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






                         [H.A.S.C. No. 112-60]

                         DEPARTMENT OF DEFENSE

                        COMPONENT AUDIT EFFORTS

                               __________

                                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

                           SEPTEMBER 8, 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, September 8, 2011, Department of Defense Component 
  Audit Efforts..................................................     1

Appendix:

Thursday, September 8, 2011......................................    23
                              ----------                              

                      THURSDAY, SEPTEMBER 8, 2011
             DEPARTMENT OF DEFENSE COMPONENT AUDIT EFFORTS
              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

Commons, Hon. Gladys J., Assistant Secretary of the Navy, 
  Financial Management and Comptroller, and Caral E. Spangler, 
  Assistant Deputy Commandant, Programs and Resources Department, 
  U.S. Marine Corps..............................................     5
Matiella, Hon. Mary Sally, Assistant Secretary of the Army, 
  Financial Management and Comptroller...........................     3
Miller, Wesley C., Director of Resource Management, U.S. Army 
  Corps of Engineers.............................................     8
Morin, Hon. Jamie M., Assistant Secretary of the Air Force, 
  Financial Management and Comptroller...........................     6

                                APPENDIX

Prepared Statements:

    Commons, Hon. Gladys J.......................................    38
    Conaway, Hon. K. Michael.....................................    27
    Matiella, Hon. Mary Sally....................................    29
    Miller, Wesley C.............................................    52
    Morin, Hon. Jamie M..........................................    43

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    Mr. Andrews..................................................    61
    Mr. Rigell...................................................    61

Questions Submitted by Members Post Hearing:

    Mr. Conaway..................................................    65
 
             DEPARTMENT OF DEFENSE COMPONENT AUDIT EFFORTS

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
    Panel on Defense Financial Management and Auditability 
                                                    Reform,
                       Washington, DC, Thursday, September 8, 2011.
    The panel met, pursuant to call, at 8:01 a.m. in room 2212, 
Rayburn House Office Building, Hon. K. Michael Conaway 
(chairman of the panel) presiding.
    Mr. Conaway. Good morning and thanks, everybody, for being 
here bright and early. I appreciate my colleagues being here; 
and, Rob, thanks for being here.
    I would like to welcome today's panel on the efforts of the 
Department of Defense to generate auditable financial 
statements.

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

    Mr. Conaway. At our first hearing, we received testimony on 
DOD's [Department of Defense] strategy--I don't think I will 
ever be able to say that word: ``strategery.'' Strategy. And I 
don't think ex-President Bush actually ever said that--
methodology to achieving audit readiness by 2017 and on the 
challenges it faces in achieving that goal.
    Today, we will hear from various DOD components on their 
approach to implementing the DOD financial improvement strategy 
and methodology. We will delve somewhat deeper into the 
challenges faced at the component level and hear how the 
components are incorporating lessons learned from ongoing 
audits in their audit readiness plans.
    Although there is a standard methodology that DOD 
components must follow to guide their audit readiness efforts, 
their approaches to achieving audit readiness may vary from 
component to component. We are interested in hearing about each 
component's approach to achieving financial statement 
auditability by 2017.
    It is widely recognized that the successful implementation 
of the enterprise resource planning systems is key to DOD's 
ability to achieve audit readiness. In my examination of this 
issue, one thing is clear. We can't afford the cost overruns--
continued cost overruns and schedule slippages that have 
plagued these systems to date if DOD is in fact going to be 
ready by 2017.
    However, as our witnesses noted in testimony before this 
panel in late July, new IT [Information Technology] systems 
alone will not guarantee auditability. The DOD must improve its 
business processes. Hopefully, today's hearing will shed some 
light on how the various components are doing in both of these 
regards.
    Although the military departments are not yet auditable, 
DOD has made some progress towards this goal. For example, six 
smaller departmental organizations, including the Corps of 
Engineers, have received clean audit opinions; and the Marine 
Corps is undergoing an audit of its statement of budgetary 
resources as we speak.
    The military departments must leverage the lessons learned 
from these efforts into their audit readiness plans. I hope our 
discussions here today will assist in that information exchange 
and bring to light some good news with respect to the 
Department's efforts to produce financial statements that we 
and the taxpayers can have confidence in.
    With that, I would like to thank our witnesses for taking 
time out of their schedules to be with us this morning.
    We have today the honorable Mary Sally Matiella--Matiella? 
Matiella. Paul and I were working on that, Mary Sally, and we 
just--Matiella, the Assistant Secretary of the Army, Financial 
Management and Comptroller; the Honorable Gladys Commons, 
Assistant Secretary of the Navy, Financial Management and 
Comptroller; Ms. Caral Spangler, the Assistant Deputy 
Commandant, Programs and Resources, U.S. Marine Corps; the 
Honorable Dr. Jamie Morin, Assistant Secretary of the Air 
Force, Financial Management and Comptroller; and Mr. Wesley 
Miller, Director of Resource Management, Corps of Engineers.
    Now I would like to turn it to my good colleague, Rob 
Andrews, for any remarks that he has at this point.
    [The prepared statement of Mr. Conaway can be found in the 
Appendix on page 27.]

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

    Mr. Andrews. Thank you, Mr. Chairman.
    Good morning, ladies and gentlemen. Good to have you all 
with us this morning. We appreciate your preparation, and I am 
sure this is a hearing where we will all be able to learn 
something.
    Mr. Chairman, thank you for your aggressive schedule on 
moving our work forward. I expected nothing less, and I am 
happy to be a part of it.
    Since the panel last met, we have made a very important 
decision as Congress in this country and that is that it is 
rather certain that, irrespective of who is in the Executive 
Branch or Congress, there will be very important decisions 
about defense spending made over the course of the next decade.
    The law as we sit here this morning is that are facing 
either a very significant reduction because of sequestration or 
we are facing an agreement that in all likelihood will contain 
some further reductions in defense spending if there is one.
    These are grave and important decisions any way you slice 
it. And the question here is not whether we are going to make 
these decisions. The question is whether we are going to make 
them based on good evidence or insufficient evidence. And the 
country would be ill-served if we make these decisions based on 
insufficient evidence, and we will make them based on 
insufficient evidence if we don't have auditable financial 
statements throughout the Department.
    This is not just another academic exercise where people 
debate the metaphysical question whether auditable statements 
are a good thing or a bad thing. This is for real. Because, as 
I say, irrespective of who is running the executive branch or 
Congress, they are going to be very consequential decisions 
that literally affect the life and death of the men and women 
who serve and affect the security of the country.
    So I think this gives a new urgency to the task of this 
panel and of the ladies and gentlemen who will testify this 
morning to put ourselves in a position where we, as a Congress 
and a country, have in front of us the correct body of evidence 
to begin to make decisions about where our investments should 
be and where they shouldn't be and how they should be altered.
    With that framework, I do think we have seen some real 
progress. Mr. Hale's testimony last time around I think laid 
out a very good roadmap to get to where we want to go; and this 
morning we begin our process of getting into the specifics, 
into the weeds, if you will, of how to get there, that you 
ladies and gentlemen of the people responsible for getting us 
there. And we are interested in hearing how far you have gotten 
and when you are going to get to where we need to go and what 
obstacles may stand in the way between here and there.
    So thank you, Mr. Chairman, for this opportunity. I look 
forward to hearing from the witnesses.
    Mr. Conaway. All right. Thank you, Rob.
    I would ask unanimous consent that non-panel members, 
specifically Tim Griffin, be allowed to participate in today's 
panel. Is there objection?
    Without objection, non-panel members will be recognized at 
the appropriate time for 5 minutes.
    Mr. Conaway. Mary Sally, your turn.

 STATEMENT OF HON. MARY SALLY MATIELLA, ASSISTANT SECRETARY OF 
         THE ARMY, FINANCIAL MANAGEMENT AND COMPTROLLER

    Secretary Matiella. Chairman Conaway, Representative 
Andrews, members of the panel, thank you for the opportunity to 
testify today regarding financial management and our commitment 
to achieving auditable financial statements.
    Secretary McHugh, the Chief of Staff of the Army General 
Odierno, Secretary Westphal, our Chief Management Officer, and 
all our senior leaders recognize the value and the importance 
of achieving the mandate of fiscal year 2010 National Defense 
Authorization Act which requires the Army to be audit ready by 
September 30, 2017.
    The Army employs hardworking soldiers and civilians, 
personnel across all functional areas who are dedicated to 
achieving audit readiness goals. These professionals are 
transforming our financial and business systems to improve 
financial management, provide timely, accurate, and relevant 
information for decision makers, and reassure American 
taxpayers and Congress the Army is a trustworthy steward of 
public funds.
    I am confident that we will be audit ready by September 30, 
2017. Because we have a sound and resourced financial 
improvement plan conforming to the Department's financial 
improvement and audit readiness criteria, a solid enterprise 
resource planning strategy guiding our businesses through 
development and deployment, and an effective governance 
oversight and structure ensuring accountability, our financial 
improvement plan is fully resourced, contains detailed 
corrective actions and milestones, identifies accountable 
organizations, incorporates lessons learned from the Army Corps 
of Engineers in the Marine Corps audit and aligns our business 
strategy.
    The plan emphasizes early and comprehensive evaluation and 
testing of management controls. This ensures the controls of 
vital--controls vital to audit readiness are in place and 
operating effectively as soon as possible. We ensure that we 
are audit ready by September 17th.
    Our improvement plan calls for annual audit examinations by 
an independent public accounting firm each year from fiscal 
year 2011 to 2014, these examinations on management and 
information technology system controlled and business processes 
in the ERP [Enterprise Resource Planning] environment. The 
accounting firms conducting these examinations will identify 
deficiencies and issue corrective actions.
    These examinations will enable us to correct deficiencies 
early enough to meet our audit goals for an assertion of the 
general fund statement of budgetary resources in fiscal year 
2015 and assertion of all financial statements in fiscal year 
2017.
    These audit exams will also condition the Army on how to 
support financial statement audits and ensure audit readiness 
strategy is sound and remains on schedule.
    Each year, we are repeating a cycle of assessing, testing, 
identifying deficiencies, and implementing corrective actions. 
Additionally, each audit exam expands its scope by covering 
additional audit installations, processes, and systems each 
time we do a different wave.
    The audit examination is currently in process at three 
installations and Army headquarters and covers several business 
processes executed in the ERP environment. We recently 
completed an examination of appropriations received, which 
resulted in an unqualified audit opinion from an independent 
auditor, thus confirming our ability to receive and account for 
nearly $230 billion of appropriations.
    Army senior leaders provide governance and oversight of our 
audit readiness efforts and hold personnel accountable for 
achieving specific milestones. Accordingly, audit readiness 
performance criteria will be included in our senior executive 
performance plans starting in October in fiscal year 2012.
    Examination of our fiscal improvement plan and enterprise 
resource planning strategy, combined with senior level 
governance and oversight, will enable the Army to be audit 
ready by September, 2017. I am personally committed to meeting 
our national security objectives and mandates of law requiring 
auditability. I look forward to continued collaboration with 
members of this panel, your counterparts in the Senate, GAO 
[Government Accountability Office], Comptroller Hale, and DCMO 
[Deputy Chief Management Officer] McGrath to ensure the 
continued improvement of the Army's business environment.
    I look forward to your questions.
    [The prepared statement of Secretary Matiella can be found 
in the Appendix on page 29.]
    Mr. Conaway. Thank, Mary Sally.
    Ms. Commons.

STATEMENT OF HON. GLADYS J. COMMONS, ASSISTANT SECRETARY OF THE 
   NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER, AND CARAL E. 
 SPANGLER, ASSISTANT DEPUTY COMMANDANT, PROGRAMS AND RESOURCES 
                 DEPARTMENT, U.S. MARINE CORPS

    Secretary Commons. Good morning, Chairman Conaway, 
Congressman Andrews, members of the panel. Thank you for the 
opportunity to discuss the Department of the Navy's effort to 
achieve financial audit readiness.
    Congressman Conaway, I want to personally thank you for 
your support and the interest that you have shown in our 
efforts to improve financial management.
    The Department is fully committed to achieving financial 
auditability, and our senior leaders have provided the 
resources to do so. Secretary Hale has asked us to concentrate 
our efforts in two areas, the statement of budgetary resources 
and existence and completeness of high-value military 
equipment. Our plans reflect those priorities.
    As noted, the Marine Corps is in the second year of the 
audit of the statement of budgetary resources. It has been 
challenging, but we continue to make progress, and we have 
learned many lessons from that audit. We have incorporated 
those lessons in the overall Department's financial improvement 
plan. We are also sharing these lessons with other departments. 
They include from the complex, proving the accuracy of our 
beginning balances for all appropriations, to the simple, 
maintenance of our supporting documentation and separation of 
duties.
    We are making progress in other areas. The Department 
recently received an unqualified opinion on our appropriations 
received process examination conducted by a private audit firm. 
The Department of Defense Inspector General is examining the 
completeness and existence of high-value military equipment, 
for example, our ships, submarines, ballistic missiles, and 
satellites. That examination will be followed by an examination 
of the existence and completeness of our aircraft and ordnance 
inventory. We believe the outcome from these examinations will 
be positive as well.
    We are working with our service providers to ensure that we 
all understand what must be done and who is responsible. We 
have reached across the aisles to assign responsibility to our 
own business process owners, such as our human resource and 
acquisition organizations. We have met with every senior 
executive responsible for executing our business processes; 
and, beginning in October, they will have an audit readiness 
objective in his or her performance plan.
    We are also engaging our general and flag officers through 
the Vice Chief of Naval Operations and the Assistant Commandant 
of the Marine Corps.
    Achieving auditability is challenging and there is much 
work to do, but our financial data is accurate, and I will give 
you an example.
    A few months ago, I received a letter from a former Navy 
employee who stated in his letter that he had not received full 
payment for a PCS [Permanent Change of Station] move that was 
made a number of years ago. We were able to go into our 
accounting system, pull out the data, show him the fact that we 
indeed had made full payment for his PCS move.
    Now, when the auditors look at that, they would ask me, can 
you provide the actual PCS order? I may not have been able to 
provide the actual PCS order because it would--it happened a 
number of years ago, but I was able to go into the accounting 
system and pull out the data to show that he had actually been 
paid in full for his permanent change of station movement.
    We are committed to this effort. We are making progress. 
Thank you for your interest and support of our efforts. I will 
be happy to answer any questions you might have, as 
appropriate.
    [The prepared statement of Secretary Commons can be found 
in the Appendix on page 38.]
    Mr. Conaway. Thank you.
    Caral.
    Ms. Spangler. I don't have a separate statement. Thank you.
    Mr. Conaway. Sorry. That is right.
    Jamie Morin, your turn.

 STATEMENT OF HON. JAMIE M. MORIN, ASSISTANT SECRETARY OF THE 
        AIR FORCE, FINANCIAL MANAGEMENT AND COMPTROLLER

    Secretary Morin. Thank you, Mr. Chairman and Mr. Andrews 
and to all of the members of the panel, for the invitation and 
for the focus of this committee over a sustained period of time 
on this important agenda.
    If I may, I would just like to briefly summarize written 
testimony and put the statement in the record.
    Mr. Conaway. Without objection.
    Secretary Morin. Thank you.
    Mr. Conaway, I think that the lesson is clear, that 
business as usual is the enemy of success in the audit 
readiness effort for the Department of Defense. Business as 
usual is not going to get the Department where we need to go. 
And the focus of the senior leadership of the Department of 
Defense, in response to the clear charge from this committee, 
from Congress, and from the American people, has helped get us 
out of the chain of business as usual.
    The Air Force is closely aligned with the strategy that 
Under Secretary Hale has laid out for a focus in audit 
readiness on the information that managers use to manage the 
Department, building that positive feedback loop that comes 
from giving senior leaders the tools they need to do their job, 
refocusing our financial improvement and readiness plan on 
those elements that are most relevant to those day-to-day 
managerial challenges.
    It was a shift of focus for the Air Force, which had put a 
lot of effort into valuation and other balance sheet pieces of 
the effort. And so we are coming from a little bit behind, but 
we are making up ground quickly due to really strong support 
from senior leaders in the Air Force, including Secretary 
Donley and Under Secretary Conaton, who is a good friend of 
this committee's, and, of course, our senior uniformed 
leadership.
    Just a month ago, Under Secretary Conaton and Vice Chief of 
Staff General Breedlove jointly wrote all of the 4-star 
commanders of the Air Force major commands to impress on them 
the criticality of building audit readiness into the 
performance plans of their senior executives across a wide 
range of functional responsibilities, pushing that effort down 
to command level and from there to base level, so it is not 
just a headquarter's effort, and pushing that effort out across 
the numerous functional areas in the Air Force, so it is not 
just a financial management effort.
    This leadership from our Chief Management Officer and our--
one of our senior military leaders has really helped us. I am 
pleased that, because of that leadership, we have made some 
real progress over the last year or so.
    Some of our wins include achieving audit readiness for our 
appropriations received, as the other Services have, and our 
funds distribution process. I think that is critical to giving 
the American taxpayer confidence that resources are being 
allocated the way they are appropriated.
    We have also asserted our funds balance with Treasury 
reconciliation process. This is really balancing the Air 
Force's checkbook with the Department of Treasury. It is over a 
million transactions a month, and we are now reconciling it to 
99.99 percent accuracy. A year ago, we couldn't reconcile it. 
So that is a significant step.
    We have made progress on some of our military equipment and 
other mission-critical assets as well, asserting audit 
readiness for existence and completeness of our full military 
equipment universe, our cruise missiles, and our aerial 
targets, which we treat as operating materials and supplies.
    Again, I think this progress directly comes from that 
intense commitment from our senior leadership, uniformed and 
civilian.
    We do have a long way to go. That is clear. And the 2017 
deadline in law is going to be challenging for the Air Force 
because of the shift in focus from the more valuation-oriented 
effort but also because of the IT acquisition challenges we 
face. We do see moderate risk, but with the high level of 
leadership commitment we feel like we are on track to make the 
deadline.
    Our ability to achieve audit readiness really does depend 
on systems modernization. Right now, we are focused on fielding 
enterprise resource planning systems, a new accounting system 
called DEAMS [Defense Enterprise Accounting and Management 
System], a new logistics system called ECSS [Expeditionary 
Combat Support System], a new personnel system, and others. We 
are behind the other Services in that regard, but that has been 
a benefit in many respects because we have been able to learn 
lessons from the experiences the other Services have gone 
through. As a result, we have made a heavy focus on data 
cleanup, we have made a heavy focus on feeder systems, we have 
made a heavy focus on change management for the user community, 
and that has been helpful. We are not rushing wide deployment 
of these systems into the field, but we are using them in real 
terms.
    The DEAMS accounting system is the system of record at 
Scott Air Force Base, one of our large and complex bases that 
is handling billions of dollars of transactions. It closed out 
last fiscal year successfully, and we will be finishing up this 
fiscal year. We will assess that and move on to rolling that 
system out.
    ERP's are not a panacea. They are not a solution to all of 
our problems. But the Air Force is running right now based on 
'70s-era bookkeeping systems that will not get us to a clean 
audit. They do not have the transaction-based fidelity. They do 
not have the U.S. standard general ledger basis that we need to 
get there. So IT systems modernization is inescapably part of 
the Air Force effort.
    Again, we can't rely on business as usual to get us across 
the finish line here. We need clear accountability for 
individual executives. The Air Force has really been leading 
the way on that. We have got a number of senior leaders with 
direct financial tie in their performance plans to audit 
readiness this year and an even larger universe next year.
    We need that real investment in systems modernization. We 
need a responsive effective acquisition process for those 
system modernization efforts. Again, you can't be stuck in 
business as usual of over cost, over schedule; and we need that 
involvement to stretch from the headquarters to the field and 
from the financial management community to the broader 
community.
    We are making good progress on all of those pieces, and 
that is due in part to the focus of this panel and of Congress, 
for which I thank you.
    Thank you, sir.
    [The prepared statement of Secretary Morin can be found in 
the Appendix on page 43.]
    Mr. Conaway. All right. Mr. Miller. Excuse me. Mr. Miller.

STATEMENT OF WESLEY C. MILLER, DIRECTOR OF RESOURCE MANAGEMENT, 
                  U.S. ARMY CORPS OF ENGINEERS

    Mr. Miller. Good morning, Congressman Conaway, Congressman 
Andrews, members of the panel.
    I am Wes Miller, Director of Resource Management for the 
U.S. Army Corps of Engineers. Thank you for this opportunity to 
discuss Civil Works Financial Statement Audits.
    The Corps of Engineers achieved a major milestone in fiscal 
year 2008 with the receipt of the first-ever unqualified 
opinion from a major Department of Defense activity. Last year, 
we received our third consecutive unqualified audit opinion and 
anticipate a fourth this year. Our current audit firm is KPMG, 
with the DOD Inspector General providing oversight.
    The Corps has been working on CFO [Chief Financial Officer] 
compliance for over 20 years and has faced many challenges 
along the way. The biggest challenge in our first audit was 
providing documentation for over $28 billion of property, 
plant, and equipment. We overcame that challenge by using 
alternate supporting documentation approved by the Inspector 
General. We also encountered many challenges processing over 
14,000 samples as well as meeting the accelerated reporting 
timelines. The key to overcoming all challenges was building a 
cohesive partnership with the auditors and working with them 
for solutions.
    From a lessons learned perspective, I would offer that the 
Corps of Engineers Financial Management System, which we refer 
to as CEFMS, is a major factor in our audit success. The Corps 
developed CEFMS as an enterprise financial system that 
encompasses travel, training, timekeeping, acquisition, asset 
accountability, and fully integrated with the Corps' project 
and asset management accountability systems. Many of the Corps' 
internal controls are automated within CEFMS, forcing 100-
percent compliance.
    For fiscal year '11 audit, we expect to process 
approximately 4,000 samples, which is a huge reduction from the 
first audit. With the reduced sample testing, we have shifted 
our resources to improve our internal controls program.
    I recently signed our fiscal year '11 internal audits over 
financial reporting letter with an unqualified assurance that 
our controls are operating effectively. I expect that our work 
on improving internal controls will result in most if not all 
of our auditor reported material weaknesses being cleared in 
this fiscal year. That is our number one priority.
    Thank you for inviting me here today. I look forward to any 
questions you may have.
    [The prepared statement of Mr. Miller can be found in the 
Appendix on page 52.]
    Mr. Conaway. Thank you, Mr. Miller.
    Thank all you panel members for coming here and the 
preparation time you put into making this happen. I am not sure 
how you got all those people here behind you, but apparently 
there is some interest in your squads as to what you were going 
to say this morning.
    We will now go on the 5-minute clock with questions. I will 
start us off.
    One of the things that--it may just be a problem I have--is 
that we have legacy systems out there. Mr. Morin, you mentioned 
in your written statement that if it looks like you are not 
going to make it to 2017. You are developing contingency plans 
to audit those systems. We will talk about that in a little 
bit.
    But is tracking the demise of legacy systems one of the 
metrics that we should be looking at as we try to evaluate the 
progress that you are making? In other words, at this stage in 
the arrangement, I would expect you to be able to point to 
those legacy systems which will no longer be needed once you 
get to where you want to get to. It would seem if those 
continue on beyond that point that you are putting in place a 
system that is not sustainable. You may be able to get that one 
time audit or whatever, but you are putting--so is--any of the 
panel members want to comment on that? And that is to how you 
track and affect the demise of these legacy systems as they are 
replaced by the others.
    Secretary Commons. Chairman Conaway, I will take that 
question.
    In implementing our ERP at our major acquisition commands, 
we believe that we will be able to eliminate 96 legacy systems 
by the end of 2016. We know that we have already eliminated 14. 
We think we will do another 11 this fiscal year. So we are 
tracking whether or not we are able to eliminate those legacy 
systems.
    One thing that I would like to highlight, however, is that 
much of the data that is contained in some of the legacy 
systems we need to keep. For example, shipbuilding is a 5-year 
appropriation, and it expends much longer, 10, 12 years in some 
instances. So converting all of that data to a new system is 
very expensive. We chose in some instances to keep that 
information into the legacy system until such time as those 
appropriations spend out. We are tracking.
    Mr. Conaway. Okay. Air Force, Army?
    Secretary Matiella. Our strategy right now is we roll out 
GFEBS [General Fund Enterprise Business System], which is our 
new accounting system, is we are inputting--as we roll it, put 
GFEBS into an installation, we only record new data into GFEBS 
and the old data stays in STANFINS [Standard Financial System], 
which is our old accounting system. But at a date certain, 
which would be, you know, something that you could track, the 
metric that you are talking about, at a date certain, by 2015, 
when we have fully deployed GFEBS, we are going to start 
working on bringing the old balances from the system, the ones 
that are still applicable, because many of those would have 
already deobligated. But the lingering balances in STANFINS, 
and we are going to bring them over into GFEBS.
    So we are tracking. We do have a strategy where we are 
concentrating on new data in GFEBS, but at some point at a date 
certain in 2015 we are going to start moving the old data into 
the new system.
    Right now, we are just concentrating on making sure that 
the new system is working, that we are training people 
correctly, and we will worry about moving the beginning 
balances after we feel like we have got a stable environment in 
GFEBS.
    Mr. Conaway. Jamie, as you answer yours, one of the things 
in looking at the three Services, your timeline gets you right 
at the bucket, right at 2017. The other two Services have--or 
at least have plans in place to get it done sooner so that if 
they have slippage and it doesn't go as planned they have got a 
window of opportunity to make that work. Can you address the 
fact that the Air Force has got it right on the dime and that 
means no slippage?
    Secretary Morin. Yes, sir.
    I think I will begin with the fact that in the dialogue 
between the committee--this committee and the Department of 
Defense, the Air Force was the pacing factor that led the 
Department of Defense to provide you with the schedule that got 
to 2017. So that it is not by happenstance that we are on the 
edge. We gave you the most aggressive deadline we could, given 
that schedule.
    But it leaves us, as you said, with very little room for 
slippage, and we are very cognizant of that. As a result, we 
are pushing now what I would call a belt-and-suspenders type 
approach.
    You have mentioned the line in my written testimony on 
that, that we are both pursuing our IT systems modernization 
through our ERP strategy, where we are definitely planning to 
replace a number of systems and we are tracking them as they 
come out, although the fact that we are rolling out many of 
these systems geographically means that the actual retirement 
of the replaced systems will not come until we have covered the 
full geography of the Air Force.
    But we are modernizing with the ERPs, and then we are also 
looking carefully at our legacy systems, the ones that can be 
remediated. Not all of them can. So, for those, we will be 
reliant on the ERPs.
    But, in certain cases, relatively cost-effective 
investments in existing legacy systems will get us the trail 
that we need to have clean financial input to the underlying 
accounting system. So we are focused on that very closely, and 
we are watching those interdependencies.
    One final point, which is that in the medium--in the early 
stages of the Air Force audit readiness effort, we perhaps bit 
off more than we could chew with some of those systems 
modernizations. Our ECSS effort, you know, was originally 
planned to replace I believe 240 IT systems. That was probably 
too much scope. And over the more than 5-year history of that 
program it has now been tailored and moved into smaller 
increments and releases of capability. Because trying to 
replace 240 systems at once strained the planning and execution 
capability of an institution of our size.
    Mr. Conaway. Thank you.
    Rob, 5 minutes.
    Mr. Andrews. Thank you, Mr. Chairman.
    Secretary Matiella, I understand in December of this 
calendar year the Army is going to match GFEBS against the 
GAO's sort of audit manual to see how it stacks up. Do you have 
any early indication as to how GFEBS is going to stack up?
    Secretary Matiella. I believe that we are going to be very 
successful. We have been working very hard to make sure that 
GFEBS is meeting the criteria that is required, that it has all 
the general ledger accounts that it requires. So I believe that 
at this point that GFEBS is going to be successful in being 
able to meet the IG's [Inspector General] and all the other 
regulation requirements.
    Mr. Andrews. What is the Plan B? Because it seems that so 
much of the Army's efforts for the audit compliance depends on 
GFEBS really working the way you want it to. Is there some sort 
of fire drill ready if there are deficiencies found in December 
of this year?
    Secretary Matiella. We are just--it is resourced. We have 
got the resources there to fix what is broken. And so at this 
point, you know, we plan on fully deploying GFEBS by July of 
next year. We have got a lot of major commands that are fully 
on GFEBS at this point. So we are sticking to Plan A. And, at 
this point, what we see is GFEBS is working. There are no data 
integrity problems. We do have to, you know, maybe slice and 
dice the data within GFEBS into different accounts, but we 
believe it is going to work. So we are very hopeful of that.
    Mr. Andrews. With the chairman's permission, I think we 
would like--the panel would probably like to have a report 
after your December review, a letter or some kind of written 
report to let us know how you are doing, because I think that 
is a very pivotal midpoint.
    [The information referred to can be found in the Appendix 
on page 61.]
    Secretary Matiella. More than happy.
    Mr. Andrews. Thank you.
    Secretary Commons, I love your story about the person who 
wrote in and thought he was underpaid. Usually, they write to 
me. I am glad it was you instead.
    How long did it take you--when you asked that question, how 
long did it take you to get the answer?
    Secretary Commons. Actually, not very long. Within a day or 
two. Our systems--our accounting systems for many years have 
been at the transaction level detail. So we are able to go in 
and look at data. Our issue is pulling that data out for the 
auditors. But we have been at the transaction detail level for 
many years.
    Mr. Andrews. That is good.
    I want to ask you a more subjective question based upon 
your professional judgment. How would you place the probability 
the Navy will get to that 2017 deadline? How probable is it?
    Secretary Commons. I am very optimistic. Our deadline that 
we have set for ourselves is fiscal year 2013. So I believe we 
will have ample time to make whatever corrections we need to 
make to meet the 2017 deadline. We are pushing very hard. We 
are not slipping our deadline. We are trying to stick to it and 
forcing the issues to make sure that we meet the 2017 deadline.
    Mr. Andrews. I appreciate that.
    And, Dr. Morin, you have spoken with great detail about the 
systems modernization challenges that the Air Force has to get 
to where we need to go. Are there any others in addition to 
systems modernization that you think are potential roadblocks 
to getting to the deadline?
    Secretary Morin. There is absolutely a range of other 
challenges. We have--it is people, it is processes, and it is 
systems. And they have got to work in concert.
    What we have found as we have rolled out DEAMS at Scott Air 
Force Base is, you know, in many cases doing financial 
management business in an auditable solid system is harder work 
than doing it in a legacy system. You know, you can't just 
enter seven 9s in a field and have the system pass the funding 
document through. So we have had to do a lot of additional 
training, a lot of hand holding as we get our workforce up on 
this system. And there is education required as to the 
strategic importance of this.
    Mr. Andrews. How are you handling the employee education to 
get your employees up to speed on what they have to do?
    Secretary Morin. We have a very deliberate and careful 
change management process that starts months and months in 
advance of turning the system on.
    Mr. Andrews. Who does the educating? Is it a vendor? Is it 
in house? How do you do that?
    Secretary Morin. It is a mixed force. We have a functional 
management office that is made up of seasoned financial 
managers that provides the detailed subject matter expertise. A 
lot of the--a lot of the training is done by contract support. 
But it is--it depends on exactly the level of training.
    Mr. Andrews. Very quickly, Mr. Miller, I saw you had a 
recommendation or a thought about the 45-day window at the end 
of the fiscal year. Do you think there should be a longer 
window for that compliance? If so, what should it be?
    Mr. Miller. In the first-year audit, sir, that is very 
difficult to make. After that, you are working towards that 45-
day window, and it is workable, and we have achieved it each of 
the last 3 years.
    Mr. Andrews. What do you think it should be in the first 
year?
    Mr. Miller. Sir, I think that first audit, it is going to 
take 4 to 5 months in order to get the results from that first 
audit.
    Mr. Andrews. Some of us just hope that the Corps has some 
money to be audited next year. A different problem. Thanks very 
much.
    Mr. Miller. Thank you, sir.
    Mr. Conaway. Thanks, Rob.
    Scott, 5 minutes.
    Mr. Rigell. Good morning. Thank you, Mr. Chairman; and 
thank you all for being here bright and early and all the 
staff. We really appreciate that.
    I am encouraged by what I am hearing. I think there is a 
deep resolve to move this forward, and just as a fellow 
American I thank you for that. We need to use our monies 
wisely.
    It seems like there was a common theme in your opening 
remarks that incorporating an assessment of the senior 
leadership, the executives, is starting to pay some benefit 
there; and I can tell you from my private sector experience 
that this is a good thing.
    I have routinely sat down with general managers of 
operating components and said, we are going to go through this 
general ledger; and they say, well, I have never done that 
before. And I say, well, this is how we run this business. And 
I said, I am not trying to make an accountant out of you, but 
you need to have a working knowledge of what you have been 
entrusted with. And it has always been very helpful. So I 
encourage you to pursue that.
    Now, with that in mind, you always wonder, okay, well, how 
are you establishing a benchline?
    Let us say I am a hard-charging colonel in Afghanistan. 
Come back, they reward me with a base. I am a 1-star now. I 
walk on the base. I don't know what I have inherited with 
respect to accounting. So how do you establish that baseline 
and how do you judge his or her performance at the end of his 
or her time?
    And I just would direct that to the general--the panel 
there, whoever would like to comment.
    Secretary Commons. First, we are indeed working with our 
flag and general officers as well. In fact, the Commandant of 
the Marine Corps believes that this is so important he has 
invited us to come and talk to his 3-star and above general 
officers to explain to them exactly what is needed for 
financial audit readiness.
    Also, the Vice Chief of Naval Operations has offered the 
same for his flag officers, that we come and talk to them about 
the importance of audit readiness.
    So we believe that we do have the support of the senior 
leaders of the Department. We take advantage of every 
opportunity to talk to senior leaders. I in fact went over and 
talked to our senior executives within the Department of the 
Navy, explained to them their role in this process. And, again, 
we have visited or talked to every senior executive within the 
Department of the Navy who influences the business processes to 
tell them of their importance and the role that they play. 
Because I think that is the key, that they understand the role 
that they play in reaching financial audit readiness.
    Mr. Rigell. A follow-up then might be if you could 
provide--certainly me and maybe the panel here with copies of 
that performance appraisal, not of course--not specific to a 
person but just the generic one. I would like to see what we 
are asking of our senior officers and how we are going about 
that.
    [The information referred to can be found in the Appendix 
on page 61.]
    And, also, I think you may want to consider, since you are 
having real success in this area and it is helping, if we could 
establish a culture even earlier on. If you have got your 3-
stars, that is great. But over time to develop that to where 
we're instilling that is at junior and mid-level officers and 
senior NCOs [non-commissioned officers] that this is just part 
of your duty. We don't want to take the warrior out of you. We 
don't want to do that. And I think we need to be careful about 
how we approach these things. But certainly being accountable 
for the assets entrusted to them is a good thing.
    As we move along in this process--and wouldn't we all love 
to fast-forward the tape to 2013 or 2017 and just see how we 
all did--but there are measurable benchmarks along the way. I 
trust those are clearly defined and we'll be informed along the 
way.
    And is there any third party--my final question, is there 
any third party--Mr. Morin, I will direct this to you, sir. Is 
there any third party that would come along and say, no, they 
really are not meeting that and alarm bells would go off so we 
could take action?
    Secretary Morin. Third-party valuation is critical, 
obviously, to any audit effort. We are relying on a series of 
third-party validators. For example, for our appropriations 
received assertion, we brought in an independent public 
accounting firm to do an examination of that. And we have 
received their unqualified opinion, and that is giving us 
confidence that we fixed the issues there.
    We also use the Inspector General. We use the DOD Inspector 
General for a portion of our examinations, and we use the Air 
Force audit agency as well. All of those bodies maintain a 
sufficient level of independence.
    But there is--we need to do a very good job of providing 
those interim metrics, and we have plans with literally 
thousands of line items of actions. Some of them----
    Mr. Rigell. Thank you. My time has expired. I just want 
to--out of respect for the chairman. Thank you, sir, very much.
    Mr. Conaway. Thank you, Scott.
    Mr. Courtney for 5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman.
    Actually, I just have one quick question. Secretary 
Commons, you mentioned in your testimony that, right now, the 
Navy is going through an audit with the Inspector General. And 
I am just--it is really--and I apologize for sort of talking 
about--or spending time on an issue that most people probably 
know standing on their head. But I mean is that an audit that 
is just random or is that a regular audit or is that something 
that you guys just sort of suddenly get a letter in the mail, 
like the IRS [Internal Revenue Service]?
    Secretary Commons. No, this is actually an examination to 
prove out that we say that we are ready for audit of 
completeness and existence of our high-value military 
equipment. The DOD IG is actually coming behind and verifying 
that the statement that I made is true, that we are ready 
there. So they are auditing that. They are going out. They are 
looking to see that the ships that are on our inventory are 
actually there and recorded.
    Mr. Courtney. And how long a process is that?
    Secretary Commons. We believe that this should take only a 
couple of months to complete this audit, but I don't control 
the IG timeframe. I just respond to them.
    Mr. Courtney. So if this effort to hit the 2017 target with 
the new systems is successful, I mean, will that moot this sort 
of Inspector General process? Or will it just make it easier to 
comply with?
    Secretary Commons. What we are actually trying to do is to 
get the auditor's lens on our processes as quickly as possible 
to confirm that the actions that we are taking, have taken are, 
in fact, successful. That gives us confidence to move to the 
next area that we need to work on. And so it is merely an 
examination to prove out the fact that, yes, your processes are 
good there, you are fully auditable in that area. When we have 
completed this entire process and will be ready for audit of 
the full statement, there will just be one audit.
    Mr. Courtney. Thank you. I yield back, Mr. Chairman.
    Mr. Conaway. Thanks, Mr. Courtney.
    Mr. Palazzo for 5 minutes.
    Mr. Palazzo. Thank you, Mr. Chairman; and I would like to 
thank the witnesses for being here today to continue this 
extremely important conversation.
    In the essence of time--and I know my colleagues to the 
right of me have some questions and there will probably be some 
closing remarks, so I will try to keep this brief.
    This is for everybody. Do you believe--I mean, there are 
certain lessons learned as we go through this process. It is a 
huge attempt to prepare the Services to become audit ready. And 
we have had to look at ERP and updating our legacy systems to 
more modern technology and, quite honestly, that--as a CPA 
[Certified Public Accountant] and a former business owner, I am 
still with the same tax preparation software and will probably 
be until they discontinue it just because I fear that change 
and that deliberative change management and, you know, we 
finally got the system tweaked, even though it is not the best.
    Anyway, I am digressing. So I didn't want to do that.
    Do you see that these lessons learned--CPAs have a habit of 
doing that. Do you see that these lessons learned are 
applicable to all of the Services or do you think each Service 
is so unique and so separate that we have to give--and I know 
there is probably a certain amount of individual attention. But 
do you think these lessons learned that, say, the Corps of 
Engineers will be applicable to the Army, the Navy, Marine 
Corps, and Air Force? So if you would just----
    Secretary Matiella. I would like to answer that.
    I believe that lessons learned are applicable across. I 
went through an audit with the Forest Service. We got our first 
clean opinion while I was CFO there. Those lessons learned are 
things we are struggling here. It is about change management. 
It is about training. It is about having the right systems. It 
is about knowing how to be auditable, how to communicate with 
the auditors.
    Internal controls are important. So there is a lot of 
lessons learned, and Wes here will also talk about that. But 
this is why we are looking at the folks that are under 
auditability. But you can go into not only inside of DOD, 
outside of DOD and have the same lessons learned. Very 
applicable.
    Mr. Palazzo. And also are you all communicating between the 
Services the lessons learned and the best practices?
    Mr. Miller. Sir, I go on the road quite a bit and talk 
about the lessons learned from our audit. I say there are four 
things that were critical for us and that we learned.
    First of all, there needs to be a CFO culture that you have 
there. You have to have competent people, one. But you also 
have to have individuals that expect to be checked. Individuals 
will do best what they know is going to be checked. So bringing 
in an external auditor in is very helpful as far as the audit 
program.
    The second point as far as having that financial management 
system that provides the detail in the transactional fidelity 
that you need to have there.
    The third item is the command support. The command has to 
be behind you 100 percent. It is just not the resource 
management community that enforces the audit, but it has to be 
the command. They have to buy into standards and enforcing 
those standards when they need be.
    And then the final element, as far as when we conduct the 
audit, is that it is work conducting that audit. You have to be 
there with the auditors, hand in hand, understanding their 
particular position, getting them to understand your position 
and why your processes are the way that they are.
    And I think those are applicable to all Services, sir.
    Mr. Palazzo. Anybody else?
    Secretary Morin. Congressmen, if I could, I think it is 
fair to say that DOD as a whole and each of the Services have 
closely looked at the success of the Army Corps of Engineers 
and we have used that to structure a lot of our governance 
process. So each of the Services has a cross-functional team 
chaired by the CFO that is responsible for bringing together 
that command support and that set of knowledge across the 
functions of a headquarters and an operation. So we have really 
looked aggressively at that.
    The Marine Corps audit, obviously still a work in progress 
but an important piece of progress, our staffs and we 
individually have had a number of interactions at a detailed 
level going through the recommendations that came out of that. 
In particular these are important for me at the Air Force 
because of our tight timeline. We can't afford to learn lessons 
by making mistakes ourselves. We have to learn lessons by 
viewing others' successes and failures.
    Mr. Palazzo. Well, that is admirable. I appreciate the fact 
that you all are sharing lessons learned, best practices, and 
everything else. And it is also admirable that you all are 
taking on such a monumental task. Just a small CPA firm and the 
fear of new technology and changing--so it is just wonderful to 
see that you all are doing this and, at the end, we are going 
to be able to achieve audit readiness. I think that is 
wonderful. Thank you.
    Mr. Conaway. The gentleman yields back.
    Our rules are a little ill-defined. I will go to Mr. 
Griffin first since he was here on time. Five minutes.
    Mr. Griffin. Thank you, Mr. Chairman. I appreciate you 
holding this hearing. And thank you all for coming early. I 
really appreciate it.
    I just did a whole lot of town halls over the break and/or 
the vacation, as it was called. I didn't get the memo on that 
one. But I talk about the fact that DOD has had this problem 
with being audit ready; and when I am discussing it, folks 
understand that. But they always want to know what are the 
consequences of that.
    And we have heard a lot of talk here about the systems. I 
know that is what you all are focused on. But could you--could 
you talk a little bit in layman's terms what the negative 
consequences has been with DOD not being audit ready?
    I know that the general narrative of some of the discussion 
this morning has been that we are not technically audit ready 
but we have the data somewhere. And that is often the case. But 
there are real-life, negative, wasteful consequences to not 
being audit ready, DOD not being audit ready. Can you all--can 
you all give some examples that I could use back home to 
explain why this is a problem for DOD? And it is not just a 
function of technical compliance, that there really is an 
impact in terms of taxpayers' dollars. Does anybody have 
anything to share on that?
    Secretary Commons. I will take a stab at that.
    First of all, our systems were never designed to do 
proprietary accounting the way that we are being asked to do it 
today. They were designed for budgetary accounting; and, quite 
frankly, we believe we do that very well. We do not have Anti 
Deficiency Act violations as--we have some but not as many as 
you find in some of the other agencies.
    Our processes--our business processes were not designed 
from end to end. In other words, if you were in the civilian 
personnel business, your system was designed to support hiring, 
getting people on board, and making sure that they were in the 
system. It was not necessarily coordinated with the financial 
system. So what we need to do is to look at our end-to-end 
processes.
    What the auditors do when they come in to look at our 
books, they will say, I see from your financial records that 
you are paying an employee. What I would now like to look at is 
the supporting data supporting that entry in the accounting 
system.
    The supporting data is in fact a personnel action, be it 
from an SF-52 or a 50. So when you go back you are going to the 
personnel people to say give me that supporting documentation.
    Our processes have not been optimized in that way. But that 
is where we are going, to optimize those processes, make sure 
that the linkages between the various business owners is there. 
So that when the auditors come I can show them from end to end 
this is the transaction in the accounting system, this is the 
supporting documentation for that transaction, and they can 
look at our entire process. That is what we have not yet done 
and what we are working toward.
    Mr. Griffin. So you would say to my constituents that, in 
many cases, this is--this is more of a technical problem and is 
not--does not reflect on a situation where you are unable to 
track money. This has more to do with being able to know the 
ins and outs of the money being spent, money coming in, and 
being able to manage it better in the future. It does not 
reflect a situation where you just don't know where the money 
is; is that correct?
    Secretary Commons. That is correct. Absolutely. I believe 
we know where the money is. I think what this does for us by 
going down to the transaction level of detail, it reinforces 
the fact that the summary level data that we have can be relied 
upon by our decisionmakers.
    Mr. Griffin. Got you. Thank you.
    Thank you, Mr. Chair.
    Mr. Conaway. Mr. Young for 5 minutes.
    Mr. Young. Thank you, Mr. Chair.
    I want to thank our Assistant Secretaries, our Assistant 
Deputy Commandant very much for being here this morning.
    I was struck by a couple of different trends that I have 
picked up, not just here today but in some of the previous 
hearings we have had. First is the collaborative cross-
departmental effort to become audit ready, to achieve those 
clean audit opinions; and then, second, is the very different 
audit readiness goals that we find across departments. So I 
would like to briefly dig into each of those.
    First, I was encouraged by the Corps of Engineers' efforts 
to educate everyone on what they regard as lessons learned, 
best practices and I wanted to see if there are any specific 
examples of changes that your departments have made, you know, 
following some of those different consultations. Specifically, 
if you can speak to--if anyone can speak to this integrated 
financial management system, is that something that can be 
overlaid into another department very easily? I mean, that 
seems like it requires quite an investment of both time and 
money to improve that. We have heard some talk about systems 
and I am sort of getting my sea legs, as we say in the Navy, 
with some of this material, but if you could speak to those 
lessons learned and changes made right now, I would appreciate 
that. Anyone.
    Mr. Miller. Sir, concerning the use of CEFMS as far as in 
other areas, that has in fact been tried. And it is a very 
specific system that is designed in order to do project-based 
accounting, so it is very good as far as for construction. But 
it isn't for general fund type of accounting that the other 
Services would need.
    Secretary Matiella. One of the huge lessons learned that we 
got from the Army Corps of Engineers is how to manage an audit. 
An audit itself is a lot of work. For example, I like to 
estimate how many samples we would get to have the support in 
an audit, and I am thinking it is about 150,000 samples, just a 
huge amount of work. So how do you manage that work so that you 
can come up with an opinion in that 45-day window? Of course, 
you start the audit way, way before the end of the fiscal year.
    So there is a lot of lessons on audit governance and how 
you communicate with the field and how you keep track of 
deliverables and how you keep folks accountable for 
deliverables, timeframes that are involved, and also developing 
business rules on what is good supporting documentation. That 
is a huge one that you can establish with the auditors way 
ahead of time, is what is it they expect and what is an 
appropriate level of work effort and support for a sample.
    So in terms of how to negotiate an audit and do it well and 
efficiently and on time and on cost is a huge lesson that we 
have learned from the Corps of Engineers.
    Mr. Young. Thank you.
    Secretary Commons. I would say that certainly we learned 
from the Corps of Engineers that we needed an efficient process 
to retrieve and provide to the auditors a large balance of 
source documentation. When the Marine Corps went to audit they 
took that lesson learned to heart and they actually developed 
an automated process using SharePoint server technology. So we 
are in fact learning from each other as we go through the audit 
process, and we are putting those lessons to use.
    Mr. Young. I have got about 1 minute 20 left, so I am going 
to allow one person to take a stab at this one. I am struck, 
though, by the fact, as I said earlier, that we have got 
different departments here learning from the lessons of the 
Corps and from others, but we have very divergent, very 
different audit readiness goals. To what do you attribute that?
    Secretary Commons. Quite frankly, we are at different 
stages of audit readiness. As we noted, the Marine Corps is 
already under audit. We have done things in the Navy that we 
may be a little farther ahead of the other departments, so it 
is a matter of what stage you are in the audit readiness that 
really sort of dictates the plan for us.
    Secretary Morin. And, sir, if I may add, I think another 
key piece is that the Services and the defense agencies are in 
different places with regard to their IT support, so that the 
Navy is starting from what is fundamentally a sound accounting 
system that they fielded a decade or so ago. The Air Force is 
starting from a bookkeeping system that was fielded in the 
early '70s. So different prerequisites have to be worked with.
    Mr. Conaway. Well, Rob, anything else?
    Mr. Andrews. Yes, Mr. Chairman, just briefly.
    I think it was Mr. Miller who used the phrase ``CFO 
culture.'' Was that your phrase? I liked that one, and I think 
it is a good summary of what we are trying to accomplish here 
on the panel and what you ladies and gentleman are 
accomplishing out in your work, which we appreciate. You said 
that if you expect to be audited, you begin to change your 
behavior. Members of Congress would be wise to maybe keep that 
in mind, too.
    Our objective on this panel is to, in effect, audit the 
auditors. We want to keep in touch with you, we want to hear 
about your progress, and as that culture filters down through 
the agencies I think we will find ourselves in a much better 
position to understand what we are doing and make informed 
judgments.
    Mr. Chairman, I give you credit that your single-minded 
devotion to making this happen is the reason we are hearing 
about this progress today, and you have my commitment that we 
will continue to work with you and with the ladies and 
gentlemen we have heard from today to move even further down 
the road so we achieve that day when each of these entities has 
an auditable financial statement, achieves that unqualified 
opinion, and I think we will accomplish something of real 
value. Thank you.
    Mr. Conaway. Thanks, Rob.
    I also was encouraged by Jamie's comments that you don't 
necessarily have to make all the mistakes yourself, that you 
can learn from each other. Each of these audit processes will 
come with a report by the auditor at the end of the deal as to 
where you need to improve, a formal system for sharing those at 
some proper level with your team so that you don't in fact have 
to reinvent the wheel each time that something is disclosed, 
that you can learn from those issues.
    This team on our side of the panel will be better informed 
this time next year. We will have a lot better sense, since we 
are putting this work together now, as to how much progress is 
being made.
    Mr. Miller, you mentioned that you do what gets checked. 
Having performance evaluation metrics in each of the senior 
executive's performance plan for next year, somebody, Rob and I 
or somebody, is going to be interested in looking at how that 
worked, are there in fact consequences to doing the job that 
you were asked to do and charged with doing, and are there 
consequences for where that did not get done and a variety of 
reasons.
    So we will be checking those kinds of things, and our side 
will have a better foundation of being able to evaluate how 
this progress is going. This is not us against you, obviously. 
That is not intended in any way to be there. But we have a 
role, and you have one as well.
    This has been one of our more productive hours spent 
together, and I appreciate each of you coming in and reaching 
out to us ahead of time as well, either in August or this past 
week or so. So thank you for that.
    If there are things that we can do to address things that 
are standing in your way, legal issues, other things that are 
there, we have an open door as to how we get that addressed.
    One of the things that Rob and I will be watching is how 
the various agencies are resourced in your efforts. Each of you 
have said at this stage you believe you are properly resourced 
to get the job done. In this era of cutting spending, sometimes 
that can impact this. So we will be watching to make sure that 
these efforts are resourced so that we do in fact get to a 
point that--and we talk about the audit, but the real issue is, 
day in and day out, data generation systems, management 
information systems, internal control systems that generate all 
of this and allow a once-a-year quick Good Housekeeping--I say 
``quick''--Good Housekeeping Seal of Approval to be laid on 
this deal. But it is really about the sustained information 
systems and flow of information that decisionmakers will need 
on both sides of our respective responsibilities that are 
there.
    So, ladies and gentlemen, thank you very much for coming 
this morning. If there is nothing else, we will stand 
adjourned. Thank you.
    [Whereupon, at 9:05 a.m., the panel was adjourned.]

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                            A P P E N D I X

                           September 8, 2011

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                           September 8, 2011

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              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                           September 8, 2011

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              RESPONSE TO QUESTION SUBMITTED BY MR. RIGELL

    Secretary Commons. Listed below are generic performance standards 
developed for use by Department of the Navy senior executives.
    General Department of the Navy Guidance. If the Senior Executive 
Service (SES) member's performance has a direct influence on the 
accomplishment of Department of the Navy Financial Improvement and 
Readiness/Financial Improvement Plan (FIAR/FIP) objectives, the 
performance objective should be reflected in the ``Contribution to 
Mission Accomplishment'' mandatory critical element. If the SES 
member's performance has an indirect influence on the accomplishment of 
DON FIAR/FIP objectives, the performance objective should be reflected 
in the ``Leadership/Supervision'' mandatory critical element.
    Generic Leadership/Supervision Mandatory Critical Element.  
Achieves results pertaining to the Department of the Navy's Financial 
Improvement and Financial Readiness/Financial Improvement Plan goals 
and objectives intended to improve access to timely, relevant, and 
reliable financial and cost information to make informed decisions and 
ensure resources are optimally aligned to priority tasks focused on 
meeting the National Defense Authorization Act requirement to have 
auditable financial statements by 2017.  Establishes 
appropriate strategic plans, including goals and implementation 
activities necessary to effect business process changes targeted at 
achieving desired results. Ensures goals and activities are reflected 
in performance plans of subordinate managers and are cascaded 
throughout the organization. Submits quality progress reports and work 
products to superiors, including Departmental officials as required. 
Effectively manages agency resources toward the attainment of the 
Department of the Navy Financial Improvement and Readiness/Financial 
Improvement Plan goals and objectives.
    Tailored Contribution to Mission Accomplishment Critical Element.
    Personnel and Payroll Business Process Objective. Ensure the 
accuracy of DON master employee records through the processing and 
retention of documentation that support human resource data in the 
Defense Civilian Personnel Data System.
    Acquisition Business Process Objective. Validate audit readiness of 
financial reporting processes associated with acquisition, including 
proper financial accounting treatment for assets, standard procurement 
systems and data elements, unique identification of assets, etc.
    Existence and Completeness of Property Business Process Objective 
 Ensure controls are in place to document receipt of physical 
assets  Implement business transformation plans to enable audit 
readiness of real property acquire-to-retire business process, 
including conducting asset inventories and establishing a valuation 
process (i.e. DD1354) [See page 14.]
                                 ______
                                 
             RESPONSE TO QUESTION SUBMITTED BY MR. ANDREWS
    Secretary Matiella. The Army expects to finish the internal review 
of GFEBS against the GAO Financial Information Systems Control Audit 
Manual (FISCAM) in late December 2011 and will plan to provide this 
panel with a summary of our results not later than January 31, 2012. 
[See page 12.]
?

      
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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                           September 8, 2011

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                   QUESTIONS SUBMITTED BY MR. CONAWAY

    Mr. Conaway. Although the Air Force, Army, and Navy are not as far 
along as the USMC in achieving full financial auditability, all three 
Services are making progress. As a result, the Air Force, Army, and 
Navy should be already seeing benefits from implementing the Financial 
Improvement and Readiness plan. Please describe, in detail, what 
tangible benefits your Service has already experienced.
    Secretary Matiella. Army has accrued several tangible benefits as a 
result of implementing audit readiness efforts. These efforts, along 
with the implementation of the General Fund Enterprise Resource System 
(GFEBS), have standardized business processes, improved both automated 
and manual internal controls and provided the framework for successful 
audits. For example, the US Army Corps of Engineers has a three year 
record of achieving an unqualified audit opinion on its financial 
statements. The lessons learned from the Corps of Engineers, along with 
Army audit readiness efforts, led to an unqualified audit opinion on 
the Army's appropriations received, a positive first step toward 
achieving an overall financial statement opinion.
    Another benefit we have experienced to date is the increased 
ownership in audit readiness from the Army's leaders and Command and 
Installation staff, specifically from outside the financial management 
community. Non-financial personnel have begun to understand and 
appreciate the role they play in supporting audit readiness on a daily 
basis, rather than requiring the financial community to shoulder the 
entire burden. This is a critical benefit to improving our business 
environment and enabling the Army to attain and sustain audit 
readiness.
    The Army has provided resources to meet all fiscal year 
requirements, from FY 11 through FY 16, for audit readiness. For 
example, the fiscal year 2012 requirement of $44 million has been 
funded. With these resources and a sound financial improvement plan, 
Army will build on its initial successes and achieve auditable 
financial statements by September 30, 2017 as required under the 
National Defense Authorization Act of 2010.

    Mr. Conaway. Although the Air Force, Army, and Navy are not as far 
along as the USMC in achieving full financial auditability, all three 
Services are making progress. As a result, the Air Force, Army, and 
Navy should be already seeing benefits from implementing the Financial 
Improvement and Readiness plan. Please describe, in detail, what 
tangible benefits your Service has already experienced.
    Secretary Commons. One outcome of progress in advancing the 
Department of the Navy's financial improvement and audit readiness 
initiative includes the recent receipt of an unqualified audit opinion 
on our funds receipt and distribution process (referred to as 
appropriations received process) from an independent public accounting 
firm this past August 2011. The tangible benefit of this unqualified 
opinion is independent evidence that Congress and the taxpayer can be 
assured that the amounts appropriated by the Congress are well 
controlled, accurately reported, and that we meet the intent of the 
Congress in allocating those resources. Sustainment of this process 
enables improved standardization of our business practices, enhanced 
transparency of our underlying management information, and better 
utilization of warfighter resources.
    The tangible benefit of the current DoD Inspector General 
examination of our selected military equipment existence and 
completeness effort is the assurance that the warfighter knows the 
assets available and where they are located to accomplish the mission.
    Finally, the tangible benefit from the USMC audit engagement is it 
provided critical insight into the DoD-wide collaboration and 
infrastructure required to efficiently provide the auditors extremely 
large amounts of transactional data and supporting documentation 
necessary to be successful in an audit engagement.
    Mr. Conaway. The United States Marine Corps (USMC) is the furthest 
along out of the Services in achieving an unqualified opinion on a 
financial audit. Please describe, in detail, the tangible benefits USMC 
has seen as a result of the statement of budgetary resources audit.
    Secretary Commons. The most significant tangible benefit the USMC 
has realized as a result of the ongoing audit of the Statement of 
Budgetary Resources (SBR) is the increasing assurance that Marine Corps 
financial data is accurate and can be relied upon to inform decision 
making. The USMC and the Department of the Navy (DON) leadership are 
cautiously optimistic the FY2011 SBR audit engagement will yield a 
positive outcome.
    A second sizeable and tangible benefit has been the key lessons 
learned from the USMC SBR audit which have been leveraged and shared 
within DON and across the Department of Defense. These include: USMC's 
recently-developed capability to fully reconcile and trace detailed 
transactions to the reported balances on the SBR; their repeatable 
capability to reconcile USMC cash balances with Treasury; strengthened 
controls over accruals and estimated obligations; greater rigor in 
validating obligations during tri-annual reviews; and increased 
controls over recording of appropriations shared with the Navy.
    Finally, another tangible benefit is the ongoing cultural change 
within the USMC. The same rigor and discipline which has long been a 
defining characteristic of USMC operations and doctrine are evolving as 
standards in USMC financial management. The value of improved, 
auditable financial practices and greater accountability for business 
and financial operations is now recognized by USMC leadership and 
throughout the organization.

    Mr. Conaway. The United States Marine Corps (USMC) is the furthest 
along out of the Services in achieving an unqualified opinion on a 
financial audit. Please describe, in detail, the tangible benefits USMC 
has seen as a result of the statement of budgetary resources audit.
    Ms. Spangler. The lessons learned from both the Fiscal Year (FY) 
2010 and 2011 Statement of Budgetary Resources (SBR) audits have 
generated many improvements and benefits for the Marine Corps as well 
as other Services and agencies within the Department of Defense (DoD).
    The foundation of the audit is to support the balances represented 
on the financial statement by performing examinations that tie the 
accounting transaction to its corresponding documentation. While 
initially very challenging, the Marine Corps was able to fully 
reconcile detailed transactions to the reported balances on the SBR, 
and the auditors were able to test samples from a listing of 
transactions. To date, the Marine Corps is the only Service with this 
validated capability.
    The Marine Corps has seen internal benefits from pursuing the audit 
such as improved models and controls for estimated obligations; a 
strengthened process to accomplish DoD mandated Tri-Annual Reviews; and 
general ledger corrections to support the appropriate recording and 
reporting of appropriations shared with the Navy. These have improved 
the clarity of our information and allowed leadership to base decisions 
with increased agility. Furthermore, we have made great strides with 
automation and reconciliation tools. However, the Marine Corps is 
acutely aware that investments will still be required to improve 
controls or systems to bring them in line with Generally Accepted 
Accounting Principles (GAAP) and audit standards.
    The larger DoD community has also benefited from Marine Corps audit 
efforts. DoD-wide processes are being analyzed for compliance with GAAP 
given auditor identified concerns with advances (pre-payments) and 
contract financing payments. While the Marine Corps' processing of 
these payments was in compliance with DoD Financial Management 
Regulation (FMR) guidelines, efforts are underway within the Office of 
the Under Secretary of Defense (Comptroller) to update and/or clarify 
the DoD FMR so that future audits will not generate similar GAAP 
concerns. The issues, findings, and lessons learned, if appropriately 
implemented throughout the Department, will exponentially speed-up the 
audit posture of the DoD. The end-state will be improved recognition 
and transparency on how, what and when we spend and in a manner that is 
accurate and auditable.
    The auditors tested several key information systems that are 
leveraged heavily across DoD. Defense Cash Accountability System (DCAS) 
and the Defense Departmental Reporting System (DDRS) were evaluated for 
internal control accuracy and the auditors' findings have generated 
improvements in system access policies, programming practices, and 
system-to-system communications. Our systems environment is being 
strengthened through improved monitoring of user roles and system 
policies, allowing for increased confidence in system reliability and 
data outputs. The audit has uncovered gaps in roles and 
responsibilities for systems that play a significant part in our 
financial management processes but whose ownership and control is 
outside of our functional purview. These DoD-wide systems are also 
undergoing improvements that will demonstrate sustainable Federal 
Financial Management Improvement Act (FFMIA) compliance as we fortify 
of our business enterprise to streamline operations and identify 
efficiencies that maximize the utilization of every dollar. From 
improved procedures that test and track system updates to better 
monitoring of system errors, the audit is generating visibility and 
accountability across key facets of our system enterprise. Working 
closely with the Defense Finance and Accounting Service (DFAS) and the 
former Business Transformation Agency (BTA), the Marine Corps performed 
a general ledger reconciliation of the unadjusted trial balance to the 
adjusted trial balance. This was an achievement never accomplished 
prior to the audit, and spurred improved financial reporting and 
reconciliation support that will yield benefits for all financial 
statement reporting entities within the DoD. In this regard, the 
automated DDRS Information Center (ICe) tool is being developed to 
assist in producing quick, accurate and reconcilable trial balances for 
all DoD components. The previous process for reconciling detailed 
transactions to the financial statement involved four separate 
departments, a myriad of system interface reconciliations, and the 
direct involvement of over 50 people. As a result of the audit, this 
new automation will represent a workforce savings, as these needed 
records will be generated swiftly and without significant manual 
intervention.
    The Marine Corps is the first Service to undertake an audit of a 
major financial statement, the General Fund SBR. We volunteered for 
this mission because we recognized that a successful audit is critical 
to effectively managing the resources provided by the Congress, and 
would further demonstrate our faithful stewardship of the Nation's 
resources. Based on the findings to date we are confident that 
auditability will enhance our readiness posture by enabling better 
utilization of the funding provided by Congress, and will provide us 
better data upon which to base future budget development in this period 
of declining resources. While the audit is not yet complete, the 
progress we have made has made us confident that our ongoing efforts 
will ultimately be validated by an audit opinion and continued 
auditability.

    Mr. Conaway. Although the Air Force, Army, and Navy are not as far 
along as the USMC in achieving full financial auditability, all three 
Services are making progress. As a result, the Air Force, Army, and 
Navy should be already seeing benefits from implementing the Financial 
Improvement and Readiness plan. Please describe, in detail, what 
tangible benefits your Service has already experienced.
    Secretary Morin. The Air Force has completed several assertions. 
They include: Funds Receipt; Existence and Completeness of Military 
Equipment, Cruise Missiles, and Aerial Targets; and Fund Balance with 
Treasury Reconciliation. In order to make these assertions, we have 
implemented multiple corrective actions which will benefit the Air 
Force. These actions include:

          Implementing an automated cash reconciliation tool 
        allowing the AF to balance its checkbook and reduce unmatched 
        disbursements from approximately $1.3 Billion to $800 thousand. 
        This reduces the time required to research and resolve our 
        unmatched disbursements; however, because numerous audit 
        readiness tasks remain to be completed, we have not reduced 
        manning based on these time savings.

          As part of our Funds Distribution assertion, AF 
        developed a four system cross reconciliation providing greater 
        transparency into our processes and ensuring the timely 
        resolution of any discrepancies identified. We also implemented 
        a standard document numbering process to facilitate the 
        reconciliation process. While the savings cannot be precisely 
        measured, the increased reliability in our data allows us to 
        execute funds with greater confidence.

    We will continue to implement appropriate controls to support audit 
readiness and enhance efficiency.

    Mr. Conaway. The U.S. Army Corps of Engineers has achieved an 
unqualified opinion on their financial audits for the past three years. 
In the testimony received on September 8, 2011, Mr. Miller indicated he 
cannot quantify the dollar savings in doing the audits; however, there 
are other benefits to doing audits, such as being able to identify 
spare equipment and parts on hand thus reducing superfluous reordering. 
Please describe, in detail, the tangible benefits the U.S. Army Corps 
of Engineers has experienced as a result of completing their audits.
    Mr. Miller. The greatest benefit related to performing financial 
statement audits in the Federal government, more specifically in the 
U.S. Army Corps of Engineers (USACE), is a continuous emphasis on 
standardizing business processes that contain strong internal controls. 
USACE can show tangible benefits such as low Prompt Payment Act 
interest penalties, fewer improper contractual payments, no unmatched 
disbursements, and shorter processing time for travel payments. These 
accomplishments may not have been a direct result of the audit but 
rather the annual Chief Financial Auditor (CFO) audit has been a main 
driver in creating what I refer to as a ``CFO Culture.''
    This ``CFO Culture'' is primarily built upon three main components: 
(1) the Corps of Engineers Financial Management System (CEFMS) and the 
internal controls programmed into that system, which forces strong 
internal controls into our business processes; (2) USACE Commanders 
understanding the importance of strong internal controls and being held 
accountable at all levels; and (3) an environment of accountability and 
stewardship over the resources entrusted to us by Congress and our many 
customers and stakeholders.
    The pillar of the USACE ``CFO Culture'' is CEFMS--an enterprise 
financial management system that USACE built internally and deployed 
fully in fiscal year (FY) 1998. CEFMS is frequently referred to as a 
comprehensive ``self contained'' system. This means from the point the 
funds are loaded into CEFMS to the point they are disbursed, the 
detailed subsidiary and general ledger transactions are linked and are 
inclusive in one system. Transactions that result in payment, 
regardless of functional source, must originate and disburse within 
CEFMS. The enterprise approach prevents costly duplication and 
expensive interfaces and improves auditability. Project Managers and 
many of the other 33,000 USACE employees use CEFMS daily for functions 
such as creating purchase requests/obligations, certifying contract 
progress and payments, creating travel orders and vouchers, recording 
the disposal of excess property, recording the receipt of goods, 
recording time and attendance, and processing collections and 
disbursements. CEFMS provides real-time funds control throughout the 
entire budget life cycle (fund, commit, obligate, expense, disburse). 
The system updates simultaneously the detailed subsidiary records and 
United States Standard General Ledgers (USSGLs) for both proprietary 
and budgetary accounts with automated reconciliations between the 
subsidiary data and the general ledgers. These features provide a 
complete audit trail, at detailed subsidiary level, to facilitate the 
accelerated reporting requirements associated with financial statement 
audits. A fully integrated financial system allows our travelers almost 
instant reimbursement of travel costs, with turnaround times of one day 
for temporary duty travel and two days for permanent change of station 
travel. Many of the USACE internal controls and data edits are ``hard 
coded'' into CEFMS, forcing user compliance and providing data 
validation. These internal controls cover data entry, transaction 
processing and reporting.
    Business process improvement is another benefit of the financial 
statement audit process. It is a critical focus embedded in the USACE 
internal controls and internal audit functions as part of our risk 
management initiatives. This provides a framework for not only 
identifying risks, errors and potential instances of fraud, but for 
addressing those risks. We can show tangible benefits such as the 
$103,633 Civil Works Prompt Payment Act interest penalties in Fiscal 
Year 2011 (through August 31, 2011) on disbursements of over $8.5 
billion. The $103,633 in interest penalties is a reduction of 86% from 
our FY 2007 figures (the year before we achieved an unqualified 
opinion). Another tangible benefit is the $5.1million in improper 
payments for FY 2011 of which almost 100% was recovered. Finally other 
benefits are $0 in both Unmatched Disbursements and Negative 
Unliquidated Obligations. USACE leadership has embraced CFO compliance. 
In FY 2008, USACE established the Executive Senior Assessment Team 
(ESAT). The ESAT mission is to provide leadership and direction over 
financial audits and associated controls. The USACE Deputy Commander 
chairs the ESAT, which is comprised of all the Headquarters Senior 
Executive Service Directors. At the field level, CFO Act compliance and 
strong internal controls have become a critical part of day-to-day 
functions and are subject to continuous monitoring through a robust 
internal testing program, which lowers the cost of an external audit.
    The audit opinion and the associated scrutiny of our strong 
internal controls demonstrate to our customers that USACE's financial 
data and underlying business processes meet the highest standards of 
generally accepted accounting practices. This type of assurance is 
crucial to develop trust between USACE and its customers. The audit of 
the USACE Civil Works Program has enhanced our ability to readily 
supply detailed accurate financial data that provides transparency to 
the American taxpayer. Our CFO culture has become engrained in every 
USACE business process and that culture is our greatest benefit.

                                  
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