[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.]

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