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



 
 THE DEPARTMENT OF DEFENSE: WHAT IS BEING DONE TO RESOLVE 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

                             SECOND SESSION

                               __________

                             MARCH 20, 2002

                               __________

                           Serial No. 107-157

                               __________

       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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84-603                             WASHINGTON : 2003
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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
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       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
                        Justin Paulhamus, Clerk
           David McMillen, Minority Professional Staff Member
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 20, 2002...................................     1
Statement of:
    Jonas, Tina W., Deputy Under Secretary for Defense, Financial 
      Management, Department of Defense, accompanied by Thomas R. 
      Bloom, Director, Defense Finance and Accounting Service, 
      Department of Defense; and De W. Ritchie, Jr., Acting 
      Deputy Chief Financial Officer, Department of Defense......    22
    Kutz, Gregory D., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, accompanied by 
      Randolph C. Hite, Director, Information Technology Systems, 
      U.S. General Accounting Office; and David R. Warren, 
      Director, Defense Capabilities and Management, U.S. General 
      Accounting Office..........................................     3
    Lieberman, Robert J., Deputy Inspector General, Department of 
      Defense....................................................    36
Letters, statements, etc., submitted for the record by:
    Jonas, Tina W., Deputy Under Secretary for Defense, Financial 
      Management, Department of Defense:
        Information concerning schedule and program plans........    54
        Prepared statement of....................................    26
    Kutz, Gregory D., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, prepared 
      statement of...............................................     5
    Lieberman, Robert J., Deputy Inspector General, Department of 
      Defense, prepared statement of.............................    38
    Schakowsky, Hon. Janice D., a Representative in Congress from 
      the State of Illinois, prepared statement of...............    49


 THE DEPARTMENT OF DEFENSE: WHAT IS BEING DONE TO RESOLVE LONGSTANDING 
                     FINANCIAL MANAGEMENT PROBLEMS?

                              ----------                              


                       WEDNESDAY, MARCH 20, 2002

                  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 1 p.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn and Schakowsky.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, deputy staff director; Rosa Harris, 
professional staffmember and GAO detailee; Earl Pierce, 
professional staff member; Justin Paulhamus, clerk; David 
McMillen, minority professional staff member; and Jean Gosa, 
minority assistant clerk.
    Mr. Horn. I think everybody is here. We have Mr. Kutz, Mr. 
Hite, Mr. Warren, Ms. Jonas, Mr. Bloom, Mr. Ritchie, and Mr. 
Lieberman. OK. If you don't mind, we'll have you rise and raise 
your right hand.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that they've all affirmed.
    We will start with my opening statement, but we will have 
to recess in a little while because two more votes have popped-
up on the floor.
    A quorum being present, this 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 the 
progress executive branch departments and agencies in the 
Federal Government are making toward providing timely and 
useful information. Encouragingly, an increasing number of 
agencies were able to produce clean, auditable financial 
statements and made marked improvements in their financial 
management systems. However, this progress was often achieved 
through difficult and costly efforts. Despite that progress, 
the failures of the few agencies continue to tarnish the 
overall record of the executive branch.
    The Department of Defense still cannot adequately account 
for the billions of tax dollars it spends. For example, the 
Department has issued more than 230,000 purchase cards to 
employees who use the card to buy $1.8 billion worth of goods 
and services last year, yet a recent General Accounting Office 
audit of only 300 accounts found numerous cases in which the 
Government-guaranteed credit card had been inappropriately or 
fraudulently used.
    For the sixth consecutive year, the Department's Inspector 
General has been unable to render an opinion on the reliability 
of the Department's financial statements. For fiscal year 2001, 
to Office of Inspector General limited its internal control 
review to examining the status of the corrective actions 
relating to material weaknesses that had been reported in prior 
audits.
    In addition, for fiscal year 2001 the Inspector General did 
not test for compliance with the Federal Financial Management 
Improvement act of 1996, but relied on the Department's 
acknowledgement that many of its systems do not comply with the 
act.
    For the last 5 years, the Department of Defense received 
the unacceptable grade of ``F'' on the subcommittee's financial 
management report card, which is one of the primary reasons the 
Federal Government is unable to prepare auditable financial 
statements. The Department of Defense's financial management 
and feeder systems simply cannot provide adequate evidence to 
support various material amounts on the financial statements.
    The Department of Defense relies on non-integrated systems 
that are prone to errors. The GAO--the General Accounting 
Office--has reported that the Department of Defense's financial 
management systems reform will take years to complete.
    For fiscal year 2001, alone, the Department of Defense 
reported total information technology investments of almost $23 
billion. Despite the billions invested in modernizing its 
financial management systems, the Department does not have a 
plan in place to guide and direct these investments.
    In today's hearings we will focus on what the Department of 
Defense is going to do to resolve these longstanding issues. I 
welcome today's witnesses and look forward to working with you 
to ensure financial accountability throughout the Federal 
Government.
    I might add that Secretary Rumsfeld made it very clear 
yesterday that he won't tolerate what has happened in terms of 
the purchase cards and that he intends to do something about 
it. I'm glad that Secretary Jonas is here too.
    We will now start with--well, I'm going to check to see if 
I need to go vote. Yes, we have about 6 minutes, so have a 
rest.
    [Recess.]
    Mr. Horn. The Nation has been saved. We stopped a motion 
that allowed us to be out and not still work. Sorry for going 
over there and holding you all up, but we will now start with 
Gregory Kutz, the Director of Financial Management and 
Assurance, U.S. General Accounting Office.

 STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL MANAGEMENT 
 AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY 
  RANDOLPH C. HITE, DIRECTOR, INFORMATION TECHNOLOGY SYSTEMS, 
U.S. GENERAL ACCOUNTING OFFICE; AND DAVID R. WARREN, DIRECTOR, 
 DEFENSE CAPABILITIES AND MANAGEMENT, U.S. GENERAL ACCOUNTING 
                             OFFICE

    Mr. Kutz. Mr. Chairman, it is a pleasure to be here to 
discuss financial management at the Department of Defense. The 
recent successes of our forces in Afghanistan has again 
demonstrated that our military forces are second to none; 
however, the same level of excellence is not evident in many of 
DOD's processes, including financial management.
    DOD's financial management problems date back decades, and 
previous attempts at reform have largely proven unsuccessful. 
Problems with DOD financial management go far beyond its 
accounting and finance systems and processes. DOD's network of 
business systems was not designed, but rather has evolved into 
an overly complex and error-prone operation, with little 
standardization across the Department, multiple systems 
performing the same tasks, the same data stored in multiple 
systems, and significant manual data entry. Some of the systems 
in operation today date back to 1950's and 1960's technology.
    Past reform efforts have not succeeded, despite good 
intentions, and the conditions that led to those reform 
initiatives remain largely unchanged. As a result, the DOD has 
fundamentally flawed financial management systems and a weak 
overall internal control environment.
    My testimony has two parts: first, the root causes of DOD's 
inability to effectively reform its business operations, and, 
second, the keys to successful reform.
    First, we believe the underlying causes of the chronic 
financial and business reform challenges include: lack of 
sustained 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.
    Let me briefly touch on two of these--the challenges 
relating to leadership and culture.
    In our Executive Guide on World-Class Financial Management, 
the leading organizations we surveyed, including General 
Electric, Boeing, and Pfizer, identified leadership as the most 
important factor in making cultural change and establishing 
effective financial management. DOD's past experience has 
suggested that top management has not had a proactive, 
consistent, and continuing role in leading financial management 
reform.
    Sustaining top management commitment to performance goals 
is a particular challenge for DOD. In the past, the 
Department's top political appointees' average tenure of 1.7 
years has served to hinder long-term reform efforts.
    Cultural resistance to change and military service 
parochialism have also played a significant role in impeding 
previous reform efforts. I testified before this subcommittee 
last week on the culture at a Navy unit in San Diego that 
dismissed the need for internal controls and allowed abusive 
usage of Government purchase cards.
    All parts of DOD will need to put aside their parochial 
interests and focus on Department-wide approaches to financial 
management reform.
    My second point relates to the key elements necessary for 
successful reform. My written statement discusses seven 
elements necessary for reform. I will touch on two of those 
seven now.
    First, the financial management challenges must be 
addressed as part of a comprehensive, integrated, DOD-wide 
business process reform and 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 
six of the twenty-two agency-specific high-risk areas in the 
Federal Government, including systems modernization and 
inventory management. In addition, our two Government-wide 
high-risk areas, human capital strategy and computer security, 
are also relevant to DOD. These inter-related management 
challenges must be addressed using an integrated, enterprise-
wide approach.
    Second, establishing and implementing an enterprise-wide 
financial management architecture will be essential for the 
Department to effectively manage its modernization effort. The 
Clinger-Cohen Act requires agencies to develop, implement, and 
maintain an integrated systems architecture. Such an 
architecture can help ensure that the Department invests only 
in integrated, enterprise-wide business system solutions. 
Building systems without an architecture is like building a 
house without a blueprint.
    And the stakes are high. For fiscal year 2001, DOD reported 
total information technology investment of about $23 billion. 
Without an architecture, DOD risks spending billions of dollars 
that will only result in perpetuating the existing complex, 
stovepipe, and high-maintenance systems environment.
    In summary, we support Secretary Rumsfeld's vision for 
transforming the Department's full range of business processes. 
The benefits of business reform are substantial. The Secretary 
estimated that DOD could save 5 percent of its budget, which 
would be $15 to $18 billion annually, through successful 
business reform.
    Today the momentum exists for reform, but the real question 
remains: Will this momentum continue to exist tomorrow, next 
year, and throughout the years to make the necessary cultural, 
systems, human capital, and other key changes necessary a 
reality.
    For our part, we will continue to work constructively with 
the Department and the Congress on these reform issues.
    Mr. Chairman, this concludes my testimony. I have Randy 
Hite and Dave Warren with me to answer questions.
    Mr. Horn. We thank you very much.
    [The prepared statement of Mr. Kutz follows:]
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    Mr. Horn. We now have Tina W. Jonas, Deputy Under Secretary 
for Defense, Financial Management, Department of Defense. When 
we were voting recently, I met with Mr. Lewis and said you were 
going to turn the Department around, and he said, 
``Absolutely.''
    Ms. Jonas. We are trying mightily.

    STATEMENTS OF TINA W. JONAS, DEPUTY UNDER SECRETARY FOR 
     DEFENSE, FINANCIAL MANAGEMENT, DEPARTMENT OF DEFENSE, 
 ACCOMPANIED BY THOMAS R. BLOOM, DIRECTOR, DEFENSE FINANCE AND 
 ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE; AND DE W. RITCHIE, 
   JR., ACTING DEPUTY CHIEF FINANCIAL OFFICER, DEPARTMENT OF 
                            DEFENSE

    Ms. Jonas. Thank you, Mr. Chairman and members of the 
committee. I am pleased to be here to give you an update on the 
Department's financial management reform program. I wish to 
reaffirm the commitment to financial management reform that we 
made to you last year. Our goal for financial management reform 
is profound and far-reaching. We intend to provide the 
Department's decisionmakers with financial data that is 
reliable, relevant, and timely so that they, in turn, can 
carefully and efficiently manage and account for taxpayer 
funds.
    You cannot change anything unless you get your arms around 
the problem, and we are beginning to get our arms around the 
extent of our problem. We are taking five basic steps to 
achieve successful financial reform. We are rebuilding our 
financial management infrastructure to include renovating our 
information systems and business processes. We are improving 
the quality of the processes we use to prepare financial 
statements, and we are developing and using performance 
measures to target areas for improvement. We are also ensuring 
that components safeguard their assets from fraud, waste, and 
abuse, and we are developing procedures to build and maintain a 
highly motivated professional financial work force.
    Our first step is building a robust financial management 
infrastructure. Our program targets two primary causes of the 
Department's extensive problems. These are the uncontrolled 
proliferation of antiquated and stand-alone financial 
management systems and the inefficient business processes that 
they support.
    It is important to note that our financial systems were 
developed to support the budget appropriations process, but, 
unfortunately, they do not generate the type of financial 
information necessary for the Department's decisionmakers and 
they do not incorporate standard accounting principles as 
required by law. We intend to fix this.
    The proliferation of systems can be seen in the inventory 
diagram here. There's a board over there, and it's on the 
screen, Mr. Chairman, that represents over 673 financial and 
what they call ``feeder systems''--in other words, systems that 
produce data that is relevant or necessary for financial 
reporting.
    The slide or the chart, aside from it, is the chart that 
GAO used last year when I came to see you. They thought that 
spider chart--I call that the spider chart--was a problem. The 
work we have been doing has identified and validated that mess. 
There are 1,500 different what they call ``interfaces.'' So, I 
think very explicitly and graphically that shows you the extent 
of the Department's problem. I was informed by my team this 
morning that we have discovered another 200 systems.
    So many of the things that we are dealing with, all the 
problems in reporting--the inability to get financial 
statements on time--stem from that mess, and it is going to be 
a very difficult task to try to clean-it-up, but we are going 
to get to that.
    We are modernizing our business processes so that we can 
produce financial information. We are eliminating as many 
systems as possible and integrating standards and standardizing 
those that remain. We are creating an enterprise architecture 
that will serve as a plan of action linking systems and 
business processes in a comprehensive and integrated fashion.
    These processes are now isolated from each other across 
functional areas. The functional areas, as I mentioned earlier, 
these include healthcare, inventory, and other areas.
    Our enterprise architecture will also outline Department-
wide financial management standards and prescribe stringent 
internal controls.
    We expect to complete this architecture by March 2003, and 
we will be looking toward six pilot sites and prototyping the 
system by 2004.
    Just as a note here, we will be briefing the Deputy 
Secretary tomorrow and the service Secretaries on the status of 
our plan, so the Secretary gets routine briefs on where we are. 
Essentially, what I am describing for you, Mr. Chairman, is the 
approach that Greg has just discussed with you on an enterprise 
architecture--that is, creating a blueprint that will guide our 
financial investments in the future and will hopefully get us 
to a point where we're not spending so much money on 
inefficient processes.
    In addition to developing a robust financial 
infrastructure, we are addressing many of the Department's most 
intractable financial problems, including those that prevent 
the Department from receiving a clean audit opinion. For 
example, we are working to change the way the Department 
accounts for ships, tanks, aircraft, and other military 
equipment, and we want to give our managers and the public a 
clear view of the full cost associated with these items.
    We are developing more accurate methods to estimate our 
environmental liabilities so that we know what it costs to 
clean them up.
    We are improving our ability to estimate retiree healthcare 
costs. Our enhanced healthcare program will help us to budget 
for future healthcare costs more accurately. Our goal is to 
improve the quality of healthcare for our retirees.
    We are also balancing our checkbook with the U.S. Treasury, 
so knowing exactly how much money we have in our Treasury 
accounts helps to ensure that we spend only the funds 
appropriated to us by Congress.
    And, fifth, we have made considerable progress in 
documenting adjustments to our books, thus improving audit 
trails.
    Another area, Secretary Rumsfeld has stated--known to state 
that if we cannot measure it, we cannot manage it. We have 
begun to use performance measures to target areas for 
improvement, and our data shows that we are making progress.
    For instance, we are doing a better job of paying our bills 
on time. From April 2001, to October 2001, we reduced the 
backlog of commercial payments by 41 percent. This improves our 
business relationships and reduces wasteful interest payments. 
For example, when I came in I realized--I started to ask for 
performance data, and they suggested that we were spending $40 
million a year on interest payments. That's something that is 
just untenable, so we're using performance measures to 
understand. We brought that down, I think, by at least $12 
million over the past year.
    We are also trying to do a better job of accurately 
recording payments so that we know the status of our funds. We 
decreased our payment recording errors by 44 percent between 
January, 2001, and October 2001. We have also reduced our 
travel card payment delinquencies by 34 percent between 
January, 2001, and December, 2001, for cards held by 
individuals, and during the same period of time we reduced 
delinquencies related to cards held by DOD organizations by 86 
percent.
    We are trying to demonstrate to the Congress and to others 
that we want to measure our progress and understand where we 
are, particularly in the travel card area. This is very 
critical, and Dr. Zakheim--I get monthly briefings on where we 
are, and we're trying to drive the numbers to an acceptable 
level.
    We are also aggressively collecting money that contractors 
owe us, overpayments. We have identified over $53 million worth 
of overpayments, and we have collected as much as $31 million 
so far, and we continue to seek to get the rest of the returns 
on that, on those overpayments.
    Concurrent with our review of policies and procedures we 
are making enforcement of internal controls a top priority, and 
we are looking very closely at our overall internal controls 
program, with a specific focus on credit cards.
    Mr. Chairman, since I was here last week and we discussed 
this a little bit, the Secretary has put together a task force. 
That task force has met on a routine basis, and Tom is part of 
that task force. He may have the actual hours committed to 
that. But we are looking exactly at what has been done, what 
has not been done, what administrative remedies we have, what 
we must do for proper control. Don Zakheim has personally 
spoken to the acting IG, and we're going to invite Justice on 
the task force, so we hope to have some solid answers for this. 
I guarantee you the Secretary is personally involved in this.
    You asked me last week whether or not the service 
Secretaries have been discussed--this has been discussed with 
the service Secretaries. I guarantee you it has. So hopefully 
we will make some progress in those areas.
    I covered--Monday the Secretary had asked Dr. Zakheim to 
meet with the senior leadership and he did so, and I just 
mentioned the task force that we are involved with.
    So, Mr. Chairman, we are also, just as a final note--and I 
don't want to give it short shrift, but we're also--we had a 
human capital work group. The financial work force is critical. 
I think Greg has talked about this many times, David Walker has 
talked about it. We're serious about improving the financial 
management work force and the credentials of that work force, 
and we may be seeking legislation on some particular matters 
associated with that.
    Thank you, Mr. Chairman. I appreciate the opportunity to 
testify.
    [The prepared statement of Ms. Jonas follows:]
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    Mr. Horn. Well, that's a good report, and we're glad to 
hear about what is happening. I look forward to the conclusions 
and summaries of the task forces that cut across the services, 
because if we don't do it down there it will never get done at 
the top, and it should be standard at the top. I think you are 
there to do it and we will work with you.
    Now, Mr. Bloom and Mr. Ritchie, I assume are here for 
questions, or do they have something?
    Mr. Bloom. Yes, for questions.
    Mr. Horn. OK. So our last presenter is Robert J. Lieberman, 
Deputy Inspector General, Department of Defense.

  STATEMENT OF ROBERT J. LIEBERMAN, DEPUTY INSPECTOR GENERAL, 
                     DEPARTMENT OF DEFENSE

    Mr. Lieberman. Thank you, Mr. Chairman.
    My written statement addresses the results of our audits of 
the Department of Defense year-end financial statements for 
fiscal year 2001. It also summarizes the most significant of 
our many audit reports on financial management issues over the 
past year. Two of those reports, in March 2001, and January 
2002, discuss the crucial efforts to modernize the vast array 
of information systems that generate financial data and to 
achieve compliance with new accounting standards. For several 
years we have reported and testified that these system 
development and modernization projects are high-risk because of 
historically fragmented management and the poor DOD track 
record for information technology system acquisition and 
control.
    Since 1999, we have been advocating the application of the 
successful Year 2000 conversion management techniques to the 
task of revamping these systems. We've also stressed that the 
primary focus needs to be on generating useful financial 
information, not just clean audit opinions.
    I am pleased to report today that the Department's new 
approach is very much along the lines that we have been 
suggesting. Therefore, we are very supportive of this effort, 
beginning with the major and difficult initiative to develop a 
comprehensive financial system architecture.
    I would be remiss, though, not to warn that there are 
undeniable risks. Specifically, development of the architecture 
could take longer than anticipated, the end product might leave 
numerous issues that are hard to resolve, the cost to implement 
the architecture might be prohibitively expensive, or the DOD 
might lack the discipline over time to make system program 
managers conform to the architecture.
    Nevertheless, the Department has taken a major step forward 
by accepting the premise that the financial management 
improvement effort needs to be treated as a program in its own 
right, with all the management controls that a very large 
Government program should have. Those include a master plan, 
well-defined management accountability, full visibility in the 
budget, regular performance reporting, and robust audit 
coverage. We believe that the DOD is making a good faith effort 
to create a strong management structure for this effort.
    We look forward to assisting with timely and useful audit 
advice, just as we did during the Year 2000 conversion.
    Likewise, we welcome the emphasis in the President's 
management initiatives on controlling erroneous payments. As 
the Department of Defense pursues the goal of greatly improved 
financial reporting, we must also keep focused on the need for 
better controls in many facets of its day-to-day finance 
operations and closely related purchasing activities such as 
the use of Government credit cards.
    As mentioned in my written statements, there have been 382 
audits of the purchase card program and 31 audits of the travel 
card program. More reports on them, as well as the aviation 
card program, are in the pipeline. In fact, we plan to issue a 
major IG report with numerous recommendations for improvement 
to the purchase card program later this month.
    Moreover, numerous criminal investigations involving credit 
card misuse are in progress, as well as proactive investigative 
research efforts intended to identify abuses of credit card 
privileges. The Defense Criminal Investigative Service, which 
is part of the Office of the Inspector General, currently has 
17 open cases involving misuse of Government credit cards. 
Cooperation from senior DOD managers on this subject has been 
exemplary, and we welcome the latest initiatives.
    Everyone agrees that much more need to be done to improve 
local level management controls. I will close by noting that, 
despite unacceptably weak controls at some DOD activities, 
particularly in the Navy, it is wrong to assume that there is 
little peril for individuals who abuse their Government credit 
card privileges. Recent criminal convictions illustrate that 
abusers of Government credit cards actually take considerable 
risk. To underscore that point, my written statement includes a 
list of examples of recently closed cases on felony frauds 
involving the misuse of DOD credit cards.
    Again, thank you for soliciting our views in this matter. 
That concludes my summary.
    [The prepared statement of Mr. Lieberman follows:]
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    Mr. Horn. Well, thank you very much. I appreciate the one-
pager of examples of Defense Criminal Investigative Service 
cases on credit card fraud. How many of those had some sort of 
sanction? Were any of them let off by either the U.S. Attorney 
or the particular judge, or what?
    Mr. Lieberman. On that particular list, every single 
example is a conviction and a sentence. Some of the sentences 
are not particularly heavy, but that is the way the criminal 
justice system works, and, of course, the Department of Defense 
has nothing to say about the sentencing.
    Mr. Horn. I see some of the others actually had 
imprisonment.
    Mr. Lieberman. Yes, sir.
    Mr. Horn. Yes.
    Mr. Lieberman. And for white collar offenses like that, in 
all these cases first-time white collar offenders, some of 
those are considered heavy sentences in those parts of the 
country.
    Mr. Horn. I now yield to the ranking member, Ms. 
Schakowsky, for her statement.
    Ms. Schakowsky. Thank you, Mr. Chairman. Here we go again, 
and I'm glad that we are. We are here today because once again 
the Department of Defense has failed to produce a set of books 
that could be audited. Unfortunately, this isn't news. It 
actually should be news. I wish there were more attention to 
this fact. Even though the Defense Department is responsible 
for half the total discretionary spending of the Federal 
Government, over $300 billion, they don't have enough respect 
for the American public to keep a clean set of books.
    This is Enron accounting ten times worse. I find this 
particularly disturbing because the men and women who put their 
lives on the line for this country are not the ones responsible 
for these failures. It's the military bureaucrats at the 
Pentagon and around the country who keep the books.
    If they're failing the American public in this way, I 
wonder in what other ways they are failing those men and women 
who are putting their lives on the line.
    In 1995, the GAO put the Defense Department financial 
management on the high-risk list. One of the issues raised then 
by the GAO was the failure of the Department to protect its 
assets from fraud, waste, and abuse. Last week, we saw just how 
vulnerable the Department is to fraud in the area of purchase 
cards, which has been discussed already. Millions of dollars in 
personal items, trips, and even plastic surgery were charged to 
Government-issued credit cards. The financial mismanagement 
continues at the Pentagon.
    Seven years ago the GAO reported that the Defense 
Department was unable to reliably report on the cost of its 
operations--7 years ago. Today that remains a problem. Seven 
years ago the GAO reported that the Defense Department was not 
properly reporting billions of dollars of future liabilities 
associated with environmental liabilities. Today, that remains 
a problem. Seven years ago the GAO reported the Defense 
Department was unable to protect its assets from fraud, waste, 
and abuse, and today that remains a problem.
    Twelve years ago the GAO reported that the Defense 
Department's inventory management was a high-risk for failure, 
and today that remains a problem. Twelve years ago the GAO 
reported that the weapons system acquisition was a high-risk 
for failure. Today that remains a problem.
    The list goes on and on, and we've heard lots of talk and 
we have not seen any progress.
    As I pointed out last week, the problems, in my view, is 
not systems or training or organization, and Mr. Kutz mentioned 
that today. The word I am looking for is the culture at the 
Department of Defense.
    The mission of the Department is critical to our safety and 
welfare; unfortunately, the bureaucracy has taken the 
importance of that mission and turned it into impudence.
    These failures to account for the cost of programs to 
properly identify environmental costs, protect against fraud, 
are not just the dry, arcane stuff of accounting, these are 
examples of how the Department abuses the public trust, wastes 
billions of dollars, and in the process asks for more.
    Today we will hear again--we are hearing again how the 
Department is going to correct these problems, and I have to 
say that, frankly, I see no reason to believe those responses 
at this moment. Last July we were told that the credit card 
issue would be addressed; instead, it was business as usual, 
fraud, waste, and abuse. And why should we not expect the same 
today? That's really the nature of the questions that I want to 
be asking. Why should we have any confidence in this?
    I think that these questions ought to be the central part 
of the debate when we look at the $48 billion increase, the 
$400 billion Defense budget that is being asked for. Why should 
we expect that these problems won't be there next year and next 
year and next year?
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Janice D. Schakowsky 
follows:]
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    Mr. Horn. If you'd like to use the 10-minutes now for 
questions, I'll yield 10 minutes to you.
    Ms. Schakowsky. Thank you.
    Mr. Lieberman, in a recent report your office criticized 
the Department. I can't get past this number--$1.2 trillion in 
Department-level accounting entries which were unsupported 
because of documentation problems or improper because the 
entries were illogical or did not follow generally accepted 
accounting principles.
    How can this happen?
    Mr. Lieberman. The number you're referring to was in our 
report last year on year-end financial statements for fiscal 
year 2000. The direct answer to your question is that, because 
those systems outlined on those two different charts they are 
incapable of generating accurate reports, the Department has to 
go through a convoluted series of procedures, work-arounds that 
are both inefficient and just simply don't work in terms of 
leaving an inadequate audit trail.
    Ms. Schakowsky. This is so obvious, though.
    Mr. Lieberman. Yes.
    Ms. Schakowsky. It is so obvious to everyone. Were you 
waiting for this subcommittee to act or to raise questions? I 
mean, anybody could look at that and say that. So why wasn't 
something done earlier, and why has it still not happened, even 
when repeatedly that has been pointed out by you and others?
    Mr. Lieberman. Yes, ma'am. That was pointed out when the 
Chief Financial Officers Act was passed. I remember hearings 
with this committee when it was called ``Government 
Operations,'' and we were saying back then the Department will 
have to completely revamp its information systems in order to 
do this, and that is a monumental effort, requiring a lot of 
intensive management attention, which, frankly, I don't think 
the problem got throughout the decade of the 1990's.
    Ms. Schakowsky. And why is that?
    Mr. Lieberman. A combination of the Department having other 
priorities and the Congress having very on-again/off-again 
interest from year to year on how much progress was being made.
    Ms. Schakowsky. Accumulating over time to $1.2 trillion in 
such transactions that we just can't adequately account for or 
sensibly, logically account for.
    Mr. Lieberman. When we first started doing these year-end 
financial statement audits, we did not try to quantify the 
value of the unsupported transactions. We only actually tried 
to do that starting 2 or 3 years ago. So I don't know what the 
number was when DOD first started, but it would have been 
astronomical, because what that number tells you is the systems 
are incapable of doing the kind of job that a corporation's 
systems can do when they put together an auditable financial 
statement.
    Ms. Schakowsky. But it is not as if these systems and 
processes are beyond our grasp. It is not that we didn't know 
there was a problem. It is not that we didn't know that the 
problem was of astronomical proportion. It's just there was no 
will to do that.
    Mr. Lieberman. I won't argue with your statement, ma'am, 
because I have said many of the same things.
    Ms. Schakowsky. Yes.
    Mr. Lieberman. I think, in addition to a lack of will, it 
has been a matter of organization. The way the Department is 
organized, all those different systems belong to many different 
organizations within the Department. There is nobody at the 
Assistant Secretary level who owns all of them. And getting the 
different parties involved to focus on the particular challenge 
of improving financial management reporting has proven to be 
very, very difficult because those other managers had their own 
priorities and there wasn't strong enough central leadership.
    The problem here is no tougher than the Year 2000 problem 
that I alluded to earlier. I know Chairman Horn probably 
remembers well that he had hearings when we all sat here and 
said, ``Gee, the Department just discovered another few hundred 
systems.'' We were still doing that well into the fall of 1999. 
But there was very strong and sustained central management 
interest, and everybody in the Department ended up marching in 
the same direction. It took 2 years of many a critical audit 
report and many a nasty meeting, but then Deputy Secretary 
Hamry kept pounding on people to get over the finish line and 
they did, and it was a successful conclusion to an enormous 
management challenge.
    This one hasn't had quite the sex appeal that one did. What 
is going on and how much is being spent has always been 
somewhat of an unknown. There was never one place you could go 
to to say, ``How much are we spending on this this year?'' The 
numbers simply didn't exist, incredibly, when you think about 
it, because we're talking a multi-billion-dollar government 
program. But there was not a program structure with someone in 
charge, a clear roadmap, as Ms. Jonas is talking about. You've 
got to have a roadmap of where you want to go and then set 
milestones and expect people to report where they are against 
those milestones. Over the years we never had any of that. We 
always had just a vague notion that we were moving forward.
    And a lot of money was spent during the 1990's. It's not 
that there hasn't been a lot of activity. Unfortunately, it has 
not been efficiently focused.
    Ms. Schakowsky. I think there is actually a lot of--you put 
it ``sex appeal'' to this issue. If the American people 
really--if this message really got out, even just the credit 
card aspect, which I think is a small part of it, I think that 
there would be a lot of interest. People would be very upset if 
we were successful in really--I think the Department has been 
lucky, actually, that this is not widely known among the 
American people, who would feel very betrayed, I think, if that 
got out.
    Let me ask you this. Our colleague, Representative 
Kucinich, has proposed the following language be added to our 
budget views: ``Except for funds to be used directly for 
homeland security, the subcommittee opposes any increase in the 
Department of Defense budget unless the Department passes a 
test of an independent audit.''
    I'd like to get your reaction to this proposal, and overall 
why--and, Ms. Jonas, feel free to answer this--why we shouldn't 
take some sort of direct action instead of just these hopeful 
kind of hearings.
    Ms. Jonas. Well, and I appreciate that because the spirit 
of the Congressman's legislation I personally would agree with. 
The problems I was describing earlier and the practicality--
when I first got into this job, I asked some very fundamental 
questions. We have known that systems, in general, have been a 
problem, but it has never been clearly defined to the point 
where you could start to resolve the problem, so one of the 
basic questions I asked was: What's the extent of the problem? 
Nobody could tell me. I asked how much we were spending on 
these systems. Nobody could tell me.
    So for several months we have had a good task force of 
people, which is now part of the structure of the Comptroller's 
Office, investigating, looking at this very carefully. This 
diagram is not just a posterboard. That represents a huge 
amount of data. It tells us every little linkage that we have, 
and we needed to have that in order to fix it.
    We must get to a point where the systems will routinely 
provide the type of information that the Congress deserves. It 
absolutely deserves it. I think everybody at this table would 
agree with the sentiments expressed here, your sentiments that 
it is inexcusable. So we must get to that.
    I think we have--I don't have it with me, but we do have 
our schedule and our program plan laid out. I'd like to submit 
that for the record, if that's all right, so that you can see 
what progress we expect to make and, you know, how we are 
measuring yourselves, if that's all right.
    Mr. Horn. Without objection, that will be in the record.
    [The information referred to follows:]
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    Mr. Horn. The clerk should get copies here.
    Ms. Schakowsky. OK. The Secretary is adamant and we are 
very hopeful with his leadership we can get this raised to the 
level. I've known John Hamry for years, and John tried very 
mightily and did a great job on the 2002--the 2000 problem. We 
need that kind of sustained leadership. That is why we've set 
up an executive committee to deal with this and a steering 
group at my level to work through these issues. It is the only 
way to get the problem solved.
    So we have got a lot of work to do. It is huge. But your 
basic question, we should be able to comply with that law and 
we intend to try to get there as soon as we possibly can.
    Mr. Horn. Let me pursue some of these issues. When the 
National Security Act brought in not only the CIA but the 
National Security Council and certainly the Department of 
Defense under the Truman administration, implemented in part by 
the Eisenhower administration, and Secretary Forrestal as we 
all know, had difficulties, and he probably just didn't know 
what he was in for. He had been a very able Secretary of the 
Navy, but once you got into the complexity and the services are 
fighting with each other, and his successor, as I remember 
Louis Johnson, decided that, ``Well, I'll just give them each 
one-third of the budget.'' That's what it was, and so it was 
submitted to Congress in that way.
    Now, when we got into the systems bit, the computer systems 
versus the accounting system, obviously computers used for the 
accounting system, but the first Secretary should have said, 
``Folks, we're going to have one accounting system and we're 
going to have it for the services and we're going to have it 
for the overall Department of Defense.'' Nobody did that.
    I'm curious, Mr. Lieberman--you could probably write a 
great memoir on this, and that is, when Mel Laird was Secretary 
of Defense and David Packard of Hewlitt Packard, he was a 
brilliant student at Stanford in the early 1930's, and he came 
back here and he was one tough hombre in terms of being Deputy 
Secretary. Now, he also wanted to turn that place around, and 
I'm just curious, were you there when he was there?
    Mr. Lieberman. Yes, I was. I was afraid for a minute you 
were going to ask me if I was there when Forrestal was there. I 
don't go back quite that far.
    Mr. Horn. And I wasn't going to ask you about General 
Grant, either. [Laughter.]
    General Grant was for a Department of Education. We've now 
got one. It took about a century, but things are going good.
    So tell me about--did David Packard, who was an 
industrialist and knows what it is to have a very tough-minded 
central group and getting the things done, so I'd be curious 
what he did or didn't do.
    Mr. Lieberman. As I recall, his primary focus was on 
weapons system acquisition.
    Mr. Horn. Yes.
    Mr. Lieberman. Trying to make sure that the different 
systems being bought by the different services didn't duplicate 
each other, and hammering out a lot of very difficult budget 
issues. In his day, the Defense Department budget was not 
growing and there was great difficulty in modernizing the 
forces. So I don't remember him being an active player in 
financial management, frankly. The first time I remember a 
concerted effort to try to get a handle on this financial 
management system problem was really in the ill-fated corporate 
information management initiative, which was launched under 
Secretary Cheney's deputy, Don Atwood, and it just did not have 
the support within the Department at the time and sort of 
petered out by the mid 1990's.
    Mr. Horn. Well, I got into the Y2K bit, and Mr. Hamre, as 
you suggest, really threw his heart into it and tried to get 
things done. And, as I remember, it started with 149 accounting 
systems, and when I said that, the next hearing a couple of 
hundred more, just as you found, were there, and they kept 
coming out. Nobody could ever get their handle on that. Of 
course, as Secretary Forrestal said, as I noted, they should 
have had one and his successor should have stuck with one 
unless there was something wrong with it and make sure that it 
is integrated and related with all the services.
    So that's one of your problems that you face, Madam 
Secretary, and we've got to get the type of things that 
executives need before them if they are going to know what the 
options are.
    What else is needed over there? Heaven knows we give them a 
lot of money.
    Ms. Jonas. Well, I really think the sustained support of 
the Congress. We recognize, you know, this is a culture 
problem, and to the extent that we can have the support of the 
Congress--OMB has been very good. You know, they have a 
watchful eye over us, as does the GAO and the IG, but we need 
to demonstrate to the culture that this is unacceptable, and 
changing culture is a very difficult job. I mean, we cannot, 
you know--a system--this isn't all just a system issue. Systems 
are a really good part of that, but we also have to do--Tom 
Bloom has been here. He is changing his culture, DFAS, quite a 
bit, retraining people, making sure that people understand that 
certain mistakes are unacceptable. He did a great job on 
cleaning-up the canceled accounts issue. At one time there were 
162 of those accounts that were illegal. He worked on that 
problem and has completely cleaned-it-up, and I'll let him give 
you the stats on it. But it is the sustained attention of 
management and letting the people know that it's not 
acceptable.
    Mr. Horn. Mr. Bloom, want to comment on that?
    Mr. Bloom. It's clearly a cultural issue, as Ms. Jonas 
mentioned. It is also a human capital issue. We're working 
those issues hard. We need to get the right folks with the 
right training in the jobs as we're changing the culture, as 
well as getting a handle on the systems, and we need to take 
these issues as seriously as we have.
    Ms. Jonas mentioned the canceled account issue that we 
talked about last July--which, by the way, was one of the worst 
days of my career to have to come up here and look you all in 
the face and say, ``Look, we screwed up. We need to fix this.'' 
But we took that and we changed the systems. We got the 
training for the people. We've worked very hard on the culture.
    I can't tell you that we'll never have another one. I'd 
like to think that we'll never have another one. But we have 
worked so hard to change the culture and the systems and the 
human capital. That's the kind of effort overall that needs to 
be done.
    Mr. Horn. I'd be curious about the Office of Personnel 
Management and how helpful they are to a department, and what's 
the kind of flexibility that you have to get that capital, 
human capital? Are you able to do it within the Department of 
Defense, or do you have to beg at the OPM?
    I was in the Eisenhower administration, and our person in 
administration who should have been working for the Department 
never worked for him. He simply said, ``Gee, I've got to do 
something with the U.S. Civil Service Commission.'' That was 
just bunk, frankly, but they were so regulatory that they 
weren't--they didn't have any vision of human capital. And we 
puttered along with that until OPM was created, and I think the 
ballots are still out on OPM, and they ought to be where they 
can.
    Looking at the various issues that you have faced and to 
get them down at your level as an agency and not an all-
executive branch, then they ought to be letting everyone. I did 
that in a rather complicated system in California, and the 
personnel people just went after us. You couldn't believe it. 
And it's because they don't have a broad vision. But, by 
George, the trustees did. And it took me 5 years to do it, but 
the fact is we had a flexible scale so that we could get the 
people that we needed and we could go between 10,000 and 
110,000 and have contracts every 6 months to see what are you 
going to accomplish.
    Mr. Kutz. Mr. Chairman, it's interesting right now. The 
environment we're in with human capital in the financial area 
is actually quite good. We've seen that, you know, with the 
dotcom bomb and the people that are available out there looking 
for a stable job, challenging work, the kind of work that we do 
at GAO, for example, is quite appealing to people. We've had 
pretty good success the last year in the financial management 
area. In the past it was very difficult to compete with the 
Pricewaterhouses and the other firms out there, but now even 
they don't look so attractive with what's happening with Arthur 
Andersen. So we've found that the environment right now is 
quite good, actually, to hire good financial management people 
from either the dotcom companies or right off of campuses, so 
this is a unique opportunity to fill the ranks with some good 
young people for succession planning and for, you know, places 
like GAO and DOD for the future leaders of the financial 
organizations.
    Mr. Horn. I think when you're out in the States, and all 50 
of them, that if you have a chance you ought to be talking to 
students that are in business school, public administration 
school, and undergrads as well as grad students and all that if 
we are going to recruit people, because it is a terrific 
opportunity.
    Mr. Bloom. Mr. Chairman, over this last year we've really 
seized on that opportunity with the economy, and every one of 
my executives now, as part of their performance plan, is to 
visit a college and university, get to know the professors, get 
to know the kids, get to know the graduate students and 
recruit. We look at this as a unique opportunity.
    In the Department of Defense, particularly in financial 
management, we had a 10-year hiatus essentially on hiring. It 
is tough to find a 29-year-old in financial management in the 
Department of Defense. We just hadn't been hiring them. And we 
have a unique opportunity now, and at DFAS we are really 
grasping.
    Mr. Horn. Well, I'm delighted to hear that.
    Mr. Lieberman. Mr. Chairman, could I add something on that?
    Mr. Horn. Yes. Let me just get one point here on this. With 
all that fine work, it might help if you sent Members of 
Congress that want to be on campuses, want to say good things 
about the Department of Defense, and so forth, I'd love to have 
a kit which I can have some decent figures and know what's 
happening now. The services have always been very good about 
educating their people, and master's and Ph.D's and all the 
rest of them.
    Go ahead on that, Mr. Lieberman.
    Mr. Lieberman. I can't tell you how much we appreciate your 
interest in this question. The entire Civil Service faces a 
crisis right now because it is an aging work force. In the 
Office of the IG, we are in the process of hiring a lot of 
young people, and I'm pleased to be able to tell you we've had 
excellent luck over the last few years. I have some of our 
junior auditors sitting here in the back row----
    Mr. Horn. They're smiling.
    Mr. Lieberman [continuing]. Thinking they were going to sit 
in the shadows.
    Mr. Horn. They're smiling and saying, ``We need a raise,'' 
right?
    Mr. Lieberman. They are smiling. And they're excellent, and 
we're very pleased that we've had good luck recruiting. Even 
though we are not competitive salary-wise head-up with private 
industry in a lot of cases, we can offer intrinsically 
interesting work and good working conditions, and I think 
anything that can be done to spread that word by public 
officials would really be for the best.
    Mr. Horn. See, that's the kind of thing, when Members of 
Congress, Senate and House, have a weekly column in many 
places, and that's one way to get it out to all the little 
towns in America, as well as the big towns in America.
    Well, let me pursue a few questions right now. Let me ask, 
Mr. Kutz, the Department of Defense received approximately $100 
million in fiscal year 2002 and has requested $96 million for 
fiscal year 2003 to transform its financial management 
operations. Over the years, the Department has undertaken 
various efforts to streamline operations within the Department. 
The success rate, however, has been less than admirable.
    In your opinion, what does the Department of Defense need 
to do to ensure that the current effort does not continue 
wasting significant resources on marginal improvements, at 
best? Have you separated out, as a critic, the degree to which 
certain things should be done and certain things are being 
done?
    Mr. Kutz. I guess I would go back to the several items that 
were mentioned earlier, the sustained leadership issue and the 
cultural transformations needed to get this done.
    The systems that you see up there I think are a symptom of 
the lack of sustained leadership and of a culture that allows 
or encourages even everybody to kind of do their own thing, to 
build their own system, even if someone else has a system that 
could do the same thing. That's how you get something like the 
computer chip and the spider chart over there as to developing 
systems.
    So I really believe that the leadership and the culture--we 
laid out in our written statement the seven key elements to 
reform, but it seems to me that the culture is going to be the 
most difficult one for the leadership here to really address 
and to get people to change the way they're doing things.
    I mean, if you look over time, people probably are hoping 
they can wait this group out and maybe this phase will pass and 
they can wait until the next group comes in, and that's the 
reality of what not only DOD faces but other agencies face that 
have difficulty having sustained leadership over time.
    Mr. Horn. With Mr. Kutz, I'm going to have the ranking 
person here, Ms. Schakowsky, for 10 minutes on going through 
and seeing some of these things just like I have.
    Ms. Schakowsky. Mr. Kutz, at every hearing we're told that 
the solutions to these problems lie, when they get solved, 5 to 
10 years down the road, but as we've seen from the purchase 
card fiasco, what happens is the deck chairs get rearranged so 
fast that it is hard to hold anybody really accountable 6 
months later, so I'm wondering how we address that, and if you 
believe, you really believe, that it is possible to solve these 
problems, and if you want to make any predictions about that, 
given the current promises, the current personnel, etc.
    Mr. Kutz. Right. I mean, we're not in a position to predict 
at this point. I think we would need to see several years of 
looking over the long-term, this being, if you did it the right 
way, a five, ten, possibly longer year type of solution until 
there are specific markers set out there that we can see being 
achieved year by year.
    If you have another hearing next year and you see that they 
have met their goal of having the enterprise architecture done, 
developed, and in place and are moving on to step two, then I 
think you can start to say, ``OK, we're seeing some progress 
here.'' But until you really see the long-term plan and have 
markers every year that they need to meet and they can come up 
and testify before this subcommittee and others saying either 
we did or didn't meet these markers, that's how you can start 
projecting.
    If you get 2 to 3 years into a seven-to 10-year planning, 
you see that you are making progress, then you can start to 
have some confidence that maybe this is going to take 7 years.
    Ms. Schakowsky. And what happens if the marker isn't met, 
you know, because that's what happens all the time.
    Mr. Kutz. Exactly. I mean, right now there are no 
consequences, necessarily, and that's why I think Secretary 
Rumsfeld has said that there are going to be personal 
consequences for people who are responsible, someone that you 
can point to and say, ``You are the person who is actually 
responsible.'' I think Ms. Jonas will probably elaborate on 
that, but that is I think what is the new culture they're 
trying to establish there, that someone actually is held 
accountable if they don't meet that marker.
    Ms. Schakowsky. And so that person gets fired and then 
there's a new person and then we have a hearing, and that 
person says, ``Well, I just got here and I have all these new 
ideas and now here is what we're going to do.'' That's what I'm 
talking about. We rearrange the deck chairs and we never get to 
the end of it.
    Ms. Jonas, did you want to comment?
    Ms. Jonas. I can really appreciate your comments, but I 
will tell you, from my own standpoint, Secretary Rumsfeld 
really is the kind of Secretary who drags people in and says, 
``What have you done for me lately? What has this system done 
for me lately? Have you met your markers?'' That type of 
leadership, you know, is filtering down. It's gradual.
    If he decided to leave tomorrow, would the culture 
continue? I don't know. But we need to continue to show that we 
are accountable, that we intend on meeting deadlines, even 
simple things like meeting deadlines from memos.
    You know, the Department is used to just delaying 
everything because there is no cost in their mind to delaying 
everything. There's a huge cost to delaying things. You know, 
you said in your discussion during my testimony that 10 years 
have gone by, what's happened since the enactment of the law. 
Well, nobody sees that there is a problem that we've delayed.
    Some of the systems there represented we discovered were 
costing us $3 to $4 billion. Nobody had made them visible. You 
know, there's so much that needs to be done to bring this into 
the light, let everybody see what is being spent, and make 
people accountable, meet deadlines, meet milestones.
    One of the reasons we went with a program management 
technique, which is something that is used in the acquisition 
side of the house, is because there is routine and regular 
senior-level review at milestones. Those systems were never 
developed with the acquisition discipline in mind, so nobody 
has ever seen that they're being really developed. It is an 
undisciplined process.
    Ms. Schakowsky. Yes, it is an undisciplined process, that's 
for sure, but it is not as if we didn't know, in many 
instances, that a billion here, a billion there was being--it 
was either unaccounted for or slipping through the cracks. So 
it's not just shedding light. A lot of light has been shed over 
the years.
    Let me ask Mr. Lieberman a question. Maybe you've said this 
in other ways. If you agree with the Department's new financial 
management plans, and then if your office has been given 
appropriate responsibilities in these plans, and, if not, if 
you think that your office should have additional 
responsibilities.
    Mr. Lieberman. Yes, I do very much support the plan. We had 
been calling for the exact same things that are in the plan now 
for some time, and there had been movement in those directions, 
but nothing put into place as concrete as what is going on now, 
so we are very pleased with that.
    Part of the scheme here, once the architecture is put 
together and systems managers know exactly what it is they're 
supposed to do, is that then we can begin auditing each one of 
these system development efforts to provide independent 
verification that they actually are making progress and doing 
what they are supposed to be doing, rather than going off on a 
tangent and creating kind of mushy result that has occurred in 
prior years.
    So we expect that to be a heavy audit requirement for us. 
It is challenging in terms of resources and priorities because 
people want us to do a lot of other things, too, but we're 
going to step up to that as best we can and put very high 
priority on it.
    The Department also, I think, is very receptive to audit 
support in other areas like credit cards. We're going to be 
issuing a report next week on the purchase card program that 
has lots of recommendations for changes in procedures in the 
program, and I expect either total concurrence with that or 
something close to it.
    Ms. Schakowsky. I wanted to ask you, I think there is 
another side to the whole purchase card issue than that has 
been suggested, and that is the whole issue of vendor fraud, 
where there is--anybody want to comment on that?
    Mr. Kutz. I certainly can. That is an issue that we see. If 
you have an environment--again, a weak control environment 
where people are not reviewing the monthly credit card bill, 
you are vulnerable to vendors peppering your account with 
inappropriate charges, and we have several investigations that 
we are going to followup on out in San Diego, based on the work 
we did for the hearing last week, that we're going to look into 
that issue. But yes, the Department is vulnerable to vendors 
hitting their accounts for inappropriate charges or work that 
wasn't done, and if nobody is looking at the bill the 
Government is going to pay the bill and not receive the 
services.
    Ms. Schakowsky. I just can't emphasize enough how 
absolutely unacceptable this would be to ordinary Americans 
who--you know, Ms. Jonas, you talk about balancing a checkbook 
as if that would be such a fabulous achievement for the 
Department, which it would be, but families in this country do 
it every single month, and it is unthinkable that they would 
proceed year to year to year without doing that, and I think 
there is this basic assumption that we are doing that here.
    So these really modest goals I think, common-sense goals 
that are regularly being violated is just--I'm speechless. 
Thank you.
    Mr. Horn. I've never seen a Member of Congress speechless. 
[Laughter.]
    But on a Wednesday afternoon--don't forget, we're not going 
to be around tomorrow.
    Anyhow, let's get back a little bit to Secretary Jonas. Is 
there anything else you have to say to what Mr. Kutz has said 
in terms of getting a comprehensive, integrated strategy for 
reengineering all of the Department's business processes? What 
actions have you taken or do you plan to take to ensure a 
comprehensive, integrated approach to reform? And obviously 
that's part of the culture and the toughest job is the culture, 
and the only way you change that is you stay around there and 
you don't run down the halls and say, ``How did I ever get into 
this? I'm going back to Congress.''
    If you're in there and they know you're in there for 5 
years, it will change.
    Ms. Jonas. I appreciate your comments, Mr. Chairman. I will 
tell you I have been working about 14-hour days at least 6 days 
a week on this job, so----
    Mr. Horn. We're used to it up here.
    Ms. Jonas [continuing]. I do wonder sometimes what did I 
get myself into.
    Mr. Horn. We're used to it up here.
    Ms. Jonas. Just one comment to the point on vendor issues. 
We are developing, as I mentioned in my testimony, and have 
available to us some very detailed performance metrics that 
we're using, and I alluded to the overpayments, which is a sore 
issue, and using DCAA and Defense Audit Agency and DFAS 
together, working very aggressively to look at some of these 
contracts to identify overpayments--in other words, what are we 
owed, and let's get it back, at a minimum, so that we're not 
asking Congress for additional appropriations if we don't need 
it. So let's get the money back from the contractors that is 
owed us. Let's be out there, be aggressive.
    I will be showing the SEC, which is the Senior Executive 
Committee that the Secretary has, our metrics, so they'll see. 
Their sustained leadership there will help.
    I agree with much of what has been said here. I agree, Ms. 
Schakowsky, with your statement it is incredible. What I have 
found out since I have been over there has been truly 
incredible. We just have to stick with it. It is a hard job. 
It's going to get harder. We just must stay with it so that we 
can demonstrate good stewardship.
    The one good thing about working for Secretary Rumsfeld is 
we know that we have his support.
    Mr. Horn. The Secretary of Defense has stated it will take 
8 years or more to complete the planned financial management 
reform at the Department. Do you agree with that time table?
    Ms. Jonas. It will take quite a while. What we do 
anticipate is by 2004 being able to prototype this system, and 
we would probably pick--I don't want to be too forward-
leaning--when we finish our architecture, that will tell us 
very specifically what we should do and how we should proceed. 
As Greg alluded to, it is the equivalent of a blueprint for 
building a house. But I would say within various functional 
areas, perhaps healthcare--I mean, healthcare is costing us $20 
billion in the Department. That is a key area. It is one that 
the Secretary is intensely interested in. We could get more 
efficient in that area. We may prototype the system in that 
area.
    But we don't know for sure. It will take several years, 
however.
    Mr. Horn. Yes, because otherwise it will be 2009 and none 
of you will be around. There will be a new administration, 
since there is a term limit for Presidents at 8 years. A lot of 
the bureaucrats say, ``Well, this crowd will go, just like the 
last crowd,'' and so forth, so that's the cynical that you have 
to really cut right through to it.
    In your testimony you stated the Department of Defense has 
created an enterprise architecture that is expected to be 
complete in March, 2003, and you're saying you'd like to at 
least get it at 2004. Anything else on that point?
    Ms. Jonas. Just to clarify. The blueprint will be 
accomplished within a year. We would be prototyping in 2004, so 
that's a--there's a distinction there.
    Mr. Horn. OK. What specifically controls does the 
Department have in place to eliminate overpayments to 
contractors? We passed a law on that, so what's happening?
    Ms. Jonas. I think, as I alluded to, one of the things that 
Dr. Zakheim did--and, Tom, you may want to pipe in here--was to 
get the Defense Contract Audit Agency engaged in reviewing some 
of these outstanding contracts and, you know, get aggressive on 
that matter, and DFAS is cooperating with them--Tom, you might 
want to address this--but really move out aggressively on these 
overpayments.
    Some of our--you know, these systems are very difficult to 
reconcile. That causes problems in the contract process. 
Contractors are anxious to get paid. We don't want to pay 
interest. But at the same time we have to be just as aggressive 
in getting what is owed to us as they are about getting the 
money that is owed to them.
    Mr. Bloom. And there is work being done on the back end, as 
Ms. Jonas mentioned, but we are also doing a fair amount of 
work on the front end to make sure we don't make the screw-ups 
to begin with, and we've--I've got a cell of folks dedicated to 
this. They're actually out in California. They work with a 
system that we've developed called ``Predator,'' where we can--
before we make payments we take certain edit areas, certain 
edit functions, and we have been able to capture an awful lot 
of potential duplicate payments.
    Most of the time we make a duplicate payment it is just 
because of a mistake. Either a contractor has billed us twice 
and we haven't caught that, or, you know, maybe we copied an 
invoice twice, and Predator has gone a long way. We still have 
a ways to go, but Predator has gone a long way to eliminate a 
lot of those duplicate payments.
    Mr. Horn. Now, one of the places we used to have--and I 
haven't heard much about now--and I'd just be curious--
Columbus, Ohio, the facility there. On the Y2K bit we found 
that $1 million went off to one, and he said, ``Hey, I didn't 
have anything. Oh, well, must be right,'' so the person put it 
in the bank, lived off the interest, and then sent it back. So 
I don't think that's apocryphal. But what has happened in that 
place--and it is clear that they were using GS-1s, for heaven's 
sake, which I thought went out with the first World War, so 
they didn't have the people there that could make judgments. So 
what is happening?
    Mr. Bloom. Columbus actually has been a success story in 
the last year. We've changed leadership totally. I think you 
had the opportunity last July to meet JoAnn Boutelle, and JoAnn 
has done some great things there, along with three or four 
other new members of the team, and she has changed the 
attitude, she has changed the culture. She does not tolerate 
mistakes. She is hard but fair, and she is working on getting 
the people trained.
    Again, I go back to the training. Ms. Boutelle is a big 
proponent of----
    Mr. Horn. Spell it out for us so she gets due credit in 
this hearing.
    Mr. Bloom. I believe it is B-O-U-T-E-L-L-E. And that's 
JoAnn.
    Mr. Horn. OK. Well, there ought to be awards for people 
like that.
    Mr. Bloom. We try to take as good care of her as we can, 
sir.
    Mr. Horn. OK. So do we have another question or so on Mr. 
Lieberman, I think? Go ahead.
    Ms. Schakowsky. Has anybody put a dollar figure to waste, 
fraud, and abuse? We talked about a billion on purchase cards. 
Has there ever been a total on that amount?
    Mr. Lieberman. No. Well, we can tell you things like how 
much money has been recovered from investigations, but if your 
question is how much waste, fraud, and abuse is going on, we 
don't know.
    Ms. Schakowsky. Well, we estimated on the purchase cards in 
terms of--oh, I see what you're saying, because that is what 
has been discovered and recovered.
    Mr. Lieberman. Right. And even the excellent GAO work at 
those two Navy sites is fine in its own right, but there are 
many different parts of the Department, so it remains to be 
seen just how widespread the problem is.
    Mr. Kutz. Well, as Mr. Lieberman said, you can quantify 
what you know, but with fraud the issue is there's a lot of 
fraud that we don't know about. Again, it gets back to the 
control environment at DOD. The weaker the control environment, 
the more fraud that's likely taking place that nobody ever 
catches. A lot of the investigative cases that do get 
prosecuted, as Mr. Lieberman said, some are caught through the 
system and some are just caught because someone talks, but 
there are as many or more that never get caught, so fraud is 
always something that's very, very difficult to quantify.
    Ms. Schakowsky. So in that context, though, then how does 
someone self-confidently propose a $48 billion increase in a 
budget where we know about billions of dollars of fraud that 
has occurred--fraud, waste, and abuse that has occurred? I just 
think the Department is on such weak footing to ask for such a 
large increase. How do you? What do you say? If the American 
people say, ``Wait a minute. Look at all this. Look at this 
mess, this spider web.'' What's the answer to that? Anybody?
    Ms. Jonas. I think one of the traditional means the 
Department has used to understand what its request should be--
I'm a former budgeteer--has been what we spent in the prior 
years, and I know that doesn't tell you what things actually 
cost, it tells you what you've spent. And the difference 
between the systems that we're proposing to create that give 
true accountability, give cost accounting, give the Secretary 
an understanding how efficient we are, they don't exist. 
They're based on appropriations laws and appropriation 
accounting, which basically tells you by quarter how much 
you've obligated and----
    Ms. Schakowsky. I understand that, but when we're asking 
for an increase that, in and of itself, is larger than the 
total defense budget of any other nation on the globe, then it 
seems to me that, given the context in which this money is 
used, that it's a pretty hard case to make, I think.
    Mr. Horn. Any comments on that?
    [No response.]
    Mr. Horn. If not, this will be the last couple of 
questions, although I'd like each of you to tell us something 
that we were too dumb to ask you. We always give you an out.
    In your testimony, Mr. Lieberman, you stated that the 
fiscal year 2002 National Defense Authorization Act directs the 
Inspector General to perform only the minimum audit procedures 
required by auditing standards for year-end financial 
statements that management acknowledges that they are 
unreliable. The act also directs you to redirect resources 
freed up by that limitation to more useful audits.
    So the question is: What changes have you made to redirect 
your audit resources from auditing statement balances to 
identifying needed improvements in the Department's systems and 
internal controls?
    Mr. Lieberman. We had already cut back a lot of our 
transaction testing on related year-end financial statements in 
anticipation of that legislation, so we're not talking about a 
massive shift in resources here.
    In addition to that legislation, the Intelligence 
Committees gave us extra financial statement audit work to do 
vis-a-vis the Defense Intelligence Agencies, so some of those 
resources are going sideways into that area.
    But what that legislation helps us avoid doing is wasting 
any audit resources telling everybody what they already know--
that these statements are unauditable. The thinking was if 
management admits the statements are unauditable, there's no 
point in the auditors having to prove that's so. We thoroughly 
support that direction, which will help us focus our resources 
toward looking at how these systems are doing rather than just 
fooling around belaboring the obvious in terms of the problems 
with the existing statements.
    Mr. Horn. You heard about the Secretary of Defense that 
certain things will take 8 or more years. Do you agree with 
that time table, and does that mean we should not expect to see 
an opinion on the Department's financial statements until 2009, 
although Secretary Jonas has said there's a performance point 
along the way?
    Mr. Lieberman. Well, that entirely depends on how sweeping 
a change the new architecture mandates, and then how much money 
the Department and the Congress are going to be willing to 
spend each year to implement that architecture. So I don't know 
whether we're talking about a plan that is going to end up 
being logically phased over 2 years, 5 years, 8 years. Any of 
those things are possible, depending on how many resources you 
throw at the problem.
    All I can say is that history tells us that it's very 
dangerous to make an optimistic estimate on this, because 
systems development projects inevitably take quite a bit longer 
than anybody forecasts upfront.
    Mr. Horn. Now, do any of you have anything else you'd like 
to get on the record?
    Mr. Kutz. Mr. Chairman, I would say one thing. In the past 
the Department had really focused its goals on getting a clean 
opinion on the financial statements, and they've really kind of 
gone away from that as the goal, because that's a misleading 
goal. I mean, you can get a clean opinion and not have good 
information to manage on a day-to-day basis. They are really--
their goal is more now to have good financial management 
information to manage the organization.
    As happens in the private sector, the goal is not a clean 
opinion. The goal is to have real-time data on a day-to-day 
basis to make decisions. That clean opinion falls out from 
that. It just happens. It isn't something that each year 
Johnson and Johnson and Exxon and Mobil are saying, ``What kind 
of opinion are we going to get?'' It's, ``We close the books in 
a day or two, we get the report to the shareholders, and we're 
done.'' So I think that they've focused more on the longer-term 
and actually real change rather than trying to take this mass 
computer chip and the spider chart and trying to gin-up 
financial statements from it.
    DOD is so large that there is no way, I don't think, to go 
through the heroic measures that would be necessary and it 
would be a waste of taxpayer money to do so, so, I mean, I 
would give them credit that they have got their priorities 
straight and they've really scaled back on that and they're 
trying to make longer-term, lasting changes.
    Mr. Horn. Any other points anybody wants to make?
    Ms. Jonas. Just to quantify what Greg has said, Mr. 
Chairman, we spent--in 2001 the Department spent about $52 
million to prepare and audit our financial statements, and, 
based on new legislation that we got from the Congress last 
year and pursuant to what Bob was talking about, this year we 
will be able to save $24 million because we don't have to go 
through the machinations. We really are interested in getting 
at the root cause of the problem and not trying to act as if we 
can come up with a clean audit that would be respectable. We 
really want to get at the problem, get the good, timely 
information to our decisionmakers so that they can become 
efficient and we can--as Greg said, you know, clean statements 
are just a product--an important product, but are not years 
worth of and millions of dollars worth of work.
    Mr. Horn. Well, thank you. All of you have contributed 
quite a bit to our further understanding of what is the major 
Department within the executive branch.
    I now want to thank those that prepared this hearing: J. 
Russell George, staff director and chief counsel; Bonnie Heald 
is deputy staff director; Rosa Harris to my left and your right 
is professional staff on detail from the General Accounting 
Office; Earl Pierce, professional staff; our faithful clerk, 
Justin Paulhamus; and the minority, Mr. Dave McMillen, 
professional staff; Jean Gosa, minority clerk; and the court 
reporter, Joan Trumps.
    We now thank you all, and we have to go to vote.
    [Whereupon, at 2:43 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]

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