[Senate Hearing 107-803]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 107-803

               DEPARTMENT OF DEFENSE FINANCIAL MANAGEMENT

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

                                HEARING

                               before the

            SUBCOMMITTEE ON READINESS AND MANAGEMENT SUPPORT

                                 of the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 6, 2002

                               __________

         Printed for the use of the Committee on Armed Services




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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

EDWARD M. KENNEDY, Massachusetts     JOHN WARNER, Virginia
ROBERT C. BYRD, West Virginia        STROM THURMOND, South Carolina
JOSEPH I. LIEBERMAN, Connecticut     JOHN McCAIN, Arizona
MAX CLELAND, Georgia                 BOB SMITH, New Hampshire
MARY L. LANDRIEU, Louisiana          JAMES M. INHOFE, Oklahoma
JACK REED, Rhode Island              RICK SANTORUM, Pennsylvania
DANIEL K. AKAKA, Hawaii              PAT ROBERTS, Kansas
BILL NELSON, Florida                 WAYNE ALLARD, Colorado
E. BENJAMIN NELSON, Nebraska         TIM HUTCHINSON, Arkansas
JEAN CARNAHAN, Missouri              JEFF SESSIONS, Alabama
MARK DAYTON, Minnesota               SUSAN COLLINS, Maine
JEFF BINGAMAN, New Mexico            JIM BUNNING, Kentucky

                     David S. Lyles, Staff Director
              Judith A. Ansley, Republican Staff Director

                                 ______

            Subcommittee on Readiness and Management Support

                   DANIEL K. AKAKA, Hawaii, Chairman

ROBERT C. BYRD, West Virginia        JAMES M. INHOFE, Oklahoma
MAX CLELAND, Georgia                 STROM THURMOND, South Carolina
MARY L. LANDRIEU, Louisiana          JOHN McCAIN, Arizona
E. BENJAMIN NELSON, Nebraska         RICK SANTORUM, Pennsylvania
MARK DAYTON, Minnesota               PAT ROBERTS, Kansas
JEFF BINGAMAN, New Mexico            JIM BUNNING, Kentucky


                                  (ii)











                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

               Department of Defense Financial Management

                             march 6, 2002

                                                                   Page

Walker, Hon. David M., Comptroller General of the United States, 
  U.S. General Accounting Office.................................     2
Zakheim, Hon. Dov S., Under Secretary of Defense (Comptroller); 
  Accompanied by Tina Jonas, Deputy Under Secretary of Defense 
  for Financial Management.......................................    16

                                 (iii)

 
               DEPARTMENT OF DEFENSE FINANCIAL MANAGEMENT

                              ----------                              


                        WEDNESDAY, MARCH 6, 2002

                           U.S. Senate,    
                  Subcommittee on Readiness
                            and Management Support,
                               Committee on Armed Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:00 a.m. in 
room SR-222, Russell Senate Office Building, Senator Daniel K. 
Akaka (chairman of the subcommittee) presiding.
    Committee members present: Senators Akaka, Levin, E. 
Benjamin Nelson, McCain, and Inhofe.
    Committee staff member present: David S. Lyles, staff 
director.
    Majority staff members present: Maren Leed, professional 
staff member; Peter K. Levine, general counsel; and Michael 
McCord, professional staff member.
    Minority staff members present: William C. Greenwalt, 
professional staff member; Ambrose R. Hock, professional staff 
member; George W. Lauffer, professional staff member; and Ann 
M. Mittermeyer, minority counsel.
    Staff assistants present: Leah C. Brewer and Nicholas W. 
West.
    Committee members' assistants present: Erik Raven, 
assistant to Senator Byrd; Davelyn Noelani Kalipi and Richard 
Kessler, assistants to Senator Akaka; Eric Pierce, assistant to 
Senator Ben Nelson; Christopher J. Paul, assistant to Senator 
McCain; John A. Bonsell, assistant to Senator Inhofe; George M. 
Bernier III, assistant to Senator Santorum; and Derek Maurer, 
assistant to Senator Bunning.

     OPENING STATEMENT OF SENATOR DANIEL K. AKAKA, CHAIRMAN

    Senator Akaka. The Readiness and Management Support 
Subcommittee meets today to address shortcomings in the 
financial management systems of the Department of Defense 
(DOD). I am delighted that we have both the Comptroller General 
of the United States and the Comptroller of  the Department of 
Defense before us today. This is exactly the kind of high-level 
attention that this issue needs, and I offer a warm welcome to 
both of you.
    As the General Accounting Office explained last year in 
designating DOD's financial management systems a ``high risk 
area,'' these systems ``(1) are flawed with decades-old 
problems that will be impossible to reverse overnight, (2) for 
the most part do not comply with federal financial management 
systems requirements, and (3) were not designed to collect data 
in accordance with generally accepted accounting principles.'' 
These problems are not exciting and they are not easily 
understood, but they are vitally important, with literally 
billions of dollars at stake.
    I am pleased that the new team at the Department of Defense 
appears to be taking this problem seriously. The Department has 
established a program office dedicated to addressing financial 
management issues and is in the process of bringing on a 
contractor to assist in the effort. Thus far, the Office of the 
Comptroller appears to be taking a disciplined approach to the 
problem, and has presented to us with a plan to develop a 
comprehensive architecture for financial management systems 
across the entire Department of Defense (DOD) over the course 
of the next year. GAO says that this is exactly the kind of 
comprehensive approach that is needed.
    Of course, this is not the first administration that has 
tried to take on the problem of DOD financial management. The 
previous Bush administration launched a corporate information 
management program with much fanfare, but produced little. The 
Clinton administration made considerable progress in 
eliminating unneeded financial systems, and consolidating 
military and personnel pay systems, but this appears to have 
had little impact for the overall quality of the financial data 
produced by the Department.
    In short, the hard work is still ahead of us. We will be 
back next year to see what kind of progress the administration 
has actually made in addressing these difficult issues. Mr. 
Walker, Dr. Zakheim, we thank you for being here today and look 
forward to your testimony.
    At this time, I would like to first call for the testimony 
of Mr. Walker.

 STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE 
         UNITED STATES, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Walker. Thank you, Mr. Chairman. It is a pleasure to be 
here to discuss the financial management of the Department of 
Defense. With your permission, Mr. Chairman, I would like for 
the entire statement to be entered into the record, and then I 
will move to summarize.
    Senator Akaka. Without objection, it will be entered into 
the record.
    Mr. Walker. Thank you, Mr. Chairman.
    Today, DOD faces financial management problems that are 
pervasive, complex, longstanding, and deeply rooted in 
virtually all business operations throughout the Department. 
DOD's financial management deficiencies, taken together, 
represent the single largest obstacle to achieving an 
unqualified opinion on the U.S. Government's consolidated 
financial statements. Today, none of the military services or 
major DOD components have passed the test of an independent 
financial audit because of pervasive weaknesses in financial 
management systems, operations, and controls.
    Overhauling financial management represents a major 
management challenge that goes far beyond financial accounting, 
to the very fiber of the Department's range of business 
operations and management culture. As you mentioned, Mr. 
Chairman, a number of previous administrations over the past 
several decades have tried to address these problems in various 
ways, but they have largely been unsuccessful.
    In this regard, on September 10, 2001, Secretary of Defense 
Rumsfeld announced a broad initiative intended to transform the 
way the Department works, and what it works on. He basically 
declared war on the bureaucracy at DOD. That was on September 
10. We all know, Mr. Chairman, what happened with the tragic 
events of September 11. When Secretary Rumsfeld made his 
remarks, he noted that he believed that through taking the 
proper actions, which would require a disciplined approach over 
a number of years, the DOD could save up to 5 percent of its 
budget, or $15 to $18 billion annually, and be able to redeploy 
those resources to meet other critical needs, such as 
readiness, quality of life for our troops and their families, 
as well as to close the gap between wants, needs, and 
affordability in connection with critical weapons systems.
    Clearly, the tragic events of September 11 have resulted in 
a range of actions that DOD needs to take and that are of a 
high priority, and that have to be addressed first.
    The Department at the same point in time has received 
significant additional funding in order to be able to fight 
terrorism internationally and to better protect our homeland, 
and it is critically important that there be appropriate 
accountability over the additional funding that Congress has 
provided therewith.
    Mr. Chairman, 6 of 22 areas on GAO's high-risk list that 
deal with individual departments and agencies relate to DOD 
program areas and, in addition, DOD also has the challenge of 
the two Government-wide high-risk areas. Therefore, 8 of 24, or 
fully one-third of GAO's high-risk areas relate to DOD. 
Clearly, one of DOD's top priorities in the business operations 
area should be to get off GAO's high-risk list in all of these 
areas, but, as Secretary Zakheim will mention, they are all 
interrelated, and it requires a comprehensive, and integrated 
approach. That will take time. Quite candidly, DOD is just 
beginning what will be a long march. The problems with the 
Department's financial management operations go beyond its 
accounting and finance systems and processes. The Department 
continues to rely on a far-flung, complex network of finance, 
logistics, personnel, acquisition, and other management 
information systems, 80 percent of which are not under the 
direct control of the DOD Comptroller. All of these systems are 
critical to gather financial data and other key management 
information to support day-to-day management decision making.
    Stated differently, the Comptroller only has direct control 
of about 20 percent of the data in the systems that will be 
necessary to be successful. I am looking forward to hearing 
about the new chart, which I think probably says 10,000 words 
rather than 1,000 words.
    As part of our constructive engagement approach with the 
Department of Defense and other departments and agencies, I met 
with Secretary Rumsfeld last summer to provide GAO's 
perspectives on the underlying causes of the problems that have 
impeded past reform efforts at the Department, and discussed 
possible options to addressing these challenges.
    In our view, there are four underlying causes to DOD's 
situation. Number 1, a lack of sustained top level leadership 
and management accountability for correcting problems. Number 
2, deeply embedded cultural resistance to change, including 
military service parochialism and stovepiped operations. Number 
3, a lack of results-oriented goals and performance measures 
and monitoring, and number 4, inadequate incentives for seeking 
change.
    As we testified in May of 2001, our experience has shown 
that there are several key elements that collectively will 
enable the Department to effectively address the underlying 
causes of DOD's inability to resolve these longstanding 
challenges. These key elements are as follows:
    1. Addressing the Department's financial management 
challenge as part of a comprehensive, integrated DOD-wide 
business process transformation effort.
    2. Providing for sustained leadership by the Secretary of 
Defense and resource control to implement needed financial 
reforms.
    3. Establishing clear lines of responsibility, authority, 
and accountability for such reform tied to the Secretary.
    4. Incorporating results-oriented performance measures and 
monitoring tied to financial management reforms.
    5. Providing appropriate incentives and consequences for 
either action or inaction, which is all too frequently the 
case.
    6. Establishing an enterprise system architecture to guide 
and direct financial management modernization efforts, and 
finally
    7. Ensuring effective oversight and monitoring.
    In conclusion, Mr. Chairman, we support Secretary 
Rumsfeld's vision for transforming the Department's full range 
of business processes. Substantial personal involvement by the 
Secretary, the Comptroller, and other top DOD executives will 
be essential for success to change DOD's culture that has over 
time perpetuated the status quo and been resistant to 
transformation of the magnitude that the Secretary envisions.
    It is clear to us at GAO that the Comptroller has the full 
support of the Secretary, and that both the Secretary and the 
Comptroller are committed to making meaningful change, a change 
which will take years. Comptroller Zakheim, as the Secretary's 
leader for financial management modernization, will need to 
have the ability to make the tough choices on systems, 
processes, and personnel, and to control spending for new 
systems across the Department, especially where new systems 
development is involved.
    Processes will have to be reengineered and hierarchical 
process-oriented, stovepiped, and internally focused approaches 
will have to be set aside. The past has taught us that well-
intentioned initiatives will only succeed if they have the 
right incentives, appropriate transparency, and adequate 
accountability mechanisms in place.
    The events of September 11 and other funding and asset 
accountability issues associated with the war on terrorism, at 
least in the short term, may dilute the focused attention and 
the sustained action that will be necessary to fully realize 
these transformation goals. That is somewhat understandable, 
under the circumstances. At the same time, the demand for 
increased Defense spending, when combined with the Government's 
long-range fiscal challenges, means that solutions to DOD's 
business system problems are even more important today than 
they were last year.
    As the Secretary has noted, billions of dollars of 
resources could be freed up for national defense priorities by 
eliminating waste and inefficiencies in DOD's existing business 
processes. Only time will tell if the Secretary's current 
transformation efforts will come to fruition. Others have 
attempted well-intentioned reform efforts in the past. Today, 
the momentum exists for reform, but the road will be long and 
difficult.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer questions after Comptroller Zakheim has an 
opportunity to make his remarks.
    [The prepared statement of Mr. Walker follows:]
                 Prepared Statement by David M. Walker
    Mr. Chairman and Members of the Subcommittee:
    It is a pleasure to be here to discuss financial management at the 
Department of Defense (DOD). Today, DOD faces financial management 
problems that are pervasive, complex, long-standing, and deeply rooted 
in virtually all business operations throughout the Department. DOD's 
financial management deficiencies, taken together, represent the single 
largest obstacle to achieving an unqualified opinion on the U.S. 
government's consolidated financial statements. To date, none of the 
military services or major DOD components have passed the test of an 
independent financial audit because of pervasive weaknesses in 
financial management systems, operations, and controls.
    Overhauling financial management represents a major management 
challenge that goes far beyond financial accounting to the very fiber 
of the Department's range of business operations and management 
culture. Previous administrations over the past several decades have 
tried to address these problems in various ways but have largely been 
unsuccessful. In this regard, on September 10, 2001, Secretary of 
Defense Rumsfeld announced a broad initiative intended to ``transform 
the way the Department works and what it works on'' that he estimated 
could save 5 percent of DOD's budget--or an estimated $15 to $18 
billion annually. The Secretary recognized that transformation would be 
difficult and expected the needed changes would take 8 or more years to 
complete.
    The President's Management Agenda includes improved financial 
management performance as one of his five governmentwide management 
goals. In addition, in August 2001, the Principals of the Joint 
Financial Management Improvement Program--the Secretary of the 
Treasury, the Director of the Office of Management and Budget, the 
Director of the Office of Personnel Management, and I, in my role as 
the Comptroller General--began a series of quarterly meetings that 
marked the first time all four of the Principals had gathered together 
in over 10 years. To date, these sessions have resulted in substantive 
deliberations and agreements focused on key issues such as better 
defining measures for financial management success. These measures 
include being able to routinely provide timely, reliable, and useful 
financial information and having no material internal control 
weaknesses. Success on these measures will be a significant challenge 
to DOD. The Principals plan to invite Defense Comptroller Zakheim to 
their upcoming April 2002 meeting to discuss the Department's 
transformation effort and to begin a constructive engagement with DOD 
on this important initiative.
    With the events of September 11, and the Federal Government's 
short- and long-term budget challenges, it is more important than ever 
that DOD effectively transform its business processes to ensure it gets 
the most from every dollar spent. The Department must be able to 
effectively account for the funding it receives and carry out its 
stewardship responsibilities for the vast amount of equipment and 
inventories used in support of military operations. Even before the 
events of September 11, increased globalization, changing security 
threats, and rapid technological advances were prompting fundamental 
changes in the environment in which DOD operates. These trends place a 
premium on increasing strategic planning, enhancing results 
orientation, ensuring effective accountability, transparency, and using 
integrated approaches. Six of the 22 areas on GAO's governmentwide 
``high-risk'' list are DOD program areas, and DOD shares responsibility 
for two other high-risk areas that are governmentwide in scope.\1\ 
Central to effectively addressing DOD's financial management problems 
will be the understanding that these eight areas are interrelated and 
cannot be addressed in an isolated, stovepiped, or piecemeal fashion.
---------------------------------------------------------------------------
    \1\ U.S. General Accounting Office, High-Risk Series: An Update, 
GAO-01-263 (Washington, DC: Jan. 2001).
---------------------------------------------------------------------------
    The recent success of our forces in Afghanistan has again 
demonstrated the unparalleled excellence of our military forces. This 
same level of excellence is not yet evident in the Department's 
financial management and other business processes. This is particularly 
problematic because effective financial management operations are 
critical to achieving the Department's mission in a reasonably 
economical, efficient, and effective manner and providing reliable, 
timely financial information on a routine basis to support management 
decision-making at all levels throughout DOD. This will also be 
critical in order to enhance overall transparency and accountability. 
Success in this area will also serve to free-up resources that can be 
redeployed to enhance readiness, improve the quality of life for our 
troops and their families, and reduce the gap between wants and 
available funding in connection with major weapon systems.
    Today, I will provide my perspectives on (1) how Defense got where 
it is today and the underlying causes of the Department's longstanding 
inability to effectively reform its financial management and other 
business systems and processes and (2) the keys to successfully 
carrying out the Secretary's business process transformation and DOD's 
plans and actions to date. Last summer, I shared with Secretary 
Rumsfeld and Comptroller Zakheim a business transformation paper, which 
provided an overview of our views on the current challenges facing the 
Department and the keys to effective reform, and detailed one option 
for addressing these challenges.
   long-standing financial management problems and attempts at reform
    History is a good teacher, and to solve the problems of today, it 
is instructive to look to the past. The problems with the Department's 
financial management operations date back decades, and previous 
attempts at reform have largely proven to be unsuccessful. These 
problems adversely affect DOD's ability to control costs, ensure basic 
accountability, anticipate future costs and claims on the budget, such 
as for health care, weapon systems, and environmental liabilities, 
measure performance, maintain funds control, prevent fraud, and address 
pressing management issues.
    Problems with the Department's financial management operations go 
far beyond its accounting and finance systems and processes. The 
Department continues to rely on a far-flung, complex network of 
finance, logistics, personnel, acquisition, and other management 
information systems--80 percent of which are not under the control of 
the DOD Comptroller--to gather the financial data needed to support 
day-to-day management decision-making. This network was not designed, 
but rather has evolved into the overly complex and error-prone 
operation that exists today, including (1) little standardization 
across DOD components, (2) multiple systems performing the same tasks, 
(3) the same data stored in multiple systems, (4) manual data entry 
into multiple systems, and (5) a large number of data translations and 
interfaces which combine to exacerbate problems with data integrity. 
DOD determined, for example, that efforts to reconcile a single 
contract involving 162 payments resulted in an estimated 15,000 
adjustments.
    Many of the Department's business processes in operation today are 
mired in old, inefficient processes and legacy systems, some of which 
go back to the 1950s and 1960s. For example, the Department relies on 
the Mechanization of Contract Administration Services (MOCAS) system to 
process a substantial portion of DOD contract payment transactions for 
all DOD organizations, which totaled about $78 billion in fiscal year 
2001. When MOCAS was first implemented in 1968, ``mechanization'' was a 
high tech word. Past efforts to replace MOCAS have failed. Most 
recently, in 1994, DOD began acquiring the Standard Procurement System 
(SPS) to replace the contract administration functions currently 
performed by MOCAS. However, our July 2001 and February 2002 reporting 
\2\ on DOD's $3.7 billion investment in SPS showed that this 
substantial investment was not economically justified and raised 
questions as to whether further investment in SPS was justified. For 
the foreseeable future, DOD will continue to be saddled with MOCAS.
---------------------------------------------------------------------------
    \2\ U.S. General Accounting Office, DOD Ssytems Modernization: 
Continued Investment in the Standard Procurement System Has Not Been 
Justified, GAO-01-682 (Washington, DC: July 31, 2001) and DOD's 
Standard Procurement System: Continued Investment Has Yet to Be 
Justified, GAO-02-392T (Washington, DC: Feb. 7, 2002).
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    Moving to the 1970s, we, the Defense Inspector General, and the 
military service audit organizations, issued numerous reports detailing 
serious problems with the Department's financial management operations. 
For example, between 1975 and 1981, we issued more than 75 reports 
documenting serious problems with DOD's existing cost, property, fund 
control, and payroll accounting systems. In the 1980s, we found that 
despite the billions of dollars invested in individual systems, these 
efforts too fell far short of the mark, with extensive schedule delays 
and cost overruns. For example, in 1989, our report \3\ on eight major 
DOD system development efforts--including two major accounting 
systems--under way at that time, showed that system development cost 
estimates doubled, two of the eight efforts were abandoned, and the 
remaining six efforts experienced delays of from 3 to 7 years.
---------------------------------------------------------------------------
    \3\ U.S. General Accounting Office, Automated Information Systems: 
Schedule Delays and Cost Overruns Plague DOD Systems, GAO/IMTEC-89-36 
(Washington, DC: May 10, 1989).
---------------------------------------------------------------------------
    Beginning in the 1990s, following passage of the Chief Financial 
Officers (CFO) Act of 1990, there was a recognition in DOD that broad-
based financial management reform was needed. Over the past 12 years, 
the Department has initiated several departmentwide reform initiatives 
intended to fundamentally reform its financial operations as well as 
other key business support processes, including the Corporate 
Information Management Initiative, the Defense Business Operations 
Fund, and the Defense Reform Initiative. These efforts, which I will 
highlight today, have proven to be unsuccessful despite good intentions 
and significant effort. The conditions that led to these previous 
attempts at reform remain largely unchanged today.
    Corporate Information Management. The Corporate Information 
Management (CIM) Initiative, begun in 1989, was expected to save 
billions of dollars by streamlining operations and implementing 
standard information systems. CIM was expected to reform all DOD's 
functional areas, including finance, procurement, material management, 
and human resources through consolidating, standardizing, and 
integrating information systems. DOD also expected CIM to replace 
approximately 2,000 duplicative systems. Over the years, we made 
numerous recommendations to improve CIM's management, but these 
recommendations were largely not addressed. Instead, DOD spent billions 
of dollars with little sound analytical justification. We reported in 
1997,\4\ that 8 years after beginning CIM, and spending about $20 
billion on the initiative, expected savings had yet to materialize. The 
initiative was eventually abandoned.
---------------------------------------------------------------------------
    \4\ U.S. General Accounting Office, High-Risk Series: Information 
Management and Technology, GAO/HR-97-9 (Washington, DC: February 1997).
---------------------------------------------------------------------------
    Defense Business Operations Fund. In October 1991, DOD established 
a new entity, the Defense Business Operations Fund by consolidating 
nine existing industrial and stock funds and five other activities 
operated throughout DOD. Through this consolidation, the fund was 
intended to bring greater visibility and management to the overall cost 
of carrying out certain critical DOD business operations. However, from 
its inception, the fund was plagued by management problems. In 1996, 
DOD announced the fund's elimination. In its place, DOD established 
four working capital funds. These new working capital funds inherited 
their predecessor's operational and financial reporting problems.
    Defense Reform Initiative (DRI). In announcing the DRI program in 
November 1997, the then Secretary of Defense stated that his goal was 
``to ignite a revolution in business affairs.'' DRI represented a set 
of proposed actions aimed at improving the effectiveness and efficiency 
of DOD's business operations, particularly in areas that have been 
long-standing problems--including financial management. In July 2000, 
we reported \5\ that while DRI got off to a good start and made 
progress in implementing many of the component initiatives, DRI did not 
meet expected timeframes and goals, and the extent to which savings 
from these initiatives will be realized is yet to be determined. GAO is 
currently examining the extent to which DRI efforts begun under the 
previous administration are continuing.
---------------------------------------------------------------------------
    \5\ U.S. General Accounting Office, Defense Management: Actions 
Needed to Sustain Reform Initiatives and Achieve Greater Results, GAO/
NSIAD-00-72 (Washington, DC: July 25, 2000).
---------------------------------------------------------------------------
    The past has clearly taught us that addressing the Department's 
serious financial management problems will not be easy. Early in his 
tenure, Secretary Rumsfeld commissioned a new study of the Department's 
financial management operations. The report on the results of the 
study, Transforming Department of Defense Financial Management: A 
Strategy for Change, was issued on April 13, 2001. The report 
recognized that the Department will have to undergo ``a radical 
financial management transformation'' and that it would take more than 
a decade to achieve. The report concluded that many studies and 
interviews with current and former leaders in DOD point to the same 
problems and frustrations, and that repetitive audit reports verify 
systemic problems illustrating the need for radical transformation in 
order to achieve success. Secretary Rumsfeld further confirmed the need 
for a fundamental transformation of DOD in his ``top-down'' Quadrennial 
Defense Review. Specifically, his September 30, 2001, Quadrennial 
Defense Review Report concluded that the Department must transform its 
outdated support structure, including decades old financial systems 
that are not well interconnected. The report summed up the challenge 
well in stating: ``While America's business have streamlined and 
adopted new business models to react to fast-moving changes in markets 
and technologies, the Defense Department has lagged behind without an 
overarching strategy to improve its business practices.''
  underlying causes of financial and related business process reform 
                               challenges
    As part of our constructive engagement approach with DOD, I met 
with Secretary Rumsfeld last summer to provide our perspectives on the 
underlying causes of the problems that have impeded past reform efforts 
at the Department and to discuss options for addressing these 
challenges. There are four underlying causes:

         a lack of sustained top-level leadership and 
        management accountability for correcting problems;
         deeply embedded cultural resistance to change, 
        including military service parochialism and stovepiped 
        operations;
         a lack of results-oriented goals and performance 
        measures and monitoring; and
         inadequate incentives for seeking change.
Lack of leadership and accountability
    Historically, DOD has not routinely assigned accountability for 
performance to specific organizations or individuals that have 
sufficient authority to accomplish desired goals. For example, under 
the CFO Act, it is the responsibility of agency CFOs to establish the 
mission and vision for the agency's future financial management. 
However, at DOD, the Comptroller--who is by statute the Department's 
CFO--has direct responsibility for only an estimated 20 percent of the 
data relied on to carry out the Department's financial management 
operations. The Department has learned through its efforts to meet the 
Year 2000 computing challenge that to be successful, major improvement 
initiatives must have the direct, active support and involvement of the 
Secretary and Deputy Secretary of Defense. In the Year 2000 case, the 
then Deputy Secretary of Defense was personally and substantially 
involved and played a major role in the Department's success. Such top-
level support and attention helps ensure that daily activities 
throughout the Department remain focused on achieving shared, agency-
wide outcomes. A central finding from our report on our survey of best 
practices of world-class financial management organizations--Boeing, 
Chase Manhattan Bank, General Electric, Pfizer, Hewlett-Packard, Owens 
Corning, and the states of Massachusetts, Texas and Virginia--was that 
clear, strong executive leadership was essential to (1) making 
financial management and entitywide priority, (2) redefining the role 
of finance, (3) providing meaningful information to decision-makers, 
and (4) building a team of people that deliver results.\6\
---------------------------------------------------------------------------
    \6\ U.S. General Accounting Office, Executive Guide: Creating Value 
Through World-class Financial Management, GAO/AIMD-00-134 (Washington, 
DC: Apr. 2000).
---------------------------------------------------------------------------
    DOD past experience has suggested that top management has not had a 
proactive, consistent, and continuing role in building capacity, 
integrating daily operations for achieving performance goals, and 
creating incentives. Sustaining top management commitment to 
performance goals is a particular challenge for DOD. In the past, the 
average 1.7 year tenure of the Department's top political appointees 
has served to hinder long-term planning and follow-through.
Cultural resistance and parochialism
    Cultural resistance to change and military service parochialism 
have also played a significant role in impeding previous attempts to 
implement broad-based management reforms at DOD. The Department has 
acknowledged that it confronts decades-old problems deeply grounded in 
the bureaucratic history and operating practices of a complex, 
multifaceted organization, and that many of these practices were 
developed piecemeal and evolved to accommodate different organizations, 
each with its own policies and procedures.
    For example, as discussed in our July 2000 report,\7\ the 
Department encountered resistance to developing departmentwide 
solutions under the then Secretary's broad-based DRI.\8\ In 1997, the 
Department established a Defense Management Council--including high-
level representatives from each of the military services and other 
senior executives in the Office of the Secretary of Defense--which was 
intended to serve as the ``board of directors'' to help break down 
organizational stovepipes and overcome cultural resistance to changes 
called for under DRI. However, we found that the council's 
effectiveness was impaired because members were not able to put their 
individual military services' or DOD agencies' interests aside to focus 
on department-wide approaches to long-standing problems.
---------------------------------------------------------------------------
    \7\ U.S. General Accounting Office, Defense Management: Actions 
Needed to Sustain Reform Initiatives and Achieve Greater Results, GAO/
NSIAD-00-72 (Washington DC: July 25, 2000).
    \8\ Announced by the Secretary of Defense in 1997, DRI represents a 
set of actions aimed at reforming the Department's major business 
processes and support operations.
---------------------------------------------------------------------------
    We have also seen that an inability to put aside parochial views. 
Cultural resistance to change has impeded reforms in not only financial 
management, but also in other business areas, such as weapon system 
acquisition and inventory management. For example, as we reported \9\ 
last year, while the individual military services conduct considerable 
analyses justifying major acquisitions, these analyses can be narrowly 
focused and do not consider joint acquisitions with the other services. 
In the inventory management area, DOD's culture has supported buying 
and storing multiple layers of inventory rather than managing with just 
the amount of stock needed.
---------------------------------------------------------------------------
    \9\ U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-01-244 (Washington DC: Jan. 
2001).
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Unclear goals and performance measures
    Further, DOD's past reform efforts have been handicapped by the 
lack of clear, linked goals and performance measures. As a result, DOD 
managers lack straightforward road maps showing how their work 
contributes to attaining the Department's strategic goals, and they 
risk operating autonomously rather than collectively. In some cases, 
DOD had not yet developed appropriate strategic goals, and in other 
cases, its strategic goals and objectives were not linked to those of 
the military services and defense agencies.
    As part of our assessment of DOD's Fiscal Year 2000 Financial 
Management Improvement Plan, we reported \10\ that, for the most part, 
the plan represented the military services' and Defense components' 
stovepiped approaches to reforming financial management, and did not 
clearly articulate how these various efforts will collectively result 
in an integrated DOD-wide approach to financial management improvement. 
In addition, we reported the Department's plan did not have performance 
measures that could be used to assess DOD's progress in resolving its 
financial management problems. DOD officials have informed us that they 
are now working to revise the Department's approach to this plan so 
that it in future years' updates it will reflect a more strategic, 
department-wide vision and tool for financial management reform.
---------------------------------------------------------------------------
    \10\ U.S. General Accounting Office, Financial Management: DOD 
Improvement Plan Needs Strategic Focus, GAO-01-764 (Washington DC: Aug. 
17, 2001).
---------------------------------------------------------------------------
    The Department faces a formidable challenge in responding to 
technological advances that are changing traditional approaches to 
business management as it moves to modernize its systems. For fiscal 
year 2001, DOD's reported total information technology investments of 
almost $23 billion, supporting a wide range of military operations as 
well as its business functions. As we have reported,\11\ while DOD 
plans to invest billions of dollars in modernizing its financial 
management and other business support systems, it does not yet have an 
overall blueprint--or enterprise architecture--in place to guide and 
direct these investments. As we recently testified,\12\ our review of 
practices at leading organizations showed they were able to make sure 
their business systems addressed corporate--rather than individual 
business unit--objectives by using enterprise architectures to guide 
and constrain investments. Consistent with our recommendation, DOD is 
now working to develop a financial management enterprise architecture, 
which is a very positive development.
---------------------------------------------------------------------------
    \11\ U.S. General Accounting Office, Information Technology: 
Architecture Needed to Guide Modernization of DOD's Financial 
Operations, GAO-01-525 (Washington, DC: May 17, 2001).
    \12\ U.S. General Accounting Office, Defense Acquisitions: DOD 
Faces Challenges in Implementing Best Practices, GAO-02-469T 
(Washington, DC: Feb. 27, 2002).
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Lack of incentives for change
    The final underlying cause of the Department's long-standing 
inability to carry out needed fundamental reform has been the lack of 
incentives for making more than incremental change to existing 
``business as usual'' processes, systems, and structures. 
Traditionally, DOD has focused on justifying its need for more funding 
rather than on the outcomes its programs have produced. DOD generally 
measures its performance by the amount of money spent, people employed, 
or number of tasks completed. Incentives for DOD decisionmakers to 
implement changed behavior have been minimal or nonexistent. Secretary 
Rumsfeld perhaps said it best in announcing his planned transformation 
at DOD, ``. . . there will be real consequences from, and real 
resistance to, fundamental change.''
    This underlying problem has perhaps been most evident in the 
Department's acquisition area. In DOD's culture, the success of a 
manager's career has depended more on moving programs and operations 
through the DOD process rather than on achieving better program 
outcomes. The fact that a given program may have cost more than 
estimated, took longer to complete, and did not generate results or 
perform as promised was secondary to fielding a new program. To effect 
real change, actions are needed to (1) break down parochialism and 
reward behaviors that meet DOD-wide and congressional goals, (2) 
develop incentives that motivate decisionmakers to initiate and 
implement efforts that are consistent with better program outcomes, 
including saying ``no'' or ``pulling the plug'' on a system or program 
that is failing, and (3) facilitate a congressional focus on results-
oriented management, particularly with respect to resource allocation 
decisions.
          keys to fundamental dod financial management reform
    As we testified in May 2001,\13\ our experience has shown there are 
several key elements that, collectively will enable the Department to 
effectively address the underlying causes of DOD's inability to resolve 
its long-standing financial management problems. These elements, which 
will be key to any successful approach to financial management reform 
include:
---------------------------------------------------------------------------
    \13\ GAO-01-681T.

         addressing the Department's financial management 
        challenges as part of a comprehensive, integrated, DOD-wide 
        business process reform;
         providing for sustained leadership by the Secretary of 
        Defense and resource control to implement needed financial 
        management reforms;
         establishing clear lines of responsibility, authority, 
        and accountability for such reform tied to the Secretary;
         incorporating results-oriented performance measures 
        and monitoring tied to financial management reforms;
         providing appropriate incentives or consequences for 
        action or inaction;
         establishing an enterprisewide system architecture to 
        guide and direct financial management modernization 
        investments; and
         ensuring effective oversight and monitoring.

    Actions on many of the key areas central to successfully achieving 
desired financial management and related business process 
transformation goals--particularly those that rely on longer term 
systems improvements--will take a number of years to fully implement. 
Secretary Rumsfeld has estimated that his envisioned transformation may 
take 8 or more years to complete. Consequently, both long-term actions 
focused on the Secretary's envisioned business transformation, as well 
as short-term actions, focused on improvements within existing systems 
and processes, will be critical going forward. Short-term actions in 
particular will be critical if the Department is to achieve the 
greatest possible accountability over existing resources and more 
reliable data for day-to-day decision-making while longer term systems 
and business process reengineering efforts are under way.
    Beginning with the Secretary's recognition of a need for a 
fundamental transformation of the Department's business processes, and 
building on some of the work begun under past administrations, DOD has 
taken a number of positive steps in many of these key areas. At the 
same time, the challenges remaining in each of these key areas are 
somewhat daunting.
Integrated business process reform strategy
    As we have reported in the past,\14\ establishing the right goal is 
essential for success. Central to effectively addressing DOD's 
financial management problems will be the recognition that they cannot 
be addressed in an isolated, stovepiped, or piecemeal fashion separate 
from the other high-risk areas facing the Department.\15\ Successfully 
reengineering the Department's processes supporting its financial 
management and other business support operations will be critical if 
DOD is to effectively address deep-rooted organizational emphasis on 
maintaining ``business as usual'' across the Department.
---------------------------------------------------------------------------
    \14\ U.S. General Accounting Office, Department of Defense: 
Progress in Financial Management Reform, GAO/T-AIMD/NSIAD-00-163 
(Washington, DC: May 9, 2000).
    \15\ The eight interrelated high-risk areas that represent the 
greatest challenge to DOD developing world-class business operations 
supporting its forces are: financial management, human capital, 
information security, systems modernization, weapon system acquisition, 
contract management, infrastructure management, and inventory 
management.
---------------------------------------------------------------------------
    Financial management is a crosscutting issue that affects virtually 
all of DOD's business areas. For example, improving its financial 
management operations so that they can produce timely, reliable, and 
useful cost information will be essential if the Department is to 
effectively measure its progress toward achieving many key outcomes and 
goals across virtually the entire spectrum of DOD's business 
operations. At the same time, the Department's financial management 
problems--and, most importantly, the keys to their resolution--are 
deeply rooted in and dependent upon developing solutions to a wide 
variety of management problems across DOD's various organizations and 
business areas. For example, we have reported \16\ that many of DOD's 
financial management shortcomings were attributable in part to human 
capital issues. The Department does not yet have a strategy in place 
for improving its financial management human capital. This is 
especially critical in connection with DOD's civilian workforce, since 
DOD has generally done a much better job in conjunction with human 
capital planning for its military personnel. In addition, DOD's 
civilian personnel face a variety of size, shape, skills, and 
succession planning challenges that need to be addressed.
---------------------------------------------------------------------------
    \16\ GAO-01-244.
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    As I mentioned earlier, and it bears repetition, the Department has 
reported that an estimated 80 percent of the data needed for sound 
financial management comes from its other business operations, such as 
its acquisition and logistics communities. DOD's vast array of costly, 
nonintegrated, duplicative, and inefficient financial management 
systems is reflective of the lack of an enterprisewide, integrated 
approach to addressing its management challenges. DOD has acknowledged 
that one of the reasons for the lack of clarity in its reporting under 
the Government Performance and Results Act has been that most of the 
program outcomes the Department is striving to achieve are 
interrelated, while its management systems are not integrated.
    As I mentioned earlier, the Secretary of Defense has made the 
fundamental transformation of business practices throughout the 
Department a top priority. In this context, the Secretary established a 
number of top-level committees, councils and boards, including the 
Senior Executive Committee, Business Initiative Council, and the 
Defense Business Practices Implementation Board. The Senior Executive 
Committee was established to help guide efforts across the Department 
to improve its business practices. This committee, chaired by the 
Secretary of Defense, and with membership to include the Deputy 
Secretary, the military service secretaries and the Under Secretary of 
Defense for Acquisition, Logistics and Technology, was established to 
function as the board of directors for the Department. The Business 
Initiative Council, comprised of the military service secretaries and 
headed by the Under Secretary of Defense for Acquisition, Technology 
and Logistics, was established to encourage the military services to 
explore new money saving business practices to help offset funding 
requirements for transformation and other initiatives. The Secretary 
also established the Defense Business Practices Implementation Board, 
composed of business leaders from the private sector. The board is 
intended to tap outside expertise to advise the Department on its 
efforts to improve business practices.
Active leadership and resource control
    The Department's successful Year 2000 effort illustrated and our 
survey of leading financial management organizations \17\ captured the 
importance of strong leadership from top management. As we have stated 
many times before, strong, sustained executive leadership is critical 
to changing a deeply rooted corporate culture--such as the existing 
``business as usual'' culture at DOD--and successfully implementing 
financial management reform. As I mentioned earlier, the personal, 
active involvement of the Deputy Secretary of Defense played a key role 
in building entitywide support and focus for the Department's Year 2000 
initiatives. Given the long-standing and deeply entrenched nature of 
the Department's financial management problems combined with the 
numerous competing DOD organizations, each operating with varying and 
often parochial views and incentives, such visible, sustained top-level 
leadership will be critical.
---------------------------------------------------------------------------
    \17\ GAO/AIMD-00-134.
---------------------------------------------------------------------------
    In discussing their April 2001 report to the Secretary of Defense 
on transforming financial management,\18\ the authors stated that, 
``unlike previous failed attempts to improve DOD's financial practices, 
there is a new push by DOD leadership to make this issue a priority.'' 
With respect to the key area of investment control, the Secretary took 
action to set aside $100 million for financial modernization. Strong, 
sustained executive leadership--over a number of years and 
administrations--will be key to changing a deeply rooted culture. In 
addition, given that significant investments in information systems and 
related processes have historically occurred in a largely decentralized 
manner throughout the Department, additional actions will likely be 
required to implement a centralized IT investment control strategy. For 
example, in our May 2001 report,\19\ we recommended DOD take action to 
establish centralized control over transformation investments to ensure 
that funding is provided for only those proposed investments in systems 
and business processes that are consistent with the Department's 
overall business process transformation strategy.
---------------------------------------------------------------------------
    \18\ Department of Defense, Transforming Department of Defense 
Financial Management: A Strategy for Change, (Washington, DC: Apr. 13, 
2001).
    \19\ GAO-01-525.
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Clear lines of responsibility and accountability
    Last summer, when I met with Secretary Rumsfeld, I stressed the 
importance of establishing clear lines of responsibility, decision-
making authority, and resource control for actions across the 
Department tied to the Secretary as a key to reform. As we previously 
reported,\20\ such an accountability structure should emanate from the 
highest levels and include the secretaries of each of the military 
services as well as heads of the Department's various major business 
areas.
---------------------------------------------------------------------------
    \20\ GAO/NSIAD-00-72.
---------------------------------------------------------------------------
    The Secretary of Defense has taken action to vest responsibility 
and accountability for financial management modernization with the DOD 
Comptroller. In October 2001, the DOD Comptroller established the 
Financial Management Modernization Executive and Steering Committees as 
the governing bodies to oversee the activities related to this 
modernization effort and also established a supporting working group to 
provide day-to-day guidance and direction on these efforts. DOD reports 
that the executive and steering committees met for the first time in 
January 2002.
    It is clear to us that the Comptroller has the full support of the 
Secretary and that the Secretary is committed to making meaningful 
change. To make this work, it will be important that the Comptroller 
has sufficient authority to bring about the full, effective 
participation of the military services and business process owners 
across the Department. The Comptroller has direct control of 20 percent 
of the data needed for sound financial management and has historically 
had limited ability to control information technology investments 
across the Department. Addressing issues such as centralization of 
authority for information systems investments and continuity of 
leadership will be critical to successful business process 
transformation.
    In addition to DOD, a number of other Federal departments and 
agencies are facing an array of interrelated business system management 
challenges for which resolution is likely to require a number of years 
and could span administrations. One option that may have merit would be 
the establishment of chief operating officers, who could be appointed 
for a set term of 5 to 7 years, with the potential for reappointment. 
These individuals should have a proven track record as a business 
process change agent for a large, diverse organization and would 
spearhead business process transformation across the department or 
agency.
Results-oriented performance
    As discussed in our January 2001 report on DOD's major performance 
and accountability challenges,\21\ establishing a results orientation 
will be another key element of any approach to reform. Such an 
orientation should draw upon results that could be achieved through 
commercial best practices, including outsourcing and shared servicing 
concepts. Personnel throughout the Department must share the common 
goal of establishing financial management operations that not only 
produce financial statements that can withstand the test of an audit 
but, more importantly, routinely generate useful, reliable, and timely 
financial information for day-to-day management purposes.
---------------------------------------------------------------------------
    \21\GAO-01-244.
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    In addition, we have previously testified \22\ that DOD's financial 
management improvement efforts should be measured against an overall 
goal of effectively supporting DOD's basic business processes, 
including appropriately considering related business process system 
interrelationships, rather than determining system-by-system 
compliance. Such a results-oriented focus is also consistent with an 
important lesson learned from the Department's Year 2000 experience. 
DOD's initial Year 2000 focus was geared toward ensuring compliance on 
a system-by-system basis and did not appropriately consider the 
interrelationship of systems and business areas across the Department. 
It was not until the Department, under the direction of the then Deputy 
Secretary, shifted to a core mission and function review approach that 
it was able to achieve the desired result of greatly reducing its Year 
2000 risk.
---------------------------------------------------------------------------
    \22\ GAO/T-AIMD/NSIAD-00-163.
---------------------------------------------------------------------------
    Since the Secretary has established an overall business process 
transformation goal that will require a number of years to achieve, 
going forward, it will be especially critical for managers throughout 
the Department to focus on specific measurable metrics that, over time, 
collectively will translate to achieving this overall goal. It will be 
important for the Department to refocus its annual accountability 
reporting on this overall goal of fundamentally transforming the 
Department's financial management systems and related business 
processes to include appropriate interim annual measures to track 
progress toward this goal.
    In the short term, it will be important to focus on actions that 
can be taken using existing systems and processes. Establishing interim 
measures to both track performance against the Department's overall 
transformation goals and facilitate near term successes using existing 
systems and processes will be critical. The Department has established 
an initial set of metrics intended to evaluate financial performance, 
and reports that it has seen improvements. For example, with respect to 
closed appropriation accounts, DOD reported during the first 4 months 
of fiscal year 2002, a reduction in the dollar value of adjustments to 
closed appropriation accounts of about 51 percent from the same 4-month 
period in fiscal year 2001. Other existing metrics concern cash and 
funds management, contract and vendor payments, and disbursement 
accounting. DOD also reported that it is working to develop these 
metrics into higher level measures more appropriate for senior 
management. We agree with the Department's efforts to expand the use of 
appropriate metrics to guide its financial management reform efforts.
Incentives and consequences
    Another key to breaking down parochial interests and stovepiped 
approaches that have plagued previous reform efforts will be 
establishing mechanisms to reward organizations and individuals for 
behaviors that comply with DOD-wide and congressional goals. Such 
mechanisms should be geared to providing appropriate incentives and 
penalties to motivate decisionmakers to initiate and implement efforts 
that result in fundamentally reformed financial management and other 
business support operations.
    In addition, such incentives and consequences will be essential if 
DOD is to break down the parochial interests that have plagued previous 
reform efforts. Incentives driving traditional ways of doing business, 
for example, must be changed, and cultural resistance to new approaches 
must be overcome. Simply put, DOD must convince people throughout the 
Department that they must change from ``business as usual'' systems and 
practices or they are likely to face serious consequences, 
organizationally and personally.
Enterprise architecture
    Establishing and implementing an enterprisewide financial 
management architecture will be essential for the Department to 
effectively manage its large, complex system modernization effort now 
underway. The Clinger-Cohen Act requires agencies to develop, 
implement, and maintain an integrated system architecture. As we 
previously reported,\23\ such an architecture can help ensure that the 
Department invests only in integrated, enterprisewide business system 
solutions and, conversely, will help move resources away from non-value 
added legacy business systems and nonintegrated business system 
development efforts. In addition, without an architecture, DOD runs the 
serious risk that its system efforts will result in perpetuating the 
existing system environment that suffers from systems duplication, 
limited interoperability, and unnecessarily costly operations and 
maintenance. In our May 2001 report,\24\ we pointed out that DOD lacks 
a financial management enterprise architecture to guide and constrain 
the billions of dollars it plans to spend to modernize its financial 
management operations and systems.
---------------------------------------------------------------------------
    \23\ GAO/T-AIMD/NSIAD-00-163.
    \24\ GAO-01-525.
---------------------------------------------------------------------------
    DOD has reported that it is in the process of contracting for the 
development of a DOD-wide financial management enterprise architecture 
to ``achieve the Secretary's vision of relevant, reliable and timely 
financial information needed to support informed decision-making.'' 
Consistent with our previous recommendations in this area, DOD has 
begun an extensive effort to document the Department's current ``as-
is'' financial management architecture by inventorying systems now 
relied on to carryout financial management operations throughout the 
Department. DOD has identified 674 top-level systems and at least 997 
associated interfaces thus far and estimates that this inventory could 
include up to 1,000 systems when completed.
    While DOD's beginning efforts at developing a financial management 
enterprise architecture are off to a good start, the challenges yet 
confronting the Department in its efforts to fully develop, implement, 
and maintain a DOD-wide financial management enterprise architecture 
are unprecedented. Our May 2001 report \25\ details a series of 
recommended actions directed at ensuring DOD employs recognized best 
practices for enterprise architecture management. This effort will be 
further complicated as the Department strives to develop multiple 
enterprise architectures across its various business areas. For 
example, in June 2001, we recommended \26\ that DOD develop an 
enterprise architecture for its logistics operations. As I discussed 
previously, an integrated reform strategy will be critical. In this 
context, it is essential that DOD closely coordinate and integrate the 
development and implementation of these, as well as other, 
architectures. By following this integrated approach and our previous 
recommendations, DOD will be in the best position to avoid the serious 
risk that after spending billions of dollars on systems modernization, 
it will continue to perpetuate the existing systems environment that 
suffers from duplication of systems, limited interoperability, and 
unnecessarily costly operations and maintenance.
---------------------------------------------------------------------------
    \25\ GAO-01-525.
    \26\ U.S. General Accounting Office, Information Technology: DLA 
Should Strengthen Business Systems Modernization Architecture and 
Investment Activities, GAO-01-631 (Washington, DC: June 29, 2001).
---------------------------------------------------------------------------
Monitoring and oversight
    Ensuring effective monitoring and oversight of progress will also 
be a key to bringing about effective implementation of the Department's 
financial management and related business process reform. We have 
previously testified \27\ that periodic reporting of status information 
to department top management, the Office of Management and Budget 
(OMB), Congress, and the audit community was another key lesson learned 
from the Department's successful effort to address its Year 2000 
challenge.
---------------------------------------------------------------------------
    \27\ GAO-01-244.
---------------------------------------------------------------------------
    Previous Financial Management Improvement Plans DOD submitted to 
Congress have simply been compilations of data call information on the 
stovepiped approaches to financial management improvements received 
from the various DOD components. It is our understanding that DOD plans 
to change its approach and anchor its plans in an enterprise system 
architecture. If the Department's future plans are upgraded to provide 
a department-wide strategic view of the financial management challenges 
facing the DOD along with planned corrective actions, these plans can 
serve as an effective tool not only to help guide and direct the 
Department's financial management reform efforts, but a tool for 
oversight. Going forward, this subcommittee's annual oversight 
hearings, as well the active interest and involvement of other 
cognizant defense and oversight committees in Congress, will continue 
to be key to effectively achieving and sustaining DOD's financial 
management and related business process reform milestones and goals.
    Given the size, complexity, and deeply engrained nature of the 
financial management problems facing DOD, heroic end-of-the year 
efforts relied on by some agencies to develop auditable financial 
statement balances are not feasible at DOD. Instead, a sustained focus 
on the underlying problems impeding the development of reliable 
financial data throughout the Department will be necessary and is the 
best course of action. I applaud the proposals spearheaded by the 
Senate Armed Services Committee, and subsequently enacted as part of 
the fiscal year 2002 National Defense Authorization Act, to provide a 
framework for redirecting the Department's resources from the 
preparation and audit of financial statements that are acknowledged by 
DOD leadership to be unauditable to the improvement of DOD's financial 
management systems and financial management policies, procedures and 
internal controls. Under this new legislation, the Department will also 
be required to report to Congress on how resources have been redirected 
and the progress that has been achieved. This reporting will provide an 
important vehicle for Congress to use in assessing whether DOD is using 
its available resources to best bring about the development of timely 
and reliable financial information for daily decisionmaking and 
transform its financial management as envisioned by the Secretary of 
Defense.
    In conclusion, we support Secretary Rumsfeld's vision for 
transforming the Department's full range of business processes. 
Substantial personal involvement by the Secretary and other DOD top 
executives will be essential for success to change the DOD culture that 
has over time perpetuated the status quo and been resistant to 
transformation of the magnitude envisioned by the Secretary. 
Comptroller Zakheim, as the Secretary's leader for financial management 
modernization, will need to have the ability to make the tough choices 
on systems, processes, and personnel, and to control spending for new 
systems across the Department, especially where new systems development 
is involved. Processes will have to be reengineered, and hierarchical, 
process-oriented, stovepiped, and internally focused approaches will 
have to be put aside. The past has taught us that well-intentioned 
initiatives will only succeed if there are the right incentives, 
transparency, and accountability mechanisms in place.
    The events of September 11 and other funding and asset 
accountability issues associated with the war on terrorism, at least in 
the short term, may dilute the focused attention and sustained action 
that will be necessary to fully realize the Secretary's transformation 
goal, which is understandable given the circumstances. At the same 
time, the demand for increased Defense spending, when combined with the 
government's long-range fiscal challenges, means that solutions to 
DOD's business systems problems are even more important. As the 
Secretary has noted, billions of dollars of resources could be freed up 
for national defense priorities by eliminating waste and inefficiencies 
in DOD's existing business processes. Only time will tell if the 
Secretary's current transformation efforts will come to fruition. 
Others have attempted well-intentioned reform efforts in the past. 
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 a reality? For our part, we will 
continue to constructively work with the Department and Congress in 
this important area.
    Mr. Chairman, this concludes my statement. I would be pleased to 
answer any questions you or other members of the Subcommittee may have 
at this time.
                     contacts and acknowledgements
    For further information about this testimony, please contact 
Jeffrey C. Steinhoff at (202) 512-2600 or [email protected], Henry L. 
Hinton, Jr. at (202) 512-4300 or [email protected], or Gregory D. Kutz at 
(202) 512-9095 or [email protected]. Other key contributors to this 
testimony include Jack Brock, Geoffrey Frank, William Hill, Randolph 
Hite, Jeffrey Jacobson, Darby Smith, and David Warren.

    Senator Akaka. Thank you for your statement, Mr. Walker. My 
friend Senator Inhofe has joined us, and is willing to submit 
his statement for the record so we can move along with this 
hearing. Thank you very much.
    [The prepared statement of Senator Inhofe follows:]

               Prepared Statement by Senator James Inhofe

    The Readiness and Management Support Subcommittee meets 
this morning to receive testimony on the state of financial 
management within the Department of Defense. DOD officials have 
for years stated that improving financial management in the 
Department is a priority, but progress to date has been slow.
    It is critical that the Department is able to produce 
reliable and timely financial information if the Department is 
to make proper management decisions and make the best use of 
its limited funding. DOD owes it to the taxpayers to ensure 
that it can accurately track expenditures of federal dollars. 
It also makes good business sense. Billions of dollars could be 
saved through better decision making that could be spent on 
pressing modernization and readiness concerns. Without good 
financial information, we may never really know if it makes 
sense to close a base or how well DOD contractors and 
organizations are performing.
    The Armed Services Committee has been active in overseeing 
DOD's financial efforts. The mechanism for achieving this 
oversight has been DOD's production of the Biennial Financial 
Management Improvement Plan required by the National Defense 
Authorization Act for Fiscal Year 1998. This document requires 
the Department to outline its strategic vision for improving 
financial management and reporting within the Department.
    Last year, the committee was successful in passing 
legislation to focus DOD's efforts on its feeder systems--or 
those computer systems that provide DOD its financial 
information. This legislation established a requirement for a 
Financial Management Modernization Executive Committee and 
Financial Feeder Systems Compliance Process. In addition, 
Congress directed a new oversight regime for those DOD 
financial statements which will not be auditable in the near 
future. This will allow DOD to not waste its time on 
unnecessary audits and focus its limited resources on fixing 
underlying financial management problems.
    I look forward to hearing from our witnesses how these 
provisions will be implemented and whether DOD is truly on the 
road to achieving better financial management.

    Senator Akaka. I will now call on Secretary Zakheim for 
your statement.

 STATEMENT OF HON. DOV S. ZAKHEIM, UNDER SECRETARY OF DEFENSE 
    (COMPTROLLER); ACCOMPANIED BY TINA JONAS, DEPUTY UNDER 
         SECRETARY OF DEFENSE FOR FINANCIAL MANAGEMENT

    Dr. Zakheim. Thank you very much, Mr. Chairman, Senator 
Inhofe. I am pleased to update you on the status of financial 
management reform within DOD.
    As we transform our Nation's posture, it is critical that 
we reform the management of the Department's finances. Just as 
we are transforming our military forces and combat 
capabilities, we have to with equal vigor transform our 
business practices and systems. That way, the Department may 
not only reap the benefits of greater efficiency, but also 
apply those resources directly to our war-fighting capability. 
Every dollar wasted on an inefficient process is a dollar that 
could have been utilized to fight the war on terrorism.
    I am going to depart from my prepared oral remarks, and I 
hope you will accept the written remarks for the record, as 
well as those of my colleague, Robert Lieberman, Deputy 
Inspector General of DOD, Senators.
    Senator Akaka. Without objection.
    Dr. Zakheim. When I testified in my confirmation hearing 
before you, I made it clear that financial management was a top 
priority of mine. I had been out of the Pentagon for 14 years. 
I had worked in private business. As I was being briefed in 
preparation for my new job, I realized, pretty much to my 
horror, that no private business could operate the way the 
Pentagon's financial management system was operating. It was 
just as simple as that, and I believe I said as much at the 
hearing.
    Once I was confirmed, the first thing I did was to 
reorganize my front office. If you do not have a management 
team that can carry out the job, then the job does not get 
carried out. Having been on Secretary Cohen's Defense Reform 
Task Force, I saw that with the best of intentions, without 
having people as point people, you could not move anything.
    With me today is Tina Jonas, I believe the first-ever 
Deputy Under Secretary of Defense for Financial Management. My 
principal deputy is twin-hatted as Deputy Under Secretary for 
Management Reform. I promised to do that at the hearing, and I 
have done that.
    Second, it became very clear to me early on that the 
culture that the Comptroller General just spoke of really was 
prevasive in the Pentagon. It is not a Democratic problem, it 
is not a Republican problem, it is a bureaucratic problem, and 
part of that difficulty was that there was an attitude that 
anyone who saw problems with the system was somehow part of the 
problem.
    I felt that those folks could be part of the solution, 
because they wanted to be, and I start with the gentleman 
sitting to my left. I felt that Comptroller General Walker and 
his staff, based on the reports that I had read, could be 
extremely valuable in helping us out. I reached out to staff on 
the Hill, as well as the staff on this committee and on other 
committees. I continue to reach out. I feel it is terribly 
important that we get whatever help we can, that we get the 
ideas, that we get the support. Otherwise we will crash up 
against that bureaucratic brick wall that the Secretary of 
Defense spoke about.
    The leadership clearly does come from the Secretary. He 
directed the entire leadership team to conduct a complete 
overhaul of the Department's financial management processes and 
practices. Again, we are talking about an individual who had 
been out of Government for 25 years, who had been an extremely 
successful businessman, and who realized, as I did in a smaller 
way, that you just could not get from here to there with the 
kind of system we have. So he tasked me, along with other 
senior leaders, to lead these efforts to achieve complete 
overhaul and restructuring. He is holding us accountable for 
the results.
    Our reform initiative involves just about every transaction 
in the Department. It is the most comprehensive and integrated 
management reform ever attempted within DOD. We are making 
fundamental changes to our financial management practices, and 
it's supporting infrastructure in order to demonstrate both to 
you and Congress and to the American people that we really are 
the responsible stewards of the resources that have been 
entrusted to us.
    We know the reform effort is aggressive. I have had enough 
people telling me that it is too aggressive, that it is too 
ambitious. I do not agree. I think it is important to set the 
bar high. I think we can clear the bar, and we owe that to the 
taxpayer.
    Let me address, at least briefly, the root causes of the 
problem. I have mentioned one of them, which is simply a 
culture that was pervasive in the Department. What we are 
trying to do is to revamp the DOD processes and systems that 
generate financial information. The root causes of the problem 
are, first of all, uncontrolled proliferation of antiquated and 
stand-alone financial management systems, and second, the 
inefficient business processes that these antiquated systems 
support. These systems and processes were fundamentally 
structured to support the budget and appropriation process. 
They do go quite far in both supporting the process and, 
indeed, in accounting for execution. The problem is that they 
do not generate the financial information that meets the needs 
both of our senior management and Government-wide management. I 
have had long discussions with the Comptroller of OMB, Mark 
Everson, about this. By the way, he is also working closely 
with us in these matters.
    In particular, none of what we have today really 
incorporates standard accounting practices, and we have to fix 
that.
    That mess that you see on the multicolored chart 
demonstrates the complexity of the DOD system that produces 
most of our financial management information. Just to let you 
know what is what: the green items are the accounting systems, 
the red items are the finance systems, the blue and gray are 
personnel and pay systems, the black are property systems, the 
purple are budget systems, the brown are inventory systems, the 
blue are management information systems, the yellow financial 
reporting, the green are external to DOD. I have a rainbow 
here. I ran out of colors.
    There are 673 systems on this chart. The majority of these 
systems do not deal with finance directly, as the Comptroller 
General pointed out. They manage personnel, logistics, health 
care, and other financial functions, but they are obviously 
integral to the financial management system because they 
generate financial data. They are therefore important to 
financial management reform, because those systems are handling 
all the accounting data. Unless they can talk to one another at 
every juncture, at every crossing point, we are subject to 
error. We are subject to mistakes of some kind. The miracle of 
it all is that the mistakes are so few.
    Now, just producing this schematic was a major effort. This 
is the first time we have ever documented what you might call 
our ``as-is'' inventory. We cannot change anything unless we 
have our arms around the problem. This tells us that we need 
some pretty long arms.
    Now, we have made some short-term progress, and we know it 
is a long-term effort. I agree completely with Comptroller 
General Walker on this. This is not going to be a deal that 
takes months, it is going to take years, but we have already 
begun to address some of the major problems. For example, we 
have accelerated and expanded the use of performance measures 
and data to target serious issues. For example, from April 1 to 
October 1 of 2001, we reduced the backlog of commercial 
payments by 41 percent. If you pay your bills on time, you 
improve your business relationship, and more important to the 
taxpayer than even that, you reduce interest payments.
    Between January 2001 and December 2001, we increased 
management oversight of travel cards. That resulted in a 34 
percent reduction in personal payment delinquencies, and an 86 
percent reduction in organizational delinquencies. That 
increases the confidence, but it also, and more important in 
many ways, reduces the cost of the card. That is to say, 
reduces the cost to the taxpayer.
    We have decreased our payment recording errors by 57 
percent, between October 2000 and October 2001. Elements of 
that reduction include a 51 percent reduction in the dollar 
value of our unmatched transactions, a 92 percent reduction in 
the dollar value of our transactions that were not obligated, 
and a 74 percent reduction in the dollar value of transactions 
requiring additional research. We have clearly defined the 
extent of DOD systems problems by cataloguing, for the first 
time, the inventory that I have shown you.
    I have instituted tighter controls over the development and 
proliferation of financial management systems, thereby slowing 
investments in systems that are not compliant with financial 
management requirements.
    The Comptroller General talked about stovepiping. It is not 
good enough just to have different parts of the Department 
saying that they are instituting reforms, if those reforms do 
not mesh with other reforms. It has to be part of an integrated 
whole, otherwise, all we are doing is modernizing our 
stovepipes, and we do not really want to do that.
    Another thing that I have done is take two parts of the 
Comptroller's organization and actually have them talk to each 
other. These are the Defense Finance and Accounting Service, 
the Defense Contract Audit Agency, both part of the 
Comptroller's office. Neither talked about these issues with 
one another, and I will talk about some of the issues I mean in 
particular.
    For instance, they are jointly identifying and collecting 
contract overpayments. DCAA has finished audits of contractor 
overpayments at 46 major contractors, and is completing audits 
at 124 others. Auditors have found overpayments of $50 million, 
with over 20 million of the overpayments already returned to 
the Government. DCAA and DFAS are jointly working to recover 
the balance.
    We are also improving accounting for our weapons system and 
support equipment. We are working with the Federal Accounting 
Standards Advisory Board, the FASAB, to change the way the 
Department accounts for ships, tanks, and aircraft and other 
military end items. They are part of the property, plant, and 
equipment category. We soon expect to be recording their full 
costs in our accounts, and showing those costs in our balance 
sheets. By the way, that was a change that the Department had 
resisted for 10 years, so it was a kind of nonpartisan 
resistance. It was just pure bureaucratic resistance. As a 
result of this change, our managers and the public will have a 
clearer view of the total costs associated with these major end 
items.
    We are standardizing the way we value inventory. We are 
beginning to use standard commercial methods to account for 
control inventories. We have increased the accuracy of our 
inventory accounts by $69 billion. We are developing more 
accurate methods to estimate our environmental liabilities, and 
these methods will help the Department report a reasonably 
accurate estimate for our cleanup costs.
    We are balancing our checkbook with the U.S. Treasury. We 
have improved procedures for reconciling our fund balance with 
the Treasury accounts, and we have created a new training 
program to teach our accountants these procedures. Just 
recently I directed the Department to reduce unreconciled 
balances by recording obligations for payments that are over 
120 days old, rather than our former target of 180 days. 
Basically, we have told the Departments, either to reconcile 
these balances, or to take outstanding balances ``out of your 
hide.'' That is a pretty good incentive to reconcile the 
balances.
    Human capital is a major concern of both my office and the 
GAO. In addition to addressing the systems issues, the business 
processes, the policies and procedures, we are strengthening 
our financial management workforce. We have formed a Financial 
Management Human Capital Work Group, which is creating a 
detailed road map that will outline tangible steps we can take 
to bolster the talents and experience of our financial 
workforce.
    We are developing incentives to encourage financial 
management personnel to obtain recognized professional 
qualifications, such as certified public accountants. I was 
absolutely shocked at the low percentage of CPAs that we have 
in our financial management organization. It just astounded me.
    I mean, I would never go to somebody who was not a CPA with 
my taxes. Here we are, custodians of the taxpayer's money, 
without CPAs looking after them. It turns out that there is a 
tangle of restrictions, some of them administrative, some of 
them legislative, that make it difficult to get from here to 
there. But it is not impossible. This working group, is doing 
just that. It is seeing how we can, within the framework of 
restrictions that may have been imposed for other very good 
reasons, to improve the quality of the people who are meant to 
manage the accounts.
    Again, here is another example where I have the Finance and 
Accounting Service and the Contract Audit Agency working 
together. They are both members of this working group, and they 
are cooperating closely to upgrade the skills of our financial 
personnel. They have never worked together in this end of the 
endeavor, and indeed, the Contract Audit Agency has a much 
higher percentage of people with senior professional education 
than does DFAS, and so Bill Reed, who heads DCAA, and Tom Bloom 
at DFAS, have been talking about how to import some of DCAA's 
ideas into DFAS's long-term plan for improving the quality of 
our personnel.
    We have also created a Defense Business Practices 
Implementation Board. Basically, as you heard from both myself 
and the Comptroller General, financial management reform is a 
massive undertaking, and we need outside help and advice. As a 
result of that need, Secretary Rumsfeld established the Defense 
Business Practices Implementation Board, which is comprised of 
senior executives, experts in the business community who will 
help our Department formulate and achieve its ongoing 
management reform.
    The need here is to get outsiders to critique what we are 
doing, to give us what you might call ``midcourse guidance,'' 
to give us new ideas. These are people who are not necessarily 
embedded in the defense community, who can bring a fresh 
outlook to what is a problem that goes beyond just the narrow 
confines of defense. The Comptroller General, next to me, and 
the OMB Comptroller, are both observers on the board. I do not 
know whether Mr. Walker has been an observer in any other DOD 
board before. Maybe he has--but to my knowledge he has not--and 
we certainly are happy and delighted that he is a part of our 
reform process. The first meeting is scheduled for March 15.
    So in conclusion, Mr. Chairman, I want to reiterate that 
Secretary Rumsfeld and his senior leadership are determined to 
transform financial management in the Department of Defense. We 
have an aggressive schedule. We intend to meet it. We are 
making every effort to meet it.
    I want to thank this committee for its support in the past 
for our efforts. As with any major undertaking in the 
Department, we need the support of Congress, including the 
approval of our 2003 budget request for financial management 
modernization. We need to maintain the strong relationship that 
we are developing with the GAO and with OMB. Together, we 
believe we can create the world class financial management 
infrastructure that will complete the revitalization and 
transforation of our defense posture, and that will finally, I 
believe, give the American taxpayer what he or she deserves.
    Thank you very much.
    [The prepared statements of Dr. Zakheim and Mr. Lieberman 
follow:]
                Prepared Statement by Dr. Dov S. Zakheim
    Mr. Chairman and members of the committee, I am pleased to update 
you on the status of financial management reform within the Department 
of Defense.
                   continuing leadership committment
    As we transform our Nation's defense posture, it is critical that 
we reform the management of the Department's finances. Just as we are 
transforming our military forces and combat capabilities, we must with 
equal vigor transform our business practices and systems. In that way, 
the Department may not only reap the benefits of greater efficiency but 
also apply those resources directly to our warfighting capability. 
Every dollar wasted on an inefficient process is a dollar that could 
have been utilized to fight the war on terrorism.
    To get this job done, Secretary Rumsfeld directed his entire 
leadership team to conduct a complete overhaul of the Department's 
financial management practices and processes. He has tasked me, along 
with other senior leaders, to lead these efforts. He is holding each 
one of us accountable for the results.
    Our reform initiative involves almost every transaction in the 
Department. It is the most comprehensive and integrated financial 
management reform effort ever attempted within DOD. We are making 
fundamental and sweeping changes to our financial management practices 
and supporting infrastructure in order to demonstrate fully both to 
Congress and the American people that we are responsible stewards of 
the resources entrusted to us.
    We realize that our reform effort is aggressive--some think overly 
aggressive. I do not believe that is the case. I have set the bar high 
and I am firmly committed to major change in this important area. The 
taxpayer deserves nothing less.
                         addressing the problem
    Our transformation initiative is integrating business process 
reform with systems renovation. We are setting clear-cut goals for our 
managers and using understandable measures to evaluate performance. 
Before I discuss what we are doing to improve financial management, I 
must emphasize that the only permanent solution to our financial 
difficulties will be the long-term modernization of our financial 
management systems and business processes.
    Root Causes. Our Financial Management Modernization Program is a 
central focus of our long-term reform plan. It is designed to revamp 
those processes and systems in the Department that generate financial 
information. It targets the root causes of the Department's financial 
management problems. Those are:

    1. the uncontrolled proliferation of antiquated and standalone 
financial management systems, and
    2. the inefficient business processes that they support.

    These systems and processes were developed to support the budget 
and appropriation process. Unfortunately, they do not generate 
financial information that meets the needs of both our senior managers 
and government-wide management. In particular, they do not contain 
standard accounting requirements. We intend to fix that.
    This proliferation of systems can be seen in our inventory 
schematic. It demonstrates the complexity of the Department's system 
that produces most of our financial management information. There are 
no less than 673 systems in our inventory. The majority of these 
systems manage personnel, logistics, health care, and other non-
financial functions. Yet we must consider them to be integral to the 
financial management system because they generate financial data. They 
are as important to financial management reform as those systems 
handling only accounting data.
    This schematic is itself the product of a major effort. It 
documents, for the first time, the Department's ``AS-IS'' inventory--a 
vital element for change.
    The key to the Department's long-term success lies in eliminating 
as many systems as possible, integrating and standardizing those that 
remain, and modernizing the business processes that produce our 
financial information. Some components in the Department already are 
actively working to eliminate systems and reengineer their business 
processes. We are working closely with all components to ensure that 
what they are doing to enhance financial management fits into the 
Department's long-term strategy for reforming its financial management 
infrastructure.
    We are developing a systems ``blueprint'' that will underpin our 
Financial Management Modernization Program for the long-term. Systems 
experts call this blueprint an ``enterprise architecture.'' Just as an 
architect uses a blueprint to construct a building, the Department will 
use a systems blueprint to construct its future financial management 
infrastructure. The blueprint will describe how to modernize and link 
both systems and business processes, now isolated from each other, 
across the functional areas I mentioned earlier: logistics, health 
care, accounting, finance, and others. The blueprint will also include 
Department-wide financial management standards. We expect the finished 
blueprint to be ready for implementation by March 2003. At that time, 
we will begin testing--or prototyping--the solution we developed in our 
blueprint.
    Short-Term Progress. Concurrent with our long-term efforts to fix 
systems and processes, we have begun to address many pressing problems.
    Already, the Department is making progress in several key areas. 
For example:

    1. We accelerated and expanded the use of performance measures and 
data to target serious issues:

         From April 2001 to October 2001, we reduced by 41 
        percent the backlog of commercial payments. Paying our bills on 
        time improves our business relationships and reduces wasteful 
        interest payments,
         Between January 2001 and December 2001, we increased 
        management oversight of travel cards, which resulted in a 34 
        percent reduction in personal payment delinquencies and an 86 
        percent reduction in organizational delinquencies. This 
        increases confidence and reduces the cost of the card,
         We decreased our payment recording errors by 57 
        percent between October 2000 and October 2001. The elements of 
        this reduction include:

                 a 51 percent reduction in the dollar value of 
                our unmatched transactions,
                 a 92 percent reduction in the dollar value of 
                our transactions not obligated, and
                 a 74 percent reduction in the dollar value of 
                transactions requiring additional research.

    2. As I mentioned, we have clearly defined the extent of the 
Department's systems problems by cataloging--for the first time--a 
complete inventory of the systems that produce financial information.
    3. I have instituted tighter controls over the development and 
proliferation of financial management systems, thus slowing investments 
in systems that are not compliant with financial management 
requirements.
    4. The Defense Contract Audit Agency (DCAA) and Defense Finance and 
Accounting Service (DFAS) are jointly identifying and collecting 
contract overpayments. DCAA has finished audits of contractor 
overpayments at 46 major contractors and is completing audits at 124 
others. Auditors have found overpayments of $50 million, with over $20 
million of the overpayments already returned to the government. DCAA 
and DFAS are working to recover the balance.
    5. We are improving accounting for our weapons systems and support 
equipment. We are working with the Federal Accounting Standards 
Advisory Board to change the way the Department accounts for ships, 
tanks, aircraft, and other military end items. We soon expect to begin 
recording their full costs in our accounts and showing those costs on 
our balance sheets. As a result, our managers, and the public, will 
have a clearer view of the total costs associated with these items.
    6. The Department is standardizing the way it values inventory. We 
are beginning to use standard commercial methods to account for and 
control inventory. We have also increased the accuracy of our inventory 
accounts by $69 billion.
    7. We are developing more accurate methods to estimate our 
environmental liabilities. These new methods will help the Department 
report reasonably accurate estimates for its clean-up costs.
    8. We are balancing our checkbook with the U.S. Treasury. We have 
improved procedures for reconciling our Fund Balance with Treasury 
accounts and have created a new training program to teach our 
accountants these procedures.
    9. Further, I have directed the Department to reduce unreconciled 
balances by recording obligations for payments that are over 120 days 
old, rather than our former target of 180 days.
    10. We have also established a Financial Management Modernization 
Executive Committee to provide consistent top level leadership. This 
committee is comprised of the Department's most senior managers and is 
providing guidance and advice to staff implementing the Financial 
Management Modernization Program.
    11. We are tackling the significant management control weaknesses 
that continue to permeate the processes we use to generate and handle 
financial management information. We are expanding training and 
reengineering our most vulnerable business processes. Only by remedying 
management control weaknesses can we reduce the tremendous amounts of 
time and resources we currently must devote to reworking and adjusting 
our accounts.

    These problems, and others like them, have caused the confusion in 
the Department's finances. The result is that our managers cannot use 
our data, the auditors cannot audit our data, and Congress and the 
Public are skeptical about our data. Of course, we cannot obtain a 
clean audit opinion. The goal of the Secretary's reform initiative is 
to end this disorder.
    Human Capital. In addition to addressing systems issues, business 
processes, and policies and procedures, we are strengthening the 
Department's financial management workforce. Secretary Rumsfeld has 
spoken repeatedly of the need to improve the professional 
qualifications and skills of the Department's workforce. The Department 
takes this issue seriously. To tackle the challenges we confront in 
this area, the Department has formed a Financial Management Human 
Capital Workgroup.
    This workgroup is creating a detailed roadmap that will outline 
tangible steps the Department can take to bolster the talents and 
experience of its financial workforce. Further, the workgroup is 
proposing incentives that encourage financial management personnel to 
attain recognized professional qualifications, such as Certified Public 
Accountant. The Defense Finance and Accounting Service and Defense 
Contract Audit Agency, the Department's two major financial agencies, 
are both members of the workgroup and are cooperating closely to 
upgrade the skills of their financial personnel. This is the first time 
that these two agencies have worked together in this kind of endeavor. 
We are integrating the procedures developed by this group into our 
overall transformation initiative. The workgroup's plan will include 
both its short-term and long-term recommendations, and will be finished 
in April 2002.
    Defense Business Practices Implementation Board. To help the 
Department in this enormous undertaking, Secretary Rumsfeld established 
the Defense Business Practices Implementation Board. The Board will 
advise us on applying best business practices to management, finance, 
acquisition, production, and logistics operations. Comprised of senior 
executives and experts from the business community, the Board will help 
the Department formulate and achieve its ongoing management reform. 
Both the Comptroller General of the United States and the Controller, 
Office of Federal Financial Management, Office of Management and 
Budget, serve as observers on the Board. The first meeting is scheduled 
for March 15, 2002.
                                closing
    In conclusion, I want to reiterate that Secretary Rumsfeld and his 
senior leadership are determined to transform financial management in 
the Department of Defense. We are using transformation techniques that 
are novel to the Department--as well as keeping the best of what was in 
our previous improvement plans. We have set an ambitious schedule and 
are making every effort to meet it.
    I would like to thank this committee for its support in the past 
for our efforts. As with any major undertaking in the Department, we 
will need continued support from Congress--to include approval of our 
fiscal year 2003 budget request for financial management modernization.
    We also need to continue our strong partnership with the General 
Accounting Office and the Office of Management and Budget. Together, we 
can create the world-class financial management infrastructure that 
will be needed to complete the revitalization and transformation of 
America's defense posture.
      
      
    
    
      
                                 ______
                                 
               Prepared Statement by Robert J. Lieberman
    Mr. Chairman and members of the committee:
    Thank you for the opportunity to provide the views of the Office of 
the Inspector General, Department of Defense, on financial management, 
which surely ranks as one of the Department's most difficult management 
improvement challenges. I would like to begin with a brief recounting 
of recent audit results.
         opinions on financial statements for fiscal year 2001
    In terms of audit opinions on the reliability of DOD year-end 
financial statements, I am unable to report progress for the DOD-wide 
or major component funds. As in previous years, we issued an 
unqualified (clean) opinion for the Military Retirement Fund's 
statements. Disclaimers of opinion were necessary for all other major 
funds, however, because of serious deficiencies in the reporting 
systems and other internal control problems. A few DOD organizations, 
whose funds are not large enough to require separate reporting to OMB, 
have made progress, but the impact is primarily symbolic.
    Measuring progress toward compliance with the Chief Financial 
Officers Act and related statutes has been extremely difficult, because 
the Government has lacked any metrics except audit opinions on year-end 
financial statements. I am greatly encouraged by the widespread support 
expressed for our concept of applying Year 2000 conversion-type metrics 
to the financial system improvement projects. As soon as the ongoing 
effort to develop a comprehensive systems architecture has laid the 
groundwork, we can begin assessing the progress of each system 
development or modification effort that is needed to achieve compliance 
with the new Federal Accounting Standards.
                       other recent audit results
    Although the annual audit opinions may continue to attract more 
attention than most individual audit reports, the DOD progress in 
addressing the specific findings and recommendations in those reports 
will be a critical factor in how much financial management improvement 
actually occurs.
    Now to bring the most important of these financial management audit 
findings to your attention. Their variety illustrates the breadth of 
the DOD financial management challenge.

        -- We reported in March 2001 that the DOD Financial Management 
        Improvement Plan, submitted to Congress in January 2001, was 
        incomplete and did not ensure that the Department would correct 
        financial system deficiencies and attain an integrated 
        financial management system structure. In addition, the Plan 
        erroneously indicated that 12 critical systems were compliant 
        with Federal Financial Management Improvement Act requirements. 
        The Plan was little more than a compilation of unvalidated 
        inputs from various organizations. Its $3.7 billion cost 
        estimate for financial systems replacement or improvement was 
        clearly understated and unreliable. (Report D-2001-085)
        -- We reported in May 2001 that the Defense Finance and 
        Accounting Service needed to be more efficient and aggressive 
        in collecting debt from large contractors. We identified 148 
        cases worth $12.6 million where action was needed. The List of 
        Contractors Indebted to the United States, which is a tool used 
        by disbursing officers to offset contractor debts, included 
        numerous invalid debts and other erroneous data that reduced 
        its usefulness. (Report D-2001-114)
        -- In June 2001, we reported that DOD had successfully adapted 
        a commercial automated payment system for DOD freight payment 
        purposes. This enabled the Department to move away from 
        untimely, paper-based, poorly controlled and labor intensive 
        processes for 1.25 million payments per year. However, 
        additional measures were warranted to take full advantage of 
        the system's capabilities and achieve optimum streamlining 
        without undue risk. (Report D-2001-148)
        -- In August 2001, we reported that the DOD had failed to 
        develop a standardized cost accounting system for managing the 
        life cycle costs of weapon systems. DOD reports that various 
        acquisition reform goals had been met by establishing such a 
        system were wrong. (Report D-2001-164)
        -- The DOD agreed with Congress in August 1998 to implement a 
        new policy to decrease the risk of progress payments being 
        charged to the wrong accounts. We reported in September 2001 
        that implementation had been poorly managed and the new policy 
        was ineffectual. (Report D-2001-188)
        -- We reported in November 2001 that DOD financial management 
        systems were not integrated and could not share data without 
        expensive and inefficient crosswalks. Nevertheless, the 
        Department had been moving ahead with the Defense Finance and 
        Accounting Service Corporate Database and other projects with 
        insufficient assurance that a truly integrated set of systems 
        would result. (Report D-2002-014)
        -- The DOD plans to transition from the existing contractor 
        payment system, the archaic Mechanization of Contract 
        Administration Services (MOCAS) system, to the new Defense 
        Procurement Payment System by fiscal year 2003. To ensure a 
        smooth transition, it is important to close as many contracts 
        that have been completed, but not closed out, as possible. In 
        December 2001, we reported that DOD had a 6 year backlog of 
        contract closure actions and needed to accelerate the process. 
        In addition, there were weaknesses in the closure process 
        itself, insufficient resources earmarked for the task and 
        untimely contractor input. Cumulatively, these problems 
        increased the risk to an orderly transition. (Report D-2002-
        027)
        -- From fiscal year 1996 through fiscal year 2001, 382 General 
        Accounting Office and DOD audit reports addressed a wide range 
        of management control issues in the DOD Purchase Card Program. 
        Those audit results were summarized in a December 2001 report. 
        Auditors documented numerous instances of misuse of the cards, 
        lack of oversight and accountability, splitting purchases to 
        avoid oversight, failure to segregate duties and inadequate 
        training. This program is beneficial, but will require 
        continued oversight. (Report D-2002-029)
        -- In January 2002, we reported that most DOD components had 
        done little to implement the DOD Financial and Feeder Systems 
        Compliance Process, which had been inaugurated in January 2001 
        to apply the proven management techniques of the Year 2000 
        conversion program to financial systems improvement. Progress 
        in mapping the flow of financial data and compiling an 
        inventory of systems had been disappointingly slow, despite the 
        fact that such research was supposed to have been done earlier 
        for a variety of reasons, including identification of security 
        vulnerabilities, contingency planning, and systems architecture 
        development. However, DOD management initiatives during fiscal 
        year 2001 and the guidance provided by the National Defense 
        Authorization Act for fiscal year 2002 had established the 
        groundwork for a more successful effort. (Report D-2002-044)
        -- In March 2002, we reported that the two versions of the 
        Computerized Accounts Payable System, used for Army and Defense 
        agency payments, lacked effective controls to detect and 
        correct improperly supported or erroneous payments to 
        contractors. (Report D-2002-056)

    The full text of our reports is available on-line at 
www.dodig.osd.mil.
                 responding to congressional direction
    Section 1008 of the National Defense Authorization Act for Fiscal 
Year 2002 directs the Inspector General, DOD, to perform only the 
minimum audit procedures required by auditing standards for year-end 
financial statements that management acknowledges to be unreliable. The 
Act also directs us to redirect any audit resources freed up by that 
limitation to more useful audits, especially in the financial systems 
improvement area.
    We strongly agree with the rationale behind Section 1008. Due to 
overall resource constraints, it would be impossible to provide audit 
support in the crucial systems improvement area if we were forced to 
expend resources on labor intensive efforts to audit the convoluted 
workarounds and poorly documented transactions that currently 
characterize most major DOD financial statements. We greatly appreciate 
your leadership in focusing attention on the system problems that are 
at the core of the DOD financial reporting problems. By rejecting the 
notion that financial statements compiled by special efforts, which 
bypass or override official accounting systems, are worth their high 
cost or constitute progress, you have reintroduced an appropriate sense 
of proportion.
                            dod initiatives
    The initiatives announced by DOD over the past year appear to be 
highly compatible with the course mandated by Section 1008. For the 
past several years, we had expressed concerns that the cost of the 
Chief Financial Officers Act compliance effort was unknown, performance 
measures were lacking, there was no sense of consistently strong 
central leadership and there was no assurance that managers would get 
more useful financial information, even if year-end financial 
statements eventually received favorable audit opinions.
    We believe that the effort to establish a comprehensive financial 
system architecture is a necessary and long overdue step. There are 
undeniable risks--development of the architecture could take much 
longer than anticipated, the end product might leave numerous 
unresolved issues, the cost to implement the architecture might be 
prohibitively expensive or the DOD might lack the discipline to make 
system program managers conform to the architecture. Nevertheless, the 
financial management improvement effort needs to be treated as a 
program, with all of the management controls that a very large 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 the 
systems improvement 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. The DOD has worked hard 
to improve the efficiency of its disbursement operations; however, this 
is another area where the inadequacy of current systems is the core 
problem. As the Department pursues the goal of greatly improved 
financial reporting, it must also keep focused on the need for better 
controls in many facets of its day-to-day finance operations. We 
understand the need for continuous audit coverage in that area too.
    Again, thank you for soliciting our views on these matters.

    Senator Akaka. Thank you very much.
    At this point, I would like to ask my friend Senator McCain 
if he has any statements.
    Senator McCain. I have no statement, Mr. Chairman. I have 
some questions for the witnesses.
    Senator Akaka. Thank you.
    I am glad to hear from the witnesses, as I said in my 
statement. I was hoping that this administration would be 
moving seriously in this reform effort and, from what you have 
said this morning, you appear to be very serious about it. Mr. 
Walker mentioned about the Defense Secretary saying he is 
declaring war on this. I mean, that is serious, and hearing the 
comprehensive integrated financial management reform that Dr. 
Zakheim is talking about is serious, so I am glad to hear all 
of that, and I hope to see some movement here.
    Dr. Zakheim, you have launched an effort to develop and 
implement an enterprise architecture for DOD's financial 
management and feeder system. GAO says that this kind of 
comprehensive approach is a necessary first step toward 
addressing the problems with the Department's financial 
management systems. How close do you expect to come to meeting 
the February 13 objective for an enterprise architect and 
transition plan established in your time line?
    Dr. Zakheim. I believe we are going to come very close to 
it. We are right now studying industry's best practices. That 
will be complete this month. We are completing the financial 
and nonfinancial systems inventory. It is 85 percent complete. 
We hope this month to award the enterprise architect support 
contract. That will be the first major step in creating this 
new architecture you are talking about.
    I might add as well that we are developing Defense-wide 
data standards. We hope to complete that this month--excuse me, 
this month a year from now, and then also a year from now we 
hope to perform business process reengineering and to develop 
the future information architecture and transition plan to get 
there. So this month we hope to move ahead with awarding that 
first critical contract that gets us on the road.
    Senator--and this is not because I am a ``green 
eyeshade''--the way you get the Department to move is to get 
the money spent. Until there are dollars allocated, it is all 
words, and that is why we believe that we have really begun to 
turn the corner. When we let this contract, we set a process in 
motion that really is different from anything we have had 
before.
    Senator Akaka. Secretary Zakheim, your time line appears to 
allow just 3 or 4 months to come up with a plan of action and 
milestones for achieving compliance with Federal financial 
requirements, and even less than that to develop a transition 
plan for moving to your proposed enterprise architecture.
    Previous administrations have spent years trying to develop 
such plans without success. Do you believe that you will be 
able to come up with the kind of detailed blueprint for action 
that is needed in this limited time, or is that going to 
require more time and effort? If so, will that delay the actual 
implementation of your plan?
    Dr. Zakheim. As I said, we intend to award that first 
contract this month, actually in the next 2 weeks, so I do not 
see any delay there. I also said that we have really done 85 
percent of the financial and nonfinancial systems inventory 
work, so we are a very, very long way there. Let me explain why 
the timetable seems constrained, and yet we have made so much 
progress.
    What we did was to stand up a team pretty much as soon as I 
came on board at DOD. We began working, people were basically 
killing themselves to get things out, so that in fact we were 
in a position, when we awarded this contract, to really know 
where we were going. So we have done quite a bit of work before 
the time line officially began, if you see what I mean.
    Senator Akaka. Thank you for that response. Now I will ask 
my friend and colleague Senator McCain for any questions he may 
have.
    Senator McCain. I thank you, Mr. Chairman. I apologize for 
having to leave for another meeting.
    Dr. Zakheim, on January 28 there was an article, 
``Responding to Lott, DOD Starts Funding LHD-9 and One More 
DDG-51,'' by Chris Costellian, from the publication ``Inside 
the Navy.'' Quote, ``At the urging of Senate Minority Leader 
Trent Lott, the Pentagon has made last-minute adjustments to 
the Navy shipbuilding plan in the Bush administration in fiscal 
year 2003, paying $74 million more towards a third DDG-51 
destroyer, and allocates $10 million in advance procurement for 
a ninth amphibious ship, LHD-9, that was not previously in the 
Navy's budget.'' Is this true?
    Dr. Zakheim. It is certainly true that we put $10 million 
in the budget. That is absolutely correct, and it is also true 
that this was done toward the end of the budget review. What is 
not entirely accurate is the actual nature of the ship. There 
is a study going on as to what our amphibious program should 
look like. Amphibious ships do require some degree of advance 
funding, particularly if the nature of that ship is not going 
to be what it has been in the past, and so this essentially 
allowed us some flexibility in that regard.
    You know that the amphibious fleet, Senator--I do not have 
to tell you--is really quite old. I mean, these are ships in 
excess of 35 years, and we tend not to drive ships longer than 
25 or so, if that, so it seemed a prudent thing to do. It was 
done completely--and again, I do not think this was reported 
clearly or accurately. It was done completely in conjunction 
with the Navy. I do not like blindsiding people, and I did not 
blind-side the Navy, and they did not blind-side me. We worked 
together on this.
    Senator McCain. That is clearly not what I am told----
    Dr. Zakheim. I understand that, but that is what I am 
telling you, sir.
    Senator McCain.--by Navy people. Does the $10 million 
advance that was added by you, which is an interesting----
    Dr. Zakheim. No, it was not added by me, sir.
    Senator McCain.--of your responsibilities. According to the 
article, predetermined the results of the AOA, the analysis of 
alternatives.
    Dr. Zakheim. Well, Senator, as I just said I do not know 
who--the Navy is a big organization, so I do not know if it was 
a petty officer or someone else that told you that. I am 
telling you----
    Senator McCain. Oh, really?
    Dr. Zakheim. I am telling you that the Navy was not 
blindsided, and I am telling you that I did not make that 
decision alone.
    Senator McCain. But you made the decision. I thought it was 
the Comptroller who made the decision.
    Dr. Zakheim. No, the Comptroller simply puts a budget 
together, and to the extent that I have a responsibility for 
the budget, I had a responsibility for that, too. I did not----
    Senator McCain. That is an interesting depiction of the 
Comptroller's duties. Dr. Zakheim, I have not got a lot of 
time. You established a panel, examined multiyear leases for 
major weapons systems--what is the status of that panel?
    Dr. Zakheim. They are still looking at the various pros and 
cons of potential candidates.
    Senator McCain. Did you envision Boeing 767 tankers as a 
type of equipment that would be leased?
    Dr. Zakheim. Generically, that type of equipment was 
certainly a candidate. Specifically in terms of what the 
arrangements would be, that was not what they were looking at.
    Senator McCain. You are aware that Mr. Daniels, the 
Director of the Office of Management and Budget, is strongly 
opposed to leasing. In fact, the Navy has just proposed in 
their budget to buy out the T-5 tanker leases because, 
according to Navy officials, it is cheaper to buy the tankers 
outright than it is to continue to pay the lease.
    Dr. Zakheim. That may well be the case. Again, that goes to 
the specific nature and terms of the lease, Senator. The 
principle of leasing is clearly one that certainly is good 
business practice in the business world, otherwise no one would 
lease anything.
    The issue always comes down to what are the terms of the 
lease, what is being leased, and is this the best way to save 
the taxpayer money. So whether the Navy pulls out of a specific 
lease, or with regard to the specific nature of the Boeing 
leases, is a separate question from the general principles of 
looking at what might be a possible candidate for leasing.
    Senator McCain. Dr. Zakheim, as usual, one is wondering who 
is running things in the Pentagon when decisions on LHDs are 
made by the Comptroller and the decision on leasing of 767s are 
made by the Secretary of the Air Force without consulting the 
Secretary of Defense on a major $26 billion deal. So I do not 
have a lot of confidence in your presentation today, and before 
any changes are made in allowing this lease dealing, which most 
of us know is a way of getting around budgetary constraints, 
anybody who would consider a deal where you would keep an 
airplane for 20 years and then give it back to the manufacturer 
when it still has a number of years left on its life is clearly 
aware--is what is happening here.
    So I want to tell you, I will be looking very carefully at 
any changes that you try to make in rules and regulations. At 
least I will make sure that the Director of the Office of 
Management and Budget understands what kind of foolishness you 
are up to. So I am going to get into this, into what is going 
on now very significantly, because what you orchestrated, with 
the naming of a specific manufacturer, a $26 billion deal, 
without the slightest consultation with Congress, with this 
committee, the authorizing committee, is really quite unusual.
    I have been around 20 years. I have never seen anything 
quite like it, and I am not going to let the taxpayers of 
America be subjected to that kind of foolishness.
    I thank you, Mr. Chairman.
    Senator Akaka. Thank you, Senator McCain.
    Mr. Walker, based on your testimony, the current reform 
effort sounds quite a bit like the CIM, or corporate 
information management program launched by the previous Bush 
administration, which did not accomplish much. What does the 
Department need to do to ensure that this effort will be more 
successful?
    Mr. Walker. Well, first, Mr. Chairman, let me say that I 
think the current administration is very serious about this 
issue. They are very committed to trying to do the right thing. 
I also believe they are off to a strong start, but as I 
mentioned before, it is going to be a long march, and this is 
not the first time that an administration has tried to take on 
this challenge. I think part of it is going to be some things 
that you have already touched on, and other Members have 
touched on, and that is the idea that you need to have a plan, 
a comprehensive plan with key milestones, with appropriate 
accountability mechanisms for who is going to do what by when, 
and what are the desired outcomes.
    It is critically important that the appropriate performance 
measurement, reward systems, and accountability mechanisms 
cascade down the organization. In other words, I have no doubt 
that Secretary Rumsfeld and Dr. Zakheim are committed to this. 
I have no doubt about that. I have no doubt that the people who 
have direct responsibility for it or work with it on a day-to-
day basis are committed to it.
    But it is going to take a lot of other players, a lot of 
other organizations, and a lot of other layers and levels in 
order to make this plan become a reality. It is critically 
important that the accountability mechanisms go down the 
organization, throughout the organization, and that it be 
linked to institutional and individual performance measurement 
and reward systems.
    Our experience at DOD in the past has been that all too 
frequently the objective is to get the money and spend the 
money. Clearly, you have to have money to get certain things 
done, but it is also important to make sure that we are getting 
the right kind of results for those funds.
    I think the enterprise architecture is critically 
important. It basically represents a framework, a foundation 
for everything that has to be done in the information 
management areas. I think it is also going to be important that 
at the very top there is the ability to say yea or nay on 
systems, to be able to kill legacy systems if that is what they 
deem it appropriate, and to be able to control the dollars. If 
you cannot say yea or nay, and if you do not control the 
dollars, it will not work, and I think Dr. Zakheim recognizes 
that.
    Dr. Zakheim. Oh, I completely agree, Senator, in a way this 
almost goes to Senator McCain's point. Everything that we do is 
done at the top. When I put a budget together, it is not my 
budget, it is the President's budget, and it is the Secretary 
of Defense who recommends the budget. This is the same with 
financial management.
    We have an executive committee at the under secretary level 
to provide strategic direction and a steering committee at the 
assistant secretary level to resolve what will clearly be, on 
many occasions, disagreements among the components. This is all 
part of the financial management approach. It is to coordinate 
and ensure a uniform approach to financial management, just 
like we have a uniform approach to the budget. The steering 
committee at the assistant secretary level meets every other 
month. The executive committee at the under secretary level 
meets every quarter.
    The Secretary has assigned through me the Service 
Secretaries the responsibility to improve financial management, 
but it is done through me. They owe him an answer, they do not 
owe me an answer, very much like on the budget. It is not me 
they answer to, it is the Secretary of Defense, and it is 
terribly important that people understand this.
    This Secretary of Defense is leading from the top. He is in 
front of his troops, not behind them, and whether it is the 
budget or whether it is financial management, it is the same.
    Senator Akaka. Let me just follow up on what you just said. 
Are you telling me you do not have the authority to carry these 
actions out without the Secretary of Defense?
    Dr. Zakheim. To carry anything out I need the Secretary of 
Defense's backing. He signed off on the memorandum, that I 
believe we sent a copy to GAO as well, which essentially told 
the services that they have to report to him on financial 
management, and that he is putting me in charge of making it 
happen. He is the ultimate authority, of course. In fact if it 
were any other way, then there would really be a serious 
problem in terms of the very stovepiping that Comptroller 
General Walker just talked about.
    Precisely because the services are answerable to the 
Secretary, and precisely because the Secretary said that his 
Comptroller is putting this together and has the responsibility 
for making it happen, that is how you bind the Department 
together.
    Senator Akaka. Let me ask for questions from----
    Senator Inhofe. Well, let me--I just want to bust in on 
that one, because that could be resolved, Mr. Secretary, by 
just getting a delegation from him so that they are not 
answering to him but they are answering to you, could it not? 
Nothing would preclude that from happening. He does have his 
mind on other things right now.
    Dr. Zakheim. In practice, that is what he has done. There 
is a question of whom the Service Secretaries report to, and 
they do report to the Secretary of Defense. The way the memo 
was worded, very carefully, allowed for both the prerogatives 
they have and nevertheless made it very, very clear that they 
cannot go off on their own. Yes, the Secretary has other things 
on his mind. He is clearly leading the Department in the war 
effort, but that does not in any way mean that he is not 
concerned about financial management.
    He is devoting his time to it. He and I do discuss it, and 
the most important factor, the proof of the pudding, is that as 
soon as that memo came out the services knew that things had 
changed, and the degree of reporting, the degree of cooperation 
skyrocketed. There was a quantum jump, because everybody 
understood what the Secretary meant.
    Senator Inhofe. Well, I think what the chairman is getting 
at, and I would join him in this, is that maybe it is a quantum 
leap, but we may need two quantum leaps, and have that done 
through delegation. I just do not want that to be an 
impediment.
    Mr. Walker, I caught a phrase that you used, you said 
billions can be freed up if the reform can be effected. Can you 
quantify that?
    Mr. Walker. Well, the Secretary tried to quantify it. We 
have not directly in GAO. The Secretary quantified it at 
roughly 5 percent, which was $15 billion to $20 billion per 
annum. That is a lot of money.
    Senator Inhofe. It is a lot of money.
    Mr. Walker. We have not tried to independently verify that 
number. I do not know if Secretary Zakheim helped to come up 
with that number.
    Senator Inhofe. I think knowing that, it would put us in a 
better position--we all want to do the same thing here, and for 
those people out there who are anti-military--I am talking 
about people some in Congress, some in the Senate, and some, 
just people you talk to on the streets in our electorate, they 
always use the waste in purchasing and the waste in financial 
management as their excuse for not getting things done.
    Now, in purchasing, of course, we are talking about things 
like the $700 toilet seat and that type of thing, but then 
there are articles that have been written in other publications 
about the purchasing problem, too, I would like to be able to 
offset that in some way.
    Now, you were gone for 14 years. Were you under Reagan?
    Dr. Zakheim. Yes.
    Senator Inhofe. All right. Tell us what you have noticed in 
this field, the changes that have taken place, whether it has 
gotten worse or better, or what has happened in 14 years.
    Dr. Zakheim. I do not know that it got better, but that was 
bad enough. I think it was more the fact that I had been out 
and--well, when I was in the Department in the early eighties, 
nobody really paid much attention to financial management. Of 
course, there were people on the Hill, who did pay attention. 
Senator Grassley was already very, very concerned about that.
    Senator Inhofe. Well, no, let me just interrupt you at that 
point. I think I recall back when Vice President Cheney was 
Secretary he did make a lot of discussion on it, anyway. We 
heard that about purchasing, and how finally, I felt we were 
going to get our hands on this thing. That was a long time ago, 
and our hands are not on it yet.
    Dr. Zakheim. That is absolutely correct; when I was there, 
people did not pay much attention. Secretary Weinberger saw his 
number 1 mission as simply restoring what he felt was the 
decade of neglect in the seventies.
    Secretary Cheney clearly made a major effort, and part of 
the difficulty was that the effort and subsequent efforts, as I 
mentioned, Secretary Cohen's effort as well, tended to be what 
you might call hortatory. You told people to do things. You 
announced that you wanted them done. There was not any money 
behind it, and there was not a real change in organization 
behind it, both of which are critically important to making the 
Pentagon move.
    By the way, with your permission, Mr. Chairman, I want to 
submit the Secretary's memo that I referred to for the record, 
but this is a good example, Senator--if that is okay, Mr. 
Chairman.
    [The information referred to follows:]
      
    
      
    
    
      
    Dr. Zakheim. The memo says, the Secretaries of the Military 
Departments shall be accountable to me for the results of their 
business operations. The Under Secretary (Comptroller) is 
responsible for ensuring that we meet the objectives of the 
memorandum. What that means is that the Service Secretaries 
know that the Comptroller and his office are fully in control 
of getting this financial management operation straightened 
out, and they are accountable to the Secretary personally if 
there are difficulties.
    That kind of structure with the working groups and the 
change in my front office, buttressed by the funds that 
Congress gave us last year and that we are asking for this 
year, creates a completely different environment in that 
building. Fourteen years ago when I was there, people did not 
even think about this stuff. Ten years ago, 8 years ago, 5 
years ago, when I served on Secretary Cohen's task force, there 
was a lot of thought, a lot of concern, but frankly, not even a 
sense, entirely, of the magnitude of the problem. This is the 
first time that we have actually done that, so I think we have 
made a significant change, sir.
    Senator Inhofe. I think you have, and we are on the same 
side, all three of us, I think as far as the chairman and 
myself. They changed this jurisdiction so it is in this 
committee. It did not used to be, and when that happened, my 
first thought was, why in the world--we'll go ahead and start--
as I mentioned to you during confirmation, and I know you are 
getting a lot done--let me quote back to you two things you 
just said in your opening statement. You said, anyone who 
recognizes the problem is the problem himself. I am not sure I 
understand what you mean by that. Maybe I----
    Dr. Zakheim. I am not sure----
    Senator Inhofe. OK, but you also said, we are not talking 
about something that is going to take months, it is going to 
take years.
    Dr. Zakheim. Yes.
    Senator Inhofe. About how long is it going to take? Number 
1, is it achievable?
    Dr. Zakheim. Yes.
    Senator Inhofe. Number 2, how long?
    Dr. Zakheim. Yes, I believe it is absolutely achievable. 
Our estimate is 7 years. Why that long? Our people went around 
to industry. The size of our Department's activities far 
exceeds anything in industry by a long shot, but those 
companies that have modernized their financial management 
systems and are recognized as having done a good job--Gillette 
is a good example--have taken several years to do it. It would 
be misleading to us all if we said this was something we could 
do in a couple of years.
    On the other hand, by having milestones you can measure 
progress. By having metrics that say, ``here is where we were 
last year in a given situation, say, the ability to reconcile 
with the Treasury, or how much is now showing up on our 
statements,'' you can measure progress in a real way, and we 
have started to do that.
    Senator Inhofe. Well, and that is good, and I plan to be 
here for about that time, 7 more years----[Laughter.]
    --so I am looking forward to it.
    Thank you very much.
    Senator Akaka. Thank you very much, Senator.
    Mr. Walker. Mr. Chairman, can I come back on that issue 
real quickly to provide some context that I think would be 
possibly helpful?
    Over the years, Senator Inhofe, I think what GAO has noted 
is that if you talk about effectiveness, in other words, how 
effective is DOD at accomplishing its mission, which is 
fighting and winning armed conflicts, they earn an A. It is 
clearly unparalleled in the world. At the same point in time 
when you deal with economy, efficiency, and accountability, 
they earn a D, and some would debate whether they even deserve 
a D. This is part of the debate you talked about before and 
what many people were concerned about that.
    We believe that a lot of the reason for these problems is 
because, as Secretary Zakheim said, this was not a priority for 
many years. I mean, nobody really cared that much about it. It 
did not make any difference whether they focused attention on 
this as to how much money they got from year to year, they did 
not have their performance measurement and reward systems 
throughout the organization focused on accomplishing real and 
measurable results to reward people who did a good job and to 
hold people accountable who did not do a good job.
    In addition, in other areas, not just in financial 
management, but also in systems acquisition, whether it be 
weapons systems or information technology systems, they were 
not following commercial best practices, and this subcommittee, 
held a hearing on the 27th of last month. I know I have 
appeared before the full committee talking about the work that 
GAO has done to compare commercial best practices with DOD's 
practices to show the differences. Those differences result in 
billions of dollars of waste, significant delays, and 
compromised performed standards, so a key element of this is to 
close the gap between commercial best practices and how DOD 
does business.
    Senator Inhofe. I think we have the opportunity, now, with 
Mr. Zakheim, his background and of course Secretary Rumsfeld, 
so I think the time is right to do this, and I appreciate those 
comments.
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you very much, Senator Inhofe. May I 
ask the chairman of the full committee, Senator Levin, for any 
remarks or questions.
    Chairman Levin. Mr. Chairman, thank you, and thank you for 
holding a really important hearing. We want to thank our 
witnesses for being here today to address these problems. They 
are both experts and can make a real contribution, and have 
made real contributions toward addressing some of these issues.
    Just a few examples of what these managerial shortcomings 
lead to. Under the current system, it can take more than 100 
paper transactions in the contracting and disbursing systems 
for a single contract payment to be made.
    Because of the shortcomings, the working capital funds in 
the Department operate on the basis of arbitrary prices that 
lead to perpetual problems in making the books balance.
    Because of the current shortcomings, which have been with 
us a long time, the Department cannot reliably account for the 
cost of performing work in-house for the purposes of OMB 
circular A-76.
    Because of the shortcomings which have been identified, DOD 
managers often have to set up separate tracking systems of 
their own, with varying degrees of success, to manage funds to 
ensure that they have adequate financial reserves, and to avoid 
Antideficiency Act violations. In short, the financial 
management problems of the Department are so far-reaching they 
prevent the Department from managing its business in a 
business-like way. The new administration has ambitious plans 
to address this problem. The GAO says that the services are at 
least initially taking the right approach, I understand, but it 
is not a problem that is going to be addressed easily. It is 
going to take a long-term high-level commitment, and the 
attention of all of us in the Department, the GAO, Congress if 
this is going to happen. There have been a lot of false starts 
in this area. I hope that when we review this issue a year from 
now, when the first step is supposed to have been completed, we 
will be satisfied that we are truly on the road.
    I just have a few questions of Dr. Zakheim and Mr. Walker. 
First, Dr. Zakheim, your time lines call for you to develop an 
architecture, future architecture over the next year. The time 
lines then call for validating the architecture in 
representative business areas and acquiring software solutions 
in the year 2002. Implementation throughout the Department 
would then be from 2004 through 2007.
    My first question is this. Is it your intention that the 
enterprise architecture and the transition plan that you are 
going to be developing by early next year would be sufficiently 
detailed to serve as a basis for specific business systems 
acquisition decisions, or are you going to come to us with a 
more general top-level document which puts off the task of 
identifying specific actions that must be taken to implement 
your proposed enterprise architecture?
    Dr. Zakheim. It is the former, Senator. We definitely 
intend for the enterprise architecture effort to be very, very 
specific. I might add, in reference to your earlier concern 
about top-level management, it is not only the Secretary who is 
working on this and concerned about this, but Pete Aldridge and 
I. Pete Aldridge, of course, is the Under Secretary for 
Acquisition and, so much of this issue does relate to our 
acquisition process. We are working very closely together to 
ensure the crosswalk between the financial management systems 
side and the acquisition management side. Indeed, the new 
Business Practices Implementation Board that is being set up is 
one that is jointly sponsored by myself and Under Secretary 
Aldridge.
    So the specific answer to your question is yes, this is 
going to be detailed. The fleshed-out answer is, not only will 
it be detailed, but it is being worked in conjunction with the 
acquisition side of DOD.
    Chairman Levin. OK, now, is the GAO involved in this 
process in an ongoing way?
    Dr. Zakheim. I would say yes, and I will turn it over to 
Mr. Walker.
    Mr. Walker. We are working in a constructive fashion with 
DOD. I am not sure we have seen this particular time frame 
before. It is a good start to have specific milestones and have 
the appropriate time frames. I think it is somewhat aggressive, 
but hopefully doable, and part of the key is going to end up 
being the participation of people below Dr. Zakheim's level, 
who are key players here. For example, to what extent are their 
performance measurement and reward systems and related 
accountability mechanisms linked in with this, and to what 
extent do they have adequate time and resources to be able to 
make sure that they can get these done, and we have not done 
that evaluation yet, Senator Levin.
    Chairman Levin. After you have done that evaluation, would 
you let this subcommittee know the outcome of that evaluation?
    Mr. Walker. We will, Senator.
    Chairman Levin. How long will that take, roughly? Is it a 
matter of a couple of weeks, a month?
    Mr. Walker. Oh, clearly within a couple of months. We will 
try to do it as quickly as we can.
    Dr. Zakheim. Senator Levin, let me just mention that the 
Defense Business Practices Board includes Mr. Walker as an ex 
officio member. Part of the agenda for the March 15--that is to 
say, next week's meeting is to give a complete, detailed 
overview of our plans, so that might be a good way for him and 
his team to kick off the review you have just asked for.
    Chairman Levin. Mr. Walker, I understand that the 
Department is currently spending about $20 billion a year 
upgrading and improving its business systems and information 
technology. That's a lot of money that is going out the door 
right now, while we are working on this longer-range plan. What 
steps should the Department be taking in the period in which 
they are developing the comprehensive plan to make sure that 
huge amount of money is not wasted?
    Mr. Walker. One of the things that has to happen, in 
addition to determining what are the foundations that already 
exist that have to be part of the comprehensive solution, there 
clearly has to be a process in place to limit what type of 
additional systems development is being done in the absence of 
an enterprise-wide architecture. In the interim, other 
information technology efforts need to be limited to items that 
are absolutely critical, possibly from a national security 
standpoint or whatever else.
    Because historically what has ended up happening is, 
everybody has done their own thing. They have been given the 
money to go about and try to achieve whatever solutions they 
deem appropriate, and as Dr. Zakheim has pointed out, and we 
agree, if you are going to solve this problem, you have to deal 
with it comprehensively. You are going to end up having to have 
more control and veto authority at the top, cross-organization, 
and you are going to have to say no to people a lot more than 
people have been willing to say no in the past.
    Chairman Levin. How can you monitor that? Is there a way 
for you to monitor?
    Mr. Walker. Sure. There is a way for us to be able to 
obtain an understanding as to how Dr. Zakheim plans to go about 
trying to do that in conjunction with other responsible 
parties, and to be able to periodically let you know how we 
think things are going in that regard.
    Chairman Levin. So there are really two issues. One is the 
enterprise plan that is going to be produced in a year, as to 
how specific it will be in terms of its road map and the 
actions that would have to be taken to implement it. The GAO 
would be involved in first taking a look at your time line to 
achieve that plan, and then whether you have achieved that a 
year from now, roughly. In the interim the Department is going 
to be focusing also on trying to avoid spending money on 
systems which will either complicate the ultimate solution or 
be wasteful and useless in the ultimate solution.
    Then for all of that, we are going to need this 
subcommittee's involvement. I congratulate Chairman Akaka on 
it. This is not your most glamorous subject until you read 
about some waste item, at which point everyone's attention is 
focused. People begin questioning how can we buy that kind of 
business equipment, when a year from now it is totally useless, 
or it interferes with what some other part of the Department is 
doing, or it cannot speak to the other part of the Department?
    When that comes out in some newspaper article, everyone 
says, my God, and then it becomes the subject of public 
attention. What we are doing now is pretty dry stuff, but it is 
absolutely essential that we keep focused on this. I know that 
under Chairman Akaka's leadership this subcommittee will do it, 
and with the GAO there looking over your shoulder, I think we 
at least have a chance to do what we have never been able to do 
in the past.
    Our intentions have been good. Everyone's intentions have 
been good. Everyone knows what the problem is, I think. The 
solutions are extremely time-consuming and complex, it is going 
to take many years to achieve them. However, I think if both 
you and your agencies really put full emphasis on this--as I 
know this subcommittee and hopefully the whole Congress will--
it is maybe going to get done this time.
    Dr. Zakheim. Senator, let me first say that I appreciate 
the support. We have already started to do what you are talking 
about. As you may know, there are a number of what are called 
enterprise resource programs that are being deployed throughout 
the Department, or are planned to be deployed. I sent a memo 
out saying we would not fund any programs until we were 
convinced that they would all fit in with one another, so you 
would not have that kind of mess that we have up there on the 
chart. I have already had squawks of protest, but again the 
Secretary is backing me up in this.
    Second, I would just say that GAO is not looking over my 
shoulder. They are walking beside me. It is a very, very big 
difference.
    Chairman Levin. Thank you.
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you very much, Senator Levin.
    Dr. Zakheim, there was legislation initiated by this 
committee, after which the Department has prepared a series of 
financial management improvement plans which were required by 
that legislation. I understand that these plans have not been 
as comprehensive as you or the GAO would like, but they contain 
a number of important steps to improve the Department's 
existing system. Are you proceeding with these steps, or have 
you put them on hold while you undertake your planning process?
    Dr. Zakheim. Most of those steps tend to be consistent with 
what we are trying to do, so that is not really an issue. I 
think the real issue is what you alluded to at the beginning of 
your question, which is that by and large these improvement 
plans did not go far enough in terms of specificity, in terms 
of the kinds of things that both you and Senator Levin have 
just been talking about.
    I would much rather put out a plan that has that kind of 
timetable and then have the GAO tell me, ``you need to make 
this or that kind of change to make it work,'' rather than not 
put out timetables at all, not put out metrics at all.
    The plans are good as far as they go. I do not think they 
have gone far enough. The one we just sent out really reflected 
things that were being done before I came on board. The next 
one would I would be fully responsible for, obviously. That 
does not worry me, sir.
    Senator Akaka. Mr. Walker, do you think that the Department 
should put all improvements on hold while it goes through the 
planning process? If not, how should the Department distinguish 
between needed improvements and investments that will take us 
down the wrong path and will have to be dismantled at a future 
date?
    Mr. Walker. I think there has to be some mechanism to limit 
the type of activities that are occurring in the various silos 
pending completion of this enterprise architecture, and pending 
completion of the comprehensive plan.
    Clearly, there would be circumstances in which there are 
clear and compelling national security or other reasons why 
there might need to be exceptions. As a general rule I think 
you want to limit the amount of activities that are taking 
place during this period of time, pending the completion of the 
enterprise architecture. In the end, a lot of these systems are 
going to have to be stopped because we cannot have a situation 
where you have to enter a single transaction tens of times. We 
will never be able to accomplish the objectives that we are 
trying to accomplish if that is the case.
    Senator Akaka. Dr. Zakheim, one of the first steps that you 
are taking is the prepared comprehensive, as-is architecture 
showing the Department's existing business systems and their 
interconnections. I believe that the Department undertook a 
similar task to prepare for the anticipated Year 2000 problem. 
Have you taken advantage of that earlier work, whatever it is, 
why or why not?
    Dr. Zakheim. To my knowledge, as this was being put 
together we first drew on the Y2K experience. Actually,we drew 
on it in two ways. One was getting whatever detail we could. 
Second, though, it was the model that if you really wanted to 
force the Department to do something, you had enough of an 
incentive, and you had the high-level push, as Secretary Cohen 
and Secretary Hamre had on Y2K, then you could get the 
Department to do it.
    Now, obviously this is a different kind of situation, 
because you are not bumping up against a specific day, but 
nevertheless the model is there, and if we could do it with 
Y2K, and that was not an easy effort, then we could do it with 
this. Yes, we have drawn on the Y2K experience and data.
    Senator Akaka. Dr. Zakheim, is there any additional 
authority that you need, either from the Secretary or from 
Congress, to get this job done? If so, can you explain what 
that authority would be?
    Dr. Zakheim. At this stage, I believe we are still talking 
with our general counsel as to what other authorities might be 
needed. I think Congress has been extremely supportive, so that 
I am not yet ready to say help me out with this or that some 
more.
    There are clearly some concerns I do have. I mentioned one 
of them, which was the inability to simply by fiat say that 
everybody who works in DFAS should be a CPA or equivalent but 
we are working that problem as well.
    If I can take this as an offer to help, I very much 
appreciate it, and will certainly remain in close touch on 
this.
    Senator Akaka. Dr. Zakheim, while this hearing is focused 
more on the management support side of this subcommittee's 
responsibilities, I have a question on a readiness issue. I 
understand that based on past training levels OSD decided to 
reduce the amount the Army requested to fully fund their 
training strategy for 2003. However, in recent months General 
Shinseki has directed that Army units increase their level of 
training to better support the war effort.
    I understand that you have personally made a commitment to 
the Army leadership that if the Army shows that it is fully 
executing its planned training strategy, OSD will restore the 
training funds that were cut. The first question is, did you 
make this commitment? If so, and the funds are restored, where 
will the funds come from? If not, is it your position that the 
Army will be fully and adequately trained at the level 
requested in the budget?
    Dr. Zakheim. This is a multiple-part question. If you do 
not mind, I would like to take the last one first, because that 
is the one that is many ways the most fundamental. We believe 
we have funded the training levels, tank miles, for example, to 
the highest Army level that we have seen to this point.
    General Shinseki has set an even higher goal. Obviously, 
and this again goes to Senator McCain's point, I am not the one 
that makes the commitment to the Army. It is the Secretary of 
Defense that makes those decisions. However, if, indeed, the 
Army can exceed what it has never exceeded before, and appears 
able to execute that level, then I told them of course I was 
prepared to go and recommend to the Secretary that we make an 
adjustment.
    Then there would be some kind of reprogramming action in 
order to account for that. As with all reprogramming actions, 
first we have to find a source, and second it has to be a 
source that is acceptable to Congress. We would go through that 
process as we do all other reprogramming processes. I would 
love for the Army to train even beyond where they have up to 
now. We are not entirely convinced it is executable.
    The fact that the Army recognized that itself demonstrates 
that they know it is a reach. If they can pull it off, then I 
am committed to going to the Secretary of Defense and making 
that recommendation, and then we will work the process with 
Congress as we always do.
    Senator Akaka. Thank you.
    Dr. Zakheim, can you explain how your plans to consolidate 
the program and budget review process will work? Specifically, 
do you have the automated systems in place to allow program-
level decisions to flow down to the budget, and vice versa? 
Even if the information systems make such a consolidation 
technically feasible, I am concerned that efforts to make the 
process more efficient might result in decreased programmatic 
oversight. Are there inherent separate benefits in the program 
and budget review functions? If so, will these be clearly 
maintained and protected as you consolidate this process?
    Dr. Zakheim. The answer is yes. We believe that the systems 
themselves, in terms of how one structures the FYDP numbers, 
the future year defense plans numbers on the one hand, and the 
control information system numbers on the other, those are 
reconcilable. It was possible to pull that off this past year. 
Since both of those offices are within my overall organization, 
we have our people talking to one another to ensure 
compatibility, because you are absolutely right, the numbers 
have to be compatible.
    Now, in terms of efficiency, the concern that drove us to 
combine the processes was the fact that in the past what you 
had were many of the issues constantly being revisited. It was 
a tremendous drain on personnel and on time. There is an 
inherent question of looking at programs. There is an inherent 
question of looking at budget execution. Those are two quite 
separable efforts, but they are linked, and what you do not 
want to happen, and what was happening because you had a 
program review that preceded the budget review, was that the 
budget review went beyond just looking at issues of execution. 
We do not want that to happen.
    There is another element to this, and that is, inserting 
the planning part of it, which is supposed to be the driver. 
The defense planning guidance should drive the process much 
more effectively into the system. Having been responsible for 
that guidance when I was in the Reagan administration, I can 
tell you how frequently the guidance was ignored.
    We have a Secretary of Defense who really wants his 
guidance followed, and so we are still structuring this process 
so that the planning part really affects the program on the 
budget side, that issues are not revisited, and of course that 
the systems that go to program-level control and oversight are 
compatible. Yes, the oversight is there, and there is no 
intention to minimize that.
    Senator Akaka. Mr. Walker, Dr. Zakheim just said that this 
process should be consolidated, and my question to you, do you 
believe that consolidation is a good idea?
    Mr. Walker. We think it is important that these be 
integrated, and we think, in fact, part of the problem that has 
occurred in the past is, when you are looking at the program 
cycle differently than the budget cycle, that ends up resulting 
in some significant differences. This is one of the 
contributors to the big delta that exists between what the 
services want in the way of weapons systems and what 
realistically can be funded.
    Mr. Chairman, if I can add a couple of things quickly for 
the record, one of the things I mentioned before is, what type 
of systems does it make sense to consider in the interim. I 
mentioned critical systems that deal with national security. 
The other examples that we have given in the past would be 
systems modifications that stay in business in nature.
    Last, obviously, to the extent that there is a system that 
is substantially complete, where it has been coordinated in 
advance and it is about to be deployed, where you have 
basically got all the sunk costs and it is trying to meet a 
need, then that might make sense, but to start new things, or 
to continue things that do not meet one of these criteria 
really would not make sense in the interim.
    The other thing that I would like to mention is, one of the 
things that I have referred to is our constructive engagement 
approach with DOD. In Dr. Zakheim's statement, he talks about 
partnerships. Clearly, we are trying to work together in a 
constructive fashion on good government issues, issues that are 
nonpartisan, nonideological, making sure the taxpayers are 
getting a decent return on their investment, making sure there 
is appropriate accountability for the funds they have been 
given. We are trying to help share best practices, information, 
other tools and methodologies, and help communicate about the 
relative priorities of GAO recommendations to maximize the 
chance they will be implemented with positive outcomes.
    At the same time, we obviously understand that Dr. Zakheim 
reports to the Secretary, who reports to the President, and we 
report to Congress, and therefore we have to maintain our 
independence. We think we can do that. We think that we can 
have a constructive working relationship with no surprises, yet 
at the same time be able to say, there are going to be 
occasions where we disagree, and there are going to be 
occasions where we believe progress is being made, and we will 
note that. There will be occasions when we will identify 
weaknesses and problems and a need for appropriate 
accountability, and we will continue to report that.
    I think it is important to note that for the record, 
because we need to maintain our independence, and obviously 
myself serving as an ex officio member of the new Defense 
Business Practices Implementation Board these is unprecedented. 
I will have to have other people involved, but that is really a 
mechanism to prevent any surprises. It is really a mechanism to 
make sure that there is active communication.
    Obviously, neither I nor anybody else at GAO can be 
involved in making management decisions. That would be a 
fundamental problem with our independence, and we will not be 
involved in those type of activities.
    Thank you, Mr. Chairman.
    Dr. Zakheim. We understand that clearly, Mr. Chairman.
    Senator Akaka. May I defer to Senator Ben Nelson.
    Senator Ben Nelson. Thank you, Mr. Chairman, and thank you, 
gentlemen, for being here today. Obviously, the importance of 
being economical and efficient in the delivery of services is a 
top priority of Government, and I commend your interest in 
being able to assure us and assure the American people that it 
is the same goal of the Department of Defense and the GAO, and 
by working together perhaps we will be able to do that.
    Obviously, as well, if we were able to achieve a 
fundamental savings of approximately $18 billion annually, that 
would be a major commitment. It is almost twice the amount of 
the contingency fund, half the 7th Fleet--I mean, these dollars 
do have relativity. We can relate them back to specific things.
    One of the questions that occurs to me, and I understand 
that there has been some discussion, perhaps, about an 
independent audit, is, we have not yet gotten to where we have 
been able to have an independent audit. Do you truly believe 
that perhaps by working together we can get the systems in 
place so that an evaluation can be made of the systems? The 
accounting systems to be able to accurately account for the 
expenditure of money, also to be able to identify, for example, 
underspending in the area of shipbuilding, so that at more than 
a glance one can look at the financials and see not only what 
is happening or has happened, but what has not happened, and 
where the underages are.
    I hesitate to talk about audits today. Obviously, recently 
the failure of one audit would lead one to believe that maybe 
they are overrated. I do not happen to believe that. I think in 
the absence of fraud, the absence of tomfoolery, audits can be 
instructive and reflective of what is going on and what is not 
going on, so that is why I ask. Do you really think that we are 
going to get there? Would you hazard a guess, if you think we 
are going to get there, as to some sort of a time line to help 
me understand what your feelings are about that?
    This is to both of you.
    Mr. Walker. Senator, a couple of things, and then Dr. 
Zakheim may want to add to my comments.
    I am a CPA, and I am the audit partner on the largest, most 
complex, most important entity on the face of the earth. It is 
called the U.S. Government. While the GAO does not conduct the 
financial statement audit for the Department of Defense, we do 
do the audit of the consolidated financial statements, and 
clearly the largest single obstacle to us being able to express 
an opinion on the Government's consolidated financial 
statements is DOD, for a variety of different reasons.
    They have a disclaimer of opinion, they have major control 
weaknesses, they have significant compliance issues, and they 
do not have systems and controls in place to be able to receive 
timely, accurate, useful information to make management 
decisions on a day-to-day basis. All of those have to be in 
place to have success in financial management, as agreed to by 
myself as Chairman of the Joint Financial Management 
Improvement Program, the Secretary of the Treasury, the 
Director of OMB, and the Director of OPM.
    I believe that can be done before the end of my term--which 
is good news and bad news.
    Senator Ben Nelson. Can you tell me when that is?
    Mr. Walker. About 11\1/2\ years from now. [Laughter.]
    I have a 15-year term, so by the end of my term, I expect 
that we will be in a position that DOD will be where it needs 
to be, and I think Secretary Rumsfeld and Dr. Zakheim have 
noted that they estimate that it is going to take 7 or more 
years to get to where we need to be. I think it is going to 
take every bit of that.
    Dr. Zakheim. Yes, it certainly will. We actually have 
achieved a couple of clean audits. The two organizations that 
are under me, DFAS and DCAA got clean audits.
    Is it doable? Yes, it is. There are some major issues that 
we are trying to address. For example, valuation of property. 
There has not been supporting documentation. That creates a 
major problem. You also have to get historical documentation, 
and that makes it even tougher. That is part of what we are 
trying to work with, the other parts of the Department as well 
as within the financial management architecture that we hope to 
field will indeed give us exactly that kind of information.
    As long as you have feeder systems that are based on 
activities that are nonfinancial, and you then have to 
translate, and you have to value, and you have not adopted 
generally accepted accounting practices for a lot of those 
items, then your financial statement is just simply going to be 
insufficient. We have added, I think it is about $69 billion, 
in this year's statements. That is not enough, and as we modify 
and refine our ability to document, to value, then those 
numbers will go up.
    But can it be done? Yes, I believe it can, and hopefully 
well before Mr. Walker has to leave the Government.
    Senator Ben Nelson. Well, I hope so, too. Now, which is the 
bigger problem, the balance sheet side, or what would be the 
equivalent of an operating statement, the expenditure revenue 
side?
    Dr. Zakheim. I would argue the latter. Ultimately, getting 
a clean audit, you can spend a lot of money with clever 
accountants and get yourself a clean audit. We have discovered 
that.
    Senator Ben Nelson. We would like to spend less with less 
clever----
    Dr. Zakheim. That is right, and in fact thanks to 
congressional action we did not spend as much money in trying 
to get clean audits this year. That is not the best way to use 
your money.
    We are not looking for Band-aids. It is the fundamental 
issue, the business operations issue, that is really the target 
of what we are trying to do. Once we have cleaned up our 
business operations and we can monitor those and track those, 
and report those, and audit those, then we are going to have 
the financial statements we really need, and they are going to 
be meaningful. We have to be able to look under and beyond and 
behind the financial statement. That is what we are getting at 
first.
    Senator Ben Nelson. Now, in establishing a balance sheet, 
where you are not worried about depreciation for tax purposes, 
what does the balance sheet look like for assets in terms of, 
not just numbers, but age, and deterioration? Is that what you 
would do?
    Dr. Zakheim. That is part of what we are doing. One of the 
things that we have done already is, that we have decided that 
we will use composite factors to value major end items. That 
will give us a sense of depreciation. The Department resisted 
that for 10 years. I still do not understand why. I guess I 
have been in business too long. It is certainly very difficult, 
quite frankly, to value every single tail number of every 
single airplane you have, but you can do a composite valuation 
that will give you some sense of what the whole. You can 
indicate what a particular group of airplanes, F-16s, for 
example, are worth, and you factor in the age, and then you 
have the ability not just to depreciate in the tax sense, 
because that is not the issue. The issue is replacement.
    Senator Ben Nelson. Yes, of course.
    Dr. Zakheim. Modernization. So it gives you a real handle 
on that. That is why it is so critical to the acquisition side 
of the house, and that is why I am working so closely with Pete 
Aldridge on this.
    Mr. Walker. Senator, if I can add in there, I mean, the 
Financial Accounting Standards Advisory Board, which is the 
authoritative standard-setting body for Federal accounting 
principles----
    Senator Ben Nelson. FASB.
    Mr. Walker.--FASAB.
    Senator Ben Nelson. FASAB.
    Mr. Walker. FASB is the private sector, and FASAB is the 
Federal Government. They are confusing. There are too many 
acronyms in Government.
    The fact of the matter is, is that they now have to 
consider what the appropriate accounting and reporting 
treatment is for national defense mission assets and whether or 
not the entire value should be reported on the balance sheet 
and then depreciated, not for tax purposes, but for proper cost 
accounting and other purposes, and also whether and to what 
extent other types of information should be disclosed that 
might be meaningful with regard to quantities, condition, 
things of that nature.
    These issues are before the FASAB at the present point in 
time. It is critically important that we not only reach an 
agreement, which has happened before, but that the agreement be 
implemented, which has not been the case in the past.
    The other thing is, I think both the balance sheet and the 
operating statement are probably more of a fundamental 
challenge than this asset issue on the operating statement 
side.
    I think one last thing I would like to mention that Dr. 
Zakheim mentioned, and that is, there are a lot of Federal 
Departments and agencies that over the years spent thousands or 
tens of thousands of hours and millions of dollars to try to 
achieve a clean opinion on their financial statements, but 
that, I would argue, was a Pyrrhic victory, because in many 
cases what happened was they recreated the books, 4 to 6 months 
after the end of the year, to where the auditors could say, 
okay, these are the right numbers, but they did not have 
effective controls, they were not in compliance with the major 
applicable laws and regulations, they did not have timely, 
accurate, useful information to make informed decisions day-to-
day, and I will argue that is grossly misleading and 
inappropriate.
    So therefore the Secretary of the Treasury, the Director of 
OMB, Director of OPM, and myself have agreed on a different 
measure of success. On that basis, rather than 18 departments 
and agencies being deemed successful, you are down to about 
three, but that is more meaningful, and we ought to be looking 
for substance, not form, and putting a clean audit opinion, 
which is important, in the proper context.
    Senator Ben Nelson. We are interested in an audit, a 
performance audit in terms of what the process and the 
procedures and controls are, because I think that would be 
helpful, certainly on the overall--obviously, we are anxious to 
know the aging of the fleets and the aging of the conditions 
for obvious purposes for transformation and/or for 
retrofitting, things of that sort. It certainly helps us when 
we look at replacement, and when you are looking at the biggest 
piece of the budget in trying to evaluate it, knowing that 
there are procedures and controls in place would I think be 
some source of comfort.
    Mr. Walker. Senator, I think it is important to note here 
that the Government is not always a leader, but one of the 
areas where it does lead is the area of internal controls. In 
the Federal Government we actually express an opinion--GAO and 
all its financial statements and other auditors--on the 
effectiveness of internal controls. That is critically 
important in today's rapidly evolving technological age, if you 
will, and so as a result, frankly I think that is an area where 
we are already doing something that the private sector is not 
doing, but ultimately should.
    Senator Ben Nelson. Well, it is encouraging to know that 
you are not out there after an audit that the best money can 
buy, so I appreciate that. [Laughter.]
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you.
    Dr. Zakheim, please explain the criteria that were used to 
determine whether funds for programs such as munitions, 
intelligence, or force protection were requested as part of the 
regular service budget, as part of the defense emergency 
response fund for fiscal year 2003, or will be requested in a 
supplemental.
    The question is, why does the budget contain additional 
funding for the defense emergency response fund in the 
outyears?
    Dr. Zakheim. The 2003 budget was pretty much keyed into the 
computers as we were refining the $19.4 billion that was 
directly related to the war. If you add $700 million from the 
nuclear posture review, you are up at about $20.1 billion.
    Now, of that amount, had we had the time to put 
approximately $10.1 billion directly into the remaining 
accounts, as opposed to putting that money into the operations 
and maintenance line, we would have done so. In fact, within 
that $10.1 billion are elements that relate to research and 
development, elements that relate to procurement, and so on. It 
was simply a matter of meeting the time lines, and we had to 
get a budget out the door.
    The remaining $10 billion is the pure wartime contingency. 
It is a pure operations and maintenance deployment-driven 
number. It presupposed, as well, a level of activity that is 
considerably less than a full year's continuation of the level 
of effort in Afghanistan prior, say, to this past week, where 
the level of effort has really jumped up again. So it was a 
very conservative estimate that we needed for planning purposes 
and, as the Secretary of Defense said, to signal to everybody 
that we were committed to carry on.
    So the second part goes into the emergency response fund, 
on the O&M line, because that is where it would probably go. 
The first part, had we had a little more time, would have been, 
in fact, allocated to the different appropriation accounts, 
sir.
    Senator Akaka. Dr. Zakheim, a chart you used last month to 
explain the fiscal year 2003 budget request said the budget, 
and I am quoting, ``defers military construction projects to 
reflect delay in an additional round of base closures in 
2005.''
    Was the likelihood that any particular base might be the 
subject of a future base closure action used as a criterion in 
deciding what bases would receive military construction funding 
for new facilities, or sustainment funding for current 
facilities, in assembling the 2003 budget request? Will such 
criteria be used by this administration in the preparation of 
fiscal year 2004 and 2005 budget requests?
    Dr. Zakheim. Well, Senator, it is my understanding that 
Congress has been very, very specific about not taking 
prospective decisions on base reduction, base closures and 
consolidation into account as we prepare military construction 
budgets, and, in fact, we did not. There was no connection at 
all. We did not say, ``oh, this or that facility may or may not 
be the subject of a BRAC, and therefore, we will do this or 
that with the budget.'' We are not allowed to do that, we are 
not supposed to do that and, indeed, we did not do that.
    The chart was a little bit unfortunate. It is not the first 
time a chart has not been properly labeled. The reasons for the 
$400 million saving, as it were, that you refer to had nothing 
to do with BRAC. It had to do with program execution in some 
cases. It had to do with the acceleration of funding by 
Congress in fiscal year 2002, and therefore what had been 
anticipated spending in 2003 had already been spent. There were 
a variety of factors that went into that, none of which related 
to BRAC, and if you want I can give you that for the record, 
sir.
    Senator Akaka. Thank you.
    [The information referred to follows:]

    We deleted/deferred projects during the budget review because they 
were:

                        [In millions of dollars]
Accelerated by Congress in fiscal year 2002................       21.9
No Longer Required.........................................       67.9
Not Executable.............................................       83.5
Funded with savings from prior year funds..................       41.5
Requested prior to need....................................       33.1
Repriced based on favorable foreign currency and rates and       161.0
 Extension Congressional Action............................


    While some projects were deferred or deleted, others were added 
during the budget review. As a result, the funding level in the budget 
request was approximately the same level of funding as the initial 
submission.

    Senator Akaka. I have a last question, but may I ask, 
Senator Nelson, if you have any further----
    Senator Ben Nelson. No. I will defer to the chairman.
    Senator Akaka. Thank you.
    Mr. Walker, I asked Dr. Zakheim earlier if he needed any 
additional authority to address the Department's financial 
management problems. If you have any recommendations for 
further legislation that may be needed in this area, we would 
welcome those recommendations as well, so we are looking 
forward to your expertise on this. Do you have any comment?
    Mr. Walker. I would be happy to consider that, Mr. 
Chairman, and provide anything for the record.
    [The information referred to follows:]

    At this time, we have no legislative proposals regarding the 
Department's financial management problems and its efforts to develop 
and implement a financial management enterprise architecture. We will 
continue to work constructively with the Department and Congress on 
this important effort. We will advise Congress if we deem that 
legislative authorities are needed.

    Mr. Walker. Let me just make one comment that is a generic 
issue. It does not just relate to the Department of Defense, 
but I would like to just put this idea on the table on a 
preliminary basis to start thinking about.
    There are a number of agencies in the government that I 
would refer to as challenged agencies. There are various other 
words that could be used, but I think challenged agencies is a 
decent way to do it. These tend to be the agencies that have 
more than their fair share of high-risk items on GAO's list. 
They have had long-standing problems that various 
administrations have tried to achieve with varying degrees of 
success, or lack of success over the years, and that it is 
going to take sustained, top-level attention over a number of 
years to be able to effectively solve these problems.
    I think one of the things that we in Government are going 
to have to start thinking about is whether or not selected 
major Departments and agencies need to have some type of a 
chief operating officer who has a term appointment for a stated 
period of time, e.g., 5 years, who has a contract to deliver 
stated results within that period of time, whose contract might 
possibly be renewable, maybe one time, for positive results, 
and who could focus on the longer-term issues and the cross-
cutting issues that inherently have to be focused on 
irrespective of who is President of the United States, 
irrespective of who is Secretary of whatever Department and 
agency, because one of the major problems that we have is 
turnover of key executive. I am absolutely convinced that 
Secretary Rumsfeld, Secretary Aldridge, Secretary Zakheim are 
committed to this and his team, absolutely convinced of that.
    At the same time, we know what the average tenure is in key 
slots, and we know that to really effectuate a lot of these 
changes requires cultural transformation, and business process 
reengineering that takes 7-plus years, and you need to have 
that sustained, committed leadership over a period of time.
    This raises a number of issues, I understand that, and it 
is an issue that frankly rises way above DOD, but I think DOD 
is an example of the challenges and complexity, and in no way, 
shape, or form do I want this to take away from the efforts 
that this administration is doing, or Dr. Zakheim. This is 
really a generic issue that I think we are going to have to 
start dealing with. Other countries are ahead of us on this. We 
can learn from their experiences.
    Senator Ben Nelson. Thank you, Mr. Chairman.
    In that regard, Mr. Walker, is it possible to devise 
periodic reports that are not so inclusive of information you 
cannot read them or follow them, but that could give this 
committee, and obviously the Appropriations Committee relating 
to DOD's appropriations, the kind of information that we could 
understand to look at the condition of the military?
    Right now, from my perspective, you get a budget, and you 
can sort through it and what you do not see you can read about 
in Time Magazine, or one of the other critical evaluations of 
the budget. Apart from the budget, I do not see the kind of 
information--unless we ask for it in one of these hearings, I 
do not see anything that is periodic, that would give me the 
opportunity to review to see how the conditions are 
progressing. Without overburdening the agency, it would seem to 
me that it would be appropriate to be able to get that kind of 
report.
    Now, maybe that is consistent with having an officer within 
the agency that has continuity that could perhaps bring that 
together. I do not want to create more bureaucracy, but it is 
helpful to have that kind of information that gives us the 
basic facts that we need to make determinations.
    Mr. Walker. I would suggest, Senator, that is an issue that 
probably needs to be focused on its own merits. I mean, one of 
the things, clearly, that I think every department or agency 
needs to do is to define what are its key performance 
indicators, and presumably under GPRA, the Government 
Performance and Results Act, many agencies are not only 
publishing their financial statements, but agencies are also 
publishing annual performance and accountability reports. Those 
performance and accountability reports incorporate the 
financial statements, as well as the audit opinion and things 
of that nature, but they also incorporate other key performance 
data.
    I will be happy to provide to you and the chairman a copy 
of our latest performance and accountability report that was 
just issued last week, and it really talks about how we measure 
success, and what are the key factors that we think you need to 
know about to determine whether or not we are doing our job, 
and whether or not there is a problem you need to get involved 
with, and I think that concept is one that has broadbased 
application.
    I think it also relates to the issue that we talked about 
before, in determining financial reporting for a lot of these 
national defense assets, the mission assets, what type of 
information is meaningful? What type of information is 
meaningful to the stakeholders, and obviously Congress is a key 
stakeholder, since you appropriate the funds and you have to 
oversee the executive branch.
    So I think part of those discussions needs to be had as 
part of the FASAB deliberations as well, and then once you have 
the systems in place, once you know what you are trying to 
measure, it is easy to provide periodic reporting to do that.
    Dr. Zakheim. I am inclined to agree. I mean, Senator, that 
we have a mountain of reports that we provide to Congress. We 
have begun to work on generating the right kinds of metrics so 
we can measure some of the elements that you are discussing. It 
really is an interesting question, whether it is just a matter 
of generating paper or producing things that really are 
meaningful.
    In the case of Defense, of course, there are some things 
you just are not going to want to report, because you do not 
want bad guys to be reading it, but that should not be seen as 
an excuse for not reporting. That should not be an excuse for 
not accounting for all your assets. There are ways around those 
sorts of issues, and we are doing our best to find creative 
ways. I think that is win-win for all concerned.
    Senator Ben Nelson. Thank you, Mr. Chairman. Thank you.
    Senator Akaka. Thank you very much. I want to thank our 
witnesses for their responses today. Since GAO declared that we 
needed to look at the so-called high-risk area of DOD's 
financial management system, we have moved here to hear from 
you as to the flawed systems that we have had for decades, the 
noncompliance of requirements, and also not using accounting 
principles as the problems of the high-risk DOD financial 
systems. I am glad today we are hearing from a high-level group 
and receiving their attention. It is good to hear that there is 
a new team in DOD addressing these problems seriously and 
working together, including the Comptroller and DOD. We are 
glad to hear all of that.
    We are looking for improvements. We are expecting it, and I 
want you to know that we will be back next year to check and 
see how you have done with this. Gentlemen, I want to say thank 
you so much for bringing us up to date on this, and we wish you 
well.
    Dr. Zakheim. Thank you very much, Senator.
    Mr. Walker. Thank you, Senator.
    Senator Akaka. The subcommittee is adjourned.
    [Questions for the record with answers supplied follow:]
              Question Submitted by Senator Rick Santorum
                      financial management reform
    1. Senator Santorum. Secretary Zakheim, on March 18, 1998, the 
Subcommittee on Acquisition and Technology conducted a hearing to 
review the status of acquisition reform efforts in the Department of 
Defense (DOD). Some of the issues reviewed at the hearing were related 
to the problems in commercial spare parts procurement as documented in 
two Department of Defense Inspector General (DOD IG) reports and the 
work of the General Accounting Office (GAO).
    Testimony by the DOD IG presented a number of examples in which the 
Defense Logistics Agency paid increases over previous prices on 
commercial parts, by as much as 1,430 to 13,163 percent. An audit 
conducted by the DOD IG concluded that: ``DOD procurement approaches 
were poorly conceived, badly coordinated and did not result in the 
government getting good value for the prices paid for both commercial 
and noncommercial items.'' Recent reductions to the acquisition 
workforce have contributed to this problem.
    As a result of this hearing and review, the subcommittee concluded 
that DOD should address commercial pricing procedures in a systematic 
manner and not in an isolated fashion. Accordingly, S. 2060, the Fiscal 
Year 1999 National Defense Authorization Act (S. Rept. 105-189) 
contained a provision, the Defense Commercial Pricing Management 
Improvement Act, that would require the Secretary of Defense to take 
administrative and regulatory actions to address a number of commercial 
pricing issues. I was the author of this provision.
    One of the actions taken, as found in Section 805 of S. 2060, was 
the requirement that the Secretary of Defense establish a system for 
tracking price trends in spare parts in order to isolate categories of 
items that require further management attention. The provision provides 
the Secretary of Defense with the discretion to set up such a system in 
a manner that would ensure minimal burden on the acquisition system and 
proper management.
    Your efforts to transform the Department's business practices and 
systems are to be commended. I am convinced that the Department is 
indeed undertaking the most comprehensive and integrated financial 
management reform effort ever attempted within DOD. That being said, I 
am concerned that previous congressional attempts to provide management 
oversight might be lost in the reorganization.
    Knowing of the ongoing financial management reforms being 
undertaken, can you provide an update on whether the comprehensive and 
integrated financial management reform will incorporate or address the 
management requirements found in Section 805 of S. 2060? That is, can 
the goals of Section 805 be addressed as part of your Financial 
Management Modernization Program or will this requirement be 
incompatible with the reorganization of the Department's financial 
systems?
    Dr. Zakheim. The requirements of Section 805 are compatible with 
the reorganization of the Department's financial systems. The Secretary 
of Defense has initiated a comprehensive financial management reform 
program for the Department. The centerpiece of the Program's reform 
effort is the development of a Department-wide financial management 
enterprise architecture. The architecture effort will culminate in the 
construction of an integrated departmental financial management 
structure. Procurement systems that are incorporated into the 
enterprise architecture will adhere to the provisions contained within 
Section 805.
    The Department has taken actions to satisfy the requirements of 
Section 805--the Defense Commercial Pricing Management Improvement Act. 
The Federal Acquisition Regulation has been revised to provide better 
guidance for obtaining sales and pricing information necessary for 
pricing exempt commercial items. The Defense Logistics Agency and 
Military Departments have performed price trend analyses to improve the 
pricing of commercial items, and the Department is pursuing strategic 
supplier alliances with contractors that provide for a single contract 
for exempt commercial items.

    [Whereupon, at 11:51 a.m., the subcommittee adjourned.]

                                 
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