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






                         [H.A.S.C. No. 112-68]

                        DOD'S EFFORTS TO IMPROVE

                       PAYMENT AND FUNDS CONTROL

                               __________

                                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 22, 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 22, 2011, DOD's Efforts To Improve Payment 
  and Funds Control..............................................     1

Appendix:

Thursday, September 22, 2011.....................................    23
                              ----------                              

                      THURSDAY, SEPTEMBER 22, 2011
           DOD'S EFFORTS TO IMPROVE PAYMENT AND FUNDS CONTROL
              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

Blair, Daniel, Deputy Inspector General for Auditing, U.S. 
  Department of Defense..........................................     6
Easton, Mark, Deputy Chief Financial Officer, U.S. Department of 
  Defense........................................................     3
Khan, Asif A., Director, Financial Management and Assurance, U.S. 
  Government Accountability Office...............................     8

                                APPENDIX

Prepared Statements:

    Blair, Daniel................................................    40
    Conaway, Hon. K. Michael.....................................    27
    Easton, Mark.................................................    29
    Khan, Asif A.................................................    61

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    Mr. Andrews..................................................    97
    Mr. Conaway..................................................    97

Questions Submitted by Members Post Hearing:

    [There were no Questions submitted post hearing.]
 
           DOD'S EFFORTS TO IMPROVE PAYMENT AND FUNDS CONTROL

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
    Panel on Defense Financial Management and Auditability 
                                                    Reform,
                      Washington, DC, Thursday, September 22, 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.

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

    Mr. Conaway. Call the meeting to order. Welcome to today's 
hearing on DOD's [Department of Defense] efforts to improve 
payment and funds control. Previous hearings have covered DOD's 
efforts to improve financial management, achieve audit 
readiness.
    Improving financial management controls is critical to 
safeguarding taxpayer dollars and preventing waste, fraud, and 
abuse. Today we will examine the Department's efforts to 
address improper payments, Antideficiency Act violations, and 
other types of disbursements that increase the risk of 
fraudulent or erroneous payments and impact the ability to 
report reliable information on our financial statements.
    Billions of taxpayer dollars are wasted each year when the 
Federal Government makes payments in incorrect amounts to the 
wrong entities and to entities that are not eligible to receive 
those payments. In fiscal year 2010, the Federal agencies 
reported an estimated $125 billion in improper payments, of 
which a billion was reported by Department of Defense. Under 
any other circumstance, a billion would be considered a 
staggering amount. Yet both the DOD Office of Inspector General 
and GAO [Government Accountability Office] have reported that 
DOD may not be reporting or capturing the full extent of its 
improper payments.
    Properly identifying and reporting the amount of the 
improper payments is a critical step on the way to developing 
actions needed to prevent and recover these payments. The 
Antideficiency Act prohibits executive agencies from incurring 
obligations or making expenditures that exceed their 
appropriations. That is one of the major laws--major ways in 
which Congress exercises its constitutional control of the 
purse.
    In September 2008, GAO reported that as a result of 
continuing financial management weaknesses, including 
difficulties in ensuring the proper authorization, processing 
and recording of payments, DOD's ability to timely and reliably 
determine the amounts of funds that it has available to spend 
is impaired, and the Department remains at risk of 
overobligating and overspending its appropriations in 
violations of the Antideficiency Act. In fact, according to 
DOD--sorry, GAO, DOD reported 64 ADA [Antideficiency Act] 
violations from fiscal year 2007 through mid-September 2011, 
totaling about $927 million.
    DOD has taken actions to improve its financial management 
system, yet as illustrated by the examples--certain examples, 
there is still much work to be done. With budget deficits in 
the trillions, the Government can ill afford to not properly 
account for all of our taxpayer resources because of poor 
management controls.
    I want to thank our witnesses in advance for their 
testimony. We have today Mark Easton, Deputy Chief Financial 
Officer for the Department of Defense; we have got Daniel 
Blair, Deputy Inspector General for auditing, Department of 
Defense; and Asif Khan, Director of Financial Management and 
Assurance from GAO.
    Now I will turn to Rob Andrews for any comments he wants to 
make.
    [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. Chairman, good morning. I would like to thank 
you and our colleagues for assembling a really first-rate 
panel.
    We have heard from all three of these gentlemen in various 
iterations over the last couple years, and I look forward to 
this morning's testimony.
    I think the chairman set the context exactly right for this 
discussion. If you exclude the OCO [Overseas Contingency 
Operations] accounts, the overseas accounts in Iraq and 
Afghanistan, and you look at real dollar defense budgets, the 
defense budget is 40 percent higher than it was in 2001 in real 
dollars. We have essentially the same end strength, the same 
number of ships, the same number of airplanes, which sort of 
begs the question, where is this money, and what have we gotten 
for it?
    Now, I don't think there is a preordained right answer to 
what the level should be. Actually, the best answer I have ever 
heard was given by then-Marine Commandant General Krulak a few 
years ago before the committee when someone asked him what he 
would do with the last dollar he had to spend. And he said, I 
would spend it on, after he or she has completed their mission 
successfully, bringing my last Marine home safely. Pretty good 
answer, I thought.
    So, with that spirit in mind, in looking at this 40 percent 
real growth over time, we have a lot of important decisions to 
make. We can't make good decisions without accurate data. And 
we can't have accurate data without auditable financial 
statements.
    The chairman talked about the alarming level of 
inappropriate payments. When I say ``inappropriate,'' I don't 
mean necessarily criminal or nefarious, but, you know, paying 
too much for the right thing or paying something for the wrong 
thing. And so I think we have assembled--I know we have 
assembled--three individuals that have great expertise in 
addressing this problem and pointing us in the right direction.
    And Mr. Chairman, I am looking forward to hearing what they 
have to say and then engaging with our colleagues in some good 
questions to further edify the effort.
    So, good morning, and I look forward to hearing what you 
have to say.
    Mr. Conaway. Thanks, Rob.
    One quick anecdote. I was on a trip last week out in the 
hither lands at a DOD facility. We finished the tour, and a 
couple of the guys who were leading the tour were walking, the 
three of us were walking off, and they were having a brief 
conversation. And I wasn't paying much attention, but the 
phrase ``ERP'' [Enterprise Resource Planning] came into their 
conversation. This is between those two. So I kind of stepped 
into it.
    I said, what are you guys talking about? And they were 
talking about they were going to, over the next 3 or 4 weeks, 
they were going to have to put in an extensive amount of work 
to get converted to whatever the ERP thing they were working 
on.
    I said, well, what do you think about that? They were very 
complimentary. They had no reason to know why I had a keen 
interest in it. They said, you know, it is going to be better 
on the other side. It will help us work our work better.
    So, Mark, pass on to the rest of the squad, it is filtering 
all the way down to buy-in by folks who are actually having to, 
at the point end of that sword, to have to put it together. So 
I was very encouraged by their comments that they were sold out 
to the advantages of getting it done in their particular deal.
    So, with that, Mark, you want to start us this morning?

STATEMENT OF MARK EASTON, DEPUTY CHIEF FINANCIAL OFFICER, U.S. 
                     DEPARTMENT OF DEFENSE

    Mr. Easton. Thank you, sir.
    Chairman Conaway, Ranking Member Andrews, members of the 
panel, thank you for your continued interest in DOD financial 
management and for providing me an opportunity to relate it to 
issues like improper payments, problem disbursements, and 
Antideficiency Act violations.
    I submitted a more detailed statement for the record, but 
in the interest of time, I will summarize briefly so that we 
will have as much time as possible for questions.
    As the deputy chief financial officer, my responsibilities 
at DOD involve financial policies, systems compliance, and 
internal controls, among a lot of other things. I have dealt 
with these kinds of things in various capacities in the field, 
both in uniform and as a civil servant and in the field 
particularly. So I appreciate your comments relative to getting 
the word out.
    I am proud to be part of a financial management workforce 
that is supporting the warfighter around the world. But I am 
also mindful of our stewardship responsibility and the fact 
that DOD financial management has remained on the GAO high-risk 
list since 1995.
    My experience tells me that a reasonable level of controls 
do exist within DOD, especially in the local control of assets 
and expenditure of funds. But my current position also provides 
me with a broader perspective that must acknowledge enterprise-
wide weaknesses that negatively impact our financial management 
capabilities and demand an enterprise-wide response. The lack 
of auditable financial statements are clearly a symptom of 
those weaknesses.
    As we have talked to you many times in this forum, DOD has 
a challenging business environment, a combination of size, 
complexity, and geographical dispersion. How well we manage 
within that environment depends on how well the people, 
processes, and systems that have to deal with that interact and 
work together.
    People are really the key, particularly now. We have a 
dedicated and experienced workforce, and we rely heavily on 
those traits of dedication and technical expertise. We depend 
on them not only to support today's mission, which has been 
expanding over the last 10 years particularly, and to deal with 
today's problems, but also to be able to acquire new skills and 
to lead change throughout the enterprise.
    Another key business element is processes. And this is an 
area that I think you are going to hear a lot of issues across 
the board. But the one thing that we do agree on is the need 
for increased and improved internal controls, more standard 
processes. That is the key to being able to produce higher 
quality financial information for both reporting and 
decisionmaking.
    And the third factor, Mr. Chairman, is the one you 
mentioned about ERPs. Clearly, our size and complexity demands 
that we have automated, integrated systems. It is key to 
particularly being able for us to support auditability and 
sustain those changes. The bottom line is that a stronger 
business environment is really the key. It will reduce the 
likelihood of improper payments and problem disbursements that 
we have experienced and minimize the risk of ADA violations.
    I would assert that we manage these three risk factors 
well, despite current weaknesses, but we have to do much, much 
better. Let me highlight each of these areas very briefly.
    First, improper payments. The Defense Finance and 
Accounting Service--and you heard from Martha Smith last week--
handles about 90 percent of all our payments. We use post-base 
statistical sampling on five of the six major programs that we 
have. And we plan to expand--and this is an area of 
contention--but we plan to expand that to our commercial 
payment area, post-payment statistical sampling, in addition to 
being able to act on issues that we receive in terms of 
notifications from vendors to be able to recapture those--
capture those resources.
    We use the processes to be able to identify root causes and 
act on those causes. As you mentioned, the Government-wide 
error rate with the $120 billion that are reported of improper 
payments, you know, we represent roughly half of that as a 
percentage, and about $1 billion. The elements that we are 
emphasizing through auditability, and this is the linkage that 
I will keep am coming back to, strong internal controls will 
further reinforce this program.
    Turning to problem disbursements, and to try to use a plain 
English analogy, we have thousands of people writing checks and 
thousands of individual accounts. One digit or one problem on 
any one of those transactions oftentimes doesn't prevent that 
payment from being disbursed, but it does prevent it from being 
able to return and being posted to your checking account. We 
put problem disbursement--essentially, that is what a problem 
disbursement is--we put problem disbursements into three 
categories: unmatched, which is a case that we have an 
obligation, and that disbursement cannot find its way back to 
that obligation, so we have an unmatched condition. The second 
is something we call a negative unliquidated obligation, which 
means it did find that original obligation, but the dollar 
value exceeded that. And then the third, you might refer to it 
as float in your own checking account, where you have written 
checks, we call that in-transits. Once those in-transits reach 
a particular age, they essentially fall into the categories of 
problem disbursements.
    Across the board, we have made significant progress. For 
example, in 1999, overage problem disbursements since then have 
been reduced by 82 percent; negative unliquidated obligations 
have been reduced by 97 percent.
    Antideficiency Act violations are another matter. They can 
occur for a number of reasons: a violation of purpose, time, or 
amount. We first strive to prevent the occurrences. And as you 
heard Secretary Hale say, the only right goal for 
Antideficiency Act violations is zero. But when they do occur, 
we need to track them, track the ongoing investigation, and 
make sure that we reach a conclusion and report promptly. Each 
ADA case is unique, but there are recurring themes. And 
frequently, they reveal a need to increase the level of 
training and awareness, because it is a very, very complex 
business environment.
    Over the past 4 years, a total of 123 cases were identified 
through audits or through self-reporting, and we would like do 
more through self-reporting, having management assume that 
responsibility; 48 cases were investigated and found to be 
actual violations and were reported; 37 cases were investigated 
and found to be no violations; and 38 are currently under 
investigation as potential violations. It is important to note 
that it is not--once we begin an investigation, we may reach 
the conclusion that it is not a violation in the course of the 
investigation. We have been able to minimize, and the number of 
Antideficiency Act violations have been relatively stable 
despite a very, very porous business environment.
    Our current emphasis on internal controls as part of our 
audit readiness program should contribute to timelier 
investigation--excuse me, timelier identification, that is 
really the key, and more efficient investigation of those 
cases. Secretary Hale has placed significant emphasis on 
ensuring that we are reporting in a more timely manner. We 
inherited approximately--we have reduced the number of overage 
cases--these are cases that are too old, past the 1 year time 
frame to investigate and report--we have reduced that number by 
60 percent.
    In summary, please be assured that my colleagues and I are 
fully committed to fulfilling our stewardship responsibility to 
the taxpayer. We recognize the benefits of a stronger and 
better controlled business environment. One that supports 
auditable financial statements will increase public confidence 
in our reporting and will reduce the incidents of improper 
payments and problem disbursements. Most importantly, they will 
provide better information for us to get more out of the 
program.
    We are building a business environment, those people, 
processes, and systems, that will attack the causes, not just 
the symptoms. And finally, we are maintaining a strong working 
relationship with key stakeholders, to include my colleagues on 
the panel today, GAO and DOD IG [DOD Office of Inspector 
General]. Their feedback, while sometimes painful, is important 
to our overall efforts to strengthen financial management.
    Mr. Chairman, this concludes my statement, and I sincerely 
appreciate the time that you and your distinguished panel have 
invested to better understand our challenges and support our 
efforts to address them.
    [The prepared statement of Mr. Easton can be found in the 
Appendix on page 29.]
    Mr. Conaway. Thanks, Mark. Daniel.

    STATEMENT OF DANIEL BLAIR, DEPUTY INSPECTOR GENERAL FOR 
              AUDITING, U.S. DEPARTMENT OF DEFENSE

    Mr. Blair. Chairman Conaway, Ranking Member Andrews, and 
distinguished members of the panel, good morning, and thank you 
for the opportunity to appear here before you on behalf of the 
DOD IG to talk about improper payments, Antideficiency Act 
violations, and other problem disbursements.
    In the current economic environment, it is important for 
DOD to know that every payment that it makes goes to the right 
person for the right amount and at the right time. Over the 
past few years, the Department has worked hard to address its 
financial management challenges and has recognized some of the 
impediments that need to be resolved. However, more progress 
needs to be made in order to be good stewards of the taxpayers' 
money.
    Since fiscal year 2007, DOD IG has issued 27 audit reports 
addressing improper payments. These payments are often the 
result of unreliable data and poor internal controls, and they 
create an environment where fraud and waste are more likely.
    In fiscal year 2010, the Department reported nearly $1 
billion of estimated improper payments. However, we found the 
Department's process did not review more than half of the 
fiscal year 2010 gross outlays and therefore question the 
reliability of this estimate.
    Without strong internal controls, the Department is at risk 
of making improper payments. For example, our audit of a 
contract supporting Broad Area Maritime Surveillance found that 
DOD personnel did not validate that a contractor was entitled 
to receive over $329 million because none of the invoices were 
reviewed. We also found that the Navy paid this contractor 
$206,000 for questionable travel expenses, such as a golf 
outing and air shows in Paris and Singapore.
    We have concerns about the large number of potential 
Antideficiency Act, or ADA, violations that are averted because 
we identify them during the course of our audit, and the 
Department takes appropriate corrective actions to remedy these 
situations. Since 2005, we have issued 49 reports that have 
identified over 900 potential ADA violations, valued at over 
$2.3 billion, which the Department needed to investigate and 
resolve.
    We found that the Department often sends money to other 
Federal agencies to fulfill contracting needs. And this money 
may be used beyond the time and purpose limitations of the 
appropriation. A joint audit that we did with the State 
Department IG recently on the Afghan National Police Training 
efforts identified almost $75 million in potential ADA 
violations. Using Defense Department funds, the State 
Department re-obligated funds outside the scope of the 
reimbursable agreement and moved expired funds to cover new 
requirements.
    Fund Balance with Treasury reconciliations are a basic 
control to ensure that all disbursements are properly accounted 
for, and they help to identify problem disbursements. As you 
know, generally Fund Balance with Treasury is similar to a 
checking account that needs to be reconciled on a regular 
basis. However, the Department oftentimes struggles to 
consistently reconcile these accounts, which last year totaled 
over $521 billion.
    Currently, 54 other defense organizations share a 
commingled Fund Balance with Treasury account and must rely 
primarily on balances in the Cash Management Report when 
reconciling to the U.S. Treasury. However, we recently found 
that the cumulative balances on the Cash Management Report were 
over $9 billion different than amounts reported by the U.S. 
Treasury and included $1.45 billion in unmatched transactions.
    During fiscal year 2010, the Marine Corps' financial 
statement audit of its Budgetary Resources, Statement of 
Budgetary Resources, the Marine Corps was unable to support its 
Fund Balance with Treasury reconciliations. However, starting 
in June of this year, the Marine Corps has been able to provide 
detailed transaction files supporting its reconciliation 
process. So there is an obvious note of improvement that has 
taken place since the last year's audit.
    Before closing, I also want to briefly mention three key 
challenges that must be addressed before the Department's 
financial statements become auditable by the 2017 deadline. 
These three areas are improving data reliability, improving 
internal controls, and effectively implementing new systems. 
These challenges must be resolved before this ambitious plan 
can become a reality.
    We frequently identify financial data that is incomplete 
and inaccurate. And as a result, DOD decisionmakers and other 
leaders cannot rely on this data to make sound business 
decisions. The Department also faces pervasive internal control 
weaknesses that hamper its financial management efforts. While 
DOD's new systems are a key component of its auditability 
strategy, unless the Department first improves the quality of 
the data and reengineers its processes, many of the intended 
benefits of these systems will not be realized.
    In closing, sound financial management is critical to 
providing effective stewardship over billions of dollars the 
Defense Department receives annually. While I recognize that 
there is significant effort that the DOD leadership is putting 
in at this point to resolve financial management problems, 
frankly, much more remains to be done. Senior leadership in the 
Department and other stakeholders, including Congress, need 
reliable financial information on a daily basis to ensure that 
every dollar supports the warfighter and improves military 
readiness.
    This concludes my statement, and I would be happy to answer 
any questions that you may have.
    [The prepared statement of Mr. Blair can be found in the 
Appendix on page 40.]
    Mr. Conaway. Thank you, Daniel.
    Asif.

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

    Mr. Khan. Mr. Chairman, Ranking Member Andrews, and members 
of the panel, good morning.
    It is my pleasure to be here today to provide our 
perspectives on the status of Department of Defense funds 
control and payment controls.
    As a steward of public resources, DOD is responsible and 
accountable for using public funds for the purposes and within 
the timeframes and amounts prescribed by law, making payments 
to the right parties in the correct amount, identifying and 
recouping any improper payments, and accurately recording and 
reporting on its transactions on the use of public funds.
    I would like to thank the panel for holding this important 
hearing. Having assurance that these basic controls and 
processes are working correctly is a fundamental prerequisite 
for overall financial reliability and reporting. In my 
testimony today, I will discuss the weaknesses in DOD's funds 
control and payment controls and their impact on the 
reliability of DOD financial information. I will also discuss 
the Department's efforts to estimate its improper payments. My 
statement today is based primarily on our prior work. In 
addition, it includes relevant information from reports issued 
by the DOD Inspector General.
    First, regarding funds control, for years GAO has reported 
pervasive weaknesses in DOD's controls over its funds and the 
reliability of its financial reporting. For example, in 2008, 
like you had mentioned, Mr. Conaway, we had reported that DOD's 
complex and inefficient payment processes, unintegrated 
business systems, and weak internal controls impaired its 
ability to maintain proper funds controls, putting DOD at risk 
of overobligating or overspending its appropriations. These 
conditions have hindered its ability to ensure that 
transactions are accurately recorded, sufficiently supported, 
properly executed, and effectively monitored. In other words, 
at any given time, DOD does not have sufficient reliable 
information available to provide assurance that its obligations 
and disbursements are within budget and legal limits.
    Funds control weaknesses place DOD at risk of violating the 
Antideficiency Act, enacted to prevent agencies from incurring 
obligations or making expenditures in excess or in advance of 
appropriations. The ADA requires DOD to report on its ADA 
violations. For the 5-year time period from fiscal year 2007 
through September 15, 2011, DOD reported 64 ADA violations, 
with a total dollar amount of just over $927 million. However, 
DOD's reporting of ADA violations may not be complete as a 
result of other pervasive internal control weaknesses.
    In addition, DOD has a category of disbursement it refers 
to as problem disbursements. They include disbursements paid 
that have not been matched to their related obligation records 
as a result of breakdowns in both fund control and payment 
controls. DOD has been reporting hundreds and millions of 
dollars in unmatched disbursements over 120 days old in recent 
fiscal years.
    Problem disbursements increase the risk of making 
fraudulent or erroneous payments without detection. In 
addition, problem disbursements impair the reliability of DOD 
financial statements and DOD's ability to control its 
disbursements, a key aspect of funds control.
    These and other weaknesses over financial reporting have 
prevented the military services, and DOD overall, from 
preparing a reliable Statement of Budgetary Resources, the SBR, 
since they were first required in 1998. For instance, like Mr. 
Blair mentioned, the Marine Corps received a disclaimer of 
opinion on its fiscal year 2010 SBR due to serious control 
weaknesses. Also, funds control and other weaknesses are 
currently hindering Navy's audit readiness related to its Funds 
Balance with Treasury. Controls over Fund Balance with Treasury 
are similar to reconciling a checkbook with a bank statement 
and a key step in preparing the SBR.
    Finally, regarding improper payments, DOD reported for 
fiscal year 2010 that it made an estimated $1 billion in 
improper payments. However, these estimates do not include 
amounts from its commercial payment programs, which account for 
approximately one-third of the value of DOD payments. Our prior 
work and reports issued by the DOD IG have highlighted the 
Department's longstanding and significant problems with 
estimating and preventing improper payments.
    Specific weaknesses in DOD's payment controls include 
inadequate payment processing, inadequate support documentation 
for expenditures, financial systems deficiencies, and also weak 
contract audit and payment controls. We have also reported on 
weaknesses in DOD processes for assessing the risk of improper 
payments and in reporting estimated amounts of improper 
payments.
    In closing, Mr. Chairman, DOD continues to face difficult 
challenges. If DOD is to achieve its stated goal of audit 
readiness for its consolidated financial statement by the end 
of fiscal year 2017, it is critical for the Department to 
closely monitor its progress. It is also critically important 
for DOD to focus on the basics, such as correctly recording 
obligations, performing key reconciliations, and making 
accurate payments.
    Mr. Chairman, Ranking Member Andrews, and members of this 
panel, this concludes my prepared statement. I would be happy 
to answer any questions that you may have at this time. Thank 
you.
    [The prepared statement of Mr. Khan can be found in the 
Appendix on page 61.]
    Mr. Conaway. All right.
    Thank you, gentlemen.
    We are going to reverse order on our side.
    Todd for 5 minutes.
    Mr. Young. Thank you, Mr. Chairman.
    Thank you to all of our witnesses for your service and 
appearance here this morning. I wanted to direct my line of 
inquiry to ERP implementation, something all of you touched on 
at various levels of detail.
    DOD we know is investing billions of dollars in modernizing 
these business systems. And there have been some challenges, 
understandably at some level in terms of implementing these 
systems in a timely fashion and within budget. It was Mr. 
Blair, I believe, in his testimony, who said that DOD has been 
unable to meet key milestones for 4 of the 11 ERP systems in 
the Department.
    So I am curious what impact you project that any continued 
slippages will have in terms of the Department's efforts to 
improve its funds control and payment processes, firstly. And 
then, secondarily, what, if anything, is being done and can be 
done to mitigate those slippages in your interface with the 
vendors or internally?
    Mr. Blair. One of the things that is important to note is 
how critical the ERP systems are to the Department's fund 
balance--or not just fund balance, but to auditability of all 
of its statement. And as you noted, some of them have slipped. 
And I think that because it is such an integral part of the 
auditability efforts, this slippage is of serious concern. It 
could have a profound impact upon whether or not the Department 
is able to meet its auditability goal.
    What we have done at the IG is to increase the number of 
audits that we are doing of these systems, because what we are 
starting to see is that there are some consistent themes in LMP 
[Logistics Modernization Program], for example, or GFEBS 
[General Fund Enterprise Business System], where some of the 
same problems exist in those systems, where they are not 
compliant with the standard general ledger, for example. And we 
are making recommendations to the Department to fix these, but 
also to look at how they are implementing other ERPs so they 
can take the lessons learned from one and apply it to all, as 
appropriate.
    Mr. Young. Thank you.
    Mr. Easton.
    Mr. Easton. We appreciate the question. I think that with I 
would say most the of the ERPs--we have still got a couple of 
ERPs from Air Force coming along--but most of the ERPs we are 
beginning to more effectively apply lessons learned. And I 
would look for some of the slippages in schedule to be 
mitigated, if only for the fact that we are very close to the 
end of the program in many regards. We are directly linking 
those things to audit readiness.
    I would venture to say that some of our previous experience 
and some of the cause is the fact that we had the acquisition 
program delivering a system without the business community 
fully engaged and being able to link the kinds of things that 
we talked about. So I think that we have done a much better job 
of being able to say, you know, these are the problems that we 
are trying to solve relative to problem disbursements.
    Having said that, we are putting these ERPs into an 
environment that is sort of flawed. And so the interfaces that 
exist now, hopefully many of them will go away, we will begin 
to improve that process as well. So bottom line is that we are 
getting better, but it is a critical enabler.
    Mr. Young. You share that assessment, Mr. Khan?
    Mr. Khan. Mr. Young, I just want to mention two things as 
far as the ERP slippage is concerned. The impact is going to be 
more cost, obviously, because there are cost overruns. And it 
is going to require more money in terms of using legacy 
systems. And the impact of using legacy systems on a go-forward 
basis is going to be on improper payments and ADA violations, 
because the underlying cause is weak controls. If we continue 
forward with the legacy systems, it is going to perpetuate the 
weak controls, causing more improper payments or continuing to 
have them and also ADA violations as the status quo.
    Mr. Young. So to take that to the next level, you say if we 
continue on with the legacy systems, it would require 
additional appropriations by Congress, additional investments 
to move past some of those systems, right? Otherwise we can 
experience additional data exchange challenges and corrupt data 
and what not, right? So we are just going to have to weigh that 
trade-off.
    Mr. Khan. I mean, that is a correct consequence that you 
have laid out.
    Mr. Young. Okay.
    Mr. Khan. It is going to cost more to maintain the legacy 
systems, certainly, and operate them. And at the same time, 
additional money is going to be spent on developing the ERPs.
    Mr. Young. Thank you all.
    I yield back.
    Mr. Conaway. Thanks, Todd.
    Rob, 5 minutes, or Joe.
    Mr. Andrews. Recognize Mr. Courtney.
    Mr. Conaway. In spite of rewarding bad behavior, we will go 
with Joe Courtney.
    Mr. Courtney. Thank you, Mr. Chairman.
    Over the weekend, I was at an Indian event, the Mohegan 
Indian event, where they gave me a new name. It was Two Iron 
Fish instead of Two Subs, which Mr. Conaway would appreciate 
that. Mr. Blair, your testimony you talked about the 27 audits 
that have taken place since 2007. What triggers those? Is that 
just sort of random, or is it whistleblower complaints, or is 
it a regular process? I mean, what--maybe you could just help 
me with that.
    Mr. Blair. Our audits start from a wide variety of sources. 
Some of them are whistleblowers. Some are as a result of our 
annual planning efforts. Some of them are as of a result of 
outreach to the Department, and we ask them, what are your 
areas of concern? So we put that all together; we do our annual 
audit plan. And so that is how we come up with the wide variety 
of the audits that we do.
    Mr. Courtney. So if we fast-forward to 2017 and we get to a 
place where it is auditable systems, what does that mean for 
your office? Does that allow you to be less random in terms of 
trying to find where the problems are?
    Mr. Blair. There is no doubt that when we get to the 2017 
date that we are going to have to approach this with a large 
number of our resources. And it will reduce the number of 
audits that we can do in other areas. I do have a fairly large 
number of staff who are financial statement auditors. And they 
will be the ones that will be leading the 2017 effort. But it 
will impact some of the other work that we have been able to 
do. But what I am hoping is that as we go forward over the next 
several years, there will be more and more corrections that 
will be made, less audits are needed in those other areas, so 
that we will be able focus those resources appropriately on 
this effort.
    Mr. Courtney. So when you, on page three of your testimony, 
talked about we found the Department's review process included 
less than half of fiscal 2010's first quarter gross outlays, I 
mean, help me. I read that as saying that basically we don't 
know about where the other half is in terms of accuracy as far 
as payments. And will that change once we get to 2017, 
assuming, you know, we hit that date?
    Mr. Blair. Mr. Easton and I were talking about that before 
we started this morning. And one of the things that we agree on 
is the need to expand the methodology that they are using to 
identify improper payments and to go into those other gross 
outlays in subsequent years that they didn't look at in fiscal 
year 2010. And the more you look, the more you are going to 
find. The more you find, the more corrections that can be made 
to prevent that going forward. So I think that is the ultimate 
goal.
    Mr. Courtney. Go ahead, Mr. Easton.
    Mr. Easton. Can I follow up? On that particular issue, I 
guess going back to your broad question in 2017, I would like 
to see an environment where management assumes responsibility 
for those internal controls. I would like to be able to go to 
Dan and say, you know, you are going to have to put your 
resources in a financial audit. That will mean because we have 
recognized and acknowledged and implemented controls so that 
you don't have to make these specific kind of things. On that 
particular issue of improper payments, and this was an issue 
that, quite frankly, we did not agree with the segment of 
outlays that was in the testimony were intergovernmental 
outlays, essentially, and some in the intelligence community 
that were not included, and we did not plan to include those. 
And so there was a difference of opinion there. There is much 
that we agree on, and that particular area that we did not 
agree.
    But an audit will allow us to be able to combine the 
internal control perspective, the coverage perspective, so that 
we don't have these disagreements in the future.
    Mr. Courtney. Thank you.
    I yield back, Mr. Chairman.
    Mr. Conaway. Thank you.
    Scott.
    Mr. Rigell. Thank you, Mr. Chairman.
    I appreciate the panel coming in this morning. Having been 
in the business for about 25 years, I have certainly been 
embarrassed from time to time to learn that our business had 
overpaid a vendor twice. And I will even confess that in our 
campaign, in the blur of life, we also paid twice there on 
occasion. So when you look at the magnitude of the Department 
of Defense, it is not at all surprising that this is a 
challenge.
    Having said that, the testimony this morning, and 
particularly, Mr. Blair, for some reason, I just focused in on 
what you both said and what you have written in your testimony. 
There is a part of me that gets extremely frustrated as a 
fellow American to hear this. And the business side of me says, 
hey, what a great opportunity to make things better. There is 
no shortage of places to look.
    I share your view that we have severely, in some cases, 
understated the amount of overpayment. And at some point, if 
you could, I don't want to spend too much time on this, but if 
you could help us quantify that, what your view is; what, you 
know, if it is not a billion in the DOD, what is it? It is 
certainly higher.
    One thing that seems to be absent in the reports that we 
are hearing this morning is tying in accountability. This is 
going to be a common theme that I am going to bring pretty much 
each and every session. When we read about these overpayments--
and I am not looking for a scapegoat. I am not looking to just 
fire someone to fire someone, but there does seem to be a lack 
of accountability of the personnel. And we need to say, is it 
that the process has not been clearly communicated? Have we not 
trained our people well? Or, if we have done all of that and we 
just have some people who are not performing well, have we held 
them accountable?
    There is a sense, and you know this just as a fellow 
American here, that our Government is not holding people 
accountable. We want to promote the people who are doing well, 
reward them, have more of an entrepreneurial approach in 
Government and also work with and, if necessary, fire someone 
who is not performing well.
    So, Mr. Blair, if you could comment, please, on, what are 
the barriers to better performance? Is it the resources that we 
are not funding our auditors enough? Because it seems to me you 
would get a good marginal return on allocating more money to 
this, certainly with the numbers that I have seen. And then 
please comment on the accountability part, both for our 
personnel and for the vendors who--some who deliberately are 
stealing from the American taxpayer.
    Mr. Blair. With regard to resources, I mean, I think that 
certainly the DOD IG has sufficient resources to fulfill the 
audit mission that we have. There is no lack of opportunities 
for us to audit. Because we always end up at the end of every 
year with more audits than we have staff for, so we have to 
roll some options forward and do them in subsequent years.
    I think the Department is dedicating a lot of resources to 
improving financial management. And I think it is important to 
note that. To make real sustainable progress in financial 
management, I think more resources may have to be dedicated to 
that in the future. And that is a question that the senior 
leadership in the Department are going to have to wrestle with; 
how much can they afford to put in this area versus other 
areas?
    As with regard to accountability, I agree with some of the 
statements that you have made. It is very difficult to hold 
people accountable in the Federal Government. We oftentimes 
find that when we get in and do our audits and we zero in on 
the office or the person that was responsible, we have found 
that they left. They have retired. They have gone to another 
job. But what we are doing is making a more concerted effort, 
starting in this fiscal year, in our audit reports to include 
recommendations that the Department review the actions of 
specific individuals and take appropriate action, as necessary, 
to hold people accountable.
    Mr. Rigell. Thank you, Mr. Blair.
    And so you said we have the resources, but it is because 
maybe the person has moved on. And I think we should work 
together to help identify maybe the systemic challenges, the 
whole process.
    And one thing that is somewhat unique to the military is, 
you know, every time I meet a senior officer, for example, I 
say, well, how long are you going to be here in Hampton Roads? 
Well, 2 years, 2 years. And I have known that every time--you 
know, let's say you hire somebody to fix the Department, the 
first thing they say is, well, boy, what I inherited was 
really, really, but I will fix it for you. And then they move 
on.
    So I wonder if we should consider for these positions 
keeping them in the job 6 years and 8 years, and to build a 
base to where they could be held accountable in the most 
positive sense of the word.
    And I would like to circle back around--we will do this off 
line, my time is running out here--but I would really like to 
know the names of some of these companies who have just had 
these egregious examples of overcharging. Because if you really 
circle back around, every dollar that is spent for a golf 
outing in Paris and France and Singapore, I am sure there is a 
young lance corporal in Helmand Province that could use a 
little more support. So we need to go after these guys and hold 
them accountable. And if they steal from us, put them in jail. 
And conversely, the people who are doing a good job, we promote 
them. And I just want to build more of that culture in our 
Government.
    I yield back. Thank you, Mr. Chairman.
    Mr. Conaway. Thanks, Scott.
    Rob.
    Mr. Andrews. Thank all the witnesses.
    Mr. Khan, I want to get into your description of the 
violation in June 2010 involving the Army's overobligation of 
fiscal year 2008 MPA [Military Personnel, Army] Army 
appropriation, which Mr. Conaway and I and others have written 
a letter about to try to get some more information. Now, I know 
that we don't have the facts yet on this, so I am not asking 
you to draw a conclusion. But I am asking you to generate some 
hypotheses as to how this might happen based upon your 
experience. My understanding is what happens here is that it is 
discovered, you eventually discover that there is a $200 
million transfer by the DOD from the Working Capital Fund to 
the Army MPA fund. Is that what happens?
    Mr. Khan. That is correct.
    Mr. Andrews. And then you say, well, gee, why did this 
transfer happen? Essentially, the answer is, well, because we 
overobligated the MPA fund by $200 million. Right? Is something 
wrong with that? Is that what happens?
    Mr. Easton. That is in process. I think that there was 
using their transfer authority to transfer money. At the time, 
I think the Army's perspective was that they knew that they 
needed that money. They had not already overobligated. That is 
their perspective, but that is under investigation right now.
    Mr. Andrews. Okay. So it is not established that they 
overobligated the $200 million?
    Mr. Easton. It is being investigated right now.
    Mr. Andrews. Let me just say this. Assuming that it were, 
that it was the case, and it may not be, but assuming it was 
the case, what hypotheses could you generate, Mr. Khan, as to 
why that happened?
    Mr. Khan. I think it has been established that it was 
overobligated.
    Mr. Andrews. Whether it has or hasn't, if it were true----
    Mr. Khan. Right.
    Mr. Andrews [continuing]. Typically, what might the reasons 
be that something like that would happen?
    Mr. Khan. I mean, pure and simple, there was a lack of 
communication between the Army budget office and the program 
office. The Army budget office was using estimates or what is 
known as bulk obligations on a different set of projections 
than what was actually taking place in the field.
    This is going back to 2008, when there was an uptick in 
recruitment, fuel costs were going up. However, the budget 
estimates that the Army budget office was using was still using 
old numbers. So, consequently, there was a mismatch----
    Mr. Andrews. So they are assuming that they can hire people 
and move them around in vehicles at a cost that is actually too 
low.
    Mr. Khan. That is correct.
    Mr. Andrews. So they hire too many people and they drive 
too many miles, and they overexpend the account by $200 
million.
    Mr. Khan. And it was specifically related to permanent 
change of stations, PCS [permanent change of station] moves, 
where they are moving people around the country. And there was 
an uptick in that also.
    Mr. Andrews. Now, this is not a rhetorical question, but 
how does that happen? I mean, and I think it goes to Mr. 
Rigell's question that somebody was figuring this out assuming, 
you know, $2 gasoline instead of $4 gasoline. Who did that, and 
how did it happen? Do we know?
    Mr. Khan. It is a flaw in the estimation process. And 
really underlying that is a lack of connection, lack of a good 
process which connects where the estimates are being created 
and where the actual expenses are taking place.
    Mr. Andrews. But in plain English, doesn't somebody say, 
gee, you estimated someone is going to drive--fill their tank 
with 20 gallons last week, and you estimated it was going to 
cost $40, and it cost $80. I mean, doesn't somebody somewhere 
along the way figure that out and say, I wonder if all these 
projections are therefore flawed? How can you make $200 million 
worth of that mistake? Anybody want to take a whack at that 
one? That is a rhetorical question.
    Mr. Easton. There is no good answer to that. I think 
someone should have known. Those accounts, number one, I think 
are basically viewed as an entitlement. In other words, we are 
supporting the mission. We are managing them centrally, and we 
are executing them decentrally without good connectivity. We 
have had MILPERS [Military Personnel], ADAs across the board--
--
    Mr. Andrews. No one is questioning that when someone has a 
permanent change of station, that their family should be moved. 
It is an entitlement, absolutely. But that is not the issue. 
The issue is whomever is calculating the cost of the moving 
van, the other stuff that is going on, is wildly out of whack 
here. And I think it goes to the earlier question about 
accountability. I would ask that, consistent with the privacy 
obligations of the Department, with the chairman's consent, 
that you give us a blow-by-blow of what investigation took 
place, who was held accountable for that decision, and what 
happened to them, again consistent with your Privacy Act 
obligations. I think we would like to know that, just kind of 
see what happened here.
    I yield back on that.
    [The information referred to can be found in the Appendix 
on page 97.]
    Mr. Khan. Mr. Andrews, I just wanted to add one point that 
in DOD there are a lot of estimates. And estimates are not a 
bad thing as long as they are trued up. It is not a perfect 
system. It is like Chairman Conaway had mentioned; it is a 
large and complex organization with antiquated systems. So 
estimating----
    Mr. Andrews. Let me ask just one quick follow-up, if I 
could, and I should know this answer. The $200 million is off a 
base of how large an account? How large is that account?
    Mr. Khan. It is around $43 million--I am sorry, $43 
billion.
    Mr. Andrews. Okay. So $4 billion is 10 percent of the 
account, and $400,000 is 1--$400 million is 1 percent of the 
account. So this is one half of 1 percent? That is a small 
number, but that is a pretty big number, one half of 1 percent. 
That is more than a rounding error. It is outside the standard 
deviation, I would think, for an account that size.
    Mr. Khan. It is material.
    Mr. Andrews. Yeah, it is material. It is one half of 1 
percent, but on a $43 billion account, that is pretty serious 
money. So I think we would like that kind of report, again 
consistent with your Privacy Act obligations.
    Mr. Conaway. Thanks, Rob.
    And we will reward bad behavior on our side.
    Steven.
    Mr. Palazzo. Thank you, Mr. Chairman.
    I appreciate you all coming out this morning. I think you 
all know this is an extremely difficult job, and an important 
issue that we are going to--it is pretty difficult to 
implement, but it is not impossible.
    So we are here to keep putting the pressure on everybody to 
make sure it becomes a reality. I had some stock questions, but 
my colleagues brought up some points, so I am going to kind of 
deviate from them. I will submit those for the record or 
something.
    When we are talking about ERP, I have never met an ERP that 
actually was on time, within budget, and to the owner's 
satisfaction. Can you kind of tell me, have you all had any 
success stories where we have had an IT [information 
technology] integration that actually worked? And who actually 
comes up with these timelines? I am sure it is probably a joint 
between the person, the consultant selling the service and this 
product and the owner that is wanting to purchase it. But why 
does it always seem that that is where our time slippage comes 
from? Is it just unrealistic expectations? Or is it just one of 
those things that you can just never grasp, and this is going 
to become a reality for all ERP implementations?
    We will start with Mr. Easton.
    Mr. Easton. I think it is a combination of things. I think 
that we have typically unrealistic schedule estimates, 
overestimates when it comes to savings associated with those. 
We don't spend enough time up front in terms of really thinking 
through the changes in the business that we need to make prior 
to implementing. And so, as a result, I think that--and at the 
same time, we have a tendency not to want to stop. In other 
words, once we are going on the wrong direction, we should 
stop.
    The one example that I would say has been in general more 
successful has been the DLA [Defense Logistics Agency] 
enterprise business system, in which case they did have to make 
several starts and stops, and they incremented on small scales. 
And I think in general that tended to be more successful. But 
your track record that you point out, I think, both within the 
Government as well as private sector, is accurate.
    Mr. Blair. I would have to agree with much of what Mr. 
Easton said. The Department is the one who sets the milestone 
dates. And those dates are often driven by a lot of external 
factors. The 2017 date I think is putting a lot of pressure on 
the interim milestone dates, especially as it relates to the 
ERPs.
    As we go through and audit the ERPs and we identify 
problems, we oftentimes make recommendations that the 
Department not further implement the system until the problems 
are addressed. To this point, I have not seen where the 
Department has weighed in on the side of caution. Rather, they 
more frequently push forward with implementation, with the idea 
that they are going to fix it later. And I am not aware of any 
success stories, as you asked earlier, about ERPs being done on 
time and within, you know, cost or schedule. I think this is a 
very consistent challenge that the Department has to address.
    Mr. Khan. Sir, like you pointed out, ERPs are a challenge 
to implement, even in a commercial environment. ERP software is 
very sensitive. It is very complicated. So it has to be done 
right.
    There are three observations that we have, GAO has, as far 
as ERP implementations within the DOD environment. The first 
one is requirements. It is critical that the upfront, like Mr. 
Easton had mentioned, the upfront user requirements are 
correctly identified so that additional work, slippages, do not 
come about in terms of modifying the software once you begin to 
implement that. So that is critical.
    The other one is, like I had mentioned before, that there 
are several legacy systems within DOD. They have got data which 
has to be fed into the ERPs. Data conversion is a challenge. It 
is unwieldy. I mean, it has to be done somehow, but that is 
also a cause of slippages.
    And the third one, which is linked to the antiquated 
systems, the legacy systems, is the interface, how the older 
systems, some of them, they can't be pulled away, like MOCAS 
[Mechanization of Contract Administration Services], at least 
in the near term. They have to interface with the ERPs. And 
that can really complicate matters.
    Mr. Palazzo. Kind of running out of time. Real quick, if 
there is a repeat offender, someone that is constantly 
overcharging the Government, what mechanism do we have in 
place, one--and real quick, and whoever is the resident expert 
can pick this--to actually seek reimbursement? And also, how do 
we debar Federal contractors from doing business with the 
Federal Government? That is a loaded question.
    Mr. Easton. This is a little bit beyond my area of 
expertise, but I think that that was what I was going to say. 
There are legal procedures that we can take relative to 
debarment. We can serve to be able to recover those and offset 
those costs to be able to get that money back, because 
frequently we are doing business multiple times with the same 
people. But we aggressively go after those folks and then use 
the contract administration folks to be able to take the legal 
action as appropriate. I defer.
    Mr. Palazzo. I am out of time, but thank you. I appreciate 
it.
    Mr. Conaway. Thanks, Steven.
    The Department reported in 2010 improper payments of about 
$1.069 billion. Half of that, though, was in personnel or 
military pay. Walk us through--there are certain areas, I 
guess, like commercial pay, which is not represented on that 
list of five, you would expect problems with. But you would 
think you would get the pay right. What is in that $500 million 
number?
    Mr. Easton. In general, I think that we do get the pay 
right the vast majority of the times. You know, many of those 
improper payments are in fact underpayments. You know, we get 
situations, particularly--there are two situations I would 
point out. In other words, we will report payments based on 
information that we don't have. Members have not provided us 
information, say if they get married, that they are entitled to 
basic housing allowance or a particular thing. If we don't have 
that information, there is a lag, in other words, until we get 
that information. So when we actually are able to catch up we 
pay that.
    Mr. Conaway. Would that be considered an improper payment?
    Mr. Easton. Yes.
    Mr. Conaway. Even though you are not--okay.
    Mr. Easton. Absolutely. And that is that we did not pay 
that on time. So we keep track of those things.
    The other thing, from a military personnel perspective, 
sort of Reserve leave in terms of when reservists go on and off 
of Active Duty and their leave has to catch up. And that is 
recorded as an improper payment.
    Mr. Conaway. Okay.
    Mr. Easton. We pay I would say 97 percent, you know, on 
time. But still, and Mr. Andrews raised a question, these are 
big dollars that are reflected. But it is an ongoing 
relationship. We recover money quickly, and we catch up quickly 
if we underpay.
    Mr. Conaway. I guess I would put those in two different 
categories. If a member hasn't reported something to you and 
you have got a back pay for something, I wouldn't put that in 
the improper payment category because you didn't know. Anyway, 
we can talk about that one.
    Looking at the problem disbursements, I got a chart from 
April 2011 which shows for unmatched disbursements a total of 
$111 million, almost ununderstandable descriptor called 
negative unliquidated obligations. I have no clue what it 
means, but it is 10 million bucks. Zero for the Air Force by 
the way.
    So, congratulations, Air Force, whoever is out there.
    And anyway, and then aged in-transit float. When you say 
``aged,'' what is the date on that aging?
    Mr. Easton. Over 60 days.
    Mr. Conaway. Over 60 days. Why is the Army so much bigger 
in their unmatched disbursements than everybody else?
    Mr. Easton. A primary driver right now is the 
implementation of their ERP GFEBS, the General Funds Enterprise 
Business System that they are implementing. That is driving a 
significant number of unmatched disbursements. And these are 
disbursements that are recorded. And if the Army were here, 
they would say that in some cases, they would disagree with the 
reporting number. We are in the process of trying to sort that 
out. That has been a longstanding, as I look back on the 
reports that have been made on improper payments, you know, it 
gets into some of the cataloguing issues as the driver.
    Mr. Conaway. So how often do you pull that report?
    Mr. Easton. Every month.
    Mr. Conaway. Every month?
    Mr. Easton. Every month.
    Mr. Conaway. So, at some point, you would expect the Army 
to catch up and that number to drop when they get the GFEBS.
    Mr. Easton. Absolutely. And we put that in the FIAR 
[Financial Improvement and Audit Readiness] plan, because we 
want people to be tracking those. We want people to understand 
why we are making these changes, and not just systems changes 
but control changes towards auditability that should begin to 
reflect in those statistics.
    Mr. Conaway. All right.
    Mark, in your statement--let me see here--you are talking 
about Funds Balance with Treasury. You said that they are not 
recorded or were improperly recorded either at Treasury or in 
our general ledger. How would they get improperly recorded at 
Treasury?
    Mr. Easton. They would be--they should be recorded 
correctly at Treasury.
    Mr. Conaway. Right.
    Mr. Easton. In other words, by the time that disbursement, 
you know, oftentimes does not get back and reconciled into the 
particular chart of accounts where the transaction was 
initiated. That is really the key. In other words, oftentimes 
the transactions will in fact be recorded at Treasury, but at 
an appropriation level, but what we need do is record it into 
the individual account and chart of accounts.
    Mr. Conaway. Help me understand. I guess I had assumed that 
Treasury was just your bank, and the bank didn't really care. 
As long as you had money in there, they would clear the 
transactions in and out. Is there a recording that goes on at 
Treasury within an appropriation category, or why is it that 
you are reconciling over there?
    Mr. Easton. In other words, we are reconciling; we are 
reconciling with Treasury. And Treasury has the transaction 
recorded in a vast majority of times. So I may have misspoke on 
that particular issue.
    Mr. Conaway. That is fine. What happens at year end? We are 
on a cash basis, and we have got all these transactions out 
there that we are not sure about. How does that get reflected 
in the financial statements that we will soon be seeing 
November 15ish?
    Mr. Easton. The transactions are reflected and in some 
cases in an undistributed category. And so I think in the 
financial statements, and I can get back to you with specifics, 
they would offset receivables and payables. And I think that my 
fellow--I think that that would be how they would be recorded, 
but they would be disclosed.
    [The information referred to can be found in the Appendix 
on page 97.]
    Mr. Conaway. Okay.
    Mr. Easton. Those quantities would be disclosed in the 
footnotes.
    Mr. Conaway. All right.
    We will go a second round.
    Rob, you have any questions?
    Mr. Andrews. I really don't have a second round question, 
but just want to comment that--well, I guess I would ask each 
panelist to comment on this, that if you had to identify the 
greatest impediment toward zeroing out these improper payments, 
if we could only do one thing, what is the thing that you would 
have us do to zero out the improper payments?
    What do you think, Mr. Easton?
    Mr. Easton. I think the internal control emphasis is really 
what we need. I mean, systems clearly creates a lot of the 
problems. And the issue of accountability that you raised, I 
think the environment makes it very, very difficult to 
specifically hold people accountable. But we need to do a 
better job of that as well. But internal controls and making 
sure that we get the people to focus on those controls.
    Mr. Andrews. Mr. Blair, what do you think?
    Mr. Blair. I agree with some of what Mr. Easton said, but I 
want to add a little more specificity to it. I think the 
internal controls are key. And there are some specific things 
that I think need to be done. More importantly, you need to do 
an in-depth analysis of all of the disbursements so you have a 
better idea of where your payments are going. But there has to 
be controls over all of the payments. Some of the things that I 
cited in my testimony, the examples, those are examples where 
there is oftentimes an inadequate or absent review process over 
the payments that are made, those contract invoices that are 
paid. And that is a specific control.
    Mr. Andrews. Specifically referring to the commercial 
payment problem?
    Mr. Blair. Yes, sir.
    Mr. Andrews. Okay.
    Mr. Khan, what do you think?
    Mr. Khan. I just want to say that two important elements, 
like I have mentioned in my oral statement, funds control and 
payments control. They have to be strengthened if you have to 
reach auditability.
    And another point I just want to bring out that both funds 
control and payments control originate in nonfinancial areas. 
Typically, they originate in procurement. So it is critical in 
terms of, sir, accountability. I mean, responsibility has to be 
taken by other functions. It all ends up in financial 
management, where it has to be corrected. But procurement has 
to have the training to be able to----
    Mr. Andrews. We don't want to create a shoot-the-messenger 
problem.
    Mr. Khan. Exactly.
    Mr. Andrews. The financial people are actually doing their 
job reporting the problem. We want to get to the source of why 
the problem was created in the first place. I do understand 
that. Thank you very much.
    Mr. Conaway. There was a bit of a disagreement between--on 
the commercial pay category for estimating improper payments.
    Mr. Kahn, your team had a vision or view that was different 
than what the Department of Defense had. Did you all reconcile 
that? Are you comfortable now that those are being estimated, 
improper payments, that you used the right methodology?
    Mr. Khan. Yes. I mean, the commercial pay was not picked up 
for 2010. And based on what the comptroller, Mr. Hale, has 
recently said, commercial pays are going to be picked up for 
estimating improper pays.
    Mr. Easton. We are going to continue. The difference of 
opinion--and at the time--and there was a GAO report in 2008 or 
2009, I believe. We were complying with the OMB [Office of 
Management and Budget] guidance at the time. Subsequent 
legislation up here made it very, very clear that we want you 
to do statistical sampling to be able to support those 
estimates. But I want to make sure that we are clear that there 
is a significant amount of prepayment checks that we do. In 
fact, we emphasize--this is why I wanted to emphasize the 
people aspect. I mean, we put a lot of people and a lot of eyes 
on it. But admittedly, much like everything, it is a team 
sport. And so it goes to the contracting officer, contract 
administration, contract audit. There is a lot of aspects to be 
able to do that. But that is the key issue, and I think we 
resolved it.
    Mr. Conaway. Good.
    Just one quick--Mark, you had mentioned that--the internal 
control would be owned by you in 2017. I would posit that the 
internal control is owned by management today.
    Mr. Easton. Absolutely.
    Mr. Conaway. I wanted to make sure I understood that.
    Mr. Easton. I meant--I guess the key issue that I would 
have--and we have this discussion with my colleagues all the 
time. Too often--and this gets into the people and the 
culture--you know, we have relied on the auditors to come in 
and tell us what the issues are. Sort of detective controls. 
You know, back in 1982, even going back to 1950 if I look at 
the GAO report, clearly management has to assume 
responsibility. So what I would want--and we had a recent case 
where we were talking about the improper payments, high dollar 
value that were reported, management should have done a more 
aggressive job, saying this is what--this is why we feel the 
way we feel, as opposed to waiting for the auditors to come in. 
It is a change in mindset and it is something that goes along--
that management responsibility that is associated with the 
audit is something that we have got to change.
    Mr. Conaway. Thank you.
    Gentlemen, thank you for coming this morning. I want to 
thank our panel members as well. Anything--all right.
    Mark, Daniel, Asif, any final comments?
    All right. Thank you, boys.
    We are adjourned.
    [Whereupon, at 9:01 a.m., the subcommittee was adjourned.]


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                            A P P E N D I X

                           September 22, 2011

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                           September 22, 2011

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              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                           September 22, 2011

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             RESPONSE TO QUESTION SUBMITTED BY MR. CONAWAY

    Mr. Easton. In general, these transactions (often referred to as 
undistributed disbursements and collections) reflect outlays that have 
not been recorded in the lower level field accounting systems, but have 
been recorded against the Agency-compiled Department of Defense (DoD), 
Office of Management and Budget (OMB), and Department of the Treasury 
(Treasury) financial reports. These transactions have been recorded on 
a cash basis by Treasury, either through a disbursement or a 
collection. If the correct accrual has been established, the dollar 
value of these transactions is ``offset'' against these payables (for 
disbursements) or receivables (for collections). There are two 
categories of undistributed transactions: supported and unsupported. 
Some additional detail is provided in the paragraphs below.
    Supported undistributed disbursements or collections typically 
represent transactions that will properly post, however with a lag in 
time. Supported undistributed disbursements are offset against accounts 
payable and undistributed collections are offset against accounts 
receivable. Adjusting entries are made at the Departmental level using 
Treasury United States Standard General Ledger accounts.
    Unsupported undistributed balances represent balances that Treasury 
has reported, but DoD does not have support to accurately identify the 
outlays. Current DoD guidance is to record the unsupported 
undistributed disbursements as disbursements in transit, which offsets 
the nonfederal accounts payable. Unsupported undistributed collections 
are recorded in nonfederal other liabilities. Effective with the first 
quarter of Fiscal Year (FY) 2012, the unsupported undistributed 
disbursements will be recorded against accounts payable, and 
unsupported undistributed collections will be recorded against accounts 
receivable. New reporting attributes have been approved that will allow 
these balances to be identified within the trial balance.
    OMB Circular A-136, ``Financial Reporting Requirements,'' does not 
address or require any disclosures, including the amount, for 
undistributed disbursements or collections recorded in the financial 
statements and footnotes. As such, DoD does not disclose the balances 
in the financial statement footnotes. However, DoD includes in Note 1, 
``Significant Accounting Policies,'' a disclosure discussing the 
treatment for undistributed disbursement and collection. This 
disclosure has been included in the DoD financial statements since FY 
2004. [See page 20.]
                                 ______
                                 
             RESPONSE TO QUESTION SUBMITTED BY MR. ANDREWS
    Mr. Easton. Because the final, formal investigation is not yet 
complete, accountability and discipline is yet to be determined. The 
information below provides additional detail.
    A preliminary Antideficiency Act (ADA) investigation report was 
initiated on November 19, 2009, following the Government Accountability 
Office (GAO) Decision B-318724, ``Department of the Army--The Fiscal 
Year 2008 Military Personnel, Army Appropriation and the Antideficiency 
Act,'' dated June 22, 2010. The preliminary investigation resulted in a 
potential ADA violation of $200 million, and the Army initiated a 
formal ADA investigation in March of 2010. The Army completed the 
formal ADA investigation in January 2011, and during the next six 
months maintained a dialogue with the Department of Defense Office of 
the General Counsel. During this period the case was further refined to 
ensure that all relevant information had been included; this has been 
particularly critical in supporting assignment of individual 
responsibility/accountability. We anticipate an advanced decision in 
the near term. A final legal decision (referred to as an ``advance'' 
decision) is required prior to completing the ADA report and 
administering discipline. Once the responsible individual(s) has been 
named, and discipline imposed, the report will be finalized and 
reported to Congress, in accordance with OMB Circular A-11. Due to this 
requirement, and to ensure legal right to due process, the disciplinary 
phase of the ADA process may further delay formal submission. We 
estimate the final completion date to be December 2011. This formal 
report will establish individuals responsible and the discipline 
administered.
    In its decision of June 22, 2010, the GAO concluded the Army 
violated the Antideficiency Act in the Fiscal Year 2008 Military 
Personnel, Army appropriation because total obligations exceeded funds 
available within the appropriation. This was caused because, as stated 
in GAO's decision, ``Army Budget's accounting records, for a period of 
time, reflected estimated obligations instead of actual obligations 
until it was too late to control the incurrence of obligations in 
violation of the Antideficiency Act.'' The Army's investigation finds 
that Army program managers within the Deputy Chief of Staff (DCS G-1) 
did not record actual obligations in a timely manner, and instead used 
estimates as the basis for recording obligations. The Army Budget 
Office and DCS G-1 personnel routinely reconciled obligation estimates 
to actual disbursements, adjusting obligation estimates as necessary, 
and worked with Defense Finance and Accounting Service personnel to 
ensure the most accurate actual information was used to update recorded 
estimates. A violation occurred because total disbursements exceeded 
estimated obligations and funds available within the subdivision 
provided to DCS G-1. [See page 16.]

                                  
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