. Souder. That's in Columbus?
    Mr. Bitz. That is in Columbus, that one big system we run 
there. We run other systems at Columbus that don't have this 
problem. So in the majority of our systems, we have the red 
flags. We have the red flags that it is not all together yet. 
And we have the red flags that it is together and it is time to 
release it.
    But in the MOCAS system, we don't have a flagging system 
today. It is human beings going in, checking to make sure all 
three components have arrived, taking the latest document and 
saying it is ready to pay, going out to look for a pre-
validation to the accounting system to make sure the obligation 
is there. That is very human-driven right now on that system, 
sir.
    Mr. Souder. It seems to me that a second thing, to some 
degree, is going on, and that is that the accounts payable area 
is co-mingled with internal management accounting, in the sense 
of, for example, one of the examples in the written testimony 
was assigning some toy purchase to three different accounts, 
which sounds to me like, in a small operation we had, one of 
our small stores was a general store and many errors occur when 
you have one supplier you are trying to put into six different 
categories. Any mathematical error in there goofs up the whole 
account.
    But as you get bigger, as another company I had worked 
with, you generally don't co-mingle the payables. You have a 
simpler system to make sure you are not getting hit with the 
interest rates, and then you have another document that tracks 
how you want to internally know what you have been spending, 
what you have been buying, what the sales rates are.
    I am curious whether some of this is a mixing of accounting 
functions between internal reporting, reporting for Congress, 
and logical payables?
    Mr. Bitz. I apologize, sir. This answer is going to 
probably be a little more confusing than intended. In the 
payment system, the accounts payable system, we have a 
specificity desired by the Department that requires that we 
break down to very finite levels the different components of an 
item that we are buying.
    It is not that we are buying a tank; it is that that we are 
buying 1,132 parts on the tank. And that detail is in the 
accounts payable system. In the accounting system, resident at 
another location, that same detail is present. Where the 
complication comes in, and the auditors have tried to help us 
with over the years, is to reduce the number of lines in the 
accounts payable system, so that the accounting system worries 
about that distribution.
    Again, I hate to say it, but when we migrate to the new 
system in a few years, we have that. Both systems will share 
the same level, and it will be electronic. But, currently, with 
pre-validation requirements, we are not supposed to make any 
payment for which we cannot find an obligation. We have to keep 
the detail in the accounts payable system, so that when we go 
ask the accounting system the day before the payment, ``Do you 
have a valid obligation for the U.S. Government? Is it 
there?'', that they match. And we get lots of errors there, as 
the auditors have pointed out, and a lot of mismatches.
    Mr. Souder. Is it possible, until you transfer to that 
system--I grew up in the furniture retail business, and we 
would get these trucking bills. And they would have three or 
four different things, and one wouldn't be shipped. Then you 
were trying to figure out whether in the freight bill you were 
paying the full amount or whether they accidentally put that in 
at the last minute, when they were loading the truck, they 
didn't have it there.
    It becomes an auditing nightmare. I can't imagine doing 
this in billions of dollars. If you don't have the computer 
systems, could you say that no single bill can have more than 
one item on it, and that if there is a--if whatever is on the 
bill hasn't been shipped together, then--in other words, are 
there some things that can be required from the company's 
billing process to help the Government?
    Mr. Bitz. One of the problems we are trying to address this 
fall--we are going to make some interim changes to the current 
system--is the ability to do something very similar to that, 
Congressman. It is a partial payment, where we will take the 
lines that do match, make the payment for that, and then go 
back to the accounting system of the contractor and see if we 
can determine between their records and ours why the other 
portion didn't match. That will accelerate our payments and 
reduce some of our interest.
    The complexity of some of these contracting vehicles and 
the items being delivered, though, precludes us from going one 
to one, one item for one thing. We get a delivery of a tank. It 
just has 1,100 parts. And we ordered one tank and it is 
delivered, but those parts were probably subbed: Someone else 
produced the 50-caliber. So we have to keep track of that 
through our system.
    Mr. Souder. I know, for example, the Hummer, I had more 
parts of the Hummer in my district than another congressional 
district, and the general showed me the sheet. I had 2.1 
percent, and they happened to have covered 235 congressional 
districts, by no accident.
    Mr. Shays. Are you serious?
    Mr. Souder. Serious.
    I have a question of Mr. Cooper on the overpayments. In at 
least your written testimony--I was trying to simultaneously 
listen and catch up on all the written testimony here--you 
said, on page 10, that PRGI identified 19.1 million 
overpayments. However, recovery amounted to only 1.9, which 
looks like about 10 percent, in large part because vendors took 
issue with some of the overpayments.
    Could you explain? I mean, 90 percent are taking issue. Is 
it this complication of sorting out the actual part that was 
delivered? Or what? Well, it causes a 90 percent challenge.
    Mr. Cooper. Let me try to comment on that, and I am sure 
the PRGI people will provide you more detail. But that $19 
million was at the time we issued that report, and that 
demonstration program was in progress. The numbers are now up 
to about $29 million of overpayments have been identified. I 
think still about 10 percent has been recovered, but there are 
a number of reasons why all that money has yet to be recovered.
    One is that when the vendors receive notice--and they 
receive the notice from PRGI--their first reaction was, ``Who 
is PRGI? We deal with the contracting office in Philadelphia.'' 
There was an issue about who had the authority to ask for the 
money back. As soon as they got those notices, everything came 
to a stop for about 8 months.
    The Philadelphia people who issued the contract to PRGI 
have agreed that PRGI is correct in the claims that they have 
identified as overpayments, and they are pursuing those 
amounts. The delay in receiving money back is not unusual. When 
contractors are asked to give money back to the Government, it 
takes many, many years in some cases----
    Mr. Souder. Nobody likes to send money back.
    Mr. Cooper. Nobody likes to give money back.
    Mr. Souder. But in the process of nobody--I am curious 
because it is natural, then, to challenge, but part of the 
requests that came in here was that we should potentially say 
that you have some kind of obligation if you feel there is an 
overpayment.
    What I am trying to get underneath this, is there actually 
a dispute as to whether these are overpayments, and should the 
burden of proof really be on the individual company, because if 
these were large items--in other words, could there be a 
threshold of saying, if it is an overpayment of ``X'' amount, 
you are accountable?
    But a lot of this stuff sounds like it is relatively small, 
and you may not even realize it, and then you may have to go 
out and sort it out. And I, as the company, because, yes, the 
Government is taking a bunch in, but a lot of these defense 
contractors are pretty big, too, moving a lot, trying to sort 
out what went what day. I am trying to get a feel for, from 
their perspective, why 90 percent would be questioning. Besides 
not wanting to give up the money and feeling the burden of 
proof is on the Government, is there some real substance under 
here as to whether or not it was an overpayment? And the second 
part of that was, what about a threshold? If it is over a 
certain amount the company would be----
    Mr. Cooper. OK. There is a dispute between the contractors 
and vendors involved here, and PRGI and DOD in this case. We 
have looked at some of the issues. One of the biggest issues is 
that there is a clause in the contracts that are involved here 
that is generally referred to as the ``most-favored customer 
clause.'' In other words, the Defense Department will get as 
good of terms as any other person the company does business 
with.
    In this case, one of the issues is whether the Government 
was given the opportunity to get discounts for early payments. 
A lot of the invoices came in for those goods that were 
delivered, and the 2 percent/net 10 terms were blanked out, and 
DOD wasn't afforded the opportunity to get discounts. So there 
are some lost discounts.
    There are a host of issues that are----
    Mr. Souder. I am interested--those host of issues are 
actually pretty substantive when it is your dollars, that when 
we went into the Prompt Payment Act question to guarantee that 
they got their money on time, did the Government not address 
the question? In other words, in return for prompt payment to 
the private sector, rather than getting delayed, should not one 
of those have been some kind of a standard that you get the 
same interest terms? Or do manufacturers view it that, when 
they bid on a Government contract at that date, it is a fixed 
price because they are supposed to give the absolute bid at 
that point? And therefore, typical finance charges don't apply 
because it is a different type of a bid process?
    Mr. Cooper. Right. It is all those issues, and in addition, 
there is the other issue of price comparability. Part of a 
recovery auditing process is to look at companies' published 
price lists to see what prices they are giving other customers. 
When PRGI did that, they saw that the Defense Department wasn't 
always given the same prices for things like candy bars and 
bleach and soap, and all those kinds of things.
    Now the companies have claimed that, in fact, DOD was given 
lower prices when those goods were shipped to commissaries or 
other locations. There is no documentation. That is part of the 
dispute. All those issues.
    I don't know if that answers your question or not.
    Mr. Souder. It shows the complexity of the problem.
    Mr. Cooper. It is a very complex problem.
    Mr. Souder. It isn't just a simple matter that we are not 
collecting overpayments. There is a difficult, substantive 
question under here that has potentially huge paperwork 
questions as well as equity questions. On one hand, the 
Government--I mean, I completely agree you don't want to have 
the Government--we are supposed to get the lowest price. On the 
other hand, having functioned in retailing, boy, the lowest 
price changed by day.
    Mr. Cooper. Right. One of the problems with the 
demonstration program--and we have pointed this out in the 
report--is that it went back and covered 1993, 1994, and 1995, 
so they were looking at old contracts. The recovery auditing 
process normally deals with very current transactions, so that 
if there are disputes, the evidence or the information will be 
readily available and won't lead to these kind of disputes.
    A lot of the problems in the demonstration program is that 
the contractors did not have information, and they said it 
wasn't worth their time and effort to go try to re-create the 
transactions. So, I mean, that is part of the problem.
    Mr. Souder. A lot of defense contractors, because of 
downsizing, have had a different thing, and that is that they 
will make the bid on a defense contract, which will kind of be 
their base, and then their additive business, which may be a 
slight variation or a different run, they will have to price 
compete differently at that point than they did on their first 
contract. But, then, if they had to redo their first contract, 
they wouldn't even be in the market for the second one. I don't 
know how to resolve that question.
    Mr. Lieberman, do you have any comments? You are nodding 
your head, but I don't know--it doesn't sound like there is an 
easy solution to this other than we need better computers in 
Columbus.
    Mr. Lieberman. I totally agree with you that we could be 
looking at a paperwork nightmare, if we inadvertently create a 
requirement to do anything other than take advantage of the 
flexibility that the Prompt Payment Act already gives to the 
Government and to vendors. That is the flexibility to specify 
what the pricing terms are going to be in the contract.
    If the contractor is going to offer a discount if we pay 
early, that can be spelled out in the contract. The contractual 
terms override the don't-pay-before-7-days and must-pay-within-
30-days rule. So in those sectors of our buying, where this 
kind of approach makes sense and is felt to be equitable from 
both the Government and the contractor sides, there is already 
authority to deviate--the way is clear to do that.
    Frankly, we don't have any information on how often that 
option is already exercised, how many contracts we have that 
already match those parameters. That is one of the unknowns 
here.
    DOD buys so many different things from so many different 
sectors of the private economy that we have to be careful that 
we don't generalize off of a very limited pilot program to 
date, which has dealt mostly with what we call subsistence 
items, food stuffs, things going into the PX's, the 
commissaries, and things like that. When we are talking about 
buying pieces of major weapon systems, we are talking a whole 
different ballgame here in terms of pricing.
    Also, we have to be careful to consider the impact of the 
changes, such as really pushing anticipatory discounts such 
that both large and small businesses are affected. Large 
businesses are very interested in getting money from the 
Government as soon as possible, and they are going to instantly 
electronically transfer it into a bank account someplace and be 
earning interest on it. And they literally fly planes around to 
pick up checks--they used to fly planes around; I guess we do 
it electronically now--because they understand the value of 
money.
    With some small businesses, it is a different ballgame. 
Somebody who gets a check is going to have to go stand in line 
at a bank someplace to cash it. And they will say: I send in an 
invoice for $100; I expect to get $100 back. I don't want some 
bureaucrat deciding I am only going to get $90 because they 
paid me a couple days early, and I am supposed to run down to 
the bank to make sure that I recover the difference. So I think 
we have to be careful on that end.
    And then on recovery auditing, frankly, the prospect of 
getting money back several years after the fact is better than 
not getting it back at all. But we have to remember the money 
does not go back into the programs that need it at the time the 
overpayment is made.
    We are talking about executing contracts and executing 
projects for all sorts of purposes, and those programs need the 
money right then. When it comes back several years later, it is 
too late. Those programs either would have been made whole from 
other funding sources or perhaps they won't even exist anymore.
    But what we need, I think, is a lot more emphasis on 
accurate payment on the front end. There is a place for 
recovery auditing, and I think the Congress' approach in 
encouraging incremental pilot programs, so that we can learn 
lessons about where it works best, is the way to go, rather 
than just mandating application across the board at this point.
    Mr. Souder. Well, thank you very much. I need to get to a 
couple of other things here. I won't say it was the most 
riveting session, but actually it was pretty interesting. And I 
don't envy the difficulties that you are all facing in trying 
to sort through these things.
    Mr. Shays. Mr. Lieberman--I thank the gentleman--when we 
were doing Medicare and Medicaid audits, we had overpayments; 
we called it pay and chase. It sounds to me like we don't do 
much chasing.
    I have two areas, and then I really do want to get to the 
next panel. One is--and, Mr. Bloom, you or Mr. Bitz maybe would 
be better apt to describe it--I am told there are five pieces 
of paper that have to kind of be accounted for. Two are 
internal and three are external. And that you don't make a 
payment until you have those five papers that agree with each 
other. Is that an accurate description?
    Mr. Bitz. It is actually--we focus on three pieces in 
accordance with the act. We require a contract in our hands to 
make the payment, not just in the DOD, but it has to be into 
the paying office; in support of that contract, all established 
amendments. We require a proper invoice.
    Mr. Shays. Are we still at one?
    Mr. Bitz. That is one, but that sometimes gets counted as 
two because of the amendments.
    Mr. Shays. OK. And then two is invoice?
    Mr. Bitz. Then the invoice from the vendor or contractor, a 
proper invoice, into the paying location.
    And three is an acceptance receiving document, and that is 
sometimes split as two. The acceptance location can be 
different from the receiving location. Someone can receive it 
at the installation, but the acceptance may be inside the 
hospital or something like that.
    Mr. Shays. And a 10-day discount payment would be when you 
receive the bill?
    Mr. Bitz. Well, actually, this is one of the 
inconsistencies in the statute, Mr. Chairman. For paying 
interest penalty, we use the date that we received the invoice 
in the proper paying office. But for discounts, we are 
instructed to use the date on the invoice. And we receive some 
invoices after the discount period has already expired due to 
mail processes and for other reasons.
    Mr. Shays. So what is the net effect?
    Mr. Bitz. The net effect is that we don't take a lot of 
discounts that are offered.
    Mr. Shays. So we lose them?
    Mr. Bitz. Yes.
    Mr. Shays. All right. So that is something that I would 
think, Mr. Bloom, that you would want to be addressing? 
Correct?
    Mr. Bloom. Yes, and I guess to the extent that there is the 
difference between when the clock starts for prompt payment and 
when the clock starts for taking a discount, that is statutory 
and that might be something that----
    Mr. Shays. Yes, but don't wait for us to figure it out. 
This is the kind of thing that you who are in the field, you 
should just be coming to us and saying--this is the committee 
that--not this subcommittee--but we would recommend to Mr. 
Horn's subcommittee and to the full committee that we just take 
action, and we will. I mean, that could go on the consent 
calendar.
    That's funny, I call it the consent calendar because that 
is what it is in Hartford.
    The other area would be, I would like to ask all three of 
you, and I am not looking for long answers, but testimony from 
the next panel says that the interim and progress payments 
under service contracts should be covered by the Prompt Payment 
Act. I want to know if you agree. We'll start with you, Mr. 
Cooper. Service contracts are not part of the Prompt Payment.
    Mr. Woods. Mr. Woods, I have a theory that the person who 
says the least actually knows the most. [Laughter.]
    Mr. Woods. Well, actually, let me shoot a hole in that 
theory because we don't have a position on that, Mr. Shays. The 
regulations do provide that contract financing payments are not 
covered under the Prompt Payment Act. And that would cover a 
lot of service contracts because they are paid in a contract 
financing mode.
    Mr. Shays. So the bottom line is that GAO has no opinion 
yet?
    Mr. Woods. Not on that issue, sir.
    Mr. Shays. I would love it if you would have a dialog with 
your people and see what you might recommend.
    [The information referred to follows:]
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    Mr. Shays. Mr. Lieberman.
    Mr. Lieberman. I am going to have to give you an answer for 
the record on that, Mr. Chairman. We haven't had a chance to 
think about it.
    Mr. Shays. I would like you to think about it.
    [The information referred to follows:]

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    Mr. Shays. Mr. Lane, do you have any comment, please?
    OK. Mr. Bloom. Mr. Bitz.
    Mr. Bitz. Mr. Chairman, we support the rewrite of the OMB 
circular that establishes that contract financing payments, of 
which progress payments and certain service contracts are, are 
moneys actually being paid prior to acceptance of goods on 
services and, therefore, shouldn't be under the Prompt Payment 
Act. But we will do whatever the committee chooses.
    Mr. Shays. I realize that, but we want to do what makes 
sense.
    Let me ask this: If any of you would have a final comment--
I will get to the next panel, but I would invite all our 
witnesses up there to make a comment they would like or to make 
an observation. I will start with you. Do you have any 
observation to make to the subcommittee?
    Mr. Cooper. Mr. Chairman, I can't add much more than what 
has already been said, but, I mean, we have reported, and I 
think the committee understands, the payment problems in DOD 
are very serious, that some action is underway to address some 
of the problems. It will be a number of years before we see 
those initiatives come to fruition. In the meantime, we have 
got to be diligent and try to continue doing the audits that 
identify these overpayments and try to recover the moneys.
    Mr. Shays. Thank you. Mr. Lane.
    Mr. Lane. Just a comment: One of the things that we are 
doing, we are trying to work very closely with DFAS on a number 
of these areas, and I think, as was alluded to earlier, the 
most important thing is to make the payment right the first 
time and on time. That is what we are really trying to do, and 
trying to get the systems that will make sure that will happen.
    Mr. Shays. Thank you. Mr. Lieberman.
    Mr. Lieberman. I would like to just underscore the fact 
that we think the Prompt Payment Act is extremely important to 
keep the Government as a reliable business partner. The 
Department is trying very hard not to discourage contractors, 
particularly those who are offering high-technology products, 
from doing business with the Government.
    Mr. Shays. Very good point.
    Mr. Lieberman. And certainly not paying people on time 
means you are an unreliable partner. So I think what we are 
talking about here, in terms of the value of the Prompt Payment 
Act and the need to comply with it, is the need to keep it 
there as a means to hold our feet to the fire. This is very 
important and fits very well into the Department's overall 
acquisition reform goals in that respect.
    Mr. Shays. Thank you. Mr. Bitz. Mr. Bloom.
    Mr. Bloom. I would echo what Mr. Lieberman said about the 
supply chain being very important. We need to make sure we are 
keeping our vendors in business. Clearly, there has been a lot 
of work done at DFAS, and there is a lot left to do. And we are 
working hard at it.
    Mr. Shays. That is why you were hired, right?
    Mr. Bloom. Absolutely.
    Mr. Shays. I thank the panel, and I will call our next 
panel. Thank you very much.
    Lieutenant General Thomas G. McInerney, president and CEO 
of Business Executives for National Security [BENS], based in 
Washington, DC, accompanied by Dr. Erik Pages, vice president 
for Policy and Programs at BENS.
    Our second testimony is from Mr. Paul Dinkins, executive 
vice president, the Profit Recovery Group [PRG], based in 
Atlanta, GA, accompanied by Mr. Jack Kenny, director of 
Operations, Government Audits.
    And Mr. Rodney Mateer, partner, Deloite and Touche, 
Professional Services Council [PSC].
    I would like them all to come, and if you would remain 
standing, I will administer the oath.
    Mr. Pages, why don't we move you down one. Thank you.
    If you would raise your right hands, please?
    [Witnesses sworn.]
    Mr. Shays. For the record, our witnesses responded in the 
affirmative.
    And we will go in the order that I called you. I welcome 
you, and I appreciate your patience in listening to our first 
panel. If you want to comment on what the first panel said, I 
would be happy to have you do that. And obviously, your full 
statements will be in the record. And we will do the same 
thing; we will put a 5-minute clock and roll it for a second 5 
minutes. If you would stop at least before the second one, that 
would be great.
    General.

  STATEMENTS OF THOMAS G. MCINERNEY, LIEUTENANT GENERAL, USAF 
(RETIRED), PRESIDENT AND CEO, BUSINESS EXECUTIVES FOR NATIONAL 
SECURITY, ACCOMPANIED BY ERIK PAGES, VICE PRESIDENT FOR POLICY 
 AND PROGRAMS, BUSINESS EXECUTIVES FOR NATIONAL SECURITY; PAUL 
   J. DINKINS, EXECUTIVE VICE PRESIDENT, THE PROFIT RECOVERY 
 GROUP; JACK KENNY, DIRECTOR OF OPERATIONS, GOVERNMENT AUDITS, 
   THE PROFIT RECOVERY GROUP; AND RODNEY W. MATEER, PARTNER, 
       DELOITE AND TOUCHE, PROFESSIONAL SERVICES COUNCIL

    Mr. McInerney. Mr. Chairman, Counsel. As you know, I am 
president of the Business Executives for National Security 
[BENS], which is a national, non-partisan organization of 
business and professional leaders dedicated to the idea that a 
strong but affordable national security structure is everyone's 
business.
    Now roughly 2 years ago, we created the BENS Tail to Tooth 
Commission chaired by former Senator Warren Rudman and Mr. Josh 
Weston, honorary chairman of ADP. The commission is composed of 
senior business executives, former political leaders, and 
retired military officers. For instance, Sam Nunn, Bo Callaway, 
Vin Weber, Bernie Marcus of Home Depot, Fred Smith of FedEx, 
Mort Zuckerman of U.S. News and World Report, General Jack 
Vessey, former chairman of the Joint Chiefs of Staff, General 
Tony McPeak, Chief of Staff of the Air Force, and Gordon 
Sullivan, Al Gray, Marine Corps Commandant. We have very 
prominent American business people and defense leaders.
    We believe that the Pentagon now spends too much on 
administration and bureaucracy. In fact, nearly 70 percent of 
the current defense budget supports what we call the defense 
tail. We need to see new investment in the Pentagon's core 
business of combat capability, what we call the defense tooth. 
And you were talking a lot about defense tail in the previous 
discussions.
    We believe that DOD's financial management problems have 
structural causes that cannot be fixed through small-scale 
reforms, such as changes to the Prompt Payment Act. 
Nonetheless, we do believe that the solutions I will list can 
significantly improve DOD's performance, especially if they are 
included as part of a more comprehensive financial management 
reform package.
    The following six recommendations are the results of 
discussions we have had with BENS members, in the industry, 
Government and other experts. The recently completed study of 
DFAS by the Joint Chiefs of Staff supports many of the 
following recommendations.
    No. 1, reform of the Prompt Payment Act. One of the major 
concerns regarding application of the Prompt Payment Act is 
that current regulations do not effectively cover service 
contracts. And you asked them those questions and they didn't 
have the answers.
    We believe that it would be important and that the 
subcommittee support clarification of current regulations to 
ensure fair coverage for service contracts.
    No. 2, outsourcing of non-core defense DFAS functions that 
was touched on but, frankly, we think it missed the mark 
widely. We continue to support aggressive outsourcing of non-
core functions at DFAS. Since 1995, DFAS has initiated eight 
outsourcing studies by the A-76 process for public-private 
competition. Three have been completed, with none of the work 
going to the private sector.
    Two current outsourcing studies, which were mentioned, 
defense civilian payroll and the retired annuitant payroll are 
so unwieldy and risky that few if any private-sector bidders 
are likely to emerge. We fear that these efforts have been 
designed to fail. The subcommittee should endorse a more 
effective strategy for outsourcing these activities.
    No. 3, fix feeder systems. Much of the problem with DOD 
financial management can be traced back to the old adage, GIGO, 
garbage in, garbage out. Currently, about 80 percent of all 
financial data processed by DFAS originates in the services. 
And this data often contains errors or is not compatible with 
existing information processing systems. The subcommittee 
should also examine efforts to improve the quality of 
information generated by the military services.
    No. 4, use activity-based costing. DOD will never meet 
private-sector standards until its financial operations are 
placed on an activity-based cost foundation. Only on this 
basis, can DFAS benchmark its operations against the best in 
the private sector and conclude its outsourcing competitions in 
equitable and auditable manner. This process will take time, 
but it should be pursued.
    No. 5, continued consolidation. The Pentagon should 
continue to consolidate finance and accounting operations DOD-
wide by reviewing the exceptions that were granted in the early 
1990's by the services to retain finance and accounting 
functions.
    Mr. Shays. General, I just need to interrupt you. I am very 
sorry. Someone left a suitcase outside the door. Is there 
anyone here who might have done that? Otherwise, the bomb squad 
is going to be called. I would like to avoid that.
    Your suitcase? You are the man? Thank you very much.
    I just want to make sure that suitcase is OK if you are 
bringing it in here. But that is another question. [Laughter.]
    Mr. McInerney. In particular, the Air Force and the Navy 
retain large in-house financial management teams.
    Six, create a corporate board of directors. DOD should 
establish a DFAS board of directors composed of military, 
civilian, Government, and private sector leaders to approve 
expenditures and reform initiatives. This board will also 
improve cooperation between DFAS and financial officers in the 
military services.
    My concluding thoughts, Mr. Chairman: DOD can and should be 
able to comply with, and take advantage of, provisions of the 
PPA. In fact, with the proper focus on the customer, DFAS can 
be a model for the rest of the Federal Government.
    By looking at the lessons of the private sector accounting 
industry, DFAS can access the talent and technology that 
already exists. There is no need to start from scratch. 
America's modern private sector has prospered on the basis of 
sound financial management and adherence to standards and 
accepted accounting practices. Were the Federal Government to 
do the same, there would be no need for Congress to enforce 
compliance through repeated legislation.
    With respect to DOD and DFAS, BENS believes that improving 
its finance and accounting posture will allow them to identify 
and free up the resources so desperately needed for force 
structure modernization.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. McInerney follows:]

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    Mr. Shays. General, thank you very much.
    Mr. Dinkins.
    Mr. Dinkins. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify before the committee today.
    My company, the Profit Recovery Group, pioneered an 
accepted business practice known as recovery auditing about 30 
years ago. Basically, this practice is designed to identify and 
recover overpayments that have been inadvertently been made to 
suppliers of goods and services.
    And it is a well-known fact that even the best known, best 
run companies around the world with the best systems still make 
overpayments typically in the area of about one-tenth of 1 
percent a year.
    In our written testimony, we have made reference to results 
to date in several Government programs, the oldest of which is 
AAFES. And, for example, last year we recovered just about $30 
million on a purchase basis of about $5\1/2\ billion.
    We have been doing this now for about 30 years. We serve 
over 3,000 clients worldwide, across 22 countries, about half 
of which are the Fortune 1,000 here in the United States. And 
because of this global experience, we are pretty well 
experienced in the purchase and payment processes in large 
organizations. And I think it is worth mentioning that the 
Department of Defense is the largest bill-paying entity in the 
world.
    It is an extremely complex environment, and we think they 
do a pretty good job given what they have to work with, the age 
of the systems and the consolidation and processes that they 
have gone through over the last few years.
    Having said that, at DOD or any other entity, there will 
always be overpayments. And the purpose of the recovery audit 
process is to be a safety net to identify them and recover them 
after the fact.
    We are now finalizing a recovery audit demonstration 
program within the Department of Defense. A side benefit of 
this process is the identification of factors that contribute 
to financial loss. As a result of our experience in this 
program, we have become familiar with the Prompt Payment Act 
and have prepared a series of recommendations to revise the act 
to better mirror private-sector business practices and 
eliminate millions of dollars of financial loss.
    It is our understanding that the Prompt Payment Act was 
originally enacted at a time when the Government was unable to 
meet the private sector's standards for paying invoices 
accurately and on time. While that situation has improved, we 
at this point believe it is a good time to re-look at the 
Prompt Payment Act and the following recommendations we make to 
improve lost cash discounts, to reduce penalty interest that we 
believe is paid in error, and to improve contract prices that 
are achieved by the Government.
    The first recommendation concerns cash discounts, and one 
of the gentlemen had brought this point up earlier. The private 
sector practice is to calculate cash discount due-dating from 
the later of either the receipt of invoice, the receipt of 
goods, or the resolution of invoice discrepancies, whichever is 
most advantageous.
    The Prompt Payment Act, however, stipulates that cash 
discount due dating begins with the date of the invoice. And as 
you have heard in prior testimony, invoices are often received 
after the invoice cash terms--cash discount due-dating, which 
means that the Government cannot avail itself of cash 
discounts. This results in the inability to take advantage of 
cash discount terms. The clock starts ticking oftentimes before 
the invoice is received.
    In our limited scope of the demonstration program, we 
estimate that roughly $20 million was lost on cash discounts 
that would otherwise have been taken advantage of on a base of 
payments of only $6 billion in purchases. Therefore, you can 
extrapolate from that there is a significant opportunity here 
when extended across the entire purchase base for DOD. And we 
estimate this to be minimally at $100 million a year in savings 
with this correction.
    The second topic and recommendation is penalty interest. 
First, the private sector does not pay penalty interest. We do 
not recommend elimination of penalty interest, but rather 
revising this portion of the act. The Prompt Payment Act 
stipulates that the Government must pay penalty interest for 
any disbursements made later than the due date stipulated by in 
the act even if the terms offered by the vendor are more 
favorable. We recommend revising the act to provide the 
Government the ability to accept vendor terms stated on the 
invoice if more advantageous.
    Our next recommendation concerns recognition of extended 
dating terms. Private industry offers extended dating terms in 
many instances as an added incentive to take goods early. The 
Government is forced to pay these invoices within 30 days of 
receipt. This results in many cases in the loss of use of this 
money for 60 days or more. Again, we recommend revising the act 
to provide for acceptance of vendor terms invoiced if--vendor 
terms on the invoice if more favorable to the Government but 
not stipulated in the Prompt Payment Act.
    As an example of that, often times extended dating terms 
would be offered on an invoice that where goods are shipped and 
received but the invoice stipulates payment, say for example, 
within 120 days. Based on the act today, that bill would have 
to be paid within 30 days, losing 90 days of interest on that 
money.
    Our next recommendation has to do with recognition of 
commercial practice. Some Government contracts do stipulate 
that the Government must receive terms of sale at least as 
favorable as that offered to the private sector. We recommend 
that the act be revised to include this language and provide 
for uniformity across all Government purchases of commercial 
items. This will help to ensure Government receives the best 
price.
    Last, but not least, our recommendation concerns 
anticipation. Anticipation is a term used to describe a 
reduction of disbursed dollars based on the time value of money 
when payment is made in advance of the actual due date. In 
effect, anticipation is the reverse of penalty interest.
    The Prompt Payment Act should be revised to provide for use 
of anticipation on invoices paid early, as is common in the 
private sector. We recognize that it is not the Government's 
intention to pay invoices early; however, situations can and 
occur where payment is in fact made early. In these instances, 
the time value of money can be identified and recovered as part 
of the recovery audit process as is common in the private 
sector.
    In summary, Mr. Chairman, the Prompt Payment Act has helped 
to improve Government's ability to pay vendors on time. Now 
that these processes have been somewhat improved, we think it 
is a good time to revise the Prompt Payment Act to adopt 
private-sector business practices.
    Our recommendations to revise the act will provide for 
improved tax management, significantly reduce penalty interest 
paid, and the loss of cash discounts. These recommendations in 
no way mitigate the beneficial aspects of the act. In fact, we 
believe these changes will provide for a clear interpretation 
of the original intended purpose of the act.
    Thank you, Mr. Chairman. We are happy to entertain 
questions.
    [The prepared statement of Mr. Dinkins follows:]

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    Mr. Shays. Thank you very much.
    Mr. Mateer. Let me have you bring that microphone a little 
closer. Am I saying your name correctly?
    Mr. Mateer. Yes, you are. Thank you.
    Good morning, Mr. Chairman, I would like to thank you for 
the opportunity to comment today on the Prompt Payment Act, its 
implementation, and how the professional and technical services 
companies who work for the Federal Government are being harmed 
by some of the deficiencies in that implementation.
    I am a partner and the national director of our Government 
contract consulting practice with Deloite and Touche. We are a 
national and international accounting firm. Many of our clients 
are members of the professional services council, and I am here 
today to speak for that trade association.
    PSC members are technology companies that make up the 
fastest growing sector of our Nation's economy. Primarily, 
these services are applications of professional, expert, and 
specialized knowledge used to assist Government and private-
sector clients to solve operational, technical, and management 
problems.
    Overall, this sector performs $600 billion in services in 
the economy, including more than $100 billion in the Federal 
Government each year in such areas as defense, international 
affairs, health, environment, and others.
    Before I explain the specific problems that I believe we 
are experiencing, allow me to briefly frame the issue for you, 
because this gets into some technical details with the 
regulations, vis-a-vis the law.
    First off, Representative Jack Brooks sent a report which 
accompanied the original Prompt Payment Act, stated as follows: 
``Every Federal agency shall pay an interest penalty on amounts 
owed to business concerns through the acquisition of property 
or services when the agency does not pay on time.''
    And that is fundamentally what our issue is here today. The 
issues I will address in this testimony are essentially 
twofold. One, the purpose of the Prompt Payment Act is 
fundamentally fair, but the implementing regulations are at 
best unclear and at worst inconsistent with the law. And two, 
the application of these regulations have resulted in an 
inequity in the professional and technical services community 
by excluding the protections of the Prompt Payment Act on 
certain billing transactions where valid services have 
otherwise been performed.
    I also want to emphasize that at the very onset of my 
testimony that we acknowledge that the agencies have in certain 
circumstances will pay in less than 30 days. In fact, they have 
policies in some cases. The Department of Defense will pay 
certain transactions in 7 days or 14 days. We believe this 
scenario is ideal, and we would like to see that efficiency 
applied to all payments.
    But more to our concerns: Our concerns rest primarily with 
the facts that an unacceptably high number of services 
contractors are not getting paid under the Prompt Payment Act. 
In fact, a number of our members have indicated that they have 
had delayed payments that are 50 to 80 to 100 days or more. 
This can result in a significant cash drain on a company's 
operations, particularly for small business. And most companies 
secure lines of credit or other forms of financing to float 
those delinquent payments. Obviously, this is a hardship on the 
contractor community because these types of costs are not 
allowable, these financing costs, under the Federal acquisition 
regulations.
    Particularly perplexing and in our opinion indefensible is 
the fact that service contractors are in effect being treated 
differently than other Federal contractors. The fundamental 
equity argument here is that the Prompt Payment Act does not 
intend to make a distinction between service and non-service 
contractors. The problem arises in the regulations and their 
interpretation in implementing the act.
    By way of background, service contractors perform--are 
performed by both large and small companies, are typically 
reimbursed--and this is a point you brought up earlier in your 
question, Mr. Chairman--reimbursed as interim payments or as 
progress payments based on costs incurred or on fixed hourly 
rates.
    This is important because the regulations expressly exclude 
these forms of payment from the Prompt Payment Act coverage. 
However, in our view, each labor hour that is billed and its 
related costs incurred is a service performed. And if that 
service complies with the other requirements of the act and the 
regulations in terms of a valid invoice, compliance with the 
terms and conditions of the contracts and the like, it should 
be subject to the Prompt Payment Act.
    Focusing on the Prompt Payment Act purpose for just a 
moment, the law, we are most interested in stressing that the 
purpose of the act, which is to protect to a certain degree the 
contractor community by providing an incentive for the 
Government to pay its bills on time and to compensate 
contractors for delays in those payments. That is essentially 
the purpose.
    The Prompt Payment Act generally provides that the 
Government must pay a proper invoice within 30 days. The act 
applies to the acquisition of property or services. However, we 
believe that the regulations again do not reflect the clear 
intent of the act and are not in step either with acquisition 
reform.
    The current regulations properly state the law's purpose to 
pay contractors fairly for work performed; however, again, at 
best they are unclear or at worst inconsistent regarding the 
exclusion of terminology that has occurred in the regulation 
that is not in the law called contract financing payments. 
Contracting financing payments in the regulations are 
specifically excluded from the Prompt Payment Act.
    Now, as was mentioned earlier today, these are very common 
types of payments for the professional services business. In 
the FAR they are defined as Government disbursements of moneys 
to a contractor under a contract clause or other authorization 
prior to acceptance of supplies and services by the Government. 
And it gives illustrations as to particular types of billing 
transactions that are excluded, such as the interim payments.
    The problem with this language is that we believe that the 
regulatory definition of a contract financing payment has 
resulted in the Government's misapplication of the law's 
requirements. The definition has--and this is a key point--has 
essentially legitimized the Government's acceptance process as 
being integral to application of the Prompt Payment Act. This 
categorically lists specific types of payments that are not 
covered by the Prompt Payment Act. The FAR does that as well.
    In contrast to the law, the FAR coverage on contract 
financing payments, the law uses no such terminology, as I 
indicated, but instead the law, I believe, focuses on the 
substance, not the form, of the payment. The legal 
prerequisites for application of Prompt Payment Act are 
particularly very clear in the 1988 amendments to the Prompt 
Payment Act, are one that there is an invoice, and if required 
by the contract, for supplies delivered or services performed.
    Let me point out that some of the confusion on this in the 
past, I believe in its application, has been that there has to 
be something tangibly provided. It has to be delivered; it has 
to be given; it has to be accepted, approved, signed off, et 
cetera.
    However, the 1988 amendments to the law make it very clear 
that Congress was concerned about activities that were taking 
during the performance of the contract and that prompt payment 
should apply to in-process work as well. And so I think that is 
pretty clear in the 1988 amendments.
    And, too, the law speaks in terms of requirements as 
acceptance of the property or services. We see the term 
``acceptance,'' but we also see, particularly in the 1988 
amendments, ``or a determination by such employee that such 
performance complies with contract terms and conditions.'' 
Again, my sense is that the act is much more flexible in its 
application than the FAR is as it relates to these types of 
issues.
    In conclusion, Mr. Chairman, it is our recommendation that 
as you and this committee look at improvements to the Prompt 
Payment Act, we ask that you carefully consider the inequities 
that have resulted in its implementation. We strongly believe 
that there is no valid reason for service contractors to be 
singled out and treated differently because of the type of 
payments requested and submitted in a way that is inconsistent 
with the intent of the Prompt Payment Act.
    We believe that the Government should promptly pay for 
services performed, that conform to contract terms and 
conditions in the same manner as other transactions. I would 
also advise you that we have requested that the FAR council 
revise the FAR language.
    We have had meetings to this date with them on contract 
financing payments so that it complies with the intent of the 
law. We have also requested that the Office of Federal 
Financial Management revise OMB circular A-125 so that it, too, 
complies with the intent of the Prompt Payment Act. We hope the 
committee will stress these changes as well in its oversight 
capacity.
    Thank you, Mr. Chairman, and I stand ready for any 
questions.
    [The prepared statement of Mr. Mateer follows:]

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    Mr. Shays. Thank you very much, Mr. Mateer.
    Let me start with you, General McInerney. From your basic 
report, I think you wanted to make the point before we talked 
about Prompt Payment Act that you believe that we have to 
totally re-examine our military from a standpoint of what are 
its core missions as too much into administration and not for 
the combat. We refer to that as the ``Tail-to-Tooth 
Commission.'' And this committee will be looking at that in 
some measure, or are we deferring to other committees on that, 
because I do think it is really one of the very key questions.
    Your point, I think, was that the Prompt Payment Act is a 
tiny, tiny part of the overall. And I am going to accept that 
because I do concur. Even when it is a small part, we are still 
talking billions.
    Mr. McInerney. We think it is important, Mr. Chairman.
    Mr. Shays. Yes, right. And you then made a number or 
recommendations. You, obviously, talked about your deep concern 
about DOD's financial practices, and we have strongly supported 
the outsourcing of key parts of DFAS. In some ways, I almost 
wish this panel goes first and then I can have the other panel 
follow, but it has been an improvement just to have DOD sit in 
with GAO and the inspector general. It has been helpful.
    I am going to take your recommendations and I am going to 
ask Mr. Dinkins and Mr. Mateer and Mr. Kenny, please feel free 
to jump in, what you--I think there is consensus, and you have 
given me the structure to do that.
    One was just general reforms of the Prompt Payment Act. And 
there is consensus here. I think that the service contracts 
should be included. Obviously, you think----
    Mr. McInerney. Yes, sir.
    Mr. Shays. Yes. Mr. Dinkins, that service contracts should 
be----
    Mr. Dinkins. Yes. Without having studied this at any 
length, it sounds reasonable.
    Mr. Shays. It is reasonable but this isn't something you 
have really focused----
    Mr. Dinkins. No. It is not our area of expertise.
    Mr. Shays. Right. Mr. Mateer.
    Mr. Mateer. Yes.
    Mr. Shays. Clearly, yes. OK. The outsourcing of non-core 
DFAS functions, describe to me, first, Mr. McInerney, the 
difference between outsourcing. Oh, excuse me, that was 
basically Mr. Souder's comments and you responded to that. You 
think they haven't even gotten to first base on this issue?
    Mr. McInerney. Not at all. And we have studied very closely 
their RFP. They put out a request for proposal for those two, 
civilian pay and retired annuitant. It is a very convoluted 
request for proposal. It is 3,500 pages, including attachments. 
That stack or pile will go here. They have broken it down into 
four different proposals. And it is in the A-76 process. 
Frankly, Mr. Chairman, I don't think the industry is going to 
bid on it.
    And, of course, they will win. And the danger of that is 
then they have what they call their most efficient 
organization, the MEO and the A-76 process, and they don't 
really jump forward on the latest information technology and 
the latest business practices that industry today is using, and 
which we have a financial sector and people that do this in all 
industries. So they are not able to benchmark the very best 
practices.
    And when they say several years, Mr. Chairman, they mean 
several years. They will say 2 to 3, but I think you will see, 
from being implemented, it ends up being 3 to 5.
    Mr. Shays. One of the discouraging things from my 
standpoint, when we looked at healthcare billings, was that the 
Government would lock into a system that was obsolete 
practically before they even started to implement it.
    Mr. McInerney. That's correct.
    Mr. Shays. Yes. Any comments on that, Mr. Dinkins, Mr. 
Mateer?
    Mr. Dinkins. No.
    Mr. Mateer. No.
    Mr. Shays. Any disagreement about outsourcing, or is this 
just not something you have looked at?
    Mr. McInerney. Could I just add one thing on that so people 
understand? Companies like ADP, Automatic Data Processing, 
Inc., they pay 26 million people a month, 23 million in the 
United States, 3 million outside the United States. They are 
the largest payroll provider in the world. You have Ceridian 
that does 2 to 4 million. So you are often overwhelmed when 
Government witnesses come here, and the numbers that clearly 
DFAS states are correct.
    Mr. Shays. Right.
    Mr. McInerney. It is not the numbers that is so 
significant. It is the processes they are using. Today, with 
computers, no one cares if it is a $1 billion airplane, B-2, a 
$2 billion B-2. The fact is, the process they are using, is 
that the best process?
    Mr. Shays. Yes. I think that comes through pretty loud and 
clear in the hearings and other things we looked at.
    Explain to me what you mean by the fixed-feeder systems.
    Mr. McInerney. Well, the fixed-feeder systems are, you 
know, the services have still large financial people working 
there, and they feed those dollars over to DFAS. Those, as I 
said in my testimony, those parts of their----
    Mr. Shays. OK. I hear you.
    Mr. McInerney. So that interconnecting system needs to be 
improved.
    Mr. Shays. When you refer to the services, I refer to them 
as the branches. Am I----
    Mr. McInerney. The branches, that is correct. Well, Army, 
Navy, Air Force are the services.
    Mr. Shays. OK. Oh, good.
    Mr. McInerney. Same.
    Mr. Shays. And so, your basic point is that what we are 
getting from them is just pretty antiquated?
    Mr. McInerney. That is correct. Time-consuming.
    Mr. Shays. Any comments from others?
    [No response.]
    Mr. Shays. The activity-based costing, want to just explain 
that?
    Mr. McInerney. That is clearly what the private sector 
uses. So you know what each activity costs you. Today, 
unfortunately, in Government, people don't know what it costs 
them to do different business processes. And because they 
don't, they don't know where to focus their effort.
    And you hear the discussions on checks. It costs $8.50 to 
pay a uniform serviceman, but really the fully burdened cost, 
they had an activity-based costing system that could--it is 
probably $12.50. And so, they are not able to identify clearly 
what their costing is.
    And the Congress has directed DOD to go into the activity-
based costing, and they just have not aggressively pursued it.
    Mr. Shays. Continued consolidation? That is the finance and 
accounting, merging the two?
    Mr. McInerney. Well, today the services still have 18,000 
to 22,000. DFAS has roughly 20,000, and the services have, say, 
roughly, 20,000. So we have 40,000 people in the Department of 
Defense in finance and accounting.
    Mr. Shays. And now when you do tooth to tail, that would be 
the tail?
    Mr. McInerney. That is correct.
    Mr. Shays. But if you then outsource, we would still be 
legitimate and utilize the outsourcing costs when we look at 
tooth to tail?
    Mr. McInerney. Yes, sir. What I would say is, I got the 
chairman, General Shelton, when I told him that he had--this 
was a year-and-a-half ago--23,000 in DFAS and not one of them 
pulled a trigger; he went back and did his due diligence and 
found out from the staff that was correct. That is why we are 
working very closely with the Chiefs of--JCS.
    Now, DFAS, the bill is about $1.67 billion today in their 
working capital fund that they get. We think the fully burden 
costs are higher. But the fact is, the private sector benchmark 
standards would probably be about half that, and you could save 
upwards of $800 million by using the very best business 
practices. Then you shift those dollars over to modernization 
that is required.
    Wouldn't take it away from the services because they have a 
major problem in modernization. They are depreciating the force 
at $118 billion--the tanks, airplanes, and that--and last year 
they only modernized at $44 billion.
    So the military is going to break. The aircraft in Bosnia 
today--I am digressing, but to give you feel of the importance 
of this--the average age in Kosovo is 26 years. So our force is 
aging, and this has not been brought up. And that is why what 
you are doing this oversight; it is so important to be looking 
in these areas. The Prompt Payment Act is worthwhile, the look 
you are giving it, because it is part of the overall problem.
    Mr. Shays. And then, finally, you had mentioned about 
creating a board of oversight. I am just going to make a 
comment, and then I will ask the others, too.
    Mr. McInerney. Yes, sir. We think that by having, say, the 
service comptrollers involved and some private-sector people 
that have no vested interest in this, but that bring in the 
outside experience, would be very helpful.
    Mr. Shays. Mr. Dinkins, when you were speaking, I was 
thinking, your basic task is you come in and you help chase the 
dollars and recover them. Then you take a percent of the 
recovered money.
    Mr. Dinkins. Yes, the first task is to identify that there 
was, in fact, an overpayment.
    Mr. Shays. Right. And I am struck by--the gentleman who had 
written ``Up the Organization Man,'' Townsend, I think it was, 
he talked about how salesmen should get whatever they bring in 
business even if they get 10 times more than the president. And 
the foolish company is the one that starts to tell their 
salesmen that they are not going to get paid as much, and they 
start not having the sales.
    So I am sympathetic to the fact that if you are able to 
bring in a certain amount, that you are going to take a percent 
of it, but the one thing I don't want to make is it so easy 
because we are so foolish in our overpayments that you come in 
and quite easily get that. I would rather it be more difficult 
for you. And then you will have earned your percent, which is 
to say, is your assessment--you made comparisons of percent--is 
your assessment when you have looked at this, that there are 
some overpayments that clearly never should have been made?
    Mr. Dinkins. Yes. Well, I would revise that to say that 
overpayments always occur in every organization that we work 
for, which includes the largest corporations around the world. 
They always occur. It is a fact of life.
    Mr. Shays. I realize that. I really do. But it is kind of 
astounding to me to think of $1 billion coming back, and most 
of it, a chunk of it voluntarily. That is a lot of money.
    Mr. Dinkins. Right. It is probably appropriate to comment 
here; there was some prior discussion about that fact. In the 
private sector, there is no obligation to tell another private-
sector company that they have been overpaid. And I think that 
is the same situation you will find with the Government.
    You will find instances----
    Mr. Shays. So I hear you clearly, you mean there is no 
obligation for the company to return the money?
    Mr. Dinkins. Absolutely. Unless it is found--actually, in 
many cases they don't know where to apply it. So they don't 
even, in fact, know they have been overpaid. They just know 
that they have unapplied cash sitting in an account and don't 
know what to tag it.
    Mr. Shays. Must be wonderful.
    Mr. Dinkins. So they let it sit there until it is 
identified and that they have something to tag it to. And then 
they are happy to give it back.
    And, you know, a further point of view is that----
    Mr. Shays. So that really argues for making sure we don't 
overpay?
    Mr. Dinkins. Yes, but even as diligent as you will be on 
the front end of that process, there will always be 
overpayments. And this process is one to ensure that they are 
identified and recovered.
    Mr. Shays. Especially when you have archaic systems.
    Mr. Dinkins. Yes.
    Mr. Shays. I mean, if you have already made a payment and 
you get an invoice that says you owe a 100 percent when you 
have paid 30 percent already, and you just don't have that on 
your records because you can't compare the data, you are going 
to make overpayments you should never make.
    Mr. Dinkins. Yes, but this is not a unique situation to the 
Federal Government. You can go to--I mean, the people who get 
the money last in every organization tends to be accounts 
payable in back-office financial systems.
    Mr. Shays. Yes. I learned something about the private 
sector. And the difference is, when the private sector is 
foolish, they go out of business. And I remember Combustion 
Engineering; they went out of business. And they had two 
buildings, and the CEO didn't like the fact that the 
underground passageway sloped down. He wanted it straight 
across. And he spent a half a million dollars to have a 
straight tunnel instead of a sloping one. And I thought, if we 
had done that in Government, we would have been very 
criticized. I don't use the private sector always as the 
benchmark.
    Mr. Dinkins. Right.
    Mr. Shays. But, with the private sector, especially when 
times aren't good, they go out of business. So we don't have 
that same kind----
    Mr. Dinkins. True, but their priorities are different. For 
example, if a large retailer has $100 million to spend, they 
are more likely to spend it on new stores and merchandise as 
opposed to fixing a back-office system. But they do get around 
to fixing these things.
    Mr. Shays. Yes.
    Mr. Dinkins. It is probably worth mentioning that this 
process of recovery auditing is a repetitive process that just 
goes on year after year, and try as our clients will to clean 
it up, there are always overpayments.
    Mr. Shays. Right. You are still going to have work from 
DOD; I just want to make sure that we reduce. I think that any 
organization--I go back to my first point, the salesman who 
makes the sale should get that percent. If you are able to 
recover money that we wouldn't have recovered otherwise, God 
bless you.
    Mr. Dinkins. One thing to keep in mind though: This is a 
little bit like an automotive assembly line. For every minute 
that goes by, it is one more car that doesn't come off the line 
if it stops. And this process is similar in the sense that you 
can only go back so far before the records become too aged. In 
the private sector, typically, this year we would be auditing 
last year--not 4 and 5 years ago.
    And so I would encourage the committee to think about how 
to expedite the process such that it is more current to the 
transaction.
    Mr. Shays. Well, I am left with one bias, and that is that 
privatization or outsourcing is more important in the public 
sector because what we pay our employees and our ability to 
modernize is, I think, a greater lag in the public sector. And 
so I don't think we are always able to be on the cutting edge. 
The private sector, I think, clearly has a better option.
    Let me ask each of you if you would like any closing 
comments. And, Mr. Kenny, is there any comment you would want 
to make, any statement that you would like to--any observation, 
actually?
    Mr. Kenny. No.
    Mr. Shays. OK. Mr. Mateer.
    Mr. Mateer. I have no additional comments.
    Mr. Shays. OK. Mr. Dinkins.
    Mr. Dinkins. No, sir.
    Mr. Shays. Thank you. I really appreciate your testimony. I 
think it is very helpful. And we obviously have lots of 
opportunities here. Thank you very much.
    This hearing is closed.
    [Whereupon, at 12:02 p.m., the subcommittee was adjourned.]

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