[Senate Hearing 112-658]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-658

 
 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

                             SECOND SESSION

                               __________

                             APRIL 18, 2012

                               __________

         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

                 Ann E. Sauer, 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

                             april 18, 2012

                                                                   Page

Hale, Hon. Robert F., Under Secretary of Defense (Comptroller)...     6
McGrath, Hon. Elizabeth A., Deputy Chief Management Officer, 
  Department of Defense..........................................     7
Westphal, Hon. Joseph W., Chief Management Officer of the Army; 
  Accompanied by Hon. Mary Sally Matiella, Assistant Secretary of 
  the Army, Financial Management and Comptroller.................    15
Work, Hon. Robert O., Chief Management Officer of the Navy; 
  Accompanied by Hon. Gladys J. Commons, Assistant Secretary of 
  the Navy, Financial Management and Comptroller.................    19
Morin, Hon. Jamie M., Assistant Secretary of the Air Force, 
  Financial Management and Comptroller; Accompanied by David 
  Tillotson III, Deputy Chief Management Officer of the Air Force    22
Khan, Asif A., Director, Financial Management and Assurance, 
  Government Accountability Office...............................    29

                                 (iii)


 FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF 
                                DEFENSE

                              ----------                              


                       WEDNESDAY, APRIL 18, 2012

                           U.S. Senate,    
              Subcommittee on Readiness and
                                Management Support,
                               Committee on Armed Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:35 p.m. in 
room SD-G50, Dirksen Senate Office Building, Senator Claire 
McCaskill (chairman of the subcommittee) presiding.
    Committee members present: Senators McCaskill, Manchin, and 
Ayotte.
    Majority staff members present: Peter K. Levine, general 
counsel; and Jason W. Maroney, counsel.
    Minority staff members present: Pablo E. Carrillo, minority 
general counsel; Lucian L. Niemeyer, professional staff member; 
and Bryan D. Parker, minority investigative counsel.
    Staff assistants present: Jennifer R. Knowles, Kathleen A. 
Kulenkampff, and Mariah K. McNamara.
    Committee members' assistants present: Stephen Hedger, 
assistant to Senator McCaskill; Mara Boggs, assistant to 
Senator Manchin; and Brad Bowman, assistant to Senator Ayotte.

    OPENING STATEMENT OF SENATOR CLAIRE McCASKILL, CHAIRMAN

    Senator McCaskill. The Senate Armed Services Committee 
Subcommittee on Readiness and Management Support will begin 
this hearing.
    This is a hearing that we do on an annual basis. Some have 
likened it to going to the dentist and having your teeth 
drilled. As I said to the staff as I walked in, this is the 
kind of hearing that people who love wonky should really 
gravitate towards, because this is a subject matter that 
clearly is complicated, and difficult, and in some ways 
tedious, but it is obviously going to take a great deal of 
tenacity, which I know our military is capable of, in terms of 
getting this right. This is our annual effort to look at the 
financial management and business transformation at the 
Department of Defense (DOD).
    We are pleased to be joined by the Comptroller today--and I 
appreciate that--the DOD Deputy Chief Management Officer (CMO), 
and the CMOs and Chief Financial Officers (CFO) of all three 
military departments--I think we have one missing because of an 
injury, but we understand that--and the Director of Financial 
Management and Assurance at the Government Accountability 
Office (GAO).
    This witness list makes for a long witness table. In fact, 
we had to change rooms to accommodate all of you. However, with 
both the CMOs and the CFOs present, we have the full range of 
senior officials responsible for DOD financial management and 
business transformation before us at one time. This would not 
have been possible as recently as 5 years ago because DOD was 
unable to tell us who the responsible officials were.
    I am particularly pleased by the presence of the Service 
Under Secretaries today, which reflects both their personal 
commitment to the issues of financial management and business 
transformation, and the positive impact that our legislation 
establishing them as the CMOs of their departments has already 
begun to show.
    Welcome to all of you and thank you for your participation 
in this important hearing.
    Last October, the Secretary of Defense announced that he 
had directed DOD to accelerate its schedule to achieve audit 
readiness for its Statement of Budgetary Resources (SBR), 
moving the deadline from fiscal year 2017 to fiscal year 2014. 
Secretary Panetta stated that ``we owe it to the taxpayers to 
be transparent and accountable for how we spend their dollars'' 
and acknowledged that this will require DOD to change the way 
it does business. I could not agree with him more.
    It will not be easy for DOD to meet the 2014 deadline. Even 
as the military departments have accelerated milestones for 
future years in an effort to meet the new requirement, DOD's 
most recent update on its Financial Improvement and Audit 
Readiness (FIAR) plan indicates that it has fallen behind on a 
number of milestones that were supposed to be achieved this 
year.
    In the past, DOD has relied heavily on the fielding of 
Enterprise Resource Programs (ERP) to achieve auditability. 
This approach has always been problematic both because of DOD's 
dismal track record in fielding new business systems, and 
because new business systems alone will never solve the 
financial management problems without accompanying changes to 
business processes, internal controls, and culture.
    The 2014 deadline makes it difficult, if not impossible, 
for DOD to continue to rely on ERPs to solve its management 
problems. Senior Air Force officials have already acknowledged 
that they will not be able to rely on ERPs to meet the 2014 
deadline since the three Air Force ERPs are not scheduled to be 
fully deployed until 2016 and 2017. The Army and Navy plan to 
field their core financial ERPs in 2012 and 2013--but other 
critical Army and Navy systems, including the Integrated Pay 
and Personnel System (IPPS)-Army, Global Combat Support System 
(GCSS)-Army, IPPS-Navy, and GCSS-Marine Corps--are not 
scheduled to be fully deployed until 2017 or do not yet even 
have deployment dates established.
    DOD's inability to rely on ERPs as a cure-all for its 
financial management problems could result in lasting 
improvements if DOD seizes this opportunity to refocus its 
attention on needed changes to underlying business processes 
and internal controls. If DOD conducts end-to-end analyses of 
its business processes, identifies needed internal controls, 
and makes the cultural and process changes required to 
implement those controls, it should be able to make real 
progress towards sound financial management even before the 
fielding of new ERPs.
    If, on the other hand, it relies on one-time fixes and 
manual work-arounds in an effort to meet the 2014 deadline, it 
could spend significant amounts of money without addressing the 
underlying financial management problems. Even worse, if DOD 
pushes for audit reviews before its systems and processes are 
ready, it could spend huge sums to hire an army of auditors 
without moving any closer to a long-term solution.
    I hope we will hear a commitment from our witnesses today 
to focus on needed changes to DOD's business systems and 
culture and to avoid a short-term fix that could delay rather 
than expedite the real objective of developing timely, accurate 
data on which sound management decisions can be based.
    If we fail to address this issue, DOD will remain at risk 
of sending the wrong paychecks to soldiers in the field, 
wasting taxpayers' money on improper payments and overdue 
bills, being unable to account for billions of dollars in 
funding, and making critical management decisions on the basis 
of unsupportable financial information. Sound business 
processes 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.
    I now will turn it over to Senator Ayotte for a statement, 
if she would like to make any opening remarks.

               STATEMENT OF SENATOR KELLY AYOTTE

    Senator Ayotte. Thank you very much, Madam Chair.
    I want to welcome our witnesses for being here today and 
thank them for their hard work.
    This is our annual hearing on the defense financial 
management and business transformation in as many years, and I 
commend you. I want to commend the chairman for continuing to 
make better financial stewardship at DOD a significant and 
major priority for this important subcommittee.
    Today's hearing drives at the heart of the fiscal crisis we 
face as a Nation: how the Federal Government spends taxpayers' 
dollars. We must closely scrutinize spending at every Federal 
agency, including DOD, to identify and eliminate waste and 
duplication. However, as I have said in the past, we must 
ensure that budget cuts at DOD do not undercut our warfighters 
or endanger our readiness for future contingencies. To 
distinguish between necessary budget cuts and cuts that would 
harm our troops and damage military readiness, we must have 
reliable financial data and effective business processes and 
systems. Every wasted dollar is a dollar we deprive our 
warfighters of as they seek to protect and defend our country.
    A recent finding by GAO illustrates how important it is to 
reform financial management at DOD and how DOD does business. 
According to the GAO report released just last month, the total 
acquisition costs of DOD's 96 largest weapons procurement 
programs grew by over $74 billion, or 5 percent, just over last 
year's amounts. In the midst of our Nation's fiscal crisis and 
tightening defense budgets, we can--and must--do better.
    One specific area of financial management that should be 
reformed relates to the proliferation of requests to transfer 
funds among defense accounts. I appreciate that DOD needs the 
budgetary flexibility to respond to emergent, higher-priority 
needs for our warfighters engaged in hostilities. But we have 
been seeing a migration of funds for new, unauthorized programs 
not tied to the war and a frenzy in the last 30 days of the 
fiscal year to spend taxpayers' funds before they expire, 
regardless of the urgency of the requirements that the money is 
being spent on. Neither of these trends are conducive to a 
healthy, transparent financial management system and must be 
addressed in an era of declining defense budgets.
    To his credit, shortly after taking office, Secretary 
Panetta elevated financial management at DOD to make it a 
priority. Secretary Panetta directed DOD to cut in half the 
time it would take to achieve audit readiness of a key 
financial statement, the SBR. I fully support this goal which 
would achieve an audit-ready SBR by 2014.
    In fact, I introduced legislation last year that would have 
required by statute that DOD meet this goal. That is how 
important I think it is. My proposal passed the Senate Armed 
Services Committee and the Senate unanimously but was, 
unfortunately, not included in the final conference report. I 
hope we can revisit this important priority this year in the 
National Defense Authorization Act (NDAA), and I certainly plan 
to bring this forward.
    From our witnesses, I would like to hear their assessments 
of whether each of the Services is on track to meet the 2014 
goal. I am particularly interested in getting an update on the 
Air Force's progress on this because we know that the Air Force 
has had some difficulty on this particular aspect of meeting 
the audit readiness goal of 2014 for the SBR.
    I am also interested in hearing about DOD's efforts to 
ensure that steps being taken now to achieve auditability will 
be repeatable in future years. Spending billions of dollars for 
a one-time effort to achieve auditability that cannot be used 
in the future makes absolutely no sense. We want to be able to 
use this information year-to-year and make it valuable for you. 
Such a short-sighted approach would waste billions of dollars 
and not solve DOD's longer-term financial issues.
    While much work remains to achieve the ultimate goal of 
full audit readiness for 2017, DOD has achieved some 
encouraging progress, and I want to commend you for that. 
Notably, some of DOD components, including the Army Corps of 
Engineers, have received clean audit opinions. By contrast, the 
Marine Corps received a qualified audit opinion of its SBR from 
the DOD Inspector General (IG). It is imperative that those DOD 
components work toward clean opinions like the Marine Corps. We 
would like to see, of course, across the Services, that we 
leverage the lessons learned from other organizations within 
DOD that have succeeded to make sure that every branch 
succeeds.
    In testimony before Congress over the last few months, the 
DOD IG has maintained that three problem areas must be resolved 
before DOD will be able to meet its audit readiness goals in 
2014 and in 2017. They include: the quality of DOD's financial 
management data, weaknesses within its internal controls, and 
implementation of its ERPs. I agree with the DOD IG's overall 
observation and would certainly like our witnesses to address 
each of these areas.
    One area I would like to focus on is the DOD's procurement 
of ERP systems, automated systems that, as the chair has 
described, perform a variety of important business-related 
functions crucial to meeting the goal of audit readiness. Both 
GAO and the DOD IG have repeatedly reported that these new 
systems, some of which cost billions of dollars to develop and 
deploy, lack elements that are critical to producing auditable 
financial statements such as a standard set of accounts that 
match the United States standard general ledger. This requires 
manual work-arounds which increases the risk of human error and 
further degrades the quality of DOD's financial management 
data.
    DOD must successfully reengineer its inefficient business 
processes and implement these ERPs in a way that allows it to 
realize their intended benefits. Otherwise, it will do little 
else than line the pockets of the contractors hired to 
integrate these ERPs into DOD and will not reach our goal of 
achieving audit readiness.
    With a $1.3 trillion deficit this year, we cannot accept 
the status quo with respect to DOD or anywhere in our Federal 
Government. With at least $487 billion and up to a trillion in 
defense reductions being looked at by this committee and by 
Congress and perhaps implemented over the next decade, we 
cannot afford to do without the reliable financial management 
data needed to help us distinguish between defense budget cuts 
that are necessary and those that may endanger our national 
security.
    Madam Chair, clearly there is much to discuss today, and so 
I thank you so much for convening this hearing. Again, I want 
to thank the witnesses for being here.
    Senator McCaskill. Senator Manchin, would you like to make 
a comment?
    Senator Manchin. I am ready for the witnesses.
    Senator McCaskill. Great. Let me go through the list of 
witnesses and then I will defer to each of you to decide who 
wants to testify on behalf of each Service. I certainly would 
want to start with Robert F. Hale, the Under Secretary of 
Defense, Comptroller. But we have here today from the Air 
Force, Mr. David Tillotson III, who is the Deputy CMO of the 
Air Force, and the Honorable Jamie M. Morin who is Assistant 
Secretary of the Air Force of Financial Management and 
Comptroller. We have from the Army, the Honorable Mary Sally 
Matiella, Assistant Secretary of the Army, along with the 
Honorable Joseph W. Westphal, the CMO for the Army. We have 
Elizabeth A. McGrath who is the Deputy CMO at DOD. From the 
Navy, we have the Honorable Robert O. Work, the CMO of the 
Navy, along with the Honorable Gladys J. Commons, the Assistant 
Secretary of the Navy. From GAO, all by himself, we have Mr. 
Asif A. Khan, the Director of Financial Management and 
Assurance for GAO.
    I thank you all for being here, and I will defer to you, 
Secretary Hale, to begin this process and then to defer to your 
colleagues in whatever order you think is appropriate for us to 
move through the various branches for their testimony.

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

    Mr. Hale. Chairman McCaskill, Senator Ayotte, Senator 
Manchin, members of the subcommittee, let me thank you for the 
opportunity to talk about improvements in defense financial 
management, in particular audit readiness. Let me say at the 
outset this issue is important to me. If that makes me a wonk, 
well then, so be it. It is something we need to do. I know that 
and I think everybody at this table agrees.
    Ms. McGrath and I have submitted a joint statement and we 
will now summarize it jointly for you.
    It has been 8 months since our last status report. In that 
time, we have continued efforts across DOD. The job is not 
done, I think GAO's report makes that clear. But I believe we 
are on the right track. I think we are making progress and at a 
faster rate, and I am reasonably confident that we will meet 
our goals.
    This audit effort is important for two reasons. First, we 
need a clean audit to ensure that managers have accurate 
financial information to make these important decisions. But 
second--and I think the most important thing--we need to 
reassure the public and Congress that we are good stewards of 
the public funds.
    Today we can account for funds appropriated to us but not 
to an auditable standard. To reach that goal, more than 2 years 
ago, we put in place a new focused strategy. The strategy 
concentrates first on the information that defense managers 
most use to manage budgetary information and accounts and 
determine location of assets. That strategy has been endorsed 
by GAO. It is supported, I believe, at all levels of DOD.
    We also have in place a governance structure and you have 
before you today many of the senior leaders who provide that 
governance. Despite lean budget times, we have put aside 
adequate funds to meet audit needs throughout our 5-year budget 
planning period. Now we need to execute. We have to carry out 
that strategy, and I think it is happening.
    Let me highlight a few of our accomplishments over the last 
year. I will focus on DOD-wide accomplishments because I want 
to leave to my Service colleagues the many activities that they 
have undertaken.
    The key event in the last year was clearly Secretary 
Panetta's personal endorsement of the audit effort. At that 
time, he accelerated to 2014 our goal for the SBR for general 
funds. His endorsement has been a game-changer. It has opened 
doors I never expected to be opened, and we need to find ways 
to leverage that endorsement in every way we can. I brief him 
periodically at his staff meetings, and although a lot of 
things, from Syria to North Korea are on his mind, he always 
focuses when I bring up this topic.
    As more field level managers become involved, we are moving 
to tell them what needs to be accomplished. The Services have 
already done a lot. They are in the process of sending out now 
a checklist to all our commanders that lists the basic actions 
that they need to take.
    We are also developing a course-based certification program 
for defense financial management professionals. One of the 
goals of that is to improve audit training. Since our program 
was last announced, we have made a fair amount of progress. We 
will have pilots out this year, large-scale implementation next 
year. We are grateful to Congress for providing the legislative 
authority that we needed in the NDAA for Fiscal Year 2012.
    We have also introduced a specific training program in 
audit readiness and more than 1,000 DOD personnel took that 
program last year.
    We are working to ensure that the defense agencies have 
effective programs leading to auditability of their SBRs. These 
agencies account for almost 20 percent of our budget. We will 
never be audit-ready without them, and so we need to bring them 
along with the military departments.
    We have also worked to ensure that the agencies that 
provide needed services are pursuing audit efforts. The Defense 
Finance and Accounting Service (DFAS) is particularly 
important, but the list of key service providers includes the 
Defense Logistics Agency, the Defense Contract Management 
Agency (DCMA), the Defense Contract Audit Agency (DCAA), and 
others.
    We are partnering with other key functional areas. Here is 
one case where Secretary Panetta's endorsement has helped a lot 
to get other senior personnel involved. Our human resources 
personnel, for example, are working to help us solve audit 
issues in their areas, including some of those highlighted by 
GAO in their recent audit of Army military personnel.
    The efforts are bearing fruit. You mentioned some audits 
that we have already achieved. The Army Corps of Engineers, 
DFAS, the Defense Commissary Agency (DeCA), the DCAA, all have 
audit opinions. The Defense Information Systems Agency recently 
achieved a clean opinion on $6.6 billion of their working 
capital funds. The TRICARE Management Activity received an 
unqualified opinion on last year's statements.
    There have also been many key Service-specific initiatives, 
and I want to leave them to my colleagues.
    To achieve and sustain financial management improvement, we 
have to change our business practices. We are with you there 
and we are doing it. But we need better financial systems as 
well, especially to sustain this effort at a reasonable price.
    So let me now ask Beth McGrath, the DOD's Deputy CMO, to 
complete our joint oral statement by describing our system 
efforts.

STATEMENT OF HON. ELIZABETH A. McGRATH, DEPUTY CHIEF MANAGEMENT 
                 OFFICER, DEPARTMENT OF DEFENSE

    Ms. McGrath. Thank you.
    Like Mr. Hale, I appreciate your personal engagement in, 
and oversight of, these important issues.
    Like the private sector, DOD is focused on smarter, leaner, 
knowledge-based management and optimization of both processes 
and technology. Our efforts to improve financial management and 
achieve auditability are part of this broader effort to improve 
our business operations and deliver maximum value to the 
warfighter and the taxpayers.
    Since we last testified before this panel in July of last 
year, we have taken a number of steps to improve our 
overarching business environment. Our strategic management plan 
reflects business initiatives, including audits, each with 
specific goals, metrics, and milestones so that progress may be 
tracked. To enable the successful execution of these 
initiatives, we have developed a map which highlights 
interdependencies among them.
    Additionally, we continue to evolve the business enterprise 
architecture by further defining across functional and end 
processes, adding additional standards that enable 
interoperability, and improve usability.
    With regard to systems, we acknowledge that there have been 
and continue to be challenges with many of our business system 
implementations. However, to improve business operations, we 
must transition away from labor-intensive, paper-based, siloed 
processes to more streamlined technology-enabled approaches.
    In that regard, I wish to highlight a number of ongoing 
efforts.
    Our streamlined approach to acquisition of business 
information technology continues to be implemented across DOD. 
We are implementing and have implemented better and more 
performance-based measures that monitor system development and 
implementation progress.
    We continue to emphasize business process reengineering for 
every business system that is seen before the Defense Business 
Systems Management Committee. We have greater connectivity to 
the overarching information technology (IT) infrastructure that 
enables the most efficient and secure execution of DOD's IT 
missions.
    We have also employed tighter controls on spending, that 
both limit the government's liability on poor-performing 
programs and also enable IT rationalization through portfolio-
based analysis. To that end, we appreciate the inclusion of 
section 901 of the 2012 NDAA, enabling integrated governance 
for our entire portfolio of business systems for a single 
investment review board.
    In  summary,  DOD  continues  to  pursue  and  adopt  a  
mission-focused, outcome-driven business management culture of 
continuous change and improvement.
    We look forward to 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, and members of the 
subcommittee, thank you for the opportunity to provide you with an 
update on our efforts for improving financial operations at the 
Department of Defense (DOD).
    It has been approximately 8 months since our last status report to 
this subcommittee. In that time, we have continued to solidify plans 
and to make progress in financial management across the entire Defense 
organization. The job is not yet done, and there are still major 
challenges that we face, as highlighted in recent Government 
Accountability Office (GAO) reports, but we are confident that we are 
on the right track.
    There are two critical reasons for striving to make DOD as 
efficient and effective as possible. One is to ensure that America's 
service men and women have everything they need to defend the United 
States and its interests around the world. The other reason is to 
satisfy our duty as stewards of the resources entrusted to us by the 
taxpayers.
    Today, DOD is able to account for the funds that are appropriated 
for its use by Congress, but--unlike most other government agencies--we 
cannot yet account for those funds to an auditable standard. The 
explanation has much to do with the unique size and mission of DOD and 
its elements. Moreover, until fairly recently, there has been neither 
sustained attention nor a DOD-wide plan that could be implemented. 
Today we have both and are moving forward, as you should expect. As the 
people's elected representatives, you are entitled to know that DOD 
strives to meet the same exacting standards for financial management as 
other major government organizations.

                         SETTING THE FOUNDATION

    Achieving this important objective at DOD is no routine task. It 
requires an enterprise-wide response and an effective strategy. 
Initially, DOD's approach varied by Military Service and often 
concentrated on improving the kind of information that is helpful in 
managing a private sector company--that is, the ``book value'' of 
assets. In fact, this sort of information is of very limited value in 
meeting the daily informational needs of DOD managers. As a result, in 
August 2009, we revised our audit strategy to focus on the financial 
information that is actually needed by Defense managers. It puts 
priority on: (1) improving the quality, accuracy, and reliability of 
budgetary information; and (2) confirming the numbers and locations of 
assets.
    This change has been endorsed by the Government Accountability 
Office, among others, and it has led to improved buy-in at all levels 
in the Department. Managers at DOD now see that audit readiness has 
day-to-day implications for their work. To ensure the adoption of a 
consistent approach to auditability, we have issued clear guidance 
indicating how to assess and improve processes and controls and how to 
maintain needed documentation.
    As appreciation for the value of auditability has spread throughout 
our organization, there is recognition that it requires an investment 
in resources. Despite leaner budgets, the Department now plans to 
sustain the required level of resources each year over the next 5 years 
to improve business operations--providing the appropriate levels of 
training, tools and support--that will allow us to achieve and sustain 
auditable financial statements.
    In addition, we have a governance structure in place that is 
keeping the attention of senior leaders focused on business and 
financial management improvement. We recognize that our governance 
process needs to focus more on specific progress and must hold 
individuals accountable for that progress. Each of the Defense 
components is committed to specific outcomes for their respective 
plans, and we are requiring the same of service providers who support 
auditability. Those goals will be used to hold executives accountable 
at all levels. We will continue to use outside auditors to verify 
progress. Leveraging this senior leadership commitment will strengthen 
our current governance process and ensure both accountability and long-
term continuity.

               MAJOR ACCOMPLISHMENTS DURING THE PAST YEAR

    Secretary Panetta's direct engagement on this issue has been one of 
the most significant developments of the past year. In October, he 
issued a directive stating that the achievement of auditable financial 
statements ``is a priority for me and will be an `all hands' effort 
across the Department.'' Even more important, he has made it clear that 
the current lack of auditable statements is unacceptable.
    Last fall--in his first appearance before the House Armed Services 
Committee--Secretary Panetta also directed the Department to accelerate 
the time needed to achieve audit readiness for the Statement of 
Budgetary Resources for general funds so that ``by 2014 we will have 
the ability to conduct a full-budget audit.'' He added, ``I've directed 
the DOD Comptroller to revise the current plan within 60 days to meet 
these new goals and still achieve the requirement of overall audit 
readiness by 2017.''
    This leadership commitment from the highest level of DOD is setting 
the tone and accelerating audit readiness of the Statement of Budgetary 
Resources. Plans to significantly accelerate our efforts have been 
developed and are underway. Auditability is now a goal that every 
commander, every manager, and every functional specialist must 
understand and embrace to improve efficiency and accountability within 
DOD.
    Following the Secretary's lead, the Service Secretaries and Chiefs 
of Staff of the Military Services have committed themselves to specific 
near-term goals in support of their plans for achieving auditable 
financial statements. Their commitment is mirrored in major commands.
    For example, General Gary North, Commander of Pacific Air Forces 
(PACAF), said it well in a memorandum to his command in March. He 
wrote, ``The Air Force's ability to undergo and obtain a clean audit 
opinion of our financial statements is a direct reflection of how well 
we manage the entire Air Force.'' He added, ``PACAF/Financial 
Management will take the lead and develop Audit Readiness Working 
Groups within PACAF with the objective of developing internal and 
management control programs to assist the base level functional areas 
achieve audit readiness.''
    In September, the Commander of Naval Air Systems included a similar 
message among his Commander's Intents. Key actions include the need to 
``standardize financial processes in accordance with the Navy's 
Financial Improvement Program to provide accurate and auditable 
information that supports program execution decisions.''
    Secretary Panetta and Deputy Secretary Carter have reviewed these 
and similar commitments across DOD and are holding senior leaders 
accountable--both civilian and military--for progress against those 
plans. In addition, Senior Executives in every area now have audit 
goals in their individual performance plans and annual evaluations, and 
we are working to include these goals in General and Flag Officer 
performance plans as well. This helps to ensure that everyone under 
their leadership will understand that better control over financial 
resources has a significant effect on mission success and that everyone 
has a role to play in this process.
    We are working very hard to fulfill the Secretary's pledge. We are 
reasonably confident that we can meet his expectations and yours.

             PROVIDING NEW TOOLS AND TRAINING TO THE FIELD

    The Military Departments and Defense Agencies have the lead in 
reaching auditability, and they are all taking action to make that 
happen. Their senior representatives are with us today, and we won't 
repeat their individual messages.
    We are also taking proactive steps DOD-wide. For example, we are 
providing our commanders with an Audit Readiness Checklist which is 
providing Defense managers with a tool akin to the operational 
readiness checklists employed by military commanders. It provides 
leaders with a definitive list of questions to help ensure that their 
organizations have the records needed for sound resource decisions and 
to make certain that the Department has the records to succeed in 
coming audits. The checklist provides commanders with the basic actions 
an organization should take to determine whether they are audit-ready 
and to identify areas for improvement, if needed.
    The checklist also helps commanders to assess the efficiency of 
their organizations and to validate how well each function performs. 
For example, current evidence shows widespread weakness in providing 
support for our cost information. We understand that unless we can 
prove the soundness of our financial decisions, funding could be at 
risk. The checklist provides actions a Defense organization can use to 
prove that its financial information is accurate. With each command 
giving the management of money the same attention it gives to other 
important assets, the Department can achieve Secretary Panetta's audit 
readiness goal. Our current culture already values operational or 
mission readiness. We need a similar view of our business readiness--
one that highlights efficiency and resource stewardship--in every field 
organization.
    Another important DOD-wide development is the progress we have made 
in instituting a course-based certification program for Defense 
financial management professionals. We announced our plans last year, 
having in mind a certification program similar to the one in the 
Defense acquisition community. Since our announcement, we have 
developed a framework for the program and carried out the many steps 
necessary to bring it to reality. We intend to introduce pilot versions 
of the program for several components this year, with large-scale 
implementation beginning next year.
    We have support for the program across the Department, and Congress 
has indicated its support by providing the necessary legal authority in 
the National Defense Authorization Act for Fiscal Year 2012. We thank 
you for this sign of approval and encouragement.
    We also have made significant progress in training both financial 
managers and nonfinancial managers on the importance of audit 
readiness. We are reinforcing these lessons through a partnership with 
private sector auditors who are experienced in financial audits. We are 
using examination engagements that are an integral part of our audit 
readiness methodology to familiarize DOD personnel with the 
requirements for audits. These examinations are essentially small-scale 
or ``mock'' audits of single business processes. The audit firms 
performing these engagements employ the same procedures used in an 
actual audit, but on a smaller scope and scale. These exercises provide 
our employees with experience that is otherwise difficult to gain.
    In addition, the DOD Financial Improvement and Audit Readiness 
(FIAR) Directorate has developed a series of professional development 
training courses designed to enhance Department-wide knowledge and 
understanding of goals and priorities, as well as instructions to 
become audit-ready and to reinforce the Department's internal control 
over financial reporting requirements. In fiscal year 2011, nearly 
1,000 DOD personnel received this training. Additional professional 
development courses have been added since, including ``FIAR 100'' which 
focuses on training DOD senior leaders, enabling them to understand the 
impact of operations on financial management and audit readiness, as 
well as to identify initiatives they can undertake to assist the 
Department with its auditability objectives.

                            MAKING PROGRESS

    All of these efforts have contributed to sustaining positive audit 
opinions as well as breaking new ground since we last spoke with this 
committee:

         The Defense Information Systems Agency (DISA) achieved 
        a clean opinion on their $6.6 billion working capital fund 
        operations for fiscal year 2011, and they are moving forward 
        with an audit of their fiscal year 2012 general fund business.
         Contract Resource Management of the Tricare Management 
        Activity received an unqualified opinion on its fiscal year 
        2011 financial statements.
         The Medicare-Eligible Retiree Health Care Fund 
        received a qualified opinion on its fiscal year 2011 financial 
        statement.
         In November 2011, an examination of five business 
        processes at the initial General Fund Enterprise Business 
        Systems (GFEBS) Wave 1 sites rendered a qualified opinion, 
        establishing a benchmark for expanding the Army's audit 
        readiness program.
         In November 2011, a commercial audit examination 
        validated that the Air Force could successfully balance their 
        Treasury funds at the transaction level.
         In January 2012, an examination validated Navy's 
        existence and completeness audit readiness assertion for ships 
        and submarines, Trident missiles, and satellites.

    The U.S. Marine Corps will be the first Military Service to receive 
an audit opinion on a financial statement, which will be a significant 
step not only for the marines, but for the entire Department. While the 
Marine Corps will not receive an opinion on the fiscal year 2011 
Statement of Budgetary Resources, the significant progress made to date 
has led the Department of the Navy and DOD Inspector General to agree 
to move quickly to an audit of the fiscal year 2012 budget statement.
    The full list of DOD entities that have received opinions and other 
significant accomplishments will be published in our semi-annual FIAR 
Plan Status Report. In fiscal year 2011, for example, independent 
auditors issued clean opinions for Defense organizations totaling $110 
billion in budgetary resources, an amount equivalent to the budgets of 
nearly half of the non-Defense agencies across government. But there is 
much more to be done.

            BUSINESS TRANSFORMATION AND FINANCIAL MANAGEMENT

    In addition to our important financial management advancements, 
over the past year the Department has taken a number of steps to 
improve its overarching business environment, from releasing enhanced 
strategic guidance for its business operations, to furthering the 
establishment of a performance culture through performance management 
and improvement practices, to delivering tangible, improved business 
outcomes into the hands of our warfighters in areas such as energy 
efficiency, maintenance cycle time, and in-theater business 
intelligence.
    The Department continues to improve key enablers of its business 
operations, including financial management and auditability, the 
Business Enterprise Architecture (BEA) and defense business systems 
environment. The Armed Services Committees have been extremely helpful 
in providing the Department with tools to improve these areas. We 
appreciate this opportunity to update you on our progress.

               GOVERNANCE OF BUSINESS SYSTEMS INVESTMENTS

    One significant development in the management of the Department's 
defense business systems environment is the change to the investment 
management process that Congress passed as section 901 of the National 
Defense Authorization Act (NDAA) for Fiscal Year 2012. In response to 
section 901, we are creating a single Investment Review Board (IRB) and 
investment management process to review and certify the planning, 
design, acquisition, development, deployment, operation, maintenance, 
modernization, and project cost benefits of all defense business 
systems that have total costs greater than $1 million across the 
current Future Year Defense Program, including legacy systems. This is 
in contrast to our current process that includes multiple, 
functionally-oriented IRBs that review only development or 
modernization investments over $1 million. While we were pleased with 
the Department's fiscal year 2011 progress in eliminating 120 legacy 
systems, we anticipate that the changes introduced by section 901 will 
help to further accelerate the transition away from our legacy 
environment. Effective governance of our defense business systems 
environment is crucial to our overarching business improvement 
initiatives. Because of this critical link, we can ensure there is 
strong integration between our broader business governance and our 
investment management process.
    Implementation of section 901 is underway and is being conducted in 
phases, so that we may provide for an orderly transition from our 
current governance process to the new one. To accomplish the 
legislative mandate, the Department created an Investment Review 
Framework that requires components to create organizational execution 
plans for their portfolio of investments that are aligned to functional 
strategies approved by the IRB. The investment review process will 
employ a structured methodology for classifying and assessing business 
investments via multiple views, including:

         An organizational view that promotes visibility across 
        business mission areas for DOD components.
         A functional view that seeks to eliminate redundancy 
        and enhance interoperability.
         An end-to-end view that enables visibility from a 
        process perspective across the Department's business 
        enterprise.

    We look forward to updating you further on the implementation of 
this important legislation.

                    BUSINESS ENTERPRISE ARCHITECTURE

    The BEA, guided by the Department's strategic priorities, is an 
integrated information architecture that provides guidance for the 
Department's business operations and helps guide and constrain our 
investments in business systems. The BEA defines the Department's 
target business environment, including the necessary data standards, 
business rules, processes, and performance metrics that will allow our 
systems to be interoperable. Beginning with BEA 1.0 in 2003, the 
Department has released improved versions of the BEA. The Department 
released BEA 9.0 on March 16, 2012.
    BEA 9.0 continues to refine end-to-end process definitions and 
associated details for processes that support audit goals. Using this 
framework of end-to-end business processes, rather than an 
organizationally or functionally stove-piped approach, ensures we think 
about our business in a holistic way, recognizing the connections and 
dependencies each individual business area has on the others. This end-
to-end approach will also help to minimize the number of required data 
exchanges and system-to-system interfaces, reducing the potential for 
error and increasing process standardization, which is essential to a 
clean audit.
    BEA 9.0 also improves the usability of the architecture, consistent 
with industry leading practices. BEA 9.0 applies open (vice 
proprietary) standards and protocols to architecture development and 
common business process modeling notations. This will make it easier 
for the Department to ensure compliance with the BEA and 
interoperability between its systems, continuing the thrust toward 
enabling auditability. To implement these new approaches, DOD 
components have been directed to use these specified standards, and the 
end-to-end process framework, in the development of subordinate 
enterprise and solution architectures that are federated or asserting 
compliance with the BEA. Implementation and adoption is ongoing 
throughout the Department.

   BUSINESS CAPABILITY LIFECYCLE AND ACQUISITION OF DEFENSE BUSINESS 
                                SYSTEMS

    Another significant development in management of the Department's 
defense business systems environment has been adoption of a new 
acquisition model for defense business systems, the Business Capability 
Lifecycle (BCL). BCL provides a comprehensive process that aligns 
requirements, investment, and acquisition processes for defense 
business systems under an integrated governance framework and focuses 
on incremental delivery of capability, within 18 to 24 months of 
program initiation. The BCL approach is tailored to accommodate the 
unique characteristics of IT acquisition. It also ensures that we 
deliver new capabilities to Department users more quickly, including 
capabilities instrumental to our audit efforts. BCL's incremental 
approach also maintains better control over cost, schedule, and 
performance requirements.
    The Under Secretary of Defense (Acquisition, Technology, and 
Logistics) issued BCL policy on June 23, 2011 and the Defense 
Enterprise Accounting and Management System (DEAMS) was the first 
program to achieve an acquisition decision under BCL policy. Through 
the use of BCL, DEAMS has integrated traditionally stove-piped 
processes and enabled tight integration between the functional sponsor 
and the program office.
    BCL is being incorporated into the next update of the DOD 5000.02 
acquisition instruction and the Defense Acquisition Guidebook. We 
continue to conduct targeted outreach with Program Managers, Functional 
Sponsors, and Program Executive Officers on the BCL policy, and are 
working with the Defense Acquisition University to embed BCL into 
appropriate curriculum. Finally, we are in the process of transitioning 
several major IT programs to BCL.

                     BUSINESS PROCESS REENGINEERING

    A fourth important development in management of our defense 
business systems environment has been the introduction of new Business 
Process Reengineering (BPR) requirements into the Department's IRB 
process. Section 1072 of the NDAA for Fiscal Year 2010 stipulated that 
investments may not be certified to obligate funds through the 
Department's IRB process without having reengineered their business 
processes and reduced unique requirements and system interfaces. 
Conducting appropriate BPR throughout a defense business system's 
acquisition or modernization lifecycle is critical to improving 
requirements definition and stabilization for our acquisition programs 
and the overall performance of our defense business systems. By 
applying BPR early and upfront in a program's lifecycle, we can ensure 
the program has clearly identified and defined the business problem the 
solution is intended to solve, and that the solution appropriately 
applies changes to people, process and organization, in addition to a 
materiel technology solution.
    The Department implemented this requirement through an assessment 
process tied to the Department's IRB governance framework. As the DCMO 
and Military Department CMOs conducted BPR reviews, they incorporated 
lessons learned into revised and improved implementation guidance. 
During fiscal year 2011, assessments were completed for all 160 IRB 
certification actions. Going forward, BPR will be required in the 
Department's new IRB process.

                    BUSINESS SYSTEMS IMPLEMENTATION

    As discussed above, the Department has continued to mature Business 
Transformation related processes, architectural framework, and 
governance that support our transition to a more modern and disciplined 
business environment. This transition is driven by a number of 
activities to include the implementation of selected Military Service 
or Agency Enterprise Resource Planning Systems (ERPs), modernizing 
legacy systems when supported by a business case and aggressively sun-
setting legacy systems that are not aligned with our business 
objectives. The implementation of these new systems is a key enabler 
for executing important process and control changes as well.
    Today, DOD is implementing multiple ERPs across the Military 
Departments and Defense Agencies to serve as the business backbone of 
their operations. Each of these implementations is at a different stage 
of its lifecycle and most have experienced challenges as they have 
moved from design to implementation. Broadly, we continue to improve 
our oversight of these programs in a number of ways, including putting 
in place more rigorous performance measures that broaden the discussion 
from standard acquisition measures to key technical and business 
measures. This has led to a closer link between the information 
technology programs and the business outcomes that they are helping to 
enable. Additionally, we are applying lessons learned across all of the 
programs in the portfolio and incorporating recent GAO and DOD 
Inspector General (IG) findings, which have highlighted deficiencies in 
compliance, shortcomings in change management or training and 
difficulties in management of data quality and interfaces that have 
created inefficiencies and labor intensive rework. We acknowledge that 
there have been and continue to be issues and, as GAO has noted, DOD 
governance has taken appropriate action to limit the pace of 
deployment. We are committed to working through every significant 
deficiency in order to realize the long term value of these 
investments.
    In several cases there have been issues associated with ERP 
compliance with basic requirements (or standards) such as the U.S. 
Standard General Ledger (USSGL) and the DOD Standard Financial 
Information Structure (SFIS). Each instance of non-compliance is 
investigated and addressed. But many situations result from the 
evolution of standards and the time it takes for those standards to 
work their way into use. In short, they are matters of timing. We 
understand that these basics are the key to both reporting accuracy and 
interoperability and are working to develop processes to ensure that 
changes are better communicated and controlled. Some SFIS and USSGL 
compliance deficiencies have been identified, many have already been 
corrected, and plans are in place to correct outstanding instances of 
non-compliance. Despite these challenges, the more disciplined 
transaction processing capability will, over time, result in improved 
data quality and integrity compared to our existing legacy processes. 
That is an important element of context often lacking in discussion of 
problems associated with implementing our ERPs.
    There is also a perception that the way DOD has implemented ERPs 
creates duplication or overlapping capabilities. These investments are 
reviewed with a goal of avoiding and eliminating redundancy. With the 
implementation of Section 2222 of the NDAA 2012, we expect to achieve 
an even more robust business IT portfolio management process. We 
believe our current ERP implementations provide opportunities to 
replace redundant legacy systems and represent an appropriate mix of 
capabilities at the operational level where specific business 
operations or missions are supported.
    The Department has made notable progress over the past 2 years. A 
few noteworthy examples follow:

         The Marine Corps' Global Combat Support System (GCSS-
        MC) is supporting USMC budgetary auditability while also 
        delivering tangible operational value including:

                 ``Time to First Supply Status,'' a primary 
                measure for logistics responsiveness, has been reduced 
                from over 36 hours to an average of 10 hours.
                 ``Order Shipment Times'' for GCSS-MC users has 
                been reduced by 26 percent.
                 ``Maintenance Repair Cycle Time'' has been 
                reduced by 43 percent in the last 2 months from a 
                baseline of 40 days.
                 During Operation Tomodachi, the 2011 
                earthquake and tsunami humanitarian assistance and 
                disaster relief efforts in and around Japan, the GCSS-
                MC system provided critical real-time in transit 
                visibility for high priority parts.

         The Air Force's Defense Enterprise Accounting and 
        Management System (DEAMS) is currently fielded at Scott Air 
        Force Base and the Defense Finance and Accounting Service 
        Limestone, Maine and is delivering tangible business value:

                 Reduced late interest payments within the U.S. 
                Transportation Command from approximately $161.00 per 
                $1 million to approximately $7.00 per $1 million.

         The Defense Logistics Agency's (DLA) EProcurement 
        program provides key capabilities in a single integrated 
        procurement process solution in support of sustainment 
        logistics. EProcurement recently exceeded all key performance 
        parameters during performance stress tests, including:

                 System was designed to process 8,500 
                solicitations per day and exceeded the threshold by 
                more than 90 percent during development testing.
                 System was also designed to evaluate 23,000 
                proposals per day and during development testing 
                exceeded the threshold by 100 percent.

    DOD's modernized systems environment, including each of the 
Department's ERPs provides the opportunity for improved effectiveness 
and efficiency of budgeting and financial accounting operations by 
providing users with standardized financial and business processes, a 
single authoritative data source, and real-time posting to external 
sources. In the past, we had to rely on manually-generated summary 
information; we now have much more access to transaction-level data 
that will help support future audits and provide leaders with 
information for better business decisions. These programs and their 
organizational sponsors are committed to realizing this significant 
potential.
    While the effective implementation of ERPs will not achieve 
auditability by itself, it will help to provide the modern business 
environment we need to meet and sustain the statutory requirement for 
audit readiness.

                               CONCLUSION

    Madame Chairman, we are making significant progress. While we are 
mindful of the work that remains, we are reasonably confident that we 
will achieve our audit goals. As we look ahead, we appreciate the 
support we have received here in Congress. Your constructive criticism 
and continuing oversight are helping to sustain our progress.
    We also welcome your help with what has been a major problem for 
financial management at DOD. We refer to the budgetary uncertainty that 
we have encountered in the recent past, including no fewer than four 
threats of government shutdown last year, which generated time-
consuming and unproductive planning efforts. Now the shadow of possible 
sequestration is falling across our path. Dealing with these 
uncertainties drains valuable time and leadership attention from 
important initiatives, including our commitment to audit readiness. 
Congress could help a great deal by returning to a more orderly budget 
process.
    Thank you again for your interest in this vital subject. We welcome 
your questions.

    Mr. Hale. If it is all right with you, Chairwoman 
McCaskill, we will go Army, Navy, Air Force, one statement per 
department, and then I assume GAO. Does that work?
    Senator McCaskill. That works very well. Thank you.

STATEMENT OF HON. JOSEPH W. WESTPHAL, CHIEF MANAGEMENT OFFICER 
OF THE ARMY; ACCOMPANIED BY HON. MARY SALLY MATIELLA, ASSISTANT 
  SECRETARY OF THE ARMY, FINANCIAL MANAGEMENT AND COMPTROLLER

    Mr. Westphal. Good afternoon, Madam Chair, Ranking Member 
Ayotte, members of the subcommittee. It is good to be with you 
today and thank you for having this hearing.
    Dr. Matiella, our Assistant Secretary for Financial 
Management, and I have a joint statement together. We have 
presented it for the record, and I will make a few summary 
statements from it.
    The first thing I want to tell you is that your Army 
leadership is really engaged. I believe we have a sound plan to 
achieve an auditable SBR by the end of fiscal year 2014, and 
full financial statement audit readiness by the end of fiscal 
year 2017.
    Through DOD's FIAR efforts, the Army is connected to the 
larger audit readiness community, sharing lessons learned and 
best practices. Consistent with DOD's strategy, the Army 
developed a financial improvement plan with specific measurable 
actions and interim milestones. Our plan enables the Army to 
assess progress, overcome obstacles, and incorporate 
recommendations from both independent auditors and GAO. We 
continue to subject it to close scrutiny. Since July 2011, we 
have received two positive audit results by independent public 
accounting firms. These are incremental but important steps 
towards auditability. Dr. Matiella and I are confident that the 
Army is on track and will achieve our goals.
    In support of these efforts, the Army continues to work 
with DOD's Deputy CMO, Ms. McGrath, to improve our investment 
control process. Published in October 2010, the Army's business 
systems architecture and transition plan provides a framework 
and a road map for enabling audit readiness, optimizing 
business operations, and steering our business systems 
investments. Using this framework, the Army will transition our 
legacy systems and prioritize our business systems investments 
within a single integrated architecture.
    Over a year ago, the Army chartered the Business Systems 
Information Technology Executive Steering Group, a governance 
forum that I personally chair, to review business policy and 
serve as a key component of the Army's investment review 
process. Comprised of senior Army leaders, including Dr. 
Matiella, this group shaped the business systems information 
technology strategy that was approved by the Secretary of the 
Army in February 2011. The combination of a clearly defined 
strategy and effective investment controls ensure that the Army 
makes sound investments in our business systems.
    More recently, the Army conducted our first five business 
domain portfolio reviews covering over 700 business systems. 
The reviews are not only serving to solidify the Army's 
business systems architecture, but also helping to establish a 
targeted environment centered on our ERPs. As the process 
matures, the portfolio reviews will provide a great opportunity 
to identify improvements to our business processes, streamline 
our business systems, and establish a culture of continuous 
improvement.
    In conclusion, Dr. Matiella and I assure you that the Army 
is on track to meet our auditability goals, to improve 
management of our business systems investments, and establish a 
solid foundation for business transformation across the Army.
    On behalf of the Army, we do want to thank you, the members 
of this committee, for the continued interest in this very 
important matter and the unwavering support that you do give to 
our soldiers and families, as you so stated.
    [The joint prepared statement of Mr. Westphal and Dr. 
Matiella follows:]

Joint Prepared Statement by Hon. Joseph W. Westphal and Hon. Mary Sally 
                                Matiella

    Madam Chairman McCaskill, Ranking Member Ayotte, and distinguished 
members of this subcommittee, thank you for the opportunity to appear 
before you today to discuss the Army's financial management and 
business transformation efforts.
    It is my privilege to be here along with the Under Secretary of 
Defense (Comptroller) and Chief Financial Officer, the Honorable Robert 
Hale; the Department's Deputy Chief Management Officer, the Honorable 
Elizabeth McGrath; my colleagues from the Navy and Air Force, and the 
Assistant Secretary of the Army for Financial Management and 
Comptroller (ASA(FM&C)), the Honorable Mary Sally Matiella. I can 
assure you that our organizations all work in close collaboration, 
capturing valuable lessons learned, and sharing best business 
practices. I'd like to thank them for their continued support.
    The topics of today's hearing are as important to us as they are to 
this subcommittee. Be assured, your Army leadership, our soldiers, and 
our civilians understand the fiscal challenges confronting our country. 
We are unified in our effort to make lasting improvements that will 
enable us to operate more effectively and efficiently within limited 
resources. As President Obama stated ``we must put our fiscal house in 
order and renew our long-term economic strength.'' My colleagues and I 
are all committed to being part of the solution.

                         FINANCIAL AUDITABILITY

    Due to persistent and focused work across the entire Army, we have 
a sound, resourced plan and the appropriate leadership engagement to 
achieve Secretary Panetta's directive to assert auditable Statement of 
Budgetary Resources (SBR) by the end of fiscal year 2014 and assert 
full financial statement audit readiness by the end of fiscal year 
2017. Appropriate guidance and direction from Congress, the Secretary 
of Defense, and the Office of the Under Secretary of Defense 
(Comptroller) (OUSD(C)) have enabled the Army to develop a focused 
Financial Improvement Plan (FIP), begin demonstrating our audit 
readiness and build upon our early achievements.
    Through the DOD's Financial Improvement and Audit Readiness (FIAR) 
efforts, the Army is connected to the larger Department of Defense 
(DOD) audit readiness community, sharing lessons learned and best 
practices. OUSD(C) has formulated a comprehensive strategy with a 
critical path that allows the Army to focus on improving the 
information most useful to decisionmakers, while moving DOD closer to 
the ultimate goal of achieving and sustaining auditability. The FIAR 
guidance defines a series of standardized phases that must be followed 
to achieve audit readiness. The methodology focuses on the 
identification and implementation of key control objectives and 
supporting documents. OUSD(C) conducts quarterly updates with the 
Services to maintain the focus on auditability and efficiency progress.
    To achieve the FIAR objectives, the Army has allocated the 
necessary resources and developed an infrastructure to perform 
financial improvement activities. This infrastructure is responsible 
for defining and executing the Army's Financial Improvement Plan; it 
includes specific, measurable actions and interim milestones necessary 
to remedy known audit readiness impediments. The Army uses these 
interim milestones to assess progress and incorporate recommendations 
from independent auditors, the Government Accountability Office (GAO), 
the DOD Office of the Inspector General, and the Army Audit Agency. We 
are specifically addressing the six auditability challenges identified 
by GAO:

    (1)  Sustaining continuous leadership through the Secretary of 
Defense directive, active engagement and directive memoranda from the 
Secretary of the Army, Chief of Staff of the Army, Under Secretary of 
the Army, ASA(FM&C), and the Army Audit Readiness Strategy;
    (2)  Building a competent workforce through the Command and 
Installation Audit Readiness Guide, Army Knowledge Online Audit 
Readiness Site, audit readiness training, Annual Financial Improvement 
Workshop, and FIP Report quarterly newsletter;
    (3)  Developing a well-defined architecture that has been vetted 
through our Business Systems governance process and incorporates the 15 
End-to-End processes found in the Office of the Secretary of Defense 
(OSD) Business Enterprise Architecture (BEA);
    (4)  Conducting Enterprise Resource Planning (ERP) system 
auditability assessments and keeping the Office of Business 
Transformation and Program Executive Officer-Enterprise Information 
Systems actively engaged;
    (5)  Providing accountability and oversight through: Senior 
Executive Service performance plan requirements; Army governance, 
including quarterly In-Process Reviews, Audit Committee meetings, and 
Internal Review Workgroups; and participation in OSD(C) governance 
boards; and
    (6)  Establishing internal controls through installation-level 
process and control assessments, corrective action implementation, 
business process and controls training, leveraging Internal Review to 
assess controls and corrective actions, instilling discipline, and 
compliance with current policies.

    The Army has subjected the FIP to strenuous scrutiny to hold 
ourselves accountable and identify potential deficiencies. Over the 
past 2 years, since the initial 2010 GAO review of GFEBS, the Army has 
remediated the findings, which resulted in DOD's decision to authorize 
full deployment for GFEBS in June 2011, to include, greatly improved 
training; and adding the identified chart of accounts and Standard 
Financial Information Structure (SFIS) compliance. The Army is 
vigorously pursuing excellence in reaching the fiscal year 2014 and 
fiscal year 2017 auditability goals as reflected in recent successes.
    The U.S. Army Corps of Engineers is the Army's first and DOD's 
largest entity to receive an unqualified audit opinion on their 
financial statements and has subsequently sustained clean audit 
opinions. In the General Fund Enterprise Business System (GFEBS) 
environment since July 2011, we have received positive audit results by 
independent public accounting firms. The first of 3 planned 
examinations involved a review of over 2,500 supporting documents 
resulting in the independent auditors issuing an unqualified opinion on 
appropriations received and a qualified opinion on five business 
processes at three sites. A second examination is scheduled for this 
summer at nine GFEBS sites and DFAS. The third examination will be 
conducted next fiscal year and will include all Army GFEBS sites. These 
examinations are important incremental steps toward auditability. We 
will continue to progress and are committed to sharing our lessons 
learned with DOD and our sister Services as we proceed. We remain 
confident that the Army is on track to achieve both the fiscal year 
2014 SBR and the fiscal year 2017 full audit readiness goals. We 
appreciate your continued support.

                        BUSINESS TRANSFORMATION

    In October 2010, the Army published its first Business Systems 
Architecture & Transition Plan (BSA&TP). The BSA&TP provides the 
framework and roadmap for enabling audit readiness, optimizing business 
operations, and steering our business system investments. It integrates 
Enterprise Resource Planning (ERP) solutions, the Army's functional 
architecture, and the DOD Business Enterprise Architecture (BEA). Using 
this framework, the Army will transition over 700 legacy systems and 
prioritize new business system investments within a single, integrated 
architecture.
    Four ERPs form the backbone for our business systems enterprise 
architecture and are critical to our financial auditability goals. They 
are: the General Fund Enterprise Business System (GFEBS); the Global 
Combat Support System-Army (GCSS-Army); the Logistics Management 
Program (LMP); and the Integrated Personnel and Pay System-Army (IPPS-
Army). Collectively they will manage the material balance of the 
current and future general funds for the Army. GFEBS unifies financial 
reporting and management across the Army and serves as the centerpiece 
for financial auditability efforts and will be fully deployed in fiscal 
year 2012. Presently, GFEBS is being used by about 45,000 of 
approximate 50,000 eventual users, is 94 percent SFIS compliant and on 
track to be fully SFIS compliant by the end of this fiscal year. It has 
a track record of being 99.9 percent available, and at the beginning of 
this fiscal year, the Army had already processed over 20 million 
financial transactions using GFEBS with zero dollars in Anti-Deficiency 
Act violations. To date GFEBS has distributed nearly $80 billion in 
funds and obligated approximately $60 billion. The system also provides 
cost and asset functionality not available in legacy systems.
    LMP Increment 1 (production baseline) is fully deployed to 25,000 
users at 50 sites across the Army's Materiel Command and contains the 
financial ledger for the Army Working Capital Fund. Throughout the 
remainder of fiscal year 2012 the ASA(FM&C) is overseeing final 
enhancements to bring it within compliance with audit standards. 
Following direction from the DOD Deputy Chief Management Officer, in 
December 2011, LMP was converted from a service contract to an 
acquisition Program of Record to provide additional oversight for 
future changes to this critical enabler of national level logistics.
    GCSS-A has completed Initial Operational Testing at both Fort 
Irwin, CA, and Fort Bliss, TX. The Army is evaluating the results of 
testing and making necessary adjustments to the system. We anticipate 
receiving a full deployment decision within the next 6 months which 
will ensure GCSS-A is available to support equipment accountability and 
serviceability for our financial auditability goals in the future.
    Lastly, in February 2012 the Army awarded a contract for the first 
increment of IPPS-Army, an integrated database which consolidates 
personnel information across the Active Duty, U.S. Army Reserves and 
Army National Guard. Subsequent increments of IPPS-Army will streamline 
personnel processes and integrate personnel pay for over 1 million 
uniformed personnel across the Army. In fiscal year 2011,the Federal 
Chief Information Officer completed a top-to-bottom review of the IPPS-
Army program resulting in a revised acquisition strategy which 
minimizes risk to the government. While these changes extended the 
lifecycle of development, the military pay integration will be fielded 
in time to support our fiscal year 2017 full auditability goals.
    The Army continues to work with the DOD Deputy Chief Management 
Officer to define a revised investment control process as outlined in 
section 901 of the National Defense Authorization Act for Fiscal Year 
2012. Over a year ago, the Army chartered the Business Systems 
Information Technology Executive Steering Group (BSIT-ESG), chaired by 
the Under Secretary of the Army. In addition, the Army established the 
2-Star and 3-Star BSIT Working Groups to provide additional levels of 
collaboration on cross-functional issues. Comprised of senior Army 
business leaders, these forums review business policy and serve as a 
key component in reviewing and integrating the Army's investment review 
process. The same leaders shaped the BSIT Strategy approved by the 
Secretary of the Army in February 2011. The combination of a clearly 
defined strategy and effective investment controls will ensure the Army 
makes the appropriate investment in our ERPs and other business 
systems.
    The Chief Management Officer in collaboration with the Vice Chief 
of Staff conducted portfolio reviews of our five primary business 
functions: financial management; acquisition; logistics; human resource 
management; and installations, energy and environment. These reviews 
included scrutiny of our business systems and business architecture.
    Collectively the Army has over 700 legacy business systems aligned 
with these functions. The reviews were used to reinforce accountability 
and emphasize a cost consciousness environment among Army leaders that 
heretofore have been absorbed by fighting the war for 10 years. The 
reviews will further solidify the Army's business systems architecture 
and establish the target environment centered around our four ERP 
systems and have facilitated retiring approximately 180 legacy business 
systems incapable of meeting our enterprise management and audit 
readiness objectives. This target environment will guide the investment 
strategy for the future and ensure that systems are synchronized, 
functionally optimized, and prioritized in support of our key business 
processes. In addition, the portfolio reviews identified new 
opportunities to improve our business processes, consolidate our 
business systems, and establish a foundation for continuous 
improvement.
    Our business architecture establishes the framework for mapping and 
improving the Army's end-to-end (E2E) business processes. Process 
mapping provides a better understanding of how work gets done and 
identifies cross-domain dependencies. It enables the Army to pinpoint 
reengineering efforts, improve process efficiency, and invest wisely in 
business systems. Initially, the Army is focusing on 5 of the 15 E2E 
processes: Procure-to-Pay, Acquire-to-Retire, Hire-to-Retire, Deploy-
to-Redeploy/Retrograde, and Environmental Liabilities. These five 
processes capture most of the Army's Title 10 mission and thus provide 
the greatest opportunity for improvement.

                           CLOSING STATEMENT

    On behalf of the Army, thank you for your continued interest in 
this very important matter and for your unwavering support in all you 
do for our soldiers and their families. While the Army continues to 
support the ongoing war in Afghanistan, we are shaping our force 
structure and developing resourcing strategies to meet the new defense 
strategy. Fielding ERPs across the entire Army, we are able to leverage 
leadership at many levels to achieve our fiscal year 2014 and fiscal 
year 2017 auditability goals.
    Through an adaptive approach, thousands of military and civilian 
professionals are fielding these systems, achieving front line 
progress, and establishing a solid foundation for continuing business 
transformation across the Army. With the support of this committee, the 
Office of Management and Budget, OSD, and Army leaders throughout the 
force, I am confident that the Army is on a positive path to meet our 
goals. Thank you.

 STATEMENT OF HON. ROBERT O. WORK, CHIEF MANAGEMENT OFFICER OF 
  THE NAVY; ACCOMPANIED BY HON. GLADYS J. COMMONS, ASSISTANT 
  SECRETARY OF THE NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER

    Mr. Work. Madam Chairman, Ranking Member Ayotte, thank you 
for this opportunity to discuss the Department of the Navy's 
progress towards achieving financial auditability and business 
process reform and the important role that the Navy ERP will 
play in these efforts.
    I, like my colleagues, have submitted a joint statement 
with Ms. Commons for the record, and I would just like to make 
a couple of key points before answering your questions.
    Ms. Commons and I, as well as the Secretary of the Navy, 
the Commandant of the Marine Corps, and the Chief of Naval 
Operations (CNO), are all committed to DOD's plan to achieve 
audit readiness. At every chance I get, I personally stress the 
importance of this goal with our leaders, managers, and 
employees at every single opportunity, and I believe the 
Secretary, the Commandant, and the CNO do as well. As Secretary 
Hale has said, setting a clear tone from the top and engaging 
the entire Navy in audit readiness is very essential.
    We have developed a very detailed, Navy-wide plan. We are 
now working with each of our major commands and our service 
providers to ensure that they understand their specific role in 
achieving this very important goal. Based on some very 
important foundational work by our predecessors, the tone from 
the top, and this plan, particularly the trailblazing efforts 
of the Marine Corps, I believe the Navy is very well-positioned 
to achieve Secretary Panetta's goal of an audit-ready SBR by 
fiscal year 2014, as well as being fully audit-ready by 2017.
    Our major IT systems, we think, are well-aligned with this 
effort. All three of our major current efforts are on strong 
footing. The Navy ERP is on schedule to complete its program of 
record in fiscal year 2013. We have 66,000 users now worldwide. 
We will have 71,000 by the end of fiscal year 2013. That will 
manage about 47 percent of our total obligational authority. 27 
systems have been retired to date as a result of this 
deployment. We are on schedule to reduce another 55 systems 
this fiscal year, for a total of 82, and we expect a total of 
96 systems to be shut down by fiscal year 2016.
    Additionally, we have a comprehensive effort to standardize 
execution of business processes among our Navy ERP users. 
Reducing the process variations, as you mentioned in your 
statement, ma'am, when using the system along with standard 
operating procedures that will be followed by all, will achieve 
the greatest benefits across the Navy. Paring down the number 
of steps to complete Navy ERP transactions will make this 
system more efficient and easier to use, and by permitting 
fewer variations in the processes, we will reduce systems 
maintenance costs. Finally, consistent, streamlined procedures 
will require less future work in sustaining our control 
environment, which is very important.
    We are in the process of developing data standards across 
the enterprise that will allow us to aggregate information from 
all of our ERP systems with those systems that we decide to 
maintain.
    The Marine Corps GCSS is deployed. It will eliminate four 
major legacy systems by the end of fiscal year 2013. In fact, I 
am very pleased to report that since 2008, we have reduced more 
than 1,400 systems and applications and we have shut down 400 
networks.
    The Navy's Future Personnel and Pay Solution (FPPS) has 
been refocused. I ordered an assessment of this effort in late 
2010, and as a result of this assessment, we have determined 
that instead of initiating a large-scale business systems 
acquisition, we will instead focus on process improvement and 
leveraging this investment with the existing Navy Standard 
Integrated Personnel System. The Navy reached this conclusion 
after an exhaustive review of its policies, practices, and 
processes, and I believe this is a case of business process 
engineering done right. Instead of building the system to 
automate how we used to do business or do business today, the 
functional community is first rethinking what it wants to do in 
the future, and only then will we look to IT solutions to 
support the new and improved way of service delivery. We think 
this approach has reduced the original estimated cost by at 
least $167 million and eliminated at least $157 million in 
additional cost growth from fiscal year 2010 through 2017.
    I think this example points to one of the keys to both 
auditability and the successful launch of IT systems. As you 
mentioned, ma'am, reengineering of our business processes is 
the key. Our business process reform approach is now mature to 
the point where we address the full spectrum of business 
operations by focusing on three things: strategic management, 
understanding the costs of doing business, and managing the 
organization toward achieving better and more measurable 
results.
    Our methodology requires baselining and mapping business 
processes, allowing the business owners to identify and 
prioritize their problems and then exploiting opportunities for 
improvement.
    A second key is data standardization, and a third is having 
good internal controls.
    We are focused on all three of these things. Auditable 
financial statements will be the outcome of these efforts.
    So the Navy, I believe, has an aggressive, forward-leaning 
plan to take control of how we do business, to standardize 
data, and ultimately achieve financial audit readiness, a plan 
which has yielded initial successes. We have had two favorable 
opinions on appropriations received and on the existence and 
completeness of our submarine, ship, missile, and satellite 
inventories. We have not received formal word, but we have been 
told that our aircraft inventories are also ready. So we 
continue to make progress, and I am relatively confident that 
we will meet all of the deadlines.
    I would like to echo Under Secretary Westphal's 
appreciation for this subcommittee's focus on this effort, and 
we look forward to continuing to work with you and your staff. 
I am very much looking forward to any questions you might have.
    [The joint prepared statement of Mr. Work and Ms. Commons 
follows:]

          Joint Prepared Statement by Hon. Robert O. Work and 
                         Hon. Gladys J. Commons

    Chairman McCaskill, Senator Ayotte, thank you for this opportunity 
to discuss the Department of the Navy's (DON) progress toward achieving 
financial auditability, business process reform and the important role 
Navy Enterprise Resource Planning (ERP) will play in these efforts. To 
maximize the use of our human and fiscal resources; prevent fraud, 
waste and abuse; and provide the warfighter the best capabilities to 
achieve the Nation's security strategy, it is essential that the 
financial data we rely on for decisionmaking is accurate and reliable. 
I am committed to the Department's aggressive plan to achieve audit 
readiness and stress the importance of this goal with our leaders, 
managers, and employees at every opportunity. Setting a clear ``tone 
from the top'' and engaging the entire Department in audit readiness is 
essential for success in this complex undertaking.
    To achieve audit readiness, we have focused our efforts on 
improving our business processes end-to-end; modifying our systems to 
meet Federal Information System Controls Audit Manual standards; and 
strengthening internal controls surrounding those business processes 
and systems. Our business process reform approach has matured into 
addressing the full spectrum of business operations: focusing on 
strategic management, understanding the costs of doing business, and 
managing the organization towards achieving better and more measurable 
results. Our methodology requires baselining and mapping business 
processes, allowing the business owners to identify and prioritize 
problems, and then exploiting opportunities for improvement. Auditable 
financial statements will be the outcome of our business transformation 
efforts.
    We have developed a detailed Department-wide plan and worked with 
each major command and our service providers to ensure they understand 
their role in our success. Based
    on our comprehensive plan and our ongoing efforts, we are well-
positioned to achieve Secretary of Defense Panetta's goal of an audit 
ready Statement of Budgetary Resources (SBR) by the end of fiscal year 
2014, as well as reaching the fiscal year 2017 date established by the 
National Defense Authorization Act for Fiscal Year 2010 for full 
auditability.
    The Department is making steady progress on its financial 
auditability plan. The audit of the Marine Corps' SBR continues. Our 
goal was to achieve a favorable audit opinion on the fiscal year 2011 
SBR audit. We extended the audit 3 months because an opinion appeared 
to be within our grasp, but the need for additional test sampling, plus 
time limitations, forced the conclusion of this second-year effort 
without an opinion. However, noting the significant progress made, both 
the DON and the Department of Defense Inspector General agreed, that we 
should now move quickly into an audit of the Marine Corps' fiscal year 
2012 SBR.
    The Marine Corps' experience has been valuable to the rest of DON 
and to the other military departments as we all seek to achieve SBR 
audit readiness. The Marine Corps has developed essential financial 
management capabilities for the first time, such as reconciling cash 
with the Treasury's balance; and they constructed a robust, effective 
audit response infrastructure, enabling the rapid collection and 
transmission of large volumes of business process documentation to 
auditors for analysis.
    Additionally, the Marine Corps is executing an aggressive 
corrective action plan for business process and system deficiencies 
identified during its audit readiness preparations and during the 
annual audits. This sustained progress in improving Marine Corps 
business operations, set in motion by the pursuit of auditability, has 
produced instructive lessons for DON and the other Services.
    The Department of the Navy has achieved other notable audit 
readiness accomplishments. In late summer 2011, we achieved a favorable 
audit opinion on the Department's Appropriations Received process. 
Validation by an independent accounting firm confirms that the process 
and systems we use to allocate the resources provided by Congress are 
auditable. In January 2012, the Department of Defense Inspector General 
completed an examination and verified that the processes and systems we 
use to establish Existence and Completeness of ships, submarines, 
Trident missiles, and satellites inventories are audit ready. A similar 
examination of DON's aircraft inventory management is currently 
ongoing.
    A second examination is also underway, focusing on the E-2D Hawkeye 
aircraft acquisition program. This examination will determine whether 
the business processes and systems used to manage this major 
acquisition program meet audit standards. This examination has added 
importance because the E2-D program is executed within Navy ERP; the 
results will reflect the effectiveness of the controls in the Navy's 
``target'' financial system.
    Though the Department is making steady progress toward financial 
auditability, much remains to be done. Completing our ambitious SBR 
audit readiness schedule requires a number of business process 
assertions this fiscal year and next. We also need to assess the 
effectiveness of our major business systems' controls. Following the 
Marine Corps' example, the entire Department needs to fully develop the 
same fundamental financial management capabilities required for an 
audit, including detailed cash reconciliation; and, an effective audit 
response infrastructure needs to be in place. These complex efforts 
will test the Department's acumen, as well as the skills of our major 
service provider, the Defense Finance and Accounting Service.
    Navy ERP, which accounts for over half of the Navy's obligational 
authority, is an essential component of auditability. The Navy's 
planned implementation of ERP at six major commands, which began in 
fiscal year 2008, will conclude next fiscal year. Concurrently, we are 
focusing on two other major objectives: assessing Navy ERP's present 
ability to meet financial audit standards prescribed for a business 
system; and making improvements in its utility. A methodical effort is 
underway to standardize the execution of business processes within Navy 
ERP across our diverse user population.
    This year, an independent assessment will be conducted, determining 
if Navy ERP's internal controls comply with the Government 
Accountability Office's financial systems audit standards. Completing 
this survey, and quickly pursuing any follow-up remediation required, 
will be important steps toward Departmental audit readiness. We are 
optimistic that the assessment will demonstrate that Navy ERP has 
effective controls overall. Our E2-D audit readiness assertion, 
mentioned earlier, showed positive results in the Navy ERP environment.
    Additionally, our comprehensive effort to standardize execution of 
business processes among Navy ERP users is fully underway. Reducing 
process variations when using the system, along with establishing 
standard operating procedures to be followed by all, will yield 
benefits. Paring down the number of steps to complete Navy ERP 
transactions will make the system more efficient and easier to use. 
Permitting fewer variations in ERP business processes will reduce 
system maintenance costs. Finally, consistent, streamlined procedures 
will require less future work in sustaining Navy ERP's control 
environment.
    In conclusion, DON has an aggressive, forward-leaning plan to 
achieve financial audit readiness--a plan which has yielded initial 
successes, but one which will require much more hard work and 
creativity throughout the entire Department to complete. Thank you for 
your continued support, and I would be pleased to answer your questions 
at the appropriate time.

 STATEMENT OF HON. JAMIE M. MORIN, ASSISTANT SECRETARY OF THE 
AIR FORCE, FINANCIAL MANAGEMENT AND COMPTROLLER; ACCOMPANIED BY 
DAVID TILLOTSON III, DEPUTY CHIEF MANAGEMENT OFFICER OF THE AIR 
                             FORCE

    Dr. Morin. Madam Chair, thank you again for the opportunity 
to join my colleagues from across DOD and our valued partner 
from GAO, Mr. Khan, for today's hearing to discuss DOD and your 
Air Force's efforts to achieve audit readiness.
    As you mentioned, unfortunately, our Under Secretary and 
CMO, Ms. Conaton, is recovering from an injury today. So you 
have me and her Deputy CMO, Mr. Dave Tillotson, here and we 
will seek to provide a short statement and then answer any 
questions that you have.
    Since the Air Force leadership testified to this 
subcommittee back in July of last year about audit readiness, 
we have made continued progress towards that goal--particularly 
since the Secretary laid out his accelerated deadline of 2014. 
We remain very strongly committed to achieving that accelerated 
goal for the SBR, as well as the broader legislative 
requirements for a clean audit by 2017. We are leaning forward 
aggressively on this.
    The goals are challenging for an organization as large and 
diverse and geographically distributed as the Air Force, so we 
do continue to assess, as I have testified before, that there 
is moderate risk in meeting that deadline, primarily due to 
systems challenges. As was stated earlier, our effort now 
focuses on achieving audit readiness within our legacy systems 
which is an effort that we are working aggressively on but 
remains an uncertain piece of our effort.
    We are working to mitigate that risk very directly through, 
first of all, strong engagement of Air Force leadership at all 
levels, as well as highly focused investments of additional 
human and financial resources towards this effort. We have made 
great progress over the last year.
    Speaking of leadership engagement, Secretary Panetta's 
directive to accelerate to 2014 has been both a blessing and a 
challenge for the Air Force. The core challenge is, of course, 
that the accelerated deadline means that we cannot rely on all 
of those ERPs that we had depended upon in our previous plan. 
That is a real challenge. Waiting for those multiple critical 
systems to be deployed and fully used is no longer going to 
work, so we have a shift in strategy, that is clear.
    But the blessing is that the Secretary's engagement, 
coupled with the consistent and strong guidance--from this 
committee and other committees--in law, and in hearing after 
hearing over the last couple of years, have really helped to 
build a degree of consensus on the importance of this effort 
and a degree of leadership commitment that is showing real 
dividends. Audit readiness has become a regular agenda item for 
the four-star leadership of the Air Force, involving both 
civilian and military leaders in a way that I think could not 
have been anticipated or imagined without the leadership from 
this committee and the Secretary.
    I think this top-level leadership is driving increased 
involvement from military commanders at all levels down to the 
field. There is still work to be done in that regard, but it is 
catching on quite aggressively. It also enables our very strong 
focus on personal accountability, and that is something that is 
playing out in financial incentives for our civilian senior 
executives, where the performance plans for about 140 civilian 
senior executives are directly tied to delivery on audit 
readiness goals. It is playing out in military evaluations as 
well, albeit to a somewhat lesser extent.
    It also contributes to the very strong support we have 
received in the DOD internal resource allocation process for 
some of the key areas where we needed investments. I think of 
those investments, and we as an Air Force leadership think of 
those investments, in terms of three components: people, 
processes to include internal controls, and systems. So all 
three are working together.
    We are certainly encouraged with some of the interim 
successes we have had in meeting the accelerated deadline, 
particularly the fact that we received two clean opinions in 
the last year, on our Fund Balance with Treasury (FBWT) 
reconciliation and on our funds distribution process down to 
our major command level. We also, like some of the other 
Services, have an examination currently underway looking at our 
military equipment. The DOD IG is performing that right now, 
and indications so far are quite good. That is our aircraft, 
our intercontinental ballistic missiles, our satellites, et 
cetera.
    But we clearly still have a very aggressive schedule ahead 
of us, and it will touch those people, processes, and systems 
pieces.
    Our most immediate challenge right in front of us is 
people. We need to continue to hire, whether through government 
civilian hiring or through contractor hiring, people with the 
requisite skills, government personnel and contractors with the 
knowledge and experience in accounting, auditing, and financial 
reporting that will help us get across the finish line here. 
This is a challenge because, again, the scale of DOD makes 
finding enough people with enough skills a challenge.
    But we also need to continue to invest in the people, and 
that is why we strongly endorse Under Secretary Hale's 
leadership on this financial management workforce certification 
initiative. We think that is critical.
    Our process redesign and internal control efforts and those 
improvement efforts have become certainly all the more 
important with the accelerated deadline, and we have been 
working them aggressively. But I wanted to shift to just a very 
brief discussion of our ERP system investments because that is, 
obviously, a key focus of this subcommittee.
    Financial systems modernization is clearly a key enabler 
for both achieving and sustaining full audit readiness by 2017 
in a cost-effective manner to avoid that army of auditors that 
you discussed in your opening statement, ma'am.
    The Air Force recognizes, though, there are major 
challenges involved in fielding ERP systems in a big 
organization like ours, and we have taken and will take 
appropriate action to address concerns identified through best 
practice reviews and audits both from internal and external 
sources. We very much appreciate the active support we are 
getting from the Office of the Secretary of Defense (OSD), from 
the Air Force Audit Agency, from the DOD IG, and of course, 
from GAO.
    In the case of the Defense Enterprise Accounting and 
Management System (DEAMS), our core financial system for the 
general fund and transportation and working capital fund, we 
have learned some very key lessons from the other ERP 
deployments, and that have led us to focus on things like end-
of-year financial activities and focus on user training and 
education and especially on user experience issues associated 
with system stability. We are measuring our success against 
those goals on a weekly basis. DEAMS has now been deployed at 
Scott Air Force Base and we have gone through 2 years worth of 
budget closeout in that system. We received milestone B 
authority for that system back in January and we are about to 
kick off an operational assessment with the Air Force 
operational evaluation team looking at the actual 
implementation of the system. We will take any lessons that 
come out of that and we will expect to deploy the system at 
five other bases over the next fiscal year.
    As the subcommittee is aware, another major Air Force ERP, 
our Expeditionary Combat Support System (ECSS), has not fared 
as well. The program is currently going through a major 
restructuring effort. We are now approaching 7 years since 
funds were first expended for this system, which was designed 
to restructure our logistics processes and field a massive ERP. 
The total cost on the system is now over $1 billion. I am 
personally appalled at the limited capabilities that program 
has produced relative to that amount of investment. The rest of 
the senior Air Force leadership feels that way as well. That is 
why we are restructuring, looking for an alternative path. The 
restructuring effort is ongoing right now, but the subcommittee 
and Congress should expect to see a way forward identified in 
the next month or so. We owe you a clear and concise 
description of a much better way forward for our logistics 
modernization and financial improvement.
    Let me just conclude by saying that while we certainly do 
see moderate risk in that 2014 deadline, we are leaning 
aggressively to achieve it and we are strongly committed to 
that 2014 SBR audit goal, as well as the ultimate goal of full 
accountability by 2017. This is a key part of the Air Force's 
effort to squeeze the maximum amount of combat capability out 
of each taxpayer dollar that this Congress and this Nation 
entrusts to us. We take it seriously and we will continue to do 
so.
    Thank you again for your engagement and support.
    [The joint prepared statement of Ms. Conaton and Dr. Morin 
follows:]

  Joint Prepared Statement by Hon. Erin C. Conaton and Hon. Jamie M. 
                                 Morin

    Madame Chairman and Senator Ayotte, thank you for the opportunity 
to join our colleagues from across the Department of Defense to discuss 
your Air Force's efforts towards achieving audit readiness. Since the 
Air Force leadership last testified to this subcommittee on audit 
readiness last July, the Air Force has continued to make progress 
towards our audit goals and remains committed to achieving Secretary 
Panetta's goal for audit readiness on the General Fund Statement of 
Budgetary Resources in 2014 as well as to meeting the legislative 
requirements for a clean audit by 2017. These goals are challenging for 
an organization as large and diverse as the Air Force and so we 
continue to assess that there is moderate risk that we will miss the 
deadline due primarily to system challenges. However, the strong 
engagement of Air Force leadership as well as the additional human and 
financial resources dedicated to the effort in recent years will help 
achieve a clean audit, and we are making real progress.
    Audit readiness is an important goal. Our efforts are part of the 
broader work underway in the Department to address the national fiscal 
challenges that pose a serious threat to our national security. They 
are a key component of our ongoing work to give the American taxpayer 
confidence that we are getting the maximum value out of each dollar 
entrusted to the Air Force.
    Secretary Panetta's directive accelerating the audit readiness date 
to 2014 has been both a blessing and a challenge. The blessing is that 
it has raised the visibility of audit readiness to the point where it 
has been a regular agenda item for our 4-star leadership and created an 
environment where success is achievable within the tenure of many of 
these current leaders. To implement Secretary Panetta's directive, the 
Air Force developed a detailed audit acceleration plan for each 
assessable unit. These plans include specific milestones and 
deliverables and are reviewed on a regular cycle in sessions held 
weekly by the Deputy Chief Management Officer, financial leaders, and 
the senior leadership responsible for the particular assessable unit. 
Our assertion teams also include members of the Office of the Secretary 
of Defense (OSD) (Comptroller) staff in order to provide us with 
valuable, real-time feedback on our effort and to minimize the need for 
additional testing or rework.
    The core challenge for the Air Force is that the accelerated 
deadline will require us to achieve and sustain audit readiness while 
multiple critical systems are still under development or being 
deployed. Our previous strategy had these systems as a pacing item. We 
will not have a final judgment on whether our legacy financial systems 
can be improved sufficiently to support an overall Air Force audit 
until the auditors can examine those systems in the field. Our emerging 
confidence in our ability to achieve this challenging deadline is 
partially due to the increased engagement of commanders at every level 
in the effort, along with demonstrated progress over the last 2 years 
and strong support in the Department of Defense (DOD) resource 
allocation process for targeted investments in improvements to the 
three critical components for an auditable enterprise: people, 
processes, and system.

                            CURRENT PROGRESS

    Since the subcommittee's last hearing, the Air Force has made 
substantial progress on key Financial Improvement and Audit Readiness 
plan deliverables. Last August, we received a clean opinion from KPMG 
LLP on our Budget Authority assertion recording the receipt of funds 
down to our Major Commands. In the process of preparing the assertion, 
Air Force financial managers identified and implemented several 
corrective actions, most notably a standard document numbering systems 
for loading budget authority into our financial execution system, 
allowing us to assert audit readiness for the entire process.
    Another key accomplishment occurred last October when we received a 
clean opinion from PriceWaterhouseCoopers (PWC) on our Fund Balance 
with Treasury Reconciliation process. Our reconciliation with the 
Treasury Department for our ``checkbook'' consists of over one million 
transactions and is conducted on a monthly basis. The Air Force and the 
Defense Finance and Accounting Service (DFAS) are sustaining this 
process, reconciling 99.85 percent of our transactions at the detail 
level, exceeding the Office of Management and Budget standard.
    In January, the Department of Defense (DOD) Inspector General (IG) 
began an examination of our existence and completeness assertion for 
our military equipment (e.g., aircraft, ICBMs, and satellites), as well 
as for cruise missiles and aerial targets. We anticipate receiving 
their opinion by the end of May. These assets have a combined net book 
value of approximately $90 billion. Although cruise missiles and aerial 
targets/drones are separately reported as Operating Materials and 
Supplies rather than military equipment, we saw an opportunity to 
accelerate our overall progress and save resources by asking DOD IG to 
include these items in their examination. We will continue to look for 
additional opportunities to accelerate progress on future assertions in 
a cost effective manner.
    We also recently submitted assertions of audit readiness for the 
existence and completeness of our uninstalled spare engines and missile 
motors. These have a combined net book value of approximately $11 
billion and include over 6,400 individual end items managed at over 160 
different sites. Properly reporting these items in our financial 
statements is challenging. Items are tracked in different systems and 
classified differently depending on their installation status. It is 
common for an item to transition from one system to another and 
alternatively be reported differently in successive statements. Getting 
sufficient confidence about these areas for Air Force management to 
assert our readiness for audit required more time than we originally 
projected and demanded changes in training of our people, in our 
business processes, and our systems, but we now believe the required 
corrective actions are properly implemented or well underway.

                          INVESTING IN PEOPLE

    We are encouraged with our interim success in meeting the 
accelerated deadline, but we still have a very aggressive schedule 
ahead of us. Our most immediate challenge is on the people side: 
finding, hiring, and deploying government personnel and contractors 
with the needed knowledge and experience in accounting, auditing and 
financial reporting for the Federal Government. The compressed schedule 
also reduces the time we have to document processes, conduct testing, 
implement corrective actions, and verify those corrective actions are 
operating as intended. Additionally, many of our major milestones such 
as assertions on military pay, civilian pay, and contracting have been 
moved up by 2 or more years, making the need for experienced 
individuals even more urgent. Finally, compounding this challenge is 
the fact that the other Services and Defense Agencies will likely be 
seeking out these same individuals. We are addressing this challenge by 
reaching out to the accounting industry and soliciting an experienced 
but cost effective partner to support our core team of government 
financial managers and functional experts.
    To broaden the audit readiness effort across the enterprise, and 
building on an effort the Air Force pioneered last year, this year we 
required all Air Force civilian senior executives to include an audit 
readiness goal in their annual performance plans. While the weighting 
and level of detail in these goals vary based on individuals' duties, 
each plan is reviewed by the Deputy Assistant Secretary for Financial 
Operations to confirm the goals are appropriate and contribute to audit 
readiness in a meaningful way. Since pay and performance evaluations 
are linked directly to accomplishment of these plans, we have high 
expectations. For example, many of our logisticians have goals 
supporting our existence and completeness assertions, while acquisition 
executives have goals requiring them to ensure data in our contracting 
and accounting systems is properly reconciled.
    Since achievement of audit readiness will require further 
professionalization of the financial management workforce, the Air 
Force strongly supports the Defense Department's efforts on a financial 
management workforce certification program. This program will 
standardize educational and experience requirements for financial 
management positions. Even ahead of this effort, the Air Force's 
financial management workforce is a well-educated one. Over 60 percent 
of Air Force financial managers hold a degree of some sort. 
Additionally, our primary audit readiness workforce of almost 80 
includes 12 CPAs, 15 Certified Defense Financial Managers, and 8 
Certified Government Financial Managers.

           STRENGTHENING AND STANDARDIZING BUSINESS PROCESSES

    In addition to mobilizing our people and investing in their skills, 
improvements in our business processes are key to meeting the 
accelerated deadline of 2014. While some audit challenges require 
systems enhancements, others can be overcome with enhanced policies. 
For example, our two most recent assertions for existence and 
completeness of critical assets relied primarily upon policy changes 
clarifying the need for periodic inventories and delineating 
responsibility for managing assets as they transition among Air Force 
and contractor facilities.
    To achieve compliance with improved and standardized processes, we 
are aggressively communicating with airmen across the Air Force from 
our major command commanders down to the lowest level about the meaning 
of audit readiness and the actions they can take to assist in achieving 
audit readiness. We recently provided our wing commanders with a 
checklist to help them understand the steps they can take to ensure 
their financial house is in order.
    We continue to collaborate with our sister services to adopt best 
practices as we work towards audit readiness. For example, we leveraged 
the Navy's audit of supporting documentation and controls as a way to 
expose airmen to our audit activities and ensure process compliance at 
base level. Since February, the Air Force Audit Agency has begun 
examinations of selected financial transactions at wing level with 
seven wings participating. This effort helps to identify good and bad 
practices as well as process improvements that will be required when 
financial auditors begin their engagements. It also helps educate our 
wing commanders on audit readiness.
    The Air Force has sought validation of our progress by independent 
accounting organizations including the Government Accountability Office 
(GAO), the DOD IG, and public accounting firms. They provide valuable 
insight into the adequacy of the existing systems, recommend 
enhancements to support audit readiness and provide objective 
recommendations on the assertion process. For example, last summer GAO 
identified weaknesses in the type of testing performed to support the 
aircraft in our Military Equipment assertion. Specifically, they raised 
a concern that the sampling was limited to a few bases along the east 
coast--what auditors call judgmental sampling.
    For our recent assertions on spare engines and missile motors, we 
applied more rigorous statistical analysis allowing us to quantify 
potential errors across the population of items. In the case of our 
missile motors, we found that business practices, like timely updating 
of inventory systems, were very good at the locations where the vast 
majority of our motors were stored, but were less consistent at places 
that might have just one or two motors for training purposes. 
Statistical analysis has not only enhanced the credibility of our 
results but in the case of our review of the Space-Based Infrared 
Satellite Network program allowed us to test 148 randomly selected 
transactions in order to evaluate the accuracy of a total population of 
over 12,000 transactions.
    business transformation and enterprise resource planning systems
    Air Force business transformation is anchored in architecture and 
associated business process re-engineering. The continued development 
of the business enterprise architecture allows the Air Force to 
identify gaps and redundancies that will focus critical resources in 
the proper areas. Consistent with this focus, in the fiscal year 2013 
budget submission the Air Force established an initiative to target 
$1.1 billion in savings by reviewing Air Force information technology 
applications to identify and eliminate duplicate/redundant business and 
operational system capabilities. In addition, we are minimizing 
configuration of commercial off-the-shelf software to handle unique 
requirements and interfaces, thus reducing life cycle costs. Consistent 
with recent statute, the Air Force is adjusting its current business 
system certification review process. The revision will expand business 
system certification reviews from an average of 40 systems per year 
over the past 5 years to more than 200 systems that will need to be 
certified for fiscal year 2013. Finally, the Air Force is using 
architecture and business process re-engineering to evaluate and 
document the control processes required to support audit readiness, 
providing the necessary glue between user actions and controls 
contained within financial systems.
    Enterprise Resource Planning Systems (ERPs) are a key enabler to 
achieving full audit readiness by 2017 in a cost effective manner, but 
they are not the only step on the path to audit readiness. The 
implementation of ERPs supports achieving Air Force-wide standard 
practices and instills process controls necessary to improve financial 
management discipline. Where ERP development schedules will not support 
the audit readiness timelines, the Air Force will use a combination of 
modified legacy systems and supporting business process controls. 
Specific process and information system gaps (whether satisfied by ERPs 
or legacy system remediation) will be guided by Air Force Business 
Enterprise Architectures.
    The Air Force's three key ERPs for audit readiness are: Defense 
Enterprise Accounting and Management System (DEAMS), Expeditionary 
Combat Support System (ECSS), and Air Force Integrated Personnel and 
Pay System (Air Force-IPPS). DEAMS and ECSS are programs that have been 
underway for several years, and Air Force-IPPS is the Air Force program 
that will satisfy Air Force Total Force military personnel management.
    The Defense Enterprise Accounting and Management System is jointly 
sponsored by the Air Force, U.S. Transportation Command (TRANSCOM), and 
the Defense Finance and Accounting Service. The program will provide 
accurate, reliable, and timely financial information using standardized 
business rules and processes that comply with existing laws, 
regulations, and policies. When fully operational, DEAMS is expected to 
maintain control and accountability of about $160 billion in Air Force 
general funds and the Transportation Working Capital Fund. DEAMS will 
eventually replace or subsume nine legacy systems as it becomes fully 
operational and will provide the Air Force with financial management 
capabilities, including collections, commitments and obligations, cost 
accounting, general ledger, funds control, receipt and acceptance, 
accounts payable and disbursement, billing, and financial reporting for 
the general fund.
    The Defense Enterprise Accounting and Management System has been 
used at Scott Air Force Base and DFAS Limestone since 2010, and has 
been successfully used to process over $11.5 billion in transactions 
during fiscal years 2010 and 2011. Moving forward, our current program 
plan calls for completion of maturation of the current operational 
baseline by April 2012, followed by an operational assessment and then 
deployment of that capability to five additional Air Force bases by 
June 2013. We expect to complete development and deployment of DEAMS 
across TRANSCOM by the end of fiscal year 2014 and across the 
operational Air Force, Air Force Materiel Command (AFMC) and Air Force 
Space Command by the end of fiscal year 2016. DEAMS will not only be 
critical to sustaining audit readiness, but also have real cost 
benefit. The Air Force expects that DEAMS will support a more than $300 
million annual savings once it is fully deployed by providing real-time 
visibility into costs and allowing timely reallocation of dollars while 
reducing unliquidated obligations and accounts receivable. The program 
successfully achieved a Milestone B decision in January 2012, and the 
program is now aligned with the streamlined acquisition policies for 
Business/IT system put forward by the DOD.
    The Expeditionary Combat Support System is intended to provide the 
Air Force with a single, integrated logistics system, including 
transportation, supply, maintenance and repair, engineering and 
acquisition, for both the working capital and general funds. It will 
streamline the supply chain management process in the Air Force. 
Unfortunately, program performance on ECSS has continued to be poor. As 
a result, the Air Force raised concerns to the DOD Milestone Decision 
Authority and the Department is now engaged in strategic reassessment 
of the overall program. The reassessment will maintain focus on 
addressing both audit readiness and achievement of genuine logistics 
return on investment. A joint OSD-Air Force team recommended 
restructuring ECSS to focus on four critical logistics capabilities. 
The Air Force is currently drafting a Critical Change Report based on 
these recommendations to formally notify Congress of the restructure 
plan and expects delivery of that report by May 2012.
    The Air Force recognizes the major challenges involved in ERP 
efforts. In working with OSD and GAO, the Air Force has taken 
appropriate action to address concerns identified through internal and 
external reviews of both programs. In the case of DEAMS, we focused on 
end of year activities and user stability issues, measuring our 
progress against those efforts weekly. Our efforts resulted in 
achieving Milestone B authority in January 2012. We are actively 
working network latency issues and the program is on track to deliver a 
much needed capability. ECSS has not fared as well; the Air Force is 
restructuring the program in accordance with the OSD-led assessment and 
entered the Critical Change Report process February 2012 with an 
estimated delivery of the report 60 days later.
    The Air Force Integrated Personnel and Pay System (Air Force-IPPS) 
will integrate 105 Personnel and Pay processes, including the core 
personnel actions that drive payroll management, for the more than 
500,000 Active Duty, Reserve, and Guard members of the Air Force. Air 
Force-IPPS will directly enable synchronization of data, improve 
personnel asset visibility for combatant commanders, reduce payroll 
errors, and streamline clean audit compliance. It was initiated in 
fiscal year 2009 and is planned for full operational capability by 
October 2016. Air Force-IPPS is expected to replace 22 legacy 
information technology platforms reducing current annual system total 
cost of ownership from $110 million to $65 million. Air Force-IPPS will 
replace the Air Force's pay operations currently conducted on the 
Defense Joint Military Pay System and will reduce today's 85,000 annual 
pay cases requiring manual processing by 75 percent and improve payroll 
timeliness from 93 percent to 97 percent. The Air Force is currently 
planning to release the Request for Proposal May 2012.
    We are building on internal Air Force and independent audits by 
advancing our major IT efforts to deliver capabilities in more 
manageable steps. This is done within our broader efforts to adjust our 
IT modernization and sustainment spending reviews and certifications. 
As we review and certify our IT systems to comply with section 2222 of 
title 10, audit readiness is a key evaluation factor for both 
modernization and sustainment of financial and financial feeder 
systems.
    We recognize the challenges in front of us. We have put into action 
people, process, and system changes to achieve audit readiness and 
improve management discipline in our financial business processes. We 
have developed and achieved key interim milestones and continue to 
develop business systems acquisition and engineering strategies in 
accordance with relevant laws. While we certainly see moderate risk and 
many challenges ahead, we are strongly committed to achieving the 2014 
Statement of Budgetary Resources audit goal and the ultimate goal of 
full auditability by 2017. We appreciate this subcommittee's interest 
and advice in our audit readiness efforts and look forward to 
continuing to work with you in achieving auditable financial statements 
for the U.S. Air Force.

    Senator McCaskill. Mr. Khan?

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

    Mr. Khan. Good afternoon, Chairman McCaskill. I am here 
today to discuss the status of financial management 
improvements and business transformation in DOD.
    At the outset, I would like to thank the subcommittee for 
holding this hearing and acknowledge the importance of focusing 
attention on actions needed to meet difficult challenges.
    Effective financial management and reporting are important 
for DOD decisionmakers and their accountability for their 
stewardship of Federal funds. Financial management is integral 
to other DOD business operations such as acquisition, 
logistics, and supply chain management, that provide crucial 
support to the DOD mission and it depends on business 
information systems to store, compile, process, and report 
reliable and auditable data.
    In my testimony today, I will provide GAO's perspectives on 
the financial management weaknesses that impede DOD's progress 
towards auditability and efforts to resolve them and the 
difficulties DOD is experiencing in implementing business 
information systems to support its financial improvement. My 
testimony is based on our work at DOD.
    DOD's FIAR plan, the plan's semiannual updates, and the 
FIAR guidance, establish a strategy, track progress, and 
provide instructions for DOD military and other components' 
achievement of auditability. Interim milestones mark 
components' progress towards the ability to produce a full set 
of auditable financial statements. Congress has mandated DOD 
audit readiness by fiscal year 2017, and Defense Secretary 
Panetta has now accelerated to fiscal year 2014 a major 
milestone towards that objective, an auditable SBR.
    DOD leaders have shown commitment to improving DOD's 
financial management, and its components are taking action in 
response to our recommendations. Yet, much remains to be done. 
We have found problems that continue to impede progress, 
including deficiencies in processes and controls, missed 
interim milestones, and premature assertions of audit 
readiness.
    In 2011, we reported on the difficulties of DOD components 
in producing an auditable SBR. For example, two assessable 
units we selected for review, the Navy and the Air Force, did 
not fully follow the FIAR guidance and the work did not support 
their conclusions of audit readiness. In our review of the 
Army's military payroll processes, staff was not able to locate 
documentation needed to support payments to Active Duty 
military personnel. We found deficiencies in the Navy's attempt 
to reconcile its fund balance with those in the Treasury 
records, a key step in preparing the SBR. The Marine Corps has 
not been able to receive an opinion on its SBR due to a lack of 
supporting documentation. The Marine Corps has made progress in 
remediating many of the weaknesses identified in the fiscal 
year 2010 audit, and audit efforts continue on the SBR for 
fiscal year 2012.
    Regarding business transformation, DOD has said that it 
considers a successful implementation of its ERPs critical to 
transforming its business operations, addressing longstanding 
weaknesses, and ensuring that DOD meets its auditability goals. 
We have reported that several ERPs have cost overruns and time 
slippages. In 2011, we reported that assessment of Army and Air 
Force accounting systems found operational problems, gaps in 
capabilities that required manual work-arounds, and training 
that was not focused on system operations. As a result, 
financial services staff had difficulty using these systems to 
perform daily operations. Our own assessment of these systems 
had similar results.
    GAO also reported in 2011 on weaknesses in DOD enterprise 
architecture and business processes that affect DOD's 
auditability. While DOD and the military departments largely 
follow DOD's business process reengineering guidance to assess 
business system investments, they have not yet performed the 
key step of validating assessment results. DOD has taken 
corrective actions in response to our recommendations, and we 
have work underway to evaluate its continuing efforts.
    In closing, we are encouraged by the sustained commitment 
of the DOD leadership. Duty components now have the 
responsibility to implement the FIAR plan and respond to our 
recommendations and to implement our recommendations and those 
of the IG. That must be followed through with actions in full 
accordance with the FIAR guidance, and business systems 
following the best practice and sustained progress over the 
long-term will be needed for full auditability. To support the 
subcommittee's oversight, GAO will continue monitoring and 
reporting on DOD's financial management improvement efforts.
    Madam Chairman, this concludes my prepared statement. I 
will be pleased to answer any questions that you or others may 
have. Thank you.
    [The prepared statement of Mr. Khan follows:]

                   Prepared Statement by Asif A. Khan

    Chairman McCaskill, Ranking Member Ayotte, 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 and related business operations and to achieve audit 
readiness. DOD has been required to prepare department-wide financial 
statements and have them audited since 1997 but through 2011 has not 
been able to meet this requirement.\1\ On October 13, 2011, the 
Secretary of Defense directed the department to achieve audit readiness 
for the Statement of Budgetary Resources (SBR) for General Fund \2\ 
activities by the end of fiscal year 2014 \3\ as an interim milestone 
toward meeting the mandate in the National Defense Authorization Act 
(NDAA) for Fiscal Year 2010 to achieve full audit readiness for DOD's 
complete set of financial statements by the end of 2017.\4\ Given the 
Federal Government's fiscal challenges, it is more important than ever 
that Congress, the administration, and Federal managers have reliable, 
useful, and timely financial and performance information, particularly 
for the government's largest department.
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    \1\ The Chief Financial Officers Act of 1990, Pub. L. No. 101.576, 
title III, Sec. 303, 104 Stat. 2838, 2849 (Nov. 15, 1990), initially 
required annual audited financial statements of certain DOD components 
and activities, but the Government Management Reform Act of 1994, Pub. 
L. No. 103-356, Sec. 405, 108 Stat. 3410, 3415 (Oct. 13, 1994), 
expanded the annual requirement to department-wide financial statements 
beginning with fiscal year 1996, which at the time had to be prepared 
no later than March 1, 1997. See 31 U.S.C. Sec. 3515.
    \2\ An agency's general fund accounts are those accounts in the 
U.S. Treasury holding all Federal money not allocated by law to any 
other fund account. GAO, High-Risk Series: An Update, GA0-11-278 
(Washington, DC: Feb. 16, 2011).
    \3\ DOD, Secretary of Defense Memorandum, ``Improving Financial 
Information and Achieving Audit Readiness,'' October 13, 2011.
    \4\ Pub. L. No. 111-84, Sec. 1003(a), (b), 123 Stat. 2190, 2439-40 
(Oct. 28, 2009).
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    Today, I will discuss DOD's progress toward: (1) achieving the 
goals of an auditable SBR by fiscal year 2014 and a complete set of 
auditable financial statements by fiscal year 2017, including the 
development of interim milestones for both audit readiness goals, (2) 
acquiring and implementing new enterprise resource programs and other 
critical financial management systems, (3) reengineering business 
processes and instituting needed controls, and (4) implementing a 
comprehensive business enterprise architecture and transition plan, and 
improved investment control processes. My statement today is primarily 
based on our prior work related to the department's efforts to achieve 
audit readiness, implement modernized business systems and a business 
enterprise architecture, and reengineer its business processes. In 
addition, we are providing information on DOD's updated plans for 
achieving auditability presented at a February 2012 briefing. 
Specifically, we are presenting a comparison of key milestones in the 
February 2012 DOD briefing \5\ that outlined its plans to accelerate 
the timeframe to achieve SBR auditability with DOD's May 2011 Financial 
Improvement and Audit Readiness (FIAR) plan. We also conducted 
interviews with DOD officials about the February 2012 briefing. We did 
not independently verify information contained in the February 2012 
briefing with DOD or any of its components or agencies. Our work on 
which this testimony is based was conducted in accordance with 
generally accepted government auditing standards. 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. Additional information on our scope and 
methodology is available in previously issued products.
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    \5\ Office of the Secretary of Defense (Comptroller), Accelerated 
FIAR Plan, presented to the staff of the House Committee on Oversight 
and Government Reform, February 14, 2012.
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                               BACKGROUND

    According to the fiscal year 2013 President's budget, DOD accounts 
for about 57 percent of the discretionary Federal budget authority. 
(See figure 1.)
      
    
    
      
    For fiscal year 2011, of the 24 agencies covered by the Chief 
Financial Officers Act of 1990 (CFO Act), DOD was the only agency to 
receive a disclaimer of opinion on all of its financial statements.\6\ 
The DOD Inspector General (IG) reported that:
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    \6\ In a disclaimer of opinion, the auditor does not express an 
opinion on the financial statements. A disclaimer of opinion is 
appropriate when the audit scope is not sufficient to enable the 
auditor to express an opinion, or when there are material uncertainties 
involving a scope limitation--a situation where the auditor is unable 
to obtain sufficient appropriate audit evidence.

         the department's fiscal year 2011 financial statements 
        would not substantially conform to generally accepted 
        accounting principles;
         DOD's financial management and feeder systems were 
        unable to adequately support material amounts on the financial 
        statements; and
         longstanding material internal control weaknesses 
        identified in prior audits continued to exist, including 
        material weaknesses in areas such as financial management 
        systems, Fund Balance with Treasury, Accounts Receivable, and 
        General Property, Plant, and Equipment.

    In 2005, the DOD Comptroller first prepared the Financial 
Improvement and Audit Readiness (FIAR) Plan for improving the 
department's business processes. The FIAR Plan is DOD's strategic plan 
and management tool for guiding, monitoring, and reporting on the 
department's financial manage111ent improvement efforts. As such, the 
plan communicates progress in addressing the department's financial 
management weaknesses arid achieving financial statement auditability. 
In accordance with the NDAA for Fiscal Year 2010, DOD provides reports 
to relevant congressional committees on the status of DOD's 
implementation of the FIAR Plan twice a year--no later than May 15 and 
November 15.\7\
---------------------------------------------------------------------------
    \7\ Pub. L. No. 111-84, sec. 1003(b).
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    The NDAA for Fiscal Year 2010 also mandated that the FIAR Plan 
include the specific actions to be taken to correct the financial 
management deficiencies that impair the department's ability to prepare 
timely, reliable, and complete financial management information.\8\ In 
May 2010, the DOD Comptroller issued the FIAR Guidance to implement the 
FIAR Plan. The FIAR Guidance provides a standardized methodology for 
DOD components to follow for achieving financial management 
improvements and auditability. The FIAR Guidance requires DOD 
components to identify and prioritize their business processes into 
assessable units,\9\ and then prepare a Financial Improvement Plan 
(FIP) for each assessable unit in accordance with the FIAR Guidance. 
Many of the procedures required by the FIAR Guidance are consistent 
with selected procedures for conducting a financial audit, such as 
testing internal controls and information system controls. In September 
2010, we reported that the department needed to focus on implementing 
its FIAR Plan and that the key to successful implementation would be 
the efforts of the DOD military components and the quality of their 
individual FIPs.\10\
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    \8\ Pub. L. No. 111-84, sec. 1003(a)(2).
    \9\ An assessable unit can be any part of the financial statements, 
such as a line item or a class of assets (e.g., civilian pay or 
military equipment). a class of transactions. or it can be a process or 
a system that helps produce the financial statements.
    \10\ 10GAO, Department of Defense: Financial Management Improvement 
and Audit Readiness Efforts Continue to Evolve. GA0-10-1059T 
(Washington, DC: Sept. 29, 2010).
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    A FIP serves as a framework of steps and documentation requirements 
for both planning and implementing the FiAR Guidance. For example, 
civilian and military pay are two assessable units for which DOD 
components such as the Army, Navy, and Air Force are expected to 
develop and implement FIPs in accordance with the FIAR Guidance. The 
steps required for these plans include assessing processes, controls, 
and systems; identifying and correcting weaknesses; assessing, 
validating, and sustaining corrective actions; and ultimately achieving 
audit readiness. After a component's management determines that an 
assessable unit is ready for audit, both the DOD Comptroller and the 
DOD Inspector General (IG) review the related FIP documentation to 
determine if they agree with management's conclusion of audit 
readiness.
    DOD intends to progress toward achieving financial statement 
auditability by executing the FIAR Guidance methodology for groups of 
assessable units across four waves. Under the FIAR Plan, successful 
execution of the FIAR Guidance methodology for groups of assessable 
units across these waves is intended to result in the audit readiness 
of various components' financial statements through fiscal year 2017. 
The first two waves of the FIAR Plan focus on achieving the DOD 
Comptroller's interim budgetary priorities, which DOD believes should 
lead to an auditable SBR. The third wave focuses on accountability for 
DOD's mission-critical assets, and the fourth wave focuses on the 
remaining assessable units constituting DOD's complete set of financial 
statements.
    As mentioned earlier, the Secretary of Defense directed the 
department to achieve audit readiness for the SBR for General Fund 
activities by the end of fiscal year 2014. The NDAA for Fiscal Year 
2012 reinforced this directive by requiring that the next FIAR Plan 
Status Report--to be issued in May 2012--include a plan, with interim 
objectives and milestones for each military department and the defense 
agencies, to support the goal of SBR audit readiness by 2014.\11\ The 
NDAA for Fiscal Year 2012 also requires the plan to include process and 
control improvements and business systems modernization efforts 
necessary for the department to consistently prepare timely, reliable, 
and complete financial management information.
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    \11\ Pub. L. No. 112-81, Sec. 1003, 125 Stat. 1298, 1555 (Dec. 31, 
2011).
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    The SBR is the only financial statement predominantly derived from 
an entity's budgetary accounts in accordance with budgetary accounting 
rules, which are incorporated into generally accepted accounting 
principles (GAAP) for the Federal Government. The SBR is designed to 
provide information on authorized budgeted spending authority reported 
in the budget of the U.S. Government (President's budget), including 
budgetary resources, availability of budgetary resources, and how 
obligated resources have been used.

Overview of DOD's Accounting and Business Operations
    In November 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.\12\ 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 retained and the number of personnel they transferred 
to DFAS. As DOD's accounting agency, DFAS is critical to DOD 
auditability as it records 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 most of DOD's expenditures and are the source of most of the 
financial information that DFAS uses to make payroll and contractor 
payments. The military services also have responsibility for most of 
DOD's assets and the related information needed by DFAS to prepare 
annual financial statements required under the CFO Act.
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    \12\ DOD Directive 5118.5, ``Defense Finance and Accounting 
Service'' (Nov. 26, 1990).
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    To support its operations, DOD performs an assortment of 
interrelated and interdependent business functions, such as logistics, 
procurement, health care, and financial management. As we have 
previously reported, the DOD systems environment that supports these 
business functions has been overly complex, decentralized, and error 
prone, characterized by: (1) little standardization across the 
department; (2) multiple systems performing the same tasks and storing 
the same data; and (3) the need for data to be entered manually into 
multiple systems. For fiscal year 2012, the department requested about 
$17.3 billion to operate, maintain, and modernize its business systems. 
DOD has reported that it relies on 2,258 business systems, including 
335 financial management systems, 709 human resource management 
systems, 645 logistics systems, 243 real property and installation 
systems, and 281 weapon acquisition management systems.

Importance of Business Enterprise Architecture and Reengineering 
        Business Processes
    For decades, DOD has been challenged in modernizing its timeworn 
business systems. Since 1995, GAO has designated DOD's business systems 
modernization program as high risk. In June 2011, 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.\13\ As our research on public and private sector 
organizations has shown, two essential ingredients to a successful 
systems modernization program are an effective institutional approach 
to managing information technology (IT) investments and a well defined 
enterprise architecture.\14\ For its business systems modernization, 
DOD is developing and using a federated business enterprise 
architecture, which is a coherent family of parent and subsidiary 
architectures, to help modernize its nonintegrated and duplicative 
business operations and the systems that support them.
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    \13\ GAO, Department of Defense: Further Actions Needed to 
Institutionalize Key Business System Modernization Management Controls, 
GA0-11-684 (Washington, DC: June 29, 2011).
    \14\ GA0-11-684.
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    Section 1072 of the NDAA for Fiscal Year 2010 requires that 
programs submitted for approval under DOD's business system investment 
approach be assessed to determine whether or not appropriate business-
process reengineering efforts have been undertaken. The act further 
states that these efforts should ensure that the business process to be 
supported by the defense business system modernization will be as 
streamlined and efficient as practicable and the need to tailor 
commercial off-the-shelf systems to meet unique requirements or 
incorporate unique interfaces has been eliminated or reduced to the 
maximum extent practicable.\15\
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    \15\ Pub. L. No.111-84, Sec. 1072 (amending 10 U.S.C. 2222).
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                CHALLENGES IN ACHIEVING AUDIT READINESS

    GAO's recent work highlights the types of challenges facing DOD as 
it strives to attain audit readiness and reengineer its business 
processes and systems. DOD leadership has committed DOD to the goal of 
auditable financial statement and has developed FIAR Guidance to 
provide specific instructions for DOD components to follow for 
achieving auditability incrementally. The department and its components 
also established interim milestones for achieving audit readiness for 
various parts (or assessable units) of the financial statements. These 
efforts are an important step forward. The urgency in addressing these 
challenges has been increased by the recent efforts to accelerate audit 
readiness time frames, in particular attaining audit readiness for the 
department's SBR by fiscal year 2014. Our September 2011 report 
highlights the types of challenges DOD may continue to face as it 
strives to attain audit readiness, including instances in which DOD 
components prematurely asserted audit readiness and missed interim 
milestones.\16\ Also, DOD's efforts over the past couple of years to 
achieve audit readiness for some significant SBR assessable units have 
not been successful. However, these experiences can serve to provide 
lessons for DOD and its components to consider in addressing the 
department's auditability challenges.
---------------------------------------------------------------------------
    \16\ GAO, DOD Financial Management: Improvement Needed in DOD 
Components' Implementation of Audit Readiness Effort, GA0-11-851 
(Washington, DC: September 13, 2011).
---------------------------------------------------------------------------
DOD Component Compliance with FIAR Guidance Is Crucial to Ensuring 
        Audit Readiness
    DOD's ability to achieve department-wide audit readiness is highly 
dependent on its military components' ability to effectively develop 
and implement FIPs in compliance with DOD's FIAR Guidance. However, in 
our September 2011 report, we identified several instances in which the 
components did not prepare FIPs that fully complied with the FIAR 
Guidance, resulting in premature assertions of audit readiness.
    Specifically, as we reported in September 2011, the FIAR Guidance 
provides a reasonable methodology for the DOD components to follow in 
developing and implementing their FIPs.\17\ It details the roles and 
responsibilities of the DOD components, and prescribes a standard, 
systematic approach that components should follow to assess processes, 
controls, and systems, and identify and correct weaknesses in order to 
achieve auditability. When DOD components determine that sufficient 
financial improvement effort have been completed for an assessable unit 
in accordance with the FIAR Guidance and that the assessable unit is 
ready for audit, the FIP documentation is used to support the 
conclusion of audit readiness. Thus, complying with the FIAR Guidance 
can provide a consistent, systematic means for DOD components to 
achieve and verify audit readiness incrementally.
---------------------------------------------------------------------------
    \17\ GA0-11-851.
---------------------------------------------------------------------------
    We found that when DOD components did not prepare FIPs that fully 
complied with the FIAR Guidance, they made assertions of audit 
readiness prematurely and did not achieve interim milestones.\18\ While 
the components initially appeared to meet some milestones by asserting 
audit readiness in a timely manner, reviews of supporting documentation 
for the FIPs of two assessable units and full audits of the Marine 
Corps' SBR revealed that the milestones had not been met because the 
assessable units were not actually ready for audit. For example, the 
Navy asserted audit readiness for its civilian pay in March 2010 and 
the Air Force asserted audit readiness for its military equipment in 
December 2010. However, we reported that neither component had 
adequately developed and implemented their FIPs for these assessable 
units in accordance with the FIAR Guidance and were therefore not ready 
for audit. The Marine Corps first asserted financial audit readiness 
for its General Fund SBR on September 15, 2008. The DOD IG reviewed the 
Marine Corps' assertion package and on April 10, 2009, reported that 
the assertion of audit readiness was not accurate, and that its 
documentation supporting the assertion was not complete. GAO has made 
prior recommendations to address these issues. DOD has generally agreed 
with these recommendations and is taking corrective actions in 
response.
---------------------------------------------------------------------------
    \18\ GA0-11-851.
---------------------------------------------------------------------------
Reported DOD Progress toward Audit Readiness for the Statement of 
        Budgetary Resources
    The Secretary of Defense's direction to achieve audit readiness for 
the SBR by the end of 2014 necessitated that DOD's components revise 
some of their plans and put more focus on short-term efforts to develop 
accurate data for the SBR in order to achieve this new accelerated 
goal.\19\ In August 2011, DOD's military components achieved one 
milestone toward SBR auditability when they all received validation by 
an independent public accounting firm that their Appropriations Receipt 
and Distribution--a section of the SBR--was ready for audit. In 
addition, the November 2011 FIAR Plan Status Report indicated that the 
Air Force, achieved audit readiness for its Fund Balance with Treasury 
(FBWT).
---------------------------------------------------------------------------
    \19\ In addition to requiring audit readiness of the SBR, the 
Secretary's memo also directed the DOD Comptroller to increase emphasis 
on accountability for assets; execute a full review of the department's 
financial controls over the next 2 years and establish interim goals 
for assessing progress; ensure mandatory training for audit and other 
key financial efforts, and establish a pilot certification program for 
financial managers; appropriately resource efforts to meet these goals; 
and meet the legal requirement for full financial statement audit 
readiness by 2017.
---------------------------------------------------------------------------
    Further, in a February 2012 briefing on its accelerated plans, DOD 
indicated that 7 of 24 material general fund Defense Agencies and Other 
Defense Organizations are either already sustaining SBR audits or are 
ready to have their SBRs audited.\20\ These accomplishments represent 
important positive steps. Nevertheless, achieving audit readiness for 
the military components' full SBRs is likely to poses significant 
challenges based on the longstanding financial management weaknesses 
and audit issues affecting key SBR assessable units. Our recent reports 
highlight some of the difficulties that the components have experienced 
recently related to achieving an auditable SBR, including:
---------------------------------------------------------------------------
    \20\ According to the February 2012 accelerated plan, the seven 
defense agencies and Other Defense Organizations that are already 
sustaining SBR audits are the Defense Finance and Accounting 
Service(DFAS), Defense Contract Audit Agency (DCAA), TRICARE Management 
Activity-Contract Resource Management, Defense Commissary Agency, 
Medicare Eligible Retiree Healthcare Fund, Military Retirement Fund, 
and the DOD Office of the Inspector General.

         the Army's inability to locate and provide supporting 
        documentation for its military pay;\21\
---------------------------------------------------------------------------
    \21\ GAO, DOD Financial Management: The Army Faces Significant 
Challenges in Achieving Audit Readiness for Its Military Pay, GA0-12-
501T (Washington, DC: March 22, 2012).
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         the Navy's and Marine Corps' inability to reconcile 
        their Fund Balance with Treasury accounts; \22\ and
---------------------------------------------------------------------------
    \22\ GAO, DOD Financial Management: Ongoing Challenges with 
Reconciling Navy and Marine Corps Fund Balance with Treasury, GA0-12-
132 (Washington, DC: Dec. 20, 2011).
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         the Marine Corps' inability to provide sufficient 
        documentation to auditors of its SBR.\23\
---------------------------------------------------------------------------
    \23\ GAO, DOD Financial Management: Marine Corps Statement of 
Budgetary Resources Audit Results and Lessons Learned, GA0-11-830 
(Washington, DC: Sept. 15, 2011).

    To achieve SBR audit readiness by 2014, DOD and its components need 
accelerated, yet feasible, well-developed plans for identifying and 
correcting weaknesses in the myriad processes involved in producing the 
data needed for the SBR. While DOD has developed an accelerated FIAR 
Plan to provide an overall view of the department's approach for 
meeting the 2014 goal, most of the work must be carried out at the 
component level.
Army's Inability to Accurately Account for Military Pay
    The Army's active duty military payroll, reported at $46.1 billion 
for fiscal year 2010, made up about 20 percent of its reported net 
outlays for that year. As such, it is significant to both Army and DOD 
efforts to achieving auditability for the SBR. For years, we and others 
have reported continuing deficiencies in the Army's military payroll 
processes and controls.\24\ Moreover, other military components such as 
the Air Force and Navy share some of these same military payroll 
deficiencies.
---------------------------------------------------------------------------
    \24\ DOD Inspector General, Active Duty Military Personnel Accounts 
Were Generally Valid and Secure, but DOD May have Made Improper 
Payments, D-2011-093 (Arlington, VA: July 27, 2011); GAO, Military Pay: 
The Defense Finance and Accounting Service-Indianapolis Could Improve 
Control Activities over Its Processing of Active Duty Army Military 
Personnel Federal Payroll Taxes, GA0-09-557R (Washington, DC: June 18, 
2009); Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have 
Struggled to Resolve Military Debts, GA0-06-494 (Washington, DC: Apr. 
27, 2006); Military Pay: Army National Guard Personnel Mobilized to 
Active Duty Experienced Significant Pay Problems, GA0-04-89 
(Washington, DC: Nov. 13, 2003).
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    In March 2012, we reported that the Army could not readily identify 
a complete population of its payroll accounts for fiscal year 2010.\25\ 
DOD's FIAR Guidance states that identifying the population of 
transactions is a key task essential to achieving audit readiness. 
However, the Army and DFAS-Indianapolis (DFAS-IN), which is responsible 
for accounting, disbursing, and reporting for the Army's military 
personnel costs, did not have an effective, repeatable process for 
identifying the population of active-duty payroll records. For example, 
it took 3 months and repeated attempts before DFAS-IN could provide a 
population of servicemembers who received active duty Army military pay 
in fiscal year 2010. Further, because the Army does not have an 
integrated military personnel and payroll system, it was necessary to 
compare the payroll file to active Army personnel records. However, 
DOD's central repository for information on DOD-affiliated personnel 
did not have an effective process for comparing military pay account 
files with military personnel files to identify a valid population of 
military payroll transactions.
---------------------------------------------------------------------------
    \25\ GAO, DOD Financial Management: The Army Faces Significant 
Challenges in Achieving Audit Readiness for Its Military Pay, GA0-12-
406 (Washington, DC: Mar. 22, 2012).
---------------------------------------------------------------------------
    In addition, the Army and DFAS-IN were unable to provide 
documentation to support the validity and accuracy of a sample of 
fiscal year 2010 payroll transactions we selected for review. For 
example, DFAS-IN had difficulty retrieving and providing usable Leave 
and Earnings Statement files and the Army was unable to locate or 
provide supporting personnel documents for a statistical sample of 
fiscal year 2010 Army military pay accounts. At the end of September 
2011, 6 months after we had provided them with our sample of 250 items, 
the Army and DFAS-IN were able to provide complete documentation for 
only 2 of the sample items and provided only partial documentation for 
another 3 items; they were unable to provide any documentation for the 
remaining 245 sample items.
    At the time of our report, the Army had several military pay audit 
readiness efforts planned or under way. Timely and effective 
implementation of these efforts could help reduce the risk of DOD not 
achieving the SBR audit readiness goal of 2014. However, most of these 
actions are in the early planning stages. Moreover, these initiatives, 
while important, do not address: (1) establishing effective processes 
and systems for identifying a valid population of military payroll 
records; (2) ensuring Leave and Earnings Statement files and supporting 
personnel documents are readily available for verifying the accuracy of 
payroll records; (3) ensuring key personnel and other pay-related 
documents that support military payroll transactions are centrally 
located, retained in servicemember Official Military Personnel Files, 
or otherwise readily accessible; and (4) requiring the Army's Human 
Resources Command to periodically review and confirm that 
servicemembers' Official Military Personnel File records are consistent 
and complete to support annual financial audit requirements. GAO has 
made prior recommendations to address these issues. DOD has agreed with 
these recommendations and is taking corrective actions in response.
    Navy's and Marine Corps' Inability to Reconcile Fund Balance with 
        Treasury
    A successful audit of the SBR is dependent on the ability to 
reconcile an agency's Fund Balance with Treasury (FBWT) with the 
Treasury records. FBWT is an account that reflects an agency's 
available budget spending authority by tracking its collections and 
disbursements. Reconciling a FBWT account with Treasury records is a 
process similar in concept to reconciling a check book with a bank 
statement. In December 2011, we reported that neither the Navy nor the 
Marine Corps had implemented effective processes for reconciling their 
FBWT.\26\
---------------------------------------------------------------------------
    \26\ GA0-12-132.
---------------------------------------------------------------------------
    The Navy and the Marine Corps rely on the DFAS location in 
Cleveland (DFAS-CL) to perform their FBWT reconciliations. We found 
numerous deficiencies in DFAS processes that impair the Navy's and the 
Marine Corps's ability to effectively reconcile their FBWT with 
Treasury records, including the following:

         There are significant data reliability issues with the 
        Defense Cash Accountability System (DCAS), which records daily 
        collections and disbursements activity. The Navy and Marine 
        Corps rely on DCAS to reconcile their FBWT to Treasury records.
         DFAS-CL did not maintain adequate documentation for 
        the sample items we tested to enable an independent evaluation 
        of its efforts to research and resolve differences.
         DFAS-CL recorded unsupported entries (plugs) to force 
        the Navy and Marine Corps appropriation balances to agree with 
        those reported by Treasury instead of investigating and 
        resolving differences between these two services' appropriation 
        balances and those maintained by Treasury.

    Navy, Marine Corps, and DFAS-CL officials acknowledged that 
existing FBWT policies and procedures were inadequate. Navy and DFAS-CL 
officials stated that the base realignment and closure changes from 
2006 through 2008 resulted in loss of experienced DFAS-CL personnel and 
that remaining staff have not received the needed training. In response 
to our recommendations, the Navy is developing a plan of action and 
milestones intended to address the Navy's audit readiness weaknesses, 
including FBWT required reconciliations.
    Difficulty in Auditing the Marine Corps' Statement of Budgetary 
        Resources
    The Marine Corps received disclaimers of opinion from its auditors 
on its fiscal year 2010 and 2011 SBRs because it could not provide 
supporting documentation in a timely manner, and support for 
transactions was missing or incomplete. Further, the Marine Corps had 
not resolved significant accounting and information technology (IT) 
system weaknesses identified in the fiscal year 2010 SBR audit effort.
    The auditors also reported that the Marine Corps did not have 
adequate processes and controls, including systems controls, for 
accounting and reporting on the use of budgetary resources. Further, 
the Marine Corps could not provide evidence that reconciliations for 
key accounts (such as FBWT) and processes were being performed on a 
monthly basis. The auditors also identified ineffective controls in key 
IT systems used by the Marine Corps to process financial data. During 
fiscal year 2011, however, the Marine Corps was able to demonstrate 
progress toward auditability. For example, its auditors confirmed that 
as of October 2011, the Marine Corps had fully implemented 50 out of 
139 fiscal year 2010 audit recommendations.
    The results of the audit for fiscal year 2010 provided valuable 
lessons on preparing for a first-time financial statement audit. In our 
September 2011 report, we identified five fundamental lessons that are 
critical to success.\27\ Specifically, the Marine Corps' experience 
demonstrated that prior to asserting financial statement audit 
readiness, DOD components must: (1) confirm completeness of populations 
of transactions and address any abnormal transactions and balances; (2) 
test beginning balances; (3) perform key reconciliations; (4) provide 
timely and complete response to audit documentation requests; and (5) 
verify that key IT systems are compliant with the Federal Financial 
Management Improvement Act of 1996 \28\ and are auditable. GAO has made 
prior recommendations to address these issues. DOD has generally agreed 
with these recommendations and is taking corrective actions in 
response.
---------------------------------------------------------------------------
    \27\ GA0-11-830.
    \28\ CFO Act agencies' financial management systems are required by 
the Federal Financial Management Improvement Act of 1996 (FFMIA) to 
comply with Federal financial management systems requirements, 
applicable Federal accounting standards, and the U.S. Government 
Standard General Ledger at the transaction level, Pub. L. No. 104-208, 
div. A, title VIII, Sec. 803, 110 Stat. 3009, 3009-390 (Sept. 30, 
1996).
---------------------------------------------------------------------------
    These issues are addressed in GAO's Standards for Internal Control 
in the Federal Government \29\ and DOD's FIAR Guidance. During our 
audit, Navy, Army, and Air Force FIP officials stated that they were 
aware of the Marine Corps lessons and were planning to, or had, 
incorporated them to varying degrees into their audit readiness plans.
---------------------------------------------------------------------------
    \29\ GAO, Standards for Internal Control in the Federal Government 
(Supersedes AIMD-98-21.3.1), AIMD-00-21.3.1, (Washington, DC: November 
1999).
---------------------------------------------------------------------------
    Accelerated Plans for SBR Are in Progress
    In its November 2011 FIAR Plan, DOD provided an overall view of it 
accelerated FIAR Plan for achieving audit readiness of its SBR by the 
end of fiscal year 2014. In its February 2012 briefing, DOD recognized 
key factors that are needed to achieve auditability such as the 
consistent involvement of senior leadership as well as the buy-in of 
field commanders who ultimately must implement many of the changes 
needed. The plan also provided interim milestones for DOD components 
such as the Army, Navy, Air Force, Defense Logistics Agency, and other 
defense agencies. Acceleration substantially compresses the time 
allotted for achieving some of these milestones. For example, the May 
2011 FIAR Plan Status Report indicated that the Air Force had planned 
to validate its audit readiness for many SBR-related assessable units 
in fiscal year 2016 and that its full SBR would not be ready for audit 
until2017. However, the February 2012 briefing on the accelerated plans 
indicated that most of the Air Force's SBR assessable units will be 
audit-ready in fiscal years 2013 or 2014. These revised dates reflect 
the need to meet the expedited audit readiness goal of 2014. (See 
figure 2.)
      
    
    
      
    As discussed earlier, the key to audit readiness is for DOD 
components to effectively develop and implement FIPs for SBR assessable 
units, and to meet interim milestones as they work toward the 2014 
goal. According to Navy officials, the Navy plans to prepare a FIP for 
each of several assessable units that make up the SBR. For example, for 
its SBR, Navy officials told us they have identified assessable units 
for appropriations received, and for various types of expenditures for 
which funds are first obligated and then disbursed, such as military 
pay, civilian pay, contracts, and transportation of people. The Air 
Force will prepare FIPs for assessable units similar to those of the 
Navy. Army officials told us they are taking a different approach from 
the Navy. They said that instead of developing FIPs for discrete 
assessable units constituting the SBR, they are preparing only one FIP 
for one audit readiness date for the Army's entire SBR, an approach 
similar to that of the Marine Corps.

        EFFECTIVE IMPLEMENTATION OF BUSINESS SYSTEMS IS CRITICAL

    For years, DOD has been developing and implementing enterprise 
resource planning (ERP) systems, which are intended to be the backbone 
to improved financial management.\30\ DOD considers the successful 
implementation of these ERP systems critical to transforming its 
business operations and addressing longstanding weaknesses in areas 
such as financial and supply-chain management and business systems 
modernization. DOD officials have also stated that these systems are 
critical to ensuring the department meets its mandated September 30, 
2017, goal to have auditable department wide financial statements. 
However, as we recently reported, six of these ERP systems are not 
scheduled to be fully deployed until either fiscal year 2017 or the end 
of fiscal year 2016.\31\
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    \30\ An ERP system is an automated system using 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.
    \31\ DOD Inspector General, Navy Enterprise Resource Planning 
System Does Not Comply With the Standard Financial Information 
Structure and. U.S. Government Standard General Ledger, DOD IG-2012-051 
(Arlington, VA: Feb. 13, 2012).
---------------------------------------------------------------------------
    The DOD IG reported that the Navy developed and approved deployment 
of the Navy ERP System without ensuring that the system complied with 
DOD's Standard Financial Information Structure (SFIS) and the U.S. 
Government Standard General Ledger.\32\ The DOD IG further stated that 
as a result, the Navy ERP System, which is expected to manage 54 
percent of the Navy's obligation authority when fully deployed, might 
not produce accurate and reliable financial information.
---------------------------------------------------------------------------
    \32\ DOD Inspector General, Navy Enterprise Resource Planning 
System Does Not Comply With the Standard Financial Information 
Structure and U.S. Government Standard General Ledger, DOD IG-2012-051 
(Arlington, VA: Feb. 13, 2012).
---------------------------------------------------------------------------
    Two ERP systems--the Army's General Fund Enterprise Business System 
(GFEBS) and the Air Force's Defense Enterprise Accounting and 
Management System (DEAMS)--are general ledger systems intended to 
support a wide range of financial management and accounting functions. 
However, DFAS users of these systems told us that they were having 
difficulties using the systems to perform their daily operations. 
Problems identified by DFAS users included interoperability 
deficiencies between legacy systems and the new ERP systems, lack of 
query and ad hoc reporting capabilities, and reduced visibility for 
tracing transactions to resolve accounting differences. For example:

         Approximately two-thirds of invoice and receipt data 
        must be manually entered into GFEBS from the invoicing and 
        receiving system due to interface problems. Army officials 
        explained that the primary cause of the problem was that the 
        interface specification that GFEBS is required by DOD to use 
        did not provide the same level of functionality as the 
        interface specification used by the legacy systems. At the time 
        of our review, Army officials stated that they are working with 
        DOD to resolve the problem, but no time frame for resolution 
        had been established.
         DEAMS did not provide the capability--which existed in 
        the legacy systems--to produce ad hoc query reports that could 
        be used to perform data analysis needed for day-to-day 
        operations. DFAS officials noted that when DEAMS did produce 
        requested reports, the accuracy of those reports was 
        questionable. According to DFAS officials, they are currently 
        working with DEAMS financial management to design the type of 
        reports that DFAS needs.

    While we were told that as of February 2012, the Army and Air Force 
had corrective actions under way to address identified deficiencies, 
specific timelines had not been developed so that progress could be 
monitored.\33\
---------------------------------------------------------------------------
    \33\ GAO, DOD Financial Management: Implementation Weaknesses in 
Army and Air Force Business Systems Could Jeopardize DOD's Auditability 
Goals, GA0-12-134 (Washington, DC: Feb. 28, 2012).
---------------------------------------------------------------------------
    In February 2012, we reported that independent assessments of four 
ERPs--the Army's GFEBS and Global Combat Support System (GCSS-Army), 
and the Air Force's DEAMS and Expeditionary Combat Support System 
(ECSS)--identified operational problems, such as deficiencies in data 
accuracy, inability to generate auditable financial reports, the need 
for manual workarounds, and training.\34\ DOD oversight authority 
limited the deployment of GFEBS and DEAMS on the basis of the results 
of the independent assessments. However, in June 2011, DOD authorized 
continued deployment of GFEBS and delegated further GFEBS deployment 
decisions to the Under Secretary of the Army.
---------------------------------------------------------------------------
    \34\ GA0-12-134.
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    In addition to functional issues, we found that training was 
inadequate. According to DFAS personnel as of February 2012, the 
training they received for GFEBS and DEAMS did not fully meet their 
needs. DFAS personnel informed us that the training focused on an 
overview of GFEBS and DEAMS and how the systems were supposed to 
operate. While this was benefiCial in identifying how GFEBS and DEAMS 
were different from the existing legacy systems, the training focused 
too much on concepts rather than the skills needed for DFAS users to 
perform their day-to-day operations. GAO has made prior recommendations 
to address these issues. DOD has generally agreed with these 
recommendations and is taking corrective actions in response.

  CHALLENGES IN DEVELOPING AND IMPLEMENTING DOD'S BUSINESS ENTERPRISE 
             ARCHITECTURE AND INVESTMENT CONTROL PROCESSES

    Improving the department's business environment through efforts 
such as DOD's business enterprise architecture and improved business 
systems management is an important part of helping DOD achieve 
auditability. In June 2011, we reported that DOD had continued to make 
progress in implementing a comprehensive business enterprise 
architecture, transition plan, and improved investment control 
processes.\35\ However, we also reported that long standing challenges 
had yet to be addressed. Specifically, we reported that while DOD 
continued to release updates to its corporate enterprise architecture, 
the architecture had yet to be augmented by a coherent family of 
related subsidiary architectures.\36\ For example, we reported that 
while each of the military departments had developed aspects of a 
business architecture and transition plan, none of them had fully 
developed a well defined business enterprise architecture and 
transition plan to guide and constrain business transformation 
initiatives.\37\
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    \35\ GA0-11-684.
    \36\ DOD's business enterprise architecture approach calls for a 
federated approach, in which the architecture consists of a family of 
coherent but distinct member architectures that conform to an 
overarching corporate or parent architecture.
    \37\ GA0-11-684.
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    We also reported in June 2011 that DOD continued to improve its 
business system investment management processes, but that much remained 
to be accomplished to align these processes with investment management 
practices associated with individual projects and with portfolios of 
projects.\38\ With regard to individual projects, DOD and the military 
departments all had documented policies and procedures for identifying 
and collecting information about IT projects and systems to support 
their business system investment management processes. However, neither 
DOD nor the military departments had fully documented policies and 
procedures for selecting a new investment, reselecting ongoing 
investments, integrating funding with investment selection, or 
management oversight of IT projects and systems. With regard to 
portfolios of projects, DOD and the Departments of the Air Force and 
Navy had assigned responsibility for managing the development and 
modification of IT portfolio selection criteria. However, neither DOD 
nor the military departments had fully documented policies and 
procedures for creating and modifying IT portfolio selection criteria; 
analyzing, selecting, and maintaining their investment portfolios; 
reviewing, evaluating, and improving the performance of their 
portfolios; or conducting post implementation reviews. In addition, 
while DOD largely followed its certification and oversight processes, 
we reported that key steps were not performed. For example, as part of 
the certification process, DOD assessed investment alignment with the 
business enterprise architecture, but did not validate the results of 
this assessment, thus increasing the risk that decisions regarding 
certification would be based on inaccurate and unreliable information.
---------------------------------------------------------------------------
    \38\ These best practices are identified in GAO IT investment 
management guidance. See GAO, Information Technology Investment 
Management: A Framework for Assessing and Improving Process Maturity, 
GA0-04-394G (Washington, DC: Mar. 2004).
---------------------------------------------------------------------------
    Since 2001, we have made recommendations to improve DOD's business 
architecture, enterprise transition plan, and business system 
investment management.\39\ DOD has generally agreed with these 
recommendations and is taking corrective actions in response. It is 
essential that DOD implement our recommendations aimed at addressing 
these longstanding challenges, as doing so is critical to the 
department's ability to establish the full range of institutional 
management controls needed for its financial management as well as its 
overall business systems modernization high-risk program. We have 
ongoing work to evaluate the department's efforts to comply with the 
NDAA for Fiscal Year 2012, as amended, including updating our 
evaluations of DOD's comprehensive business enterprise architecture and 
transition plan and improved investment control processes.
---------------------------------------------------------------------------
    \39\ See, for example, GAO, Information Technology: Architecture 
Needed to Guide Modernization of DOD's Financial Operations, GA0-01-525 
(Washington, DC: May 17, 2001); DOD Business Systems Modernization: 
Improvements to Enterprise Architecture Development and Implementation 
Efforts Needed, GA0-03-458 (Washington, DC: Feb. 28, 2003); Business 
Systems Modernization: DOD Continues to Improve Institutional Approach, 
but Further Steps Needed, GA0-06-658 (Washington, DC: May 15, 2006); 
Business Systems Modernization: Strategy for Evolving DOD's Business 
Enterprise Architecture Offers a Conceptual Approach, but Execution 
Details Are Needed, GA0-07-451 (Washington, DC: Apr. 16, 2007); 
Business Systems Modernization: DOD Needs to Fully Define Policies and 
Procedures for Institutionally Managing Investments, GA0-07-538 
(Washington, DC: May 11, 2007); DOD Business Systems Modernization: 
Progress in Establishing Corporate Management Controls Needs to Be 
Replicated Within Military Departments, GA0-08-705 (Washington, DC: May 
15, 2008); DOD Business Systems Modernization: Recent Slowdown in 
Institutionalizing Key Management Controls Needs to Be Addressed, GA0-
09-586 (Washington, DC: May 18, 2009); Organizational Transformation: 
Military Departments Can Improve Their Enterprise Architecture 
Programs, GA0-11-902 (Washington, DC, Sept 26, 2011).
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  DOD HAS BEGUN PERFORMING BUSINESS-PROCESS REENGINEERING ASSESSMENTS

    Section 1072 of the NDAA for Fiscal Year 2010 requires that new DOD 
programs be assessed to determine whether or not appropriate business-
process reengineering efforts have been undertaken. The act further 
states that these efforts should ensure that: (1) the business process 
to be supported by the defense business system modernization will be as 
streamlined and efficient as practicable; and (2) the need to tailor 
commercial off-the-shelf systems to meet unique requirements or 
incorporate unique interfaces has been eliminated or reduced to the 
maximum extent practicable.\40\ In June 2011, we reported that, for 
those investments we reviewed, DOD and the military departments used 
DOD's Business Process Reengineering Guidance (dated April 2011) to 
assess whether the investments complied with the business-process 
reengineering requirement.\41\ Consistent with the guidance, DOD and 
the military departments completed questionnaires to help them identify 
and develop approaches to streamlining and improving existing business 
processes. Once these assessments had been completed, the appropriate 
authorities asserted that business-process reengineering assessments 
had been performed.
---------------------------------------------------------------------------
    \40\ Pub. L. No.111-84, Sec. 1072.
    \41\ GA0-11-684.
---------------------------------------------------------------------------
    We also reported in June 2011 that while DOD and the military 
departments largely followed DOD's guidance, they did not perform the 
key step of validating the results of these reengineering assessments 
to ensure that they, among other things, accurately assessed process 
weaknesses and identified opportunities to streamline and improve 
affected processes. The reason DOD did not follow key aspects of the 
certification process-primarily not validating assessment results-was 
attributed in part to unclear roles and responsibilities. According to 
military department officials responsible for the investments we 
reviewed, validation activities did not occur because DOD policy and 
guidance did not explicitly require them to be performed. In addition, 
there was no guidance that specified how assessments should be 
validated. According to DOD officials, the oversight and designated 
approval authorities did not validate the DOD level assessments and 
assertions because DOD policy and guidance had not yet been revised to 
require these authorities to do so. We have work underway to evaluate 
DOD's efforts to improve its business system investment process, 
including its efforts to address the act's business process 
reengineering requirement. GAO has made prior recommendations to 
address these issues. DOD has agreed with these recommendations and is 
taking corrective actions in response.

                        CONCLUDING OBSERVATIONS

    In closing, DOD has demonstrated leadership and sustained 
commitment since the first issuance of its FIAR Plan in 2005 and 
through improvements and responsiveness to our recommendations since 
then. DOD has made progress through the FIAR Guidance, with the 
development of a methodology for implementing the FIAR strategy. Full 
compliance with the guidance can provide a consistent, systematic 
process to help DOD components achieve and verify audit readiness. 
Without full compliance, as we have seen in our work, components may 
assert audit readiness while process deficiencies prevent validation, 
require corrective actions, and delay an audit for another fiscal year.
    Automated information systems are essential for modern accounting 
and recordkeeping. DOD is developing its ERP systems as the backbone of 
its financial management improvement and they are critical for 
transforming its business operations. To be fully successful, 
implementation of ERP systems should be consistent with an effective 
corporate enterprise architecture and the development of streamlined 
business processes. DOD officials have stated that these systems are 
critical to ensuring that the department meets its mandated September 
30, 2017, goal to have auditable department-wide financial statements. 
However, implementation has been delayed by deficiencies in performance 
and the need for remedial corrective actions. DOD components will 
evaluate cost-effective modifications to legacy systems and implement 
any necessary changes. According to DOD officials, for the ERP systems 
that will not be fully deployed prior to the audit readiness goals, the 
DOD components will need to identify effective workaround processes or 
modifications to legacy systems that will enable audit readiness.
    DOD faces considerable implementation challenges and has much work 
to do if it is to meet the goals of an auditable SBR by fiscal year 
2014 and a complete set of auditable financial statements by fiscal 
year 2017. It is critical that DOD continue to build on its current 
initiatives. Oversight and monitoring will also play a key role in 
making sure that DOD's plans are implemented as intended and that 
lessons learned are identified and effectively disseminated and 
addressed. Absent continued momentum and necessary future investments, 
the current initiatives may falter, similar to previous well-intended, 
but ultimately failed, efforts.
    We will continue to monitor the progress and provide feedback on 
the status of DOD's financial management improvement efforts. We 
currently have work in progress to assess: (1) the FIAR Plan's risk 
management process for identifying, assessing, and addressing risks 
that may impede DOD's ability to achieve the 2017 financial audit 
readiness goal; (2) DOD's funds control in relation to the reliability 
of its financial statements; (3) the schedule and cost of Army's GCSS; 
(4) components' efforts to prepare for SBR and full financial statement 
audits; and (5) DOD's actions in response to our recommendations. 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.
    Chairman McCaskill, Ranking Member Ayotte, and members of the 
subcommittee, this completes my prepared statement. I would be pleased 
to respond to any questions that you may have at this time.

                 GAO CONTACTS AND STAFF ACKNOWLEDGMENTS

    If you or your staff have any questions about this testimony please 
contact me at (202) 512-9869 or [email protected]. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this testimony. GAO staff who made key contributions 
to this testimony include Valerie Melvin, Director; Cindy Brown Barnes, 
Assistant Director; Mark Bird, Assistant Director; Kristi Karls; 
Michael Holland, Chris Yfantis, and Maxine Hattery.

    Senator McCaskill. Thank you, Mr. Khan.
    I think that Secretary Panetta's directive for 2014 is one 
of those good news/bad news things. I think it is good news 
because it really gets everyone leaning forward in a way that 
perhaps they had not been. The bad news is I am worried about 
this manual work-around.
    I would like all of you to address this, and you can decide 
whether or not it is the CMO or whether it is the Assistant 
Secretaries that do this. I need a yes or no about whether or 
not you are envisioning a manual work-around for a one-time fix 
to get to the 2014, and can you make any representations today 
on the record that you will avoid a manual work-around, that 
you would be more willing to say we cannot do it than do a 
manual work-around that is very expensive and does not solve 
any long-term problem? We will start with the Air Force and 
work our way down the table.
    Dr. Morin. Senator McCaskill, I can assure you there will 
be some manual workarounds required, but we will not do a 
large-scale, army of auditors, fully manual approach. We will 
rely on our existing financial systems, admittedly some of 
which date back to the Vietnam war, but we will rely on a 
series of systems that have differing degrees of controls in 
them. In some cases, we will have to do manual reconciliations 
between those systems because they do not interface. That will 
be labor-intensive, but it is not thousands of people type 
labor-intensive. We will try to strike a careful balance in 
assessing internal controls and finding out where we can rely 
on them. In some cases, there will be a level of manual work-
around, but it will not be an enterprise-scale manual work-
around which is, I think, what you are talking about here.
    Senator McCaskill. I will probably circle back once I get 
everybody's answer because I think we need to try to get our 
arms around this in terms of what costs are going to be.
    Ms. Matiella. It did create some manual workarounds for us. 
Basically we have to do more cleanup in the legacy system. It 
was cleanup that we had not planned on doing, that we did not 
feel like we needed to do because it, the program, was 
basically going to cancel. It is not going to cancel with the 
due date that is now 2014. So we have to do the cleanup now, 
but that is a one-time fix. So once you get that cleanup done, 
those beginning balances correct, those opening balances 
correct, they are correct forever. It is a one-time fix. It is 
a manual work-around. It will not create continuing work for 
us. So it is something that we are planning for and that we 
have budgeted for, and we believe that is doable by 2014 and 
will not be something that will set us back going into 2017 at 
all.
    Ms. Commons. For the Department of the Navy, we feel that 
the manual work-arounds will be at a minimum. First of all, our 
ERP is well-deployed. We only have two more commands that we 
are going to deploy, and we will have completed our program of 
record. What we are finding in our ERP is that the internal 
controls built into the system are, in fact, working. We tested 
some transactions in the system and we know that the controls 
around the system are fairly good.
    Also, for our legacy systems, we have always built our 
transactions down at the transaction level. So we know we have 
some systems issues to work there, but we feel that we are 
working those issues and that we are moving forward in the 
right direction.
    For our reconciliations, especially with FBWT, we are 
working with the DFAS to automate that process. It is a manual 
process at this point, but we think that we are making good 
progress and that we will be there within the timeframe for the 
auditable SBR, as well as 2017.
    So we really believe that we are looking at our business 
processes end-to-end and that we are trying to make 
improvements in those processes for the long-term, not just to 
achieve an audit-ready SBR, but long-term improvement.
    Senator McCaskill. Secretary Hale?
    Mr. Hale. If I could summarize, I would say that there will 
be some manual work-arounds. We see them as temporary. The 
General Fund Enterprise Business System (GFEBS), the Army 
system, for example. We have had some problems. We are doing 
some manual work-arounds. The Army is engaged, along with DFAS, 
in fixing the business process problems that led to those, and 
I expect that we will be back on track without manual work-
arounds, I hope fairly quickly. As Dr. Morin said, there will 
be some issues the Air Force's DEAMS, because they will not 
have it in place, but they will get DEAMS at some point.
    So I think yes for some, but I expect them to be temporary, 
and I would echo what was said here. We are not going to hire 
an army of auditors to do this manually. That is not 
sustainable and it is not our plan.
    Senator McCaskill. Do you think before 2014, Secretary 
Hale, that you are going to be able to put a figure on what the 
manual work-arounds for a 2014 deadline are going to cost over 
and above what we would be expending had the deadline not been 
moved?
    Mr. Hale. We could try. I am reluctant to commit to that 
because it probably would not be as easy as it may sound.
    Senator McCaskill. No, I do not think it sounds easy. I 
think it sounds really hard.
    Mr. Hale. I think it would be difficult.
    Senator McCaskill. But the problem is if you do not do that 
analysis upfront, then you really are not making a sound 
management decision as to whether or not it is worth it to move 
up the date.
    Mr. Hale. But I would argue strongly we need the pressure 
that is generated by the 2014 deadline. We need to pressurize, 
it is like turning an aircraft carrier. We have to be hard 
right or hard left. We have to get this organization moving, 
and I think this shorter deadline has done it. So if it drives 
us to some modest manual workarounds, so be it. I think we will 
get to the end game more quickly and save money sooner.
    I will think about whether or not we can quantify that, but 
I believe there are some qualitative benefits to the earlier 
goal that are significant.
    Senator McCaskill. I am not trying to pick a fight here 
about this. I really just genuinely want to have some sense of 
this. I think I am legitimately entitled to some skepticism 
because of the amount of monies that have been expended in this 
effort and the billions of dollars that clearly have not turned 
out to be wise investments in terms of what they have produced 
to date.
    What I do not want to have happen is--when you say a modest 
investment, ``modest'' needs context because I think most 
Americans would think that what you might consider modest might 
be a heck of a lot of scratch in order to meet this earlier 
deadline.
    I am glad that Secretary Panetta has done this overall. I 
think it is very positive because I do think it is going to 
help really push everyone as hard as they can possibly be 
pushed to get some of these problems resolved. But I want to 
make sure that we are not in the process being shortsighted. 
Frankly, it reminds me a little bit of Base Realignment and 
Closure (BRAC). Sometimes we have extremely high upfront costs 
for benefits that sometimes are exaggerated way down the line 
further than when everyone had been told they were. So I want 
to make sure we are not having one of those upfront 
expenditures that does not, in the long run, show that it is 
worth the investment.
    Mr. Hale. If I get to compare my cost to BRAC, I am in good 
shape.
    Senator McCaskill. Then it would be modest. You are safe 
with ``modest'' if you compare it to BRAC.
    Mr. Hale. We spent $35 billion on the last BRAC round. We 
are not going to be in that ball park.
    We will try to think about that problem systematically and 
get back to you.
    Senator McCaskill. I have a number of other questions, but 
I will defer to my colleague, Senator Manchin, because I know 
he has some questions he wants to ask. I will come back for 
more after.
    Senator Manchin. Thank you, Madam Chairman. I appreciate it 
so much and all of your service. I appreciate your all being 
here. I want to apologize for running back and forth to 
committee meetings, but that is sometimes how it happens here.
    Secretary Hale, if I may, I am sure you are scrutinizing 
contracting very closely since it accounts for about 55 percent 
of the DOD budget in 2011, and there are so many examples of 
fraud, waste, and abuse.
    I recently met with the National Guardsmen who say that a 
contractor knowingly exposed them to sodium dichromate in Iraq 
during the cleanup of the Qarmat Ali water treatment plant, 
which I think you all know about. There is even a recent DOD 
report that faults this contractor for not protecting the 
nearly 1,000 soldiers who guarded the site, and West Virginia 
had a number of those soldiers. The report states that the 
contractor recognition of, and response to, the health hazard 
represented by sodium dichromate contamination, once identified 
at the Qarmat Ali facility, was delayed. The delay occurred 
because the contractor, KBR, did not fully comply with the 
occupational safety and health standards required by the 
contract. As a result, a great number of servicemembers and DOD 
civilian employees were exposed to sodium dichromate and for 
longer periods.
    This was a $28 billion contract to restore this plant and 
the surrounding oil fields. There is ongoing litigation, so I 
am not going to go into all the details, but soldiers have 
died. Many more have lasting illnesses because of the exposure. 
I talked to one of the widows yesterday.
    The most troubling part of this contract is the indemnity 
clause which I could absolutely not believe at all that this 
Government would enter into a $28 billion contract with an 
indemnity clause that lets the contractor totally off the hook. 
Even if the contractor knowingly does something wrong like 
expose soldiers to a known carcinogen, it means that the 
taxpayers will foot the blatant contractor abuse.
    So my question is simply this, sir. Do we have any 
contracts like this in Afghanistan?
    Mr. Hale. Senator Manchin, I am not familiar enough to 
answer that question. It is a good one. I can tell you that we 
have the well-being of our soldiers, sailors, airmen, and 
marines fully in mind. But I am going to need to answer for the 
record or get somebody who is more of an expert on this to come 
talk to you.
    Senator Manchin. The bottom line. It took so long for this 
contract to be revealed to what was going on and why such a 
blatant protection of a contractor that was charging $28 
billion and held totally harmless--totally harmless--by this 
Government. It is just hard to explain to these widows. I have 
so many people involved and exposed on this. I would like to 
see and know if we have some contracts that we might have out 
there that have these types of indemnity clauses or hold 
harmless.
    To Mr. Khan, if I may. Your testimony is important because 
DOD accounts for 57 percent of discretionary spending, more 
than all of the agencies combined. The fiscal future of our 
Nation, I do not think I need to tell you, depends on us 
getting this right.
    I said throughout all of these posture hearings I am 
concerned that we are cutting 100,000 servicemembers by 2017, 
but no one can tell me how many contractors we are cutting. I 
cannot even get an accurate figure on how many we have. We have 
more contractors in Afghanistan and Iraq than we do American 
troops. I am told that we have approximately 150,000 
contractors compared to about 90,000 men and women in uniform. 
It makes common sense to me as an American, which I think we 
all love our military and we are so appreciative of what they 
do, that given the choice between the soldier and an overpaid 
contractor performing the same mission, that I would choose the 
soldier.
    Let me tell you when I was down visiting our troops in 
Afghanistan, I had soldiers coming to me from my State of West 
Virginia, and I would say, ``are you signing back up?'' They 
said, ``no, no. I am going to work for that person. I can get 
so much more money.'' I said, ``if that job was not available, 
would you stay in the Service? Probably so.'' Something is 
wrong, sir, desperately wrong. I just cannot even believe it.
    I would like to know from you, sir, just offer your 
perspective on the overdependence on contractors at DOD.
    Mr. Khan. That is an area really I am not an expert or 
specialist in. I can respond to that for the record. But I 
share your concerns on the overdependence on the contractors.
    [The information referred to follows:]

    The Department of Defense (DOD) has relied extensively on 
contractors to provide needed services, including those in support of 
operations in Iraq and Afghanistan. Over the past 15 years, we have 
made numerous recommendations intended to improve DOD's management and 
oversight of contractors in deployed locations. For example, in 2008, 
we recommended that DOD determine the appropriate balance of 
contractors and military personnel as it shapes the force for the 
future.\1\ As part of this effort, DOD would need to comprehensively 
examine the support it will require contractors to provide in future 
operations and the core capabilities the department believes it should 
not be relying on contractors to perform. Given the longstanding and 
recurring nature of the issues identified, in June 2010 we called for a 
cultural change that emphasized an awareness of contractor support 
throughout the department.\2\
---------------------------------------------------------------------------
    \1\ GAO, Military Operations: Implementation of Existing Guidance 
and Other Actions Needed to Improve DOD's Oversight and Management of 
Contractors in Future Operations, GAO-08-436T (Washington, DC: Jan. 24, 
2008).
    \2\ GAO, Warfighter Support: Cultural Change Needed to Improve How 
DOD Plans for and Manages Operational Contract Support, GAO-10-829T 
(Washington, DC: June 29, 2010).
---------------------------------------------------------------------------
    While there are benefits to using contractors to perform services 
for the government, our work has shown that reliance on contractors to 
support core missions can place the government at risk of becoming 
overly reliant on contractors to perform functions deemed inherently 
governmental or those that are closely associated with inherently 
governmental functions. Our work has identified the need for DOD to 
obtain better data on its contracted services to enable it to make more 
strategic workforce decisions and ensure that it maintains appropriate 
control of government operations.
    DOD has taken steps to gain better insights into the number of 
contractors and the functions they perform, but its efforts have had 
mixed success to date. Examples of our recent findings in this area 
include the following:

         As we reported in April 2012, DOD has made incremental 
        improvements to its processes for compiling and reviewing 
        statutorily required inventories of contracted services, but 
        DOD acknowledged a number of factors that limited the utility, 
        accuracy, and completeness of the inventory data.\3\ The 
        department does not expect to fully collect required data on 
        contractor manpower as part of the inventory until fiscal year 
        2016. Further, we found that during the military departments' 
        review of the fiscal year 2009 inventories, the Army and Air 
        Force identified 1,935 and 91 instances, respectively, of 
        contractors performing inherently governmental functions. In 8 
        of the 12 Army and Air Force cases we reviewed, contractors 
        continued to perform functions identified by the military 
        departments as inherently governmental. We found no evidence 
        that the Navy commands we contacted had conducted the required 
        reviews of the inventories to determine, among other matters, 
        whether contractors were performing inherently governmental 
        functions.
---------------------------------------------------------------------------
    \3\ GAO, Defense Acquisitions: Further Actions Needed to Improve 
Accountability for DOD's Inventory of Contracted Services, GAO-12-357 
(Washington, DC: Apr. 6, 2012).
---------------------------------------------------------------------------
         In 2008, DOD designated the Synchronized Predeployment 
        and Operational Tracker (SPOT) as its system for tracking 
        specific information on certain contracts and associated 
        personnel in Iraq and Afghanistan. While recent efforts have 
        been made to improve SPOT's tracking of contractor personnel, 
        in reports issued annually since 2008, including most recently 
        in September 2012, we reported DOD lacked reliable data and 
        systems to report on its contracts and contractor personnel in 
        Iraq and Afghanistan.\4\
---------------------------------------------------------------------------
    \4\ GAO, Iraq and Afghanistan: Agencies Are Taking Steps to Improve 
Data on Contracting but Need to Standardize Reporting, GAO-12-977R 
(Washington, DC, Sept. 12, 2012).
---------------------------------------------------------------------------
         As we reported in September 2012, DOD's 2010-2018 
        workforce plan did not include an assessment of the appropriate 
        mix of military, civilian, and contractor personnel or an 
        assessment of the capabilities of each of these workforces.\5\ 
        DOD is directed by statute to use this plan, among other 
        things, to make determinations on the most appropriate and 
        cost-efficient mix of military, civilian, and contractor 
        personnel to perform the department's mission.\6\ Therefore, 
        without an assessment of the appropriate workforce mix and 
        capabilities, DOD is not well positioned to make determinations 
        on its current and future use of contractors.
---------------------------------------------------------------------------
    \5\ GAO, Human Capital: DOD Needs Complete Assessments to Improve 
Future Civilian Strategic Workforce Plans, GAO-12-1014 (Washington, DC, 
Sept. 27, 2012).
    \6\ Pub. L. No. 112-81, Sec. 936 (2011) (codified at 10 U.S.C. 
Sec. 2330a).

    Senator Manchin. Let me give some ratios to all of you and 
---------------------------------------------------------------------------
see if it makes sense to any of you.

         World War I, we had 1 contractor for every 24 
        soldiers.
         World War II, we had 1 contractor for every 7 
        soldiers.
         Vietnam, 1 contractor for every 5 soldiers.
         The Balkans and Iraq, it was 1-to-1.

    Currently in Afghanistan, we have more than a 1-to-1 ratio.
    I do not know how the growing reliance that DOD has--how 
you choose to deploy your resources. I do not know how you 
would do that in an effective and efficient manner.
    Mr. Hale. Senator Manchin, what we need to do is think 
about the criteria for jobs. There are some jobs that ought to 
be done by contractors, and I fear that sometimes we demonize 
our contractor workforce in a way that is not helpful. We could 
not fight effectively without them. But there are certainly 
jobs that need to be done by Federal civilians and by military 
personnel. I will not say we have that right or perfect, but we 
are certainly looking at it. I can tell you, for example, that 
our contractor dollars from 2012 to 2013 go down in similar 
levels to our civilian workforce and our military workforce. So 
you are seeing some downturn in contractors.
    But I would caution against just blanket statements that we 
do not want contractors. There are jobs they should do, 
temporary jobs, jobs with special skills. Auditing is a good 
example. We do not have the skills in DOD to do audits well. 
They know how to do it better in the private sector. That is 
temporary work, at least we hope so. We need to hire people 
temporarily to do that and we are. So I would urge you to avoid 
blanket pronouncements, but I accept the fact that we need to 
look at the mix.
    Senator Manchin. Let me ask you a direct question then, 
sir. Can you get me an answer on the difference of pay between 
the front-line service person that is doing exactly the same 
job as the soldier in uniform?
    Mr. Hale. First, I do not think any contractor is doing 
exactly the same job as a front-line soldier.
    Senator Manchin. When a soldier tells me with his own mouth 
and he says I am going to go do exactly what I am doing now, 
whether he is protecting, whether he----
    Mr. Hale. I will ask for help from----
    Senator Manchin. I just want an answer. I cannot get an 
answer from anybody.
    Mr. Hale. I do not think they are doing exactly the same 
thing.
    Senator Manchin. I beg to differ with you, sir. They are. 
If you will just go to the front lines and talk to the 
soldiers.
    Mr. Westphal. Senator, we have done an analysis and a 
review of the number of contractors, and we are doing this very 
complex analysis, which is what you are getting at here, of 
what is a uniquely governmental function that we need to have 
either a soldier or a civilian employed by the Government do 
the job or a contractor. In that report, we have been able to 
identify the number of full-time equivalents that we are 
contracting for the generating force and what we have for the 
operating force. So we have some fidelity. It is not precise on 
the number of contractors both in what we call the generating 
force, which is all the support elements to our operating 
force, and our operating force. Then what is the equivalence in 
dollars.
    To do that analysis, we have gone and looked at exactly 
what you just asked, which is what are the benefits and pay and 
all of the things that accrue to a civilian or to a soldier and 
what does the same thing mean for a contractor, and we are 
finishing up that report.
    I know, Senator McCaskill, Madam Chair, you had a hearing 
on the subject of contracting. So I know there is a great deal 
of interest on this, and we are trying to get those answers.
    Senator Manchin. Can I get a comparison on the pay? All I 
am asking for is a comparison on the pay. Even if you do not 
think they do the exact same job, as close to a job as the two 
would do, if I could get that.
    Can you tell me how many contractors you are cutting? If 
you are proposing to cut 100,000 men and women in uniform by 
2017, can you tell me how many contractors you are prepared to 
cut?
    Mr. Westphal. We will get you that.
    [The information referred to follows:]

    This year for the first time the Army will be able to consciously 
make tradeoffs between military personnel, civilians, and contractors 
in a strategic way. This will replace the current process of just 
managing contracted services in the year of execution.
    In order to gain more fidelity on the value of contractors, the 
Army is using the Contractor Manpower Reporting Application (CMRA) to 
provide cost and manpower data. By utilizing the CMRA and its Panel for 
Documenting Contractors process in support of its budget submission, 
the Army will be able to project future year contractor numbers. This 
newly-established process for making projections will enable the Army, 
for the first time, to start to consciously make tradeoffs between 
military, civilians, and contractors in a strategic way, rather than 
simply continuing the current process of just managing contracted 
services in the year of execution. We are not there yet, but expect to 
move in this direction as the Department of Defense implements CMRA on 
an enterprise basis.
    In the near-term, by implementing the CMRA, the Army has an 
accurate count of the number of contractor used in fiscal year 2011. 
This fiscal year 2011 data will provide the baseline for the Army's 
future year contractor projections and will inform future year budget 
estimates. This will result in more accurate future year contractor 
estimates, beginning with forecasting the number of contractors for 
fiscal years 2012 to 2014.
    These numbers although more accurate are still just estimates, 
because unless specifically authorized by statute, most contracted 
services are performance-based and not personnel-services-based. 
Therefore, these contracted services are not managed or controlled 
based on manpower but through funding constraints applied in the year 
of execution.
    As the military and the civilian forces downsizes, the Army 
anticipates making comparable reductions in numbers of contractor 
personnel. The reduced funding levels projected for the Army through 
2017 will require deliberate and sustained planning and analysis to 
ensure that the Army's military, civilian, and contractor workforce is 
properly balanced, adequate, and affordable.
    Additionally, you have asked for a cost comparison of contractor 
costs and military and civilian personnel costs. The CMRA data is what 
will allow the Army to make more accurate contractor cost comparisons 
with civilian and military personnel cost.
    When comparing costs of military, civilian, and contractor labor, 
it is imperative to compare the fully-burdened costs to Department of 
Defense and the Federal Government, as opposed to base pay alone. As 
detailed in the Office of the Secretary of Defense's Directive Type 
Memorandum 09-007, dated January 29, 2010, a full cost comparison of 
total compensation, benefits, training, retirement, and other cost 
considerations must be utilized when making workforce mix decisions.
    The fully-burdened costs of soldiers and civilians vary greatly 
because of factors like location, skill level, and years of service. 
The fully-burdened cost of an Active Army officer can range from 
$119,000 to $331,000 and the fully-burdened cost of an Active Army 
enlisted can range from $78,000 to $181,000. The fully-burdened cost of 
a General Service (GS) civilian can range from $33,000 to $202,000. For 
example, the average fully-burdened cost of an Active Army captain, pay 
grade O-3, is $166,000, while the average fully-burdened cost of a rank 
equivalent civilian, a GS-11, is $103,000. Contractor costs are even 
more variable and sensitive to factors such as location, type of 
service performed (e.g. Medical, Transportation, IT, etc.), skill 
level, availabilities due to different shifts, contractor leave 
policies, and overhead. To further complicate the comparison no direct 
military/civilian to contractor rank equivalency exists. The fully-
burdened average unit cost of a Contractor ranges from $36,000 to 
$437,000. Therefore, any direct comparisons of military/civilian to 
contractor workforce cost should be addressed on a case-by-case basis.

    Senator Manchin. Thank you, sir.
    Senator McCaskill. Thank you.
    Senator Ayotte.
    Senator Ayotte. Thank you very much, Madam Chair.
    I wanted to ask all of you, we have seen with the General 
Services Administration (GSA) the rightful public outrage and 
outrage from this Congress about the misuse of taxpayers' 
funds, inappropriate use of taxpayers' funds for mind readers 
and all kinds of things that is just completely unacceptable. 
Please tell me how we can assure that each of your departments 
has proper oversight and controls in place to make sure that 
that type of misuse of taxpayers' funds never happens within 
DOD, please.
    Ms. McGrath. I will start. With regard to specifically the 
conferences, I can tell you that in the November timeframe, we 
completed a thorough review across DOD to ensure we had proper 
controls and policies in place for conferences, and each of the 
heads of components reviewed and attested to the Deputy 
Secretary that those were in place.
    Following what I will call the GSA incident, we have gone 
back out to all of our heads of components in the military and 
actually across DOD to once again, look and to assure that they 
have proper controls in place to make sure we have not missed 
anything. We asked for a review of all conferences that have 
occurred in the last 2 years, and that is to be reported back 
to the Deputy Secretary on May 11. So we absolutely take this 
very seriously. Each of the components can attest to their 
specific actions and activities, if you like, but I can say 
that we are absolutely ensuring that we have proper controls in 
place so that things like that do not happen.
    Mr. Westphal. If I could, the Secretary of the Army issued 
a directive over a year ago on this matter which is to look at 
all of the conferences done by the Department of the Army, the 
costs, and to have a process by which conferences are approved. 
That was partly due to cost-cutting requirements that we had, 
but partly also to ensure that we were not doing anything 
excessive. So I think we can provide you that policy, that 
directive. I believe the Navy and the Air Force have adopted 
something similar.
    Senator Ayotte. We would be very interested in receiving 
that. I think it is important. We have to be able to account to 
taxpayers. When I think about some of the reductions that you 
are asked to make, it would be completely unacceptable to find 
out that our taxpayers' dollars were somehow going to 
conferences that were wasteful or somehow did not address core 
training important opportunities that are needed for our 
military. So, yes, I appreciate that you are looking at this, 
and we would love to see a copy of that.
    Mr. Tillotson. From the Department of the Air Force point 
of view, we have implemented similar policies. I think Ms. 
McGrath and Secretary Westphal have captured the thought. The 
Secretary issued guidance out to the field about a year ago. We 
have followed up since that time several times, and it has been 
reiterated, I can assure you, to all command levels as recently 
as last week to make sure that we are following diligently the 
policies we have already put on place, as well as collecting 
the information over the last 2 years to support Ms. McGrath's 
review.
    Mr. Work. The Department of the Navy has a very similar 
thing, ma'am. What we have is a tiering system in which 
commanders at lower levels can, for example, approve 
conferences for maybe $100,000, but anything of great expense 
has to come all the way to either the Assistant Commandant of 
the Marine Corps or the Vice CNO, or in the case of the 
secretariat, to the Administrative Assistant who works for the 
Secretary. So like all of the other Services, there is a tiered 
system in which we monitor very closely, and we have flags. For 
example, if it goes to an area that might be considered a nice 
place to go, like Las Vegas, the first thing we always ask is 
why are you going to Vegas? If they cannot prove that that is 
the cheapest opportunity for taxpayers, then we deny it.
    Senator Ayotte. I appreciate that and we certainly would 
like to see your policies and appreciate that this is something 
you have already put a focus on prior to this incident that was 
really a complete debacle.
    [The information referred to follows:]

    Mr. Westphal. See attached memo.
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    Mr. Work. In May 2012, the Office of Management and Budget (OMB) 
released a memorandum to promote further efficiency and cost 
consciousness and directed the government to reduce cost and improve 
efficiencies in areas such as travel and conferences. The Department of 
Defense (DOD) issued amplifying guidance that directed the heads of 
each component or service to review all conferences that their 
organization was hosting or sponsoring. In June 2012, the Department of 
the Navy, in response to the OMB and DOD guidance, issued the attached 
updated conference guidance and data call.
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    Mr. Morin. See attached memo (28 Oct. 2011 Air Force POlicy 
Memorandum--Conferences).
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    

    Senator Ayotte. Let me just ask you, Secretary Hale. 
Government-wide Federal agencies have reported an estimated 
$115 billion in improper payments in fiscal year 2011, and in 
turn, we have only recovered, as I understand it, a little over 
$1 billion of those over $120 billion. Now, that is over across 
all Federal agencies.
    So I would ask Secretary Hale and also Mr. Khan, how much 
did DOD pay in improper payments over the last fiscal year, and 
how much of that amount has been recovered? What are we doing 
to make sure that we are clamping down on overpayments and also 
recovering money that has been overpaid?
    Mr. Hale. We have an aggressive program. I will start with 
the end. We have an aggressive program, we believe, to look for 
improper payments. I will give you some examples, and it varies 
by the category of payment.
    For commercial payments, we use a system called the 
Business Activity Monitoring (BAM) system. It is a set of 
business rules that looks for payments that look suspicious, 
and then kicks them out. If they have the same number and the 
same date or a similar date and amount, it will kick them out 
for human review. The BAM system has, we think, been quite 
effective.
    TRICARE, which is our medical system that pays providers, 
has built into all their contracts what amounts to a recovering 
auditing procedure where they look after the money has been 
paid for whether there have been overpayments.
    We are developing, in connection with the legislation 
Congress passed a couple of years ago, a post-payment sampling 
procedure for all of our payment categories so that we will 
statistically go back and verify that we have reasonable 
levels.
    I believe it is around $1 billion of improper payments. 
That is $1 billion too much, but it is a tiny portion of our 
budget. We do have a recovery procedure. Many of those improper 
payments are personnel, and we tend to get those back very 
quickly. We have the best set of auditors in the world for 
personnel, which is all the people that receive the money, and 
they tend to look very carefully at their paychecks and tell us 
if there is a problem. Many of them will tell us if it is too 
high. They will all tell us if it is too low, I think. We are 
usually able to quickly correct those problems.
    I think we have a good program, but it is one that needs 
continued attention because we are aware that in this day and 
age we need to have as few as possible, preferably zero, 
improper payments.
    So let me get you more specific numbers on the exact amount 
and the recovery.
    [The information referred to follows:]


Fiscal Year 2011:...............  Total Department-   $1139.5 million
                                   wide improper
                                   payments:
                                  Department-wide     0.18 percent
                                   error rate:
                                    Total             $456.4 million
                                   underpayments*:
                                    Total             $683.1 million
                                   overpayments:
                                    Total             $368.6 million
                                   recoveries:
                                    Recovery rate (1  54 percent (fiscal
                                   year)               year 2011 only)
                                    Recovery rate     93 percent (fiscal
                                   (cumulative)        years 2004-2011)

* Underpayments are not subject to recovery.

    In response to your question on what the Department of Defense 
(DOD) is doing to prevent improper payments, we use a computer software 
tool (called Business Activity Monitoring) that utilizes algorithmic 
logic to identify potential duplicate and overpayments in time for a 
technician to review and stop disbursement if the transaction is 
identified as potentially improper. We also analyze the root causes of 
our payment errors to see if technicians need additional training, or 
if a system edit could help prevent future errors. DOD also conducts 
regular outreach meetings with vendors and contractors to explain the 
importance of accurate invoicing and to encourage single invoice 
submissions where possible, rather than multiple submissions. For 
example, if a vendor submits an invoice through regular mail and then 
also submits it electronically, it is possible this could result in a 
duplicate payment.
    DOD also has an aggressive debt management program to recover 
improper payments. One area that is proving especially successful is 
where a debt in one part of DOD (let's say the Army) can be offset 
against a payment pending in another part of DOD (for example, the 
Navy). We call this our Centralized Offset Program. We have also 
partnered with Treasury by transferring outstanding debts at day 120 
instead of day 180 which is the legal threshold. By doing this earlier 
transfer, there is a better chance for recovery because Treasury has 
access to collection tools not available to other Federal agencies that 
enhance the collection of debt.

    Senator Ayotte. I appreciate that.
    Mr. Khan, I do not know if you had anything to add to that.
    Mr. Khan. I am not going to dispute the numbers that 
Secretary Hale has just mentioned. It is just that going back 
to fiscal year 2010, we had concerns about DOD not including 
all classes of transactions which were captured in the 
methodology for calculating improper payments. We understand 
this year--the class of transaction I am referring to is 
commercial pay--that that is included in the methodology for 
calculating improper payments. We do have work underway to look 
at--essentially it is done on a sampling basis as to how robust 
the methodology this year is to come up with the improper 
payments numbers. Again, we are also going to look at recovery 
auditing as part of that body of work. So we will have more 
information forthcoming later on this year.
    Senator Ayotte. Thank you.
    I just wanted to ask one final question with the chair's 
permission.
    We have this problem with the end-of-the-fiscal-year 
spendathon. How do we solve this? How do we get to the point 
where there is not this position and what are we doing about 
it, this idea that at the end of the fiscal year, program 
managers and everyone involved have to try to find ways to 
obligate money so that they are getting to the end of the 
fiscal year and we do it on things that we do not need because 
of this concern that if you do not do it, you come before us 
and say, well, they did not obligate all their money last year, 
they did not need it all, so we can give them less.
    So help us with this because, I think, it is not only a 
problem in DOD, I think it is a problem across the Federal 
Government. But I know that it is a problem in DOD because I 
have spoken to people at the highest levels about it and I have 
spoken to people at the lowest levels about how this happens.
    Mr. Hale. I share your concern. There are some rules in 
place that Congress has put in place that we can only obligate 
so much of our operating dollars in the last 2 months, and we 
do adhere to that. But it is still a lot of money, and I do not 
think it solves it all.
    I will tell you something called the Budget Control Act is 
probably one of the better ways to do this. There is just going 
to be a lot less free money, and we will be looking for ways to 
reprogram--and I would like to address that in a moment, if I 
might--funds to meet what are probably more than $3 billion of 
unbudgeted fuel bills, some very substantial increases above 
budgeted levels for operating tempo in Afghanistan. I think it 
will soak up a lot of the dollars.
    But I hear your concern. In a private business, if you have 
found a way to save money at the end of the year and still meet 
customer needs, you would probably get a bonus.
    Senator Ayotte. You would get a bonus.
    Mr. Hale. We, unfortunately, do not do that, and there is 
some of what you said, that we do judge, to some extent, by the 
amount of obligations.
    So I will not sit here and tell you it is not a problem. I 
think that tighter times will help correct it, and there are 
some rules in place that try to discourage it.
    Do any of my colleagues want to add to that?
    Mr. Westphal. I totally agree.
    The other issue that we get, as we work through Continuing 
Resolutions and the lack of a budget, we are also in many cases 
under-executing on parts of our budget. That creates a 
different kind of culture within the enterprise about how 
dollars are allocated. So we need a tighter process all the way 
around. We need a better sense of our budget obligations where 
Congress can be helpful and we need a better sense ourselves to 
manage through that.
    I think we are getting the mechanisms. I do not know if you 
can talk about this. In the Army we have some mechanisms to 
address this end of the year.
    Ms. Matiella. We do a very aggressive major review. For 
example, we are doing that right now. We are looking at 
obligation rates. We are making sure that folks are on track 
according to their plan because everybody has a plan, an 
expenditure plan, out there. So if we see that they are not 
spending according to plan, then we ask them why and they have 
to come back and give the reasons. Then at that point, we 
evaluate whether they are even capable of spending the money. 
If not, there are other areas where there is a need. So the 
mid-year review process looks at that and tries to push back on 
people spending according to plan, and if they are not able to, 
what is it that is out there that is unfunded that needs to be 
addressed.
    Dr. Morin. Ma'am, if I could add on behalf of the Air 
Force. We are working on a number of lines in order to address 
this challenge. As Mr. Hale said, some of them are getting 
addressed naturally by the more scarce dollars, and the fact 
that the Air Force is looking at a more than $1.4 billion fuel 
price shortfall will mean that we are tapping all of our other 
operational accounts looking for the sources to pay for that. 
So that will reduce available funds for all activities whether 
end-of-year spending or otherwise.
    But I would also say that we are looking at some of the key 
areas of challenge. End-of-year spending typically migrates to 
things like information technology and support contracting. For 
information technology, as part of our broad enterprise-level 
efficiency initiatives, we have moved to more strategic 
sourcing and enterprise-level buys of that technology, which 
will make it harder for local operations to identify and buy 
ahead of need, if you will, for information technology because 
they have available resources. It will bring those monies back 
to headquarters for prioritization.
    Similarly, service support contracts are being very 
carefully tracked as part of our efficiency effort. We are 
projecting a 30 percent decline in service support contract 
funding for 2013 compared to 2010, and we are enforcing those 
restrictions. So again, the ability to migrate dollars into 
that at the end of year is constrained.
    But I think most importantly, what we are doing is working 
to change a culture of spend-it-all. You particularly see this 
with our acquisition programs where our progress reviews that 
the financial and acquisition personnel conduct out in the 
field with the program managers and program financial officers 
are focusing on right-sizing and right-timing resources. It may 
be that a program needs more resources in 2012 and fewer 
resources in 2013 because a particular piece is available 
earlier. It may be the opposite. We work to realign those 
resources, take money that is made available and apply it to 
higher priority warfighter needs. We have an open discussion 
with those program managers where they are incentivized to find 
savings to address the substantial list of execution-year 
challenges that emerge in the context of running an enterprise 
of the scale of the defense establishment.
    Senator Ayotte. I thank you all. I want to thank the chair 
for her patience.
    Also, I would suggest if it is not already a criteria, that 
performance evaluations be part of the measure, how much money 
did you return to the taxpayers. Thank you.
    Senator McCaskill. It reminds me of that episode of The 
Office where Steve Carell found out that he had $4,300 left and 
he had to spend it by the end of the day or he was going to 
lose it in next year's budget, and they had to decide whether 
to buy a new copier or new office chairs. Near the end of the 
day, the CFO in the office explained to him that he could get 
15 percent of it in a bonus if he did not spend it at all. You 
can imagine what he decided to try to do.
    Unfortunately, we do not have that at DOD, and we waste a 
lot of money because of it.
    Mr. Hale. I wonder if I might say a word about 
reprogramming?
    This is an area that is very important to DOD. We depend on 
this, and we work hard to be transparent and to have discipline 
in this process. I am well aware that concerns have been raised 
in Congress and by a number of members about it.
    But I did want to put it in context for you. Last year in 
2011, we did policy reprograms. Congress allows a certain 
amount of mechanical transactions between funds, which are just 
that; they are mechanical. Our policy-related ones were about 
$18 billion. That is a huge sum of money, but it is less than 3 
percent of our budget. We put budgets together a full 2 years 
in advance before we complete executing them. 97 percent 2 
years in advance does not sound that bad to me. We need that 
flexibility.
    I understand we also need to do better at things like new 
starts and to minimize them--and I am working to do fewer 
September reprogrammings. The last one just did not work out 
for a variety of reasons. But I would appeal to you to not 
judge the whole process harshly. We need it to meet the needs 
of the warfighters and to make effective use of taxpayers' 
dollars.
    Senator Ayotte. I appreciate that and I understand that. I 
think where we become concerned, is when it is leading us in 
directions that we did not authorize or we said as a policy 
matter as a group, we do not want you to go in this direction. 
That is where we become concerned or starting something new. So 
I think those are the areas where we become particularly 
concerned. I am not saying that you do not need flexibility. So 
I appreciate that very much.
    Senator McCaskill. I am going to try to get to some of the 
nitty-gritty on some of the things we have talked about today 
now. I do think we do need context. While I understand this 
conference in Las Vegas is deplorable and embarrassing and 
horrible for taxpayers, if you look in context, the reason it 
has become such a big deal is it is so easy for everyone to 
understand. It is so easy for everyone to visualize it. 
Therefore, it is very easy to communicate it, and it is the 
kind of thing around here that allows everyone to do righteous 
indignation and photo ops because it is bad and it is easy for 
people to understand.
    Now, this stuff is not. It is the opposite. It is very 
difficult to understand. I have really worked at it to try to 
understand it.
    But just to give context so people understand, we have a 
defense integrated military human resource system that we spent 
12 years on and more than $1 billion in an effort to modernize 
the military payroll and personnel systems. Of course, we had 
to cancel it 2 years ago. Now, if you look at that, that makes 
that money spent on that conference in Las Vegas look like 
couch change.
    If I look at all the 11 ERP programs, we now cumulatively 
are $6 billion over budget and 31 years behind schedule. Now, 
that is a problem. I know you are all working on it and I sense 
how focused you are and I do think improvements have been made. 
So I am not here to say that we are not doing better because I 
think we are. But I do think that if everyone out there 
understood the magnitude of the issues that we face in terms of 
financial accountability in DOD, maybe they would be more 
focused on this than on the clowns and the mind readers in Las 
Vegas.
    Let me talk a little bit about the inability to account for 
funds in Afghanistan. I have been worried about the accuracy of 
distribution of our money to the payroll of the Afghanistan 
National Army (ANA). I know that the IG identified almost $50 
million worth of errors in the ANA payroll advances. They 
concluded this was possible because DOD did not have written 
procedures or perform adequate reviews and they relied on 
summary and not detailed data when distributing the quarterly 
advances.
    After all the problems we had in Iraq and after all the 
reports of the Special Inspector General for Iraq 
Reconstruction there, how is it possible that we still have 
this level of failure in terms of written procedures or review 
as it relates to the expenditures of funds in Afghanistan?
    Mr. Hale. I am not familiar with this, I am embarrassed to 
say. I will get familiar with it. I am going to ask if any of 
my colleagues are aware.
    Ms. Matiella. I am not familiar with the issue. However, I 
can propose that anytime there is a problem, it is because the 
systems, like you said, are not there to do the work that they 
need to do. As you well know, in the Department of the Army, 
our legacy systems just cannot do that kind of work. That is 
why we are rolling out a new system, a system that will have 
much more discipline, that is much more integrated than the 
ones we have now.
    Senator McCaskill. Is the ANA payroll coming through the 
Army or is it coming through OSD?
    Mr. Hale. I think it would be through the Army, and we do 
pay them. This is American money. I believe it is done through 
the Army.
    Senator McCaskill. I understand. There is a lot of the 
subject covered here. If you will get back to me on this 
particular problem because I want to make sure that we are 
doing better on that.
    Mr. Hale. We will.
    [The information referred to follows:]

    Since the Department of Defense (DOD) Inspector General (IG) 
investigation was completed in December 2011, the NATO Training 
Mission-Afghanistan/Combined Security Transition Command-Afghanistan 
(NTM-A/CSTC-A) has redesigned the Afghanistan National Army (ANA) 
payroll distribution process, implemented internal control procedures, 
and developed detailed standard operating procedures. The payroll 
advances described in the DOD IG report have been replaced with the 
current Direct Contributions process whereby ANA budget managers are 
provided a financial commitment ceiling from NTM-A/CSTC-A, and 
Financial Management Oversight offices at NTM-A/CSTC-A provide 
oversight and control. Furthermore, NTM-A/CSTC-A has put into practice 
four initiatives that have improved internal controls and mitigated 
fraud within the ANA payroll process: integration of financial advisors 
who work on-site in close cooperation with the ANA Corps Finance 
Officers; implementation of a monthly pay verification process; 
implementation of a centralized pay system; and improved banking 
operations.
    The ANA payroll funding is provided by the Office of the Secretary 
of Defense (OSD) to Army who releases the funding to NTM-A/CSTC-A. 
During the commitment letter process between NTM-A/CSTC-A and the 
Afghans, OSD is notified of the total payroll fiscal ceiling for Direct 
Contribution to the ANA. The commitment letter requires ANA budget 
managers to specifically identify which items require funding by Afghan 
budget code (e.g., salaries and food, incentives) instead of an overall 
bottom line amount. Any deviation at the fund code level requires 
written approval and an amendment to the distribution authorization. 
When funds are required by the Afghans, a funding request from the 
Afghanistan Ministry of Finance is processed through the Defense 
Finance and Accounting Service and wired to the Ministry of Finance 
into the ANA corporate account.

    Senator McCaskill. I noticed that Mr. Work said that the 
Navy will be shutting down more than 100 legacy systems over 
the next few years. Do the other branches have numbers for me 
on how many legacy systems and what the plans are that you are 
going to be shutting down? Air Force or Army, do you have any 
numbers for me on legacy systems?
    Ms. Matiella. Overall, we are going to shut down 700 legacy 
systems as we implement the different ERPs that we have. So to 
date, for example, with GFEBS we have shut down 80 systems so 
far. But in the long run, our goal is to shut down 700 systems.
    Senator McCaskill. Okay, and the Air Force?
    Mr. Tillotson. For the two ERPs, DEAMS and ECSS, the target 
was nine systems, as I recall, for DEAMS and about 240 systems 
for ECSS. The ECSS shutdown, obviously, has been delayed. So 
those plans, which should have been executing over the next 
several years are now put out. As we deploy DEAMS, over the 
next 2 years, we will get a partial shutdown for each base that 
we go to. We will not get the full shutdown until DEAMS goes to 
full operational capacity, which is about in 2016 or 
thereabouts.
    We are looking, however, at our broader range of business 
systems, and I will get back to you with the kinds of numbers 
we are looking at there. Those are unrelated ERPs. This is part 
of the broader business system review that we have been 
conducting all along but we have put renewed emphasis on as a 
result of the 2012 language that directs us to go back and look 
at business expenditures of $1 million or more over the Future 
Years Defense Program.
    [The information referred to follows:]

    Yes. Separate from the 2 Enterprise Resource Planning systems 
previously described the Air Force plans to shut down 65 legacy systems 
over the next 3 years.

    Senator McCaskill. Are there any legacy systems that you 
want to speak to at OSD?
    Ms. McGrath. I can add that we just submitted our annual 
report on business operations, and we do articulate a 
termination or shutdown of 120 systems across the board. I 
think it is important to note that regarding systems and 
instantiations of systems, there is sometimes an art in the way 
we count. The 120 that we report back to you this year comes 
from our DOD IT repository. What we are counting includes 
multiple instantiations of systems. Not to make this more 
complicated, but there are many different versions of systems 
that are out there. So when you are hearing really big numbers, 
all that is very good news, but the way we count from a 
departmental level, we would count those multiple 
instantiations as one, even though there may be more than one 
out there in existence.
    Senator McCaskill. What you are referring to is you would 
have one system with a lot of modifications that had occurred 
over time, and so you are counting each modification as a 
separate system as opposed to that entire enterprise.
    Ms. McGrath. Or if we have a system that is deployed in the 
Navy and it is the same one that is deployed in the Army, we 
would count those as two instantiations of the same system. 
They both have the same name.
    So, I would just caution: This has been a long dialogue 
with regard to how we count systems and what those definitions 
are. Again, it is all very good news in terms of shutting down 
and rationalizing the legacy environment. When we report on an 
annual basis to you, we are very specific about the 
authoritative data source that we use.
    I can say unequivocally we have terminated 120 systems that 
were in the DOD inventory last year, in addition to some of 
what the military departments are articulating in terms of 
various instantiations. It is all good news, and I do not mean 
to complicate it, but it is important to understand where the 
numbers come from.
    Senator McCaskill. Yes, Secretary Westphal?
    Mr. Westphal. Madam Chair, if I could. The Army went 
through a series of portfolio reviews on each of our enterprise 
systems. I just held a meeting on each one of them to have a 
report on how many of the legacy systems we are in fact--as we 
integrate these enterprise systems, we are eliminating.
    I have asked our staff to get together with those two great 
folks that you have behind you there, Mr. Levine and Mr. 
Carrillo, to report to them about the results of the portfolio 
reviews. I do not know if they have received that report yet. 
But I wanted the committee--because I think the three Under 
Secretaries have been in great partnership with your staff over 
the course of the last year and a half meeting on a regular 
basis and sending our folks to report on these activities to 
get some feedback, but also to keep you and the membership 
involved.
    So on these portfolio reviews, I think at least the Army 
will be able to give you a pretty good assessment of where we 
are in terms of those legacy systems and what progress we 
intend to make this year as we integrate across all these 
different portfolios.
    Senator McCaskill. Okay.
    You mentioned GFEBS, let me go down that road.
    According to the DOD IG, GFEBS does not have effective 
internal controls and, as a result, does not contain accurate 
and complete general ledger information as required by 
applicable law.
    At about the same time, GAO reported that approximately 
two-thirds of the invoice and receipt data must be manually 
entered into the Army's GFEBS system from the invoicing and 
receiving system due to interface problems, and the system's 
limitations significantly affect users' abilities to perform 
their daily task. As a result, Army installations were 
certifying year-end data with caveats and notes relating to 
inaccurate, incomplete, and missing data.
    This system, this General Fund Enterprise Business System, 
was initiated more than 7 years ago and is scheduled to be 
effectively deployed this summer--fully deployed. How soon do 
you think you can address these problems, and do you agree with 
both the findings of GAO and the DOD IG as it relates to these 
problems?
    Ms. Matiella. Some of this work was done almost 2 years 
ago, and since then, GFEBS has gone through a lot of reviews 
and a lot of fixing. Like you said, at this point we are almost 
fully deployed. We have 45,000 users on the system. We project 
to have about 55,000 users in the end. We have closed out 
several years. We got a clean opinion on appropriations 
received. After exam 1, which examined three different 
installations and how they used GFEBS, we got a qualified 
opinion on that. We are getting ready to roll out exam 2. So we 
are doing a lot of self-checking, and through that self-
checking, we are improving GFEBS.
    At the time that they did the audit, we were not as 
compliant as we are now. Right now we are 95 percent compliant 
with Standard Financial Information System (SFIS) requirements 
which DOD requires and that the Army Audit Agency (AAA) checks 
for us. So we have made a lot of improvements in GFEBS since 
that time.
    However, we still have problems and we continue working on 
those problems. The Army has been very aggressive, but it is a 
system that shows--I have talked with different CFOs throughout 
Government about this software. It is systems, applications, 
and products (SAP) software. I have talked with them about 
whether--for example, SAP is used by the Department of 
Agriculture who has a clean opinion and got a clean opinion 
with this software. So I have talked to them about how they 
rolled it out, how they were using it, and they are all 
believers in the fact that this is good software. So it is just 
a matter of us learning how to use it, making sure that we are 
improving the way we use it, so that we are interfacing into it 
correctly. We do have interface problems, but we are getting 
data that drops out of it. That itself has also improved. Our 
reject rate is much lower than it used to be. We are tracking 
it. We send weekly reports to the CMO and to Secretary Hale 
about how we are improving those reject rates. So we are 
holding ourselves very accountable for improving it. So we see 
a bright future for GFEBS.
    Senator McCaskill. Mr. Khan, do you have any comment on 
Secretary Matiella's comments?
    Mr. Khan. The GFEBS problem highlights an issue which is a 
bigger issue, the issue of the manual work-around that we 
highlighted in our report. That is because of the information 
the ERPs are going to be receiving from the feeder systems, the 
older systems, which are going to have to continue operating 
because there are so many of them. This is an issue which other 
ERPs also will be facing because the system operational entries 
of the feeder system and then that has to really get 
communicated into ERPs. If that is not done correctly, then 
there would be a need for manual work-arounds.
    Ms. McGrath. Ma'am, I would just agree with what Asif just 
articulated in terms of the challenges, in terms of passing the 
data from the legacy environment into the ERP. We do not have 
standard data across the enterprise, and so it becomes evident 
in the implementations. That is why we are working from an end-
to-end perspective, because if we do not, then we will never 
fix the ECSS. We have to take that broader perspective to your 
point earlier about the business process reengineering. It 
requires us to bring forward all of the legacy practices and 
change them so that when we are implementing these ERPs, we 
have a holistic approach to the data and the systems and the 
training aspects that have been identified.
    Senator McCaskill. Stepping back from this, do you think we 
have made--if you look at what has been a common problem in all 
of these struggles, it has been data standardization and it has 
been the specs on interface. So if 5 years ago, on a scale of 1 
to 10, we were a 1 on data standardization and interface specs, 
are we at a 5 now? Can we measure our progress? Because really 
that is what has caused a lot of these overruns and the date 
sliding and a lot of the money that has been wasted. Am I 
correct? Those two issues?
    Mr. Westphal. You are, Madam Chair. I will give you one 
example of what I think you are trying to show here. If you 
take the Army's personnel system and its financial systems, 
they were two separate systems that did not interface. So 
consequently when an auditor says how do I know Colonel 
Westphal is really married? Colonel Westphal has been in the 
Army for 30 years. Somebody goes back and looks and cannot find 
a marriage certificate because 30 years ago there was a 
different way of doing that and the personnel system was not 
interfacing with the financial system. So this enterprise 
system, IPPS-Army, will integrate those two systems, and it 
will be one individual who will enter data. So you will not 
have different stovepipes entering separate data that is not 
going to give that auditor the things he needs.
    The GAO was right. That documentation was not there, and 
therefore it could not verify that we were making the right 
payments at the right time at the right place. We hope to fix 
that.
    Unfortunately, IPPS-Army is not going to be fully 
deployable until 2017. So we have a lot of work to do between 
now and then to get those records in place, first of all, to 
come up within the Army and figure out what are the rules about 
what documents are going to be acceptable. A marriage 
certificate may be acceptable in one place but somebody else 
might say that is difficult to get. They come in different 
forms and shapes from each State. So we have to have some way 
to line up those requirements across the board, and that is 
what we are working on.
    Senator McCaskill. Mr. Khan, what would your reaction be to 
overall where are we on data standardization and interface 
specs?
    Mr. Khan. Data standardization is very critical, especially 
given the accelerated date of 2014 and the plans of the 
Services to use the legacy systems longer than expected without 
data standardization. It is not really going to be feasible how 
the information from the legacy systems or the feeder system is 
going to get input into ERPs or how they will be able to 
produce financial statements.
    Going back to your original question, where we are compared 
to 5 years ago, the SFIS initiative--that was the initiative to 
standardize the data within DOD. That really has gone through 
fits and starts and really has not reached the degree of 
maturity it should have to this point in time. So it still 
needs a fair amount of work to get to where it needs to be.
    Senator McCaskill. Maybe I need to talk to Secretary 
Panetta and say we need a deadline for data standardization. We 
will get to some significant manual work-arounds on that.
    Even before Secretary Panetta established the 2014 goal, 
the Navy plan called for achieving an audit-ready SBR by the 
end of the third quarter of 2013. The most recent update we 
received indicates that that Navy schedule is slipping. For 
example, the Navy had planned to begin audit for its 
reimbursable orders in the second quarter of 2012, but now it 
has skipped to the first quarter of fiscal year 2013. You had 
planned to begin audit of its requisitioning orders in the 
second quarter of 2012, but that has slipped to the second 
quarter of 2013. You had planned to begin audit of its 
contracts in the second quarter of 2012. That has slipped to 
the third quarter of 2013, and planned to do an audit of its 
FBWT in the fourth quarter of fiscal year 2012, but the goal 
has now slipped to the fourth quarter of 2013.
    What is the postponement of these milestones about, and how 
is it going to impact your 2014 deadline?
    Ms. Commons. Madam Chairman, we still believe that we will 
meet the 2013 date that we established. We believe that by the 
end of fiscal year 2013, that we will have an audit-ready SBR.
    What we are finding in our discovery, as we go through 
these processes, we are finding that we need to take more 
corrective actions than originally planned. We want to go 
through a very deliberate process.
    We are not rushing this just to meet a deadline. We want to 
ensure that when we make changes to our business processes, 
that these are long-term improvements. That is one reason that 
we are focused on our business processes end-to-end, not just 
looking at financial pieces, but we are going from the 
beginning of the process to the very end to ensure that when we 
make changes to the process, that it will result in an audit-
ready statement. So much of the delay is that in discovery, we 
have found that we need to make more corrective actions.
    With regard to reimbursable work orders, we realize that it 
is a government-wide problem. It is not simply a problem that 
DOD can solve by itself because we get reimbursable work orders 
from across the Federal Government. We need to have a 
methodology for accounting for that, and I believe we are all 
working to figure out exactly what to do in that process so 
that we can do the necessary eliminations.
    So basically we understand that we are moving some of the 
dates out but primarily because the corrective actions will 
take some time. We also need to have time to test those 
corrective actions to make sure that the things that we have 
put in place actually work. So we want to have a very 
deliberate process to be able to have an audit-ready SBR.
    Senator McCaskill. Mr. Khan, let me ask you about one of 
your findings--I think it was just last month--about the 
difficulty the Army is going to have meeting the 2014 date 
because of deficiencies with payroll processes and controls.
    One of the findings was that the Army did not have an 
effective, repeatable process for identifying the population of 
Active Duty payroll records. This is a big deal because it is 
$46 billion. It is a lot of money. Could you comment on whether 
or not you think that the Army has established a viable 
approach to addressing this particular finding in your audit?
    Mr. Khan. At the point in time we had done our field work, 
they were in the process of addressing that issue, but we were 
not able to validate whether or not they had come up with a 
repeatable process. We had highlighted in that report many of 
the processes and systems that are used by the Army are also 
used by the Air Force and the Navy. So we just wanted to 
highlight that. That is an issue that both the other two 
Services should also really keep in mind when they are coming 
up to their SBR timeline.
    Senator McCaskill. Do you think you have made some 
improvements in that area? Do you think you have something that 
will pass the standard in terms of an effective, repeatable 
process?
    Mr. Westphal. We think we are on our way to get there, but 
boy, we are working very hard right now to get that 
documentation and get it ready for 2014. So we are working very 
hard on it and we will keep you apprised of that as well.
    Senator McCaskill. In 2010, the Marine Corps asserted that 
its SBR was ready for audit but was unable to get the clean 
audit. GAO reviewed the audit findings and concluded the 
failure was attributable in part to the fact that the Marine 
Corps did not have adequate process and system controls and 
controls for accounting and reporting on the use of budgetary 
resources. The Marine Corps developed an action plan and 
milestones in response to that finding and sought a new audit 
for fiscal year 2011 SBR. However, GAO found that many of the 
Marine Corps' actions did not address the specific auditor 
recommendations and other actions were not adequate to correct 
the underlying problems.
    Some of this is just underlying internal control problems, 
which if you do not get that fixed, you cannot dress it up. You 
have to start with the internal controls or you are never going 
to get that clean opinion that you are all working so hard to 
get.
    So talk to me about that. I would like both Mr. Khan and 
Secretary Commons to address, why would you push for another 
audit if you had not addressed the internal control issue? Was 
it a miscommunication or a lack of understanding about what was 
going to be necessary? Or did you think you had solved the 
problem and were disappointed to find that you had not?
    Ms. Commons. The Marine Corps has, in fact, addressed many 
of the issues that were identified in the findings and 
recommendations. Many of those were systems issues which will 
take time to correct. So we felt it important to continue the 
audit because of the lessons that we are learning from the 
Marine Corps.
    We agree with you that internal controls are key. We have 
to address the internal controls across DOD, not just in the 
Marine Corps but across the entire DOD, and the Marine Corps 
has taken action to do that. In fact, the DOD IG recommended 
that we continue the audit because the Marine Corps had made 
significant progress. So we believe that we are solving those 
issues that we can do in the short-term. There are some long-
term issues we are going to have to continue to work on.
    Mr. Hale. Can I add a thought there, Madam Chairman?
    Senator McCaskill. Sure.
    Mr. Hale. I believe that we would have been better off to 
jump in the pool and get a private auditor to look at what we 
have done. Often we have done this for small parts. The Marine 
Corps was an exception where we did it for the entire SBR. But 
we just found they know a lot more about what we need to do 
frankly, and we did not know what we did not know. So I think 
it has been very helpful to have that audit. We have learned a 
great deal, and I have encouraged the other Services and they 
are doing it. Whenever they think they are reasonably close--I 
realize we cannot just do this whimsically, but when they are 
reasonably close, let us go get somebody in here and pass the 
test or not pass the test, and if we do not, they will usually 
tell you why.
    Senator McCaskill. They better. That is part of their job. 
Right, Mr. Khan?
    Mr. Hale. They should, as you know from your career better 
than I do.
    So I think this strategy of going to audit when we think we 
are reasonably close is a good one. It is not cheap, but it is 
not cheap to not get there either. So I endorse it strongly, 
and we are going to pursue it.
    Senator McCaskill. Do you have Yellow Book experience, 
which you all know, I assume, Yellow Book is the Bible of 
government auditing? Do you have people internally that are 
familiar with Yellow Book standards and auditing processes? How 
much of this are we outsourcing? Frankly, I think going through 
a trial run audit is a great idea. It is a great learning 
process, but if we are buying one from a full-blown private 
accounting firm, as complicated as your enterprises are, I do 
not want to think about what your bills are. In fact, do not 
tell me because then I will be off on a tangent----
    Mr. Hale. So I will not tell you.
    Senator McCaskill--about contracting for personal services 
that are beyond the pale.
    So why can we not get either through DCAA or--one time I 
tried to count how many auditors were in DOD between IG, DCAA, 
DCMA, GAO, everybody who worked at DOD, and I think I got to 
30,000 when I stopped counting. Now, a lot of them are not 
doing audit functions. A lot of them are doing different kinds 
of functions, but they are within organizations that would be 
considered audit-like.
    So could we not get a team of trained government auditors 
within DOD to be a roving squad to put people through their 
paces on audit work and come up with findings and would be 
illustrative to these different branches as to where they are 
in the process that maybe would not be as expensive as hiring a 
full-blown audit from the outside?
    Mr. Hale. First, we are trying to develop more skills. I 
wish we had more. We have some. We have some good people, and I 
will ask my colleagues to comment on this.
    As far as using the internal audit agencies, it will 
violate the independence rules. GAO will not allow that.
    Senator McCaskill. Not GAO. What if we got a special hit 
squad from DCAA and----
    Mr. Hale. First, DCAA is a pricing audit agency. They do 
not do financial statement audits. They are auditors.
    Senator McCaskill. Yes, but a lot of them are Yellow Book.
    Mr. Hale. I have them pretty busy doing other things right 
now.
    Senator McCaskill. I can go find you a bunch--I can go out 
to State auditors offices----
    Mr. Hale. You could do that.
    Senator McCaskill--and find you a team of government-
trained auditors that you could get a lot less expensively than 
$500 an hour.
    Mr. Hale. I think we would get into independence problems 
there too if they really worked for me or for any of the 
unders.
    Senator McCaskill. Yes, but you are not trying to do this 
to get a clean opinion. You are doing it for training.
    Mr. Hale. Let me ask the Services to comment on their 
remediation efforts and the extent they have people.
    Dr. Morin. Ma'am, if I may.
    Senator McCaskill. Yes.
    Dr. Morin. Ma'am, we have been trying to do this within the 
limits of audit independence and have had some reasonable 
success. The Air Force Audit Agency has provided a team of 
about 25 of their auditors that are focusing for us on just 
targeted areas of internal control investigation that directly 
support our audit readiness effort. They are not telling me, go 
in and do this to pass an audit, in quite those terms, and they 
are not themselves auditing in that sense, but they are doing 
very targeted investigations of key controls that are driven by 
our audit readiness plan. Then we will, of course, have 
another, a separate auditor, come in and do an eventual 
examination.
    Senator McCaskill. Of course. Obviously, I am not 
suggesting that we would ever hire anyone to do audits 
internally. That would not work. But having the expertise 
inside that can help with guideposts. I get that you wanted to 
try again because you had made progress and you wanted to see 
how much progress you had made. I think that is all good. But 
the basics of internal controls I think a lot of government 
auditors could have helped with that would have not needed a 
whole----
    Ms. Matiella. I believe that certifications are very 
important. They show a skill set. For example, the 
certification of being a Certified Public Accountant (CPA) is 
an important skill set to have when you are trying to become 
auditable or create financial statements that are auditable. I 
am a CPA. My audit director is a CPA. It is a very valuable 
skill to go out and hire. It does make a difference in terms of 
knowing what is required by the Yellow Book.
    We also use our AAA to a large extent to check us, to be 
independent but also to check us to make sure that we are doing 
the right thing.
    Senator McCaskill. I think that is great.
    Mr. Work. Ma'am, we are doing something very similar. We 
have about 30 members of the Naval Audit Service that go out. 
They did surprise audits. The first thing they looked at was 
internal controls. We identified a major issue there. Then we 
started to populate that around all of the different budget 
submitting offices.
    Then the second thing that we go in and look at is, do they 
have the right documentation. These are lessons learned from 
the Marine Corps audit.
    So we will continually step up what they will look at.
    But I think, going back to what Mr. Hale said, saying we 
will get to a SBR by 2014, put a search light or a flashlight 
on all of the different internal processes we have, and that 
has, quite frankly, illuminated a lot of problems that we did 
not know existed. So as Ms. Commons said, this is a very 
deliberate process and the more help we get from--the Marine 
Corps audit was very important for all of us because it really 
set the bar on what we have to do. So I believe that we are 
doing much of what you are suggesting right now.
    Senator McCaskill. Good.
    Dr. Morin. Senator, can I add one more point on that topic, 
if I may?
    Senator McCaskill. Sure.
    Dr. Morin. One of the things that we did not probably 
anticipate, when we hired these independent public accounting 
firms to do examinations and do limited scope looks at our 
assertions, is in some cases they have come and told us we were 
going further than we needed to in preparation for this 
assertion. I had independent public accounting firms on two of 
the assertions I have done where they identified areas where 
our plans, they felt, went beyond the standards that were 
required. Now, other areas they said, even though they gave us 
favorable opinions, there are other areas for improvement. But 
in certain cases they said, you are moving towards doing a full 
financial system certification for a particular system, and 
that is not a system of record and you probably do not need to 
go to the expense of doing that. So there is return in having 
these outside eyes on the problem that goes beyond just working 
through the process. Sometimes that external commercial audit 
perspective tells us we are making the problem harder than it 
had to be.
    Senator McCaskill. I am sure all the outside audit firms 
that are watching this hearing, glued to whatever place, are 
very grateful to you right now because I summarily dismissed 
how expensive they were, I think you were pointing out that 
there can be value added is important.
    I only have two more questions and then we will submit some 
more to you for the record. I will note that Senator Manchin 
had more contractor-related questions that we will submit. I 
will not go into them now, but I think they are important. 
Obviously, I think all of you know how engaged I am in the 
contracting issue. But he wants to know about the costs of 
benefits to veterans versus the overseas contractors, and I 
will make sure that those get in the record for his answer on 
that.
    Let's talk about DEAMS for a minute at the Air Force. In 
February, GAO reported that the interfaces on DEAMS and the 
legacy systems at the Air Force were inoperable and required 
reports either that are not being produced or that are 
inaccurate or incomplete. The interface problem with the 
Standard Procurement System (SPS) became so serious that that 
interface was turned off and the data was manually entered into 
DEAMS. In an April 2011 survey, 48 percent of the DEAMS users 
said their workload has increased as a result of DEAMS and only 
10 percent felt that their work was more accurate. Clearly that 
is not a good outcome for this system since we have spent 8 
years and $330 million on it.
    What is your response to these problems that have been so 
recently pointed out? I would like Mr. Khan to also speak to 
that.
    Dr. Morin. Yes, ma'am. Now, it is important to note the GAO 
study was just published a couple of months ago, but it was a 
result of field work that occurred predominantly in the last 
calendar year, some of it early in that year. So there has been 
significant progress since then.
    Let me begin with the interface issue. You referred to the 
SPS interface, and it is a portion of that interface which does 
not work. We are successfully importing data from the standard 
procurement interface, which is one of our main basic 
contracting systems, for new contracts. Modifications of 
existing contracts are the part that do not come through. So 95 
percent of the new contracts come through fine. For the 
modified contracts, the majority need to be handled manually. 
That is among the 245 areas that were identified for 
improvement in the course of moving towards stabilization of 
the system ahead of the operational assessment that I referred 
to in testimony earlier. There are some inherent limitations in 
working with an old system like SPS, and that is a system that 
has been looked at for replacement for some time and has been 
frozen and in place for a while, which is a problem. We believe 
that with the bulk of the new contracts coming in successfully 
and with some process improvements, we can get to an acceptable 
level of performance there.
    On the workload piece, if staff were promised that DEAMS 
would yield a lightening in their workload, that was not a good 
promise to make. ERPs in general are not workload savers and 
they should not be sold that way in comparison to the legacy 
systems which we have in a lot of the DOD which are quite easy 
to use. They are quite easy to use in some cases because they 
do not have appropriate internal controls. So doing the work 
properly sometimes takes more effort. Directly linking 
obligations to specific contracts and tying that through to a 
receiving report requires work.
    So I do not want to overpromise here. There are areas where 
we can improve workload. Again, we had laid in 245 specific 
discrepancies we were seeking to resolve as we worked through 
to stabilization of DEAMS. We have addressed all but about 40 
of those. The remaining 40 we anticipate being closed out by 
the second week of May, so within a month. That will be when we 
move into the operational assessment of that system at Scott 
Air Force Base. We take the workload piece seriously, but we do 
not anticipate fielding a system that is going to make 
everyone's life much easier because we are fielding a rigorous 
system.
    Senator McCaskill. I really understand the point you are 
making because I think one of the reasons we got into this mess 
is everybody wanted to hold onto legacy systems. So every time 
they were asked, it was, oh, no, this is horrible. It is just 
way too much work. So there was this cultural predisposition 
towards holding onto legacy systems which frankly has caused a 
lot of the interface problems and a lot of the time slippage 
and a lot of the budget overruns and so forth.
    Would you agree with the description that Secretary Morin 
made, Mr. Khan, that they are getting there?
    Mr. Khan. We would have to go back and evaluate that.
    Part of the issue is also related to what I mentioned 
earlier about data standardization. That was the problem, why 
SPS was not communicating properly with DEAMS. That is an 
issue.
    The other one goes to some of the features which the users 
of DEAMS had in the legacy systems are not in the newer system.
    So it is like Dr. Morin is saying, it is managing the 
expectations that in some of the cases workload is not going to 
lighten up for the users. But this is also linked up with the 
business process reengineering effort which is a part of the 
NDAA. If that is followed through, the expectation is that the 
processes are going to be much more streamlined than they were 
in the legacy environment. So ideally that is going to lighten 
the workload.
    Senator McCaskill. Finally, the auditability of Army 
classified programs. Earlier this year, the Army was asked to 
reprogram funds for a variant of the GFEBS that will be able to 
handle its classified programs. Without this new system, the 
Army said it would not be able to achieve full auditability of 
its SBR by the 2014 deadline set by Secretary Panetta. The 
reprogramming request was recently withdrawn largely because it 
did not meet Senator McCain's criteria for approval of a new 
start reprogramming request.
    I would like you to state for the record what the impact of 
a withdrawal of the GFEBS Sensitive Activities reprogramming 
request on the Army's ability to meet the deadline is, and what 
steps, if any, would you like Congress to take in the 2013 
authorization and appropriations legislation to address this 
issue?
    Mr. Westphal. Madam Chair, as I understand it, if we are 
able to get the resources in fiscal year 2013, we will be able 
to fix this issue. We have asked for the reprogramming, and 
Senator McCain, as you pointed out, has asked us to put our 
report together on that and we are producing that.
    Senator McCaskill. Okay. If you would let us know and make 
sure that we get what you need in the authorization, as it 
relates to that, I think it is very important that the 
classified programs have that auditability, and I do not want 
to leave them behind. So let us know on that.
    As usual, you all are working very hard at a very difficult 
problem. I get very frustrated with the amount of money that 
has been spent and the amount of time it has taken. But please 
do not lose sight that I do understand that it is incredibly 
complicated what you are trying to do. There are no businesses 
that have the challenges that you have in terms of enterprise-
wide auditability.
    I am not going to let up on this because I think it is 
essential that we get to that point. I will be watching. I feel 
like ordering my buttered popcorn and Diet Coke to watch this 
2014 date because I think this is going to be very interesting 
to see how this turns out. I do think everybody is on point 
about it. I think everybody is working very hard towards the 
goal. I will be paying very close attention to how much money 
it costs us to get to this 2014 number. I will look forward to 
whatever assessment you think you can give us, Secretary Hale, 
about manual work-arounds and what the price tag on that is 
going to be so that I could have a conversation with both you 
and Secretary Panetta to make sure that we have done the cost-
benefit analysis.
    I think pushing everybody has a lot of benefit. I just want 
to make sure the costs associated with that benefit are not too 
high. I would appreciate any feedback we can get specifically 
on that in the coming weeks and months.
    As usual, thank you very much for all of your service. The 
public has no idea how much you know and how hard you work. I 
do. Thank you very much. This hearing is adjourned.
    [Questions for the record with answers supplied follow:]

            Questions Submitted by Senator Claire McCaskill

               PROBLEMS WITH FUNDS BALANCE WITH TREASURY

    1. Senator McCaskill. Secretary Hale, Ms. McGrath, Secretary Work, 
and Secretary Commons, the Department of Defense (DOD) identified the 
reconciliation of its Funds Balance with Treasury (FBWT) as the first 
and easiest step that it could take toward auditability. In November 
2010, however, the DOD Inspector General (IG) issued a disclaimer of 
opinion on the Navy's fiscal year 2010 FBWT. The Government 
Accountability Office (GAO) reviewed the audit findings and concluded 
that although DOD has spent over 4 years and $29 million to acquire an 
information technology tool to reconcile FBWT, this tool won't be able 
to get the job done until DOD takes additional steps to fix internal 
controls. For example, GAO found that the Navy relies on data from the 
Defense Cash Accountability System (DCAS) to reconcile their FBWT to 
Treasury's records, however, ``DOD has not tested the application 
controls over DCAS since its implementation to determine if the system 
is processing data as intended''. ``A list of over 650 DCAS system 
change requests'' needs to be addressed ``in order to correct DCAS data 
reliability and security problems or process required system updates''; 
and ``over 200 of these system change requests are deficiencies that 
affect audit readiness and 20 require immediate action.'' Have the 
problems identified by the DOD IG and GAO been addressed?
    Mr. Hale and Ms. McGrath. In its 2011 report on Navy and Marine 
Corps FBWT reconciliation, GAO noted that Defense Finance and 
Accounting Service (DFAS) has been developing a Business Activity 
Monitoring (BAM) tool. The tool is an essential component in successful 
and repeatable Department of the Navy FBWT reconciliation. This year, 
DFAS has loaded the Navy appropriation data for fiscal year 2010 
through fiscal year 2012 and has completed monthly FBWT reconciliations 
for the first 4 months of fiscal year 2012. DFAS is also retaining all 
supporting documentation for audit purposes. Further strengthening of 
the BAM tool's internal controls is planned for third quarter of fiscal 
year 2012, along with the loading of the Navy appropriations data from 
fiscal year 2006 to 2009. Other improvements are also planned. DFAS 
expects the BAM tool to fully support the Navy FBWT reconciliation by 
the scheduled audit readiness date of March 2013.
    These 650 System Change Requests (SCR) GAO noted related to DCAS 
are not solely system deficiencies related to cash accountability 
reporting, but a combination of audit-related weaknesses, user 
enhancements, and other changes to systems functionality requested by 
both technical and functional experts. DOD has developed a two-step 
improvement plan to address the system change requests. First, DOD is 
currently migrating the systems platform that DCAS operates in, moving 
it to a web-based, Common Access Card enabled environment. This 
migration will complete approximately 100 of the SCRs. Second, the DCAS 
governance board, comprised of executive level personnel, will review 
and reprioritize all remaining SCRs after the systems migration. This 
board will be held accountable for ensuring that the scarce resources 
allotted to DCAS are used wisely with emphasis on ensuring auditability 
of the cash accountability reporting.
    Mr. Work and Ms. Commons. The Navy does rely on the data from the 
DCAS to reconcile the FBWT to Treasury's records. DCAS is managed and 
maintained by the Defense Logistics Agency (DLA). DLA is addressing the 
concerns noted by GAO, with plans to move DCAS to a more secure web 
environment, and with a planned November 2012 deployment of multiple 
systems change requests to enable Navy-Marine Corps SBR audit 
readiness.
    In their 2011 report on Navy and Marine Corps FBWT reconciliation, 
GAO also noted that the DFAS has been developing a BAM tool. This 
information technology tool is essential to successful and repeatable 
Navy FBWT reconciliation. This year, DFAS has loaded Navy data for 
fiscal year 2010 through fiscal year 2012 appropriations and has 
completed monthly FBWT reconciliations for the first 4 months of fiscal 
year 2012. DFAS expects to be current with the monthly reconciliations 
from October 2011 going forward by the end of May 2012. For audit 
purposes, DFAS is also retaining all documentation supporting the 
monthly reconciliations. Further strengthening of the BAM tool's 
internal controls is planned for third quarter of fiscal year 2012. 
DFAS expects the BAM tool to fully support the Navy FBWT reconciliation 
by the scheduled audit readiness date of March 2013.

    2. Senator McCaskill. Secretary Hale, Ms. McGrath, Secretary Work, 
and Secretary Commons, why is it that the DCAS problem does not appear 
to have adversely affected other DOD entities that submitted their FBWT 
for audit?
    Mr. Hale. The current 2014 directive for auditability will require 
all entities to reconcile FBWT, regardless of system in use. Only a few 
entities to include the Navy currently use DCAS for U.S. Treasury 
expenditure reporting and FBWT reconciliation. DOD is working closely 
with the U.S. Treasury in conjunction with the Government Wide 
Accounting reporting modernization effort to ensure all of our systems 
that affect the FBWT reconciliation are properly aligned and auditable.
    Ms. McGrath. The DCAS capabilities affect other entities and the 
solutions being implemented will improve the processes for all impacted 
entities.
    Mr. Work and Ms. Commons. The Navy is the only DOD organization 
using DCAS for cash accountability and Treasury reporting.

    3. Senator McCaskill. Secretary Hale, Ms. McGrath, Secretary Work, 
and Secretary Commons, is the Navy now in a position to receive a clean 
audit opinion on its FBWT?
    Mr. Hale and Ms. McGrath. Navy has established a plan to assert 
audit readiness for FBWT by March 31, 2013. We are monitoring Navy's 
progress against their plan.
    Mr. Work and Ms. Commons. The Navy's FBWT audit readiness assertion 
date is planned for March 31, 2013. The Navy is not yet audit ready. 
The Navy is collaborating with the DFAS to execute its detailed plan to 
achieve audit readiness in this area. The Navy has financial managers 
on-site at DFAS Cleveland working closely with DFAS managers to keep 
the detailed FBWT auditability plan on schedule.

                                 ______
                                 
           Questions Submitted by Senator Joseph Manchin III

                        OVERSIGHT OF CONTRACTING

    4. Senator Manchin. Secretary Hale, we must look closely at the 
business practices of contracting since contracted spending accounted 
for over half of the DOD budget in fiscal year 2011. In your response 
to my question regarding the ratio of contractors to uniformed 
personnel, and the jobs performed by contractors in overseas 
operations, you stated, ``I don't think any contractor is doing exactly 
the same job as a frontline soldier.''
    However, I maintain that contractors are performing many jobs that 
our servicemembers have been trained to do, and at a higher cost. From 
what I understand, contractors eat at the same dining facilities, see 
the same doctors, and are resupplied by the same convoys that support 
our troops. There are also long-term costs associated with contractors, 
especially in cases like Qarmat Ali where the taxpayers may foot the 
bill because of the indemnity clause that relieves the contractor of 
responsibilities even under willful misconduct conditions.
    As you may know, the Corps of Engineers contracts for security in 
both Afghanistan and Iraq. According to a 2011 Special Inspector 
General for Iraq Reconstruction report, in May 2004 the Army awarded a 
services contract to the Aegis Corporation for security management 
services, protective services, and antiterrorism support and analyses 
in Iraq. The contract was for a 1-year base period--June 1, 2004 
through May 31, 2005--and two 1-year options--June 1, 2005 through May 
31, 2007. The two 1-year options were exercised, and the second option 
year was extended for 6 months to November 30, 2007. As of April 7, 
2011, obligations totaled $447.5 million, and Aegis had received $445.5 
million.
    Similar jobs go well beyond security and frontline soldier 
missions. For example, according to a 2009 CBS report, Kellogg, Brown, 
and Root (KBR) was found to charge $100 per load of laundry. Yet, we 
have Quartermaster Corps soldiers trained to operate shower and laundry 
equipment. Further, the Laundry Advance System, which is a mobile 
laundry trailer, is capable of supporting large military units.
    With that in mind, below is a sampling of jobs being performed by 
contractors doing the same job as a military servicemember in 
Afghanistan. Please provide a comparison in salaries of the following 
positions:

          Contracted Position Military Position
          FLUOR Security Manager (Afghanistan)--U.S. Marine MOS 0311
          SABRE International Security Manager--U.S. Army 11B30
          Dyncorp Detainee Expert--U.S. Army 31E20
          Armor Group Security (Afghanistan)--Army 11B10/Marine 0311
          Aegis Security Escort Team Leader--Army 11B20/Marine 0311
          Aegis Personal Security Detail Leader--Army 11B20/Marine 0311
          Aegis Kennel Master--U.S. Army MOS 31K30
          Aegis EOD Dog Handler--U.S. Army MOS 31K10
          Triple Canopy Security Guard (Afghanistan)--U.S. Army 11B/
        Marine 0311
          KBR Laundry Facility Attendant--U.S. Army MOS 57E10
          KBR Laundry Facility Supervisor--U.S. Army MOS 57E30
          KBR Food Service Specialist--U.S. Army MOS 92G10
          KBR Food Service Specialist Supervisor--U.S. Army MOS 92G

    Mr. Hale. The 2012 Defense Strategic Guidance \1\ indicates DOD is 
maintaining a ready and capable force even as it reduces the size of 
the military. We are focused on sustaining the military's warfighting 
capabilities. This strategy entails leveraging non-military personnel 
for the support activities associated with combat, including the types 
of support services listed in your question as well as reconstruction 
activity, which is non-military in nature. The use of contractors in 
these support activities has been a feature in every war or contingency 
operation in our history. As the 2010 Quadrennial Defense Review 
(QDR)\2\ acknowledged, contractors are part of the total force, 
providing an adaptable mix of unique skill sets, local knowledge, and 
flexibility that a strictly military force cannot cultivate or resource 
for all scenarios. This is true even for contractor-provided 
security.\3\ More broadly, contractors provide a range of supplies, 
services, and critical logistics support in many capability areas, 
while reducing military footprint and increasing the availability and 
readiness of resources.
---------------------------------------------------------------------------
    \1\ Available at http://www.defense.gov/news/Defense--Strategic--
Guidance.pdf
    \2\ Available at http://www.defense.gov/qdr/
    \3\ These security providers provide self defense against criminal 
violence, not deliberate destructive action against armed forces or 
armed actors. In many cases, using soldiers to protect non-military 
personnel or reconstruction activities could turn civilian development 
into a military target.
---------------------------------------------------------------------------
    We are in the process of assembling the requested data, but caution 
that a direct comparison between the contracted cost for an individual 
and the salary of a military position poses challenges. For example, a 
soldier's annual salary does not reflect the life-cycle costs to 
recruit, train, retain, and retire the individual; and a contractor's 
annual salary does not capture the fact that this work-for-hire 
resource comes pre-recruited and pre-trained and can be flexibly 
engaged and released. In 2009, the Chairman of the Joint Chiefs of 
Staff commissioned a task force to assess DOD's reliance on contracted 
support in contingency operations and provide recommendations to 
improve our ability to plan for and execute operational contract 
support. As a result, the Chairman, with great support from the 
Secretary of Defense, has directed a number of efforts to 
institutionalize this capability. These ongoing efforts include, but 
are not limited to, improvement to strategic planning guidance, 
doctrine, education, and resources. GAO is currently evaluating DOD's 
efforts in this area under job number 351692.
    DOD agrees that it must continuously look closely at the business 
practices of contracting, particularly in support of frontline 
soldiers. We have been working with Senator McCaskill, who chairs this 
subcommittee, and others on improving wartime contracting efforts. In 
recent years, we supported the 2008 to 2011 Wartime Commission that 
Senators McCaskill and Webb established, providing the Commission with 
personnel, data, interviews, and insights. The Commission issued three 
major reports containing many recommendations. We maintain a scorecard 
to manage DOD progress against all the Commission's recommendations. We 
currently are working with GAO, which is engaged under job number 
121042 in evaluating DOD's progress against the Commission's 
recommendations. We are also working with Senator McCaskill's Senate 
Homeland Security and Governmental Affairs Committee Contracting 
Oversight Subcommittee staff on the language of her proposed 
Comprehensive Contingency Contracting Reform Act of 2012 (S. 2139). The 
provisions are far-reaching and include coverage related to topics 
raised in your question: contracting for security and base operations 
support services, which are obtained through omnibus contracts, like 
the Logistics Civil Augmentation Program.

    5. Senator Manchin. Secretary Hale, as a follow-up to your 
testimony regarding the mix of contractors to military personnel, 
according to the public website for the Defense Contract Audit Agency 
(DCAA), the agency that provides standardized contract audit services 
for DOD, as well as accounting and financial advisory services 
regarding contracts and subcontracts, there resides an inherent 
skillset within DOD for oversight of contracts. There are 4,172 
auditors within DOD, and a total staff of nearly 5,000 in DCAA. Nearly 
all of these employees have college degrees (4,399), advanced degrees 
(1,424), or are Certified Public Accountants (1,216). Beyond the 
organic audit functions performed within DOD, could you further provide 
the number and type of contractors that DOD intends to employ to 
perform an audit?
    Mr. Hale. While contract audits are an inherently governmental 
function, financial statement auditing is not. Financial statement 
audits are different than contract audits, and require a different 
skillset. Our estimate of the number and type of contractors that DOD 
intends to employ to perform financial statement audits is contract 
sensitive. However, significant financial statement audits that have 
been performed, such as the U.S. Army Corps of Engineers and the U.S. 
Marine Corps audits, have involved approximately 100 auditors.

    6. Senator Manchin. Secretary Hale, how long do you anticipate 
hiring these contractors to perform audit functions?
    Mr. Hale. Since financial statement audits are not an inherently 
governmental function and they require specialized skills and 
experience, we believe it is most efficient and effective to use 
contractors to perform this function indefinitely. It should be noted 
that this is a common practice across government, and that independent 
public accountants' work is frequently subject to review by government 
auditors such as the DOD IG and GAO.

    7. Senator Manchin. Secretary Hale, in your testimony you stated, 
``our contractor dollars from 2012 to 2013 go down in similar levels to 
our civilian workforce and our military workforce. So, you are seeing 
some downturn in contractors.'' Can you provide me the details behind 
your statement, to include the details on the number of contractors in 
2012 and 2013?
    Mr. Hale. As reflected in the fiscal year 2013 President's budget 
request, overall contract services funding decreases by $3.9 billion (3 
percent) from fiscal year 2012 level of $136 billion to the fiscal year 
2013 level of $132 billion. The primary reason for this decrease in 
contractor support ($2.4 billion) is the reduction in staff support 
contract services, one of our targeted fiscal year 2012 efficiencies. 
Advisory and Assistance and Other Services decrease by 10.2 percent 
from the fiscal year 2012 budget, largely attributable to reductions in 
support to the Army, the Defense Intelligence Agency and other 
classified programs. These are the object classes that would contain 
the majority of staff-support contractor functions; however, some of 
the specific staff-support contracts may be reflected against other 
object classes. A process to measure actual progress against the 
Secretary's reduction goal has been implemented. Although overall 
contract services funding is estimated to decrease by 3 percent in 
fiscal year 2013, the fiscal year 2013 contractor full-time equivalent 
(FTE) levels are estimated to increase by 6 percent from 290,133 to 
308,532--with the largest increases in the less costly skill set of 
equipment maintenance.
                                 ______
                                 
              Questions Submitted by Senator Kelly Ayotte

                             SEQUESTRATION

    8. Senator Ayotte. Secretary Westphal, Secretary Matiella, 
Secretary Work, Secretary Commons, Secretary Morin, and Mr. Tillotson, 
as the Chief Management Officers (CMO) and Chief Financial Officers, 
each of you enjoys unique visibility across the breadth of your 
respective Services' financial and management operations. Under current 
law, the defense sequestration cuts are due to be implemented in 
January. Including the existing $487 billion in cuts over the next 9 
years, defense sequestration would result in an approximately $1 
trillion reduction in defense spending over the next decade. Secretary 
Panetta has said the defense sequestration cuts would be catastrophic 
and would inflict severe damage to our national defense for 
generations. He compared the defense sequestration cuts to shooting 
ourselves in the head. From a budget and management perspective, what 
impact will defense sequestration have on your Service?
    Mr. Westphal and Ms. Matiella. To echo Secretary Panetta, the 
magnitude of these cuts would be catastrophic. Sequestration would 
force an immediate percentage reduction in our operation and 
maintenance accounts that could damage readiness, for example through 
reduced training, and make our ability to cover any emergent execution 
year requirements extremely difficult. The reductions could also affect 
ongoing efforts to improve our infrastructure and could desynchronize 
our investment and modernization strategies.
    While recognizing the Nation's deficit challenges, it is imperative 
that any future reductions as a result of reduced discretionary 
spending caps to the Army's budget be based on comprehensive strategic 
analysis. We must ensure that we preclude hollowing the Army by 
maintaining balance in force structure, readiness, modernization 
efforts, and commitments to the All-Volunteer Force.
    Mr. Work and Ms. Commons. Any planning for sequestration would be a 
government-wide effort guided by the Office of Management and Budget 
(OMB). If sequestration occurs, automatic percentage cuts are required 
to be applied without regard to strategy, importance, or priorities, 
resulting in adverse impact to almost every contract and operation 
within DOD. Sequestration would adversely impact all components of the 
fiscal year 2013 budget request through contract cancellations, 
contract terminations, undetermined cost increases caused by 
inefficient contracting, and schedule delays.
    Dr. Morin and Mr. Tillotson. Per guidance from OMB, DOD is not 
planning for sequestration; however, sequestration would drive major 
additional reductions beyond the first phase of the Budget Control Act 
(BCA) reductions to the Air Force fiscal year 2013 budget request. We 
concur with Secretary Panetta's assessment. As Air Force leadership has 
testified, the proposed fiscal year 2013 budget is a balanced and 
complete package with no margin of error. Under sequestration, 
additional programs would need to be restructured, reduced and/or 
terminated. Our readiness and operations would be impacted, as well as 
all investment accounts, including our high-priority modernization 
efforts.

                        YEAR-END FUNDS TRANSFERS

    9. Senator Ayotte. Secretary Hale, as I said in my opening 
statement, I am concerned that the annual transfer of funds between 
defense accounts, especially at the end of the fiscal year, decreases 
accountability and increases the difficulty in achieving accurate 
financial statements. These requests are supposed to be for higher 
priority items based on unforeseen military requirements. How do you 
ensure that funds-transfers, including those that are below the 
threshold needed for congressional approval, are, in fact, being spent 
on higher-priority items based on unforeseen military requirements?
    Mr. Hale. I believe that the current reprogramming process provides 
DOD with necessary flexibility while providing Congress with 
appropriate oversight. DOD prepares the budget 18 to 20 months prior to 
actual execution, the reprogramming process permits DOD to meet most 
emerging requirements in a timely manner while staying under the 
Transfer Authority limits. I have personally conveyed your concerns and 
those of other committees to my staff and to the senior staff in the 
military departments.

    10. Senator Ayotte. Secretary Hale, do you agree that the 
persistent transfer of funds among accounts without oversight, 
particularly at the end of the fiscal year, makes the prospect of an 
accurate financial statement that much more difficult to obtain? If so, 
what are you doing to curtail these transfers and end-of-year spending 
sprees?
    Mr. Hale. I believe that the current reprogramming process provides 
DOD with necessary flexibility while providing Congress with 
appropriate oversight. The reprogramming process provides critical 
support enabling DOD to respond to emerging needs and to make effective 
use of taypayers' dollars. The process is especially important when we 
are at war. I have personally conveyed your concerns and those of other 
committees to my staff and to the senior staff in the military 
departments. We will seek to minimize reprogrammings, but we need your 
help to create a process that continues to meet warfighters' needs.

                         BASE OPERATING BUDGETS

    11. Senator Ayotte. Secretary Hale, the Services historically 
propose annual budgets that contain an amount for base operating 
support that is significantly less than the known requirements. They 
know that they will have the flexibility to transfer funds into the 
account to cover bills during the year. But this practice results in a 
budget that does not reflect reality. How can we change this process to 
ensure the budget proposals reviewed by Congress are an accurate 
accounting of what we expect to pay?
    Mr. Hale. A number of factors have challenged the Services' efforts 
in recent years to predict and budget for Base Operations Support (BOS) 
costs. Utilities costs across all commodities (i.e., electricity, fuel 
oil, natural gas, and coal) are rising at a faster rate than previously 
experienced. Soldier and family support programs related to transition 
assistance, suicide prevention, and sexual harassment and assault have 
expanded to meet the evolving needs of our warfighters and their 
families. The fidelity of the Services' BOS budget proposals will 
improve over time as cost estimating models are updated to reflect 
recent trends in utilities costs and the impact that the redeployment 
of personnel from Afghanistan will have on BOS programs and costs has 
been fully assessed.

    12. Senator Ayotte. Secretary Hale, if we have predictability 
regarding certain budget expenses, why are these accounts not 
completely funded in DOD's budget requests?
    Mr. Hale. The Services can accurately predict the costs of certain 
BOS programs. These include traditional family programs such as child 
care and youth programs, law enforcement and force protection, fire 
protection, leases, long-term utilities privatization contracts, and 
civilian salaries. These fixed costs represent more than 80 percent of 
the total BOS requirements and are fully funded each year. As mentioned 
in the response to Question #11, there have been unfunded requirements 
in recent years due in part to the growth in specialized soldier and 
family support programs and utilities bills that are not tied to fixed 
rates.

                      MAJOR WEAPONS SYSTEMS COSTS

    13. Senator Ayotte. Secretary Hale, after the defense budget cuts 
of the early 1990s, we saw significant growth in the unit costs of 
major systems as their procurement quantities were reduced and their 
acquisition schedules were stretched out. We are now facing a similar 
scenario where--through sequestration--the BCA will significantly cut 
the defense budget. Has DOD looked at how the drawdown during the 1990s 
impacted the costs of major weapons systems?
    Mr. Hale. If sequestration takes effect early next year, 
significant inefficiencies and impediments to prudent acquisition 
program management and financing will be introduced. The requirement 
that each program, project, and activity take a reduction will 
introduce serious management challenges for program managers. DOD does 
not have the data on the cost impact of the previous drawdown.

    14. Senator Ayotte. Secretary Hale, is DOD doing any similar 
analysis today as it plans its budgets for the out-years? If not, why 
not?
    Mr. Hale. DOD prepares the annual budget request within the 
framework of the Planning, Programming, Budgeting, and Execution system 
process. The Secretary of Defense has noted that additional reductions 
in resources will require a revised strategy and will prepare a budget 
that includes the out-years.

    15. Senator Ayotte. Secretary Hale, to what extent could cost 
savings from these reductions be eaten up over the long-term by higher 
per-unit costs and termination costs?
    Mr. Hale. Procuring defense articles at economic rates often yields 
savings, in comparison to procurement actions where vendors are unable 
to take advantage of economies of scale production. Likewise, 
terminating or cancelling procurement in advance of what was 
contracted, typically results in additional costs to the government, to 
prematurely closeout production. DOD customarily seeks to maximize its 
spending by buying at economic rates. However, when the funding is 
constrained and the resources are allocated over a wide portfolio of 
defense missions, maintaining efficient rates and keeping production 
lines open become challenging.
    Once DOD has been notified by OMB as to the annual budget level, 
DOD will carefully examine investment strategies and alternatives to 
address the full spectrum of national security requirements by crafting 
a balanced budget plan to minimize inefficiencies as a result of lower 
funding levels.

                          BUDGET EFFICIENCIES

    16. Senator Ayotte. Secretary Hale, in January 2011, DOD announced 
that it had found $154 billion in efficiencies over the next 5 years 
and that it would be able to invest $70 billion of that saved money 
into more deserving accounts. Those efficiencies included scores of 
initiatives, including program cancellations and restructuring, 
consolidations in various facilities and functional areas, reductions 
to DOD's workforce, and cuts to the number of flag and general officers 
and senior executive personnel. Where in its overall plan of action and 
milestones is DOD in implementing these efficiency initiatives?
    Mr. Hale. DOD has established governance processes and reporting 
mechanisms to manage implementation of the 300+ efficiency initiatives. 
The Services and the Office of the Secretary of Defense (OSD) are on 
target to successfully implement their President's budget for 2012 
efficiencies. On April 23, 2012, the Services briefed the Senate 
Appropriations Committee and Senate Armed Services Committee staffs on 
their fiscal year 2012 Secretary of Defense efficiency initiatives, 
explaining the key focus areas in which they intended to gain 
efficiencies, the implementation process, and assessment of risk.
    Due to enactment of the BCA of 2011, many of the reinvestments 
included in the fiscal year 2012 President's budget request have been 
offset by major force structure changes and other reductions in the 
fiscal year 2013 budget.

    17. Senator Ayotte. Secretary Hale, to what extent is DOD actually 
realizing the intended savings?
    Mr. Hale. Senior leadership within DOD routinely monitor execution 
of these efficiencies to ensure that intended savings are realized. As 
of the March 19, 2012, briefing to the Deputy Secretary of Defense, the 
Services and OSD are on target to successfully implement their 
President's budget for 2012 efficiencies. In addition, the Services 
briefed the Senate Appropriations Committee and the Senate Armed 
Services Committee staffs on April 23, 2012, assuring the staffs that 
they are on track to meet their fiscal year 2012 efficiency targets.

    18. Senator Ayotte. Secretary Hale, without the ability to audit 
DOD's Statement of Budgetary Resources (SBR), how do we actually know 
we are saving this money?
    Mr. Hale. Although the overall DOD SBR is not yet auditable, each 
component annually certifies its own financial reports. These 
individual, component-level accounting systems provide the execution 
information utilized in each component's efficiency governance and 
reporting process. In March 2012, all the Services and OSD reported on 
track execution of their efficiencies.

    19. Senator Ayotte. Mr. Khan, do you have any concerns that the 
quality of DOD's financial management data, business processes, and 
business systems may not be conducive to fully achieving these intended 
savings?
    Mr. Khan. As we have reported, DOD does not yet have accurate and 
reliable financial data needed to effectively carry out its management 
functions, including identifying and managing the costs of its 
operations, and reliably estimating resource needs. We have also 
reported that weaknesses in DOD's business processes and systems 
contribute to the lack of reliable financial data. In estimating 
reported cost savings, we would expect that DOD would have to rely to 
some extent on historical financial management data as well as program 
performance information to identify areas where potential efficiencies 
and related cost savings could be achieved. To track its progress in 
achieving these savings, we would expect that DOD would need to rely on 
information in its accounting systems as well. Therefore, until DOD 
corrects the weaknesses in its accounting and other business processes 
and systems so that it is able to produce reliable financial data for 
its cost savings efforts, any reported cost savings will not be 
reliable.

    20. Senator Ayotte. Secretary Hale, of the $100 billion in savings, 
the plan was to let the Services use about $28 billion to cope with 
higher-than-expected operating expenses and $70 billion for high-
priority weapons systems. To what extent have these monies been 
reinvested as intended?
    Mr. Hale. Due to enactment of the BCA of 2011, many of the 
reinvestments included in the fiscal year 2012 President's budget 
request have been offset by major force structure changes and other 
reductions in the fiscal year 2013 budget.

                     CONTRACTOR PENSION LIABILITIES

    21. Senator Ayotte. Secretary Hale, a few months ago, Senator 
McCaskill and I, and subsequently Chairman Levin and Ranking Member 
McCain, asked GAO to look into the issue of defense contractor unfunded 
pension liability. Due to a change in Federal accounting rules that 
would accelerate the amount contractors can recover from DOD for their 
employee pension costs, DOD may have to pay billions of dollars more 
for weapons programs than originally planned. To what extent has DOD 
budgeted for these pension liabilities?
    Mr. Hale. DOD did not budget for the increased pension costs 
resulting from the rule revision in the fiscal year 2013 President's 
budget submission.

    22. Senator Ayotte. Secretary Hale, what will DOD's approach be 
going forward to properly budget for these liabilities?
    Mr. Hale. The Director, Defense Pricing has issued guidance stating 
that all contracts entered into after February 27, 2012, should 
properly reflect contractor pension costs calculated under the newly 
revised Cost Accounting Standards. We will continue to work with the 
Office of Defense Pricing to ensure that these costs are properly 
captured in future budget submissions.

    23. Senator Ayotte. Secretary Hale, how concerned are you about 
this issue today?
    Mr. Hale. We are concerned that the recent change to the Cost 
Accounting Standards will result in higher pension costs to DOD in the 
near-term. It is unfortunate that these higher costs are coming at a 
time when DOD is working hard to identify ways to efficiently reduce 
spending. However, we recognize that this will not likely be a 
permanent cost increase to DOD. As contractors' pensions become fully 
funded, DOD's reimbursement costs should revert to historically normal 
levels.

    24. Senator Ayotte. Secretary Hale, according to the 10-K 
Securities and Exchange Commission reports that the four top defense 
contractors recently filed, the difference between their pension plan 
assets and future pension liabilities range from $2.9 billion to $13.5 
billion each. At this point, what is your sense of roughly how much 
these liabilities could cost DOD?
    Mr. Hale. These costs will be spread over all entities that do 
business with these companies. The amount that those liabilities could 
cost DOD depends on the amount of work DOD does with those contractors 
relative to other agencies and customers. Even under the old Federal 
accounting rules, DOD would have had to pay its share of those 
liabilities. The real cost to DOD from the new rules is the timing of 
cost--those liabilities will be recuperated much faster under the new 
rules, resulting in a cost increase in the near-term. DOD is currently 
working closely with our contractors to estimate DOD's cost for our 
next budget submission.

                         AIR FORCE AUDITABILITY

    25. Senator Ayotte. Secretary Morin, Mr. Tillotson, and Mr. Khan, I 
understand that, among all the Services, the Air Force may have the 
most difficulty meeting Secretary Panetta's accelerated goal of 2014, 
as opposed to 2017, to achieve auditability of its SBR. What are the 
most significant challenges facing the Air Force in this regard and how 
is the Air Force addressing them?
    Dr. Morin and Mr. Tillotson. The most significant challenge facing 
the Air Force is the lack of a single integrated financial management 
system. Financial data flows through multiple systems before it is 
posted to our general ledger. This creates opportunities for data to be 
lost or otherwise degraded. To address this problem, the Air Force 
began implementing an Oracle-based COTS package widely used in the 
Federal Government. The resulting system, Defense Enterprise Accounting 
and Management System (DEAMS), is a joint effort with U.S. 
Transportation Command (TRANSCOM), DFAS, and the U.S. Air Force. DEAMS 
will not be fully deployed prior to the 2014 date. To address this 
shortfall, the Air Force and DFAS are evaluating additional process 
controls and cost-effective enhancements to legacy systems to achieve 
the accelerated goal. The ability to meet the 2014 goal will also 
require increased manpower to support additional anticipated testing of 
data and controls.
    Mr. Khan. As part of the May 2012 Financial Improvement and Audit 
Readiness (FIAR) Plan Status Report, the Air Force reports accelerating 
audit readiness milestones for each of its SBR assessable units and its 
planned strategy for meeting those milestones. However, the Air Force 
may face challenges similar to those for the Marine Corps' initial SBR 
audit experience that it must overcome if it is to meet the 2014 audit 
readiness date for its SBR. These challenges include the ability to 
produce supporting documentation for individual transactions; 
reconciling data between different systems such as military pay and 
personnel systems; ensuring that it can identify complete populations 
of transactions for activities such as civilian pay; and ensuring that 
its personnel are adequately trained to carry out key internal controls 
and other activities necessary for an audit. According to the Air 
Force, it will require additional contractor and auditing expertise to 
meet these accelerated milestones.
    Another challenge involves the lack of effective automated 
information systems such as Enterprise Resource Planning (ERP) systems. 
In the May 2012 FIAR Plan Status Report, the Air Force reported that it 
will need to rely on manual controls and legacy system enhancements to 
meet the SBR audit readiness goal. Reliance on manual controls and 
legacy systems to produce financial management information for 
reporting results will necessitate more time-consuming, extensive 
testing, the collection of more supporting documentation, and the 
reconciliation of data maintained in the numerous legacy systems, not 
only in Air Force systems, but also in those under the control of the 
DFAS.

    26. Senator Ayotte. Secretary Morin, Mr. Tillotson, and Mr. Khan, 
how confident are you that the Air Force will make the 2014 goal in a 
way that is repeatable and that will, in fact, ensure that the Air 
Force has the reliable data and efficient business processes it needs 
to support major financial management decisionmaking?
    Dr. Morin and Mr. Tillotson. We are confident that the Air Force is 
making the necessary changes to improve business processes and enhance 
data reliability to support major financial management decisionmaking. 
We have implemented additional reconciliations and controls in our 
funds distribution and reimbursable authority business processes, 
clarified guidance related to asset accountability, and are deploying 
an automated time and attendance system for our civilian employees. We 
have a disciplined review process and anticipate identifying and 
implementing additional corrective actions required to meet the 2014 
date. We continue to assess that there is moderate risk involved in 
meeting the deadline, primarily due to systems deficiencies that we are 
working to remedy.
    Mr. Khan. It is unclear at this time whether the Air Force can meet 
the 2014 audit readiness goal of enabling an effective and efficient 
audit and timely audit opinion. The recent experiences of the Marine 
Corps in its efforts to have its SBR audited demonstrate the kinds of 
difficulties that the Air Force might also encounter, such as the 
inability to provide supporting documentation for its transactions and 
beginning balances. Given the significant change in the deadline for 
the Air Force and the relatively short time to develop and implement 
new plans to meet the new goal of 2014 along with its existing systems' 
limitations, it is likely that the Air Force will rely on labor-
intensive, error-prone manual workarounds and other extraordinary 
efforts if it is to achieve the 2014 goal. Such extraordinary, stop-gap 
measures are unlikely to address the root causes of the Air Force's 
financial data deficiencies, thereby increasing the risk of not being 
able to repeat any success achieved in 2014.

                    AUDITABILITY OF ARMY PAY RECORDS

    27. Senator Ayotte. Secretary Westphal and Secretary Matiella, a 
few weeks ago, GAO issued a report that indicated that the Army faces 
significant challenges in achieving audit readiness for its military 
pay area of business. Basically, GAO found that, with its existing 
procedures and systems, the Army could not effectively identify 
populations of military pay records and compare military pay accounts 
to personnel records. According to GAO, the Army also did not have an 
efficient or effective process or system for providing supporting 
documents for Army military payroll. Identifying populations of 
transactions and reliably generating supporting documentation are 
essential to achieving audit readiness. But, as GAO concluded, without 
effective processes related to military pay, the Army will have 
difficulty meeting DOD's 2014 audit readiness goal for the SBR. What 
military pay audit readiness efforts is the Army pursuing that, if 
successfully implemented, could help increase the likelihood of meeting 
DOD's 2014 SBR audit readiness goal and the 2017 mandate for audit-
readiness on a complete set of DOD financial statements?
    Mr. Westphal and Ms. Matiella. The Army is working with the DFAS to 
develop and document an effective and repeatable process for 
identifying the population of Active Duty military payroll accounts 
each fiscal year. In fact, the Army and DFAS implemented a new process 
in October 2011 that includes a monthly reconciliation of all detailed 
military personnel pay statements to the summary financial reporting 
records. This process improvement represents a significant 
accomplishment that advances the Army's military personnel pay audit 
readiness.
    In addition, we are documenting the military personnel and payroll 
business processes, identifying the key pay-related substantiating 
documents and procedures for maintaining these documents. As part of 
this effort, the Army and DFAS have created a matrix that outlines the 
relevant substantiating documents and points of retention of those 
documents for each payroll entitlement. We are also documenting 
business processes and internal control activities associated with each 
detailed military payroll transaction. The business process maps and 
document retention criteria, which were not available during the GAO 
audit, will inform the financial statement auditors of how payroll 
entitlements are processed and how to obtain supporting documentation.
    Finally, we are reviewing all policies governing the storage and 
retention of key personnel and payroll-related documents. Specifically, 
we are revising Army Regulation 600-8-104, Military Personnel 
Information Management/Record, to require key personnel and pay-related 
documents supporting military payroll transactions be centrally located 
and retained in the servicemember's Official Military Personnel File. 
These revisions will require human resource managers to periodically 
review and confirm that Official Military Personnel File records in 
master personnel record systems are consistent and complete to support 
financial statement audit requirements. The review will ensure 
policies, processes, and supporting business systems enable timely 
access to substantiating documentation in a cost-effective manner.
    These accomplishments and ongoing efforts will enable auditable 
Army military pay business processes in support of the 2014 SBR audit 
readiness deadline and the 2017 financial statement deadlines.

    28. Senator Ayotte. Secretary Westphal and Secretary Matiella, to 
what extent are these efforts documented sufficiently to help ensure 
that they will be implemented in a timely and effective manner?
    Mr. Westphal and Ms. Matiella. These efforts are extensively 
documented. The Army follows the OSD-C FIAR Guidance, which requires a 
detailed financial improvement plan. OSD-C reviews the Army's financial 
improvement plan each month for compliance with the FIAR Guidance.

          NAVY'S AND MARINE CORPS' FUND BALANCE WITH TREASURY

    29. Senator Ayotte. Secretary Work and Secretary Commons, in the 
Federal Government, an agency's FBWT account is like a corporate bank 
account. But instead of a cash balance, the FBWT represents unexpended 
spending authority in appropriations. So, the FBWT account basically 
reflects how much budget spending authority is available to DOD and is, 
for this reason, important to funds control. Because in this regard the 
FBWT supports the SBR, it must be ready for audit by the end of 2014 
for the SBR to be auditable in compliance with the Secretary of 
Defense's October 2011 direction. I understand DOD's components have to 
reconcile their FBWT records periodically, to provide an adequate audit 
trail and resolve any differences. Reconciliation is vital for 
maintaining the accuracy and reliability of the component's FBWT 
records. But, late last year, GAO found numerous deficiencies in the 
FBWT processes at the Navy and the Marine Corps that impair their 
ability to perform these FBWT reconciliations. In what ways are the 
Navy's and Marine Corps' existing FBWT policies and procedures 
inadequate?
    Mr. Work and Ms. Commons. The December 2011 GAO report on Navy-
Marine Corps FBWT reconciliation processes reported deficiencies with 
which the Navy concurred. Since GAO conducted its assessment, Marine 
Corps successfully demonstrated its FBWT reconciliation process to the 
public accounting firm auditing the Marine Corp's SBR. There were no 
findings or recommendations made. Reconciliations are performed on a 
monthly basis; in addition, Marine Corps and DFAS-Cleveland have 
documented the process with written procedures to address and improve 
weaknesses in demonstrating comprehensive and repeatable FBWT 
reconciliations.
    For the Navy, progress has also been made to address similar 
weaknesses noted in the GAO report. DFAS has further developed its BAM 
tool, which is essential to successful and repeatable Navy FBWT 
reconciliation. This year, DFAS has loaded the Navy data for fiscal 
year 2010 through fiscal year 2012 appropriations and has completed 
monthly FBWT reconciliations for the first 4 months of fiscal year 
2012. DFAS expects to be current with monthly reconciliations at the 
end of May 2012. DFAS is also retaining all documentation supporting 
the monthly reconciliations. Further strengthening of the BAM tool's 
internal controls is planned by third quarter of fiscal year 2012, and 
DFAS expects the tool to fully support FBWT reconciliation by the 
scheduled audit readiness date of March 2013. These milestones are 
identified in joint DFAS-Navy detailed plans of actions and milestones.
    The major challenge remaining in the Navy's FBWT reconciliation 
process is the timely resolution of reconciling items--disbursements or 
collections which do not precisely match obligations in the Navy's 
accounting systems. Root causes of reconciling items are being 
identified and corrected.

    30. Senator Ayotte. Secretary Work and Secretary Commons, to what 
extent do these deficiencies present a risk that your Services' SBRs 
will not be audit-ready by the 2014 deadline?
    Mr. Work and Ms. Commons. An effective and repeatable FBWT 
reconciliation process is an essential capability for SBR audit 
readiness. The Navy currently projects that this process will be 
auditable by the second quarter of fiscal year 2013. Complete SBR 
auditability is scheduled for fourth quarter of fiscal year 2013.

    31. Senator Ayotte. Secretary Work and Secretary Commons, how 
adequately do the Navy's and the Marine Corps' current plan of action 
and milestones address these weaknesses in their ability to achieve 
audit-readiness?
    Mr. Work and Ms. Commons. The Navy has developed a comprehensive, 
integrated Plan of Action and Milestones (POAM) governing audit 
readiness efforts for the Navy's SBR. Each POAM action item is assigned 
to a Navy manager or to a manager from the Navy's collaborative 
partners and service providers. Each organization assigned actions 
participated in the development of the POAM, which is updated on a 
recurring basis by the Navy and its partners. The Navy tracks audit 
readiness progress, as indicated by the Navy SBR POAM, on a continual 
basis. Senior leaders responsible for audit readiness meet monthly for 
a progress update. Accomplishments are noted, and emerging risks to 
success are also discussed, along with any mitigating actions which are 
required.
    Accountability has been distributed to those organizations and 
managers responsible for making the changes necessary to achieve audit 
readiness. Flag officers have been assigned by the Vice Chief of Naval 
Operations to lead the auditability efforts in different segments 
comprising the Navy's SBR. In addition, all Navy senior executives have 
an audit readiness objective in their annual performance plans. These 
senior leaders are setting the ``tone-from-the-top;'' they are driving 
the need for change in Navy business processes and systems which will 
enable audit readiness.

                GENERAL FUND ENTERPRISE BUSINESS SYSTEM

    32. Senator Ayotte. Secretary Westphal and Secretary Matiella, 
please provide an assessment of the General Fund Enterprise Business 
System (GFEBS).
    Mr. Westphal and Ms. Matiella. The GFEBS is already the Army's 
primary financial accounting and management system, and the cornerstone 
for producing unqualified financial statements for the Army general 
fund. GFEBS enables the Army to comply with numerous statutory and 
regulatory requirements, which include:

         94.7 percent compliance (or 1,054 of 1,113 
        requirements) from the Federal Financial Management Improvement 
        Act (FFMIA) with full compliance later this fiscal year 2012. 
        Source: U.S. Army Audit Agency.
         98 percent compliance with DOD's Business Enterprise 
        Architecture.
         92 percent compliance (212 of 232 applicable 
        requirements) with DOD's Standard Financial Information 
        Structure (SFIS) with full compliance planned by the end of 
        fiscal year 2012.
         100 percent compliance with DOD's 250 real property 
        accountability and inventory requirements.

    Following extensive operational testing, the OSD Milestone Decision 
Authority granted GFEBS a Full Deployment Decision in June 2011. GFEBS 
is operational today with over 45,000 users at 20 commands and over 200 
locations worldwide. GFEBS will add about 8,000 more users in July to 
complete the Army-wide implementation at 71 countries around the globe.
    In the 3 years since initial operations, GFEBS grew from 1 million 
transactions in fiscal year 2009 to an estimated 60 million 
transactions in fiscal year 2012 and from $1.2 billion in obligations 
to over $100 billion executed in fiscal year 2012.

    33. Senator Ayotte. Secretary Westphal and Secretary Matiella, how 
is GFEBS helping the Army achieve its financial management goals?
    Mr. Westphal and Ms. Matiella. GFEBS is critical to the Army's 
financial management goals, which include producing unqualified 
financial statements and providing cost accounting capability for more 
effective use of resources.
    GFEBS is providing the Army with:

         A financial accounting system that complies with 
        statutory and regularity requirements for funds control, 
        accounting, and auditing, to include real property and other 
        asset data for depreciation; and provides visibility of the 
        transactional and budget execution data in real or near real 
        time. GFEBS provides the foundation for the Army to receive an 
        unqualified audit opinion on its annual general fund financial 
        statements.
         A cost accounting system that provides full cost by 
        allocating overhead and other indirect costs to outcomes, 
        outputs, and services; and connects operational performance 
        data to the cost data. GFEBS enables the Army to conduct more 
        cost-benefit and other types of cost analyses as well as 
        transition to a cost culture.
         A management and decision support system that records 
        financial and various other transactions in a single system, 
        provides visibility of the transactional data in real time or 
        near real time and provides trend, comparative, and other 
        analytic data. GFEBS will enable more thorough, fact-based 
        analyses for both current-year operational performance and 
        future programs and budgeting decisionmaking.

    Consistent with OSD and Army goals to strengthen financial 
management, GFEBS enables the Army to:

         Reduce costs, by subsuming the capabilities of over 
        100 systems.
         Standardize processes across all Army organizations.
         Achieve compliance with numerous requirements, 
        including FFMIA, SFIS, and the Bureau of Economic Analysis.
         Implement a transaction-driven general ledger as well 
        as tighter system controls in accordance with Federal 
        Information Systems Control Audit Manual (FISCAM) requirements.

    With GFEBS, the Army is poised to support both a SBR audit 
assertion in fiscal year 2014, as directed by the Secretary of Defense; 
and fully auditable financial statements, as required by Congress by 
2017.

    34. Senator Ayotte. Secretary Westphal and Secretary Matiella, what 
is the experience from the field in using the system?
    Mr. Westphal and Ms. Matiella. The magnitude of change associated 
with GFEBS is unprecedented in the Army business community. Not only is 
GFEBS a major technology change, replacing 40-year-old financial 
systems, but with the GFEBS deployment the Army is dramatically 
changing business processes, user roles and functions, implementing a 
new financial language (based on SFIS), and enforcing system and 
processes controls that were not mandated in our previous systems.
    The Army has embraced GFEBS and understands the value GFEBS 
provides in achieving Army and DOD objectives. Before every GFEBS go-
live, each organization asserts its readiness for deployment and at 
each of the 10 go-lives we have received universal concurrence from all 
organizations in the Army and DFAS.
    While there is a significant learning curve that must still be 
overcome by those organizations that have recently gone live, those who 
have been using the system are pleased with its capabilities. They 
experience better data visibility, faster year-end close processes, 
more streamlined reimbursable processes, and much greater cost 
management capabilities. Not a single GFEBS user or organization that 
has been using the system for more than a few months has ever asked to 
go back to their legacy systems.

    35. Senator Ayotte. Secretary Westphal and Secretary Matiella, I 
understand that you received a qualified audit opinion on a portion of 
the program. Can you explain what that means and its impact?
    Mr. Westphal and Ms. Matiella. In November 2011 an independent 
public accounting (IPA) firm issued a qualified opinion on five 
business processes associated with the SBR at the first three 
installations to deploy GFEBS (Forts Benning, Jackson, and Stewart). A 
qualified audit opinion indicates that the information presented was 
fairly presented with certain exceptions. A key area cited by the 
auditors was the lack of supporting documentation to support the 
samples.
    The Army developed corrective actions to address all of these 
findings in the report. This first exam and the subsequent exams 
scheduled for fiscal year 2012 and fiscal year 2013 bring the Army 
incrementally closer to meeting the fiscal year 2014 SBR deadline and 
the fiscal year 2017 overall audit readiness deadline.
    The good news is in examining approximately 2,500 supporting 
documents, the auditor found consistency of standardized business 
processes across all three sites, which significantly enables the 
Army's audit readiness efforts.

    36. Senator Ayotte. Secretary Westphal and Secretary Matiella, is 
the GFEBS progressing according to the Army's expectations?
    Mr. Westphal and Ms. Matiella. The progress of GFEBS development 
and deployment is meeting the Army's expectations. In December 2011, 
development of the system completed on schedule. In April 2012, 42 
months after the initial pilot with one organization and 250 end-users, 
GFEBS had 45,000 end-users in the Army and DFAS across 20 commands and 
over 200 locations, and was executing billions of dollars of 
transactions each month.
    GFEBS is on track to fully subsume 68 legacy systems and partially 
subsume 39 systems. GFEBS has already enabled the Army to retire 20 
systems and reduce costs for data reconciliation and manual processes. 
Additionally, GFEBS has begun disbursing funds directly through 
Department of the Treasury as a pilot project, eliminating the need for 
a number of interfaces. GFEBS is allowing the Army to reduce its IT 
footprint, while streamlining and standardizing processes Army wide.
    Given the significant business process change associated with 
GFEBS, there have been some challenges in ensuring data, processes, and 
system interfaces are working optimally. There have also been some 
issues in ensuring that users at both the Army and DFAS understand 
their new roles and responsibilities in this much more integrated 
system, which requires greater competence in accounting and cost 
management than was required in the past. The Army expected this would 
be difficult because of the size and diversity of activities that 
collectively provide the Nation with the finest land forces in the 
world. However, GFEBS also provides visibility to non-compliant 
business practices that were heretofore masked by our legacy systems, 
and allows the Army to take corrective action to redesign these 
processes to ensure auditability. We are pleased with our progress to 
date and will continue to look holistically to ensure that people, 
process, and technology are working in concert to overcome these 
challenges and achieve the return on investment intended with this 
system.

    37. Senator Ayotte. Secretary Westphal and Secretary Matiella, what 
is the justification for spinning off a portion of the existing system 
to support some agencies and potentially recompeting sustainment early?
    Mr. Westphal and Ms. Matiella. If ``spin off'' is referring to 
GFEBS-Sensitive Activities (GFEBS-SA), GFEBS-SA is being developed to 
meet the Army's validated requirement for a classified financial 
management capability that integrates seamlessly with GFEBS to provide 
secure, web-based financial execution and reporting capabilities to the 
Army's Classified and Sensitive activities. GFEBS-SA will interface 
with GFEBS to provide summary level financial data to facilitate total 
general ledger accountability in one system. This will enable the Army 
to meet the requirements of the FFMIA of 1996 and a Guide to Federal 
Requirements for Financial Management Systems. GFEBS sustainment 
contract will be competed in fiscal year 2013 (no change to previous 
schedule).

       LEGACY SYSTEMS VERSUS ENTERPRISE RESOURCE PLANNING SYSTEM

    38. Senator Ayotte. Secretary Westphal and Secretary Matiella, what 
current challenges related to achieving Secretary Panetta's audit goals 
are due to legacy systems versus the current ERP system?
    Mr. Westphal and Ms. Matiella. Legacy systems have some impact on 
the Army's ability to achieve Secretary Panetta's audit goals. However, 
the Army is accounting for any legacy systems that may impact the 
financial statements in 2014 or 2017. First, the Army's aggressive and 
successful implementation of GFEBS, which will be fully deployed in 
July 2012, significantly contributes to the Army's ability to achieve 
audit readiness. In addition, Global Combat Support System-Army (GCSS-
Army) will have largely completed its first of two major deployments 
and be able to provide substantive support to the SBR assertion in 
2014. Assessments have already begun to determine if further 
remediation to the legacy systems is necessary.
    The largest legacy system impact in 2014 is military pay. However, 
the Army has already accounted for the Integrated Personnel and Pay 
System-Army (IPPS-Army) timeline, which exceeds the 2014 SBR 
requirements, by working to assess and correct any deficiencies in the 
legacy military pay processes and systems. Upon ensuring the current 
military pay processes and systems are auditable, Army will sustain the 
current environment until the transition to IPPS-Army in 2017. Army's 
audit readiness plan includes an assessment of ERPs to ensure that Army 
is aware of any system deficiencies well in advance of the targeted 
assertion dates.
                                 ______
                                 
             Questions Submitted by Senator Saxby Chambliss

                 ARMY SENSITIVE ACTIVITIES PROCUREMENT

    39. Senator Chambliss. Secretary Westphal and Secretary Matiella, I 
understand that the Army is considering competing a portion of the 
current GFEBS program for the SA. What is the Army's plan for future SA 
procurement, continuing the success of the core program, and can you 
explain any changes in your plans for this effort since you last 
testified before this committee?
    Mr. Westphal and Ms. Matiella. GFEBS-SA is being developed and 
implemented as an individual program with cost, schedule, and 
performance separate from the GFEBS base program. GFEBS-Army will 
leverage Program Executive Office Enterprise Information Systems' (PEO 
EIS) competitively awarded existing contract vehicle to procure 
application development and system integration services. Anticipated 
release of the Request for Proposal (RFP) is the fourth quarter of 
fiscal year 2012. Since I last testified before this committee, a 
decision was made to not fund GFEBS-Army during the fiscal year 2012 
cycle but to commence program initiation in fiscal year 2013. The Army 
is currently working with congressional staff on realignment of 
funding.

          DEFENSE ENTERPRISE AND ACCOUNTING MANAGEMENT SYSTEM

    40. Senator Chambliss. Secretary Morin and Mr. Tillotson, has the 
Air Force considered speeding up the deployment of the DEAMS rather 
than carrying out limited deployments at select Air Force bases?
    Dr. Morin and Mr. Tillotson. Yes, the Air Force has considered 
speeding up the deployment of DEAMS. The Air Force plans to upgrade our 
hosting facility architecture to coincide with the upgrade of the DEAMS 
Oracle software. This parallel path to upgrade the application and the 
hosting facility is the most cost effective and expedient approach for 
delivering capabilities to the warfighter. We are carefully watching 
the deployments of the other ERPs across DOD and the Federal Government 
to ensure we are learning from others' efforts.

    41. Senator Chambliss. Secretary Morin and Mr. Tillotson, you 
testified that DEAMS is progressing on schedule. Can you explain how 
you might deploy DEAMS Air Force-wide to get it into the hands of the 
warfighters sooner?
    Dr. Morin and Mr. Tillotson. The purpose of the Technology 
Demonstration at Scott Air Force Base was to identify problems on a 
limited scale prior to Air Force-wide deployment. Training was 
initially conducted by DEAMS Subject Matter Experts, and the training 
material was developed based on Oracle Modules, instead of DEAMS end-
user roles and responsibilities.
    The Air Force captured lessons learned from the initial deployment 
and is taking action to resolve deficiencies in the training during the 
initial DEAMS Technology Demonstration. The Air Force is restructuring 
the training to align with end-user roles and responsibilities to 
ensure future training is a success and end-users receive sufficient 
training on DEAMS. Additionally, the Air Force is utilizing the Oracle 
User Productivity Kit (UPK) and hired professional instructors to 
support end-user training. The expected completion date for training 
restructuring is June 1, 2012. Following the updates, the DEAMS 
deployment team will review the material with a focus group of Air 
Mobility Command end-users from Scott and McConnell AFBs in early June.
                                 ______
                                 
               Questions Submitted by Senator John Cornyn

                          FINANCIAL MANAGEMENT

    42. Senator Cornyn. Secretary Hale and Ms. McGrath, according to 
House Armed Services Committee hearings, DOD has over 48,000 civilian 
financial managers. That's 48,000 accountants, auditors, financial 
managers, budget analysts, clerks, administrators, payroll officials, 
and others. On top of that, it is my understanding that there are 
another 10,000 DOD military personnel who perform these roles. To put 
this into perspective, this would be enough people to operate both the 
ship and air crews for 10 aircraft carriers or the equivalent of 10 
fully-equipped Army Brigade Combat Teams. It's more than 10 times the 
number of combat aviators in the Air Force. How is it that you cannot 
make more progress when you have 10 brigades worth of people coming to 
work every day to help fix it?
    Mr. Hale. DOD relies on these dedicated financial management 
professionals to provide and manage the resources DOD uses to execute 
the national security mission. The number of financial managers does 
seem extraordinarily large on first glance.
    To better understand the figures in light of DOD's enormous size 
(over 3 million employees), we have performed analysis comparing our 
financial management workforce to other Federal agencies as well as 
large private sector companies. The size of our workforce and the 
resources devoted to financial management as a percentage of resources 
are in line with these organizations, using them as comparable 
benchmarks.
    I agree that we can make more progress on financial management, and 
recent efforts including the involvement of Secretary Panetta have 
already sped up that progress. In addition, as we implement more 
automated and integrated processes, our financial management processes 
will become less labor-intensive, offering opportunities for reducing 
these numbers. Even more importantly, those personnel remaining will 
have more time to devote to analysis and process improvement.
    Ms. McGrath. DOD relies on these dedicated financial management 
professionals to provide and manage the resources DOD uses to execute 
the national security mission.
    To better understand the figures in light of DOD's enormous size 
(over 3 million employees), our Comptroller staff has conducted an 
analysis comparing our financial management workforce to other Federal 
agencies as well as large private sector companies. The number of 
financial managers does seem extraordinarily large on first glance, but 
when described as a percentage of DOD's population, the numbers align 
to other Federal agencies. The size of our workforce and the resources 
devoted to financial management as a percentage of resources are in 
line with those benchmarks.
    We agree that DOD can make more progress on financial management, 
and recent efforts including the involvement of Secretary Panetta have 
already accelerated our progress. In addition, as we implement more 
automated and integrated processes, our financial managers will have 
more time to devote to analysis and process improvement.

    43. Senator Cornyn. Secretary Hale, you have regularly testified 
that congressional involvement has helped spur action with regard to 
improving financial management. Would you agree that Congress should 
pass legislation codifying Secretary Panetta's announcement that DOD 
would have an auditable financial statement on its SBR by 2014?
    Mr. Hale. DOD is committed to achieving Secretary Panetta's goal of 
an auditable SBR by 2014, regardless of whether the date is codified in 
legislation. If Congress did pass legislation to codify the Secretary's 
accelerated date, we recommend the legislation specify that ``the 
general fund SBRs of material components are validated as ready for 
audit by not later than September 30, 2014'' for consistency with the 
Secretary's direction.

    44. Senator Cornyn. Secretary Hale and Ms. McGrath, could you 
please provide a date when DOD will be removed from GAO's high risk 
list for fraud, waste, and abuse for financial management and business 
transformation?
    Mr. Hale and Ms. McGrath. GAO has established five criteria for 
removal from the high-risk list that can form a roadmap for efforts to 
improve and ultimately address high-risk issues: (1) Demonstrated top 
leadership commitment; (2) Capacity, including people and other 
resources to resolve the risk, and establishing reporting and 
accountability mechanisms; (3) Corrective action plan that implements 
solutions to address root causes; (4) Monitoring, including 
establishing performance measures; and (5) Demonstrated progress in 
implementing corrective actions and making appropriate adjustments to 
action plans based on data. GAO makes the determination to remove an 
area from the high-risk list once they conclude that sufficient 
progress has been made in addressing the issues associated with the 
high-risk area.
    GAO noted in its February 2011 High-Risk Series Update that DOD is 
taking steps to resolve the issues identified by GAO as associated with 
the DOD Financial Management high-risk area. DOD is implementing 
department-wide financial management improvements that provide timely, 
reliable, accurate, and useful information for management operations, 
including financial reporting and decisionmaking. Using the established 
criteria, DOD believes that it is making good progress to address the 
issues associated with the DOD Financial Management high-risk area. For 
example, Secretary Panetta has demonstrated leadership commitment and 
support to achieving audit readiness for DOD by accelerating the date 
to achieve audit readiness of the SBR to the end of calendar year 2014. 
While GAO cited progress by DOD on the Financial Management high-risk 
area, it is unlikely that GAO will remove this area from the high-risk 
list before 2017, which is when DOD is expected to meet the legal 
requirements to achieve full audit readiness for all DOD financial 
statements.
    DOD believes that it has also made significant progress in the DOD 
Approach to Business Transformation high-risk area. GAO cited DOD's 
progress in establishing management oversight and developing a 
strategic plan to guide business transformation efforts in its February 
2011 High-Risk Series Update. The report noted that DOD's senior 
leadership has demonstrated its commitment to address the risks by 
filling key positions, issuing directives broadly defining the 
responsibilities of the CMO and the Deputy Chief Management Officer 
(DCMO), establishing governance entities, and issuing a strategic 
management plan with two subsequent updates. DOD believes these changes 
have led to a much better approach to business transformation within 
DOD. More recent changes codified in the National Defense Authorization 
Act for Fiscal Year 2012 will help DOD continue to make progress, 
including using portfolio reviews to improve the business system 
investment management review process and oversight of business systems. 
DOD has also centralized defense business management under the Deputy's 
Management Action Group, led by the Deputy Secretary of Defense. DOD is 
hopeful that it has demonstrated enough progress in addressing the 
issues associated with the DOD Approach to Business Transformation that 
GAO will remove this area from the 2013 high-risk list update.

                GENERAL FUND ENTERPRISE BUSINESS SYSTEM

    45. Senator Cornyn. Secretary Westphal and Secretary Matiella, 
GFEBS was developed by the Army's financial management community for 
the Army's financial community. However, GAO found that two-thirds of 
invoice and receipt data must be manually entered into GFEBS due to 
interface problems. The DOD IG found the Army spent $630 million on 
GFEBS, but that at the time it was tested it was not compliant with the 
U.S. Standard General Ledger (USSGL) and the Standard Financial 
Information System (SFIS). How do you explain this failure?
    Mr. Westphal and Ms. Matiella. As stated in the Army's response to 
the DOD IG audit report, the Army disagreed with the report's 
assertions. At the time of the audit, GFEBS was not fully configured or 
fully deployed and was transacting less than 2 percent of the Army's 
general fund total obligation authority.
    The results of the GFEBS SFIS compliance review conducted in June 
2011 by the DOD Office of the DCMO concluded that GFEBS is 92 percent 
compliant with DOD SFIS business rules with full compliance planned by 
the end of fiscal year 2012. In addition, DOD and the Army have 
established procedures to continue reviewing all ERPs for SFIS 
compliance going forward.
    Furthermore, as of September 30, 2011, GFEBS accounted for the 
missing USSGL and 28 DOD reporting accounts the DOD IG identified as 
missing. The absence of these accounts on September 30, 2010 (the time 
of the DOD IG audit) did not materially impact Army's ability to 
provide accurate financial information in GFEBS. None of these accounts 
were required to support the GFEBS user base as of September 30, 2010, 
which only encompassed approximately 1.9 percent of the Army's general 
fund total obligation authority.

    46. Senator Cornyn. Secretary Westphal and Secretary Matiella, how 
do you plan to reach auditability when the systems you are purchasing 
are themselves not auditable?
    Mr. Westphal and Ms. Matiella. Systems must meet numerous Federal 
standards, including the FFMIA, the DOD SFIS, and the GAO FISCAM, among 
others. However, the systems are not meant to be auditable in the sense 
that financial statements are auditable. The systems form the 
foundation for financial statement auditability.
    To ensure these systems comply with additional Federal financial 
system standards, the Army utilizes the Army Audit Agency to audit for 
FFMIA compliance and the OSD DCMO for SFIS compliance.
    In addition, the Army is conducting assessments to ensure GFEBS 
meets or exceeds Federal systems standards and can successfully meet 
FISCAM requirements. In 2011 the Army began a FISCAM assessment of 
GCSS-A that includes the same scope of work defined for GFEBS and will 
begin a FISCAM assessment of Logistics Modernization Program (LMP) in 
the fourth quarter of fiscal year 2012.

                   GLOBAL COMBAT SUPPORT SYSTEM-ARMY

    47. Senator Cornyn. Secretary Westphal and Secretary Matiella, 
according to GAO, adding the requirement that the GCSS-Army be 
auditable added $200 million in  cost  and  2  years  of  development  
time  for  a  commercial  off-the-shelf  (COTS)  system  that  now  
won't  be  ready  until  2017.  Long-established  laws,  such  as  
Clinger-Cohen and the FFFMIA, have mandated that the Army only purchase 
business/finance systems that provide auditable financial information. 
Did the Army break these laws in spending $891 million to date on GCSS-
Army?
    Mr. Westphal and Ms. Matiella. No, the Army did not break these 
laws. The GCSS-Army system uses the commercial product SAP. The SAP 
product does provide auditable financial information and is used to do 
so in thousands of companies around the world.
    The $200 million increase in cost and the 2 years of time added for 
deployment was to add missing units to the scope of the program. The 
Army was not going to be auditable because not all of the parts of the 
Army that needed it were going to get the system--the Directorate of 
Logistics (DOL) organizations were not in scope.
    The scope was expanded to add the DOL organizations on posts, 
camps, and stations around the Army. The DOL provides repair and return 
maintenance, back-up supply, and in some cases, a forward capability to 
support limited depot level maintenance. The GCSS-Army program, as 
originally baselined, did not include these organizations as part of 
the base. The scope was expanded to incorporate these units into the 
GCSS-Army system.

                           ARMY MILITARY PAY

    48. Senator Cornyn. Secretary Westphal and Secretary Matiella, GAO 
recently released a scathing report on Army military pay, raising all 
sorts of issues regarding identification of payroll accounts, 
validating transactions, and matching records. The report raises 
serious questions regarding whether the Army will be able to meet 
Secretary Panetta's 2014 deadline for auditability for the Army's SBR. 
Out of all the Army processes that should be auditable, it would seem 
that paying your people would be the easiest. How do you explain the 
problems GAO found?
    Mr. Westphal and Ms. Matiella. Our goal for Army military pay audit 
readiness is to ensure controls are in place to continue paying 
soldiers the right entitlements, in the right amounts, at the right 
time, and to accurately report these transactions on the financial 
statements. Together, the Army and DFAS are working to meet the fiscal 
year 2014 SBR assertion deadline. As a part of DOD audit readiness 
strategy, we are documenting the military pay processes and control 
environment, testing the key internal controls, developing and 
implementing corrective actions to address gaps and deficiencies, and 
establishing a process for recurring control testing to sustain the 
auditable environment.
    The majority of GAO's findings are consistent with the corrective 
actions the Army expected GAO would find because they are the same 
types of obstacles the U.S. Marine Corps has faced and the Army faces 
in other business processes, namely insufficient supporting 
documentation or inefficient processes for gathering the supporting 
documentation. The Army is working closely with DFAS, OSD-C, and GAO to 
address these findings and will have all GAO recommendations 
implemented by June 30, 2013.

                   ARMY ENTERPRISE RESOURCE PLANNING

    49. Senator Cornyn. Secretary Westphal and Secretary Matiella, has 
the Army saved money with its deployment of its ERP systems? If not 
yet, when will it?
    Mr. Westphal and Ms. Matiella. The Army will save money with the 
deployment of our four ERPs through the streamlining of business 
processes and retirement of legacy business systems.
    As of today, only one ERP is fully deployed, the LMP, however, the 
GFEBS will be fully deployed later this fiscal year. The two remaining 
Army ERPs, the GCSS-Army and the IPPS-Army are projected to be fully 
deployed in fiscal year 2016 and fiscal year 2017 respectively.
    Based on the standard Cost-Benefit Analysis that is approved for 
each acquisition program, the break-even point for our investment is 
slightly different for each ERP investment. For example, the break-even 
point for GFEBS is fiscal year 2019. Similar analysis has been 
completed for each investment and is reviewed and approved by the DOD 
Acquisition Authority for each Major Automated Information System.
    In addition to the calculated savings and benefits, the four Army 
ERPs are critical to the Army achieving the congressionally-mandated 
goal of financial auditability. The benefits of being financially 
transparent and good stewards of public funds are not included in the 
Cost-Benefit Analysis but, nonetheless, an important aspect of our 
investment decision.

          DEFENSE ENTERPRISE AND ACCOUNTING MANAGEMENT SYSTEM

    50. Senator Cornyn. Secretary Morin and Mr. Tillotson, GAO found 
that more than half of the users of the Air Force's main financial ERP 
system, DEAMS, were not prepared to use the system after the training. 
Who conducted this training?
    Dr. Morin and Mr. Tillotson. The purpose of the Technology 
Demonstration at Scott Air Force Base was to identify problems on a 
limited scale prior to Air Force-wide deployment. Training was 
initially conducted by DEAMS Subject Matter Experts, and the training 
material was developed based on Oracle Modules, instead of DEAMS end-
user roles and responsibilities.
    The Air Force captured lessons learned from the initial deployment 
and is taking action to resolve deficiencies in the training during the 
initial DEAMS Technology Demonstration. The Air Force is restructuring 
the training to align with end-user roles and responsibilities to 
ensure future training is a success and end users receive sufficient 
training on DEAMS. Additionally, the Air Force is utilizing the Oracle 
UPK and hired professional instructors to support end-user training. 
The expected completion date for training restructuring is June 1, 
2012. Following the updates, the DEAMS deployment team will review the 
material with a focus group of Air Mobility Command end-users from 
Scott and McConnell AFBs in early June.

    51. Senator Cornyn. Secretary Morin and Mr. Tillotson, if it was a 
contractor, were they paid to conduct this training?
    Dr. Morin and Mr. Tillotson. Contractors that supported the 
training were paid to conduct the training in accordance with the 
approved statement of work.

    52. Senator Cornyn. Secretary Morin and Mr. Tillotson, was any 
evaluation done on the effectiveness of this training?
    Dr. Morin and Mr. Tillotson. An evaluation was conducted on the 
DEAMS Technology Demonstration training. This evaluation informed the 
Air Force lessons learned, which led to the development of role-based 
training, hiring professional trainers to work with Subject Matter 
Experts, and utilizing the Oracle UPK Module to support DEAMS training 
activities.

    53. Senator Cornyn. Secretary Morin and Mr. Tillotson, were 
contractors asked to refund any money for training that was 
ineffective?
    Dr. Morin and Mr. Tillotson. No, contractors were not asked to 
refund money for ineffective training. The training was conducted in 
accordance with the approved statement of work. Based on the evaluation 
of the training, the Air Force has revamped the training to meet user 
needs in transitioning from the legacy financial systems to DEAMS.

    54. Senator Cornyn. Secretary Morin and Mr. Tillotson, has the Air 
Force saved money with the deployment of its ERPs? If not yet, when 
will it?
    Dr. Morin and Mr. Tillotson. The Air Force has three key ERPs: 
DEAMS, Air Force-IPPS, and Expeditionary Combat Support System (ECSS).
    DEAMS is expected to begin generating savings 1 year after 
Increment 1 reaches Full Operational Capability (FOC). FOC is projected 
for fiscal year 2016; therefore, savings are projected to begin in 
fiscal year 2017. Air Force-IPPS is expected to begin generating 
savings in fiscal year 2018. The ECSS Critical Change Team, headed by 
the Program Management Office, is still refining its assessment as a 
result of additional efforts necessary to finalize the Critical Change 
Report currently planned to go to Congress in August 2012. At that 
time, the Air Force expects to have cost savings estimated for the 
restructured program. The Air Force is fundamentally reshaping the ECSS 
program for more timely and efficient delivery of logistics 
transformation that will also enable audit readiness.

    55. Senator Cornyn. Secretary Morin and Mr. Tillotson, because of 
the Air Force's failure to modernize its financial systems and its 
extremely slow progress in adopting COTS technology, how much money 
will the Air Force have to spend on modernizing its legacy financial 
systems to meet the deadline set by the Secretary of Defense for a 
clean audit of the SBR?
    Dr. Morin and Mr. Tillotson. The Air Force is documenting and 
testing the existing systems and processes to identify what changes are 
required. This process is expected to continue for at least another 
year. Only at that time will the Air Force be able to estimate a cost 
based on identifying the extent of the required changes and evaluating 
compensating process controls.

                   NAVY ENTERPRISE RESOURCE PLANNING

    56. Senator Cornyn. Secretary Work and Secretary Commons, the DOD 
IG found that the Navy was not compliant with the USSGL and the SFIS. 
How is it that the Navy's main financial ERP system is not compliant?
    Mr. Work and Ms. Commons. At this point, the Navy ERP system 
includes all USSGL accounts appropriate for the accounting and business 
requirements of the Navy. The Navy does not plan to implement all the 
USSGL accounts defined by the DOD chart of accounts as there are no 
accounting or business requirements for some accounts, and to include 
unnecessary accounts would be too costly and administratively 
burdensome. For example, Navy ERP is required to use Moving Average 
Cost not Latest Acquisition Cost (LAC) for inventory valuation, and 
therefore does not use account 1521.0900: Inventory Purchase for 
Resale--LAC. The Navy is currently evaluating the 110 general ledger 
accounts mentioned in the DOD IG audit and will work with the OSD 
(Comptroller) to determine the appropriateness of including any of 
these accounts in the Navy ERP system. Our estimated date of updating 
the system with any appropriate accounts is September 30, 2012.
    The SFIS standards were developed and implemented in 2006, after 
the ERP system completed its design. SFIS business rules were 
introduced in 2009 along with data requirements; thus SFIS standards, 
rules, and data requirements continue to change and evolve. For 
example, the Navy is currently working to implement Version 8.0. We 
will continue to work within the Navy and with the OSD DCMO to ensure 
compliance with the SFIS standards.

    57. Senator Cornyn. Secretary Work and Secretary Commons, who is 
responsible for the failure of Navy ERP to comply with long-established 
Federal laws governing the purchase of Federal financial systems?
    Mr. Work and Ms. Commons. Since program establishment in 2003, the 
Navy ERP has complied with all applicable Federal and DOD acquisition 
statutes and policies.

    58. Senator Cornyn. Secretary Work and Secretary Commons, how can 
the Navy expect to obtain auditable financial statements when the ERP 
system it is purchasing does not comply with the law?
    Mr. Work and Ms. Commons. The Navy ERP system is in compliance with 
relevant laws and statutes. The system will enhance the Navy's ability 
to produce auditable financial statements through significantly 
improved process, internal controls, and documentation. The Navy is 
currently conducting an assessment of the Navy ERP system controls for 
compliance with the FISCAM standards using an independent public 
accounting firm. We expect to complete this assessment by the end of 
2012.

    59. Senator Cornyn. Secretary Work and Secretary Commons, has the 
Navy saved money with its deployment of Navy ERP? If not yet, when will 
it?
    Mr. Work and Ms. Commons. Monetary benefit resulting from the 
deployment of Navy ERP is captured in two primary areas:

         Legacy IT system savings of $350 million resulting 
        from the retirement of systems and fewer system interfaces. The 
        Navy is scheduled to have retired 74 systems by the end of 
        fiscal year 2012, with 10 more to be retired by 2016.
         Supply inventory reductions resulting from improved 
        inventory control and a reduction of excess inventory items. 
        Improved inventory management is expected to result in a 
        reduction in Navy Supply Working Capital Fund rates amounting 
        to $276 million from fiscal year 2012 through fiscal year 2017 
        and expected cost avoidance of $456 million for fiscal year 
        2018 through fiscal year 2023.

    [Whereupon, at 4:44 p.m., the subcommittee adjourned.]

                                 
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