    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

       WINNING THE WAR ON FINANCIAL MANAGEMENT--STATUS OF DEPARTMENT OF
                             DEFENSE REFORM EFFORTS

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

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT EFFICIENCY
                            AND FINANCIAL MANAGEMENT

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JUNE 25, 2003

                                   __________

                               Serial No. 108-64

                                   __________

           Printed for the use of the Committee on Government Reform

      Available via the World Wide Web: http://www.gpo.gov/congress/house
                          http://www.house.gov/reform

                                     ______

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                                WASHINGTON : 2003
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                         COMMITTEE ON GOVERNMENT REFORM

                         TOM DAVIS, Virginia, Chairman
    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
    CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
    MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
    RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
    JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
    TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
    CHRIS CANNON, Utah                   DIANE E. WATSON, California
    ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
    EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
    JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
    JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER,
    NATHAN DEAL, Georgia                     Maryland
    CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of
    TIM MURPHY, Pennsylvania                 Columbia
    MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
    JOHN R. CARTER, Texas                CHRIS BELL, Texas
    WILLIAM J. JANKLOW, South Dakota                 ------
    MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont
                                             (Independent)

                           Peter Sirh, Staff Director
                     Melissa Wojciak, Deputy Staff Director
                          Rob Borden, Parliamentarian
                           Teresa Austin, Chief Clerk
                  Philip M. Schiliro, Minority Staff Director

         Subcommittee on Government Efficiency and Financial Management

                  TODD RUSSELL PLATTS, Pennsylvania, Chairman
    MARSHA BLACKBURN, Tennessee          EDOLPHUS TOWNS, New York
    STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
    JOHN SULLIVAN, Oklahoma              MAJOR R. OWENS, New York
    CANDICE S. MILLER, Michigan          CAROLYN B. MALONEY, New York
    MICHAEL R. TURNER, Ohio

                                   Ex Officio

    TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                         Mike Hettinger, Staff Director
                     Larry Brady, Professional Staff Member
                              Amy Laudeman, Clerk
              Mark Stephenson, Minority Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on June 25, 2003....................................     1
    Statement of:
        Kutz, Gregory D., Director of Financial Management and
          Assurance, General Accounting Office; Lawrence J.
          Lanzillotta, Principal Deputy and the Deputy Under
          Secretary of Defense for Management Reform, Office of the
          Under Secretary of Defense (Comptroller); and Paul
          Granetto, Director, Defense Financial Auditing Service,
          Office of the Inspector General, Department of Defense.....     9
    Letters, statements, etc., submitted for the record by:
        Granetto, Paul, Director, Defense Financial Auditing Service,
          Office of the Inspector General, Department of Defense:
            Information concerning qualifed audit opinion............    85
            Prepared statement of....................................    60
        Kutz, Gregory D., Director of Financial Management and
          Assurance, General Accounting Office, prepared statement of    12
        Lanzillotta, Lawrence J., Principal Deputy and the Deputy
          Under Secretary of Defense for Management Reform, Office of
          the Under Secretary of Defense (Comptroller), prepared
          statement of...............................................    51
        Platts, Hon. Todd Russell, a Representative in Congress from
          the State of Pennsylvania, prepared statement of...........     3
        Towns, Hon. Edolphus, a Representative in Congress from the
          State of New York, prepared statement of...................     6

       WINNING THE WAR ON FINANCIAL MANAGEMENT--STATUS OF DEPARTMENT OF
                             DEFENSE REFORM EFFORTS

                                  ----------

                            WEDNESDAY, JUNE 25, 2003

                      House of Representatives,
    Subcommittee on Government Efficiency and Financial
                                            Management,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2:35 p.m., in
    room 2154, Rayburn House Office Building, Hon. Todd Russell
    Platts (chairman of the subcommittee) presiding.
        Present: Representatives Blackburn and Towns.
        Staff present: Mike Hettinger, staff director; Dan Daly,
    counsel; Larry Brady, Kara Galles, and Tabetha Mueller,
    professional staff members; Amy Laudeman, clerk; Mark
    Stephenson, minority professional staff member; and Jean Gosa,
    minority clerk.
        Mr. Platts. A quorum being present this hearing, the
    Subcommittee on Government Efficiency and Financial Management
    will come to order. Today's hearing is one in a series focusing
    on recently released audit opinions for Federal agencies. This
    year 21 of the 24 agencies mandated by the CFO Act to perform
    financial audits earned an unqualified or clean opinion. The
    Department of Defense [DOD], one of three entities not
    receiving a clean audit, will be the focus of today's hearing,
    and I would like to thank each of the witnesses for agreeing to
    testify here today and for your work leading up to your
    testimony today.
        We are all very much aware that DOD is years away from
    earning an unqualified or clean opinion on its financial
    statements. The financial management challenges of DOD are
    unlike those of any other agency. In fact, they are unlike any
    entity in the world. With an annual budget of $400 billion, DOD
    is almost twice as large as the biggest publicly held
    corporation. It is our country's largest employer. The
    consolidated statement of DOD encompasses 13 stand-alone
    financials, many of which are larger and more complex than the
    statements of other CFO Act agencies.
        The good news is DOD has begun a complete restructuring of
    its financial management and business processes. Once
    completed, these reforms will likely result in savings between
    $15 billion and $30 billion, according to Business Executives
    for National Security. The saving of such substantial sums will
    greatly enhance DOD's ability to adequately fund and fulfill
    its primary mission, protecting the safety and security of
    America and its citizens. This transformation will take years
    to complete, but it could also become a model for other
    agencies to follow.
        The purpose of today's hearing is not to look back at DOD's
    problems of the past, but rather to focus on the reforms that
    have begun and, most importantly, to ensure that these reforms
    will be seen through to completion.
        I am aware of the hundred of studies that have been done on
    DOD, and I'm also aware of the pressure on the Department to
    earn a clean opinion. But I want to repeat today what I have
    said in many of our previous hearings, a clean opinion is not
    an end in and of itself. A clean opinion should come as a
    benefit and as a result of sound financial management.
        In order for DOD to accomplish its mission, managers must
    have access to timely, accurate and reliable information. Right
    now, DOD has over 2,300 individual financial management and
    business process systems. The systems infrastructure is
    hampered by a lack of functional and technical integration.
    Many of the systems are home-grown, built from the ground up to
    serve a particular purpose and have never intended to be
    integrated. These IT challenges and limitations have proven
    difficult to overcome.
        No one knows these limitations better than the leaders at
    DOD. Commendably, Secretary Rumsfeld has made financial
    management a high priority and has reiterated that it's one of
    his top 10 priorities for the Department.
        Changes are clearly underway. The Office of Comptroller
    developed the Business Management Modernization Program, and a
    major contract has been awarded to create a new Enterprise
    Architecture that will revolutionize the way things are done at
    DOD. Our job, in this subcommittee, is to provide oversight and
    support for these new efforts so that the work can continue
    until the job is done.
        Today the subcommittee will hear from Mr. Greg Kutz,
    Director of Financial Management and Assurance at GAO; Mr.
    Larry Lanzillotta, Principal Deputy to the Comptroller at DOD;
    and Mr. Paul Granetto, Director of Auditing for the DOD
    Inspector General. Thank you each for agreeing to be with us
    here today, and I look forward to your testimonies. And I thank
    you for your extensive written testimonies that you provided to
    the committee.
        I now yield to the gentleman from New York, Mr. Towns, for
    the purpose of making an opening statement.
        [The prepared statement of Hon. Todd Russell Platts
    follows:]

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        Mr. Towns. Thank you very much, Mr. Chairman. Let me thank
    you for staying the course on this financial management issue.
        The subcommittee recently had a hearing on the consolidated
    financial statements of the U.S. Government. It was clear from
    that hearing that while there has been some improvement in
    financial management at many Federal agencies, at others,
    serious problem still remains.
        The Department of Defense is perhaps the worst agency, both
    because of the sheer magnitude of the amount of money involved
    and because of the complexity of its financial management
    problems.
        The Defense Department receives approximately one half of
    the discretionary budget of the United States each year. Its
    annual budget is about $380 billion. Its own assets value over
    $1 trillion. It has about 3 million military and civilian
    employees. Because of the huge sum of money flowing through the
    Department, its financial management systems, practices, and
    procedures are hampered by critical weaknesses.
        Since 1995, GAO has designated the financial management
    systems at DOD as high risk because they are vulnerable to
    waste, fraud and abuse. And again this year, as has been the
    case for at least the last 7 years, the Defense Inspector
    General could not provide an opinion on the agency's financial
    statements. None of the military services or major components
    has passed the test of an independent financial audit.
        DOD cannot properly account for an estimated $1 trillion of
    its assets holdings, including weapons systems and support
    equipment. It lacks complete and reliable information on its
    environmental liabilities, potentially understating by 10's of
    billions the reported $59 billion liability. There are hundreds
    of millions of dollars of under and over-payments to
    contractors.
        These are longstanding problems. We have had literally
    decades of reports from GAO and the Inspector General on the
    history of financial mismanagement at the Department.
    Approximately 8 years ago, in 1995 to be exact, the DOD
    Inspector General testified before Congress that a turnaround
    in the Pentagon's financial management practices might be
    expected by the year 2000. Well, 2000 is gone, 2001, 2002, and
    now we are into 2003, and the Department is saying it might
    have financial statements that can be audited by the middle of
    the decade.
        This doesn't seem like progress to me, but there are some
    hopeful signs. Most important is the fact that the political
    leadership of the Department seems to recognize the seriousness
    of the problem and has developed a plan to address it with the
    Business Management Modernization Program. But plans are just
    plans. We have seen many such initiatives over the years. I am
    hopeful this one will be different from the others that we have
    heard and talked about.
        On that note, Mr. Chairman, I yield back.
        Mr. Platts. Thank you, Mr. Towns.
        [The prepared statement of Hon. Edolphus Towns follows:]

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        Mr. Platts. I will proceed to our testimonies, and I would
    ask each of our witnesses, and any others who will be assisting
    you in your testimonies today, if you could stand and we will
    swear you in.
        [Witnesses sworn.]
        Mr. Platts. The clerk will reflect that all witnesses
    affirmed the oath, and we will now proceed directly to
    testimonies.
        Mr. Kutz we will begin with you, followed by Mr.
    Lanzillotta and finally Mr. Granetto. The subcommittee
    appreciates the extensive written testimonies and would ask
    that you limit your opening testimonies here today to
    approximately 10 minutes, and then we'll get into questions and
    you certainly will have an opportunity to expand.
        So Mr. Kutz if you would like to begin, the floor is yours.

    STATEMENTS OF GREGORY D. KUTZ, DIRECTOR OF FINANCIAL MANAGEMENT
         AND ASSURANCE, GENERAL ACCOUNTING OFFICE; LAWRENCE J.
    LANZILLOTTA, PRINCIPAL DEPUTY AND THE DEPUTY UNDER SECRETARY OF
    DEFENSE FOR MANAGEMENT REFORM, OFFICE OF THE UNDER SECRETARY OF
      DEFENSE (COMPTROLLER); AND PAUL GRANETTO, DIRECTOR, DEFENSE
     FINANCIAL AUDITING SERVICE, OFFICE OF THE INSPECTOR GENERAL,
                         DEPARTMENT OF DEFENSE

        Mr. Kutz. Thank you Mr. Chairman and Representative Towns,
    it is a pleasure to be here to discuss financial management at
    the Department of Defense.
        As both of you mentioned, DOD is enormous when compared to
    other entities, with a reported over $1 trillion in both assets
    and liabilities, $380 billion in net program costs and a work
    force of over 3 million. To provide some perspective on the
    size of DOD, consider that it had 35 times more employees, at
    least six times more in assets and spent $200 billion more than
    Exxon-Mobil in fiscal year 2002.
        The recent success of our forces in Iraq has demonstrated,
    once again, that our military forces are second to none.
    However, that same level of excellence is not evident in many
    of DOD business operations, including the topic of today's
    hearing, financial management.
        The bottom line of my testimony this afternoon is that DOD
    is taking positive steps to reform its financial management.
    However, the road to reform is very long with significant
    challenges ahead. My testimony has two parts. First, DOD's
    financial management challenges and the related causes; and
    second, the key elements necessary for successful reform and
    some progress to date.
        First, DOD's financial management challenges relate to
    people, processes and systems. These problems have resulted in
    the lack of reliable information for decisionmaking, have
    hindered operational efficiency, impacted mission performance
    and left DOD vulnerable to fraud, waste and abuse. Significant
    weaknesses exist across the board ranging from asset
    accountability to the lack of reliable cost information.
    Secretary Rumsfeld has stated that successful business process
    reform could save DOD 5 percent of its budget or $20 billion a
    year.
        One example of inefficiency is DOD's 2,300 stove-piped
    duplicative business systems which will cost $18 billion this
    year. Successful systems modernization would improve the
    quality of information and save billions of dollars annually.
    Problems impacting mission performance include the inability to
    locate defective chem-bio suits, shortages of key aircraft
    spare parts, and problems with timely and accurate payment of
    military personnel.
        You are probably wondering why these problems have not been
    fixed. Based on our experience, we believe the reasons include
    the lack of sustained top-level leadership and accountability,
    cultural resistance to change, including service parochialism,
    lack of results-oriented performance measures and inadequate
    incentives for change.
        My second point relates to what we believe are seven key
    elements necessary for successful reform. I will touch on three
    of those seven now.
        First, financial management challenges must be addressed as
    part of a comprehensive, integrated, DOD-wide business process
    reform. Financial management is a cross-cutting issue that
    impacts all of an organization's business operations. Currently
    9 of the 25 GAO high-risk areas in the Federal Government are
    relevant to DOD. These management challenges must be addressed
    in an integrated fashion. DOD agrees with us and is working on
    integrated solutions to many of these problems. For example,
    DOD is currently attempting to modernize its systems by
    developing and implementing a Business Enterprise Architecture.
    We support this effort, as successful modernization of DOD's
    2,300 systems is essential to addressing many of DOD's nine
    high-risk challenges.
        Second, results-oriented performance measures and top-level
    management monitoring are critical. DOD is focused on the right
    goal, which is reducing cost and developing systems that
    produce timely, reliable financial information. In addition to
    the long-term systems effort, DOD is working on improving its
    internal controls and processes. Examples of improvements
    include reduced travel card delinquencies, the elimination of
    over 100,000 purchase cards and reduced payment recording
    errors. We attribute these improvements primarily to top
    management focus and the use of results-based performance
    metrics.
        Third, we believe effective oversight and monitoring of
    DOD's strategy and progress are critical. Oversight hearings,
    like the one today, provide a constructive dialog for
    discussing progress made and actions needed. The Inspector
    General and GAO can contribute by providing professional,
    objective and constructive input on financial management
    reform.
        In closing, I offer the question, is reforming DOD
    possible? DOD has made great strides in its military
    capabilities, as demonstrated in Afghanistan and Iraq. I
    believe DOD can make great strides in its business operations
    with similar management focus and attention. It is too early to
    predict whether the current reform effort will succeed, but
    there will be certain indicators of success, such as the
    elimination of hundreds of DOD's duplicative business systems.
        In addition, you will know reform is working when GAO and
    the IG having a hard time identifying fraud, waste and abuse,
    DOD senior management has taken positive reform steps. However,
    there is a risk that other priorities, such as the
    reconstruction of Iraq, will dilute the management focus
    necessary for reform to succeed, which is understandable. At
    the same time, with waste and inefficiency costing $20 billion
    or more a year, true reform is needed to restore public
    confidence that taxpayer dollars are well spent in meeting our
    Nation's defense objectives.
        Mr. Chairman, this ends my statement and I would be happy
    to answer any questions.
        Mr. Platts. Thank you, Mr. Kutz.
        [The prepared statement of Mr. Kutz follows:]

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        Mr. Platts. Mr. Lanzillotta.
        Mr. Lanzillotta. Thank you Mr. Chairman and members of the
    committee. I am pleased to be here to discuss financial
    management in the Department of Defense and the progress that
    the Department is making.
        The overarching challenge facing us is to reform DOD
    business processes and systems. The size of the Department
    makes this a challenge of magnitude that has never been
    attempted in the private sector. Our challenge requires not
    only an overhaul of those processes and systems but a cultural
    change for the people using them.
        Our success will be measured by efficiently providing DOD
    decisionmakers with timely, accurate, and reliable information.
    To accomplish these reforms, we must facilitate the integration
    and streamlining and modernization of the DOD business
    functions, transform the Department's business processes and
    fulfill all financial management laws, standards and
    requirements.
        Currently DOD's business processes and financial management
    systems are not able to meet this challenge. The primary reason
    is that those processes and systems were not designed to meet
    today's requirements and the volume of transactions. In the
    past, each major DOD organization was allowed to design and
    manage its own systems without having to integrate it into a
    DOD-wide architecture. This created a stove-piped support
    structure that was inefficient and unresponsive to leaders'
    needs.
        Clearly the Department of Defense needs much more than a
    marginal change to set things right. The solution is a long-
    term, comprehensive reform of its financial management and
    business processes.
        The Department of Defense has undertaken such a
    comprehensive overhaul of its business practices and financial
    management. The overhaul will also enable us to meet all
    business management requirements, including a clean audit
    opinion on our financial statements.
        To achieve our business management goals, our strategy is
    to take the lessons learned from the warfighters and integrate
    them into our business practices. We plan to use a DOD-wide
    architecture to describe standard business and financial rules;
    employ a DOD-wide oversight process directed by senior leaders
    to implement the architecture and to guide spending; refine and
    extend the architecture to create a seamless connection between
    it and other Federal and DOD transformation initiatives; and in
    the near term, address the critical financial problems, notably
    financial reporting.
        The Department's Business Management Modernization Program
    was developed to overhaul our business management. The
    blueprint for this overhaul will be our Business Enterprise
    Architecture which we recently made public.
        In developing our Business Enterprise Architecture, the
    Department and IBM experts applied over 160 business and
    technology practices used successfully in industry
    organizations. The architecture is a function of the technical
    requirements for design in the integrating of DOD business
    practices. It will provide a road map to reduce our 2,000 plus
    systems to a much smaller number of integrated, compatible
    systems.
        What is the difference from previous approaches for reform
    is that the Department has created what we term domains. Under
    seven domains or business lines, we have grouped our major
    business processes. These domains define and illustrate the
    scope of our Business Management Modernization Program. The
    domains are Logistics; Acquisition/Procurement; Installations
    and Environment; Human Resources; Accounting and Financial
    Management; Strategic Planning and Budgeting; and Technical
    Infrastructure.
        The domain leaders will implement the architecture by
    reengineering business processes and developing a systems
    solution that is consistent with the Enterprise Architecture.
    In this way, leaders who are expert in each domain will
    reengineer the way the Department does business and formulate
    business improvements.
        These domain leaders and staff are excited about the plan.
    Just today I opened the conference for domain owners to explain
    the responsibilities, and there were over 400 people in
    attendance. This governance process was designed to build, buy,
    and at the same time make the Department's experts available
    for this project. The DOD senior leadership has developed a
    strong governance process to guide the implementation and the
    refinement of the Business Management Modernization Program and
    the Business Enterprise Architecture. Our governance process
    will ensure that all improvements are fully supportable for our
    long-term goal for a cohesive business management across the
    entire Department. It will also guide our investment in
    information systems and technologies.
        The overhaul being advanced by the Business Management
    Modernization Program promises to greatly improve the
    Department's financial reporting. But we cannot put off fixing
    the Department's financial reporting until BMMP is fully
    implemented. We must achieve clean opinions on the DOD
    financial statements as soon as possible.
        As the senior official directly responsible for financial
    reporting, the Under Secretary Defense (Comptroller) Dr. Dov
    Zackheim is intensely involved in improving financial
    management statements. Of special note, he has directed each of
    the major DOD reporting entities to prepare a comprehensive
    plan of how it can achieve a favorable audit opinion in 2004.
    The Controller's leadership is being briefed on each agency's
    and components' financial statements on a quarterly basis. From
    these quarterly briefs, lessons are learned and provided to
    other components and agencies. An example would be the
    establishment of audit committees. That involved not only
    members of the Comptroller staff and Defense Finance and
    Accounting Service, but the Inspector General as well.
        The Department is making improvements in management outside
    the focus of this hearing, and I would like to list a few. Last
    year we overhauled the management of the government charge
    cards. We clarified and strengthened policies and increased
    oversight to prevent abuse and made other changes to ensure
    that the charge card programs will be a source of government
    savings and not an opportunity for abuse.
        The Department is changing its budgeting process to
    increase our focus on program performance and results. We are
    developing an increase in the use of performance metrics to
    measure the programs' effectiveness and have moved to an
    internal 2-year budgeting cycle requiring us to formulate a
    completely new budget only every other year. This will enable
    an off-year focus on budget execution and program performance.
    We are continuing our adherence to realistic budgeting.
        We are continuing our reengineering of our processes. As an
    example, the Department is seeking statutory authority to
    transfer the field Personnel Security Investigation function to
    the Office of Personnel Management, which would make it a
    central provider of these services to the Federal Government.
    This would eliminate redundancies and other inefficiencies.
        In closing, I want to assure this committee that the
    Department of Defense is advancing as rapidly as possible in
    its bold agenda for overhauling the DOD financial management
    and business processes. We have partnered with GAO, the IG,
    OMB, and other Federal agencies to address our goal. Our
    ultimate aim is to streamline integrate and modernize business
    management systems that fully and efficiently meet the needs of
    the DOD decisionmakers and all financial management
    requirements.
        Transformation of its business management is one of
    Secretary Rumsfeld's top priorities for the Department of
    Defense, and we are confident of success. Thank you Mr.
    Chairman, and I am prepared to take your questions.
        Mr. Platts. Thank you Mr. Lanzillotta.
        [The prepared statement of Mr. Lanzillotta follows:]

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        Mr. Platts. Mr. Granetto.
        Mr. Granetto. Mr. Chairman and members of the committee, I
    want to thank you for the opportunity to appear before the
    committee today and to address your questions concerning the
    Department's financial management.
        I am pleased to report that the Department has undertaken
    the ambitious task of overhauling its financial management
    systems and business processes. Nevertheless, the current
    financial statements remain generally unreliable. For fiscal
    year 2002, we again issued a disclaimer of opinion for the
    Department of Defense agency-wide financial statements. Serious
    deficiencies continue to exist, particularly with the quality
    of data, adequacy of the reporting systems and the reliability
    of internal controls. We also issued a disclaimer of opinion on
    all but one of the major reporting entities. As in past years,
    we issued an unqualified or a clean opinion for the Military
    Retirement Funds financial statements.
        Data reliability, integrity, timeliness and auditability
    continue to impede our ability to render an opinion on the
    financial statements. The Department has readily acknowledged
    that many of its financial management and feeder systems simply
    do not produce accurate enough data to support some material
    amounts on the financial statements. Although the annual audit
    opinions may continue to attract more attention than other
    individual audit reports, the Department's progress in
    addressing the specific findings and recommendations of those
    individual reports will be an extremely critical factor in
    determining how much financial management improvement actually
    occurs.
        Section 1008 of the National Defense Authorization Act for
    fiscal year 2002 directed our office to perform only the
    minimum audit procedures required by auditing standards,
    provided management acknowledges the financial statements are
    unreliable. We agree with the rationale behind Section 1008,
    and we have complied with those requirements in performing our
    audits of the fiscal year 2002 Departmental financial
    statements.
        Generally, the financial management weaknesses acknowledged
    by management were of such a magnitude that they simply
    required us to limit our audit work and issue disclaimers.
    However, these known weaknesses may represent only the tip of
    the iceberg. To mitigate the risk of new weaknesses surfacing
    during the financial statement audits, we have encouraged
    departmental management to rigorously and thoroughly review the
    impact of corrective actions before asserting that the
    statements are ready.
        On September 18, 2002, the U.S. Army Corps of Engineers,
    Civil Works management represented that their fiscal year 2002
    financial statements would be fairly presented in all material
    aspects. After the audit began, the Corps and we realized that
    audit-ready evidential matter was simply not available for our
    review. As a result, we issued a disclaimer of opinion in
    January 2003. We are continuing extensive financial audit work
    in the Army Corps of Engineers, Civil Works, and we are finding
    additional problem areas. The Corps is, however, taking very
    aggressive action to correct those problems when they are
    identified.
        However, the Corps audit has demonstrated the magnitude of
    the effort required to perform comprehensive audits in
    nondepartmental entities. In supporting our disclaimer of
    opinion on the balance sheet for the Corps, I used 120 auditors
    to perform that audit. Since the Corps is one of the smaller
    departmental entities, additional auditors will be needed to
    audit larger components. The current initiative by the
    Comptroller in establishing the Department of Defense Business
    Management Modernization Program Office supports the course
    mandated by Section 1008 of the fiscal year 2002 National
    Defense Authorization Act.
        We believe that the effort to establish Comprehensive
    Business Systems Architecture is a necessary and very long-
    overdue step. There are however undeniable risks.
    Implementation of the architecture could take much longer than
    anticipated. The cost to implement the architecture might be
    prohibitive and the Department may simply lack the discipline
    to make system program managers conform to the architecture
    over an extended period of time.
        In addition to the effort to upgrade its financial systems,
    the Department faces challenges related to accelerated
    reporting requirements, the new requirements to include
    military equipment on the financial statements and implementing
    numerous open recommendations from prior audits.
        Like other Federal entities, the Department is faced with
    the challenge of submitting the fiscal year 2004 audited
    financial statements by November 15, 2004. The accelerated
    reporting deadline has very vividly emphasized the already
    evident need for systems that can produce reliable information
    on a real-time basis.
        One new challenge, specific to fiscal year 2003, is the
    requirement to report military equipment on the primary
    financial statements. The Department currently estimates that
    more than $1.1 trillion, minus depreciation, will need to be
    added to the financial statements. DOD will need to emphasize
    the development and implementation of a robust framework for
    tracking and valuing military equipment as it returns to the
    Department's financial statements.
        During the past 5 years, we have issued more than 115
    financial audit reports with almost 600 recommendations. About
    one-third of those recommendations are still open while
    management completes corrective action. The financial reporting
    process will be significantly impacted by the OMB's new
    accelerated reporting deadline, by the Department's very
    energetic effort to overhaul its systems and business processes
    and by the very significant efforts made by the Comptroller and
    his staff to fully engage all parties including GAO, OMB and my
    own office in full and open dialog on the Department's problems
    in achieving a favorable audit opinion.
        The Comptroller is the Department's Chief Financial
    Officer, and his staff have a very refreshing attitude and open
    door policy to the Office of Inspector General. We both realize
    that the lack of a favorable opinion on the Department's
    financial statements is the major impediment to the U.S.
    Government receiving an unqualified opinion on its annual
    financial statements. Without compromising our status as the
    independent auditor, the Inspector General, at the request of
    the Comptroller, is actively participating in discussions with
    senior leadership within the Department and the government on
    ways to help the Department achieve a favorable audit opinion.
        The Inspector General has also recently reorganized my
    financial auditing operations in order to better facilitate our
    responses to the Department's increased emphasis on financial
    auditing and achieving favorable audit opinions. I now report
    directly to the new Deputy Inspector General for Auditing.
        For budgetary purposes, we have recently analyzed the size,
    scope and potential costs of comprehensive audits of the
    Department's financial statements once they become reliable. We
    considered various mixes of government and public accounting
    resources. Comptroller staff is currently evaluating this
    information but conclusions have not been finalized on how best
    to support our long-term strategy.
        Concurrent with our development of a long-term audit
    strategy, the Comptroller, as Mr. Lanzillotta has mentioned,
    requested the military departments and DLA to develop an
    estimate of resources required to correct existing deficiencies
    in order to achieve a qualified audit opinion on the fiscal
    year 2004 financial statements. These plans generally conclude
    that it is neither cost effective nor practical to invest the
    resources necessary to obtain a favorable audit opinion by
    fiscal year 2004. We are evaluating the results of those plans.
    But we generally accept the conclusion that it may be
    impractical to expect a favorable audit opinion in the very
    near future for the financial statements of the major
    departmental components.
        The Comptroller and our office plan to develop a
    coordinated approach to addressing the challenges that impede
    an audit of the Department's financial statements. Regardless
    of the approach, we will need additional audit resources as the
    Department begins to improve its systems and processes and
    certifies that various financial statement line items and
    components are ready for comprehensive audits.
        We believe that strong leadership is the key element to
    successful financial management reform. The Department must
    continue to improve its systems, processes and internal
    controls in order to ensure that financial information is
    accurately recorded and reported. We are fully committed to
    meeting the challenges ahead. Thank you for considering our
    views. This concludes my testimony.
        Mr. Platts. Thank you Mr. Granetto.
        [The prepared statement of Mr. Granetto follows:]

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        Mr. Platts. We will now proceed to questions. Mr. Towns is
    going to try to come back. He had to run off for a meeting, and
    hopefully be able to come back for some questions.
        Mr. Lanzillotta, I would like to start with a more broad
    question to you. In your testimony both written and here today,
    you talk about the comprehensive approach you're taking, and
    you state what is different this time around than in the past.
    You touched on the seven domain areas where you are crossing
    services and looking at acquisition, all charges under the
    Department or whatever the domain area in question is, and that
    would be a different approach. And my question is when we look
    back at the history, and we have had testimony here today about
    the savings that we can achieve in billions of dollars. We have
    had testimony about how much has been spent time and time again
    over the last 15 to 20 years, specifically the effort in the
    late 80's, early 90's, the Corporate Information Management
    System. And in GAO's report they talk about an 8-year effort,
    $20 billion. And I am going to read the language of the GAO
    report where they talk about one of the focuses of that report
    was implementing standard information systems across the
    Department to support common business operations. DOD intended
    CIM to reform all of its functional areas, including finance,
    procurement, material management, human resources. That sounds
    very much--functional areas--domain, sounds very similar to
    what we're talking about now. Why should this committee, or the
    taxpayers have more confidence this time around that we are not
    going to be 8 years from now with billions more dollars spent
    and be in the same situation where we don't have--we are not
    any closer to a clean audit.
        Mr. Lanzillotta. Thank you Mr. Chairman.
        I believe one of the major differences between this effort
    and some of the past efforts and the CIM effort that you made
    reference to, the CIM effort was a much more centralized,
    controlled approach where all the money was held in one office
    and everybody had to go back and get that approved. It wasn't
    really a cross-domain effort. It wasn't an effort where the
    entire Department was involved. It was definitely an office
    that had control of that program. And I believe why other past
    efforts have failed is because they have gone to that same
    area. Each of the services have stove-piped their area, and
    they have tried to fix it in their domains, and they didn't
    worry about what happens when it left that area, that domain,
    that service.
        All the witnesses, I think, have mentioned the fact that
    the Department of Defense and the huge effort it has. It has a
    huge effort because of the diversity and size of the
    transactions we have to accomplish.
        I believe this approach is fundamentally different because
    we are not trying to stove-pipe. This is trying to bring in all
    the different areas, all the different business lines into one
    comprehensive approach. We are not trying to get an office that
    controls all the funding, but we have created the seven domains
    or business lines for them to review the funding and make
    recommendations to a central committee that will then implement
    it in the budget request one way or the other.
        I believe that the only way that this program will succeed
    where the others have failed is because we do have senior level
    participation at all levels, and we have transparency; people
    see what we do and we have participation. All the services are
    involved. When I talked about the 400 people that came to the
    domain owners, I think currently on the project we have 275
    people, 75 of those are government. They are not all
    Comptroller people. They are from the Army, Navy, Marines
    defense agencies. They are all coming together. The Departments
    are coming together to accomplish that.
        I would say in summary, the difference is it is more of a
    broader approach, it is more inclusive, and I do believe we
    have senior level management and oversight watching this
    program.
        Mr. Platts. Certainly having people throughout all
    Departments, agencies within DOD, buying in is going to be
    critical to the success. The example of kicking off the efforts
    with the 400 employees is a good effort of having that buy-in
    and that empowerment. What authority for that work, for that
    cross-service effort to work, and to really be by business
    line, there is going to have to be some authority or cross
    service for those business lines. And can you share some of the
    authority that these individuals responsible for these domain
    areas are going to have to actually have uniformity occur and
    have those changes occur across the service lines.
        Mr. Lanzillotta. All authority to this program, of course,
    generates from the Secretary. And he has made my boss, Dr. Dov
    Zackheim, responsible for getting this program off the ground.
    The authority for the domain owners, which I think goes back to
    your original question, we are developing a set of
    responsibilities as a guideline for running the domains or at
    least the domain owner will know what those responsibilities
    are. We are also developing criteria for which they can judge
    programs and investment. What we plan to do with the domain
    owners is give them a box or set of responsibilities and
    requirements to get accomplished and then let that domain owner
    who is a functional expert in that area go ahead and carry out
    that project. The domain owner for that area has the ultimate
    responsibility. It has been delegated to him or her to make
    that happen. I believe that the use of domains is going to be a
    significant advantage for the department in trying to institute
    this new architecture.
        Mr. Platts. My understanding is that the domain owners will
    be delegated the authority basically from the Secretary, to go
    in and say to Army, Navy, Air Force, on acquisition you are to
    go do X, Y and Z to have a more uniformed effort to bring
    everybody onto the same page and everybody in line; that they
    will be able to have that authority across the services.
        Mr. Lanzillotta. They will have that authority across the
    services and defense agencies, but we like to refer to it more
    on the activity that they are accomplishing, a supply activity.
    We want them to look at the supply activity and how the supply
    activity should be reengineered and accomplished and then they
    say this is best practice. And then everybody else's has to
    fall into line. We don't expect the domain owner to go into
    each of the services and go over and reengineer their practice.
    We expect them to reengineer the activity or the process, and
    then the service will have to have the responsibility of making
    it compliant to that requirement or that set of requirements
    that the domain owner has put forth.
        Mr. Platts. If the service doesn't followup, I mean the
    domain owner is responsible for that change, but is not the one
    actually implementing it, you know, what are the consequences
    for that service not following that model that has now been
    identified?
        Mr. Lanzillotta. Another advantage we have with this
    program is the Comptroller has teamed up with the Department's
    Chief Information Officer, and we manage this program together.
    We, and the Comptroller are the traffic cops through the
    budgeting process. When the domain owner comes over there and
    does a review of a system and tells us that certain systems
    ought to be turned off or certain systems ought to be funded
    and they bring it up to the steering group and it gets approved
    then we implement that in the budget process. So we will either
    take the money away from the services for systems they say need
    to be turned off on a schedule that they give us, or we will
    approve the funding for a new system that the domain owner has
    said, I reviewed this system, and it's compliant and it meets
    our requirements for standard business process, and also it has
    been reengineered and whatever the requirement would be.
        Mr. Platts. Sounds like that would go toward the GAO's
    recommendation that the incentives or consequences has to be
    part of your program to truly have everyone buy in. If they
    don't follow what's identified, there is going to be a
    consequence, and there are incentives to buy in and make it
    their best effort.
        Mr. Lanzillotta. I think it is a little different task than
    what Mr. Kutz would give you. But I think if--we do have a huge
    budget in the Department of Defense but we also have a huge
    requirement that goes along with that budget. And I always
    believe--I always tell people, they say they have a $12 million
    budget and they have a small unfunded requirement, but it is a
    small budget. We have a big budget and we have big requirements
    that are driven by such things as Iraq. The incentive is if
    they find the money in the savings, then they can keep that
    money to plow it back into their program. If we have to go find
    it then we take it. So the incentive is to find the business
    process, find the savings and reengineer the business process
    before we get to it, because if we get to it, then it's gone.
        The other thing that we have is an incentive that private
    industry doesn't have, we have a mission. And I think if you go
    in your own district and talk to some of your people, they
    really feel that the mission of their accomplishment is their
    job satisfaction. It's what they feel that they need to do.
    They feel that it has priority. They feel it is satisfying and
    they feel that they do important work. And they do important
    work. And this helps them accomplish that. So their incentive
    although it is not like private industry which equates to
    money, this is what they get and surprisingly enough for most,
    that's enough.
        Mr. Platts. I appreciate your answers regarding the
    differences now than in the past in trying to be comprehensive
    in your approach.
        Let me ask and I will start with you, Mr. Lanzillotta, and
    then involve Mr. Kutz and Mr. Granetto on this issue. We heard
    testimony regarding the push to get a clean audit or at least a
    qualified opinion for the 2004 fiscal year. And while we are
    certainly anxious for DOD to get to that point, as I stated in
    my opening, it's not just getting to a clean audit that maybe
    through heroic efforts that we get there, but that we actually
    have a change in process and are able to maintain that process
    of clean audits. And my question would be, Mr. Lanzillotta, if
    you do push forward and as I understand that DOD wants to get
    at least a qualified opinion for the 2004 year, do you think
    it's realistically going to be sustainable in 2005, and 2006
    based on what it will take to get it in 2004?
        Mr. Lanzillotta. Dr. Zackheim and others in the senior
    leadership have put forth that we won't do anything that is
    just going to give us that one time help. I think the original
    plans that the services costed out, it would take $1.8 billion
    from the services to try to correct fiscal year 2004 problems
    and another $500 million to the IG to get the auditing assets
    to make that work. Then you have to do that again in 2005 and
    do it again in 2006 and have to continue to do that. That
    doesn't make economic sense for us to try to do that. We are
    much more following the belief that what we need to do is
    something that is sustainable and go for the long-term solution
    and fix it. That doesn't mean that in areas where there are not
    systems problems like their processes or procedures, that we
    can't make progress, because we are making progress on
    environmental liability and several areas that I think will be
    close to audit in 2004. I believe for the taxpayers money, what
    we have to do is look for the long-term solution that occurs
    every year instead of trying to make a heroic effort in 1 year
    and then have to repeat that every year just to get a clean
    opinion.
        Mr. Platts. And I would agree. I think it defeats the
    purpose of the efforts of getting a true financial process in
    place that is going to negate the need for that annual effort.
    Do I take from your answer that you are basically not looking--
    you are going to keep moving forward which is what we want and
    is the whole purpose of our oversight, but that the discussions
    about pushing forward for 2004 to have a DOD Department-wide
    qualified opinion is not going to be present because you have
    identified several billion dollars requirement for that 1-year
    clean opinion and then an annual repeating of that. What I hear
    you saying is you looked at that, but in making a cost-benefit
    analysis, you are not going to pursue that avenue?
        Mr. Lanzillotta. I believe when it is all said and done and
    the IG was going to have a big piece of that, that is
    absolutely correct. That it won't be economically beneficial
    for the Department to try to do that. The other point I want to
    try to make is the whole purpose of the program is to provide
    timely and accurate management information. If you spend $2
    billion to get accurate information at the end of the year,
    then that information isn't available for the managers to make
    a decision during the course of the year. And so you get a
    clean opinion, but you don't get the benefits of being able to
    make the smart decisions over the course of the year to manage
    the programs because you had to wait until the end of the year
    to get the information and unfortunately, you make those
    decisions throughout the course of the year.
        Mr. Platts. And I couldn't agree more. That is the exact
    message that we want to see as a committee namely, change that
    allows, day one in the middle of the second quarter you can see
    where you stand and the same for the third quarter, it's not
    just at the end of the year. You can say here are our books;
    that we truly have processes in place that throughout the year,
    every Department under the CFO Act are able to give a good
    assessment of where they stand.
        Mr. Kutz, I would take from your testimony here and your
    extensive written testimony, that GAO shares the position that
    spending several million dollars for a one time 2004 qualified
    opinion is not a wise course to follow.
        Mr. Kutz. We would share that position and I would say, I
    have done dozens of audits in my career and given that its June
    2003 and the deadline would be November 2004 it isn't feasible
    given the size and all of the different issues at DOD.
        So I think that a qualified opinion in 2004 is about as
    close to zero percent possible as you can get without being
    zero.
        Mr. Platts. Mr. Granetto, for it to happen, your office--
    you talked with just the Army Corps, 120 auditors and made note
    that is a small part of DOD and that 120 was a substantial
    majority of your entire auditor work force. Can you give us--
    and I was going to ask in the context of 2004 but maybe in a
    broader sense, what would it take for your manpower needs? And
    Mr. Lanzillotta mentioned the figure of $500 million for your
    offices' needs. Is that a fair guesstimate in your opinion?
        Mr. Granetto. That, in fact, was our guesstimate. We have
    done a study. It is a little beyond guesstimate, but my staff
    and I believe that in the long run, we probably need a growth
    of about 240 people internally. And then you would be in the
    range of 2,000 to 3,000 auditors to audit this Department and
    all its financial entities.
        Mr. Platts. What is your number today?
        Mr. Granetto. 160-some.
        Mr. Platts. You need 240 more?
        Mr. Granetto. That is our estimate as of the moment. And
    this may well change because what we are doing, as Mr.
    Lanzillotta pointed out, we have taken the service studies on
    the 2004. And while I don't think the 2004--I am even more
    pessimistic than Mr. Kutz. I think it is zero that you would
    get a 2004 opinion. But those two efforts are going to be very
    valuable in the long run because it is going to turn into
    planning with us. And we are going to have to sit down and
    chart this out and see what is going to be ready when, when we
    are going to need it and what kind of moneys we are going to
    need. We have a study that says $500 million possibly to audit
    this Department and all its financial statements. But that $500
    million is to hire CPA firms. We are not thinking in terms of
    doing it ourselves. We don't have the resources.
        [The information referred to follows:]

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        Mr. Kutz. One of the reasons it takes extraordinary efforts
    from the auditors is again the current state of records over at
    DOD. When you audit and it has these many problems, you end up
    spending an enormous amount of time reconciling. You have 2,300
    systems that have financial information at this point. Just the
    sheer volume of time it would take to reconcile and get
    supporting data is just enormous. And in a normal audit you
    would not have that kind of a scenario, let's say auditing
    Johnson & Johnson or Exxon-Mobil where you have good day-to-day
    operations and you're not going through the heroic effort to
    put something together.
        So those audit resources of several thousand possibly would
    come down dramatically if reform was successful.
        Mr. Granetto. I should add too that we are talking a first-
    year audit. And once you get an audit opinion, then the
    resources also go down dramatically.
        Mr. Platts. From a realistic standpoint in the labor force
    with SEC hiring huge numbers of new auditors for their new
    responsibilities, have you made--in addition to how many slots
    you need to fill an assessment of what you believe is your
    ability to fill those slots in a timely fashion?
        Mr. Granetto. I think that is going to be a problem--I mean
    essentially, for me to pick up 240 people, we are talking about
    80 people a year for the next 3 years. That we can do. I don't
    have a problem. But to go out and find--I question whether we
    would get a bid if we put the whole Department out on the
    street. I'm not sure anybody's big enough. And unless Mr.
    Lanzillotta or the Army have a warehouse full of auditors that
    we don't know about, I don't think they are there right at the
    present time--I really don't.
        Mr. Platts. And that leads to a question, Mr. Lanzillotta,
    that goes to our conversation before the hearing started. You
    touched on personnel challenges here for auditors, and for you
    in the sense of getting individuals to buy in to the challenges
    facing the Department. That includes perhaps attracting new
    staff. And I was wondering if you could share as part of the
    record the example in getting a new staff person under the
    current personnel requirements because it relates to a broader
    issue that the full Committee on Government Reform had hearings
    on and acted on and is moving through the legislative process
    regarding personnel changes that are DOD-wide and would relate
    to the ability to go out and hire new auditors and compete in
    the private sector where there is a lot of demand. You shared a
    great example on that personnel issue that really didn't relate
    to an auditor, but I think gives an example of the challenges
    you are facing.
        Mr. Lanzillotta. What I was referring to is we had an
    applicant, which goes back to my earlier point that you have a
    lot of people who go out there and have a strong desire to help
    the government, a strong desire to get the mission
    accomplished. She was willing to come on to be a program
    manager for this program.
        Mr. Platts. For one of the domain areas?
        Mr. Lanzillotta. For the overall program in the
    Comptroller's shop. She also had an offer from a leading
    consulting firm to be a partner, and that had a $350,000 salary
    attached to it, but she was willing to come in and help us out
    and do this job and she knew what we were paying, which was
    basically an SES 1 Level, which I think is somewhere around
    $123. I would have to check that, but it is very close to that.
    And she said, you know, I am willing to do this if you are
    willing to hire me. And I had to tell her no, I can't. The way
    the personnel system works is you have to apply, then you have
    to get through personnel, and if you are on the list, and you
    go to a board which is composed of three people, of which I
    only have one person from my organization, and they give you--
    they give us your name, then we can select you, and then it
    goes to OPM for final decision. So she said, well, I have this
    offer. You know, can you give me a commitment? No, I can't.
    Because that would be preselection and that would invalidate
    the entire process. And so, needless to say, she is working
    elsewhere.
        Mr. Platts. I appreciate you sharing that because that
    directly impacts this programs' success and the challenges
    facing Mr. Granetto in a more finite way and the challenges you
    are going to face as you are required to ramp up and fill more
    and more spots. And I certainly commend Secretary Rumsfeld and
    your Department. That is an issue that is on the human resource
    side but it will impact financial management success as well
    and we will hopefully see success on that at the program level
    and at the IG's Office as well.
        Mr. Lanzillotta, could you expand a little bit on the
    Business Enterprise Architecture Plan. I know that the
    blueprint was recently released and the GAO's reviewing that.
    What are your thoughts, on the success of what's being
    proposed. But Mr. Lanzillotta, can you give us kind of maybe a
    little more detail on how long you think it is going to take to
    implement the Architecture Plan and within that, the
    decisionmaking timetable within the Architecture Plan?
        Mr. Lanzillotta. Mr. Chairman, that is a difficult
    question. The next phase of the program is--we just delivered
    the architecture and Mr. Kutz and his people are getting ready
    to evaluate it--but the next phase of the program is to define
    some core business segments, and those business segments are--
    equate to processes, business processes. What we want to do is
    define these business processes, these core segments,
    reengineer those segments and find out what the technical
    solution would be to make those segments work.
        There's 103 segments or business processes that we have
    identified in the Department of Defense. This will be a phased
    approach, and I don't have an exact date as to when it will be
    complete, but then again I don't know if the exact date is as
    important as the department making progress and reengineering
    our processes and getting better; because I've always believed,
    even at the inception of this program, that this was going to
    be one of those things that we were just going to constantly be
    getting better.
        You know, I don't know if there's really a date that I'm
    going to be able to sit down there and say June 7, 2008, we're
    there, because I--you know, we have some defense agencies now
    that have clean opinion, next year we hope for more. We hope
    for the medical accrual fund to get a clean opinion and we hope
    to make gradual progress as we reengineer these systems. So I
    guess the long and the short of it is I don't have an exact
    date as to when the entire architecture will be implemented.
        And I'd also like to say that I don't think that the
    architecture is--it's a living document, and it's technology--
    we're using some technology that wasn't around 18 months ago.
    And as technology advances, we are always going to implement it
    and put it back into our architecture. We call our architecture
    that we have out now version 1.0, because it's a living
    document, and as we reengineer our business practices we go
    back into the architecture and redo it for that piece of it. It
    may be not be a terribly satisfying answer, but it will be a
    gradual process and I don't have an exact date.
        Mr. Platts. I have some followup questions on the
    architecture plan, but I want to recognize our vice chair from
    Tennessee, the gentlelady Ms. Marsha Blackburn. And Marsha, I
    apologize, I got involved in my questions and didn't realize
    you were over here and certainly want to give you the
    opportunity to ask questions.
        Mrs. Blackburn. I appreciate that, Mr. Chairman, and I
    apologize that I was not here as you all were giving your
    statements. I had a meeting elsewhere and had to be there.
        I do appreciate also that you all gave us your testimony in
    advance, because that does help us to do the reading and a
    little bit of advance work and to prepare. And I will have to
    admit last night when I was reading this, I thought I cannot
    wait to see these individuals and see, first of all, if they
    are absolutely black and blue from being--feeling as if they're
    being beat up with trying to wrestle with this system.
        I congratulate you all for the challenges that you're
    facing and for the decisions that you're trying to make to
    address these challenges, because I want to be sure that I
    understood what I read, and these were some of the key points
    that I pulled out of this. And then I want to be sure that we
    as a committee--and the chairman and I both are two individuals
    that are very committed to helping you with government reform.
    I came out of the State senate in Tennessee, and one of my key
    issues is governmental reform. I think it is incumbent upon us
    as elected officials to do everything we can to be sure that
    21st-century government is responsive to the taxpayers. So I
    want you to know that as you address these, that we will gladly
    work with you.
        But what I gleaned from this is seven key points: that
    DOD's financial system has been in almost total disarray in all
    business operations for the last 7 years; that DOD has
    developed 2,300 financial management systems over the last 40
    years; that DOD is required under the Bob Stump authorization
    act to produce a financial management architecture along with a
    transition plan; that DOD awarded a contract for this plan, and
    it is currently being reviewed by the GAO. This plan is
    expected to take a decade for full implementation. A reform
    plan by Business Executives for National Security [BENS], in
    June 2001 was claimed to totally revolutionize DOD's financial
    system into the 21st century. And the last point: 30 percent of
    DOD's budget is on weapons training and combat, whereas 70
    percent is on support functions.
        So my question is--and I do not know who would like to
    answer, or if all of you would like to start through these. If
    you would like to verify for me, whomever, that these are the
    appropriate and correct assumptions--Mr. Kutz, would you like
    to go first?
        Mr. Kutz. Yeah. With respect to the 7 years you're probably
    going back to when we first recognized DOD financial management
    as high risk, but that doesn't mean it started in 1995. I fully
    suspect it's been high risk for some time longer. We didn't
    start a high-risk series of reports until the 1990's. So this
    problem, I suspect, goes way back to the beginning of the
    Department.
        Mrs. Blackburn. OK. Any other comment on this?
        Mr. Kutz. With respect to the 2,300 systems, that is
    something that has also--that was not something that was
    designed by the Department. They didn't plan to have 2,300
    systems. It has evolved over time, as I think Mr. Lanzillotta
    has said in his opening statement, because you've got a lot of
    people with different buckets of money that have developed
    their own systems for their narrowly focused solutions to a
    bigger problem, and there has not really been a corporate
    structure driving systems modernization. It's been more of a
    subsidiary function, where the Army, Navy, Air Force, have each
    tried to develop their own solutions to problems. So that is
    how you end up getting 2,300 different systems.
        We are currently looking at the business enterprise
    architecture and we'll be issuing a report early next month on,
    as Larry said, version 1.0 of the architecture. But I want to
    make sure that you understand we fully support them doing an
    architecture, developing one and implementing one. It is one of
    the key elements that we believe is necessary for them to
    reform financial management.
        A couple of things. The contract with IBM, that's been
    something we've had for quite some time. We're not looking at
    just the contract. We're actually looking at the entire effort
    to develop and implement the architecture, including the kinds
    of oversight they have over their current and ongoing
    investments while they are developing the architecture. It's
    important to understand that there's billions of dollars being
    spent on systems as they're trying to develop an architecture.
    So if you think about it like building a house, they don't have
    a blueprint, but they're building a house, and so you can
    imagine what kind of situation that would create. And that
    again gets back to how you got to 2,300 systems.
        With respect to your question on the budget, I think Mr.
    Lanzillotta is probably in a better position to discuss that,
    but I believe the numbers that you said are accurate from the
    breakdown of the budget.
        Mrs. Blackburn. Thank you very much.
        Mr. Lanzillotta.
        Mr. Lanzillotta. When this problem--Greg is right. This
    problem didn't occur in 1995, and my view of it is prior to the
    CFO Act of 1990, these systems were put into place to track
    appropriations, because that is the way the Department was
    tracking its expenses. It wasn't until the CFO Act came into
    place and financial statements became the area of focus that we
    looked back and looked at our systems to see what they could
    do. These systems were never designed in this case to produce
    financial information. They were designed to do appropriation
    and congressional reporting requirements, and that's what they
    did, and they did that very well.
        We later got these old systems, and we tried to modify them
    to get the financial data that we needed, but these are old
    systems, and we forget now sometimes that technology has
    evolved such that we're on--I don't know even know what,
    Pentium 4--or what is the current speed? I just looked to see
    that you can get a great computer from Dell--I don't know if I
    should say that, you know--for like $400.
        Mrs. Blackburn. That is fine. They're in Tennessee. That
    works for me. You go right ahead.
        Mr. Lanzillotta. I have a Dell. I have to say that my first
    computer did not have a hard drive, and it had two floppy
    disks, and I thought that I was really riding high. The systems
    that we had in that place, you know, some of the systems that
    we're writing are DL4. They are in COBOL, some of the languages
    that won't handle the type of information that we want it to
    handle.
        Mrs. Blackburn. Yes, sir. Now, if I remember correctly from
    our previous hearing, you all have moved to the model, now the
    management model, where you do have a Chief Technology Officer,
    is that not correct? And someone who is handling your systems
    in the integration of each and every one of these systems; is
    that not correct?
        Mr. Lanzillotta. Ma'am, are you referring to the
    Department's Chief Information Officer or----
        Mrs. Blackburn. Yes. Yes. You may call him the Chief
    Information Officer.
        Mr. Lanzillotta. The Department does have that. We are in
    league--his name is--the Chief Information Officer is helping
    us manage--he is co-managing this program. So we manage this
    program together.
        To go back to your other statement or one of your points
    about the 2,300 financial management systems, only about 20
    percent of those are actually financial management systems; 80
    percent of those systems are what we call feeder systems. And
    what the definition of a feeder system is, is a system that was
    originally intended to do something else, and we draw on those
    systems to feed our financial systems. So when we look at the
    number of systems we have, they're not all financial management
    systems. Some of those systems are made to keep track of Band-
    Aids in hospitals or spare parts for aviation or spare parts
    for a tank battalion or acquisition systems, personnel systems,
    all kinds of systems.
        We did put together an architecture, and we did do it with
    a contractor. The Department felt that we didn't have the
    technical expertise to use leading-edge practices and
    technology without some help.
        When we went through the process, the acquisition process,
    we determined that IBM--or team IBM, because it's actually a
    coalition of six contractors--were best able to help us
    transform the Department. The plan for 10 years goes back to
    the chairman's question. This progress will be continual. I
    believe that every year we are going to make progress. I don't
    know if the architecture is ever going to be 100 percent
    implemented, because just this week our chief architect came in
    from IBM, and he says, you know, we are going to start using
    some technologies that weren't even available 18 months ago,
    but these technologies are going to help us cure some of your
    problems. Now these technologies are common practice, but when
    we started this concept or this idea, these technologies were a
    PowerPoint drawing or something.
        Mrs. Blackburn. And I appreciate that very much, and, you
    know, the life cycle of any of the technological advances is
    about 18 months. I think that when we look at something taking
    10 years, you know how outdated that would be by the time it's
    finished, and so it is something that would be an evolving
    process; but I think--I personally feel that it would be
    helpful if we had a plan that had some tangible benchmarks and
    some goals that you all were going to hit. As you move to a
    business model, one of the great motivating factors in any
    business model, whether it is a growth business or something
    that you're sustaining, is having benchmarks and some goals
    that you are striving to reach, and then incentivizing that
    process. So I would hope that we can help you all with that.
        Mr. Granetto, so you're saying $500 million is what you
    think it's going to cost to put this in place?
        Mr. Granetto. That is our current estimate of what it would
    cost to get CPA firms in.
        Mrs. Blackburn. Have you raised or lowered that estimate
    since your beginning?
        Mr. Granetto. No, ma'am. This is a very recent estimate. It
    will change once we start evaluating the plans that the
    services have put forth on an opinion.
        Mrs. Blackburn. OK. And you need 2,000 to 3,000 auditors.
    So what you're saying is you could basically employ every
    accounting student that is graduating this year?
        Mr. Granetto. I suspect that is what we could do. I'm not
    sure there's a CPA firm big enough out there. They might have
    to go to a consortium--we might have to break this down into
    chunks, Army, Navy, Air Force, DLA, something like that to get
    somebody to bid on it.
        Mrs. Blackburn. Well, I appreciate all of those thoughts
    and comments, and, again, as someone who is passionate about
    government reform and leaving things in better shape than I
    found them when I got here, I hope that we can do our part to
    help you along the path to that.
        I told someone today, I said, you know, I'm 51 years old,
    and when I am 81 and have my grandkids, I hope that they look
    at me and say, well, she made some good decisions. I hope they
    do not say, ``Man, what a sorry legislator and what a big bill
    we have to pay for,'' because it's taking so much to pay for
    government. So I hope that we can encourage you along the road
    to some of these efficiencies. Thank you all very much.
        Mr. Platts. Thank you, Mrs. Blackburn.
        Mr. Lanzillotta, I want to come back to where I was on the
    business enterprise architecture and a couple more specific
    questions. When identifying the various systems--and we're
    talking now over 2,300 as of last fall, do we have a good
    comfort level that we now have our arms around the whole
    picture, that it's not going to be 2,500 or 3,000 as far as
    what we're really trying to deal with? Because that kind of
    epitomized to me one of the challenges you're facing is just
    identifying the systems that need to be correlated and brought,
    you know, together as one.
        Mr. Lanzillotta. Mr. Chairman, you're right. We have--when
    we started this number, I think it was originally 475 systems,
    but when we started to do our operational architecture and we
    started to actually diagram our processes, we started to
    diagram our processes and then look back to see how many
    systems that we were touching; and as we fully developed this
    operational architecture, we went through and then that's when
    we started going and the number of systems started jumping as
    we started going through and looking at the number of systems
    that we were dealing with; and that's when we got to the 2,274
    systems.
        I have a high degree of confidence that is the ballpark
    range where we're at, but the Department is large. There are
    other systems out there. And as we further define our
    operational architecture and we go down another couple of
    levels as we reengineer these processes, we might find that we
    go over there and touch another system that we didn't know that
    we touched.
        One of the accomplishments, I guess, from kind of a
    technical point of view--and it doesn't mean much to most, but
    we actually now have a list or an inventory of these systems,
    and that is a major event for the Department, to be able to
    look at a list and have these systems; and we have them in the
    domains that we know where they affect and who's watching them,
    because this in itself added another degree of supervision and
    oversight that did not exist before. So it's kind of I guess a
    budget geek kind of dream to make sure that we go in there and
    know exactly how many systems we're dealing with.
        Mr. Platts. And, Mr. Granetto, I assume that process of
    even identifying all of those systems is helpful to your
    office.
        Mr. Granetto. Absolutely.
        Mr. Platts. Again, to get your arms around exactly what
    you're supposed to be looking at is--even though we may be a
    ways off from where we want to be ultimately, each one of these
    steps is going to help you in doing your duties.
        Mr. Granetto. It is. And they are keeping us very well
    informed on what's going on.
        Mr. Platts. And it is what might be helpful as you complete
    that identification process and realize that it may change. As
    you say, it is a kind of a living document you're working with,
    this architecture plan. If you could submit for the record a
    listing of all those systems that you identified, it would give
    us kind of a comprehensive understanding of what all you're
    dealing with.
        When you get into making decisions about those systems--and
    you stated that they're identified kind of by domain, and your
    domain owners are making recommendations of which ones should
    go, i.e., should not be funded, and, which ones should remain,
    my understanding from your previous comments, is that those
    domain owners will make recommendations to the comptroller's
    office. And is it the Senior Executive Council that will make a
    final decision that this recommendation, we accept it and we're
    going to eliminate this system and do this instead? How is this
    process going to work?
        Mr. Lanzillotta. We have set up a series of a hierarchical
    boards. At the bottom is the domains where they have the seven
    domains and they kind of report into a centralized office,
    which is our office, the BMMP Program Office, that kind of
    keeps everything moving and kind of makes sure that the domains
    are integrated.
        When it comes time for reporting, we have a senior steering
    group. The senior steering group is chaired by myself and the
    Department's Chief Information Officer. We chair the group.
    Members of the board are the assistant secretaries for
    financial management, acquisition and installations. GAO is an
    observer.
        There's a wealth of representation from the Department.
    These domains will then come and make their presentations as to
    what they think should be in the budget, as is the system
    turned off, system turned on? And the reason why we keep this
    presentation up to the system and don't make the domain owners
    particular kings or queens of their area is we want to make
    sure everybody stays honest. We want to make sure that a
    certain domain owner doesn't think that they are going to
    bypass these principles of the architecture just because they
    want to make sure the system is fielded, because no longer are
    we just going to field the system to field it. They will come
    to the board and make that recommendation. The board ultimately
    reports to an executive committee, which is chaired by the
    Comptroller, the Chief Information Officer, the Under Secretary
    for Acquisition, and all of the service under secretaries are
    represented on that board.
        So there is a hierarchical board that the domain owners
    will report through to make their recommendation. When
    approved, then it will be implemented in the budget process
    through the comptroller's office.
        Mr. Platts. OK. Mr. Kutz, with GAO playing an advisory role
    in this process--or envisioned in playing----
        Mr. Kutz. We do what we call our constructive engagement
    because we have to be independent because we're doing audits of
    these items, but we are there real-time and do provide our
    observations where we can to improve the situation. And I would
    say in our view the governance situation is moving in the right
    direction, but it still has not yet been fully defined. And
    there's a lot of things that are being worked out as to how
    that's actually going to work, because if you think about it
    down the road with the 2,300 systems, the rubber is going to
    really hit the road when they start to try to reduce those
    systems, and some of the owners of those systems are going to
    have to have them terminated and someone is not going to get to
    keep their system. That is where I think you're really going to
    see how this governance works with respect to the architecture.
        Mr. Platts. Mr. Lanzillotta, that point being well taken,
    about, you know, where the rubber meets the road--as we
    actually start to make decision--when do you see even your
    initial--I realize that you can't give me a date of everything
    being in place and working as you want it, but when do you see
    some of the decisions on systems being made--i.e., the
    recommendation is going to be to terminate this system and we
    move forward with that? When is the earliest as a committee we
    could start to see that type of action take place?
        Mr. Lanzillotta. Mr. Chairman, two of the systems in the
    financial accounting systems have already been terminated. We
    evaluated a system called DJAS, which was the Defense Joint
    Accounting System. It was a misnomer, because it wasn't going
    to be used by all defense agencies. It was only going to be
    used by the Army Missile Defense Agency. When we reviewed the
    system, it just wasn't going to match the architecture on what
    we needed for a general accounting system, and that system was
    terminated.
        We terminated DPPS, which was the standard procurement
    payment system, because it was replacing a system which was
    very old, MOCAS. But when we looked to see the linkup with the
    other systems that it was supposed to talk to, it didn't, and
    it wasn't going to be as good as the system that was going to
    be replaced, you know. So before it was fielded, it was
    terminated.
        We are going to continue to look at these systems and have
    already started to look at some of these systems and have
    terminated those systems when we found them. There will be
    more.
        Mr. Kutz. Mr. Chairman, one important point with that is
    those are Comptroller-controlled systems. The difference is
    going to be when they start doing that with Navy, Army, and Air
    Force systems, and that will be a little different game.
        Mr. Platts. That's one of my followups. If I understand the
    testimony, the written testimony correctly, about 20 percent
    you have direct responsibility for, 80 percent is outside of
    the Comptroller's area of responsibility. How are you going to
    deal with that challenge? Is it because of the leadership of
    the Secretary, Secretary Rumsfeld, you know, to say you're
    going to do this, you know, across the service department
    lines?
        Mr. Lanzillotta. I can assure you, Mr. Chairman, I deeply
    feel that I have the backing of the Secretary when we look at
    these systems. Of course, all authority starts with the
    Secretary. He has delegated it down to my boss. I feel no
    apprehension at all to cancel an Army, Navy, Air Force system
    that's not working, or it should not be deployed.
        I understand in the past, because I have been in the
    Department in the past administrations, and sometimes it gets
    to be a concern; but one thing with Secretary Rumsfeld, this is
    a priority with him. I honestly don't believe that a service
    secretary would try to defend a system that wasn't doing what
    it was supposed to do. There is always that gray area, and
    there is always that room for discussion, because as many
    systems as you have, you'll have different people with
    different opinions. But when it comes right down to it, I don't
    think that--I have full faith and confidence. I really believe
    that Secretary Rumsfeld has changed the culture in that regard,
    and the service secretaries I don't think would even defend one
    of their systems that wasn't working.
        Mr. Platts. And a quick followup. Then I want to yield to
    Mrs. Blackburn again quickly.
        And so you have that authority with the Chief Information
    Officer, and that is kind of your board that you structured
    where that is the final authority to say to the Army, now
    you're getting rid of that system. You have that authority now?
        Mr. Lanzillotta. We have that authority now. An example I
    could give is on the Navy ERPs. The Navy ERPs were a little in
    front of us as far as the architecture goes. We weren't trying
    to stop the development of all the systems, because these
    systems need to go on to support the warfighter and the
    Department's ability to do the Department's mission. But we
    withheld $57 million from the Navy ERPs until they could prove
    their convergence issues and that there wouldn't be cross-
    domain issues with other systems. When they came in and we
    agreed on a schedule and we agreed on milestones and
    performance measures that they would go through and tell us and
    show us that they would be fully compliant, then we released
    the money. These Navy ERPs, we released the money in stages.
    We'd get an agreement of what the system is supposed to do, how
    it's supposed to do it, and then they get the money.
        If a system doesn't live up to that agreement or it doesn't
    come off as advertised, the money is not released and the money
    is withheld. In the words of Admiral Owens, a former vice
    chairman of the chiefs, you know, all transformation is done
    through the budget, and I believe that, and we're able to use--
    with the CIO's advantage with technology and acquisition
    experience and our leverage with the budget, this is another
    thing that has made this program different than past programs.
    You know, we are married with the CIO. So we bring that IT
    experience, that acquisition experience, married in with the
    budget and the power that you can get through leveraging the
    budget. And so I think that is a major difference as to why
    this program will be more successful than past programs.
        Mr. Platts. Thank you. Mrs. Blackburn.
        Mrs. Blackburn. Thank you, Mr. Chairman.
        I want to follow right along with that line of questioning
    and tie a couple of things in this. As you look at those
    benchmarks, have you been given the appropriate
    responsibilities in handling the plans and working to pull this
    architecture together? And if not, what additional leeway or
    responsibility would you need? I think you referenced the
    hiring being a problem. Is there anything else?
        Mr. Lanzillotta. The hiring is not just my problem. I mean,
    that's--crosses anywhere in the Department or some places,
    probably the Federal Government as a whole. We have asked the
    Congress--and if you don't mind me using this as a lead-in--for
    several legislative changes that we would like.
        Mrs. Blackburn. I think that would be helpful, because it
    helps us to know what we can do to help you and what you see--
    you know, where you see our role, things that we could do that
    would allow you to maybe move more expediently, to move forward
    with maybe a little bit more empowerment and a little bit more
    encouraged. So let's answer that and then let's move to a human
    capital question.
        Mr. Lanzillotta. To follow on to Mr. Chairman--his question
    that he had on this committee's role at the full committee
    level on the civilian personnel reform, we have asked for
    authority to do split disbursements. And what split
    disbursements are is when a member of the Department of Defense
    uses their travel card and they fill out their voucher and
    those expenses are verified by their supervisor, it's outlined
    on that voucher as to whether it belongs to the credit card
    company or they get reimbursed. So if they use their credit
    card company to pay for their hotel, if they outline that on
    their travel voucher, we will pay the hotel for them, and then
    they won't have to get their money and then later send a check
    to the credit card company. That is called split disbursement.
        For the military we have made it mandatory for split
    disbursement, but we don't have the authority at the civilian
    level, because it has to be negotiated at the local level.
        In the Department of Defense there are 1,400 local
    bargaining units. I am told that it takes on the average of 5
    years to negotiate any agreement through all 1,400 units. I
    recently had a--the Congress had graciously given us the
    ability to reimburse our employees for training that they
    received. So we want people to get certain certifications. We
    now have the authority to pay for that. That also requires us
    to go to the 1,400 local bargaining units to get--to bargain
    that to say, look, we want to pay these people and reimburse
    these people when they go through this. That's split
    disbursement.
        On DSS in front of the Congress right now, we have a
    request to transfer that function, the field function, for
    personnel security investigations to OPM. When we went and
    looked at our security process, we reengineered that process,
    and what we decided to do was that automation has matured
    enough, that we used to--every time you had a top secret
    clearance, you get a mandatory investigation at the 5-year
    point. So if you were kind of bad up to 4\1/2\ years, then you
    left, you didn't get an investigation because it wasn't at the
    5-year point.
        So now we have one of these systems where your record can
    always be monitored for certain hits, like if you declare
    bankruptcy and you have a top secret clearance, maybe somebody
    needs to come over there and look at your record even though
    it's not at the 5-year point. Maybe you have a top secret
    clearance, but you don't have access to top secret information.
    So maybe we don't need to come see you every 5 years because
    you have no access. We now have the ability through automation
    to make those determinations, and we have put $91 million into
    this program to reengineer that process.
        When we look at the field investigation piece of this of
    DSS, OPM was doing it much better. In fact, we were OPM's No. 1
    customer, and so we were competing with ourselves on contracts
    to do these personnel security investigations. We decided that
    we could either put money to modernize our field operating
    agencies, or we could give the entire function to OPM to
    accomplish for the government in a consolidated effort. We
    decided, based on the market factors that OPM and that DOD were
    bidding against each other and bidding out the cost of these
    investigations, that if we left OPM just to manage it, that it
    would be cheaper for the entire Federal Government; that it
    would be in our best interest to transfer this function and
    1,800 field investigators to OPM.
        We have asked for that authority, because right now we have
    the authority to do that, but we would have to RIF 1,800
    people, and OPM would have to hire 1,800 people. We prefer the
    authority just to transfer these 1,800 people and not put these
    people through the angst of going through this process, even
    though the process has been set that these people would get the
    jobs, but this would just make it so much smoother on these
    families.
        We are going through processes of consolidation and
    realignment that we will be coming up to the Congress and
    asking for permission on further consolidations and realignment
    where we think we can make a business case where it makes
    sense.
        Something that I don't know if this committee could help us
    with--with the number of appropriations that we have. Every
    year we get 80 active checking accounts, per se, and some of
    these checking accounts are good for a number of years. So I
    might be wrong on this number--and I'll correct it for the
    record--but I think there's 247 active checking accounts that
    leads to our financial management problem, because we have so
    many appropriations that we get, so many small appropriations
    we get in a number of years, and all this has to be kept in the
    right year, in the right appropriation.
        Mrs. Blackburn. And we've got 435 Members.
        Mr. Lanzillotta. I could go on, but I've overstayed my
    welcome and the light is on.
        Mrs. Blackburn. The light is on red. Mr. Chairman, can I
    ask, though, one final question?
        Mr. Platts. Yes.
        Mrs. Blackburn. OK.
        Mr. Granetto and Mr. Lanzillotta, I think this goes to both
    of you. The Department's human capital strategy and the other
    reform initiatives that we hear are going on there, how do
    those relate back into the enterprise architecture?
        Mr. Lanzillotta. Human capital is a serious problem--it was
    actually identified by Greg early on in the financial
    management area. We have an aging work force. This aging work
    force is getting toward retirement. We need a professional
    development program to take care of training new people as this
    aging work force retires.
        When I first got to the comptroller shop in our SES level,
    I had 27 SES's, and 43 percent of them were retirement
    eligible. In the last 2 years they have retired as expected. I
    only have three left to be retired. That's why this personnel
    reform becomes an issue, because it often takes me a lot longer
    to hire somebody new than it takes to leave.
        The other part of the human capital piece that you're
    referring to is our professional development program. We have
    instituted reimbursement on professional certificates, and we
    need to get more, and it's a challenge to the Department to
    ensure our professional development of our people, that we grow
    our people. That way they can replace the senior management
    people and personnel that are leaving.
        I take the challenge, and it's an area that the Department
    needs to continue to look at as far as incentive initiatives,
    but some of the packages that the full committee was gracious
    enough to give the Department will go a long way into helping
    us develop our work force and be able to make this happen.
        Mr. Kutz. Representative Blackburn, I would make a comment
    on that. Right now for financial management the environment is
    actually quite good to hire, with what happened with Arthur
    Andersen and the public accounting profession. At GAO we used
    to have a difficult time competing for people. That has
    changed. The government looks as a much more favorable place
    right now, with more stability, interesting work, and so we've
    had a good hiring group the last several years.
        One other thing to consider here is as they transform from
    where they are today to the future, they're going to need
    different skill sets across DOD. Right now you have a lot of
    people entering and reentering data manually because of the bad
    systems we've talked about. You've got people who are
    correcting errors. You've got hundreds of people out at DFAS
    Columbus who are involved in contract reconciliation. And,
    again, once you reform, you're going to need people--instead of
    data processors, you're going to need data analyzers and
    different types of skill sets, so human capital is a critical
    element of this architecture reform effort.
        Mrs. Blackburn. Thank you.
        Mr. Lanzillotta. I couldn't agree more with Greg's
    statement. As we get the better systems on board, we'll reduce
    the number of people, but the skill set keeps on changing, and
    what we have to do is be dynamic enough to train our people for
    the new skill sets that we need.
        Mrs. Blackburn. Thank you. Thank you, Mr. Chairman.
        Mr. Platts. Thank you, Mrs. Blackburn.
        And your final comment about being dynamic in training your
    people for the skill sets needed kind of goes to that--again,
    that transformation you're looking for; whereas today, if it's
    to train them in something that is outside their specific job
    description, your hands are often tied, because of the
    bargaining process you need to go through to make that type of
    change in a timely fashion is just not doable.
        So, again, I hope we can see on the human capital side some
    added flexibility, that we do get that through and give you
    some more options.
        Mr. Granetto, I wanted to get your thoughts on looking at
    examples--and we've heard lots of estimates of what the cost
    savings will be, from $15 to $30 billion a year; Secretary
    Rumsfeld's 5 percent, perhaps $20 billion a year.
        The DFAS example, which, I understand, has installed a CFO
    Act compliant financial management system and has received a
    clean audit--the numbers I've seen is that over a 5 year period
    we've had a significant reduction in work force, about 4,500
    positions a correlated cost savings, while we've seen that
    office handle an increased amount of workload. Is that a good
    example of what we can hope to see across the board as we get a
    financial management system in place that's working?
        Mr. Granetto. I don't think so, and I'll tell you why:
    Because that CFO-compliant system that they're putting in is a
    four-part system. They have two parts in now. It's very recent.
    The DFAS improvements that you're talking to and the savings
    are really caused by DFAS' consolidation efforts and among its
    functioning offices, its improvements in its automated
    processes, and it's done a significant amount of outsourcing,
    and we've created other process improvements.
        I would state that the Secretary has said there is a 5
    percent improvement or savings involvement. I think that is
    true, but this is not a good example of that.
        Mr. Platts. It's other structural changes.
        Mr. Granetto. It's other structural changes.
        Mr. Lanzillotta. Could I amplify that comment? I think
    DFAS, though, is an excellent example of what the Department is
    trying to accomplish. It may not be true because of all the
    automation systems that DFAS has, because Paul is right; they
    are incrementally putting in new systems. But the Director of
    DFAS, Tom Bloom, has been very successful in reengineering his
    processes. We have gone from numerous personnel pay systems and
    brought them down. In fact, DFAS now is a provider of civilian
    pay services to other Federal agencies. He has reengineered, he
    has consolidated, and he has brought in and is in the process
    of putting in new automation systems. He recently realigned the
    work force from Europe, because our force structure in Europe
    has been significantly reduced, and has brought that back home
    through the use of automation systems, because it's no longer
    important that the finance clerk sit exactly where the troops
    are, because what he needs is somebody to talk to. And then all
    the work can be done--he needs a storefront operation. Then all
    the work can be done back in the States where existing systems
    take place.
        So we're able to bring--reengineer that process where we
    brought workload home from Europe, put it in three or four
    locations here in the States, with fewer people. So he is an
    excellent example of reengineering processes and administrative
    procedures to do it better. It might not be straight-through
    automation. And he has been extremely successful in being more
    efficient.
        Mr. Kutz. Mr. Chairman, I would concur with that. One other
    thing, too----
        Mr. Platts. I wanted to ask you your assessment as well.
        Mr. Kutz. DFAS is a working capital fund, and so they are
    required to charge fees that cover their cost, and so over time
    compared to other parts of DOD, they have better cost
    information. And so I would say that they are one of the
    leaders in DOD in showing that they can reduce and out costs by
    having good cost information and performance-based metrics and
    other types of management focus. So they have done a reasonably
    good job compared to certainly other parts of DOD in getting
    some of those costs out.
        Mr. Platts. And hopefully they will be an example to be
    followed, and not necessarily the savings, again, directly
    related to the financial management aspect, but to that kind of
    big-picture restructuring. And as you continue to bring work
    back from Europe--if you're looking for a good location, south
    central Pennsylvania is a beautiful area, and we have a lot of
    very content Federal workers there now. We're always glad to
    have more.
        Mr. Lanzillotta, in your testimony, near the conclusion I
    think it was, you talked about what you see over the horizon,
    and that perhaps 90 percent of the liabilities of the
    Department will be included in clean opinions in the near
    future. I think you're somewhere now like 28 percent of your
    liability is with the agencies that do have clean opinions.
        Could you expand on that? It was a pretty bright picture
    you painted in your statement. I wasn't sure I actually
    understood completely what you were envisioning.
        Mr. Lanzillotta. Ninety percent of our liabilities
    basically exist in three areas. They exist in the military
    retirement trust fund, the military health benefits, and the
    environmental liabilities. So when we talk about 90 percent of
    our liabilities, that is where they are. So getting a clean
    statement, it's only in those three areas that we're talking
    about. The problems in the financial statements are evaluation
    of assets, spares, property and other lines in the financial
    statements.
        I think it is a rosy picture as far as these three funds
    go. I think that the military retirement fund has had a clean
    opinion, and we hope that the military health benefits, which
    is a new fund, will get a clean opinion since it is a new fund.
    And we're making progress on the environmental area where
    there's some systems--Army, environmental liabilities, and Navy
    nuclear ships--that we believe are ready for audit.
        So in these areas I think we're making good progress, but
    this is what I talked about, about the incremental approach. I
    never believed that we would just have a bad opinion and then 1
    day in the future we would just have a good opinion. It was
    going to be an incremental approach. We would get things like
    liabilities taken care of. We'd get more defense agencies, and
    before too long we hope to have a service organization pop, and
    then I think the rest of it will come.
        Mr. Platts. Mr. Kutz or Mr. Granetto, would you want to
    comment on that projection on the liability side?
        Mr. Kutz. Yes. With respect to the retirement liability for
    the military personnel, that is one that has had a clean
    opinion for quite some time. The other larger chunk is the
    post-retirement health care liability, which is the present
    value of the future cash-flows for post-retirement health
    benefits. That one, as far as we understand, is reasonably
    close to having a chance to get an opinion on it.
        I would say environmental in our view would be further away
    from success than certainly the post-retirement health one,
    although I don't believe it's as large necessarily dollarwise.
    But there is important progress being made on all three of
    those, and for the most part those aren't systems issues. Those
    are process issues and people issues, which are again some of
    the--you talk about metrics you can use to measure the
    Department's progress. Those are ones that you can hold them
    accountable for in the short term, because again it had be a
    matter of management focus and attention.
        Mr. Platts. Mr. Granetto.
        Mr. Granetto. I would agree with Larry. I would point out
    that--and Greg, for that matter--point out that the two
    liabilities you're talking about are both actuarial
    liabilities, and those are fairly easy to audit. We have
    Deloitte & Touche doing the one, and they've been doing it for
    the last 6 years. We've got a clean opinion. I think it's
    fairly--we're fairly close to opinion, although I don't speak
    for the CPA firm on the other liability, the military
    retirement health care liability.
        The environmental liability, I would like to make a point.
    Larry says they're ready for audit, and really what we are
    doing is assessing whether it is ready for audit. I've got a
    team doing that now, approximately 20 to 30 people and one of
    our other directorates taking a look at that. I do not know at
    this point in time what the assessment on that will be, but we
    will probably be prepared to discuss that in a couple of weeks.
        The other two, no problem. I think we're going to get
    opinions on both of those.
        Mr. Platts. On the environmental, does that fall within the
    2002 authorization language that you have to make that
    assessment on whether you think it's at a stage where you
    should invest?
        Mr. Granetto. Yes. That's one of the intricacies of the
    authorization act. What it says is we shouldn't spend resources
    to audit if something is not ready. But if we do that, if I
    literally wait until they assert that something is ready for
    audit, I've got a problem, and it occurred with us on the Corps
    this year--or this last year. When the Corps came in with an
    assessment that they were ready for a complete audit, we were
    caught by total surprise, because we had no auditors in there
    to speak of and no real basic knowledge. It caused a lot of
    problems in my operation. So from that viewpoint I have a
    little problem with section 1008. I need to keep on it so I
    know they're ready for audit. That's why we're going to
    assessments.
        Mr. Platts. Was the Corps incident maybe a good wakeup as
    far as the----
        Mr. Granetto. Oh, yes, it was.
        Mr. Platts [continuing]. Interaction between the offices
    that you're onboard early, that they're getting closer, not----
        Mr. Granetto. That's what's driven us to the cooperation
    and to the amount of planning that's going back and forth
    across the board. If the Air Force, for example, is ready to
    state that the Air Force statement of budgetary resources is
    ready, I'd like to know that a year in advance so I've got the
    resources ready to go. And that's what we're going to do.
        Mr. Lanzillotta. One of the things we've done, Mr.
    Chairman, is we've established these audit committees, and by
    establishing these audit committees, the IG is a member of all
    these audit committees. So when they meet, he's in at the
    ground level and knows what the problems are and the state of
    that particular organization's financial statements.
        The other things that we've done are, although the law does
    not require us to put auditors on those statements that we know
    aren't going to make it, we still require quarterly financial
    statements and we still require these statements to be briefed.
        In the last go-around, I don't know how many hours' worth
    of financial statements I've listened to--somewhere around a
    day I think, 24 hours, but by doing that and doing it on a
    quarterly basis, we check things. Last time we concentrated on
    footnotes, and this time around when the financial statements
    were briefed, that part of the financial statements made
    remarkable improvement as far as explaining footnotes.
        When we concentrate on these areas, even though we're not
    turning them over to the IG for audit, we're still making
    progress, and we're still--the services are still looking at it
    in more detail; and when they know they have to brief their
    statement, they're also taking ownership. Because we had a
    problem when we first came in, that a lot of the organizations
    sat down there and says, well, it's a systems problem, and
    those systems belong to DFAS and so I can never get a clean
    statement. And we said, no, it may be a systems problem, but
    they're your systems, your financial statements, and you need
    to make that progress.
        Since then, I think that we've made significant progress.
    And these statements are brief, I'm being reminded by the IG,
    GAO and OMB, as well as the OSD comptroller.
        Mr. Platts. Well, I think that is one of the silver linings
    or the bright spots as we look ahead to truly having success
    this time. The examples like what's happened with the Corps
    issue and what has resulted in that will hopefully be long
    term, and that there is throughout the Department more and more
    cooperation and interaction, to getting to the same achievement
    at the end of the day.
        I want to turn to Mr. Kutz. Earlier this year, I think it
    was late March, GAO testified on your oversight of the systems
    that were being used by DOD and not necessarily seeing a lot of
    changes in the specifically at-risk aspects of DOD. And I
    think, if I have this right, that $18 million was being
    designated for business systems in the current fiscal year;
    that money was at risk of being spent without a good return for
    the taxpayer I guess is how I'd say it.
        I was wondering if you could expand on that previous
    testimony, but from GAO, what is meant by that being at risk,
    you know, what causes that opinion to be given?
        Mr. Kutz. Right. If you think about the architecture as a
    blueprint, what is at risk is the ability to build out the
    blueprint, and with respect to developing information
    technology systems. And we looked at four systems that DFAS was
    developing, and we found serious problems with the investment
    management of those four systems. They all had serious problems
    with cost, schedule, and performance.
        And Mr. Lanzillotta mentioned one of them earlier, the
    defense procurement payment system [DPPS], which they
    terminated at a cost of $126 million for which the government
    got virtually nothing for that. And so my view is that in
    addition to developing the architecture, they're going to have
    to make some serious improvements in their investment
    management and project management practices, because otherwise
    what you're going to have is a blueprint that never gets built
    out.
        And so this is just another area where we believe, parallel
    with the development of the architecture, they've got to put
    good project management controls in place over investment
    technology investments.
        Mr. Platts. And I was going to ask you a followup. Since
    then, what's transpired? One system is being terminated. What
    about the other three of the four identified?
        Mr. Kutz. I can't answer. They were going to go back and
    reassess those three and determine whether or not additional
    investment was justified. Now, Mr. Lanzillotta can probably
    answer with respect to those three--possibly can answer to
    those three.
        Mr. Lanzillotta. One system was terminated. Two others are
    under review right now. DDRS is probably the one system that's
    probably not all we want it to be, but right now it is one of
    our critical systems to be able to produce financial
    statements. We are looking at that more seriously as to what we
    can do to correct the problems in that system, more so than
    what we did with DPPS, where we terminated it because we never
    thought that the system would meet our expectations.
        In line with that, Mr. Chairman, one of the things that
    we've established on the new systems, we have put in metrics to
    measure the performance of these systems to see how they're
    going to do at the initial stages versus taking them farther on
    down the line. We also have asked our program analysis and
    evaluation [PA&E], which is outside of the comptroller shop, to
    also do evaluations on major systems independent of our
    evaluation to make sure that they come up with the same
    evaluation that we did. This is also in conjunction with the
    CIO's program reviews that he does on these major systems.
        So we have introduced the concept of performance measures
    on these systems on early development to try to avoid some of
    these problems that Greg has alluded to. Is it perfect? Not
    yet, but we hope to get there.
        Mr. Platts. Well, having that performance measurement
    process completed or implemented hopefully will keep us from
    getting where we have $136 million spent and no return. Because
    it's easy to understand, I think we'd all agree, why the
    taxpayer is sitting back in whatever town and whatever State
    saying what the heck are they doing? They spent $136 million,
    and it got that far along before they realized that. What I
    take from your efforts is your intent to put a process in place
    across the board so that doesn't continue to happen, that we do
    have early identification.
        And that kind of leads to my next question, which is in the
    private sector the marketplace really drives a lot of the
    accountability in the private sector--competition. For
    government in general there's not that same type of market
    pressure as to how we perform--the drivers for change that we
    need to see happen at DOD--that is what we're talking about
    here today.
        You know, I'd be interested in--all three of you, comments
    on who are the drivers or the change agents that will make it
    happen for DOD, that is the market in the private sector? Who
    is the market? What is going to drive this? Is it going to be
    oversight from Congress being the key, you know, with GAO; is
    it the senior leadership combination? What is the most
    important issue to help drive this effort home so we don't have
    that repeat of the system?
        Mr. Granetto. Let me deal with that one first, Mr. Platts.
    My concern, and I've said this before, we have to embed this
    somehow in the Department. I have no doubt that Mr. Lanzillotta
    and the current management of the Department intend for this
    thing to roll forward like nobody's business, and they doing a
    great job of doing it. But what happens when Dr. Zakheim isn't
    there? I've seen--I can maybe name a couple of things I've
    seen--let me back up. I've been in the Department since 1964 as
    an auditor with GAO and the Department. I have seen one of the
    major financial issues corrected six times and declared fixed.
    We still have the problem. It's the property in the hands of
    contractors.
        The embedding of this--it's got to be embedded and it's got
    to continue when the current leadership changes, and I don't
    know how you do that.
        Mr. Platts. And that was going to be my followup. Before we
    move on, we would welcome your insights and would thank you for
    your 39 years of service. I won't tell you what year I was
    born, but your insights and expertise, we would welcome
    suggestions to me and to this committee as to how to--because I
    share your assessment that the sincerity of Mr. Lanzillotta and
    the leadership there now want to do this; but given that we're
    talking about it being many years of effort, you know, my hope
    is that the current administration and its appointees are there
    for many more years. But how do we make sure that happens, that
    it's not, you know, the effort of today but not of tomorrow?
        So if you--not meaning today, but if you continue to give
    thought to it and want to share suggestions, whether it be
    legislative in nature or just from our oversight
    responsibilities, I'd welcome them.
        Mr. Lanzillotta.
        Mr. Lanzillotta. I agree with Paul. You know, our challenge
    institutional-wise is this, while we're there, because if this
    is going to continue, it must continue over the next
    administration and the next administration; otherwise it will
    just be another wasted effort.
        I believe the answer, though, is probably more motherhood
    and apple pie, but I think it is still true. I think that the
    oversight committee is playing an important role here. I think
    that the oversight committees--as long as Congress continues to
    demonstrate interest, the Department will continue to
    demonstrate interest. I think that GAO coming in and offering
    observations has been most helpful to make this program go
    along. I think that the senior leadership needs to be informed.
    But then it goes back to Paul's point that the process has to
    be institutionalized.
        One of the ways that we hope to do that is these domains,
    by use across sections of the Department, using the Entire
    department instead of just making it another stovepipe system,
    that this is the way the Department will do business.
        The major motive factor yet remains is that we're there to
    support the warfighter, and that requirement to do it better,
    to turn over these savings into those programs is always there.
    And now that we are transforming the Department, I think that
    these requirements will continue and will even be more
    emphasis, because people now have started to see their product
    for the transformation.
        You know, the recent military operation showed where,
    because of information technology, that we can pick up
    intelligence, put ordnance on target in a matter of hours. You
    know, that used to take us weeks to do that, and so I think
    people are seeing the advantage of that, and I think the
    warfighter's appetite for that type of technology is growing.
    And I think that he, the warfighter, will continue to put
    emphasis on the support systems to reengineer these processes.
    I don't think that they will tolerate--you know, we've never
    tolerated a second-rate military force and never had a second-
    rate military force, but I don't think that our military forces
    will tolerate a second-rate business process anymore either.
        Mr. Platts. And, Mr. Kutz, before you expand or comment on
    this, I think that internal incentive--it actually surprised me
    that hasn't driven more accountability over many years from
    that soldier on the front lines, and I'll use an example. We're
    very grateful in the 19th District being home to the Carlisle--
    the war college in Carlisle and a major new investment in
    housing there. And, you know, for senior leaders of the army
    that go through there, the standard of the housing now is
    pretty abysmal, and the Army is, through the residential
    initiative, making substantial investment.
        If we turn to the families of those leaders going through
    the War College over the past many years, or the privates out
    on the front lines and said, we want you all to come to the
    Pentagon and get some answers as to why we just spent $136
    million on an accounting system that we now know doesn't work
    but we won't, or can't, you know, give adequate housing for you
    and your family out in whatever base you're on. That should
    drive some real incentive to fix the problems. Unfortunately,
    though, it doesn't seem to have done that in the last several
    years or decades.
        Yet it should be a natural incentive that we--we talk about
    $20 billion, you know, what that translates to, whether it be
    family issues for our military personnel, whether it be
    training for our military personnel, whether it be actual
    equipment purchases and program development. It would seem to
    me the most natural incentive that would drive these changes,
    but it hasn't for some reason; and so, I think that's why
    looking at institutionalizing changes that really are going to
    be lasting is going to be critical.
        Mr. Lanzillotta. I don't know when Secretary Rumsfeld came
    to the Department whether everybody believed him, that
    transformation and concentrating on developing new capabilities
    was the thing to do. I think now the military leaders have seen
    that the transformation of this military capability and the
    things that it can now produce, everybody is a believer. That
    is institutionalized. No longer do you have to preach
    transformation. Everybody preaches transformation, and that is
    driving these new requirements now on the support system.
        Another example would be during Desert Storm we moved a
    huge amount of logistics and supplies over into theatre. Some
    of that, according to Greg, was never opened and shipped back
    unopened, because there were supplies that weren't needed or
    were lost.
        GAO was right, but the warfighter drove the technology in
    reengineering their business practice. We now invest in little
    radio transmitters that actually have logged in them everything
    that is in that shipping container. So when that shipping
    container gets to port and they're looking for Band-Aids, they
    can pull it up on the computer, and it says it's in storage
    container number such-and-such, and then they can go to that
    storage container and find that. These type of transformational
    efforts on the business side were being driven by the
    warfighter. So I think that this is one of the ways that this
    is going to institutionalize the way that we do business that
    didn't exist prior to this.
        On your example on the systems that were canceled, we do
    need to go early on and decide whether the system is going to
    live up to its advertisement, and if it's not, to cancel it a
    lot earlier than wait till further on down the line.
        I still believe there's no way out to not develop the
    system to a certain point so it can be judged. But this
    milestone in my example of how we withheld the $57 million is a
    system that I think that we have to go in the future.
        We have to wait and say, hey, you said you were going to do
    this. OK. If you can do that, then you get the money. If you
    can't, then I'm sorry. And in DPPS's case the reason why we
    canceled it even after the $126 million had been spent is
    because to fix it, to do the fixes we wanted it to do, was too
    costly. We decided that it was cheaper to fix the current
    system to do the things we wanted to do and not put the money
    into the system. So there was a business case there that, you
    know, came down to canceling that system, and I think all these
    systems come down to a business case.
        Mr. Platts. Well--and while the loss of the money that was
    invested in the system, canceled is unfortunate, you're right
    that we want to make that cost/benefit, even if it's down the
    road. The earlier we can make it the better, but making that
    cost/benefit analysis and then having that drive our actions as
    opposed to, well, hey, we said we're going to build this so
    we're going to build this whether it makes sense or not.
        So I commend you for making those decisions, even when it
    brings forth examples of dollars that were spent that we wish
    hadn't been done.
        I want to give Mr. Kutz the--we kind of got away from it,
    but on the issue of driving the change permanently, your----
        Mr. Kutz. Yeah. With respect to drivers, certainly the ones
    that have been mentioned are--I think Congress, GAO, the IG,
    etc. I think maybe the fiscal condition of the country will
    ultimately be the driver as we go forward with the deficits and
    the challenges we face there.
        But again, Congress having oversight, consistent oversight,
    and providing incentives to DOD is very important.
        With respect to institutionalizing, that is something that
    is another challenge that we actually have offered something in
    several of--my testimony and Comptroller General Walker's
    testimony, the concept of a Chief Management Officer. And I
    don't know if you're familiar with that concept from other
    testimony we've given or someone else has given, but it's kind
    of like the idea of Charles Rossotti over at IRS, where he was
    brought in for a term of 5 years for his credentials. He was
    nonpolitical. He was brought in for his business background and
    his management background, and he stayed at IRS for 5 years. I
    think it would be nice to have him stay 5 more years, but he
    made a significant impact over there.
        In the Federal Government, the average political appointee
    turns over less than every 2 years, or less than 2 years. So
    maintaining that consistent leadership and drive is a
    challenge. And certainly there's great leadership right now at
    DOD with the Comptroller and the Secretary, but whether they
    will be around long enough to sustain this over the period of
    time necessary has yet to be seen. So this Chief Management
    Officer is something that we've thrown out there as an idea for
    consideration.
        Mr. Platts. And I know that the Department has looked at
    that and is aware of that proposal from GAO. Would you want to
    comment on the general, you know, pros and cons as the
    Department sees it? And the exact proposal for DOD was a 10-
    year, I think--wasn't it--to have a chief management----
        Mr. Kutz. I think we've talked 5 to 7 years, but it could
    be 10 years, a number of years----
        Mr. Platts [continuing]. The IRS a better example of that 5
    years than 10, but I don't know if you want to comment at all.
        Mr. Lanzillotta. Greg is right. The GAO has proposed this
    several times. And the Department at last has taken a look at
    it, and currently the Department is looking at something very
    similar. In the logistics area, the Secretary received a
    briefing as to whether there should be one guy in charge of all
    logistics throughout the Department, which is a very similar
    concept as to what Greg is proposing, a chief operating officer
    to take a look at these programs.
        There are several initiatives that the Department is
    looking at, and I don't know how these initiatives will come
    out. It's kind of proposing a different structure for the
    Department--for the OSD staff, instead of an Under Secretary
    for Acquisition Technology and Logistics, one for Personnel
    Readiness and one for Comptroller. What Greg is alluding to is
    probably a different OSD structure that would have operating
    officers for different business lines, per se.
        The Secretary has several studies going on right now. He
    has been briefed on several of these concepts already and has
    not made any decision as to how he wants to proceed with this.
    There are certain pros and cons. Greg is right. It does
    institutionalize it for that area, but I don't know--the
    Department once had a similar concept, and went away from that
    concept because it didn't work. There was too much conflict
    between the current deputy that was supposed to be sort of
    policy and the deputy that was--for a deputy secretary that was
    for operating management. And it went back to the one deputy.
    So it's not without precedent, and it's not without precedent
    that it had to go back to the previous form.
        Mr. Platts. What's the timeframe for what is being looked
    at within the Department such as for a logistics? Is there a
    timeframe, you know, for reviewing this and making a decision
    or recommendation as to whether to pursue it or not?
        Mr. Lanzillotta. It was briefed to the Secretary. He's
    asked several other questions that people have been tasked to
    come back to, and I wouldn't hazard a guess as to when he'll
    make that decision.
        Mr. Platts. OK. Thank you.
        One other specific area I wanted to touch on. Mr.
    Lanzillotta I mentioned to you, I think before, about having
    the Navy Supply Systems Command in my district--and I've been
    briefed there on some of the significant changes that the Navy
    has made with the purchase and travel card programs, and they
    clearly seem to be on very much the right track of getting
    control and responsibility in these programs. And I give great
    credit to my predecessor, subcommittee chairman Steve Horn and
    his work on that issue. And I think this is a very good example
    of the oversight that this committee can play by shedding light
    and working with GAO and bringing attention to an issue, have
    some serious problems addressed, and very good results come
    from that oversight. And I know that Chairman Horn probably is
    pleased with the results he is seeing.
        I saw the Navy's efforts, and I was wondering if, Mr.
    Lanzillotta, you could expand on where you see DOD in total
    today on the travel and purchase card issues and trying to
    ensure that the abuses of the past don't reoccur to the level
    they were; and then also what--if you can give us any specific
    examples of what consequences have resulted from those abusing
    travel purchase cards.
        Mr. Lanzillotta. The Department has done several things,
    and I think when you talk about what the Navy has done, it has
    been a product of a joint task force. When this problem was
    highlighted to the Department that we were having, not with
    just purchase cards but with travel cards and charge cards in
    general, the Secretary asked Dr. Zakheim to convene a task
    force and look into this in a more serious way. We got a task
    force and got all the people involved, from the services to the
    Department of Justice, to OMB, GAO, IG, and the whole host of
    issues. We came out with certain findings that I think that
    we're starting to see the results of.
        By another metric, performance measures, our delinquency
    rate is way down, and we hope that the possibility of fraud is
    being eliminated. We've done this by increasing our oversight,
    and we've increased our oversight by the services by making
    them report on cases and also by tracking through performance
    metrics of what the services are doing. We've canceled a lot of
    cards 400,000 travel cards and 80,000 purchase cards, I
    believe, to take away the possibility of somebody having a card
    and using it for a purpose that it wasn't intended for. We
    increased the amount of training, because part of our problem
    was that the people who had these cards were not fully trained;
    or they were given a CD that says, you know, here is an 8-hour
    CD, watch this before you use this card. And of course they
    didn't, you know, and we ran into problems that way.
        And we've also started the process of data mining, and we
    use data mining to find possible cases of abuse, and we run
    different scenarios. They come over there and show us, this is
    a possible case. We prosecuted--and you probably read about it
    in the papers--somebody in the Department of Defense Graphics
    Division that had embezzled $1.7 million. That was found
    through our efforts in data mining. It wasn't found by the IG
    or GAO. It was found by data mining, and we were able to go
    after that person and prosecute that person for fraud. What
    we're hoping is more of this data mining, more of these--not
    that we want more of these cases, but when people know that
    we're doing this, it will keep people from attempting to use
    this.
        Are there more cases of fraud out there? I guess these two
    gentlemen out there will let us know. But we are making efforts
    in those areas to try to put emphasis on these programs and so
    eliminate it, and I think your example of the Navy is an
    excellent example of leadership and supervision in the things
    that it can accomplish.
        Mr. Platts. I would be interested, Mr. Kutz--both of you--
    if you want to comment, on your assessment on where we are on
    the purchase.
        Mr. Kutz. With respect to consequences, I guess that was
    one of the areas where we did see significant issues. And
    whether it was fraud that either we identified, the IG or the
    Department identified, people went after those folks and
    attempted to prosecute them.
        Where we are talking about abuse improper usage of the
    cards, where you were buying things you really didn't need like
    $500 computer bags, we saw little or no consequence to those
    folks. They might have had their card taken away eventually,
    but, for the most part, there was little or no consequence.
        With respect to fraud, there were consequences. Although
    one issue that's interesting with credit cards is U.S.
    Attorneys oftentimes will decline cases under $100,000. So many
    of the civilians who didn't go through the military justice
    system walked, basically.
        There is substantial progress, though. The NAVSUP team you
    mentioned in your district, they have done a tremendous job--we
    work very well with them--in improving the controls, processes;
    and they have actually reduced the Navy's cards from about
    60,000 when we first started working with them down to about
    20,000.
        Mr. Platts. Using technology available now seems to be a
    huge part----
        Mr. Kutz. Right. If they are automating their systems. It
    used to be a very paper-intensive and more costly system, so
    they are making great progress there, and they have done a real
    good job there.
        With respect to the extent of the problem, we are still
    looking at one of the programs called the centrally billed
    travel accounts; and we have to report out on that and will be
    doing that over the next 6 months.
        With respect to the purchase cards and the individually
    billed travel cards, there has been good progress in improving
    the systems processes and controls; and we have not been back
    to audit that.
        We are required by law to report back in December on the
    progress against our recommendations and some of the open
    investigations and other cases we had.
        Mr. Platts. Mr. Granetto.
        Mr. Granetto. We are very actively involved in this. I'm
    probably not going to make Mr. Lanzillotta very happy at this
    point, because we are about to issue a report prior to early
    next week, another one on this, and there will be several more
    after this.
        I think it's fair to say, from a publicity viewpoint, this
    issue is going to continue to bleed. We are very, very
    intimately involved in it. The Department is very aggressive in
    reacting when we come up with something.
        The data mining effort is part of our information. Colonel
    Kelly, who works for us and originally worked for me, is
    running a large part of that. We are almost on real-time. Right
    now, we are near real-time on the transactions. We're getting
    them in less than a month. We could almost have them on the day
    they occurred, except we can't handle the volume of data at
    this point in time.
        Well, you asked--there are IPTs going on. Let me read you a
    couple of things that will not make, I am sure, people happy: A
    cardholder purchased a Santa suit for $232 with a government
    purchase card.
        A cardholder inappropriately rented a vehicle for $910
    using the government purchase card. That individual was
    terminated from Federal employment and allowed to reimburse the
    $910.
        A cardholder accessed pornographic sites and sports-related
    Web sites with the government purchase card.
        A Navy facility building renovations budgeted at more than
    $500,000 was paid for by the government purchase card by
    splitting the project into smaller transactions to stay below
    the $2,500 micropurchase threshold.
        One Navy cardholder used the government purchase card to
    purchase two automobiles, surgical enhancements and a
    motorcycle.
        A cardholder made 59 fraudulent purchases that totaled more
    than $132,000.
        A cardholder purchased personal goods and services, meals,
    gasoline. This particular cardholder made 29 inappropriate or
    unauthorized purchases that totaled about $6,000.
        Air Force individuals used the Air Force purchase card for
    155 purchases and transactions totaling $30,000. They then
    disputed 118 of these charges as inappropriate and got a credit
    of $28,000 back.
        One cardholder split a $9,131 requirement to four separate
    transactions with the same date to purchase new uniforms for
    military personnel.
        He already mentioned the $1.7 million in fraudulent
    purchases in the Washington headquarters service.
        One cardholder used a purchase card 52 times in an 8-week
    period to make a single purchase for more than $551,000.
        Those are the kinds of things we are finding. They are
    still there. It is tightening down. The Department is reacting
    very quickly. Some of these are ongoing. All of them are being
    resolved via investigations.
        We have an employee at the Naval Service Weapons Center who
    pled guilty in U.S. District Court, Eastern District, theft of
    government property and was sentenced to 6 months home
    confinement and 3 years probation because of misuse of the card
    for $29,000 to include purchase of motorcycles.
        We have an employee at the Naval Service Warfare Center who
    pled guilty in District court same thing, theft of government
    property, and was sentenced to 5 years probation and ordered to
    pay a $1,000 fine for using the card to purchase several items,
    including an all-terrain vehicle, a motorcycle and a brass bed.
        And we have another Defense Commissary employee who pled
    guilty to possession of child pornography and theft of
    government property for using his government-issued purchase
    card to purchase personal items to include that child
    pornography.
        All of these were acted upon once we found out. We have the
    investigators involved. They are involved. We have the service
    auditors involved in this. The Department is emphasizing it.
    The Department is making it very well known that they are
    prosecuting and taking action.
        In my opinion, we are going in the right direction. It is
    still a problem.
        Mr. Platts. Are the examples you are citing ones that
    occurred not recently, but have more been called recently, so
    some of the changes that are happening, technology and the fact
    that 100,000 or less cardholders--that they were incidents
    before these changes and are now being pursued?
        Mr. Granetto. These were instances in 2001 and 2002 that we
    found by mining that old data, and we are getting very current
    with the data.
        Mr. Platts. It sounds like where you are finding it, the
    Department is aggressively pursuing, especially where there is
    fraud involved--but it also sounds like that there are some
    challenges with the U.S. Attorneys Office as far as getting
    them to actually prosecute.
        Mr. Lanzillotta. We have come up with an alternative that
    the Department of Justice has decided not to prosecute. It
    doesn't make me happy or sad. It makes me sad if a Federal
    employee misuses a government card and does things like this.
    It makes me happy when somebody else does my work and finds it
    for me so we can take action.
        Mr. Platts. I see that, as an example, where there is a
    partnership here and all three of your offices are looking to
    tighten down the hatches when these instances are happening
    and, if they are happening, aggressively pursuing them.
        Mr. Lanzillotta. We have 1.1 million travel cards out
    there. We reduced that number by 400,000, but we continually
    review this every 6 months as to who ought to have cards. We
    have 143,000 purchase cards out there, and we have reduced--
    that number is down 33 percent from where it was. There is
    always the possibility that somebody's looking for the free
    lunch.
        I have another list of people that we've caught and
    prosecuted and taken similar action with. I think it's
    encouraging not that we found people, but I think it's
    encouraging that action is being taken. With that many cards in
    circulation, I guess statistically I feel that somebody is
    going to try to take advantage of it and do something that they
    shouldn't be doing. You see it all over on corporate cards. You
    read about cases where people have done certain things on
    corporate cards and private sector that they aren't happy that
    shows up in the paper.
        There were some recent articles in the D.C. government
    about the purchase card, because I remember going with relief
    that they had some examples and it wasn't DOD, great.
        Mr. Kutz. With respect to the purchase card, I think DOD
    was one of the first ones to be looked at governmentwide. We
    have people calling and talking to us about this, and we just
    issued a guide for auditing and investigating. So some of the
    same things that were happening here at DOD are happening at a
    lot of other organizations.
        Mr. Lanzillotta. But the important thing to remember is
    that there is action being taken.
        Mr. Platts. And certainly, because of the media's interest
    in this issue, it gets a lot of attention. Hopefully, the
    action that is being taken gets equal attention so when the
    disclosures of somebody doing this is played up that the
    consequences that are taken against an individual are also
    equally reported. But it is a small part of that big picture of
    getting control of our financial management processes and that
    we are doing right by the taxpayers.
        At the end of a good number of hours of your patience with
    me and our questions, I didn't mean to touch on a sensitive
    issue, but also it is an important issue, and with the report
    that you reference next week, we will certainly look forward to
    receiving that and reviewing that as well.
        I have no other questions I want to ask. I don't know if
    you have anything you want to add before we do wrap up our
    discussion here today.
        If not, I want to thank each of you for your efforts; and
    if you could convey to your colleagues and each of your offices
    my gratitude as well. Because, of the magnitude of the issue we
    are dealing with in trying to get our arms around the financial
    management of a $400 billion annual expenditure by that entity,
    it is not going to take one person, one office doing it. It's
    going to take a partnership.
        One of the things I am most encouraged by is what seems to
    me the openness and the cooperation that is now going on
    between the three of you, OMB as well. There is a team effort
    here that will help get to that institutionalizing, you know,
    these changes, that it's not just one entity's idea of a shared
    vision and commitment and goal of all.
        So as a subcommittee and as Chair of the subcommittee I
    certainly look forward to continuing to work with each of you
    and your offices as we continue our oversight and really, as we
    are at the early stages of the business enterprise
    architecture, to see how that actually moves forward. The
    example of the two systems that already have been terminated is
    a good start, but as we get into some of those challenges that
    are outside of your direct oversight and Department, how the
    plan actually gets implemented and acted upon is something we
    are going to be closely watching and hoping to promote and to
    praise is what we hope to be doing as we see successes being
    achieved.
        But, again, my sincere thanks for your efforts day in and
    day out and your efforts in preparing for this hearing and your
    patience with me over several hours of questioning.
        So, I appreciate that, and we will keep the record open for
    2 weeks for any additional submissions such as the systems that
    you have identified that you are now reviewing or will be
    reviewing and any other information that is to be submitted.
        Otherwise, this meeting stands adjourned.
        [Whereupon, at 5 p.m., the subcommittee was adjourned.]