[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




 
     THE DEPARTMENT OF DEFENSE: WHAT MUST BE DONE TO RESOLVE DOD'S 
              LONGSTANDING FINANCIAL MANAGEMENT PROBLEMS?

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 8, 2001

                               __________

                           Serial No. 107-52

                               __________

       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


77-920              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
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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       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   ------ ------
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida                  MAJOR R. OWENS, New York
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                 Earl Pierce, Professional Staff Member
                          Grant Newman, Clerk
          Mark Stephenson, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 8, 2001......................................     1
Statement of:
    Kutz, Gregory D., Director for Defense, State and NASA 
      Financial Management, Financial Management and Assurance, 
      U.S. General Accounting Office, accompanied by David R. 
      Warren, Director for Logistics, Defense Capabilities and 
      Management; Robert J. Lieberman, Deputy Inspector General, 
      U.S. Department of Defense; and Lawrence J. Lanzillotta, 
      principal Deputy and Deputy Under Secretary for Management 
      Reform, U.S. Department of Defense.........................    10
Letters, statements, etc., submitted for the record by:
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     4
    Kutz, Gregory D., Director for Defense, State and NASA 
      Financial Management, Financial Management and Assurance, 
      U.S. General Accounting Office, prepared statement of......    14
    Lanzillotta, Lawrence J., principal Deputy and Deputy Under 
      Secretary for Management Reform, U.S. Department of 
      Defense, prepared statement of.............................    43
    Lieberman, Robert J., Deputy Inspector General, U.S. 
      Department of Defense:
        Information concerning reports...........................    57
        Prepared statement of....................................    30
    Schakowsky, Hon. Janice D., a Representative in Congress from 
      the State of Illinois, prepared statement of...............     8

 
     THE DEPARTMENT OF DEFENSE: WHAT MUST BE DONE TO RESOLVE DOD'S 
              LONGSTANDING FINANCIAL MANAGEMENT PROBLEMS?

                              ----------                              


                          TUESDAY, MAY 8, 2001

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Putnam and Schakowsky.
    Staff present: J. Russell George, staff director and chief 
counsel; Dianne Guensberg, detailee; Bonnie Heald, director of 
communications; Earl Pierce, professional staff member; Grant 
Newman, assistant to the committee; Alex Hurowitz, intern; Mark 
Stephenson, minority professional staff member; and Jean Gosa, 
minority assistant clerk.
    Mr. Horn. The hearing of the Subcommittee on Government 
Efficiency, Financial Management and Intergovernmental 
Relations will come to order.
    We are here today to continue our examination of how the 
executive branch departments and agencies of the Federal 
Government account for the billions of tax dollars they spend 
each year. The subcommittee began its examination of the 
government's fiscal year 2000 financial statements with the 
release of the General Accounting Office's audit report on 
March 30, 2001.
    For the 5th consecutive year, the General Accounting Office 
was unable to render an opinion on the reliability of the 
Federal Government's financial statements. In addition, GAO 
auditors found significant material deficiencies that adversely 
affected both the financial statements and the management of 
government operations.
    According to the GAO, the Federal Government did not 
maintain effective internal controls and its financial 
statements did not substantially comply with the Federal 
Financial Management Improvement Act of 1996, Public Law 104-
208.
    Encouragingly, an increasing number of agencies were able 
to produce clean, auditable financial statements and made 
marked improvements in their financial statements and 
processes. However, this progress was often achieved through 
difficult and costly efforts. Despite that progress, the 
failures of a few agencies continue to tarnish the overall 
record of the executive branch.
    Most disheartening, however, is the abysmal lack of 
achievement by two significant government departments and one 
agency. For the 5th consecutive year, the Agency for 
Intergovernmental Development and two of the government's 
largest departments, the Department of Defense and the 
Department of Agriculture, still cannot adequately account for 
the billions of tax dollars they spend. All three, again, 
received the unacceptable grade of F in the subcommittee's 
report card on Federal financial management.
    Today we focus on what actions must be taken to resolve 
these financial issues. In this hearing, we will focus on the 
Department of Defense. The Department of Defense is cited as 
one of the primary reasons the Federal Government is unable to 
prepare auditable financial statements.
    Specifically, the General Accounting Office, headed by the 
Comptroller General, found the Department of Defense cannot 
properly account for its assets; in particular, its property, 
plant and equipment, and inventories.
    In addition, the Department cannot estimate the cost of 
cleaning-up and disposing of extensive environmental 
contaminants, including unexploded ordnance and residual 
contaminants from training ranges.
    Finally, it cannot accurately document the net cost of its 
operations.
    In fiscal year 2000, the Department of Defense spent $397 
billion, 16 percent of the Federal Government's total spending 
of $2 trillion. Government spending on national defense is 
second only to that spent on human resource costs, such as 
Social Security, Medicaid, and Medicare.
    Further, the Department of Defense controls an estimated $1 
trillion in weapons systems and inventories. In fiscal year 
2000, the Department's inventory, evaluated at an estimated 
$139 billion, accounted for 75 percent of the Federal 
Government's total inventories of $185 billion.
    Despite the Department's enormous budget and inventory, its 
Inspector General has been unable to render an opinion on the 
reliability of the Department's financial statements. Similar 
to findings by the General Accounting Office, the Inspector 
General reported that significant material deficiencies 
adversely affected both the Department's financial statements 
and its ability to manage its day-to-day operations.
    Further, the Inspector General found that the Department 
did not maintain effective internal controls and that its 
financial systems and management systems did not substantially 
comply with the Federal Financial Management Improvement Act of 
1996.
    Now we have a new administration which we hope will focus 
close attention on the Department of Defense's continuing 
failure to address its longstanding financial management 
problems.
    We welcome our witnesses today: Gregory D. Kutz, Director 
of Defense, State and National Aeronautics and Space 
Administration Financial Management Issues, Financial 
Management and Assurance, U.S. General Accounting Office; 
Robert Lieberman, Deputy Inspector General, Department of 
Defense; and Lawrence J. Lanzillotta, Principal Deputy and 
Deputy Under Secretary for Management Reform.
    Gentlemen, we look forward to your testimony, your insight, 
and your recommendations to end this intolerable financial 
situation at the Department of Defense.
    [The prepared statement of Hon. Stephen Horn follows:]

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    Mr. Horn. I now yield for an opening statement to the 
ranking member, the gentlewoman from Illinois, Ms. Schakowsky.
    Ms. Schakowsky. Thank you, Mr. Chairman. Welcome to our 
witnesses.
    The subcommittee recently held a hearing on the 
consolidated financial management for the U.S. Government. It 
was clear from that hearing that while there has been some 
improvement in financial management at many Federal agencies, 
at others serious problems remain.
    The Department of Defense is perhaps the worst such problem 
agency, both because of the sheer magnitude of the amount of 
money involved and because of the seeming intractability of 
some of these financial management problems.
    The Department of Defense receives approximately one-half 
of the discretionary budget of the United States each year. Its 
annual budget is about $310 billion. It owns assets valued at 
over $1 trillion. It has about 3 million military and civilian 
employees.
    Despite, and maybe in part because of, the huge sums of 
money flowing through the Department, its financial management 
systems, practices, and procedures are hampered by critical 
weaknesses.
    Since 1995, the GAO has designated the financial management 
systems at DOD as ``high-risk'' because they are vulnerable to 
waste, fraud and abuse. Again this year, as has been the case 
for at least the last 5, the Defense Inspector General could 
not provide an opinion on the agency's financial statements.
    No major part of the Department has been able to pass the 
test of an independent audit. Of about $7 trillion--that is 
trillion with a T--in accounting entries at Defense, at least 
$1.2 trillion were not supported by sufficient evidence to 
determine their validity.
    DOD could not properly account for hundreds of billions of 
dollars of its asset holdings, including weapons systems and 
support equipments. It lacks a complete and reliable inventory 
of its environmental liabilities, potentially understating by 
tens of billions the reported $63 billion liability. Its 
inventory exceeds its needs by nearly $30 billion.
    DOD cannot reconcile payments to its contractors reliably. 
Between 1994 and 1999, defense contractors returned nearly $5.3 
billion in overpayment.
    These are not isolated incidents. Far from it. We have had 
literally decades of reports from GAO and from the Inspector 
General at Defense on the history of financial management 
problems at the Department.
    Six years ago, in 1995, the DOD Inspector General testified 
before Congress that a turn-around in the Pentagon's financial 
management practices might be expected by the year 2000. Well, 
it is now 2001, and the IG is saying that the Department might 
have financial statements which can be audited by the middle of 
the decade.
    This is not progress. I, for one, would support reducing 
the Pentagon's appropriations until these fundamental issues 
are addressed.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you.
    [The prepared statement of Hon. Janice D. Schakowsky 
follows:]

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    Mr. Horn. I think most of you are regulars, so you know our 
little routine here. I will be swearing you in, and then the 
agenda is the one we see in front of you, and we will just go 
down the line.
    We would like it very much if you could summarize in 5 or, 
at the most, 10 minutes. We have essentially an hour and a 
half, and we would like to have a chance for questions on this. 
So once I call on your name, your full statement is 
automatically in the record all the rest of the day. We are 
going to be here until about 2:30--not with all of you, 
hopefully.
    If you will stand and raise your right hands, please. Any 
who are backing you up, please have them stand, too.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that all of you nodded your 
head or affirmed to the oath.
    We will start with Mr. Kutz, Gregory D. Kutz, Director for 
Defense, State, and National Aeronautics and Space 
Administration Financial Management and Assurance of the U.S. 
General Accounting Office.
    Mr. Kutz.

STATEMENTS OF GREGORY D. KUTZ, DIRECTOR FOR DEFENSE, STATE AND 
NASA FINANCIAL MANAGEMENT, FINANCIAL MANAGEMENT AND ASSURANCE, 
U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY DAVID R. WARREN, 
 DIRECTOR FOR LOGISTICS, DEFENSE CAPABILITIES AND MANAGEMENT; 
ROBERT J. LIEBERMAN, DEPUTY INSPECTOR GENERAL, U.S. DEPARTMENT 
 OF DEFENSE; AND LAWRENCE J. LANZILLOTTA, PRINCIPAL DEPUTY AND 
 DEPUTY UNDER SECRETARY FOR MANAGEMENT REFORM, U.S. DEPARTMENT 
                           OF DEFENSE

    Mr. Kutz. Mr. Chairman and Representative Schakowsky, good 
morning. It is a pleasure to be here to testify on the need for 
financial management reform at the Department of Defense.
    With me is Dave Warren, a Director on our Logistics, 
Defense Capabilities, and Management team.
    The financial activity of DOD is enormous when compared to 
other entities, with a reported $1 trillion in both assets and 
liabilities, nearly $350 billion in net program costs, and a 
workforce of about 3 million.
    To provide some perspective on the size of DOD, consider 
that it had 30 times more employees, at least 4 times more in 
assets, and spent $140 billion more than ExxonMobil in fiscal 
year 2000.
    Currently, the United States is the world's sole 
superpower, with military forces that are second to none. 
However, the same level of excellence is not evident in many of 
DOD's business processes, including financial management.
    The bottom line of my testimony this morning is that, 
although incremental progress has been made in recent years, 
DOD financial management reform has largely failed. As a 
result, substantial waste and inefficiency exists and, in some 
cases, mission performance is placed at risk.
    My testimony this morning has three parts: first, a brief 
discussion of DOD's financial management weaknesses; second, 
the underlying or root causes of those weaknesses; and, third, 
the key elements necessary for successful reform.
    First, some of DOD's more significant financial management 
weaknesses include asset accountability, budget execution 
accounting, environmental liability reporting, cost accounting, 
and financial management systems.
    I would like to highlight several examples of the 
operational impact of some of these weaknesses. Clearly, asset 
accountability problems--not knowing what you have or where it 
is located--can impact mission performance. For example, during 
fiscal year 2000, we found that Army managers lost 
accountability for and visibility of about 62,000 missiles, 
rockets, and other ammunition that were stored at four test 
facilities.
    This inventory was reported in test facility records. 
However, the items were excluded from the Army's central 
visibility records for nearly 2 years. These visibility records 
are used to manage inventory for readiness and procurement 
decisions, along with financial reporting. These visibility 
items at the test facilities include hand-held, ready-to-fire 
Stinger and Javelin missiles.
    Loss of accountability has resulted in DOD purchasing items 
that it already has. Also, shortages of spare parts--the direct 
result of poor inventory controls--have resulted in aircraft 
being grounded and the need to cannibalize good parts from 
aircraft in order to complete repairs.
    In the area of budget execution accounting, for years we 
have reported that DOD has overpaid contractors because of 
duplicate payments or otherwise erroneous. Private sector 
companies devote resources to collecting amounts due from 
customers for goods and services provided. In contrast, DOD 
devotes resources to collecting its own overpayments to 
contractors.
    Mr. Chairman, given your interest in debt collection, you 
will find the next example a telling one. From DOD's Debt 
Collection Office at the DFAS Columbus Center, we recently 
chose 10 cases of amounts from contractors for overpayments. 
For these cases, we attempted to collect the amounts due using 
DFAS' own policies and procedures.
    Using only basic debt collection practices, we were 
successful in facilitating full collection of five cases, 
including interest and penalties, for about $103,000. As this 
example demonstrates, many of DOD's financial management 
weaknesses could be solved if people simply followed existing 
policies and procedures.
    Going on to my second point, which relates to the 
underlying causes of DOD's financial and other management 
problems, we believe the underlying reasons for failed reform 
include a lack of top-level leadership and accountability; 
cultural resistance to change, including service parochialism; 
lack of results-oriented goals and performance measures; and 
inadequate incentives for seeking change.
    In our executive guide on world-class financial management, 
the leading organizations we studied, including General 
Electric, Boeing, and Pfizer, identified leadership as the most 
important factor in making cultural changes and establishing 
effective financial management.
    DOD has not traditionally established accountability for 
performance to specific individuals or organizations with the 
authority to implement change. For example, the DOD 
Comptroller, also the Chief Financial Officer, has direct 
responsibility for only an estimated 20 percent of the data 
relied on for financial management operations.
    DOD learned from the year 2000 computing crisis that active 
leadership from the Deputy Secretary is the key to success. 
Such top-level leadership will be necessary to transform the 
DOD culture and reform financial management.
    One of the goals of financial reform is for agencies to 
develop timely, reliable financial information for 
decisionmaking purposes. For financial management, the primary 
goal at DOD has been to get an unqualified or clean audit 
opinion. This approach has resulted in millions of dollars 
being spent on contractors to perform ad hoc work-around 
procedures designed to develop one-time numbers for annual 
financial reporting.
    Although many agencies, including IRS, have successfully 
done these work-arounds to get clean opinions, these costly 
procedures do not result in lasting or meaningful change. In 
fact, what they do is create the need to replicate the process 
annually in order to maintain the clean opinion.
    In the case of DOD, the financial management problems are 
so severe that it may not be possible to get a clean opinion 
using these work-arounds. The new DOD team will need to 
carefully balance the resources expended on short-term efforts 
to achieve a clean opinion with the long-term efforts needed to 
truly reform Defense financial management.
    My third part relates to the key elements necessary for 
reform. Going forward, various approaches could be used to 
address the underlying causes of financial management 
weaknesses. Our written statement discusses what we believe are 
seven key elements to successful reform. I will now discuss two 
of those seven.
    First, financial management challenges must be addressed in 
a comprehensive, integrated, DOD-wide business process reform. 
An improvement strategy cannot be developed in a vacuum. 
Financial management is a cross-cutting issue that affects all 
of an organization's business processes.
    Currently, DOD has 6 of the 21 agency-specific high-risk 
areas in the Federal Government, including information 
technology and logistics. In addition, our two governmentwide 
high-risk areas--human capital strategy and computer security--
are also relevant to DOD. These interrelated management 
challenges must be addressed using an integrated, enterprise-
wide approach.
    Second, we believe effective oversight and monitoring of 
DOD's strategy and progress is critical. I commend the 
subcommittee for holding a series of DOD financial management 
hearings over the last several years. Oversight hearings like 
the one today shine light on this serious matter and provide a 
constructive dialog for discussing progress made and actions 
needed.
    The Defense Inspector General and GAO can contribute by 
providing our professional, objective, and constructive 
assistance in reforming financial management.
    In summary, reforming DOD financial management is a 
monumental challenge. Reform will require sustained, top-level 
leadership and a cultural transformation.
    Without addressing the underlying causes of the current 
situation, DOD will continue to make incremental change but 
will not achieve the dramatic improvements needed for effective 
financial management. With hundreds of billions of dollars in 
annual DOD spending, true financial management reform is needed 
to restore public confidence that these taxpayer dollars are 
well spent in meeting the Nation's Defense objectives.
    Mr. Chairman, this concludes my statement. Mr. Warren and I 
would be happy to answer questions after the other witnesses 
have given their testimony.
    Mr. Horn. Thank you very much for that very helpful 
overview. We will get back to that in the questions.
    [The prepared statement of Mr. Kutz follows:]

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    Mr. Horn. Our next speaker is Robert J. Lieberman, Deputy 
Inspector General of the U.S. Department of Defense.
    Mr. Lieberman.
    Mr. Lieberman. Thank you. I appreciate the opportunity to 
be here once again to discuss this significant challenge with 
the subcommittee.
    First, to summarize the results of the audit of major DOD 
financial statements for fiscal year 2000, I must report, 
unfortunately, that the extensive and costly DOD efforts to 
compile an audit of the fiscal year 2000 financial statements 
did not overcome the impediments caused by poor systems and 
unreliable documentation of transactions and assets. We were, 
therefore, unable to issue audit opinions on the Department-
wide funds, or on all but one of the major subsidiary funds.
    My written testimony describes some examples of the 
numerous problems in these year-end statements. I will just 
highlight two of them that I think are illustrative.
    First, Department-level accounting adjustment entries used 
to compile the financial statements totaled $4.5 trillion, at 
least $1.1 trillion worth of which were unsupported by reliable 
explanatory information for the audit entries. This is somewhat 
of an improvement from last year, but remains a good indication 
of the need for wholesale changes to the financial data 
reporting systems.
    Another example pertains to the reporting of estimated 
liabilities for environmental costs, basically clean-up costs. 
The estimate of $63.2 billion for environmental liabilities 
could not be verified and is obviously badly understated. Last 
year, the Department reported $79.7 billion of liabilities for 
that category of cost and agreed with us that that figure was 
understated by several tens of billions of dollars. Yet it went 
down this year.
    Further compounding the problem, the financial statements 
that we were given to audit in December had a figure of $52.2 
billion. No one could explain how they got from $52.2 billion 
to the $63.2 billion that was ultimately sent to OMB.
    So this demonstrates a number of problems and difficulties 
in collecting information to put together credible 
environmental cost estimates in the first place, and then 
difficulties in compiling those estimates and getting them into 
financial statements in a timely manner to be audited.
    A listing of the financial audit reports issued thus far in 
the current fiscal year is attached to my statement. Most 
pertain to financial statements, and they describe dozens more 
similar problems in financial reporting.
    During the past year, DOD made some progress in addressing 
major impediments to favorable audit opinions, but the pace of 
overall improvement remains disappointingly slow. The level of 
frustration is high. Although the DOD has put a full decade of 
effort into improving its financial reporting, it seems that 
everyone involved, from Congress and the OMB to the audit 
community and DOD managers, have been unable to determine or 
clearly articulate exactly how much progress has been made and 
how far we still have to go.
    In my view, this is at least partially caused by the 
emphasis on overall audit opinions for the year-end statements, 
as opposed to focusing on the status of individual system 
modernization projects.
    The DOD has been working to identify and evaluate critical 
systems against Federal financial management requirements and 
accounting standards. Although it would be unfair to 
characterize this vital system's improvement effort as futile, 
progress has been very slow.
    To facilitate oversight, and because of the successful 
results of the Defense-wide Y2K initiatives, 2 years ago we 
recommended that the DOD apply the same general management 
approach in bringing its systems into compliance with Federal 
financial management requirements. The Under Secretary of 
Defense--Comptroller--formally put into place such a process in 
January 2001 to implement that recommendation. We believe this 
initiative is really important and offers by far the best hope 
for more effective management of this crucial activity. We 
realize that the incoming Defense financial managers may wish 
to alter various details, but we hope that the basic approach 
will be followed, because we know it works.
    The Y2K approach is completely compatible with the notion 
of holding Defense officials accountable by considering the DOD 
financial management improvement plan to be, in effect, a 
contract between the Department, the Congress, and OMB. The 
plan offers a potentially excellent vehicle for displaying the 
relevant performance goals and specific progress against those 
goals.
    Each iteration of the plan has been more informative, but 
it remains a one-time status report, rather than a management 
tool that is actually used for management oversight. In 
addition, there are major problems with its accuracy, as 
described in our March 19, 2001, audit report and summarized in 
my written statement.
    For the committee's benefit, I would like to underscore 
that, according to the plan, it will cost about $3.7 billion to 
make the critical reporting systems compliant with standards by 
2003. This huge figure does not appear anywhere in the plan, 
but can be derived by adding up 167 individual system cost 
estimates. Its size illustrates both the scope of the remaining 
challenge and the need to treat CFO compliance as a very large 
Defense program or project needing strong management controls 
and oversight.
    We believe, incidentally, that the $3.7 billion figure is 
significantly understated.
    In any event, success or failure in the systems 
modernization and compliance effort will determine whether DOD 
ever achieves accurate financial reporting, both at year end 
and during the year, whenever managers need financial 
information.
    This concludes my verbal statement.
    Mr. Horn. Thank you. You have been very dedicated with the 
studies we have here. We will get into that soon.
    [The prepared statement of Mr. Lieberman follows:]

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    Mr. Horn. Our next witness is from the Department of 
Defense, Mr. Lawrence J. Lanzillotta, the Principal Deputy and 
Deputy Under Secretary for Management Reform in the Department 
of Defense.
    We are glad to have you here.
    Mr. Lanzillotta. Thank you, Mr. Chairman.
    Mr. Chairman and members of the committee, it is my 
pleasure to be here to discuss financial management within the 
Department of Defense.
    Let me begin by stating that financial management reform is 
one of Secretary Rumsfeld's top priorities, as he reflected in 
several major actions he has already undertaken.
    Shortly after being confirmed, he initiated a study of the 
Department's financial operations, to include an examination of 
initiatives under way or planned. The Secretary has begun 
assembling a senior leadership team that is committed to 
financial management reform across the Department, and he has 
recognized the Comptroller's office and established Deputy 
Under Secretary positions to focus more on financial management 
reform and on management initiatives.
    Additionally, Dr. Zakheim, the recently confirmed Under 
Secretary-Comptroller, stated during his confirmation hearing 
that financial management reform is his top priority.
    The reorganization of the Comptroller's office established 
my position as the Principal Deputy to the Comptroller and the 
Deputy Under Secretary for Management Reform. It also 
established a new Deputy Under Secretary who will specifically 
focus on financial management issues, Ms. Tina Jonas, and 
another Deputy Under Secretary who will focus on program budget 
issues, Mr. Wayne Schroeder.
    As Principal Deputy and Deputy Under Secretary for 
Management Reform for the Department, I give you my personal 
assurance that reforming financial management within the 
Department of Defense is my top priority.
    Mr. Chairman, from the top down, the Secretary has in place 
a cadre of leaders who are committed to improving financial 
management within the Department.
    It is Secretary Rumsfeld's intent to obtain timely and 
accurate information as a routine matter of business. We have 
world-class armed forces. We intend to achieve world-class 
financial management.
    Accurate and timely management information is the lifeblood 
of successful management decisions. Managers across the 
Department require accurate and timely information on the cost 
of operations and programs if they are to achieve the most 
effective use of taxpayers' dollars.
    The Department must have processes and systems that do more 
than prepare accurate financial statements once a year. The 
Department's management processes must be able to provide 
managers with current, reliable, and relevant information to 
facilitate sound decisionmaking.
    The most critical step in the Department's effort to 
produce timely and reliable financial management information 
and to produce auditable financial statements is having, within 
a coherent architecture, compliant financial management systems 
and associated feeder systems--such as inventory, logistics, 
property, and medical--that provide the majority of the 
Department's financial information.
    The lack of integrated systems, both financial and 
nonfinancial systems, has been a major contributor to the 
Department's inability to produce such information. Without 
systems that comply with prevailing Federal accounting 
standards, the Department would not be able to produce reliable 
financial statements on a timely and consistent basis.
    Over the past decade, the Department has implemented a 
number of improvements to consolidate and overhaul financial 
management processes. Financial operations have been 
consolidated, the number of non-compliant financial accounting 
systems has been significantly reduced, and standard systems 
have been designated. Nonetheless, much remains to be done.
    The Congress and the American people must have full 
confidence that the Department maintains the very highest 
standards in managing the Department. Secretary Rumsfeld is a 
proven industry leader who is focusing on Department-wide 
management reform. We have to improve our management 
information and financial management processes. Financial 
management reform is part of a much larger Department-wide 
management reform initiative. Business practices will be 
reengineered to adopt best practices from both the private and 
government sector.
    The Department is in the process of transforming our 
Defense forces to meet the challenges of the 21st century. We 
must also transform our management processes. As with any major 
Department of Defense transformation initiative, we will need 
widespread support from the Congress and other governmental 
agencies to achieve our shared goal. Transforming management 
processes will allow the Department to obtain more timely and 
better information to enable our Defense leaders to make more 
informed management decisions.
    In closing, Mr. Chairman, I would like to thank you and the 
committee for providing me this opportunity to address 
financial management reform and management reform within the 
Department. Thank you.
    Mr. Horn. Thank you very much for the statement.
    [The prepared statement of Mr. Lanzillotta follows:]

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    Mr. Horn. Now we go to questions. We will alternate with 
Members here. I will start with the first 5 minutes, and the 
ranking member will have 5 minutes, and then we will go back 
and forth. If others come in, they will have their crack at it.
    Mr. Kutz, what you said is very well taken. We have a new 
Secretary in place. I, for one, have a lot of good impressions 
of the Secretary. I have known him for 30 years. If anybody 
turns that place around, it will be Don Rumsfeld.
    The question I would like to hear, to just get out here and 
see if we are on the same wave length, you just sort of 
isolate, what is the essence of the first three things on the 
financial side and what are the first three things on the 
management side that really ultimately relate to the management 
side?
    What is your first three? Then I want to see if Mr. 
Lieberman and Mr. Lanzillotta agree with that.
    Mr. Kutz. On the financial side, we have a combination of 
issues: people, processes, and financial systems. My statement 
has examples of both people and processes that were not working 
properly.
    The Department has policies and procedures that are not 
being followed. That is something that can be fixed without a 
long-term system reform. That is something that can be done in 
the short-term.
    The other major issue besides the people and processes 
involves the financial management systems. That is where Mr. 
Lanzillotta mentioned an enterprise architecture is needed to 
make sure that all of DOD's decentralized and in some cases 
duplicative systems efforts that are going on will, at the end 
of the day, work toward a system that will give the Department 
world-class financial management.
    So it is the people, processes, and systems on the 
financial side. On the other side, we have the logistics, and 
some of the examples I mentioned earlier included inventory 
problems, which ties very closely to financial management. We 
also have the acquisition process challenges with respect to 
contracts and the payment of contracts, the management of 
contracts, etc.
    I would also say that computer security is another 
important challenge that is closely linked to financial 
management and has lots of issues beyond efficiency. It is a 
security of data issue that needs to be addressed.
    Mr. Horn. Mr. Lieberman, do you agree with that list, or 
would you add a few things to it?
    Mr. Lieberman. I would add a few things to it.
    To a significant degree, as mentioned in my written and 
oral statements, the system modernization effort is the key to 
this whole thing. But, beyond that, I think that we need to run 
this whole effort as a program. I don't feel that it has ever 
really been run like a program with explicit goals and 
measurements.
    We all know what the end state goal is: auditable financial 
statements and useful financial information. But the myriad of 
milestones, including interim milestones that are normally 
tracked in a complicated program, have been very hard to nail 
down over the years. I think we have gone far too long with too 
little structure in this whole process.
    Third, we are spending a lot of money on this process. I 
believe the Department needs to revisit its priorities in terms 
of where it puts its resources for corrective action.
    I thoroughly agree with the GAO's point that extraordinary 
efforts to put together financial statements will ultimately 
probably fail anyway and do nothing to fix the underlying 
systems problems, and should not be our highest priority. It is 
not the best way to spend DOD money.
    Last, I believe that the human factor here is very 
important. I think a lot of the problems we are talking about 
are management problems for the defense finance and accounting 
community in particular, but DOD as a whole has lots of 
workforce issues in terms of drastically downsized 
organizations that cannot keep up with their current workload, 
promises of process redesign to decrease workload that have not 
quite come true, and major training challenges. Each and every 
individual involved with these processes can do a better job in 
the first place so we are not continually trying to reconcile 
records that do not match and doing things the hard way, 
retroactively, rather than doing it right the first time.
    Mr. Horn. Mr. Lanzillotta, what do you think? What would 
you add to it?
    Mr. Lanzillotta. I don't know if I would disagree with 
anything that they have said. I think I would look at it in a 
slightly different way. I think the Department has a lot of 
these problems that they mentioned, but they all have to be 
addressed. I don't know if we can sit down and have the luxury 
to say we will take care of the top three now and go to the 
next three.
    In looking at that, we have already had some discussions 
prior, not for this hearing but in the past. But I'm looking 
more--we have a plan. We just need to upgrade our plan. We need 
to get the system architecture and get all the requirements for 
these systems together for modernization.
    We just cannot concentrate on one or two systems right now. 
We have to get a whole plan that shows where every one of these 
systems interact on the financial management and management 
information process. We have to identify more specific 
milestones. That way, we can measure our progress, not just for 
the auditors to come and measure the progress or people to come 
in and see but for our management in the Department of Defense. 
They need to know--the first responsibility is to them, our 
defense leaders. They need to know how we are doing on this.
    We have to also do a better job, as mentioned, on 
identifying the resources it is going to take to fix this 
problem. This is not a Department of Defense problem; this is a 
shared problem with our government. We have to be up-front. We 
have to say, this is what the cost is for fixing this system. 
We have to develop measurable matrixes we can measure against 
on these.
    Our plan has to have--and I agree with Mr. Lieberman. We 
might have some initial problems, as he is talking about, but 
it has to be measured overall. We have to have accountability. 
Somebody has to be responsible for fixing this.
    We have systems in stovepipes right now. We have to make 
sure they match. Then when somebody is developing their system, 
he has to have the authority to allow us to reengineer the 
practices to make it work. We just cannot continue to do 
stovepipe development.
    The last thing, I think Secretary Rumsfeld--the things are 
lining up now that we have the leadership to do a structural 
change--not only a structural change but a cultural change in 
the way the Department attacks these problems. I think that is 
key.
    I don't know if I can say, well, we just want to reestimate 
our environmental liability and then look at another problem, 
asset accountability. I think we are probably past that. I 
think we are to the point now that it just has to be done. I 
don't want to quibble with any of the comments on initial 
things or little facts. I think it is just time for us to step 
up to the plate.
    Mr. Horn. As I usually find out, the question period is too 
short, so the gentlewoman from Illinois will have 10 minutes, 
and then Mr. Putnam, who has come, he will have 10 minutes.
    Ms. Schakowsky. Thank you, Mr. Chairman.
    Let me ask first--in my opening statement, I said that the 
DOD Inspector General testified in 1995 that by 2000 there 
would be this turnaround; and now, Mr. Lieberman, the word is 
that by the middle of the decade that there may be financial 
statements that could be audited.
    Though we have heard the magnitude of the problem, why is 
it it would take that long? Do you expect that is the time you 
are projecting?
    Mr. Lieberman. I don't remember exactly who gave that 
testimony, but I wrote it. At the time, we were severely 
criticized for being pessimists, and we were labeled as 
defeatists. As it turns out, we were wrong, because it took 
even longer than the 5 years we were talking about back then.
    The problem here is this large number of automated systems 
that compile data on millions and millions of various kinds of 
transactions that have financial implications, and all of this 
has to be crunched together. The typical corporation can do 
that because they design an integrated information technology 
construct in the first place. Defense did not have that in 
place, and developing new systems is a slow process in the best 
of circumstances. It always takes several years.
    I think, in retrospect, no one can deny that systems 
improvement was too slow in the decade of the 1990's. There are 
various reasons for that. One is resources. This has never been 
a popular thing to spend money on, and there was never a big 
push to do so.
    Ms. Schakowsky. Are you saying there were insufficient 
resources in the Department on this?
    Mr. Lieberman. Yes. It was possibly the Department's own 
fault. They did not address it. Nobody ever knew what the 
projected cost of this effort was. It has only been since the 
Congress has required systems improvement cost estimates during 
the last 3 years that we have begun to get a handle on how big 
the cost of this really is.
    Ms. Schakowsky. Are you saying that over the last 6 years 
there has been steady progress? Can we look back at the annual 
reports and say that, though it has been slow, we are getting 
there?
    Mr. Lieberman. There has been progress. I think it could 
have been a lot faster than it was. Resources are part of the 
problem. Management commitment is part of the problem. To get 
all the parts in line to cooperate to do this has been a 
problem. It has been viewed as the accountants' challenge, and 
the rest of the Department has been very hard to capture in 
terms of getting on board.
    Now, I think because of the fact that the Department itself 
agrees that it will take until at least 2003--and I think that 
is optimistic--to fix these systems, there simply is no way we 
are going to have credible financial statements until the 
systems are fixed. So I think the middle of this decade is 
probably a pretty good bet at this point for clean audit 
opinions.
    Ms. Schakowsky. Mr. Kutz, the cultural thing in this, if 
there were an accountant from Mars who might look at the 
Department of Defense, they might think about the different 
branches of the Armed Forces and all the repetitive or 
duplicative things we do as being not the most efficient way to 
run a Department.
    It says here, ``These analyses can be narrowly focused, and 
do not consider joint acquisitions with other services.'' Is 
that the kind of resistance you are talking about, the kind of 
efficiency that might result from joint cooperation? How does 
one overcome these longstanding cultural problems?
    Mr. Kutz. This relates to the plan Mr. Lanzillotta 
mentioned. I think that is a good example of the reflection of 
the parochialism and narrowness of interest.
    The financial management improvement plan is a very big 
improvement from the prior years' plan. It has a lot of data 
and a lot of good information. The problem is, however, the 
plan is not a management tool at this point. It is a reflection 
of a data call of all the different decentralized, stovepiped 
efforts that are going on out there. Without an actual plan 
from the top that is driven by someone in a senior management 
position, it is going to be very difficult to make the kind of 
long-term change in culture that we are talking about.
    I will let Mr. Warren address the acquisition issue 
specifically.
    Mr. Warren. I would just add that, as you said, that is a 
perfect example. There is a real bias toward each service 
having their own individual system, rather than, as has been 
mentioned here today, an overall architecture which guides the 
management process of the Department.
    What that ultimately means is that funds are spent for 
multiple systems, and they again, as has been said, often do 
not talk together, or do not provide the information and 
interchange, the information that is needed to provide not only 
financial management information but also management 
information that is needed for the day-to-day operation of 
other activities.
    Weapons systems certainly is an area over time where that 
same phenomenon has occurred. There are various examples out 
there where multiple systems have been built that have similar 
capabilities, so that clearly is a problem.
    I think at the heart of solving this--and, again, it has 
been mentioned by the other panelists--is getting central 
leadership, a top-level commitment that you are going to go to 
an integrated system. That person needs to have control of the 
resources to make that stick, so these multiple systems are not 
put into place.
    Part of the reason that it occurs, quite simply, is because 
the services have the money to do it.
    Ms. Schakowsky. You mentioned the issue of systems, weapons 
systems. I wanted to just ask you this. The issue of inventory 
control in the GAO's high-risk report, which was issued earlier 
this year--I was really shocked to learn that about half of 
DOD's $64 billion inventory exceeds war reserve or current 
operating requirements. Specifically, you cited a figure of 
$29.6 billion.
    Let me ask you if you can elaborate on that. Are we getting 
desensitized to these huge numbers? Are you saying that DOD 
essentially bought $30 billion worth of equipment that it does 
not need? What are we going to do to correct this?
    Mr. Warren. Just to correct that, not that it necessarily 
does not need, but it did not need at the point in time that it 
bought it, based on its own requirements.
    Once the items are purchased and are in the inventory, then 
I think there is a very good argument to say that we need to 
take a look at this from an economic retention standpoint and 
decide, now that we have it, should we go ahead and retain some 
of it.
    Ms. Schakowsky. I am concerned about the earlier decision.
    Mr. Warren. Correct. All things being equal, if they had 
accurate information in terms of forecast demands, in terms of 
systems that were ultimately going to become obsolete, those 
items would not have been purchased. Those are breakdowns in 
the systems and in management processes within the inventory 
management area.
    That area has been on GAO's high-risk list since 1990. We 
have issued a number of reports on that area, as well as the 
Inspector General.
    At the heart of that system is a need for business process 
reform. We have been advocating an overall logistics 
transformation plan that would guide not only the inventory 
piece but there are many other pieces: transportation, 
maintenance of major weapons systems, storage of items, 
disposal of items. These all go to make up the logistics 
expenditures.
    We think there needs to be a comprehensive plan that deals 
with all of those issues. Again, as the other plan said, that 
needs to be tied into what you are going to do in your 
financial management area, so ultimately you come out and have 
an effective management system for all elements of the 
Department in your major business areas.
    Ms. Schakowsky. Thank you.
    Thank you, Mr. Chairman.
    Mr. Horn. Let's pursue that just for a second before Mr. 
Putnam----
    Does GAO say, why don't we just get one system in one place 
on one aspect and get all those services to do that?
    Mr. Warren. We would say that would be certainly one 
approach that could be used. In other words, we understand the 
enormous challenge that would be involved in putting the 
entire--or dealing with all of the various business functions 
at a single time.
    Perhaps the approach would be to take one of your major 
business areas and come up with a model for success in terms of 
getting the results that you want, and then move forward and do 
that. Perhaps financial management is the area to use in order 
to accomplish that.
    But, in doing that, clearly whatever approach is used for 
that model has to be integrated so that the other elements of 
the business processes within the Department are in fact 
considered as those decisions are made.
    Too often in the feeder systems that were mentioned, they 
will go on and make improvements, for example, in their 
inventory accounting or control processes, without taking into 
consideration the things that need to be done to provide 
accurate information to the financial community.
    Mr. Lieberman. If I can add one thing, Mr. Chairman.
    Mr. Horn. Go ahead.
    Mr. Lieberman. We have talked for a whole hour about 
systems, and we have never mentioned the Chief Information 
Officer of the Department.
    One of the problems that remains is that 5 years after the 
Clinger-Cophen Act the Department still has not effectively 
implemented that law and really established an information 
systems czar to help all these different functional communities 
come together.
    Mr. Horn. Mr. Lanzillotta has to leave at 11:20. By the 
way, you are free to come back this afternoon, because if 
members have questions we can then do it, from 1:30 to 2:30.
    What do you think of that idea of incrementalism, let us 
get one and get that done right? Who is the Chief Information 
Officer now? Is that in your bailiwick, or what?
    Mr. Lanzillotta. Mr. Chairman, no, that does not fall 
within my responsibilities, although I recognize the need for 
such an office or somebody within the OSD comptroller to try to 
get a handle around all these financial management systems.
    I do not disagree with the standardization of systems, but 
I don't want that to become the goal for the Department by 
itself. The goal is to have accurate and timely management 
information.
    Now, when GM or a large corporation merges with another 
corporation, they don't necessarily make the new corporation 
conform to their system. They look at the systems and make sure 
that they can talk and that they are compliant.
    I am not so much concerned with coming through and making 
sure that we have a standardized system that does one thing or 
another, as long as we have systems that prove accurate and 
timely and are compliant with financial regulations and that 
talk to each other. Then, as time goes on, we may come later 
and replace those systems with an integrated system.
    I think the Department needs to focus to make sure that--we 
have to play the hand we are dealt. This is where we are. We 
don't have the luxury of going back and stopping in our repair 
part system, our inventory system, our health care system, or 
any of those systems, and say, OK, we are going to develop a 
single system, and we are going to take time to institute it 
and get everybody trained on it. We are playing the hand we are 
dealt.
    Eventually, that is where we are going to go. But I think 
first we have to get everything compliant, and it has to meet 
our management objectives. Then we can turn around and, as we 
replace those systems, maybe we can come to a more efficient 
system that is just one system for each category.
    Mr. Horn. We will send you a few questions. I would like to 
start in the page right here on which management systems are 
you talking about. If you could just give us that.
    Now, the gentleman from Florida, Mr. Putnam, will question 
you for 10 minutes.
    Mr. Putnam. Thank you, Mr. Chairman.
    What are your management objectives?
    Mr. Lanzillotta. I think Secretary Rumsfeld has one focus. 
That focus is to provide, in the area of financial management--
he has many focuses--but in the area of financial management I 
think that he wants clear, accurate, timely, compliant 
information when he wants it. I don't think he wants to wait 
until the end of the year to find out about how these systems 
are doing, or inventory, or anything else like that. He wants 
management information to make management decisions now.
    The fact that we have a clean opinion is kind of a matrix. 
It is kind of a measurement on how well the systems are doing, 
but it is not the goal. I think Secretary Rumsfeld's goal and 
what he has charged the people to do is--to include myself--is 
to make sure that he has the management information, to know 
the cost of operations so when he is trying to make financial 
decisions on the readiness of his forces, he can do that.
    Mr. Putnam. What will it cost to get to that system or that 
set of systems or that network of systems or that web of 
systems that would allow him to have clear, accurate, timely 
information at his fingertips at his request?
    Mr. Lanzillotta. Sir, I guess after a week here I really 
don't have that information, and I don't know when I will. It's 
going to be terribly expensive, I know that. But it's kind of 
like, you know, we're starting and building the system 
architecture and mapping the data flow as it currently exists. 
We kind of have to take that to find out where our rough spots 
are to see where we need to devote some assets and make it 
work. I'm afraid if I gave you a dollar number, I know it would 
be absolutely wrong.
    Mr. Kutz. Congressman Putnam, the current amount being 
spent on systems at the Department is about $21 billion a year, 
which includes new systems development and legacy systems 
upkeep. I'm not sure exactly what the breakdown is between the 
two. But in many respects there is not a shortage of money 
going into IT. $21 billion is half of what the Federal 
Government is spending on IT; governmentwide it's about $44 
billion. So it's a pretty substantial investment being made 
right now and we've seen minimal progress over the years.
    Mr. Putnam. Was information technology logistics and those 
considerations, part of this tooth to tail review of Pentagon 
operations and strategy? Did that play any part whatsoever?
    Mr. Lanzillotta. Yes, sir, I think does. I think that you 
know the creation of my position as management reform exists 
prior to me taking this position April 30th. And I think that's 
what the Secretary has in mind, is looking at that type of 
thing. You know, we have some of those things that are working 
now. For my sake I hope there will be more in the future, and 
the Department has taken this very seriously.
    Mr. Putnam. Thank you. Tell me perhaps for the GAO, or 
whomever, if you have an estimate on the amount of improper 
payments, duplicate payments, overpayments, payments made for 
goods and services not delivered that have been made by the 
Defense Department.
    Mr. Kutz. For fiscal year 2000 what I know is that about 
$900 million was repaid by contractors for overpayments. I 
don't believe though that the Department knows how many dollars 
of improper payments are made annually. No one knows in the 
Federal Government. There are estimates at certain departments, 
for example, the earned income tax credit.
    Mr. Putnam. $900 million.
    Mr. Kutz. $900 million. But that's what they know. And much 
of that is for contractors that identified the overpayments and 
voluntarily sent them back versus the Department identifying 
overpayments and asking for them to be sent back.
    Mr. Putnam. So that was the Good Samaritan refund?
    Mr. Kutz. Much of that would have been the Good Samaritan.
    Mr. Putnam. Are some defense agencies performing more 
efficiently or producing better financial statements or 
financial instruments than other agencies? Who's performing at 
the top and who's performing at the bottom within the 
Department?
    Mr. Lieberman. Well, the Military Retirement Fund earned a 
clean audit opinion and that's been true for several years. So 
it's in the best shape in terms of the large reporting entities 
that make up the overall departmental financial statements.
    Some defense agencies are doing better than others. The 
Defense Finance and Accounting Service itself got a clean 
opinion on its statements for fiscal year 2000. However, that 
organization is not that large in the overall DOD scheme of 
things. So these are significant steps forward, but they're not 
giant leaps forward.
    Mr. Putnam. What process is in place now to identify these 
improper payments or overpayments?
    Mr. Kutz. At the Department--I'm not aware of what process 
they have to estimate what overpayments there are. There are 
controls intended to reduce overpayments that have been put in 
place. And I believe one of the areas of improvement has been 
the reduction in the amount of overpayments at DFAS from what 
it was several years ago.
    Mr. Lieberman. There is one area where there is definite 
progress on the systems front. A lot of the faulty payments 
problem is because of the outmoded systems that we use in the 
payment process as well as bad data in our systems. There is a 
system called MOCAS, the Mechanization of Contract 
Administration Services, horrible acronym, which has been our 
main data base for facilitating the payment of contractors for 
the last 20 years. It is being phased out now in favor of a new 
system, which should improve the efficiency of the payment 
process dramatically.
    Mr. Putnam. Could you elaborate a little bit on what you 
described as the outmoded system?
    Mr. Lieberman. Well, MOCAS has 20-year-old technology. It 
is not efficiently interoperable with a lot of other systems.
    Mr. Putnam. Hang on 1 second. How do you have a $21 billion 
information technology budget that is--but yet you still have a 
vendor system that is 20 years old and obsolete? How do you 
reconcile those two things?
    Mr. Lieberman. Well, the need to replace MOCAS was 
recognized several years ago and it takes several years to 
develop replacement systems. So the replacement system has been 
under development for the past several years and a good chunk 
of that annual IT budget goes into systems like that.
    I think it's unfair for us to sit here and give the 
impression that DOD has not improved a lot of its systems over 
the past decade because it has. There are a lot of new systems 
coming online now whose developments started in the middle of 
the decade, for example, that are quantum improvements over 
what they're replacing.
    Mr. Putnam. I think that the committee and the Congress 
recognize that nobody goes to work every day at the Pentagon 
thinking of ways to waste the taxpayers' money. But the budgets 
are so enormous and the scope is so broad and everything about 
what goes on in our Defense Department is by factors of 10 so 
much larger than any other portion of the government. And so it 
is rather frustrating when all of us hear about supply 
shortages or training and operations budgets that are going to 
be depleted by August 31, and yet we're spending half of what 
the entire Federal Government spends on information technology 
and nobody really can tell us, at least not through an 
auditor's eyeball, where it all went. And so there is a 
frustration out there.
    And it doesn't mean that anybody is here to beat up on the 
Department of Defense or to beat up on the Pentagon. We 
certainly recognize that you have a very difficult job, and all 
of us want to support you in that effort. But good God 
almighty, $21 billion and we still can't pay our bills on time? 
I mean, there's a cause for concern there. And I think that's 
where the chairman is headed with this.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Horn. Before Mr. Lanzillotta leaves let me ask this 
question of GAO. Mr. Kutz, GAO recently issued a report on the 
Department of Defense's inability to estimate the cost of 
removing unexploded ordnance from its training ranges. What do 
you believe the Department of Defense needs to do to determine 
the locations and extent of contamination and what it will cost 
to clean up the various Department of Defense training ranges?
    Mr. Kutz. The estimate that they have right now is about 
$14 billion in their financial statements, but there are 
estimates out there and these are DOD estimates also that could 
be over $100 billion. What they need to do is what the 
Department of Energy has done, is go through a disciplined 
process of inventorying and costing out what it takes to 
remediate the environmental issues.
    I had some experience with Energy in looking at what they 
did in the mid-1990's and DOD is clearly years behind where 
Energy is in actually documenting and costing out what the 
issues are and giving the Congress a good idea of what it's 
going to cost for all of the remediation.
    There is a report that they issued or they issue annually 
that talks about what's being funded today. But that is 
woefully less or significantly less than what actually is going 
to have to be done at the Department. So this is potentially a 
$700 billion issue at DOD versus what Mr. Lieberman said 
earlier, the $60 or $80 billion that has been reported the last 
several years.
    Mr. Horn. Well, on that point and whether it's a management 
tool or not, I can remember 3 years ago when we were talking 
about cruise missiles in the former Yugoslavia, Serbia, etc., 
and we were left absolutely speechless here. Now a couple of 
people knew that you didn't have the cruise missiles and you 
didn't have an assembly line from the Gulf war and all of that. 
We couldn't believe it. I just wonder when the Secretary wakes 
up in the morning does somebody give him an inventory on where 
we are on some of these key things that the country might have 
to use either in its own defense or anything else?
    I'd like to know, can you explain the significance of the 
DOD not having the 62,000 missiles, rockets and other 
ammunition items in its records? Our understanding is that you 
can't really find what kind of missile is in there or not. Are 
we just being misled or what? What do you know about that, Mr. 
Lanzillotta.
    Mr. Lanzillotta. Sir, I'll give you what I know about it. I 
think there's a difference between things that are lost in the 
financial records and things that are lost in the property 
accountability records. I think when you go down to the unit 
and on the property accountability you know they can tell and 
there's been other reports on spot reports of this that there 
is a 99 or some high percentage of accountability at that 
level.
    The problem is our financial systems don't necessarily, 
because they're old and weren't originally meant to track that, 
can go back there and track that same data. And that's the 
problem. The guy knows down there where his missiles are and 
how many missiles he's got, but our financial systems need to 
be revamped, and that's part of the system's problem, to make 
sure that same information comes in.
    Mr. Kutz. The policies and procedures are there that the 
test facility in this case or the four test facilities were 
acquired by DOD's own policies to report these items into the 
central visibility records. They just told us they didn't do 
it.
    Mr. Lanzillotta. There's just no excuse for that.
    Mr. Horn. I agree. So I hope there will be a series of 
things that the Secretary of Defense, the Deputy Secretary, 
etc., all can know that this is what we've got as of this date. 
And certainly the CINCs that run a lot of the military things, 
they ought to have that on their desk in the morning. I wonder, 
Mr. Lieberman, as I remember, the environmental unit on the 
base closures is part of the Office of the Secretary of 
Defense. Have you ever done the Inspector General matter with 
them?
    Mr. Lieberman. Yes, indeed. We try to maintain a level of 
effort of several audits a year on the Department's 
environmental program. Many of those audits over the years have 
been requested by
that office. Others have been requested by Congress or are 
self-initiated. But I'd be happy to provide for the record a 
list of those reports going back over the last few years.
    Mr. Horn. Well, and if you could send me the reports 
because my feeling is that's the slowest snail in the Pentagon.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T7920.033
    
    Mr. Lieberman. It's a tough area. Cost containment 
historically has been a real challenge. Motivating the services 
to fully identify their problems has always been a problem, 
too.
    Mr. Horn. But it just seems to me the Congress gave them 
the money and they ought to be administering it so the 
contamination can be moved at least into a brownfield situation 
and the community that is devastated by thousands of people 
being put out of work can't get anywhere and can't bring in new 
industry or anything else because the Department of Defense, 
the Navy is one of the worst snails I know, too. So when you 
stay around here you begin to wonder, my heavens.
    Mr. Lieberman. I agree with you. Congress has been generous 
in funding cleanup efforts. And there is a lot being done--
there is the usual mix of positive and not so positive 
information, but I'd be happy to provide all that stuff to you.
    Mr. Horn. Appreciate it. We'll have some staff go through 
it.
    Mr. Warren. Mr. Chairman, we've also done a number of 
studies in relation to the environmental cleanup and we'd be 
happy to provide those as well.
    Mr. Horn. Great. I almost thought we had another 
speechwriter there with Mr. Lieberman and you sitting next to 
each other. So I was waiting for a speech. Mr. Warren, if you 
have anything else to put on the deck, let us know.
    Mr. Warren. No.
    Mr. Horn. OK. Anything else you'd like to say, Mr. 
Lanzillotta?
    Mr. Lanzillotta. No, sir.
    Mr. Horn. Thank you for coming. So we will maybe send you 
all a few questions and we'll put your responses in the record 
here. Thank you very much.
    [Whereupon, at 11:15 a.m., the subcommittee was adjourned.]

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