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





 OVERSIGHT OF THE FINANCIAL MANAGEMENT PRACTICES AT THE DEPARTMENT OF 
                                DEFENSE

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 4, 1999

                               __________

                           Serial No. 106-80

                               __________

       Printed for the use of the Committee on Government Reform


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

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
62-467 CC                   WASHINGTON : 2000




                     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 Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
   Bonnie Heald, Director of Communications/Professional Staff Member
                          Mason Alinger, Clerk
                     Faith Weiss, Minority Counsel




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 4, 1999......................................     1
Statement of:
    Mancuso, Donald, Acting Inspector General, Department of 
      Defense, accompanied by Robert Lieberman, Assistant 
      Inspector General for Audit, Department of Defense; Gene 
      Dodaro, Assistant Comptroller General for Accounting and 
      Information Management, General Accounting Office, 
      accompanied by Lisa Jacobson, Director of Defense Audits, 
      Accounting and Information Management Division; and William 
      Lynn, Under Secretary of Defense, Chief Financial Officer, 
      Department of Defense, accompanied by Nelson Toye, Deputy 
      Chief Financial Officer, Department of Defense.............     8
Letters, statements, et cetera, submitted for the record by:
    Dodaro, Gene, Assistant Comptroller General for Accounting 
      and Information Management, General Accounting Office, 
      prepared statement of......................................    43
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Lynn, William, Under Secretary of Defense, Chief Financial 
      Officer, Department of Defense, prepared statement of......    76
    Mancuso, Donald, Acting Inspector General, Department of 
      Defense, prepared statement of.............................    12
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     5

 
 OVERSIGHT OF THE FINANCIAL MANAGEMENT PRACTICES AT THE DEPARTMENT OF 
                                DEFENSE

                              ----------                              


                          TUESDAY, MAY 4, 1999

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Biggert, Ose, and Turner.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, director of communications, professional 
staff member, Mason Alinger, clerk; Richard Lukas, intern; 
Faith Weiss, minority counsel; and Earley Green, minority staff 
assistant.
    Mr. Horn. We're here today to discuss the status of the 
efforts at the Department of Defense to correct long-standing 
financial management problems. Again, in fiscal year 1998, 
auditors were unable to express an opinion on the financial 
statements of the Department of Defense or any of its services. 
Pervasive, crosscutting problems continue to plague the 
Department.
    These weaknesses in financial management result in wasted 
resources and undermine the Department of Defense's ability to 
manage its annual budget, which exceeds $250 billion. In 
addition, these problems cause inefficiencies and 
ineffectiveness in the Department's management and oversight of 
approximately $1 trillion in assets, assets such as weapon 
systems, aircraft, vessels and related inventory and supplies.
    In our March 31 hearing on the second annual governmentwide 
audit, the Comptroller General, when asked which Federal agency 
had the most significant financial management weaknesses, 
quickly responded ``DOD, the Department of Defense.''
    This subcommittee has held numerous hearings exploring a 
wide array of issues facing the Department of Defense. We take 
seriously the need to resolve these financial management 
problems, as I'm sure the Department of Defense does.
    We will explore these issues in greater detail today. We 
want to know what the Department of Defense is doing to resolve 
these deficiencies, both in the short term and in the long 
term. We need to be sure that we have a commitment of the top 
executives in the Department to resolve these issues.
    These problems are severe. We cannot allow them to persist, 
and I'm looking forward to the testimony.
    We have a very fine panel this morning. If we would have it 
on the front of my binder, it would help. We're going to have 
essentially one panel.
    The opening witness will be the Acting Inspector General of 
Defense, who will be followed by the Assistant Comptroller 
General, the Under Secretary of Defense, and the Chief 
Financial Officer.
    The routine in this subcommittee as part of the full 
committee is to swear in all witnesses. When we call on you, 
that statement is automatically put in the record in full. What 
I would like to do this morning is give you a great liberality 
to an oral statement; roughly 10 minutes for each principal 
witness; then, we would like to spend the rest of the time on 
dialog and questioning between both sides.
    [The prepared statement of Hon. Stephen Horn follows:]
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    Mr. Horn. Mr. Turner has joined us. And, Mr. Turner, you're 
free as ranking member to make an opening statement. You're 
just in time.
    Mr. Turner. Well, since I'm a little late, I will ask the 
Chair if I can file my opening statement for the record.
    [The prepared statement of Hon. Jim Turner follows:]
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    Mr. Horn. We will have it filed for the record as if read. 
We're delighted to see our colleague this morning. It's sort of 
a quiet day around here, but that will change as the morning 
goes on.
    So, if you will stand with the people that will also give 
answers behind you, I want everybody sworn in at once. Just 
raise your right hands.
    [Witnesses sworn.]
    Mr. Horn. We have seven witnesses or potential witnesses.
    We will start with Mr. Donald Mancuso, the Acting Inspector 
General, Department of Defense. Mr. Mancuso is accompanied by 
Mr. Robert Lieberman, Assistant Inspector General for Audit, 
Department of Defense.
    So, Mr. Mancuso, go ahead.

    STATEMENTS OF DONALD MANCUSO, ACTING INSPECTOR GENERAL, 
    DEPARTMENT OF DEFENSE, ACCOMPANIED BY ROBERT LIEBERMAN, 
 ASSISTANT INSPECTOR GENERAL FOR AUDIT, DEPARTMENT OF DEFENSE; 
 GENE DODARO, ASSISTANT COMPTROLLER GENERAL FOR ACCOUNTING AND 
INFORMATION MANAGEMENT, GENERAL ACCOUNTING OFFICE, ACCOMPANIED 
 BY LISA JACOBSON, DIRECTOR OF DEFENSE AUDITS, ACCOUNTING AND 
   INFORMATION MANAGEMENT DIVISION; AND WILLIAM LYNN, UNDER 
 SECRETARY OF DEFENSE, CHIEF FINANCIAL OFFICER, DEPARTMENT OF 
  DEFENSE, ACCOMPANIED BY NELSON TOYE, DEPUTY CHIEF FINANCIAL 
                 OFFICER, DEPARTMENT OF DEFENSE

    Mr. Mancuso. Thank you. Mr. Chairman and members of the 
committee, I appreciate the opportunity to be here today, to 
discuss the significant challenges facing the Department of 
Defense in the financial management area and the progress made 
since your last hearing on these matters just over a year ago.
    I would like to begin by underscoring both the critical 
importance of sound financial management and the unavoidable 
complexity of finance and accounting operations in an 
organization as large as the Department of Defense. The 
Department is the largest holder of U.S. Government physical 
assets, has the most employees, owns the most automated 
systems, administers the most complicated chart of accounts, 
and manages the most diverse mix of operating and business 
functions of any government agency.
    The end of the cold war and the downsizing of the Defense 
budget caused many profound changes in the Department. For 
example, it was evident that administrative processes of all 
kinds, including finance and accounting, in their current forms 
were neither affordable nor capable of keeping pace with 
rapidly changing management practices and information 
technology.
    Likewise, individual DOD components have been allowed to 
develop several hundred finance and accounting automated 
systems, whose interoperability among themselves and with 
nonfinancial systems was generally poor.
    In my office's estimation, achieving full integration of 
DOD support operations, including financial management, is far 
from complete. It will require sustained and probably even 
intensified commitment by both the Congress and the Department 
and will certainly take several more years.
    The Department has not been able to comply with the 
requirements for automated financial statements levied by the 
Chief Financial Officers Act, the Government Management Reform 
Act, and the Federal Finance Management Improvement Act. The 
results of the audits of the DOD financial statements for 
fiscal year 1998, when viewed solely in terms of audit 
opinions, were identical to the previous poor results.
    My office and the Auditors General of the Army, Navy and 
Air Force issued opinion reports earlier this year. Only the 
Military Retirement Trust Fund received an unqualified clean 
audit opinion. Disclaimers of opinion were necessary for the 
consolidated DOD statements, as well as all other major fund 
statements.
    The Department lacks systems capable of compiling financial 
reports that comply with Federal accounting standards and laws, 
nor will those systems be in place for several more years. Much 
effort is being expended, however, to compensate for inadequate 
systems and to achieve improvement. It is likely that one or 
more of the major fund entities below the DOD level will 
achieve a clean or unqualified opinion during the next 1 to 3 
years and various smaller entities are likely to do so as well.
    Although such indicators of progress may be good for 
morale, favorable opinions on fragments of the Department's 
financial reports have limited actual importance if the 
consolidated statements remain fundamentally flawed. The 
prospect for favorable audit opinions on the consolidated DOD 
financial statements in the near term are not good.
    We believe that focusing on audit opinions as the primary 
indicator of financial management and improvement may well 
incentivize some Federal managers merely to want to shop around 
for favorable audit opinions on annual statements, instead of 
focusing on the usefulness of all financial reports and the 
adequacy of management controls.
    An agency could conceivably develop workaround procedures, 
actually bypassing its official accounting systems, that would 
function well enough to achieve a favorable audit opinion on 
its consolidated financial statements.
    Unfortunately, failure to fix those systems and related 
control weaknesses would leave program managers still unable to 
rely on the various financial reports that they need to conduct 
day-to-day business. Several other sources of insight into the 
Department's progress should be considered in addition to audit 
opinions.
    First, the previously mentioned extensive audit reporting 
provides considerable information. Second, numerous action-plan 
milestones have been created in an effort begun in mid-1998 by 
the Office of Management and Budget, the General Accounting 
Office, the DOD Chief Financial Officer and my staff to develop 
sound action plans for implementing the new Federal accounting 
standards.
    Third, progress toward making financial and nonfinancial 
feeder systems compliant with applicable laws, regulations and 
new accounting standards is an excellent indicator of how well 
the system deficiencies that are the root cause of inaccurate 
financial reporting are being addressed.
    We recently issued a report that assessed the Biennial 
Financial Management Improvement Plan whose first version was 
provided by DOD to Congress last September as a response to a 
tasking in the National Defense Authorization Act for fiscal 
year 1998. We concluded that the plan's focus on systems was 
very appropriate, although much can be done to improve it as a 
reporting vehicle to the Congress.
    Another major step would be to develop more effective 
internal DOD management mechanisms. It is useful to compare the 
well-focused reporting now being regularly provided to senior 
managers and Congress on the Y2K compliance status of several 
thousand DOD systems with the rather unfocused information 
available annually on the CFO compliance status of about 200 of 
those same systems.
    As you know, the DOD struggled at first with the year 2000 
conversion, because definitions of terms like ``compliant'' and 
``certified'' were unclear, but there was insufficient 
management control of the overall program; and many functional 
managers and commanders initially remained uninvolved. So far 
the same kinds of problems have hampered the financial 
management system improvement effort.
    We look forward to helping the Department learn from the 
Y2K experience and establish an approach that will allow senior 
managers and Congress to know exactly how well each DOD 
management sector is supporting the DOD system improvement 
goals.
    Mr. Chairman, my written statement discusses several other 
challenges confronting the DOD financial community in addition 
to financial reporting. I would, however, like to emphasize my 
concern about information assurance. As the recent hacker 
attack against the NATO website and the so-called Melissa virus 
incident demonstrated, any automated system may be attacked or 
misused.
    My office has been working closely with the Defense 
Information Systems Agency and the Defense Finance and 
Accounting Service over the past several years to address this 
problem. We have issued 20 audit reports during the 1990's on 
security matters related to DFAS and made over 200 
recommendations.
    The Defense Criminal Investigative Service, the 
investigative arm of our office, recently established an 
information infrastructure team. This new unit works in 
partnership with other law enforcement organizations and the 
Defense Information Systems Agency to react immediately to 
system penetration incidents involving any part of the 
Department. Additionally, we have a special agent assigned 
full-time to the FBI National Infrastructure Protection Center.
    Knowing this subcommittee's leading role in monitoring 
efforts to combat the so-called millennium bug, I also want to 
emphasize we've been auditing the DFAS Y2K conversion problem 
continuously since mid-1997. DFAS has been responsive to audit 
advice and has made great progress in ensuring that its 41 
mission-critical systems will be able to function; however, 
much remains to be done.
    Of those, 13 systems missed the OMB compliance goal of 
March 31, 1999; and DFAS still faces formidable challenges in 
terms of ensuring robust end-to-end testing and formulating 
realistic contingency plans.
    In summary, the DOD financial management community faces 
major challenges and needs the active support of senior 
departmental managers and the Congress. My office will continue 
to place heavy emphasis on DOD finance and accounting 
operations. We'll be keeping all stakeholders, the Department, 
Congress, OMB, and the public informed of our audit and 
investigative results. Thank you.
    Mr. Horn. Thank you. You actually have 3 minutes to go. So 
thanks for the rapid summary, it was very good.
    [The prepared statement of Mr. Mancuso follows:]
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    Mr. Horn. We now deal with the General Accounting Office, 
Mr. Gene Dodaro, the Assistant Comptroller General for 
Accounting and Information Management. He is accompanied by Ms. 
Lisa Jacobson, the Director of Defense Audits, same division.
    Mr. Dodaro.
    Mr. Dodaro. Thank you, Mr. Chairman. Good morning to you, 
Congressman Turner, Congressman Ose. We appreciate the 
opportunity to be here today to talk about the need to 
strengthen financial management at the Department of Defense.
    A few weeks ago, I was before this committee and we were 
talking about the major challenges confronting the Federal 
Government in receiving a positive opinion on the consolidated 
statements of the Federal Government. DOD represents a 
significant portion of its assets and liabilities. And, indeed, 
over half of all discretionary spending of the Federal 
Government. Addressing the financial management weaknesses at 
the Department of Defense is an integral part of achieving the 
administration's goal of having an unqualified or clean opinion 
on the financial report of the entire Federal Government.
    Equally as important, however, if not more critical, is the 
need to strengthen financial management at the Department to 
better demonstrate accountability over billions of taxpayer 
dollars and also to provide more reliable and timely 
information in order to manage the Department's vast operations 
more efficiently. The Department recognizes these potential 
benefits, and I'm pleased to report this year that they've 
accelerated their efforts to address these problems that have 
been plaguing them for a number of years.
    But we also need to recognize that these problems are 
pervasive. They're serious, and they need to be corrected in a 
very large decentralized organization. As a result, it's going 
to take time. It's going to take a lot of effort, and it will 
take dedicated top-level attention in the Department similar 
to, as Mr. Mancuso mentioned, the effort being put forward on 
the year 2000 problem, to really make some progress.
    Now, while the challenges are great at improving financial 
management at DOD, so are the potential benefits. No. 1, 
improving financial management over at the Department of 
Defense would help address known inefficiencies that are 
draining resources away from readiness and other priorities, 
such as modernizing weapons systems.
    For example, it's widely recognized that problems in having 
adequate visibility over assets has led to greatly increased 
costs of military operations such as Desert Storm.
    It's also well known and well documented that inventories 
are incomplete and not accurate at the Department and, as a 
result, this is a contributing factor to hundreds of millions 
of dollars in uneconomical purchases and also has an impact on 
readiness.
    Also good financial management information is really a 
critical foundation to identifying and implementing other 
management reforms. For example, questions have been raised 
about the cost savings occurring from base closures because of 
the lack of good historical data at the Department.
    Now, when we look at this, we always see that savings 
indeed happen, but the timing of when the savings occur and the 
exact amount to be saved always do not come to pass because of 
the difficulty in making the estimates. Also when the 
Department compares its internal operations to those of the 
private sector in arriving at decisions on outsourcing options, 
it's difficult to make a decision if you're a Department 
manager on what's the most economical option to pursue because 
there's not good historical information on the costs of their 
operations.
    And it is also well recognized within the Department that 
the cost accounting systems to track life-cycle costs of weapon 
systems are not what they need to be, and they need to be 
improved. Third, there's a need to make sure there's better 
financial management to track the status of budget resources.
    There was approximately over $9 billion of differences this 
past year between DOD's records and the Department of 
Treasury's records. And you can well imagine what the 
significance of that would be if you're trying to balance your 
own checkbook with that of a bank. And, indeed, not balancing 
results in some difficulties. For example, during the 1998 
audit, the auditors came across a deposit that the Army had 
made in 1991, 7 years earlier, that was supposed to be an over 
$2 million deposit in the bank. Well, the bank, because of an 
error, only recorded that deposit at less than $3,500.
    So until the reconciliations got started, this went 
undetected for a 7-year period. Once it was discovered, the 
bank repaid the Federal Government the $2.1 million plus 
$640,000 of interest; but during that 7-year period, the 
government was deprived of this money. And as most of you know 
during many of those years, we were borrowing to fund the 
general operations of the government. So the need to do these 
reconcilations is very important.
    Also, audits have discovered where sometimes budget 
authority might lapse. There are budget resources that are 
encumbered or obligated that may not be deobligated and used 
for other sources, and in still other instances, there are some 
concerns whether or not the Department has exceeded budget 
limits that have been set by the Congress. So this whole area 
is one where better financial management would lead to sound 
budget integrity which is one of the key goals of the CFO Act.
    Now, the Department recognizes the importance of these 
problems and this past year has accelerated its effort, put 
more resources on it. We're having a very constructive dialog, 
as Mr. Mancuso outlined, coming up with short-term plans, as 
well as highlighting some of the longer-term issues that need 
to be dealt with.
    Now in the short term, what needs to be done? No. 1, the 
data in the existing systems the Department is using needs to 
be better in terms of being cleaned up, and following control 
procedures that aren't followed. The existing systems could 
produce better information as the Department focuses on 
implementing procedures that are in place or making some 
modifications to those procedures.
    Second, accounting standards are in place across the 
Federal Government. The Department has not yet fully 
implemented, then for example, in the environmental disposal 
area. They need to implement those standards; they're working 
on that. But those need to be put in place and procedures 
followed. The Department also needs to balance its checkbook 
with the Treasury Department. That needs to be cleaned up, 
because every day billions of dollars are spent.
    If these records are not cleaned up from the beginning, 
they're just going to snowball and have a cumulative effect of 
never being able to be unraveled over time.
    Also the Department needs to have better financial 
management training for its employees. The requirements for 
Federal financial management have been increased through the 
CFO Act and other mandates that the Congress has legislated to 
achieve financial management reform, but there needs to be 
commensurate training that for the financial management work 
force in the Department. We made some recommendations along 
those lines for minimum training requirements. Training needs 
to be revamped.
    One of the key goals of the CFO Act was to upgrade the 
qualifications of financial management personnel across the 
government. That needs to be done in order for these changes to 
come to fruition. Also in addressing the long term, the 
Department had a major step this past year in issuing its first 
biennial financial management improvement plan. That plan was a 
good start. For the first time DOD recognized that systems, 
other than just the finance and accounting systems, need to be 
revamped. Such as logistics systems that are used to track 
inventories, and property management systems. Indeed, 80 
percent of the information to prepare the financial statements 
comes from outside the financial sphere, and so they need to 
involve people across the Department.
    This plan begins that process. They've also committed to 
update this plan annually, which is a good step forward. And 
we've made some recommendations, as they do that, to 
incorporate more requirements into that plan to make sure that 
they, indeed, do in the new systems that are developed have--
first of all, a smooth transition from the existing systems to 
their new environment in the future; that they build in 
requirements to have data integrity in the new systems so you 
don't just have modern updated systems but still have the data 
integrity problems because they're not following procedures; 
and they really need to improve their activities to implement 
information technology reform, and embody the Clinger, Cohen 
amendments that the Congress has levied in 1996 to develop IT 
investments in modular projects to have good cost investment, 
disciplined processes.
    The Department is committed to put in place the 
requirements of that legislation, but it's yet to fully 
implement them. That will be very important if the Department 
is ever going to have modern management systems that will work 
effectively and produce all the requirements.
    In closing, let me commend this committee for its diligent 
oversight in this area. It's really the series of hearings that 
have been held over the past few years on DOD financial 
management that have been very important to helping stimulate 
and encourage the type of constructive dialog we've had with 
the Department. And we
look forward to continuing to work with this committee and with 
DOD in really making financial management reform a day-to-day 
reality at the Department.
    Thank you very much. I would be happy to answer questions 
after all the witnesses have given their statement.
    [The prepared statement of Mr. Dodaro follows:]
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    Mr. Horn. Well, we thank you and the GAO for that very 
thorough statement.
    Our last witness this morning is the Honorable William 
Lynn, the Under Secretary of Defense, Chief Financial Officer 
of the Department of Defense. And he's accompanied by Mr. 
Nelson Toye, the Deputy Chief Financial Officer, Department of 
Defense.
    Mr. Lynn.
    Mr. Lynn. Thank you very much, Mr. Chairman. I was going to 
thank you for the opportunity to be here, but since you've 
sworn me in, I thought better of that.
    Mr. Horn. Right.
    Mr. Lynn. I do appreciate you putting the full statement in 
the record, and I will just try and summarize it in the 10 
minutes that you've allotted. Let me start, you know----
    Mr. Horn. You can take more time if you want.
    Mr. Lynn. Let me start by stressing what both Mr. Mancuso, 
Mr. Dodaro said is that the effort in financial management 
reform is important. It is a priority at the highest levels of 
the Department, starting with Secretary Cohen and Deputy 
Secretary Hamre and, I, as the Chief Financial Officer and the 
implementer of their will on this.
    And I want to talk about the progress we've made so far and 
what our plans are for further progress over the next several 
years.
    In terms of where we are right now, what progress we've 
made so far, the way I would describe it, we've laid the 
foundations for a massive shift of the DOD financial management 
systems from a 200-year focus on an obligation-based system 
toward a more commercial style accrual-base system.
    This is not an easy shift, particularly, with an operation 
the size of the Department dwarfs any private sector enterprise 
that dwarfs any other government enterprise. But we need--
despite the challenge, we need to be able to do this for 
exactly the reasons Mr. Dodaro cited in his testimony, which I 
would summarize as cost visibility and public confidence, in 
terms of the accounting systems and the finance systems where a 
good portion of the Nation's tax dollars are spent.
    The foundations that we've laid here are three. First was 
the creation of DFAS by the prior administration in 1991. The 
Defense Finance and Accounting Service is the critical, pivotal 
agent for financial management reform. The creation of DFAS has 
allowed to consolidate financial operations, eliminate non-
Chief Financial Officer compliant finance and accounting 
systems, and fundamentally reengineer our business practices to 
accomplish these goals.
    The second major foundation is that of consolidation. Since 
1991, we've consolidated from 330 Defense accounting offices 
down to 5 centers and 20 operating locations. This is a 
reduction of over 90 percent. It's been accomplished in 7 
years. That's 2 years earlier than planned. It saved us money; 
but probably, more importantly, it's eliminated redundancy and 
facilitated the standardization and improved the accuracy and 
time limits of all of our financial operations.
    And that's, in fact, the third element of the foundation of 
these financial reforms is that consolidation. To remedy the 
problem we had of too numerous and incompatible finance and 
accounting systems, DFAS embarked on a major streamlining 
effort. We started in 1991 with 324 finance and accounting 
systems. We are on a path to reduce that by 90 percent, down to 
32 by 2003. We're just over 100 right now.
    The number of 100 compares favorably with most fortune--or 
the top Fortune 500 companies. The number of 32 will put us in 
the upper tier of those companies. And we are right now on 
track to do that. But the objective is not simply to reduce the 
number of finance systems. The consolidation effort, rather, is 
meant to eliminate outdated financial management systems and 
replace them with systems that provide more accurate, more 
timely, and more meaningful data to decisionmakers.
    It's that data that gives you the cost visibility that 
gives the taxpayers the confidence that we are, indeed, good 
stewards of the national defense resources. With those 
foundations which, as I say, we just completed the 
consolidation effort, in the last year and we're about two-
thirds of the way through the effort to streamline our finance 
and accounting services, we've been able in the last year to 
turn to next steps. And those next steps have been alluded to 
by the previous two witnesses.
    They focus now on an area that we have not focused as 
heavily on because we were not able to, but we can now focus on 
the achievement of clean opinion on an auditable financial 
statement. With the foundations laid by DFAS's consolidation of 
the accounting stations and the financial management systems, 
we are able to take the next steps of focusing on a clean audit 
opinion.
    We've been working closely on the last year with our 
partners at GAO and the Inspector General, who are here, as 
well as the Office of Management and Budget, to develop both a 
short-term and a long-term strategy. Why do we need two 
strategies? The fundamen- tal fact is the long-term strategy, 
as Mr. Mancuso indicated, requires a complete overhaul of the 
Department's management information systems. Now, that goes far 
behind the improvements in the finance and accounting systems 
that I described just a moment ago.
    As was indicated earlier, more than 80 percent of the data 
that is on a finance--on our financial statement comes from 
outside the financial systems. It comes from the logistics 
systems. It comes from the personnel systems, from the 
acquisition systems, from the medical systems. So in order to 
achieve a clean financial opinion, we need to integrate those 
systems into our reporting chain.
    That requires upgrades of those systems so that they're CFO 
compliant and it requires improved interfaces with the 
financial systems. The financial management improvement plan 
that we submitted this past fall is the first step in that 
effort. We need to improve on that plan, but we think that lays 
a cornerstone in our effort to get a clean opinion.
    While there's no substitute, as Mr. Mancuso indicated, for 
the system changes, in terms of achieving the long-term goals, 
those goals will take several years, maybe more than several 
years. Accordingly, we've developed a short-term strategy to 
try and acceler- ate the achievement of a clean opinion on our 
financial statements.
    We've been working with the GAO and the Inspector General 
and OMB to develop this strategy. They've been very helpful in 
identifying the major deficiencies in our financial management 
reporting. And we've focused a series of interim methodologies 
on each of those deficiencies to try and narrow the deficiency 
down, such that we would at least be able to achieve a clean 
financial opinion in advance of getting all the systems 
improvements that are in the pipeline now.
    Let me just give you one or two examples of what we're 
doing. Probably the best example is in the area of real 
property, real property--and personal property as well. The 
problem we have there is the Department only keeps paperwork 
for 6 years and 6 months, most 6 our--almost all of our real 
property and much of our personal property has been around much 
longer than that.
    The paperwork for those properties, however, is no longer 
around. That's a problem for the auditors. We don't have an 
audit train that goes back to the acquisition of that property 
and goes through to the current time. I think all of us agree 
that the auditors, as well as DOD, agree that it would not be 
worth the effort to try and find the receipt for, say, West 
Point. It's not a helpful project. On the other hand, it is a 
useful step to know what the value of that property is.
    And so what we've undertaken with two CPA firms is for them 
to develop a methodology for us to value our current inventory 
of both real property and personal property and then to set up 
a system that will continually update those valuations so that 
they will be usable for audit purposes. That's an example of 
the kinds of interim methodology that addresses one of the 
principal deficiencies that cause the Department not to be able 
to achieve a clean opinion on its financial statements.
    Let me just conclude by saying the Department takes full 
responsibility for its financial stewardship. We take that 
responsibility seriously. As I say, it goes straight to the 
top, to the Secretary. We're taking substantial steps in the 
direction of reform. As I mentioned, we've already taken the 
steps to lay the foundation with DFAS and the consolidation of 
the accounting stations, as well as the finance and accounting 
systems.
    We are now expanding that effort to include all of the 
feeder systems that involve the 80 percent of the data outside 
the financial systems. And we're working with GAO, the IG, and 
the OMB to develop an interim approach to try and achieve an 
even more accelerated goal of clean financial opinion.
    But I think we always need to remember that as we go 
through this effort, that this is an effort that the Department 
cannot stop to achieve. Every month we have to pay our 2 
million members of the military, both active and reserve, our 
700,000 civilians. We have to pay $24 billion a month in 
contractor and vendor payments. None of that can stop.
    So financial management for the reform for the Department 
of Defense is a lot like changing the wheels on an automobile 
without stopping. We've changed one or two of those wheels; we 
are not all the way there. We will not stop, though, until we 
achieve our overall goals. Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Lynn follows:]
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    Mr. Horn. Well, we thank you. I don't envy you your 
responsibilities. And I appreciate your statement.
    We're going to allow 10 minutes to each Member for 
questioning. We will alternate, and the chairman's time will go 
to Mr. Ose for 10 minutes and then the ranking member, Mr. 
Turner, and then the vice chairwoman, Mrs. Biggert.
    So, Mr. Ose, 10 minutes on questioning.
    Mr. Ose. Thank you, Mr. Chairman.
    My questions are primarily directed to Mr. Dodaro. I have 
read your testimony. I have a couple of questions. I think they 
boil down to really a concern on my part as highlighted on page 
15 and 16, regarding training of personnel, page 15 at the 
bottom and page 16 at the top.
    There is a comment in there, ``It is essential that DOD 
also establish a well-trained cadre of financial management 
personnel. ``And at the risk of cherry-picking this testimony, 
I'm going to hop forward a couple of paragraphs, where it also 
makes the comment that over half of those surveyed had received 
no financial or accounting-related training during 1995 and 
1996.
    First of all, the DOD has a cadre--I hate that word--but a 
group of accountants that it uses to establish the books. Do 
they come out of the military? Do they come out of military 
training? Do they come out of business school? Where do these 
folks aggregate to us from?
    Mr. Dodaro. Yes. Most of the accounting technicians are 
from the civilian work force. Part of the issue here--and 
really this is an issue across the Federal Government, but it's 
most acute in the Department--is that in many cases, the 
accounting functions could be best described as administrative 
backwater functions over the years. This occurred until there 
were requirements to prepare financial statements which started 
in fiscal year 1996, which was the first year these 
requirements were in place across the government.
    So there were in place a lot of technicians or clerks, 
voucher-processing people, and really there was not a great 
deal of attention given to training of those people over time, 
which was our point to the Department. We went out and we 
compared the type of training activities that occur in leading 
organizations in the private sector and in State governments, 
where they have had audited financial statements for a number 
of years, and good financial management operations, and we 
asked, ``How much do you devote to training?''
    And they came back and said, we devote quite a bit of 
effort, resources and time to do that. We believe, unless 
there's minimum training requirements established and a 
training curriculum put in place for the Department, that 
there's going to be continual difficulties. Part of the 
recurring audit problems, Congressman Ose, largely revolve 
around failure to follow established procedures that are in 
place, not doing these monthly reconciliations that I mentioned 
at Treasury Department. So training is really important.
    And I understand that the Department has been reluctant to 
set minimum requirements then that implies a resource 
commitment to this organization of people to bring them up to 
the level in which they're been held accountable now. And 
that's really important.
    Mr. Lynn. If I could jump in.
    Mr. Ose. Mr. Secretary.
    Mr. Lynn. I think what Mr. Dodaro said is true. In the past 
we have been reluctant to set standards. In fact, we are now 
undertaking an effort that would set standards and 
certification to those standards.
    Mr. Ose. For the personnel?
    Mr. Lynn. For the personnel. We set up a new school in 
Massachusetts with the curriculum toward this end. We're 
working with the American Society of Military Comptrollers in 
terms of an effort to do that certification, to have an 
objective set of criteria by which to judge people. And we 
agree with Mr. Dodaro that more efforts need to be put into 
training. That's actually not, I think, limited to financial 
management. I think that's government generally.
    One of the things that we've found, in general, is that the 
Federal Government does not spend nearly as much on training 
its people as private sector people, private sector companies 
do across the board. And the Secretary is committed to 
improving that across the board, and we've taken steps in the 
financial management area in particular.
    Mr. Ose. As a freshman I would hasten to add, I wish they 
would have some congressional training for Members, but it's 
not just on that side of the table.
    Mr. Dodaro. Congressman Ose, one of the things we point out 
in those paragraphs that you're citing is that there's a well-
defined program that has been put in place in the acquisition 
community in the Department of Defense, because there has been 
problems over the years and because of the billions of dollars 
that that organization handles, now there's certification 
requirements and training programs; and we think the same level 
of effort needs to be given to financial management. So I'm 
glad you raised that question.
    Mr. Ose. I don't know how to handle a problem unless the 
person handling it is well trained. You can see how I'm 
flailing about up here. I can imagine how it is out there.
    I do want to note that there's a couple of spots under the 
short-term improvements notation in some of these paragraphs 
where accounting standards are in the process of being 
implemented. I specifically want to go to the citation on page 
9 related to the Air Force in differentiating between national 
defense assets and property plant and equipment. This indicates 
that we're in the process of implementing that. I would 
appreciate a status report if anyone has information as to 
however along that is.
    Mr. Dodaro. Sure. The basic standard changed abit for 
fiscal year 1998. Let me back up and explain the way that 
standards are set. There's a Federal Financial Accounting 
Standards Advisory Board that has been created by the Director 
of OMB, the Secretary of Treasury and the Comptroller General, 
and they recommend standards to OMB and GAO and then they're 
adopted and put into effect.
    One of the fundamental issues that they've been focusing in 
on is while they use commercial accounting standards to the 
extent they make sense for the Federal Government, is to really 
tailor the standards to the unique requirements of the Federal 
Government. Nowhere is this more applicable than in the 
national defense arena, where you really don't always have 
comparable standards. This area is very unique.
    So the requirements for 1998 were to take mission assets, 
weapons systems, et cetera, off the balance sheet because 
everybody agreed it didn't make any sense to depreciate 
carriers over a period of time. The change put them in a 
separate stewardship statement, whereby there would still be 
accountability for quantities of those assets, have some 
information on the level of investment that we're making as a 
country in weapons systems development, and there would be 
responsibility for tracking additions and deletions over time. 
And that standard is still under review as to exactly what type 
of reporting would best be useful to the users of the financial 
statements.
    But the basic idea was to treat mission assets differently 
than you would treat the buildings used on bases in the normal 
support, real property, land and buildings and personal 
property, desks, computers, et cetera, that carry out normal 
business functions. And the Department is in the process now of 
separating that out. There are some gray areas, obviously.
    Mr. Ose. How far along is the separation?
    Mr. Dodaro. Let me ask Ms. Jacobson to answer that. And I'm 
sure the Comptroller's office has some information on it.
    Ms. Jacobson. They basically have just begun going through 
the individual kinds of assets and trying to separate them 
between the various categories, between weapons systems and 
other types of property. Part of that is because the definition 
did change under the standard this year, to try to clarify some 
ambiguous items. So they are in the process. They are working 
on it, and they do have contractors involved trying to help 
them do that.
    Mr. Ose. If I may, one thing I always like to do is I 
always like to do something small and then expand it, if it 
works. Are there any departments or--that's not the right 
word--subdepartments of the DOD where your review has shown 
things to be properly accounted for that you have a high degree 
of confidence in the reports that you submit?
    Mr. Dodaro. Basically, the Military Retirement Trust Fund 
has received a clean audit opinion from the audits done by the 
Inspector General. The various services are at different stages 
of development. Under the original Chief Financial Officers Act 
that passed in 1990, the Department of Army and the Department 
of Air Force were designated pilot programs and audits were 
done. So they've undergone audit scrutiny for a longer period 
of time and are moving to correct some of the weaknesses.
    But by far, the service that needs the most work is the 
Department of Navy. And I know there are different levels of 
effort that's going to be required to bring up different parts 
of DOD. But the only one so far in the major parts of DOD to 
get a clean opinion is the Military Retirement Trust Fund.
    Mr. Ose. Does that include the post-retirement medical--
because I saw in here there's 200--an estimate of $223 billion 
in actuarial liability.
    Mr. Dodaro. No, that does not include that, and that is 
still an issue which we raised on the consolidated financial 
statements of the Federal Government. On the civilian side for 
the fiscal 1998 statements, problems were rectified by changes 
that OPM put in place. But on the military side, the post-
retirement health care benefit still needs work to determine a 
better basis for making the estimates, having actual claims 
data, documentation, et cetera.
    Mr. Ose. Mr. Chairman. If I may, I would like to submit 
questions for followup. Just the observation that I've got is 
that--I mean my business was very small and it was no grand 
enterprise, by any means. But I always figured that if I could 
get one thing under control and keep it there and move to the 
next thing where it was screwed up, if it was, and correct that 
and keep moving across the board, we could always get to the 
end at some point in the future where we knew things were 
right.
    That's why I asked the question about the retirement 
system. If that's fixed, let's not take our eye off the ball 
there. Let's move to another segment, fix that, if we can, and 
keep moving through. So I thank you for the chance, and I will 
submit questions.
    Mr. Horn. I agree with the gentleman. And the questions and 
the answers from the various witnesses will be put in the 
record at this point, without objection.
    Now I yield 10 minutes for questioning to the ranking 
minority member on the committee, Mr. Turner of Texas.
    Mr. Turner. Thank you, Mr. Chairman.
    One area that I wanted to inquire a little bit into in the 
prepared testimony that was submitted today related to improper 
contract and vendor payments. You know, this just almost 
boggles the mind to read that particular section of the report.
    It says the DFAS Columbus Center received in return 
payments from defense contractors $4.6 billion. Between 1994 
and 1998 those return payments were due to overpayments to 
contractors. It's just beyond me to understand how that much in 
overpayments could be made to contractors, and you have to try 
and get it back and you wonder how much more is out there that 
you didn't get back.
    It would be helpful if you can explain to me how in the 
world that kind of situation exists. I mean, are contracts all 
that complex that we just--that they can't even administer them 
properly and everybody is having to go back and check on 
whether they've got the right amount of money?
    Mr. Dodaro. Basically, there are a couple of fundamental 
problems. No. 1, many of these contracts are complex. They're 
modified many times over a number of years, and there are 
countless amendments. And some of the files and contract files 
that DFAS Columbus require--in fact, reinforced floors to hold 
the size of some of these contract files.
    So contract administration is complex. When contractors 
return payments on their own; a lot of these cases the 
contractors are just sending back voluntarily overpayments, in 
addition to those found by the Defense Contract Agency. Part of 
the problem stems from the fact that a large part is contract 
administration errors that occur along the way, and then there 
are payment errors.
    This problem, Congressman Turner--if you remember when we 
were talking about the consolidated statements of the Federal 
Government, we mentioned the Medicare area where there were a 
lot of improper payments made in the fee-for-service program. A 
lot of this stems from the fact that over the years the primary 
measure of performance for a lot of financial management 
functions were how quickly you could get the payments out, in 
this case, to the DOD contractors and other cases the Medicare 
service providers.
    So there was pretty much a pay-and-chase mentality in place 
over time, as you get the money out quickly, and then you sort 
through the process through a post-audit evaluation, which is 
why the Defense Contract Agency has been set up. And that is 
not a good way to run a business. I mean, it's not a good 
internal control to rely on the people you're paying to 
voluntarily send money back to you if they're overpaid.
    So DOD started to validate some of the material beforehand. 
But part of it also stems from the fact that the contract 
payment process is different than the accounting process. And 
so the payments are made, and then it takes a while to match 
up. This is where the systems problems are really problematic, 
because they have no ability to compare and reconcile the 
information to know that the goods were received and also that 
it was a valid obligation.
    So this is a fundamental area that needs reform. And you're 
putting your finger on a proper issue. It's a fundamental 
problem. And it's been in place for a while. The Department is 
trying to address it, but until they reform and bring the 
contract community together with the accounting community--and 
this is another area where you have diffuse responsibilities 
within the Department--and really have a good check and balance 
in place on those payment systems to make sure that only proper 
payments go out the door, this is going to continue to occur.
    Mr. Lynn. Mr. Turner, if I might just jump in. One of the 
challenges we have in the Department of Defense is that any 
number that involves the Department of Defense is going to be 
huge, which is a two-edge sword. It means that we have to 
redouble our efforts to make sure that we're--we have the right 
controls in place, because so many dollars are involved.
    It also means that any example that you cite is going to 
have a large number associated with it. The number you've cited 
is coming down. We've cut contractor overpayments in half over 
the last 3 years. So it's down. Just to give you an example of 
what kind of magnitude, it's about one-tenth of 1 percent right 
now. But that still gets you up into the hundreds of millions 
of dollars, which is still too large. And Mr. Dodaro is exactly 
right. We need--and we are taking the steps which involve 
electronic data transmission, electronic commerce, that will 
link up the systems to avoid any of these overpayments.
    But I don't want you to leave the impression that this is a 
large portion of our dollars. It is a small portion, and it is 
declining.
    Mr. Turner. Well, just if my math is correct, it looks like 
we have to return about $2 million a day to Defense contractors 
or they have to return to us about $2 million a day. It just 
seems like an awful lot of money to me.
    Mr. Lynn. You're making my point; just about any level of 
the Defense Department has a lot of money.
    Mr. Turner. It seems to me that, you know, maybe it goes to 
the complexity of the contract arrangements; maybe it's 
inevitable that there is going to be some confusion in it. One 
thing I noticed under the section labeled ``improper contract 
and vendor payments,'' in the first paragraph you refer to the 
$4.6 billion that is returned over that 5-year period by 
Defense contractors; and then down in the third paragraph on 
page 19, we're talking about $6.8 billion. I'm not sure I 
understand the difference in those two numbers.
    Mr. Dodaro. The $4.6 billion is what the contractors 
returned on their own voluntarily. The $6.8 billion is what the 
Defense Contract Agency disallowed through a post-audit 
function, where they're reviewing all the contract documents on 
the payments and they disallow some costs. So the $6.8 billion 
is what DOD identified on its own through the contract agency 
and settling out a contract. Any time a contract is closed, 
it's then audited by this contract agency. So those numbers are 
mutually exclusive.
    Mr. Turner. And, Mr. Secretary, the numbers you were 
mentioning that have improved, are those the voluntary 
repayments or the amount that we've actually recovered through 
efforts of the Defense Department?
    Mr. Lynn. The numbers I was referring to was the first set 
that you referred to, which are in some voluntary overpayments, 
others are overpayments that we find ourselves as we go back 
and research the payments. It's a combination of both of those.
    Mr. Turner. So you can't tell me what percentage of the 
improvement is represented by increased voluntary return from 
Defense contractors versus the percentage that we have 
recovered because of our own Department of Defense initiative?
    Mr. Lynn. Oh, no, I can tell you that. Almost all of the 
improvement stems from improved systems and better linkages 
between our disbursement activities and our accounting 
activities. It doesn't represent an increase in voluntary 
payments.
    Mr. Turner. Is there any way--and I guess you have to be 
pretty close to all of this to understand this very well--but 
is there any way to know how much more we should be recovering? 
These are large numbers to me, and you say it's improved in 
terms of repayments from Defense contractors. But is this sort 
of a tip-of-the-iceberg sort of the problem, or does this 
represent just the way the system works and we're probably 
getting back all that we're supposed to get back?
    Mr. Dodaro. It's difficult at this point to really tell 
until there are thorough audits done on a statistically valid 
basis to look at total disbursements. As we point out in here, 
there are other problems with disbursements that are made that 
are not matched to obligations for a long period of time.
    And so part of the problems that the audit community have 
been identifying we really have not gone in and taken like we 
have in the Medicare program, as we explained to you before, a 
nationwide sample of claims and come up with a number of 
improper payments, so that those can be tracked over time. That 
has not occurred yet at the Department of Defense.
    And at some point in the future, when the records can be in 
a little bit better shape, that needs to be done; and then you 
would have the figure that you're talking about. So you would 
really know the magnitude. These are anecdotal examples at this 
point and not based on a statistically valid sample of all the 
disbursements at the Department.
    Mr. Turner. What would it take to do a statistical-analysis 
sampling to really--I mean, is this really a big undertaking to 
do this?
    Mr. Dodaro. It would be a significant effort. But right 
now, it's not worth the resources, because there are so many 
fundamental problems and the lack of documentation. In some 
cases, some of these disbursements are researched for 4 and 5 
and 6 years before they're matched with the disbursement with 
the obligation. So some of the records--the fundamental 
recordkeeping is problematic--that's why I mentioned getting 
the existing systems better in shape and the reconciliations 
that need to be done. Those things need to be done first and 
narrow this problem.
    Because you could do a statistical sample, but in most 
cases what you would find is that perhaps the documentation is 
not available to make a conclusion one way or the other. So our 
judgment at this point is that it wouldn't be a prudent use of 
resources until we can get some more fundamental improvements 
in place at the Department. But once that has occurred, through 
use of the proper statistical-sampling techniques, you should 
be able to do this.
    Mr. Turner. Thank you.
    Mr. Horn. Ms. Jacobson, you had to really work on that 
audit. Do you want to say some things in response to Mr. 
Turner's questions?
    Ms. Jacobson. Well, I would just add to Gene's comments 
that we did do some testing of those MOCAS disbursements out of 
Columbus this year; and one of the things that our preliminary 
findings show is that about half of the total dollars in 
transactions are adjustments. Some of those go back for 24 
years adjusting the accounts to reflect what happened when that 
disbursement went out the door. So it's a very messy system in 
process right now. And it's going to take a lot of effort to 
clean up.
    Mr. Horn. That was Mr. McNamara's beat, 1965.
    Mr. Mancuso. Mr. Chairman, if I might, I would add that 
from the Inspector General's perspective, there have been any 
number of occasions over the last several years where the 
Department has recognized that a particular contractor or an 
individual may have received what appeared to be duplicate 
payments or excessive payments and for whatever reason has not 
acknowledged that and in some cases denies it when confronted.
    Just as a matter of course, the Department relates that 
information to the Inspector General's office, and we pursue 
those matters as potentially being fraud against the 
Department. Although in numbers, these are very few compared to 
the overall numbers of instances of overpayment, we have found 
on occasion that people have deliberately double-billed the 
Department because they suspect there may have been a weakness 
in the accounting system.
    Or in other cases, unfortunately, there have been times 
when people internal to the Department have generated payments 
through the payment offices in a roundabout way, moneys that 
would come back to themselves or associates, again taking 
advantage of the poor controls in the systems that we currently 
have.
    So there has been a somewhat good relationship with the 
Department and the IG's office in trying to ferret out these 
anomalies where it is just not a simple mistake in overpayment 
or a mistaken act by a contractor in accepting an overpayment. 
But overall, those have been relatively few.
    Mr. Horn. In our first hearing on this, the figure was, and 
we sort of looked at it with certain bemusement, the same 
outrage, in a sense, that Mr. Turner has and, that is, what has 
the Pentagon done with $25 billion that we can't find? We asked 
Mr. Hamre at that time, the Assistant Secretary. I think it was 
your job, and yours has a new nice title to it, Under 
Secretary.
    We did another hearing, and we were told it is down from 
$25 billion that we can't find to $10 billion that we can't 
find. I think that figure was used today in the testimony. Is 
it basically just a problem of acquisition, contracts, and 
inventory that we can't seem to match up somewhere? Again, a 
lot of it was the Columbus, OH, processing center.
    We even heard there were such things as general schedule 1 
still around. I thought they went with the first world war 
because I actually knew a GS-1, an administrative Assistant 
Secretary who worked his way up the whole hierarchy when it was 
GS-1 to GS-18. Have they cleaned up that situation?
    Mr. Lynn. Maybe I can help with you that one. The $25 
billion and the $10 billion numbers that you were referring to 
is actually not money that we can't find. We can find the 
money. The issue there is the paperwork. What you are looking 
at--those are what is called the problem disbursements. The 
problem there is that the paperwork is not all complete. There 
is some missing element. There are a variety of explanations 
for it. It can be a transposed set of numbers; it can be not 
being able to find the right obligation; it can be not being 
able to find the right contract. There is a whole series. Those 
take a long time and too long, as Mr. Dodaro indicated, to 
research and find. The vast majority, as Mr. Mancuso indicated, 
involved just lost paperwork and ultimately it is found. But 
the money is not lost. It is a problem in the paperwork.
    The numbers that you cited going from $25 billion to $10 
billion indicate the improvement in the systems that we have 
put into place. The systems are about two-thirds there. As we 
replace other systems, the MOCA system in Columbus that Ms. 
Jacobson was referring to is on the list to be replaced over 
the next year or year and a half. That will substantially help 
that area.
    The prevalidation efforts that we are putting into place at 
this point will substantially help that. We are trying to drive 
this down, but it's a very large operation. I don't want to 
leave you with the misimpression that the money is lost or 
cannot be found. This is an issue of making sure that the 
paperwork is all up to date and matched.
    Mr. Horn. Are you saying, Mr. Lynn, that the money has 
found the Defense Department, but the Defense Department hasn't 
found the money? Where is it in the pipeline?
    Mr. Dodaro. I am saying, for example, that----
    Mr. Horn. Let's move that team that has got the retirement 
problem fixed up and move them over to the Columbus processing 
center if they are still screwed up.
    Mr. Dodaro. One of the ways that we have gotten the $25 
billion that we inherited down to $10 billion is we have had 
tiger teams where we put the best people on it and drive these 
things down. You are talking about going through warehouse 
after warehouse of information to try to find that right piece 
of paper that matches with the payment. It takes time. We are 
working our way through it.
    Ultimately what you want to do, as I think that Mr. Dodaro 
and Mr. Mancuso indicated, is you want to have an electronic 
system so that you don't have to do that paperwork research, 
that the system itself is seamless, and that those matches are 
made electronically. We are working that. At the same time we 
are trying to work that backlog of unmatched disbursements 
down.
    Mr. Horn. Any other comments? Mr. Lieberman has a comment.
    Mr. Lieberman. If I might, Mr. Chairman, make a couple of 
quick comments. We analyzed the problem disbursement situation 
in a report that we just issued on April 16, which the 
committee now has. I think there are a few basic points to make 
when we talk about contract payments.
    First of all, Mr. Turner alluded to the way DOD contracts 
are structured in the first place. It is true that we have 
bewilderingly complex contracting which is something that the 
acquisition reform effort is trying to do something about. 
Second, we have to keep in mind that we are talking about tens 
of millions of transactions annually. It's imperative that we 
fix the process on the front end so that these payments are 
made right, rather than trying to audit fidelity back into the 
system afterwards, because there are just too many of them 
being made.
    It's equally imperative that these disbursements be made by 
automated systems, because DOD just can't do tens of millions 
of transactions manually and have any hope at all of complying 
with the Prompt Payment Act. Therefore, we are back to systems 
as being the root cause. We have lousy systems. New ones are in 
the works and will be in place by, say, 2002. That's the long-
term solution.
    In the meantime, the Congress has legislated an extra step 
in the process which we call ``prevalidation.'' Disbursements 
over $1 million are not supposed to be made unless the 
disbursement people know that they have a valid obligation 
already on the books to match against that disbursement. That's 
supposed to be an extra control.
    The Department is trying to drive the prevalidation 
threshold down from the $1 million figure required by Congress 
all the way to a de minimus level of, say, $2,500, which would 
cover many more payments. But that's been terribly difficult 
because this is a manual process. We have been unable to get 
below the $500,000 figure and stay there because payments slow 
down. Contractors have a right to be paid if they provide 
services to the government. If they are not paid, they scream 
to the Department and to the Congress. This is a real dilemma 
over the next 3 years or so until we have these better 
automated systems in place. So it's a very tough problem.
    Last, it's hard to judge whether DOD is making progress or 
not with problem disbursements, because we don't know what we 
don't know. The data that managers have in their systems is not 
particularly reliable to tell them what is going on and we have 
done limited auditing due to resource constraints.
    Mr. Dodaro. The parallel issue that needs attention at the 
same time that the Department is automating systems is to 
really fix some of the weaknesses in computer controls. The 
Department's computer systems are like a lot of Federal agency 
computer systems. I am talking now about unclassified systems 
which would include some of these payments systems as well as 
some logistics information. They have serious computer security 
problems that make them vulnerable, both to outside hackers 
getting into the system and as well as people within the 
Department or its contractors who have too much access.
    Mr. Mancuso mentioned the number of reports that they have 
issued in that regard with recommendations. We have, at GAO 
made recommendations, and the Department is trying to put into 
place a comprehensive computer security program. But if that 
problem is not handled now with the existing systems, as the 
Department becomes more automated, that problem will become 
more acute and the Department will become more vulnerable.
    So both things have to go in tandem: process reforms, 
upgrading the systems, and having the proper computer security 
controls in place to make sure that the systems are not 
exploited.
    Mr. Horn. Anybody else want to comment on Mr. Turner's 
question? OK. Vice Chairwoman Biggert, 10 minutes questioning.
    Mrs. Biggert. Thank you, Mr. Chairman. I think that the GAO 
reported that in the Department of Defense lessons learned and 
studies from operation Desert Storm, that better asset 
information could have saved over $2 billion and that the 
weaknesses in management control assets have been longstanding.
    Mr. Lynn, will the Department experience any cost 
deficiencies in the current conflict in Kosovo as a result of 
the changes from the lessons learned in Desert Storm?
    Mr. Lynn. I wouldn't be able to quantify that. We have 
improved our systems since Desert Storm. We have better total 
asset visibility. So what that will mean is the units in the 
field are better able to know when their munitions and other 
spare parts stocks are on the way so they won't double and 
triple order them. I think that was the problem referred to.
    We think we have reduced that problem, which would imply 
some savings, but I wouldn't even try to quantify it. We have 
not licked that problem, though. In particular, we need better 
inventory systems in the logistics area, and we need a better 
connection between the inventory systems and the financial 
accounting systems. That interface right now is not adequate, 
and that's one of the reasons that we are not able to get a 
clean opinion. That's one of the four or five major 
deficiencies that we are focussing on with GAO, the IG, and OMB 
to try and better improve our performance there.
    Mrs. Biggert. I think one of the problems that we are 
facing with a vote coming up is the fact that we don't have 
really the inventories and what is really the supplies and 
inventories that we need right now, over and above the bullet 
for bullet in Kosovo. So if you say that you don't know or have 
control over those assets, then it makes our job much more 
difficult.
    Mr. Lynn. I'm not saying that we don't know and don't have 
control over the assets. We do have control over the assets. 
The issue with regard to the vote that you are talking about, I 
think, is somewhat different. The kinds of things where we are 
proposing to replace right now are major end items like cruise 
missiles, JDAM bombs, Tomahawk cruise missiles, Navy cruise 
missiles. All of those, we have very exact controls. We know 
where all of them are. We know how many we need. We know how 
many we have expended.
    The issue surrounding them has to do with where we are in 
production. For example, the JDAM is only in its second year of 
production. It is becoming the munition of choice because it's 
performed so well. But you obviously do not have very many if 
you are only in the second year of production. The proposal 
that is going to be before you this week would be to accelerate 
that production, to actually double that production because of 
the performance.
    The cruise missiles are still a different story. The air-
launched cruise missiles are actually older cruise missiles. 
They were nuclear. They were built during the Reagan 
administration. The line was shut down then. As the nuclear 
forces have been coming down, we have been converting those 
nuclear cruise missiles to conventional purposes. There is only 
so many that we can do that with. The long-term solution, which 
is not that long term, production starts next year on a new 
standoff attack weapon called the JASSM. The air-launched 
cruise missile is just an interim weapon.
    Similarly with the Tomahawk, the Navy-launched cruise 
missile. The issue there is we are going into a production of a 
new system in 2003. The question is how many of the older 
systems that are not quite as good or quite a bit more 
expensive, how many of those do you want to keep as a bridge to 
the new system that starts production in 2003? The proposal 
that you have before you would increase that number because of 
the expenditures in Kosovo and Kosovo as well as Desert Fox.
    Because we have shot those numbers at a higher rate than we 
anticipated, we now see a need to supplement the numbers we 
have between 2000 and 2003. In no case, though, here do you 
have an inventory problem with any of those systems.
    Mrs. Biggert. Mr. Dodaro, could you comment on that? Do you 
think that there has been any significant change since Desert 
Storm?
    Mr. Dodaro. I would only say that I agree with Mr. Lynn's 
comment, that they haven't got the problem licked yet with the 
systems, and they will need to continue to work on that to get 
the integration between the accounting system and the logistic 
systems.
    Mrs. Biggert. OK. Mr. Mancuso, in your statement, you point 
out that you believe that focusing primarily on the financial 
statement audit opinions may not be the best approach for the 
Department. We keep hearing about the clean audit, the clean 
audit. Could you expand on that a little bit?
    Mr. Mancuso. Yes. I think it's clear that despite our 
efforts and despite our work with the Department, at least many 
of us believe that the statement, for instance, for this year, 
which was a disclaimer, will probably be repeated next year, 
certainly on the consolidated statements and almost certainly 
on many of the other supporting statements.
    We feel it necessary to keep working with the Department 
and with GAO and OMB on ensuring that the feeder systems get 
addressed, that the underlying systems receive the resources 
that they need to ensure continued progress so that eventually 
we can reach clean statements.
    Even within our own organization, however, I would say that 
there is some debate as to how much of our resources need to be 
continued toward just achieving clean statements. By that I 
mean that, for instance, in the DOD IG's office, we spend about 
200 audit work years solely on CFO work. That consists of close 
to half of our audit resources.
    At the same time, for instance, we have no resources at all 
looking on the finance side of DFAS, where we know there are 
problems. Yet we continue to spend our 200 audit work years. To 
be fair, there is a very strong argument that could be made to 
say that we will never achieve clean statements if we let up 
the pressure, if we tried--for instance, an elementary 
suggestion would be, well, why can't we just look at them every 
other year if we already know what we are going to find next 
year? An argument could be made that that would lessen the 
pressure on certain leadership in the Department to achieve 
clean statements and to achieve the work that needs to be done 
on the underlying feeder systems.
    So in sum, again, I guess our perspective would be that we 
see a greater good coming from resources being applied toward 
correcting the underlying problems and not in solely aiming 
toward clean financial statements which may, in themselves, 
disguise problems that still exist in the feeder systems.
    Mrs. Biggert. Thank you.
    Mr. Dodaro. If I could add a couple of perspectives to 
that, the underlying law, the Government Management Reform Act, 
really requires annual audits to be done, financial statements 
to be prepared and audits to be done across the 24 departments 
and agencies of the Federal Government as well as the 
consolidated financial statements of the U.S. Government, which 
means that for the first time the Federal Government is now 
living by the rules that it sets through the SEC for publicly 
traded corporations. They have annual audits so the 
stockholders have good information.
    Every State and local government in this country that 
receives over $100,000 in Federal assistance has to have an 
annual financial audit. But the executive branch of our 
National Government has not had that requirement in place until 
recently. We have seen other departments and agencies across 
the Federal Government begin to get their fiscal house in order 
only through this annual public scorecard.
    We now have about half of the departments and agencies that 
get unqualified or clean opinions. It takes a number of years, 
but the annual requirement is paramount in our opinion, and 
also the measurement of progress should not be the overall 
opinion, but it should be how many deficiencies are identified 
in that opinion and are the departments making progress in 
reducing the number and severity of the audit deficiencies. As 
Mr. Lynn indicated, we are working on a plan with the 
Department that will be a better measuring stick of the 
Department's short-term progress.
    Mr. Lynn. If I might add, I agree entirely with Mr. 
Mancuso. The audit opinion in and of itself is of limited value 
to the Department. We don't determine expansion as a commercial 
operation would be on a--we don't need a profit and loss 
statement for stockholders. The value for us is the state of 
our underlying finance and accounting systems and public 
confidence in our financial stewardship. Those are the purposes 
for which we would seek a clean audit opinion, which are 
considerably more narrow than a commercial operation.
    Mr. Mancuso, I think, is exactly right. The goal needs to 
be to improve our underlying systems. If we are to get a clean 
opinion that doesn't improve our underlying financial systems, 
that is--that's meaningless. What we need to do is improve our 
overall effort in this regard, and the clean opinion should be 
a measure of our progress in that. That's its major value.
    Mr. Dodaro. I would agree with what Mr. Lynn is saying, but 
I would say that if a department or any organization cannot get 
their end-of-year financial data correct 6 months after the end 
of the financial year, there is no hope to have underlying data 
correct throughout the year. It's a starting point. It's not an 
end in and of itself, but a starting point to get year-end data 
correct so that at least you have annual trends that you can 
track over a period of time. It is a modest beginning, but it's 
a necessary one.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Horn. Thank you. Did you get enough people answering 
that last question? It's a very important question, so let me 
pursue it a little bit. I will yield myself some time on this 
and then turn to Mr. Turner. Are the logistic systems part of 
the problem, the inventory controls and the interface with the 
financial systems? It seems to me that you have a product, you 
purchased it, it has a certain value on it, it is located in a 
certain place. Tell me how that works, Mr. Lynn, and how far 
along we are in getting those matchups?
    Mr. Lynn. The logistics systems are indeed a problem, Mr. 
Chairman. One of the problems was alluded to in your question. 
You indicated they have a value. Actually, many of the 
logistics systems were not designed to do financial accounting. 
They didn't include a value. They were just for accountability 
purposes to track the equipment but not to track the value. In 
other cases, if they track the value, they are interested in 
the replacement costs whereas the auditors would be interested 
in the initial purchase cost and then to depreciate that.
    Oftentimes the logistic systems do not actually have the 
right information for us to be able to get a clean opinion. We 
are taking steps and we are moving in the direction of 
putting--either replacing those systems or putting modules in 
those logistic systems that provide that information. And we 
are taking steps. The first major one was this financial 
management improvement plan to try to improve the interfaces 
between those systems and the finance and accounting systems.
    Mr. Horn. Have you lined up different categories? And if 
so, give me some examples. I would think you are talking about 
the replacement costs of cruise missiles. Pencils, who knows 
what you are talking about on that one. Can you just show me a 
few different forms of logistic interface with financial 
management?
    Mr. Lynn. You are getting into more of a detailed area that 
I think Mr. Toye would be better able to answer.
    Mr. Toye. Mr. Chairman, we have identified 83 critical 
feeder systems. These are the systems that are most essential 
to provide financial information to DOD to allow it to produce 
audited financial statements. We are focusing on each of those 
systems, identifying the information that we need from those 
systems, determining what the difference is between what is in 
there and what the needs are, and we are modifying the systems 
to get the information that we need.
    One of those areas, for example, would be property systems. 
Another area would be medical systems. There are, within each 
of those categories, numerous systems that capture information. 
For example, in the property area there are multiple systems 
that took national defense weapons systems. There are systems 
that focus on real property. There are other systems that focus 
on what we call personal property which would include general 
equipment, vehicles, ADP systems and software. The problem in 
each of those systems is a little different. The overarching 
problem is the same, as indicated by Bill Lynn. Often those 
systems do not capture the value information that we need to 
report in our financial reports.
    Mr. Horn. For most Members of Congress who are not on the 
Armed Services Committee or on the Defense Appropriations 
Subcommittee, it came as a tremendous surprise that we did not 
have a very good inventory of cruise missiles. We heard of a 
few Tomahawks floating around and a few cruise missiles turning 
around. It just seems to me that Congress would have been 
rather upset if they had known what maybe the Armed Services 
Committee did know but the rest of us didn't know.
    When that word spread around here a few weeks ago that we 
were out of munitions, that came as a surprise to Members of 
Congress as a whole. Mr. Lynn.
    Mr. Lynn. Let me be clear. We are not out of munitions, Mr. 
Chairman. As I said, there are certain interim munitions in 
which the stocks have been reduced. We have gotten proposals to 
restore those stocks. There are other categories of munitions 
such as laser-guided bombs which just came in at the very front 
end of Desert Storm. A few were used then. We now have tens of 
thousands of those.
    It's when you--as you shift from one munition to a more 
advanced munition, there is a tendency to focus on the stock of 
the most advanced munition which will always be the smallest 
because you just started production. The munition just behind 
it, we have tens and tens of thousands. We are not running out 
of munitions, Mr. Chairman.
    Mr. Horn. Now you noted that you have got--was it the JASSM 
missile?
    Mr. Dodaro. JASSM. It's a joint-air-to-surface missile.
    Mr. Horn. Because I thought of tea when you first said it, 
and I also thought of a jazz man in New Orleans, and I wasn't 
quite sure what that was. Now we have gotten that straight for 
the reporter. Right now if somebody asked you what is your 
surplus in the Pentagon budget, could you give them a number?
    Mr. Lynn. We don't have a surplus in the Pentagon budget, 
Mr. Chairman. We spend every dollar that you give us, and we 
try to spend it responsibly.
    Mr. Horn. How much money did you have at the end of fiscal 
year 1998, that you could reprogram?
    Mr. Lynn. I don't have that number in my head. I could 
provide it for the record.
    Mr. Horn. Without objection, it will be provided for the 
record. Was it $20 billion? Was it $50 billion reprogrammable 
money?
    Mr. Lynn. Oh, no. It would be nowhere near that. To give 
you an order or magnitude, the omnibus reprogramming which is 
where we pull together all of that kind of effort where we try 
and take account of the things that have changed. Some things 
change in which we either need more money and other things 
change that we need less money.
    The omnibus reprogramming last year was about $1.5 billion, 
I believe it was. It would be about a half of a percent of the 
Department's overall budget was reprogramed. That's both a 
positive and a negative. In other words, in some cases, an 
acquisition program may miss a test or something and, 
therefore, resources would not be able to be spent on that 
program. In other cases, say in a depot, we do more depot 
maintenance than we anticipated, so we would shift resources 
from one area to another. But the magnitude would be in that 
area.
    Mr. Horn. So it would be $1 to $2 billion roughly.
    Mr. Lynn. That is the normal reprogramming that the 
Department proposes over the course of the year. Congress 
actually limits our transfer authority. The limit in the 
transfer authority this year is $1.6 billion. Last year, I 
think it was a little bit over $2 billion.
    Mr. Horn. I forgot to look at the language, but I looked at 
it years ago. Generally, you get the sign off of the Chair and 
the ranking member of your Appropriations and Authorizations 
Committee. Is that how that currently works?
    Mr. Lynn. That's correct, Mr. Chairman. All four of the 
oversight committees need to approve a reprogramming and they 
need to approve both the source, that is where the money is 
coming from, and where the money is going to.
    Mr. Horn. Now, we have had Clinger-Cohen in law for about 2 
years, right? I don't know the exact date.
    Mr. Lynn. I think he has been Secretary for 2 years, so a 
little bit longer than that.
    Mr. Dodaro. It has been 3 years.
    Mr. Horn. What have we learned from the use of Clinger-
Cohen in terms of liberalization of acquisition, and has that 
been reflected in your financial systems, and what has been the 
difference between what you did and had prior to Clinger-Cohen 
that you have now?
    We are going to hold a hearing on seeing what agencies are 
taking advantage of this legislation and liberalized 
purchasing, and I am just curious about any feelings in the 
financial management community in relation to that acquisition 
law.
    Mr. Lynn. I'm not sure where you are going with that, Mr. 
Chairman.
    Mr. Horn. I'm going for an answer, hopefully.
    Mr. Lynn. I guess I don't have enough of a question.
    Mr. Horn. Let's try it out on GAO and the Inspector 
General. Have you done anything to see how that is being 
administered?
    Mr. Dodaro. From our standpoint, we have been focussing 
more on the aspects of the law to reform the information 
technology infrastructure, putting CIOs in place with the 
requisite authority, using disciplined investment processes, 
and good cost-benefit analysis. There were, as you point out, 
some provisions to allow for piloting in the information 
technology arena some advanced acquisition reforms. To my 
knowledge, there has not been very many pilots exercised. I 
would have to go back and check on that.
    Mr. Horn. It's been in effect 3 years. Is there any plan by 
the General Accounting Office to take a look at it and see how 
it is being administered?
    Mr. Dodaro. Yes, there is, because it is up for 
reauthorization in 2001. We are targeting for that, and we plan 
to move more resouces into that as soon as we emerge from this 
Y2K computer challenge.
    Mr. Horn. So that would be early in 2000 you would start?
    Mr. Dodaro. Start taking an indepth look at all aspects of 
the legislation.
    Mr. Horn. How about the Inspector General's office? Any 
thoughts, since that is a major purchaser for the Federal 
Government?
    Mr. Lieberman. Mr. Chairman, first of all, we are largely 
in the same boat the GAO is, that is, we are so involved in the 
Y2K conversion that we have had to defer a lot of potentially 
very important audits of DOD's investment processes for 
information technology and also of our security systems.
    There are many different systems involved in the financial 
management area. There are roughly 200 systems that are 
directly pertinent to preparing financial statements alone. 
Many of those are development efforts and others are 
modification efforts.
    I would say that the application of the principles of the 
Clinger-Cohen Act has been very uneven. We could probably find 
examples on either end of the spectrum. Some programs would be 
considered models in terms of good application of principles 
like modular development, good oversight, good involvement by 
the Chief Information Officer, et cetera. And on the other 
hand, I'm sure that we could find lots of examples where the 
feedback is not so positive.
    We need to do a lot more auditing across the spectrum of IT 
investments in Defense, which spends $15 billion a year buying 
and modifying systems. As Mr. Mancuso's testimony indicated, 
for just this population of 200 financial management related 
systems, we don't really have the kind of management control 
and oversight of the whole process that Clinger-Cohen 
envisions. So there is considerable extra work to do.
    Mr. Horn. One of the concerns that Members of Congress will 
have in various committees in both bodies will be the degree to 
which Clinger-Cohen has reflected some of the purchases at 
least in small business or in minority businesses, because as 
some of you will remember, we had quite a battle on the floor 
in getting that legislation through two chambers. It's just one 
of the things that we will be asking about, and we might as 
well build it into the study.
    Ten minutes to my colleague, Mr. Turner of Texas, the 
ranking member.
    Mr. Turner. I want to talk a little bit with you about the 
problem of overspending and budget authority. It's mentioned on 
page 18 of the GAO testimony today. Just for clarification on 
my part, we were talking a minute ago about reprogramming and 
this $1.6 billion in transfer authority. Are we talking about 
the same thing? In other words, the Department has the 
authority to transfer this year $1.6 billion, but is that what 
we are talking about that is approved, or is that a separate 
matter?
    Mr. Dodaro. It's a separate matter.
    Mr. Turner. Explain that to me so that I will have an 
understanding. It might help me with the next series of 
questions.
    Mr. Lynn. The reprogramming involves resources that were 
originally appropriated by Congress for one purpose. That 
purpose can no longer be accomplished so the Department returns 
to Congress through its four oversight committees and proposes 
a different purpose for that funding. That's the process that I 
was discussing with Chairman Horn. The limit on that transfer 
authority, which is the reprogramming, is this year $1.6 
billion which is somewhat less than it was the prior year. But 
it's generally in that $2 billion neighborhood.
    Mr. Turner. Those are separate things. You can transfer 
$1.6 billion within your budget?
    Mr. Lynn. That's right.
    Mr. Turner. That's not subject to any congressional 
approval?
    Mr. Lynn. It is subject to approval by the four oversight 
committees, the House and Senate Armed Services Committee and 
the Defense subcommittees of the two Appropriations committees.
    Mr. Turner. So the reprogramming that you do has to fit 
within the $1.6 billion?
    Mr. Lynn. That's correct.
    Mr. Turner. Returning then to the portion on page 18 of the 
GAO testimony--and I suppose I could direct this to Mr. Mancuso 
or Mr. Lieberman. I assume that I found the right audit report 
here, the one that refers to the oversight of the Air Force. Is 
it in this report that the GAO is referring to the $1.1 billion 
that were obligations incurred in excess of available budget 
resources as of September 30, 1998?
    Mr. Lieberman. We have issed two reports on the Air Force 
financial statements, one on the general funds and one in the 
working capital funds. They are both equally thick so I'm not 
sure which one you have in hand.
    Mr. Turner. Irrespective of whether I have been looking at 
the right one or not, let's just look at the GAO testimony. It 
makes mention of the fact that the Air Force audit agency 
reported that the Air Force's depot maintenance activity, which 
is a component of one of the Department's working capital 
funds, may have incurred obligations of $1.1 billion in excess 
of available budgetary resources as of September 30, 1998.
    I guess what I would like for you to do for me is explain--
it says may have occurred, as if maybe it occurred and maybe it 
didn't--but that would be an awful lot of excess obligations 
that were incurred there by the Air Force if they had no 
budgetary resources to fulfill those obligations. If that's the 
problem, would that be the kind of thing that the Air Force and 
the DOD should have come forward with and asked for a transfer 
or a reprogramming to remedy that problem?
    Mr. Lieberman. In a case of this type, whenever you have an 
apparent overobligation, or overdisbursement for that matter, 
whether it is a small amount or gigantic one like this, there 
probably will have to be an Antideficiency Act violation 
investigation, because it is a criminal offense to overspend.
    This is a very structured process. The word ``may'' is used 
in there on purpose because the auditors can't normally 
determine definitively that there has been an overobligation or 
overdisbursement. We are dealing with records that are flawed. 
It may well be that after the records are straightened out 
there is not overspend- ing, but this has to be investigated 
and it will be investigated. The Department of the Air Force 
will have the responsibility to conduct an Antideficiency Act 
violation investigation. If a violation is determined to have 
occurred, the details have to be reported by the Secretary of 
Defense to the President and the Congress.
    Mr. Turner. If that had been discovered earlier, then it 
could have been remedied by a request for reprogramming?
    Mr. Lieberman. Yes. They will have to find a way to cover 
the deficiency either through a supplemental appropriation or 
using current year budget authority. But for an amount that 
size, certainly they would break a reprogramming threshold and 
have to come back for congressional approval.
    Mr. Turner. Give me a little bit of a description so that I 
can understand. What are we talking about that this $1.1 
billion may have been spent for? These are Air Force depot 
maintenance activities. I am a little bit at a loss as to how 
we could spend $1 billion more than we have budget authority to 
do so without anybody noticing it or coming forward or 
requesting reprogramming or something. It is a lot of money, 
even though it does say may have. Somebody must think they are 
on to something here.
    Ms. Jacobson. Mr. Turner, perhaps since I put it in the 
testimony I can explain what the background of this particular 
transaction is. The Air Force does not have a budgetary system 
comparable to some of the other services--this depot 
maintenance facility does not have a budgetary system 
comparable to some of the other systems in DOD. What they were 
doing was using an estimate of what their--the budget authority 
and maintenance account really stems from how much they believe 
they are going to get in orders and from the service itself.
    So the service orders goods and services from the depot to 
provide depot maintenance, and then the depot uses the money as 
their budget authority to pay for their people and their 
inventories to do the actual activity that they are there to 
perform. These are supposed to be working capital--they are 
working capital funds. They are supposed to be run like 
business operations.
    Basically, they are supposed to be on a break-even basis. 
Money comes from the services to pay for the activity as if it 
were a business activity. They can spend as much as they are 
going to get from the services. And in this case, what they 
were doing is estimating what they thought at the beginning of 
the year they were going to get from the service, from the Air 
Force, and using that as their budget authority; and, in fact, 
they did not get that much activity in that depot. So they 
ended up obligating more than they actually got in orders and 
activity from the Air Force.
    Mr. Turner. So this problem occurred at one particular 
depot location?
    Ms. Jacobson. I believe there were a couple of incidences 
in Air Force, but I would have to go back and check the Air 
Force report.
    Mr. Horn. Would the gentleman yield for 10 seconds. I'm 
curious, was this at McClellan Air Force Base?
    Ms. Jacobson. I don't know specifically.
    Mr. Horn. How many people were involved? I hear you saying 
something back there but I can't quite----
    Mr. Warren. There are five Air Force maintenance depots in 
the working capital funds, so it could have been an 
accumulation among those five. Two are in the process of 
closure----
    Mr. Horn. Just let the reporter know name and title and so 
forth.
    Mr. Warren. Dave Warren, Director of Defense Management 
issues for GAO.
    Mr. Horn. I was just curious because those were authorized, 
or rather recommended by the Hoover Commission. This would be a 
way that government could do business. And presumably what you 
took out, as you say, Ms. Jacobson, you get other services or 
your own service to pay for whatever those maintenance and 
repairs are. Mr. Turner certainly raised a very pertinent 
question as to overoptimistic budgeting.
    Ms. Jacobson. In terms of reprogramming, generally, again, 
these organizations are supposed to recover their cost through 
their rates. So we would have expected that they would have to 
raise rates either now or in the future to recover any 
overexpenditure.
    Mr. Horn. It isn't limited to the Air Force in terms of 
uses. It is other services that can use it. Right?
    Ms. Jacobson. That's correct.
    Mr. Horn. Go ahead.
    Mr. Turner. Give me a feel for--we are talking about $1.1 
billion in excess obligations. What is the total picture in 
terms of the total expenses related to depot? We are talking 
about $1.1 billion out of $5 billion or how big of a problem 
are we looking at here?
    Ms. Jacobson. My associate behind me is saying that it's 
about $5 billion for the depots, for the Air Force depot.
    Mr. Turner. Do we attribute this kind of problem to just 
total incompetence on somebody's part? It seems like a serious 
breakdown to say that $1 billion out of a roughly $5 billion 
operation was overobligated. That's a little bit of a shocking 
number.
    I ask the size of it because we have been cautioned here a 
minute ago not to be too struck by these billion dollar figures 
because it may be one half of 1 percent of something. Obviously 
that one wasn't. It seems to me a very serious problem. I see 
my time has expired, Mr. Chairman, and I will defer back.
    Mr. Horn. If you would like to finish up----
    Mr. Dodaro. If I might, Mr. Chairman, to just add just one 
broad point to this whole discussion is that prior to fiscal 
year 1998, the agencies prepared budgetary statements on how 
well they complied with fund control procedures and provided 
that information to the Treasury Department and OMB. That 
information was not audited.
    Beginning with fiscal year 1998, the statement of budgetary 
resources, how much budget authority agencies were given and 
how much had been obligated and how much remains unobligated, 
prior year balances, carry overs, et cetera, is now subject to 
these annual audit requirements to ensure that there is 
budgetary integrity in the system; and, indeed, that agencies 
are complying with the limits established by the Congress.
    So we are hopeful, and that's one of the reasons why annual 
requirements are important, that this new requirement in place 
now will lead to more attention being given to these matters 
during the year by agencies to make sure that their fund 
control procedures that are in place are operating effectively 
and do provide them the internal control necessary to make sure 
that they either did not overobligate, or have obligations that 
could be deobligated and used for other purposes.
    That's when some of these investigations take place and 
people go back and scrub these accounts. They find that they 
have obligations on the books here that they didn't use, so 
they deobligate that money to cover these overobligations and 
that is why there is ``may'' in many of these cases until those 
thorough investigations are done. That tells us from an audit 
standpoint that there needs to be more rigor in making sure 
that the fund control processes operate as intended.
    Mr. Toye. Mr. Turner, if I may, all violations have a 
negative number, but not necessarily all negative numbers are a 
violation or are the result of a violation. Let me give you 
some examples.
    Recently in the Navy, preliminary indications were that 
potentially a number of Navy accounts, over 20, about 29, may 
have incurred a violation. DOD investigates, as the IG 
indicated, all of those negative numbers. In those instances in 
which we have completed those investigations--I should say the 
Navy has completed the investigations--on over 20 of those 29 
accounts, none of those were a violation.
    Regarding the incidence of the Air Force negative numbers, 
DOD will also take a look at that. However, the fact that it is 
a negative number does not by itself mean that it is a 
violation. That's why the auditors tend to use the words ``may 
have been'' because it may be, as indicated, an accounting 
error.
    It may be other valid reasons that something different than 
a violation or an overobligation, even though that's what it 
appears to be at first. We do followup on all of these negative 
numbers and we do investigate them and we do find that a number 
of them are simply not overobligations, but we cannot--and we 
do not--ignore them when the negative numbers appear.
    Mr. Horn. One last question and then it's Mrs. Biggert's 
turn. I just want to get the record clear.
    When you find this series of negatives for one reason or 
another, can you balance those off with other funds in the DOD 
and the various services where you would pick up a surplus to 
balance them?
    Mr. Toye. If we have a violation, then the Department needs 
to correct that violation. They need to fund it. It depends 
upon the level at which the violation occurs. For example, if 
it's below the appropriation level, if it's at a particular 
command--let's pick on the Army since we haven't talked about 
them yet--if it's at an Army Command but at the Army 
appropriation level, and there is sufficient funds to fund that 
negative number, we can do it within the appropriation. If it's 
at the appropriation level, then we would have to come back to 
the Congress. But we always report it.
    Mr. Horn. Ten minutes to the gentlewoman from Illinois, 
Vice Chairman Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. I just have one 
question and that is to start with Mr. Dodaro. You mentioned 
that the Department has underestimated the future cost of 
environmental cleanup in the disposal of weapons systems, and 
then for unexploded ordnance--I guess that's how you pronounce 
it--from the training ranges. How poorly has this been done? 
And I guess my question is, how does that fit into the whole 
scheme of the financial management?
    Mr. Dodaro. Basically, those figures that the Department 
has, it's not how poorly the case is. They just have not made 
estimates for those major classes of weapons systems disposals. 
We have been undertaking discussions with them. This is in the 
category of accounting standards that have been adopted but 
need to be implemented by the Department.
    Those amounts are material essentially to the consolidated 
financial statements of the U.S. Government along with the 
environmental disposal liabilities estimated by the Department 
of Energy for cleanup and nuclear weapons complex. That was the 
one area, looking across the government on the consolidated 
financial statements, that we knew was understated.
    In many other areas, we didn't know if the right number was 
there. It couldn't be substantiated with this area, because 
those estimates are not yet being made, that we reached that 
conclusion that we did. So the Department is in the process now 
of adopting that standard and then methodologies need to be 
developed to have a sound basis for making those estimates.
    We have provided the Department with some information based 
on our research of how that could be done as a starting point, 
a foundation, but they need to implement it.
    Mrs. Biggert. Mr. Secretary.
    Mr. Lynn. Mrs. Biggert, we are doing exactly what Mr. 
Dodaro said. This goes back, I think, to my comments of my 
original testimony where I said we are making the shift from a 
system where we were essentially a budgetary-based system to 
now we are doing an accrual-based system.
    Under a budgetary-based system, your environmental 
liabilities wouldn't be on the books until you budgeted for 
them. On the accrual-based system that we are moving to, you 
would anticipate those liabilities and include them on the 
financial statement. That is exactly the shift that we are 
making now.
    Mr. Dodaro is exactly right. We are in a discussion over 
what standards ought to be applied with the FASAB and the other 
participants in that, and then we are looking at methodologies 
to try and come up with an acceptable means of estimating those 
liabilities. I think that we are actually making some progress 
in that area.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Horn. We thank you. Let me just ask a few general 
questions here and let everybody get into it. I have a lot of 
confidence in Secretary Cohen and Deputy Secretary Hamre.
    Mr. Lynn, you are the Under Secretary. What is it that you 
need to solve those problems, and are you getting the support 
from the Secretary and the Deputy Secretary? Could you outline 
for us the strategy of how the next time we meet we will have a 
lot of these things cleaned up; and, if we are going to have 
that situation, what are you going to have to ask for?
    Mr. Lynn. Mr. Chairman, I think that we have asked for it. 
It starts at the top, as you said. We have the support of Mr. 
Cohen, who came to the Department with some experience in this 
area. You referenced the act. He sponsored the Clinger-Cohen 
Act and his participation in your corresponding body in the 
Senate in which he was a Member. Deputy Secretary Hamre, having 
had this job, fully understands the problems and is committed 
to the solutions.
    What specifically are we doing? That I tried to indicate in 
my opening testimony. The biggest thing we need to do--and it 
was a point Mr. Mancuso stressed--is we need to improve the 
systems. We have a plan in place that is going to update all of 
the financial accounting systems and neck them down to 32. That 
should be complete by 2002. We are two-thirds done; we are on 
track to complete the rest. That will put us in a very good 
position with regard to the 20 percent of the data that is on 
the financial statement that comes from those systems directly. 
The other 80 percent that we have taken the next step just this 
past fall, which is to do a financial management improvement 
plan.
    The major comment that we got from the auditors is we need 
to take further steps on the feeder systems. They are 
absolutely right. That is, indeed, the next step. That is where 
we are going. I have been holding meetings on a monthly basis 
with all of the departments which are the action agents in this 
regard. We have tapped, in general, the financial manager of 
each department to try and put in place a system of upgrades to 
the feeder systems, the logistics, the acquisition, the 
personnel, the medical systems, all of the various systems that 
feed data into the finance and accounting. We are taking those 
steps as we speak.
    As I said, it involves quite a major effort involving all 
components in the Department. Finally, we have been meeting not 
quite on a monthly basis, but with the audit agencies as well 
as OMB to develop these interim strategies that I mentioned 
earlier.
    I think the most helpful step and really the corner stone 
of that effort was the auditors identifying what they the 
called ``show stoppers.'' What are the five or six items that 
are really causing us--what are the five or six deficiencies in 
the financial statement that we really need to address, 
valuation of real and personal property, the connection of the 
inventory systems and so on.
    Mrs. Biggert just left, but the liabilities issue that she 
mentioned. We are attacking each one of those. We are trying to 
develop a strategy that will get us better data in advance of 
the final effort which is the improvements in the systems.
    Mr. Horn. Does the General Accounting Office have anything 
to add to that outline of a strategy to solve some of these 
problems?
    Mr. Dodaro. As I indicated in my statement, both oral and 
written, I'm very encouraged. The Secretary had put out a 
memorandum, which is the first time that there is a written 
document urging that this be given priority across the 
Department.
    And everything that Mr. Lynn outlined is correct. We are 
engaging in short-term activities. The big question mark in my 
mind is that financial management reform is a Department-wide 
issue. And Mr. Lynn is a very important player there, but he 
needs the cooperation of both the military and the civilian 
leadership across the Department.
    I was also encouraged that the Secretary adopted the 
financial management reform under the defense reform initiative 
which means that the senior management of the agency will 
follow it and track it and develop it. That to me will be the 
telling of the tale as to whether or not the reforms are 
adequately implemented a year from now; as to whether the 
financial management reform is as vigorously pursued as the 
year 2000 computing challenge problem; and whether the very top 
people across the Department are helping Mr. Lynn and his 
colleagues achieve change.
    That, only time will tell. But unless that happens, a lot 
of these plans will not bring about the real improvements that 
are needed. But the foundation is being laid. This is a 
question of follow-through and execution on the plans. And 
Defense, like a lot of agencies, have had many good plans that 
just stay on the shelf and never get implemented. This is a 
case where we are watching that very closely, and that will be 
the pivotal element in this whole exercise.
    Mr. Horn. Mr. Mancuso, how does the Inspector General feel? 
Is that strategy outlined by Mr. Lynn acceptable to the 
Inspector General's office?
    Mr. Mancuso. Yes, it is. And I would add that the 
Secretary, the Deputy Secretary, and Mr. Lynn have been 
supportive of our efforts. In the past few years--and I know 
your committee has heard this story--our budget had been 
planned to decrease at a dramatic rate. We were up around 1,650 
people in 1994; we're at about 1,250 people now, and we were 
scheduled to decrease another 200 people in the next 2 years.
    The Department sat down in good faith and discussed this 
matter with us. We presented our concerns as to why we felt 
that we could not do our statutory job and the job that the 
Department deserves and needs in handling such things as high 
risk areas, et cetera, without some relief.
    The Deputy Secretary and the Comptroller negotiated that 
relief with us. We're now on an even path to maintain 
approximately our current level of resources, and we believe we 
will be able to cover the things that absolutely need to be 
covered. We also have ongoing negotiations with the Comptroller 
involving the number of entities for which annual statements 
will be required.
    And we feel that with some possible relief in that area, we 
may be able to shift some resources toward, again, more 
concentration on the underlying problems. We also have, I 
think, a healthy relationship with the Department in that we've 
been asked to participate in well over 100 process-action teams 
and improvement task forces in the Department.
    So the IG has become an active player in identifying some 
of the problems and seeking solutions at an early stage. And as 
Mr. Dodaro said, we view as very positive the fact that the 
Department is willing to consider using the Y2K methodology in 
addressing some of the more serious financial management 
challenges that we have.
    So in sum, I would say that we are quite pleased and we 
believe that we have general agreement with the Department as 
far as how efforts need to be focused in addressing such 
important challenges as financial management.
    Mr. Horn. We could stop here, but I just want to get them 
on the record. Computer system security, the General Accounting 
Office, and the Inspector General have reported on the 
vulnerabilities that exist in the Department of Defense's 
computer systems. The Inspector General, in its written 
testimony, stated that the defense financial systems that 
processed nearly $300 billion in disbursements annually are 
clearly at risk.
    Could you expand on that area. How much of a problem is 
this? Usually, we've read headlines somewhere during the year 
that some 18-year-old has cracked into a defense system. I 
mean, can we protect most of those or where are we on that?
    Mr. Mancuso. Again, what I would say is that, as you are 
well aware, 18-year-olds may attack any system. We had a case 
just recently where there was an attack on a DOD system and the 
same individual had actually had a hacker attack on a nuclear 
facility in India, so that there's certainly no sacred systems 
out there.
    The Department of Defense presents a very dramatic 
challenge for a lot of hackers. Our financial systems are of 
great concern, and the Department is rightfully not placing 
emphasis solely on security issues. They're looking at whether 
we are protecting our resources.
    The way to do that is through a strong infrastructure 
protection program; and we're working on that. We're reasonably 
satisfied--in fact we are satisfied with the efforts of the 
Defense Information Systems Agency in that regard. We have 
individuals, trained individuals, that we have placed in DISA 
to help us develop the mechanisms to identify problems and to 
react to them. So on that one, yes, we are satisfied with what 
the Department is doing. We're reasonably assured that the 
right level of effort and concern is being placed there.
    And we're hopefully optimistic, I guess, that the controls 
that are in place or are being put in place right now will 
succeed.
    Mr. Horn. Any comment from the General Accounting Office?
    Mr. Dodaro. From our aspect, as you know, we've identified 
computer security across the Federal Government as a high-risk 
area. Along with Y2K, back in early 1997. Those were the first 
two areas we've ever identified governmentwide on our high risk 
program. The risks are increasing as we become a more 
interconnected world, if you will, the increased use of the 
Internet. The Internet, as many people have said, it's not 
ready for prime time from a security standpoint.
    But to give you some indication, in 1995, we issued a 
report where the Defense Department estimated that there were 
approximately 250,000 hacker attacks on the Department during 
that particular year and it estimated about 60 percent or so 
have been successful. This is a growing problem.
    I agree with Mr. Mancuso that the Department has given this 
elevated attention over the past few years, thanks to Deputy 
Secretary Hamre. I also know Mr. Lynn has been involved, as 
well the Defense Information Agency. They do have an 
information assurance plan in place. It's being staffed now. 
But, again, it's not yet implemented; and it needs to be 
implemented.
    And this is another example of a Department-wide problem 
that needs department-wide attention and execution. And we're 
going to continue to followup and evaluate those computer 
controls as part of the annual audit. But the Department of 
Defense, like some other Department's are really an attractive 
target for people; and there's growing capacity of people 
developing information warfare capabilities. And this is a very 
serious issue.
    I was pleased to see after we designated this a high-risk 
area the President came out with a decision directive, 
Presidential Decision Directive 63, that talked about trying to 
secure critical information infrastructures across the country, 
not just the Federal Government, but on electric power systems, 
telecommunication systems, and transportation systems. It's a 
very important issue. And I would urge this committee to really 
continue to keep an eye on that.
    Mr. Horn. Mr. Lynn, do you want to add something to that? 
You heard the 1995 number. What has it been in 1998, 1999 in 
terms of hacker attacks?
    Mr. Lynn. I'm afraid that's outside my knowledge at this 
point. I would be happy to provide it.
    Mr. Horn. OK. For the record.
    Mr. Lynn. For the record.
    Mr. Horn. Without objection, it will be in the record.
    This is really a national security thing, obviously. Is the 
National Security Agency involved to help get at the hacking 
problem?
    Mr. Lynn. Yes, they are. They are--there are a couple of 
agencies in the Department. Mr. Dodaro mentioned DISA, the 
Defense Information Assistance Agency. We also have an 
information assurance team at the NSA, and they do a great deal 
of work both in terms of monitoring our systems as well as 
looking to the future and trying to anticipate future threats 
and develop hardware and software and techniques for doing that 
for dealing with that.
    Mr. Horn. There's no problem within NSA's help, no problem 
in having their help?
    Mr. Lynn. No, they're a full member of the team.
    Mr. Horn. Yes, OK. Because Secretary Weinberger, I think, 
was the first Defense Secretary they realized they report to 
him; and when they were going around him, there was little 
discussion with the then commanding general. I'm glad to hear 
they are helping.
    Mr. Dodaro. Mr. Chairman, I might add that the National 
Security Council has been given lead responsibility under this 
Presidential Decision Directive to get involved. They're asking 
for plans from each of the Federal agencies. They're working 
with OMB. We've made a series of recommendations to make sure 
that it is coordinated and there's adequate follow through. So, 
again, I'm pleased to see that they are involved on a broad 
basis.
    And they're also trying, as relates to an earlier question 
by Congressman Ose, to develop training to make sure there are 
adequately trained people to be security administrators in the 
area. This is another area where security is always taking a 
back seat to making the system more user friendly, more easily 
accessed; and security now needs to be elevated to be a 
competing priority.
    Mr. Horn. That's fine. Nothing else to add, Mr. Lynn, to 
this? You're happy with the security?
    Mr. Lynn. Well, I don't want to say happy or satisfied. 
We're well aware of our attractiveness as a target. With my 
specific responsibilities for the defense finance and 
accounting service, we are taking it very seriously. We have a 
team down in Florida that focuses exclusively on that, as I 
think Mr. Mancuso's testimony indicated. We have taken the vast 
majority of the IG recommendations with regard to that. And 
it's, I think, a constant effort to try and stay ahead of the 
hackers and other people who would wish us ill.
    Mr. Horn. OK. The General Accounting Office has testified 
that in raising its capitalization threshold from $5,000 to 
$100,000. The Department of Defense has effectively removed 
billions of dollars in assets from accounting controls. Do you 
still feel strongly on that?
    Mr. Dodaro. Well, part of----
    Mr. Horn. Can you elaborate?
    Mr. Dodaro. Well, that issue, the capitalization threshold 
issue needs to be reexamined. Mr. Lynn and myself and our 
organizations have had an ongoing dialog about that, as well as 
with the contractors that DOD has hired to look at the real 
property and personal property area. I know Mr. Lynn is going 
to have them take a look at the capitalization threshold. I'm 
very encouraged that they're reconsidering that now, and 
hopefully we can come to an acceptable outcome that we can all 
feel is an agreeable solution to this issue.
    It's important not only from asset control and 
accountability but also in coming up with costs associated with 
the useful life of the assets and spreading those costs over a 
period of time, so that when cost comparisons are made between 
DOD activities and commercial activities where they have much 
lower capitalization thresholds and their costs are spread over 
a period of time that there's a comparability and also for 
charging prices under DOD's working capital funds so that 
there's adequate consideration of what the appropriate costs 
would be over time, depending on the assets.
    Mr. Horn. How would you define the capitalization aspect at 
$100,000? I mean, is there a definition there of what is in and 
what is out in terms of capitalization or potential 
capitalization?
    Mr. Dodaro. The Department has a definition that's fairly 
generic, although there are some nuances. I think the likely 
outcome will be more capitalization thresholds targeted to 
different types of assets, rather than a more of a generic 
approach.
    Mr. Horn. How are we defining this, Mr. Lynn?
    Mr. Lynn. As Mr. Dodaro indicated where this is an issue 
that we're actively working, as we speak, I guess I would not 
agree with your characterization. The threshold takes assets 
off the statement. That is actually not true. It's a question 
of timing. Assets that are above the threshold are put on the 
statement and depreciated over time. Assets that are below the 
threshold are also on the statement. They're just expensed all 
in the year that they're purchased. But either way, they end up 
on the statement. The difference is, as Mr. Dodaro indicated, 
the accounting treatment. Do you want to treat this as a 
capital asset which you depreciate?
    We think at this point $100,000 is the right level. We do 
not want to depreciate, say, a fire hydrant. That isn't 
valuable. Actually, it takes quite a bit of work to depreciate 
these things, and there's no value to us in depreciating things 
that low.
    Having said that, we have asked, as Mr. Dodaro indicated, 
two private contractors to come and, based on commercial 
standards, to come in and recommend to us where our thresholds 
ought to be. And we plan to evaluate those recommendations as 
we get them later in the summer and work with GAO.
    The other point I would make, though, is DOD's threshold at 
$100,000 actually puts it in the middle in terms of government 
agencies. There are several agencies that are higher, or at 
$100,000, that have received clean opinions, and GAO has 
approved those clean opinions. Those are agencies that are 
considerably smaller than that that have many fewer assets and 
you would think have a lower threshold than DOD, but it's 
actually equal to or greater.
    So there's a prima facie case there that we're at least at 
a reasonable level if other agencies are able to get a clean 
opinion at that level.
    Mr. Horn. Does the Inspector General have a dog in this 
hunt?
    Mr. Mancuso. I think I'm going to defer to Mr. Lieberman on 
this one.
    Mr. Lieberman. No, we do not feel strongly about what the 
threshold should be. As these gentlemen and lady know, we're 
most concerned with the Department's ability to accurately 
account for these items, no matter what the threshold ends up 
being. So I think we will just stay on the sidelines and then 
try to enforce the rule, whatever it turns out to be.
    Mr. Dodaro. As Mr. Lynn indicated, this is a governmentwide 
issue, and we're exploring it on a governmentwide basis to make 
sure there's consistency across the agencies.
    Mr. Horn. You've got a study under way?
    Mr. Dodaro. Yes, we're going to start this spring.
    Mr. Horn. Has that been requested by a particular 
committee?
    Mr. Dodaro. No.
    Mr. Horn. We will request it then.
    Mr. Dodaro. I can always count on this committee, Mr. 
Chairman, for requests.
    Mr. Horn. I held this partnership in assets of property 
last week. We might as well see what's being either amortized 
or expensed, as the case may be.
    Mr. Dodaro. Request accepted.
    Mr. Horn. Although I have great sympathy with Mr. Lynn, why 
are we fiddling around with a fire plug at $5,000?
    Mr. Dodaro. I don't think that's in my statement, Mr. 
Chairman. We're not talking about fire plugs.
    Mr. Horn. OK. That's gone to the dogs, too, I think.
    Are expense assets tracked as to where they are or is it 
what the condition they're in or what are we talking about when 
you expense something?
    Mr. Dodaro. Well, that's part of the issue that we want to 
have examined. It's one thing to have an expense, but there 
needs to be control from an internal control standpoint that 
the asset is safeguarded, it's protected from theft and, that 
the Department knows the location, the condition that they 
could use it properly.
    So that's one of the other reasons why, as Mr. Lieberman 
just articulated, beyond the capitalization level, there's a 
stewardship responsibility for any use of the taxpayer money to 
make sure that there's accurate tracking of that and to be put 
in place. So the asset accountability and stewardship 
responsibilities are throughout the use of the money and the 
tracking of those assets. That needs to be dealt with.
    There are problems associated with tracking, which are 
included in my statement and the Department's and the Inspector 
General's reports about inaccuracies of information of assets 
under $100,000 and how those are properly accounted for.
    Mr. Horn. So, between the three forces here that relate to 
Defense in some way or the other, you think this will be worked 
out on some consensus?
    Mr. Dodaro. That is our goal, Mr. Chairman. I must admit 
we've had some spirited discussions on this particular issue. I 
think--part of the problem is that there's not accurate 
information to do analysis in the beginning, to find out how 
many of the Department assets--assuming certain threshold 
levels--how much of the assets are really removed and expensed 
on an annual basis.
    There's also the comparability issue from an IRS 
standpoint. The IRS is much more judicious about a private 
enterprise's assets that have a useful life over a year, and 
there are other standards that need to be looked through. So 
I'm always optimistic that we're going to be able to work this 
out. I hope we can.
    But if we can't, we will have to acknowledge our 
differences and outline what those are and make the judgments 
that we're all paid to make.
    Mr. Horn. Any comments, Mr. Lynn?
    Mr. Lynn. I certainly hope we will be able work it out. 
That was the purpose of the hiring--or asking the two outside 
CPA firms to make a recommendation was to try and get a common 
basis from which to proceed. It is a difficult issue, though. 
The Federal Accounting Standards Board did look at the idea of 
setting a governmentwide standard and found it too complex and 
too difficult and chose not to.
    Mr. Horn. Have you had that report from the accounting 
firms yet?
    Mr. Lynn. No, they're just reviewing the data bases as we 
speak; and as Mr. Dodaro indicated, you have to make first a 
judgment about the accuracy of the data bases and what the 
value of below $100,000 or below any threshold is, vis-a-vis 
the statement, before you can make a recommendation. So they're 
in that part of the process right now.
    Mr. Horn. I assume you're using the Y2K mess as a way to 
take a look at a lot of systems you either don't need or you 
need in better hardware and software?
    Mr. Lynn. Yes, we are.
    Mr. Horn. This is an opportunity to throw a few overboard.
    Mr. Toye. Mr. Chairman, before we leave the capitalization 
issue, I think it's important to understand that within DOD we 
make a distinction between accounting and accountability. And 
irrespective of what the capitalization threshold is, that does 
not mean that anything below that threshold does not have 
accountability controls, that is, we maintain controls, we know 
where the item is, and what the condition is.
    All of those items that Mr. Dodaro mentioned that we should 
do for those items below the capitalization threshold, we do 
do, so the accounting threshold does not automatically 
eliminate accountability for those items that are below that 
threshold. And I think that point is important also to 
consider.
    Mr. Horn. Well, that's certainly true on a base in terms of 
inventory. And it sort of mellows out, I think, at a few other 
levels. Has anybody lost any ships this year or missile 
launchers that we can't find?
    Mr. Lynn. No, Mr. Chairman, we have not lost any ships or 
any missile launchers.
    Mr. Horn. OK. That's good to know.
    On that optimistic view, we will close the hearing; and I 
will thank the staff for its work. I thank the witnesses for 
their work. J. Russell George is the staff director, chief 
counsel for the Government Management, Information, and 
Technology Subcommittee. The director of communications is way 
in the second row from the last wall there, Bonnie Heald, and 
professional staff member; and then on my left and your right, 
Larry Malenich, the detailee from the General Accounting 
Office. That's why we get thoroughly into these things. Mason 
Alinger in the corner over there is our faithful clerk that 
makes sure that things are set up around here; and Richard 
Lucas--is Richard around today? Richard isn't. He is our 
intern. Faith Weiss, counsel to the minority and Earley Green, 
staff assistant. And our court reporters are Cindy Sebo and 
Randy Sandefer.
    So with that, we thank you all for coming over. And we 
adjourn this session.
    [Whereupon, at 12:20 p.m., the subcommittee was adjourned.]

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