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

       RESULTS OF THE DEPARTMENT OF DEFENSE'S FISCAL YEAR 1999 FINANCIAL
                                STATEMENTS AUDIT

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

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                          INFORMATION, AND TECHNOLOGY

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 9, 2000

                                   __________

                               Serial No. 106-200

                                   __________

           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
                                     ______

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                         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
    HELEN CHENOWETH-HAGE, Idaho              (Independent)
    DAVID VITTER, Louisiana

                          Kevin Binger, Staff Director
                     Daniel R. Moll, Deputy Staff Director
               David A. Kass, Deputy Counsel and Parliamentarian
                        Lisa Smith Arafune, 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
                 Louise DiBenedetto, Professional Staff Member
                               Bryan Sisk, Clerk
                        Trey Henderson, Minority Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on May 9, 2000......................................     1
    Statement of:
        Coburn, General John G., Commanding General, U.S. Army
          Materiel Command; General Lester L. Lyles, Commander, Air
          Force Materiel Command; and Vice Admiral James F. Amerault,
          Deputy Chief of Naval Operations...........................   117
        Lieberman, Robert J., Assistant Inspector General for
          Auditing, Department of Defense............................     3
        Lynn, William J., Under Secretary of Defense (Comptroller),
          Chief Financial Officer, Department of Defense, accompanied
          by Nelson E. Toye, Deputy Chief Financial Officer..........    83
        Steinhoff, Jeffrey C., Acting Assistant Comptroller General,
          Accounting and Information Management Division, U.S.
          General Accounting Office, accompanied by Lisa G. Jacobson,
          Director, Defense Audits; and David R. Warren, Director,
          Defense Management Issues..................................    26
    Letters, statements, etc., submitted for the record by:
        Amerault, Vice Admiral James F., Deputy Chief of Naval
          Operations, prepared statement of..........................   134
        Coburn, General John G., Commanding General, U.S. Army
          Materiel Command, prepared statement of....................   118
        Lieberman, Robert J., Assistant Inspector General for
          Auditing, Department of Defense, prepared statement of.....     5
        Lyles, General Lester L., Commander, Air Force Materiel
          Command, prepared statement of.............................   127
        Lynn, William J., Under Secretary of Defense (Comptroller),
          Chief Financial Officer, Department of Defense, prepared
          statement of...............................................    86
        Steinhoff, Jeffrey C., Acting Assistant Comptroller General,
          Accounting and Information Management Division, U.S.
          General Accounting Office, prepared statement of...........    29
        Turner, Hon. Jim, a Representative in Congress from the State
          of Texas, prepared statement of............................   143

       RESULTS OF THE DEPARTMENT OF DEFENSE'S FISCAL YEAR 1999 FINANCIAL
                                STATEMENTS AUDIT

                                  ----------

                              TUESDAY, MAY 9, 2000

                      House of Representatives,
    Subcommittee on Government Management, Information,
                                        and Technology,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2 p.m., in
    room 2154, Rayburn House Office Building, Hon. Stephen Horn
    (chairman of the subcommittee) presiding.
        Present: Representatives Horn, Walden, and Turner.
        Staff present: J. Russell George, staff director and chief
    counsel; Louise DiBenedetto, professional staff member; Bonnie
    Heald, director of communications; Bryan Sisk, clerk; Trey
    Henderson, minority counsel; and Jean Gosa, minority assistant
    clerk.
        Mr. Horn. The Subcommittee on Government Management,
    Information, and Technology will come to order.
        The subcommittee recessed after this morning's hearing, and
    we will proceed today with the results really of the Department
    of Defense's fiscal year 1999 financial statements audit.
        In February, the subcommittee began its third series of
    hearings to examine the results of financial audits of selected
    Federal agencies. Since then, we have learned that agencies
    have made some progress, especially in the area of receiving
    unqualified audit opinions. However, the important goal of
    maintaining financial systems that produce accurate, reliable
    financial information on a day-to-day basis continues to be a
    significant challenge to nearly all Federal departments and
    agencies, including the Department of Defense.
        Fiscal year 1999 is the 4th year the Department of Defense
    has prepared agencywide financial statements and the fourth
    time that the Department's Inspector General could not express
    an opinion on these statements. The Defense Department's
    financial information is simply not reliable.
        The financial management deficiencies at the Department of
    Defense continue to represent the single largest obstacle in
    preventing the U.S. Government from achieving an unqualified
    opinion on its governmentwide financial statements. As a
    result, the assets, the liabilities, and net costs of the
    entire Federal Government continue to be questionable.
        Again this year, the Inspector General reported that the
    Department of Defense cannot accurately report on its finances,
    including an estimated $196 billion in military retirement
    health benefits, $80 billion in environmental cleanup
    liabilities, and $119 billion in general property, plant, and
    equipment.
        The Inspector General also reported that the Department had
    to process $7.6 trillion in accounting entries to correct
    errors, add new data and force its financial data to agree with
    other data sources. At least $2.3 trillion of that money was
    not supported by documentation.
        Last month, the General Accounting Office, Congress's own
    auditor program fiscal and part of the legislative branch,
    found that controls over ready-to-fire, hand-held rockets, and
    missiles at one Army depot in Kentucky were inadequate, leaving
    these weapons vulnerable to undetected loss, theft, or
    unauthorized use. The General Accounting Office noted that
    although these problems were specific to one depot, it could
    represent a possible systemic weakness throughout the Army.
        In addition, auditors found that again in 1999, the
    Department of Defense was still unable to account for and
    control more than $1 trillion in physical assets, including
    ammunition and multimillion dollar weapons systems.
        These are just a few of the significant problems identified
    in the 1999 financial audit. Such lack of accountability,
    frankly, cannot continue.
        The Inspector General, the General Accounting Office, and
    Defense Department officials acknowledge that the Department's
    financial management systems are plagued with serious problems,
    in fact, so serious Department officials feel about this, they
    do not anticipate having adequate financial systems that can
    produce reliable information until the year 2003.
        Because of the significance of these problems, Department
    leaders must be committed to addressing both long-term and
    short-term issues. Today, we want to learn about the Defense
    Department's incremental improvements to its financial
    management systems and operations. We also want to explore what
    is being done to fix its serious, long-term financial problems.
        We welcome each of our witnesses and look forward to your
    testimony. I'd like to especially thank our distinguished
    guests on panel II for accommodating our invitation on such
    short notice: Commanding General John G. Coburn, Commander
    Lester Lyles, and Vice Admiral James F. Amerault. We thank you
    all.
        Just to give you the way we approach this, we do swear in
    all witnesses, and we don't want you to read your text. We'd
    just like you to summarize it, because we want to get you out
    of here on time. I believe General Coburn has to leave, and I
    think Mr. Lynn has to leave, and we want to get the most out of
    you while you're here.
        Those texts automatically that are written go into the
    hearing record the minute I welcome you as one of the
    presenters; and what we prefer, of course, is that summary that
    you can make. And then we can get into a dialog between those
    at the table, GAO, and Defense Department as well as those up
    here in terms of asking various questions for the majority and
    the minority. Although this is a very bipartisan committee, the
    questions are probably the same whether it's minority or
    majority.
        So let us start in then with the first presenter, and that
    is Robert J. Lieberman, the Assistant Inspector General for
    Auditing of the Department of Defense. Mr. Lieberman.
        I should swear you all in. If you've got some staff behind
    you that will whisper in your ear, get them up, too.
        [Witnesses sworn.]
        Mr. Horn. The clerk will note that they affirm the oath.
        Mr. Lieberman.

     STATEMENT OF ROBERT J. LIEBERMAN, ASSISTANT INSPECTOR GENERAL
                  FOR AUDITING, DEPARTMENT OF DEFENSE

        Mr. Lieberman. Thank you.
        Chairman Horn, Mr. Turner, I appreciate the opportunity to
    be here today to talk about DOD financial management. The DOD
    efforts to compile an audit of the fiscal year 1999 financial
    statements were massive. Nevertheless, the Department could not
    overcome the impediments caused by poor systems and inadequate
    documentation of transactions and assets.
        In terms of audit opinions, therefore, the results differed
    little from previous years. A clean opinion was issued by us
    for the Military Retirement Fund, but the other funds of the
    Department, including the consolidated statements, were not in
    condition to merit a favorable audit opinion. So we had to
    disclaim.
        The GAO written testimony elaborates on results of our
    audits in considerable detail, so I won't repeat the rather
    lengthy list of deficiencies that precluded favorable audit
    opinions. Suffice it to say my office issued 36 reports over
    the last 12 months. I believe one of them was good news. The
    extent to which DOD must rely on unusual accounting entries to
    compile financial statements, which has been reported by
    auditors annually for 10 years but not fully measured until
    this year, perhaps would be instructive in terms of laying out
    how far the Department has to go to fix its financial systems.
    So I'm going to focus on that a bit in this summary.
        When the financial reporting system of a public or private
    sector organization can't produce fully reliable financial
    statements, accountants sometimes make accounting entries,
    often as recommended by auditors, to complete or correct the
    statements. Making major entries or adjustments is not the
    preferred way of doing business, and there is considerable
    attention paid to any significant change made to official
    accounting records.
        The notion of accounting records being made on a mass scale
    to compensate for incomplete and inaccurate financial reporting
    input is completely foreign to corporate America, as is the
    prospect of such adjustments being unsupported by clear audit
    trails. Unfortunately, the audits of the DOD financial
    statements indicated that at least $7.6 trillion worth of
    accounting entries were made to compile them. This startling
    number is perhaps the most graphic imaginable indicator of just
    how poor the existing automated systems are.
        The magnitude of the problem is further demonstrated by the
    fact that out of $5.8 trillion of these adjustments that we
    audited this year, $2.3 trillion were unsupported by reliable
    explanatory information and audit trails. Although there are
    procedural control issues involved, fundamentally, DOD needs
    across-the-board automated systems solutions so that it can
    compile financial statements like any other large business
    entity would and does.
        Unfortunately, developing automated systems on time and
    with adequate performance has never been the Department's
    strong suit, and it is still in the process of implementing the
    Clinger-Cohen Act. We have suggested that, in order to provide
    additional assurance that the systems development efforts
    necessary to achieve CFO compliance are successful, the
    Department adopt the same management approaches that were used
    for the successful year 2000 conversion.
        That's still an ongoing process. Implementation, frankly,
    has been slower than we would have liked. We intend to continue
    working closely with the Department to try to put that full
    process into place. The advantage of that process is, among
    other things, that it generates measurement information that
    can be used by the Congress, by senior DOD managers and other
    interested parties to understand how much progress has actually
    been made toward the goal.
        Right now, we're relying strictly on audit opinions for
    such information; and using audited opinions as the sole metric
    is really not satisfactory because a lot of progress can go on
    and not affect the overall opinion. I give at least one example
    of that in my statement.
        I also stress environmental liabilities in my written
    statement. There are a couple dozen major categories of
    deficiencies that we could have selected. I picked that one
    because it is, first of all, fairly easily understandable; and
    it also shows you the kinds of issues involved as we try to
    create Federal accounting standards that make sense for the
    Federal Government, generate information for financial
    statements that would be useful to the Congress and the
    executive branch and, finally, get all the different DOD
    components who have a share of those liabilities to compute
    them and report them so that they can be compiled. Each one of
    these several dozen categories of information that has to be
    collected is monumental in its own right.
        As you mentioned, the Department reported almost $80
    billion in environmental liabilities. We feel that's
    considerably understated. We know that it is understated. These
    are large numbers. In every case they have to be compiled with
    the input of hundreds of different program offices and in some
    cases many dozen automated systems. Meeting that formidable
    challenge has been a high priority for the Department for 10
    years.
        As you said, the Department has candidly said that its
    systems problems will not be solved before 2003; and even that
    probably is an optimistic estimate, given the fact that most
    system projects schedules slip both in the public and private
    sectors.
        With that, I'll close and welcome any questions.
        Mr. Horn. Thank you very much.
        [The prepared statement of Mr. Lieberman follows:]
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        Mr. Horn. We now have the next presenter from the General
    Accounting Office, Jeffrey C. Steinhoff, who is Acting
    Assistant Comptroller General for the Accounting and
    Information Management Division.

    STATEMENT OF JEFFREY C. STEINHOFF, ACTING ASSISTANT COMPTROLLER
     GENERAL, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S.
      GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY LISA G. JACOBSON,
       DIRECTOR, DEFENSE AUDITS; AND DAVID R. WARREN, DIRECTOR,
                       DEFENSE MANAGEMENT ISSUES

        Mr. Steinhoff. Mr. Chairman, it's a pleasure to be here
    today to discuss the state of financial management at DOD. The
    bottom line, DOD continues to make important progress in
    addressing its serious financial management weaknesses; and, at
    the same time, it has a long way to go.
        DOD's problems are pervasive, long-standing, deeply rooted,
    widespread, and complex in nature. What has been markedly
    different over the past 2 years is that DOD has, for the first
    time, clearly demonstrated a strong commitment to addressing
    its serious weaknesses. A number of important initiatives, both
    short-term and long-term, are under way and planned; and we're
    seeing positive results, as the IG just mentioned. I applaud
    Bill Lynn and his team for their efforts.
        This commitment, though, must be sustained over a number of
    years to turn plans into reality. A big challenge remains, and
    the finish line is not yet in sight. For that matter, it's not
    even close.
        For the short term, continuing efforts to standardize,
    streamline, and simplify processes--reengineering will be
    critical to success, as DOD's current processes are extremely
    convoluted and complex; to strengthen and enforce existing
    controls; to ensure basic transaction processing which today is
    a major impediment as the IG pointed out, to enhance human
    capital; and to oversee performance will be essential.
        At the heart of the long-term challenge, and this is a
    major challenge, is a financial system that is far from
    compliant with requirements of the Federal Financial Management
    Improvement Act and needs to be overhauled. The system is not
    integrated or tied together and really represents a patchwork
    of systems that individually have weaknesses, some very
    serious, and collectively just do not get the job done.
    Information does not automatically flow from system to system,
    and it really manifests itself as the IG stated, in the $7.6
    trillion of adjustments to prepare DOD's fiscal year 1999
    financial reports.
        And to give you some sense as to the difficulty of the
    challenge that DOD faces, this is DOD's own depiction over at
    your right on the poster board, of the current systems
    environment for its payment system, which as you can readily
    see, is overly complex. Around the outer edge are 22 payment
    systems that are fed by numerous other systems, systems that
    are generally not compatible or properly integrated and often
    do not use common data codes.
        For example, I have an example in my detailed testimony of
    a 65 character code. It's my understanding that some codes can
    exceed 100 digits. You make an error on one digit, the
    transaction gets rejected, it goes into suspense. You have to
    find it. They are very complex systems. In a nutshell, this
    tells the story as to what they are trying to fix and this is
    just one environment. Compounding the challenge is that most of
    the information needed to prepare annual financial reports and
    more importantly, I stress more importantly, to manage DOD's
    resources on a day-to-day basis comes from program or feeder
    systems--logistics, acquisition personnel--that are not under
    the direct control of the DOD Comptroller.
        He owns about 20 percent of the information. The other
    managers own the rest. So to achieve the endgame of the CFO
    Act--and the endgame is beyond financial reporting, it's not a
    clean audit opinion. It is systems that routinely generate good
    information for decisionmaking on a day-to-day basis so the
    gentlemen you'll be hearing on the next package have the data
    they need to do their jobs well. That's the endgame here. To
    achieve that endgame, DOD faces a system challenge that far
    transcends the operation of the Comptroller. I agree fully with
    the IG and support the efforts by DOD to use the Y2K process as
    a mechanism for addressing this.
        There are great lessons learned by DOD. They had had a
    success.
        I want to just focus on a couple of elements that I think
    are particularly important though. One, DOD recognized in Y2K
    that this was not just a CIO issue. This was a chief executive
    officer issue and the Deputy Secretary took direct control.
    Once that occurred, you saw a major change. You saw them moving
    there from the back of the pack up through till they had
    ultimate success.
        The issue with financial management as well as Y2K
    transcends the operations of DOD and the same type of high-
    level focus is needed. Several weeks ago, we issued this
    Executive Guide: Creating Value Through World-class Financial
    Management. And there are a lot of lessons learned here. This
    is what successful organizations do. This is how they have
    success. Organizations like Boeing, Chase Manhattan, GE,
    Hewlett-Packard, Owens Corning, and Pfizer. They determined
    that financial management is an entity-wide priority for which
    the chief executive provides clear, strong leadership including
    involvement in systems.
        Second, Y2K had a date certain. It also had interim
    milestone dates which were tracked and reported on. The same
    can be applied here. A clear plan with an end date and enforced
    interim milestones will be essential.
        Third, as the IG representative, Bob Lieberman stated, DOD
    must follow a standard discipline approach. It will be
    imperative that there be no shortcuts taken, that Clinger-Cohen
    be followed.
        Systems development has been a high risk area in DOD on
    GAO's list since 1995. Their last big effort, the corporate
    information management initiative, went on for about a decade
    and did not succeed; so it is very important that this project
    be very closely monitored.
        And finally, for Y2K there was extensive validation and
    verification by the IG as well as end-to-end testing. It just
    can't be in the environment of preparing financial reports.
    This all has to be addressed in the environment of having
    management information for DOD.
        In closing, a sustained high level commitment that
    transcends this administration will be key to the ultimate
    success of DOD's reform efforts. Likewise, sustained
    congressional attention such as this hearing and the light
    you've placed on this issue over the past 5 years will be
    critical to really instilling the expected accountability in
    DOD.
        Mr. Chairman, this concludes my remarks. I'd be pleased to
    answer any questions that you or Mr. Turner may have.
        Mr. Horn. Thank you very much.
        [The prepared statement of Mr. Steinhoff follows:]
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        Mr. Horn. As usual, we have had some excellent
    presentations so far, and we now move to the honorable William
    J. Lynn, Under Secretary of Defense Comptroller and Chief
    Financial Officer of the Department of Defense. He's
    accompanied by Nelson Toye, Deputy Chief Financial Officer. So
    Mr. Lynn.

       STATEMENT OF WILLIAM J. LYNN, UNDER SECRETARY OF DEFENSE
    (COMPTROLLER), CHIEF FINANCIAL OFFICER, DEPARTMENT OF DEFENSE,
     ACCOMPANIED BY NELSON E. TOYE, DEPUTY CHIEF FINANCIAL OFFICER

        Mr. Lynn. Thank you very much, Mr. Chairman, members of the
    subcommittee. Mr. Chairman, I do welcome the opportunity to be
    here today to discuss the financial management of the
    Department of Defense. As you already entered my formal written
    statement into the record, I'll just cover a few of the high
    points in my opening statement as you requested and then turn
    to your questions.
        About a year ago I appeared before this subcommittee to
    discuss the Department's financial management initiatives. I
    said then and repeat now that financial management reform
    continues to be a high priority for the Department's senior
    leaders. As the Department's Chief Financial Officer, financial
    management reform is my highest priority. I remain encouraged
    by our substantial progress and in particular by the commitment
    of the people advancing that progress, but as has been pointed
    out here today by the other witnesses, we have much left to do.
        Today what I'd like to do is give you a status report on
    our major initiatives and highlighted challenges ahead. While
    the Department has had many notable successes in its financial
    management reform, the reality is that it's impossible to
    overhaul our financial management operations overnight. The
    plan reforms will require years to fully implement and require
    a sustained commitment over not just this administration but
    future administrations. Nonetheless and though much remains to
    be done, we are making progress.
        Let me divide financial management reform of the Department
    into thee major phases. The first phase is to consolidate our
    financial management operations. That phase is complete. We
    have consolidated over 300 finance and accounting field sites
    scattered throughout the world into 26 locations. That in
    itself has produced financial savings over $120 million
    annually. More importantly, this organizational consolidation
    has enabled the second phase of financial management reform,
    the elimination of incompatible and not compliant financial
    systems.
        This phase two is well under way. The number of non-
    compliant finance and accounting systems has been significantly
    reduced. In 1991, we had 324 finance and accounting systems.
    None of them met today's requirements. Today we are down to 96
    and by 2003, we expect to have about 30 finance and accounting
    systems overall a 90 percent reduction, and we expect all of
    those finance and accounting systems to be compliant with
    current accounting standards. If we succeed at that, Mr.
    Chairman, we will have brought DOD from very low standard in
    terms of other commercial style entities up to the head of the
    class in terms of the number and the compliance of its finance
    and accounting. We're about two-thirds of the way there, and we
    intend to finish it.
        The third phase: We've recently initiated this phase which
    is to upgrade the interfaces with functional systems that feed
    data into finance and accounting reports. More than 80 percent
    of the data on DOD's financial statement comes from outside the
    finance and accounting network. The data comes from personnel,
    from acquisition, from logistics, from medical, and other
    systems. It has to be inputted into the finance and accounting
    systems to provide the finance and accounting or provide the
    accounting reports that are necessary to produce audited
    financial statements and to produce the kind of management
    information that's needed to oversee the Department.
        Establishing a seamless connection between these so-called
    feeder systems and the accounting systems used to prepare
    financial statements is the crucial final step in financial
    management reform. These feeder systems were developed and put
    into service well before the promulgation of Federal accounting
    standards. They simply were not designed to produce business-
    style financial statements. Accordingly, much of our financial
    information has to be manually transfered from these systems
    into the accountant system. Indeed, some of the information
    that the auditors insist upon is simply not available within
    those systems at all and therefore has to be estimated in some
    way.
        The systems just don't produce the information. Let me give
    you an example. Our inventory systems primarily are designed to
    maintain records on the latest acquisition costs. This is the
    data the logistic managers find most critical. The systems do
    not retain, in most, cases the historical costs of items, which
    is the data that the auditors want for their financial
    statements--for our financial statements. We are moving to
    upgrade our inventory systems to retain both historical and
    latest acquisition costs, so that single inventory system will
    produce both the data needed to manage the logistic system as
    well as to produce the finance and accounting statements, but
    this is an expensive and laborious process. It is going to take
    several years.
        The third phase of this--of financial management reform is
    going to extend well beyond the financial arena. It touches
    nearly every other function of the Department. To oversee this
    massive effort, we've accepted the recommendation of both the
    GAO and the IG that we establish a Y2K-like process run by a
    panel. The panel will report to the Deputy Secretary through
    the defense management counsel and the panel will as in the Y2K
    effort establish milestones, review progress, and monitor
    implementation to move the 70 or so critical feeder systems
    into compliance with current accounting standards.
        In order to accomplish the fundamental financial management
    reform that we have in mind, we will have to complete this
    effort to establish the interfaces with all these critical
    feeder systems. This will take several years and substantial
    new resources. In the interim, however, we believe we can make
    substantial progress toward earning an unqualified audit
    opinion for the Department.
        Toward that end, we've collaborated the organizations and
    individuals represented at this table to identify major
    obstacles that must be overcome for the Department to be
    successful. We have developed interim solutions to systemic
    problems, and we are applying accounting and auditing standards
    in ways that make sense for the Department of Defense. Major
    deficiencies that have prevented us from receiving a favorable
    audit opinion in the past have been identified; strategies to
    deal with those deficiencies have been developed and are being
    coordinated with my colleagues at this table today. Details of
    those strategies are discussed at some length in my written
    statement for the record. I'm happy to go into further detail
    on any questions you might have.
        Let me close, Mr. Chairman, by saying that during my tenure
    as the Department's Chief Financial Officer, I witnessed
    substantial progress and an extraordinary transformation of our
    financial activities as well as other financial areas with
    which those activities must interact. This progress reflects a
    collective effort spanning both the financial and the non-
    financial communities.
        I want to publicly acknowledge and offer my sincere thanks
    to my staff as well as the staff element also of the other
    principles within the office of the Secretary of Defense, the
    Defense Accounting Service, the military departments and the
    defense agencies for their hard work and for their dedication.
        In sum, we have built a strong financial management reform
    foundation upon which those that follow us can build. We remain
    determined to have financial management reform so well advanced
    by the time the next DOD leadership team takes over, that it
    will conclude that completing the job is not only wise and
    necessary but achievable.
        Our DOD leadership team also has been determined to keep
    foremost in our minds that the Department's primary mission is
    national security. Our reforms must support that mission, not
    burden the troops and support activity who fulfill it.
        We've been asked by Congress and the audit community to do
    things not previously required of the Department. Our challenge
    is to design such new procedures so that they enhance, not
    diminish the Department's management and leadership and the
    accomplishment. Its overall mission. In closing, Mr. Chairman,
    I would like to thank you and the subcommittee for this
    opportunity to discuss financial management reform within the
    Department. I'm happy to answer your questions.
        [The prepared statement of Mr. Lynn follows:]
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        Mr. Horn. Thank you very much, Mr. Secretary. I'd like to
    know how you're proceeding to make sure that next year this
    situation will not occur. Are you working with the services and
    your people working with the services? Who are we pulling
    together to get the seriousness of this situation, and how are
    you going about it just as an open-ended question?
        Mr. Lynn. Mr. Chairman, we have two approaches. We have a
    short-term and a long-term approach as I alluded to in my
    statement. Over the long term, as I think the other witnesses
    indicated, the only solution is systemic improvement. We need
    to get the finance and accounting systems compliant with the
    CFO Act and the other legislative requirements and we need--
    we're well within range on that.
        Bob Lieberman may be right. 2003 is aggressive and
    optimistic but we're not going to be far off of that and I
    think he would probably agree with that, that we're going to be
    very close to achieving that date or something close to it for
    the finance and accounting systems. But for the other systems
    which comprise 80 percent of the data, the challenge is even
    stronger because those systems were never designed to provide
    this kind of data and it requires a complete overhaul of at
    least 70 critical systems.
        To undertake that, our long-term approach is to set up
    exactly as has been recommended, a Y2K-like process that will
    take as we did with Y2K, take those 70 systems, go through the
    5 phases starting with awareness through renovation to
    compliance and testing. As we move each of those systems into a
    compliant phase, we'll improve the financial management data of
    the Department.
        That's a multi-year process. In order not to be waiting in
    line for that development, we've also developed a short-term
    process, short-term meaning less than multiple years but
    probably will take us at least 2, maybe 3 more years at least
    which is to develop, try to get a clean opinion by tackling
    deficiency, by deficiency, the problems that we have, working
    with the audit community, trying to develop--work around trying
    to develop auditable estimates. Where we can't produce the data
    through the systems, we work through the general property area
    relatively well on that area.
        We're working now on the personal property area. We started
    to discuss some of the areas that were mentioned at the other
    end of the table in terms of environmental liabilities and
    health care liabilities. We're trying to take each of the major
    show stoppers that the auditors have identified and develop a
    short-term process that will give us more reliable data such
    that we hope we can get a clean opinion.
        Mr. Horn. In testimony that will come after you leave,
    General Coburn will have spoken of several significant
    initiatives under way in terms of the Army and particularly the
    materiel command of which he's commanding general. I'm curious
    and also General Lyles for the Air Force materiel, he will have
    stated that the imperfect data is inevitable due to the 161
    feeder systems that use thousands of interfaces to pass
    critical information. Now, Mr. Steinhoff noted in his testimony
    that the logistics systems and the general ledger systems are
    not integrated. Is that true?
        Mr. Lynn. Yes, it is.
        Mr. Horn. And what are we doing to try to get those? You
    know, about 4 or 5 years ago when Mr. Hamre came up here, my
    hearing was titled ``what did you do with the $25 billion we
    can't find.'' So I asked John how many years is it going to
    take to untangle that. He said, well, give me a couple of
    years. A couple of years went by and presumably you had it down
    to about $10 billion instead of the $25 billion and a lot of it
    was in the Columbus, OH, Army processing operation where checks
    were just spewed out to small business people, etc. And I
    wondered are we getting on top of acquisition and inventory so
    you can find some of these things and what's your feelings on
    this.
        Mr. Lynn. I think what you're talking about in terms of the
    numbers with Dr. Hamre were problem disbursements. We brought
    problem disbursements down from a high of I think $31 billion
    half a dozen years ago to about $5 billion today.
        We are gradually and steadily making progress on this.
    Progress, it involves going out to two causes. One of the
    causes was in fact the consolidation I described at the
    beginning of my testimony. When we pulled 330 finance and
    accounting stations into 26, there were inevitable difficulties
    in terms of recordkeeping and establishing proper internal
    controls.
        We've had a number of issues. I think we have resolved most
    of those. We've now completed that consolidation as I said 2
    years early, and I think we're working through now most of the
    organizational impediments to those problem disbursements. What
    remain are system impediments. In order to properly account for
    all of the disbursements and match them with the corresponding
    obligations, what we need are automated systems ultimately.
    That is, as I say by 2003 we think we will have those. We're
    about two-thirds of the way to that. It's that two-thirds of
    the way that has produced the progress that we've had to date
    and I think we will bring the number down very much further as
    we bring on the other third of new finance and accounting
    systems.
        Mr. Horn. You obviously have jurisdiction over the three
    basic services; and when you look at some of that from how a
    financial statement is prepared, are the three services able to
    get commonality in terms of inventory categories? I realize
    they are very different between services, but that's something
    that the private sector certainly can solve. And when you've
    got different corporations under one large corporation in terms
    of a conglomerate, what's your feeling in terms of the services
    where the core of this whole operation starts with them and the
    only reason we have a Department of Defense is--that's to
    coordinate the efforts of the basic services. And of course,
    we've evolved in the last 20, 30 years with super agencies
    within Defense on accounting logistics and all that.
        What's your feeling? Are you getting the basic raw material
    on the right steps that it aggregates to the financial
    statement or have we got weird things going on in the three
    services so they can never get in something that is inputted
    when it's aggregated step after step. So I'm just curious how
    difficult that is when you look at it from the top of the
    Pentagon to the people you're serving down at the bottom. How
    do you deal with that?
        Mr. Lynn. There is certainly as you say, Mr. Chairman,
    inconsistencies between how the different military departments
    treat issues although I would not trace our challenges and
    problems to that primarily. We are generally able to overcome
    those inconsistencies and in particular with the establishment
    of the Defense Finance and Accounting Service, we're able to
    establish common policies and definitions and use those to
    build financial statements.
        I don't think it's cross service inconsistencies that cause
    our problems at least primarily. The problems we have primarily
    and what I alluded to in our statement is the bulk of the
    systems and the systems for which the next panel is responsible
    for were never constructed to produce the kind of financial
    data that's necessary for financial statements. We're
    endeavoring to change those systems to put modules in those
    systems or to upgrade those systems to provide that data, but
    that's a massive task. That's the challenge. It's that
    challenge in changing the systems to establish a seamless Web
    from the logistics systems, from the personnel systems, from
    the medical systems into the finance and accounting systems. We
    need to be able to transfer that data in a seamless automated
    way. We're not now able to do that, and that's our main
    challenge.
        Mr. Horn. So you're optimistic. Is that what that boils
    down to?
        Mr. Lynn. Yes.
        Mr. Horn. The basic number of accounting systems I assume
    was merged a little bit during the Y2K exercise. What number of
    accounting systems do you have within the Department of Defense
    at this point?
        Mr. Lynn. We have 98 finance and accounting systems. We can
    provide that for the record.
        Mr. Horn. Please provide it for the record.
        I think there's been a figure when General Page was
    testifying here, and there was more than that 10 years ago.
        Mr. Lynn. 10 years ago there were 330.
        Mr. Horn. Was that it; 330?
        Mr. Lynn. Approximately, yes.
        Mr. Horn. Well, do you think--how much further do you think
    we can go with some basic accounting systems?
        Mr. Lynn. We think we can get the finance and accounting
    systems down to about 30.
        Mr. Horn. Have you ever examined some large corporations in
    this country and looked at how they do this? And have we
    learned anything from it, or is it something that just isn't
    relevant?
        Mr. Lynn. It's relevant although not completely. The
    purposes for which commercial entities use financial statements
    are quite different. They use them in terms of bond ratings, in
    terms of loans. Frankly, we're not interested in valuing the
    Department so we can sell it. It's the--the differences are
    substantial; but where we have a common ground with commercial
    entities is, and I think it's what Jeff Steinhoff talked about,
    it's not the financial statement itself. It's the underlying
    systems that produce the data in the financial statement. And
    their corporate leaders need reliable and accurate financial
    data and so too does the Department. So to the extent that a
    financial statement is just a measure of your systems' ability
    to produce reliable and accurate data, then it's an important
    measure for the Department although the use in and of itself of
    that statement is quite different than in the corporate world.
        Mr. Horn. I'm curious. Mr. Steinhoff, you've heard the
    testimony of Mr. Lynn. Where are the weaknesses?
        Mr. Steinhoff. Basically the weaknesses are in the systems.
    They've got disparate systems that were developed in a stove
    pipe environment, each service developing its own systems over
    the years. The systems don't work as intended. They don't tie
    together. They are not integrated. As all the panelists have
    said today, the systems can't readily exchange information. It
    has to be drawn out from the systems and even then you don't
    know if it is, in fact, reliable.
        There's a big problem in processing transactions. It's an
    incredibly complex environment. One study done by the Air Force
    a few years ago found that if they changed the way they
    accounted for reparable items, in accord with private sector
    accounting, they wouldn't care if an item went from one status
    to another for purposes of accounting. But in DOD the way the
    system was designed, they accounted for every separate event.
    The study that was done for the Air Force found that they could
    have eliminated 155 million transactions or 78 percent of the
    transactions being processed. So they've got just a huge volume
    of transactions from systems that were developed many years ago
    and were not developed under a systems architecture for the
    Department.
        You asked a little bit about best practices or what's done
    in the private sector. What we found in our study is that the
    finance and accounting doesn't sit separately in the private
    sector. It's integrated into the business processes. It's part
    of the business processes, and whatever comes out of the
    business process is adequate for financial reporting. The key
    being real time information of value to the business managers,
    which is the endgame the Comptroller General talks about.
        What we're really looking for is for the financial
    information to come from the business systems as a by-product
    and for financial reporting to be something that just routinely
    occurs. Social Security is preparing their financial report
    within a matter of weeks after the close of the fiscal year
    whereas many departments struggle and take months and months
    because the systems, in fact, are not tied together.
        Mr. Horn. Well, we thank you. I now yield 15 minutes to my
    colleague, the ranking member, Mr. Turner, the gentleman from
    Texas.
        Mr. Turner. Mr. Steinhoff, I want you to try to illustrate
    the importance of the issue we're discussing today by maybe
    giving us a few examples of what this failure to have these
    systems in place and to have the seamless transition data from
    the logistics personnel, medical, other systems and the
    financial management systems, what's this costing us? What's
    the cost to the taxpayers for the failure to come to grips with
    this issue that we come and talk about year after year which we
    still are talking about dates in the future when we hope maybe
    the financial and accounting systems will be in place in 2003
    and then we haven't even talked about dates to get systems in
    place beyond that. Give us some sense of--if this is just a
    matter that accountants would like to talk about, then we can
    keep talking about this year after year; but somewhere in here
    I suspect there's a significant cost to the taxpayers for our
    failure to come to grips with this.
        Mr. Steinhoff. This has adverse impacts on the ability to
    control costs in the Department. For example, Defense has
    recognized the lack of cost-accounting systems to be one of its
    major impediments to controlling the cost of weapons systems.
        Also, for the past several years, has had large losses in
    its working capital funds, in part because it's very difficult
    to set prices without good cost information. In addition,
    because of weaknesses in the systems, visibility over billions
    of dollars of assets have, in fact, been lost which puts these
    items at risk and also is one factor in purchasing items that
    are not needed. At the end of fiscal year 1999, I believe about
    58 percent of Defense's secondary inventory, about $37 billion,
    is in long supply or unneeded. In part, visibility and good
    accounting information is one reason for that, not the sole
    reason but one reason.
        We have found many times because of breakdowns in controls,
    things have occurred that shouldn't occur, and things haven't
    happened that should have. For example, we found that foreign
    countries have not always been billed under the foreign sales
    program because there wasn't good visibility over the
    deliveries that had been made so therefore the billings reports
    were not made. This past year we identified, for example, $330
    million of R&D costs, non-recurring costs that had not been
    billed to foreign countries. In addition, some of these
    problems have been reported for decades, I want to put in
    perspective that the challenges Mr. Lynn and his top team are
    trying to tackle are decades old. GAO has been reporting on
    these types of problems since I've been at GAO, and that's over
    25 years. Most of these areas are on our high risk list; so
    this is a very difficult issue.
        I think there are also lost opportunity costs. Instead of
    managing by cost oftentimes people manage by budget. They get
    the budget dollars and obligate and spend the budget dollars
    without data on what was achieved in terms of cost, what was
    the cost of this depot as compared to that depot, or could this
    have been done this more efficiently and effectively. That's
    really one of the key components of the CFO Act. It calls for
    the systematic measurement of performance, it calls for the
    development of cost information, and it calls for the
    integration of systems. That's the key, that's the endgame.
    There is a great loss when you don't have that kind of data day
    to day.
        Mr. Turner. Secretary Lynn, can you add to that list? It's
    a fairly exhaustive list I know, but do you have anything to
    add to the areas that are apparent to you where we are actually
    costing taxpayers dollars because we have failed to get these
    systems in place?
        Mr. Lynn. From my perspective, Mr. Turner, the biggest
    issue is to get at the infrastructure costs of the Department
    to try and reduce overhead. In order to be able to reduce
    overhead, we have to have a very precise understanding of what
    activities cost what amounts because we're going to have to try
    and streamline those activities. In that area, our data is
    limited and it limits our ability to reduce overhead. I think
    that's the biggest challenge that goes unanswered as a result
    of inadequate cost accounting systems.
        Mr. Turner. You mentioned this 2003 date you thought was a
    reasonable date. I think it's September 30, 2003 for getting
    the financial and accounting systems in order and in place.
    What's the estimate of what it's going to take to get the rest
    of the systems where they ought to be?
        Mr. Lynn. That's the first job of this new panel that we
    have set up to review the systems first. As I say that number,
    we think, is about 70 but it may be--there's quite a few more
    systems in this area. We think there are 70 critical ones, but
    the first job is to review first what are the critical systems
    and what's a reasonable schedule to set up milestones for
    bringing these systems into compliance. So we'll have to
    provide that as soon as we've developed it in that panel.
        Mr. Turner. It seems like in order to carry out our
    oversight role, it would be helpful if we had that group
    establish those benchmarks, those deadlines and we could be
    aware of them and hold the Department to those dates.
    Otherwise, we're going to continue, down the path of talking
    about this and these dates continue to slip; and I think it
    would be very helpful to us if we could know about what date
    will we be able to see the entire schedule to accomplish this
    monumental task that we're talking about here today.
        Mr. Lynn. I think that's a fair request, Mr. Turner. As I
    say, we can provide that for the finance and accounting
    systems. We've already provided it for the consolidation. As I
    said, we gave you a schedule for the consolidation; and we beat
    it by 2 years. The next stage which is making the finance and
    accounting systems compliant will be more difficult still, but
    we think we are on track for 2003. And we're developing the
    schedule for the third most important phase which is the
    compliance of the feeder systems and, we'll provide that
    schedule to the committee as soon as we have it.
        Mr. Turner. How long are we talking until that schedule
    will actually be developed?
        Mr. Lynn. We're working on it this summer. Before the end
    of the year.
        Mr. Turner. When we talk about a schedule to accomplish
    these tasks, what are the elements necessary to shorten that
    timetable? We've heard references to perhaps the most important
    and that is leadership from the top, emphasis on this problem.
    What are the other elements? Are we talking about additional
    staff, additional dollars? What does it take to bring these
    systems to a point where we find them acceptable other than
    just sheer leadership and emphasis on the issue?
        Mr. Lynn. It is going to take both additional staff and
    additional dollars. We have put additional funding into the
    2001 budget request to accomplish exactly that. We'll be
    reviewing this budget. I think we'll build on that. It also
    will take additional staff. We're working with the IG and the
    GAO to go outside the Department's own capabilities in this
    area and to hire outside CPA firms to help us with the remedial
    efforts that we clearly need in developing these systems. We're
    hiring agency by agency individual audit firms to go through
    what the steps are in terms of system improvement in order to
    be able to clean up our financial data.
        Mr. Turner. Thank you, Mr. Secretary. I yield back, Mr.
    Chairman.
        Mr. Horn. Well, I thank the gentleman. Those are excellent
    questions. Mr. Steinhoff, as a premise to the rest of the
    panel, in your testimony you stated that the General Accounting
    Office, the Army depot personnel identified 835 quantity and
    location discrepancies associated with 3,272 ready-to-fire
    hand-held rocket and launcher units. Now, could you describe
    how this happened and what it all means?
        Mr. Steinhoff. We visited the Army depot to really gain an
    understanding of its control system. We went to the first
    storage location and looked at one of the first items there. It
    was this hand-held rocket which is a sensitive item. Because of
    its classification as a sensitive item, it must be controlled
    by serial number and it must have a continual audit trail.
        Those are the requirements from DOD, and we found items
    that were being stored that weren't on the accounting records,
    weren't on the property records. What we found working with the
    depot folks and they were very responsive and got right on top
    of this, what we found was that several shipments of rockets
    had been received but there was a glitch in entering it to the
    system. It rejected. It went into a suspense account.
    Automatically after 10 days anything that hadn't been cleared
    from suspense was just dropped. Therefore it wasn't flagged.
    The items were on the floor. They weren't on the records. At
    the same time, at the first location we went to, we found
    things on the floor that were on the records but they were on
    the records for a non-location. So in all we found 414 for
    which there was no property record that it was there, and we
    found another 421 that there was a property record but it was
    in the wrong place. So visibility is lost over this item.
        Mr. Horn. Mr. Lieberman, I noted when Mr. Steinhoff was
    responding to my questions about what did you disagree with the
    Under Secretary and you were nodding your head so you seem to
    agree with Mr. Steinhoff and let me ask you about inventory.
    You continue to report on inventory controls and it's a major
    problem for the Department. In February, you reported the
    inventory problems related to chemical protective suits which
    have been identified more than 2 years ago and were still not
    corrected. Could you tell us what you found out?
        Mr. Lieberman. Yes. In 1997, we had reported that, at the
    defense depot in Columbus, there was very poor inventory
    control, drastic discrepancies in numbers of suits that were
    shown on the inventory records as opposed to suits that were
    actually counted when we observed physical counts. We
    recommended that wall-to-wall inventories be done.
        There are 20 different types of suits. They are not all the
    same so it's important to keep them separate and keep good
    inventory control because these have to be issued to operating
    forces that are being deployed. DLA agreed to work on the
    problem in general, and fix the suit problem specifically. Part
    of their answer was to move responsibility for the suits and
    the suits themselves to the defense depot in Albany, GA. So we
    did a followup audit this year down there. We found the
    situation actually was worse. We observed a count of the
    inventory of 1 of the 20 types of suits, the most commonly used
    kind. The inventory records said there should have been 225,000
    of them there and actually there were 194,000. No one could
    tell us what happened to the remaining 31,000 suits.
        This is typical, I'm afraid, of the kind of inventory
    accuracy problems that we have been running across; and I think
    one of the advantages of the CFO Act which is commonly ignored
    is that it levies more stringent audit requirements on numbers
    that the Department of Defense in the past has just sort of
    accepted as being right without a whole lot of audit
    validation.
        Inventory accuracy numbers are typical. Recently GAO
    reported that for the fourth quarter last year, DLA's inventory
    accuracy rate was only 83 percent, which is very poor for
    logistics inventory standards, and all three military
    departments have reported the same kinds of problems.
        Mr. Horn. Now, in the potentially defective chemical
    protective suits, when you went back you found out they were
    not separated from the usable suits. I'm just curious what do
    these suits cost? What's the worth on them?
        Mr. Lieberman. The 31,000 missing suits were worth about
    $1.4 million.
        Mr. Horn. $1.4 billion.
        Mr. Lieberman. Million.
        Mr. Horn. Oh, I thought the Pentagon only had billions. OK.
    Sorry about that slip.
        Mr. Lieberman. They are not terribly expensive on a per
    unit basis. They are just glorified rubber basically.
        Mr. Horn. What about the separation? Why are they saving
    potentially defective chemical protective suits? Is there some
    rigmarole they have to go through to get them off the inventory
    or what?
        Mr. Lieberman. I have to be very careful talking about this
    particular case because sentencing proceedings are still in
    process for some contractor personnel involved in selling
    defective suits to the government and some of the questions
    pertaining to what was wrong with the suits are involved in the
    sentencing procedures. But in general, again I'm afraid this
    was not as much of an anomaly as we might think. There are a
    lot of products in the inventory system where the lots are
    merged together, where we don't have particularly good
    visibility over exactly what we have where. And when an issue
    does come up concerning the quality of something, whether it's
    a chemical suit or fasteners or something like that, sometimes
    it's difficult for the supply people to isolate that particular
    batch because everything has been merged into a warehouse or
    into a bin in a warehouse or on to shelves.
        And the typical warehouseman can't distinguish them. They
    all look the same to them. So if there's not serial item
    control like there is with a piece of equipment, it gets very
    difficult sometimes. There were several reasons involved why
    DLA was slow in getting these particular suits out of the
    inventory. Some of them had to do with communications both
    within the depot and between DLA and the users of the suits
    around the world.
        Mr. Horn. I'd be curious how that's used. I mean, are these
    used by soldiers on the line, by fire departments on various
    bases or what? If somebody says we need 20 of these at
    Leavenworth or Camp Stewart or Fort Stewart and they go
    grabbing 20 and they don't know whether they are defective or
    not defective makes no sense to me.
        Mr. Lieberman. Absolutely. There's no rule any place that
    says it's OK to keep known defective products in the inventory.
    The problem here was that after questions were raised about the
    quality of the suits, DLA did not react fast enough to find
    them and pull them back. These suits are used by combat units.
    They are issued to people who would face possible exposure to
    nerve gas agents and things like that.
        Mr. Horn. So if in our various pursuits around the world
    now, if someone says in Kosovo, a major country, says wait a
    minute, we'll slow them down and they don't have the protective
    suits because they are defective.
        Mr. Lieberman. Fortunately the inventory of chemical suits
    was very large so I haven't heard that pulling the defective
    ones out has really had a readiness impact. But I would have to
    get back to you on whether there's any perceived shortage.
        Mr. Horn. I just wondered. It seemed to me a good master
    sergeant would straighten that inventory out with the services.
    Maybe the Defense Logistics Agency, maybe they don't have a
    good master sergeant. That might be part of the problem. But it
    seems to me when you find there is something wrong, you get rid
    of it and granted if the contractor's playing games, then the
    need is to deal with that contractor. Apparently they are from
    what you tell me.
        Mr. Lieberman. Yes.
        Mr. Horn. Let me just cover a few more things because I
    know Mr. Lynn has other commitments also. Let me ask about Mr.
    Steinhoff as a predicate to this with Mr. Lynn on the
    antideficiency act. Do you find in the GAO where anybody in any
    cabinet department and particularly Defense ever even talks
    about the antideficiency act.
        Mr. Steinhoff. I can't say for that meeting per se but that
    is an area that people in the financial community do talk
    about. It's a law on the books and, the issue of fund control
    is an important issue to the accountant. With respect to any
    penalties that might be accrued from having an Antideficiency
    Act violation, if that's what you're getting at, no, I know of
    no cases where there has been a criminal penalty from the
    violation.
        Mr. Horn. In your testimony, you noted the Department was
    unable to support $378 billion in net costs, and that the
    Department typically uses unreliable obligation data as a
    substitute for cost data. Could you elaborate on that and tell
    us about the effects on budget data used by managers?
        Mr. Steinhoff. The CFO Act calls for the development of
    cost information. Across government, not just in DOD, across
    government, this represents a major challenge because
    government is typically managed based on budget numbers or
    inputs versus outputs and cost.
        As I mentioned before, DOD cited the lack of cost
    accounting systems as the single largest impediment to its
    ability to oversee its weapons systems cost and development.
    And lack of good cost data affects the ability to make economic
    choices, such as A-76 studies, and investments in IT, to
    evaluate programs, such as health care which is a big cost in
    Defense, and to control costs such as working capital fund
    pricing that I mentioned before. Because of a lack of cost
    accounting systems, they've used budget data as a proxy
    forecast, and this budget data wasn't developed for that
    purpose. Also, it's basically not totally reliable itself, and
    therefore, the IG was unable to audit the Statement of
    Budgetary Resources. The Statement of Net Cost also could not
    be audited.
        We find in our work that the obligated balances aren't
    always reliable. The unmatched disbursement issue impacts on
    this. The fund balance with Treasury or the cash account
    doesn't balance. So what you have basically is the need to
    develop accounting systems to provide this basic data.
        Mr. Horn. Mr. Lieberman, what do you think about Mr.
    Steinhoff's comments on that $378 billion in net costs and the
    Department typically using unreliable obligation data as a
    substitute for cost data in, has that been your finding
    basically?
        Mr. Lieberman. Yes, it has. I certainly agree with that,
    and it's really important to have accurate obligation data
    because if you have invalid obligations on the books, you're
    tying up money that will not be used for anything else. And if
    you don't identify those obligations as being invalid by the
    time the obligation availability of the appropriation expires,
    you're never going to be using that money for the purpose for
    which it was appropriated.
        Mr. Horn. Mr. Lynn, the ball is now in your court. What's
    being done to address this situation.
        Mr. Lynn. I think it's what we've talked about, Mr.
    Chairman. What we're trying to do is shift a system that
    frankly for 200 years was designed around the presentation of
    the budget to Congress. That focuses on obligations and
    disbursements. For those purposes, the system works reasonably
    well. We're able to track those and report to our oversight
    committees on what--how we've spent the money and how it has
    been done in accordance with congressional direction. What
    we've only recently in the last decade or so tried to do is a
    business style accrual base system which is used for a
    different purpose, not so much for reporting to our oversight
    committees on how the budget has been spent but for the kinds
    of things that Mr. Steinhoff and Mr. Lieberman are talking
    about, evaluating costs in the working capital fund, trying to
    eliminate overhead by identifying activities that are low
    payoff and high cost, trying to understand the various
    liabilities over the long term the Department faces and to
    accord for those in the normal process. We're trying to shift
    that system. It is a substantial overhaul, and we're only
    partway there.
        Mr. Horn. You noted that you're developing a comprehensive
    financial management improvement plan and have you had a chance
    to review that one yet? Where is that within the bowels of the
    Pentagon?
        Mr. Lynn. We are producing our second one--excuse me. We've
    produced our second. We're in the process of producing a third.
    The difference, in the first one we largely focused on the
    financial and accounting world itself. In the second one we've
    moved out, tried to identify the feeder systems and the core of
    the third one will be to try and implement this Y2K process
    that we've talked about which will do the overhaul of those
    feeder systems and bring them into compliance with the various
    statutes.
        Mr. Horn. Mr. Steinhoff, do you have any comments on the
    Department's financial management improvement plan or its
    implementation?
        Mr. Steinhoff. Yes. First, this is an important milestone,
    a step forward for the Department. I applaud those efforts. We
    did review the first plan. We've made a number of
    recommendations to the comptroller. They really get to some of
    the issues I mentioned before, the need to really describe this
    plan and maybe this is the third plan Mr. Lynn is speaking
    about, but how financial management will support the other
    functional areas. It will be very important that the plan go
    beyond financial reporting to the overall management processes
    of DOD. Also how the plan ties to budget formulation, how the
    several hundred projects in the plan actually tie together
    toward DOD's vision and how the quality of the feeder systems,
    that data will be improved because those systems need quite a
    bit of improvement.
        The final comment I'll make about the plan, I said it
    before, it will be imperative, I can't say this strongly
    enough, that the concepts of Clinger-Cohen be followed.
    Clinger-Cohen has got rigor to it. It requires some heavy
    lifting. It requires some times for you to step back and not
    move forward until you've gone through certain milestones and
    certain steps but it is essential. At the IRS which also has
    serious systems problems, they have been put on a very strong
    Clinger-Cohen by the Congress where their funds are rolled out
    to them for modernization one bit at a time and they go through
    certain milestones and they've done certain things like having
    established systems architecture in place. And it will be very
    important that systems efforts--and this is, as I said before,
    a world class systems challenge, they are trying to deal with
    decades of problems here, that that be very strictly enforced
    and that those concepts be followed, no shortcuts be taken, and
    that the money be very well spent.
        Also, I wanted to clarify a previous statement I had. I
    have an attorney here with me today. He commented I was wrong
    when I said that no one has been punished for antideficiency.
    There have been no criminal prosecutions is what I meant to
    say. There have been administrative admonishments to some
    employees.
        Mr. Horn. Is it admonishments, or is it not trusting that
    particular contractor in the future? Clinger-Cohen ought to
    give them enough flexibility to say no; is that correct?
        Mr. Steinhoff. Yes, yes.
        Mr. Horn. Mr. Lieberman, how does the Inspector General
    feel about the financial management improvement plan?
        Mr. Lieberman. I thought it was long overdue, and I think
    in fairness we ought to recognize that the idea was born in the
    Senate. There was a 5-year plan that OMB compiles, but the
    Defense authorization act from 3 years ago was now--created a
    new requirement for this plan and with a heavy focus on
    systems, which was absolutely appropriate. It is an evolving
    type thing, and, as Mr. Lynn said, each year DOD has improved
    it and added things to it, which certainly needs to continue in
    the future.
        There are still a few concerns I would have about it. I
    still think it's too much of a comptroller community document,
    not well known outside the comptroller community. I think it's
    still too much of a one-time annual snapshot as opposed to a
    living document that's used by management during the year to
    actually control this whole effort as a program. And it still
    doesn't have enough information in it on what is this is
    costing. There's beginning to be specific information on some
    of the systems, but everybody has wondered for 10 years what
    this whole effort is costing and even more, how much more do we
    have to spend to get from here to there. So with the proviso
    that there is going to be continued effort to refine the plan,
    I think it's excellent.
        Mr. Horn. Would anybody like to comment? And feel I haven't
    asked them the right question. You can have the last word on
    this.
        Mr. Lynn. Let me take the opportunity, Mr. Chairman. You
    asked for the precise data on the number of accounting and
    finance systems. You'll find that on page 3 of my written
    statement, provide you the numbers starting in 1991 and going
    through the plan in 2003. In terms of a wrap-up, Mr. Chairman,
    I want to thank again the committee for holding the hearing and
    frankly keeping our feet to the fire. This is an important
    area. I think we have been treating it as such. As Mr.
    Steinhoff has indicated, this is a decade, and I would actually
    say centuries. We went centuries without trying to do this.
        It is going to take us at least decades to establish the
    kind of controls and systems that we think we need to provide
    the data, but I think we have made two important steps forward
    in terms of the consolidation of the financial operations of
    the Department. We're nearly there in terms of the upgrade of
    the finance and accounting systems, both Mr. Lieberman and Mr.
    Steinhoff have appropriately pointed out that we need to
    broaden this beyond the comptroller community, beyond the
    finance community and get at the logistics, the acquisition and
    the personnel and the other communities to make sure that the
    data that comes into the financial system from those areas is
    audible and reliable and accurate. We're working with those. I
    have worked closely in particular with Jack Gansler who is the
    Under Secretary who oversees most of those to try and make that
    happen. Thank you, Mr. Chairman.
        Mr. Horn. We thank you. Can we get the IG and the GAO to
    stay with panel II? We'd appreciate it. We'll get some closure
    here. So you're certainly excused, Mr. Secretary, and thank you
    for coming. We wish you well.
        Mr. Lynn. Thank you, Mr. Chairman.
        Mr. Horn. We now go to panel II, General Coburn, General
    Lyles, and Vice Admiral Amerault. So if you'll please come
    forward. We'll swear you in.
        [Witnesses sworn.]
        Mr. Horn. The clerk will note that the three witnesses have
    affirmed the oath. And we will start with General Coburn.
    General, it's good to see you again.

    STATEMENTS OF GENERAL JOHN G. COBURN, COMMANDING GENERAL, U.S.
    ARMY MATERIEL COMMAND; GENERAL LESTER L. LYLES, COMMANDER, AIR
      FORCE MATERIEL COMMAND; AND VICE ADMIRAL JAMES F. AMERAULT,
                    DEPUTY CHIEF OF NAVAL OPERATIONS

        General Coburn. Good to see you, sir. Mr. Chairman, members
    of the subcommittee, I thank you for the invitation to appear
    here today. I express my appreciation to all the members of the
    committee for your efforts to improve our business processes.
        Let me start by saying that we know we have an obligation
    to be good stewards of every dollar that is given to us and to
    be good stewards of Army assets. Put another way, we recognize
    that stewardship of Army assets is every leader's business, and
    we know that without effective asset accountability and
    control, that we cannot effectively measure performance, reduce
    costs, and maintain adequate funds control. In that regard, I
    can tell you that the Army leadership in consonance with DOD is
    committed to the Department's financial management improvement
    plan and that much progress has been made in the last few
    years. We recognize however that we still have a ways to go and
    significant initiatives both short term and long term are under
    way as we move toward the goal of a single integrated financial
    system.
        Let me just highlight a couple, and I'll try to do that
    very quickly. One of the most important initiatives that the
    Army has under way is a program called the single stock fund.
    I'll just make a few comments about that, and will not be in
    consonance with the oral statement I think you have. Currently
    the Army has two stock funds, a retail fund and a wholesale
    fund. This means that we have layering and duplication of both
    financial and logistics processes. Thus we're consolidating
    these two funds. This consolidation will result in the
    elimination of multiple ledgers, eliminate multiple billings,
    multiple points of sale and integrate all the automation
    systems. Overall, this is an Army-wide change in how we conduct
    logistics operations and associated financial processes which
    will allow us to capture costs with greater clarity. It is a
    fundamental change in the way we do business.
        Another program that I'll highlight very briefly is the
    wholesale logistics modernization program, an initiative
    designed to modernize the army's two largest and most important
    wholesale logistics systems, we call the commodity commerce
    standard system and the standard depot system. And again, this
    is an extremely important initiative for Army. Those are but
    two. There are others that I won't highlight that are equally
    important.
        I'm just going to go right to the summary with your
    permission and just say that although we have a ways to go, the
    Army is not just beginning to focus on accountability. We focus
    on accountability daily and consistently. But notwithstanding
    all these efforts, however, we acknowledge that we need a
    single integrated financial management system that will provide
    commanders and leaders with the financial information they need
    to most effectively use their resources. Mr. Chairman, that was
    brief. But I thank you and the committee for your continued
    support and look forward to your questions.
        [The prepared statement of General Coburn follows:]
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        Mr. Horn. Thank you very much. Let us now turn to General
    Lyles. General Lester L. Lyles is the commander of the Air
    Force materiel command.
        General Lyles. Mr. Chairman, I appreciate the opportunity
    to come before this committee today. On April 20th, Mr.
    Chairman, I assumed command at the Air Force Materiel Command
    in Dayton, Ohio Wright-Patterson Air Force base. Prior to that
    time, I served as vice chief of staff of the U.S. Air Force.
    And in that capacity, I had an opportunity to witness and
    watch, particularly for the last 2 years as my predecessor, as
    the commander of AFMC brought a business management perspective
    to Air Force Materiel Command.
        He instituted a policy of cost accounting, cost control,
    and, more importantly, a cost culture to everything we do in
    Air Force Materiel Command, from research and development to
    acquisition to logistics to sustainment to actually taking
    things out of the inventory.
        Mr. Chairman, I am a big supporter of what General Babbitt
    started, and my plans are to continue that posture for Air
    Force Materiel Command. And I've let the entire command know
    that in the 2 weeks since I've been in charge.
        Air Force Materiel Command is very, very big business.
    Accurate and timely financial information is absolutely key to
    our management and stewardship of the $26.3 billion of
    appropriated budget and the $13.2 billion of annual working
    capital fund budget. It's a very complex business. And the
    complexity of that business makes financial information
    important, but as you know and as the panel members before me
    recently stated, it's very, very hard to obtain. Without timely
    and accurate information, programs like F-22 program and the
    program directors in charge of it will not have the opportunity
    to do solid costing and schedule information for managing that
    program. Our depot maintenance foreman cannot manage their
    costs. The supply chain manager has difficulty doing his day-
    to-day inventory management and doing his responsibilities and
    even things that are seemingly mundane to some people as the
    lodging manager, will not know whether or not he has met his
    cost in performance targets and is doing a good job of managing
    his programs.
        Mr. Chairman, we know we have imperfect data. That's been
    stated by the panel before us. You are very well aware of that.
    That is inevitable as you quoted earlier with the 161 legacy
    feeder systems and the thousands of interfaces that have to
    pass critical information. And these interfaces require weeks
    to run. As a former manager and commander of one of our
    logistics systems, the logistic centers and depots, I can tell
    you I would have loved to have the opportunity to close our
    books in a matter of days as industry does. It takes weeks and
    sometimes a couple of months to actually do it with the systems
    we have today.
        So we're trying to make strides to improve that. There are
    lots of deficiencies, and we are trying to make corrections of
    all those deficiencies. I will not go through all the details.
    You have my draft written report in front of you, the written
    report that has some descriptions of some of the systems.
        I'd like to mention just a couple because I think there are
    major milestones toward trying to achieve the objectives that
    you, this committee, and others want us to achieve. In the
    depot maintenance area we're partnering with Defense, with the
    Air Force audit agency, and with the Navy to implement the
    depot maintenance, accounting, and production system. DMAPS is
    the acronym. And this suite of systems will give us the actual
    cost information and automated billings processes and
    strengthen the cost controls that we need in order to have CFO
    compliance.
        For the supply chain manager, we're trying to mirror
    commercial practices and bring in commercial practices as much
    as we possibly can. General Babbitt, my predecessor, back in
    October when he testified before the Military Readiness
    Subcommittee talked about some of the things we're doing such
    as going to moving average costs for inventory accounting
    rather than the latest acquisition costs to value the
    inventory, the millions of inventory that we have in our
    system. You understand what that means. I won't go through a
    description of it. There is an example given in my written
    account.
        We think this is very, very important to us to allow us to
    get our arms around this very critical function and again to
    get us to a point where we can be CFO compliant.
        We've also gone to data warehousing to improve supply
    management costs visibility and oversight. One system that we
    call Keystone is helping us to sort of bridge, if you will,
    between the systems we have for financial accounting and the
    systems we have for just managing systems and keeping
    inventories. This is a link between the logistics systems as
    the previous panel discussed and the financial systems that are
    very, very important to managing our day-to-day business. We
    will continue toward making those kinds of strides and bringing
    on systems like that.
        One last comment for addressing total ownership costs which
    is very, very important for the U.S. Air Force and particularly
    for our major weapons systems. We're using target costing for
    all of our installation and support activities. This activity
    base costing methodology is one that we're trying to implement
    throughout the entire Air Force but particularly in Air Force
    Materiel Command.
        As the former vice chief of staff for the Air Force, I was
    responsible for trying to make activity-based costing a
    rubric--a mandate for everything we do in the U.S. Air Force
    whether it's flying airplanes, whether it's preparing systems
    for deployment, or whether it's developing the major systems
    we're trying to use to provide capability to our war fighter.
    This target system, activity-based accounting system is very,
    very important to us and we're going to continue strides to
    bring that into the entire Air Force, not just to the materiel
    function.
        Mr. Chairman, we've mapped the road toward CFO compliance.
    We think it's the only thing that we have to do. We think it's
    extremely important in everything that we do. We've identified
    the audit findings and material weaknesses and we are trying to
    address each one of those. We've closed 103 of the 121 audit
    findings against the U.S. Air Force and all the materiel
    weaknesses, and we will continue strides to close all of them.
        In summary, Mr. Chairman, we know we don't have a perfect
    system. We know we have untimely data. We know we have some
    systems that provide us occasionally dirty data, but we're
    making strides and we have the energy to improve that and to
    use a word that you used earlier, we are fully committed toward
    these endeavors. We think we're on the right road, and we're
    proceeding aggressively and we hope responsibly to make those
    improvements for the U.S. Air Force.
        I look forward to your questions, Mr. Chairman. Thank you
    very, very much for inviting me.
        [The prepared statement of General Lyles follows:]
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        Mr. Horn. Thank you, General. It's very well done. Our last
    presenter on panel II is Vice Admiral James F. Amerault, the
    Deputy Chief of Naval Operations for Logistics. Admiral, go
    ahead.
        Admiral Amerault. Mr. Chairman, distinguished members of
    the panel, thank you for the opportunity to appear before you
    today. Although I don't believe that the bottom line of a
    balance sheet can tell us that we are ready for war or not, as
    Navy's Deputy Chief of Naval Operations for Logistics, I do
    understand completely that reliable and accurate financial
    information is extremely important in reaching that very
    readiness. My staff identifies requirements for materiel and
    services in support of logistics. And they program discrete
    levels of funding for them in the defense plan. The quality of
    the financial information on which these actions are based is
    critical to us getting it right.
        As Navy's infrastructure manager, I've looked very hard at
    reducing infrastructure costs in order to modernize and sustain
    operational readiness. Again, the quality of financial
    information can be critical to Navy decisionmakers as they
    consider appropriate actions to reengineer processes to effect
    cost reductions. In some instances the lack of financial data
    could cause us to miss an opportunity as Mr. Lynn has said, an
    extremely large opportunity cost that we can't afford to take
    appropriate action all together and preclude us from
    identifying savings or diversion of funds to other war-fighting
    priorities.
        It's impossible to determine how much is enough if you
    don't know how much you have. The idea that what things cost
    equals what was spent on them has persisted for a very long
    time. Today's declining budget top lines as well as our
    accountability to the taxpayers say that time has been too
    long. I'm ready for your questions, sir.
        [The prepared statement of Vice Admiral Amerault follows:]
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        Mr. Horn. Thank you very much. Let me ask our friends, the
    Inspector General and General Accounting Office, they've
    commented on both the inventory controls and we might as well
    start with that since we had a few examples. Inspector General
    and GAO and the audits generally have repeatedly reported on
    the military service's quote weak controls over inventory
    including weapons and ammunition. Mr. Steinhoff noted that weak
    inventory controls can lead to inaccurate records, and
    inaccurate records can effect supply responsiveness and
    purchase decisions. Do you agree with that or where are we from
    the three services? General Coburn, you want to start?
        General Coburn. Mr. Chairman, I think that as has been
    stated we do have problems with inventory, but it's a
    consistent daily battle. We get very concerned whenever we have
    any shortages of any kind, particularly with weapons. I can
    tell you that when commanders, even at the company level,
    change command, they are required to do a total 100 percent
    inventory of weapons, ammunition, all equipment, and sign off
    on it as all being there, that they have physically counted and
    looked at it personally. Notwithstanding that, we continue to
    have problems with inventory.
        When I get into it, when I invariably find that you haven't
    lost anything, it's simply that you have a record keeping--a
    paperwork problem. So that's what I find time after time. I can
    also tell you that we get so concerned about it that on
    occasion we have senior commanders verify the same kind of
    thing as we have our junior commanders do. So I think that
    there's lots of room for improvement in the system, but I think
    that by the same token that we basically know what we've got
    and that control is really pretty good because there's an awful
    lot of systems.
        I can go on and tell you there are a lot of complementing
    systems as well. It's not just the inventory system. It's also
    the system where you have--you know, we have service
    inspections. Some equipment like ammunition, rockets, that kind
    of thing, you have to not only look at it to make sure it's
    there but make sure it works. So when you're looking at it to
    make sure it works, there's a cross-check to make sure the
    inventory is correct as well. So I guess that's kind of the way
    I see it. Again, problems but not a perfect system but a system
    that we continually work at.
        Mr. Horn. General Lyles.
        General Lyles. Mr. Chairman, I agree with the comment from
    General Coburn. It's a very insidious problem because it's one
    that ultimately affects a lot of different things. Invariably
    we find in looking at inventory and checking inventory that we
    haven't lost things but the paperwork is very, very complex and
    very, very tedious to try to locate exactly where they are or
    even what the status is of various inventory items.
        We had examples of that during the air war with Serbia last
    year, the Kosovo activities. As we tried to track munitions and
    make sure we knew where they were, what the status of the
    various munitions, particularly some of our high-valued
    accurate munitions we needed to prosecute that particular war.
    The issue is the manpower intensive which is a major, major
    problem when you consider the downsizing that we're facing
    today, when you consider that we need to have our young men and
    women doing other things instead of just tracking paperwork,
    both at a junior level and a senior level. So the complexities
    of the systems have made it somewhat of a manpower drain to us.
        We feel that we have a head on where things ultimately are,
    that is, we haven't lost things completely but it becomes very,
    very tedious to try to track them. We need automated systems
    where we can instantly understand and account for where systems
    might be. That same thing carries over when we're talking about
    developing new systems to contractors. The inventory, whether
    it's government-furnished property or equipment, that we
    provide to contractors has a similar sort of situation. We can
    track it but there are like three or four different systems we
    have to do--look at to do that. It becomes very tedious to us
    and the contractors. So it is a major problem.
        Mr. Horn. Admiral Amerault, you want to add to that?
        Admiral Amerault. Yes, sir. I believe we do a pretty good
    job of accounting for what we have in inventory, particularly
    in the field in ships and activity squadrons and detachments
    and so forth. There are places where this has been a problem.
    Receipts in some cases have not tracked in both the inventory
    records and the financial records causing us to not know on the
    financial side what we've got on the physical inventory side.
    This is important.
        Control is a key, generally good but the detail to have the
    kind of accurate control that one might need on both sides of
    the ledger, cost dollars, people, and time. I think there's a
    lot of room for improvement. I think IT systems have come to
    the point where the investments that we're now making in those
    will help us close the gap.
        We don't think this is unimportant. We think it's very
    important. As I said, it's really hard to tell how much is
    enough if you don't know how much you've got. We're dedicated
    to fixing this. I would say that support of our Navy-Marine
    Corps intranet that we are attempting to invest in and purvey
    throughout the Navy is an important step. I would urge the
    committee to support that effort on our behalf. Thanks.
        Mr. Horn. Mr. Steinhoff, do you agree that progress is
    being made in the three services or do you see the same thing
    every year when you go back?
        Mr. Steinhoff. We continue to find a number of the same
    underlying problems with the systems. With respect to this
    area, there's a lot of attention being placed on it. We've seen
    commitment; but until the underlying systems are fixed, it's
    going to be very, very difficult.
        The comment that General Lyles made about using the members
    of the military to track items and to try to find items, it's a
    real difficult issue. These are incredibly complicated systems
    and processes, so complicated it makes no sense. And you don't
    enter information one time and it goes from system to system.
    So not only are the logistics systems not integrated or
    compatible with the financial system, they may not be
    compatible with each other either.
        So you've got a real disconnect here, and when something is
    shipped from point A to point B, it's in transit. You might
    lose visibility over that item. It's a very difficult issue. I
    would say there is certainly a commitment. We've seen all the
    services working toward making changes to reduce their business
    operations costs to be more efficient, effective; but they all
    face a major systems challenge which isn't easily overcome.
        I know I've emphasized this a lot, but there hasn't been
    great success in government or great success in DOD in systems
    development, and you're going to have to have common systems in
    some cases, standard approaches for addressing it, and a lot of
    reengineering.
        Mr. Horn. I would think that in an inventory, you've got a
    way to certainly have an electronic inventory and to what
    degree do you see that or are we still just putting checks on
    papers? When I got here, I couldn't believe it that the General
    Services Administration in its St. Louis operation to which all
    our district offices can ask for supplies and so forth would
    automatically send five invoices together. I said this is
    crazy. We only need one. We've got a Xerox machine. If we need
    two, and with getting reimbursements let's say in the Capitol's
    arcane reaches of trying to pay the bills around here, and it
    was just a waste of trees and papers. How often do you see that
    in the services or do they have it on electronic inventory? Mr.
    Lieberman.
        Mr. Lieberman. There's certainly been a concerted effort
    over the last few years to implement technology like bar
    coding. Clearly for many items the solution merely is to bar
    code them and then let the computer do your recordkeeping and
    calculations for you. This is a problem that has many different
    facets because when we talk about inventory, this is a
    hodgepodge accumulation of items. We're talking about
    everything from little consumables like screws to large
    equipment and subassemblies and things like that.
        Some of it belongs to the services. Some of it belongs to
    the Defense Logistics Agency. Some is warehoused. Some is
    actually distributed to using units. Some is outsourced--we
    hire contractors nowadays often for supply support, and it's
    their responsibility to keep the inventory. In many cases DOD
    doesn't maintain anything in stock. We operate on a just-in-
    time delivery basis. There are, I believe, about 300 separate
    DOD logistics initiatives and a lot have to do with overcoming
    this asset visibility problem.
        In most cases, the answer to whatever the problem is is
    application of a new technology. So a lot of effort is being
    put into it, but a lot more needs to be done and then we still
    have human problems. We still have the guy assigned to do the
    inventory who doesn't feel like doing it so he looks up the
    record to see what's supposed to be there and low and behold
    that's what he reports. Then someone else has to come along,
    and we've actually had cases like this during these audits this
    year, and redo the task. The auditors may do another count. The
    auditors say, hey, none of these quantities match.
        So we're fighting human fate a little bit. To give on just
    very mundane example, at one of the defense depots, the people
    were supposed to wait for the auditors to arrive onsite to do
    the count because an accepted part of the methodology is the
    auditors observe part of the count. They thought they would
    speed things up by going ahead, then just hand the auditors the
    results when they got there. One of the first times we checked
    was a type of rubber seal that is inventoried by how many
    linear feet you have. The record said there should be 396
    linear feet on the shelf. The count done previous day said
    there's 396 linear feet on the shelf. The auditors went and
    measured. This didn't take rocket science. There were only 200
    linear feet on the shelf.
        So that's the sort of thing that is never going to go away
    because we're talking about millions of items and thousands of
    people with varying degrees of responsibility over them, but
    ultimately the computer is the answer here. Fewer systems, and
    more diligence paid to the user friendliness of those systems
    so that we take administrative burden off the troops, are
    urgently needed.
        Mr. Horn. Well, it would seem to me that with the services'
    chiefs telling all of us here we've got too much
    infrastructure, that what they ought to do is have a
    competition with various depots and the ones that aren't doing
    anything that make sense, get rid of those and keep the others.
        But I think if we had a little competition in those depot
    things--now with the Naval shipyards I have a few very strong
    opinions. When you knock out the inefficient shipyards and--
    rather you save the inefficient shipyards, and you hurt the
    ones that threw the money back and never had to repair them a
    second time. And so that didn't give me much faith, I've got to
    tell you, in the Navy, in terms of how they make decisions. It
    seems to me let's get some competition in that.
        If you've got all these things, you can get rid of those
    depots. Granted somebody will bark at you here, but I don't
    think we'll back them up. We also can't--it's a two-way screen.
    We also cannot--you can get the law through to have another
    base closure situation, but I just think you've got to let them
    expand. If they aren't doing anything let's do it another way.
    I don't know what your need in a geographic sense is needed. A
    lot of the services forward fund supplies as they should
    because there's no use going through some of the domestic
    problems when it ought to be closer to where you need it if you
    have troops sent there and this kind of thing. What else does
    the Inspector General and the GAO see they ought to be educated
    on if they aren't? I'm talking the services now, not you three
    gentlemen but if--are we missing something somewhere to get
    that moving so we don't go through this every year.
        Mr. Steinhoff. I think that the three gentlemen here today
    described very well the challenge very forthright. I agree with
    what they said about the challenge. I think that the one area
    of education, and I maybe beat it too much today, I apologize
    if I had, that there are no shortcuts in developing systems
    that must be done with a discipline process. And I feel very
    strongly that the Department has to look at the business
    processes and systems together and to put aside some of the
    stove pipes and barriers and view these as a corporate issue.
        Our study of world-class finance organizations, the best
    practices in State governments as well as commercial
    enterprises, finds that when these types of issues are
    addressed at the CEO level, at the top level, that a lot of
    differences between units are put aside. Also it has to be
    viewed that financial management is providing something of
    value. I'm not sure across the Federal Government how many
    managers really understand what financial management can
    provide. So there's probably a broader educational process, not
    regarding these gentlemen, but perhaps across the organization.
        Mr. Lieberman. May I add one thing, Mr. Chairman. These
    gentlemen really are the business leaders of the Department.
    They are the closest thing in the Department to chief operating
    officers and heads of corporations. It's terribly important
    that they, the users of the financial information, tell the
    people that design these systems what it is that they need,
    because if you leave it to the accountants to decide what the
    managers need, you are going to get some bizarre answers. So
    we've got to just do everything we can to improve that user-
    systems designer interface.
        Mr. Horn. Any other comments, Mr. Steinhoff?
        Mr. Steinhoff. No.
        Mr. Horn. General, anything you'd like to get on the
    record?
        General Coburn. No, I totally agree, Mr. Chairman, with
    what's been said. I would just say, though, that I'm heartened
    by what I see. We've never had visibility in Vietnam. We've
    been in a lot of excess. We never had it in the Gulf. We opened
    an awful lot of containers just to see what was inside. I think
    if you went to Bosnia and Kosovo you'd see it a whole lot
    better. The way that works the standard is a bar code, and then
    we put a little card inside the box. It's called an AMS card.
    It prints out everything that's in the box. The box goes in a
    container. An RF tag goes on the outside of the container and
    that goes through fixed level interrogators so we know what
    we've got along the way. I think that while much remains to be
    done, there's an awful lot of progress being made in a lot of
    areas. The key is pulling it all together it seems to me in the
    one system.
        Mr. Horn. General Lyles.
        General Lyles. Two comments, Mr. Chairman, that also give
    me confidence that we're certainly on the right road and we
    have the commitment. One is for us in the Air Force we closed
    two of our five depots. We're now down to three depots. We've
    aligned work and work packages and inventory from those two
    that were closed and to the three remaining depots, we have
    provided additional workloads so that we're almost worked in
    terms of manning levels at the three depots. This has put an
    even more of an imperative to make sure we have the right kind
    of financial accounting systems at those three depots. So for
    us, this becomes a mandate we have to stay on this course. We
    have to make sure we have the best, most efficient, most
    commercial-like systems and best practices that we possibly can
    and we'll continue that.
        The second one is I think an even greater demonstration of
    leadership, support for this area. As I mentioned earlier, I
    was, prior to taking command of Air Force Materiel Command 3
    weeks ago, I was a vice chief of staff of the Air Force, and in
    that capacity a member of the joint requirements oversight
    committee, the JROC, and the joint staff. And we within the
    joint staff, within the JROC over the last year, I dare say we
    reviewed business operating systems, asset visibility systems,
    the importance of those systems, the mandate from the chairman
    of the joint chief of staff, General Shelton, to put emphasis
    in that area just as much as we reviewed new weapons systems
    from F-22 to Comanches to what have you.
        I think the commitment and recognition that this is a major
    problem goes to the very top of the Department, from the very
    top of the chairman and joint chief of staff to all the
    services; and I feel very positive that we have the right sort
    of focus to continue toward success.
        Mr. Horn. That's very well said. Admiral.
        Admiral Amerault. Yes, sir. Mr. Chairman, I think this is
    an area that we can't afford not to get it right. As I said,
    top lines are not going up for us. It's critical to us being
    able to do business and fund the readiness that we need that we
    get the financial data that helps us make accurate, timely, and
    good decisions as long, I hope, as we make military sense when
    we put those systems in place.
        Obviously a ship full of weapons, operators, and people
    that make it move doesn't have a whole lot of room for stock
    clerks and pay clerks. So we need to take advantage of the key
    that IT gives us today to put in systems that are geared to do
    the job, do it right, and user friendly to us in a war-time
    environment. Thank you, sir.
        Mr. Horn. Well, this has been very enlightening and you
    give me some optimism that things are going to change, and I'm
    glad to see that you're all working on that within your three
    services. It sounds like you've got the GAO and the Inspector
    General on your side so they are pretty good company to have.
    And I want to thank you all for coming and this is the staff. I
    want to thank----
        Mr. Walden, we're going to adjourn so I want to introduce
    you to Mr. Coburn.
        Mr. Walden is a valued member of this but he couldn't make
    it this afternoon.
        So we thank J. Russel George, the staff director and chief
    counsel and Louise DiBenedetto, the professional staff to my
    left. Bonnie Heald, director of communications, Brian Sisk,
    clerk, and Elizabeth Seong and Michael Soon, interns; and on
    the minority side Trey Henderson is counsel, Jean Gosa, the
    minority clerk, and Laurie Harris has been our faithful
    reporter. Thank you and with that we are adjourned.
        [Whereupon, at 3:50 p.m., the subcommittee was adjourned.]
        [The prepared statement of Hon. Jim Turner follows:]
        [GRAPHIC] [TIFF OMITTED] T0660.110

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