[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:] [GRAPHIC] [TIFF OMITTED] T2467.001 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:] [GRAPHIC] [TIFF OMITTED] T2467.002 [GRAPHIC] [TIFF OMITTED] T2467.003 [GRAPHIC] [TIFF OMITTED] T2467.004 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:] [GRAPHIC] [TIFF OMITTED] T2467.005 [GRAPHIC] [TIFF OMITTED] T2467.006 [GRAPHIC] [TIFF OMITTED] T2467.007 [GRAPHIC] [TIFF OMITTED] T2467.008 [GRAPHIC] [TIFF OMITTED] T2467.009 [GRAPHIC] [TIFF OMITTED] T2467.010 [GRAPHIC] [TIFF OMITTED] T2467.011 [GRAPHIC] [TIFF OMITTED] T2467.012 [GRAPHIC] [TIFF OMITTED] T2467.013 [GRAPHIC] [TIFF OMITTED] T2467.014 [GRAPHIC] [TIFF OMITTED] T2467.015 [GRAPHIC] [TIFF OMITTED] T2467.016 [GRAPHIC] [TIFF OMITTED] T2467.017 [GRAPHIC] [TIFF OMITTED] T2467.018 [GRAPHIC] [TIFF OMITTED] T2467.019 [GRAPHIC] [TIFF OMITTED] T2467.020 [GRAPHIC] [TIFF OMITTED] T2467.021 [GRAPHIC] [TIFF OMITTED] T2467.022 [GRAPHIC] [TIFF OMITTED] T2467.023 [GRAPHIC] [TIFF OMITTED] T2467.024 [GRAPHIC] [TIFF OMITTED] T2467.025 [GRAPHIC] [TIFF OMITTED] T2467.026 [GRAPHIC] [TIFF OMITTED] T2467.027 [GRAPHIC] [TIFF OMITTED] T2467.028 [GRAPHIC] [TIFF OMITTED] T2467.029 [GRAPHIC] [TIFF OMITTED] T2467.030 [GRAPHIC] [TIFF OMITTED] T2467.031 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. 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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:] [GRAPHIC] [TIFF OMITTED] T2467.062 [GRAPHIC] [TIFF OMITTED] T2467.063 [GRAPHIC] [TIFF OMITTED] T2467.064 [GRAPHIC] [TIFF OMITTED] T2467.065 [GRAPHIC] [TIFF OMITTED] T2467.066 [GRAPHIC] [TIFF OMITTED] T2467.067 [GRAPHIC] [TIFF OMITTED] T2467.068 [GRAPHIC] [TIFF OMITTED] T2467.069 [GRAPHIC] [TIFF OMITTED] T2467.070 [GRAPHIC] [TIFF OMITTED] T2467.071 [GRAPHIC] [TIFF OMITTED] T2467.072 [GRAPHIC] [TIFF OMITTED] T2467.073 [GRAPHIC] [TIFF OMITTED] T2467.074 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.] -