[Senate Hearing 112-297]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-297
 
 FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF 
                                DEFENSE

=======================================================================

                                HEARING

                               before the

            SUBCOMMITTEE ON READINESS AND MANAGEMENT SUPPORT

                                 of the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 27, 2011

                               __________


         Printed for the use of the Committee on Armed Services




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

                               __________


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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

JOSEPH I. LIEBERMAN, Connecticut     JOHN McCAIN, Arizona
JACK REED, Rhode Island              JAMES M. INHOFE, Oklahoma
DANIEL K. AKAKA, Hawaii              JEFF SESSIONS, Alabama
E. BENJAMIN NELSON, Nebraska         SAXBY CHAMBLISS, Georgia
JIM WEBB, Virginia                   ROGER F. WICKER, Mississippi
CLAIRE McCASKILL, Missouri           SCOTT P. BROWN, Massachusetts
MARK UDALL, Colorado                 ROB PORTMAN, Ohio
KAY R. HAGAN, North Carolina         KELLY AYOTTE, New Hampshire
MARK BEGICH, Alaska                  SUSAN M. COLLINS, Maine
JOE MANCHIN III, West Virginia       LINDSEY GRAHAM, South Carolina
JEANNE SHAHEEN, New Hampshire        JOHN CORNYN, Texas
KIRSTEN E. GILLIBRAND, New York      DAVID VITTER, Louisiana
RICHARD BLUMENTHAL, Connecticut

                   Richard D. DeBobes, Staff Director

               David M. Morriss, Minority Staff Director

                                 ______

            Subcommittee on Readiness and Management Support

                  CLAIRE McCASKILL, Missouri, Chairman

DANIEL K. AKAKA, Hawaii              KELLY AYOTTE, New Hampshire
E. BENJAMIN NELSON, Nebraska         JAMES M. INHOFE, Oklahoma
JIM WEBB, Virginia                   SAXBY CHAMBLISS, Georgia
MARK UDALL, Colorado                 ROB PORTMAN, Ohio
MARK BEGICH, Alaska                  SUSAN M. COLLINS, Maine
JOE MANCHIN III, West Virginia       LINDSEY GRAHAM, South Carolina
JEANNE SHAHEEN, New Hampshire        JOHN CORNYN, Texas

                                  (ii)

  




                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

 Financial Management and Business Transformation at the Department of 
                                Defense

                             july 27, 2011

                                                                   Page

Hale, Hon. Robert F., Under Secretary of Defense, Comptroller; 
  Accompanied by Hon. Elizabeth A. McGrath, Deputy Chief 
  Management Officer, Department of Defense......................    20
Matiella, Hon. Mary Sally, Assistant Secretary of the Army, 
  Financial Management and Comptroller...........................    26
Commons, Hon. Gladys J., Assistant Secretary of the Navy, 
  Financial Management and Comptroller...........................    30
Morin, Hon. Jamie M., Assistant Secretary of the Air Force, 
  Financial Management and Comptroller...........................    32
Khan, Asif A., Director, Financial Management and Assurance, 
  Government Accountability Office...............................    36
Annex: The Analysis of Alternatives for the Global Combat Support 
  System-Army....................................................   102

                                 (iii)


 FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF 
                                DEFENSE

                              ----------                              


                        WEDNESDAY, JULY 27, 2011

                           U.S. Senate,    
              Subcommittee on Readiness and
                                Management Support,
                               Committee on Armed Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:09 p.m., in 
room SR-232A, Russell Senate Office Building, Senator Claire 
McCaskill (chairman of the subcommittee) presiding.
    Committee members present: Senators McCaskill, Begich, 
Manchin, Portman, Ayotte, and Cornyn.
    Committee staff members present: Leah C. Brewer, 
nominations and hearings clerk; and Jennifer L. Stoker, 
security clerk.
    Majority staff member present: Peter K. Levine, general 
counsel.
    Minority staff members present: Pablo E. Carrillo, minority 
investigative counsel; and Lucian L. Niemeyer, professional 
staff member.
    Staff assistants present: Brian F. Sebold and Breon N. 
Wells.
    Committee members' assistants present: Tressa Guenov, 
assistant to Senator McCaskill; Lindsay Kavanaugh, assistant to 
Senator Begich; Joanne McLaughlin, assistant to Senator 
Manchin; Brent Bombach, assistant to Senator Portman; Brad 
Bowman, assistant to Senator Ayotte; and Dave Hanke, assistant 
to Senator Cornyn.

    OPENING STATEMENT OF SENATOR CLAIRE McCASKILL, CHAIRMAN

    Senator McCaskill. Thank you, everyone, for joining us 
today for this hearing.
    The Readiness and Management Support Subcommittee meets 
today to address the issues of financial management and 
business transformation at the Department of Defense (DOD). We 
are pleased to be joined by the Honorable Robert Hale, DOD 
Comptroller; the Honorable Elizabeth A. McGrath, the DOD Deputy 
Chief Management Officer (CMO); the Comptrollers of the three 
Military Departments; and Mr. Asif A. Khan, Director of 
Financial Management and Assurance at the Government 
Accountability Office (GAO).
    Welcome to all of you, and thank you for your participation 
in this very important hearing.
    GAO first designated DOD financial management as high risk 
in 1995, as a result of pervasive financial and related 
business management systems and control deficiencies. These 
deficiencies, GAO reported, have adversely affected DOD's 
ability to control costs, ensure basic accountability, 
anticipate future costs and claims on the budget, measure 
performance, maintain funds control, prevent and detect fraud, 
waste, and abuse, address pressing management issues, and in 
some ways maybe the most important of all, the ability to 
prepare auditable financial statements.
    Over the last decade, this committee has initiated a series 
of legislative provisions designed to address these problems as 
recommended by GAO. Unfortunately, we continue to hear reports 
that soldiers in the field have received the wrong paychecks, 
that DOD cannot account for expenditures of billions of dollars 
in Iraq and Afghanistan, and that DOD cannot reliably determine 
the number of contractors it employs.
    Before leaving office earlier this month, Secretary Gates 
likened his efforts to find efficiencies and reduce waste in 
DOD to something akin to an Easter egg hunt. He stated, ``My 
staff and I learned that it was nearly impossible to get 
accurate information and answers to questions such as `How much 
money do you spend?' and `How many people do you have?' ''
    The underlying problem is that DOD financial management 
systems are riddled with decades-old problems that are 
difficult to reverse. As GAO recently explained, the DOD 
systems environment that supports its business functions is 
overly complex and error prone and is characterized by: one, 
little standardization across DOD; two, multiple systems 
performing the same tasks; three, the same data stored in 
multiple systems; and four, the need for data to be entered 
manually into multiple systems.
    According to DOD's systems inventory, this environment--now 
this is hard to believe--is composed of 2,258 business systems 
and includes 335 financial management, 709 human resource 
management, 645 logistics, 243 real property installation, and 
281 weapon acquisition management systems.
    DOD is endeavoring to address these problems by fielding a 
series of enterprise resource planning (ERP) programs. I hate 
acronyms, but it is very hard to function on the Senate Armed 
Services Committee without getting close and personal with 
acronyms.
    So for everyone, and the public particularly, you should 
know that ERP is basically shorthand for ``We are trying to get 
our arms around it.'' Which are intended to provide timely, 
reliable, accurate, and useful information for management 
decisions.
    Unfortunately, these programs have not lived up to 
expectations. The Financial Improvement and Audit Readiness 
(FIAR) plan itself indicates that all three Military 
Departments have already missed deadlines on the implementation 
of their ERP systems. Last year, GAO reported that six of DOD's 
nine largest ERP programs had experienced schedule delays 
ranging from 2 to 12 years and incurred cost increases ranging 
from $530 million to $2.4 billion, in significant part because 
of DOD's failure to follow good management practices.
    Similarly, the DOD Inspector General (IG) reported last 
month that the Army's General Fund Enterprise Business System 
(GFEBS), or its ERP system, is at high risk of incurring 
additional schedule delays, exceeding planned cost, and not 
meeting program objectives as a result of inadequate planning 
and integration efforts.
    Even if the GFEBS is deployed in a timely manner, the IG 
reported, it may not meet the Army's financial management 
objectives. In particular, the IG reported that the Army has 
not adequately planned for data conversion from existing 
systems to the GFEBS, failing completely to address the 
conversion of historical transaction data and the conversion of 
data from 49 non-Army systems.
    According to the IG, these flaws mean that even if the Army 
fully deploys GFEBS in a timely manner, the Army will not be 
able to achieve its objective of auditable financial 
statements. I am deeply concerned that the shortcomings 
documented by the IG in the Army's GFEBS program are 
symptomatic of problems with the other ERP systems and that 
these problems will undermine DOD's efforts to address its 
financial management issues and achieve an auditable financial 
statement by 2017.
    Sound financial systems and good data are critical to our 
efforts to provide efficient management, save money, and ensure 
accountability at DOD. We simply have to do better.
    At this time, I would like also to insert a useful document 
into the record. Thanks to Senator Coburn's efforts, this 
document was prepared by the Congressional Research Service to 
chronicle the timeline of DOD's efforts since 1990 to achieve 
an unqualified audit.
    It is a document that I recommend to everyone for their 
perusal. I think it is an excellent history for the public to 
know about. So I want it to be added to the record at this 
time, followed by my prepared statement.
    [The information referred to follows:]
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
                                ------                                

             Prepared Statement by Senator Claire McCaskill

    The Readiness and Management Support Subcommittee meets today to 
address the issues of financial management and business transformation 
at the Department of Defense (DOD). We are pleased to be joined by the 
Hon. Robert F. Hale, the DOD Comptroller; the Hon. Elizabeth A. 
McGrath, the DOD Deputy Chief Management Officer; the Comptrollers of 
the three Military Departments; and Asif A. Khan, Director of Financial 
Management and Assurance at the Government Accountability Office (GAO). 
Welcome to all of you, and thank you for your participation in this 
important hearing.
    The Government Accountability Office first designated DOD financial 
management as a ``high risk'' area in 1995, as a result of ``pervasive 
financial and related business management systems and control 
deficiencies.'' These deficiencies, GAO reported, have adversely 
affected the Department's ability to control costs; ensure basic 
accountability; anticipate future costs and claims on the budget; 
measure performance; maintain funds control; prevent and detect fraud, 
waste, and abuse; address pressing management issues; and prepare 
auditable financial statements.
    Over the last decade, this committee has initiated a series of 
legislative provisions designed to address these problems, as 
recommended by GAO. Unfortunately, we continue to hear reports that 
soldiers in the field have received the wrong paychecks; that the 
Department cannot account for expenditures of billions of dollars in 
Iraq and Afghanistan; and that DOD cannot reliably determine the number 
of contractors it employs. Before leaving office earlier this month, 
Secretary Gates likened his efforts to find efficiencies and reduce 
waste in the Department to ``something akin an Easter egg hunt.'' He 
stated: ``My staff and I learned that it was nearly impossible to get 
accurate information and answers to questions such as 'How much money 
do you spend?' and `How many people do you have?''
    The underlying problem is that DOD's financial management systems 
are riddled with decades-old problems that are difficult to reverse. As 
GAO recently explained:

          ``[T]he DOD systems environment that supports [its] business 
        functions is overly complex and error prone, and is 
        characterized by: (1) little standardization across the 
        department, (2) multiple systems performing the same tasks, (3) 
        the same data stored in multiple systems, and (4) the need for 
        data to be entered manually into multiple systems. . . . 
        According to the department's systems inventory, this 
        environment is composed of 2,258 business systems and includes 
        335 financial management, 709 human resource management, 645 
        logistics, 243 real property and installation, and 281 weapon 
        acquisition management systems.''

    The Department is endeavoring to address these problems by 
information for management decisions. Unfortunately, these programs 
have not lived up to expectations. The FIAR plan itself indicates that 
all three Military Departments have already missed deadlines on the 
implementation of their enterprise resource planning (ERP) systems. 
Last year, GAO reported that six of DOD's nine largest ERPs had 
experienced schedule delays ranging from 2 to 12 years and incurred 
cost increases ranging from $530 million to $2.4 billion--in 
significant part because of the Department's failure to follow good 
management practices.
    Similarly, the DOD Inspector General (IG) reported last month that 
the Army's General Fund Enterprise Business System (GFEBS) program is 
at ``high risk of incurring additional schedule delays, exceeding 
planned costs, and not meeting program objectives'' as a result of 
inadequate planning and integration efforts. Even if GFEBS is deployed 
in a timely manner, the IG reported, it may not meet the Army's 
financial management objectives. In particular, the IG reported that 
the Army has not adequately planned for data conversion from existing 
systems to GFEBS, failing completely to address the conversion of 
historical transaction data and the conversion of data from 49 non-Army 
systems. According to the IG, these flaws mean that even if the Army 
fully deploys GFEBS in a timely manner, the Army will not be able to 
achieve its objective of auditable financial statements.
    I am deeply concerned that the shortcomings documented by the IG in 
the Army's GFEBS program are symptomatic of problems with other ERP 
systems and that these problems will undermine the Department's efforts 
to address its financial management issues and achieve an auditable 
financial statement by 2017.
    Sound financial systems and good data are critical to our efforts 
to provide efficient management, save money, and ensure accountability 
at the Department of Defense. We simply have to do better.

    Senator McCaskill. I will now turn the microphone over to 
Senator Ayotte if she would like to make an opening statement.

               STATEMENT OF SENATOR KELLY AYOTTE

    Senator Ayotte. Thank you very much, Madam Chairman.
    I want to welcome our witnesses and thank them for 
appearing today.
    I understand that this is the first hearing the Senate 
Armed Services Committee has held on defense financial 
management and business transformation in several years. So I 
want to thank the chairman for scheduling this meeting.
    This hearing goes to the heart of the fiscal crisis that 
faces our Nation. As Admiral Mullen has said, the greatest 
threat to our national security is our national debt. We need 
to work to address that fiscal crisis, and obviously, with what 
we are looking at on a national level, DOD needs to be included 
in that process.
    We have to closely scrutinize every single Federal agency, 
including DOD, to identify and eliminate wasteful or 
duplicative programs. However, as we reduce defense spending, 
we must ensure that those reductions do not undercut our 
warfighters or endanger our readiness for future contingencies.
    To distinguish between necessary defense budget cuts and 
cuts that would harm our troops and damage readiness, we must 
have reliable financial data and effective business processes 
and systems in place. Unfortunately, DOD is one of the few 
agencies in the entire Federal Government that cannot pass an 
independent audit of its finances. I am skeptical whether DOD 
will even be ready for an audit by 2017, as required by the 
law.
    DOD's inability to be audited could limit its ability to 
successfully implement management controls and efficiency 
initiatives, achieve savings, and redirect increasingly scarce 
defense dollars to the higher priorities.
    Shortly before Secretary Gates left office, he publicly 
expressed frustration that his efforts to find efficiencies and 
reduce wastes were ``something akin to an Easter egg hunt.'' He 
explained: ``My staff and I learned that it was nearly 
impossible to get accurate information and answers, such as 
`How much money do you spend?' and `How many people do you 
have?' ''
    In light of the fiscal crisis we are confronting and the 
many proposals to cut defense spending, these are questions 
that we must be able to answer. I am encouraged that Secretary 
of Defense Leon Panetta has said that making DOD auditable is a 
top priority and that he will look into actually accelerating 
the current timetable for achieving this important goal.
    But it is important to remember that the auditable 
financial statement is not really the desired objective. It is 
a means to a more important end. DOD must be auditable and we 
must have reliable financial data so that we can be responsible 
stewards of the taxpayers' dollars and so that we can ensure 
that every dollar supports our warfighters and improves our 
military readiness.
    Let there be no doubt, careful investment in financial 
management can save money. The Defense Information Systems 
Agency (DISA), for example, has returned $10 for every $1 spent 
on financial improvement. The Marine Corps has achieved $3 for 
every $1 invested in improved financial management.
    Senator Tom Coburn estimates, as the chairman has mentioned 
and, of course, introduced the document that CRS produced, and 
I want to commend her for doing that. It is a very important 
document. Senator Tom Coburn estimates that DOD could realize 
at least $25 billion in savings each year for the next 10 years 
through improved financial management.
    In preparing for this hearing, staff polled several experts 
inside and outside of Government regarding the most significant 
structural impediments to improving financial management and 
business processes and systems at DOD. There seems to be a 
consensus regarding the leading impediments to improving 
financial management, and that is some of these impediments 
include unclear lines of authority, a workforce not 
sufficiently trained in key components of financial management, 
as well as potentially ineffective accountability and 
oversight.
    There are also potential problems related to enterprise 
architecture and investment controls as well as, the chairman 
has mentioned, with the implementation of the ERP systems. Here 
are some important questions I hope to address at this hearing.
    Do those leading DOD's financial improvement efforts have 
the authority needed to influence the Service Secretaries and 
military chiefs, as well as other political appointees within 
DOD, to ensure that what is required to succeed actually gets 
done?
    How well are current oversight mechanisms within DOD 
functioning?
    Is DOD's financial management workforce sufficiently 
trained and certified in accounting, well-versed in Government 
accounting practices and standards, and experienced in relevant 
information technology?
    Is DOD's FIAR plan on a path to succeed?
    I am troubled by cases where we are spending billions of 
dollars on ERPs that accomplish little more than lining the 
pockets of contractors who are hired to integrate them into 
DOD. In a few high-profile cases, new systems have come online 
at considerable expense to the taxpayers, but the relevant 
entities are still unable to pass an audit. Every dollar must 
be spent deliberately and carefully to achieve the desired 
objective.
    Thank you, again, Madam Chairman, for calling this 
important hearing. I look forward to hearing from the 
witnesses, and I look forward to working together to improve 
financial management at DOD. Improved financial management will 
help us make the tough decisions we need to make, eliminate 
waste, and support our warfighters.
    I want to thank all of you for being here today.
    Senator McCaskill. Since this topic is rather dry, and 
typically, we don't have hordes of Senators show up, I want to 
particularly comment on both Senator Cornyn and Senator Begich 
being here. I had not planned on giving anyone else an 
opportunity to make an opening statement, but I am so proud of 
you for showing up----[Laughter.]
    I want to give both of you an opportunity, if you would 
like, to make a few comments on the record.
    Senator Cornyn.
    Senator Cornyn. Madam Chairman, thank you for having this 
very important hearing.
    I am called away to the Judiciary Committee to introduce a 
Texan who is being nominated for a judicial office. So I am 
going to be leaving now, and I will come back.
    I have some questions for the witnesses, but no opening 
statement.
    Thank you for the opportunity.
    Senator McCaskill. Thank you, Senator.
    Senator Begich.
    Senator Begich. I am glad we could surprise you, Madam 
Chair. That is always good. [Laughter.]
    But I really don't have any opening statement. I am anxious 
for the testimony. You have a great lineup, as I saw when I 
decided to be able to make it over here for at least an hour, I 
think, I can be here for.
    Senator McCaskill. Great.
    Senator Begich. So I look forward to it.
    Thank you.
    Senator McCaskill. Thank you, Senator.
    We will start with Secretary Hale.

 STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY OF DEFENSE, 
 COMPTROLLER; ACCOMPANIED BY HON. ELIZABETH A. McGRATH, DEPUTY 
        CHIEF MANAGEMENT OFFICER, DEPARTMENT OF DEFENSE

    Mr. Hale. Good afternoon, Madam Chairman, Senator Ayotte, 
and Senator Begich.
    Thank you for the opportunity to discuss financial 
management at DOD. Secretary Panetta, as you have said, our new 
Secretary of Defense, my new boss, shares your interest in 
financial management, shares my interest in financial 
management improvements, and has asked that I provide him a 
comprehensive review of our efforts. I look forward to his 
personal guidance.
    To bring you up-to-date on our progress and also our 
continued challenges, DOD's Deputy Chief Financial Management 
Officer (DCMO), Ms. McGrath, and I have prepared a joint 
statement. I am going to summarize it briefly for the both of 
us, and then we will turn to the service financial management 
(FM) executives.
    The first thing to note is that as we work to meet national 
security objectives, DOD financial management has its 
strengths. I know that is not popular, but I believe it is 
true.
    For one thing, I think it is effective in getting the 
financial resources that we need to our warfighters, and I view 
that as my primary job. We do have a dedicated workforce, I 
think a reasonably well-trained one--let us talk more about 
that later--more than 60,000 financial management professionals 
who bring a culture of stewardship, certainly my experience for 
7 years in the Air Force, a culture of stewardship to their 
jobs.
    We have effective processes in some key areas. As a result, 
violations of key financial laws are few. Much better, I might 
add, than in the non-defense agencies. Timely and accurate 
payments are the rule. Again, much better than in the non-
defense agencies, and interest associated with late payments is 
low.
    We have also made progress on an issue that is of concern 
to me--I have been working on it for several decades as a 
professional--and I know to you, improving financial 
information and moving toward audit readiness. We have 
auditable financial statements in a couple of large 
organizations, particularly in the Army Corps of Engineers, 
several of the large defense agencies, and several of our large 
trust funds.
    But it is also clear that our greatest audit challenges lie 
ahead, especially the need to move the Military Services to 
auditability. We really have been picking around the edges of 
this problem, to some extent. We have to turn to them because 
they are the key issue. In addition, there are enterprise-wide 
weaknesses in DOD financial management, without question, and 
they require an enterprise-wide response.
    To pass an audit, an organization needs systems and 
processes that record financial results of business events in a 
consistent and reliable manner. Our current business 
environment does not always meet that standard. Many of our 
systems are old, and they weren't designed to handle 
information that supports audit standards.
    The issue is even more challenging because of DOD's 
enormous size and geographical dispersion, which makes a manual 
solution of these problems almost impossible. Some of the 
smaller independent agencies have been able to do that. We 
simply can't.
    To deal with these enterprise challenges and to improve 
financial information and achieve audit readiness, we have 
revised the approach that DOD has used in the past. It wasn't 
working, I think we can all agree.
    Since August 2009, our emphasis has been improving the 
quality of data and moving toward audit readiness for the 
information that we use every day to manage DOD. Specifically, 
budgetary information and existence and completeness of assets. 
Knowing where our assets are and how many we have.
    We have also put in place a cost-effective approach to 
dealing with the other information that is needed to move 
toward full auditability. Less than 2 years have passed since 
we launched this new approach. I call it the focused approach. 
I can tell you that financial auditability is now readily 
acknowledged as a high priority in DOD. I think it will be even 
a higher priority under my new boss.
    We have made some noteworthy changes, I think, that are 
moving us in the right direction. We have a clear governance 
process headed by our DOD CMO, Deputy Secretary, and supported 
at the Office of the Secretary of Defense (OSD) level by me, 
the Chief Financial Officer (CFO), and the DCMO, and by the 
Service FMs and the Service DCMOs.
    We have established long-term and, particularly 
importantly, short-term goals which are actively managed by our 
governance bodies. We have ensured that each Military 
Department has programmed adequate resources to support this 
focused strategy over the entire Future Years Defense Plan.
    We now require, and I think this is important, that senior 
executive performance appraisals for both financial and 
nonfinancial personnel include financial and audit goals where 
that is relevant to them. We are assembling teams within each 
Military Department that will be tasked with improving 
financial controls because we need to do that if we are going 
to be successful.
    We are establishing a course-based certification program 
for our defense financial managers that will give us a 
framework like they have in the acquisition workforce so that 
we can require certain courses of our personnel and ensure, for 
example, that they have training in accounting and auditing. We 
have maintained a close working relationship with our oversight 
bodies, including GAO and the DOD IG. I have personally briefed 
Gene Dodaro, the Comptroller General, and Gordon Heddell, the 
DOD IG.
    In addition, we have focused our improvement on 
improvements in business systems, and I know you are 
particularly interested in these. Our goal is a streamlined 
systems environment made up of information technology (IT) 
capabilities that work together to support effective and 
efficient processes and operations.
    Ms. McGrath, the DCMO, has the lead for OSD. The Services 
and agencies are managing overall implementation. We are 
focusing our system efforts in three areas--improvements in 
acquiring and implementing IT systems, including those, 
implementing those ERPs, that word you don't like, Madam 
Chairman; reducing required data exchanges and system-to-system 
interfaces while increasing standardization; and use of 
business enterprise architecture, which provides data 
standards, business rules, performance metrics, and standard 
system configurations.
    In addition to procedural changes, though, we are actually 
doing something. We are actually moving and taking tangible 
steps toward auditability of the service statements that big 
boys use in the audit world. We have launched an audit of the 
Marine Corps statement of budgetary resources. If successful, 
this would be the first time that any military Service has 
completed an audit of a financial statement.
    In May, we began a DOD-wide examination and validation of 
our funds control and distribution process, known in audit 
terms as appropriations received. This is being done by an 
independent public accounting firm. I expect that this 
validation will yield a positive opinion in August, and 
periodic validations of our appropriations received will 
demonstrate to Congress and to me that we are controlling our 
funds carefully and in ways that ensure we comply with the laws 
that you enact.
    In June, we began a validation by a public accounting 
organization of the Army's organization and bases that have 
implemented their ERP, the GFEBS. This will identify any areas 
that must be improved to ensure that we are using the system in 
a manner that is auditable. I don't want to get these things 
deployed throughout DOD and find out that we aren't going to 
achieve our goal.
    In July, we tasked a public accounting firm to validate the 
Air Force's processes and controls to reconcile their accounts 
with Treasury, essentially their checkbook with Treasury. It is 
called Funds Balance with Treasury.
    By the end of the calendar year, we expect to begin several 
other validation efforts, including the accounts and locations 
of large portions of our military equipment. In short, there is 
a lot still to do. I make no bones about it. We have a long way 
to go, but I think we are making progress.
    I believe we do have a plan. We are committed to improving 
financial information and achieving audit readiness in DOD. Our 
goal is to achieve auditable financial statements by 2017.
    Madam Chairman, this concludes my opening statement. I 
believe we will turn to the Service FMs now, and then we will 
be glad to answer your questions.
    [The joint prepared statement of Mr. Hale and Ms. McGrath 
follows:]

          Joint Prepared Statement by Hon. Robert F. Hale and 
                       Hon. Elizabeth A. McGrath

    Chairman McCaskill, Senator Ayotte, members of the subcommittee, 
thank you for the opportunity to testify today concerning financial 
management at the Department of Defense (DOD) and our ongoing efforts 
to improve financial operations. We should note that this is an area of 
interest to our new Secretary of Defense. Secretary Panetta has asked 
us to join with other Department leaders to review our plans for 
financial improvement and report back to him with any suggested 
improvements.
    From our perspective, there are two principal reasons for striving 
to make DOD as efficient and effective a manager as possible. The first 
is to ensure that America's service men and women have the resources 
they need to carry out their mission. The second reason is to satisfy 
our duty as stewards of the resources entrusted to us by the taxpayers.
    As Members of the U.S. Senate, you have a great interest in both 
purposes. Moreover, your oversight and interest in this subject is a 
great help to us as we go forward.

                         BACKGROUND AND CONTEXT

    As we pursue these dual goals, we rely on the support of a 
dedicated professional work force of approximately 60,000 financial 
management personnel, who provide our warfighters with the resources 
and financial services they need to meet national security objectives 
in every area of the world, including Afghanistan and Iraq. We know 
that you appreciate their efforts as much as we do.
    Today, the Department has effective financial processes in many key 
areas. As a result, our violations of the key financial laws are quite 
low, timely and accurate payments are produced in a very high 
percentage of cases, while interest payments have been dramatically 
reduced.
    In fact, there has been significant progress toward improving 
financial information and audit readiness in several entities. For 
example, the Army Corps of Engineers has fully auditable financial 
statements and is maintaining them. Several Defense Agencies maintain 
auditable statements including the Defense Finance and Accounting 
Service and the Defense Contract Audit Agency. Several large trust 
funds managed by DOD are also auditable.
    At the same time, it is clear that the most daunting challenges 
remain ahead, particularly the challenge of moving the Military 
Services toward auditability. Moreover, we know that there are 
enterprise-wide weaknesses in DOD financial management, and they demand 
an enterprise-wide business response. The lack of auditable financial 
statements for DOD as a whole reflects those weaknesses.
    The challenge is more daunting because of DOD's enormous size and 
geographical dispersion. For example, we obligate an average of $2 
billion to $3 billion every business day and handle hundreds of 
thousands of payment transactions. These financial transactions take 
place in thousands of locations worldwide, including war zones. Given 
our size and mission requirements, we are not able to deploy the vast 
numbers of accountants that would be required to fully meet audit 
standards.
    To pass an audit, an organization is required to have a business 
environment--including systems and processes--that record the financial 
results of business events (such as contract signing) in a consistent 
and reliable manner. Our current business environment does not always 
meet that standard. Many of our systems are old and handle or exchange 
information in ways that do not readily support current audit 
standards. They were designed decades ago to meet budgetary rather than 
proprietary accounting standards. They tend to be non-standard and 
sometimes do not include strong financial controls. In these cases, the 
consistent application of internal controls becomes critical. Many of 
the legacy systems also do not record data at the transaction level, a 
capability essential to audit success.

                      AN ENTERPRISE-WIDE RESPONSE

    To address these enterprise-wide issues, we have put in place a 
strong governance model. As the Department's Chief Management Officer 
(CMO), the Deputy Secretary is responsible for Department-wide business 
operations and management issues. He is supported in this by the Deputy 
Chief Management Officer (DCMO).
    The Under Secretary of Defense (Comptroller) (USD(C)) and Chief 
Financial Officer is responsible for financial management policy and 
operations for the Department. He has the lead in efforts to improve 
financial information and audit readiness. But the Comptroller 
organization cannot improve financial management on its own. The 
Department will achieve its financial management goals only through an 
active partnership involving both the Comptroller and the DCMO. We must 
also have help from those in acquisition, logistics, and other business 
areas, as well as the business communities that reside in the Military 
Departments.
    To inject this holistic, integrated way of thinking into the 
existing fabric of defense management, the DCMO has established a 
framework for organizing our Business Enterprise Architecture (BEO), 
business processes, and systems environment into essential end-to-end 
business processes, such as Budget-to-Report, Order-to-Cash, and 
Procure-to-Pay. This enterprise-wide approach is building the future 
business processes and systems environment of DOD, with audit readiness 
and management information in mind.
       improving the quality of the information we use every day
    To deal with these enterprise challenges--and to improve financial 
information and achieve audit readiness--we revised our approach from 
those pursued by DOD in the past.
    Our strategy revision was shaped by senior leaders in the 
Comptroller and DCMO organizations and in the Military Departments and 
Defense agencies. We also solicited input from the Office of Management 
and Budget, the Government Accountability Office (GAO), and 
congressional staff.
    In August 2009, we issued a memorandum outlining the new approach, 
which emphasizes improvements in the quality, accuracy, and reliability 
of the financial and asset information that we use every day to manage 
the Department. This approach leads to our current concentration on 
areas that are most important to defense managers while holding down 
costs in a period of budgetary constraints. Specifically, we are 
working on two types of information--budgetary information and 
existence and completeness of assets.
    Budgetary information is critical to leadership at all levels, as 
people make operational and resource allocation decisions. Our new 
approach on improving budgetary information will lead to audit 
readiness for our Statements of Budgetary Resources (SBR).
    We are also focusing on the accuracy in the numbers and locations 
of our mission critical assets. The financial audit elements of 
``existence and completeness'' translate directly into knowing ``what 
we have'' and ``where it is,'' so we can use the equipment in combat 
and ensure that our acquisition organization is buying only what DOD 
needs.
    We have not ignored other efforts necessary to achieve fully 
auditable statements. This spring we completed a business case analysis 
that was required by key stakeholders and included as a provision in 
the National Defense Authorization Act (NDAA) for Fiscal Year 2011. 
This analysis provides a roadmap to a cost-effective way for achieving 
auditability for financial statements beyond the SBR.
    The NDAA for Fiscal Year 2010 and subsequent acts accommodated our 
new approach to financial improvement and audit readiness. We 
appreciate the support of Congress and remain committed to have fully 
auditable statements by 2017.

              SYSTEM IMPROVEMENTS ARE CRITICAL TO SUCCESS

    To achieve and sustain auditable financial statements, even using 
this new approach, we must improve our financial systems.
    To accomplish this, we must orient the DOD around end-to-end 
business processes that support audit goals, implement Enterprise 
Resource Planning (ERP) systems, leverage those investments to the 
maximum extent practicable, modernize legacy systems when necessary and 
supported by a business case, and also aggressively sunset legacy 
systems that are obsolete, redundant, or not aligned with our business 
objectives. Our goal is to deliver a streamlined, 21st-century systems 
environment comprised of IT capabilities that work seamlessly together 
to support effective and efficient business processes and operations. 
The DCMO and the Military Department CMOs play an integral role in the 
governance processes overseeing the implementation of these systems and 
the processes they enable.
    We are focusing on three key areas:
    First, we have taken steps to improve our current approach to 
acquiring and implementing IT systems, particularly in the business 
domain. Important revisions to the Department's standard acquisition 
process will be included in an update to the DOD Instruction 5000.2, 
``Operation of the Defense Acquisition System,'' for IT systems. These 
revisions will include an improved acquisition model for our defense 
business systems, called the Business Capability Lifecycle, which is in 
use today for a growing number of programs and is an essential pilot 
effort for our broader IT reform effort. The Deputy Secretary has made 
clear that one of his highest management priorities is improving the 
acquisition, development, and fielding of IT systems.
    Further, in addition to improving acquisition policy, the 
Department is working to improve specific acquisition outcomes of its 
business Major Automated Information System programs through more 
rigorous acquisition oversight and investment review. The Department is 
more closely tying business outcomes to acquisition milestones and 
specifically requiring that individual programs, such as Army's General 
Fund Enterprise Business System (GFEBS) and Navy ERP, define the role 
that they play in their organizations' auditability efforts and end-to-
end processes. For example, in the last GFEBS Acquisition Decision 
Memorandum, signed June 24, 2011, we explicitly required that GFEBS:

         Obtain the USD(C) and DOD DCMO approval of the end-to-
        end process and system portions of the Army plan to achieve 
        audit readiness by September 2017 as defined in Financial 
        Improvement and Audit Readiness (FIAR) Guidance. Specifically, 
        the Army plan must address the GFEBS role in achieving audit 
        readiness in the work products defined in phases 1 and 3 of the 
        FIAR Guidance Methodology.
         Obtain USD(C) concurrence that the end-to-end business 
        systems and processes within Army control support auditable 
        financial statements where GFEBS has been implemented and 
        integrated. The USD(C) will rely on the opinion of an 
        independent public accounting firm expressed in an examination 
        of the Army audit readiness assertion of a GFEBS entity 
        currently planned for December 31, 2012 and will allow for 
        remaining minor system and process enhancements scheduled for 
        completion within 12 months.

    Second, we are defining a target systems architecture that is 
modeled on the premise of end-to-end business processes and uses the 
capability inherent in our ERP systems to the maximum extent 
practicable. This will minimize the number of required data exchanges 
and system-to-system interfaces, thus reducing the potential for error. 
It will also increase the degree of process standardization and cut 
down on unnecessary software development.
    Third, we will continue to guide our system investments using the 
BEA, which defines the necessary data standards, business rules, 
performance metrics, and standard system configurations that will allow 
our systems to be interoperable. This, along with our Enterprise 
Transition Plan, will ensure that when data is exchanged between 
systems, it happens securely and maintains the integrity of the data.
    Improved systems alone, however, will not eliminate our weaknesses 
or guarantee auditable statements. Achieving auditability requires that 
we apply a consistent level of process controls that cross 
organizations and functional areas. Business and financial information 
that is passed from system to system must also be subject to a control 
environment to ensure that only authorized personnel are using the 
system and that these systems protect the data quality and maintain a 
compliant audit trail within the end-to-end business process. This 
process must be controlled at the transaction level, from the source to 
the general ledger postings, accurate trial balances, and reliable 
period closeouts. Only by completing these steps can we prepare 
financial statements that an auditor can cost-effectively review and 
verify. Many elements of our current business environment must be 
changed to allow us to meet financial audit standards. In the midst of 
two wars and numerous military operations, implementation of our new 
approach will continue to be a major challenge.

                           WHERE WE ARE TODAY

    Less than 2 years have passed since we took stock of our previous 
efforts and decided on new priorities designed to bring the various 
functional communities together to work toward the common goal of 
financial auditability. Financial auditability is now accepted as a 
high priority for the Department. To move forward with our new, focused 
approach, we have made many changes:

         We established a clear governance process with the 
        Department's CMO in the lead and the USD(C) and DCMO playing 
        key roles.
         We established clear but flexible guidance, so the 
        components can prepare to assert audit readiness by developing 
        detailed plans for their discovery and remediation efforts.
         We have engaged the Department's CMO (the Deputy 
        Secretary), as well as the Military Department CMOs (Under 
        Secretaries) and the Service Vice Chiefs, in a personal 
        commitment to support our goals.
         We have ensured that each Military Department has 
        programmed adequate resources to move forward with this 
        strategy.
         We established a clear and meaningful linkage between 
        major business system investments and the goals of financial 
        auditability.
         We are requiring Senior Executive performance 
        appraisals to include financial audit goals among their 
        criteria, including functional business areas that generate 
        business events with financial impact. This key initiative will 
        help establish audit requirements in business areas outside 
        comptroller.
         We have begun efforts to establish a course-based 
        certification program for defense financial managers that will 
        permit us to emphasize education in key areas including 
        auditability.
         We are assembling teams within each Military 
        Department that will be tasked with improving financial 
        controls.
         We have maintained a close working relationship with 
        key stakeholders and oversight bodies, including GAO and the 
        Department's Inspector General.

    While we have made or are making many process changes, we also 
recognize that we must demonstrate specific progress to reassure 
ourselves, and Congress, that we are actually moving toward auditable 
financial statements. To that end, we launched an audit of the Marine 
Corps' Statement of Budgetary Resources. If successful, this would be 
the first time that any Military Service has completed an audit of a 
financial statement. We have already learned a great deal from this 
effort, and we believe that it will lead to a positive audit opinion.
    We are also undertaking a number of other efforts to validate and 
demonstrate progress. In May of this year we began a DOD-wide 
examination and validation of our funds control and distribution 
process (known in audit terms as ``appropriations received'') by a 
public accounting firm. Periodic validation of appropriations received 
will demonstrate to Congress that we are controlling our funds 
carefully and in ways that ensure we comply with the laws you enact. In 
June we began a public accounting firm validation of the Army's 
organizations and bases that have implemented the GFEBS business 
environment, a key effort to ensure that this new system is being used 
in a manner that is auditable. In July we began a public accounting 
firm validation of the Air Force's processes and controls to reconcile 
their accounts with Treasury. This ``checkbook reconciliation'' is a 
key building block to auditable financial statements. By the end of 
this calendar year we expect to begin several other validation efforts 
including validations of the counts and locations of large portions of 
our military equipment.

                               CONCLUSION

    In sum, we recognize the challenges associated with improving 
financial information and achieving audit readiness at DOD. To meet 
that challenge, we have developed a workable and promising partnership 
between the CFO and DCMO communities that will help with 
implementation. We have also implemented a new, focused approach that 
includes near-term goals, in addition to the long-term goal of 
achieving auditable statements by 2017.
    As we mentioned at the outset of this statement, we are also 
currently reviewing plans for financial management improvement at the 
request of Secretary Panetta. We will report back to him and solicit 
his guidance about future initiatives.
    We would conclude by emphasizing that we are personally committed 
to this effort as part of our overall commitment to providing the 
financial resources and business operations necessary to meet our 
national security objectives.

    Senator McCaskill. Thank you very much, Secretary Hale.
    Secretary--is it Matiella?
    Ms. Matiella. Matiella.
    Senator McCaskill. Secretary Matiella.

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

    Ms. Matiella. Thank you.
    Madam Chairman, Senator Ayotte, 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.
    Secretary McHugh, Chief of Staff Dempsey, Secretary 
Westphal, our CMO, and all of our senior leaders recognize the 
value and the importance of achieving the mandate of the 
National Defense Authorization Act (NDAA) for Fiscal Year 2010, 
which requires the Army to be audit-ready by September 30, 
2017.
    The Army employs hard-working soldiers and civilian 
personnel across all functional areas, who are dedicated to 
achieving audit readiness goals. These professionals are 
transforming our financial and business systems to improve 
financial management, to provide timely, accurate, and relevant 
information for decisionmakers, and to reassure the 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 30, 
2017, because we have a sound and resourced financial 
improvement plan, which conforms to DOD's FIAR criteria. We 
have a solid ERP strategy guiding our business systems 
development and deployment, and we have effective governance 
and oversight ensuring accountability.
    Our financial improvement plan is fully resourced, contains 
detailed corrective actions and milestones, incorporates 
lessons learned from the Army Corps of Engineers audit and the 
Marine Corps audit, and identifies the organizations 
responsible for corrective actions. Further, the plan requires 
significant evaluation and testing to ensure internal controls 
vital to the audit readiness and ensures that the internal 
controls are in place and operating effectively.
    To ensure that we are audit ready by September 30, 2017, 
our improvement plan calls for four audit examinations each 
year from fiscal year 2011 to fiscal year 2014. These 
examinations culminate with an assertion of audit readiness of 
the Army's statement of budgetary resources in fiscal year 
2015.
    These four audit examinations ensure that our financial 
management practices and corrective actions pass audit 
scrutiny. To ensure audit readiness is sustained, governance 
and oversight are being provided by the auditors' senior 
leaders.
    Additionally, management personnel across all business 
functions are being held accountable for achieving audit 
readiness milestones. This accountability is included in their 
fiscal year 2012 performance plans.
    In summary, execution of our financial improvement plan and 
our ERP strategy, combined with our senior-level governance and 
oversight, enable the Army to be audit-ready by September 30, 
2017.
    I am personally committed to meeting our national security 
objectives and mandates of the law requiring auditability. I 
will continue to collaborate with the members of this 
committee, your counterparts in the House of Representatives, 
the GAO, Comptroller Hale, and DCMO McGrath to ensure the 
continued improvement of the Army's business environment.
    I look forward to your questions.
    [The prepared statement of Ms. Matiella follows:]

             Prepared Statement by Dr. Mary Sally Matiella

    Madam Chairman, Senator Ayotte, and members of the subcommittee, 
thank you for an opportunity to testify today regarding financial 
management in the U.S. Army, my assessment of Army's progress toward 
achieving auditable financial statements, the implementation of Army 
enterprise resource planning systems, and our ongoing efforts to 
improve financial management operations.
    I share Mr. Hale's belief regarding the importance of audit 
readiness. With Secretary McHugh's support, the Army intends to achieve 
the milestones required by section 1003 of the National Defense 
Authorization Act (NDAA) for Fiscal Year 2010: that is, be audit ready 
not later than September 30, 2017. The emphasis on audit readiness 
underscores the transformation in financial management across the Army 
enterprise. The Army employs extremely hard working individuals across 
all functional areas, both military and civilian, committed to 
supporting the soldiers executing their mission and defending our 
country. However, the improvements we are implementing will require our 
dedicated soldiers and civilians to execute their business differently. 
Our financial and business systems, processes, controls and training 
are all keyed to improved financial management and will result in 
timely, accurate, and relevant information for decisionmakers.
    Our enterprise resource planning systems are in various stages of 
deployment and include a new transaction-driven, compliant general 
ledger for our general fund, a compliant general ledger for our working 
capital fund, a tactical supply system and an integrated pay and 
personnel system. As these systems are being implemented, legacy 
systems are being drawn down. Our financial managers and business 
process owners will employ compliant systems operating with associated 
internal controls as a part of new business processes, which creates a 
sustainable business environment when coupled with the ongoing 
training.
    We are following the Department's Financial Improvement and Audit 
Readiness (FIAR) guidance by executing a detailed, fully resourced 
Financial Improvement Plan (FIP) which provides detailed corrective 
actions, associated milestone schedule, and identifies organizations 
responsible for corrective actions. Our FIP tracks multiple elements 
including implementation and stabilization of the Army's Enterprise 
Resource Planning (ERP) systems, testing of internal controls and 
implementation of corrective actions where controls are not operating 
effectively, and the execution of multiple audit examinations conducted 
by Independent Public Accountants (IPAs) to ensure corrective actions 
will withstand audit scrutiny. Additionally, our FIP incorporates 
lessons learned from the Army Corps of Engineers' successful audit, and 
the current audit activity with the U.S. Marine Corps. To ensure we 
remain on track, all Army senior executives will be held accountable in 
their fiscal year 2012 performance plans for meeting specific audit 
readiness milestone requirements.
    Our major mid-term goals are to assert audit readiness on the 
General Fund Statement of Budgetary Resources at the end of fiscal year 
2015 and to verify the existence and completeness of mission critical 
assets by the third quarter of fiscal year 2015. These mid-term 
milestones support requirements established by Comptroller Hale and the 
NDAA for Fiscal Year 2010 to focus audit readiness activities on 
improving the information most useful to the department's managers such 
as budgetary information reflected in the Statement of Budgetary 
Resources and the existence and completeness of mission critical 
assets.
    To ensure we achieve these mid-term milestones, we have established 
several interim milestones in our FIP. For example the Army asserted 
audit readiness for all general fund appropriations received, covering 
about $232 billion fiscal year 2010 appropriations. The Army's entire 
appropriations received is under audit examination by an IPA. The audit 
will determine if the Army has the appropriate controls and 
documentation to properly record and report appropriations received and 
distributed throughout all Army commands. Appropriations received 
represents a significant interim milestone covering a substantial 
reporting element on the Army's financial statements.
    Another example of our interim milestones is a second audit 
examination currently in process by an IPA of multiple business 
activities conducted at Army Headquarters and several field sites 
operating the Army's financial management ERP system, the General Fund 
Enterprise Business System (GFEBS). This is the first of four interim 
audit examinations planned between now and fiscal year 2015 to ensure 
our management controls, business processes and documentation, as 
established in the objective ERP environment supported by GFEBS, are 
capable of meeting the rigors of a financial statement audit. 
Collectively, the appropriations received audit, and the interim audit 
examinations of the ERP environment will enable us to achieve our mid-
term objective to assert audit readiness of the Army's Statement of 
Budgetary Resources by fiscal year 2015, and to assert audit readiness 
of all financial statements by September 30, 2107.
    In addition to audit examinations conducted by IPAs, we are also 
mapping all our end-to-end business processes, identifying key controls 
within each business process, and executing discovery and evaluation 
activities to ensure controls are properly established and operating 
effectively. Our discovery and evaluation efforts are led by my audit 
readiness staff with support provided by the Army Audit Agency and the 
Army's Internal Review and Audit Compliance network. Our discovery and 
evaluation efforts comply with the Department's FIAR criteria, and 
requirements established by Office of Management and Budget Circular A-
123 Appendix A. The discovery and evaluation efforts enable us to 
ensure all business activity within the Army is conducted in a 
compliant manner, and to isolate non conforming activity for corrective 
actions. Follow-up audit by the Army Audit Agency and reviews by our 
Internal Review and Audit Compliance personnel ensure corrective 
actions are properly implemented.
    This strategy enables us to make adjustments to our approach by the 
early detection and correction of control and process deficiencies. We 
have several interim milestones that will provide us with appropriate 
information on our progress for meeting both the 2015 and 2017 goals. 
In fact, we have already started to achieve some important milestones 
that will pave the way for full financial statement audit readiness by 
September 30, 2017. Army will engage the Department of Defense (DOD) 
Inspector General in fiscal year 2014 to conduct an audit of the 
existence and completeness of mission critical assets, which includes 
nearly 700,000 general equipment, military equipment, and real property 
end items, as well as several million missiles and ammunition assets. 
We have already completed an existence and completeness assertion of 97 
percent of our aviation assets, which accounts for 17 percent of the 
Army's military equipment line items, and have expanded our audit 
readiness work to cover all mission critical assets across the Army.
    The Army FIP focuses on correcting internal control weaknesses 
throughout the Army's business processes and business systems. The plan 
includes corrective actions, milestones and performance measures, and 
links the replacement of non-standard, non-compliant business 
information systems with implementation of the Army's Enterprise 
Resource Planning systems. Establishing and maintaining an auditable 
organization requires executing standardized business processes and 
systems, as well as complying with Federal accounting standards and the 
DOD business enterprise architecture. By linking the FIP with the 
Army's Enterprise Resource Planning Strategy, we are able to ensure 
business system development and modernization is synchronized with 
audit readiness requirements.
    Since the Army's Enterprise Resource Planning systems are vital to 
achieving and sustaining audit readiness, we are conducting internal 
assessments of our business systems using the Government Accountability 
Office (GAO) Financial Information Systems Control Audit Manual 
(FISCAM). Our business system assessment is informed by the Single Army 
Financial Enterprise architecture which provides all business system 
components and processes. The FISCAM provides the standards against 
which an IPA will conduct a financial statement audit.
    As an interim milestone, we plan to complete and document our 
internal assessment of the GFEBS against FISCAM standards by December 
2011, and conduct an audit examination by an IPA in fiscal year 2012. 
The results our fiscal year 2011 internal assessment and the fiscal 
year 2012 follow-up systems audit will provide assurance that the GFEBS 
is able to fully support the Army's audit readiness goals, well in 
advance of our fiscal year 2015 Statement of Budgetary Resources 
assertion. In the fall of 2011, we will begin similar FISCAM 
preparation work, using our Single Army Financial Enterprise 
Architecture as a guide, to ensure all business systems supporting the 
financial enterprise, including the Army's Enterprise Resource Planning 
systems are able to support the Army's audit readiness goals.
    Since February 2010, we have experienced successes and achieved 
milestones never accomplished previously. For example, GFEBS has been 
fielded to over 34,000 users worldwide and is substantially compliant 
with the Federal Financial Managers' Integrity Act. We have made 
several assertions in the past 9 months and have IPAs currently 
conducting two audits. In addition, three of our four Enterprise 
Resource Planning systems are in deployment providing the Army for the 
first time a standard, transaction driven general ledger recording and 
reporting capability enabling auditors to track balances from the 
financial statements to the detailed transactions supporting these 
balances. Much of this success can be attributed to the 2 years of 
consistent Army and DOD leader engagement, the Department's focus and 
sound audit readiness guidance, and the support provided by Congress.
    I am encouraged by preliminary results of the GAO's current audit 
of the Department's financial improvement efforts. Results indicate the 
Department has a solid methodology as established by criteria of the 
FIAR framework. We are implementing the FIAR methodology in our FIP by 
taking a controls-based audit readiness approach focused on 
establishing and sustaining audit readiness by identifying risks, 
mapping them to the key control objectives established by the GAO 
Financial Audit Manual and FIAR Guidance, and implementing effective 
controls throughout the business environment. In addition, we are 
automating as many controls as possible within the Enterprise Resource 
Planning systems to minimize manual controls and reduce risks that 
exist within business processes.
    Our strategy is focused on building the internal structure to 
sustain audit readiness and realize the benefits of an improved and 
controlled business environment. This corporate knowledge begins with 
top-down leadership engagement and accountability. The Army recognizes 
that audit readiness requires engagement throughout the organization 
and the Army is the first Service to take the bold step holding all 
Senior Executive Service personnel--not just those in the financial 
management community--accountable for achieving audit readiness 
milestones. On May 26, 2011, I established assessment criteria against 
which all Army Senior Executive personnel will be held accountable in 
fiscal year 2012 performance plans for achieving audit readiness 
milestones.
    I am confident we are executing a sound plan that will achieve the 
NDAA 2010 mandate. I do, however, recognize we have many hard 
challenges ahead and areas for improvement. The feedback we are 
receiving from our discovery and evaluation efforts, IPA Audit 
Examinations, and lessons from U.S. Army Corps of Engineers and U.S. 
Marine Corps audits are all helpful to forming and shaping our audit 
readiness efforts. We will continue to leverage these resources as we 
move forward in the execution of our FIP.
    In summary, I recognize the challenges associated with improving 
financial information and achieving audit readiness within Army. 
However, we are making great progress because of the commitment from 
senior Army leaders and business process owners. I am personally 
committed to this effort to meet our national security objectives and 
the mandates of the law. I look forward to working with the members of 
this committee, your counterparts in the House of Representatives, GAO, 
and Comptroller Hale to ensure the continued improvement of the Army's 
business environment.

    Senator McCaskill. Thank you.
    Secretary Commons.

STATEMENT OF HON. GLADYS J. COMMONS, ASSISTANT SECRETARY OF THE 
           NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER

    Ms. Commons. Madam Chairman, Senator Ayotte, Senator 
Begich, thank you for the opportunity to discuss the Navy's 
efforts to achieve financial audit readiness.
    The Navy is fully committed to achieving financial 
auditability, and our senior leaders have provided the 
resources to do so. We are moving forward.
    As Secretary Hale noted, the Marine Corps is in the second 
year of audit of the statement of budgetary resources. We hope 
to have positive results from that audit by the end of the 
year.
    As also noted, the Navy is currently undergoing examination 
by a private firm of our appropriations received process, and 
we should have those results in August.
    The DOD IG is currently examining the completeness and 
existence of high-value military equipment--that is, our ships, 
ballistic missiles, and satellites--to be followed by an 
examination of the existence and completeness of our aircraft 
and ordnance inventory.
    We have learned many lessons from the Marine Corps audit, 
and we have incorporated those lessons into our overall Navy 
financial improvement plan. We are also sharing these lessons 
with the other Services. They include from the very complex of 
ensuring the accuracy of our beginning balances to the simple--
maintenance of our supporting documentation and separation of 
duties.
    We are working with our service providers to ensure we all 
understand what must be done and who is responsible. We have 
reached across our own aisles to assign responsibility to our 
business process owners, such as our human resource 
organizations and our acquisition organizations. Beginning in 
October, every senior executive responsible for executing our 
business processes will have an audit readiness objective in 
his or her performance plan.
    We are also engaging our general and flag officers through 
the Vice Chief of Naval Operations and the Assistant Commandant 
of the Marine Corps. In August, we will begin training our new 
general and flag officers specifically on their responsibility 
as they relate to auditability.
    Achieving auditability is challenging, and there is much 
work to be done. We are committed to this effort and we are 
making progress.
    Thank you for your interest and support of our efforts. I 
will be pleased to answer any questions you might have later.
    [The prepared statement of Ms. Commons follows:]

              Prepared Statement by Hon. Gladys J. Commons

    Chairman McCaskill, Senator Ayotte, members of the subcommittee, 
thank you for the opportunity to discuss the Department of the Navy's 
efforts to achieve financial audit readiness. Achieving financial 
auditability is one of my highest priorities and I am personally 
committed to this objective. The top leaders in the Department, 
Secretary Mabus, Under Secretary Work, as well as the Chief of Naval 
Operations, Admiral Roughead, and General Amos, the Commandant of the 
Marine Corps, are all also committed to our drive to auditability.
    Indeed, the Department has demonstrated through performance that we 
are aggressively moving forward. The Marine Corps is in its second year 
of audit on its Statement of Budgetary Resources. Our goal is to attain 
an opinion later this year from the Department of Defense (DOD) 
Inspector General and the private firm conducting the engagement. This 
effort has been a significant first-time challenge for us, but the 
marines have risen admirably to the test, as they always do. This audit 
has been invaluable because of the lessons we've learned. We have 
incorporated those lessons into our larger Department of the Navy 
financial improvement plan and are sharing them with the other Military 
Departments.
    The Department of the Navy is currently undergoing an examination 
by an outside auditor of its Appropriation Received process; and the 
DOD Inspector General is conducting an examination on the existence and 
Completeness of high-value military equipment, including ships, 
ballistic missiles, and satellites. We also believe that we are ready 
for an examination of the existence and completeness of our aircraft 
and ordnance.
    In addition to supporting these ongoing audits, we continue to 
identify the improvements to business processes and systems needed to 
support an audit of the entire Department's Statement of Budgetary 
Resources. We know we must comply comprehensively with accounting and 
auditing standards, just as all financial entities, public or private, 
are required to do; however, our systems and processes are not yet 
designed to do so. Internal controls in most areas must be 
strengthened. Our audit readiness team has refined its detailed plan 
for audit readiness, based on the extensive lessons we've learned from 
our Marine Corps audit and from our initial assessments of the 
auditability of our business processes.
    One current focus is bolstering our collaboration with our service 
providers, particularly the Defense Finance and Accounting Service 
(DFAS). We know that we must develop several essential capabilities 
before we can undergo an audit, including reconciling our cash balance 
with Treasury and tracing transactions from their orgination through 
the financial statements. Extensive cooperation with DFAS will be 
required for success in these areas. We have their commitment.
    In addition to changing business processes, we need to improve 
controls in supporting business systems. Navy's Enterprise Resource 
Planning (ERP) system will make a significant contribution to our 
auditability efforts. Navy ERP will enhance these efforts because it 
establishes a stronger, embedded internal control framework and helps 
standardize business processes for a sustainably auditable environment. 
Implementation of Navy ERP continues space and according to schedule.
    As a final point, I'd like to reiterate our leadership's commitment 
to audit readiness. We continue to widen the circle of accountability. 
Beginning next fiscal year, every senior executive responsible for 
executing our business processes will have an audit readiness objective 
in his or her performance plan. These frontline leaders will help the 
Department transform its business processes and orient its business 
culture toward auditability. In addition, we continue to have the 
commitment of our leadership to resource these efforts adequately now 
and into the future.
    I'll be pleased to answer any of your questions at the appropriate 
time.

    Senator McCaskill. Thank you very much.
    Secretary Morin.

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

    Mr. Morin. Thank you very much, Madam Chair, Ranking 
Member.
    It is a pleasure, as always, to have a chance to come 
before this committee and the subcommittee. It is a committee I 
had a lot of chances to work with when I spent 6 years on the 
staff in the Senate.
    If I may, I would like to just summarize the written 
testimony that I prepared for the committee and have the 
statement entered in the record.
    When I came before the Senate Armed Services Committee 2 
years ago as a nominee, I accepted a charge from Senator McCain 
that for the Air Force, business-as-usual would not be 
acceptable when it came to the audit readiness effort. That is 
a charge I have taken to heart and I think the Air Force has 
stepped forward aggressively on over the last couple of years. 
Air Force leadership simply will not and cannot accept doing 
business as usual if we expect to get to audit readiness by the 
statutory deadline in 2017.
    As I promised at that confirmation hearing, I have been a 
very strong advocate for Under Secretary Hale's effort to 
really focus our FIAR plan on the information that matters to 
managers. I said at the time and I agree now that that is a 
good idea because it builds a positive feedback loop, where the 
people charged with leading and running DOD on a day-to-day 
basis see the practical results of the FIAR effort.
    They get the better information they need to manage better, 
and therefore, they are more likely to seek to invest more in 
getting us to that statutory timeline. It gives the leaders the 
information they need in order to maximize the value we get out 
of each taxpayer dollar.
    I think this new focus really has delivered in terms of 
creating stronger managerial incentives, and it has raised the 
profile of audit readiness across the Air Force. Senator 
Ayotte's point about auditability as a means to an end of good 
stewardship is, I think, right on target, and that mindset is 
really taking hold across the Air Force.
    Like my colleagues, I am pleased to report that the Air 
Force has made some very good and important progress on some of 
our key interim deliverables over the last year or 2. Some of 
the wins include our assertions of audit readiness on 
appropriations received and distributed; our Funds Balance with 
Treasury reconciliation process, which Mr. Hale mentioned.
    That is a critical challenge, and sort of balancing our 
checkbook with Treasury, it is over a million transactions a 
month. We are matching up 99.99 percent of them, which is an 
essential enabler for our broader audit readiness effort.
    The existence and completeness of our entire military 
equipment portfolio. We are also moving onto a range of 
operating materials and supplies, things like our cruise 
missiles and aerial targets and several other items there.
    The progress that has been made is a direct result of the 
exceptional commitment from our CMO, Under Secretary Conaton, 
and the Air Force senior leadership. They have increased the 
resources to this--applied to this effort every year, and they 
have applied the right level of management attention to focus 
the team on the progress.
    Just 2 months ago, Under Secretary Conaton and the Vice 
Chief of Staff for the Air Force, General Breedlove, wrote to 
all of our major commands underscoring, first, the overall 
importance of the FIAR and how it plays into Air Force 
efficiency efforts; but also charging each of those commands 
with creating the right incentives in the performance plans of 
their senior leaders to focus the organization not just at a 
headquarters level, but down to the field on the financial 
improvement effort.
    But while we have made great progress on some of these 
interim deliverables, we do still have a long way to go to meet 
the 2017 deadline. Our ability to achieve audit readiness 
depends in part on our ability to field our ERPs. These systems 
are replacing Vietnam-era bookkeeping systems that are not 
compliant with any of the key requirements that are needed to 
get to audit readiness.
    While ERPs are not a panacea and the fielding of them has 
not been without challenges, there is no alternative to 
modernizing Air Force financial management systems. Whether it 
is ERP or something else, we have to modernize those systems if 
we are going to get to audit readiness.
    In fielding our ERPs, we have benefited greatly in the Air 
Force from being a little bit behind the other Services. We 
have had an opportunity to observe their deployments, observe 
their fielding, and learned quite a few lessons.
    So, for example, we have had a heavy focus on data cleanup 
and data integrity efforts and migrating the historical data 
over. We continue to push forward, consistent with guidance 
from the Office of Management and Budget (OMB) and others, to 
focus on fielding discrete increments and smaller pieces of 
these ERPs in order to improve accountability, avoid big bang 
approaches.
    Successful deployment of these systems, though, will depend 
on execution and our ability to work these systems through an 
acquisition and fielding timeline that is--will strain the 
system. If we do DOD acquisition business as usual, we will not 
be able to successfully field these systems.
    It is for those reasons that I do see moderate risk in the 
Air Force's ability to meet that fielding timeline. As a 
result, we are working to hedge against that risk and explore 
interim solutions that would help us achieve auditability in a 
more patchwork way if the systems do not deliver on the 
schedule that is currently there.
    Again, this is a belt-and-suspenders approach in many 
cases. But having observed the DOD acquisition of IT systems 
over quite a few years, while we have a schedule in front of us 
that I have reasonable confidence in, I know that the 
historical record of achievement of planned schedules on IT 
acquisitions is not good, and I feel a need to hedge against 
that.
    But I do want to be very clear. We have a comprehensive 
plan toward our business systems modernization and toward our 
business process improvement that is carefully crafted to get 
us toward an audit-ready environment by 2017. We are pressing 
forward with a very strong leadership commitment to achieving 
that deadline.
    With that, I am ready for the committee's questions and the 
testimony of the other witnesses.
    [The prepared statement of Mr. Morin follows:]

                 Prepared Statement Hon. Jamie M. Morin

    Thank you for the opportunity to brief the subcommittee on your Air 
Force's efforts and progress towards financial improvement and audit 
readiness. We recognize that auditable financials will be useful tools 
helping the Air Force produce the maximum combat capability from each 
taxpayer dollar invested. The Air Force is implementing the Department 
of Defense (DOD) Financial Improvement and Audit Readiness (FIAR) 
guidance through a detailed Financial Improvement Plan (FIP) which 
includes discovery of problem areas, a set of milestones and interim 
deliverable, and assignment of corrective actions to accountable 
parties.
    Air Force leadership is engaged and committed to our audit 
readiness efforts. This engagement extends to the highest levels--for 
instance, both uniformed and civilian. In May, the Under Secretary of 
the Air Force, Ms. Conaton, and the Air Force Vice Chief of Staff, 
General Breedlove wrote to the leadership of all our Air Force Major 
Commands emphasizing the importance of audit readiness.
    A key focus in Air Force audit readiness efforts is individual 
accountability. Toward that end, the Air Force has led the way 
requiring senior executives to include audit readiness objectives in 
their annual performance plans. These goals must be concrete, 
measurable and individually tailored to ensure accountability. Members 
of my team, the Air Force Deputy Chief Management Officer and a small 
number of other key leaders already have these goals in their 
performance plans. We continue to expand this effort to include 
executives in acquisition, logistics, and personnel.
    Currently, the end date on Air Force's audit readiness schedule 
comes later than those of the other Services. This is due in part to 
our reliance on our Enterprise Resource Planning (ERP) systems as part 
of the solution to several key audit readiness challenges. Over the 
last 2 years, we have aimed to accelerate our progress by seeking 
additional funding in our fiscal year 2012 budget request and 
evaluating legacy systems for audit. Additionally, Air Force leadership 
placed heavy emphasis on identifying opportunities for interim 
progress, such as accelerating asserting Existence and Completeness for 
Medical Equipment and Munitions. Air Force financial managers and other 
responsible officials are engaging with the Office of the Secretary of 
Defense (OSD) and the other Services to ensure we benefit from the 
lessons learned by other organizations in their own audit readiness 
efforts.
    As a result of strong leadership commitment and the changes we have 
made in the last year, we have made significant progress in Under 
Secretary Hale's prioritized audit readiness areas--Budgetary 
Information and Mission Critical Assets.
    In September 2010, the Air Force asserted audit readiness on 
Appropriations received and distributed to our major commands. This 
assertion covers $165 billion or 94 percent of new budget authority. 
This assertion provides taxpayers the confidence we have control of 
appropriations received. In April 2011, KPMG, an Independent Public 
Accounting firm, was hired to express an opinion on our assertion and 
we expect completion of this engagement in late August 2011.
    In December 2010, we asserted audit readiness for our Fund Balance 
with Treasury (FBwT) Reconciliation. This is analogous to balancing the 
Air Force checkbook, albeit one with approximately 1.1 million 
transactions per month. Since April 2010, we have consistently exceeded 
the OSD goal of reconciling 98 percent and in June 2011, we reconciled 
99.99 percent of the dollar value. Our unmatched disbursements declined 
from $1.3 billion to $800 thousand since implementing our FBwT 
reconciliation tool and process.
    We also asserted audit readiness for the existence and completeness 
of Military Equipment in December 2010. This includes satellites, 
aircraft, remotely piloted vehicles, aircraft pods, and 
intercontinental ballistic missiles. With a Net Book Value of $103 
billion, Military Equipment represents approximately one third of our 
total assets. Finally, we asserted audit readiness on the existence and 
completeness of our cruise missiles, aerial targets, and drones in June 
2011. Testing will likely reveal a few areas for further cleanup, but 
this is a major accomplishment.
    Standard business rules and data structures defined in 
comprehensive business architecture are critical to establishing an 
audit ready environment. The Air Force Chief Management Officer (CMO) 
is responsible for ensuring comprehensive business enterprise 
architecture is adopted across the enterprise. The CMO's office 
exercises oversight of the functional communities' adoption of this 
architecture through biweekly meetings with representatives from all 
communities. This enterprise senior working group also reviews systems 
investments exceeding $1 million ensuring appropriate consideration has 
been given to business process reengineering as an alternative to 
system investments.
    The Air Force is committed to continuous progress toward audit 
readiness. For several years, we have deferred enhancements to our 
legacy systems while we developed more robust IT Solutions, including 
Enterprise Resource Planning Systems (ERPs) such as Defense Enterprise 
Accounting Management System (DEAMS), Expeditionary Combat Support 
System (ECSS), Air Force Integrated Personnel and Pay System (AF-IPPS), 
and NexGen IT for our real estate and facilities. These ERPs were 
designed to replace numerous subsidiary systems, reduce the number of 
interfaces and eliminate redundant data entry, while providing an 
environment for end-to-end business processes. These systems serve as 
the foundation for our audit readiness which means that delays in 
deploying these ERPs will impact our ability to successfully complete 
an audit. We coordinated our FIAR plan to achieve audit readiness with 
the deployment of these ERPs.
    For example, DEAMS will serve as the General Ledger for our General 
Fund while ECSS serves as the General Ledger for our Working Capital 
Fund and the Accountable Property System of Record for our Military 
Equipment, Operating Materials and Supplies, and Inventory. AF-IPPS 
integrates our military personnel and pay processes; recording and 
managing an annual payroll in excess of $33 billion. NexGen IT is our 
target Accountable Property System of Record for Real Property handling 
$32 billion or 10 percent of total assets. DEAMS and ECSS have already 
deployed initial capabilities and are operating at Scott and Hanscom 
AFB respectively. We are close to completing the requirements 
definition process for AF-IPPS, including the ``clean-audit'' 
standards--and will release an RFP to industry in the next 8 weeks for 
bids on a technical solution. NexGen IT is our target Accountable 
Property System of Record for Real Property handling $32 billion or 10 
percent of total assets.
    These systems clearly will have a material impact on our statements 
and any delays in their deployment will impact our audit readiness 
goals. We are working with OSD and the Office of Management and Budget 
to mitigate these risks and are exploring opportunities to accelerate 
the acquisition process using a new approach--the Business Capability 
Lifecycle model rather than the lengthier process outlined in DOD 
Instruction 5000.
    Successfully implementing a more tailored approached to acquisition 
that works in the fast moving IT environment is key to achieving our 
audit schedule. I am also concerned about the cost and capabilities of 
the ERPs and am looking at alternatives for deploying several smaller 
discrete software releases, regularly competed to incentivize 
contractors assisting us. We have also encountered integration 
challenges with the ERPs within our current information technology 
architecture. While we have taken major steps to get the Air Force ERP 
systems on track, and I've seen real progress with DEAMS in its initial 
deployment, there is very little flex in the implementation schedule. 
Therefore, I see a moderate risk in the Air Force's overall audit 
readiness schedule. To hedge against the risks either our acquisition 
process or our systems infrastructure will fall short, I have directed 
an exploration of interim solutions to achieve auditability by the 2017 
deadline.
    During fiscal year 2012 we have several important milestones to 
achieve. We will do an early assessment of DEAMS and ECSS to validate 
they are configured with the appropriate controls and data to support 
an audit. I fully expect to find some issues through this review which 
we will correct as we work towards full deployment, but that is a 
normal part of the process addressing system weaknesses. Another 
important fiscal year 2012 milestone is our audit assertion of the 
Space Based Infrared System program. Because a program does not 
typically create stand alone financial statements that are audited, we 
are working with DFAS to establish the parameters of the audit, but 
anticipate it covering at least 90 percent of the SIBRS Procurement and 
R&D expenditures between fiscal year 2008 and fiscal year 2010. Our 
team had been working to assert existence and completeness for aircraft 
spare engines and missile motors in June 2011. However, we did not feel 
that the testing results were sufficient to support audit readiness and 
are withholding the assertions while additional corrective actions are 
implemented. We believe that the corrective actions will allow us to 
submit both assertions during the first quarter of fiscal year 2012 and 
begin an audit by the third quarter of fiscal year 2012.
    The slippage in the assertion on space engines and missile motors 
underlines the importance of incremental progress and setting stretch 
goals. We do not expect a perfect batting average the first time 
through and if we built a process to deliver perfection the first time, 
it would not be timely. We develop the FIP and schedule primarily at 
Headquarters based on the best available information, but there are 
always unknowns due to the Air Force's decentralized operating 
structure. Our people conduct business at 191 bases across the world 
organized in 11 major commands. Many processes have evolved differently 
across our organization, meaning that implementing the required 
corrective actions sometimes takes longer than expected.
    As we work to achieve the 2017 deadline, Air Force leadership is 
setting numerous stretch goals and setting ambitious goals means 
occasionally missing them. On the other hand, we have also been able to 
accelerate some assertions based on better than expected results. We 
are also striving to strike the right balance between applying 
resources to robust planning and testing of progress versus hands-on 
fixing of weaknesses. Both are important. In keeping with best 
practices, we will rely on the DOD Inspector General or hire an 
independent public accounting firm to opine on each of our assertions. 
It is important to note that there are three or more phases of testing 
enroute to a clean audit--internal Air Force review prior to assertion, 
external review of the assertion itself, and then the actual audit of 
Air Force financials.
    Thank you for the committee's interest and focus on this important 
effort. The continued involvement of Congress, OSD, and the Government 
Accountability Office as well as the very strong commitment of today's 
Air Force leadership is crucial to ensuring continued progress towards 
an unqualified audit opinion no later than 2017.

    Senator McCaskill. Thank you, Secretary Morin.
    Mr. Khan.

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

    Mr. Khan. Thank you.
    Madam Chairman and members of the subcommittee, good 
afternoon. It is a pleasure to be here today to discuss the 
status of DOD financial management improvement and business 
transformation efforts.
    At the outset, I would like to thank the subcommittee for 
holding this hearing and acknowledge the importance of focused 
attention on the corrective actions needed to meet difficult 
challenges.
    In my testimony today I will provide GAO's perspective on 
the status of DOD financial management weaknesses and its 
efforts to resolve them. In addition, I will also address the 
challenges DOD continues to face in improving its financial 
management operations. My testimony today is based on our prior 
work at DOD.
    Regarding the status, like, Madam Chairman, you had 
mentioned, more than a decade DOD has dominated GAO's list of 
Federal programs and operations at high risk due to their 
susceptibility to fraud, waste, abuse, and mismanagement. In 
the last 20 years, as a result of significant financial 
management weaknesses, none of the DOD components--including 
the Army, Navy, or the Air Force--have been able to prepare 
auditable financial statements.
    DOD's past strategies for improving financial management 
have generally been ineffective. But recent initiatives are 
encouraging, specifically recent changes, as Mr. Hale laid out, 
to the DOD's plan for FIAR plan, if implemented effectively, 
could result in improved financial management and progress 
toward our auditability. The Army, Navy, Air Force, and the 
Defense Logistics Agency have key roles in implementing this 
plan.
    DOD faces many challenges in overcoming its longstanding 
management weaknesses. I am going to highlight six of these 
challenges, which very much resonate what you have mentioned in 
your opening statements.
    First, one of the toughest challenges in implementing the 
FIAR plan is sustaining committed leadership. The DOD 
Comptroller has expressed commitment to the FIAR plan, and he 
has established a focused approach to achieve FIAR's long-term 
goals. This is intended to help DOD achieve near-term successes 
as well.
    To succeed in the long-term, efforts to improve financial 
management need to be cross-functional. DOD agencies and 
offices that perform business functions--for example, weapon 
system acquisitions and supply chain management--are highly 
dependent on financial management.
    However, within every administration and, of course, 
between administrations, there are changes in senior 
leadership. Therefore, it is paramount that the FIAR plan and 
other current initiatives be institutionalized throughout DOD 
at all levels.
    Second, a competent financial management workforce with the 
right knowledge and skills is needed to implement the FIAR 
plan. Effective financial management requires a knowledgeable 
and skilled workforce that includes individuals who are trained 
as well and well-versed in Government accounting practices and 
experienced information technology. Analyzing skill needs and 
then building and retaining an appropriately skilled workforce 
are needed to succeed in DOD's transformation efforts.
    The third challenge is to assure accountability and 
effective oversight to the improvement efforts. DOD has 
established bodies responsible for governance and oversight of 
the FIAR plan implementation. It will be critical for senior 
leadership at each DOD component to ensure that oversight of 
financial management improvement projects is effective and that 
responsible officials are held accountable for progress.
    Fourth, a well-defined business architecture is the fourth 
challenge. For DOD, a key element of modernizing financial 
management and business operations is the use of integrated 
information systems with the capability of supporting the vast 
and complex business operations that DOD has.
    A well-defined enterprise architecture will be needed as 
DOD's blueprint for modernizing its business systems. However, 
DOD has yet to address previously identified issues associated 
with both architecture and investment management.
    The fifth challenge, like we have mentioned, is the ERP 
systems. They are expected to form the core of business 
information systems and DOD components. Their effective 
implementation is essential to improving DOD financial 
management and related business operations, and they will be 
key to becoming auditable.
    However, the components have largely been unable to 
implement ERPs that deliver the needed capabilities and on 
schedule and within budget. Effective business system 
modernization across DOD is a key to achieving hundreds and 
millions of dollars in annual savings.
    Finally, weaknesses in DOD internal control over financial 
management are pervasive and primary factor in DOD's ability to 
become auditable. DOD needs a practical approach to 
prioritizing actions to correct these weaknesses.
    In closing, I am encouraged by the recent efforts and 
commitments the DOD leaders have shown towards improving DOD's 
financial management. However, DOD's ability to address these 
six major challenges that I have highlighted today will be 
critical to improving its financial management operations and 
achieving auditability.
    These challenges are significant. They deal with the very 
basic building blocks of sound financial management. However, 
it is absolutely critical at the same time that DOD continues 
with its current efforts, commitments, and momentum going 
forward.
    Madam Chairman, this concludes my remarks. I will be happy 
to answer questions you may have.
    Thank you.
    [The prepared statement of Mr. Khan follows:]

                   Prepared Statement by Asif A. Khan

    Chairwoman McCaskill, Ranking Member Ayotte, and members of the 
subcommittee:
    It is a pleasure to be here today to discuss the status of the 
Department of Defense's (DOD) efforts to improve its financial 
management operations and achieve audit readiness. At the outset, I 
would like to thank the Subcommittee for holding this hearing and to 
acknowledge the important role of such hearings in the oversight of 
DOD's financial management efforts.
    DOD is one of the largest and most complex organizations in the 
world. For fiscal year 2012, the budget requested for the department 
was approximately $671 billion--$553 billion in discretionary budget 
authority and $118 billion to support overseas contingency operations. 
The fiscal year 2012 budget request also noted that DOD employed over 3 
million military and civilian personnel--including Active and Reserve 
servicemembers. DOD operations span a wide range of defense 
organizations, including the Military Departments and their respective 
major commands and functional activities, large defense agencies and 
field activities, and various combatant and joint operational commands 
that are responsible for military operations for specific geographic 
regions or theaters of operation. To execute its operations, the 
department performs interrelated and interdependent business functions, 
including financial management, logistics management, health care 
management, and procurement. To support its business functions, DOD has 
reported that it relies on over 2,200 business systems,\1\ including 
accounting, acquisition, logistics, and personnel systems.
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    \1\ DOD excludes from its business systems those designated as 
national security systems under section 2222(j) of title 10, U.S.C. 
National security systems are intelligence systems, cryptologic 
activities related to national security, military command and control 
systems, and equipment that is an integral part of a weapon or weapons 
system or is critical to the direct fulfillment of military or 
intelligence missions.
---------------------------------------------------------------------------
    The department's sheer size and complexity contribute to the many 
challenges DOD faces in resolving its pervasive, complex, and 
longstanding financial management and related business operations and 
systems problems. Numerous initiatives and efforts have been undertaken 
by DOD and its components to improve the department's financial 
management operations and to arrive at a point where the reliability of 
its financial statements and related financial management information 
would be sufficient to pass an audit with favorable (clean) audit 
opinions. To date, DOD has not achieved effective financial management 
capabilities or financial statement auditability.\2\
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    \2\ DOD's auditors have reported material financial management 
weaknesses in the following areas: (1) Financial Management Systems, 
(2) Fund Balance with Treasury, (3) Accounts Receivable, (4) Inventory, 
(5) Operating Materials and Supplies, (6) General Property, Plant, and 
Equipment, (7) Government-Furnished Material and Contractor-Acquired 
Material, (8) Accounts Payable, (9) Environmental Liabilities, (10) 
Statement of Net Cost, (11) Intragovernmental Eliminations, (12) Other 
Accounting Entries, and (13) Reconciliation of Net Cost of Operations 
to Budget.
---------------------------------------------------------------------------
    Today, I will discuss the status of DOD's financial management 
weaknesses, its efforts to resolve those weaknesses, and the challenges 
DOD continues to face in its efforts to improve its financial 
management operations. In addition, I will outline the status of the 
department's efforts to implement its Enterprise Resource Planning 
(ERP) systems,\3\ which represent a critical element of the 
department's Financial Improvement and Audit Readiness (FIAR) strategy. 
My statement today is based on our prior work related to the 
department's FIAR plan \4\ and ERP implementation efforts.\5\ Our work 
was conducted in accordance with generally accepted government auditing 
standards and our previously published reports contain additional 
details on the scope and methodology for those reviews. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives.
---------------------------------------------------------------------------
    \3\ An ERP system uses commercial off-the-shelf software consisting 
of multiple, integrated functional modules that perform a variety of 
business related tasks such as general ledger accounting, payroll, and 
supply chain management.
    \4\ GAO, Financial Management: Achieving Financial Statement 
Auditability in the Department of Defense, GAO-09-373 (Washington, DC: 
May 6, 2009).
    \5\ GAO, DOD Business Transformation: Improved Management and 
Oversight of Business Modernization Efforts Needed, GAO-11-53 
(Washington, DC: Oct. 7, 2010); Defense Logistics: Actions Needed to 
Improve Implementation of the Army Logistics Modernization Program, 
GAO-10-461 (Washington, DC: Apr. 30, 2010), DOD Business 
Transformation: Air Force's Current Approach Increases Risk That Asset 
Visibility Goals and Transformation Priorities Will Not Be Achieved, 
GAO-08-866 (Washington, DC: Aug. 8, 2008), DOD Business Systems 
Modernization: Important Management Controls Being Implemented on Major 
Navy Program, but Improvements Needed in Key Areas, GAO-08-896 
(Washington, DC: Sept. 8, 2008), and DOD Business Transformation: Lack 
of an Integrated Strategy Puts the Army's Asset Visibility System 
Investments at Risk, GAO-07-860 (Washington, DC: July 27, 2007).
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                               BACKGROUND

    The department is facing near- and long-term internal fiscal 
pressures as it attempts to balance competing demands to support 
ongoing operations, rebuild readiness following extended military 
operations, and manage increasing personnel and health care costs as 
well as significant cost growth in its weapon systems programs. For 
more than a decade, DOD has dominated GAO's list of Federal programs 
and operations at high risk of being vulnerable to fraud, waste, 
abuse.\6\ In fact, all of the DOD programs on GAO's High-Risk List 
relate to business operations, including systems and processes related 
to management of contracts, finances, supply chain, and support 
infrastructure,\7\ as well as weapon systems acquisition. Longstanding 
and pervasive weaknesses in DOD's financial management and related 
business processes and systems have: (1) resulted in a lack of reliable 
information needed to make sound decisions and report on the financial 
status and cost of DOD activities to Congress and DOD decisionmakers; 
(2) adversely impacted its operational efficiency and mission 
performance in areas of major weapons system support and logistics; and 
(3) left the department vulnerable to fraud, waste, and abuse.
---------------------------------------------------------------------------
    \6\ DOD bears responsibility, in whole or in part, for 14 of the 30 
Federal programs or activities that GAO has identified as being at high 
risk of waste, fraud, abuse, and mismanagement. The eight specific DOD 
high-risk areas are: (1) approach to business transformation, (2) 
business systems modernization, (3) contract management, (4) financial 
management, (5) supply chain management, (6) support infrastructure 
management, and (7) weapon systems acquisition. The seven 
governmentwide high-risk areas that include DOD are: (1) disability 
programs, (2) interagency contracting, (3) information systems and 
critical infrastructure, (4) information sharing for homeland security, 
(5) human capital, (6) real property, and (7) ensuring the effective 
protection of technologies critical to U.S. national security 
Interests.
    \7\ Support infrastructure includes categories such as 
installations, central logistics, the defense health program, and 
central training.
---------------------------------------------------------------------------
    Because of the complexity and long-term nature of DOD's 
transformation efforts, GAO has reported the need for a chief 
management officer (CMO) position and a comprehensive, enterprisewide 
business transformation plan. In May 2007, DOD designated the Deputy 
Secretary of Defense as the CMO. In addition, the National Defense 
Authorization Acts for Fiscal Years 2008 and 2009 contained provisions 
that codified the CMO and Deputy CMO (DCMO) positions, required DOD to 
develop a strategic management plan, and required the Secretaries of 
the Military Departments to designate their under secretaries as CMOs 
and to develop business transformation plans.
Overview of DOD's Accounting and Finance Activities
    DOD financial managers are responsible for the functions of 
budgeting, financing, accounting for transactions and events, and 
reporting of financial and budgetary information. To maintain 
accountability over the use of public funds, DOD must carry out 
financial management functions such as recording, tracking, and 
reporting its budgeted spending, actual spending, and the value of its 
assets and liabilities. DOD relies on a complex network of 
organizations and personnel to execute these functions. Also, its 
financial managers must work closely with other departmental personnel 
to ensure that transactions and events with financial consequences, 
such as awarding and administering contracts, managing military and 
civilian personnel, and authorizing employee travel, are properly 
monitored, controlled, and reported, in part, to ensure that DOD does 
not violate spending limitations established in legislation or other 
legal provisions regarding the use of funds.
    Before fiscal year 1991, the Military Services and Defense agencies 
independently managed their finance and accounting operations. 
According to DOD, these decentralized operations were highly 
inefficient and failed to produce reliable information. On November 26, 
1990, DOD created the Defense Finance and Accounting Service (DFAS) as 
its accounting agency to consolidate, standardize, and integrate 
finance and accounting requirements, functions, procedures, operations, 
and systems. The Military Services and defense agencies pay for finance 
and accounting services provided by DFAS using their operations and 
maintenance appropriations. The Military Services continue to perform 
certain finance and accounting activities at each military 
installation. These activities vary by Military Service depending on 
what the Services wanted to maintain in-house and the number of 
personnel they were willing to transfer to DFAS. As DOD's accounting 
agency, DFAS records these transactions in the accounting records, 
prepares thousands of reports used by managers throughout DOD and by 
Congress, and prepares DOD-wide and service-specific financial 
statements. The Military Services play a vital role in that they 
authorize the expenditure of funds and are the source of most of the 
financial information that allows DFAS to make payroll and contractor 
payments. The Military Services also have responsibility over all DOD 
assets and the related information needed by DFAS to prepare annual 
financial statements required under the Chief Financial Officers 
Act.\8\
---------------------------------------------------------------------------
    \8\ Sec. 31 U.S.C. Sec. 3515(a),(c); PMB Bulletin No. 07-04, Audit 
Requirements For Federal Agencies Statements, Appendix B (Sept. 2004).
---------------------------------------------------------------------------
    DOD accounting personnel are responsible for accounting for funds 
received through congressional appropriations, the sale of goods and 
services by working capital fund businesses, revenue generated through 
nonappropriated fund activities, and the sales of military systems and 
equipment to foreign governments or international organizations. DOD's 
finance activities generally involve paying the salaries of its 
employees, paying retirees and annuitants, reimbursing its employees 
for travel-related expenses, paying contractors and vendors for goods 
and services, and collecting debts owed to DOD. DOD defines its 
accounting activities to include accumulating and recording operating 
and capital expenses as well as appropriations, revenues, and other 
receipts. According to DOD's fiscal year 2012 budget request, in fiscal 
year 2010 DFAS

         processed approximately 198 million payment-related 
        transactions and disbursed over $578 billion;
         accounted for 1,129 Active DOD appropriation accounts; 
        and
         processed more that 11 million commercial invoices.

    PERVASIVE FINANCIAL MANAGEMENT PROBLEMS CONTINUE TO AFFECT THE 
             EFFICIENCY AND EFFECTIVENESS OF DOD OPERATIONS

    DOD financial management was designated as a high-risk area by GAO 
in 1995. Pervasive deficiencies in financial management processes, 
systems, and controls, and the resulting lack of data reliability, 
continue to impair management's ability to assess the resources needed 
for DOD operations; track and control costs; ensure basic 
accountability; anticipate future costs; measure performance; maintain 
funds control; and reduce the risk of loss from fraud, waste, and 
abuse.
    Other business operations, including the high-risk areas of 
contract management, supply chain management, support infrastructure 
management, and weapon systems acquisition are directly impacted by the 
problems in financial management. We have reported that continuing 
weaknesses in these business operations result in billions of dollars 
of wasted resources, reduced efficiency, ineffective performance, and 
inadequate accountability. Examples of the pervasive weaknesses in the 
department's business operations are highlighted below.

         DOD invests billions of dollars to acquire weapon 
        systems, but it lacks the financial management processes and 
        capabilities it needs to track and report on the cost of weapon 
        systems in a reliable manner. We reported on this issue over 20 
        years ago,\9\ but the problems continue to persist. In July 
        2010, we reported \10\ that although DOD and the Military 
        Departments have efforts underway to begin addressing these 
        financial management weaknesses, problems continue to exist and 
        remediation and improvement efforts would require the support 
        of other business areas beyond the financial community before 
        they could be fully addressed.
---------------------------------------------------------------------------
    \9\ GAO, Financial Audit: Air Force Does Not Effectively Account 
for Billions of Dollars of Resources, GAO/AFMD 90-23 (Washington, DC: 
Feb. 23, 1990).
    \10\ GAO, Department of Defense: Additional Actions Needed to 
Improve Financial Management of Military Equipment, GAO-10-695 
(Washington, DC July 26, 2010).
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         DOD also requests billions of dollars each year to 
        maintain its weapon systems, but it has limited ability to 
        identify, aggregate, and use financial management information 
        for managing and controlling operating and support costs. 
        Operating and support costs can account for a significant 
        portion of a weapon system's total life-cycle costs, including 
        costs for repair parts, maintenance, and contract services. In 
        July 2010, we reported \11\ that the department lacked key 
        information needed to manage and reduce operating and support 
        costs for most of the weapon systems we reviewed \12\--
        including cost estimates and historical data on actual 
        operating and support costs. For acquiring and maintaining 
        weapon systems, the lack of complete and reliable financial 
        information hampers DOD officials in analyzing the rate of cost 
        growth, identifying cost drivers, and developing plans for 
        managing and controlling these costs. Without timely, reliable, 
        and useful financial information on cost, DOD management lacks 
        information needed to accurately report on acquisition costs, 
        allocate resources to programs, or evaluate program 
        performance.
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    \11\ GAO, Defense Management: DOD Needs Better Information and 
Guidance to More Effectively Manage and Reduce Operating and Support 
Costs of Major Weapon Systems, GAO-10-717 (Washington, DC: July 20, 
2010).
    \12\ GAO reviewed the following seven major aviation systems: the 
Navy's F/A-18E/F; the Air Force's F-22A, B-1B, and F-15E; and the 
Army's AH-64D, CH-47D, and UH-60L.
---------------------------------------------------------------------------
         In June 2010, we reported \13\ that the Army Budget 
        Office lacked an adequate funds control process to provide it 
        with ongoing assurance that obligations and expenditures do not 
        exceed funds available in the Military Personnel-Army (MPA) 
        appropriation. We found that an obligation of $200 million in 
        excess of available funds in the Army's military personnel 
        account violated the Antideficiency Act. The overobligation 
        likely stemmed, in part, from lack of communication between 
        Army Budget and program managers so that Army Budget's 
        accounting records reflected estimates instead of actual 
        amounts until it was too late to control the incurrence of 
        excessive obligations in violation of the act. Thus, at any 
        given time in the fiscal year, Army Budget did not know the 
        actual obligation and expenditure levels of the account. Army 
        Budget explained that it relies on estimated obligations--
        despite the availability of actual data from program managers--
        because of inadequate financial management systems. The lack of 
        adequate process and system controls to maintain effective 
        funds control impacted the Army's ability to prevent, identify, 
        correct, and report potential violations of the Antideficiency 
        Act.
---------------------------------------------------------------------------
    \13\ GAO, Department of the Army--The fiscal year 2008 Military 
Personnel, Army Appropriation and the Antideficiency Act, B-318724 
(Washington, DC: June 22, 2010).
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         In our February 2011 report \14\ on the Defense 
        Centers of Excellence (DCOE), we found that DOD's TRICARE 
        Management Activity (TMA) had misclassified $102.7 million of 
        the nearly $112 million in DCOE advisory and assistance 
        contract obligations. The proper classification and recording 
        of costs are basic financial management functions that and are 
        also key in analyzing areas for potential future savings.
---------------------------------------------------------------------------
    \14\ GAO, Defense Health: Management Weaknesses at Defense Centers 
of Excellence for Psychological Health and Traumatic Brain Injury 
Require Attention, GAO-11-219 (Washington, DC: Feb. 28, 2011).

    Without adequate financial management processes, systems, and 
controls, DOD components are at risk of reporting inaccurate, 
inconsistent, and unreliable data for financial reporting and 
management decisionmaking and potentially exceeding authorized spending 
limits. The lack of effective internal controls hinders management's 
ability to have reasonable assurance that their allocated resources are 
used effectively, properly, and in compliance with budget and 
appropriations law.

     DOD'S PAST STRATEGIES FOR IMPROVING FINANCIAL MANAGEMENT WERE 
           INEFFECTIVE BUT RECENT INITIATIVES ARE ENCOURAGING

    Over the years, DOD has initiated several broadbased reform efforts 
to address its longstanding financial management weaknesses. However, 
as we have reported, those efforts did not achieve their intended 
purpose of improving the department's financial management operations. 
In 2005, the DOD Comptroller established the DOD FIAR Directorate to 
develop, manage, and implement a strategic approach for addressing the 
department's financial management weaknesses and for achieving 
auditability, and to integrate those efforts with other improvement 
activities, such as the department's business system modernization 
efforts. In May 2009,\15\ we identified several concerns with the 
adequacy of the FIAR plan as a strategic and management tool to resolve 
DOD's financial management difficulties and thereby position the 
department to be able to produce auditable financial statements.
---------------------------------------------------------------------------
    \15\ GAO, Financial Management: Achieving Financial Statement 
Auditability in the Department of Defense, GAO-09-373 (Washington, DC: 
May 6, 2009).
---------------------------------------------------------------------------
    Overall, since the issuance of the first FIAR plan in December 
2005, improvement efforts have not resulted in the fundamental 
transformation of operations necessary to resolve the department's 
longstanding financial management deficiencies. However, DOD has made 
significant improvements to the FIAR plan that, if implemented 
effectively, could result in significant improvement in DOD's financial 
management and progress toward auditability, but progress in taking 
corrective actions and resolving deficiencies remains slow. While none 
of the Military Services has obtained an unqualified (clean) audit 
opinion, some DOD organizations, such as the Army Corps of Engineers, 
DFAS, the Defense Contract Audit Agency, and the DOD Inspector General, 
have achieved this goal. Moreover, some DOD components that have not 
yet received clean audit opinions are beginning to reap the benefits of 
strengthened controls and processes gained through ongoing efforts to 
improve their financial management operations and reporting 
capabilities. Lessons learned from the Marine Corps' Statement of 
Budgetary Resources audit can provide a roadmap to help other 
components better stage their audit readiness efforts by strengthening 
their financial management processes to increase data reliability as 
they develop action plans to become audit ready.
    In August 2009, the DOD Comptroller sought to further focus efforts 
of the department and components, in order to achieve certain short- 
and long-term results, by giving priority to improving processes and 
controls that support the financial information most often used to 
manage the department. Accordingly, DOD revised its FIAR strategy and 
methodology to focus on the DOD Comptroller's two priorities--budgetary 
information and asset accountability. The first priority is to 
strengthen processes, controls, and systems that produce DOD's 
budgetary information and the department's Statements of Budgetary 
Resources. The second priority is to improve the accuracy and 
reliability of management information pertaining to the department's 
mission-critical assets, including military equipment, real property, 
and general equipment, and validating improvement through existence and 
completeness testing. The DOD Comptroller directed the DOD components 
participating in the FIAR plan--the departments of the Army, Navy, Air 
Force and Defense Logistics Agency--to use a standard process and 
aggressively modify their activities to support and emphasize 
achievement of the priorities.
    GAO supports DOD's current approach of focusing and prioritizing 
efforts in order to achieve incremental progress in addressing 
weaknesses and making progress toward audit readiness. Budgetary and 
asset information is widely used by DOD managers at all levels, so its 
reliability is vital to daily operations and management. DOD needs to 
provide accountability over the existence and completeness of its 
assets. Problems with asset accountability can further complicate 
critical functions, such as planning for the current troop withdrawals.
    In May 2010, DOD introduced a new phased approach that divides 
progress toward achieving financial statement auditability into five 
waves (or phases) of concerted improvement activities (see appendix I). 
According to DOD, the components' implementation of the methodology 
described in the 2010 FIAR plan is essential to the success of the 
department's efforts to ultimately achieve full financial statement 
auditability. To assist the components in their efforts, the FIAR 
guidance, issued along with the revised plan, details the 
implementation of the methodology with an emphasis on internal controls 
and supporting documentation that recognizes both the challenge of 
resolving the many internal control weaknesses and the fundamental 
importance of establishing effective and efficient financial 
management. The FIAR Guidance provides the process for the components 
to follow, through their individual financial improvement plans (FIP), 
in assessing processes, controls, and systems; identifying and 
correcting weaknesses; assessing, validating, and sustaining corrective 
actions; and achieving full auditability. The guidance directs the 
components to identify responsible organizations and personnel and 
resource requirements for improvement work. In developing their plans, 
components use a standard template that comprises data fields aligned 
to the methodology. The consistent application of a standard 
methodology for assessing the components' current financial management 
capabilities can help establish valid baselines against which to 
measure, sustain, and report progress.

NUMEROUS CHALLENGES MUST BE ADDRESSED IN ORDER FOR DOD TO SUCCESSFULLY 
                      REFORM FINANCIAL MANAGEMENT

    Improving the department's financial management operations and 
thereby providing DOD management and Congress more accurate and 
reliable information on the results of its business operations will not 
be an easy task. It is critical that the current initiatives being led 
by the DOD Deputy Chief Management Officer and the DOD Comptroller be 
continued and provided with sufficient resources and ongoing monitoring 
in the future. Absent continued momentum and necessary future 
investments, the current initiatives may falter, similar to previous 
efforts. Below are some of the key challenges that the department must 
address in order for the financial management operations of the 
department to improve to the point where DOD may be able to produce 
auditable financial statements.
    Committed and sustained leadership. The FIAR plan is in its 6th 
year and continues to evolve based on lessons learned, corrective 
actions, and policy changes that refine and build on the plan. The DOD 
Comptroller has expressed commitment to the FIAR goals, and established 
a focused approach that is intended to help DOD achieve successes in 
the near term. But the financial transformation needed at DOD, and its 
removal from GAO's high-risk list, is a long-term endeavor. Improving 
financial management will need to be a cross-functional endeavor. It 
requires the involvement of DOD operations performing other business 
functions that interact with financial management--including those in 
the high-risk areas of contract management, supply chain management, 
support infrastructure management, and weapon systems acquisition. As 
acknowledged by DOD officials, sustained and active involvement of the 
department's Chief Management Officer, the Deputy Chief Management 
Officer, the Military Departments' Chief Management Officers, the DOD 
Comptroller, and other senior leaders is critical. Within every 
administration, there are changes at the senior leadership; therefore, 
it is paramount that the current initiative be institutionalized 
throughout the department--at all working levels--in order for success 
to be achieved.
    Effective plan to correct internal control weaknesses. In May 2009, 
we reported \16\ that the FIAR plan did not establish a baseline of the 
department's state of internal control and financial management 
weaknesses as its starting point. Such a baseline could be used to 
assess and plan for the necessary improvements and remediation to be 
used to measure incremental progress toward achieving estimated 
milestones for each DOD component and the department. DOD currently has 
efforts underway to address known internal control weaknesses through 
three interrelated programs: (1) Internal Controls over Financial 
Reporting (ICOFR) program, (2) ERP implementation, and (3) FIAR plan. 
However, the effectiveness of these three interrelated efforts at 
establishing a baseline remains to be seen. Furthermore, DOD has yet to 
identify the specific control actions that need to be taken in Waves 4 
and 5 of the FIAR plan, which deal with asset accountability and other 
financial reporting matters. Because of the department's complexity and 
magnitude, developing and implementing a comprehensive plan that 
identifies DOD's internal control weaknesses will not be an easy task. 
But it is a task that is critical to resolving the longstanding 
weaknesses and will require consistent management oversight and 
monitoring for it to be successful.
---------------------------------------------------------------------------
    \16\ GAO-09-373.
---------------------------------------------------------------------------
    Competent financial management workforce. Effective financial 
management in DOD will require a knowledgeable and skilled workforce 
that includes individuals who are trained and certified in accounting, 
well versed in government accounting practices and standards, and 
experienced in information technology. Hiring and retaining such a 
skilled workforce is a challenge DOD must meet to succeed in its 
transformation to efficient, effective, and accountable business 
operations. The National Defense Authorization Act for Fiscal Year 2006 
\17\ directed DOD to develop a strategic plan to shape and improve the 
department's civilian workforce. The plan was to, among other things; 
include assessments of: (1) existing critical skills and competencies 
in DOD's civilian workforce, (2) future critical skills and 
competencies needed over the next decade, and (3) any gaps in the 
existing or future critical skills and competencies identified. In 
addition, DOD was to submit a plan of action for developing and 
reshaping the civilian employee workforce to address any identified 
gaps, as well as specific recruiting and retention goals and strategies 
on how to train, compensate, and motivate civilian employees. In 
developing the plan, the department identified financial management as 
one of its enterprisewide mission-critical occupations.
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    \17\ Pub. L. No. 109-163, div. A, Sec. 1122, 119 Stat. 3136, 3452 
(Jan. 6, 2006). The National Defense Authorization Act for Fiscal Year 
2010 made this strategic plan into a permanent annual requirement. Pub. 
L. No. 111-84, div. A, Sec. 1108, 123 Stat. 2190, 2488 (Oct. 28, 2009), 
codified at 10 U.S.C. Sec. 115b.
---------------------------------------------------------------------------
    In July 2011, we reported \18\ that DOD's 2009 overall civilian 
workforce plan had addressed some legislative requirements, including 
assessing the critical skills of its existing civilian workforce. 
Although some aspects of the legislative requirements were addressed, 
DOD still has significant work to do. For example, while the plan 
included gap analyses related to the number of personnel needed for 
some of the mission-critical occupations, the department had only 
discussed competency gap analyses for three mission-critical 
occupations--language, logistics management, and information technology 
management. A competency gap for financial management was not included 
in the department's analysis. Until DOD analyzes personnel needs and 
gaps in the financial management area, it will not be in a position to 
develop an effective financial management recruitment, retention, and 
investment strategy to successfully address its financial management 
challenges.
---------------------------------------------------------------------------
    \18\ GAO, DOD Civilian Personnel: Competency Gap Analysis and Other 
Actions Needed to Enhance DOD's Strategic Workforce Plans, GAO-11-827T 
(Washington, DC: July 14, 2011).
---------------------------------------------------------------------------
    Accountability and effective oversight. The department established 
a governance structure for the FIAR plan, which includes review bodies 
for governance and oversight. The governance structure is intended to 
provide the vision and oversight necessary to align financial 
Improvement and audit readiness efforts across the department. To 
monitor progress and hold individuals accountable for progress, DOD 
managers and oversight bodies need reliable, valid, meaningful metrics 
to measure performance and the results of corrective actions. In May 
2009, we reported \19\ that the FIAR plan did not have clear results-
oriented metrics. To its credit, DOD has taken action to begin defining 
results-oriented FIAR metrics it intends to use to provide visibility 
of component-level progress in assessment; and testing and remediation 
activities, including progress in identifying and addressing supporting 
documentation issues.
---------------------------------------------------------------------------
    \19\ GAO-09-373.
---------------------------------------------------------------------------
    We have not yet had an opportunity to assess implementation of 
these metrics--including the components' control over the accuracy of 
supporting data--or their usefulness in monitoring and redirecting 
actions.
    Ensuring effective monitoring and oversight of progress--especially 
by the leadership in the components--will be key to bringing about 
effective implementation, through the components' Financial Information 
Plans, of the department's financial management and related business 
process reform. If the department's future FIAR plan updates provide a 
comprehensive strategy for completing Waves 4 and 5, the plan can serve 
as an effective tool to help guide and direct the department's 
financial management reform efforts.
    Effective oversight holds individuals accountable for carrying out 
their responsibilities. DOD has introduced incentives such as including 
FIAR goals in Senior Executive Service Performance Plans, increased 
reprogramming thresholds granted to components that receive a positive 
audit opinion on their Statement of Budgetary Resources, audit costs 
funded by the Office of the Secretary of Defense after a successful 
audit, and publicizing and rewarding components for successful audits. 
The challenge now is to evaluate and validate these and other 
incentives to determine their effectiveness and whether the right mix 
of incentives has been established.
    Well-defined enterprise architecture. For decades, DOD has been 
challenged in modernizing its timeworn business systems. Since 1995, we 
have designated DOD's business systems modernization program as high 
risk. Between 2001 and 2005, we reported that the modernization program 
had spent hundreds of millions of dollars on an enterprise architecture 
and investment management structures that had limited value. 
Accordingly, we made explicit architecture and investment management-
related recommendations. Congress included provisions in the Ronald W. 
Reagan National Defense Authorization Act for Fiscal Year 2005 that 
were consistent with our recommendations. In response, DOD continues to 
take steps to comply with the act's provisions and to satisfy relevant 
system modernization management guidance. Collectively, these steps 
address best practices in implementing the statutory provisions 
concerning the business enterprise architecture and review of systems 
costing in excess of $1 million. However, longstanding challenges that 
we previously identified remain to be addressed. Specifically, while 
DOD continues to release updates to its corporate enterprise 
architecture, the architecture has yet to be federated \20\ through 
development of aligned subordinate architectures for each of the 
Military Departments. In this regard, each of the Military Departments 
has made progress in managing its respective architecture program, but 
there are still limitations in the scope and completeness, as well as 
the maturity of the Military Departments' architecture programs. For 
example, while each department has established or is in the process of 
establishing an executive committee with responsibility and 
accountability for the enterprise architecture, none has fully 
developed an enterprise architecture methodology or a well-defined 
business enterprise architecture and transition plan to guide and 
constrain business transformation initiatives. In addition, while DOD 
continues to establish investment management processes, the DOD 
enterprise and the Military Departments' approaches to business systems 
investment management still lack the defined policies and procedures to 
be considered effective investment selection, control, and evaluation 
mechanisms. Until DOD fully implements these longstanding institutional 
modernization management controls its business systems modernization 
will likely remain a high-risk program.
---------------------------------------------------------------------------
    \20\ A federated architecture consists of a family of coherent but 
distinct member architectures in which subsidiary architectures conform 
to an overarching corporate architectural view and rule set.
---------------------------------------------------------------------------
    Successful implementation of the ERPs. The department has invested 
billions of dollars and will invest billions more to implement the 
ERPs. DOD officials have said that successful implementation of ERPs is 
key to transforming the department's business operations, including 
financial management, and in improving the department's capability to 
provide DOD management and Congress with accurate and reliable 
information on the results of DOD's operations. DOD has stated that the 
ERPs will replace over 500 legacy systems. The successful 
implementation of the ERPs is not only critical for addressing 
longstanding weaknesses in financial management, but equally important 
for helping to resolve weaknesses in other high-risk areas such as 
business transformation, business system modernization, and supply 
chain management.
    Over the years we have reported \21\ that the department has not 
effectively employed acquisition management controls to help ensure the 
ERPs deliver the promised capabilities on time and within budget. 
Delays in the successful implementation of ERPs have extended the use 
of existing duplicative, stovepiped systems, and continued funding of 
the existing legacy systems longer than anticipated. Additionally, the 
continued implementation problems can erode savings that were estimated 
to accrue to DOD as a result of modernizing its business systems and 
thereby reduce funds that could be used for other DOD priorities.
---------------------------------------------------------------------------
    \21\ GAO-10-461; DOD Business Systems Modernization: Navy 
Implementing a Number of Key Management Controls on Enterprise Resource 
Planning System, but Improvements Still Needed, GAO-09-841 (Washington, 
DC: Sept. 15, 2009); GAO-08-896; GAO-08-866; DOD Business Systems 
Modernization: Key Marine Corps System Acquisition Needs to Be Better 
Justified, Defined, and Managed, GAO-08-822 (Washington, DC: July 28, 
2008); GAO-07-860.
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    To help improve the department's management oversight of its ERPs, 
we have recommended \22\ that DOD define success for ERP implementation 
in the context of business operations and in a way that is measurable. 
Accepted practices in system development include testing the system in 
terms of the organization's mission and operations--whether the system 
performs as envisioned at expected levels of cost and risk when 
implemented within the organization's business operations. Developing 
and using specific performance measures to evaluate a system effort 
should help management understand whether the expected benefits are 
being realized. Without performance measures to evaluate how well these 
systems are accomplishing their desired goals, DOD decisionmakers 
including program managers, do not have all the information they need 
to evaluate their investments to determine whether the individual 
programs are helping DOD achieve business transformation and thereby 
improve upon its primary mission of supporting the warfighter.
---------------------------------------------------------------------------
    \22\ GAO, DOD Business Transformation: Improved Management and 
Oversight of Business Modernization Efforts Needed, GAO-11-53 
(Washington, DC Oct. 7, 2010).
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    Another key element in DOD efforts to modernize its business 
systems is investment management policies and procedures. We reported 
in June 2011 \23\ that DOD's oversight process does not provide 
sufficient visibility into the Military Department's investment 
management activities, including its reviews of systems that are in 
operations and maintenance made and smaller investments. As discussed 
in our information technology investment management framework and 
previous reports on DOD's investment management of its business 
systems,\24\ adequately documenting both policies and associated 
procedures that govern how an organization manages its information 
technology projects and investment portfolios is important because 
doing so provides the basis for rigor, discipline, and repeatability in 
how investments are selected and controlled across the entire 
organization. Until DOD fully defines missing policies and procedures, 
it is unlikely that the department's over 2,200 business systems will 
be managed in a consistent, repeatable, and effective manner that, 
among other things, maximizes mission performance while minimizing or 
eliminating system overlap and duplication. To this point, there is 
evidence showing that DOD is not managing its systems in this manner. 
For example, DOD reported that of its 79 major business and other IT 
investments, about a third are encountering cost, schedule, and 
performance shortfalls requiring immediate and sustained management 
attention. In addition, we have previously reported \25\ that DOD's 
business system environment has been characterized by: (1) little 
standardization; (2) multiple systems performing the same tasks; (3) 
the same data stored in multiple systems; and (4) manual data entry 
into multiple systems. Because DOD spends billions of dollars annually 
on its business systems and related IT infrastructure, the potential 
for identifying and avoiding the costs associated with duplicative 
functionality across its business system investments is significant.
---------------------------------------------------------------------------
    \23\ GAO, Department of Defense: Further Actions Needed to 
Institutionalize Key Business Systems Modernization Management Control, 
GAO-11-684 (Washington, DC: June 29, 2011).
    \24\ GAO, Business Systems Modernization: DOD Needs to Fully Define 
Policies and Procedures for Institutionally Managing Investments, GAO-
07-538 (Washington, DC: May 11, 2007); Business Systems Modernization: 
Air Force Needs to Fully Define Policies and Procedures for 
Institutionally Managing Investments, GAO-08-52 (Washington D.C.: Oct. 
31, 2007); Business Systems Modernization: Department of the Navy Needs 
to Establish Management Structure and Fully Define Policies and 
Procedures for Institutionally Managing Investments, GAO-08-53 
(Washington, DC: Oct. 31, 2007).
    \25\ GAO, Opportunities to Reduce Potential Duplication in 
Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-
318SP (Washington, DC: Mar. 1, 2011).
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                            CLOSING COMMENTS

    In closing, I am encouraged by the recent efforts and commitment 
DOD's leaders have shown toward improving the department's financial 
management. Progress we have seen includes recently issued guidance to 
aid DOD components in their efforts to address their financial 
management weaknesses and achieve audit readiness; standardized 
component financial improvement plans to facilitate oversight and 
monitoring; and the sharing of lessons learned. In addition, the DCMO 
and the DOD Comptroller have shown commitment and leadership in moving 
DOD's financial management improvement efforts forward.
    The revised FIAR strategy is still in the early stages of 
implementation, and DOD has a long way and many longstanding challenges 
to overcome, particularly with regard to sustained commitment, 
leadership, and oversight, before the department and its military 
components are fully auditable, and DOD financial management is no 
longer considered high risk. However, the department is heading in the 
right direction and making progress. Some of the most difficult 
challenges ahead lie in the effective implementation of the 
department's strategy by the Army, Navy, Air Force, and DLA, including 
successful implementation of ERP systems and integration of financial 
management improvement efforts with other DOD initiatives.
    GAO will continue to monitor the progress of and provide feedback 
on the status of DOD's financial management improvement efforts. We 
currently have work in progress to assess implementation of the 
department's FIAR strategy and efforts toward auditability.
    As a final point, I want to emphasize the value of sustained 
congressional interest in the department's financial management 
improvement efforts, as demonstrated by this Subcommittee's leadership.
    Chairwoman McCaskill and Ranking Member Ayotte, this concludes my 
prepared statement. I would be pleased to respond to any questions that 
you or other members of the subcommittee may have at this time.
    For further information regarding this testimony, please contact 
Asif A. Khan, (202) 512-9095 or [email protected]. Key contributors to this 
testimony include J. Christopher Martin, Senior-Level Technologist; F. 
Abe Dymond, assistant Director; Gayle Fischer, assistant Director; Greg 
Pugnetti, assistant Director; Darby Smith, assistant Director; Beatrice 
Alff; Steve Donahue; Keith McDaniel; Maxine Hattery; Hal Santarelli; 
and Sandy Silzer.

                      APPENDIX I: FIAR PLAN WAVES

    The first three waves focus on achieving the DOD Comptroller's 
interim budgetary and asset accountability priorities, while the 
remaining two waves are intended to complete actions needed to achieve 
full financial statement auditability. However, the department has not 
yet fully defined its strategy for completing waves 4 and 5. Each wave 
focuses on assessing and strengthening internal controls and business 
systems related to the stage of auditability addressed in the wave.
    Wave 1--Appropriations Received Audit focuses on the appropriations 
receipt and distribution process, including funding appropriated by 
Congress for the current fiscal year and related apportionment/
reapportionment activity by the OMB, as well as allotment and sub-
allotment activity within the department.
    Wave 2--Statement of Budgetary Resources Audit focuses on 
supporting the budget-related data (e.g., status of funds received, 
obligated, and expended) used for management decision making and 
reporting, including the Statement of Budgetary Resources. In addition 
to fund balance with Treasury reporting and reconciliation, other 
significant end-to-end business processes in this wave include procure-
to-pay, hire-to-retire, order-to-cash, and budget-to-report.
    Wave 3--Mission Critical Assets Existence and Completeness Audit 
focuses on ensuring that all assets (including military equipment, 
general equipment, real property, inventory, and operating materials 
and supplies) that are recorded in the department's accountable 
property systems of record exist; all of the reporting entities' assets 
are recorded in those systems of record; reporting entities have the 
right (ownership) to report these assets; and the assets are 
consistently categorized, summarized, and reported.
    Wave 4--Full Audit Except for Legacy Asset Valuation includes the 
valuation assertion over new asset acquisitions and validation of 
management's assertion regarding new asset acquisitions, and it depends 
on remediation of the existence and completeness assertions in Wave 3. 
Also, proper contract structure for cost accumulation and cost 
accounting data must be in place prior to completion of the valuation 
assertion for new acquisitions. It involves the budgetary transactions 
covered by the Statement of Budgetary Resources effort in Wave 2, 
including accounts receivable, revenue, accounts payable, expenses, 
environmental liabilities, and other liabilities.
    Wave 5--Full Financial Statement Audit focuses efforts on assessing 
and strengthening, as necessary, internal controls, processes, and 
business systems involved in supporting the valuations reported for 
legacy assets once efforts to ensure control over the valuation of new 
assets acquired and the existence and completeness of all mission 
assets are deemed effective on a go-forward basis. Given the lack of 
documentation to support the values of the department's legacy assets, 
Federal accounting standards allow for the use of alternative methods 
to provide reasonable estimates for the cost of these assets.
    In the context of this phased approach, DOD's dual focus on 
budgetary and asset information offers the potential to obtain 
preliminary assessments regarding the effectiveness of current 
processes and controls and identify potential issues that may adversely 
impact subsequent waves.

    Senator McCaskill. Thank you, Mr. Khan, and thank you for 
all of your work in this area.
    We will begin questions now. Let me start with using an 
example, because the challenge of this hearing is to make this 
product consumable to the public and to my fellow Senators in a 
way that allows us to keep attention and pressure on this 
issue.
    I think one of the reasons that DOD has failed at this for 
so long is because it never received the kind of attention and 
emphasis that it should have through the years, particularly as 
it relates to sun-setting legacy systems and interfacing 
between the various functions of the military. The military, I 
think, is famous for its silo capability, and no place has the 
silo been more prevalent than in the management of financial 
information within DOD.
    But there are real consequences to the failures that have 
continued to plague DOD in terms of financial management. It 
caught my eye that there was a report just issued a few days 
ago, and this is from the IG of DOD. The cost of war data for 
Marine Corps contingency operations were not reliable.
    What this report said is that the data--out of $4.3 billion 
in Marine Corps transactions, the IG found that 86 transactions 
valued at $1.82 billion were not properly supported. In 
addition, almost $1.5 billion in transactions were reported in 
the wrong operation or cost category. As a result, data 
provided to Members of Congress and other decisionmakers did 
not reflect how funds were really actually spent.
    Now, it is astonishing to me that we would have almost half 
of the transactions in a contingency operation not properly 
supported and that we would have $1.5 billion in those 
transactions in the wrong cost or operations category.
    I want to give you a chance, Secretary Commons, to respond 
to the report. I know that management has been asked to provide 
completion date for the recommendations on this audit by August 
22. I would ask you that this committee would also like to 
receive the completion date for the recommendations that have 
been made in this audit.
    But I want to give you a chance to respond to this recent 
report that Congress is not getting accurate information about 
how we are spending our money in Iraq and Afghanistan when it 
comes to Marine Corps operations.
    Ms. Commons. Madam Chairman, I believe for that report, it 
was a matter of establishing a cost code to report those costs, 
and we had not promulgated that information to all of our field 
activities. So some of them did, in fact, record it in the 
wrong category.
    We are in the process of correcting that and putting out 
policy so that they will know exactly how to report the costs 
in the proper category. We will work with that. We will be 
happy to give you the information about the completion date and 
the precise actions that we will take to make sure that that 
does not happen in the future.
    Senator McCaskill. It is very troubling that we are not 
getting cost codes to people in the field. The taxpayers of 
this country have spent an enormous amount of money on these 
contingency operations. I don't need to go through the record 
as to how many different ways we have figured out that we 
weren't keeping good track of the money in contingency 
operations.
    So we will look forward to responses on this and, most 
importantly, look forward to a signal from the IG that they are 
more comfortable that we are keeping track of contingency 
operations spending.
    Let me now briefly go to the Global Combat Support System 
(GCSS)-Army and GCSS-Marine Corps systems. One of the elements 
of the FIAR plan, which is the FIAR plan that people have 
referred to, is the existence and completeness of critical 
assets.
    In a report that is scheduled to be issued tomorrow, GAO 
says that DOD's business systems make it difficult to obtain 
timely and accurate information on the assets that are present 
in theater and operations, and DOD lacks a comprehensive plan 
for addressing the problem.
    They go on to say ongoing efforts to modernize or replace 
DOD business information systems, including systems supporting 
supply chain management, are intended to improve data quality. 
However, we have found that data quality problems persist, and 
these systems are not designed to routinely share data across 
organizational boundaries, such as among Military Departments.
    So this is the situation we have. We have the Army and the 
Marine Corps sharing equipment in theater. Anybody disagree 
with that--that they are sharing equipment in theater, the Army 
and the Marine Corps?
    Okay. They both are designing systems to track real-time 
equipment in theater, equipment that they are sharing. Now, 
$3.9 billion we are planning to pay for this system for the 
Army, almost $4 billion for a system to track equipment for the 
Army. We are paying another $934 million, or another $1 
billion, to develop and field the same kind of system for the 
Marine Corps to track the same equipment.
    Now, here is the punch line. They don't speak to each 
other. Now, how does this happen? How do we end up buying $5 
billion worth of systems to track the same equipment that don't 
talk to each other? That is for, obviously, the Army and the 
Navy, but also I would love to hear from Ms. McGrath or 
Secretary Hale on this question also.
    Ms. McGrath. I am happy to start.
    The two systems, although they sound very similar in the 
capabilities they deliver for the respective organizations, are 
embedded into very different, I will say, business processes 
that they execute their both supply and maintenance 
infrastructures.
    So, although they sound very much the same, they do operate 
within two very different infrastructures and processes, and 
they are not one-for-one used by the same people. So, although, 
as I mentioned, they sound very similar, there is a lot more 
detail behind the execution of those systems and those 
capabilities that those systems enable.
    Senator McCaskill. They couldn't use the same system?
    Ms. McGrath. That said, I do believe that because the 
Marine Corps has fielded, GCSS-Marine Corps--they are certainly 
further ahead in their implementation than the Army is to 
date--that the Army did, as part of their analysis of 
alternatives (AoA), it is my understanding, take a look at the 
GCSS-Marine Corps capability as part of their AoA prior to 
making the decision to go with a different application to 
deliver their capability.
    Senator McCaskill. I would like to find out who that person 
was that made that decision, that looked at the Marine Corps. I 
would like the analysis as to why the Marine Corps system was 
not adequate and why we had to spend another $4 billion.
    That is a significant price tag, and it is--there better be 
damned good reasons as to why the Marine Corps system was 
inadequate, if it was so inadequate that you had to spend 
another $4 billion to get the job done.
    So, I would appreciate knowing who the decisionmakers were 
on that item. I would like to have a written analysis of why 
the Marine Corps system was inadequate and why it remains 
inadequate today.
    In light of our current fiscal climate, why they cannot 
suck it up and use the same system the Marine Corps is using to 
track equipment since it has been fielded.
    Ms. McGrath. Yes, ma'am. There is an AoA that is required 
to be done on every one of those business systems. So, for us 
to provide to you, we could do that in the very near-term.
    [The AoA for the Global Combat Support System Army, 
follows:]

     [See annex printed at the end of this hearing].

    Senator McCaskill. Okay, great. Thank you very much.
    Senator Ayotte.
    Senator Ayotte. Thank you, Madam Chairman.
    I wanted to follow up on the IG's report. I know that you 
are going to report back to this committee, but I think what 
that report showed is that the reconstruction money, defense 
dollars, are particularly susceptible to waste, fraud, and 
mismanagement, in conjunction with the Overseas Contingency 
Operations (OCO) funding.
    What is it that--I know we are going to get a report back. 
But Secretary Hale, what is it that you see, having reviewed 
that report, that needs to be done to DOD to improve that 
process, the financial management of the OCO funding?
    Also, I guess in conjunction with that, the other piece of 
that report, which I am deeply interested in, had to do, of 
course, with the money that was going to our enemy because we 
were contracting in some instances with those that were 
collaborating with our enemy. Senator Brown and I have a bill 
that is incorporated in the NDAA.
    But I think also recently when we asked General Dempsey in 
his confirmation hearing about this topic, he pointed out that 
there was a need for more contracting officers, better-trained 
contracting officers.
    So I throw all of that at you and would ask you to say, 
when you reviewed that report, what was the impression you had 
in terms of what we need to do differently? I would like to 
have Mr. Khan also comment on that.
    Mr. Hale. Let me focus on the corruption issues in 
Afghanistan. There are major problems, Senator Ayotte. I think 
you know that. We have established a task force to try to 
reduce it where we can. We are dealing with a culture that is 
just different than ours.
    But I believe they are having some success. They have 
started vetting contractors and subcontractors to try to weed 
out those that have bad records. They are trying to work with 
Afghan officials, the ones that we can work with well, to 
minimize corruption.
    We have gotten most of the cash off the battlefield. We pay 
for hardly anything in U.S. cash now in Afghanistan. It is 
almost all electronic funds transfer. Where we can, we pay in 
afghanis, which are a lot harder to export to outside the 
country.
    So I think there is some progress. But it is an uphill 
fight, and we are dealing with just a very different culture 
than the one we have. So the best answer I can give you, it is 
going to be an ongoing issue, I think, as long as we are 
involved in Afghanistan.
    Senator Ayotte. Can you also follow up to the issue that 
the chairman raised in terms of the misallocation of funds in 
terms of the OCO funding?
    Mr. Hale. I am going to defer that one to Ms. Commons. I, 
frankly, have not reviewed that particular report. I think she 
answered it. I will look at it, but I have not.
    Senator Ayotte. I know that you had answered to it, but I 
thought maybe you might have some insight on that as well.
    Mr. Hale. I would underscore what she said. We need to fix 
it, and I think what I heard Gladys say was we need to get the 
right codes out there.
    I don't know that we violated the Anti-Deficiency Act or 
anything like that. But we need to get it in the right category 
so we are supporting and providing the information that we all 
need. Not just you, I need it, and we all need it. So we need 
to fix it.
    Senator Ayotte. I also wanted to ask you about the 
milestones that have been completed since you submitted your 
last report on DOD's FIAR plan in November 2010. According to 
your most recent report, which you submitted in May, DOD 
accomplished only 1 milestone and 11 were pushed out to future 
dates.
    So, as I understand the math, 1 for 12. Your report also 
identifies another set of milestones called the interim goals 
for initial FIAR opportunities--excuse me, priorities--and the 
results here aren't much better, with four milestones being met 
and nine pushed out to later dates.
    So if we put that all together, we are basically 4 for 13 
on these interim goals, and DOD has been citing those as things 
that it has been focusing on. But if we look at it as 5 for 25, 
shouldn't we be concerned about this? What does it suggest in 
terms of DOD's ability to meet the 2017 deadlines?
    If Mr. Khan can also comment on this, I would appreciate 
it.
    Mr. Hale. I haven't counted them in the fashion you have, 
but I will accept your math. I like to look at the ones we have 
actually started, and I think they are so important. We haven't 
done any in the past in terms of validations. We haven't had 
any goals, nor have we done any to speak of.
    We actually have an audit of a Military Service underway. 
First time that has ever happened in DOD. I won't go through 
them all again, but we have a number of the validations.
    I don't want to waste the money by pushing if we are not 
ready, but I hear your point that we need to pick up the pace 
in terms of meeting these deadlines. I share your concern.
    Again, I haven't counted them quite that way, but I will 
accept your math and accept the challenge that we need to pick 
up the pace.
    Senator Ayotte. Is there anything more that we can be doing 
as Congress to help this process move forward? Because, 
obviously, you are working toward it. Are there obstacles that 
we have put in place, or can we better give you the tools that 
you are missing right now?
    Mr. Hale. I rarely ask for hearings, but I think some 
steady pressure, hopefully moderate pressure, is a good idea. 
It focuses us, just as I had a boss early in my career who said 
to me when I became confirmed, ``Yours is the power to call 
meetings.''
    That sounded very bureaucratic, but I learned that he was 
right because it focused attention. Well, yours is the power to 
call hearings, and it also focuses attention.
    There are some things you can do. One in particular. We 
haven't talked about it, but we have proposed a course-based 
certification program for defense financial managers, similar 
to the one in acquisition. It will establish a framework we 
don't have now. It will allow us to require courses.
    We want it to be mandatory with appropriate waivers. That 
will require legislation. It is in the House bill. I believe it 
is in the Senate Armed Services Committee (SASC) bill. I think 
the SASC language is very good, and I hope that it survives in 
conference. So I would appreciate your help there.
    I will say one more thing you can do, and I know you can't 
do this personally. Don't put us on another Continuing 
Resolution for 6 months. I can't tell you how much time that 
drained from financial managers. It is very difficult to 
manage, and it also was devastating, I think, to our 
contracting workforce.
    So if there is any way we can avoid that, I would hope you 
would try.
    Senator Ayotte. Secretary Hale, I have to tell you, this is 
music to my ears because I am the newest appointment to the 
Senate Budget Committee, and I am anxious for us to actually 
get down to the hard work of putting together a budget. I 
couldn't agree more that this short-term funding is not the 
best way to fund a government, nor is it the best to deal with 
the fiscal crisis that we face.
    Mr. Hale. A debt ceiling agreement would help, too.
    Senator Ayotte. Well, there you go. [Laughter.]
    I don't know if Mr. Khan had any comments? My time is up. 
But if you had any comments?
    Mr. Khan. Just to add to what Mr. Hale said, I think there 
have been slippages in milestones. The more important ones to 
view and to keep track of are the slippages in the ERP 
milestones.
    2017 is going to be upon us very soon, sooner than we 
expect. Without the implementation or effective implementation 
of those ERPs within the Services, it will be a challenge 
reaching the 2017 milestone to be audit ready.
    Thank you.
    Senator Ayotte. Thank you.
    Senator McCaskill. Thank you.
    I do want to say for the record that the irony is not lost 
on at least the subcommittee chairman that it does take some 
nerve for us to call a hearing calling you to task for your 
lack of fiscal management in light of what we are busy trying 
to get done here in the halls of Congress this week.
    Clearly, this could be in the category of, ``Hello, pot, 
this is kettle.'' [Laughter.]
    So I do get that part.
    Senator Begich, questions?
    Senator Begich. Thank you very much, Madam Chair.
    Let me, if I can, and whoever can answer this, and then I 
may have some additional follow-up to it.
    First, we know the Corps of Engineers--and maybe this is 
for Secretary McGrath and Secretary Hale. I am not sure which 
one. But the Corps of Engineers and Defense Contract Audit 
Agency have auditable financial statements. I heard you 
mentioned a little bit, but I want to follow through on this. 
They are able to be audited. What are we learning from that?
    I guess, just so you know, I am just a little frustrated. I 
know a lot of you folks are new to the process here. But I am 
frustrated that we are not--it is one of the largest units, and 
we can't audit ourselves. So I won't go through that lecture.
    But how does the Corps do it? What are you doing to 
replicate or improve on that? Why is it going to take you 6 
years?
    Mr. Hale. The Corps is a lot smaller. I don't take away 
from their accomplishment one bit. It took them about 8 years, 
I might add, to get there. But they are a lot smaller, and that 
makes it easier.
    We have learned, I think, from what they have done and are 
trying to copy their successes. Even more importantly, we are 
finally, as I have said, auditing the financial statement, one 
of them, of a Service, the Marine Corps statement of budgetary 
resources. We are learning a great deal from that.
    It is discouraging in some ways because I think we have 
learned that our business processes are simply not standard, 
sufficiently standard to accommodate an audit, and I believe 
that is going to be true throughout all of the Military 
Services.
    To start to fix that, I have asked the Services to assemble 
teams, probably from their audit agencies, that should go out 
to the commands and get a report on financial processes and 
make an assessment for us about what we have to do to improve 
them so that they are auditable. I hope that we can get that 
started soon. We are working internally to move ahead.
    So that is an important lesson learned. The other reason it 
takes so long are the systems. We simply have to have them. I 
think it is particularly true in the Army and the Air Force. 
Their systems are sufficiently old that they just aren't going 
to support what an audit requires.
    They take time to implement and money, and both are in 
short supply, particularly the money. I am not making excuses. 
I know it sounds like whining. I would like to go faster, too.
    Senator Begich. No, let me walk through this. Are you going 
to do within each one of those kind of--and it sounds like you 
are, to some extent--but instead of waiting for the whole thing 
to be developed, are you going to do subaudits?
    Mr. Hale. Yes.
    Senator Begich. I know when I was on my local assembly, I 
was chair of the Budget and Audit Committee for, I think, 2 or 
3 years. We were given a presentation to change the system and 
do the whole thing.
    They were going to do the whole thing all at once, which 
was going to be a disaster. You could see it coming. We forced 
them into kind of these micro elements so we could actually 
refine it as it moved along. Is that the game plan?
    Mr. Hale. Yes. That is the game plan and a focused 
strategy. So let us focus on the information we most use to 
manage, which makes sense, let us start with the stuff that we 
actually need, which would include the budget, because we 
manage the place based on budgets, and also knowing where our 
assets are and how many we have because that is critical to 
warfighters.
    So we focused first on that. We will take pieces within 
that as well. These validations that I spoke of are essentially 
mini audits. Pick a section they think we are ready to go. We 
will hire an independent public accountant or, in some cases, 
the IG, and ask him to go in and give us advice.
    We are already finding that we are learning a lot from 
those because they can tell us, ``Hey, you are doing okay here, 
but you are not doing okay there. You have to change.''
    Senator Begich. Let me ask you in regards to assets. I am 
trying to follow up on what the chairwoman was getting to. That 
is so the Army versus the Air Force versus the Marine Corps, is 
their management of their assets systems different, or will be 
different? I am seeing a head shake ``yes'' here. So it wasn't 
your words, but I saw a head over here----
    Mr. Hale. I would say they have different processes.
    Senator Begich. That is not what I am asking. I am not 
sure--an asset is an asset, okay? As a former mayor, I had a 
police department, a fire station. We had the same system. They 
had different missions. They had sub-missions. Then I had 
public works, libraries. Everyone had a different mission, but 
the asset management was the same.
    So, as a mayor, if I wanted to know, at any given point, 
what my capacity is in an emergency, what kind of equipment was 
available department-wide, city-wide, I could do that.
    Ms. McGrath. So their total asset visibility is what you 
are talking about, and the GCSS capabilities that we have 
discussed, both the Army and the Marine Corps, are their 
respective contributors, if you will, to that total asset 
picture.
    There is another, I will call it a command-and-control 
system that has a responsibility to bring that asset visibility 
from the respective components into that common operating 
picture. Today, my understanding is that we don't have that 
total asset visibility in the aggregate because we don't have 
defined, I will call them standards across DOD.
    Senator Begich. That is your goal?
    Ms. McGrath. Yes, absolutely. Moving toward not only the 
standards within the logistics space for asset visibility, but 
total asset visibility, period, irrespective of commodity, be 
it a ship or a plane or a piece part.
    That is tied to the overarching logistics, I will call it 
road map, so that they have that common operating picture, both 
on the field and in the business space.
    Senator Begich. Let me ask you another question in regards 
to the layers. As you guys are doing your work, and not to be 
disrespectful, but like us, we come and go. It is the layers 
deeper down.
    What is going to change in that culture after how many 
years of no audits, forever? So how are you going to change 
that?
    I know you are going to say you are going to do training. 
You are going to do this and do that. But the reality is some 
of those people will have to go. That is just the way it is. 
Because I know this--you cannot retrain 100 percent of the 
people to change the way they have been doing business for the 
last umpteen years.
    One, are you going to do that? Do you have the systems to 
do it and a process that is going to be immediate, not just, 
well, we have to kind of move them over here and move them over 
there to survive?
    Because if you don't do that, it doesn't matter what system 
you have. Because the people--and this is my simplistic way of 
saying it--at the front desk, putting the data in, wherever 
they may be stretched across the globe, wherever our assets 
are--if they are not trained or understand the new culture, you 
are going to still have problems down the road.
    So to me, it is going to be those layers deeper down. What 
are you going to do to dramatically change that culture? Are 
you going to be able to do and have the wherewithal to say to 
them we are not doing business that way. If you don't like 
working here, then get the hell out because we have to change 
the way we do business.
    Who wants to take that one?
    Ms. McGrath. Again, I will start. The change management 
challenge, I think, is the largest challenge. There are many 
challenges----
    Senator Begich. The change--the culture?
    Ms. McGrath. The culture, right. The change management 
challenge, articulating both the business value and the need to 
change so that people understand what their contribution is to 
the overall business outcome you are trying to achieve. Here we 
are talking about financial auditability.
    Some of the things that have been discussed in terms of 
taking a cross-functional look at achieving auditability we are 
putting in place largely due to a lot of the tools that 
Congress has provided us in the NDAA legislation, ensuring that 
we have done appropriate business process reengineering. So the 
front desk individual can't do things the way they are 
accustomed to doing. They must change.
    Senator Begich. So my question is, if you can't get them to 
change, do you have the mechanisms to get rid of them? That is 
the ultimate question because the human element is what starts 
the train moving.
    Ms. McGrath. I think, through the systems implementations 
and the drive to the business outcomes driven by not only the 
top leadership but layers down is what is required to make 
those changes happen. I think that all of the tools we are 
putting in place, institutionalizing where we can, wherever we 
can, will help enable that sustained practice.
    Senator Begich. Simple question--I am going to end here. Do 
you have the capacity to get rid of people who are not--it is 
human nature in any organization change that you are going to 
have a percentage that will not adapt. That will want to keep 
their job, but will not adapt.
    That is the ultimate question, because if you don't get 
that information flowing on the front end, I guarantee you, 
whatever you see on the top, it is going to be a problem. That 
is my only question--yes or no?
    It is a pretty--you should say yes to this. I am trying to 
help you.
    Ms. McGrath. Well, no, no----
    Mr. Hale. Yes, but this is not a strength of the Federal 
Government. It is very difficult to terminate employees. But, 
yes, the process exists. It is just it is cumbersome, and it 
tends to take a long time.
    Senator Begich. But you understand the problem?
    Ms. McGrath. Absolutely, and I think that driving a change 
management through efficiencies and effectiveness at the 
organization will enable those people to I want to say get out 
of the way, whether----
    Senator Begich. Think about their future?
    Ms. McGrath. Think about their future--much better words.
    Senator Begich. Okay. I will leave it at that.
    Thank you, Madam Chair.
    Senator McCaskill. Senator Cornyn?
    Senator Cornyn. Thank you, Madam Chairman.
    Thank you all for coming today.
    I am here because I am concerned about our national 
security. During tight budgetary times, I know DOD is going to 
have to be doing more with less. I intend to make it one of my 
responsibilities to make sure it is adequate to the task and 
the challenges we face.
    But as someone who believes that national security is the 
number one responsibility of the Federal Government, I simply 
can't explain to my constituents some of the anecdotes that we 
have heard with regard to financial mismanagement. I appreciate 
what you said, Secretary Hale, that a little firm pressure is a 
good thing, and I just wanted to show up and let you know I am 
going to be contributing to that. [Laughter.]
    That pressure is going to get firmer and firmer and firmer, 
using every tool that I have, whatever that may be.
    But when I read an interview in 2008 that the Comptroller 
at the DISA gave to Federal News Radio where he acknowledged 
both the problems with the financial management discipline that 
you talked about, as Senator Ayotte identified, the 10-to-1 
savings, $10 basically saved for every dollar invested in 
financial management system improvement.
    But they actually, in this radio interview, said that they 
found $400 million at DISA. This is for an agency that has 
16,000 personnel. So, if you multiply that across all the 
personnel, assuming you could do that, it is shocking, to say 
the least.
    I was delighted to hear Secretary Panetta testify, both 
informally and at his hearing, that he intended to make this a 
priority. I appreciate all the work that each of you are doing 
to make it a reality. But it strikes me along the lines that 
Senator Begich mentioned, that what is critical is to have 
goals, resources, and accountability.
    I know the chairwoman well enough and Senator Ayotte and 
the rest of us enough to know that we intend to provide you 
with not only the goals, but the resources and also the 
accountability that is going to be necessary for your success 
and our collective success.
    Secretary Hale, in 2006, you headed up a task force to look 
into the possibility of creating a CMO for the Secretary of 
Defense. In your report, your task force recommended creating a 
position with responsibility and authority to be the CMO/Chief 
Operating Officer for DOD, a principal under the Secretary of 
Defense for management and CMO.
    There continues to be difficulty with not having senior-
level managers armed with appropriate budgetary and 
organizational authority needed to direct Under Secretaries and 
Service Secretaries responsible for the day-to-day management 
of DOD's financial improvement and business transformation 
efforts across all the functions within DOD.
    Why isn't the approach that you recommended when you headed 
up the task force needed today?
    Mr. Hale. I think DOD chose another route, which is to vest 
that authority in the Deputy Secretary. They wanted one 
Secretary, and I understand that.
    They did create a DCMO. She is sitting to my left. I think 
it has been very valuable to DOD. It has given somebody who has 
the experience, the time to focus on the systems.
    They used to fall as a collateral duty to the Comptroller, 
in many respects, and it wasn't happening because the budget 
was so overwhelming in terms of time. It has given somebody who 
has the experience and the time the opportunity to focus on 
performance management and other things that Beth does.
    So I believe it has worked out well. They did choose a 
different route, and I accept that. We were an advisory group 
when I issued that report. I wasn't, I think, the lead, but I 
was on the team. But I think it is working reasonably well.
    I am pleased with the DCMOs--and not just, I might add, at 
OSD. Let me add something maybe, Madam Chairman. We had a 
hearing on efficiencies. We just finished a review with each of 
the Services and the defense agencies.
    I confess I was skeptical going in about how well we were 
doing with the plans for those--that is $178 billion in fiscal 
year 2012 to fiscal year 2016. I am much more encouraged. The 
Services are clearly taking this very seriously. They all have 
management structures. Generally, they have plans for the 
fiscal year 2012 and fiscal year 2013, or where they can't meet 
them, and there are cases, they are looking actively to 
substitute other efficiencies.
    So I believe I teamed with Beth, the DCMO, in that effort, 
and I think she was very helpful, and her office. So I am 
feeling better about the $178 billion, and I know that we are 
going to have to look for more and that we will need to 
continue that oversight.
    So I just wanted you to know that we are working the issue, 
and wherever Secretary Gates is, I want to tell him, too.
    Senator Cornyn. Ms. McGrath, since you are the DCMO, how do 
you feel about the recommendations of Secretary Hale's task 
force and the alternative direction DOD has taken? Do you feel 
that you have the resources you need not only to do your job, 
but to hold other people in DOD accountable?
    Mr. Hale. Can I just clarify one thing? I wasn't the 
Secretary at the time. That was an advisory group. I just want 
to make sure that I didn't make the recommendation as the 
Secretary. I was on the Defense Business Board.
    Senator Cornyn. If I misspoke, I apologize. I knew you 
headed up the task force, or at least that is in my notes here.
    But Ms. McGrath?
    Ms. McGrath. I feel that the DCMO has the authority through 
the CMO, or the Deputy Secretary of Defense, where I am going 
to say all of this conversation comes together to execute both 
the priorities, some of the oversight that Mr. Hale talked 
about in terms of efficiencies, both the follow-through and 
execution, and the identification of new ones.
    I work very closely with the Under Secretaries of the 
Military Departments, as the CMOs of the Military Departments. 
Again, they are looking from a corporate perspective how do 
things integrate. So, I actually do think it is an effective 
structure and that DOD has capitalized on the opportunity and 
is using it effectively.
    Senator Cornyn. Mr. Khan, do you agree or disagree?
    Mr. Khan. The positions have been established, and people 
have filled those offices. We are waiting for how these 
particular offices are going to result in specific actions.
    One of the positives that maybe I can point out, and that 
is the example we are looking for, was the recent removal of 
the DOD personnel security from DOD high risk. That is a 
positive. We are looking for the same type of intensity, same 
type of commitment and leadership for the removal of the other 
high-risk areas.
    So we are much more focused on results. There have been 
plans. There have been governance boards. The role of the CMO 
or the CMO organization at the Military Departments is to drive 
the transformation.
    As far as from what we can see, it is a start, but we want 
to see the results. The results would be how it impacts, how 
the role, responsibilities, and action impact some of the other 
longstanding and pervasive weaknesses. We would like to see 
some more action on the other high-risk areas--financial 
management being one area.
    Senator Cornyn. Thank you. My time is up.
    Senator McCaskill. Thank you, Senator.
    Senator Manchin.
    Senator Manchin. Thank you, Madam Chairman.
    I am so sorry that I was running late. I had another 
meeting to be at, but I wanted to fill in a few things.
    First of all, the concern, I think, that Senator Ayotte 
talked about is what we have is with what is happening and what 
we are hearing about happening as far as the corruption, 
outright thievery that goes on over in Afghanistan and Pakistan 
and every place else that we seem to be doing business over 
there.
    It is hard for me to understand how $10 million can go 
missing in cash. The report, I think, is $10 million a day, up 
to about $10 million a day. Did you touch on this, Kelly?
    Senator Ayotte. I didn't touch on the numbers, but, yes, 
talked about it.
    Senator Manchin. But $10 million, that is $3.6 billion a 
year. This has been going on for I don't know how long. I have 
been over there a few times. So we see a lot of concerns we 
had. But I can follow up with another question that might be 
something more on your line, if that is not in your line on the 
money.
    Mr. Hale. It is in my line. Anything to do with money. I am 
not familiar with the specific numbers. I will say what I said 
earlier.
    There is a problem in Afghanistan. It is a different 
culture. We are doing our best to push for less corruption. We 
have established a task force under the command now of General 
Allen. It has done a number of specific things--vetting of 
contractors and subcontractors to try to be sure that we are 
dealing with people that are reliable, working with the 
officials where we can work with them to try to minimize this 
problem.
    We don't use American cash anymore in Afghanistan. Almost 
all of it is electronic funds transfer. We are trying wherever 
we can to pay local vendors in afghanis. It is a lot harder to 
export those to other nations.
    All of these are good things, and we need to continue, and 
we need to push this hard. I think we probably won't fully 
solve the cultural issues. We will do our best.
    Senator Manchin. No, I know that. I can give you a few 
examples.
    I have a constituent who is in the military and working 
with the Afghanistan Ministry of Interior, Public Affairs. He 
tells me that 250 to 1,000 vehicles that we purchased through 
U.S. tax dollars are missing. That is a lot of vehicles that go 
just missing.
    I was a former Governor, and all of us have had former 
positions we were responsible for offices. I was responsible 
for the State budget and how we procured. It all starts with 
how you purchase. If you don't have a good purchasing system, 
you are not going to have good auditing because you can't 
follow it.
    We revamped our whole purchasing, and we had to have a 
purchase order. It had to be one that was of need. The purchase 
order followed into a purchasing agreement. The purchasing 
agreement followed into basically a complete auditing system 
that had to show how we disposed of it also.
    I don't know why it is so complicated, and why you--has it 
just morphed into something so large that it is just 
unmanageable for you all?
    Mr. Hale. I think we are just dealing with different 
attitudes than we do in the United States toward 
accountability.
    Senator Manchin. I am not even saying over there. I am just 
saying how we do our business.
    Mr. Hale. Oh, here.
    Senator Manchin. Yes, I mean----
    Mr. Hale. I am not dealing with 250,000 vehicles missing in 
the United States. I need to know about that.
    Senator Manchin. Well, I am----
    Mr. Hale. Is that here? Is that what you are saying?
    Senator Manchin. I am just asking when was the last time we 
had a really good audit for the entire DOD?
    Mr. Hale. Well, we have never had a successful one.
    Senator Manchin. That is what I thought.
    Mr. Hale. A financial audit. I hear your point. But I do 
believe that--I mean, I am not aware of----
    Senator Manchin. I am brand new. I am the new kid on the 
block here. I can't--it is just inconceivable for me how DOD, 
being one of our largest, and you can see the amount of money 
we put into it. We were told yesterday that we spend more money 
on defense than all the other nations combined.
    I don't know if that is accurate or not, but it might be 
right close.
    Mr. Hale. Might be.
    Senator Manchin. How we don't have a handle on this thing.
    Mr. Hale. Let me come at that differently. I believe we do 
have reasonable financial controls--and I know this probably 
won't be a popular statement--in DOD on the budgetary--on the 
money you give us. I think we aren't over there spending your 
$671 billion that you gave us any way we want.
    I say that for two reasons. One, we have 60,000 people who 
do have a culture of stewardship. I have a lot of personal 
familiarity with them, and I know they do.
    But we also have external auditors. We have about 3,000 
auditors in DOD watching our every program and financial move. 
It is really a notch in their belt to find that we violate the 
law or the rules. That should be. That is their job.
    Over the last 5 years, if you look at violations of the 
major Federal law governing financial management, the Anti-
Deficiency Act (ADA), 20 cents out of every $1,000--20 cents 
out of $1,000--actually resulted in an ADA violation. That is 
20 cents too much. My goal is zero, and it is the only right 
goal. But it is 200th of 1 percent.
    I don't think it suggests a system that has no reasonable 
controls. I think we do. We have problems. We need to pass an 
audit. But we do, I believe, have reasonable controls.
    I might add that the amount of ADA violations are 
significantly less than in the non-defense agencies, taken as a 
whole.
    Senator Manchin. Let me just say this, that you know that 
with the financial challenges we are having right now, and we 
have our problems, too. So none of us are immune from those 
problems. But you know there are going to be some adjustments 
as far as the budget--and your budget and everybody's. I think 
you----
    Mr. Hale. Say it is not so, Senator.
    Senator Manchin. You see that coming. To what extent 
everyone believes--everyone believes since you all really don't 
have an accurate audit, then whatever we have to cut, we could 
cut there, and it could probably be made up in the waste or 
fraud or abuse.
    What do you believe truly is feasible through fraud, waste, 
and abuse right now before you start cutting into what we call 
the quick of the matter?
    Mr. Hale. I can't give you a number. I think that fraud 
that goes on----
    Senator Manchin. We are going to cut--let us say we can cut 
$400 billion.
    Mr. Hale. I certainly don't think you can get anywhere near 
that from fraud, and waste is in the eye of the beholder.
    Senator Manchin. I am saying over a 10-year period. I have 
heard anywhere from $400 billion to maybe $800 billion over 10 
years. That is $40 billion to $80 billion a year.
    Mr. Hale. I don't think you can get anywhere near $400 
billion with fraud, waste, and abuse by any reasonable 
definition.
    Senator Manchin. Over a 10-year period?
    Mr. Hale. Over a 10-year period. We will have to make 
changes in our strategy in order to accommodate those kinds of 
cuts. We will also look for efficiencies of the sort that we 
identified and that we are now monitoring, $178 billion over 5 
years in that case. But it is not going to do it by itself.
    We will have to cut back numbers of troops. We will have to 
delay investments, and we will have to look at that in a 
strategic context.
    Senator Manchin. Then what you are saying, out of a $700 
billion a year budget, you don't believe that there is 5 to 7 
percent of waste or fraud or abuse in that?
    Mr. Hale. I certainly don't think there is 5 to 7 percent 
of fraud. Waste is always in the eye of the beholder. There are 
some who feel some of our programs are wasteful, even though--
--
    Senator Manchin. I agree.
    Mr. Hale.--we believe they contribute to national security. 
That is a debate we need to have. But, no, I absolutely don't 
think that we are sitting there with $400 billion over 10 years 
of fraud. I don't know of any evidence.
    If that were true, how come those 3,000 auditors are only 
finding 20 cents out of every $1,000 that violates the ADA? 
Because it is a violation--it would be. Fraud is almost 
certainly going to be a violation.
    Senator Manchin. So you are basically thinking it might be 
more policy, deciding on what we think we need and what we 
don't need?
    Mr. Hale. Absolutely. We are looking at it carefully, and 
we will be responsive. But it is not going to be--it will be 
fewer troops and less investments.
    Senator McCaskill. I know you can't put a number on it. I 
think that sometimes that waste part is in the eye of the 
beholder. I would say that two systems tracking assets that 
can't speak to each other, even if one has much more capability 
than the other, a $5 billion price tag on IT that is tracking 
assets is a huge number in any private sector enterprise, even 
as big as DOD.
    But let me ask about accountability. Who is the single 
official within DOD who is responsible for the FIAR plan?
    Mr. Hale. It would be the Secretary of Defense. But he has 
basically delegated that to the CMO, the Deputy Secretary.
    But in an organization our size and with the scope of the 
responsibility, I think you are looking at the rascals who have 
the day-to-day responsibility--the CFO and the DCMO at the OSD 
level; the Service FMs and the Service DCFOs--DCMOs, I should 
say, at the Service level.
    Senator McCaskill. Who has the primary responsibility on 
all the feeder systems?
    Mr. Hale. That would be the Service--you want to take a 
shot at that?
    Ms. McGrath. So the systems that really, I am going to say, 
it depends where they are in their respective life cycle in 
terms of who has the day-to-day operational control and then 
investment decisions.
    Through the investment review board process, we have been 
able to obtain greater visibility in terms of development and 
modernization, and so that we do have an oversight process 
required by statute, where we are reviewing the development, 
any modernization to the legacy environment, so we have a 
better understanding on how those investments fit into the 
broader picture.
    The proposed legislation--the revision to the section 2222 
actually provides--we very much support. It provides greater 
visibility into total investment for those systems. So it is 
not just development modernization. It is the total investment.
    So that we can, from in particular a perspective have a 
better view of all of the investments to then drive both IT 
rationalization, any changes that are made, any changes over $1 
million to that business environment so that we can better 
drive elimination of duplication from a legacy to an ERP, the 
future, to look at duplication of existing systems across DOD.
    So we very much support the draft legislation that has been 
proposed.
    Senator McCaskill. The reason I ask about the feeder 
systems is I review all this. As I look at the plans and I look 
at the ERPs, I am always on the watch for that moment in this--
I know we have some issues about all the things that are going 
to happen all at once in some years and some of the Services in 
2015 and 2016. I am realistic about whether there is going to 
be a pushback on the 2017 number.
    But what I am really worried about is we are going to get 
to the end of this process, and they are going to say, ``Well, 
there is the feeder system problem.'' That no one is going to 
say, ``Well, that really wasn't my problem. That feeder system 
wasn't my problem.''
    I want to make sure that, right now, we know who to hold 
accountable on the feeder system problem. Mr. Khan, could you 
speak to that issue as to from where you sit can you make any 
observations about who you think is the logical person to have 
responsibility over all these feeder systems that are going to 
ultimately either provide or not provide the ability for us to 
get to an auditable system?
    Mr. Khan. Feeder system is a huge problem because of the 
data which comes in from the feeder systems has to be fed 
eventually into the ERPs. So the data conversion would be an 
issue.
    I think that is critical that when investment decisions are 
made for giving additional funding to a particular system or a 
program, that it has to be looked at very carefully as to how 
they are going to be linked with their transformation within 
DOD itself.
    One of the elements of transformation which is linked with 
the business--or the enterprise architecture is how it is going 
to address the legacy systems and the feeder systems. So that 
is the point in time when the investment decisions are being 
made that those hard questions have to be asked.
    Senator McCaskill. Right.
    Mr. Hale. Can I address that?
    Senator McCaskill. Yes.
    Mr. Hale. I think we--I am very worried about that, too. I 
don't want to get all these systems deployed at great cost and 
in considerable time find out we are not using them in the 
right way or the feeders.
    So what we have done is asked each Service--and the Army 
has started, and I will ask Ms. Matiella if she will comment on 
that--with these validations. We have taken--is it three bases 
you are starting with?
    Ms. Matiella. Yes.
    Mr. Hale. We are actually asking an independent public 
accountant to go out, look at GFEBS, which is their ERP.
    Senator McCaskill. Right.
    Mr. Hale. Say, ``Are we using it in a way to include the 
feeder systems that is auditable?'' I suspect we are going to 
have problems and that we will have to fix them, but at least 
we are finding out now.
    So do you want to add to that?
    Ms. Matiella. Yes. As the auditors go onto a specific 
installation, they look at GFEBS and the integrity of the data 
and the processes in GFEBS. Of course, what that includes is 
the data that came in.
    So, as they come up with their recommendations and their 
findings, it will include that data that came in from other 
feeder systems. So, we will be alerted to the fact that it may 
be that it is an HR feeder system or logistic feeder system 
that may be creating a data integrity problem within GFEBS.
    Of course, I am in charge of, to a large extent, making 
sure that the end-to-end processes will end up in auditability. 
For example, I am the process owner for procure-to-pay. So I 
have to make sure that whatever goes through a procurement 
system, in fact, does result in good, auditable data in the 
end.
    So, we are in the Army looking at end-to-end processes to 
make sure that whatever goes into the accounting system, into 
GFEBS, is auditable at that transaction level, does have 
supporting documentation.
    I work with the other Assistant Secretaries very, very 
closely to make sure that they are working their systems to 
make sure that in the end, the Army is successful in 
auditability. So we are looking at things end-to-end.
    Senator McCaskill. Okay, good.
    Mr. Hale. We will do it with the Navy. I hope this year to 
start one with the Navy ERP in the context of a major defense 
acquisition program. As the Air Force's system matures, we will 
do the same thing there.
    Senator McCaskill. Okay, good. I just want to make sure 
that we are prepared. Obviously, you are concerned about it, 
Secretary Hale, for the right reasons.
    It could be all of this effort and all of this money is 
only as good as the data feed-in.
    Mr. Hale. I might add, the processes that we use and the 
training of the people, it is all a package.
    Senator McCaskill. It is all included. Yes.
    Mr. Morin. Madam Chairman?
    Senator McCaskill. Yes?
    Mr. Morin. Thank you, ma'am.
    I wanted to highlight just one thing that I think is 
important in the context of our overall business systems 
modernization. It is that these new systems are much more 
intolerant of bad data.
    So, whereas the legacy systems have tolerated feeder 
systems that have bad data, and it has skated sometimes below 
the radar screen, with our implementation of DEAMS at Scott Air 
Force Base, we found instances where feeder systems are 
providing bad information in large quantities because the 
business processes in those nonfinancial systems were bad.
    But the system highlighted that for us directly. It told us 
thousands of transactions were not meeting standards, which 
instantly brought the level of management attention in order to 
fix the problem. So there is an advantage to these new systems 
in that we catch those problems.
    Senator McCaskill. Yes, that is good. That is great. Thank 
you for that.
    Senate Ayotte.
    Senator Ayotte. Thank you.
    Ms. McGrath, I just wanted to ask you about something that 
had happened. One of the Business Transformation Agency's 
(BTA), largest initiatives is the Defense Agencies Initiative 
(DAI), an ERP system for the defense agencies. BTA, in fact, 
was the first agency to implement DAI for itself and, from what 
we understand, was a small-scale effort but one that was very 
successful in terms of following the best practices that we are 
talking about today.
    Now we have heard that as BTA is being shut down and about 
half of that agency or so is being folded into your office, 
that you are going to stop using DAI for your new business in 
fiscal year 2012 and force the BTA folks that you are 
inheriting to go back to the old, antiquated system supplied 
out of DOD.
    Is that what is happening? If so, why would we want to go 
backwards when we have this new system that we have piloted?
    Ms. McGrath. BTA was the first user, if you will, of the 
DAI, which is the financial--ERP solution for the defense 
agencies. There are other agencies who are also using the DAI 
solution today and has a complete implementation schedule.
    The OSD team, if you will, uses a legacy system called WAAS 
today. Instead of having, I am going to say, my office on a 
standalone system as part of the overall OSD footprint, we are 
not moving toward implementation for just my office, but rather 
moving toward implementation with the rest of OSD when we move 
on to DAI. We are scheduled to implement DAI as part of OSD.
    It is just I would not have my own office do it, whereas my 
budget is rolled up into the overall OSD budget. So, I would be 
the anomaly, if you will, and not standard with the rest of 
OSD. So I guess my overall message is we are moving to DAI. We 
are not doing it today because I am a component of the broader 
OSD budget, but we are certainly aligned and on track to do 
that.
    Senator Ayotte. As the DCMO, you are leading the 
transformation of business operations across DOD. What 
problems, if any, have you had in convincing folks in DOD to 
get on board and to start using the new system that has already 
been up and running for a few years and is completely ready for 
them to use? Are you having problems convincing DOD to use the 
new system?
    Ms. McGrath. I am sorry. Is your question specific to 
utilization of DAI?
    Senator Ayotte. Yes.
    Ms. McGrath. So there is no problem convincing DOD, if you 
will. The Washington Headquarters Services actually executes 
the budget for OSD. We are on the implementation schedule for 
DAI.
    It is just more of a timing issue than a convincing them to 
do that. So there is no, I will say, challenge in terms of the 
business benefit for the solution. We will align to the rest of 
the implementation, just like I would have otherwise before 
the----
    Senator Ayotte. But if you have folks that have already 
used this system successfully, why are you farther down on the 
list rather than farther up on the list?
    Ms. McGrath. BTA--my office is an OSD element today. Before 
any of the functions from BTA moved into my office, I today am 
part of OSD. So, my budget today is done as part of the broader 
OSD budget.
    BTA, as a defense agency, used an ERP-based solution to do 
their financials. So, with the disestablishment of the defense 
agency, all of their systems, which they use to executive the 
operations of their defense agency, aren't needed to run that. 
Again, I am a member of the OSD element.
    OSD is on a path to move to DAI. We are moving there. I am 
just part of the implementation for OSD. So, I don't view it as 
a challenge in terms of the business value. It is just a--it is 
a timing----
    Senator Ayotte. So when would----
    Mr. Hale. Would I help if I made it clear, her office was 
never on DAI. It was the agency that was on it. She will move 
to it, along with all our offices, I hope, fairly soon. I can't 
remember when it is scheduled.
    Senator Ayotte. Right. So what is the timing then?
    Ms. McGrath. I don't have it, I am sorry, off the top of my 
head. I know it is not the beginning of fiscal year 2012. I 
believe it is fiscal year 2013, but I would like to come back 
and tell you what the very specific date is.
    Senator Ayotte. I would appreciate that.
    [The information referred to follows:]

    The current implementation schedule for Defense Agencies Initiative 
(DAI), for fiscal years 2012 through 2016, continues to include 25 
Defense Agencies. The Office of the Deputy Chief Management Officer is 
part of the Office of the Secretary of Defense (OSD), which is 
currently supported by Washington Headquarters Service (WHS). WHS is 
scheduled to begin implementation of DAI in fiscal year 2015 and become 
operational in early fiscal year 2016. It did not make sense for DOD to 
significantly alter the implementation schedule for DAI because of a 
small number of Business Transformation Agency employees moving into 
OSD.

    Senator Ayotte. I just wanted to ask Mr. Khan. Overall, we 
are going to have to make some tough choices around here, no 
matter what the deficit plan that goes forward. It is going to 
cause us to have to make some difficult choices across every 
agency.
    How sufficient is the quality of our financial data to 
ensure that we are not making cuts that undercut our 
warfighters or endanger readiness? Can you help us, just in 
terms of where we are on the financial management end of when 
we need to make these difficult decisions, how reliable is the 
information we are going to receive?
    Mr. Khan. Thank you for that question.
    That question really goes to the heart of the importance of 
a financial statement audit, which really trues up the internal 
controls and the infrastructure which provides reliable 
financial information.
    So the challenge in answering your question is that without 
having adequate internal controls, adequate processes, it is 
difficult to say how reliable the information that we are 
making decisions on. In part, it also touches upon some of the 
other questions you had earlier on about information coming 
from other areas, which feed into DOD, about the internal 
controls, about how that information is processed, how that 
information is reported.
    So just want to link that to the importance of the 
improvement in financial management infrastructure itself. The 
proof of that is going to be successfully passing an audit, 
which will give management comfort that the information that 
they are using for decisionmaking is reliable.
    It has reasonableness of having gone through internal 
controls. It has the rigor of an audit. Even though you may not 
be using the financial statements for making decisions, but the 
information that goes into them, which is much more detailed, 
that is reasonable, reliable.
    Mr. Hale. May I add to that? Oh, go ahead.
    Senator Ayotte. Sure. No, I thank you for that answer. Go 
ahead, Mr. Secretary.
    Mr. Hale. You have heard me say, and I believe it is true, 
we have reasonable controls. We are not over there spending 
this money wherever we want. If we were doing that, you would 
get wholesale ADA violations. It is just not happening.
    So I will use the colorful language of my former boss, 
Secretary Gates. Maybe it was an Easter egg hunt to get the 
information. But I guess he found the eggs because he made the 
decision--and I am not trying to be silly.
    In the end, I think we got him enough so that he felt 
comfortable making those decisions in a way that wouldn't 
damage the troops. He would never do that.
    So it is not pretty. We need better financial systems. We 
need audits. But we are not over there just randomly spending 
this money. We are spending it the way you tell us.
    I think we can establish that. In August, we will establish 
it for our funds distribution process through an independent 
auditor. I will go back to my ADA violations to say, overall, I 
believe we have reasonable controls.
    Senator Ayotte. One of, I think, the overall fears we have 
is that we are in a position, if you are looking to 2017 and 
the best scenario of being audit ready, we just don't want to 
be in a position here where we are getting--instead of taking 
the rotten eggs, we are taking the chocolate eggs, so to speak.
    So, that is where we want to make sure that we are making 
some good decisions. So, I appreciate your commenting on that, 
and that kind of goes to the whole----
    Mr. Hale. We share your concerns. We are heading towards 
some difficult times. We need to work with you and with less 
than perfect information, unquestionably. But I believe we can 
make the right decisions.
    Senator Ayotte. Thank you.
    Senator McCaskill. Senator Portman.
    I will let the witnesses know that we are planning on 
having a vote at 4 p.m. So I am sure we will be able to wrap 
this up by about 10 minutes after the hour.
    Senator Portman.
    Senator Portman. Thank you, Madam Chair. We have to stop 
having these meetings together like this.
    Senator McCaskill. I know.
    Senator Portman. My chair on every committee.
    Senator McCaskill. It is because you are a wonk, too.
    Senator Portman. Yes. [Laughter.]
    First of all, thank you all for being here. I appreciated 
the comments from my colleague from New Hampshire, and your 
answers to her.
    I am sure that you have heard this today already, but we 
think what you do is incredibly important. As some of you know, 
I offered an amendment, which was later accepted, to ensure 
that you all continue to have the stature that comes with being 
a confirmed position.
    Now that you are all in position, you probably think that 
is okay. Maybe if you have to go through it again, you would 
disagree with that. But, seriously, we really believed, as a 
Congress, that it was important to hold you all up and to 
empower you so that in dealing with other confirmed appointees, 
you had the ability to ensure that financial management and the 
critical roles you play were given adequate consideration.
    With that comes a lot of responsibility, and we expect you 
to utilize that full power that we were trying to empower you 
with. When I was the OMB director, I met regularly with the 
CFOs in the hopes of doing just that, empowering people, 
letting them know that, at least in my role as OMB director, I 
viewed what you do in the agencies as incredibly important.
    I think what Senator Ayotte said is true. We are going to 
be under enormous budget pressure here. So, it is more 
important than ever. We want the money to go to our troops, and 
we want it to be as efficiently and effectively spent as 
possible.
    That is going to be your job in a tight budget environment, 
where there will be tremendous pressures on the budgets of 
every one of the Services. So, with that in mind, let me ask a 
couple of questions about accountability and specifically as it 
relates to the audits.
    I think Senator McCaskill and, I am told, Senator Cornyn 
also raised this accountability issue earlier today. But 
Secretary Hale, I saw in your prepared remarks, you talked 
about the audit process, and you said, ``The department will 
achieve its financial management goals only through the active 
partnership involving both the Comptroller''--you--``and the 
DCMO. We also have to have help from those in acquisitions, 
logistics, other business areas as well as business communities 
that reside in the department.''
    You said you have ``engaged the department's CMO as well as 
Military Department CMOs and the Service Vice Chiefs in a 
personal commitment to support the goals.''
    I am just, to be honest with you, a little concerned about 
some of these terms. Active partnership? Help, engage, personal 
commitment? It doesn't sound like a mission with a whole lot of 
accountability and responsibility.
    I thought that the whole point of having the CMO or at 
least an identifiable leader, a single leader, who puts his or 
her weight behind this problem and can hold people accountable, 
was the intent of Congress.
    I know Secretary Panetta has said this is a priority of 
his. But again, from your comments, I get the sense it is going 
to take more than just prioritization to make audits happen.
    Can you speak a little to the accountability issue and how 
we ensure that, at the very highest level, there is a 
commitment to this and that someone is held accountable?
    Mr. Hale. I think there is clear accountability. It starts 
with the Secretary of Defense. But his focus is, he has so many 
things to do. I think the CMO, who will be the Deputy Secretary 
of Defense, Bill Lynn for the moment, is the primary 
accountable official.
    I meet weekly with him. I have discussed this issue a 
number of times. We have had several formal meetings. But we 
have to get this out farther than OSD. So, there has to be a 
process. So we have set up one.
    Beth McGrath and I chair a governance board, meets 
quarterly, has the Service FMs there. So we get down to that 
level. Also has many of the defense agency leaders. It has 
senior representatives from acquisition, technology and 
logistics, and from personnel. Increasingly, where we are going 
with that FIAR governance board, as we call it, is kind of 
stoplight charts of how we are doing on our various milestones.
    Then there is a monthly meeting at a level down with my 
Deputy CFO and the financial operations personnel in the 
Services so that we get it a level down. This is a big 
organization. No one person--Bill Lynn can't manage this day-
to-day. He just doesn't have time. I don't have enough time. I 
can't devote all my time to it.
    Senator Portman. I can't believe he has----
    Mr. Hale. But he is responsible for it, and he understands 
that.
    Senator Portman. Yes. You think there is an understanding 
of that and the accountability thing, how you talked about the, 
in a sense, I guess, performance measures that you are using? 
Then you have some green, yellow, and red lights, since you 
said stoplights, attached to those. Do you feel like that is 
something that, at the highest level, there is a commitment to? 
Is there an alignment that people understand at Mr. Lynn's 
level?
    Mr. Hale. Yes. Maybe Beth wants to add to this. We have 
monthly meetings of the Defense Business Systems Management 
Group (DBSMG) and we review all the major priorities. This is 
one of the top nine business priorities in DOD. There are 
stoplight charts.
    Is it perfect? No. Could we do better? I am sure we could. 
But there is a commitment to this. I spent 7 years as the Air 
Force FM. It is a whole lot different. There was no commitment, 
frankly, at that point, no strong senior commitment.
    It is going to get more senior because, obviously, 
Secretary Panetta cares about this. I mentioned these 
testimonies to him, and he is just busy with a lot of other 
things. But I am scheduled to see him next week, and I will 
give him an overview of where we are and get his personal 
guidance.
    Senator Portman. Tell him that the former OMB directors are 
all relying on him.
    Mr. Hale. Okay. [Laughter.]
    Senator Portman. I am a former OMB director, too.
    Mr. Hale. His heart is in the right place, and I am looking 
forward to his help. Even if it is--just his support will be 
very important, and just his stating that it is important will 
be very important.
    Senator Portman. Given your background, do you feel there 
are enough green and yellow lights on your charts to indicate 
that you are going to meet your 2017 date?
    Mr. Hale. I am cautiously optimistic, but I know we have to 
pick up the pace. You look at the timing, there is a lot toward 
the end of that. We are going to have to find ways to move that 
back in order to meet it.
    I am more optimistic that we will meet these requirements 
for the high-priority information. I know you weren't here, but 
we have a plan that focuses on the information we most use to 
manage, and we are focusing heavily on that. It is budgetary 
information because we manage the Government, and certainly 
DOD, by budgets.
    Also, our accounts and availability of assets because they 
are so critical to the warfighter. I am more confident that we 
will meet it there because we are focusing heavily on it. But 
we have an approach for full auditability, and as I say, I will 
choose my words carefully, I am cautiously optimistic.
    Senator Portman. Thank you all very much.
    One quick final question and just a nodding of heads or 
shaking of heads. How much time do you spend ensuring financial 
standards--the CFO role--as opposed to just getting through the 
budget process and preparing the budget? Do you all feel like 
you have enough time to spend on the broader CFO role?
    Ms. Matiella. Absolutely. We focus a lot on auditability, 
as well as the budget. Basically, it is a long, long day, but 
both things are important. We have to focus on both things, the 
budget side and the accounting side.
    So, I believe, not only does it have my attention as a 
senior leader, but it has the attention of the CMO and the 
Secretary of the Army and all the senior leadership. Definitely 
accountability is there and ownership is there at many, many 
levels.
    Senator Portman. Good to hear.
    Ms. Commons.
    Ms. Commons. I spend a considerable amount of my time 
focused on the auditability effort. By and large, the budget 
process is one that has worked very well for us, and I can 
spend a little less time focused on it. So I do spend a lot 
more time focused on auditability.
    As Secretary Hale said, I was also here in 1995 working as 
the Principal Deputy, and certainly, there was no real senior 
leadership focus on these issues. The senior leaders are really 
focused on this issue now. They have given us the resources 
that we need to make progress here.
    Even the business owners are now aligned with us and 
focused on improving our business processes. I believe that is 
the key to sustainability for this effort. We are focused on 
actually look at our business processes end-to-end, 
standardizing those processes and making the changes that we 
need in order to sustain this even when I leave as the 
Assistant Secretary.
    I believe that is the only way that we will become 
auditable and keep that auditability forever.
    Mr. Morin. Sir, I would also agree. The three priorities 
that I am working pretty much every day are rebalancing the Air 
Force budget to get the maximum combat capability out of each 
taxpayers' dollar, the FIAR effort and the broader 
transformation of our financial operations to have actionable 
accurate information and quality service to the airmen who 
depend on it, and then the reinvigoration of our cost-
estimating capability so that we make the right decisions on 
our acquisition programs with the best possible information as 
we make those long-term investment commitments.
    Senator Portman. Thank you.
    Mr. Khan, you are welcome to--I am over my time here. So 
the chair is being very generous.
    Mr. Khan. Maybe I can just comment on the commitment of the 
leadership. We have been impressed by the current team. Like I 
mentioned in my opening statement, I think the leadership is an 
important element to have a plan in there to be able to sustain 
it and to be able to work together across the different 
functions.
    Thank you.
    Senator McCaskill. Thank you, Mr. Portman.
    I just have two other areas I want to discuss and one of 
them we may not have time to get time for and take for the 
record. But the first is interfacing.
    We have--one of the problems is that we can't take 
commercial off-the-shelf systems because everybody wants to 
hold onto the legacy systems, and then we have to like adjust 
them and customize them to try to do interfaces. It is 
expensive. It is very, very expensive.
    GAO has looked at the data on the planned interfaces in the 
ERP systems. I am a little surprised at how many interfaces are 
planned. It is a huge number in every branch.
    The winner goes to the Air Force, and so I am going to 
focus this question for you and ask you to get back with an 
answer. You all are planning on having an interface with your 
system, the Expeditionary Combat Support System (ECSS), 157 
interfaces in Phase 1, growing to 673 interfaces.
    Now I don't know how you get to 673 interfaces. I can't 
figure out why you would need to get to 673 interfaces. So I 
would like you to look into that and get back to us with an 
explanation and maybe a plan to reduce the number of 
interfaces. Because the more interfaces you have, the more 
unwieldy it is in terms of getting systems that work 
efficiently and effectively that don't cost $5 billion to 
develop.
    Mr. Morin. Yes, ma'am. We will get back to you with details 
on the interfaces that are involved.
    [The information referred to follows:]

    As the Expeditionary Combat Support System (ECSS) design has 
matured, we have determined there are 141 currently planned interfaces 
established for Increment 1. For Increments 2-4 we have identified 423 
currently planned interfaces, for a total of 564 interfaces; this is an 
update to the 830 as reported in the October 2010 GAO Report. This 
number was revised during our May 2011 Government Accountability Office 
audit. ECSS Increment 1 is projected to interface with over 30 discrete 
systems, and each transmission of data to and from the ECSS application 
is counted as an interface. For example, ECSS interfaces with the 
Defense Communications Security Material System, a supply chain system 
that requires 5 separate interfaces. Therefore, the 30+ systems that 
ECSS interacts with are what creates the 141 data exchanges or 
interfaces with ECSS Increment 1. The refinement of the number of 
interfaces is a normal part of Enterprise Resource Planning design and 
development activities. The Air Force will continue to eliminate or 
consolidate interfaces as data needs are challenged and/or duplication 
is uncovered.

    Mr. Morin. I will say at a top level, and recognizing that 
ECSS is a system to run essentially the entire logistics 
enterprise of the Air Force. So it is a very broad all-
encompassing system.
    But there is always a tradeoff in developing these ERPs 
between do you make it truly the entire enterprise, thereby 
doing away with lots of the interfaces, but accepting much more 
development risk in building a more complicated system to 
address different business processes? Or do you constrain the 
size of that system, accept the need to build interfaces to 
legacy systems, and all of the data interface problems that you 
have alluded to earlier?
    There is no one good answer there. But the process that we 
have in DOD for looking at these systems and challenging those 
sorts of assumptions that Ms. McGrath and Mr. Hale are very 
intimately involved on, forces discussion on exactly those 
design decisions.
    Senator McCaskill. We need some kind of clarification. I 
think all of you have 40, 50, 100 planned, but nobody has 
anywhere near 657 planned. So we need to understand why there 
is this wide disparity and why there are so many. Because it is 
trouble. It is trouble to have that many interfaces. It is not 
going to happen.
    Now, finally, asset valuation. In the grand scheme of 
public accounting and Government accounting and yellow book 
standards, asset valuation has obviously been controversial and 
difficult in terms of auditing and determining what asset 
valuation is. I was there for the wars over asset valuation in 
terms of infrastructure in State government.
    So I know that, Mr. Hale, you have said that the asset 
valuation, you are asking the Federal Accounting Standards 
Advisory Board (FASAB) to change the Federal accounting 
standards to prevent the expensing of military acquisition 
costs.
    I am curious what OMB and GAO, if they agree with this 
approach. I would particularly like your input, Mr. Khan, about 
what GAO thinks about the approach that DOD is recommending, 
saying it is too expensive to get at some of the legacy aspects 
in terms of valuation. We would just like briefly your input on 
that.
    Mr. Hale. Yes, briefly. We will ask--we haven't yet--but we 
will ask the FASAB for military equipment, to allow us to 
expense it. For other assets, we will pursue our waiver phased 
approach.
    We are going to wait until we get the statement of 
budgetary resources because it feeds the information once it is 
auditable. That will help. We need the ERPs, especially the 
logistics ones, to do this.
    Finally, we plan to do it only prospectively. That is, we 
won't go back and try to figure out every building we ever 
built. We will start with the ones that--which means that we 
will get qualifications on our opinions for a while. But I 
think it is a more effective use of the taxpayers' money.
    Bottom line is we don't use it much to manage. It is of low 
value, very low value, and very different than a private 
company where asset valuation allows them to depreciate, and 
they can use it to offset taxes. I don't pay any taxes. They 
need the book values, especially if they were going to sell it. 
I am not going to plan to sell the Pentagon.
    It is just not information we use. So we need a cost-
effective way, and we think we found it. I did brief Mr. Dodaro 
on this, and I believe he was generally supportive. I am not 
going to sign him up to saying he would agree to everything. 
But I believe he was generally supportive.
    Senator McCaskill. Is OMB okay with it?
    Mr. Hale. Say again?
    Senator McCaskill. OMB okay with it?
    Mr. Hale. Yes. We believe they are comfortable. I don't 
have anything signed, and we will have to go through a formal 
coordination process when we get to FASAB. But yes, we have 
briefed Danny Werfel, and I believe he is generally supportive.
    Senator McCaskill. Mr. Khan, do you want to let Mr. Dodaro 
speak for GAO here, since his name has been brought up? I don't 
want to put you in an awkward position where you state one 
thing, and maybe Gene disagrees.
    Mr. Khan. No, I don't. I wouldn't do that, speak for Mr. 
Dodaro.
    But essentially, in our discussions with Mr. Hale's office 
and OSD, certainly we agreed with the current approach of 
continuing with the existence and completeness of the mission-
critical asset. We feel that is going to provide important 
information.
    At the same time, we feel that maybe going to FASAB may be 
premature. Going down the existence and completeness approach 
may provide more information in the next few years, which may 
impact what sort of standards you may really need to have to 
address. Primarily, this is the issue of military equipment, 
accounting for that, because that is largest part of the assets 
which has different viewpoints of how that may be accounted 
for.
    The other point is that having the standards changed in the 
near future is not really going to impact the auditability. 
Because before going through existence and completeness, 
valuation is going to be a stage after that.
    Mr. Hale. We accept to wait a year or 2.
    Senator McCaskill. Right. I understand.
    Mr. Hale. We are going to focus on the higher-priority 
stuff at the moment, as we are doing.
    Senator McCaskill. I understand that. The vote has been 
called. So we will close the hearing here. I will say that I 
will look forward to an opinion, even if it is qualified. I 
would be thrilled with a qualified opinion.
    Mr. Hale. So, if we get a qualified opinion, we are going 
to have a party. Will you come? [Laughter.]
    Senator McCaskill. I think you can assume it will be a 
qualified. I don't think that any of us are expecting a clean 
audit the first time around.
    Mr. Hale. But how about the party, Madam Chair? [Laughter.]
    Senator McCaskill. I am just looking forward to an audit.
    Thank you all for this hearing, and we will continue to 
follow up and provide the pressure we think is necessary.
    Thank you. We are adjourned.
    [Questions for the record with answers supplied follow:]

              Questions Submitted by Senator Kelly Ayotte

                        DEFENSE AUDIT READINESS

    1. Senator Ayotte. Secretary Hale and Ms. McGrath, today, what are 
the most significant impediments to making the Department of Defense 
(DOD) auditable by the 2017 statutory deadline?
    Secretary Hale and Ms. McGrath. DOD's legacy financial processes 
and systems were established many years ago and were designed to ensure 
budgetary accountability--not meet the proprietary or commercial 
accounting standards called for in the Chief Financial Officer (CFO) 
Act, which are necessary to achieve auditability. To meet these 
standards, there is a substantial amount of work to be done. Some of 
the most significant impediments include:

         DOD business and financial management systems are not 
        fully integrated and do not always collect data at the 
        necessary transaction level.
         Reliable end-to-end processes and internal controls 
        have not fully been defined to support financial reporting.
         DOD lacks sufficient operational and financial 
        personnel experienced in financial audits.
         DOD's traditionally stove-piped culture is primarily 
        focused on mission outcomes and does not yet place a 
        sufficiently high value on capturing and using financial and 
        cost information.
         Significant cultural change is necessary to achieve 
        success.

    2. Senator Ayotte. Secretary Hale and Ms. McGrath, exactly what 
aspects of those impediments remain unaddressed in DOD's current 
financial improvement and business transformation plans, if any remain 
unaddressed?
    Secretary Hale. All of these impediments--systems, processes, 
workforce, and culture--are addressed through the Financial Improvement 
and Audit Readiness (FIAR) Plan, as well as the Department's Strategic 
Management Plan (SMP), Enterprise Transition Plan (ETP), and supporting 
component business and financial management plans.
    Ms. McGrath. All of these impediments--systems, processes, 
workforce, and culture--are collectively addressed through the FIAR 
plan, the Department's SMP, ETP, Business Enterprise Architecture (BEA) 
and supporting component business and financial management plans. 
Culture is also being addressed through many additional avenues, such 
as communications, training, and accountability.

    3. Senator Ayotte. Secretary Hale and Ms. McGrath, what, if 
anything, can Congress do to help DOD overcome these unaddressed 
obstacles, to ensure that it meets the 2017 statutory deadline?
    Secretary Hale. Continued attention and oversight from Congress 
encourages more attention and participation from the non-financial 
management community to sustain the current focus. Additionally, 
providing a timely appropriations bill without the use of multiple 
continuing resolutions will help leaders devote more time to audit 
readiness.
    Ms. McGrath. Continued attention and oversight from Congress is 
beneficial and encourages more attention and participation from the 
entire DOD management community in sustaining the current focus on 
auditability.

                  ENTERPRISE RESOURCE PLANNING SYSTEMS

    4. Senator Ayotte. Secretary Hale and Ms. McGrath, over the last 5 
years, how much per year and in total has DOD been applying towards the 
development, procurement, and deployment of Enterprise Resource 
Planning (ERP) systems?
    Secretary Hale and Ms. McGrath. In order to provide the committee 
with the most relevant number, we have taken a look at the available 
information for all prior year funding for the ERPs listed in the GAO's 
October 2010 report on DOD Business Transformation, GAO-11-53. These 
ERPs are the Army's General Funds Enterprise Business System (GFEBS), 
Global Combat Support System-Army (GCSS-Army), Logistics Modernization 
Program (LMP), and Integrated Personnel and Pay System-Army (IPPS-A), 
Navy's ERP, Global Combat Support system-Marine Corps (GCSS-MC), and 
Future Personnel and Pay Systems (FPPS), the Air Force's Defense 
Enterprise Accounting and Management System (DEAMS), Expeditionary 
Combat Support System (ECSS), and Integrated Personnel and Pay System-
Air Force (IPPS-AF), and DOD's Defense Agencies Initiative (DAI). DOD 
has applied approximately $7.2 billion towards the design, development, 
procurement, test and evaluation, and deployment of these systems since 
their inception.

    5. Senator Ayotte. Secretary Hale and Ms. McGrath, please provide 
the same information over the current Future Years Defense Plan.
    Secretary Hale and Ms. McGrath. Based on available information, DOD 
plans to apply approximately $6.2 billion towards the design, 
development, procurement, test and evaluation, and deployment of the 
systems identified in question #4 over fiscal years 2012 to 2016.

    6. Senator Ayotte. Secretary Hale and Ms. McGrath, DOD has made it 
clear that modernizing its business systems is central to its approach 
to getting auditable. But, even when its new systems have begun to come 
on-line, those entities are still not able to pass an audit. Why is 
that, and what does that mean for the future of audit readiness?
    Secretary Hale and Ms. McGrath. Modernizing DOD's business systems 
is a key aspect of our overall effort to achieve auditability. However, 
improved systems alone will not eliminate our weaknesses or guarantee 
auditable statements. Achieving auditability requires that we apply 
consistent levels of process controls that cross organizations and 
functional areas. Many elements of our current business environment 
must be changed to allow us to meet financial audit standards, 
including improving the data quality of our feeder systems. So, while 
DOD is taking pro-active steps to more closely tie individual ERP 
programs with auditability outcomes, we are also focused on delivering 
audit ready processes and controls that will remain outside the ERP 
systems.

    7. Senator Ayotte. Secretary Hale and Ms. McGrath, the Defense 
Logistics Agency's (DLA) ERP system has been at full operational 
capability (FOC) for several years and has been proclaimed as a major 
success, but DLA is still projecting many years until audit readiness. 
In fact, it looks like they'll be last in getting to audit readiness, 
way out in 2017. That's more than a decade after the system reached 
FOC. How is that possible?
    Secretary Hale and Ms. McGrath. DLA has made great strides toward 
full implementation of their ERP, Enterprise Business System (EBS). To 
date, the EBS has been implemented for the non-fuels supply business 
line, with great success. However, EBS has not been fully implemented 
for the full range of business lines and processes needed for DLA to be 
audit ready. Of particular note, the DLA audit readiness efforts are 
impacted by two EBS programs that are extending the capabilities and 
scope of EBS, EBS-Energy Convergence, and EBS-eProcurement.
    Additionally, full implementation of EBS is not enough to ensure 
that DLA is audit ready. Further corrective actions are necessary to 
ensure that the process and control environments around the systems 
(including at service providers) are compliant and sufficient to 
withstand a financial statement audit. DLA must also develop more 
complete documentation to achieve audit readiness. The DLA audit 
readiness plan has always included these elements when projecting full 
audit readiness.

    8. Senator Ayotte. Secretary Hale and Ms. McGrath, how can DOD cite 
the implementation of this ERP as a success given this reality?
    Secretary Hale and Ms. McGrath. DOD considers the implementation of 
EBS a success because it has dramatically improved processes and 
controls in the non-fuels supply business. Auditability for the entire 
DLA likely will be achieved, as described in the previous answer, when 
further process and control improvements are made and additional ERP 
functionality is fully implemented.

    9. Senator Ayotte. Secretary Hale and Ms. McGrath, what does this 
mean to all the strategies in the FIAR plan that says these new systems 
are so essential to audit readiness; but, here, your best one has 
already been up-and-running for years and audit readiness is still many 
more years away?
    Secretary Hale and Ms. McGrath. As explained in the answer to 
question #7, the DLA ERP has been implemented for the supply business 
line but not for the full range of business lines and processes needed 
for the entity to be audit ready. The DLA audit readiness plan has 
always included these material elements of the business when projecting 
full audit readiness. We continue to work with all DOD components to 
improve all material parts of their business operations to achieve 
audit readiness as soon as possible and within the goals established in 
legislation.

    10. Senator Ayotte. Secretary Hale and Ms. McGrath, exactly what 
evidence do you have that any of the new systems that are being 
implemented and integrated with legacy systems will in fact yield an 
auditable result?
    Secretary Hale. Each of the system acquisition programs has 
included the requirements of the Federal Financial Management 
Improvement Act (FFMIA) in the system requirements. Testing of these 
requirements are part of the system acceptance process. These tests 
give us confidence that the software is largely audit ready. 
Additionally, DOD is more closely tying business and financial 
management outcomes with specific acquisition milestone decisions, 
which provides us additional confidence that at each step of the 
acquisition process, we are ensuring that they will yield the results 
that we desire.
    However, the new systems cannot achieve audit readiness on their 
own. They must be well-integrated with many other systems to create a 
well-controlled end-to-end business process. Many elements of the 
larger business environment, including processes and controls, must 
also be changed to allow us to meet financial audit standards.
    Ms. McGrath. Each of the system acquisition programs has included 
the requirements of the FFMIA in the system requirements. Testing of 
these requirements are part of the system acceptance process. 
Additionally, my office has begun an independent assessment of every 
ERP and business system that needs to be compliant with SFIS and USSGL. 
These reviews look at the underlying system's SFIS configuration, its 
USSGL posting logic, its ability to interface using SFIS, and its 
financial reporting capability. These tests give us confidence that the 
software is largely audit ready. Additionally, DOD is more closely 
tying business and financial management outcomes with specific 
acquisition milestone decisions, which provides us additional 
confidence that at each step of the acquisition process, we are 
ensuring that they will yield the results that we desire.
    However, the new systems cannot achieve audit readiness on their 
own. They must be well-integrated with many other systems to create a 
well-controlled end-to-end business process. Many elements of the 
larger business environment, including processes and controls, must 
also be changed to allow us to meet financial audit standards.

    11. Senator Ayotte. Secretary Hale and Ms. McGrath, have you tested 
any of these systems from the perspective of a financial audit? If yes, 
exactly what have you learned? Please be specific.
    Secretary Hale and Ms. McGrath. The FFMIA testing we described in 
the answer to question #10 covers many of the requirements of a 
financial statement audit. While we have learned a few lessons from 
this testing, it is the ongoing testing of the end-to-end processes 
that include the ERPs where we will learn valuable lessons. Right now, 
an Independent Public Accounting (IPA) firm is examining the Army's 
target business environment with a report expected by late November. We 
have a similar evaluation planned to begin for the Navy target 
environment in the first quarter of fiscal year 2012.

    12. Senator Ayotte. Secretary Hale and Ms. McGrath, we are 
concerned that DOD is spending billions of dollars on new state-of-the-
art systems but in the end these systems will not be able to provide it 
with the compliant processes and adequate controls needed to achieve an 
audit opinion. I understand DOD has a BEA that is suppose to include 
the business rules for end-to-end processes to include standard data 
elements and controls. So, why is DOD still implementing ERPs that are 
not auditable?
    Secretary Hale. BEA provides a foundation of requirements for 
implementation of sound business practices. Improved systems alone will 
not eliminate our weaknesses or guarantee auditable statements. 
Achieving auditability requires that we apply a consistent level of 
process controls that cross organizations and functional areas. Many 
elements of our current business environment must be changed to allow 
us to meet financial audit standards. We have every reason to believe 
that the ERPs themselves are auditable and as described in the answer 
to question #11 we have engagements with accounting firms to evaluate 
the state of audit readiness in Army and Navy entities using the ERPs 
as core parts of their business environment.
    Ms. McGrath. The BEA provides a foundation of requirements for 
implementation of sound business practices. Compliance to the BEA 
includes the ability of reporting entities to implement necessary 
internal controls. business rules and standard data elements, and the 
successful implementation of systems to support these internal 
controls. However. many of the ERP programs that the Military 
Departments are currently implementing were initiated prior to the 
development and refinement of the BEA, so in some cases we are forced 
to make incremental improvement to the systems to bring them in line 
with the standards that are included in the BEA. To increase the 
validation of key enterprise data standards/requirement, DOD is 
conducting independent assessments of each ERP and business system that 
needs to be compliant with SFIS and USSGL and is taking remedial action 
where deficiencies are identified.

    13. Senator Ayotte. Secretary Hale and Ms. McGrath, why is DOD 
buying ERPs without deliverables for ensuring these systems can pass an 
audit?
    Secretary Hale and Ms. McGrath. The implementation of ERPs is a 
central part of our business systems modernization strategy because the 
design principles within an ERP directly enable key elements of 
auditability. Among those principles, ERPs are designed to handle 
transactions end-to-end, enforce process and execution standardization 
among implementing organizations, manage consolidated business data in 
a single repository that allows centralized access control, and 
facilitate the flow of information both within an organization and with 
outside stakeholders. These design principles within an ERP directly 
enable these capabilities essential to auditability:

         Traceability of all transactions from source to 
        statement
         The ability to recreate a transaction
         Documented, repeatable processes and procedures
         Demonstrable compliance with laws, regulations, and 
        standards
         A control environment that is sufficient to reduce 
        risk to an acceptable level

    Additionally, we are ensuring that all of our ERP programs are 
accountable for delivering systems compliant with the standards 
necessary to achieve an audit such as the Standard Financial 
Information Structure (SFIS) and others captured in the BEA. We are 
validating this compliance through onsite audits. As part of each 
audit, we look at the underlying system's SFIS configuration, its USSGL 
posting logic, its ability to interface using SFIS, and its financial 
reporting capability. DOD is also tying business outcomes to 
acquisition milestones and specifically requiring, in Acquisition 
Decision Memoranda, that individual programs, such as Army's GFEBS and 
Navy ERP, define the role that they play in their organizations' 
auditability efforts and end-to-end processes. However, improved 
systems will not eliminate all of our weaknesses nor guarantee 
auditable statements alone. Achieving auditability requires that we 
apply a consistent level of process controls across organizations and 
functional areas. DOD's senior leadership understands this and is 
committed to achieving our audit goal.

    14. Senator Ayotte. Secretary Hale and Ms. McGrath, what, if 
anything, is DOD doing to ensure all new systems and ERPs are compliant 
with the BEA and that the BEA is compliant with accounting and auditing 
standards?
    Secretary Hale and Ms. McGrath. DOD is doing many things to improve 
the content and quality of the BEA and the BEA compliance process. 
Currently, the BEA captures and maps all applicable laws, regulations, 
and policies to a framework of 15 end-to-end processes. Our existing 
policies require all business systems and services to document their 
solution compliance to the business architecture via a self-assertion 
process. In order to validate the self-assertion for compliance with 
the SFIS and USSGL, we are conducting an independent assessment for 
every system involved. This assessment ensures compliance with the 
standards and adoption and enforcement of the business rules, elements, 
and usage. For an ERP, this equates to approximately 250 business rules 
that will be evaluated. In addition to checking for compliance, DOD 
initiated a plan to improve the usability of the BEA by adopting open 
semantic standards that allow for machine readable discoverability of 
applicable rules and standards. This change will ensure systems and 
processes are aware of all applicable standards in addition to 
providing a substantially improved compliance process.

    15. Senator Ayotte. Secretary Hale and Ms. McGrath, what 
improvements, if any, can be made in this area?
    Secretary Hale and Ms. McGrath. DOD continues to take steps to 
ensure all new systems are compliant with the BEA and that the BEA 
sufficiently documents all appropriate accounting and auditing 
standards. First, DOD is evolving and improving the underlying 
technology and methodology of the BEA and the business solution 
architectures. The next version of the BEA will be based upon non-
proprietary, open-standards that provide the ability to validate 
compliance in an automated machine readable fashion. DOD has also 
directed business system and business solution architectures to adopt 
these same languages and symbols. This standards-based approach will 
allow the solutions to leverage the BEA directly and the enterprise to 
directly access solution architectures. As a result of this evolution 
and common language, DOD will be able to more effectively guide for 
investments within a portfolio and ascertain impacts of business 
process and rule changes on systems and data.
    Second, we are taking steps to rationalize our current portfolio of 
investments. Within the procure-to-pay end-to-end process, we have 
identified and categorized legacy, interim, and target systems by 
function, activity, and cost. We have also documented transition dates, 
overlapping capability, and termination dates of these systems. This 
information is available to the Investment Review Board (IRB) to 
provide transparency and enable rationalization of systems and 
services.
    Third, we plan to increase independent BEA compliance assessments 
leveraging lessons learned during the SFIS validation and those learned 
by the Real Property and Infrastructure Lifecycle Management IRB, which 
is a leader in validating compliance. Independent assessments in 
addition to self-assessments will provide a much higher-level assurance 
that systems and organizations are complying with the BEA.

    16. Senator Ayotte. Secretary Hale and Ms. McGrath, one of the big 
obstacles to DOD's ability to become auditable by 2017 relates to its 
feeder systems--in particular, the fact that the data that supports 
their use is many times configured differently from how they should be 
for them to communicate effectively with the core ERP systems. This 
frustrates DOD's ability to get reliable information into the overall 
system (they have to be inputted manually and that creates errors) and 
to reengineer its business processes in a way that allows the ERPs to 
work as intended--to facilitate auditability. Do you recognize that 
concern? If so, how is DOD addressing it?
    Secretary Hale and Ms. McGrath. Yes, we recognize the concern. 
Interoperability between core ERPs and associated systems challenges 
DOD's ability to reach its auditability and efficiency goals. DOD has 
adopted a framework of 15 end-to-end processes that facilitates the 
ability to document and describe the processes and the data required by 
DOD to conduct business. As DOD improves its ability to describe the 
data and processes using machine-readable open standards, we expose 
obstacles and address them as part of our continuing efforts to 
rational IT investments. We are also using the end-to-end framework to 
identify business process reengineering (BPR) opportunities within a 
portfolio versus an individual system. For example, DOD recently 
initiated a project to provide a common service for contract clause 
validation within the enterprise vice multiple individual system 
solutions.

    17. Senator Ayotte. Secretary Hale and Ms. McGrath, what 
improvements, if any, can be made in this area?
    Secretary Hale and Ms. McGrath. DOD has adopted a framework of 15 
end-to-end processes that facilitates the ability to document and 
describe the processes and the data required to conduct our business. 
As DOD improves its ability to describe the data and processes using 
machine readable open standards, we expose obstacles and address them 
as part of our continuing efforts to rational IT investments. This will 
help to improve data quality across our end-to-end processes, 
regardless what system it resides in. We are also using the end-to-end 
framework to identify BPR opportunities within a portfolio versus an 
individual system. For example, DOD recently initiated a project to 
provide a common service for contract clause validation within the 
enterprise vice creation of multiple individual system solutions.

                 DEFENSE FINANCE AND ACCOUNTING SERVICE

    18. Senator Ayotte. Secretary Hale and Ms. McGrath, the Treasury 
performs financial transactions on behalf of other Federal agencies. 
With the adoption of the new ERP systems, it seems that these brand-new 
systems could communicate directly with the Treasury and bypass the 
Defense Finance and Accounting Service (DFAS). We understand that an 
Army system is undergoing a pilot to look into the viability of this 
approach. We are interested in the idea that we can reduce the DFAS 
footprint and direct any savings realized into both increased 
capability for our military and, possibly, debt reduction. In your 
view, to what extent can the Treasury perform at least some of the 
financial functions that DFAS is now performing?
    Secretary Hale and Ms. McGrath. The Army is using the GFEBS to 
pilot/test the feasibility of making payments directly from the 
Treasury to the payee, replacing many of the payment processes and 
systems currently employed by DFAS today. However, it is too early to 
estimate potential savings that could result from the pilot and what 
DFAS functions could be replaced by GFEBS in conjunction with Treasury 
disbursing. As part of DOD's audit readiness efforts, we will continue 
to evaluate this effort and determine whether it can potentially 
replace some DFAS processes and systems.

    19. Senator Ayotte. Secretary Hale and Ms. McGrath, are you aware 
of any business case that supports having the ERPs communicate directly 
with the Treasury for financial transactions, bypassing DFAS? If so, 
please explain. If not, do you intend to conduct that business case 
analysis? If so, when?
    Secretary Hale and Ms. McGrath. As explained in the answer to 
question #18, the Army is using the GFEBS to pilot/test the feasibility 
of making payments directly from the Treasury to the payee, replacing 
many of the payment processes and systems currently employed by DFAS 
today. There is a planned 6-month evaluation period at the conclusion 
of the pilot. This will include a full Cost-Benefit Analysis and 
Business Case. These will be used to determine if the Army should go 
forward with implementing the Treasury disbursing capability Army-wide.

    20. Senator Ayotte. Secretary Hale and Ms. McGrath, is leadership 
at DOD waiting for the result of the pilot effort with the Army 
financial ERP GFEBS before approving it?
    Secretary Hale and Ms. McGrath. DOD has approved the current GFEBS 
baseline for full deployment and, as explained in the answers to 
questions #18 and #19, has approved the Army to use GFEBS to pilot/test 
the feasibility of making payments directly from the Treasury to the 
payee. There is a planned 6-month evaluation period at the conclusion 
of the pilot. The results of this evaluation will be used to determine 
whether these additional capabilities should be integrated in the 
current GFEBS baseline and deployed throughout the Army. The results of 
the pilot will be shared DOD-wide.

    21. Senator Ayotte. Secretary Hale and Ms. McGrath, why would an 
extensive pilot be needed for a brand-new ERP system?
    Secretary Hale and Ms. McGrath. The complex nature of the business 
operation involves multiple processes with linked outcomes. A change in 
a particular process often affects related process, data flows, and 
systems. There are business process differences between how DOD 
currently conducts disbursement as compared to the Treasury and a 
phased approach is prudent to ensure there are no unintended 
consequences on reconciliation and reporting. We feel it is necessary 
to assess the impacts in a microenvironment before prematurely rolling 
out an enterprise solution.

    22. Senator Ayotte. Secretary Hale and Ms. McGrath, other agencies 
have ERPs that communicate directly with the Treasury. Could your 
analysis leverage those experiences to possibly field this solution 
more quickly?
    Secretary Hale and Ms. McGrath. DOD has consulted with other 
agencies on their experiences and has benefited from their lessons-
learned. Among other examples, the Army has held extensive discussions 
with Customs and Border Protection (CBP) about the business processes 
and the efficiencies that agency gained by disbursing directly through 
Treasury. The Army is leveraging CBP's experience while implementing 
the Army's ERP. In addition, DOD has been represented in ERP users 
groups sponsored by the Office of Management and Budget's (OMB) CFO 
Council, providing other opportunities to leverage non-defense agency 
experience.

    23. Senator Ayotte. Secretary Hale and Ms. McGrath, please provide 
a rough order of magnitude of how much could be saved--in terms of 
dollars and personnel--by this approach vis-a-vis DFAS?
    Secretary Hale and Ms. McGrath. That information is not yet 
available. The extent of potential savings is part of what the Army's 
pilot/test is trying to assess. For the Treasury disbursing capability, 
it is the Army's belief that by eliminating and streamlining processes 
and systems, the Army will generate cost savings within DOD and also 
enhance the likelihood of achieving audit readiness. However, specific 
figures are still being determined.

    24. Senator Ayotte. Secretary Hale and Ms. McGrath, the Navy ERP is 
nearly fully deployed. Is it transacting financial payments direct to 
the Treasury? If not, why not?
    Secretary Hale and Ms. McGrath. No, the Navy ERP system is not 
transacting payments to the Treasury. Depending on the results of the 
ongoing pilot/test, Navy ERP may move in that direction.

             FINANCIAL IMPROVEMENT AND AUDIT READINESS PLAN

    25. Senator Ayotte. Secretary Hale, I have reviewed what you have 
described as Interim Goals for fiscal year 2011 and fiscal year 2012 in 
your FIAR plans. With the exception of one goal for fiscal year 2011 
(``Achieve audit opinion on USMC'') and one goal for fiscal year 2012 
(``fully deploy GFEBS''), all the others are, in fact, not goals. They 
are a list of tasks to ``begin'' or for DOD to ``assert'', which only 
begins the audit process. As of today, what is the status of your goals 
for fiscal year 2011 and fiscal year 2012; as of today, will they be 
met? If so, please specify when.
    Secretary Hale. DOD has set aggressive stretch goals in order to 
push the organization to meet the goal of audit readiness by September 
2017. Since publication of the May FIAR plan Status Report, we have 
completed six of the eight fiscal year 2011 goals depicted in Figure 7 
of the May 2011 FIAR plan Status Report. An independent accounting firm 
issued a clean opinion on the audit readiness examination of the Army, 
Navy, and Air Force appropriations received assertions. The IG has 
begun an examination of the Navy military equipment and accounting 
firms have begun the examinations of Army entities using GFEBS and Air 
Force Funds Balance with Treasury reconciliation.
    We will not meet all interim goals and our performance in fiscal 
year 2012 remains to be seen. I have reason to be confident that we can 
continue to build on the momentum we have developed in fiscal year 
2011.

    26. Senator Ayotte. Secretary Hale, why are your goals listed as 
beginnings or assertions instead of when these tasks will be complete?
    Secretary Hale. We have developed a methodology for audit readiness 
that addresses many lessons from our earlier efforts. The recent GAO 
audit (http://www.gao.gov/Products/GAO-11-851) reviewed our methodology 
and reports that ``DOD's FIAR Guidance provides a reasonable and 
systematic process that DOD components can follow in their efforts to 
achieve audit readiness. It establishes clear priorities for the 
components and a road map for reaching auditability.''
    One key part of the process is for the DOD IG and my office to 
review assertions of audit readiness before beginning a more detailed 
examination. As also reported in the GAO audit, this review is not a 
rubber-stamp process and has more often than not determined the 
component must perform additional work before beginning the external 
validation. So we consider the beginning of the external validation to 
be a significant milestone. While not all examinations will result in a 
clean opinion we feel that the components are more likely than not 
audit ready when the examination begins.

    27. Senator Ayotte. Secretary Hale, please provide me with a list 
of when the fiscal year 2011 and fiscal year 2012 tasks are expected to 
be complete--and not merely begun.
    Secretary Hale. We plan to complete validations of audit readiness 
assertions within 6 months. Several of these early efforts were delayed 
while we established a contract vehicle for the work. Since publication 
of the May FIAR plan Status Report, we have completed validations 
related to three of the fiscal year 2011 goals in Figure 7 of the 
report, the independent validation of the Army, Navy, and Air Force 
appropriations received assertions. Three of the other four ``begin 
validation'' goals have also been met and all four validations will be 
complete in fiscal year 2012. The latest status on all fiscal year 2011 
and fiscal year 2012 goals will be reported in the November 2011 FIAR 
plan Status Report.

    28. Senator Ayotte. Secretary Hale, wave 1 of your strategy for 
financial readiness is for there to be an audit of ``Appropriations 
Received''. Isn't that basically just making sure that the 
congressional appropriations got into the right accounts?
    Secretary Hale. Yes, this first phase of our effort is to prove 
that DOD accurately accounts for and distributes funds provided by 
Congress into the right accounts in accordance with law. While funds 
receipt and distribution is a simple process relative to some other DOD 
processes such as weapon system acquisition, it is an important step 
for two reasons. First, we want to have independent validation that we 
receive and distribute funding in accordance with the law to provide 
Congress confidence. We also want to get our components more experience 
with the rigors of audit and this was a good early exercise of their 
ability to meet audit documentation requirements.

    29. Senator Ayotte. Secretary Hale, this sounds simple; why is it 
that none of the Services--the Departments of the Army, Navy, or Air 
Force--can do that simple task yet?
    Secretary Hale. We always had confidence that the Services could 
pass this test and in August, an IPA firm completed its examination and 
issued unqualified (``clean'') opinions to the Army, Navy, and Air 
Force on their Appropriations Received audit readiness assertion. These 
clean opinions validate that the Military Departments have reliable and 
auditable processes, controls, and systems in place to record the 
annual appropriations from Congress.

    30. Senator Ayotte. Secretary Hale, why shouldn't Congress be 
alarmed that the simple task of depositing the right money into the 
right accounts before even spending it cannot now be verified by 
independent auditors?
    Secretary Hale. Congress should be confident that we use 
appropriations in accordance with the law and we now have it verified 
by an IPA firm. In August, an IPA firm completed its examination and 
issued unqualified (``clean'') opinions to the Army, Navy, and Air 
Force on their Appropriations Received audit readiness assertion. These 
clean opinions validate that the Military Departments have reliable and 
auditable processes, controls, and systems in place to record the 
annual appropriations from Congress.

    31. Senator Ayotte. Secretary Hale, exactly how is that objective 
necessary for achieving full audit readiness?
    Secretary Hale. Accurate and timely recording of appropriations and 
other related budget activity is critical as it is the focus of the 
first third of the Statement of Budgetary Resources (SBR). If the 
resources received are not recorded accurately then all remaining 
sections of the SBR will be inaccurate.

    32. Senator Ayotte. Secretary Hale, according to the most recent 
FIAR plan, this was supposed to have been completed in fiscal year 2010 
for the Navy and fiscal year 2011 for the Army and the Air Force. But, 
they have all been moved to fiscal year 2012. Please explain why.
    Secretary Hale. In the May 2011 FIAR plan Status Report, we 
reported the validations of Army, Navy, and Air Force Appropriations 
Received audit readiness assertions would be complete in the fourth 
quarter of fiscal year 2011 and, in fact, they were completed. In 
August, an IPA firm completed its examination and issued unqualified 
(``clean'') opinions to the Army, Navy, and Air Force on their 
Appropriations Received audit readiness assertion. These clean opinions 
validate that the Military Departments have reliable and auditable 
processes, controls, and systems in place to record the annual 
appropriations from Congress.
    There was a delay to the Navy milestone while we contracted with 
IPA firms to do this work at the best value to the Government.

    33. Senator Ayotte. Secretary Hale, I am concerned that DOD has too 
much of a budget focus and not enough of a focus on what they are 
spending the $700 billion Congress has given them. We know DOD spends 
enormous resources putting together a budget and justifying the need. 
We know the management focus is on spending all of the funds we approve 
for fear of not getting to keep the same level of funding going 
forward. Now, for the approach to getting to an unqualified audit 
opinion, DOD is focusing on the SBR--once again a budget focus. Why is 
DOD not focusing on the balance sheet so we can improve the quality of 
data captured on what we are buying? It would seem wiser to be focused 
on the end-to-end business transactions that encompass both the 
budgetary and proprietary general ledger account postings.
    Secretary Hale. DOD's major financial decisions are based upon 
budgetary data (e.g., status of funds received, obligated, and 
expended). Therefore, the first priority focuses on process 
improvements, controls, and systems associated with budgetary 
information. This effort involves ensuring improved quality of 
information in order to better inform decisions--not just to ensure the 
funds are spent. Fiscal pressure and good stewardship demand this. The 
budget is key to public sector accounting. Proving positive control 
over each business event in the end-to-end process provides the 
framework for the rest of the statements. With modern, capable systems, 
business events are posted to both proprietary and budgetary ledgers. 
Our revised strategy to focus on budgetary information and asset 
counts/locations has resulted in more participation from the non-
financial business communities. They are active in our efforts to 
improve controls over asset management as well as ensuring that 
obligations are recorded and adjusted when needed. This approach has 
also been validated by GAO and advisory bodies.

    34. Senator Ayotte. Secretary Hale, doesn't managing to the budget, 
as the SBR does, focus the FIAR effort mostly on funding in and funding 
obligated and expended, where Congress wants DOD to focus additionally 
on what it is buying so it can analyze its buying decisions and the 
costs of programs, as Secretary Gates complained about?
    Secretary Hale. By focusing first on budgetary data, we will 
improve processes, controls, and systems we use to manage DOD budgets, 
appropriations, funds availability, and expenditure information--which 
are critical to effectively managing operations and acquisitions. The 
type of cost or managerial accounting you refer to in your question is 
dependent on a basis of accurate financial accounting. We are focused 
on building that solid foundation while also looking to improve cost 
accounting.

    35. Senator Ayotte. Secretary Hale, are you focusing on the SBR 
because you lack the people who understand the proprietary side of the 
accounting processes and systems?
    Secretary Hale. We have some of the finest people in Government. 
They are experienced, trained, and dedicated. We have an extensive 
training program to ensure our financial managers know the proper rules 
and processes. However, they generally do not have financial audit 
experience. That is changing. We have hired people from the outside, 
employed contractors, and developed an audit readiness training 
program. My certification plan that is included in the House and Senate 
versions of the NDAA of 2012 will institute the skills we need moving 
forward.

    36. Senator Ayotte. Secretary Hale, it seems you are more 
comfortable with the budget processes. Does DOD have enough individuals 
with experience auditing complex financial statements?
    Secretary Hale. Our people are experienced, well-trained, and 
dedicated; but they generally do not have financial audit experience. 
We are working to add this experience through actual audits and 
examinations, interaction with experienced auditors helping our audit 
readiness efforts, training, and through hiring.

    37. Senator Ayotte. Secretary Hale, I understand that you are 
sponsoring an accreditation program before Congress to increase the 
number of government employees holding a CPA certification. I applaud 
this initiative, but how concerned are you that even under the 
initiative, the workforce within DOD will not be trained quickly or 
sufficiently enough to achieve a first-time audit opinion by 2017?
    Secretary Hale. The 2017 goal is ambitious from a variety of 
perspectives but we are committed to this date. I hope you will 
continue to encourage and support this workforce initiative and others 
which will help us to not only achieve but also sustain auditability in 
the future. Our intended business environment, as well as external 
pressure to do more with fewer resources, will demand that our 
workforce has the right skills. Increased requirements for credentials 
will be part of this emerging program.

    38. Senator Ayotte. Secretary Hale, how critical is this as a 
limiting factor?
    Secretary Hale. Our people's experience is a critical factor but no 
single factor will result in success. We believe we have a strategy and 
approach that addresses all factors sufficiently. Inclusion of FIAR 
goals as a requirement in performance plans and organization strategic 
plans will also help motivate our people to get the skills they need to 
succeed and be rewarded.

              OVERSIGHT OF BUSINESS SYSTEMS MODERNIZATION

    39. Senator Ayotte. Ms. McGrath, you are the vice chair of the 
Defense Business Systems Management Committee (DBSMC), which has been 
in existence for more than 5 years now. The statute that authorized the 
DBSMC requires oversight of enterprise architecture and business system 
modernization efforts across DOD. These ERP systems appear to be at the 
heart of those modernization efforts, both for audit readiness and 
other important reasons. Exactly what kind of oversight has the DBSMC 
provided over these ERP programs?
    Ms. McGrath. The DBSMC has provided consistent oversight over DOD's 
ERP investments. In addition to responsibility for reviewing and 
approving the ERP programs' funds certification requests, the DBSMC has 
played an active role in defining DOD's overall strategy with regard to 
these programs, authorizing and reviewing the results of pilot efforts, 
such as the Procure-to-Pay pilot, to investigate ways to make better 
use of the capability inherent in the ERP software packages, and 
holding component leaders responsible and accountable for the 
performance of their programs.

    40. Senator Ayotte. Ms. McGrath, how often, and specifically how, 
do you personally verify that the Services are building ERPs in a way 
that is compatible for the Office of the Secretary of Defense (OSD) and 
other users to undertake cross-Service search for financial, human 
resources, or supply information?
    Ms. McGrath. I am personally involved in ensuring that the Services 
are building ERPs in a way that is compatible for OSD and other users 
to undertake cross-Service search for financial, human resources, or 
supply information in a number of ways. As Vice Chair of the DBSMC, a 
key member of our IRBs, and Milestone Decision Authority of many of the 
Service ERPs, I ensure that they are being built in compliance with the 
BEA, which contains the data and process standards that provide for 
information interoperability. Additionally, my office, through our ERP 
laboratory, provides the Services with standard configurations of the 
major ERP software packages that facilitate Service-specific 
implementation of the BEA standards. Finally, my office is leading 
efforts to further improve the BEA and develop innovative technology 
approaches for business intelligence and analytics.

    41. Senator Ayotte. Ms. McGrath, please provide me with a 
description of which ERPs the DBSMC reviewed in detail and the dates 
when the DBSMC conducted those detailed reviews.
    Ms. McGrath. Since the DBSMC was established in 2005, in addition 
to considering certification requests for DOD's ERP systems, it 
specifically reviewed DOD's overarching ERP strategy, Procure-to-Pay 
End-to-End process pilot efforts, and its individual ERP investments 
many times. With regard to the individual ERP programs, the DBSMC's 
reviews included the Defense Integrated Military Human Resources System 
(DIMHRS), Defense Agencies Initiative (DAI), Navy Enterprise Resource 
Planning System (Navy ERP), the Air Force's Defense Enterprise 
Accounting and Management System (DEAMS) and ECSS, the Army's GFEBS, 
GCSS-Army, and LMP, and the DLA's Enterprise Business System (EBS). 
These reviews took place on the following dates:

         April 29, 2005;
         June 5, 2005;
         July 27, 2005;
         August 31, 2005;
         September 28, 2005;
         October 25, 2005;
         December 1, 2005;
         December 21, 2005;
         January 25, 2006;
         March 23, 2006;
         April 13, 2006;
         May 19, 2006;
         July 26, 2006;
         August 23, 2006;
         September 22, 2006;
         November 30, 2006;
         December 21, 2006;
         January 31, 2007;
         February 22, 2007;
         March 29, 2007;
         May 22, 2007;
         June 25, 2007;
         July 23, 2007;
         August 17, 2007;
         September 26, 2007;
         October 26, 2007;
         November 27, 2007;
         December 21, 2007;
         February 1, 2008;
         February 28, 2008;
         April 3, 2008;
         April 29, 2008;
         July 24, 2008;
         August 21, 2008;
         September 24, 2008;
         October 30, 2008;
         December 5, 2008;
         January 14, 2009;
         February 24, 2009;
         March 30, 2009;
         April 30, 2009;
         July 21, 2009;
         February 2, 2010;
         March 2, 2010;
         June 1, 2010; and
         November 10, 2010.

    42. Senator Ayotte. Ms. McGrath, with this information, please 
briefly describe the matter reviewed in a level of detail for me to 
understand the nature of these detailed reviews.
    Ms. McGrath. The reviews listed in the answer to question #41 vary 
greatly, but can be grouped into a number of general categories. First, 
the DBSMC has received a number of broad program overviews, 
particularly in the months following the creation of the DBSMC in 2005, 
to introduce the DBSMC members to a particular program. Second, the 
DBSMC has received program updates throughout programs' acquisition 
lifecycles to stay informed about progress and share lessons learned 
across DOD. These updates generally would be composed of broad looks at 
cost, schedule, performance, and risk factors. Third, the DBSMC has 
conducted in-depth reviews on particular programs or individual issues 
associated with particular programs. The subjects of these in-depth 
reviews vary, but include issues such as interfaces, data conversion, 
implementation/roll-out, change management, et cetera. Fourth, the 
DBSMC has received decision briefs on ERP programs or strategies that 
present potential courses of action for the group's consideration and 
decision. Finally, the DBSMC has received a number of follow-up 
briefings to answer members' questions from a previous meeting or 
present the status of actions assigned at previous meetings.

    43. Senator Ayotte. Ms. McGrath, most of the business systems DOD 
has bought are over-budget and have gone long past scheduled delivery. 
The Government Accountability Office (GAO) puts those numbers in the 
billions of dollars on the budget side, and most of these programs have 
had to go through the so-called ``Critical Change Process (CCP)'' with 
reports to Congress because they breached on execution targets. Exactly 
what specific changes has the DBSMC prescribed for each of these over-
budget programs to get them under control?
    Ms. McGrath. The senior official, typically the component 
acquisition executive, within the acquisition chain of command is 
responsible for certifying programs in accordance with CCP described in 
10 U.S.C., Chapter 144a, not the DBSMC. As part of the CCP the senior 
DOD official responsible for the program provides written certification 
(with supporting explanation) that:

         the automated information system to be acquired is 
        essential to the national security or to the efficient 
        management of DOD;
         there is no alternative to the system which will 
        provide equal or greater capability at less cost;
         the new estimates of the cost, schedule, and 
        performance with respect to the program and system or 
        information technology investment, as applicable, have been 
        determined with the concurrence of the Director of Cost 
        Assessment and Program Evaluation (CAPE), to be reasonable; and
         the management structure of the program is adequate to 
        manage and control program costs.

    Based on the findings of various programs' CCP, the senior official 
or the Milestone Decision Authority, in consultation with DBSMC 
members, has directly implemented corrective actions to address the 
root causes of the breaches. For example, programs have been directed 
to:

         restructure into smaller increments focused on 
        discrete capability delivery aligned to the user needs;
         put in place additional performance measures to track 
        high risk areas identified by the critical change team, such as 
        interfaces, data conversion, defect reports, et cetera;
         restructure the program's contracts to limit the 
        Government's cost exposure;
         limit obligation authority tied to short-term program 
        milestones vice multi-year funding authority; and
         limit fielding of releases of an increment to do 
        additional testing or demonstrate operational stability of a 
        release prior to full deployment.

    44. Senator Ayotte. Ms. McGrath, most of the CCP submissions to 
Congress basically come to the conclusion that the status quo is 
appropriate and that, despite the fact of being over budget and beyond 
schedule, we should just keep going and going under the original plans. 
What specific programmatic changes can you point to that the DBSMC has 
imposed on any of these programs in response to this poor track record?
    Ms. McGrath. The senior official, typically the component 
acquisition executive, within the acquisition chain of command is 
responsible for certifying programs in accordance with CCP described in 
10 U.S.C., Chapter 144a, not the DBSMC. As part of the CCP the senior 
DOD official responsible for the program provides written certification 
(with supporting explanation) that:

         the automated information system to be acquired is 
        essential to the national security or to the efficient 
        management of DOD;
         there is no alternative to the system which will 
        provide equal or greater capability at less cost;
         the new estimates of the cost, schedule, and 
        performance with respect to the program and system or 
        information technology investment, as applicable have been 
        determined with the concurrence of the Director of CAPE, to be 
        reasonable; and
         the management structure of the program is adequate to 
        manage and control program costs.

    Based on the findings of various programs' CCP, the senior official 
or the Milestone Decision Authority, in consultation with DBSMC 
members, has directly implemented corrective actions to address the 
root causes of the breaches. For example, programs have been directed 
to:

         restructure into smaller increments focused on 
        discrete capability delivery aligned to the user needs;
         put in place additional performance measures to track 
        high risk areas identified by the critical change team, such as 
        interfaces, data conversion, defect reports, et cetera;
         restructure the program's contracts to limit the 
        Government's cost exposure;
         limit obligation authority tied to short-term program 
        milestones vice multi-year funding authority; and
         limit fielding of releases of an increment to do 
        additional testing or demonstrate operational stability of a 
        release prior to full deployment.

    45. Senator Ayotte. Ms. McGrath, how often has audit readiness been 
discussed at DBSMC meetings?
    Ms. McGrath. DOD's FIAR efforts have been specifically briefed at 
the DBSMC six times and have also been discussed as part of the DBSMC's 
quarterly performance reviews.

    46. Senator Ayotte. Ms. McGrath, what specific actions have 
resulted from those discussions where people were directed to do 
something differently?
    Ms. McGrath. Examples of direction from the DBSMC as a result of 
briefings on DOD's FIAR efforts include revisions of financial 
management goals in DOD's SMP, further development of the Standard 
Financial Information Structure (SFIS) standards and additional 
dialogue between the Under Secretary of Defense (Comptroller), and the 
CMO of the Air Force to ensure that Air Force audit efforts were 
properly resourced and aligned with DOD's direction.

    47. Senator Ayotte. Ms. McGrath, the DBSMC has the responsibility 
to oversee DOD's compliance with the BEA, but GAO has raised concerns 
about the thoroughness of the reviews that are performed by the IRBs to 
ensure that compliance is actually occurring. I'm specifically 
interested in what you call the SFIS, which has been in the 
architecture for several years and is essential for achieving audit 
readiness. I believe the DOD IG had written a report a couple of years 
ago that was very critical of one of the Army ERP programs for not 
really being compliant with this requirement, even though they had 
successfully gone through the review process. What steps does the 
review process under the direction of the DBSMC take to absolutely 
ensure that these new systems are compliant with this standard 
financial structure?
    Ms. McGrath. Since the DOD IG report concerning the Army ERP 
programs, my office has begun an independent assessment of every ERP 
and business system that needs to be compliant with SFIS and USSGL. 
These reviews look at the underlying system's SFIS configuration, its 
USSGL posting logic, its ability to interface using SFIS, and its 
financial reporting capability. For each element in SFIS, there are 
implementable business rules that address syntax, usage, and 
relationships. To be compliant with SFIS, a system must be compliant 
with the SFIS business rules. Each business rule is evaluated against 
the system's configuration. For an ERP, approximately 250 business 
rules will be evaluated. To date, we have performed 12 validations and 
expect to complete the remaining 38 validations by December 2012. 
Additionally, since the DOD IG report concerning the Army ERP programs, 
the DOD IG has begun to review all ERPs for the SFIS requirements and 
my staff meets regularly with DOD IG to provide recommendations and 
exchange information concerning SFIS validation. Prior to this, the 
SFIS assessment process was a self-assertion process.

    48. Senator Ayotte. Ms. McGrath, where those reviews have actually 
been conducted, what did they find?
    Ms. McGrath. As discussed in the answer to question #47, to date, 
DOD has conducted 12 independent assessments of SFIS compliance and 
expects to complete the remaining 38 assessments by December 2012. For 
the systems assessed to date, preliminary results indicate that overall 
average SFIS compliance is approximately 78 percent. General reasons 
for non-compliance include:

         Out-of-date reporting chart of accounts
         Out-of-date posting chart of accounts
         Improper posting logic
         System interfaces not yet updated for SFIS compliance
         Poorly maintained data sets
         Improper derivation logic
         External configuration guidance that conflicts with 
        and/or is not documented in the BEA
         Financial business processes highly dependent on non-
        SFIS or legacy data

    We continue to work closely with DOD IG, the Program Offices, and 
Office of the Under Secretary of Defense (Comptroller) to correct 
deficiencies that have been identified.

    49. Senator Ayotte. Ms. McGrath, what examples can you offer where 
you have actually validated this compliance, as opposed to, say, just 
taking someone's word for it through unchecked self-assertions?
    Ms. McGrath. As discussed in the answers to questions #47 and #48, 
my office has begun an independent assessment of every ERP and business 
system that is required to be compliant with SFIS and USSGL. These 
reviews look at the underlying system's SFIS configuration, its USSGL 
posting logic, its ability to interface using SFIS, and its financial 
reporting capability. To date, we have performed 12 validations and 
expect to complete the remaining 38 validations by December 2012. 
Additionally, since the DOD IG report concerning the Army ERP programs, 
the DOD IG has begun to review all ERPs for the SFIS requirements and 
my staff meets regularly with DOD IG to provide recommendations and 
exchange information concerning SFIS validation.

                 DEFENSE AGENCIES INITIATIVE CASE STUDY

    50. Senator Ayotte. Ms. McGrath, one of the Business Transformation 
Agency's (BTA) largest initiatives is the DAI, an ERP system for 
defense agencies. BTA, in fact, was the first agency to implement DAI 
for itself, and from what we understand, was a small-scale effort but 
one that was very successful in terms of following the best practices 
you advocate. Now, we hear that as BTA is being shut down, and about 
half the agency or so is being folded into your office, that you're 
going to stop using DAI for your new business in fiscal year 2012 and 
force the BTA folks that you're inheriting to go back to the old, 
antiquated system supplied out of DOD. Why would you want to go 
backwards when you have this new system already up and running?
    Ms. McGrath. I do not intend to move backwards with DAI deployment 
plans. The current implementation schedule for DAI, for fiscal years 
2012 through 2016, continues to include 25 Defense Agencies.
    The Office of the Deputy CMO is part of OSD, which is currently 
supported by Washington Headquarters Service (WHS). WHS is scheduled to 
implement DAI in fiscal year 2016. It did not make sense for DOD to 
significantly alter the implementation schedule for DAI because of a 
small number of BTA employees moving into OSD.

    51. Senator Ayotte. Ms. McGrath, isn't DOD operation targeted to 
migrate to DAI in the future?
    Ms. McGrath. Yes, the activity that supports day-to-day operations 
for OSD, WHS is scheduled to begin implementation of DAI in fiscal year 
2015 and become operational in early fiscal year 2016.

    52. Senator Ayotte. Ms. McGrath, why does it not just accelerate 
DAI's deployment, instead of forcing you to regress to their old system 
that appears to be exactly the kind of system you are trying to move 
away from?
    Ms. McGrath. Acceleration of the schedule would be extremely 
challenging and provide increased risk to the established workload. The 
DAI implementation schedule includes the deployment of multiple sites 
over the next few years and program resources have been allocated to 
meet this schedule. Additionally, the specific sites are currently 
preparing for implementation, which includes data cleansing efforts, 
training, and BPR. Further, in addition to the increased risk, 
additional resources would be required to accelerate.

    53. Senator Ayotte. Ms. McGrath, how is jettisoning DAI today 
consistent with the practices and direction you've otherwise advocated 
for DOD in terms of improving its business systems and processes?
    Ms. McGrath. The program has not been jettisoned. The current 
implementation schedule for DAI, for fiscal years 2012 through 2016, 
continues to include 25 Defense Agencies.

    54. Senator Ayotte. Ms. McGrath, in your best, independent, 
professional judgment, should this system continue to be used?
    Ms. McGrath. Yes, the program should continue. DAI is pivotal for 
DOD Agencies in terms of meeting the requirements of Federal statutes 
requiring auditable financials and producing clean audits, and in 
complying with DOD architectural standards driven by the Deputy Chief 
Management Officer (DCMO).

    55. Senator Ayotte. Ms. McGrath, what, if anything, does this 
episode relating to DOD's decision to move away from DAI imply about 
your office's ability to fulfill its charter?
    Ms. McGrath. DOD is not moving away from DAI. My office will 
continue to play a significant role in DOD's DAI implementation and 
will move to DAI itself with the rest of OSD in early fiscal year 2016. 
I do not believe that this reflects on my office's ability to fulfill 
its charter.

    56. Senator Ayotte. Ms. McGrath, regardless of what happened with 
DAI or why it was done, to what extent does not having funds control of 
the multiple different service business system programs hamper your 
ability to get the Services to follow your business transformation 
guidance or directives?
    Ms. McGrath. I am currently able to influence funds control of 
DOD's diverse portfolio of business systems as Vice Chair of the DBSMC, 
as a member of the IRBs, and as Milestone Decision Authority for many 
of our business Major Automated Information System (MAIS) programs. 
However, the proposed changes to 10 U.S.C. Section 2222, expanding and 
centralizing the oversight function of the IRBs, under consideration by 
the Congressional Defense Committees in the National Defense 
Authorization Act (NDAA) for Fiscal Year 2012 would be a welcome 
expansion of the existing statute, as it would enable greater 
transparency of business investments.

         DISESTABLISHMENT OF THE BUSINESS TRANSFORMATION AGENCY

    57. Senator Ayotte. Ms. McGrath, Secretary Gates directed that the 
BTA be disestablished in his announcement last August. What impact, if 
any, will that decision have on your ability to continue to drive 
business transformation across DOD?
    Ms. McGrath. I do not see a long-term impact on my ability to drive 
business transformation across DOD. When BTA was established in 2006, 
it was entrusted with the mission of reforming and modernizing DOD's 
business practices. That mission remains valid. However, with the 
establishment of the position of DCMO as an Under Secretary of Defense-
level official in OSD, fairly substantial overlap was created. It was 
determined that the benefit provided by the BTA could be more 
effectively realized through the disestablishment of the BTA and the 
incorporation of its core functions into the office of the DCMO and the 
incorporation of its direct program management responsibilities for 
specific enterprise Defense Business Systems (DBS) into the DLA. This 
consolidation will enable more agile management of DOD's business 
transformation functions and enhance our ability to carry out our 
mission.

    58. Senator Ayotte. Ms. McGrath, it seems that transformation kinds 
of programs require highly skilled people to lead those efforts. I, 
however, understand that more than a third of the BTA staff has left 
DOD since the Secretary's announcement last year, including most of the 
top leadership. Why should I not conclude that this will negatively 
impact on your ability to be successful?
    Ms. McGrath. My office continues to be equipped with the people and 
hiring authorities necessary to effectively execute its mission. First, 
while we lost several key personnel during the disestablishment of the 
BTA and the incorporation of its core functions into the office of the 
DCMO and the incorporation of its direct program management 
responsibilities for specific enterprise DBS into the DLA, we also 
retained many key personnel, including those with expertise in ERP 
system implementations, architecture development, and process 
improvement, among other critical skills. We are moving quickly to hire 
new staff to replace those that left. Additionally, I plan on 
continuing to utilize the Highly Qualified Expert (HQE) hiring 
authority, which BTA used quite effectively, to hire individuals 
outside of the Federal Government who are leading authorities in 
technical disciplines and other areas of expertise needed by the 
Government to satisfy emerging and non-permanent requirements. I 
embrace the HQE model and intend to supplement my seasoned government 
staff with these HQEs.

                  EXPEDITIONARY COMBAT SUPPORT SYSTEMS

    59. Senator Ayotte. Ms. McGrath and Secretary Morin, one of the 
most expensive ERP systems in DOD is the Air Force's ECSS. While this 
ERP, which is actually a commercial-off-the-shelf system, is primarily 
seen as a logistics system, our understanding is that it is also very 
much a financial system, in particular for the Air Force's Working 
Capital Fund (WCF).
    Since having begun in 2004, to date this program has spent 
approximately $800 million and has yet to really deliver any meaningful 
capabilities. And it won't be fully deployed until 2016--just a year 
before the 2017 deadline by which DOD must be audit-ready. To me, this 
sounds like a train wreck waiting to happen. On what factual basis do 
you have confidence that this program will get fully implemented or 
provide required capability as intended?
    Ms. McGrath. I share your concerns regarding ECSS. In February 
2011, the Milestone Decision Authority, the Under Secretary of Defense 
for Acquisition, Technology, and Logistics directed the program to 
create time and condition-based success criteria that if not met, would 
be used to evaluate future options for ECSS. The Milestone Decision 
Authority allowed the program to proceed with increment one, Pilot C 
(material management) because that effort was already on contract with 
the system integrator as a fixed-price effort.
    By September 2011, it was evident that the program was not able to 
meet the stated success criteria. Therefore the Milestone Decision 
Authority directed the program to conclude pilot C and stop work on 
pilot D (mobile supply chain management) which limits the Government's 
customer liability. In addition, the Milestone Decision Authority 
created an assessment team to identify possible way-ahead options for 
the program. The assessment team concluded their analysis and made a 
recommendation to the Milestone Decision Authority in late 2011. The 
Milestone Decision Authority is in the process of evaluating the 
information.
    Secretary Morin. The Air Force has already fielded some limited 
system capability through ECSS Pilot A (Vehicle and Tools Management) 
and Pilot B (Equipment Management) at Hanscom AFB. In addition, the Air 
Force reviews ECSS' key metrics on a weekly basis to assess the 
progress of software code development, data cleansing, interface test 
readiness, test case execution, and deficiency reports. This review 
provides leadership with actionable information on the health of Pilot 
C (Materiel Management) and Pilot D (Mobile Supply Chain) activities. 
The ECSS program is both a critical and complex enterprise. Although 
its performance has been inconsistent, ECSS is only one tool the Air 
Force plans to use to create auditable financial statements. The 
combination of enhancements to legacy systems and fielding of ERP 
systems helps reduce the risks of achieving the 2017 deadline.

    60. Senator Ayotte. Ms. McGrath, what specific oversight, if any, 
has you office exercised over this program?
    Ms. McGrath. My office has direct involvement with the oversight of 
this program. In February 2011, in concert with the Under Secretary of 
Defense, Acquisition, Technology and Logistics, we created an 
Overarching Integrated Product Team (OIPT) lead for MAIS DBS. The DBS 
OIPT is chaired by one of my senior division directors who reports 
directly to me and the Milestone Decision Authority. The DBS OIPT lead 
is well-versed in DOD's business processes as well as the defense 
acquisition process.

    61. Senator Ayotte. Ms. McGrath, on the basis of that oversight, 
what are your concerns about this ERP?
    Ms. McGrath. My concerns with ECSS center around the ability of the 
program office to meet the criteria established in February 2011 
(reference my response to question #59). As such, I worked with the 
Milestone Decision Authority to place the following conditions on the 
program as part of the critical change certification per 10 U.S.C. 
Chapter 144a:

         Document and lock requirement for ECSS Increment I, 
        Pilot C and D. Pilot C was designed to provide operational and 
        tactical logistics capability at the base level. Pilot D was 
        designed to provide capability that would enable Air Force 
        personnel to operate in a disconnected environment; i.e., away 
        from a base. The intent of this action was to prevent 
        ``requirements churn''.
         Define the success criteria the Air Force will use to 
        assess the health of the program as well as alternative 
        strategies to provide the necessary ECSS capabilities if the 
        program is unable to meet the defined success criteria. The 
        intent of this condition was to define and enforce a 
        performance based ``trigger'' that the Air Force could be used 
        to evaluate success of the program.
         Adopt program status metrics defined by the Milestone 
        Decision Authority to measure the health of the program. The 
        intent of this condition was to establish a set of transparent 
        measures that all program stakeholders could use to monitor the 
        health of the program.

    62. Senator Ayotte. Ms. McGrath, has your office explored, or does 
it intend to explore, any alternatives to ECSS?
    Ms. McGrath. Yes, my office is actively exploring options for ECSS. 
In fact, functional and ERP experts from my staff are directly involved 
in the assessment team referenced in response to question #59. Further, 
the DBS OIPT referenced in response to question #60 has a direct role 
in the assessment process.

    63. Senator Ayotte. Ms. McGrath, at some point, don't you need to 
just shut down out-of-control programs like this? Should that happen 
here?
    Ms. McGrath. Yes, we should shut down out-of-control programs. In 
this case, however, I believe it was not appropriate to shutdown ECSS 
because Increment One, Pilot C (base level logistics support) was 
already on contract with the system integrator as a fixed price effort. 
Increment One, Pilot D on the other hand (disconnected logistics 
support) was not under contract on a fixed-priced basis. In September, 
when it was evident that the program was not able to meet established 
success criteria (see question #61), the Milestone Decision Authority 
directed the program to stop work on Increment One, Pilot D, 
effectively limiting the Government's liability and shutting down 
future development work. In addition, the Milestone Decision Authority 
created an assessment team to identify possible way-ahead options for 
the program. The assessment team made a recommendation in late 2011 
that we are in the process of evaluating.

    64. Senator Ayotte. Secretary Morin, has the Air Force explored, or 
does it intend to explore, an alternative to ECSS?
    Secretary Morin. Yes, the Air Force has and will continue to 
investigate alternatives to the ECSS program. In February 2011, the Air 
Force submitted the ECSS Critical Change report through OSD/AT&L to 
Congress. The report included analysis of several delivery alternatives 
and different ECSS program structures. In addition, the Air Force 
actively monitors the health of ECSS using pilot programs, capturing 
metrics, and collectively assessing ECSS alternatives. The metrics 
reviews and alternative development efforts are ongoing.

          enterprise architecture and investment controls \1\
---------------------------------------------------------------------------
    \1\ GAO, DOD Financial Management: Numerous Challenges Must Be 
Addressed to Improve Reliability of Financial Information, GAO-11-835T 
(Washington, DC: July 27, 2011).
---------------------------------------------------------------------------
    65. Senator Ayotte. Ms. McGrath and Mr. Khan, as Congress, the OMB, 
and the Federal Chief Information Officers Council (CIOC) have 
recognized, effectively using a well-defined enterprise architecture is 
vital to organizational transformation and systems modernization. A 
corporate approach to investment controls management is a similarly 
important characteristic of successful public and private 
organizations. DOD continues to release updates to its corporate 
enterprise architecture. But, how successfully has this architecture 
been federated through the development of aligned subordinate 
architectures for each of the Military Departments?
    Ms. McGrath. BEA is the thin enterprise architecture layer that 
articulates the corporate vision, strategic direction, and principles 
for the target capabilities and processes in support of the DOD 
Strategic Management Plan goals. It is aligned to and decomposed by the 
Military Departments into segment architectures. Individual program and 
system investments and their architectures are first aligned with and 
assessed against the Military Departments' architectural segments and 
then assessed against the enterprise direction contained in the BEA for 
capital planning and investment control. While important progress has 
been made, as recognized by the GAO, architecture federation between 
BEA and the Military Department architectures remains a challenge.
    Mr. Khan. As we reported in June 2011,\2\ adopting a federated \3\ 
approach continues to be a challenge with much remaining to be 
accomplished at the component level. While DOD continues to release 
updates to its corporate enterprise architecture, the architecture has 
yet to be federated through development of aligned subordinate 
architectures for each of the Military Departments. Each of the 
Military Departments has made progress in managing its respective 
architecture program, but there are still limitations in the scope and 
completeness, and the maturity of the Military Departments' 
architecture programs. For example, while each department has 
established or is in the process of establishing an executive committee 
with responsibility and accountability for the enterprise architecture, 
none has fully developed an enterprise architecture methodology or a 
well-defined BEA and transition plan to guide and constrain business 
transformation initiatives.
---------------------------------------------------------------------------
    \2\ GAO, DOD: Further Actions Needed to Institutionalize Key 
Business System Modernization Management Controls, GAO-11-684 
(Washington, DC: June 29, 2011).
    \3\ A federated architecture consists of a family of coherent but 
distinct member architectures, in which subsidiary architectures 
conform to an overarching corporate architectural view and rule set.
---------------------------------------------------------------------------
    In addition, while DOD continues to establish investment management 
processes, the DOD enterprise and the Military Departments' approaches 
to business systems investment management still lack the defined 
policies and procedures needed for effective investment selection, 
control, and evaluation. Until DOD fully implements these institutional 
modernization management controls required by law and addressed in GAO 
recommendations, its business systems modernization will likely remain 
a high-risk program.

    66. Senator Ayotte. Ms. McGrath and Mr. Khan, how does DOD intend 
to improve in this area?
    Ms. McGrath. DOD is focused on improving architecture federation in 
two main areas. First, we have shifted the BEA from being organized 
functionally to being organized based on end-to-end (E2E) business 
processes. Second, we are mandating the use of international standards 
for building architectures. Our use of standards such as the Web 
Ontotology Language (OWL) and Business Process Modeling Notation (BPMN) 
provides the same opportunity for universal understanding that 
HyperText Markup Language (HTML) provides for users browsing pages on 
the internet. Both areas will facilitate the alignment and integration 
of DOD's efforts.

         DOD has identified 15 E2E business processes that 
        represent a set of mature industry and Government leading 
        practices for horizontal integration across the organization. 
        DOD's Strategic Management Plan (fiscal years 2012-2013) in its 
        goal #6 focuses DOD's efforts to reengineer/use E2E business 
        processes to reduce transaction times, drive down costs, and 
        improve service. For fiscal year 2012, DOD is focusing first on 
        mapping the Procure-to-Pay and Hire-to-Retire processes while 
        continuing to enhance other E2E processes.
         The E2Es are represented as Business Process Models 
        (BPMs) and are both horizontally integrated and vertically 
        integrated where they connect. The DCMO issued an executive 
        memorandum requiring that the BEA adopt international standards 
        for visualizing the BPMs and for the identifying and 
        documenting the data required to support the models. BEA 
        version 10.0 will be based opon these standards. As the 
        Military Departments adopt these standards, it will support 
        better alignment and federation to the BEA.

    Mr. Khan. As we reported in June 2011,\4\ a well-defined federated 
architecture and accompanying transition plans for the business mission 
area, along with well-defined investment management policies and 
procedures across all levels of DOD, are critical to effectively 
addressing DOD's business systems modernization high-risk area. DOD has 
continued to take steps in defining and implementing key institutional 
modernization management controls, but challenges that we identified in 
prior years \5\ still need to be addressed. Our previous 
recommendations to DOD have been aimed at accomplishing these and other 
important activities related to its business systems modernization. To 
DOD's credit, it has agreed with these recommendations and said it is 
committed to implementing them.
---------------------------------------------------------------------------
    \4\ GAO-11-684.
    \5\ See for example, GAO, DOD Business Systems Modernization: 
Recent Slowdown in Institutionalizing Key Management Controls Needs to 
Be Addressed, GAO-09-586 (Washington, DC: May 18, 2009); DOD Business 
Systems Modernization: Military Departments Need to Strengthen 
Management of Enterprise Architecture Programs, GAO-08-519 (Washington 
DC: May 12, 2008); DOD Business Systems Modernization: Progress in 
Establishing Corporate Management Controls Needs to Be Replicated 
Within Military Departments, GAO-08-705 (Washington, DC: May 15, 2008); 
Business Systems Modernization: Department of the Navy Needs to 
Establish Management Structure and Fully Define Policies and Procedures 
for Institutionally Managing Investments, GAO-08-53 (Washington, DC: 
Oct. 31, 2007); Business Systems Modernization: Air Force Needs to 
Fully Define Policies and Procedures for Institutionally Managing 
Investments, GAO-08-52 (Washington, DC: Oct. 31, 2007); DOD Business 
Systems Modernization: Progress Continues to Be Made in Establishing 
Corporate Management Controls, but Further Steps Are Needed, GAO-07-733 
(Washington, DC: May 14, 2007); Business Systems Modernization: DOD 
Continues to Improve Institutional Approach, but Further Steps Needed, 
GAO-06-658 (Washington, DC: May 15, 2006); and DOD Business Systems 
Modernization: Important Progress Made in Establishing Foundational 
Architecture Products and Investment Management Practices, but Much 
Work Remains, GAO-06-219 (Washington, DC: Nov. 23, 2005).

                      NAVY SYSTEMS AUDIT READINESS

    67. Senator Ayotte. Ms. McGrath and Secretary Commons, the Marine 
Corps has been trying to become fully auditable for quite some time, 
putting a lot of effort into this. Yet, it seems like every year the 
FIAR plan indicates slippage, and that the Navy won't ever get to the 
goal. What, in your view, are the primary obstacles to progress?
    Ms. McGrath. The current legacy environment has several material 
internal control deficiencies such as lack of proper supporting 
documentation, non-standard systems, non-standard data, and non-
standard processes. DOD needs to move to a business environment that 
enforces internal controls and begins to replace non-standard business 
operations and systems. A disparate system environment is one of the 
key challenges in achieving auditability. As stated in the DOD 2010 
Agency Wide Financial Report, material weaknesses fall into two major 
categories: (1) Noncompliant Systems. Most legacy systems do not comply 
with the wide range of systems requirements, and do not provide 
assurance that core financial systems and related information is 
traceable to source transactional information. Smaller organizations 
have successfully applied compensating controls, as demonstrated by 
favorable audit opinions, but these are not as practical in larger 
organizations, such as the military departments. (2) Legacy Financial 
Processes. Many financial processes, such as accounts receivable and 
accounts payable, do not comply with Generally Accepted Accounting 
Principles (GAAP) because they are dependent on the noncompliant legacy 
systems currently used to compile financial information for DOD 
financial statements. Leveraging ERP investments to their fullest 
potential will increase referential integrity, reduce the number of 
interfaces, and significantly reduce these material weaknesses.
    Secretary Commons. The major challenges the Navy faces pursuing 
auditability are in two general areas. First, the Navy's business-
financial environment has evolved over time without synchronization to 
financial audit standards. Business processes have been tailored by 
users for their own optimization; financial accounting implications of 
these designs were of a lesser concern. End-to-end business processes 
span multiple functional areas, with stakeholders both in and outside 
of the Navy; coordinating these multiple stakeholders to embrace 
changes needed for audit readiness is a large task. Moreover, legacy 
accounting systems have been designed primarily to perform funds/
budgetary accounting, not proprietary/financial accounting.
    Our second challenge is data management. Source documentation to 
support a financial audit may not be available in all instances, as 
systems and processes have not been designed to support audit 
readiness. Building an audit response infrastructure, which can 
assemble and transfer massive amounts of transactional data in a short 
timeframe, is a complex challenge.

    68. Senator Ayotte. Ms. McGrath and Secretary Commons, the Navy has 
its core accounting system, and then all these feeder systems, some of 
which are Marine Corps systems, DFAS systems, DOD systems, et cetera. 
From what you've learned, how does all this integration to these other 
systems impact the Navy's ability to become ready for an audit?
    Ms. McGrath. Integration between core accounting systems and legacy 
feeder systems is a challenge as the key to becoming auditable rests 
with developing compliant, integrated systems aligned to our stated 
audit objectives. If we cannot completely integrate our financial and 
financial feeder systems we will implement and document manual work-
arounds in order to become ready for an audit.
    Secretary Commons. As the number of systems and systems owners 
increase, the complexity of the challenge increases commensurately. 
However, audit readiness in this complicated business-financial 
environment is feasible. Auditability is dependent on strengthening the 
control environment of our end-to-end business processes. In that vein, 
standardization of our business process and associated systems are key 
elements of these end-to-end processes.
    As a milestone in audit readiness, comprehensive surveys must be 
conducted on relevant business systems to ensure that their general 
(access and security) controls and their application (business 
execution, including interfaces) controls are designed and operating 
effectively. The Navy will continue to conduct surveys on its major 
business-financial systems and correct any deficiencies indicated by 
these assessments; an assessment of Navy ERP's control environment 
using financial audit standards is currently underway.
    The Navy is also highly dependent on multiple outside service 
providers (primarily other Defense agencies) which manage and maintain 
business systems producing data flowing to the Navy financial 
statements. These service providers must bolster the control 
environments of their contributing business systems by assessing their 
general and application controls and strengthening them where 
necessary. The Navy is partnering with OSD, other components, and with 
external service providers to ensure that joint collaboration leads to 
success.

    69. Senator Ayotte. Ms. McGrath and Secretary Commons, what, if 
anything, is your office doing to either make these other systems 
compliant to support an audit or to replace them?
    Ms. McGrath. I have made a concerted effort as part of the systems 
acquisition process to ensure that business systems progress toward DOD 
audit goals while also delivering capability to the users. To that end, 
I fully support the DOD Comptroller's effort, which was integrated with 
a recent acquisition decision, to rely upon the opinion of an IPA firm, 
to be expressed in an examination of the Navy audit readiness assertion 
of a Navy ERP entity, currently planned for September 30, 2012. This 
approach will allow for identification of system and process 
enhancements scheduled for completion within 12 months.
    Secretary Commons. The control environment of all relevant business 
systems must be assessed for adequacy, and changes must be made to 
strengthen the controls when necessary to support audit readiness. 
Enforced standardization of our business processes is the underlying 
foundation. The Navy will conduct these surveys on the major business-
financial systems managed and maintained by the Navy. We are partnering 
with OSD, other components, and with external service providers to 
ensure success in this area.

    70. Senator Ayotte. Ms. McGrath, please provide a list of those 
systems, especially the ones that are required to be used by OSD across 
DOD, that represent the most significant stumbling blocks to audit 
readiness and explain exactly what the plan is to overcome this problem 
for each of these systems.
    Ms. McGrath. Some of the most critical enterprise systems to 
achieving audit readiness are the Defense Departmental Reporting System 
and the Defense Cash Accountability System, which are part of the 
Business Enterprise Information Services (BEIS) family of systems, as 
well as the Automated Disbursing System (ADS) and the Deployable 
Disbursing System (DDS), which are part of the Standard Disbursing 
Initiative (SDI). The BEIS family of systems provides timely, accurate, 
and reliable business information from across DOD to support auditable 
financial statements and provides specific functionality such as a DOD-
wide system for Treasury reporting. SDI addresses current disbursing 
challenges by consolidating existing functionality to meet DFAS 
customer needs for enterprise ADS and tactical DDS disbursing. These 
enterprise systems are primarily developed and maintained by DOD core 
service providers such as the DFAS and DLA and must efficiently work 
with each of the Military Department's financial systems and processes. 
To ensure that this happens, the DCMO and Under Secretary of Defense 
(Comptroller), through the FIAR governance structure, are facilitating 
collaboration between the service providers and Military Departments to 
make sure that the necessary changes are made on both sides to create 
an effective target environment.
    Additionally, each Military Department has a number of legacy 
systems in place that must be replaced through the implementation of 
modern ERP systems to achieve audit readiness. These ERPs come with 
greater capabilities and higher level controls than the systems they're 
replacing. These plans are included in the DOD's FIAR plan.

    71. Senator Ayotte. Secretary Commons, I understand that when the 
Navy's primary ERP system is fully deployed it will only cover just 
over half of all obligation authority in the Navy. The rest will be 
covered by legacy financial systems. How will the Navy maintain a clean 
audit opinion if it achieves one?
    Secretary Commons. The control environments of Navy ERP and other 
business-financial systems must be assessed and strengthened to ensure 
that they meet the standards for financial auditability. Enforced 
standardization of our business processes is the underlying foundation. 
The Navy will make necessary changes to its legacy and Navy ERP 
financial systems to strengthen its key internal and systems controls 
as required. We will also partner with outside service providers to 
ensure they do the same to their systems which support us. To ensure 
sustained effectiveness, key controls will be continually monitored and 
periodically tested as an essential component of the system owner's 
internal controls program.

    72. Senator Ayotte. Secretary Commons, is it the Navy's plan to 
employ a time-consuming, expensive manual effort each year to maintain 
a clean audit opinion with the legacy financial systems?
    Secretary Commons. It is not our intent to employ a time consuming, 
expensive manual effort each year to maintain a clean audit opinion 
with our legacy financial systems. The Navy plans to implement Navy ERP 
through the present schedule, which encompasses six large acquisition 
commands. The Navy will continue to assess the costs and benefits of 
expanding the number of organizations using Navy ERP; part of the cost-
benefit equation will be the costs and returns of audit readiness.
    The Navy will make necessary changes to its legacy and Navy ERP 
financial systems to strengthen its key internal and systems controls 
as required, with the objective of automating as many manual processes 
as possible. We will also partner with outside service providers to 
ensure they do the same to their systems which support us. To ensure 
sustained effectiveness, key controls will be continually monitored and 
periodically tested as an essential component of the system owner's 
internal controls program.

                     LEADERSHIP AND ACCOUNTABILITY

    73. Senator Ayotte. Mr. Khan, my sense is that there is no day-to-
day commitment among leadership at DOD to achieve auditability. And, 
DOD's oversight of the components' efforts to become auditable seems to 
rely mostly on self-reporting. Do you agree?
    Mr. Khan. The DOD Comptroller has expressed commitment to the FIAR 
goals, and has established a focused approach that is intended to help 
DOD achieve successes in the near-term. But the financial 
transformation needed at DOD, and its removal from GAO's high-risk 
list, is a long-term effort. Improving financial management will need 
to be a cross-functional endeavor; which requires improvement in some 
of DOD's other business operations such as those in the high-risk areas 
of contract management, supply chain management, support infrastructure 
management, and weapon systems acquisition. As acknowledged by DOD 
officials, sustained and active involvement of DOD's CMO, the DCMO, the 
DOD Comptroller, the Military Departments' CMOs, and other senior 
leaders is critical for the successful implementation of the FIAR plan. 
Absent continued momentum, the current initiative may falter, as have 
previous efforts.
    Ensuring effective monitoring and oversight of progress--especially 
by the leadership in the components--will be key to bringing about 
effective implementation through the components' Financial Improvement 
Plans (FIP). Effective oversight also holds individuals accountable for 
carrying out their responsibilities. In this regard, DOD has introduced 
incentives such as including FIAR goals in Senior Executive Service 
Performance Plans.

    74. Senator Ayotte. Mr. Khan, how, in your view, can top leadership 
at DOD better drive throughout DOD an effort as large as achieving the 
first unqualified audit opinion of DOD's consolidated financial 
statements?
    Mr. Khan. DOD's past strategies for improving its financial 
management were ineffective, but recent initiatives are encouraging. In 
2005, DOD issued its FIAR plan for improving financial management and 
reporting. In 2009, the DOD Comptroller directed that FIAR efforts 
focus on financial information in two priority areas: budgetary 
information and asset accountability. The FIAR plan also has a new 
phased approach that comprises five waves of concerted improvement 
activities. The first three waves focus on the two priority areas and 
the last two waves on working toward full financial statement 
auditability. The FIAR plan is being implemented largely through the 
DOD components, including the Army, the Navy, and the Air Force 
Military Departments and the DLA, through the development and 
implementation of their respective FIPs--lending increased importance 
to the commitment of component leadership. The component's FIPs are 
intended to both guide and document financial improvement efforts.
    As discussed in our testimony,\6\ improving DOD's financial 
management operations and thereby providing DOD management and Congress 
more accurate and reliable information on the results of its business 
operations will not be an easy task. Numerous challenges must be 
addressed in order for DOD to successfully reform financial management. 
Some of the key challenges that DOD must address in order for the 
financial management operations of DOD to improve to the point where 
DOD may be able to produce auditable financial statements are:
---------------------------------------------------------------------------
    \6\ GAO-11-835T.

         Committed and sustained leadership. Improving 
        financial management will need to be a cross-functional 
        endeavor. The successful resolution of the weaknesses in 
        financial management depends on improvements in some of DOD's 
        other business operations such as contract management, supply 
        chain management, and weapon systems acquisition. As 
        acknowledged by DOD officials, sustained and active involvement 
        of DOD's CMO, the DCMO, the Military Departments' CMOs, the DOD 
        Comptroller, and other senior leaders is critical.
         Effective plan to correct internal control weaknesses. 
        Because of DOD's complexity and magnitude, developing and 
        implementing a comprehensive plan that identifies DOD's 
        internal control weaknesses will not be an easy task. But it is 
        a task that is critical to resolving the longstanding 
        weaknesses and will require consistent management oversight and 
        monitoring, at all levels including each and every component of 
        DOD, for it to be successful. Such a baseline could be used to 
        assess and plan for the necessary improvements and remediation 
        to be used to measure incremental progress toward achieving 
        estimated milestones for each DOD component and DOD.
         Accountability and effective oversight. Ensuring 
        effective monitoring and oversight of progress--especially by 
        the leadership in the components--will be key to bringing about 
        effective implementation of the FIAR plan through the 
        components' FIPs. If DOD's future FIAR plan updates provide a 
        comprehensive strategy for completing Waves 4 and 5, the FIAR 
        plan can serve as an effective tool to help guide and direct 
        DOD's financial management reform efforts.

    75. Senator Ayotte. Mr. Khan, what value do you see in either 
separating the CMO position from the position of Deputy Secretary of 
Defense or putting the responsibility for achieving an unqualified 
audit opinion of DOD's consolidated fiscal year 2017 financial 
statements under the joint leadership of the CMO and the CFO?
    Mr. Khan. Because of the complexity and long-term nature of DOD's 
business transformation efforts, GAO has recommended the need for a 
separate CMO position with significant authority, experience, and a 
sufficient term to provide focused and sustained leadership. In May 
2007, the Secretary of Defense designated the Deputy Secretary of 
Defense as DOD's CMO. The NDAA for Fiscal Year 2008 codified the CMO 
position, created a DCMO position, directed that CMO duties be assigned 
to the Under Secretary of each Military Department, and required DOD to 
develop a SMP for business operations.
    DOD has taken various steps to implement the CMO and DCMO 
positions, and to develop a strategic plan. For example, in 2008, DOD 
issued its first SMP. DOD has also issued directives that outlined 
broad CMO and DCMO responsibilities, established a DCMO office, and 
named an Assistant DCMO. In July 2009, and again in December 2010, DOD 
updated its SMP. As of March 2010, all of the Military Departments had 
CMOs in place, and in July 2010, the DCMO was confirmed in her 
position. In addition, DOD has established various governance entities, 
such as the DBSMC, which is intended to serve as the primary forum for 
addressing overall business transformation, and the End-to-End Process 
Governance Board, whose role is to advise the DBSMC on opportunities to 
enhance the management and execution of end-to-end business processes 
across DOD. While GAO recognizes that DOD has taken some positive 
steps, our work indicates that additional opportunities exist for the 
CMO, assisted by the DCMO, to provide the leadership needed to ensure 
that actions to implement reforms are completed and to achieve the 
goals reflected in the SMP, including those in areas we have identified 
as high-risk, such as financial management. Moreover, opportunities 
also exist for the CMO and DCMO to take on a greater leadership role in 
implementing ongoing DOD-wide efforts to achieve more efficiencies in 
its operations and to ensure results in individual business areas. 
Finally, DOD needs to take additional actions to further develop a 
business transformation plan that contains measurable goals and funding 
priorities and that is supported by a strategic planning process that 
includes mechanisms to fully align plans and budgets and to measure 
progress against goals. It remains to be seen whether the current 
arrangement, rather than establishing the CMO as a separate position, 
will enable DOD to provide the long-term sustained leadership needed to 
address significant challenges in its business operations.
    The CMO has various responsibilities, including to develop and 
maintain a DOD-wide strategic plan for business reform; establish 
performance goals and measures for improving and evaluating overall 
economy, efficiency, and effectiveness; and monitor and measure the 
progress of DOD. The DOD Comptroller/CFO is focused on the financial 
management aspects of DOD, which includes preparing auditable financial 
statements. Based upon our discussions with the office of DOD's 
Comptroller/CFO and statements made by DOD's DCMO and DOD Comptroller/
CFO, at the hearing, they are working in a collaborative manner to 
address DOD's business transformation issues and auditability. Both 
individuals are part of the FIAR Governance Board which is responsible 
for reviewing the DOD components' progress in achieving auditability. 
Further, both offices participate in the review of the various DOD 
components' efforts to modernize their business systems, which DOD has 
acknowledged as critical for achieving audit readiness by fiscal year 
2017. Issuing auditable financial statements is a key responsibility of 
the DOD Comptroller, but the CMO and DCMO will be instrumental in 
supporting the Comptroller's efforts to improve the reliability of 
financial information generated by business functions for which other 
DOD leaders are responsible.

    76. Senator Ayotte. Mr. Khan, from a management or leadership 
perspective, what, if anything, can be done to better ensure commitment 
and support across functional areas to improve financial management at 
DOD?
    Mr. Khan. The DOD Comptroller has expressed commitment to the FIAR 
goals, and established a focused approach that is intended to help DOD 
achieve successes in the near-term. But the financial transformation 
needed at DOD, and its removal from GAO's high-risk list, is a long-
term endeavor. Improving financial management will need to be a cross-
functional endeavor. The successful resolution of the weaknesses in 
financial management depends on improvements in some of DOD's other 
business operations such as contract management, supply chain 
management, and weapon systems acquisition. As acknowledged by DOD 
officials, sustained and active involvement of DOD's CMO, the DCMO, the 
Military Departments' CMOs, the DOD Comptroller, and other senior 
leaders is critical. Furthermore, it is paramount that DOD's ongoing 
efforts to improve financial management through the FIAR plan and the 
components' FIPs must be institutionalized--at all working levels--in 
order for success to be achieved.

    77. Senator Ayotte. Mr. Khan, there can be no doubt that effective 
accountability and oversight are vital to effectively implementing 
DOD's financial management and related business process reform. The 
FIAR plan has established a set of review bodies for governance and 
oversight of the Plan's implementation. But, what more, if anything, 
can be done to ensure effective monitoring and oversight of progress--
especially by the leadership in the components?
    Mr. Khan. DOD established a governance structure for the FIAR plan 
that includes review bodies for governance and oversight. The 
governance structure is intended to provide the vision and oversight 
necessary to align FIAR efforts across DOD. To monitor progress and 
hold individuals accountable for progress, DOD managers and oversight 
bodies need reliable, valid, meaningful metrics to measure performance 
and the results of corrective actions.
    In May 2009, we reported \7\ that the FIAR plan did not have clear 
results-oriented metrics. To its credit, DOD has taken action to begin 
defining results-oriented FIAR metrics for use in providing visibility 
of component-level progress in assessment, and in testing and 
remediation activities, including progress in identifying and 
addressing supporting documentation issues. We have not yet had an 
opportunity to assess implementation of these metrics--including the 
components' control over the accuracy of supporting data--or their 
usefulness in monitoring and redirecting actions.
---------------------------------------------------------------------------
    \7\ GAO, Financial Management: Achieving Financial Statement 
Auditability in the Department of Defense, GAO-09-373 (Washington, DC: 
May 6, 2009).
---------------------------------------------------------------------------
    The success of the FIAR plan is dependent upon the ability of the 
components to develop and implement their respective FIPs. The 
components' plans are intended to guide and document financial 
improvement efforts. In this regard, component senior leadership, such 
as the CMO, needs to be actively involved in the oversight and 
monitoring of their component's efforts to help ensure that corrective 
actions are being taken to resolve the longstanding financial 
management weaknesses that limit DOD's ability to produce accurate and 
reliable information on the results of operations. Further, while DOD 
has established a governance structure to oversee and monitor the 
components' efforts, the various governance bodies must be active 
participants in order for the components' FIPs to be effective in 
resolving DOD's longstanding financial management weaknesses.

    78. Senator Ayotte. Mr. Khan, to help drive the cultural change 
through DOD that is necessary for these important initiatives to 
succeed, we have to demonstrate that there is a cost for an inferior 
FIAR plan or ERP transition plan. Otherwise, I believe very little will 
change. In your view, what should those consequences be?
    Mr. Khan. As discussed in our testimony,\8\ ensuring effective 
monitoring and oversight of progress--especially by the components' 
leadership--will be key to bringing about effective implementation, 
through the components' FIPs. If DOD's future FIAR plan updates provide 
a comprehensive strategy for completing Waves 4 and 5, the plan can 
serve as an effective tool to help guide and direct DOD's financial 
management reform efforts.
---------------------------------------------------------------------------
    \8\ GAO-11-835T.
---------------------------------------------------------------------------
    Effective oversight holds individuals accountable for carrying out 
their responsibilities. DOD has introduced incentives such as including 
FIAR goals in Senior Executive Service Performance Plans, increased 
reprogramming thresholds granted to components that receive a positive 
audit opinion on their SBRs, audit costs funded by OSD after a 
successful audit, and publicizing and rewarding components for 
successful audits. The challenge now is to evaluate and validate these 
and other incentives to determine their effectiveness and whether the 
right mix of incentives has been established.

    79. Senator Ayotte. Mr. Khan, can any type of budgetary 
consequence, for example, be useful?
    Mr. Khan. The FIAR plan has established various milestones to mark 
when specific actions are to be completed as DOD continues to work on 
its two priority areas--budgetary information and asset accountability. 
The FIAR plan has also identified specific timeframes for when DOD's 
various ERP efforts are going to be implemented. DOD has stated that 
these system efforts are critical to achieving auditability. 
Congressional hearings on the ability of DOD to achieve these 
milestones would be one way to encourage the development of 
quantitative measures on the progress being made to achieve 
auditability. These hearings could also be used by Congress to assess 
whether continued funding of certain efforts is worthwhile.
    As noted in our testimony,\9\ effective oversight holds individuals 
accountable for carrying out their responsibilities. DOD has introduced 
incentives such as including FIAR goals in Senior Executive Service 
Performance Plans, increased reprogramming thresholds granted to 
components that receive a positive audit opinion on their SBRs, funding 
of audit costs by the OSD after a successful audit, and publicizing and 
rewarding components for successful audits. To determine their 
effectiveness and whether the right mix of incentives has been 
established, DOD needs to evaluate and validate these and other 
incentives, including the possibility of other organization-based 
incentives such as incentives or disincentives to DOD components based 
on results.
---------------------------------------------------------------------------
    \9\ GAO-11-835T.

                           SKILLED WORKFORCE

    80. Senator Ayotte. Mr. Khan, there can be no doubt that effective 
financial management in the Federal Government today requires a 
knowledgeable and skilled workforce that includes individuals who are 
trained and certified in accounting, well-versed in government 
accounting practices and standards, and experienced in information 
technology. While the authority to hire HQEs was put in place for DOD 
to go find private sector experts who have experiences with ERP 
business systems and mergers and acquisitions, my sense is that DOD 
has, instead, been using that unique authority to hire the same types 
of civilians who should be brought under the regular general service/
senior executive service schedule. Do you agree?
    Mr. Khan. While DOD's fiscal year 2009 Strategic Civilian Human 
Capital Plan mentions some use of the HQEs,\10\ we have not assessed 
how DOD has implemented this authority. Specifically regarding the 
plan, DOD noted that authorities for the Intergovernmental Personnel 
Act\11\ and HQEs are used as an avenue to fill some positions with 
highly technical requirements, but neither authority can be used to 
fill continuing positions. This results in a high turnover rate and 
lack of stability for work that is continuing. It also states that, in 
areas of emerging science, medical technologies, and information 
technology, DOD has supplemented its Federal workforce with both HQEs 
and contractor personnel. According to the 2009 plan, since September 
11, 2001, and the beginning of the Overseas Contingency Operations, 
contractors and HQEs have commonly been used to fill gaps in expertise 
in the Federal DOD workforce. However, it further stated that the HQE 
authority had some stringent guidelines and could not be used to 
address all gaps. While we note that the 2009 plan discussed DOD's use 
of such authorities for some of its functional communities, to date, we 
have not assessed the extent to which or how this authority has been 
used by DOD, particularly in the area of financial management.
---------------------------------------------------------------------------
    \10\ 5 U.S.C. Sec. 9903.
    \11\ 5 U.S.C. Sec. Sec. 3371-3376.

    81. Senator Ayotte. Mr. Khan, what more, if anything, can be done 
to ensure that DOD hires and retains the skilled workforce needed for 
it to successfully transform its business operations to become 
efficient, effective, and accountable?
    Mr. Khan. Effective financial management in DOD will require a 
knowledgeable and skilled workforce that includes individuals who are 
trained and certified in accounting, well-versed in government 
accounting practices and standards, and experienced in information 
technology. Hiring and retaining such a skilled workforce is a 
challenge DOD must meet to succeed in its transformation to efficient, 
effective, and accountable business operations. The NDAA for Fiscal 
Year 2006 \12\ directed DOD to develop a strategic plan to shape and 
improve DOD's civilian workforce. The plan was to, among other things, 
include assessments of: (1) existing critical skills and competencies 
in DOD's civilian workforce; (2) future critical skills and 
competencies needed over the next decade; and (3) any gaps in the 
existing or future critical skills and competencies identified. In 
addition, DOD was to submit a plan for developing and reshaping the 
civilian employee workforce to address any identified gaps. The plan 
was to include specific recruiting and retention goals and strategies 
on how to train, compensate, and motivate civilian employees. In 
developing the plan, DOD identified financial management as one of its 
enterprise-wide mission-critical occupations.
---------------------------------------------------------------------------
    \12\ Pub. L. No. 109-163, div. A, Sec. 1122, 119 Stat. 3136, 3452 
(Jan. 6, 2006). The NDAA for Fiscal Year 2010 made this strategic plan 
into an annual requirement. Pub. L. No. 111-84, div. A, Sec. 1108, 123 
Stat. 2190, 2488 (Oct. 28, 2009), codified at 10 U.S.C. Sec. 115b.
---------------------------------------------------------------------------
    In July 2011, we reported \13\ that DOD's 2009 overall civilian 
workforce plan had addressed some legislative requirements, including 
assessing the critical skills of its existing civilian workforce. 
Although some aspects of the legislative requirements were addressed, 
DOD still has significant work to do. For example, while the plan 
included gap analyses related to the number of personnel needed for 
some of the mission-critical occupations, DOD had only discussed 
competency gap analyses for three mission-critical occupations--
language, logistics management, and information technology management. 
A competency gap for financial management was not included in DOD's 
analysis. Until DOD analyzes personnel needs and gaps in the financial 
management area, it will not be in a position to develop an effective 
financial management recruitment, retention, and investment strategy to 
successfully address its financial management challenges.
---------------------------------------------------------------------------
    \13\ GAO, DOD Civilian Personnel: Competency Gap Analysis and Other 
Actions Needed to Enhance DOD's Strategic Workforce Plans, GAO-11-827T 
(Washington, DC: July 14, 2011).

                    STATEMENT OF BUDGETARY RESOURCES

    82. Senator Ayotte. Secretary Morin, exactly how is the Air Force 
planning to get an audit of its SBR 2 years after the Army is planning 
to and 4 years after the Navy?
    Secretary Morin. The Air Force schedule for auditing its SBR is 
within the timeframe established in the 2010 NDAA. The first step in 
the process is to evaluate the current state of processes and systems 
and determine the necessary corrective actions. The constraining 
factors on the Air Force schedule are primarily related to financial 
systems modernization. We have accelerated aspects of our audit 
readiness efforts, such as budget authority, and continue to look for 
other opportunities to reach audit readiness sooner. We are proceeding 
in a methodical fashion to reduce the risk of not meeting the 2017 
deadline.

    83. Senator Ayotte. Secretary Morin, what has the Air Force learned 
from the Marine Corps' success and how have those lessons been 
incorporated?
    Secretary Morin. The Air Force reviewed the Management Letter from 
the Marine Corps' audit. We looked at each finding and evaluated its 
relevance to the Air Force. Of the 71 findings, our initial review 
determined that 68 items could possibly impact the Air Force. As we 
evaluate systems and processes, we continue to keep the findings from 
the Marine Corps' audit efforts in mind, ensuring our review is as 
complete as possible.

    84. Senator Ayotte. Secretary Morin, at this point, what's the most 
significant impediment to the Air Force's ability to get its SBR audit 
ready?
    Secretary Morin. Perhaps the greatest challenge is the state of the 
legacy systems. While many of our systems allow the Air Force to 
efficiently manage its operations, they do this at the expense of 
transparency. We are unable to pull the detailed transactions from many 
systems that are necessary to support the summary level balances. In 
order to rectify these shortcomings, the Air Force is relying on a 
systems modernization effort that includes replacement of legacy 
systems with ERP systems, as well as cost-effective system enhancements 
and process improvements to provide the necessary detail in certain 
legacy systems. For example, we recently implemented a standard 
document numbering policy in our legacy accounting system that will 
allow us to perform a detailed reconciliation on our Budget Authority. 
We are continuing to look at legacy system enhancements as we develop 
our ERP systems.

              ARMY'S ENTERPRISE RESOURCE PLANNING SYSTEMS

    85. Senator Ayotte. Secretary Matiella, DOD's FIAR plan has a 
strong emphasis on the implementation of GFEBS, as the cornerstone of 
your audit readiness strategy. But GFEBS, which covers the General Fund 
of the Army, represents only part of the Army. It doesn't include any 
of the Army's Working Capital Fund, which is measured in tens of 
billions of dollars annually. I understand that most of that activity 
is going to occur in another system called the LMP, which is managed 
out of Army Materiel Command. The DOD Inspector General (IG) has, 
however, been particularly critical of LMP for its compliance regarding 
financial management controls. What is your role in overseeing LMP and 
ensuring that it meets the same financial standards and requirements as 
GFEBS?
    Secretary Matiella. I am responsible for ensuring LMP financial 
functionality meets audit standards and requirements. My staff oversees 
Army Materiel Command actions to ensure LMP meets financial compliance 
standards and that the problems identified in the DOD IG audit are 
addressed. This oversight has achieved positive results. We have 
updated LMP's general ledger to include the missing accounts identified 
by the audit. We have identified requirements for compliance with DOD's 
Standard Financial Information Structure (SFIS), and are on track to 
add these requirements to LMP's baseline in fiscal year 2012. We have 
included LMP and working capital fund requirements in our FIP to ensure 
management controls, business process, and systems for both meet audit 
readiness requirements. We will continue to work with the auditors to 
identify problems and initiate corrective actions to ensure LMP is 
audit ready by fiscal year 2017.

    86. Senator Ayotte. Secretary Matiella, LMP has already been 
deployed to parts of the Army for a few years now. Have any auditors 
examined that system and provided any feedback on its ability to 
support a financial audit?
    Secretary Matiella. My office is working closely with Army Audit 
Agency to ensure LMP complies with the financial systems requirements 
of the FFMIA of 1996. The audit agency examined LMP in 2007, and 
reported the system substantially complied with the 757 applicable 
FFMIA requirements. Now that LMP is fully deployed, we have engaged the 
audit agency to perform a follow-on FFMIA compliance audit that will 
test 1,298 requirements. The requirements growth is attributable to 
functionality added to the LMP baseline since 2007, and the growth in 
DOD's compliance criteria. Additionally, we have included LMP and 
working capital fund requirements in our FIP to ensure management 
controls, business process, and systems for both meet audit readiness 
requirements.

    87. Senator Ayotte. Secretary Matiella, I understand that the Army 
is buying two logistics ERPs--the LMP system and the GFEBS-Army. Why?
    Secretary Matiella. The LMP system is the logistics and financial 
management system for the Army Working Capital Fund, which is a 
separate legal entity from the Army General Fund. The Working Capital 
Fund conducts business that is very different from the General Fund. 
The LMP system provides logistics and inventory support for the Army's 
depots, arsenals, and wholesale supply facilities. LMP will serve as 
the general ledger for the Army's Working Capital Fund. The GFEBS 
supports the Army's General Fund business and financial reporting 
requirements.

    88. Senator Ayotte. Secretary Matiella, why is the Army buying one 
logistics ERP for ground logistics and the Marine Corps is buying a 
completely separate one, made by a different company, so that the two 
systems will be unable to work together?
    Secretary Matiella. GCSS-MC and GCSS-Army will be interoperable 
just as Army and Marine Corps systems interoperate today--they will be 
perfectly capable of passing transactions back and forth to one 
another. However, it is important to realize that less than 1 percent 
of the transactions occurring within Army logistics systems involve the 
Marine Corps. Most of the Army's logistics transactions (tens of 
thousands daily) are within Army Enterprise Systems, or with the DLA, 
all of which run the same commercial software, SAP. It is far more 
important that the Army and DLA work together than it is to optimize 
Army systems with the Marine Corps. Also, GCSS-A and GFEBS use the same 
SAP software and share a common financial design, including a standard 
general ledger configuration, to ensure auditability and financial 
interoperability between the two systems. An initial review estimates 
moving Army to GCSS-MC would increase life cycle costs substantially 
and would place the Army's ability to be auditable by fiscal year 2017 
at significant risk.

    89. Senator Ayotte. Secretary Matiella, what is the cost per 
transaction and cost per user of the legacy systems versus the ERP 
systems?
    Secretary Matiella. Prior to initiating an ERP development effort, 
an economic analysis is performed to justify investment in the ERP. 
Each economic analysis is subject to multiple reviews, and is 
ultimately approved by DOD's CAPE organization. The economic analysis 
documents the cost and justifies the economic benefit of the ERP 
development. The ERP systems have many different types of transactions 
that are more complex than those in the legacy environment, making a 
cost per transaction comparison very difficult. For example, the ERP 
systems track cost, asset values, and expenses at the transaction 
level. This capability is not present in the legacy environment. Unlike 
the legacy systems, the ERP systems provide integrated general ledger 
capabilities, updating the general ledger instantly at the transaction 
level. Many general ledger updates in the legacy environment are done 
at a summary level, a practice that will not pass audit scrutiny. 
Although transactional complexity is greater in the ERP environment, 
this complexity is necessary to achieve DOD's audit readiness goals, 
and to provide transparent cost and financial information for use by 
managers and review by auditors.
                                 ______
                                 
               Questions Submitted by Senator John McCain

                  DEFENSE FINANCIAL MANAGEMENT METRICS

    90. Senator McCain. Secretary Hale and Mr. Khan, during the 
Readiness and Management Support Subcommittee of the Senate Armed 
Service Committee hearing, Secretary Hale said that DOD is doing well 
on financial management, citing the relatively low levels of Anti-
Deficiency Act (ADA) violations at DOD as compared with other Federal 
agencies. Specifically, you mentioned that only 20 cents of every 
$1,000 appropriated to DOD were in violation of the ADA--much lower 
than other agencies. You also stated that DOD pays its bills on time 
and avoids interest payments--another indicia of sound financial 
management. If these are the only important indicia of sound financial 
management, why, in your view, has DOD remained on GAO's High-Risk List 
for its financial management since 1995?
    Secretary Hale. I continue to strongly feel that we have 
``islands'' of excellence, and elements of our process tied to our 
stewardship culture--ADAs and timely payments are two. While these are 
important indicators of sound financial management, they are certainly 
not the only ones. Broadly, a financial audit opinion is the most 
comprehensive and important indicator and it is something that DOD has 
not yet achieved. Being able to achieve auditability would ensure that 
we had eliminated the kind of systemic weakness that have kept us on 
the GAO High-Risk List to date. Therefore, we will continue to focus on 
these two indicators, while also focusing on the broader objective of 
achieving auditability.
    Mr. Khan. These are two indicators that are important, but provide 
information about narrow aspects of DOD financial management. 
Furthermore, the 13 material weaknesses in financial management 
reported by the DOD auditors,\14\ and the lack of audit assurance and 
reliability surrounding DOD's financial information, call into question 
the completeness and accuracy of these two measures.
---------------------------------------------------------------------------
    \14\ DOD's auditors have reported material financial management 
weaknesses in the following areas: (1) Financial Management Systems, 
(2) Fund Balance with Treasury, (3) Accounts Receivable, (4) Inventory, 
(5) Operating Materials and Supplies, (6) General Property, Plant, and 
Equipment, (7) Government-Furnished Material and Contractor-Acquired 
Material, (8) Accounts Payable, (9) Environmental Liabilities, (10) 
Statement of Net Cost, (11) Intragovernmental Eliminations, (12) Other 
Accounting Entries, and (13) Reconciliation of Net Cost of Operations 
to Budget.
---------------------------------------------------------------------------
    Also, discussed in our testimony,\15\ numerous challenges must be 
addressed in order for DOD to successfully reform its financial 
management operations. One of those challenges is the development and 
implementation of an effective plan to correct internal control 
weaknesses. Internal control comprises the plans, methods, and 
procedures that serve as the first line of defense in safeguarding 
assets and preventing fraud. In May 2009, we reported \16\ that the 
FIAR plan had not established a baseline of DOD's state of internal 
control and financial management weaknesses. Such a baseline is used to 
plan for and assess improvements and remediation. DOD currently has 
efforts underway to address known internal control weaknesses through 
three integrated programs: (1) Internal Controls over Financial 
Reporting (ICOFR) program; (2) ERP implementation; and (3) the FIAR 
plan. However, the effectiveness of these three integrated efforts in 
establishing a baseline remains to be seen.
---------------------------------------------------------------------------
    \15\ GAO-11-835T.
    \16\ GAO-09-373.
---------------------------------------------------------------------------
    Furthermore, the success of the Military Services' ability to 
achieve audit readiness of their SBR should help provide broader 
measures of DOD's financial management effectiveness. The DOD 
Comptroller has indicated that one of the highest priorities in 
improving financial management is the improvement of the budgetary 
information and processes underlying the SBR. A successful SBR audit is 
an important tool in providing accountability and discipline over the 
budgetary resources provided by Congress.

    91. Senator McCain. Mr. Khan, what metrics does GAO use to make 
this determination for high risk, both generally and with respect to 
DOD's financial management?
    Mr. Khan. GAO maintains a program to focus attention on government 
operations that it identifies as high risk due to their greater 
vulnerabilities to fraud, waste, abuse, and mismanagement. An 
individual performance and accountability challenge merits a GAO high-
risk designation when it involves a program or mission area having 
national significance or a management function that is key to 
performance and accountability. We then determine whether the risk 
stems from an inherent risk, which may arise when the nature of a 
program creates susceptibility to fraud, waste, and abuse, or a 
systemic problem, which may arise when programmatic, management 
support, or financial systems, policies, and procedures established by 
an agency are ineffective.
    We also consider qualitative and quantitative factors. Qualitative 
factors include whether the risk is seriously detrimental to the Nation 
in areas that include, for example, health or safety or national 
defense. We also consider potential results of the risk, such as 
significantly reduced effectiveness and efficiency; injury or loss of 
life; unreliable decisionmaking data; reduced confidence in government; 
misuse of sensitive information; or program failure. In addition to 
qualitative factors, we consider the exposure to loss in monetary or 
other quantitative terms. A minimum of $1 billion must be at risk in 
areas such as:

         the value of major assets;
         revenue sources (e.g., taxes due) not being realized;
         improper payments; and
         contingencies or potential liabilities (e.g., 
        environmental cleanup).

    Before assigning a high-risk designation, we determine and assess 
the effectiveness of an agency's planned and ongoing corrective actions 
to address a material weakness. This assessment considers whether the 
agency has demonstrated commitment to resolving the problem, progress 
in addressing the problem, appropriate corrective action planning, and 
solutions that will be substantially completed near-term and will 
resolve the root cause of the problem. These criteria and other 
elements of the assessment of programs for designation as high risk, 
and for removal from the list, are discussed further in GAO's 
Determining Performance and Accountability Challenges and High 
Risks.\17\
---------------------------------------------------------------------------
    \17\ GAO, Determining Performance and Accountability Challenges and 
High Risks, GAO-01-159SP (Washington, DC: November 2000).
---------------------------------------------------------------------------
    With regard to the designation of DOD's financial management as 
high risk, the area meets the criteria as a program and a mission area 
of national significance and as a management function that is key to 
performance and accountability. Long-standing and pervasive weaknesses 
in DOD's financial management and related business processes and 
systems have: (1) resulted in a lack of reliable information needed to 
make sound decisions and report on the financial status and cost of DOD 
activities to Congress and DOD decisionmakers; (2) adversely impact its 
operational efficiency and mission performance in areas of major 
weapons systems support and logistics; and (3) left DOD vulnerable to 
fraud, waste, and abuse.
    The financial transformation needed at DOD, and its removal from 
GAO's high-risk list, will be a long-term effort. Improving financial 
management needs to be a cross-functional endeavor. The successful 
resolution of the weaknesses in financial management depends on 
improvements in some of DOD's other business operations such as 
contract management, supply chain management, and weapons systems 
acquisition. As acknowledged by DOD officials, sustained and active 
involvement of DOD's CMO, the DCMO, the Military Departments' CMOs, the 
DOD Comptroller, and other senior leaders is critical.

                GENERAL FUND ENTERPRISE BUSINESS SYSTEMS

    92. Senator McCain. Ms. McGrath, during the Readiness and 
Management Support Subcommittee of the Senate Armed Services Committee 
hearing, Mr. Hale mentioned several times that the Army's GFEBS was 
undergoing an audit check. He also said, ``I don't want to get all 
these ERP systems deployed at great cost and in considerable time find 
out we're not using them in the right way.'' With this in mind, why did 
you approve GFEBS full deployment last month before this audit was 
completed and before evaluating the results of that audit?
    Ms. McGrath. In June 2011, I approved a Full Deployment Decision 
(FDD) for GFEBS because the program met the criteria established in the 
Acquisition Program Baseline and had successfully completed an 
Independent Operational Test and Evaluation. I recognize the importance 
of the financial audit to DOD however and as part of the FDD, I levied 
specific audit related criteria that the Army must meet before 
declaring GFEBS fully deployed.

      ARMY VS. MARINE CORPS ENTERPRISE RESOURCES PLANNING SYSTEMS

    93. Senator McCain. Ms. McGrath, you stated that the reason the 
Army and Marine Corps have two very different, but similar sounding, 
ERP systems for logistics was that they were: ``embedded into very 
different I'll say business processes that they execute their both 
supply and maintenance infrastructures. So although they sound very 
much the same, they do operate within two very different 
infrastructures and processes and they are not one-for-one used by the 
same people. And so, although, as I mentioned, they sound very similar, 
there's a lot more detail behind the execution of those systems and 
those capabilities that those systems enable.'' Why do the Army and 
Marine Corps, both ground military forces with similar equipment and 
doctrine, have very different processes?
    Ms. McGrath. The way the systems are employed is tactically 
different. For example, the Marine Corps system requires servers to be 
placed on ships and taken ashore when operations require traversing 
long distances inland. This distributed architecture is needed because 
the Marine Corps does not have the robust satellite-based networking 
capability that the Army has in every battalion throughout its force 
structure.

    94. Senator McCain. Ms. McGrath, did they not go through BPR under 
the direction of your office before the adoption and installation of 
their billion dollar ERPs?
    Ms. McGrath. Most of the large ERP investments predate the decision 
to create the DCMO as well as the NDAA provision that requires the DCMO 
or Military Department CMO to make BPR determinations. However, the 
DCMO is involved with the Army's ongoing ERP Strategy review, which is 
continuously seeking to improve its business processes leveraging its 
ERP implementations.

    95. Senator McCain. Ms. McGrath, will the Army and Marine Corps 
continue to maintain very different business processes for logistics, 
maintenance, and supply functions? If so, why?
    Ms. McGrath. Yes, I believe the Army and Marine Corps will continue 
to maintain different business processes for logistics, maintenance, 
and supply functions. GCSS-Army and GCSS-Marine Corps have very 
different mission and system requirements, even though they do perform 
some similar core logistics functions. The primary differences are 
scale of operations, interoperability with other Service-component 
systems, and financial reporting processes. However, the two systems 
will interoperate to the degree necessary to conduct joint operations.

    96. Senator McCain. Ms. McGrath, what plan, if any, is there to 
subject those processes to BPR?
    Ms. McGrath. I will look for opportunities where it makes sense to 
drive common business processes across DOD. For example, I am 
establishing an enterprise architecture to determine the feasibility of 
leveraging the Military Services' processes in our end-to-end business 
cycles. The Services' business systems will then be compared to the 
established process to focus project execution and enable trade-offs 
across a portfolio to reduce redundancy and effectively align resources 
to deliver valued mission capabilities. The business processes between 
the Army and Marine Corps are more different than alike and to adopt a 
standard set of processes prematurely would drastically affect each 
organization's ability to organize, train, equip, and operate in 
support of the combatant commanders.

    97. Senator McCain. Ms. McGrath, there may be a case for the Navy 
and Air Force having different logistics needs as ships and planes are 
very different. But, how are the Marine Corps and Army so different 
that they need separate, wholly incompatible billion-dollar ERP systems 
that are supposed to be modeled after commercial best practices?
    Ms. McGrath. The primary differences are related to complexity and 
scope. The GCSS-Army system supports a customer base much greater than 
the GCSS-Marine Corps system (four times more people and equipment) and 
provides much greater functionality resident in the system. GCSS-Army 
Increment I provides the tactical warfighter with supply, maintenance, 
ammunition, property accountability, integrated materiel management 
center, management functionality, and support to tactical financial 
processes. GCSS-Marine Corps Increment 1 provides Combat Service 
Support functionality: Supply, Maintenance, Task Organization, and 
Request Tracking in a shared data environment in support of deployed 
operations.
    Additionally, there are numerous situations where the Army and the 
Marine Corps have been working together to improve systems 
interoperability. For example, in Iraq and Afghanistan the legacy 
Standard Army Retail Supply System and Marine Corps Supported 
Activities Supply System interoperate today. Legacy operations over the 
last 12 months have resulted in over 6,000 orders with a 92 percent 
fill rate out of over 19.6 million overall supply transactions.
    Further, the interaction between the Army and Marine Corps in the 
greater logistics area is a relatively small (less than .03 percent of 
Army transactions in the past 6 months), whereas the interaction within 
the Army and with the DLA makes up the vast majority of the workload. 
As a result, the emphasis has been to improve the interoperability 
between the Army and DLA.

    98. Senator McCain. Ms. McGrath, please provide the Analysis of 
Alternatives (AoA) that the Army used in determining to not implement 
the Marine Corps' ERP solution.
    Ms. McGrath. The AoA for the GCSS-Army is attached.
    [See annex printed at the end of this hearing].

    99. Senator McCain. Ms. McGrath, when will OSD adopt the DAI to 
manage its business processes?
    Ms. McGrath. The activity that supports OSD, WHS, is scheduled to 
begin implementation of DAI in fiscal year 2015 and complete 
implementation in early fiscal year 2016.

    100. Senator McCain. Ms. McGrath, shouldn't OSD lead the way with 
ERP implementation?
    Ms. McGrath. OSD is currently supported by WHS. WHS is scheduled to 
begin implementation of DAI in fiscal year 2015 and complete 
implementation in early fiscal year 2016. Acceleration of the schedule 
to accommodate a small number of employees moving from the BTA into OSD 
would be extremely challenging and provide increased risk to the 
established workload. The DAI implementation schedule includes the 
deployment of multiple sites over the next few years and program 
resources have been allocated to meet this schedule. Additionally, the 
specific sites are currently preparing for implementation, which 
includes data cleansing efforts, training, and BPR. Further, in 
addition to the increased risk, additional resources would be required 
to accelerate. I intend to leverage lessons learned within the defense 
agencies when deploying DAI across OSD.

    101. Senator McCain. Ms. McGrath, how can the CMO convince the 
Military Services and other agencies through change management to adopt 
ERPs and turn off legacy systems while they continue to use their 
legacy system?
    Ms. McGrath. Each of the Services is committed to the 
implementation of ERPs in order to modernize their business system 
environments and drive toward audit readiness. However, turning off 
legacy systems remains a challenge. That said, there has been recent 
progress in sunsetting legacy systems. For example, the fielding of 
Navy ERP has enabled the retirement of 27 systems to date, with 69 more 
planned by 2016. Additionally, DOD is using the tools provided by 
Congress in 10 U.S.C. section 2222, such as the IRBs, the BEA, and the 
ETP, to ensure that legacy systems are being turned off as new 
capability comes online. However, section 2222, as written, focuses 
exclusively on development and modernization (i.e., new systems), and 
not legacy systems in sustainment. The changes to section 2222 under 
consideration by the Congressional Defense Committees in the NDAA for 
Fiscal Year 2012 could provide DOD with a more effective tool to drive 
the retirement of DOD legacy systems.
                                 ______
                                 

                             ANNEX

    [The Analysis of Alternatives for the Global Combat Support 
System-Army, follows:]

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