[Senate Hearing 109-971]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 109-971
 
           FINANCIAL MANAGEMENT AT THE DEPARTMENT OF DEFENSE 
=======================================================================
                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             AUGUST 3, 2006

                               __________

        Available via http://www.access.gpo.gov/congress/senate

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs

                              -------

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29-762 PDF                 WASHINGTON DC:  2007
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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

             Michael L. Alexander, Minority Staff Director
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk













                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1
    Senator Carper...............................................     6

                               WITNESSES
                        Thursday, August 3, 2006

Hon. David M. Walker, Comptroller General, U.S. Government 
  Accountability Office..........................................     7
J. David Patterson, Principal Deputy Under Secretary of Defense 
  (Comptroller), U.S. Department of Defense......................    17
Teresa McKay, Deputy Chief Financial Officer, U.S. Department of 
  Defense........................................................    19
Thomas F. Gimble, Acting Inspector General, Office of the 
  Inspector General, U.S. Department of Defense..................    21

                     Alphabetical List of Witnesses

Gimble, Thomas F.:
    Testimony....................................................    21
    Prepared statement with an attachment........................    71
McKay, Teresa:
    Testimony....................................................    19
Patterson, J. David:
    Testimony....................................................    17
    Prepared statement...........................................    59
Walker, Hon. David M.:
    Testimony....................................................     7
    Prepared statement...........................................    33

                                APPENDIX

Questions and responses for the Record from:
    Mr. Patterson................................................    83
    Mr. Gimble...................................................   115


           FINANCIAL MANAGEMENT AT THE DEPARTMENT OF DEFENSE

                              ----------                              


                        THURSDAY, AUGUST 3, 2006

                                     U.S. Senate,  
            Subcommittee on Federal Financial Management,  
        Government Information, and International Security,
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn and Carper.

              OPENING STATEMENT OF CHAIRMAN COBURN

    Chairman Coburn. Today's hearing of the Federal Financial 
Management, Government Information, and International Security 
Subcommittee of the Homeland Security and Governmental Affairs 
Committee will come to order.
    I want to thank all our witnesses for being here, the work 
you have put into it plus the work that you are doing in every 
area, whether it is at DOD or IG or with General Walker and his 
staff and the wonderful work they do to help us get things 
realigned.
    On September 10, 2001, the day before the terrorist attacks 
that shook our Nation, Secretary of Defense Donald Rumsfeld 
stated the following: ``Financial management efforts at the 
Pentagon are not just about money or waste. In the end, it is 
really about a matter of life and death, ultimately, every 
American's life and death. Our job is defending America, and if 
we cannot change the way we do business, then we cannot do our 
job well and we must.''
    I don't think it could be said any better. The U.S. 
Department of Defense fiscal year 2006 budget was more than the 
combined defense spending of the rest of the world. We are 
currently debating the proposed $441.2 billion budget for DOD 
on the Senate floor right now, plus another $120 billion that 
will have come through supplementals and add-ons to total $513 
billion in this next fiscal year. The baseline amount reflects 
a 7 percent increase over 2006, a 48 percent increase over 
2001, without including war supplementals.
    It is difficult for most of us to wrap our hands around a 
budget that big. Our budget for defense will be higher than at 
any time in our history in real dollars, even including World 
War II. We must secure America--that is not negotiable--
whatever it costs. But do we really know what it costs? When we 
don't know how we are spending that money and we don't know 
whether it is being managed well, we don't know what areas of 
the budget are really necessary for the Nation's defense and 
what areas aren't.
    We had Secretary Rumsfeld this morning before the Armed 
Services Committee and he made a valid point, is the very 
things that the Defense Department wants to do, the Congress 
won't let them, and the very things they don't want to do in 
terms of earmarks, some $20 billion, the Congress is making 
them do.
    There is quite a bit of evidence that the amounts that are 
lost to payment errors, waste, fraud, abuse, and duplication 
could be in excess of tens of billions of dollars each year. 
When you consider that seven of nine advanced weapon programs 
today are over budget and behind schedule, something is very 
wrong.
    The most glaring problem has been the Department's 
inability to produce auditable financial statements. In other 
words, they can't undergo an audit, much less pass one. If DOD 
were a privately-owned company, it would have been bankrupt 
long ago. There is good movement, I am proud to say, within the 
DOD in trying to address that. In 2004, the Department set the 
goal of undergoing a full audit by the year 2007. 
Unfortunately, that deadline has not been met, and in fact, it 
has been moved fairly far out, to 2016. That is 10 years from 
today.
    Americans are being asked to wait a full 10 years before 
their dollars are tracked well enough for the Department to 
hold an audit, and that seems to be the new objective of 
financial managers, is to get to a place where we can actually 
have an audit, and that is a laudable goal. Don't get me wrong. 
Undergoing an audit is real and measurable progress. The 
President inherited a Department in financial disarray and many 
hard-working folks have been making slow but steady progress on 
the goals of having audited financial statements.
    I have had individual conversations with your Comptroller. 
I think the ideas and the plans and the institutional plans of 
change are ongoing. I am pleased that the Government 
Accountability Office (GAO) and Office of Management and Budget 
(OMB) believe that the goal is realistic and can be met. Just 
being able to get a financial audit of all the components of 
the Department will be a marked improvement over what we have 
today.
    Over the past 5 years, GAO has made a series of 
recommendations to DOD, which they are in the process of 
implementing, and I want to recognize them and thank them for 
that process. They deserve to be commended for their work. The 
financial audit and improvement readiness plan to incrementally 
move the Department to an auditable state by 2015 and the 
standard financial information structure to categorize DOD 
financial information are two key elements driving this plan 
for financial management improvement. They are both promising 
steps. They will require, however, vigorous oversight to see 
that these plans are on track and receiving the attention 
necessary within DOD and that these efforts yield the results 
that we want them to.
    This Subcommittee is going to be watching closely and 
asking for regular updates every 3 to 5 months. Quite frankly, 
2016 is not good enough for the American taxpayer. When we call 
on the Defense Department to do things that we think are 
unimaginable and they do it in terms of defending this country, 
they demonstrate the leadership qualities and characteristics 
that make them as good as they are. We need to apply those same 
characteristics, those same leadership traits, to getting the 
Department's financial management under control.
    This drive to improve the financial management controls in 
DOD will not happen without sustained leadership--every day, 
every week, every month. It is essential to obtaining the 
outlined results, the benchmarks, and meeting the goals the 
Department has set.
    GAO has recommended the position of a Chief Management 
Officer be established within the Department of Defense to keep 
the business transformation intact as a new administration is 
ushered in. I am interested to hear more about the role and 
function of such a position within DOD to see how this 
organizational change will help maintain continuity during 
times of administrative transition.
    GAO has also been reporting to Congress that DOD is at the 
top of its high-risk list for years. Of the 26 high-risk areas, 
14 are at DOD. While sustained leadership at the agency is 
critical to achieving success with financial management 
improvement, continued oversight by Congress is just as 
important.
    And as the Secretary's quote reminds us, none of this is 
trivial and none of it is optional. The financial management of 
the world's largest and most competent military force affects 
not only the stewardship of taxpayer dollars, but the safety 
and well-being of the real men and women on the battlefield, 
the security of our civilian population at home and abroad, and 
indeed, the freedom and peace of the world. Beyond these life 
and death issues, there are fundamental issues of respect in 
how we treat our sons and daughters in harm's way every day.
    During this time of war, GAO reported that our battle-
wounded soldiers were hounded by debt collectors for debt they 
incurred on no fault of their own. In fact, GAO found as many 
as 73 percent of the reported debts were caused by overpayments 
of pay allowances, pay calculation errors, or erroneous leave 
payments.
    Every dollar wasted or misspent is a dollar we won't spend 
preparing and equipping our warfighters. Recently, Lt. Gen. 
Steven Baum, the top National Guard General, said that two-
thirds of the active Army brigades are not rated ready for war. 
Army officials, analysts, and some of my colleagues have 
complained that there just isn't enough money to complete the 
personnel training and equipment repairs and replacement that 
must be done when units return home after deploying to Iraq and 
Afghanistan. And we heard this morning that, in fact, part of 
the problem with that is underfunding from the 302(b), earmarks 
that take away, and not allowing the Defense Department to do 
the things that they think will create efficiencies and economy 
of scale.
    If there is one agency in the government where corners can 
be cut, it is not the DOD, and we are not suggesting that with 
this hearing today. If there is one agency where we should 
ensure an abundance of resources, it is DOD. My colleagues know 
that, and perhaps that explains why so much money has rolled 
out the door to DOD with so little oversight. That same desire 
to give our armed forces whatever they need may be what has 
hampered us from following what we do give them.
    It is not enough just to write blank checks to DOD without 
effective oversight, call ourselves patriots, and go home. It 
is a perverse world when we can roll out the types of 
appropriations, both through regular order and emergency war 
supplementals, and still hear complaints of equipment and 
training for warfighters that the Department can't afford. It 
is time for Congress to match the level of its abundant 
provision of resources of the American taxpayers' money with an 
intensity and frequency of financial oversight. The safety and 
protection of our country should be our top priority. I have a 
hard time, however, justifying continued multiple emergency war 
supplementals for the Department when we don't know exactly 
what that money is buying, and neither does the Department of 
Defense.
    I would like to stress that this hearing is not a policy 
debate about whether or not U.S. troops should be present in 
Afghanistan or Iraq. We are there and we must win. We must be 
prepared to win the next time, as well, and the time after 
that. The Department of Defense has adopted a motto, and it is 
a good one. ``Check it. What gets checked, gets done.''
    Senator Carper and I are committed to Congressional 
checking.
    We thank each of our witnesses for appearing today before 
this Subcommittee.
    [The prepared statement of Chairman Coburn follows:]
                  PREPARED STATEMENT OF SENATOR COBURN
    On September 10, 2001--the day before the terrorist attacks that 
shook our Nation--Secretary of Defense Donald Rumsfeld stated that, ``. 
. . financial management efforts at the Pentagon are not just about 
money or waste . . . in the end, it is really a matter of life and 
death--ultimately every American's . . .'' Secretary Rumsfeld 
continued: ``Our job is defending America, and if we cannot change the 
way we do business, then we cannot do our job well, and we must.''
    The U.S. Department of Defense fiscal year 2006 budget was more 
than the combined defense spending of the rest of the world. We are 
currently debating a proposed $441.2 billion dollar budget for DOD on 
the Senate floor right now. This, of course, does not include money the 
Department receives through supplemental appropriations to pay for the 
Iraq war. This amount reflects a 7 percent increase over 2006 and a 48 
percent increase over 2001--again, and that doesn't even include war 
expenses.
    It's difficult for most of us to wrap our heads around a budget 
that big. Let's put it in more tangible terms: U.S. defense spending 
will exceed $513 billion next year, the highest amount at any time 
since World War II. It also exceeds the rest of the world's military 
spending--combined.
    We must secure America--that's not negotiable--whatever it costs. 
But do we really know what it costs? When we don't know how we're 
spending that money, and if it's being managed well, we have no idea 
what areas of the budget are really necessary for the Nation's defense 
and what areas aren't. And there's quite a bit of evidence that the 
amounts lost to payment errors, waste, fraud, and abuse each year could 
be in the tens of billions.
    The most glaring problem has been the Department's inability to 
produce auditable financial statements--in other words, they can't 
undergo an audit, much less pass one. If DOD were a privately-owned 
company, it would have been bankrupt long ago. In 2004, the Department 
set the goal of undergoing a full audit by 2007. That deadline has not 
been met, and in fact, has been moved to the year 2016. That's 10 years 
from today. Americans are being asked to wait a full 10 years before 
their dollars are tracked well enough for the Department to fail an 
audit. And that seems to be the new objective of financial managers at 
DOD--to get to a place where DOD can actually fail an audit. Passing 
the audit is a pipedream for some future date beyond 2016.
    Don't get me wrong. I understand that merely undergoing an audit is 
real and measurable progress. The President inherited a Department in 
financial disarray, and many hardworking folks have been making slow 
but steady progress. I am pleased that the Government Accountability 
Office and the Office of Management and Budget believe that goal is 
realistic and can be met. Just being able to get a financial audit of 
all components of the Department will be a measurable improvement.
    Over the past 5 years, GAO has made a series of recommendations to 
DOD, which they are in the process of implementing. They deserve to be 
commended for their work so far. The Financial Improvement and Audit 
Readiness (FIAR) Plan to incrementally move the Department to an 
auditable state by 2016 and the Standard Financial Information 
Structure (SFIS) to categorize DOD financial information are two key 
elements driving this plan for financial management improvement. These 
are both promising steps. We still need, however, rigorous oversight to 
see that these plans are on track and receiving the attention necessary 
within DOD, and that these efforts yield the intended results. This 
Subcommittee will be watching closely, and asking for regular updates 
every few months.
    DOD's plans to improve the financial management of our defense 
system will not happen without sustained leadership. Leadership is 
essential to obtaining outlined results, benchmarks, and meeting the 
goals the Department has set. GAO has recommended the position of Chief 
Management Officer be established within the Department of Defense to 
keep the business transformation intact as a new Administration is 
ushered in. I am interested to hear more about the role and function of 
such a position within DOD to see how this organizational change could 
help maintain continuity during times of transition.
    GAO has been reporting to Congress that DOD is at the top of its 
``High-risk'' list for years. Of the 26 ``high-risk'' areas, 14 are at 
DOD. While sustained leadership at the agency is critical to achieving 
success with financial management improvement at DOD, continued 
oversight by Congress is just as important. And as the Secretary's 
quote reminds us, none of this is trivial or optional. The financial 
management of the world's largest and most competent military force 
affects not only the stewardship of taxpayer dollars, but the safety 
and well being of real men and women on the battlefield, the security 
of our civilian population at home and abroad, and indeed the freedom 
and peace of the world.
    Beyond these life and death issues, there are fundamental issues of 
respect and how we treat our sons and daughters in harm's way every 
day. During this time of war, GAO reported that our battle-wounded 
soldiers were hounded by debt collectors for debt they incurred by no 
fault of their own. In fact, GAO found that as many as 73 percent of 
the reported debts were caused by overpayments of pay allowances, pay 
calculation errors, and erroneous leave payments.
    Every dollar wasted or misspent is a dollar we don't spend 
preparing and equipping our warfighters. Recently, Lt. Gen. H. Steven 
Blum, the top National Guard General, said that two-thirds of the 
active Army's brigades are not rated ``ready for war.'' Army officials, 
analysts and some of my colleagues have complained that there just 
isn't enough money to complete the personnel training and equipment 
repairs and replacement that must be done when units return home after 
deploying to Iraq or Afghanistan.
    If there is one agency in the government where corners can be cut, 
it is not DOD. If there is one agency where we should ensure an 
abundance of resources--it is DOD. My colleagues know this, and that 
perhaps explains why so much money has rolled out the door to DOD with 
so little oversight. That same desire to give our armed forces whatever 
they need may be what has hampered us from following what we do give 
them. It is not enough just to write blank checks to DOD without 
effective oversight, call ourselves patriots and go home. It is a 
perverse world when we can roll out the types of appropriations--both 
through regular order, and emergency war supplements--and still hear 
complaints of equipment and training of warfighters that the Department 
can't afford.
    It is time for Congress to match the level of its abundant 
provision of resources with an intensity and frequency of financial 
oversight. The safety and protection of our country should be our top 
priority; however, I have a hard time justifying continued multiple 
emergency war supplementals for the Department when we don't know 
exactly what that money is buying, and neither does the Department.
    I would like to stress that this hearing is not a policy debate 
about whether or not U.S. troops should be present in Afghanistan or 
Iraq: We're there and we must win. We must be prepared to win next 
time, and the time after that. The Department of Defense has an adopted 
motto: ``Check it. What gets checked, get done.''
    Senator Carper and I are committed to some Congressional 
``checking.'' Thank you to each of our witnesses for appearing before 
the Subcommittee today.

    Chairman Coburn. Senator Carper.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thanks, Mr. Chairman. Normally, I don't say 
this about opening statements that other people give, but that 
was a good statement.
    Chairman Coburn. Thank you.
    Senator Carper. I am delighted that we are here and I thank 
you for scheduling this hearing and our witnesses for joining 
us today at this time.
    I read not long ago that we spend more money in the 
Department of Defense on our military than all the other 
countries combined. I sort of come at this as a guy who has 
spent a lot of his life in the military, in the Navy as a Naval 
flight officer on active duty and later in the Reserves for 
many years, so having served in a war, hot war, cold war, and 
now having some idea and some real special personal feeling as 
to the importance of the Armed Forces. As governor, I got to be 
Commander in Chief of the Delaware National Guard, so I bring 
that experience to this table. This is a great affection for 
those who wear the uniform and great respect.
    I also know that we are spending a whole lot more money 
than we have in the government, and General Walker is going to 
probably share a little bit of that with us here today. We have 
to find ways to reduce the deficit. We had a real good hearing 
this week on the kind of abuses that are going on in terms of 
tax shelters. It was another Subcommittee of our Committee that 
held that hearing and hopefully can help us narrow that tax gap 
that the Chairman and I talked a fair amount about. There is no 
silver bullet here. Some of the money that we need to narrow 
the deficit is going to be in the tax gap and others from a 
wide variety of different kinds of programs, domestic and 
defense.
    But I want to talk a little bit today before we turn it 
over to General Walker, acknowledging that the Department of 
Defense is a very large organization, a very complex 
organization with a critical mission. Its success or its lack 
of success in carrying out that mission is a matter of life and 
death to the men and women who serve in our military today, and 
frankly, for all of us who are sitting here today.
    Unfortunately, the Department's ability to effectively 
carry out its mission is threatened by a number of 
longstanding, ongoing management problems that the Chairman has 
alluded to. Eight of the 26 problem areas highlighted on GAO's 
high-risk list are within the Department of Defense. Six others 
on the list are government-wide problems that also apply to the 
Department of Defense.
    There have been hearings held in the past on a number of 
DOD problem areas. I am pleased that this Subcommittee will now 
be spending some time examining those basic financial 
management failures at the Department, failures that have kept 
DOD's financial management on the high-risk list now for more 
than a decade.
    The Department of Defense and most of its components have 
essentially been deemed unauditable. The thousands of business 
systems scattered throughout the Department don't talk to one 
another and simply can't produce timely, accurate financial 
data. This has led to an unacceptable situation, a situation 
where decisionmakers within the Department and also here within 
Congress don't have a clear picture of what the Department has, 
what it needs, and how it spends its money.
    The murky nature of the Department's finances is, according 
to GAO, the single largest obstacle to achieving overall 
qualified audit opinions on the Federal Government's 
consolidated financial statements. It also creates an 
environment that invites waste, fraud, and abuse, and abuse of 
the taxpayers' trust. No Secretary of Defense, no matter how 
determined or how accomplished he or she might be, can be as 
effective as they need to be facing these kinds of problems.
    I understand that the Department of Defense has made some 
progress in recent months laying out a road map for how to 
address these problems and I hope we can continue to pay close 
attention to the Department's efforts to ensure that the 
milestones are met and the goals remain in sight. Like you, Mr. 
Chairman, the idea of waiting until 2016 when we were hoping 
2007, that is just not acceptable. I like to say, if it isn't 
perfect, make it better. We also like to say in my office, we 
can do better than that. With respect to the timeline, we can 
do better than that. We need to do better than that.
    Thank you, Mr. Chairman.
    Chairman Coburn. Thank you, Senator Carper.
    Before us now is the Hon. David Walker. He is well known to 
this Subcommittee. I don't know if he has testified before more 
Subcommittees than this one, but we are up in the running with 
him. We appreciate him being here.
    He became Comptroller General in 1998, a 15-year term. He 
dare not leave before that term is up. I will get you if you 
do. We will come back after you. We are very pleased you are 
here. We are very proud of the dedicated work that you and all 
the people who work with you give in assisting this 
Subcommittee and the rest of Congress an honest look at 
problems that we are facing. Please give us your statement.
    General Walker. Do you want to swear me in?
    Chairman Coburn. I don't think you need to be sworn in.
    General Walker. Thank you very much. I would rather be 
sworn in than sworn at.
    Senator Carper. Can we vote on that?
    Chairman Coburn. Do you want him sworn in?
    Senator Carper. No. [Laughter.]

TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S. 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Walker. Thank you very much. You can trust what I tell 
you, whether I am sworn in or not. Thank you for your kind 
comments about GAO and our staff. We have an outstanding staff.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Walker appears in the Appendix on 
page 33.
---------------------------------------------------------------------------
    It is a pleasure to be back before this Subcommittee to 
talk about the Defense transformation efforts on the business 
side. I want to commend this Subcommittee, you, Mr. Chairman, 
and Senator Carper, for your dedication and commitment to 
oversight. Frankly, there are not enough committees and 
Subcommittees in Congress that are doing oversight and this 
Subcommittee is a clear exception.
    As has been mentioned by the Chairman as well as Senator 
Carper, 14 of GAO's 26 high-risk areas relate directly or 
indirectly to the Department of Defense. We are No. 1 in the 
world in fighting and winning in armed conflicts. We do not 
deserve a passing grade on economy, efficiency, transparency, 
and accountability, and that needs to change.
    You are right, Mr. Chairman, that Secretary Rumsfeld 
basically noted the importance of business transformation on 
September 10, 2001. We all know the tragic events of September 
11, 2001, and as a result, not as much progress has been made 
in this area as everybody would like. But, we are seeing signs 
that things are starting to change.
    It is important to keep in mind that this is not about 
audited financial statements. I mean, clearly, in the end, DOD 
has a responsibility to achieve a clean opinion on its audited 
financial statements. That is an indicator, but it is not an 
end in and of itself. What is important that we have sound 
internal controls coupled with timely, accurate and useful 
financial and management information in order to make informed 
decisions on a day-to-day basis, and to make sure that we are 
maximizing economy, efficiency, and effectiveness and we are 
providing for appropriate transparency and accountability to 
the American people.
    The simple fact of the matter is, because of decades-old 
problems with internal controls, with financial management 
information systems, and selected other issues, the Defense 
Department wastes billions of dollars every year. That is money 
that we cannot afford to waste at any time, especially at a 
time when we are running large and imprudent budget deficits. 
These deficits are only going to get worse when the baby 
boomers start to retire in the next few years unless we end up 
changing our path.
    I will note that DOD has shown increased commitment to 
trying to take on some of these challenges within the last year 
and there are a number of steps that it has taken that are 
encouraging and they represent improvements over their past 
efforts.
    I would note for the record, however, that I have not heard 
that 2016 date before. I can tell you that while I thought that 
the 2007 date to achieve an audited financial statement for the 
DOD was ridiculously optimistic and not credible on its face, 
the 2016 date is likewise not credible on its face. I would 
suggest 2012 at the absolute latest. I would like to see their 
plan showing how they are going to try to get there. We ought 
to be able to get there.
    Quite frankly, in all fairness, one of the reasons I 
mentioned that date is that it is the last fiscal year in which 
I will be Comptroller General and have an opportunity to 
express an opinion on the consolidated financial statements of 
the U.S. Government. You can take it to the bank, there will 
not be an opinion on the consolidated financial statements of 
the U.S. Government until there is one at DOD. There won't be, 
because DOD is just too big from the standpoint of the balance 
sheet and the statement of net cost of operations of the 
Federal Government.
    Some examples of some positive things that have happened of 
late are the issuance of the FIAR Plan, or the Financial 
Improvement and Audit Readiness Plan. The plan is clearly a 
much more logical and pragmatic approach to trying to look at 
different line items in different entities, which is what we 
have been suggesting for a while. Namely, that DOD try to hit 
some singles and doubles before they go for the fence, and I 
think the new plan is clearly an improvement in approach.
    In addition, the Standard Financial Information Structure, 
the SFIS, represents a more pragmatic approach with regard to 
financial management information, and the enterprise 
architecture is clearly superior to the prior approach that 
they were taking.
    The creation of the DBSMC, the Defense Business System 
Management Committee--there are more acronyms than you can 
count over at the Defense Department--as a means to oversee the 
overall business transformation effort was also a positive 
step. The creation of the Business Transformation Agency, 
otherwise known as BTA, in order to support that effort 
obviously is a positive step.
    There are a number of things that we think will be 
essential in order for the Department to achieve sustainable 
success in business transformation. I will mention two. One, 
they need a strategic and integrated business transformation 
plan. They don't have it right now.
    Two, it is not a panacea, but it is essential. They will 
need a Chief Management Officer at the right level, for the 
right period of time, and doing the right things to provide 
continuity within administrations and between administrations 
to deal with these many challenges that are years in the making 
and will take years to successfully address.
    I am pleased to note that the Defense Business Board has 
recommended the creation of a Chief Management Official. I am 
also pleased to note that McKinsey, one of the world's most 
respected global consulting firms, has also recommended it. I 
am hopeful that the FFRDC entity that is going to conduct an 
additional study that is going to come out later this year will 
also recommend it. As you know, GAO has recommended it for at 
least 2 years.
    Last thing, given the fact that we are in a real but 
undeclared global war on terrorism, it is time for us to 
declare war on waste. It is long overdue and the time to do it 
is now.
    Thank you, Mr. Chairman.
    Chairman Coburn. Thank you, General Walker.
    I think Senator Carper and I feel like we have declared the 
war on waste. That is what we have been doing the last 18 
months up here, and we are on our 44th or 45th hearing. Most of 
it has to do with waste, fraud, abuse, and inefficiencies.
    You are uncomfortable with this 2016 because you think it 
can be achieved sooner, and----
    Mr. Walker. I haven't seen the 2016 date. That was news to 
me. But I do think it can be achieved sooner.
    Chairman Coburn. Would you talk for a minute about the 
information systems problems that the Defense Department has in 
terms of even if they wanted to do it sooner, because they 
have, what, 70 or 80 different management information systems 
and all these different programs and different computers that 
don't talk to one another, describe for us and also for the 
American public the size and extent of this problem. It would 
just seem to most people, if you just look at this, well, just 
put in new systems everywhere and make them all talk to each 
other and you can do this. Can you comment on that for me, if 
you would?
    Mr. Walker. The Department of Defense, as you properly 
pointed out, is one of the largest, most complex, and arguably 
most important entities on the face of the earth. It has over 
3,000 legacy and non-integrated financial and other management 
information systems that have accumulated over decades.
    In many cases, for a single transaction for a purchase or 
acquisition or other type of activity, there are multiple 
entries that have to be made into different systems in order to 
record that transaction rather than a single entry into an 
integrated information system. In some cases, there is a 16-
digit code that has to go for each transaction, irrespective of 
the size of the transaction.
    We have a situation where you have thousands of outdated 
systems that don't talk with each other that have accumulated 
over the years and trying to reconcile those numbers is a 
nightmare. We need to kill, discontinue, all non-essential, all 
non-stay-in-business information systems. We need to kill them. 
We need to free up that money and redeploy that money to create 
a more positive future, creating more modern and integrated 
information systems. It will take time. It will take money. But 
it clearly can be done before, in my view, 2016.
    Mr. Chairman, last week another event that occurred that is 
important was the kick-off of the Check It Campaign, which 
deals with internal controls. The Department recognizes the 
importance of sound controls as well as appropriate systems. I 
was there at that event, at the request of Deputy Secretary 
Gordon England, in order to show the importance and commitment 
to that. It is going to take years, but we can do it a lot 
quicker than 2016.
    Chairman Coburn. Let us talk for a minute about the CMO 
position. We had testimony yesterday in front of us in terms of 
Iraq and Special Investigative--SIGIR, I think it was----
    Mr. Walker. Stuart Bowen.
    Chairman Coburn. Yes, Stuart Bowen, who has done a 
wonderful job over there looking at things. The problem is he 
is looking at it after it happened. We have made several 
recommendations on Hurricane Katrina, Senator Carper and myself 
and Senator Obama, about having a Chief Financial Officer watch 
the store, and we have seen billions wasted because we didn't 
have anybody watching the store.
    In your mind, is there progress being made at the Defense 
Department to look at this realistically, to put somebody in 
such a position and give them the authority as well as the 
position to make management decisions in terms of the 
organization?
    Mr. Walker. Senator, as you probably know, the Congress 
required as a matter of law that the Department of Defense 
conduct two studies on the concept of a Chief Management 
Official and to report the results of those two independent 
studies by the end of this calendar year.
    Chairman Coburn. I would just note for the record that by 
law, they are supposed to be reporting improper payments 
throughout the Pentagon, as well, and they don't.
    Mr. Walker. The good news here, Senator, is that the first 
study has already been completed by the Defense Business Board 
and they did recommend the creation of a Chief Management 
Official at level two that would be a principal Under Secretary 
of Management to focus on the business transformation process, 
that would have statutory qualification requirements, a 5-year 
term appointment, and presumably a performance-based contract. 
So basically, their recommendation is very consistent with what 
GAO has recommended, minor differences, but intellectually very 
consistent.
    McKinsey within the last 2 weeks came out with a study 
noting the need for chief management officials or chief 
operating officers in a number of Federal departments and 
agencies around the government.
    It is my understanding that IDA is doing a study now. I met 
with representatives from IDA for about an hour and a half 
about 10 days ago. They are doing their independent study. It 
is my understanding they are going to make some 
recommendations. They are also going to talk about a short-term 
versus long-term approach and they expect to meet their 
statutory deadline.
    Chairman Coburn. Why do we need another study? I mean, that 
sounds like what the government does usually. We study things 
to death, but we don't get any action. Why do we need another 
study on whether or not we need a chief----
    Mr. Walker. I don't think we need a study. I will tell you 
why I think we got a study. We were very clear that this was 
needed. The Department did not embrace that recommendation. 
Therefore, the Congress decided, well, let us get a couple more 
views, because the Department didn't want to do it, we were 
recommending that it be done, and it was a way to try to get 
additional information. It shouldn't have been necessary, but 
nonetheless, it is going to happen. I am cautiously optimistic 
that both will end up recommending this position. I continue to 
believe today, more than ever, that it is an essential element 
to sustainable progress in business transformation within DOD.
    Chairman Coburn. Thank you. Senator Carper.
    Senator Carper. Thanks, Mr. Chairman.
    Mr. Walker, again, it is great to have you before our 
Subcommittee today. When you were testifying, during your 
statement, General Walker, I wrote down that 2007 is not 
achievable, and if 2016 is not soon enough, what time line 
makes sense? You, reading my mind, responded no later than 
2012. I think you said 2012 at the latest.
    Mr. Walker. In fairness, I haven't ended up independently 
going down and taking the building block approach to get there, 
but if this country can send a man to the moon and return them 
in less than 9 years, we ought to be able to get our act 
together in this area in at least 6 years.
    Senator Carper. How do we make 2012 or 2011 or some other 
year a reality rather than just a target? How do we go about 
making it reality? And if you would, talk about what you can 
do, if you will, through GAO----
    Mr. Walker. Absolutely.
    Senator Carper [continuing]. And what we can do through our 
oversight role. Later on, I am going to come back and say, what 
can the Administration do? What can the Executive Branch do?
    Mr. Walker. Well, first, if you want to achieve a 
challenging and complex objective, you must have a plan. If you 
don't have a plan, you will have no prayer. Or stated 
differently, that may be the only thing you have, is a prayer.
    There is an approach now to develop a plan, which I 
mentioned, which is good. The conceptual approach to it is much 
better. It is taking specific line items, specific entities, 
taking a building block approach, providing for accountability 
to specific parties as to what they need to be doing by when in 
order to achieve that objective.
    I will need to take a look at it to see how they got to 
2016. As I said, that is a new date to me. It seems too far 
out. In my view, I would like to see how they got to it.
    You also need, to have accountability. Who is going to be 
responsible for what? You need to make sure that they are held 
accountable, that they are rewarded for meeting dates and that 
they are held accountable if they don't end up meeting dates.
    The Congress needs to continue to provide for appropriate 
oversight. It needs to provide enough resources to get the job 
done, reasonable flexibility with appropriate transparency and 
accountability to make sure that people are doing what needs to 
be done within the time frame.
    With regard to us, we can continue to work with them on a 
constructive basis to give them our views as to what we think 
are the most important issues and what possibly might be the 
best way forward, but ultimately DOD management needs to make 
that judgment, if you will.
    I think OMB needs to hold DOD more accountable than they 
have in the past in these areas, and hopefully that will 
happen. I also think that it may be necessary, although I have 
not made a decision on this and I would want to coordinate this 
with the Department of Defense, with the Inspector General for 
the Department of Defense, and other appropriate parties, for 
us to have to assume more responsibility for the audit of the 
Department of Defense.
    Senator Carper. So you are going to maybe----
    Mr. Walker. It may be possible that we, GAO, may have to 
directly assume more responsibility for the financial statement 
audit of the Department of Defense, and let me tell you what I 
mean by that. We have not made a decision, and I would need to 
consult with a variety of parties. It is too early to make that 
decision. Under law, we have the authority to audit any entity 
that we say we think it is appropriate that we audit because of 
either confidentiality, because of complexity, because of 
materiality or whatever.
    In the case of the Department of Defense, it is the last 
linchpin in order to achieve an opinion on the consolidated 
financial statements. We have to make sure that gets done and 
we have to make sure that it gets done the right way in order 
for us to be comfortable to express an opinion on the 
consolidated financial statements.
    Furthermore, whether the Inspector General does it or 
whether we do it, it is going to require a tremendous amount of 
resources across several organizations and it is going to 
require contractor resources, too, from independent public 
accounting firms. Unfortunately, it appears that most of the 
major independent public accounting firms are doing so much 
work in the Department of Defense that they themselves couldn't 
assume responsibility for the audit and be deemed to be 
independent.
    Therefore, I think, we need to work out an approach, a 
coordinated approach as to who is going to be on the point. All 
three of us are going to have to be involved. By that, I mean 
the IG, us, and outside auditors. But, who is going to be on 
the point, who is going to do what, over what relative time 
frame, in order to achieve the end objective? That is something 
that we are going to need to begin conversations on, and that 
is obviously also relevant with regard to whatever a realistic 
date may or may not be for achieving an opinion on DOD's 
financials.
    Senator Carper. I was wondering, listening to you testify 
and the back-and-forth between you and our Chairman, if there 
are any models in this country, business models, government 
models in this country or around the world that we could look 
to to provide some road map, if you will, to getting our arms 
around the financial, really our business situation in the 
Department of Defense?
    Mr. Walker. It is interesting that you ask that question, 
Senator Carper. I mean, you didn't know I was going to say what 
I said and I didn't know you were going to ask this question.
    Senator Carper. This shows that he has been before the 
Subcommittee a whole lot of times.
    Mr. Walker. Yes, that is right. We are familiar with each 
other, I guess. But one of the things we are doing with 
increasing frequency at GAO is recognizing the reality, that 
while the United States may be No. 1 in many things, we are not 
No. 1 in everything. We have things to teach others, but we 
also have things to learn from others.
    One of the things that I have been doing is working with my 
counterparts around the world. As you know, we are on the Board 
of Directors for auditor generals around the world and head of 
strategic planning. One of the things I have recently done is 
look at this financial management area and find out what other 
countries have done to try to address some similar challenges.
    Interestingly, the country of Brazil has a modern and 
integrated financial management system for their entire Federal 
Government. We are not talking about that. We are just talking 
about the Department of Defense, which is probably bigger than 
the entire Brazilian government if we looked at the numbers. If 
Brazil can do it, we can do it.
    Senator Carper. You are not the first person who has said 
that in the last week or two. I have said, if Brazil can do it, 
we can do it, and that was with respect to declaring energy 
dependence and achieving the goal within 15 years.
    Mr. Walker. If they can do it, we can do it.
    And second, with regard to the United Kingdom, I was 
recently in London meeting with officials of the Ministry of 
Defence, and within the last 5 years or so, they have gotten 
their financial management act together. I think for 3 years in 
a row, they have achieved a clean opinion on their financial 
statement audit. Furthermore, they have also made progress on 
reconciling program planning with budgeting, not just in the 
current year, but for the out years, which is something that we 
need to do, as well.
    Now, we are a lot larger. We are a lot more complex. We 
have a lot more important role in the world, arguably, but 
there are lessons to be learned from others and I think it is 
important that we learn them.
    Senator Carper. Mr. Chairman, will there be another round 
of questions?
    Chairman Coburn. No, go on and I will wrap up.
    Senator Carper. Go ahead. I want to just figure out one of 
these question that I want to ask.
    Chairman Coburn. In December of this last year, the 
Department of Defense issued the BEA and an ETP for modernizing 
their business processes and supporting information technology 
processes and assets. What it really is is a blueprint for 
modernizing the business operations, one, and their business 
information systems and their management information systems 
while ETP provides a road map and management tool that 
sequences the business systems, investments in the areas of 
personnel, logistics, real property, acquisition, purchasing, 
and financial management. Do you think the ETP goes far enough 
in achieving what they need to do to get a hold on this?
    Mr. Walker. First, let me say that I think the approach 
they are taking now is vastly superior to the approach that 
they were taking before. I would like to provide some more 
detailed information for the record. But I clearly think it is 
vastly superior to what they were doing before. I would like to 
consult with some of my information technology specialists to 
provide you more detail for the record, if I can, Mr. Chairman.
           INFORMATION PROVIDED FOR THE RECORD BY MR. WALKER
    As we reported in May of this year, the department has taken steps 
over the last one year to further comply with the requirements 
specified in the Fiscal Year 2006 National Defense Authorization Act 
and related guidance. The Act's requirements were consistent with our 
recommendations for developing a business enterprise architecture and 
associated enterprise transition plan, and establishing and 
implementing effective information technology (IT) business system 
investment management structures and processes. As part of DOD's 
incremental strategy for developing and implementing its architecture, 
transition plan, and tiered accountability framework for managing 
business systems, DOD has improved its overall approach to business 
systems modernization. On March 15, 2006, DOD released a minor update 
to its business enterprise architecture, developed an updated 
enterprise transition plan, and issued its annual report to Congress 
describing steps taken to address the Act's requirements, among other 
things.
    The updated architecture and transition plan, as well as the report 
and related documentation, reflect steps taken to address a number of 
the areas that we previously reported as falling short of the Act's 
requirements and related guidance. While this progress better positions 
the department to address the business systems modernization high-risk 
area, many challenges remain relative to improving the architecture, 
implementing its tiered accountability investment approach, and 
actually acquiring and implementing modernized business systems on time 
and within budget that provide promised capabilities and benefits.
    The enterprise transition plan now includes an initiative aimed at 
identifying capability gaps between the current and target 
architectural environments, and DOD continues to validate the inventory 
of ongoing IT investments that formed the basis for the prior version 
of the transition plan. Further, the plan provides information on 
progress on major investments--including key accomplishments and 
milestones attained, and more information about the termination of 
legacy systems. However, it still does not identify, among other 
things, all legacy systems that will not be part of the target 
architecture, and it does not include system investment information for 
all the department's agencies and combatant commands. Once missing 
content is added and all planned investments are validated by 
capability gap analyses, the department will be better positioned to 
sequentially manage the migration and disposition of existing business 
processes and systems--and the introduction of new ones.

    Chairman Coburn. Thank you. Senator Carper.
    Senator Carper. Thanks. I think in your testimony, your 
written testimony, you criticized the Department of Defense for 
lacking a comprehensive department-wide plan for transforming 
itself. Let me just ask, what is lacking in the Department's 
current strategy that you would like to see taken up in this 
plan?
    Mr. Walker. First, as you noted, Senator Carper, they have, 
directly or indirectly, 14 of 26 high-risk agencies--high-risk 
areas government-wide and you need to start with that. Those 
aren't the only things that need to be addressed with regard to 
business transformation, but they are arguably the most 
important things that need to be addressed with regard to 
business transformation.
    You need to have a strategic and integrated plan for how 
you are going to end up addressing all these different areas. 
Quite frankly, many, if not most of them, are interrelated. A 
decision you make in one area can have a ripple effect with 
regard to decisions in others.
    Furthermore, you have too many layers, too many players, 
too many hardened silos within the Department of Defense. There 
is so much hierarchy and so much process orientation there, all 
the more reason why you need to have somebody on the point, who 
has got a plan, who is responsible and accountable, whose is 
matrixing both with the different under secretaries as well as 
the service secretaries, uniformed and non-uniformed key 
players to make progress on all these different fronts in a 
strategic and integrated fashion. That doesn't exist to the 
extent that it needs to exist.
    Now, they have made progress. They have individual plans. 
The approaches that they are taking on those individual plans 
in most cases are much better than the approaches they were 
taking before. There is also more accountability being provided 
for.
    But the two big points that I said they need to do, they 
need this strategic and integrated business transformation plan 
that deals with all these areas, and they need a Chief 
Management Official, because these problems aren't going to 
come close to getting solved by the end of this Administration 
and it is going to take years of sustained attention to get us 
to where we need to be and we need to recognize that reality.
    Senator Carper. Give us just some idea of the profile of 
the Chief Management Official----
    Mr. Walker. Sure.
    Senator Carper [continuing]. You mentioned and where might 
we be looking for him or her.
    Mr. Walker. First, let me say we are not talking about 
something that is novel. Let me go back to the other question 
you asked about can we learn something from other countries. 
The answer is yes.
    Now, we don't have a parliamentary system, but in many 
parliamentary systems of government, they have something called 
either a permanent secretary, or a general secretary. They are 
the chief operating officers for the departments and agencies 
in government and they have a lot fewer political appointees in 
the executive branch than we do. I would argue that is all the 
more reason why you need a Chief Management Official or Chief 
Operating Officer because it means you are going to get a lot 
more turnover at the top because we have a lot more political 
appointees.
    We are talking about a proven professional, who will be a 
political appointee, subject to Senate confirmation. Hopefully, 
there will be statutory qualification requirements. The person 
should have a proven track record of success, ideally both in 
the private sector as well as the public sector. They would 
commit, hopefully, if everything goes well, to a 7-year term. 
They would have performance standards, and performance-based 
compensation. They would be responsible for assuring that this 
strategic and integrated plan was developed and properly 
implemented.
    Importantly, they would not be another layer that people 
would have to deal with on a recurring basis. In other words, 
they would be focused solely on achieving business 
transformation, not trying to manage day-to-day operations, not 
trying to deal with the normal things that the under secretary 
and comptroller or under secretary for AT&L, or others have to 
deal with, just the business transformation part.
    This has worked in other countries. It can work here, and I 
would argue we need it worse here than they did because we have 
a lot more turnover and a lot more political appointees in 
leadership positions, and a lot more money and risk at stake 
than they do.
    Chairman Coburn. So it is your opinion that DOD today does 
not have that comprehensive, integrated business management 
information system? They don't have that plan?
    Mr. Walker. Let me clarify. The plan that I am talking 
about is beyond business information systems. In other words, 
you have business information systems, you have financial 
management, you have acquisition reforms, and you have human 
capital reforms. There are a number of different areas on our 
high-risk list.
    Chairman Coburn. So it is total transformation.
    Mr. Walker. Correct. A total business transformation plan.
    Chairman Coburn. But you would agree that they are on their 
way to putting some of these other systems----
    Mr. Walker. Absolutely. They are making progress and they 
have plans for many, if not most, of the sub-elements. We are 
working constructively with the Office of Management and Budget 
and trying to make sure that every department and agency in 
government has an action plan for getting off of GAO's high-
risk list eventually. Some are going to take longer than 
others, obviously.
    Senator Carper. Mr. Chairman, you and I have talked with 
General Walker about our oversight role. This Subcommittee 
under your leadership has done, I think, a remarkable job in 
terms of performing or attempting to perform an oversight role. 
We have a lot of other committees in the House and Senate that 
don't take those responsibilities as seriously, and one of the 
ideas we have kicked around to better enable committees to meet 
their oversight responsibilities, to enable the Congress to 
meet its oversight responsibility, would be to look at a 2-year 
budget process or a biennial budget, where 1 year you are 
basically doing the budget and the second year you focus a bit 
more on oversight, not one exclusively over the other. Would 
you just give us your thought on our idea?
    Mr. Walker. First, I think there is conceptual merit to 
biennial budgeting. As you know, there are States that have 
biennial budgets. At this same point in time, I don't think 
they are a panacea. The assumption is that if you only have to 
do the budget every 2 years, that you would use the time that 
was made available from not having to do the budget 1 year out 
of two to do more oversight. I don't know whether or not that 
would occur, but clearly to the extent that time is a problem, 
that would free up some time.
    Furthermore, lately, we have been running at least one 
supplemental a year. So one of the questions you have to ask 
yourself is, what do you do if something happens and you have 
an unanticipated event, maybe a really true emergency rather 
than an ``emergency''? Well, then that is what the supplemental 
process is supposed to be for. Unfortunately, as the Chairman 
mentioned before, we have got too many things running through 
the supplemental process right now that, frankly, we need to 
move into the base. In terms of forcing more trade-offs, you 
are getting more transparency and accountability than 
historically has been the case.
    Senator Carper. Thank you very much. Thanks for your 
service and for the great resources you provide in your team 
that you bring.
    Mr. Walker. My pleasure.
    Chairman Coburn. General Walker, thank you so much.
    Mr. Walker. Thank you.
    Chairman Coburn. Our next panel, first is Jack Patterson, 
Principal Deputy Under Secretary at the Department of Defense. 
He is directly responsible for advising and assisting the 
Comptroller with oversight of the DOD financial management 
policy, financial management systems, and business 
modernization programs.
    Accompanying Mr. Patterson is Teresa McKay, Deputy Chief 
Financial Officer at the U.S. Department of Defense. She is the 
principal advisor to the Comptroller for accounting and 
financial matters.
    Thomas Gimble is the Acting Inspector General for the 
Department of Defense. As the Acting Inspector General, Mr. 
Gimble is charged by law to report directly to the Secretary of 
Defense on matters relating to the prevention of fraud, waste, 
and abuse in programs and operations of the Department.
    Let me welcome each of you. We will recognize Mr. Patterson 
first and we will go in the order in which we introduced you. 
Mr. Patterson.

  TESTIMONY OF J. DAVID PATTERSON,\1\ PRINCIPAL DEPUTY UNDER 
 SECRETARY OF DEFENSE (COMPTROLLER), U.S. DEPARTMENT OF DEFENSE

    Mr. Patterson. Mr. Chairman, Senator Carper, thank you for 
the opportunity to update you on the progress the Department 
has made in business transformation and financial management. 
And by way of the opportunity to meet with you, we also 
recognize that we have an opportunity to inform the American 
people.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Patterson appears in the Appendix 
on page 59.
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    As stewards of the resources entrusted to us for the 
defense of the Nation, we take our responsibility to the 
American taxpayer very seriously. We also strive to never lose 
sight of the fact that everything we do, every dollar we 
manage, every contract we fund, affects the men and women in 
uniform who put their lives on the line every single day.
    This has been the case since the Administration first took 
office, the words of Secretary Rumsfeld said on September 10, 
and we appreciate very much that you put them up because, in 
fact, they are the vision that all of us must look to in our 
daily business in the Department. Since that time the Secretary 
made that statement, Mr. Chairman, we have been working to make 
this vision a reality.
    The challenges the Department faces are not insignificant. 
Beginning with the sheer size of the enterprise, which you have 
alluded to this afternoon, with more than 600,000 buildings and 
structures in over 146 countries around the globe, the 
Department's assets and liabilities alone exceed those of Wal-
Mart, Exxon, Ford, and IBM combined. Add to that an employment 
roster that includes 1.4 million active-duty men and women, 
740,000 civilians, 860,000 Guard and Reserve members, two 
million retirees and their families, and an operating budget in 
excess of $400 billion.
    Add that together and you have some idea of the sheer 
volume of the financial information and data that the 
Department manages daily, not to mention the difficulty in 
consistently capturing that information and preparing that data 
so that it can be analyzed and communicated to Congress as well 
as the decisionmakers in the Department. That data, to be 
usable, depends on common business system solutions. Indeed, 
for decades, there were no such common solutions, only a wide 
variety of different systems and processes unable to talk to 
one another, and consequently, unable to produce consistent, 
complete, timely information.
    In 2001, the Department embarked on an ambitious plan to 
bring the Department of Defense into the 21st Century. After 4 
years of work and preparation, in 2005, two comprehensive and 
integrated plans for financial improvement and business systems 
modernization were launched. As you have heard, they are the 
Enterprise Transition Plan and the Financial Improvement and 
Audit Readiness Plan.
    The Enterprise Transition Plan is a step-by-step plan that 
consolidates DOD's many different business systems and focuses 
resources to minimize redundancy and reduce overhead. It also 
details the schedules, milestones, and costs for 98 key 
transformational programs and initiatives across the 
Department.
    The Financial Improvement and Audit Readiness Plan, or 
something we refer to as the FIAR Plan, focuses the 
Department's efforts on improving business processes and 
internal management controls. The FIAR Plan unites DOD's 
functional and financial operations and comprehensively guides 
the effort to incrementally eliminate material weaknesses to 
achieve an independently verified and clean audit opinion.
    I have asked Deputy Chief Financial Officer Terri McKay to 
join me this afternoon, and following my brief remarks, she 
will speak to you about the Department's progress in improving 
financial management and audit readiness.
    The second part of our plan, improving business systems and 
processes, is equally important and the key to future and 
continuing success. Like good financial management, effective 
business systems and processes also support the clean audit 
opinions and the internal management controls that help 
eliminate material weaknesses. In this respect, the Department 
has made clear and measurable progress in modernizing and 
consolidating DOD business systems and operations as well as 
improving accuracy, reliability, and timeliness.
    There are numerous examples of where we have made progress, 
and if you would allow me, I would just like to enumerate a 
few. Unsupported accounting entries have been reduced by 86 
percent, or $1.98 trillion, from fiscal year 1999 to 2005. 
Delinquent debts receivable have been reduced by 42 percent, or 
$1.1 billion, from fiscal year 2004 to 2005. Fully 95 percent 
of all vendor payments are now done electronically, as compared 
with 86 percent in 2001, realizing a savings of $6 million. And 
since 2001, process efficiencies at the Defense Finance and 
Accounting Service have resulted in a cost savings of 
approximately $238 million, all while improving productivity 
and service to the warfighter.
    Mr. Chairman, the challenges we face in accomplishing our 
goals are many and the task is still far from complete by any 
measure, but I believe the Department of Defense has made a 
clear and measurable progress in improving business systems and 
financial management of the Nation's largest and most complex 
Department, and that progress will continue.
    I thank you again for the opportunity to share these 
accomplishments with you, and on behalf of the Department, I 
thank the Subcommittee for its very strong support for these 
important efforts, and most importantly, for your continued 
strong support of the men and women who are out there doing the 
Nation's business in the global war against terror.
    Chairman Coburn. Thank you. Ms. McKay.

TESTIMONY OF TERESA McKAY, DEPUTY CHIEF FINANCIAL OFFICER, U.S. 
                     DEPARTMENT OF DEFENSE

    Ms. McKay. Mr. Chairman, Senator Carper, thank you for this 
opportunity to discuss the Department's financial management 
improvement effort. As the Deputy Chief Financial Officer for 
the last 2 years, it has been my privilege to oversee this 
undertaking with the help of a dedicated staff of financial 
management professionals. Indeed, well over half of my 
immediate staff have professional certifications.
    As the Deputy Chief Financial Officer, I have three primary 
responsibilities in this area: To establish policy for 
accounting, finance, and internal control functions throughout 
the Department; to oversee periodic financial reporting, 
including quarterly financial statements; and to develop and 
execute a systematic plan for financial management improvement 
and audit readiness, and we are doing this.
    The Financial Improvement and Audit Readiness, or FIAR 
Plan, released in December 2005, charts a course to sound 
financial management by improving internal controls, resolving 
material weaknesses, and advancing the Department's fiscal 
stewardship. The plan also details a path for integrating the 
Financial Management Improvement Plans of the military services 
and components and confirming those improvements with favorable 
audits.
    Employing an incremental methodology to achieving audit 
readiness, we focused our initial efforts on four high-impact 
areas that represent a significant portion of the Department's 
assets and liabilities, military equipment, real property, 
health care liabilities, and environmental liabilities. Fund 
balance with Treasury is also a priority. Each focus area 
includes specific milestones for achieving a successful audit, 
and during the last 6 months, 64 percent of those milestones 
have been met.
    To give you a couple of quick examples of the progress that 
has been made, in the area of military equipment, which 
represents 27 percent of the value of all DOD assets, an 
initial baseline valuation for all military equipment programs, 
everything from combat vehicles to ships to aircraft, has now 
been established. This value was reported in the Department's 
third quarter fiscal year 2006 financial statements. This 
achievement is especially significant because the Department 
has never before had an accurate valuation of its military 
equipment.
    In the area of environmental liabilities, the initial 
inventory and estimate for 97 percent of all environmental 
liabilities have now been completed. Calculating the value of 
this important category of liabilities will enable the 
Department to precisely identify the amount and the timing of 
funding requirements necessary to resolve environmental issues.
    The military components are also making good progress 
toward independent audit opinions. For example, the U.S. Army 
Corps of Engineers is currently undergoing an audit of its 
fiscal year 2006 financial statements and the Marine Corps 
expects to be ready for a full audit of their financial 
statements in fiscal year 2007.
    Clean audits for the military components confirm the 
reliability of the financial information and demonstrate the 
Department's commitment to accurate and timely reporting using 
a publicly recognized standard, and that commitment is 
producing results.
    Four years ago, it took the Department 5 months to produce 
a single set of financial statements, and we did it once a 
year. Today, we are able to produce statements every quarter 
and publish end-of-year financial statements in 45 days. This 
is not, however, reporting for reporting's sake alone. Rather, 
we are using the information to better manage business 
operations.
    For example, through the analysis performed on the 
quarterly financial statements, we are able to identify monies 
owed to the various components of the Department and emphasize 
collection efforts. Efforts thus far have reduced the amount 
owed to the various components by over $1 billion in the last 
year.
    This information is also used to reduce the cycle time of 
collections owed to the Department. This effort is especially 
critical to our working capital funds' cash management efforts.
    So while the FIAR Plan is designed to produce steady, 
incremental progress toward a clean audit opinion that will 
take years to accomplish, the effort itself is yielding 
valuable benefits in other important areas, so I believe we are 
making real progress.
    Mr. Chairman, as Mr. Patterson has said, we take our 
responsibilities seriously, our responsibility to be good 
stewards of the resources entrusted to us by the American 
people, and especially our responsibility to do all we can to 
support the brave men and women of America's armed forces who 
are fighting to defend our freedom and our future. Thank you, 
Mr. Chairman, and I am happy to answer any questions that you 
may have.
    Senator Coburn. Thanks you. Inspector General Gimble.

  TESTIMONY OF THOMAS F. GIMBLE,\1\ ACTING INSPECTOR GENERAL, 
     OFFICE OF THE INSPECTOR GENERAL, DEPARTMENT OF DEFENSE

    Mr. Gimble. Mr. Chairman, Senator Carper, thank you for the 
opportunity to discuss the financial management challenges that 
the Department of Defense continues to face and the progress 
that the Department has made in addressing the challenges and 
achieving business process modernization goals established by 
the 2001 Quadrennial Defense Review.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gimble appears in the Appendix on 
page 71.
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    The Department's financial statements are the most 
extensive, complex, and diverse financial statements in the 
government. As we have reported in prior testimony, the 
Department faces financial management problems that are 
longstanding, pervasive, and deeply rooted in virtually all 
operations. Those financial problems continue to impede the 
Department's ability to provide reliable, timely, and useful 
financial and managerial data to support operating, budgeting, 
and policy decisions. The problems have also prevented the 
Department from receiving an unqualified opinion on its 
financial statements.
    We are encouraged, however, by the framework the Department 
has established to address those problems. The framework 
consists of the Enterprise Transition Plan, which addresses the 
business process modernization goals established in the 2001 
QDR and the Financial Improvement and Audit Readiness Plan. 
This framework provides the direction for the Department's 
financial improvement efforts and can be a mechanism for 
holding the Department's managers accountable for correcting 
specific weaknesses and for meeting milestones. More 
importantly, it provides a mechanism for measuring success.
    The challenge to the Department managers is to continue to 
fortify and refine the framework. Further, within the 
framework, there must be a sustained effort to identify, 
monitor, and correct internal control and system weaknesses. 
The Department must continue to recognize that financial 
improvement is an ongoing effort that needs sustained 
management attention and accountability at all levels.
    In order for the Department to achieve results in the 
financial management area, the Department must exercise rigor 
and continued management focus in executing the Enterprise 
Transition Plan, the FIAR, and the assessments of internal 
controls over financial reporting under OMB Circular A-123.
    Not only does the Department need to focus on financial 
management improvement efforts on known deficiencies, it also 
needs to continue developing corrective action plans for the 
financial management challenges identified during the course of 
business and while implementing the programs mentioned above. 
Known balance sheet line item deficiencies include fund balance 
with Treasury; inventory; operating materials and supplies; 
property, plant, and equipment. Government-furnished material; 
contractor-required materials, environmental liabilities; 
accounts payable and accounts receivable. Other known 
deficiencies that are not specifically associated with balance 
sheet line items include financial management systems, 
intragovernmental eliminations, unsupported accounting entries, 
the statement of net cost, and the statement of financing.
    In addition, we believe the quality of existing financial 
data in the systems is still a major challenge that the 
Department faces. Although the Department has had some 
successes in establishing the framework to execute financial 
improvement and audit readiness initiatives, continued focus 
and commitment by management are needed to successfully execute 
all the improvement initiatives. Management must continue to 
identify and correct pervasive weaknesses that have impaired 
the Department's ability to achieve auditable financial 
statements, and more importantly, to provide reliable, 
accurate, and timely data for decisionmaking.
    Our Inspector General financial auditors are active in the 
financial management improvement process and auditors serve as 
advisors on the Financial Improvement and Readiness Committee 
and all the DOD audit component committees. Auditors also 
perform financial-related audits focusing on internal control 
and compliance with laws and regulations. We make 
recommendations to improve the efficiencies in those areas. We 
have made over 500 separate recommendations in the last 2 
years.
    The auditors also review assertion packages prepared by the 
financial managers and serve as contracting officer 
representatives on contracts to audit financial statements, 
line items, or financial management systems.
    Mr. Chairman and Senator Carper, that concludes my 
statement. I would be happy to address any questions you might 
have.
    Chairman Coburn. I thank each of you.
    Mr. Patterson, I got the difference between what General 
Walker was talking about and the components that you all have 
put in place. You put the accounting and financial controls, 
are starting to put those into place. But he is talking about 
an integrated and transformational management plan that will 
use the tools that you are putting into place now. And so 
basically what he is saying is you are doing the right thing, 
but you are not doing the overall thing.
    I just would like your comments. Before I went to medical 
school, I was a manufacturing manager and we used management 
information systems to tell us how to make decisions about how 
we ran plants and what to invest in and what not to. I just 
wonder, if we had this integrated, strategic and integrated 
business transformational plan, would seven of the nine major 
weapons systems now be behind and over-budget, and not small 
amounts of over-budget, 40 and 50 percent over budget for the 
American taxpayer. I am just wondering what your comments are. 
And I am not trying to lay blame on anybody.
    General Walker made a significant difference in terms of 
what the overall picture has to be, and you all are 
implementing a significant component of that. I just wonder 
what your comments are on his thought that you have got to move 
to the next level, the bigger level, to where you are really 
managing it at every aspect, using the financial tools that you 
all are developing, you and Ms. McKay, but how do you take 
those tools and then turn them into management tools? And where 
is the overall plan at the Department of Defense to get to what 
he was talking about?
    Mr. Patterson. I think that General Walker does have a good 
point, and we obviously consult with the GAO on a regular 
basis. I think that where we believe we are making progress is, 
in fact, to build one brick on top of the other, and I take 
your point that you do need to have a vision of where you want 
to go. I think the Department is, in fact, doing that. With the 
Enterprise Transition Plan, with the FIAR Plan, and with the 
Business Transformation Agency as an implementor, if you will, 
as well as the Defense Business Management Systems Committee, 
which I sit on on occasion, we are, in fact, bringing together 
all of the disparate, different ideas, all of the different 
systems and attempting to do precisely what General Walker is 
talking about.
    But these kinds of things, when you start out to do them, 
it is easy to say it is hard to do, and what we are finding is 
that it is very complex to take the systems that have 
previously been very unique, very tailored to specific needs 
and now start to build systems that talk to one another, not 
necessarily totally integrated, but at least turn out reports 
that are usable for decisionmakers so that those people who 
have to make decisions, those people who use the analysis, like 
the Congress, are able to have a common set of business 
solutions that can be used for decisionmaking. And that is 
really the goal here, is to have a common set of business 
solutions that people can use, particularly in leadership 
positions, to make the decisions so important to the business 
of the government.
    Chairman Coburn. Would you agree that the American people 
should be suspect about the management when seven of nine--I am 
talking billions, hundreds of billions of dollars in weapons 
systems--are over budget and behind schedule? There has got to 
be something. It can't be just poor planning. There has got to 
be something about the management of that. Some of it is 
culture in terms of the defense industry, I understand that. 
They think they can milk the thing along. But it has to be 
management and the techniques of management and the business 
plan that has allowed us to get to that level. Would you agree 
with that?
    Mr. Patterson. I would. I would say that what we have found 
in a study that I was a part of during the summer is that there 
are a number of components that all come together to cause the 
kind of circumstances, and I agree, programs are over cost, 
they are behind schedule, and they are not performing, and that 
is not where we want the Department of Defense to be.
    There are things that the current Secretary and Deputy 
Secretary are doing that have great promise. Using the studies 
and the conclusions to recent studies--the CSIS study, 
Goldwater II, the study that I mentioned that I was on--and 
taking from these studies the good recommendations, we are now 
starting to put these recommendations into a plan and implement 
them.
    Chairman Coburn. Do you think it is a good idea to have a 
Chief Management Official in place? You don't have to answer 
that if you don't want to, if you think that causes you 
problems at the Pentagon.
    Mr. Patterson. No, it doesn't. I mean, what we have done, 
and I think it is to Secretary England's great credit that he 
has asked the Defense Business Board to look at this very 
seriously. They have. They have concluded that a CMO would 
benefit the Department and now it is a matter of how do you, 
understanding the culture, as you have pointed out so clearly, 
how do you start to put those kinds of disciplines into this 
behemoth we call the Department of Defense of the United 
States.
    Chairman Coburn. It is kind of like having a mentor with 
authority in your life. You voluntarily give authority to your 
mentors and they exercise that authority to improve you. That 
is what we are really talking about, is having this overall 
plan where we get a hold of everything.
    Talk to me about 2016 and why you all have moved--I 
understand 2007 wasn't realistic, but I have to give some 
credence to what----
    Mr. Patterson. Well, I am going to give you the broad-brush 
view and then I am going to turn that question over to my 
expert. But effectively, when we put together the FIAR Plan, we 
established boundaries, time boundaries. But truthfully, what 
we propose is an event-driven process, not a time-driven 
process. So as we find that we can do things much more quickly, 
we will accomplish them and get them behind us and move on to 
the next thing.
    But with that as kind of an umbrella statement, I would 
like to turn it over to Ms. McKay, who actually----
    Chairman Coburn. Fine. It is kind of like me asking my dad 
when I was a teenager for $100 when I only wanted $10, because 
I knew he wouldn't give me $100, but by the time I got down to 
$10, I could pretty sure bet I was going to get the $10. I 
think there is merit to an event-driven system, but the fact 
is--you are talking 9 years from now--before we can have 
systems which you all say you can present adequate financial 
data that you would say could get blessed by an auditor.
    Quite frankly, I have looked at a lot of areas in the 
Defense Department, and to me, my advice is don't give us a 
date if you are not going to go date-driven. Give us an event-
driven. But the point is, then let us hold you accountable for 
achieving the events and asking questions, why haven't you 
gotten to the next stage on time, rather than give us something 
that is truly unrealistic, because you just said, we are not 
going to do it based on dates. We are going to do it based on 
events.
    That is part of the problem. It is gaming it. What this 
Subcommittee wants to do is we want to find out real facts, 
what the real problems are, what the situation behind them is, 
and what can we do, both Senator Carper and myself, to 
implement things in the Senate that makes this easier for you, 
that gives you the tools.
    How do you replace all these computer systems that are 
running on RPG or Cobol? I mean, how do you do that and how do 
you do that in a system where you get the information you want? 
What do you need and how do we do that?
    It is fine for Ms. McKay to answer that, but the point is, 
if the date is meaningless, the date should be said that the 
date is meaningless. You don't mean the date.
    Mr. Patterson. When I say event-driven, I mean that we are 
going to beat that date by some significant number of years, 
and----
    Chairman Coburn. All the more reason not to give us that 
date, then.
    Ms. McKay. We didn't explicitly give anybody that date. 
Where I believe that date is coming from is as we develop the 
FIAR Plan and put the building blocks in place, some of those 
tracks are more detailed than other tracks.
    Chairman Coburn. Right.
    Ms. McKay. The 2016 is the long pole in the tent in an area 
that, quite frankly, we don't know a lot of details about yet. 
What we do know is a notional system implementation date and we 
know that we are dependent on that system implementation to 
resolve that particular issue.
    So, in fact, the intent of the FIAR Plan is to do just what 
you suggested, to give you the events and ask us to be 
accountable for achieving those events, and that is the intent. 
But we have to put some targets there as we build these action 
plans, and so that is where those dates come from. The area in 
question here is the valuation of the Department's inventory 
and operating materials and supplies. That is an area that has 
not been a focus area of the FIAR Plan to date. We have just 
recently added that and would include a more detailed action 
plan on how to resolve that issue in the version that would be 
published in September.
    So again, the 2016 date isn't something that was explicitly 
stated by any of us, but rather I think maybe an assumption 
made based on some GANT charts that are displayed in the plan.
    Chairman Coburn. Let me talk about one other area real 
quick, and Mr. Gimble, if you would comment on this. Senator 
Ensign held a hearing a couple months ago on contract bonus 
performance payments. And my question is not to make a big deal 
of that. It is something we certainly don't want to happen if 
people aren't performing, and the fact is a lot of bonus 
payments over the last 4 years have been paid for non-
performance.
    Where is the management system in what you are setting up 
that is going to keep that from happening in the future so that 
we are not paying performance bonuses for people who haven't 
achieved the performance ratings under their contract? Mr. 
Gimble, if you would comment on how that happens, and what you 
see needing to happen in terms of management information 
systems so we are not doing it.
    And this is $6 billion. This isn't small change. One of the 
things that was heard at that hearing is if we didn't spend the 
money, we were going to lose it, and that is exactly the wrong 
answer to tell the Congress of the United States and the people 
of this country, simply because we have this budget cycle 
problem and we are afraid we are not going to fund things. This 
honesty, we have got to get back. What do you really need? We 
want to give you what you really need, but we don't want to 
play the game of just spending money that you don't need to 
spend because you will feel like you are going to get penalized 
next year if you haven't spent it. We ought to be rewarding 
people for not spending money rather than rewarding them for 
spending it.
    So, Mr. Gimble, if you would answer that first, and then I 
will give both of you an opportunity to answer. It is not to 
beat up on anyone. It has happened. What we want to do is keep 
it from happening in the future.
    Mr. Gimble. Mr. Chairman, the idea of having a central 
management information system that makes that not happen, I am 
not sure that is the right answer. I think, in my view, the 
answer would be that we need to hold the program offices 
accountable. When they write contracts and put in the 
provisions and the metrics that have to be met, they need to 
hold the contractors accountable to meeting those or not pay 
that bonus, and I think that is really the issue.
    Chairman Coburn. So you are saying this is pure management. 
This isn't management information system, this is just pure 
management.
    Mr. Gimble. I think, largely, it is, because obviously, you 
need to have some management information systems within the 
contract management arena, but the real issue of those bonuses, 
of a performance bonus being paid without being deserved, I 
think that is a management issue more so than a system issue.
    Chairman Coburn. OK. Thank you. Mr. Patterson.
    Mr. Patterson. Well, we found exactly the same thing, and 
when we did our study of the large major defense acquisition 
programs, what we couldn't find is a thread that linked the 
Contractor Performance Assessment Reports to the award fees. I 
mean, you would have a company that is red and they got 92 
percent award fees. How did that happen?
    What we also believe is that chronologically, they are not 
linked. And sometimes you can fix things mechanically, just 
simply having a CPAR come out followed by the assessment of the 
award fee immediately afterwards so that the two are linked, if 
for no other reason, they are linked chronologically.
    But the point is that this is a management issue, not a 
systems issue. This is purely a management issue and these 
kinds of things can be fixed.
    Chairman Coburn. OK, and that goes back to what Mr. Walker 
was talking about, is having an overall long-term plan for 
setting in a management structure using the information systems 
that you all are so--you have done a great job. I have no 
criticism. It has moved a long ways. There is no question about 
it. But utilizing those tools with a vision of how we want to 
manage the Defense Department.
    How about giving me the next two events that you all are 
looking for to accomplish so that we can follow that? What are 
the next two events, Ms. McKay, in terms of event-driven things 
that we should be looking for as milestones for you all to 
accomplish?
    Ms. McKay. I would say to you that the goals that we are 
working toward that are described in detail in the FIAR Plan 
today get us to a level of auditability in 2009, where we would 
have 79 percent of our liabilities auditable and, don't quote 
me on this, but it is in the vicinity of 64 percent of our 
assets.
    And then the other shorter-term thing that I would say is 
as we continue to execute and monitor those specific milestones 
in the four focus areas that we have described in detail today, 
we are continuing the planning process in the additional 
significant areas of additional asset and liability categories 
so that we will have a better understanding of what it takes to 
resolve those deficiencies and pull in the system solutions, 
take a look at can we accelerate some of those system solutions 
once we have a better understanding of that.
    Chairman Coburn. If the Defense Department doesn't have a 
strategic and integrated business transformation plan that has 
the vision for that, will that change what you decide without 
that vision and that transformation plan in there that you are 
looking to? In other words, you are going to use these marks of 
where you need to go, but you are going to be doing it without 
an overall transformation plan and business plan, how you run 
it.
    In other words, the key is really not the--I was 
interviewed once when I graduated from college. I had a degree 
in accounting and production management. And I was interviewed 
by the now-defunct Arthur Andersen who said, why do you want to 
do this? And I said, because you can do anything you want with 
numbers. It is exactly the opposite of what everybody believes. 
You can do whatever you want with numbers. You can use them as 
a tool. You can do lots of things with numbers.
    Without an overall transformational plan as you all go 
along, let us say if we get the plan 3 years from now, that is 
going to impact some of the things you all do. So would you not 
agree with that, that is going to have an impact on what 
decisions you make in terms of trying to run this? Are you 
going to be running two parallel tracks again, which is what we 
are trying to get away from?
    Mr. Patterson. I think what I would say to that is we 
believe that the Enterprise Transition Plan, in combination 
with the Business Transformation Agency, the Defense Business 
Management Systems Committee, as well as the FIAR Plan, that 
most of us sit on all of those committees----
    Chairman Coburn. So you are involved in creating those 
transitional plans----
    Mr. Patterson [continuing]. So we are involved in----
    Chairman Coburn. OK.
    Mr. Patterson. And, if you will, it is a human integration, 
and we all work very closely together to see that these 
initiatives are successful.
    But your challenge is well taken. If we find that, as we go 
back and we review these things, that we haven't done what I 
have just said that we were going to do, we will report back 
and tell you how we are going to fix that.
    Chairman Coburn. One last little note. We are going to have 
another one of these hearings in 3 to 5 months on this same 
issue. What are the things that we should be expecting from 
you? What are the milestones that you hope to achieve in the 
next 3 to 5 months? Do you want to go on record with that so we 
can hold you accountable for it?
    Ms. McKay. Well, again, we are going to have a good view of 
what it takes to resolve some additional significant categories 
of assets and liabilities, so we would be able to give you some 
projections on when we would be able to be auditable there. And 
I would say that the current milestones that are described in 
the plan, we would be able to report to you on our completion 
of--our success in completing those.
    Chairman Coburn. Thank you. Senator Carper.
    Senator Carper. We have talked a fair amount today about 
information systems, about inventory systems, and financial 
management systems. We have not talked a lot about the people 
that we hire to really develop and to run those systems. I 
would like for us to focus on that for a bit if we could.
    In the military, when you have folks in uniform that are 
assigned to different jobs--at least in my experience in Naval 
aviation was, and we have a big Air Force base in Dover, 
Delaware--and folks, a lot of times will cycle out there, and 
sometimes the very senior will go into a job in the Pentagon 
for a while, I don't remember a lot of men or women who look 
forward to tours at the Pentagon. We wanted to be running 
squadrons or running ships, not sitting at a desk. We had a lot 
of good people and a lot of able people, but that is not what 
they wanted to do.
    How do we go about making sure that we get the right people 
with the right set of talents and skill sets in some of these 
key positions, get them to stay there long enough so that they 
can learn the job, and not just learn the job, but be able to 
make a real difference? How do we go about doing that?
    Mr. Patterson. I think you have hit upon a really important 
point, and actually, I did cycle out of Dover Air Force Base as 
the Deputy Ops Group Commander into the IG at the Pentagon.
    Senator Carper. When were you at Dover?
    Mr. Patterson. I was there from 1990 until 1992.
    Senator Carper. Good for you.
    Mr. Patterson. I was there during Desert Storm, Desert 
Shield, and----
    Senator Carper. Do you recall who the Wing Commander was 
there? Was it Bill Welzer?
    Mr. Patterson. Yes, Mike Moffatt and Bill Welzer followed 
him.
    Senator Carper. Good.
    Mr. Patterson. But, as I was going to say, it is very 
difficult. I mean, it is a difficult thing. It is a high-rent 
area to come to. It is a culture shock when you walk through 
the building, and if you are a Wing Commander, you leave your 
white-topped car out in North Parking and they truck you in. It 
is an unusual place where the people who have the most 
information and who have the actual money are at the lowest 
rung in the hierarchy, so if you think you are going to make a 
big difference and you are going to change how Western 
civilization views our Defense Department, you are probably 
going to be shocked.
    But at the same time, I think that the Department offers 
such incredible opportunities. I mean, honestly, where can a 
major come to a corporation and write a paper that, in fact, 
changes the way we think about defense?
    So it is a difficult prospect that you offer, but 
nonetheless, we must be doing something right, because as I go 
through the Pentagon, we have absolutely marvelous people doing 
superb work under extraordinarily difficult circumstances, and 
so I would offer to you that it is hard to fill individual 
places, but as you look at the folks that we have working for 
us, you can be proud of them.
    Senator Carper. Ms. McKay.
    Ms. McKay. Well, I would echo that and maybe talk more 
specifically about the financial management career field. It is 
a tight market today and the Washington area itself is very 
competitive. We have been very fortunate in the Pentagon in 
filling positions with people who have professional 
credentials. It is something that we emphasize. The majority, 
almost all of my staff, my immediate staff have either a 
professional certification and/or an advanced degree. We do 
have some special hiring authority that we have been able to 
capitalize on that has brought some well-qualified people to 
us. We have some special pay authority that we have been able 
to leverage from time to time. So we have a tool kit and we try 
to use every tool that we can find in it to find the right 
people, but I will tell you, as we exist today, we have a group 
of the finest professionals that I have ever worked with.
    Senator Carper. Our colleague, Senator Voinovich, who 
serves on this Subcommittee with us, is a fellow who focuses a 
lot on human resources and having to make the right investments 
in human capital so you have the right person in the right job, 
the kind of tools that they need to do their jobs better. Give 
us some advice on what the Legislative Branch needs to do to 
better ensure that we do have the right people and the right 
skill sets?
    Mr. Patterson. Well, since you asked that question, I think 
that one of the things that you can review or assess is what 
would be by any stretch a byzantine, difficult, arduous 
approach to getting a political appointee into a job of 
importance. It is unbelievable----
    Senator Carper. Should some of those political appointees, 
should they not be political jobs, if you will, or----
    Mr. Patterson. No, I think that there are more constructive 
and, in fact, more valid ways of bringing people on into these 
jobs of very high responsibility. I mean, CEOs of Fortune 500 
companies do not go through anything like an under secretary 
goes through to be confirmed in that job. Not that you 
shouldn't be very, very careful about who is chosen, but the 
way in which--the methodology, the road to that success is far 
more difficult than it needs to be.
    Senator Carper. OK, thanks. Ms. McKay, I am going to ask 
you if you have any thoughts on this, as well.
    Ms. McKay. I believe we have the authority that we need to 
operate within the environment that we are in. We are in the 
process of implementing some legislation that was provided a 
couple of years ago that allows the Secretary to designate 
specific positions as requiring professional certifications. 
That was helpful. And we expect to have implementing guidance 
on that published within the next couple of months. I think we 
have what we need.
    Senator Carper. Mr. Gimble, any thoughts?
    Mr. Gimble. I think we have what we need in terms of the 
ability to do it. It is a kind of a funding issue. Also, it 
goes back to the, if you are talking about the auditing and 
accounting world, it is very competitive, and let me just give 
you--I am certified in the State of Texas, and this is kind of 
dated information, but I think that it demonstrates something.
    My State Board said that in 1990, they had 8,000 candidates 
sit for the CPA exam. In 2000, 10 years later, they had 3,000 
to sit for the exam. So then we open up a whole big area in the 
auditing world of government financial statements, which is in 
addition, too. So the competition for the talent out there is 
extremely tight and tough and we have a hard time, frankly, 
competing with that to some extent. But we also serve as a 
training ground for the private sector when we are contracting 
those out. So it is a challenge and a balancing act.
    Do we have the ability to hire the people? We get really 
good people, we do. Sometimes we retain them, sometimes we are 
not able to because they get better offers in the private 
sector. But I think that it is a challenge.
    And I think the other challenge that we have, particularly 
on the career side of the house, is the baby boomers really are 
beginning to retire. Thankfully, we have gotten a little option 
where we can do the rehired annuitant and attract some of that 
talent back in on a case-by-case basis, and that is really 
important for us. So I would say we probably have the tools. Is 
it challenging? Always, it is.
    Senator Carper. OK. I want to talk about an intersection 
and the intersection is the responsibilities of Inspector 
Generals, OMB, GAO, the Congress through its oversight 
responsibilities. My sense is we try to focus and encourage 
better financial management, better control. I am not so sure 
that we work in a synergistic type of way.
    How might we better harness our shared goals to get a 
better result, realizing that the IG is sort of an independent 
free agent out there, the folks within the Department are 
Executive Branch? You have OMB sort of saying grace over all of 
you, and then there are a whole bunch of us in the House and 
the Senate, Democrats and Republicans, and some have different 
priorities other than oversight, as I said earlier. How do we 
get better on sort of pulling together rather than maybe 
pushing us apart?
    Ms. McKay. I think some of the things that we are already 
doing are bringing us to that end. Certainly, we have the IG as 
advisors on many of our boards. As Mr. Gimble mentioned, 
someone from the IG Office sits on all of the audit committees 
of the components and on the various committees that we have to 
provide oversight to the operations that we have underway. We 
meet regularly with OMB to describe our progress to them, make 
sure that they understand the approach that we are taking. 
Similarly, we meet regularly with the Government Accountability 
Office for the same reason. We seek their advice. We accept 
their advice and try to move forward with that.
    With regard to the Congress, I think hearings like this and 
meetings with the staff can further the communication channels 
so that we both understand what each other's objectives are and 
where they converge.
    Senator Carper. Thank you. Are you all aware of any 
resistance within the Department of Defense to some of the 
initiatives that are underway? All of us have been in parts of 
organizations where we have been faced with change, and change 
is not always easy, but it is necessary and certainly necessary 
in this case to change the culture and to institutionalize some 
of the improved management processes that are currently being 
developed.
    Mr. Patterson. Change is always hard, and in cultures that 
are entrenched, it is even harder. But it is a manager's 
responsibility to adopt leadership to go within their 
particular organization and bring the people along, make them 
part of your solution. It is not easy. It is easy to sit down 
and write books and say it. It is not easy to do it.
    But what I have found in my experience is that you start 
from the bottom and socialize the idea, and quite frankly, the 
people who know the most about the organization and how it 
should work generally are at the lower ranks, and you had 
better start listening to them because they have the ideas at 
how it works, where the tires reach pavement. If you start 
there and start to move it up the chain and get everybody as a 
part of your solution, as opposed to being part of the problem, 
I think that although it sounds Pollyanna-ish, it does work, 
and I think that is how a good manager goes about that. If you 
have difficult things to move within the oversight world, you 
had better get to the staff early and get the idea starting to 
bubble up, because that is where I think you are going to be 
most successful.
    Senator Carper. Ms. McKay.
    Ms. McKay. I absolutely agree, and I would like to give you 
a couple of examples. A couple of the areas that we have had 
the most success in executing against this FIAR Plan, 
environmental liabilities and the military equipment valuation, 
that would not have happened had we not partnered with the 
functional communities. We have been hand-in-hand working on 
these areas for several years now. It actually predates the 
actual formal plan.
    And so if you look at that model of the functional 
community and the financial community understanding each 
other's objectives and where those come together and how we can 
move forward in tandem rather than separately, we have taken 
that success and we have applied it to the other areas. We are 
in the process--we have partnered with both the folks over in 
the real property area and the health care liability area and 
are starting to see movement in those areas, as well, for the 
same reason.
    Senator Carper. Mr. Gimble.
    Mr. Gimble. I think that we have historically worked very 
well with GAO from the IG standpoint. Also, what has not been 
mentioned very much is the services each have very capable 
audit components and we have all partnered--we realize it is a 
big job, a big task, and I think we have been very good at 
working collectively together to achieve the progress that we 
are making.
    Another thing, I think this is just a personal observation, 
having been in the area for a lot of years, is that I recall 
when we first started back in the 1990s looking at this, I 
would go up to some of the meetings and it would be the 
auditors' statement, and my position was, the statement belongs 
to you, the manager, and we have the opinion. That is the clear 
break in responsibilities. And for a number of years, it wasn't 
that clear.
    Currently, now, it is very clear that management owns the 
statements. We can advise on ways to improve the statements and 
so forth and we do that. Ms. McKay and I had a discussion 
yesterday that went kind of like this, ``well, I don't think 
that we agree on these all the time.'' And I said, ``well, 
really, I think it is a healthy thing to have a little bit of 
contention between the oversight community and the management, 
but at the end of the day, you need to work together to move it 
forward.''
    So I think we really do that, since the turn of the 
century, I think there has really been a lot of progress made 
in that area.
    Senator Carper. Let me just say again, thank you all for 
being here. This is important stuff, as you know, not just for 
the dollars and cents that are involved, but really for the 
folks that are out on the point carrying the battle for all of 
us. Thank you.
    Chairman Coburn. First of all, I want to congratulate you 
on the good work that you have done thus far. I want to 
encourage you to keep doing it. We are going to have several 
questions for the record that we would like responses within 2 
weeks, if we could.
    Mr. Patterson, my understanding is under the FIAR Plan, you 
are at 64 percent, and I think I heard 2009 to be at 100 
percent. I guess my question is, is 2009 a hard date or can we 
expect 2007 or 2008? You don't have to answer that, but we are 
going to submit that question to you because that is the kind 
of milestones we want to see you get to.
    The other thing I would say is I had a meeting with 
Secretary Rumsfeld before I came to this meeting, a personal 
one-on-one meeting, and I am committed to help the Pentagon do 
what it wants to do to get things right and to be good stewards 
of the country's money. I think he has got fine people working 
for him and the cooperation--we are going to have better 
cooperation and it is going to grow and we are going to do more 
things to give you the tools.
    So one of the questions we are going to be asking you is 
what do you need that you don't have now to accomplish what you 
need in terms of management to get the information systems up 
and develop this overall strategic and integrated management 
plan so that we can be there sooner and we can be there at less 
cost?
    So I want to thank each of you for being here.
    Mr. Patterson. Thank you, Mr. Chairman.
    Chairman Coburn. The hearing is adjourned. Thank you all.
    [Whereupon, at 4:09 p.m., the Subcommittee was adjourned.]

                            A P P E N D I X

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