[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]






                                     

                         [H.A.S.C. No. 112-59]

 
                       DOD'S PLANS FOR FINANCIAL
                       MANAGEMENT IMPROVEMENT AND
                       ACHIEVING AUDIT READINESS

                               __________

                                HEARING

                               BEFORE THE

                 PANEL ON DEFENSE FINANCIAL MANAGEMENT

                        AND AUDITABILITY REFORM

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                             JULY 28, 2011

                                     
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                 PANEL ON DEFENSE FINANCIAL MANAGEMENT 
                        AND AUDITABILITY REFORM

                  K. MICHAEL CONAWAY, Texas, Chairman
SCOTT RIGELL, Virginia               ROBERT ANDREWS, New Jersey
STEVEN PALAZZO, Mississippi          JOE COURTNEY, Connecticut
TODD YOUNG, Indiana                  TIM RYAN, Ohio
                Paul Foderaro, Professional Staff Member
               William Johnson, Professional Staff Member
                    Lauren Hauhn, Research Assistant


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2011

                                                                   Page

Hearing:

Thursday, July 28, 2011, DOD's Plans for Financial Management 
  Improvement and Achieving Audit Readiness......................     1

Appendix:

Thursday, July 28, 2011..........................................    25
                              ----------                              

                        THURSDAY, JULY 28, 2011
 DOD'S PLANS FOR FINANCIAL MANAGEMENT IMPROVEMENT AND ACHIEVING AUDIT 
                               READINESS
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Andrews, Hon. Robert, a Representative from New Jersey, Ranking 
  Member, Panel on Defense Financial Management and Auditability 
  Reform.........................................................     2
Conaway, Hon. K. Michael, a Representative from Texas, Chairman, 
  Panel on Defense Financial Management and Auditability Reform..     1

                               WITNESSES

Hale, Hon. Robert F., Under Secretary of Defense (Comptroller), 
  U.S. Department of Defense.....................................     3
Khan, Asif A., Director, Financial Management and Assurance, U.S. 
  Government Accountability Office...............................     8
McGrath, Hon. Elizabeth A., Deputy Chief Management Officer, U.S. 
  Department of Defense..........................................     6

                                APPENDIX

Prepared Statements:

    Conaway, Hon. K. Michael.....................................    29
    Hale, Hon. Robert F., joint with Hon. Elizabeth A. McGrath...    32
    Khan, Asif A.................................................    43

Documents Submitted for the Record:

    Organizational Plan of the Panel on Defense Financial 
      Management and Auditability Reform.........................    69

Witness Responses to Questions Asked During the Hearing:

    Mr. Rigell...................................................    73

Questions Submitted by Members Post Hearing:

    Mr. Palazzo..................................................    79

 DOD'S PLANS FOR FINANCIAL MANAGEMENT IMPROVEMENT AND ACHIEVING AUDIT 
                               READINESS

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
    Panel on Defense Financial Management and Auditability 
                                                    Reform,
                           Washington, DC, Thursday, July 28, 2011.
    The panel met, pursuant to call, at 8:00 a.m. in room 2118, 
Rayburn House Office Building, Hon. K. Michael Conaway 
(chairman of the panel) presiding.

        OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A 
         REPRESENTATIVE FROM TEXAS, CHAIRMAN, PANEL ON 
         DEFENSE FINANCIAL MANAGEMENT AND AUDITABILITY 
                             REFORM

    Mr. Conaway. Welcome to the inaugural hearing for the Armed 
Services Committee's Panel on Defense Financial Management and 
Auditability Reform.
    The panel met to organize on July 13th and had our first 
informal briefing last week. We have adopted an organizational 
plan, including a detailed work plan, to assist us in examining 
the progress the Department of Defense has made in improving 
financial management and achieving audit readiness and 
identifying the challenges that remain.
    Without objection, I would like to enter the organizational 
plan into the record for today's hearing.
    [The information referred to can be found in the Appendix 
on page 69.]
    Mr. Conaway. But more important are the details of our 
oversight agenda. Chairman McKeon and Ranking Member Smith have 
charged this body with making recommendations and providing 
continuity of leadership on this issue.
    Therefore, I would like to take a moment to introduce each 
of the panel members and thank them for their commitment to 
join Rob and me as we continue to work on the previous Defense 
Acquisition Panel.
    In addition to my partner, Rob Andrews of New Jersey, the 
following members will serve on the panel: Scott Rigell from 
Virginia; Joe Courtney from Connecticut; Steven Palazzo of 
Mississippi; Tim Ryan of Ohio; Todd Young of Indiana.
    They will be embarrassed that they weren't here to hear 
their names read and bragged on, and all that kind of stuff. 
The first question on the panel's work plan addresses whether 
DOD's [the Department of Defense's] current financial 
improvement and audit readiness strategy, methodology and 
timeliness are appropriate.
    I feel this is the appropriate starting point as DOD has 
initiated numerous efforts over the years to address its 
financial management weaknesses and achieve audit readiness 
with little or no success.
    In fact, for over 20 years now, GAO [Government 
Accountability Office] and DOD auditors have continued to 
report significant weaknesses in DOD's ability to provide 
timely, reliable and useful information for decisionmaking and 
reporting.
    In these difficult fiscal times it is absolutely crucial 
that DOD has reliable information to manage its resources. 
Having reliable information is essential, is especially 
critical, as DOD attempts to implement the $178 billion in cuts 
and efficiencies proposed by the former Secretary of Defense, 
not to mention how important it is for DOD, it will be, if DOD 
is forced to look for further significant cuts in the near 
future.
    The Department of Defense also needs to provide assurance 
to the American taxpayer that they are not wasting resources. 
However, because of DOD's poor internal controls, the financial 
management area has been on GAO's list of high-risk programs 
that are vulnerable to waste, fraud and abuse since 1995.
    The Defense Authorization Act of 2010 requires that DOD's 
financial statements be ready for audit by no later than 
September 30, 2017.
    Today we will hear about DOD's strategy and methodology to 
get the Department of Defense to audit readiness by 2017 and 
the challenges that the Department faces to achieving that 
goal. We do not expect to discuss all the challenges DOD is 
facing in great detail in this hearing, but it is a good 
starting point to understanding what the Department is up 
against in its financial improvement efforts.
    I expect the panel to hold future hearings that will cover 
in much more detail the challenges that the Department is 
facing in their efforts to resolve the issues.
    I would like thank our witnesses in advance for their 
testimony and agreeing to be here at such an early hour. Our 
witnesses today are the Honorable Robert Hale, Under Secretary 
of defense, comptroller; the Honorable Elizabeth McGrath, 
deputy chief management officer, Department of Defense; Mr. 
Asif Khan, the director of financial management and assurance 
at GAO.
    I would now like to turn to Rob Andrews for any remarks he 
would like to make.
    Rob.
    [The prepared statement of Mr. Conaway can be found in the 
Appendix on page 29.]

  STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE FROM NEW 
               JERSEY, RANKING MEMBER, PANEL ON 
         DEFENSE FINANCIAL MANAGEMENT AND AUDITABILITY 
                             REFORM

    Mr. Andrews. Well, good morning to my colleagues.
    Good morning, ladies and gentleman. We thank you for your 
attendance at this early hour.
    I want to thank Chairman Conaway for his leadership on this 
panel. It has been a pleasure to work with him the last couple 
of years, to roll up our sleeves, and I am very much looking 
forward to continuing that effort.
    And I also wanted to take a minute and introduce 
Congressman Jim Cooper, who is a member of our full committee, 
who is the ranking member on the Oversight Committee, who I 
commend for having the zeal to be here at this hour to 
participate in this.
    You can't make good decisions without good information. And 
when it comes to the complexity of the Department of Defense, 
you can't have good information without financial statements. 
And we don't have them.
    Now, most people hear that and think that is the result of 
some sinister conspiracy to hide money or this or that. That is 
simply not true. What is true is that the Department of Defense 
is probably the most complex organization in the world. It is 
actually multiple organizations under the same organizational 
rubric.
    It does just about everything, and it is organized just 
about everywhere, so--and it is this sui generis organization. 
You know, the way you value a hotel or a shopping mall is not 
the way you would value Andrews Air Force Base, a very well-
named installation here in the country.
    [Laughter.]
    So I want to dispel from the outset the notion that the 
reason we don't have these statements is some military-
industrial conspiracy to hide things from the public. That is 
not true.
    What is true are two other things. One is that it is a 
complex task to figure out how to get from where we are today 
to where we need to be, which are good, auditable financial 
statements.
    But the second is it is doable. And I think you are going 
to hear from this panel today that these are folks involved in 
getting it done. And the briefing we had last week shows that 
there has been a sincere, concerted, focused effort from 
Secretary Hale and his team.
    And we are anxious to try to be a resource in making that 
happen so that the members of Congress and the public can make 
well-informed decisions about future expenditures in this 
Department.
    So I look forward to hearing what the witnesses have to 
say, and I am glad to join you this morning.
    Mr. Conaway. Well, thank you. With that, I will turn the 
microphones over to the panel, whoever wants to start, however 
you want to do it.
    So, Bob.

 STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY OF DEFENSE 
               (COMPTROLLER), U.S. DEPARTMENT OF 
                            DEFENSE

    Secretary Hale. Well, good morning, Congressman Conaway, 
Congressman Andrews, members of the panel. Thank you for the 
opportunity to testify this morning on financial management 
improvements at the Department of Defense.
    Secretary Leon Panetta, our new Secretary of Defense, 
shares your interest and mine in improving financial management 
at DOD and has asked that I provide him a comprehensive review 
of our efforts in the near future. And I look forward to 
getting his personal guidance on this topic.
    To bring you up to date on our progress, the Department's 
Deputy Chief Management Officer, Ms. Beth McGrath, and I have 
prepared a joint statement, which we have submitted for the 
record. We will jointly summarize that statement. We are going 
to do tag-team. I will start out. Beth will join midway on some 
of the I.T. [Information Technology] system issues, and I will 
finish up.
    I believe that defense financial managers have three broad 
goals. They need to help the Department acquire the resources 
necessary to meet national security objectives. It is the key 
goal, the budget goal, if you will.
    Second, they need to ensure that once those resources are 
enacted, they are spent in a manner that is legal, effective 
and efficient. And that goal probably encompasses many that we 
will talk about today.
    And, third, they need to champion a strong financial 
management workforce, because if we don't do that, we won't be 
able to accomplish the other goals.
    The first thing I would like to note is as we work to meet 
national security objectives, DOD financial management has its 
strengths. Mainly we are effective, in my view, in meeting the 
needs of our warfighters--the financial management needs--
financial needs of our warfighters. And that is the key goal, 
maybe the most important one for me.
    We also have a dedicated workforce of more than 60,000 
financial management professionals, and through personal 
experience I can tell you they bring a culture of stewardship 
to their jobs. They worry about whether or not this money is 
spent effectively.
    We also have effective financial processes in some key 
areas. As a result, violations of key financial laws are few in 
the Department of Defense. Timely and accurate payments are the 
rule, and interest associated with late payments is quite low.
    Financial managers have also made some progress on the 
areas that I know of, and an area that I know is of particular 
interest, I should say, to this panel, namely the financial 
improvement and audit readiness area.
    I am sorry, I am getting ahead of myself. There are some 
other things that we do that I wanted to cover before I get to 
the FIAR [Financial Improvement and Audit Readiness] plan.
    We are working to try to improve financial information. 
That is key. Partly in response to congressional direction, we 
are working to improve information on the number and costs of 
contractors employed by DOD.
    We are also working to further improve training for 
financial managers by implementing a course-based certification 
program similar to the one available to or now in place for 
acquisition managers.
    Financial managers have partnered with the deputy chief 
management officers to ensure implementation of proposed 
efficiencies. Last year DOD proposed efficiencies in 
streamlining totaling $178 billion in fiscal year 2012 to 2016.
    We recently completed an internal review of plans for 
achieving those efficiencies, and I am pleased to report that 
the Services and agencies, I believe, are developing credible 
plans and processes to meet these demanding goals. They are 
clearly taking this effort seriously.
    We have also made progress improving financial information 
and achieving audit readiness. That is a topic I know that is 
of particular interest to this panel. It is of particular 
interest to me.
    We have already achieved and are maintaining auditable 
statements in some key entities--the Army Corps of Engineers, a 
number of our defense agencies and several of our large trust 
funds. But it is also clear that the greatest audit challenges 
lie ahead, especially the need to move the military services 
toward auditability.
    In addition, there are enterprise-wide weaknesses in DOD 
financial management which require an enterprise-wide response. 
To pass an audit, an organization has got to have systems and 
processes that record financial results of business events in a 
consistent and reliable manner.
    Our processes and systems don't always meet that standard. 
Many of the systems are old. They don't record information in 
the level of detail that is required for an audit. Our 
processes are sometimes variable across commands, even across 
bases.
    These issues are especially challenging in the Department 
of Defense, because DOD's enormous size and geographical 
dispersion mean we just can't rely on manual solutions or 
workarounds, as many other agencies have been able to do.
    To deal with these enterprise challenges and to improve 
financial information and achieve audit readiness, we revised 
our approach that we have taken--and obviously it hasn't 
worked--over the past 17 years since the Government Management 
and Reform Act.
    Since August 2009, our emphasis has been on improving the 
quality of our data and moving toward audit readiness with the 
information that we use to manage the Department every day--
specifically, budgetary information, because we manage the 
Department based on budgets, and the accounts and location of 
our assets, which is key to our warfighters. Auditors call it 
existence and completeness.
    We have also put in place a cost-effective approach for 
dealing with other information required for full auditability. 
Less than 2 years have passed since we launched this new 
approach. I can say without hesitation or reservation, 
financial auditability is now readily acknowledged as a high 
priority in the Department, and that was not true in some 
previous terms that I have served in the Department. And we 
have made noteworthy changes.
    We have a clear governance process. There is somebody in 
charge here. It is the Chief Management Officer, the Deputy 
Secretary for the Department of Defense, supported on a day-to-
day basis by the Chief Financial Officer--me--and also the 
Deputy Chief Management Officer and an analogous organization 
at the service level, the CMOs [chief management officers], the 
under secretaries in that case in charge, aided by their 
assistant secretaries for financial management and also the 
deputy chief management officers.
    We have established long-term and, more importantly, short-
term goals, which are actively managed by our governance 
process. We need to have goals that we can check are happening 
over the next couple of years, not just 2017.
    We ensured that each military department has programmed 
adequate resources to support this refocused strategy, and they 
have done that over the full Future Years Defense Plan [FYDP], 
so out 5 years.
    We now require that senior executive performance appraisals 
for both financial and nonfinancial personnel include financial 
audit goals where they are relevant. So we are trying to get 
this outside the comptroller community.
    We are assembling teams within each military department 
that will be tasked with improving financial controls. I have 
told you, they are too variable and sometimes they don't meet 
our audit standards. We have got to fix them. The systems will 
help, but they alone are not this full solution.
    We are in the process of establishing a course-based 
certification program for defense financial managers that I 
hope will provide a framework and, among other things, ensure 
that we provide training to our people on accounting and audit 
issues.
    And we have maintained a close working relationship with 
our oversight bodies, including the Government Accountability 
Office and the Department's Inspector General. I have 
personally briefed Gene Dodaro, the Comptroller General, on 
this plan, also Gordon Heddell, the DOD IG [Inspector General].
    In addition, we have focused on improvements in business 
systems, and I would like now to ask my colleague, Beth 
McGrath, to discuss our system efforts.

STATEMENT OF HON. ELIZABETH A. MCGRATH, DEPUTY CHIEF MANAGEMENT 
                  OFFICER, U.S. DEPARTMENT OF 
                            DEFENSE

    Ms. McGrath. Good morning. I do appreciate the opportunity 
to discuss financial management improvements at the Department 
of Defense.
    As the Deputy Chief Management Officer, I am responsible 
for instituting a framework that clearly defines business 
goals, develops meaningful performance measures and aligns 
activities through established and repeatable processes.
    The purpose of DOD's overarching management agenda is to 
establish an effective, agile, innovative business environment 
that is fiscally responsible.
    This business environment includes many IT solutions, which 
are essential enablers of a broader set of innovative business 
operations, rather than an end only unto themselves. While I 
acknowledge past challenges, there are number of things that we 
are doing, putting together these programs to ensure that they 
are on the right path.
    To ensure that the future programs are structured for 
success, we are deliberately tying acquisition decisions on our 
major programs with business outcomes, such as financial 
auditability.
    We are ensuring a program's complete proper business 
process reengineering to make certain we are not automating 
inefficient processes and that the Department is prepared for 
the new system and the process prior to implementation.
    By analyzing business investment from a cross-functional 
perspective, Mr. Hale noted that we are ensuring that the 
financial auditability goals are part of other than financial 
managers' performance appraisals. It is because of their 
significant contribution to our ability to achieve audit 
readiness. That takes everyone. Every functional area must 
participate.
    We are adopting a concept of end-to-end processes and 
standard development methodologies into the business enterprise 
architecture, together this will enable a more holistic way of 
thinking into the management of our business operations and 
ensure we have a shared understanding of our architecture so 
that we can achieve the interoperability that we are 
discussing.
    We are implementing a new acquisition process for our 
defense business systems that are tailored to meet the 
requirements of the business area. Guidance for this process, 
called the business capabilities life cycle, has been released 
and is being used today.
    Our goal is to deliver a streamlined 21st century systems 
environment consisting of I.T. capabilities that work together 
to support efficient, effective business operations.
    I would like to note that GAO's removal of the DOD 
personnel security clearance program from its high-risk list is 
a significant first in the Department. And it owes its success 
to our commitment to this results-oriented, end-to-end approach 
that I just described.
    In closing, we are committed to improving management and 
acquisition of I.T. systems, as it contributes to the overall 
business operations, again, to include financial auditability. 
These issues receive significant management attention and are a 
key part of our overarching strategy to build a better business 
environment, business processes and systems that create results 
our men and women in uniform need.
    I look forward to continuing our work with this panel as we 
strive together to a greater efficiency and effectiveness and 
to create an agile business space enabled by modern, 
interoperable I.T. solutions. I look forward to your questions.
    Secretary Hale. Okay. So we have made a lot of process 
improvements in business systems, governance, funding. But I 
want to do more than that. We need to actually start doing some 
audits and validations. It will focus us on the real problems.
    And so we have begun doing that. We have launched an audit 
of the Marine Corps' statement of budgetary resources. If 
successful, this would be the first time any military service 
has actually completed an audit of a financial statement. And 
we are learning a great deal.
    We have brought an independent public accountant in--and 
they do this for a living, so they know what the problems are. 
We have learned so much from that audit already.
    In May, we began a DOD-wide examination and validation of 
our funds control and distribution process. It is known in 
audit terms as appropriations received. Again, an independent 
public accounting firm is doing that for us. I expect this 
validation will yield positive results next month.
    Periodic validation of our funds control process is very 
important to me. It also should be important to you, because it 
will reassure you that we are issuing and controlling our funds 
in ways that ensure we comply with the laws that you enact.
    In June, we began a validation by a public accounting firm 
of the Army's new General Fund Enterprise Business System, its 
enterprise research planning system, GFEBS, at those bases 
where GFEBS has been installed and is mature.
    This is also very important, because it will identify areas 
that must be improved--and there are going to be some, I am 
sure--to be sure that we are using that system in a manner that 
is auditable. I am not so worried about the system. I am 
worried about all the feeders and the processes that are 
associated with it.
    And I don't want to get these systems deployed throughout 
the Department of Defense and find out, or have somebody find 
out 3 or 4 years from now, that they are not auditable. So we 
will cycle through the other Services with that same approach 
as we can.
    In July, we tasked the public accounting firm to validate 
the Air Force's processes and controls to reconcile their 
accounts with Treasury, essentially our checkbook with 
Treasury. It is called funds balance with Treasury. And, again, 
another key step, and I am cautiously optimistic we will get 
positive results there.
    And by the end of this calendar year, we expect to begin 
several other validation efforts, including accounts and 
locations of large portions of our military equipment.
    In short, I would tell you there is still a lot to do. I 
have focused on the positive side, but I am not naive. We have 
got a long way to go. There are still enterprise-wide 
weaknesses that we have not resolved. We need to institute a 
culture of financial controls in the Department, consistent 
ones that don't yet exist.
    But we are committed to improving financial information and 
audit readiness in the Department of Defense, and I believe we 
have made significant progress. Our goal is to achieve fully 
auditable statements by 2017.
    That concludes our opening statement, and after Mr. Khan 
finishes, we welcome your questions.
    [The joint prepared statement of Secretary Hale and Ms. 
McGrath can be found in the Appendix on page 32.]
    Mr. Conaway. Mr. Khan.

 STATEMENT OF ASIF A. KHAN, DIRECTOR, FINANCIAL MANAGEMENT AND 
        ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Khan. Thank you.
    Good morning, Mr. Chairman, Ranking Member Andrews and 
members of the panel. It is a pleasure to be here today to 
discuss DOD financial management improvement efforts and how it 
is going to achieve auditability.
    At the outset, I really want to thank this panel for 
inviting us here. We believe that focused attention, such as 
these panels, is the key to corrective actions within the 
Department of Defense.
    In my testimony today, I am going to be providing GAO's 
perspective on the status of DOD's financial management 
weaknesses and the efforts to resolve them.
    In addition to that, I will also touch upon some of the 
challenges, which DOD continues to face in improving its 
financial management operations. My testimony is based on our 
prior work within the Department of Defense.
    Regarding the status, for more than a decade, DOD has 
dominated GAO's list of federal programs and operations at high 
risk, due to their susceptibility to fraud, waste, abuse and 
mismanagement.
    In the last 20 years, as a result of significant management 
weaknesses, none of the DOD military departments--Army, Navy or 
the Air Force--have been able to prepare auditable financial 
statements.
    DOD's past strategies for improving its financial 
management have generally been ineffective. But recent 
initiatives and what we have heard this morning are encouraging 
and show promise.
    Specifically, recent changes to the DOD plan for financial 
improvement and audit readiness, the FIAR plan, if implemented 
effectively, could result in improved financial management and 
progress toward auditability. The Army, Navy, Air Force and the 
Defense Logistics Agency have key roles in implementing the 
plan.
    However, DOD does face many challenges in overcoming its 
longstanding financial management weaknesses. I am going to 
briefly highlight six of these major challenges.
    The first one, one of the toughest challenges in 
implementing the FIAR plan is sustaining committed leadership. 
The DOD comptroller has expressed commitment to the FIAR goals 
and has established a focused approach to achieving the FIAR 
long-term goals that is intended to help the DOD achieve near-
term successes as well.
    To succeed in the long-term efforts to improve, financial 
management needs to be cross-functional. DOD agencies and 
offices that perform business functions--for example, weapon 
system acquisition, and supply chain management--have to work 
together, as financial management function is dependent on the 
information received from these two functions and, vice versa, 
these two functions also need financial management information 
in order to perform their functions effectively.
    However, within every administration and, of course, 
between administrations there are changes in leadership. It is 
paramount that the FIAR plan and other current initiatives be 
institutionalized throughout the Department at all working 
levels.
    The second one is a competent financial management 
workforce, with the right knowledge and skills, is needed to 
implement the FIAR plan. Effective financial management 
requires a knowledgeable, skilled workforce that includes 
individuals who are trained and well-versed in government 
accounting practices and information technology.
    Analyzing skills needed and then building and retaining an 
appropriately skilled workforce are needed for DOD to succeed 
in its transformation effort.
    The third one is the accountability and effective oversight 
of the improvement efforts. DOD has established bodies 
responsible for governance and oversight of the FIAR plan 
implementation. It will be critical for senior leadership in 
each of the DOD components to ensure that oversight of the 
financial improvement projects and efforts is effective, and 
that responsible officials are held accountable for the 
progress.
    Fourth, a well-defined enterprise architecture. For DOD, a 
key element of modern financial management and business 
operations is the use of integrated information systems with a 
capability of supporting a vast and complex business operation.
    A well-defined enterprise architecture will be needed as 
DOD blueprints for modernizing its business systems. However, 
DOD has yet to address previously identified issues associated 
both with the architecture and investment management.
    The fifth one, which is linked to the prior points I have 
made, is enterprise resource planning, or ERP systems. These 
are expected to form the core of the business information 
systems and the DOD components. Their effective implementation 
is effective to improving DOD financial management and related 
business operations, and will be key to becoming auditable.
    However, the components have largely been unable to 
implement ERPs that deliver the needed capability on schedule 
and within budget. Effective business system modernization 
across DOD is key to achieving hundreds and millions of dollars 
in annual savings.
    Finally, weaknesses in DOD's internal controls over 
financial management are a pervasive and primary factor in 
DOD's inability to become auditable. DOD needs a practical 
approach to prioritize these internal control weaknesses and to 
correct them within a reasonable period of time.
    In closing, I am encouraged by the recent efforts shown and 
the commitment by DOD leadership, however the Department's 
ability to address these six weaknesses, or the six major 
challenges, that I have highlighted today will be a major 
factor in reaching auditability.
    Mr. Chairman, these are my remarks for the morning. I will 
be happy to answer any questions that you have. Thank you.
    [The prepared statement of Mr. Khan can be found in the 
Appendix on page 43.]
    Mr. Conaway. All right, Mr. Khan.
    Thank you, panelists.
    Without objection, I think everybody will go on the 5-
minute clock so that we get a lot of the way through. So I will 
start us.
    Bob, yesterday you talked to the Senate about the most 
recent analysis on the FIAR, that you had made 5 of the 25----
    Secretary Hale. You had a spy there, sir.
    Mr. Conaway. We pay attention, or try to. Five of those 
short-term goals and you have now extended 20 of those. Were 
there consequences to the folks who did the 5 versus the folks 
who did not get the 20? Is your accountability system in place 
yet to hold managers accountable for that? Has it been 
implemented?
    Secretary Hale. You know I think we are still getting the 
point there, and certainly nobody was fired and shouldn't have 
been in that regard. Many of those were interim goals. As I 
have told you we have met a number of them. We are going to 
meet within this fiscal year the key goals that concern me--the 
appropriations received, funds balanced with treasury, the 
GFEBS, and continue with the Marine Corps audit.
    We did miss some of the interim goals and, frankly, it was 
probably because we didn't plan them well, so I think at this 
point I don't feel disciplinary action is appropriate. I think 
encouragement is what is appropriate. We are making progress.
    I was taken aback by the numbers, but I believe she was 
right, Mr. Chairman. Senator Udall had made that comment 
yesterday. We did miss a number of the interim goals, but I 
think we have hit the key goals, at least within the fiscal 
year.
    And we have got to pick up the pace. I understand that. I 
am hoping for a learning curve here, both in terms of our 
ability to plan what we can carry out, but also our ability to 
know how to do it.
    Mr. Conaway. Let me pivot over to Ms. McGrath, then. The 
senior executive staff--what is the S for, the SES, Senior 
Executive----
    Ms. McGrath. Service.
    Mr. Conaway [continuing]. Service now has performance 
measures built into their evaluation process. Have you been at 
it long enough to have gone through a cycle yet where you put 
the SES folks through a specific analysis of what their 
performance goal was versus what they did?
    Ms. McGrath. Sir, we certainly did that during last 
performance year's cycle at the, lets say, at the OSD [Office 
of the Secretary of Defense] level. They were proliferated 
across the OSD, and they were established for the military 
departments going into this year's cycle. And we are just at 
the tail end of this performance year.
    Mr. Conaway. Can you talk to us about what did and didn't 
happen to folks who either had a satisfactory performance 
against the goal they were assigned or did not have 
satisfactory performance? Any actions taken at this stage?
    Ms. McGrath. So, certainly, the overall performance. The 
Department has embedded financial audit goals into its 
overarching----
    Mr. Conaway. Right, but try to get down to the individual 
level, because----
    Ms. McGrath [continuing]. Performance----
    Mr. Conaway. Has anybody actually been--yet--held 
accountable for not getting something done they were supposed 
to get done?
    Ms. McGrath. So, I would say yes. The Department's overall 
performance against all of our goals, it would contribute to 
their--I will call it their bonus calculation. So those have 
been in place, and what we have done in the existing year is 
proliferated them outside the financial space. So the short 
answer is yes, they have. They have been in place.
    Mr. Conaway. Given that it is inappropriate to share 
individual names in here because of the privacy issues, I do 
think it is going to be helpful to those on the panel to see 
where--at least some statistics that folks who didn't meet 
their goals were not as well--they did not get compensated for 
not making those goals, and folks who did make those goals are, 
in fact, compensated. So that would be one of the things that 
we look at.
    I want to talk briefly in my time remaining on legacy 
systems. The folks on this side of the table are trying to 
figure out ways to kind of watch what goes on. The folks on 
your side of the table will know abundantly more about what is 
going on than we will. One of the measures that I am going to 
try to focus on and look at is continued legacy systems.
    We asked some folks in the Army yesterday once they got the 
GFEBS done across all 211 sites, having legacy systems would go 
away. There are about 150-something sites now, so there would 
be a ways to go. But at some point, we need to do a meaningful 
job in the number of legacy systems being maintained.
    So is that a good tracking metric, Bob, or not?
    Secretary Hale. I think it is. I am going to ask Beth to 
add to that, because it is more in her lane. But I believe it 
is. You will need to be patient, and GFEBS made a decision not 
to try to bring all the old data, past data, into the system. 
That greatly speeds up our ability to deploy this.
    It also means that for a period of time we are going to 
have to operate the old systems so that we can keep track of 
the legacy data, if you will. So it will be a number of years 
before they go away.
    The other Services have chosen a different approach. That 
is to bring the old data into the system. That means a huge job 
of data cleanup, which just slows the implementation.
    I am not sure which one is right, you know. I will go with 
their judgments, but yes we do need to get rid of legacy 
systems there.
    Ms. McGrath. But I would add that we currently published an 
enterprise transition plan that identifies our target solutions 
like the Army's accounting solutions, GFEBS solution that we 
have talked about a couple of times.
    In the enterprise transition plan, it identifies sunset 
dates for the legacy systems associated with the implementation 
of GFEBS. And so we do identify those with dates, and we 
monitor those as well--again, tied to auditability but also 
reducing and rationalizing our overall I.T. footprint.
    Mr. Conaway. Thank you. Rob, for 5 minutes.
    Mr. Andrews. Well thank you for the testimony. It appears 
that there has been some substantial progress in the Marine 
Corps area, Secretary, which you referred to. What are the 
lessons learned from that? What has led to the relative better 
progress in that area? I am sure it is a smaller organization. 
That has a lot to with it. But what has led to the better 
progress there? And what have we learned that still need to be 
done there?
    Secretary Hale. Well, I think the reason, and you know, 
frankly, the Department of Navy in general is ahead. All of the 
other Services are working to catch up. The inter-service 
rivalry is a very powerful tool in the Department.
    Mr. Andrews. We have heard this.
    Secretary Hale. And I will work this whenever I can. I 
learned that as the Air Force F.M. [Financial Manager]. And the 
Navy has been investing steadily over the past 5, 7 years. That 
is why they are ahead. And the Marine Corps in particular has 
strong commitments, so----
    Mr. Andrews. Investing in personnel training, software?
    Secretary Hale. Both dollars, I think, and personnel, 
both--and across the board, not just the Marine Corps, although 
the Marine Corps is particularly focused. But we have learned a 
great deal. I mean, we learned, first, that we don't know what 
we don't know.
    We don't really fully understand in the Department of 
Defense what you have to do to pass an audit for military 
service, because we have never done it. And you can't learn to 
swim on the beach. It is hard to talk to other agencies that 
tend to be different from us, so as the Marine Corps jumped in 
to try to swim, they found out they had a number of problems.
    Some of them were system related, although they have got a 
pretty decent and fairly integrated system. The real problem is 
with business processes. We are just doing some things which 
are effective in terms of meeting war fighter needs, but aren't 
auditable.
    For example, we do bulk obligations of military pay. The 
auditors want it done in a much more detailed fashion. 
Sometimes we weren't doing basic and blocking and tackling 
appropriately.
    For example, we weren't taking people off access lists of 
financial systems when they left the base. They were busy. They 
didn't get to it. The auditors looked and said, ``Hey, there 
are people here that shouldn't have access.'' So we have got to 
correct those kinds of business processes.
    Mr. Andrews. Does the Department of the Navy have more 
people relative to the size of the organization working on this 
problem, or do they have the same number of people doing it 
more effectively?
    Secretary Hale. I think they have in the past. Now I am 
less sure, because the other Services have definitely bulked up 
here, and in terms of funding, they are right up. I have kind 
of used the Navy as a benchmark, as I have looked at the other 
Services, figuring they are making progress, probably need 
similar resources. And the other Services are coming up to that 
level.
    Mr. Andrews. Mr. Khan, one of the things that you have 
mentioned in your testimony is major weapons system maintenance 
and operating and support costs. Do you have any suggestions as 
to how we might require estimates of those operating support 
costs be billed into the up front statement of the weapons 
system?
    In other words, one of the problems that has plagued us for 
a long time is we buy a weapons system and it winds up costing 
an awful lot more than we thought it was going to--in part, 
because of the requirement creep, in part because of other 
problems, but I think also in part, because we understate the 
operating and support cost.
    What suggestions do you have that we might require bidders 
to build into their costs so that we can more accurately 
anticipate what is coming?
    Mr. Khan. I mean, certainly this issue starts with process, 
really, that start in acquisition.
    I am sorry, can you hear me now. I am sorry.
    It does start in the acquisition process and what Ms. 
McGrath mentioned that DOD is implementing, an end-to-end 
process so that when you have a procurement, when you raise a 
purchase order, you begin to collect all the data which is 
necessary for accumulating the actual cost which is going to be 
spent on that particular product itself.
    So, I mean, in our work, we have seen that. That is slow to 
happen in acquisition to link that up with capturing the cost 
information, which can be meaningfully built into, if you will, 
a profile, whether its weapon systems or even in the large 
system acquisitions.
    I think that will go a long way towards having more of a 
discipline so that you can true up the estimates with what the 
actual costs are.
    Mr. Andrews. Your agency did a compelling study that said 
we were $297 billion in cost overruns in seven major weapons 
systems, I believe it was. Could you just guess what percentage 
of that $297 was misunderstanding of support and maintenance 
costs?
    Mr. Khan. That would be a tough guess. I am sorry.
    Mr. Andrews. If you would supplement the record later, I 
would be curious.
    Mr. Khan. Okay.
    Secretary Hale. I believe I would let GAO supplement it, 
though. That was looking at--those were the selected 
acquisition reports, and they were looking at the procurement 
on the investment costs associated with the weapons. I don't 
believe that any of that was associated with that.
    Mr. Andrews. I think you are right. I think I would modify 
my question to say, could you make an interesting projection as 
to what follow-on costs behind the $297 are going to come 
because of this problem. That is a better way to frame it. It 
may be worse, but----
    Secretary Hale. May I add a brief point--may I add a brief 
point to that?
    Mr. Andrews. Sure.
    Secretary Hale. A major issue in the Department has been, 
as long as I have been associated with DOD, we tend to be 
overly optimistic about projections of operating and support 
costs, and we don't make decisions based on them. And you have 
to make that decision very early in the life of a weapons 
system to have any meaningful effect.
    In some cases we are paying for game-changing capabilities. 
I think stealth capability has been extremely costly, because 
every time you exercise with a weapon and it hits a rock or a 
bird, you have got to recode it. If you have to do maintenance, 
you have to recode it. It is very expensive.
    On the other hand, it has been a war fighter game change. 
So I wouldn't always say higher operating costs are a bad idea. 
You have to judge them against what you get.
    Mr. Conaway. Thanks, Rob.
    Scott, for 5 minutes.
    Mr. Rigell. Thank you Mr. Chairman.
    I certainly thank our panel for getting up early.
    Mr. Chairman, I commend you for starting on time. I think 
in my 6 months here, this is the first and only meeting that 
has actually started on time. I am impressed by that.
    I also want to thank the Ranking Member Andrews. I think 
the tone that has been set here is the tone that we need set. I 
think it is actually, if I can go as far as to say, it is 
beyond bipartisan. It is just American, you know, us trying to 
get our hands around this and work together.
    And I think that we are here today talking about the 
challenges faced in the accounting of DOD is of no surprise, 
given the rapid increase in funding and the mission that was 
given to DOD after 9/11.
    Mr. Hale, I wanted to ask you, given the complexity of DOD, 
it seems like this of all endeavors we would have to slow down 
and be very thoughtful and very strategic about how you get 
your arms around this challenge here.
    And have you identified global challenges, those barriers 
that inhibit our ability to produce audited statements and on a 
global scale, but identified maybe a smaller sector that we 
could go after and see if we could get real success in a 
smaller sector?
    I know the government likes to have these acronyms and 
things like a center of excellence and then ramp it up and move 
across. Now, I don't know if that is a profound statement at 
all. You may have done that. Maybe that is reflected in the 
success that you have had in the Marine Corps. But if you could 
comment on that, it would be helpful to me.
    Secretary Hale. First off, we have been pretty good at 
slowing down over the years. I am not working to do that. I 
would like to speed up.
    There are two broad problems that we have had in the 
challenges we face. I would say one is better systems. 
Especially the Army and Air Force feel that their current 
systems simply cannot support auditability. Now I will give you 
just one example to try to make that more concrete.
    These systems don't keep track of data at the invoice 
level. And so when an auditor wants to check our payment, they 
want to see an invoice. They want to see a contract that backs 
up that invoice. They want to see a receiving report. Right now 
what we have to do if we are going to audit that is manually go 
out and get those documents.
    And when you are doing samples of thousands, you can't do 
it in a timely fashion. The new systems keep track of this data 
so you literally can hit a button, if it is working right, and 
you will have the data available. So especially the Army and 
Air Force feel they must have a new system. So that is one 
global problem.
    The other ones are business processes or financial controls 
which are too variable and in some cases not strong enough to 
support audits. I mean, I would say they are reasonable. I know 
where we are spending the money in budget terms, and I would 
argue with those who say differently. But they aren't good 
enough to support audits.
    So we are going to have to improve them. We are working on 
teams to try to identify those and get our commands to start 
making changes now at the same time they are doing the systems. 
I don't want to do this--I don't want to do it--I want to do it 
concurrently, not sequentially.
    Finally in terms of your--you have hit exactly what we are 
trying to do. We are trying to do this in a phased manner. The 
Marine Corps is a good first step, and these validations are 
also looking at pieces of this. And so we will learn, and I 
hope build up some successes, as well as areas where we need to 
improve.
    Mr. Rigell. I appreciate the answer. Maybe the second part 
of the question is still a bit unclear to me.
    Have we identified a smaller sector, maybe a division, a 
branch to say this is the one that we are really going to do 
very, very well, and then we are going to scale this up--
lessons learned, best practices. And has that been done? Or is 
it more you are trying to get your arms around the whole thing?
    Secretary Hale. No, I think we have done exactly what you 
are saying. First, we picked budgetary information as our major 
focus. And the reason we did that is because it is most used to 
manage. Then within that, the Marine Corps is our smallest 
service. It is also the least complex, because the Navy handles 
a lot of its procurements. And so it is a good starting point, 
and we are learning a great deal.
    But I don't want to just focus on the Marine Corps and have 
the Air Force----
    Mr. Rigell. That is okay. I think I----
    Secretary Hale [continuing]. And the Army sit over there 
and do nothing.
    Mr. Rigell [continuing]. A lot of Marines on the panel. 
That is okay.
    Secretary Hale. We are counting on the Marine Corps for a 
financial beachhead and to hold it, too.
    I want the other Services to be active. We can't audit 
their whole statement yet. We are not close enough to do that. 
So that is why we picked these validations. We are picking 
pieces that are key--the Air Force for funds balance with 
Treasury, the Army to look at its systems----
    Mr. Rigell. I am not----
    Secretary Hale. We have a phased approach--we call them 
waves----
    Mr. Rigell. Okay.
    Secretary Hale [continuing]. That attempts to do this.
    Mr. Rigell. Thank you.
    In my remaining 15 seconds, could you provide the 
committee--we may have this; I don't believe we do, though--
could you provide the committee with the observations and 
recommendations from the outside auditors? And I am not talking 
about reams of papers, but if you could condense that, 
summarize it.
    What are the outside auditors, to the extend that that can 
be summarized in, you know, four or five pages, and 
specifically if there were any legislative--and this may be 
going to the end of the book, the last page of the book, but 
are there any legislative suggestions that they may have made?
    Thank you, Mr. Chairman.
    Thank you, Mr. Hale.
    [The information referred to can be found in the Appendix 
on page 73.]
    Mr. Conaway. All right thanks.
    Tim, 5 minutes.
    Mr. Ryan. Thank you, Mr. Chairman.
    I am reading here through the GAO report, and one of the 
issues that they brought up here is the limited ability to 
identify, aggregate and use financial management information 
for managing and controlling operating and support costs.
    What are you specifically doing to try to get that more 
information? And how much of that--I would imagine a good deal 
of it--you will be interfacing with contractors to try to get 
that information?
    Secretary Hale. Yes. Certainly, in some cases we will use 
contractor support, although the overall process has to be led 
by government employees.
    First, I would say that for budgetary information, I mean, 
when you make an appropriation to us, we can track whether or 
not we meet that appropriation. The appropriations received 
that I spoke of is the process we use at the start to 
distribute the money in a manner consistent with the laws the 
Congress enacts.
    And then we do have ability to track that. And I can go 
through--you heard it when I was giving the briefing a week 
ago; if you want I will go through it again--but there is some 
external corroboration of that. We have about 3,000 auditors 
watching every program and financial move.
    Generally, our violations of the Anti-Deficiency Act, which 
essentially says you weren't doing what the law told you, are 
quite low--very much lower, I might add, than nondefense 
agencies taken as a whole. So I have reasonable confidence in 
the data, that we know where we are spending the data as you 
tell us.
    What gets hard is when you want to start getting cost data, 
which is very important. When you want to figure out what the 
JSF, Joint Strike Fighter, costs to operate, that requires 
special studies. Our systems just can't do that.
    We can do the studies, but they take time, and so we need 
to improve there. And overall, we do need audits to verify that 
the information is correct. Now, I am pretty sure it is in the 
right spots and, therefore, I have reasonable confidence in the 
data we are using to make decisions. But I fully accept that we 
need audits to verify that point.
    Mr. Ryan. So, well, I am not an accountant, so I am trying 
to----
    Secretary Hale. Neither am I.
    Mr. Ryan [continuing]. Wrap my brain around this. You are 
not getting enough good information. Is that fair? Is that what 
the GAO is saying here?
    Secretary Hale. Certainly----
    Mr. Ryan. So what are you doing to get more information to 
eventually figure this out?
    Secretary Hale. I would say its in some cases we don't have 
good information, and overall we don't have audits to verify 
the quality of that information. There are some good points, 
like I said. I think our budgetary information--when you 
appropriate something in Army weapons and track combat vehicles 
and tell us to spend it a certain way, we can track that.
    Mr. Ryan. But what it says here--and maybe GAO would like 
to chip in here--I mean, what your report here is saying is 
that this is a repair costs, maintenance, contract services. It 
seems--feel free to chime in, too--you know, it seems like 
those are pretty standard requests to know, okay, on the Joint 
Strike Fighter what are the repair costs? What are the 
maintenance costs?
    And I am having trouble figuring out what the issue is 
here.
    Mr. Khan. Let me just--oh, I am sorry. Turned that off.
    Let me just build on my response to Mr. Andrews' question. 
The issue is cost here. I mean, DOD does have very good 
estimates, which they have developed themselves. But they have 
to be trued up with the actual cost information.
    And that is where acquisition process comes into it, 
because they are the primary people dealing with the 
contractors. So it has to be set up front the expectation with 
the contractors that they need specific cost information to be 
broken down in a certain way, which DOD systems and DOD 
processes can take into their systems to be able to develop 
that and match that with the estimates.
    Mr. Ryan. Okay. So are we doing that with the contractors 
now?
    Ms. McGrath. So part of the today's environment, as Mr. 
Hale has articulated, the systems weren't designed to do cost 
accounting. And I am not an accountant either. But as Mr. Hale 
also articulates, we know where the money goes. It is the 
actual costs of doing, you know, repairs and those kinds of 
things.
    Mr. Ryan. Right.
    Ms. McGrath. And so the enterprise resource planning 
systems, many of those systems that we have been talking about, 
the target solutions are being designed such that we can 
capture that cost information, have the actual data that says 
that we can do forecasting for maintenance and sustainment of 
those systems, so that we are actually using real data to 
establish both our inventory needs and our forecasting.
    So it is a long way of saying that we are through the 
development of the business center enterprise architecture. We 
are developing standard financial information standards along 
with logistics based standards to ensure at the end of the day 
that we can aggregate the data, have the cost information so 
that, you know, that we can have those estimates that GAO has 
articulated that we don't currently have today.
    Mr. Ryan. Okay. I am out of time.
    Thank you, Mr. Chairman.
    Secretary Hale. If I can take one more shot, because I 
don't feel I have been helpful.
    Let me take the JSF as an example. If you want its 
operating costs, you are going to have to look at our personnel 
information, you are going to have to look at our day-to-day 
operation and maintenance information, you have to look at 
spare parts.
    Those all are in separate appropriations. If you wanted 
that now, you could not punch a button and get it. You would 
have to get a team of experienced analysts to go in, look at 
the budgetary data in those categories, in some cases estimate 
what portion were attributable to the JSF and come up with that 
data.
    When you are done with that study, I think you would have 
reasonable information to make a decision, but it is slow, and 
we don't have an audit that verifies that all of the 
information is correct.
    So it is a nuanced answer. Yes, I can get something that 
would help the commander make a decision, but it will take a 
long time, and it will require specialized expertise, 
contractors and others. And, again, there is no audit to verify 
its capability.
    I hope that is helpful. It is not a black-or-white answer. 
It is not that we don't have any information. It is just not as 
readily available, and sometimes it is not as high quality as I 
would like.
    Mr. Conaway. It is still a good rationale for continuing 
pushing on this issue to get this done at the end of the day.
    Secretary Hale. Yes, but, you know, to be honest, even if 
we got an audit, it wouldn't solve----
    Mr. Conaway. No, no, no, but you can have systems in place, 
and you would sustain the audits and do those kinds of analysis 
quicker----
    Secretary Hale. You will have----
    Mr. Conaway [continuing]. More nimble
    Secretary Hale [continuing]. Somewhat quicker, yes.
    Mr. Conaway. And so, Todd Young for 5 minutes.
    Mr. Young. Thank you, Mr. Chairman.
    Thank you to all our panelists. I do appreciate you being 
here early this morning.
    Mr. Khan, I appreciated your six pillars, if you will, of 
change that, as you see, must occur in order to really begin to 
tackle this challenge in a serious way.
    I would further reduce those into a few different buckets, 
if you give me liberty. One would be processes, another would 
be systems, and then, finally, we have people. And you have put 
people first in terms of your comments. I don't know if these 
were order of priority, but it strikes me they were.
    Certainly, if we are going to have any sort of lasting 
change here, we are going to have to have sustaining, committed 
leadership. We are going to have to institutionalize whatever 
plans we develop here, and we also need people with the 
appropriate skill sets to be able to add some value to this 
overall process.
    And so I would ask you or anyone here on the panel, what we 
have done first to try and--from the beginning, I think we need 
to be thinking about institutionalizing whatever plans are put 
in place here. So what have we done to ensure that we are going 
to have sustaining, committed leadership across 
administrations, with respect to the FIAR plan?
    And then, secondarily, what is being done with respect to 
assessing the skills needed within DOD in order to make sense 
of this and to then build that skilled workforce?
    Secretary Hale. Perhaps the biggest concern of mine is 
sustained commitment to this over time. That really depends 
on--and we have got it right now. I care about this. I learned 
it in my Air Force F.M. days. I cared about it then. I care 
about it now.
    But, frankly, the people that sit in my chair have 
generally been--I like to use the phrase ``budget junkies.'' 
There is a heavy focus on budget. And I consider myself a 
budget junkie. I am working constantly, watching what you are 
doing right now to the budgets. I am very concerned.
    So it is important that we have somebody that is my 
successor or somebody at senior levels who knows something and 
cares about the audits. I won't be able to do anything about 
that. I would urge you to do what you can to ensure that. And 
it will, obviously, be very important that the deputy secretary 
and the secretary care about it as well. Sustained leadership 
over a couple of administrations will be required to make this 
happen.
    Let me turn to the workforce. I think, generally, there are 
about 68,000 people in the defense financial management 
workforce, roughly 58,000 government civilians, and about 
10,000 of these in the so-called G.S. [grade scale] 500 series, 
and about 10,000 military personnel. I think, generally, they 
are well trained. But we haven't been as systematic about that 
as I would like.
    We are starting to do that in two respects: one, completing 
a competency review--figuring out what they ought to know. I 
think we generally knew that, but we have to be more specific.
    And, second, we have asked for legislative authority, and 
you have given it to us, as has the Senate, so I hope we will 
come out of conference, to impose a course-based certification 
program for defense financial managers, analogous to the 
Defense Acquisition Workforce Improvement Act legislation for 
acquisition, which would allow a framework.
    And we would require certain courses for certain jobs. And 
auditability and accounting would be one of them. So I believe 
that it is, generally, a well-trained workforce, based on my 
experience with it, especially at the senior levels. But I 
think a more systematic approach would be appropriate.
    You are scowling at me. Did I answer your question?
    Mr. Young. Thank you. You did, and, actually when 
sustained, committed leadership was said, I wasn't necessarily 
thinking about just the top people in the organization.
    And perhaps that is what you meant, Mr. Khan, but I thought 
institutionally, things might be implemented so that we didn't 
have a--it didn't require each administration to appoint 
enlightened people. Maybe we could do things that would ensure 
that they stayed focused on this problem.
    Mr. Khan. Right, Mr. Young, I mean, that is why I 
emphasized the human capital of the well-trained workforce. I 
think that is going to go a long way towards helping 
institutionalizing some of the topics we are talking about 
today.
    This is to drive transformation. This is change management 
process. And without having a well-trained workforce in a very 
complex environment, that is going to be a huge challenge.
    I think Congress recognized that. There was a requirement 
in National Defense Authorization Act of 2006 for DOD to 
perform a skill set analysis, if you will, and then do a gap 
analysis of what the to-be requirements are for the skill sets 
and where they were currently and what the plan was to 
transition.
    So that is going to be key. I mean, it is a complex 
environment, and then financial management itself is a 
technically complex area. So you are dealing with several 
different moving parts here, so the process and systems issue 
has received attention, but human capital is equally important. 
And without that the elements aren't going to come together.
    Secretary Hale. But I don't think this will succeed unless 
the secretary, deputy and comptroller and both OSD and the 
Services care about it and make a high priority of it. It won't 
happen.
    Ms. McGrath. Can I also add, though, that we are, from an 
institutional perspective, baking it into the summary 
justification of the budget. So there are performance measures 
that are identified as part of the budget submission. They are 
part of the overall GPRA Modernization Act [Government 
Performance and Results Modernization Act of 2010]. So these 
are top priorities. It is part of the strategic management 
plan.
    We are utilizing the business enterprise architecture to 
tie directly to achieving the financial auditability outcome, 
leveraging the investment review board process, so when systems 
do come in for development and modernization, there is that 
connectivity.
    And so from an institutional perspective, we are using all 
of the levers that are there. That notwithstanding, I don't 
disagree with Mr. Hale's point about the leadership, top-down 
driven requirement must happen.
    Mr. Young. Great. Thank you.
    Mr. Conaway. Thank you.
    To Joe for 5 minutes.
    Mr. Courtney. Thanks, Mr. Chairman.
    Secretary Gates, when he has been before the full 
committee, has said over and over again that the Department is 
getting eaten alive by health care costs. Mr. Khan, in your 
report, you mentioned a problem that GAO identified with 
TRICARE [DOD health care program] in terms of 
misclassification.
    And I was wondering, first of all, is that just a sort of 
anecdotal, you know, sui generis incident? Or is that something 
that you think is a broader based problem?
    The second question is--and this is just showing my lack of 
knowledge--is TRICARE done service by service, or is this a 
program that is administered by the Pentagon in one place?
    And given the fact that that is sort of a hot spot in terms 
of the Pentagon's budget, I mean, is there efforts that are 
being, you know, focused, in terms of this area, because, 
again, it is something the Secretary said repeatedly to our 
committee.
    So, Mr. Khan, maybe you can just talk about the report that 
you submitted.
    Mr. Khan. Yes. I mean, that was an accounting 
misclassification of information. I mean, that is one instance 
that we have highlighted. There are several other instances 
where--I mean, this goes down to the basic fundamentals of 
bookkeeping, coding of information to make sure that it has 
correct classification.
    These are building blocks of financial reports. If the 
information is not being accumulated and aggregated at the 
correct level under the correct classifications, the 
information is going to be mischaracterized in the financial 
statements, so you will end up with certain types of 
information to be understated and other types of information to 
be overstated.
    So this really points towards the importance of having that 
discipline so that when you pull together the financial 
statements that you have reasonable assurance that the 
information that you have in front of you is accurate.
    This comes to all the decisionmaking process. If you are 
making important decisions, if you want to reduce certain 
activity, where you want to increase activity, or where you can 
have any cuts, this type of information is going to be very 
useful.
    Secretary Hale. TRICARE is managed centrally in the 
Department. The Services, obviously, participate, but it is 
managed centrally.
    And, yes, it is a major problem, and we have made two broad 
proposals: One, to achieve some efficiencies in the TRICARE 
management agency. And they are working right now to implement 
those. Can we do it with fewer contractors, fewer people to 
reduce the overhead?
    The other one is to make some changes in the benefits, 
particularly to working age retirees.
    And we have both in the military health care area. We have 
made a set of proposals, and I very much appreciate the fact 
that the House supported those proposals in almost all cases. 
And, generally, the Senate Armed Services Committee has, too, 
so I would hope that we will get authority, for example, for 
modest increases in the enrollment fee for working-age retirees 
in TRICARE and some changes in pharmacy co-pays.
    These are tough votes. I recognize that. But some of this 
is getting out of hand, and we need to begin to make some 
modest changes in those benefits. So I appreciate your support.
    Mr. Courtney. Well, again, I understand that certainly one 
way to save money in the system is to, obviously, shift some 
costs to the beneficiaries. And, again, that debate has already 
taken place.
    I guess the question is, though, that, you know, what I 
think we would appreciate is having some confidence in knowing 
that the program is being administered as efficiently as 
possible, and the GAO criticism seems to suggest that there are 
problems there.
    And I guess that is sort of, you know, is the Pentagon 
making efforts to really try and make sure before they come to 
Congress, asking the beneficiaries to pay more, that, you know, 
you feel good about whether or not the management is up to 
speed?
    Secretary Hale. We have made a whole series of efforts, 
prior to proposing those beneficiary increases, to look for 
ways to hold down the growth in cost.
    For example, we were able to use the Veterans pricing 
scheme for pharmaceuticals, which saved us--I want to say--half 
a billion a year. I may correct that for the record, but it was 
substantial savings.
    We have looked at a variety of management improvements to 
deliver the care more carefully. The miscategorization--I need 
to look more carefully at the GAO report. I don't know enough 
details to give the answer.
    But I can tell you that before we asked for those benefit 
increases, even though I think they are increases in enrollment 
fees, even though I think they are fully justified, we tried to 
do everything we could to try to make the system more 
efficient.
    Can we do more? Yes. There is an ongoing review right now 
of TRICARE and the rest of the military health system, looking 
for additional efficiencies. And I would hope that coming out 
of that would be some further recommendations next year to the 
Congress.
    Mr. Conaway. Thanks, Joe.
    Rob, you okay?
    Mr. Andrews. Yes.
    Mr. Conaway. All right.
    Well, then, Bob, Beth, Asif, thank you for coming. I guess, 
just in concluding here, Bob, and Beth are spectacular 
professionals. You say all the right things. And to someone who 
just came walking in and sat down, you would think that you 
guys almost have it done, because, you know, you are really 
good at telling us all these things.
    As this panel progresses, diving deeper into the weeds, so 
to speak, I want that sense of urgency somehow to be seen other 
places, or a sense of urgency seen other places. You know Bob, 
you told us last week that, you know, nobody gets up thinking 
about September 30th, 2017, and that you have got to make 
interim progress, incremental progress to make this happen and 
a 5 for 25 on that first round on the FIAR plan.
    What I don't want to see happen, though, is to set the bar 
so low on those goes that you go 25/25, because you didn't push 
yourselves far enough to make that happen. So there is a 
balance in there. You put it too far out there, and you get 
discouraged because you don't get there. You put it too low, 
and you waste time as well.
    So this panel is going to be committed to trying to figure 
out how Congress can put that institutional continuity or 
sustainability of focus in place so that over these next 6 
years that we get this done. You and your predecessors are 
going to be, you know, integral parts to that. So thank you for 
coming this morning at 8 o'clock.
    Rob, you got any closing remarks?
    Mr. Andrews. Well, I just want to associate myself with the 
Chairman's remarks here. We see tangible progress, and we want 
to work with you to make that happen, but, frankly, the reason 
this panel exists is to guarantee that progress.
    We are hopeful we have a kindred spirit in Secretary 
Panetta. We know we have kindred spirits on your team, but we 
want to do more than spirit. We want the body as well. And the 
panel is on a bipartisan basis committed to that kind of 
oversight. I appreciate the opportunity to speak this morning.
    Mr. Conaway. All right.
    Thank you all very much.
    The hearing is adjourned.
    [Whereupon, at 9:03 a.m., the panel was adjourned.]
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              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                             July 28, 2011

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              RESPONSE TO QUESTION SUBMITTED BY MR. RIGELL

    Secretary Hale. While the outside auditors have provided feedback 
on the audits, they have not made any legislative suggestions. The 
auditors' detailed observations and recommendations from the financial 
statement audit of the U.S. Marine Corps (USMC) General Fund Statement 
of Budgetary Resources (SBR) follow.
    The audit has yielded significant improvements in key business 
processes and internal controls. The Fiscal Year (FY) 2010 audit 
employed a two-track approach to assessing the validity and fair 
presentation of General Fund SBR in accordance with accounting 
principles generally accepted in the U.S. (GAAP). Audit work streams 
were segmented into two distinct categories: 1) Financial Transaction 
Supportability; and 2) Information Systems Reliability.
    Financial Transaction Supportability--Audit requirements are aimed 
at supporting the balances reported on the financial statement by 
performing examination procedures that tie the accounting transaction 
to its corresponding supporting documentation. These are termed 
``substantive procedures'' and assume little, if any, reliance on 
internal controls.
    The auditors approached testing across three key components of the 
financial statement: 1) Beginning Balances; 2) Current-Year Operations; 
and 3) Ending Balances and Compilation. The most difficult and 
challenging component of a first-year audit is assessing the 
reliability of a Beginning Balance, which represents all brought 
forward balances for every appropriation that is not in cancelled 
status in the year of audit. That is, appropriations that are active 
for making obligation adjustments and/or disbursement for requirements 
established in a prior period and remain active. The USMC financial 
statement audit did not significantly progress beyond Beginning Balance 
testing in FY 2010 because of the following significant auditor 
observations and findings:

        1.   Inappropriate Accrual. The auditors uncovered 
        inappropriate accruals that lacked support at the time of 
        recognition and entry into the core accounting system. This 
        matter was corrected by the USMC prior to the end of the FY 
        2010 SBR audit.

        2.   Lack of Management Evidence to Substantiate Obligation 
        Estimates. On occasion, the USMC initiates a ``bulk'' 
        transaction or one that is based on an estimate or calculation 
        for future requirements. The auditors determined that these 
        estimates were not being monitored or adjusted as necessary. As 
        a result of this audit finding, the USMC has taken steps to 
        implement improved estimation models and monitoring controls.

        3.   Inappropriate Recognition of Contract Financing Payments 
        as Advances. The auditors confirmed the equal general ledger 
        treatment of advances (pre-payments) and contract financing 
        payment. This represents an accounting classification error for 
        a specific subset of assets. Although the USMC has corrected 
        its core accounting system logic in order to properly record 
        and report contract financing payments, the impact of this 
        issue to the balances reflected on the financial statement was 
        minimal. Prior to the SBR audit, the USMC was in compliance 
        with the Department of Defense Financial Management Regulation 
        (DoDFMR) when processing the recognition of contract financing 
        payments. However, as a result of this audit, there are efforts 
        underway within the Office of the Under Secretary of Defense 
        (Comptroller) to update and clarify the DoDFMR.

        4.   Timely Recording and Review. The auditors identified a 
        number of documents during testing that contained abnormal 
        balances. These balances were a combination of negative 
        obligations, latent undelivered orders balances, documents 
        containing no recorded expenses, and stale obligations. A more 
        robust quarterly and year-end review is needed in order to 
        maintain normal balances on the documents in the core 
        accounting system. This includes stronger management oversight 
        and review of monthly reporting. The USMC has strengthened the 
        tri-annual review process that is required throughout the DoD.

        5.   Trial Balance Compilation. The compilation and 
        reconciliation of the detailed transactions to the financial 
        statements is the first and most important requirement of any 
        audit. The USMC was able, although with some difficulty and 
        delay, to reconcile the detailed financial transactions to the 
        unadjusted trail balance that the auditors use to sample and 
        test the balances of the SBR. In order to sustain these 
        improvements, the USMC implemented a series of reports that are 
        generated monthly to facilitate faster and more accurate data 
        exchange to the auditors. Additionally, the USMC worked closely 
        with the Defense Finance and Accounting Service (DFAS) and the 
        Business Transformation Agency to create a complete general 
        ledger reconciliation of the unadjusted trial balance to the 
        adjusted trial balance. This was an achievement never 
        accomplished prior to the audit that spurred improved financial 
        reporting and reconciliation support that will yield tangible 
        audit benefits all financial statement reporting entities 
        within the DoD.

        6.   Shared Appropriations. Shared appropriations are 
        appropriations identified and authorized through the Department 
        of the Navy (DON) annual budget process that are shared by the 
        Navy and the USMC. The auditors uncovered the inappropriate use 
        of a general ledger account that does not reflect an allotment 
        from the DON. For the FY 2011 General Fund SBR audit, the USMC 
        implemented general ledger corrections to effect a 
        reclassification across the impacted general ledger accounts to 
        support the appropriate recording and reporting of a shared 
        appropriation. There is no net effect to the presentation of 
        the financial statement and the balances reported. These 
        corrections are currently under evaluation.

    Information Systems Reliability--The audit requirements focus on 
leveraging the Government Accountability Office Federal Information 
System Controls Audit Manual in the auditor's approach for testing 
financial systems and mixed-use systems controls. The controls tested 
consisted of select internal controls that depend on information 
systems processing and included general controls and application 
controls.
    The FY 2010 audit focused on three systems: 1) the Marine Corps 
Total Force System (MCTFS); 2) the Standard Accounting Budgeting and 
Reporting System (SABRS); and 3) the Defense Departmental Reporting 
System (DDRS). Of the three systems, only one system, MCTFS, is owned 
by the USMC. MCTFS supports integrated personnel and pay transactions 
for both the active and reserve components of the USMC as well as 
retired Marines. SABRS, which is owned by DFAS, is the core accounting 
systems used by the USMC for all General Funds appropriations. DDRS is 
used by the USMC to produce DoD financial statements, interim financial 
statements and budgetary reports. For FY 2011, the auditors added the 
Defense Cash Accountability System (DCAS) to their information systems 
audit scope. Along with DDRS, audit assessment of DCAS represents 
significant value for the DoD as this is a key financial recording and 
reporting system that is utilized across the enterprise.
    The FY 2010 audit of the USMC SBR identified 56 information systems 
(IS) audit findings for the 3 systems. Examples of the auditor's 
observations and findings, as categorized by application control, 
include:

        1.   Security Management. These controls provide reasonable 
        assurance that security management is effective. The auditors 
        identified instances where application level logging and 
        monitoring was not performed and formal policy and procedures 
        for the monitoring performed by third party providers had not 
        been documented. By not actively monitoring application level 
        activity nor third party providers adherence to service level 
        agreements or other performance metrics, management cannot 
        ensure they are receiving the agreed upon services at agreed 
        upon metrics. There is also the risk that the third party 
        provider does not properly communicate any security 
        vulnerability to management in a timely manner. This could 
        impact the SBR if unauthorized, fraudulent, or erroneous 
        application activity is not detected, logged, and investigated 
        by the third-party information technology (IT) security 
        organization.

        2.   Access Controls. These controls provide reasonable 
        assurance that access to computer resources (data, equipment, 
        and facilities) is reasonable and restricted to authorized 
        individuals. The audit revealed that periodic management review 
        of user access was not performed. Without periodic reviews and 
        recertification of users, inappropriate access to significant 
        financial data may be undetected. Additionally, there is risk 
        of lingering access for employees who have been reassigned, 
        terminated, or retired.

        3.   Configuration Management. These controls provide 
        reasonable assurance that changes to information system 
        resources are authorized and systems are configured and 
        operated securely and as intended. The audit revealed little 
        evidence of periodic review of changes that were migrated into 
        production. Without a periodic review of changes that are 
        migrated to production, there is an increased risk that an 
        unauthorized, erroneous, or harmful code could be introduced 
        the production environment and negatively impact the SBR 
        financial statement reporting systems and related processes.

        4.   Segregation of Duties. These controls provide reasonable 
        assurance that incompatible duties are effectively segregated. 
        The auditors uncovered instances where administrators were 
        granted a functional role for their administrator accounts 
        without an approved waiver from management. By not effectively 
        restricting access to applications based on job function and 
        adhering to segregation of duties principles, the risks for 
        fraud and inappropriate transactions are increased.

        5.   Contingency Planning. These controls provide reasonable 
        assurance that contingency planning: 1) protects information 
        resources and minimizes the risk of unplanned interruptions; 
        and 2) provides for recovery of critical operations should 
        interruptions occur. The contingency plan was not approved or 
        tested, and did not include a business impact analysis. By not 
        having a tested contingency plan and business impact analysis, 
        there is an increased risk that the USMC will not be able to 
        restore a system quickly and effectively after a service 
        disruption.

        6.   Business Process. These controls are the automated and/or 
        manual controls applied to business transaction flows. They 
        relate to the completeness, accuracy, validity and 
        confidentiality of transactions and data during application 
        processing. They typically cover the structure, policies, and 
        procedures that operate at a detailed business process level 
        and operate over individual transactions or activities across 
        business processes. The auditors found that a data management 
        strategy and design (i.e., how data is organized into 
        structures to facilitate retrieval while minimizing redundancy) 
        was not formally documented. Additionally, there was no formal 
        procedure that documented how data was managed and monitored. A 
        data management strategy and design is a critical factor in 
        helping to assure the quality of data as well as its 
        interrelationship with other data elements. Without a data 
        management strategy and design there is a risk of poor quality 
        data that may lead to a failure of system controls, process 
        inefficiencies, and inaccurate management reporting.

        7.   Interface Controls. These consist of those controls over 
        the: 1) timely, accurate, and complete processing of 
        information between applications and other feeder and receiving 
        systems on an on-going basis; and 2) complete and accurate 
        migration of clean data during conversion. Documentation that 
        identified, listed, and provided an explanation for interface 
        data processing files was not readily available for the 
        auditors. Without properly listing, identifying, and providing 
        an explanation for all the edit conditions contained in the 
        input process program, there is no evidence that the edit 
        checks are appropriately configured for data processing.

        8.   Data Management System Controls. Enforce user 
        authentication/authorization, availability of system 
        privileges, data access privileges, application processing 
        hosted within the data management systems, and segregation of 
        duties. The audit testing found that multiple users shared one 
        administrative account and password to access the Collection 
        Server and could invoke privileged level access. Allowing the 
        use of a shared account decreases the ability for management to 
        establish accountability for user actions. Additionally, the 
        use of a guest account with administrative privileges compounds 
        the potential effect by having a generic account that could 
        potentially be used to modify system settings or data without 
        the action being tied to an individual.

    The audit helped to identify areas of both financial and IS risk in 
the USMC. The USMC audit team has worked with the auditors to 
understand the issues and risks and has taken firm action to remediate 
the known findings. The corrective actions resulting from the findings 
and issues identified in the FY 2010 audit are currently being 
reevaluated by the auditors during the FY 2011 audit. At this time the 
FY 2011 audit is not complete. The USMC is confident that its action to 
address these audit issues and findings in FY 2011 will be sustained 
and ultimately validated by an audit opinion. Additionally, the USMC 
will continue to strengthen its management controls and improve its IT 
security posture in response to any future audit findings. [See page 
16.]
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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                             July 28, 2011

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                   QUESTIONS SUBMITTED BY MR. PALAZZO

    Mr. Palazzo. On Page 7, under the heading ``Where We Are Today,'' 
you stated that you are ``assembling teams within each Military 
Department that will be tasked with improving financial controls.'' I 
applaud your efforts to assemble these important teams within the 
Services. Can you please elaborate, for the Panel, the makeup of these 
teams with respect to their accounting background? How many of them are 
working on this task daily, etc?
    Secretary Hale and Ms. McGrath. Congressman Palazzo let me start by 
thanking you for your comment in support of our plan to assemble teams 
to improve financial controls. Our plan calls for each Military 
Department to devote at least 15 people from its audit agency to assist 
the Department to improve its internal controls. Auditors have the 
experience needed to assist business and financial process owners with 
designing sound internal controls and then assisting with their 
effective implementation. As for the accounting background of the 
teams, the employment requirements for auditors include at least 24 
hours of accounting or auditing course work and many of the auditors 
have years of financial audit experience.
    Mr. Palazzo. On Page 5 of your submitted statement, you mention 
that the ``Deputy Secretary has made clear that one of his highest 
management priorities is improving the acquisition, development, and 
fielding of IT systems.'' While I can appreciate the attention and 
urgency given to acquiring, developing, and getting IT systems into the 
field, could DOD utilize systems they already have, instead of going 
through rounds of acquisitions to purchase something we could find in a 
desk 
drawer?
    Secretary Hale and Ms. McGrath. The Department is committed to 
taking a balanced approach to transitioning from its legacy systems 
environment to its target systems environment. This balanced approach 
includes both the acquisition of new systems and the modernization or 
retirement of existing systems. In many cases, utilization of existing 
systems to meet current capability needs is not possible, however, due 
to outdated programming languages, non-compliance with statute such as 
the Federal Financial Management Improvement Act (FFMIA), stovepiped 
business processes, or a variety of other reasons. In those cases, it 
is critical that the Department efficiently and effectively acquire new 
business systems that help to integrate our business operations and 
deliver interoperable data.

                                  
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