[Senate Hearing 112-445]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 112-445
 
    IMPROVING FINANCIAL ACCOUNTABILITY AT THE DEPARTMENT OF DEFENSE
=======================================================================

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                   INFORMATION, FEDERAL SERVICES, AND
                  INTERNATIONAL SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 15, 2011

                               __________

         Available via the World Wide Web: http://www.fdsys.gov

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




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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  JERRY MORAN, Kansas

                  Michael L. Alexander, Staff Director
               Nicholas A. Rossi, Minority Staff Director
                  Trina Driessnack Tyrer, Chief Clerk
            Joyce Ward, Publications Clerk and GPO Detailee
                                 ------                                

 SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, 
              FEDERAL SERVICES, AND INTERNATIONAL SECURITY

                  THOMAS R. CARPER, Delaware, Chairman
CARL LEVIN, Michigan                 SCOTT P. BROWN, Massachusetts
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
CLAIRE McCASKILL, Missouri           RON JOHNSON, Wisconsin
MARK BEGICH, Alaska                  ROB PORTMAN, Ohio

                    John Kilvington, Staff Director
                William Wright, Minority Staff Director
                   Deirdre G. Armstrong, Chief Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Brown................................................     4
    Senator Coburn...............................................     5
Prepared statements:
    Senator Carper...............................................    35
    Senator Brown................................................    38

                               WITNESSES
                      THURSDAY, SEPTEMBER 15, 2011

Hon. Robert F. Hale, Under Secretary of Defense (Comptroller) and 
  Chief Financial Officer, U.S. Department of Defense and the 
  Honorable Elizabeth A. McGrath, Deputy Chief Management 
  Officer, U.S. Department of Defense............................     6
Hon. Gladys J. Commons, Assistant Secretary of the Navy, 
  Financial Management and Comptroller, U.S. Department of the 
  Navy, accompanied by Caral E. Spangler, Assistant Deputy 
  Commandant (Resources), U.S. Marine Corps......................    10
Hon. Mary Sally Matiella, Assistant Secretary of the Army, 
  Financial Management and Comptroller, U.S. Department of the 
  Army...........................................................    12
Hon. Jamie M. Morin, Assistant Secretary of the Air Force, 
  Financial Management and Comptroller, U.S. Department of the 
  Air Force......................................................    13
Asif Khan, Director, Financial Management and Assurance, U.S. 
  Government Accountability Office...............................    16

                     Alphabetical List of Witnesses

Commons, Hon. Gladys J.:
    Testimony....................................................    10
    Prepared statement...........................................    49
Hale, Hon. Robert F.
    Testimony....................................................     6
    Prepared statement...........................................    40
Khan, Asif:
    Testimony....................................................    16
    Prepared statement...........................................    70
Matiella, Hon. Mary Sally:
    Testimony....................................................    12
    Prepared statement...........................................    54
Morin, Hon. Jamie M.:
    Testimony....................................................    13
    Prepared statement...........................................    62

                                APPENDIX

The chart referenced by Senator Carper...........................    93
Questions and responses for the Record from:
    Mr. Hale.....................................................    94
    Ms. McGrath..................................................   112
    Ms. Commons..................................................   123
    Ms. Spangler.................................................   127
    Ms. Matiella.................................................   128
    Mr. Morin....................................................   135
    Mr. Khan.....................................................   143


    IMPROVING FINANCIAL ACCOUNTABILITY AT THE DEPARTMENT OF DEFENSE

                              ----------                              


                      THURSDAY, SEPTEMBER 15, 2011

                                 U.S. Senate,      
        Subcommittee on Federal Financial Management,      
              Government Information, Federal Services,    
                              and International Security,  
                      of the Committee on Homeland Security
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
Room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper, Brown and Coburn.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. The Subcommittee will come to order.
    Senator Brown, I welcome all of the witnesses and our 
guests. Nice of you to come. It is an important hearing and we 
are delighted that you could be with us. Thanks for your 
preparation and for your willingness to respond to our 
questions.
    Normally, when we have a hearing of this nature, I 
introduce each of our witnesses and provide some background on 
each. We are going to start voting I think at 4 o'clock, and so 
I will mention your names, your titles but we are not going to 
tell where you went to high school and how many kids you have 
and stuff like that. So, this will be the shorthand version.
    But we are happy to be here. This is something we have been 
looking forward to, and we have done this kind of hearing 
before, and we are going to keep doing it until we get it 
right.
    Since the 1990s, Federal agencies have been required to 
produce auditable financial statements. Currently, the 
Department of Defense (DOD) is incapable of doing this. In 
fact, it is one of two departments, the other being Homeland 
Security, although Janet Napolitano, the Secretary there, told 
us this week that they are making some progress, and I think 
they are. But the books at the DOD I am told are so bad that 
auditors cannot even attempt to perform a complete audit, and 
that is clearly unacceptable.
    A year ago we met in this same room and held a hearing, 
maybe a hearing with the same title, I am not sure. But we 
talked about how the Department of Defense was going to meet 
its statutory deadline of achieving financial auditability by 
2017. And we are here today to get an update. We know the 
Marine Corps is currently attempting, its second try at 
auditing a portion of its financial books and are learning from 
these audits.
    As our witnesses and my colleagues know, successful 
financial statement audits are simply the outcome of strong 
financial management. Keeping a Federal agency's books in 
order, ensuring good financial controls, and getting a clean 
audit helps to ensure that taxpayers are getting the services 
they paid for at a price we can afford. Unfortunately, these 
basic managerial tasks have proven challenging to the 
Department of Defense.
    Federal agencies should always strive to be good stewards 
of our taxpayer funds; but as we struggle to address our 
massive Federal debt and deficit, this effort has taken on an 
even greater importance. We must improve the basic financial 
management practices at the Department of Defense, the 
Department of Homeland Security (DHS), and throughout the 
Federal Government. After all, we cannot effectively identify 
areas to reduce spending if we do not know how much and where 
we are spending that money in the first place.
    Unfortunately, most Americans question whether those of us 
in government are capable of making the kind of tough decisions 
that they and their families make with their own budgets and 
with their checkbooks every month.
    They wonder why a massive arm of the Federal Government 
like the Department of Defense can be so incapable year after 
year of doing the same kind of work. It is hard to blame those 
citizens for their frustration and skepticism with us.
    Now more than ever, we need to establish a different kind 
of culture in Washington when it comes to spending. Clean, 
auditable financial statements can provide the roadmap we need 
to move from what I call a culture of spendthrift towards a 
culture of thrift. Cleans statements would give an agency 
leadership, and those of us here in the Congress, the 
information we need to look at every nook and cranny of the 
Federal spending and ask this question. Is it possible to get 
better results for less money?
    When it comes to the Department of Defense, it is clear to 
me that we can get better results and save money, promote our 
national defense, and provide better support for the war 
fighters in the field and across the world.
    The department's finances have been on the Government 
Accountability Office's (GAO's) high risk list since 1995, in 
part due to pervasive management deficiencies that would never 
be tolerated in private sector businesses. In fact, these 
deficiencies are not tolerated even at most Federal agencies. 
These deficiencies make it difficult, if not impossible, to 
know for certain how and when the Department of Defense spends 
its money.
    The Department of Defense has annual expenditures of nearly 
$700 billion, spending approximately $2 billion every day. 
Managing this level of spending requires transparent 
information that is reliable and relevant. Without quality 
financial data and the assurance of a clean audit opinion, the 
department is unable to assure the Congress, and the American 
people that the funds that we entrust them with are spent 
prudently.
    A series of recent reports detail a litany of the 
Pentagon's oversight problems. This is not a complete list but 
it is a list that I think is illustrative.
    First, members of this panel recently wrote to the 
Department of Defense about the Inspector General's (IGs) 
report on the Department's inability to recoup about $200 
million in delinquent debts due to poor but basic record 
keeping.
    Second, just last week we learned about a helicopter 
contract through which the Army has overpaid millions of 
dollars for spare parts. The size of some of these overpayments 
is staggering. An $8 helicopter door part, for example, went 
for $284 in DOD's accounting world. In another instance, the 
Army paid five times too much for a $1,500 rotor part that 
turned out to have already been in the military warehouse.
    Third, in fact, we have seen from the Department of Defense 
that at any given time there is roughly $1 billion of spare 
parts on order that the Department simply does not need, but 
the Pentagon inventory system does not allow for the order to 
be changed.
    This kind of thing drives me crazy. I am sure it drives 
Senator Brown crazy, taxpayers crazy, and it must keep you up 
at night as well.
    Fourth, USA Today recently reported that the Department of 
Defense racked up $720 million in late fees for shipping 
container leases by not returning the containers on time. The 
$720 million in late fees was on top of the cost of the actual 
leases.
    And finally, the Commission on Wartime Contracting found 
earlier this month that there was an estimated $60 billion in 
Department of Defense waste and fraud related to the Iraq war. 
In these tough economic times, this level of waste is just 
unacceptable.
    Even worse are the fraud, waste, and abuse that we cannot 
identify at the Department of Defense because the financial 
management systems are so poor.
    Fortunately, momentum is building to address this widely 
recognized problem. The House of Representatives has formed a 
panel to study financial management at the Department of 
Defense, and as Mr. Hale can attest, he is often called to 
testify in front of Congress on the Department's progress in 
this area.
    And most encouraging of all, Secretary Leon Panetta, who 
was good enough to stop by my office about a month ago, has 
expressed his intent to greatly improve financial management at 
the Department of Defense.
    We have a chart\1\ over here that has a quote from the 
Secretary and reads, ``It is unacceptable to me that the 
Department of Defense cannot produce a financial statement that 
passes all financial audit standards. That will change. I have 
directed that this requirement be put in place as soon as 
possible. America deserves nothing less.''
---------------------------------------------------------------------------
    \1\ The chart referenced by Senator Carper appears in the appendix 
on page 93.
---------------------------------------------------------------------------
    Was that his testimony at his confirmation hearing?
    Mr. Hale. Very similar to his confirmation.
    Senator Carper. No?
    Mr. Hale. It was a statement. That part is from a statement 
he made to the employees in the Department of Defense.
    Senator Carper. Oh, good.
    Mr. Hale. But he made similar statements at his 
confirmation hearing.
    Senator Carper. That is what I call being on message, and 
it is a good message to have. All right.
    We have an opportunity to make financial management at the 
Department of Defense better so that every day decisions can be 
made on quality information. This way we can support, better 
support the men and women in uniform in a way that obtains the 
best results for a fair and reasonable price.
    Today we have been joined by several witnesses who are each 
key players in helping the Department of Defense improve its 
financial management processes and controls.
    Your work, if successful, will allow the department to 
produce reliable financial statements that regularly produce 
critical information for decisionmakers.
    More importantly, doing this job well will enable us to 
support the war fighters, the men and women on the line 
fighting every day to protect our freedoms. That is what this 
is all about.
    And as a guy who spent about 23 years active and reserve 
duty as a Naval flight officer, someone who cares deeply about 
these issues personally, whose family has spent a lot of time 
in uniform, these issues are even more personal and important 
to me.
    With that, let me turn to Senator Brown for any comments he 
would like to make. Senator Brown.

               OPENING STATEMENT OF SENATOR BROWN

    Senator Brown. Thank you, Mr. Chairman. You said a lot on 
this issue. We have talked about this issue a lot since I have 
been here; and as you know, DOD has suffered from significant 
financial system weaknesses, problems of bookkeeping, 
incomplete documentation, weak internal controls.
    And efforts to fix these problems, such as modernizing key 
business systems, have themselves been plagued by 
mismanagement, going years over schedule and billions over 
budget at a time when we obviously cannot afford it.
    DOD faces a deadline of 2017. These challenges are numerous 
and pervasive. However, there are some encouraging signs. The 
persistence of this Subcommittee and other committees is paying 
off; and senior leadership at DOD, including our witnesses 
today, are finally giving this the priority it deserves.
    Mr. Chairman, you noted Secretary Panetta's recent comments 
on this issue. It is something that, as you have said many 
times before and I agree, we need to do it better between the 
three people that are up here, Senator Coburn, you and me and 
others. We are just trying to find a way to maximize Federal 
dollars, find out where the holes are, plug them up, and use 
our resources better.
    I had the honor recently to go to Afghanistan on your CODE 
L which was great, and then to followup as a soldier. But to 
see our men and women fighting and it also concerns me deeply 
about the draw down and how, in fact, we are going to continue 
on with the mission with the limited resources that are 
potentially going to be made available is deeply troubling to 
each and every one of them serving.
    So, I want to make sure that we do it right and we need to 
do it immediately. So, I am anxious to hear what is being said 
and thank you for holding the hearing.
    Senator Carper. You bet. Thanks for being here and being a 
part of it. Senator Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Mr. Chairman, I very much appreciate you 
continuing to focus on this issue. We have a distinct 
obligation under the Constitution to defend the country and I 
appreciate all of your service in that regard.
    We also have a unique aspect of the Constitution which I 
thought I would read because it is just as applicable as any 
other area of the Constitution. It is Article 1, Section 9, 
clause 7 which says, ``No money shall be drawn from the 
Treasury but in a consequence of appropriations made by law and 
a regular statement and account of the receipts and 
expenditures of all public moneys shall be published from time 
to time.''
    Well, the Pentagon cannot do that. And in a very depressing 
and little noticed report, the IG reported the following in 
their summary on DOD office of audits of financial management 
for 2010, and I think there is some significant things here.
    ``Financial management systems DOD has put in place to 
control and monitor the money flow do not facilitate but 
actually prevent DOD from collecting and reporting financial 
information that is accurate, reliable, and timely. DOD 
frequently enters unsupported amounts in its books and uses 
those imaginary figures to make the books balance. DOD managers 
do not know how much money is in their accounts at the Treasury 
nor when they spent more than Congress appropriates to them nor 
does DOD record, report, collect, and reconcile funds received 
from other agencies or the public, and DOD tracks neither buyer 
nor seller amounts when conducting transactions with other 
agencies.''
    And that is just the few. And I know you all are working on 
that. But we are in a whole new set of realities in our 
country; and many at that table I visited with before, they 
know my intensity on the issue; and my hope is is that we can 
help you do what I know you want to do, and we will not be a 
hindrance to it but we will be a help to it.
    So, there is no questioning of your motives that you want 
to try to solve it. It is a big problem. We all know that. The 
question is is how do we get it solved, and how do we get it 
solved quickly, because we do not have the luxury anymore of 
allowing it to continue, given our fiscal situation.
    Senator Carper. Well said. We are going to just lead off 
with Hon. Robert Hale, Under Secretary of Defense, Chief 
Financial Office (CFO) of the U.S. Department of Defense. 
Welcome back. The Hon. Elizabeth McGrath, Deputy Chief 
Management Officer (DCMO), U.S. Department of Defense.
    The Hon. Gladys J. Commons, Assistant Secretary of the 
Navy, Financial Management and Comptroller, U.S. Department of 
Defense. A pleasure. Ms. Caral Spangler, Assistant Deputy 
Commandant, U.S. Marine Corps. I understand you are going to be 
joining Ms. Commons. How are you all going to do this in terms 
of presenting the testimony? How is this going to work?
    Ms. Commons. I will make the opening statement, and then 
Ms. Spangler will answer any questions that you might have.
    Senator Carper. OK. Good.
    The Hon. Mary Sally Matiella, Assistant Secretary of the 
Army, Information Management and Comptroller, U.S. Department 
of the Army. Ms. Matiella, welcome.
    Jamie Morin, Assistant Secretary of the Air Force, 
Financial Management and Comptroller, Department of the Air 
Force.
    And Asif Khan. Great to see you. Director of Financial 
Management and Assurance. I like that ``and Assurance''. We can 
always use some of that from GAO.
    Your whole statement will be made part of the record. I ask 
you to proceed. The last I heard, we are going to start voting 
at 4 o'clock. So, we would like to be able to move through this 
and be able to complete your statements, have our questions, 
and be out the door shortly after 4 o'clock.
    Please proceed, Mr. Hale.

TESTIMONY OF HON. ROBERT F. HALE,\1\ UNDER SECRETARY OF DEFENSE 
 (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF 
DEFENSE AND HON. ELIZABETH A. MCGRATH, DEPUTY CHIEF MANAGEMENT 
              OFFICER, U.S. DEPARTMENT OF DEFENSE

    Mr. Hale. Well, thank you, Mr. Chairman, Ranking Member 
Brown, Senator Coburn. Thank you for the chance to discuss our 
efforts to improve financial management of the Department of 
Defense.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hale appears in the appendix on 
page 40.
---------------------------------------------------------------------------
    I appreciate your interest and your support in helping us 
keep a focus on improving defense financial management, and I 
can assure you that this is an issue that is of personal 
interest to me. It was of personal interest to me 10 years ago 
when I was with the Air Force FM. It still is, and the same, I 
think, is true of Ms. McGrath. I am joined by Beth McGrath, our 
Deputy Chief Management Officer, and we will summarize our 
joint statement together.
    Let me start with the significant weaknesses and the 
problems that the department faces. I think you know these. I 
will go quickly. We have enterprise-wide weaknesses in defense 
financial management.
    There are two main ones. Our problems are our legacy 
systems are old. Some of them are several decades old, and 
those that are still there do not always provide adequate 
financial controls, and they often do not accumulate data at a 
level that the auditors require for auditability.
    But systems are not our only problem. The other is 
financial controls outside of the systems that are not always 
adequate. They are either not strong enough to support audits 
or they are too variable across commands to convince auditors 
that we have a consistent set of controls.
    These weaknesses manifest themselves, as you well know, in 
our inability to obtain a clean audit opinion. The problems are 
significant and are of great concern to me. We are working to 
solve them, and in a moment Beth McGrath and I will tell you 
more about what we are doing, as will the service FMs that 
follow us.
    But first, in an effort to provide balance, I want to do 
one more thing, and that is to mention a strength of defense 
financial management, and that is, that I believe we are 
meeting our mission. We could do it better, but we are meeting 
our mission by effectively providing resources and services to 
our war fighters. There are problems and auditable financial 
statements would help. But when I ask senior commanders, they 
almost always tell me that they get the financial support that 
they need, and I might add that we are doing this despite some 
incredible obstacles--something I have not seen in more than 30 
years of working in and around defense financial management. 
The 6-month continuing resolution which just drained support 
that we needed to do other things. Planning for a government 
shutdown that consumed an enormous amount of attention. 
Fortunately, we did not have to implement it. Planning to run 
out of cash, which consumed less-but significant' attention, 
especially in places like the Defense Finance and Accounting 
Service (DFAS), and now innumerable what-if drills on 
sequesters.
    So, I think there are strengths to defense financial 
management. I am not going to dwell on them after this but I 
would like you to keep them in mind. I believe we are meeting 
our basic mission.
    Let me turn back, now, to the systematic weaknesses in 
defense financial management, and what we are doing to address 
them. When I took over as CFO in February 2009, one of my key 
goals was to fix these problems and achieve auditable financial 
statements, or at least get as far as I could.
    I knew we needed a new approach. The one we had was not 
working. Everybody was kind of going in their own direction. We 
needed to establish some priorities. This is an enormous 
problem and we cannot fix it all at once, and we have a new 
approach, one that focuses on budgetary information and 
accounts and locations of our assets; key information we use to 
manage.
    I knew we needed to make auditability a priority. It is now 
on DOD's top-10 priorities list, and of course, as I might add, 
my new boss, Secretary Panetta, as your quote shows, feels 
strongly about the need for auditable financial statements, and 
I am working actively with him in this area.
    I knew we needed resources. When I walked into this 
building, there were not resources available to all the 
departments. There certainly was not anything 10 years ago when 
I was Air Force FM.
    Now every service in the Defense Finance and Accounting 
Service has substantial resources for auditability programming 
throughout the 5-year planning period.
    And I knew we needed goals and not just long-term goals. 
Part of our problem has been that we set these goals out to 
2017. That is important, but nobody wakes up in the morning 
thinking: I have to get to work today to meet a goal 5 or 6 
years from now. We need short-term goals, and we have 
established them and the plans to meet that.
    I also knew that we needed to do more than plan. We had to 
make tangible progress toward auditability, something that 
could convince us we could do it and convince you; and one of 
the most important accomplishments is improving our financial 
systems.
    And I would like to ask Beth McGrath to address those.
    Ms. McGrath. Sir, thank you very much for also allowing us 
the opportunity to come back and talk more about the progress 
the Defense Department is making with regard to our financial 
management operations.
    Our approach toward overarching management reform efforts 
emphasizes improving our ability to access execution through 
performance, strengthening governance, and ensuring leadership 
accountability, and also making necessary changes to the way we 
procure our information technology.
    In each of these areas, we rely heavily on tools that 
Congress provided us through the last several National Defense 
Authorization Acts (NDAA), and for that we are very 
appreciative.
    As Secretary Hale makes clear, improvements to our business 
systems and the business environments in which those systems 
operate are important to achieve the goals for auditability 
that the Department and Congress share.
    In pursuit of these goals, we are taking an enterprise 
approach to meet the challenges of implementing information 
technology systems on time, within budget, and with the needed 
capabilities, as required.
    We are also establishing effective governance over their 
operations; not only the management of those programs, but also 
how they are going to be used once they are fielded.
    To improve our financial systems, we have oriented them 
around end-to-end business processes that support audit goals, 
including procure-to-pay and hire-to-retire. Each of these has 
been identified and documented in our Business Enterprise 
Architecture (BEA), whose success requires that we 
appropriately implement and utilize our enterprise resource 
planning systems; modernize legacy systems only when necessary 
and supported by a business case; and aggressively sunset 
legacy systems that are obsolete, redundant, or not aligned 
with our business objectives.
    As you saw in greater detail in our written statement, we 
have placed significant emphasis and effort in several areas: 
Managing the business processes from end-to-end across the 
government, the way we actually execute our business; improving 
business systems acquisition; implementing the architectures as 
I mentioned; and improving process controls across functions 
and organizations.
    Our focus on business operations to include financial 
management at the department, is an area of great and immediate 
interest to all of our senior leadership, as well as an area of 
serious activity and concerted efforts. We are on the way to 
creating better business processes that will create the kind of 
lasting result our country deserves.
    As always, I appreciate the opportunity to work with 
Congress to optimize performance across the department. I look 
forward to your questions.
    Mr. Hale. We need to improve financial controls. I know we 
are running a little late. Do I get to count this as two 
witnesses?
    Senator Carper. Go ahead.
    Mr. Hale. I will go fast.
    We need to improve the controls, financial controls outside 
the system. So, we have set up teams in each service trying to 
rely on the service of auditors to actually go out and help us 
start making those controlled changes now even if we are not 
going to be audited for a while.
    We need to get key personnel outside the department or 
outside the financial community involved in this process. This 
is a DOD-wide issue, not just DOD FM. So, each service has put 
audit goals into the performance plans of appropriate members 
of the Senior Executive Service (SES) so their professional 
success and bonuses are tied to audit success.
    And we need to have independent checks on our progress. So, 
we have hired independent public accountants, or sometimes we 
are using the DOD IG, to audit or validate what we are doing.
    The biggest one is the Marine Corps audit or the statement 
of budgetary resources which I am cautiously optimistic that we 
are going to get a positive opinion. We have recently received 
a clean opinion on what is called ``appropriations received.'' 
That is our funds distribution process. That clean opinion 
reassures me, and I think it should reassure you regarding a 
key step in knowing where we are spending the public's money.
    Defense Finance and Accounting System recently received a 
clean opinion on a system that handles civilian pay. We have 
independent auditors, as we speak, looking at the Army's 
emerging business environment and their new system, the General 
Fund Enterprise Business (GFEB) system; and the Air Force 
currently has auditors looking at their ability to reconcile 
their so-called Funds Balanced with Treasury, essentially their 
checkbook with Treasury, if you will.
    And I could go on. There are a number of others, but in the 
interest of time I will not.
    Now, I can already hear some of our critics saying, there 
he goes again suggesting everything is fixed. So, in the 
interest of balance, let me acknowledge our continued problems.
    We could have better plans. GAO will tell you about that. 
We need to look at them again, but I would rather focus the 
resources I have, and they are limited, on having auditors 
actually go out and check what we are doing. I think we will 
learn a lot more and get there quicker.
    We have missed some milestones which frustrates me, but in 
many cases we are catching up. We were overly optimistic early 
on.
    And finally, and most importantly, I know we have a long 
way to go. We are working to address the fundamentals of 
defense financial management, but it is a journey that will 
inevitably take a number of years.
    So, just summing up, I believe there are some significant 
strengths in defense financial management, but there are also 
systemic problems and weaknesses. We need to focus on those. I 
think we are making progress, but I understand we have a long 
ways to go.
    With that, I will stop and be glad to answer your 
questions.
    Senator Carper. Good. Thanks, Mr. Hale.
    Ms. Commons, I think you are next. Please proceed.

TESTIMONY OF HON. GLADYS J. COMMONS,\1\ ASSISTANT SECRETARY OF 
THE NAVY (FINANCIAL MANAGEMENT AND COMPTROLLER), ACCOMPANIED BY 
 CAROL E. SPANGLER, ASSISTANT DEPUTY COMMANDANT OF THE MARINE 
                  CORPS PROGRAM AND RESOURCES

    Ms. Commons. Chairman Carper, Senator Coburn, thank you for 
the opportunity to discuss our efforts to improve financial 
management and achieve audit readiness.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Commons appears in the appendix 
on page 49.
---------------------------------------------------------------------------
    The Department is fully committed to improving our 
financial data. Our senior leaders, Secretary Ray Mabus, Under 
Secretary Work, the Chief of Naval Operations, and Commandant 
of the Marine Corps are all engaged, and so are our major 
commands and field activities.
    We have met with every senior executive responsible for 
executing our business processes, and as Secretary Hale noted, 
we will include an audit readiness objective in their 
performance plans.
    We are also engaging our flag and general officers. We are 
working with our business process owners and service providers 
to ensure that we all understand what must be done and who is 
responsible.
    We support the priorities established by Secretary Hale and 
have focused our plans and efforts on achieving an auditable 
Statement of Budgetary Resources (SBR) and proving the 
existence and completeness of our military equipment. We are 
making steady progress.
    The Marine Corps is currently undergoing the second year of 
audit on its Statement of Budgetary Resources. It has been 
challenging but both the Department of Defense Inspector 
General staff and the private firm auditing the Statement of 
Budgetary Resources have noted the significant progress made by 
the Marine Corps this year.
    They have already agreed that 11 of the remediation actions 
taken by the Marine Corps are effective, and third quarter 
testing will assess the effectiveness of the remaining 
remediation actions. They have indicated they will provide 
their assessment to me in October.
    We have embraced the lessons learned from the Marine Corps 
and have incorporated them in our departmentwide plan. We are 
also sharing these lessons with the other Departments. We know 
we must strengthen the internal controls surrounding our 
business processes end to end and our systems. We are working 
to do so.
    It is also crucial that we prove the accuracy of our 
beginning balances for our approximately 200 open 
appropriations before we start the final audit of our Statement 
of Budgetary Resources.
    Because of the large volume of supporting documentation 
required during an audit, we know we must have an audit 
infrastructure that will allow the smooth and quick transfer of 
immense volumes of data to the auditors.
    The Department recently received an unqualified opinion on 
our appropriations received process examination as noted by 
Secretary Hale. So, we are comfortable in knowing that the 
amounts appropriated by the Congress are well controlled and 
that we meet the intent of the Congress in allocating those 
resources.
    The Department of Defense Inspector General is currently 
examining the existence and completeness of our ship, 
submarine, ballistic missile, and satellite inventories. We 
believe this examination will be successful and prove that the 
number of assets recorded in our systems of record represent 
the actual assets available. It will demonstrate that we have 
the necessary stewardship over assets important to our mission.
    We are also ready for an examination of the existence and 
completeness of our aircraft and ordnance inventories.
    The auditors have noted that because of the number of 
systems we use in the accounting and reporting, it is critical 
that we perform reconciliations of the transactions between our 
systems in order to support our Funds Balance with Treasury 
(FBWT).
    Our accounting partner, the Defense Finance and Accounting 
Service, has identified an automated tool, the Business 
Activity Monitoring tool, to accomplish these reconciliations. 
We recently conducted a sample manual reconciliation down to 
the penny to ensure that the Business Activity Monitoring tool 
was performing effectively.
    We did find that some adjustments were needed in the tool 
and the Defense Finance and Accounting Service Cleveland is 
working to make those adjustments and expect to complete these 
actions by December.
    Our intent is to use the tool to produce monthly 
reconciliations of our Funds Balance with Treasury linked to 
transaction level details as required by auditing standards.
    Earlier this year we believed our Civilian Personnel Pay 
process was ready for audit. But closer examination by the 
Financial Improvement and Audit Readiness Team, the Department 
of Defense Inspector General, and the Government Accountability 
Office noted that our sampling and testing was insufficient.
    Even though we were not ready for assertion, viewing our 
process through the auditors lens has proven to be very 
helpful. We are now completing the necessary remediation 
actions and retesting and we believe we will be ready for 
examination next summer.
    In addition, the Defense Finance and Accounting Service, 
through an independent public accounting firm, will conduct a 
Statement on Standards for Attestation Engagement (SSAE 16), on 
the civilian pay system. This will complete an end-to-end 
review of our civilian personnel pay process.
    Achieving auditability is challenging, and there is much 
work to be done. We are committed to this effort and we are 
making process.
    Thank you for your interest and support of our efforts. I 
will be pleased to answer any questions you might have. Thank 
you.
    Senator Carper. Thank you.
    Ms. Spangler, do I understand that you are not going to be 
giving a statement but you are here to answer questions?
    Ms. Spangler. That is right, Senator.
    Senator Carper. My first questions, I will just ask one 
question of you and then go to Ms. Matiella. How did she do, 
how did Ms. Commons do?
    Ms. Spangler. Oh, she covers me very well.
    Senator Carper. Fair enough. Thank you. Ms. Matiella.

 TESTIMONY OF HON. MARY SALLY MATIELLA,\1\ ASSISTANT SECRETARY 
    OF THE ARMY, FINANCIAL MANAGEMENT AND COMPTROLLER, U.S. 
                     DEPARTMENT OF THE ARMY

    Ms. Matiella. Thank you. Chairman Carper, Ranking Member 
Brown, Members of the Subcommittee, thank you for the 
opportunity to testify today regarding financial management in 
the U.S. Army and our commitment to achieving auditable 
financial statements.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Matiella appears in the appendix 
on page 54.
---------------------------------------------------------------------------
    Secretary John McHugh, Chief of Staff Odinero, Under 
Secretary Westphal, and all of our senior leaders recognize the 
value and importance of achieving the mandate of the 2010 
National Defense Authorization Act, which requires the Army to 
be audit ready by September 30, 2017.
    Past audits have demonstrated the importance of leadership, 
governance, accountability, competent workforce, effective ERP 
systems, and improved internal controls. We have incorporated 
these factors into our financial improvement plan.
    The Army's leaders, soldiers, civilians 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 decisionmakers, and to assure American 
taxpayers and Congress that the Army is a trustworthy steward 
of public funds.
    I am confident that we will be audit ready by September 
2017 because we have a sound and resource financial management 
plan which conforms to the department's financial improvement 
and audit readiness plan.
    Army senior leaders are committed to providing governance 
and oversight of our audit readiness efforts and will hold 
personnel accountable for achieving specific milestones. For 
example, audit readiness performance criteria will be included 
in senior executive performance plans in fiscal year (FY) 2012.
    Further, we have a solid enterprise resource and planning 
strategy guiding our business systems development and 
deployment. Our plan contains detailed corrective actions and 
milestones, identifies accountable organizations, incorporates 
lessons learned from the Army Corps of Engineers and Marine 
Corps audits, and aligns with our business systems strategy.
    Our plan calls for annual audit examinations by an 
independent public accounting firm each year from fiscal year 
2011 to 2014. These examinations focus on management and 
information technology systems controls and business practices 
in the ERP environments.
    We are now examining three installations and by October of 
next year, 2012, all of our installations, stations, and posts 
will be under examinations.
    The accounting firms conducting these examinations will 
identify controlled deficiencies and issue corrective actions. 
This will enable us to correct the deficiencies in time to have 
assert the general fund Statement of Budgetary Resources in 
fiscal year 2015 and all of our financial statements in fiscal 
year 2017.
    These audit exams will also serve to condition the Army on 
how to support financial statement audits and ensure our 
readiness tragedy is sound and remains on schedule. At the same 
time, we are also ensuring that we have a financial management 
workforce that is knowledgeable in audit requirements and thus 
allowing the Army to sustain these processes and system 
improvements.
    Each year we are repeating a cycle of assessing, testing, 
and identifying deficiencies and corrective actions. 
Additionally, each audit exam expands our assessment of 
business processes and systems controls.
    We recently completed an examination of our appropriations 
which received an unqualified audit opinion from an independent 
auditor. This confirms our ability to receive and account for 
nearly $232 billion of appropriations.
    Execution of our financial improvement plan and enterprise 
resource planning strategy combined with focused senior-level 
oversight and accountability will enable the Army to be audit 
ready by September 30, 2017.
    I am personally committed to accountability and 
auditability. I look forward to continued collaboration with 
the Members of this Subcommittee, your counterparts in the 
House of Representatives, the GAO, Comptroller Hale, DCMO 
McGrath to ensure the continued improvement of the Army's 
business environment.
    I look forward to your questions.
    Senator Carper. Thank you very much for that testimony. Did 
you say personally committed, I am personally committed?
    Ms. Matiella. I am personally committed.
    Senator Carper. We do not hear that every day. Good. 
Thanks.
    Dr. Morin, please proceed. Thanks.

TESTIMONY OF HON. JAMIE M. MORIN,\1\ ASSISTANT SECRETARY OF THE 
     AIR FORCE, FINANCIAL MANAGEMENT AND COMPTROLLER, U.S. 
                  DEPARTMENT OF THE AIR FORCE

    Dr. Morin. Thank you very much, Mr. Chairman. Dr. Coburn, 
thank you also. I appreciate the Subcommittee's invitation to 
testify today and the interest of really the entire Congress on 
this issue. We have had a great deal of interest. If I may, I 
would like to just summarize my written testimony and place it 
in the record.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. Morin appears in the appendix on 
page 62.
---------------------------------------------------------------------------
    Senator Carper. Everyone's testimony will be made part of 
the record. Please summarize. Thank you.
    Dr. Morin. Thank you, sir. Let me just start by saying, 
business as usual is the enemy of success in the financial 
improvement and audit readiness (FIAR) effort at DOD. In the 
Air Force, we are committed to getting to auditability and we 
are committed to not letting business as usual be the enemy of 
success.
    This is a charge I too take very personally and intensely, 
and we very much appreciate the intensified focus that 
Secretary Panetta has placed on audit readiness and the 
leadership that his team and Secretary Gates's team had 
provided.
    Personally, I am a strong advocate of the re-focusing on 
the financial improvement and audit readiness effort that Under 
Secretary Hale has laid in place. His emphasis on getting the 
sort of information that managers use to manage and 
prioritizing that at the head of our audit readiness efforts 
has been very helpful in getting us on the sort of virtuous 
circle where the leaders in the department see the value of the 
audit readiness effort. It ties it more directly to business 
outcomes and things they need to know in order to manage their 
organizations.
    In the Air Force, we have seen already the fruits of that 
prioritization. I have seen additional resources approved by 
the topmost leadership of the Air Force. I have seen additional 
focus from the Secretary, from the Chief of Staff, the Under 
Secretary, the Vice Chief, all of them are seeing the value of 
this effort. It has been a good step in the right direction.
    I think thanks to that focus we have made real progress 
over the last year or so although, to be clear, there is a long 
way to go.
    Some of the key wins that we have achieved. First, a clean 
opinion on our appropriations received from an independent 
public accounting firm. That was a key step that should be able 
to give the confidence to the Congress and the American people 
that we understand how the Congress appropriates money and 
where it ought to be allocated.
    We have also had what looks like a successful assertion on 
our Funds Balance with Treasury reconciliation process. You 
heard Mr. Hale talk about that. That is balancing a check book 
with 1.1 million entries a month. It is not a trivial matter. 
Again, a key step on the way. It does not get us all the way 
there but it is a key step, and that is looking like a good 
assertion there.
    We asserted audit readiness on the existence and 
completeness of our military equipment and several categories 
of our operating materials and supplies like cruise missiles 
and aerial targets.
    Again, I think this is directly attributable to the strong 
commitment of our leadership. In May, our Chief Management 
Officer, Under Secretary Erin Conaton, and our Vice Chief of 
Staff, General Philip Breedlove, wrote to all the commanders of 
the Air Force major commands talking specifically about the 
need for personal accountability on this issue and moving 
forward along our path of senior leader accountability, senior 
executive accountability toward audit readiness goals, 
extending that outside of just the financial community and 
extending it outside of just the headquarters, two key steps.
    We really led the way in building direct financial 
incentives into senior executives performance plans in the Air 
Force, and we have a number of senior executives that have it 
in their plans already. But we are pressing that further now, 
getting it out to the field where the rubber really hits the 
road.
    As we have worked through this substantial number of audit 
readiness assertions over the past year or 2 years, we have 
learned some very important lessons that are helping us as we 
move further down the road.
    For example, we have found that things like lack of timely 
updating of our real estate, our real property accountability 
system was not happening consistently in the field. We are not 
consistently getting that timely updated, and that is the sort 
of decision that actually affects allocation of resources.
    If the system does not know that you own property, you will 
not get the funds to maintain it. So, we have put in place the 
corrections necessary and the training necessary to make sure 
that the folks at a base level are making those transactions in 
their system, recording them timely, saving resources, making 
sure resources are adequately aligned.
    Again, while we have made significant progress toward the 
2017 deadline, I think we do still have a ways to go. The Air 
Force is catching up but we are still behind the other 
services.
    That is in part because our audit readiness efforts for 
quite some many years focused heavily on the balance sheet and 
on valuation of assets which is the area we de-emphasize 
because of the business case analysis on the value of that to 
managers.
    So, our ability to achieve audit readiness I think depends 
pretty heavily on successfully fielding new financial systems, 
modernized financial systems.
    We have a variety of them. Defense Enterprise Accounting 
and Management System (DEAMS) is our fundamental accounting 
systems. We have personnel systems, logistics systems. We need 
modernization because we are relying on 1970s era bookkeeping 
systems that do not conform to the standard general ledger, do 
not roll up transactions at an appropriate level in order to 
produce financial statements that will withstand auditability.
    Again, these systems are good at handling budgetary 
resources as appropriated by Congress and providing controls on 
them. That is what they were designed to do. They do not fit 
the CFO Act and the need to produce financial statements.
    We are trying to follow a deliberate and careful path. 
Again, because we are a little bit behind the other services, 
we have had an opportunity to learn some lessons from their 
efforts.
    For example, we are not pushing wide deployment of systems 
perhaps as fast as sometimes has happened. The DEAMS accounting 
system we have now had in the field at Scott Air Force Base 
for, this will be the second year that we have closed out on 
that system.
    We are getting it stable. We are getting it to a degree 
that it does not drive too much manual workload for the users 
before we turned it on Air Force-wide, but, you know, 
processing billions of dollars of transactions there.
    I think because of the historical challenges DOD has faced 
in major IT acquisition, I do see a moderate level of risk as 
we march toward 2017, and that is, not because we do not have 
plans that get us to audit readiness by 2017 but because those 
plans are contingent on us achieving goals for fielding of 
systems.
    And looking at history, I know that across DOD those plans 
do not always stand up 5 years down the road. So, I do see a 
moderate level of risk. But as a result, we are focusing on a 
sort of belt and suspenders approach here where we are looking 
at our legacy systems, making remediation in those systems in 
some cases where it would be otherwise subsumed by the follow-
on system but we can perhaps give ourselves a little less risk 
toward the 2017 deadline by having both approaches available. 
Again, we do need business systems modernization to get to a 
clean audit.
    So, let me just briefly come back to where I started. We 
cannot rely on business as usual if we are going to get to a 
clean audit by 2017.
    If we are going to achieve the financial modernization, 
better financial practices we need true accountability. We need 
investment in real systems modernization, both our ERPs and our 
enduring legacy systems. We need responsive and effective 
acquisition of IT systems. We need to learn lessons from one 
another, each of the services, and we need involvement to reach 
from the headquarters to the field and from the financial 
community to the broader world.
    We have to be willing to change our processes, change our 
practices; and we have to take this charge seriously. I think 
the Air Force is on the right course and I know that my senior 
leadership is backing me up in this effort.
    Thank you again for the commitment.
    Senator Carper. No, not at all. Thanks, Dr. Morin. Mr. 
Khan.

 TESTIMONY OF ASIF KHAN,\1\ DIRECTOR, FINANCIAL MANAGEMENT AND 
        ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Kahn. Thank you, Mr. Chairman, Ranking Member Brown, 
and Dr. Coburn. Good afternoon. It is my pleasure to be here 
today to discuss the status of Department of Defense financial 
management improvement and business transformation.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Khan appears in the appendix on 
page 70.
---------------------------------------------------------------------------
    As you said, Mr. Chairman, the Federal Government's fiscal 
challenges highlight the need for accountability and effective 
financial management, and this is particularly so at the most 
important and the largest department in the government, the 
DOD. I would like to thank the Subcommittee for holding this 
important hearing.
    In my testimony today, I will summarize three areas related 
to DOD's continuing efforts to remediate its long-standing 
financial management weaknesses and become auditable.
    First, I will discuss the progress made by the DOD 
Comptroller in issuing the Financial Improvement and Audit 
Readiness guidance for DOD military services.
    Next I will highlight the challenges experienced by these 
services in implementing the FIAR guidance. And finally, I will 
focus on improvements needed in DOD's oversight and monitoring 
of its readiness process.
    My testimony is based on recent and ongoing work at DOD, 
including two reports we are issuing today and another two that 
will be issued in the next few weeks.
    First, regarding the progress made. The DOD Comptroller has 
established a focused approach to achieve the FIAR Plan audit 
readiness goals. The Army, Navy, Air Force, and other defense 
agencies, including the Defense Logistics Agency, have key 
roles in implementing this Plan.
    After reviewing the FIAR guidance issued by the DOD 
Comptroller in May 2010, we concluded it provides a reasonable 
methodology for DOD components to follow in developing and 
implementing their individual Financial Improvement Plans.
    Nevertheless, DOD's ability to achieve audit readiness is 
highly dependent on the military services' effective 
implementation of this guidance and that leads me to my second 
point, the challenges experienced by the military services and 
their recent financial management improvement efforts.
    In our recent work, we examined specific areas including 
Navy civilian pay, Air Force military equipment, Fund Balance 
with Treasury at the Marine Corps and Navy, the Statement of 
Budgetary Resources audit efforts at the Marine Corps, and the 
Army and Air Force's business systems. We did find significant 
weaknesses in each of these areas.
    As discussed in our report released today, the Navy and Air 
Force did not follow the FIAR guidance in implementing the 
Financial Improvement Plans that we reviewed--Navy civilian pay 
and Air Force military equipment. As a result, they did not 
conduct sufficient or appropriate work to support their 
conclusions that these two areas were ready for audit.
    In another example, auditors for the Marine Corps fiscal 
year 2010 Statement of Budgetary Resources issued a disclaimer 
of opinion, meaning that they were not able to audit those 
financial statements even though the Marine Corps had concluded 
that the statements and underlying financial transactions were 
ready for an audit. The processes identified 139 internal 
control weaknesses that need to be addressed and remediated.
    The Marine Corps has begun making progress. But our report 
issued points out that the remediation efforts were focused on 
short-term heroic efforts that may not result in sustained 
improvements over the long-term.
    Our preliminary work has identified significant weaknesses 
in the Navy and Marine Corps's ability to reconcile their Fund 
Balances with Treasury. This reconciliation, as Ms. Commons 
mentioned, is a procedure similar to reconciling a checkbook to 
a monthly bank statement.
    It is a key step in achieving accurate financial 
information, tracking available budgetary authority and 
preparing a reliable Statement of Budgetary Resources.
    Preliminary results of another audit identify significant 
weaknesses in the implementation of two major IT systems. The 
effectiveness and timely implementation of such systems is 
crucial to DOD-wide audit readiness and meeting the fiscal year 
2017 goal.
    My third point deals with the need for effective DOD 
oversight and monitoring of the FIAR implementation effort. DOD 
and the military services have designated offices and 
established committees responsible for overseeing audit 
readiness efforts.
    However, these responsibilities were not carried out 
effectively. As a result, the Navy and Air Force incorrectly 
asserted audit readiness in two key audit areas.
    Oversight and monitoring are important for keeping 
improvement efforts on track, making steady progress and 
ultimately achieving auditability goals and within the 
timeframe designated.
    Effective oversight can also help to ensure that lessons 
learned are disseminated throughout the services so others can 
avoid similar problems.
    In closing, I am encouraged by the recent efforts and 
commitment by DOD leaders. However, the challenges that I am 
highlighting are significant and include putting into place 
some very basic building blocks of sound financial management 
with effective oversight and monitoring of the process.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions that you or other members may have.
    Senator Carper. Good. Mr. Khan, thanks. And thanks to all 
of you for your statements.
    Let me start with you, Mr. Khan, if I could. I have a 
friend whenever he is asked, how are you doing, he says 
compared to what. I want to ask really a variation of that same 
question.
    How are we doing compared to the last time we met here? 
Some of you testified, I think you were present. How are we 
doing compared to roughly a year ago? How are we doing? Are we 
doing better and where are the areas we should be most 
concerned about?
    The last thing I want to say is what do we need to do. What 
do we need to do on our end? Those are like about three 
questions. How are we doing compared to what, a year ago? What 
should we be encouraged about? And you said some of this 
already. What should we be concerned about? What do we need to 
do to help make sure we stay on the right path?
    Mr. Kahn. Senator Carper, the positive is that there is a 
good plan. The key is in implementation of the plan. Last year 
we had mentioned that the plan has some phases which need to be 
filled out. That is an important element.
    So, in one way DOD does have a plan. However, the path is 
not clear to reaching auditability by 2017. The Comptroller 
office, I understand, is working on defining the remaining 
steps of the FIAR Plan.
    However, the picture changes when we begin to look at the 
components. Admittedly, the plan has to be executed and it has 
to be executed properly. Based on what I have mentioned and the 
reports that we have issued today, the results are very mixed, 
and that is of concern.
    One key point. The systems have to be implemented and be in 
place well before 2017, and just looking at the time line it is 
a bit worrying because their completion time line is very close 
to 2017 to be able to affect a successful audit. Thank you.
    Senator Carper. My last question. How do we help? What can 
we do at our end? And I asked this question a lot as my 
colleagues know. What can the Legislative Branch do here?
    Sometimes the answer is more resources. Sometimes it is get 
somebody confirmed for a position of leadership. A lot of times 
I hear the answer to that question is do more oversight, keep 
doing what you are doing, keep putting a spotlight on whatever 
the issue of the day is, and keep holding us accountable. What 
advice would you have for us?
    Mr. Kahn. I am going to reiterate what you have just said, 
Senator Carper. One of the issues that I have mentioned is 
stronger oversight and monitoring of the implementation of the 
plan itself that would be critical to understanding where the 
shortfalls are, and not allowing some of these areas to go 
forward when they would not be likely to succeed.
    Similarly, I would like to reflect the same point for you 
is oversight hearings are important because they really help to 
focus on what the issues are and to be able to focus resources 
to resolve those issues.
    Senator Carper. I would note to our witnesses and to our 
audience and to my colleagues, when the President spoke last 
Thursday evening and addressed the Nation in the joint session 
of Congress, he had a lot of great applause lines but none of 
them dealt with the clean financial audits statements or 
audited statements.
    We had the Republican, and I think it was the second of a 
series of Republican debates, Presidential candidate debates, 
and not one of them ever touched on this issue to either draw 
applause or just to make a point.
    However, our colleague Scott Brown just led a cadre over to 
Afghanistan. One of the things I want to make sure that we do 
with Afghanistan when we pretty much pull out by the end of 
2014 is that we leave behind a country that can feed itself, a 
country that can govern itself, and a country that can defend 
itself.
    And more than most people would realize are doing these 
jobs well, our ability to do these jobs well, to better ensure 
that we have that kind of success 3 or 4 years down the line is 
to improve financial management.
    Somebody talk to me about the selection of independent 
auditors. We have heard a lot of discussion of independent 
auditors for this or that or the other. How do we select those? 
How do you all select those? And we will start with the 
comptroller, Mr. Hale, do you want to take a shot at that?
    Mr. Hale. Sure. We have a blanket purchasing agreement, it 
is called. We did that competitively. All audit firms that were 
interested and could meet our requirements could bid, and we 
selected a number of them. I want to say six, about six audit 
firms, teams.
    Then when we have a particular task, they go out to the 
teams, they give us a price estimate, but they have been pre-
qualified. So, it is a lot quicker at that point.
    So, it is a competitive process, and we have several audit 
firms working right now. If I may say so I think this is a good 
way to go. I believe in plans. We can probably do better with 
the plans.
    But we are learning so much because when you finally get 
somebody looking out there that actually does this for a 
living; they are really auditors; they know financial audits. 
We do not at the Department of Defense, frankly.
    They have helped us immensely, because they can often say, 
``you are not going to make it here but if you did this . . . 
.'' They cannot do it for us, but they can say, ``if you did A, 
B, and C, you would be OK.''
    I think it has been enormously helpful in the case of the 
Marine Corps. We got some advice on appropriations received 
although we got a clean opinion there. I think it will be true 
in many of the Independent Public Accountant (IPA) engagements, 
Independent public accountant engagements that we have in mind 
for the future.
    Senator Carper. Does anybody else want to add or take away 
from that response? Anyone else? OK. Who are the firms? Can you 
give us some idea of the firms, who the firms are?
    Mr. Hale. May I give you that for the record. May I do 
that? I can name a couple of them but I do not want to not name 
all of them. Is that OK?
    Senator Carper. Oh, sure.


                       information for the record


    The Department has established a Multiple Award Purchase 
Agreement (BPA) for Financial Management System Auditability 
Assessments, Audit Readiness Validation, Examinations and Audit 
to acquire the services to perform validations for Service 
interim goals. Six firms are awardees for the BPA--they are as 
follows:

     LErnest & Young LLP
     LKearney & Company, PC
     LKPMG LLP
     LPricewaterhouseCoopers LLP/Grant Thornton LLP
     LWilliams, Adley & Company DC, LLP
     LLani Eko & Company, CPAs, PLLC

    Mr. Hale. You would recognize them. I mean, I can tell you 
one for sure. Grant Thornton is working on the Marine Corps 
audit. KPMG and Price Waterhouse Coopers are two that we have 
used so far.
    Senator Carper. Thanks. To change gears just a little bit. 
My colleagues often hear me say everything I do I know I can do 
better. One thing they do not hear me say as much is I learn 
more from my mistakes probably than what I do well. And the 
Marines are the first on the beach trying to lead the way into 
this promised land. We are delighted with that.
    What have you learned from your mistakes and missteps along 
this path, in particular? And what have you learned that you 
think might be informative to our other services, our other 
departments that are here today?
    Ms. Commons. First off, I will let Caral, since she is much 
closer to this than I am. But certainly, we have learned that 
we must validate our beginning balances before we go to audit. 
We know that we must tie out our transaction level detail to 
the general ledger accounts. If we cannot do that, it will be 
very difficult to get an audit opinion.
    We also learned from the Marine Corps that we need an audit 
infrastructure. We need to have a methodology for passing 
information to the auditors, and it is a large volume of 
information.
    We have also learned from the Marine Corps that we need to 
get everybody involved. Leadership, business process owners, 
our service providers. This is not just a financial management 
problem. We need to look at our business processes end to end 
and make sure that those processes are compliant as well.
    So, we have learned a tremendous lesson from the Marine 
Corps stepping out and starting this audit. Certainly, we have 
incorporated those lessons in our plans. Caral.
    Senator Carper. Ms. Spangler, my time has expired. I am 
going to yield to Senator Brown.
    Senator Brown. Why don't you just go ahead.
    Senator Carper. Why don't you just respond if you would and 
then I will yield to Senator Brown. Thanks.
    Ms. Spangler. I would actually say that some of our lessons 
learned are summarized in the GAO report, and we would agree 
with a lot of those lessons learned, and we can see the other 
services picking them up and running with them.
    As Ms. Commons talked about, some of just the very physical 
things, logistics challenges of dealing with the audit and the 
volumes of data, we had to establish a Web site to be able to 
take in all the data as opposed to what the Army Corps of 
Engineers did which was have boxes and boxes of information.
    To the more esoteric type issues, we have also learned 
things like ensuring the documentation is there. In some of our 
older accounts, that has been a problem for us. We also have 
put in place reconciliation actions. We have been working with 
DFAS, the accounting service, to make sure----
    Senator Carper. What is DFAS? I am sorry.
    Ms. Spangler. The accounting service. I am sorry. To make 
sure that they have all the reconciliations in their repeatable 
processes, and that lesson has been translated to the other 
services and is being reflected in their plans.
    We also learned about establishing relationships with the 
people that do business for us, that work with us, the service 
providers in making sure that they understand what their role 
is.
    Also just preparing for the logistics challenges and then 
rehearsing our response to it, we found that it was very 
difficult sometimes to pull the data accurately the first time 
and get it posted and sent to the auditors. So that is 
critical. And if the other services would do things like 
rehearse that, that would be very beneficial.
    Senator Carper. Good. I am going to telegraph a pitch and 
the pitch I am going to telegraph is the next question when it 
comes back and I get to ask a question. What I am going to ask 
is how do we go about sharing what is working and what is not 
working? For example, how do we share what we learned with the 
Marines, with other departments, with the Navy as such? Do not 
answer now, but also with the Air Force, and the Army. That is 
my next question.
    Senator Brown. Thank you. Of course, Mr. Chairman, I always 
like to give you leeway.
    Senator Carper. I wish that my other colleagues were as 
considerate.
    Senator Brown. I will remember that.
    So, the Marine Corps should be commended for being first 
up. I mean, they are always the first into battle usually. So 
that does not surprise me.
    They started the audit in 2010 and it was ultimately 
unsuccessful and now we are told it will be 2012, 2013 before 
they can reasonably achieve a clean opinion, and it is just one 
part of the overall audit, the smallest part at that. I know 
there is a learning curve.
    However, Mr. Hale, how does this time line, 5 years to see 
an assertion and a clean opinion affect your confidence about 
being audit ready to the degree that you had planned by 2017?
    Mr. Hale. Well, as you know, the law requires audit 
readiness, so, I am cautiously optimistic we will make that by 
2017 DOD-wide.
    I am more optimistic that we will make it for the high 
value information that we actually use every day, the budgetary 
information, and accounts, and locations of our assets.
    But I hear your point. We need to pick up the pace. I am 
counting on a learning curve. Once we get to audit-ready, it 
will take a couple of years to go through this process. We have 
seen this with the Army Corps of Engineers. It actually took 
them about 6 years. They were doing all of their statements.
    We are seeing it with the Marine Corps. I am sure we will 
see it with the other services, because once you jump into the 
pool, we discover there are things that we did not expect that 
we have to fix.
    Senator Brown. Do you think you will see similar types of 
up and downs--learning curve issues?
    Mr. Hale. I do. We will learn some from it. I will answer 
the Chairman's question in a moment. But you cannot learn to 
swim on the beach. I mean, until they are actually under 
audits. That is why I am so anxious to do these validations, 
take pieces of this and get started and let us learn from the 
independent public accountants who do this for a living, and 
then we can fix those problems and we will be that much further 
along.
    Moreover, we will begin to establish some knowledge on the 
part of the auditors of our business processes. That is another 
thing is that when the auditor comes in, they do not know us 
either, and so it takes them a while to get up to speed so they 
can function effectively.
    Senator Brown. Sure. I guess if we assume that all of DOD 
is audit ready by 2017, we could reasonably assume that the 
entire department will be able to receive a clean audit by 
2020. That is a full 30 years since the passage of the CFO Act 
in 1990.
    But considering 2017 is looking optimistic, would 2025 be a 
more accurate estimate for the clean opinion for DOD?
    Mr. Hale. I am sticking with 2017 for audit-ready.
    Senator Brown. OK.
    Mr. Hale. But I hear your concern about the fact that it 
has been so long. To be candid, in the early years--it was 
actually 1994 that they passed the Government Management Reform 
Act that required auditable statements.
    Senator Brown. Thank you.
    Mr. Hale. In the early years, there was just not a 
commitment by senior leadership on the part of the Department 
of Defense, and it has been variable, frankly, since then.
    But I believe in this Administration there has been a 
commitment from day one. The comment has never been as strong 
as it is right now. I have never briefed Secretary Panetta in 
the first month that he was in office on audits. That is a 
first. So, he clearly has a commitment, I think stronger than 
anything we have seen before, and that is going to help a lot.
    Senator Brown. Just as a side note. As I said, I did go to 
Afghanistan and speaking with a lot of the leaders on the 
ground, General McHale, for example. He indicated to me that he 
has 50 independent audits going on right now. Fifty, and a lot 
of the questions are from different entities, different groups, 
and they are saying the same thing.
    I would like to maybe speak to you and Mr. Khan and whoever 
else, obviously the IG too, as to whether our soldiers there to 
do audits or to do the mission? And is it affecting readiness 
and safety and security? So, that is just a side note. Maybe we 
can talk off-line.
    Mr. Khan, does all of what you just heard from Mr. Hale 
seem reasonable in light of the challenges you have described 
in your reports?
    Mr. Kahn. I have concerns about some of the challenges that 
we have highlighted in our report and that really is the 
implementation of the plan by the components. In a few areas 
that we have looked at over the last 12 months, the results 
have been very mixed. I wish there was something more positive 
to add.
    Senator Brown. I just want the facts. You do not need to 
sugarcoat it. I appreciate your honesty.
    Dr. Morin, I think you are the newest one here, the newest 
and freshest face in the DOD having been appointed in 2009, 6 
years on the staff of obviously Senate Budget.
    As a relative outsider, what is your perspective on 
addressing the challenge from your own recent experiences?
    Dr. Morin. Senator Brown, I think that the perspective I 
have developed on the Air Force's audit readiness efforts is 
really threefold.
    First of all, the intense importance of senior leadership 
commitment. The fact that the Secretary of the Air Force is a 
former Air Force comptroller, the fact that Secretary Hale is a 
former Air Force comptroller provides me with a lot of top 
cover, a lot of engagement, a lot of focused interest that 
helps motivate the entire organization.
    The second point is that breaking this effort out of a 
purely financial lens into an operational lens, into a lens 
that crosses all of the various stovepipes that make up a big 
institution like the Department of Defense or the Air Force is 
absolutely key.
    We will not get to audit readiness without aggressive 
involvement from the personnel community, the acquisition and 
contracting community, without aggressive involvement from the 
logistics community, and many others.
    If it does not play in the field and if it does not play in 
those silos of functional expertise that hold much of the data 
and conduct much of the business activities of the department, 
we will not get there.
    A third piece is that there really is not at present a 
culture in the department of managing from financial 
statements, and it is probably the case that there will not be. 
The government agencies that have clean audit are not generally 
managing from their financial statements, and that is why Mr. 
Hale's focus on the Statement of Budgetary Resources 
specifically is a useful bridge.
    It is the entry point into the relevance of the financial 
statements, because the managers in the department do 
understand how to do their budgetary accounting and how to 
understand what appropriations they have available and how they 
expend them. So that helps us down the way of using these to 
actually run our business type operations and squeeze the 
maximum amount of combat capability out of each dollar we have 
entrusted to us.
    Senator Brown. I will save for the next round, if that is 
all right.
    Senator Carper. Let me come back to, if I could, to 
Comptroller Hale on Secretary Panetta's statement. As I 
mentioned in my opening statement, the words of the Secretary 
over here are not the kind of thing we always hear from 
Secretaries of Defense. I have known a bunch of them. I do not 
recall everybody being quite this direct on this subject.
    He said much of the same thing in my office about a month 
and a half ago. He said that in any number of forums and people 
start to believe them. I think it is just usually helpful to 
have the person at the top saying this is what one of our key 
goals and to hold people accountable.
    But I applaud his commitment to the goal and I am going to 
work during my time as Chairman on this Subcommittee to partner 
with the department toward this goal of better accountability.
    As I said earlier, war fighters are counting on us. 
Frankly, so are the taxpayers, because we spend money we do not 
have and we have to do our best efforts for our war fighters. 
By the same token, we have to face these huge deficits as you 
know, and we have to be all over them.
    I will not repeat the Secretary's words. They are here for 
us to see. But, Comptroller Hale, could you just tell us what 
changes are forthcoming and how you plan to continue to respond 
to Secretary Panetta's commitment to not only meet the 2017 
goal of auditability but to meet the Secretary's challenge of 
becoming auditable before 2017?
    Mr. Hale. Well, I am working actively with Secretary 
Panetta and his senior staff. I do not want to get ahead of him 
on this. So, I am not going to make a pronouncement. I am going 
to let him do that. I think it will be soon. He has a lot on 
his plate as he addresses issues from Afghanistan and the 
budget and everything in between. But he is very interested.
    I think my jobs are two. The main one is to serve him and 
make sure I do what he wants. But also, frankly, to figure out 
how I can exploit his interest in order to make this process 
move faster and place more emphasis on the effort of the 
Department.
    Senator Carper. It is enormously helpful to be able to say 
to folks up and down the line in the different branches of our 
armed forces, the Secretary says we are going to get this done.
    Mr. Hale. It is enormously helpful. I have used that phrase 
already. I think all of us at this table and all of the DOD 
employees are well aware of it.
    Part of my job is to make sure everybody in DOD is aware of 
it, and we have some thoughts on how to do it. So, I know I am 
being vague but I do not want to get ahead of him on this. I 
have given him some suggestions, but I need to let him decide 
how and when and what he wants to do and how and when he 
announces it.
    Senator Carper. All right. Let me just ask our other branch 
witnesses, and Ms. Spangler, you might get your shot here.
    But if you all could take a moment and tell us in as much 
detail as possible what your branch is doing to help meet 
Secretary Panetta's new goal. And do you want to just lead it 
off and then we will turn to the folks from the other branches?
    Ms. Spangler. I think by leading the charge on the 
Statement of Budgetary Resources and sharing those lessons 
learned with people, I mean, we were in progress on doing that. 
I think we will have some notable successes this fall.
    We do not know yet what the result will be. But as Ms. 
Commons said, she is waiting for them to come back to her in 
October to give us an assessment of whether we can keep going 
with the effort. The lessons learned I think do translate to 
the other services, and I think that is part of what we are 
doing to lead the charge.
    Senator Carper. Ms. Commons, do you want to add or take 
away anything away from that?
    Ms. Commons. We have a very aggressive schedule. We 
anticipate that by 2013 we will be ready for audit on our 
Statement of Budgetary Resources. So, we are very aggressive. 
We are focused. We are putting our energy and our resources 
behind this effort, and I am cautiously optimistic that we will 
get there and that we will meet our deadline which is well 
ahead of the 2017 deadline.
    Even if we do not make 2013, I believe we have enough time 
built into our schedule to self-correct and that we will get 
there.
    Senator Carper. Is it true that as Governor of Mississippi, 
Governor Mabus could have cared less about clean audited 
financials? Now he is starting to get religion. Is that true?
    Ms. Commons. I cannot speak for what kind of religion he 
had as Governor. I can tell you that he is fully committed to 
this effort. He is supporting us and we are working very hard.
    Senator Carper. I am just kidding. We were Governors, not 
at the same time, but I thought he was a great Governor. 
Staying in the religions vein though, every now and then I say 
people need ``a come to Jesus message'' from one of their 
leaders and I think the Secretary of Defense has provided that.
    How about the Army?
    Ms. Matiella. It is very important to Secretary McHugh and 
the senior leadership to make a resource-informed decisions. 
Given our budget situation, it is important, like you said, to 
stretch a dollar as far as we can and to use it as effectively 
as possible, and the way to make those resource-informed 
decisions, the way to implement a cost culture that will be 
effective is to have accurate and timely data.
    And for that reason, it is important to our senior leaders 
to change that, to change the systems, to change the practices, 
to change the controls, to change our workforce so that they 
are able to create this accurate data, capture accurate data, 
and present the information to our leadership and our leaders 
that will help them make these resource-informed decisions, to 
make the best possible decision that in terms of what to buy, 
when to buy it, how much it costs, and so, I believe that 
auditability will help us in our endeavor to develop a cost 
culture.
    Senator Carper. Mr. Morin, would you respond to the same 
question on behalf of the Air Force?
    Mr. Morin. Absolutely. Well, I can begin with the personal 
level where the Under Secretary Chief Management Officer of the 
Air Force, Ms. Erin Conaton, was, in a previous job, the staff 
director of the House Armed Services Committee at the time that 
that Committee initiated the legislation that gave us the 2017 
audit deadline.
    So, to say she feels a personal commitment to that effort 
and that she is driving----
    Senator Carper. That is encouraging.
    Mr. Morin. Yes. It really goes without saying but I said it 
anyway.
    On the few substantive issues where I think the Air Force 
is leading the way, even though across-the-board we are behind 
the other services, is the Funds Balance with Treasury 
reconciliation effort that we have done working very closely 
with the Defense Financing and Accounting Service. I think that 
is going to be helpful for the other services.
    We use different systems so they just cannot take our tools 
wholesale. But working through that process and getting to 
99.997 percent reconciliation each month, which is where we are 
right now, is a useful example.
    I think our effort to lead on the personal accountability 
issue and the tying audit readiness outcomes to senior 
executives performance goals is helpful. Working with Mr. Hale 
on that has been rewarding.
    And though we are still working through some discrepancies 
and some corrective actions associated with our existence and 
completeness of military equipment assertion, we were further 
along on that in many respects and I know that the other 
services are learning from the work we have done there and the 
input that has come from the GAO and the office of the 
Secretary of Defense on that assertion.
    Senator Carper. Good. Thanks. I said earlier at the end of 
my last questioning I was going to ask you how you cross 
pollinate from lessons learned. When I have another shot, I 
really am going to ask that question. Senator Brown.
    Senator Brown. Thank you. This will be my last round 
because I have to get ready for our votes. I just have a few 
questions. I need to make sure I understand one of the issues 
that we are working on.
    But, Ms. McGrath, you look lonely so I figured I would ask 
you a question.
    In considering the importance to the overall FIAR efforts, 
this is also a concern as the pressure builds to fully deploy 
the ERPs. There has already been criticism of some of the ERPs 
regarding the number of interfaces and manual workarounds that 
are required to fully integrate these systems into the current 
financial accounting environment. These systems were intended 
to solve a lot of these issues, not create more.
    How are you ensuring that the components are fixing the 
major weaknesses with long-term solutions and not just creating 
more kind of bureaucracy and overlap and similar problems?
    Ms. McGrath. Thank you very much for the question. You have 
heard a lot today in terms of themes, business process re-
engineering; taking an end-to-end perspective; the engagement 
from across functional perspectives so it is not just the 
financial community. It is all across the department.
    And in my opening statement, in our written testimony, it 
articulates, really, the different approach the department is 
taking not only to audit, but our entire business environment. 
We really are looking from an end-to-end perspective.
    You tend to see the disconnects in the system 
implementations. What we are doing is ensuring that we are 
identifying what those lessons are and baking those into our 
overarching business process re-engineering.
    The National Defense Authorization Act, Section 1072 
actually was very helpful in illuminating our collective 
responsibility to identify appropriate Business Process re-
engineering (BPR) so that before these systems go into 
implementation, there is a documentation path that is 
articulated, that says, ``I understand how I am going to 
execute my business and how this system plays in doing that.'' 
And part of that documentation is the identification of the 
interfaces that are needed.
    Historically, what we would do is deploy a logistics 
system. It would define its own interfaces; and now, we are 
saying, ``well, really, are those the right ones? How would you 
best optimize the entire business environment? ''
    So, we are identifying interfaces that do not need to 
happen anymore, trying to maximize the investment that we have 
made than not only in the ERPs but those capabilities that 
surround it. So, it is a much broader, wider aperture regarding 
systems implementations.
    Some of what you have heard today in terms of the learning 
experience to turn on these systems once you have identified 
you have a stable platform, you have gone through the initial 
operational test and evaluation, then you ought to turn it on 
because that is the best way to learn and that is the best way 
to also identify the change management in both challenges and 
opportunities that come with systems implementations.
    So, it is a long answer.
    Senator Brown. No. Fine.
    Ms. McGrath. I would also say that it is more than just the 
system itself. It is all the surrounding conversation that 
happens with the implementations.
    Senator Brown. Well, thank you. I appreciate that.
    Ms. Matiella, as a long-term DFAS veteran, how has this 
informed your experience with a working relationship between 
DFAS and the Army in regard to the audit readiness?
    And then take it a step further. What are your concerns 
regarding the interaction that is required and the impact that 
the potential problems at DFAS have on the Army not being at a 
State of readiness?
    Ms. Matiella. Having worked in DFAS, I saw people work 
extremely hard with a very high customer service ethic. They 
are doing the best they can with what they have, and they too, 
just like us, they have systems that are not creating 
transaction level information that updates general ledgers. 
They have obligations that come in bulk instead of at 
transaction level.
    So, whatever challenges we say that we have with our 
financial data and the way it is being created by our feeder 
systems or within our accounting system they have those same 
challenges.
    And so, there has been a lot of manual workarounds both on 
their part and our part, and that is why they are equally, I 
think, supportive of us changing to systems that are more 
compliant because it will help them as well as us do our work.
    They are, I think, equally mindful of the fact that we have 
to change, that we have to improve what we are doing, and they 
are our No. 1 cheerleader in terms of getting a clean audit, 
and I am 100 percent confident that DFAS will help us get 
there.
    But again they too have to change like we have to change. 
So, it will be a challenge for them as well as for us.
    Senator Brown. Thank you. And, Ms. Commons, with a career 
spent in Navy financial services, I would like to get your 
perspective on the challenges that you faced with this issue 
over the years and how you are addressing it in your leadership 
role now.
    Ms. Commons. I was the principal deputy in 1994 when the 
Act was passed, and I can tell you that we tried at that point 
in time to get interest in auditable financial statements.
    At that time, it was really viewed as a financial 
management issue and certainly the leadership pushed it right 
over onto my plate. I kept saying it is not just a financial 
management issue.
    And so, we have come a long way in establishing this as a 
department-wide issue across all of our business processes and 
with all of our stakeholders.
    Also, back in 1994, we tried to do everything. We tried to 
do every statement, and it was just too much of a bite of the 
apple. So, I was very gratified that Secretary Hale brought 
focus to this initiative and that we could focus on two things 
as opposed to trying to do everything within the statement.
    That has been very helpful for us. We are working lockstep 
with DFAS Cleveland. They are very supportive of us. In fact, 
we have what we call a monthly drumbeat with them to talk about 
progress and the things that we need to accomplish.
    So, it is a very different environment and culture from the 
time I was there in 1994.
    Senator Brown. Very well. Thank you for that thorough 
answer.
    Thank you, Mr. Chairman, for holding the hearing.
    Senator Carper. Not at all. I said to the fellow sitting 
behind you, our staff, one of the principal authors, maybe the 
principal author of the Chief Financial Officer Act was Senator 
Roth, our senior Senator, and I worked in the House as a 
Congressman but after that period of time. But he is deceased 
now.
    But in terms of legacies for him, if we are able to 
continue on his path and actually achieve the auditability and 
get some clean audits by 2017 or thereabouts that would be a 
great legacy for him, and a very good thing I think for our 
country.
    I want to come back, and somebody mentioned and I am not 
sure who maybe it was Ms. Matiella mentioned I think 
workarounds. I want to come back with a different question on 
workarounds and direct to Ms. McGrath, if I could.
    I think in his testimony Asif Khan explained that following 
the implementation of the Army's general fund, the enterprise 
business system, approximately I think he said two-thirds of 
the invoice and receipt data must be manually entered, and 
eventually this type of increasing amounts of repetitive data 
entry become infeasible due to the amount of data that would 
need to be entered in the Air Force system.
    The Defense Enterprise Accounting and Management System. 
Workarounds are needed to process data such as travel debts 
data I believe. This seems to be maybe an odd situation. And 
when we see a huge increase in data entry costs by implementing 
a modern billion-dollar financial system, it just seems counter 
intuitive to me, and maybe to others as well.
    But I would just ask Ms. McGrath, can you explain how you 
are working with the different branches as they implement these 
very expensive systems to make them as efficient as possible, 
make sure that these types of workarounds and manual entries 
are not ultimately necessary?
    Obviously, these problems are not sustainable and they 
cannot be allowed to continue to occur. Would you tackle that 
for us?
    Ms. McGrath. Sure. I would also ask that Dr. Morin and Ms. 
Matiella augment as necessary.
    Senator Carper. Would you all be willing to do that? They 
said yes.
    Ms. McGrath. Yes. I think, too, with the DEAMS, the Air 
Force's financial system is still in what we call a ``tech 
demo'' status----
    Senator Carper. Tech demo, I wanted to use that word today.
    Ms. McGrath. It is a technical demonstration. I tried not 
to use an acronym.
    Senator Carper. Thank you.
    Ms. McGrath. It has, for 2 years, been deployed at Scott 
Air Force Base to learn, and then to educate the workforce. You 
have heard a lot today about business process re-engineering 
and change management challenges.
    A lot of the change management comes to folks who have been 
doing their jobs for a very long time the way they have been 
doing it. We have now introduced a new, modern capability that 
has a lot more controls and rigor, that they are not 
necessarily accustomed to.
    They would like flexibility but flexibility equates to non-
standard data which then does not enable a clean financial 
opinion, nor does it necessarily equate to a smooth 
transaction.
    With the implementation of the systems, it is really a 
significant change management challenge, and referential 
integrity that comes with the implementation of these systems 
is really what we are after from an audit perspective, so that 
you can rely upon and trust the data that comes out the other 
end.
    At the end of the day, what we are all after it is the 
clean data with which to make decisions.
    As we implement these systems, again the DEAMS Air Force 
solution is in a tech demo status. So, before we deploy it to 
other Air Force bases, we want to ensure that we have 
identified and eliminated as many manual workarounds as 
possible before it goes to the next. We are looking for DEAMS 
to deploy to five additional bases once it has completed its 
operational test and evaluation, which is scheduled for March 
or April of next year.
    As I mentioned earlier, I think turning on these solutions 
is a significant way to learn what else you need to fix and 
what changes you need to make not only from a systems 
perspective, but also from a people perspective. And I would 
give the same but shorter answer from a GFEBS perspective.
    Senator Carper. What is GFEBS?
    Ms. McGrath. I am sorry. The Army's accounting solution, 
General Funds Enterprise Business System. It deployed to many 
different additional sites, and so the number of users 
significantly increased in a short amount of time.
    So again, we went to a different population. We are 
learning a lot more about both of the types of users. We talked 
a little bit about the DFAS involvement and also the Army 
involvement, and again I think we are ensuring that we document 
all of the feedback from implementation so that we can make the 
appropriate course corrections; again, system changes, people 
changes, business process.
    And so, turning on the system, although there are going to 
be-we expect, I will say, some bumpiness when we turn it on, 
but we want to learn from what is happening so that we can, at 
the end of the day, make it the solution that works from a 
business process perspective, a change management perspective, 
and a data conversion.
    Senator Carper. All right. I think you said you were going 
to yield to our friends from the Army and the Air Force.
    Do you all agree with anything she just said?
    Ms. Matiella. The Army is deploying our GFEBS or accounting 
system very aggressively. We are going to be done with full 
deployment of the General Funds Enterprise Business System by 
next year at this time.
    There is a lot of change management. One of the things 
about change management is that people have to learn new 
business practices. It is not business as usual as Dr. Morin 
said. They have to learn new business practices.
    The old system would allow for weak internal controls, bad 
practices. GFEBS does not. GFEBS has a lot of edits. So as 
people are learning how to deal with these edits, there is 
going to be anxiety. There will be more data input problems.
    It is not that the system is bad. It is just because it 
requires a lot more discipline. And so, at this point as we go 
back to the installations that have been on it the longest, 
those are the installations that can use it the best. The ones 
that have been on it the least are the ones that are still 
probably having higher anxiety levels.
    In the end, the system works. There are no data integrity 
problems and we are improving it. For example, that 40 percent 
acceptance rate is now up to 70 percent acceptance rate for 
invoices. So, it has changed the management.
    I am confident that as we train our folks to use it, as 
they learn over time how to use it and become accustomed to 
this added discipline and additional edits that we will get to 
where we need to go in terms of accurate and complete data.
    Senator Carper. Mr. Morin, just very briefly, anything you 
want to add?
    Dr. Morin. I think the others have said most of the key 
points but I would just point out one thing which is the fact 
that these systems, these enterprise research planning systems 
have interfaces that do not always work is most often a feature 
not a bug in that it reflects feeder systems and data from 
feeder systems which is not reliable.
    So, our procurement feeder system to Deems, the interface 
is not working well because the data in the procurement system 
is not good and it is not formatted consistently as Ms. 
Matiella said.
    So, what that does, the implementation of these more 
rigorous systems brings to light the process problems and the 
systems problems that are around the rest of the enterprise. 
So, I think it is helpful and it is yet another reason why we 
have to turn these things on and try them rather than maybe 
build the perfect plan and only then confront it with the real 
world.
    Senator Carper. OK. Our voting has begun on the Senate 
floor so we are going to have to wrap up here in a few minutes. 
What I would like to do is come back to the question I said I 
was going to ask and now I am going to ask it.
    In the National Governors Association (NGA), during my old 
job as Governor, we used something called the Center for Best 
Practices which is really a clearinghouse for good ideas.
    We could learn from other States what they are doing well 
or what they did not do well. We learn from their mistakes. A 
good idea. It is still used in terms of some of the good work 
in different venues here as we approach better financial 
auditing and accountability.
    But how do we impart to other departments, whether it is 
Army, Navy, Air Force, Marines, how do we impart to other 
departments lessons learned? How do we do that in a consistent 
way and a helpful way?
    Mr. Hale. Let me start.
    Senator Carper. And I am going to ask you to be very brief.
    Mr. Hale. OK. We have set up a structure for governance by 
the Chief Management Officer but a quarterly meeting of a group 
that Beth McGrath and I chair also has service FMs on it, a 
number of others, and the Defense Chief Management Officer 
(DCMOs) from the services; and we have had a number of 
presentations at these sessions about lessons learned, 
especially from the Marine Corps audit because we are learning 
so much, and frankly we have had a number of problems.
    I think that is one forum in which we can exchange 
information. My Deputy Chief Financial Officer, Mark Easton, 
who is sitting behind me, also chairs a monthly meeting of 
financial operations folks in the department, each of the 
military departments. They share information there.
    If we have a center for excellence, I think it would be the 
Defense Finance and Accounting Service. They are going to be 
involved in every one of these audits because they serve all of 
the departments as service providers, and they have set up a 
team focused on audit, and part of what I have asked of Terroy 
McKay, as the Director, is to make sure we are exchanging 
information.
    So, we are trying, but there is no substitute for jumping 
in the pool. We are not going to learn to swim unless we do 
that. So, I am anxious to see us actually try these 
validations, and as soon as we can actual audits.
    Senator Carper. Another comment. Mr. Morin.
    Dr. Morin. I think Mr. Hale has left out an important 
point.
    Senator Carper. What is it?
    Dr. Morin. His staff is a center of excellence for the 
department as a whole and his FIAR team holds us to standards, 
helps transmit data back and forth between these services. We 
talk directly, of course, but they bring things to light. That 
is really a big part of the reason that they exist. They do a 
good and increasingly better job of it.
    Senator Carper. You would expect that, Mr. Hale?
    Mr. Hale. Absolutely, thanks to Mark Easton and Joe Quinn, 
who are here, for the work they are doing.
    Senator Carper. Would they raise their hands please? All 
right.
    Anybody else on this particular issue, cross pollination, 
sharing ideas? Ms. Commons, just very briefly please.
    Ms. Commons. We also have what we call a quarterly audit 
committee meeting where we share with all of the stakeholders 
involved and with the other services. They actually attend our 
meeting. We tell them the things that we have learned during 
that quarter and actively pass that information to them.
    Senator Carper. Ms. Matiella.
    Ms. Matiella. Communicate both formally and informally. We 
do it all the time. It is working well.
    Senator Carper. All right, good. We come down to my 
favorite part of the hearing where I go back down the list from 
Mr. Asif Khan to Mr. Hale and just ask each of you to take 
maybe 15 or 20 seconds and just give a quick closing comment 
you would like to leave as like a take-away for us. This is 
like a benediction. You all help give it.
    Mr. Kahn. Thank you, Senator Carper. One of the important 
elements in transformation is tone at the top and we are really 
encouraged to see that the current leaders within the DOD and 
the components have the right tone and they are going through 
the right actions to be able to get to auditability eventually.
    Senator Carper. All right. Good. Mr. Morin.
    Mr. Morin. My final thought would be we have to keep in 
mind our ultimate goal here. Our ultimate goal here is not a 
clean financial statement audit. That is a symptom. Our 
ultimate goal is financial improvements across the departments 
so that we are better stewards of the taxpayers resources and 
we get that maximum amount of combat capability out of each 
dollar that they entrust to us.
    Senator Carper. Better results for less money or at least 
better results for the same amount of money. Ms. Matiella.
    Ms. Matiella. Our focus is to provide the information that 
the war fighter needs to make decisions. These decisions will 
help the war fighter become more effective and get the 
resources they need to do the job, and that is our focus.
    Senator Carper. Good. Ms. Spangler, you did not get to give 
an opening statement but we will give you twice as much time 
for a closing statement.
    Ms. Spangler. Thank you. I do not know if I need twice as 
much time. But I would just say that our efforts have really 
been a benefit to the other services, and we have come a lot 
further this year than we were able to come last year.
    We responded to 2,500 different sample requests from the 
auditors. We provided 65 million transactions to them as we 
establish the beginning balances. We are going to go into areas 
in the next few months that we were not able to go into last 
year, things like civilian payroll and the Fund Balance with 
Treasury and actually doing some testing on that as well as 
military pay which is vitally important for all of us since we 
all have military pay that we have to go forward with.
    Senator Carper. Thank you. Ms. Commons.
    Ms. Commons. We are fully committed to this effort. We are 
working very hard to achieve auditability, and thank you for 
your support and interest.
    Senator Carper. You are welcome. Ms. McGrath.
    Ms. McGrath. I guess I would like to say I have heard a lot 
of conversation today about the additional focus on the 
financial audit. But with the passing of the Chief Management 
Officer legislation, I think that has put a greater focus on 
the entire business space and the business outcomes of which 
financial auditability is one of them.
    So, I do appreciate the attention that Congress has put on 
the entire business space.
    Senator Carper. Thank you. Mr. Hale.
    Mr. Hale. I would like to associate myself with the remarks 
of my colleagues and add that I think we will get there more 
quickly if we focus on doing audits----
    Senator Carper. Focus on what?
    Mr. Hale. If we focus on actually doing audits and 
validations. I am so anxious that we try out various pieces, 
get independent public accountants to give us their own 
opinion, and tell us where we need to do better. I would also 
like to thank you for your support and continued assistance.
    Senator Carper. You are most welcome.
    Senator Brown has joined us more recently, and I am 
grateful to him for his focus and interest in these issues and 
his staff.
    Senator Coburn has been at it even longer and he has been 
working the vineyards with me for, 6 or 7 years. For those of 
you who do not know him, he is tenacious, and I am pretty 
persistent myself, and we are not going away on this.
    What we have here is like a situation where you have the 
Secretary saying this is important and you have to do this, and 
the Executive Branch providing leadership and with the relevant 
Subcommittee here in the Senate saying this is important as 
well.
    That is what we described in the business as an echo, an 
echo effect. Sometimes it is helpful to have that. I am not 
sure who said this. Maybe it was Peter Tyler. Maybe it was 
Heather who said this, but what we measure we manage, and with 
the cost of the Federal Government we need to do a better job 
of measuring so that we can actually manage, and that is for us 
to help do our jobs as well as for you and your colleagues.
    But I turned around to our colleagues during the back and 
forth and I said, I do not know if this is my imagination but I 
sense sort of different spirit here at this hearing this year 
compared to the last time that we gathered and discussed these 
issues, and I am encouraged by that, and that is not to mean 
that we should take our foot off the accelerator.
    We need to keep it right there but I think we are heading 
in the right direction. I think we are heading there a little 
bit faster, and God knows we need to.
    The last question. Who is here from the Air Force? Dr. 
Morin. My recollection is that in the Air Force, every year 
they hold a competition. I think it is like Commander-in-Chief 
competition to pick the best Air Force Base in the country, and 
they usually end up with two finalists. Any idea? Have you 
heard who the two finalists are this year?
    Dr. Morin. I have a sneaking suspicion Dover might be one 
of them. [Laughter.]
    Senator Carper. One of them is Arkansas, Little Rock. But 
for the third time in 4 years the other finalist is Dover Air 
Force Base, and we are so proud of the work they do. They do a 
lot of work in airlift and they handle the receipt of the 
remains of our fallen heroes. They just do some extraordinary 
work.
    We are very proud of them, and what I would like to see is 
us doing this across-the-board in every part of our armed 
services and Department of Defense.
    We should be doing as good a job with respect to managing 
our finances as well as we are in Dover in handling the airlift 
and other important duties. That is a good standard for us to 
shoot for.
    Some of my colleagues will be asking questions, following 
up in writing. Senator Coburn I know is going to do that. How 
long do they have? They have 2 weeks to submit those questions 
in writing in followup. I would just ask that you try to 
respond to those promptly.
    And we will look forward to the next time we are gathered 
together and have even better news to share with all of us. 
Thank you all.
    With that, this hearing is adjourned.
    [Whereupon, at 4:14 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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