[Senate Hearing 113-753]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-753
 
      IMPROVING FINANCIAL MANAGEMENT AT THE DEPARTMENT OF DEFENSE

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

                                HEARING

                               before the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             SECOND SESSION

                               __________

                              MAY 13, 2014

                               __________

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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                  THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

                  Gabrielle A. Batkin, Staff Director
               John P. Kilvington, Deputy Staff Director
                    Mary Beth Schultz, Chief Counsel
            Peter P. Tyler, Senior Professional Staff Member
         Troy H. Cribb, Chief Counsel for Governmental Affairs
               Keith B. Ashdown, Minority Staff Director
         Christopher J. Barkley, Minority Deputy Staff Director
               Andrew C. Dockham, Minority Chief Counsel
           Jenniefer E. White, Minority Legislative Assistant
                     Laura W. Kilbride, Chief Clerk
                   Lauren M. Corcoran, Hearing Clerk
                   
                   
                   
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Coburn...............................................     3
    Senator Tester...............................................    19
    Senator Johnson..............................................    26
    Senator Ayotte...............................................    29
Prepared statements:
    Senator Carper...............................................    55
    Senator Coburn...............................................    57

                               WITNESSES
                         Tuesday, May 13, 2014

Hon. Robert F. Hale, Under Secretary (Comptroller) and Chief 
  Financial Officer, Office of the Under Secretary of Defense 
  (Comptroller), U.S. Department of Defense......................     7
Robert M. Speer, Acting Assistant Secretary of the Army 
  (Financial Management and Comptroller), U.S. Department of the 
  Army...........................................................    10
Hon. Susan J. Rabern, Ph.D., Assistant Secretary of the Navy 
  (Financial Management and Comptroller), U.S. Department of the 
  Navy...........................................................    11
Hon. Jamie M. Morin, Ph.D., Assistant Secretary of the Air Force 
  (Financial Management and Comptroller), U.S. Department of the 
  Air Force......................................................    14
Hon. Jon T. Rymer, Inspector General, U.S. Department of Defense.    43
Asif A. Khan, Director, Financial Management and Assurance, U.S. 
  Governmental Accountability Office.............................    44

                     Alphabetical List of Witnesses

Hale, Hon. Robert F.:
    Testimony....................................................     7
    Prepared statement...........................................    60
Khan, Asif A.:
    Testimony....................................................    44
    Prepared statement...........................................   102
Morin, Hon. Jamie T.:
    Testimony....................................................    14
    Prepared statement...........................................    85
Rabern, Hon. Susan J.:
    Testimony....................................................    11
    Prepared statement...........................................    78
Rymer, Hon. Jon T.:
    Testimony....................................................    43
    Prepared statement...........................................    92
Speer, Robert M.:
    Testimony....................................................    10
    Prepared statement...........................................    71

                                APPENDIX

Chart submitted by Senator Coburn................................   135
Chart submitted by Senator Coburn................................   136
Information submitted by Mr. Rymer...............................   138
Information submitted by Ms. Rabern..............................   154
Information submitted by Mr. Hale................................   154
Responses for post-hearing questions for the Record from:
    Mr. Hale.....................................................   139
    Mr. Speer....................................................   148
    Mr. Rymer....................................................   157
    Mr. Khan.....................................................   166


      IMPROVING FINANCIAL MANAGEMENT AT THE DEPARTMENT OF DEFENSE

                              ----------                              


                         TUESDAY, MAY 13, 2014

                                     U.S. Senate,  
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:30 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Committee, presiding.
    Present: Senators Carper, Tester, Coburn, Johnson, and 
Ayotte.

              OPENING STATEMENT OF CHAIRMAN CARPER

    Chairman Carper. Good morning. The hearing will come to 
order. Today's hearing will examine, as we know, the efforts 
underway at the Department of Defense (DOD) to improve 
financial management and to obtain a clean, unqualified audit 
of the books at the Department of Defense. I want to begin 
today's hearing by asking why financial management at the 
Department of Defense, and any other agency, is important in 
the first place, but especially the Department of Defense.
    Accurate and complete financial accounts give agency 
leadership and Congress the information that we need for 
effective management and planning, and, I might add, execution. 
Clean auditable financial statements also give us the 
information we need to hold agencies accountable, to look in 
every nook and cranny of the Federal Government and ask this 
question: Is it possible to get better results for less money?
    I talk to people all the time who say to me, I do not mind 
paying some extra taxes, I just do not want you to waste my 
money. And we waste money probably in every agency to some 
extent. We especially waste it in the Department of Defense. 
You know that is true, I know that is true. So do our 
taxpayers.
    We cannot, however, effectively identify areas to reduce 
spending if we do not know how much and where we are spending 
that money in the first place. Federal agencies have been 
required to produce auditable financial statements since the 
mid-1990s. Unfortunately, nearly two decades later, the 
Department of Defense, which spends more than $2 billion every 
day, has yet to meet this obligation. Despite years of effort 
and one deadline after another, Department of Defense books are 
so flawed that auditors still cannot even attempt to perform a 
complete audit.
    It is no surprise then that the Department of Defense 
finances have been on the Government Accountability Office 
(GAO) high risk list since 1995. In part, this is due to 
pervasive management deficiencies that would never be tolerated 
in private sector business and that are actively being 
addressed in other Federal agencies. Here are just two 
examples.
    Just last month, the Government Accountability Office 
released a report showing that the Department's antiquated 
inventory systems, often containing incomplete and inaccurate 
information, have led to millions of dollars in wasteful 
ammunition purchases. The Department continues to buy spare 
parts that it does not need.
    In fact, last year the Department gave this Committee 
figures showing that at one point in 2013, it had $754 million 
worth of items that were on order, but not yet delivered, which 
the military services simply did not need. However, the 
Department still paid for and accepted the unneeded items. This 
is an unacceptable situation. And these are just some of the 
problems we know about. In all likelihood, the poor state of 
the Department's books mask even more instances of waste and 
fraud.
    In these tough economic times when we are going to be 
asked, and we are being asked, to make decisions about pay for 
our active personnel, compensation for active duty personnel, 
compensation for our veterans, making those decisions, we are 
going to be asked to make decisions about base realignment and 
closures again before too long, making those kind of decisions. 
And for us, as we face those kinds of decisions, I just want to 
say, we cannot tolerate this continuing level of mismanagement 
and waste.
    In 2011, we met in this same room. Dr. Coburn and I held a 
hearing, maybe even with the same title, and we discussed how 
the Department was going to meet its statutory deadline of 
achieving financial auditability by 2017. Just after that 
hearing, then-Secretary of Defense Leon Panetta made an 
important announcement that greatly elevated the priority of 
financial management, higher than it had been ever elevated 
before.
    He also established an additional deadline for a partial 
financial audit by the end of fiscal 2014 in order to quicken 
the pace of improvements. To his credit, his successor, 
Secretary Hagel, has stood by these goals. This means that in 
several months, the entire Department should have its Statement 
of Budgetary Resources (SBR), a key financial component, ready 
for audit.
    We are here today to get an update on this quickly 
approaching deadline. Fortunately, the Department can look to 
some recent successes to help find the right path to reach its 
goal. The Marine Corps has made some important progress in 
auditing its books, achieving a clean opinion, at least on a 
portion of its fiscal year (FY) 2012 accounts, last December. 
And that is good news.
    Also, the Department of Homeland Security (DHS) was until 
recently the only other department unable to audit its 
finances. Last year, Homeland Security, as we know, was able to 
achieve a clean audit. A department created barely 10 years 
ago, broad, large, lot of people, lot of money, they were able 
to achieve a clean audit last year.
    If they can do that, the Department of Defense needs to 
keep its--we need to keep your feet to the fire and you all 
need to get the job done. And this idea of a goal for 2014 
slipping and the goal for 2017 slipping, that dog does not hunt 
here. We are going to make that perfectly clear.
    A key question is whether the entire Department of Defense 
is learning enough and fast enough from these examples. Let me 
just say, we have some obligation in this, too, and when we 
shut down the government, we allowed the government to be shut 
down, when we do stop and go budgeting, fiscal cliffs, then we 
are part of the problem and are not part of the solution, I 
acknowledge that.
    Tom Coburn and I have made a compact with Senator Johnson 
and Senator Tester that we are not going to let the government 
be shut down again. We are going to do a better job, we are 
going to do our share, and maybe if we do, you guys will do a 
better job of doing your part as well. But we do not want to be 
the problem. We want to be part of the solution.
    A key question, again, is whether the entire Department of 
Defense is learning enough and fast enough from these examples 
that I just mentioned. Today we have been joined by several 
witnesses and key players for helping the Department of Defense 
improve its financial management processes and controls. Their 
work, if successful, will allow the Department to produce 
reliable financial statements that regularly produce critical 
information for decisionmakers.
    To our witnesses, we want to thank you for joining us. We 
look forward to your testimony. Let me now turn to Dr. Coburn 
for any comments that he wishes to make. Thank you, Dr. Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Thank you, Mr. Chairman, for holding this 
hearing. I would welcome all of our panelists and say we 
applaud your effort. But as my dad used to say, effort 
sometimes is not enough. You have to apply maybe a different 
approach and a different technique.
    I want to start by reading an assessment I am going to put 
up for you comparing 2001 to where we are today.\1\ The 
assessment in 2001, inability to consistently provide reliable 
financial data, managerial data for effective decisionmaking. 
Still there, no change. Lack of an overreaching approach to 
financial management, disparate systems, accounting, financial, 
and feeder hampered by a lack of integration and 
standardization. Still exists.
---------------------------------------------------------------------------
    \1\ The charts referenced by Senator Coburn appear in the Appendix 
on page 136 and 137.
---------------------------------------------------------------------------
    The Financial Improvement and Audit Readiness (FIAR) plan 
provides the approach. It is unclear right now to me how well 
it is being implemented, especially as audit goals are descoped 
and deadlines are missed. Systems environment remains more or 
less unchanged. Convoluted business processes, which fail to 
streamline excessive process steps, sometimes driven by 
accounting, operational and organizational structures, further 
complicated by aged and disparate systems.
    Enterprise Resource Planning (ERP) results have been mixed. 
Air Force Expeditionary Combat Support System (ECSS) was 
canceled after nearly 10 years of work and a billion dollars. 
We recommended in 2011 it be canceled. It took 2\1/2\ years to 
get it canceled, then we paid the contractor a payment and did 
not hold them accountable for what they were developing.
    Difficulty in obtaining financially based outcome oriented 
management metrics. This problem continues. GAO has reported 
that metrics are not adequately defined. Inability to produce 
Chief Financial Officer (CFO) Act compliant annual financial 
statements. No change. Disproportionate budget dollars appear 
to support non-value-added activities. Since useful information 
is hard to extract, useful corrective action is difficult to 
implement with a lack of widespread understanding of how 
financial information can help us. Has not changed.
    Cultural bias toward the status quo driven by disincentives 
for change and short timeframes of political appointees who 
otherwise might serve as agents of change. No change. 
Requirement of an infusion of personnel with technical and 
financial skill sets necessary to achieve integrated financial 
management systems. DOD is investing in training programs. It 
is still not fully implemented, and oftentimes CFO nominees 
lack the requisite qualifications.
    I am most surprised when I hear some of my associates ask 
why auditability matters. I suspect this question is a result 
that many of my colleagues lack real world experience. They 
have never run a business in an organization that has to make 
the most of its resources that it has available. To a 
business--and the Pentagon is not a business--but to a 
management organization, reliable financial data is what powers 
the strategic planning, the strategic budgeting, and 
operational decisions, and often means the difference between 
success and failure.
    But even to Congress, auditability is of paramount 
importance. We cannot do our job without it. The fact that our 
largest Federal department with nearly a $700 billion budget 
still cannot comply with the law after several decades is a 
failure that rests squarely on us, the Congress, because by 
accepting the continued excuses and delays, we have failed to 
do our job.
    The appropriations and accountability clause of the 
Constitution, Article I, Section 9, Clause 7, says the 
following: No money shall be drawn from the Treasury but in 
consequence of appropriations made by law, and a regular 
statement and account of the receipts and expenditures of all 
public money shall be published from time to time. They have 
not done that in 30 years in the Pentagon.
    The intent of this clause is simple. Congress cannot 
possibly know that the Executive Branch is obeying the first 
part of the appropriations clause, spending, without confidence 
in the second, accountability. The decades-long failure by the 
Pentagon to comply with existing Federal financial management 
laws is against the very spirit of the Constitution. Our 
Founding Fathers demanded that those spending taxpayer dollars 
are held accountable to the taxpayers, the people funding the 
bill.
    The financial management problems within the Pentagon are 
intimately related to its problems of waste, mismanagement, its 
budget woes under sequestration. Currently, neither military 
leaders nor lawmakers can consistently and reliably identify 
what our defense programs cost, what they will cost in the 
future, or what they have cost us in the past.
    When the Pentagon itself does not know and cannot tell 
Congress how it is spending its money, good programs face cuts 
along with wasteful programs that we will not need, which is 
the situation we find ourselves in today, cutting meat instead 
of fat. Unreliable financial information makes it impossible to 
link the consequences of past decisions and, oh by the way, 
holding people accountable for those decisions to the Defense 
budget or measure whether or not the activities of the Defense 
Department are actually meeting military requirements.
    The problem is clear. You cannot manage what you cannot 
measure. If the Pentagon does not know how it spends its money, 
Congress does not know how DOD is spending its money. With the 
Nation's debt nearing $18 trillion and counting and tighter 
budgets across the Federal Government, DOD needs now, more than 
ever, to better manage the scarce resources. The first charge 
of the Congress is to defend the country.
    Today DOD leadership has told us that they are on the right 
track, making progress. I have heard that song before. Some of 
our Nation's best watchdogs, the GAO and DOD Inspector General 
(IG), will testify that the core financial management 
weaknesses, the longstanding deficiencies, still exist and 
remain a significant risk to DOD meeting its statutory, 
constitutional requirements.
    If you take away only one point today it should be this: 
Poor financial management is the root cause of much of DOD's 
current problems, be it the ability to control costs, as 
evidenced by weapon system and information technology (IT) 
system overruns, anticipate its future costs, measure 
performance, or prevent waste, fraud, and abuse. Congress best 
helps DOD fulfill its obligations under the law and to the 
American taxpayers by holding DOD accountable for its failure 
to comply with the law.
    Mr. Chairman, I have only one request of our first panel, 
is that you will stay and listen to the GAO and IG. I know they 
seem to be a thorn, but there is some reality in what they say, 
and if we mix that reality with a good effort that everybody at 
this table right now is making--I am talking about our 
panelists--we will get closer.
    I would just summarize, and we will do it through the 
questioning. We have changed what the National Defense 
Authorization Act (NDAA) called for by going to the accounts 
instead of the resources. I understand you were allowed to do 
that, but if you really want financial data to be able to make 
good financial decisions and to control costs, you are not 
going to get it that way until maybe 2022, 2021. With that, I 
yield back.
    Chairman Carper. Let me just followup on something that Dr. 
Coburn just said. He has urged you to stay, if you can, for the 
second panel. I would ask that you do that as well. If for some 
reason you cannot, please, for God's sake, make sure that you 
have somebody senior who is going to be here dutifully taking 
notes.
    Jane Hall Lute who about a year or so ago, was the Deputy 
Secretary of Homeland Security, as you may recall, and she 
would go meet with Gene Dodaro, the Comptroller General, not 
every week or every month, but just about, to talk with him 
face to face--the No. 2 person at DHS--to figure out how to get 
the Department of Homeland Security off the high risk list at 
GAO.
    And working it, working it, working it month in and month 
out, and finally they did make progress. And as Dr. Coburn 
said, some people think of the Government Accountability 
Office, our watchdog, as a thorn in the side of agencies. They 
actually play a very constructive role, as you know. And they 
want agencies off the list. They want to have other things they 
can focus on instead of the problems that we are going to be 
talking about here today.
    And one of the items they would like to get off the list, 
and so would I, is major weapons systems cost overruns, which 
now I think exceeds $400 billion. So plenty of work to do.
    I am going to introduce briefly everybody. Mr. Hale, it is 
not going to be a pleasant hearing, but having said that, I 
just want to say we do appreciate your service. I know you are 
going to be stepping down later this year. We appreciate your 
service and wish you only well as you go forward.
    Bob Hale is the Under Secretary and Chief Financial Officer 
at the Office of Under Secretary of Defense, at the Department 
of Defense. Mr. Hale was appointed to his current position in 
January 2009. As Under Secretary of Defense, Mr. Hale is 
principal advisor to the Secretary of Defense on budgetary and 
fiscal matters, including development and execution of the 
Department's annual budget of $600 billion. As Chief Financial 
Officer, Mr. Hale oversees the Department's financial policy, 
financial management systems, and business modernization 
efforts.
    Our next witness is Mr. Robert Speer, Acting Assistant 
Secretary of the Department of the Army. Mr. Speer assumed 
responsibility for his position a couple months ago, in 
February of this year. As Acting Assistant Secretary, Mr. Speer 
advises the Secretary of the Army and Chief of Staff on matters 
relating to financial management and oversees the development, 
formulation, and implementation of policies, procedures, and 
programs for improving the efficiency and effectiveness of 
Department resources.
    Our next witness is the Honorable Susan Rabern. Is it 
Doctor Rabern? Are you retired Navy?
    Ms. Rabern. Yes, sir.
    Chairman Carper. What was your rank in the Navy?
    Ms. Rabern. Captain.
    Chairman Carper. Captain. All right. So we will have 
several titles we will use for you today. The Assistant 
Secretary of the Department of the Navy for Financial 
Management and Comptroller. Dr. Rabern was appointed to her 
current position in August 2013, last year. As Assistant 
Secretary and Comptroller, Dr. Rabern is responsible for 
managing and directing financial matters, including the annual 
budget of the United States Navy and the U.S. Marine Corps. Dr. 
Rabern, again, retired from the United States Navy and we now 
know is a retired Navy captain.
    Our final witness is the Honorable Jamie Morin. Assistant 
Secretary of the Air Force for Financial Management and 
Comptroller. Dr. Morin was appointed to his current position in 
June 2009. As Comptroller and Chief Financial Officer, Dr. 
Morin is the principal advisor to the Secretary and Chief of 
Staff of the Air Force on all financial matters. He is 
responsible for providing financial management and analytical 
services necessary for the effective and efficient use of Air 
Force resources.
    We thank you all for being here today. We thank you for 
your preparation, for your testimony, and for your willingness 
to respond to our questions. I have one other favor to ask of 
all of you. I want you to take this to heart. I read through 
your statements and it was replete with acronyms. I do not like 
acronyms. GAO is fine, DOD is fine, the Federal Bureau of 
Investigation (FBI) is fine, the Environmental Protection 
Agency (EPA) is fine. The Schedule of Budgetary Activity (SBA), 
which shows up repeatedly. The Americans with Disabilities Act 
(ADA) shows up repeatedly.
    I do not want you to use acronyms. If it is something that 
is common, we see it all the time, that is fine. Otherwise, I 
will stop you every time you do it. Use the words. All right? 
It will help me, it will help us, and ultimately it will help 
you.
    With that having been said, I think we have a vote 
starting--what time--we will have a vote starting at 11:10. 
Tom, you and I may want to do what we did last week and just 
take turns going back and forth so we can make progress. Mr. 
Hale, please, welcome, and again, please proceed.

  TESTIMONY OF THE HON ROBERT F. HALE,\1\ UNDER SECRETARY OF 
    DEFENSE (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, U.S. 
                     DEPARTMENT OF DEFENSE

    Mr. Hale. OK. Well, thank you, Mr. Chairman, Senator 
Coburn, Members of the Committee. I am here to report on 
financial management of the Department of Defense. When I 
became DOD's Chief Financial Officer more than 5 years ago, I 
established a number of goals. I have reported on progress on 
those goals in my prepared statement. In my oral remarks, I 
will focus on one of those goals, namely, I think the key one 
for today, improving financial management and achieving 
auditable financial statements.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hale appears in the Appendix on 
page 60.
---------------------------------------------------------------------------
    Meeting this goal has been a challenge; frankly, more of a 
challenge than I expected when I started. However, despite the 
budgetary turmoil of recent years, I believe we have made 
substantial progress, without question more progress in the 
last few years than we have made in any other period after 
passage of the 1994 Act.
    Our audit strategy focused first on the elements of our 
business that most often influence our decisionmaking, 
particularly budgetary information and counts and location of 
our property known as existence and completeness, not an 
acronym, but not a very helpful English phrase either.
    We have set interim goals for our audit efforts and we have 
clearly in mind the legally mandated goals for overall audit 
readiness. We report on those goals regularly, twice a year, in 
an audit progress report. We will deliver the ninth installment 
later this week to the Congress. All of those, I might add, 
were provided on time.
    While we are focusing first on our budget statement and 
property information, we also have a plan to achieve audit 
readiness for all of DOD financial statements, and I believe we 
are on track to achieve audit readiness for all our financial 
statements by 2017.
    Meeting audit goals requires major changes in a department 
that is big and where change is difficult. We needed new 
financial systems, we need significant changes in our business 
practices. They are hard to implement in a big organization and 
we face special challenges that you alluded to, Mr. Chairman.
    Five government shutdown planning drills in the last few 
years, two 6-month continuing resolutions, last year 
sequestration and a furlough, followed by a shut-down and a 
furlough. And we have wasted time--time and again we have 
wasted time, replanning budgets because of the seemingly 
constant changes and the outlook for revenues. This turmoil has 
definitely usurped time that could have been spent on audit and 
other activities.
    But despite that turmoil and other challenges, we have made 
substantial progress, and much of that has been documented by 
independent public accounting (IPA) firms, and I think that is 
a big difference compared to prior periods. We understand that 
after 20 years without auditable financial statements, Congress 
is skeptical. You want an independent verification of our 
progress and, frankly, so do we.
    Let me highlight a few audit results for you. The Marine 
Corps last year received a clean audit opinion on the current 
year of its budget statement--that is the statement for 
budgetary activity, but I like the current year better--for 
2012 and we expect a similar result in 2013. This result was 
verified not by one, but by two independent auditors, one in 
the private sector and one in the public.
    The entire Department of Defense has been evaluated and 
deemed ready for audit of our funds distribution process known 
as appropriations received. It is a critical accomplishment 
because it provides verification that we are distributing the 
funds the way that Congress envisioned when you passed the 
laws. Again, the services were all verified by independent 
public accounting firms.
    We received a clean audit opinion from an independent 
auditor on the controls within our civilian personnel data 
system, as well as systems handling military pay, civilian pay, 
and disbursing. Navy has achieved a positive opinion on 
civilian pay and travel expenses; Air Force on funds balance 
with Treasury; Army has completed an examination similar in 
scope to the audit they will face this fall.
    And finally, DOD is well along in deploying financial 
systems and they are stabilizing in terms of cost and schedule. 
So independent auditors have verified progress in many specific 
areas, but we will soon face a broader goal that we are all 
aware of, audit ready budget statements by September 2014.
    By audit ready, we mean that we have made significant--
sufficient progress in processes and data so that we can 
withstand an independent audit, in the view of management. 
Audit readiness provides most of the benefits of the audit 
process. The audit itself attests to our success. It is too 
early to know for sure the audit ready status for every budget 
statement by September 30 because we are still in the process 
of remediation. We are going to use every moment we have to try 
to make fixes.
    However, we expect that most of DOD's budget statements 
will be ready for audit by September 30, including statements 
in all of the military services, and I believe that is an 
enormous accomplishment for this Department. We are finally 
getting to the real issue of the military services. We had not 
done that before and we need to do it.
    Once our statements are audit ready, we will pursue the 
formal audit in a cost-effective manner and that Congress 
requires that by law, actually. One lesson we learned from the 
Marine Corps is we simply cannot acquire the documentation 
needed to verify prior year transactions quickly enough to meet 
audit needs. Some of those transactions go back 10 years, they 
are in long-term storage, and we just do not have quick access 
to them.
    We will, therefore, focus the formal audit on the current 
year budget activity which contains, by far, the most important 
information. And we will build quickly toward the full SBR, 
because we will get one year done and that will give us that 
data correct. We can probably go back a couple of years, so I 
hope, quickly we will build toward the full SBR, and I do not 
think that this process will significantly delay the time we 
get an audit opinion on the full SBR.
    Time does not permit me to cover other important goals that 
we are pursuing. You will see them documented in my statement. 
I will end with the bottom line on auditability. Despite 
formidable obstacles, we have made demonstrable progress, 
progress that has been verified by independent auditors. We 
still, clearly, have much work to do and I accept that point.
    However, in most cases, we will substantially meet the 
first broad goal for audit readiness and budget statements in 
September 2014, and we will then begin the formal audit in a 
cost-effective manner. Meeting this goal is an important step 
for the Department and that is something that Secretary Hagel 
believes in. Whenever I talk to him, he clearly is interested 
in this topic.
    Last year he made a video for the entire Department of 
Defense on audit readiness, and I will quote from that video, 
and that is, We need audit readiness and audits to demonstrate 
that DOD manages the public's money with the same confidence 
and accountability that we bring to our military operations.
    Mr. Chairman, that concludes my brief opening remarks. 
After my colleagues are finished, I will be glad to join in 
answering questions.
    Chairman Carper. Thanks for that testimony. I am pleased to 
hear about the video--I heard that Secretary Hagel gave 
underlining the importance of making progress on this front to 
the employees of the Department. The video I am really looking 
forward to is the one that he does later this year and says 
that we really did--not just most of our agencies, but we 
nailed it by the end of this fiscal year. And the one I am 
really looking forward to is 2017. He may not still be the 
Secretary, but somebody will be, and that is the one I am 
looking forward to. Thanks very much.
    All right. Mr. Speer, please proceed.

TESTIMONY OF ROBERT M. SPEER,\1\ ACTING ASSISTANT SECRETARY OF 
     THE ARMY (FINANCIAL MANAGEMENT AND COMPTROLLER), U.S. 
                     DEPARTMENT OF THE ARMY

    Mr. Speer. Chairman Carper, Ranking Member Coburn, and 
distinguished Members of the Committee, thank you for the 
opportunity to appear before you today to discuss the Army's 
approach to implementing financial improvement, my assessment 
of Army's progress toward achieving auditable financial 
statements, and implementation of the Army's enterprise 
resource planning systems.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Speer appears in the Appendix on 
page 71.
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    In addition, I want to convey to you that Secretary of the 
Army McHugh, Chief of Staff of the Army Odierno, and Under 
Secretary of the Army and Chief Management Officer Carson and I 
remain committed to improving the Army's financial management 
and meeting the Army's requirement to be auditable by September 
2017.
    Despite the serious challenges the Army faces from ongoing 
resource uncertainty, the Army's soldiers and civilians remain 
dedicated to improving our business processes. The Army's 
financial management improvement plan documents the Army's 
approach to achieving our audit readiness milestones, and 
includes reliance and iterative exams, audits from an 
independent public accounting firm to inform the Army's audit 
readiness status, and provide objective feedback on areas 
requiring additional focus and corrective action.
    The Army is making progress. An independent public 
accounting firm recently examined and delivered a report on the 
general fund Statement of Budgetary Resources focusing on 2013 
transactions within the Army's Enterprise Resource Planning 
environment. Although not a clean opinion, the independent 
public accounting firm was able to complete the examination, 
was able to provide us and confirm confirmation of 
improvements, and throughout the examination, identify areas we 
need corrective action.
    In response, the Army has been implementing a plan of 
action to remediate those findings prior to the 2015 audit of 
scheduled budgetary activities. In addition, during fiscal year 
2014, the Army received a clean opinion from a public 
accounting firm on the examination of real property. Those 
assets are at 23 different Army installations, which accounted 
for over 50 percent of the book value of the Army's real 
property assets. This audit supports the second DOD audit 
readiness priority verifying the existence and completeness of 
our assets.
    Additionally, the Army continues to achieve success in 
implementing new systems. The General Fund Enterprise Business 
System (GFEBS) is our core business system used by over 53,000 
users at over 200 locations worldwide. It enables the Army's 
audit readiness progress while simultaneously modernizing and 
improving our Army's business processes. The Global Combat 
Support Systems (GCSS), GCSS-Army, and the Logistics 
Modernization Program (LMP), our retail supply and wholesale 
logistics systems, will effectively complement our auditable 
features of GFEBS.
    We recognize audit readiness requires engagement throughout 
the organization so we hold senior executives accountable for 
achieving the audit readiness success. Since fiscal year 2012, 
financial improvement metrics have been a component of all 
senior executives' annual performance assessments.
    The Chief of Staff of the Army regularly monitors progress 
of both internal assessments as well as external audits and 
holds formal reviews to hold leaders accountable. The Army-wide 
engagement has facilitated our progress to date and is critical 
to our overall success.
    The current fiscal environment involving defense 
requirements, both at home and abroad, present unique 
challenges for our organization to achieve audit readiness. 
However, this environment also affords us an opportunity to 
evaluate and optimize our technology, our organizations, our 
workforce, and our training to improve the overall business 
processes.
    We are looking to evaluate these financial management 
optimization concepts in the coming year, and to gain benefits 
and improve performance from accurate and timely auditable 
data. We continue to demonstrate improvement across the whole 
business process area.
    Our annual exams have continued to expand on scope and size 
and mirroring the growth and evolving involvement in our audit 
readiness program, while providing us valuable insights for 
remediation and correction toward the overall goal of achieving 
audit readiness.
    I sincerely look forward to continue our work with Members 
of this Committee, the General Accounting Office, and the DOD 
Comptroller to ensure our continued improvement in Army 
business processes to achieve audit readiness. Thank you and I 
look forward to the engagement.
    Chairman Carper. When Dr. Coburn and I led the Federal 
Financial Management Subcommittee, we cared a lot about these 
issues as well. He is going away at the end of the year, but we 
are going to stay right on this issue for as long as it takes. 
He has worked there for years, when we were on the 
Subcommittee, and certainly now as well. So thank you.
    Mr. Speer. Yes, sir.
    Chairman Carper. OK. Captain, Doctor.

  TESTIMONY OF THE HON. SUSAN J. RABERN,\1\ Ph.D., ASSISTANT 
 SECRETARY OF THE NAVY (FINANCIAL MANAGEMENT AND COMPTROLLER), 
                  U.S. DEPARTMENT OF THE NAVY

    Ms. Rabern. Yes, sir. Thank you. Chairman Carper, Senator 
Coburn, Members of the Committee, I am pleased to have this 
opportunity to discuss with you the progress the Department of 
the Navy is making toward Congressional mandates for financial 
audit readiness. I will share with you some of our significant 
achievements to date, but I will also tell you that much more 
hard work needs to be done by our Navy-Marine Corps team before 
we reach our goal of full financial auditability.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Rabern appears in the Appendix on 
page 78.
---------------------------------------------------------------------------
    Implementing effective internal controls over the 
Department's business operations, verified by successful 
financial audits in coming years, will send a reassuring 
message to Members of Congress and American taxpayers. The 
message will be clear. In supporting our Nation's modern 
powerful Navy-Marine Corps warfighting team, the Department of 
Navy is minimizing the risk of misusing taxpayer dollars and 
maximizing accountability.
    The underlying fundamentals for our task are relatively 
simple. Strong, prescribed internal controls must be in place, 
regularly performed and periodically tested for effectiveness. 
Documentation proving the controls performance must be readily 
available. Implementation of these objectives is known to be 
extremely complex when applied to a very large organization 
such as our military department, but all the more critical in 
an environment of uncertainty.
    We are making steady progress toward our goals. Our most 
immediate objective is complying with the mandate to achieve 
audit readiness on our Department's Schedule of Budgetary 
Activity by the end of the present fiscal year. The Marine 
Corps portion of this schedule has been under audit for four 
cycles, and in December, the Department of Defense Inspector 
General issued an unqualified opinion for the fiscal year 2012 
schedule.
    In addition to the Marine Corps effort, our Department has 
asserted audit readiness on nine SBA business segments, 
receiving favorable examination opinions on four of these nine 
assertions. Exams on three more of the nine assertions are 
currently underway. The tenth remaining SBA segment, financial 
statement compilation and reporting, is undergoing remediation 
which will support an eventual SBA audit. Today I am cautiously 
optimistic that we will achieve SBA audit readiness by the end 
of fiscal year 2014.
    In the area of asset management we have received favorable 
audit opinions on the Department's accountability for ships, 
aircraft, satellites, and fleet ballistic missiles, and shore-
based ordnance. In addition to these initial successes, the 
Department of Navy is now executing a detailed plan to achieve 
Department-wide compliance with financial standards for all 
asset classes.
    In addition to the benefit of enhanced stewardship over 
public assets, our auditability efforts will assist in moving 
needed items to the warfighters more quickly and avoid excess 
buying. We will face formidable challenges as we pursue full 
financial auditability by the end of fiscal year 2017. 
Complying with audit standards for asset accountability, 
including accurate valuations, will be a complex endeavor.
    And as we move to strengthen the capabilities of our 
present suite of business systems, our future business systems 
are still evolving. Also, we must continue developing 
additional capacity to sustain the business improvements we 
have made Department-wide in every organization, recognizing 
that reaching audit readiness is not a one-time exercise.
    Today I believe we have a solid approach to known remaining 
impediments to full financial auditability. As with my previous 
assessment of the fiscal year 2014 SBA goal, I am cautiously 
optimistic that the Department of Navy will achieve full 
financial audit readiness by the end of fiscal year 2017.
    As we progress, we have begun cataloging tangible 
efficiencies resulting from our auditability efforts. One 
example is the significant savings on our departmental bill for 
paying vendors by expanding automatic feeds of electronic 
contracting data. As manual controls are replaced by automatic 
controls, bill-paying is at the same time less costly and more 
accurate.
    In fiscal year 2013, we estimate that the Department saved 
approximately $4 million because of the specific improvements 
in electronic commerce. In a second example, one of our major 
commands tightened internal controls over its requisitioning 
process, adding more rigor and validating outstanding orders 
for goods and services.
    By doing so over several years, this organization canceled 
requisitions totaling $3.5 million for orders no longer needed, 
recouping this buying power and allowing them to purchase other 
needed items. Other instances of savings will be replicated 
through the Department as internal controls are strengthened 
and lessons learned.
    In closing, I would tell you that our Department-wide 
effort has the active support of our executive leadership and 
we are driving this accountability all the way down the chain 
of command. As we make the changes which move us closer to 
audit readiness, thousands of managers throughout the 
Department of Navy are embracing these positive improvements to 
our business environment.
    I pledge to you that you have our Department's full 
commitment to achieve these challenging mandates through the 
collaborative hard work and persistence of our determined 
workforce. I would be pleased to address any of your questions 
at the appropriate time. Thank you very much.
    Chairman Carper. Thanks very much. I am a retired Navy 
captain as well. Sometimes when we talk about difficult things 
to do, we talk about trying to change the course of an aircraft 
carrier, but we know that if we stick with it, all hands on 
deck, everybody pulling together, we can change the course of 
aircraft carriers. This is a really big aircraft carrier.
    Ms. Rabern. Roger that, sir.
    Chairman Carper. And this is a really tough course change 
to make.
    Ms. Rabern. Yes, sir.
    Chairman Carper. And it is all hands on deck. We appreciate 
some good things that are going on with the Marine Corps and 
the encouragement that you have given to us. We just want to 
keep pushing.
    Ms. Rabern. Yes, sir. Will do.
    Chairman Carper. Thank you. Dr. Morin.

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

    Mr. Morin. Thank you, Mr. Chairman. Thanks for the 
opportunity, once again, to share Air Force progress toward 
audit readiness and our strong commitment to the goals set out 
in the legislation. Sir, in 2011, I testified to your 
Subcommittee at the time that we saw moderate risk in the Air 
Force's plan to achieve overall audit readiness by 2017, and 
that that was mainly due to IT challenges.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Morin appears in the Appendix on 
page 85.
---------------------------------------------------------------------------
    Since then, as you know, Secretary Panetta gave us the 
challenging deadline for the Statement of Budgetary Resources 
by 2014.
    Chairman Carper. I like the way you caught yourself there. 
That was good. Let me just say, my admonition at the beginning, 
I do not like acronyms. In fact, I think lots of my colleagues 
feel as strongly about it as I do. You are doing just fine on 
that score. Keep it up.
    Mr. Morin. We will try to keep it up. In response to that 
near-term aggressive challenge, the Air Force dramatically 
increased the resources that we are investing in the audit 
readiness effort, including both management attention and 
funds.
    As a result, I can testify to you today that I believe we 
have increased the likelihood that we will meet the 2017 audit 
deadline. And while there is a great deal of work still to be 
done, I have observed fundamental and positive changes in the 
Department's approach to the audit agenda over just the last 
few years. I think these improvements continue under Secretary 
Hagel's leadership.
    Mr. Chairman, you have been a very strong proponent of the 
military services sharing audit readiness lessons with one 
another. I am pleased to report we are doing a great deal of 
that, including learning from the work of outside auditors, 
like the GAO, and of course from our Inspector General.
    For example, a couple of years ago, the GAO briefed this 
Committee on deficiencies it found during an audit reviewing 
another service's military pay records. You held a hearing on 
the topic and we saw that report. We then had the opportunity 
to request the Air Force audit agency conduct a similar review 
of our own pay records.
    We found that the overwhelming majority of airmen are 
properly and timely paid, correctly, and we found that our 
processes were generally good. However, we found that in one 
specific area, our process for reviewing and retaining 
documentation about the housing allowances paid to our airmen 
was not sufficient and we were not retaining enough records to 
support an audit. We were validating the pay was correct, but 
not documenting that validation in a way that would withstand 
audit.
    So as a result of that internal audit, my office put in 
place a new set of procedures for document retention and for 
validation. We are currently in the midst of an Air Force-wide 
100 percent recertification of every Airman's housing allowance 
entitlement for those with dependents.
    This is one example. Another example was a best practice we 
adopted from the Navy. They used their audit agency to conduct 
monthly field testing of critical financial processes. We took 
that on a couple of years ago and last year we tested over 
10,000 transactions Air Force-wide, assessing each one for 
compliance with a long list of audit requirements. We have seen 
compliance increase from roughly 40 percent to roughly 90 
percent over those 2 years of testing.
    These are just a couple of many collaboration examples; Mr. 
Chairman, we appreciate the attention and your continued 
engagement.
    To make an assertion of audit readiness on the Schedule of 
Budgetary Activities at the end of this year, Air Force 
leadership will need to review our progress and remaining 
challenges. So let me provide you with just a few specifics 
about where we are at.
    Over the last several years, the Air Force has asserted 
audit readiness on a variety of processes. You have seen those, 
including civilian pay, budget authority and distribution, 
military equipment, spare engines, and other components of our 
operating materials and supplies. In some cases, we have 
received clean bills of health from independent auditors. In 
other cases, as with the other services, we have received a 
list of specific control weaknesses that we need to fix. We now 
have well-developed plans to resolve those weaknesses.
    Your Air Force is strongly committed to this effort. It is 
the law, we believe it enhances our readiness, and we believe 
it is an important sign of good financial stewardship. 
Secretary James, our Secretary of the Air Force, included the 
audit and making every dollar count as one of her top three 
priorities for the Air Force. She recently wrote to key leaders 
across the Air Force on audit readiness and gave them some very 
specific directions about things they needed to do to help.
    Our Chief of Staff, General Welsh, has also been a strong 
supporter and is engaged. In addition, many of our major 
command commanders, our four-star leadership, have integrated 
audit readiness into their own personal management control 
structures in a way that simply was not the case years ago.
    The support of senior leaders is all the more important 
when we are asking airmen to do difficult things like the 
revalidation of housing allowance that I mentioned, or like our 
count of 1.9 million individual items in our general equipment 
inventory, which we have been doing. Leadership support has 
allowed us to increase financial resources approximately 
eightfold and partner with a Big Four accounting firm to help 
assess our readiness and identify corrective actions.
    There are still, of course, challenges remaining despite 
all this progress and support. Our IT systems remain our 
biggest single challenge. We have made great strides, 
particularly in the last year, in fielding the Defense 
Enterprise Accounting Management System (DEAMS), to replace our 
current 1968 accounting system. We received a positive 
assessment from the Air Force Operational Test and Evaluation 
Center on DEAMS as currently deployed, and we have deployed it 
to six more bases since October 1.
    We will complete deployment to all of Air Mobility Command 
in just the next couple of weeks and then many more bases 
October 1. We are on track to complete deployment Air Force-
wide before the full financial statement audits begin.
    I do, Mr. Chairman, want to single out the folks at Dover 
Air Force Base who were some of our early adopters, and their 
Comptroller, Major Will Vivoni, who is doing a great job 
leading there. They are pathfinders for us. So while the 
systems issues continue to be our single greatest risk area----
    Chairman Carper. I am happy to extend your time for a 
couple more minutes now. You mentioned Dover Air Force Base. 
Much appreciated. Actually, I will just take a moment. Every 
year we go--the Air Force and the Commander-in-Chief, go 
through a process where they evaluate all the Air Force bases 
across the world, and they go through a Commander-in-Chief 
evaluation, and there is usually an Air Force base that is on 
the airlift side and there is a base that is on the fighter 
aircraft side. And they sort of compete for the top prize.
    I think for 3 out of the last 5 years, Dover Air Force Base 
has been a finalist for 3 of those 5 years. We are enormously 
proud of them. Thank you for mentioning them.
    Mr. Morin. Absolutely, sir. The work they are doing there 
supporting the mobility mission and, of course, supporting the 
dignified return of those that we have lost in conflicts 
overseas is absolutely central to what your Air Force does 
every day.
    So the systems issues that I mentioned are our single 
greatest risk factor. As others have testified, budget 
uncertainty has harmed our audit readiness efforts as well. 
Restrictions on travel and restrictions coming with the 
civilian furloughs have all had significant impacts. We are 
working to recover from those. We also, unfortunately, lost 
about 7 months due to a contract protest that took our 
independent public accounting firm support offline. We resolved 
that last year.
    As you acknowledged Mr. Chairman, the single most important 
thing, I think, that the Congress could do to help and to 
support our troops in this vital area would be to provide a 
level of budgetary clarity and to complete legislative work on 
time.
    Based on our assessments to date, sir, I believe it is 
likely that Air Force leadership will be able to assert audit 
readiness for our Schedule of Budgetary Activity at the end of 
this fiscal year. That is a decision to be made later this 
fiscal year, but that is my current assessment.
    An audit of the Schedule of Budgetary Activity beginning in 
2015 will be challenging for the Air Force, but I think it will 
help us accelerate towards a clean audit opinion on all of our 
statements. I think getting auditors' eyes on our processes has 
paid dividends so far and will continue to do so.
    My final point, if I may, is that for financial improvement 
and audit readiness, the journey is every bit as important as 
the outcome.
    It is through the process of building toward these clean 
audits that we are identifying weaknesses in department 
financial management that we can focus on and correct. It is 
the correcting of those weaknesses that enables us to carry out 
our mission as financial managers in DOD, which is to produce 
the maximum amount of combat capability for this Nation with 
each taxpayer dollar that is entrusted to us. That is the job. 
This journey is well worth the effort.
    Chairman Carper. Well said. Thank you very much to each of 
you for your testimonies this morning. We have a vote underway 
and we are about 5 minutes in. I am going to go ahead and ask 
some questions and then head off and vote. Dr. Coburn is going 
to come back. Between him and Senator Tester we will tag team 
and make sure we keep going and do not lose any time.
    I mentioned GAO tells us weapons systems cost overruns for 
major weapons systems, I think, is over $400 billion. Every now 
and then, though, we do some smart things, too, and I just want 
to acknowledge that. We have about 100 C-5A's and B's aircraft, 
huge cargo aircraft. They are about 30, 40 years old. They are 
very reliable in terms of providing the airlift that we need 
from time to time.
    We collectively made a tough decision, what to do with 
them. We ultimately decided to go ahead and begin retiring not 
all, but some of the C-5A's, the older aircraft, and to take 
the C-5B's and modernize them. And as Mr. Morin and others 
know, we have now modernized not all, but most of the, I think, 
C-5B's. They are now C-5M's. We have a whole squadron, about 18 
of them at Dover Air Force Base.
    About a year and half ago, one of them set, I think, 40 
world records for the ability to carry cargo nonstop. We fly 
routinely over the top of the world from Dover Air Force Base 
to Afghanistan. They use less gas, they are quieter, and they 
are much more reliable. I think operations maintenance, rather, 
their operational capability is approaching 80 percent, which 
is where it ought to be. So we are pleased with that.
    The first question I want to ask is to Comptroller Hale on 
meeting audit goals. As I mentioned in my opening statement, 
Secretary Hagel has been vocal in his support, as was Secretary 
Panetta, for improved financial management at the Department of 
Defense. Leadership is the key. If we do not have leadership on 
this stuff, we will never get it done. And their support, from 
both of them, is incredibly important.
    I applaud their strong commitment to improving financial 
management. Some people think this stuff is just green eye 
shades and it is not especially interesting and people get lost 
in the acronyms, SBA, ADA, SBR. What does all this mean? Well, 
what it means is the ability to be ready, for us to be ready to 
take on a fight, whatever part of the world it is in.
    For us to be effective, to be able to do so with minimal 
loss of life to our folks, to be able to make sure they are 
paid, that we have travel systems that work, that we are able 
to provide for their healthcare needs, that the weapons that 
they need, the weapons systems that they need are reliable, 
that we have the spare parts that we need when we need them.
    We need to have the ability to have electronic health care 
records when people go from active duty into the Veterans 
Affairs (VA) system. All that is necessary for us to be ready 
for the fight. Warfighters are counting on us. The American 
taxpayers deserve our best efforts on this front.
    So, again, Mr. Hale, I have already pointed out this is, I 
think, your last appearance before this Committee. Kind of a 
mixed blessing, is it not? But we are glad, nonetheless, to see 
you and wish you well. I understand if you do retire, there is 
a fellow that the Administration thinks would be a worthy 
successor. His name is Michael McCord. Has he actually been 
nominated?
    Mr. Hale. Yes, he has been nominated and through Committee 
for confirmation.
    Chairman Carper. OK. Fair enough. Thank you for that 
update. In your statement, you said that we expect that most of 
the DOD budget statements will be ready for audit by September 
30, 2014. That would imply that some parts of DOD will not be 
audit ready. Also your testimony says that for the Department-
this is, I think, a quote--eventually a fully auditable 
Statement of Budgetary Resources will emerge.
    I would just say, the audit goal is for the entire 
Department, to have a fully auditable Statement of Budgetary 
Resources by the end of fiscal 2014. And that is not that many 
months away.
    Mr. Hale, will the Department of Defense meet the 2014 
deadline for achieving a fully auditable Statement of Budgetary 
Resources or will just some of the requirements of that 
deadline be met?
    Mr. Hale. Well, Mr. Chairman, I think that we will meet the 
great majority of them, but I am not going to put into audit 
statements and waste the taxpayers' money if they are not audit 
ready. There may be a few that are not. Principally, probably, 
in the Defense agencies. We started later with them and they 
are particularly complex, although they are smaller.
    I hope we can make it with all of them, but I want to be 
candid with you that we may not and we will move immediately to 
fix those as quickly as we can. I want to get to the top of the 
hill badly, and that is audit readiness for all of the 
Statement of Budgetary Resources, but I also do not want to 
waste money by putting into audit a statement that we know is 
not ready.
    So bottom line, I think we will get there for most, but 
there may be a few that are not ready by September 30, and we 
will move as quickly as we can to fix those.
    Chairman Carper. Most can be 51 percent. Most can be over 
half.
    Mr. Hale. I think it will be more than that. I expect you 
have heard my colleagues say that we expect--there is a good 
chance that all four of the military services will declare 
audit readiness. That is probably more than 80 percent of our 
budget if that happens. All of our trust funds, like the 
military retirement trust funds, are all ready. They are 
auditable or under audit.
    And a number of our agencies are ready, but a few may not 
be. So it will be substantially more than 51 percent.
    Chairman Carper. All right. Mr. Hale, the difference 
between a Statement of Budgetary Resources audit and a Schedule 
of Budgetary Assessment audit is, understandably, confusing to 
a lot of my colleagues and even our staff, smart as they are.
    But to my understanding, is that the Schedule of Budgetary 
Assessment is just a portion of the full Statement of Budgetary 
Resources. I also understand the Department will need several 
years of conducting the Schedule of Budgetary Assessment in 
order to meet the requirements of the Statement of Budgetary--
--
    Mr. Hale. So let us use English. It is current year versus 
the prior year.
    Chairman Carper. Statement of Budgetary Resources audit.
    Mr. Hale. Right.
    Chairman Carper. All right. That was clear, was it not?
    Mr. Hale. Yes.
    Chairman Carper. No wonder this is hard to do. It is hard 
to even say.
    Mr. Hale. It is hard to say. So we want the full statement, 
which is all the current year transactions and prior years. 
Some go back as much as 10 years. That was our goal and when we 
got into the Marine audit, we realized that we could not 
produce the documentation quickly enough. Do you need to leave, 
Mr. Chairman?
    Chairman Carper. In a moment.
    Mr. Hale. When we got into the Marine audit, we realized we 
could not produce the prior year documentation quickly enough. 
Some of it is probably in long-term storage. It goes back as 
much as 10 years. And we were basically wasting our time and 
audit money looking for data that we could not get.
    So we said, Look, let us go after the current year, it is 
the most important one. It will buildup over a couple of years 
a body of data where we do have the documentation and that will 
lead us to a Statement of Budgetary Resources.
    I want to get to the top of the hill, but I want to do it 
in a manner that is reasonable and efficient. If we have to 
vary the path a little bit we will, and that is what we have 
done here. But there is no change in the goal. We want to do 
the full Statement of Budgetary Resources, including both the 
current year and the prior year information.
    Chairman Carper. All right. Sometime later this year, you 
will be gone. Maybe Mr. McCord will be in your seat, in your 
shoes. I said earlier we are going to stay on this. And Dr. 
Coburn is going to be here until the end of the year. I wish he 
would stay on a lot longer. We are going to make sure every day 
that he is here and I am here, this Committee is around, that 
we are going to just stay on top of this. And if it is 80 
percent or 90 percent, that is better than certainly 50 or 60 
percent.
    Mr. Hale. Better than zero.
    Chairman Carper. It is a lot better than zero, but it is 
not 100 percent and we want to get as close to 100 percent as 
we can. And we want to be helpful and not a problem in getting 
to that goal. Senator Tester and then when Dr. Coburn comes 
back, he will be chairing and I will be back shortly. Thank 
you.

              OPENING STATEMENT OF SENATOR TESTER

    Senator Tester [presiding]. Absolutely. Thank you, Mr. 
Chairman. I do want to thank the Ranking Member and I want to 
thank all the witnesses for being here today. In the Banking 
Committee, we talk about banks that are too big to fail, and I 
do not know how we got to this point, but maybe the DOD has 
gotten too big to audit.
    I certainly hope not because I do not think anybody around 
here disagrees that a full audit of the Pentagon's books is 
critical for moving forward. It would not only help identify 
ways to increase operational efficiencies, it would increase 
transparency, it would bring a more appropriate level of 
oversight to the Department of Defense.
    In a budget environment in which we continue to see 
requests for program eliminations, base closures, reduced 
personnel benefits, the DOD's failure to meet audit readiness 
is frustrating.
    I appreciate the fact that Mr. Hale talked about being at 
80, potentially 90 percent, but the Chairman is right. We need 
to get to 100 percent, especially when we continue to hear 
about wasteful contracts in Afghanistan or the failure of the 
DOD to develop an electronic health record in tandem with the 
VA. We can do better, we must do better, and I do look forward 
to working with all of you to get it done.
    As I said when I opened, I do not know how we got here, but 
we have to get this fixed because, quite frankly, it is unfair 
to the country and really unfair to the taxpayers.
    Mr. Hale, in your testimony, you highlighted that one of 
your three goals is resources in a legal, effective, and 
efficient manner. A few months back, we had a few 
conversations--I appreciate that--about a provision in last 
year's omnibus appropriations bill that is related to the 
environmental studies for Intercontinental Ballistic Missile 
(ICBM) silos. You are nodding your head. You remember. I 
appreciate those conversations.
    As you remember, I felt strongly that the language in the 
bill clearly prohibited the DOD from taking certain actions. 
Meanwhile, there were some, not all, but some in the Pentagon 
and high places that seemed intent on moving forward regardless 
of what Congress had to say on the matter.
    This was incredibly troubling to me, and there is no doubt 
in my mind that the DOD would have completely disregarded this 
particular provision if we would not have put pressure, myself 
and some other Senators, on the DOD.
    I just want to ask you a few basic questions. Would you 
agree that disregarding the voice of Congress is dangerous and 
counterproductive?
    Mr. Hale. Yes. It is also illegal.
    Senator Tester. That is good. When there are questions 
about the DOD's authority to execute certain funds, how are 
they resolved?
    Mr. Hale. Generally it is clear, from what you say, in the 
law. When it is not, we consult our lawyers and sometimes they 
consult the Administration lawyers, and that happened in this 
case. Lawyers can disagree or there can be vagueness, and so at 
that point there has to be an adjudication at the highest 
level, and it occurred here, it does not always come out the 
way you want, but that is the process.
    Senator Tester. OK.
    Mr. Hale. I should tell you that we took it seriously.
    Senator Tester. And I appreciate that and I think you did. 
You talked to your lawyers, you talked to the Administration's 
lawyers. Do you ever engage in Congress when there are 
conflicts like this?
    Mr. Hale. Yes, I think so. I mean, it would probably be 
better to have our general counsel here, but I believe there 
are discussions with Congressional lawyers when it is 
appropriate. In the end, I mean, we will be guided by the 
Administration's lawyers, but we do talk.
    Senator Tester. OK. I just think it is really critically 
important. I think Congressional intent is very important, and 
I will tell you that it was more than just a little bit 
disconcerting when we had the conversation with the ICBM caucus 
Senators, and basically one of the people in that meeting 
basically said, We do not care. We are doing what we want to 
do.
    Mr. Hale. I would not agree with that.
    Senator Tester. Well, were you in the meeting?
    Mr. Hale. No. I mean, I would not agree with the statement.
    Senator Tester. OK, perfect. That is good.
    Mr. Hale. I was not in the meeting.
    Senator Tester. Now I want to talk about the inability of 
the DOD and the VA to coordinate development and deployment of 
electronic medical records. The Chairman talked about it a 
little bit. It allows for a seamless transition for a service 
member. It is the right thing to do. It has been talked about 
since January 2007 and maybe before when I walked into this 
body.
    To what extent are you able to answer what the specific 
challenges are here? Because it seems pretty basic stuff to me. 
DOD gets together with the VA and moves forward with an 
electronic medical record that talks to one another. So what is 
the problem?
    Mr. Hale. Well, I am not the expert here, although I am 
definitely aware of the issue and I think DOD and the VA are 
committed to that. We have differing views at times about which 
system to use, but if we choose a different system, it will 
have to be able to talk to Vista. However, I would like you to 
consult with others rather than me on the details of that.
    Senator Tester. OK. Anybody specifically?
    Mr. Hale. I will get, it is probably just right, our Acting 
Under Secretary of Defense for Personnel and Readiness (P&R) or 
our lawyers.
    Senator Tester. OK.
    Mr. Hale. I will get you that.\1\
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    \1\ Information submitted by Mr. Hale appears in the Appendix on 
page 154.
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    Senator Tester. Well, this brings me to another issue. If 
it happens with VA and DOD, the question becomes-when it comes 
to major acquisitions that the military is going to make, to 
what extent does your office engage with other agencies, for 
instance, DHS? There is some parallel work that is being done. 
They may have already something tricked out that works from a 
technological standpoint. Do you consult with other agencies?
    Mr. Hale. Yes. I mean, we have cooperated with other 
agencies, satellite programs, with the National Oceanic and 
Atmospheric Administration (NOAA), for example, as just one 
example. Many of our weapons are somewhat unique and therefore, 
the Department-there are not other agencies involved, but where 
that is appropriate, I believe we do do it. Do you have 
something specific in mind?
    Senator Tester. No, I can give you specifics, but generally 
speaking, I think it is critically important, when you guys are 
looking at a new system, to look around and see if somebody has 
already built it and then you could utilize it. It saves a 
whole bunch of money and eliminates the problem.
    I know that there are turf issues. We see it in the Senate 
between committees. It is silly and I think it is silly between 
agencies, too. So if you can utilize that, I think it makes it 
more cost effective. And I think it makes you more effective 
overall. That is all.
    Susan--and I appreciate you all being here. But you 
represent the one service on the panel that has achieved audit 
readiness. Congratulations.
    Ms. Rabern. Thank you, sir.
    Senator Tester. I appreciate your examples of how this 
accomplishment translates into real-world benefits for our 
military, our veterans and those who do business with the DOD. 
Do you have an estimate of the savings that you have achieved 
from the Marines audit?
    Ms. Rabern. Across-the-board, I do not, but I would be 
happy to provide that for you, sir.\1\
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    \1\ Information submitted by Ms. Rabern appears in the Appendix on 
page 154.
---------------------------------------------------------------------------
    Senator Tester. That would be great if you had it. I mean, 
I think that if you could use--if you could utilize the 
information that you have gained with yours, with your audit 
process, I think that it makes it all that more important to 
get a DOD-wide audit done.
    I just want to close by saying something similar to what 
the Chairman said before he left. There is no reason the DOD 
cannot have an audit. If it is because you are too big, then we 
need to address that, and you need to be honest with us, but I 
do not think that is a reason.
    I think it has been something that there has not been a 
focus on. I get the impression that Mr. Hale has put a focus on 
it and I appreciate that. The proof is going to be in the 
pudding because the charts that the Ranking Member put up about 
2001 compared to today are spot on, and if we are here next 
year or the year after and we still have those same kind of 
charts up, there is going to be some ramifications to that 
because more and more people in the Senate are aware of this 
and they want it fixed. Thank you all.
    Senator Coburn [presiding]. Thank you, Senator Tester.
    Let me make just a few comments. Audit readiness to me is a 
misnomer. What you want is an audit to see whether or not you 
have the financial controls in place with which to make 
management decisions. You do not do an audit to do an audit. 
You do an audit so that it enhances and hones your ability to 
make financial judgments based on the data, to know that your 
data is accurate.
    So, I put up this little chart.\1\ It is the audit 
deadlines, and I understand Senator Carper asked you about SBA 
versus SBR. But the fact is, an SBA is meaningless to me as an 
accountant because it gives you just one little scope of 
period. And the Pentagon has multitude of programs that are run 
in years. So all it says is for this one short period of time, 
we have some financial controls if you pass it. Not on the 
statement of resources, but on the statement of activity.
---------------------------------------------------------------------------
    \1\ The chart referenced by Senator Coburn appears in the Appendix 
on page 135.
---------------------------------------------------------------------------
    And so, the whole idea of an audit is to have an audit to 
know what your holes are and your financial weaknesses and your 
management weaknesses, so you can change things. Now, let me 
give you an example of somebody who has done it right in the 
Air Force, General Wolfenbarger. She is responsible for $16 
billion at the supply depots. Three years ago, she instituted a 
continuous process improvement. Most of the people in the 
Pentagon do not even have any idea what that is.
    But it is how every other modern business combines their 
audit information with their management so that they achieve 
savings. General Wolfenbarger and her team have saved, year to 
date in the last year, about $680 million, and they did it 
because they actually know what they are doing because they got 
good numbers.
    The question I asked her after she made her presentation 
is, could you pass an audit? Of course. We could not do 
continuous process improvement unless we could pass an audit. 
So I kind of want to take us away from audit readiness, which 
is the buzzword that we are hearing at this hearing, to having 
an organization that has the financial controls with which to 
make the proper decisions, because that is the whole basis.
    The audit is the check to see if you have got the 
information systems, if you have got the financial data. I also 
have one other anecdote. The commanding general at Altus Air 
Force Base cut $100 million out of his budget in one year. It 
is a small Air Force base and he did it through good 
management. He did not have a general saying, You will cut $100 
million. He did it on his own. And, of course, the flashback 
came, You did not spend all your money, which is another 
problem. Use it or lose it.
    So Mr. Hale, really what has happened is, based on the 
NDAA, we have descoped on the basis of the outlet clause that 
was in that, that if it is too hard or too expensive, you can 
go to one year audit readiness. Right? We descoped what the 
NDAA said. Is that not correct?
    Mr. Hale. Yes, but only as a way to get to the top of the 
hill, because we knew we could not get there any other way. I 
mean, we still want the full statement and we will get the full 
statement. That is the whole point. But I did not want to waste 
taxpayers' money doing audits when we knew, after the 
experience in the Marines, that we did not have 10-year-old 
data quickly enough to satisfy audit needs. So we are going to 
build toward it more slowly.
    Senator Coburn. So when you meet the statutory deadline, if 
it is met, you will have only 5 years of data?
    Mr. Hale. Well, I think we can do better than that. As you 
get back to the far distant data, it is small as a percentage. 
If we can get the first few years correct, I think the 
percentage will be small enough that we may have to engage in 
some special efforts, but I believe that we will not have to 
wait 10 years. I mean, it is certainly not our plan.
    Senator Coburn. So is 2 years data good?
    Mr. Hale. I do not know if two will do it, but I would hope 
two or three would do it.
    Senator Coburn. But right now, do we not have last year's 
data?
    Mr. Hale. We would have last year's data, yes. It is when 
we go back--I mean, some of our accounts are open for 
obligation for 5 years, military construction, for example. And 
then the law allows up to 5 years to expend the money. So some 
of it goes back as much as 10 years. You get back 5, 7, 8 
years, we do not have it readily available. It is there, but it 
could be in some long-term storage and we need it quickly 
during an audit. An auditor cannot wait for weeks while we are 
looking for the data.
    And we just found with the Marines, we were not getting 
there. So, I want to get to the top of the hill, but I want to 
do it in a way that is as quick as possible, and also mindful 
that I do not want to spend audit money and I am not getting 
anything for it.
    Senator Coburn. So that question comes on, on construction 
accounts, for example. Whoever is managing that does not need 
that long-term data to manage that effectively right now?
    Mr. Hale. Yes, they need the data right now. I wish I had 
it and I do not.
    Senator Coburn. So the point is, is because we do not have 
the data and we have not developed a system for the data, you 
cannot manage it effectively right now because you have 
information that is missing.
    Mr. Hale. I think our management is impaired. I mean, we do 
have information on obligations, and I know that is correct. We 
do 150 million accounting transactions a year. If 1 percent is 
wrong, we have 1.5 million wrong transactions. We would have 
massive mispayments. We have massive Antideficiency Act 
violations. None of that is occurring.
    But we need the audit both to verify it and especially for 
the outlay data. So I agree with you. We need this information 
as quickly as we can get it. I do not want to waste money in 
the process of getting it, and I know you do not want me to do 
that either.
    Senator Coburn. So in your written testimony, you say, DOD 
does have accurate information about where we obligate public 
funds. If that is true, you know where the money is going.
    Mr. Hale. Yes, we know where the obligations are going. And 
again, my rationale there is what I just gave you. If we did 
not, we would have massive antideficiency--I mean, even if a 
tenth of a percent were wrong, we would have 150,000 wrong 
transactions every year. We would be paying the wrong people, 
we would be overrunning accounts. None of that is happening.
    Senator Coburn. So my question is this: If you know where 
the money is going, then you should have a Statement of 
Budgetary Resources.
    Mr. Hale. And that is a good question. And I cannot 
document it in a manner that satisfies auditor. I know it is 
there because otherwise I would have the problems I just 
described to you. But I cannot document it in a way that will 
satisfy an audit and we need to do that. Moreover, the outlays 
are more of an issue. I think we do not have----
    Senator Coburn. So you know that, but you cannot document 
it. So my question to you is, how do you know that? If you 
cannot document--if somebody comes in, you cannot prove it to 
an auditor, but you can sit here and testify that you know it, 
but you cannot give us the backup information to say that is 
true, how can we rely on that as a----
    Mr. Hale. Senator, if there were any significant percentage 
that were wrong, as I said, we would have massive mispayments, 
and I will tell you what, we would hear about them real quickly 
if we were not paying our vendors, if we were not paying our 
people, and we have some, but they are tiny as a percentage.
    So I know that that information is right. That does not 
take away, in my mind, for the need to do the audit at all. We 
need to verify through an independent audit and we need to 
correct, other than the obligations, and we need to improve our 
business practices.
    Senator Coburn. OK. The Antideficiency Act you mentioned is 
a key to Congress's constitutional power to control the purse 
strings and ensure that public funds are spent as appropriated. 
The DOD IG reported that it found hundreds of near-missed ADA 
violations, Antideficiency Act violations--I will try to not 
use the acronyms to please my Chairman.
    Mr. Hale. You could get in trouble, too, Senator.
    Senator Coburn [continuing]. Because of inadequate funds 
control and that several of these near misses turned out to be 
actual Antideficiency Act violations. In your testimony, you 
note that one way to reduce the Antideficiency Act violations 
is to process potential violations quickly. But GAO has 
reported several examples where investigations of potential 
Antideficiency Act violations took months or even years to 
complete.
    Would you provide us the number and dollar amount of the 
investigations that have been initiated, completed, and 
reported for the last 2 years?
    Mr. Hale. Yes. I do not have those in my head.\1\ What I 
can tell you is when I took over this job, we had about 25 
ongoing ADA investigations that were late. Now we are down to 
one and I have worked with my colleagues here and they can 
attest to that--that we needed to speed up the process. 
Oftentimes, by the time we finally get done, people are 
retired, and we need to hold them accountable by doing this 
more quickly.
---------------------------------------------------------------------------
    \1\ Information submitted by Mr. Hale appears in the Appendix on 
page 154.
---------------------------------------------------------------------------
    Senator Coburn. OK. The other thing I would like for you to 
answer--you do not have to answer this today--is the average 
length of time it takes to complete one of those and how many 
people are involved.
    Mr. Hale. OK.
    Senator Coburn. You have also reported, and you said so 
again just in your recent testimony, that they are a small 
portion of your budget.
    Mr. Hale. Yes.
    Senator Coburn. My question is, is it OK to have those even 
though the numbers are small?
    Mr. Hale. No. I mean, zero is the only right goal. I do not 
know that I will ever get there, but it is the only right goal.
    Senator Coburn. Are you aware that the DOD IG has reported 
that of the 120 actual ADA violations, Antideficiency Act 
violations reported by Federal agencies, 82 were reported by 
the Department of Defense?
    Mr. Hale. I do not recognize that number. What I have 
calculated is the percentage of our budget.
    Senator Coburn. Well, but your budget is the biggest budget 
in the Federal Government so percents do not mean anything. 
Actual dollars mean something to the American people.
    Mr. Hale. Zero is the only right goal.
    Senator Coburn. OK. I guess we will come back for another 
round.
    Mr. Hale. OK.
    Senator Coburn. Thank you.
    Chairman Carper [presiding]. Senator Johnson, I think you 
are next and then Senator Ayotte.

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Mr. Chairman. I want to 
continue to explore this term audit ready, because I do not 
think it should be a goal. I mean, it should be a requirement. 
In business, I would go to the department or division and say, 
``Are you ready for the audit? '', because the audit was going 
to happen. I just think the purpose and the goals here are just 
being misused and I think that is part of the problem.
    The goal of the audit is not to just prove you are doing 
everything right. The audit should be used as a management tool 
to be conducted to tell you where you have deficiencies.
    So I think the reason we do not have an audit for the 
Defense Department is because we have been pursuing what should 
be a requirement, audit readiness, when we should be pursuing 
just having the audit and then using the information, because 
it is going to be a qualified audit. You are not going to get a 
clean audit. But the goal would be then to utilize the 
information from the audit to drive your management.
    So tell me where I am wrong there. Tell me why we are 
pursuing what I think is the wrong goal and why do we not just 
start conducting audits?
    Mr. Hale. A couple of years ago, we knew we were not ready 
and we would have simply wasted time. The auditor probably 
would have come in and said, You are not even close, and so we 
would end up paying them to do nothing. That was----
    Senator Johnson. First of all, I totally disagree with that 
assessment.
    Mr. Hale. OK.
    Senator Johnson. I do not see how spending money on an 
audit to determine how bad you really are is a waste of money.
    Mr. Hale. Well, I would ask the GAO and IG if they agree 
that we, 2 or 3 years ago, should have immediately begun an 
audit. But now, I think we are to the point where you are 
exactly right. We will learn so much more by getting into audit 
because we will have a private sector audit firm that really 
knows this stuff telling us what is right and what is wrong.
    Senator Johnson. So when will we do that? When are we going 
to start? Have we ever conducted an audit on any component of 
the Defense Department?
    Mr. Hale. Oh, yes. If you look at my prepared statement, 
you will see we have audited or been examined by independent 
public accountants a large number of parts. We had a full-up 
audit of the current year of the Marine Corps, and they just 
got a clean opinion last December. And I hope and I think that 
we will have----
    Chairman Carper. Excuse me. Would you just stop right 
there? Say that again, your last statement about full year 
end--just say that again about the Marine Corps.
    Mr. Hale. The Marine Corps had an audit completed last 
December of the current year of its Statement of Budgetary 
Resources and got a clean opinion in December of last year. We 
expect they will get another one--that was on the 2012 
statement on the 2013 one. Does that answer your question?
    Chairman Carper. I am confused. I was thinking that 
progress had been made on 2012, not on the current year.
    Mr. Hale. No, I meant current year meaning the 2012 data, 
just that year, not the prior year data where we could not find 
the documentation quickly enough.
    Chairman Carper. OK. All right.
    Mr. Hale. So that was the year of 2012.
    Chairman Carper. Fair enough. That will not be counted 
against your time.
    Senator Johnson. I want to go to a statement that Senator 
Tester talked about, whether the Department of Defense is too 
big to be audited. I just want to point out the fact that 
Walmart's, revenue exceeds $450 billion per year. They have 2.2 
million employees, 1.3 million just here in the United States. 
They have to go through an audit, and they do it successfully, 
because of Sarbanes-Oxley, risking prosecution and fines if 
they do not have a successful audit.
    What is different about the Defense Department than Walmart 
in terms of why you just do not do an audit and why you cannot 
successfully complete one? Tell me the difference between 
private sector and public sector, why this has been such a 
difficult task.
    Mr. Hale. Well, first off, we are not too big, I mean, and 
we will divide it up into sections and we are not too big to do 
it. That is certainly not a reason. Size makes it harder, but 
we are not too big.
    If you ask me why we are not done now, I would really like 
to have the first 15 years after the Government Management 
Reform Act, which required auditable statements in 1994, I 
would like to have them back. We made some progress then, but 
there was never a coherent plan in the Department and we did 
not have systematic senior leader attention.
    I think in the last 5 years, we have solved both of those 
problems. We now have a plan. We have resources set aside, 
which was not the case in those first 15 years, and we clearly 
have senior leader attention. It starts with Secretary Hagel, 
but as you have heard my colleagues say, it goes down through 
their own leadership and so on.
    Senator Johnson. Let me back up. The point I am trying to 
make is if back in 1994, you would have just started conducting 
audits, start auditing, start seeing the deficiencies and start 
correcting based on the information, why did we not do that? 
Would that not have made sense to do that?
    Mr. Hale. Well----
    Senator Johnson. Does it not make sense to do that now?
    Mr. Hale. I think it does now.
    Senator Johnson. Why delay 3, 4, or 5 years?
    Mr. Hale. I think it does now and we intend to for the 
budget statement.
    Senator Johnson. Anybody else want to chime in in terms of 
why do we not just start auditing? And does that not make sense 
for some reason?
    Mr. Speer. No, sir, to me it does not make sense if you 
know you are not ready. An independent public accounting firm 
would come in and if after doing an evaluation and testing 
right away would disclaim. It depends on where you are in your 
current environment, your controls, and the benefits you can 
get out of doing the audit. And the cost of that was deemed to 
be, and rightfully so, that you would not get anywhere to where 
you are improving or get the financial information that they 
are expecting and the benefits.
    Senator Johnson. You know what you get out of it? A lot of 
management pressure to correct the deficiencies, which I am not 
seeing right now. That is what you get out of it.
    Mr. Speer. I agree with where we are right now.
    Senator Johnson. Certainly in public companies, they have 
the necessary pressure. If they do not do it, they are either 
going to jail or they are going to have massive fines 
implemented against them. What kind of pressure do we need to 
institute against the Department of Defense to actually get it 
done?
    Mr. Speer. Senator, I believe we have it right now and I 
believe you have heard it here already. I think to get audited, 
you are going to hear GAO talk about the six issues and six 
challenges you have to meet. We have got leadership involvement 
now. You had to have a reality of understanding the benefits 
that the Ranking Senator talked about.
    It is not just a journey. It is a journey to get you there 
and prove the controls, but it is using the financial 
information for the benefit of the entity, and we are about 
making leadership understand that.
    The Vice Chief of Staff of the Army now sees it as 
readiness, readiness to the units that he oversees. He is 
brought into the strategic readiness where he looks at units 
being ready to go. He had to have the understanding and control 
governance over it. So now that you have the controls put in 
place, we are putting controls in place that allows the audits. 
We had systems that did not talk to each other. I do not know 
how we got to where we were.
    Senator Johnson. I understand. Again, let me get back to 
the point. How much of the Defense Department has undergone an 
audit, what percentage?
    Mr. Hale. For the budget statement, it is probably 10 
percent at this point. I think for the budget statement, after 
September, I hope, it will be in the high 80s or more.
    Senator Johnson. How have you broken down this task into 
components? What are the components? Is it strictly by service 
branch? How have you broken it down?
    Mr. Hale. More than that.
    Senator Johnson. Have you broken it down even further?
    Mr. Hale. By service and then also each Defense agency and 
some trust funds on the side. But then we have broken it down, 
as my statement indicates, into various categories of 
information, military and civilian pay, our disbursing 
activities, the various activities that we conduct financially. 
And we have sought to improve those processes to the point 
where we can get an examination by an independent public 
accountant--we are not grading our own homework-and have them 
come in and say, Yes, it is either right or no, you have to do 
the following things.
    Senator Johnson. Is part of the problem there because as 
those systems are systemwide and they become massive, it 
becomes pretty difficult to get your arms around that? Again, 
in a public company, you would audit a division or a department 
and you would knock it down to small enough component parts and 
you would complete it. Basically, it is like cleaning out a 
garage.
    You go in the corner, you clean out one of the corners 
first. Again, have we made this so massive, have we made it 
such a process that we are just not getting it completed?
    Mr. Hale. I do not think so. I think it has been a lack of 
a coherent plan and attention in the first 15 years. I think we 
have got them now and you are seeing the results. We are going 
to be under audit, I believe, starting in October or November 
for the fiscal 2015 statement on most of the Department's 
budget.
    Senator Johnson. Thank you. I am out of time.
    Chairman Carper. Your time is expired. Senator Ayotte, you 
are on. Welcome.

              OPENING STATEMENT OF SENATOR AYOTTE

    Senator Ayotte. Thank you. This is obviously a very 
important topic. Appreciate all of you being here and I 
appreciate the Chairman and Ranking Member having this hearing.
    One thing I am trying to get a hold of is--and I know, 
Secretary Hale, we had a recent Armed Services Committee 
hearing on this acquisition topic as well. I mean, the 
Department is just littered with failed acquisition programs 
throughout the services. I mean, billions and billions of 
dollars. There are lots of examples. $2.8 billion wasted on 
National Polar Orbiting Operational Environmental Satellite 
System; 2.5 wasted on the Transformational Satellite 
Communications System.
    From 2007 to 2013, the Air Force wasted $6.8 billion on 12 
major acquisition programs that never went to field. Help me 
understand. I believe that this audit issue is incredibly 
important, and the fact that we are now diminished from a 
Statement of Budgetary Resources, which was what what was in 
the NDAA in terms of requirement, to a statement of budget 
activity which really only shows us the year window, how is 
this tool going to help us with the acquisition programs, 
Secretary Hale?
    Mr. Hale. Well, first off, let me repeat, the Statement of 
Budgetary activity of the current year is just a means to get 
to the full statement because we did not have-we cannot produce 
the data or documentation quickly enough. So we are not backing 
off of the goal of auditing the full statement at all. We are 
just getting there in a way that I think is cost-effective.
    I am not going to sit here and tell you, Senator Ayotte, 
that financial statement audits are a panacea for every problem 
in the Department of Defense, including all the acquisition 
issues. Requirements are a key issue in terms of determining 
whether we succeed in acquisition, as are the skills of the 
workforce, and I think Frank Kendall is working those issues 
hard.
    But I believe we could help by tightening our controls and 
we will have to do that in the process of getting the financial 
statements, in terms of giving all of us, including Frank 
Kendall and those who work for him, better information.
    Senator Ayotte. Can I ask you about a particular one?
    Senator Coburn. Could I interrupt for just a second?
    Senator Ayotte. Sure.
    Senator Coburn. Here is the difference, Bob. In a large 
business with big acquisitions, the CEO is getting a report 
every week, whether it is on time or on budget. We do not have 
that. Secretary Hagel does not know the major acquisition 
programs, whether it be an enterprise resource program or a 
weapons system or anything else. He is not getting a weekly 
report so he can act on it because we do not have the 
information to give it to him.
    That is the key point. That is why the audit is important, 
so you will get the financial information so you can flow the 
information up to the decisionmakers so that when you have a 
red flag, they know it. Not 2 years after the red flag came up, 
but the day the red flag came up.
    Senator Coburn. Not after we spent billions of dollars.
    Mr. Hale. It sounds reasonable to me, Senator Coburn.
    Senator Ayotte. Thank you, Senator Coburn, and I agree 
fully with the comments of Senator Coburn and how important 
this is.
    So this morning, there was a description of reports that 
the Pentagon is going to field an $11 billion contract to 
overhaul its electronic health records system, and this would 
be by far the biggest IT contract since healthcare.gov failed 
rollout.
    And with all due respect, we do not really have--I think 
there are a lot of issues with IT acquisition, not just in DOD, 
but this has been an issue that this Committee has focused on 
across the government. And as I hear that, it raises red flags 
for me in terms of what controls are going to be put in place 
given that you are not in a position, as you would like to be, 
Secretary Hale, to have this type of data that we just talked 
about.
    What are the controls that are going to be in place for 
taxpayers on this huge contract? Important. I understand the 
purpose of the contract. It is going to, as I understand it, 
impact all of the health records for our men and women in 
uniform, but we have a history of not having-obviously, we are 
not in the place we want to be on the audit.
    We have notable examples of failed IT projects and this is 
an $11 billion project. So what controls can you assure us are 
going to be put in place as you go forward with this? And I 
guess a good question is, will Secretary Hagel get those 
reports weekly to know whether the $11 billion is being spent 
properly and we are on time?
    Mr. Hale. That one I think I can tell you he will. He is 
deeply and personally involved in that program. Frank Kendall 
meets with him weekly, and although I am not in those meetings 
typically, I think that this issue will come up. I think he 
will get regular reports. We will give him the best data we 
have, and actually on the obligation side--we have had this 
conversation before--I believe our data is fundamentally 
accurate. We still need to do the audit to verify that, but I 
am not seeing the problems that would occur if it were not 
accurate.
    The key thing on the IT--two key things. One is the 
requirements. There has been a lot of time devoted to trying to 
make sure the requirements are right in this contract. So 
although I am not the best guy to talk about it, I know that 
there has been a great deal of attention.
    And I think Frank Kendall, if he were here, would say that 
we need to develop better training for our acquisition 
professionals in IT. And they are consciously working to expand 
the curriculum, for example, the Defense Acquisition 
University, to try to improve the training.
    Senator Ayotte. So I think this is a contract that this 
Committee also--we really need to keep an eye on it. It is $11 
billion. It is a huge IT acquisition and it makes me very 
concerned. I am glad that the Secretary himself is going to 
focus on this because there are just too many examples where we 
have invested in IT projects that have not gotten the results, 
and $11 billion is a significant project.
    Senator Coburn. Why not convert the VA system to the 
military? I know that we always have a reason why, just like on 
our ERP programs, we always buy programs and then modify them 
to fit the military, rather than have the military modify their 
programs to fit a proven system.
    Senator Ayotte. Great idea.
    Mr. Hale. I would like to get you with Frank Kendall to 
answer that question, Senator Coburn. I have heard the answer, 
but I think that he has the depth that is appropriate to 
address it. If we do go with a separate system, the requirement 
that it be interoperable and be able to talk to Vista will be a 
key, which is the VA system will be a key requirement. But I 
would rather have him address that.
    Senator Coburn. Just to note for the record, the Federal 
Government spends $80 billion a year on IT. Forty billion of it 
is wasted every year.
    Senator Ayotte. I look forward to seeing that answer as 
well. Thank you. I wanted to ask you about improper payments. 
You have, I think, testified again today about the fact that 
the DOD's rate of improper payments is only .17 percent.
    If you compare that to governmentwide, it is 3.53 percent. 
But GAO, in its 2011 report, really targeted--and I know that 
some of the data used in that report was going backward. So I 
will give it that. But GAO basically found that DOD's improper 
payment estimates were neither reliable nor statistically valid 
because of long-standing and pervasive financial management 
weaknesses.
    Of course, this is all about what this hearing is about. 
But how do we know that what you have given us today is 
accurate? And can you give me some more details on how DOD's 
improper payments program has evolved to get to this point 
where apparently your statistics are quite good?
    Mr. Hale. Well, I think the main thing we have done is try 
to close the barn door before the cows leave, rather than just 
looking at improper payments after they occur and trying to fix 
them. For example, we put in place in commercial payments 
something called the Business Activity Monitoring (BAM) System 
which looks to see--it is pretty simple.
    It has rules. It says, Hey, if two invoices come in within 
2 days and they have the same number, spit it out to a human so 
they can see if it is a duplicate payment. That is a trivial 
one, but there are many others. We are trying to do something 
similar in travel, which is an area where we still need to make 
further improvements.
    In terms of the accuracy, we have done, because of IPERA, 
or to comply with it, pretty extensive statistical testing. GAO 
does not like all of our testing, but you get two 
statisticians, you are going to get two different opinions. Our 
statisticians think our sampling is fine, but we have actually 
changed it to try to satisfy GAO.
    Pretty extensive sampling after the fact to see if indeed 
the cows are still in the barn, and the data you are seeing 
reflects that they are, with some exceptions. And again, zero 
is the only right goal for improper payments.
    Senator Ayotte. Of course.
    Mr. Hale. But they are pretty small and I am not sure we 
are going to get all that much better. I think it is a success 
area for this Department.
    Senator Ayotte. Thank you. May I ask one more question, Mr. 
Chairman? I know my time----
    Chairman Carper. Yes.
    Senator Ayotte. I just want to ask the Air Force, when 
Secretary Hale talked about the 80 percent goal in terms of 
this fall, obviously we are not where we want to be with the 
SBRs----
    Mr. Hale. The goal is 100, but we may not----
    Senator Ayotte. Correct. Where is the Air Force on this? 
Because you have been the service branch that I think has had 
the most difficulties and challenges.
    Mr. Morin. Yes, ma'am. We certainly started behind in this 
effort. Our financial systems modernization was and remains 
several years behind the other departments. We are in the early 
stages of fielding a modern financial system, and are still 
relying on our 1968 accounting system. The other services are 
further along.
    However, while the ultimate--while the judgment of audit 
readiness for the Schedule of Budgetary Activity will be made 
later this year by the Secretary of the Air Force, right now it 
looks like we will be ready to assert on that schedule. So that 
is our view at this point. Again, we have significant 
milestones to get through over the course of the summer. These 
issues include our work in conjunction with the Defense Finance 
and Accounting Service (DFAS). We have corrective action plans 
that we are laying in place based on past engagements by 
independent public accounting firms. But our assessment right 
now is that we are on track for that.
    Senator Ayotte. And on all of this audit issue, is it being 
driven, I know, not just beyond Secretary Hagel, but at the 
Secretary level of each service branch?
    Mr. Morin. Senator, when our new Secretary of the Air Force 
took office just a few months ago, she laid out three top 
priorities for her tenure and for the Air Force under her 
authority, direction and control. One of those three was making 
every dollar count and audit readiness was a key part of that 
for her. So very much so.
    Ms. Rabern. Yes, ma'am. The Secretary of the Navy is a 
former State auditor for the State of Mississippi. He made it 
clear to me on day one this was his highest priority and he 
talks to me about it every week.
    Chairman Carper. Did you say Secretary of the Air Force or 
the Navy?
    Ms. Rabern. Navy, sir.
    Chairman Carper. Thank you.
    Mr. Speer. Yes, ma'am. Secretary McHugh is very heavily 
involved in and interested in it. I was in the Chief of Staff 
of the Army's office yesterday talking to him about 
auditability and he is trying to get better financial 
information for cost informing readiness. And heavily involved 
with the Vice Chief of Staff of the Army overseas and on a 
monthly basis.
    Senator Ayotte. Thank you.
    Chairman Carper. I am a recovering Governor. My last job 
when trying to solve issues in our little State of Delaware, I 
would oftentimes say to my Cabinet, some other Governor in some 
other State has confronted this problem and has figured out how 
to solve it and we need to find that State, that Governor, and 
whoever solved it and find out if their solution was exportable 
to our State.
    Occasionally we would have Governors from other States who 
would say, Well, how did you do this or that, and we would try 
to help them.
    In the Navy, Captain Rabern, I do not know if you ever 
heard the term refusal speed, but when you have an airplane 
heading down the runway to take off, the airplane gathers up 
speed until it finally reaches a speed we call refusal speed, 
and that is the speed at which the pilot decides to keep the 
airplane on the ground or decides, We are going to fly this 
baby.
    The Department of Homeland Security a couple of years ago 
decided--they had, if you will, the aircraft going down the 
runway moving toward--heading forward to being auditable and 
actually having a clean audit. And somewhere along the way, 
they reached refusal speed and they said, We are going to fly, 
we are going to get this done. And they did.
    And it was not just Jane Lute who we have no disrespect 
for, the Deputy Secretary, it was not just Rafael Borras. It 
was all the way down and through their organization. But 
thinking back about my experience as Governor, flying in from 
other States seeing, how they solved particular problems, what 
lessons have we learned? And this is for each of you. What 
lessons have we learned, taken to heart, from the Department of 
Homeland Security?
    For them to have actually achieved not just to be 
auditable, but actually have a clean audit within the timeframe 
they had, it is pretty amazing. They are a huge department. 
They have hundreds of thousands of employees. They do all kinds 
of things. They are spread out not just all over the country, 
all over the world.
    If they can do it in a short timeframe, how did they do it? 
What have we learned from them? What have you learned from 
them?
    Ms. Rabern. Sir, we have learned a lot not only from the 
Marine Corps, but from our sister services. I am not sure you 
are aware, I was the Chief Financial Officer of the FBI, U.S. 
Customs Service, and the Agency for International Development. 
So I bring those lessons learned to this job.
    Chairman Carper. Well, you have quite a resume.
    Ms. Rabern. I have been in other places. I have been 
blessed. Yes, sir, thank you. The thing that I find most 
important, absolutely across-the-board in every one of my 
experiences is if the boss does not get it, then it will not 
work. So the tone from the top is absolutely most----
    Chairman Carper. Leadership is the key in everything and 
that includes this.
    Ms. Rabern. Absolutely. It is also about me being actively 
involved and spending time with those who are responsible for 
the subsections of our budget. We have 19 budget submitting 
offices. I meet with them regularly. I bring them to me, I go 
to them, I go into the duck plates. I talk with the people who 
are actually making the transactions.
    You and I both know that you can tell by doing that, 
walking around management, whether you are ready or not, 
whether the tone and tenor is right, and absolutely, from my 
past experience, I can tell you that the Department of the Navy 
is there. The momentum is there, the refusal speed, I think you 
called it, we are there. We are excited. We are ready to go. We 
are ready to take the lead that Senator Johnson has just 
described. It is time. It is time for us to do it.
    Also, having a staff that is trained. This is one of the 
things that I spend time thinking about and that is making sure 
that the government employees understand their particular 
individual role with audit, so their day-to-day duties are well 
understood about what their personal role is in audit success. 
We are working on that. We are working on a fundamental 
training framework so that every person involved in financial 
management in the Department of the Navy understands what their 
role is.
    The other thing that I have learned across-the-board is 
that it is not only about training the culture of the 
organization that is being audited. It is about also 
understanding. You have to train the auditors so that they 
understand what the mission of the organization is. And that is 
something that you have to do up front and early. They have to 
understand who you are and what your language is and what your 
business is.
    And the other thing--the final thing that I would say is 
you should never dance in the end zone. You should never 
discount the difficulty of this work, nor should you discount 
the importance of getting on with it. Thank you, sir.
    Chairman Carper. Well, before we can dance in the end zone, 
we have to get into the red zone. I think we may have moved 
into the other team's territory, but we are not even in the red 
zone. So maybe we can get there if we keep this up. We have to. 
All right?
    Ms. Rabern. Yes, sir.
    Chairman Carper. Football is not that far away. So like 
late September we want to be in that red zone. Dr. Morin, just 
quickly, Air Force has really the most ground to make up. You 
said that a couple of times. What do you learn from DHS and the 
way that they have actually made up ground, they made up 
quickly, and got into the end zone? I invited them to come here 
today and do a dance in the end zone. They declined.
    Mr. Morin. Senator Carper, Dr. Rabern has an exceptional 
resume. I have a very good staff to compensate for my lack of 
resume. I will note that the Acting CFO of the Department of 
Homeland Security is a retired Air Force officer who used to 
work for me, so we have a lot of opportunities to exchange 
thoughts and ideas on efficient fiscal management as well as 
audit.
    Chairman Carper. What are some things you have learned from 
that person or others in DHS that would help expedite this 
process?
    Mr. Morin. For us, the biggest piece is the value of 
getting the auditors' eyes in. To Senator Johnson's point from 
earlier, I think we really are taking exactly the strategy you 
have laid out, which is starting the audit. I think we have had 
very recently a Big Four accounting firm in looking at Air 
Force-wide civilian pay, billions and billions of dollars of 
our activity, and they looked at it end to end.
    They found our noninformation technology controls were 
generally functioning well. I think it was 25 out of the 28 
that they examined they found were well designed and 
functioning well. Punch list of things to improve, just like 
you brought up, on the remainder. They found in some of our IT 
areas we had issues where, for example, we were not doing a 
good job of purging user rosters on systems, and so people 
would move on from a job but still retain their systems access.
    Again, those are issues, but they are punch list items. 
Right? You can fix those. I think that is exactly what is going 
on and that is a key lesson from Homeland Security. You have to 
build that list of concrete, definitive actions. For many 
years, the Department would have auditors come in and issue a 
same day disclaimer: We cannot get to the answer, the systems 
are not reliable, the data is not reliable, we are done.
    We are now to the point that by focusing on these 
individual segments--we call them assessable units--and 
breaking it down, we are getting to finite and achievable 
lists. We are not hitting them all right the first time, but we 
are getting most of them right and we are cleaning them up as 
we go. So that is just absolutely key.
    Chairman Carper. Thank you. Real quick, 30 seconds, Mr. 
Speer, same question.
    Mr. Speer. Yes, sir. I agree with that and I guess my 
background is in audit and accounting. I came from 
PriceWaterhouse Coopers to this job and I was a program manager 
in the Corps of Engineers audit, which is probably the largest 
audit in the Department of Defense, and we learned a lot from 
it. Part of it, I think I agree with Senator Johnson. Get in 
the game and start playing. You start to learn the value of the 
audit, you start to learn the culture of an audit, and you 
start to understand that leadership involvement and commitment 
to it is what accomplishes it.
    You cannot win it if you do not play. So we are at that 
stage now where I think it is the value of playing the game. I 
think we have the controls in place and we have leadership 
involved and you see now the benefit. We see people actually 
using the data now out of the systems that makes the difference 
and that is part of the value of the audit.
    Chairman Carper. Mr. Hale, 30 seconds, same question. DHS, 
what have you learned from them? How have they helped you with 
this challenge? How are they helping you with this challenge?
    Mr. Hale. We actually hired the person who did the DHS 
audit.
    Chairman Carper. Is that person in this room?
    Mr. Hale. Because of personal problems she had to leave us.
    Chairman Carper. Is she in this room?
    Mr. Hale. Is Margo here? She is not here. She had some 
serious personal problems and is going to have to leave us. But 
I think the tone at the top was clear. They had the biggest 
problem valuing their assets, which is an issue we have not 
confronted yet, but I think we got a fair amount out of Margo 
while she was with us and we will continue to benefit from 
them.
    Chairman Carper. All right. We wish her well. Thank you. 
Dr. Coburn.
    Senator Coburn. Mr. Hale, let us assume that GAO was right 
on improper payments and the statistical validation. You 
disagree with them and you said you have made some changes in 
how you are doing that. So let us assume that they are right 
and you are wrong. So we do not know. If we make that 
assumption, we do not know how all of the money is spent, 
right? And we do not know the accuracy of the improper 
payments. And 1 percent of $700 billion is $7 billion in 
Oklahoma. I do not know what it is up here, but that is what it 
is.
    Mr. Hale. Pretty much the same.
    Senator Coburn. $7 billion is a lot of money, and I can 
tell you I am skeptical at every hearing on the improper 
payments for the DOD simply because of the massive size of it. 
Let us talk for a minute about plugs. Tell me what plugs are in 
your mind in terms of the Pentagon's financial statements.
    Mr. Hale. The jargon we use, which I think is more 
explicit, is journal vouchers. There are circumstances that we 
need to fix. I will use the analogy, you have 1,000 people on 
your bank account and by the end of the month 990 of them 
report and 10 do not. We have to return. We have to tell the 
Treasury what we spent.
    And so we issue what is called a journal voucher that 
estimates the amount for those 10 who have not reported, and 
are supposed to go back and reconcile it. We have not always 
done that and that is one of the things we have to fix and are 
fixing. They are pretty small as a percentage. They are getting 
down to levels that may not be material in a financial audit of 
less than, say, 1 percent, but they are an issue and they have 
to get fixed.
    Senator Coburn. Mr. Speer, you have received questions from 
the Senate Armed Services Committee hearings about the Army's 
decision to process some of their disbursements directly 
through your ERP system, and in the process, bypassing the need 
for these transactions to be processed by DFAS. I will use--he 
is turned around. He will not care that I am using an acronym.
    Can you explain why you made that decision and how it 
improves the Army's financial management capabilities?
    Mr. Speer. Yes, sir. It was part of a review we did. It was 
part of cure to pay and to analyze and optimize the system. We 
looked at the way we were currently disbursing and we looked at 
some of the connectivity between some of the systems that 
caused us some of the errors. And so, when we looked at 
Treasury direct disbursing out of the system, we tried to 
engineer the process and see whether or not that could go 
direct Treasury disbursement. It eliminates some of those 
errors and some of the reconciliation needs, some of the 
plugging of the numbers and fixing back.
    And so, we piloted that program and we are phasing it in as 
we are finding success. We are still measuring whether the 
results of such provided a reduced cost. We are going through 
that currently now, the cost benefit analysis. We believe that 
from--the disbursements we are making now is about 15,000 a 
month and we are having zero out of balance condition with 
Treasury, so it provides that correct, easy reconciliation by 
not going through some of those other processes.
    Defense Finance Accounting Service it turns out to be very 
much still involved in the process, still coming back to the 
accounting and sees that it still has oversight and 
participation in that process. So we believe that this 
entitlement within the system will provide oversight of what we 
are paying, then creates that disbursement file out of the same 
system, provides a more easily reconcilable, direct, and less 
costly way of doing business.
    Mr. Hale. I do want to clarify. We have not made any 
decision to change the roles and missions between the Army and 
DFAS yet. We are looking, the Army is, we are. If it is cost-
effective, we will do it. If it is not, we will not.
    Senator Coburn. Well it is only cost-effective if you can 
have real savings or you can have real accuracy, which you do 
not have now, and I do not know how you put a dollar on that 
other than you are going to markedly improve financial 
management if you have real accuracy.
    During your testimony, you mentioned that disbursing 
straight from Treasury is the best practice. Who has determined 
that and what other agencies use this?
    Mr. Speer. Most other agencies use Treasury direct 
disbursing. I do not recall, in terms of the testimony, saying 
best practice. We believe it is best practice and we are 
testing that out as part of what we believe it is. We have seen 
other agencies do so, and so the systems are capable of doing 
it. It is a changing of the environment of the systems, and so 
that is why we went to the procure-to-pay pilot to assess that.
    Senator Coburn. Well, every other agency uses Treasury.
    Mr. Speer. Yes, sir.
    Senator Coburn. I had one other question for you, Mr. 
Speer. Given the Air Force's success on their supply depots, 
would it not be nice if the Defense Logistic Agency went and 
learned from General Wolfenbarger what she did? I do not know 
what the size of the Defense Logistics Agency (DLA) is, but I 
know it is bigger than $16 billion.
    It would seem to me that you would not have to reinvent the 
wheel if you went and had a little confab with the head of the 
DLA and the head of the depot system in the Air Force. And 
maybe transferred management techniques, motivational 
techniques, and processes could really significantly increase 
the savings and also increase the accuracy and decrease the 
inventory, because that is money that is tied up and we all 
know that is a problem.
    Mr. Speer. Yes, sir. As a matter of fact, I wrote that one 
down, to go back and follow through with the Air Force on that 
one. I am very interested in it. I think we are going through 
some of our own asset visibility and trying to improve, and 
General Via has significant efforts ongoing for improving the 
accuracy of the data.
    The U.S. Army Material Command (AMC), for instance, is one 
of the ones that is reporting directly to the Chief and very 
involved right now on the cost of training and cost of 
readiness, and we are looking at those kind of activities.
    Senator Coburn. Well, the key thing that Doctor--I want to 
say Doctor when I say general, pardon me, that is my former 
training--General Wolfenbarger did is she got her commanders at 
each one of these to buy into this as well, which you all 
mentioned. Leadership is the key and the whole goal is to 
better financially manage so that you do not waste money, that 
you buy better, that you get a more efficient utilization of 
the American taxpayer dollars.
    So I would just say, just having a meeting, you meet with 
Wolfenbarger and then see what you think. It is just me saying 
that, but when I see almost $600 million last year in savings 
that would not have occurred had they not done that, to me that 
is real change. That is 10 percent of Oklahoma's budget. Thank 
you.
    Chairman Carper. Thank you. Senator Johnson.
    Senator Johnson. Thank you, Mr. Chairman. I want to just go 
back to the discussion of the goal of what we should be looking 
at in terms of an audit. Again, from my standpoint, the goal of 
an audit is to provide management information. What I am 
hearing, maybe I am making an incorrect assumption here, is the 
goal, in terms of the Department of Defense, is to get audit 
ready so that when you conduct an audit, it is going to be a 
clean audit. Am I misreading that?
    Mr. Hale. Well, it is a step on the road, Senator Johnson. 
We have to get close enough so that we are just not wasting the 
public's money with an audit. But no, the goal is to have 
accurate information and have the audit attest to that.
    Senator Johnson. OK. I am glad a couple members of the 
panel have somewhat agreed with my approach--conduct the audit 
and use the management results. I want to talk about the 
component parts, how you break this thing down so it is 
manageable. I think you called it assessable units.
    I would like to call it accountable units, because I think 
leadership is key, but the way you are really going to get 
results is if you hold people accountable. So I want to go back 
to how have we broken this down--which is obviously an enormous 
task--but I go back to my private sector experience here.
    You have a large corporation. You are going to have 
individual divisions. Within the divisions or different 
companies, you also have individual departments. Each one of 
those departments, every one of those divisions and every one 
of those individual companies is accountable for its own 
successful audit. Sometimes those audits are done by totally 
different firms.
    Would that not be part of the process to do this 
successfully? Break this down into smaller component parts and 
hold those individuals accountable, and again, also put 
pressure on individual units. Here, you have the Navy, you have 
the Marine Corps. We have a clean audit. What is wrong with the 
rest of you branches? Set up just that type of pressure.
    Mr. Speer. Yes, Senator, I would agree with you. We have 
broken it down both in terms of the fire, in terms of doing the 
Statement of Budgetary Resources first and then moving out 
broader into existence and completeness. I think somewhat 
slightly different approach in terms of services. One of the 
things we did, we followed up with again the Corps of 
Engineers. We also looked at it as we fielded a new system, our 
first exam.
    We decided to do an exam across five different business 
processes and did it at the first three installations that 
adapted the General Fund Enterprise Business System, a new 
system. The next year we broadened it out to 10 installations, 
did an audit of eight of their business processes. And this 
year we audited the whole Army across all business processes 
for the Statement of Budgetary Resources.
    So we have broken it off into pieces and get larger and 
larger to show success and identify where we can remediate and 
make a successful audit overall.
    Senator Johnson. And again, coming from the private sector, 
you are never going to get an unqualified opinion if you do not 
have prior years' experience. And because we are not doing 
audits, is that a bit of a problem in terms of a clean audit? 
So why not say, let us start auditing so you have that prior 
year experience?
    Mr. Speer. I believe so, Senator, and I think my earlier 
statement is if you are not ready, you know you are not ready, 
you will not get the benefit out of it. We believe we are 
starting to get closer and closer to ready. That experience, 
and some of my colleagues here talked about it, they are 
building the culture of an audit, making sure that people 
understand how to be audited and know that they are 
accountable.
    That is the lacking we had for many years in the Department 
of the Army, people who were not held accountable to ensure 
that they were auditable. It is part now of their business. It 
is part of the process, part of their controls that they are 
responsible for and they understand that now. That is part of 
the audit that builds that kind of accountability.
    So one of the things we have seen is we have seen 
competition between commands now. Hey, I want to show that I am 
better than the other command and I am getting the results 
better. The U.S. Army Forces Command (FORSCOM), if you go to 
FORSCOM's website during Exam 3, you go and click on the four-
star general's website and he would have by installation the 
results of their individual audits of their documents, whether 
they turned them in on time and whether they are right or 
wrong.
    Senator Johnson. Well, not to beat a dead horse, but once 
you start doing it, they will be accountable and they will get 
into line. Secretary Hale, you were talking about, as an 
example, 10 units that have not reported their cash or their 
budgetary outlays. How can that be? Tell me about that. Again, 
coming from the private sector, every division reports their 
cash position. How are those units not accountable for 
providing that kind of information on time?
    Mr. Hale. Well, they are accountable, but if it does not 
happen on time that we can report to the Treasury, we have to 
do something. We are down to less than 1 percent, in most 
cases, for those journal voucher entries. And it has to get 
lower than that.
    Senator Johnson. Again, I understand. The accounting 
department is going to have to account for it in some way. How 
is the management structure holding those individuals 
accountable who are not providing pretty basic information?
    Mr. Hale. And I think one of the benefits of the audit is 
it is raising the visibility to our commanders. I doubt they 
knew that these things existed. Some of them still do not, but 
they will if they flunk the audit, as Bob Speer has said and my 
other colleagues have said. This has now become part of the 
readiness of the military.
    The Vice Chiefs are asking questions of their commanders. 
And if we are having trouble with journal vouchers, they will 
be asking questions of them. Do any of you want add to this?
    Senator Johnson. Let me just say, you are making my point, 
that you should just go ahead and audit.
    Mr. Hale. We are ready to go.
    Senator Johnson. OK. But again, everything I am seeing is 
we are just talking about getting audit ready as opposed to 
just conducting the audit.
    Mr. Hale. It is a milestone on the road and more than that, 
but it is a milestone I believe we have to meet because if we 
do not, the auditor will just come in and, as Jamie said, give 
us a same date disclaimer, and especially if it is a firm-fixed 
price contract, we would have paid a lot of money for it.
    You should ask this question, if you are here, of the GAO 
and the IG. I think they will have to say that we do need to be 
audit ready before we can do an audit.
    Senator Johnson. There is one other area I want to talk 
about, because a number of people have mentioned how disruptive 
the government shutdowns, the budget dysfunction is in terms of 
being able to obtain an audit. I understand the disruption. I 
understand how incredibly difficult it is to manage under those 
circumstances. But again, in the private sector, there are all 
kinds of uncertainty. There are all types of disruptions, and 
yet, you still are able to audit your results.
    Specifically, why does that really affect your ability to 
get an audit unless it is just a personnel issue?
    Mr. Hale. It slowed it down, no more than that, no less. I 
mean, we furloughed 650,000 people, both in their morale and 
their paychecks, and the time they had were affected. But I 
agree with you. We have to work beyond it. And I am hoping it 
never happens again. We need to work hard with the Congress and 
the President to make sure it does not.
    Senator Johnson. OK. Thank you. Thank you, Mr. Chairman.
    Chairman Carper. Thank you and thanks for all your 
questions. I am going to ask just one quick question and ask 
for a very brief response from each of you. We have heard today 
from Secretary Hale that audits are not free. They can be very 
expensive in some cases. Do not want to waste money on an 
audit. I understand that.
    For each of our witnesses, starting with you, Secretary 
Hale, do you have the resources in this fiscal year, that is 
2014, do you have the resources in this fiscal year 2014 and in 
the fiscal year 2015 budget request from the Administration to 
actually conduct an audit? I do not want a long answer.
    Mr. Hale. Are they adequate, you are asking?
    Chairman Carper. Yes.
    Mr. Hale. Yes, I believe they are. I mean, we have worked 
hard to do so. I will let my colleagues answer, but there is a 
sizable amount of money set aside over the whole 5-year period 
from fiscal 2015 through 2019, which is our current and future 
years defense plan, to carry out this program. That is 
something that has never been the case in those first 15 years. 
I think they are, but I will let my colleagues respond.
    Chairman Carper. Mr. Speer.
    Mr. Speer. Yes, Chairman, they are adequate. As a matter of 
fact, we fenced them in to make sure that we did not touch the 
funds that we needed in 2015 to make sure we can continue on. 
That is part of our priority.
    Chairman Carper. All right. Thank you.
    Ms. Rabern. Yes, sir, I would agree. The Department of Navy 
is in the same place.
    Chairman Carper. OK. Dr. Morin.
    Mr. Morin. I would agree as well. Again, we are setting 
aside fiscal year 2015 funds since the auditors will come on 
station in fiscal year 2015, and for fiscal year 2014, we have 
adequate funds to prepare.
    Chairman Carper. Good. Dr. Coburn.
    Mr. Hale. Can I have a brief comeback to that? The area 
that I am concerned about are Defense agencies. We have not 
necessarily solved that problem fully and we are working it.
    Chairman Carper. All right. Dr. Coburn.
    Senator Coburn. I have just one final question. Bob, your 
service has been remarkable. I want to tell you I appreciate 
it. I am concerned that who replaces you should have the 
management experience, the educational experience, the 
financial auditing experience to actually lead this 
organization.
    We have a good nominee, but he does not have any of those 
qualifications. Your ideal replacement, not in terms of 
individuals, but your ideal replacement, what qualifications 
would they have?
    Mr. Hale. First and foremost, I would want somebody who is 
a leader. I think Mike McCord will do that. I would want 
somebody who knows the Defense financial management and Federal 
financial management. And it is not just audit. We have to 
worry about budget, too. I mean, that is part of the job of the 
Under Secretary of Defense, Comptroller. I think Mike knows 
that well.
    We have people--he will need help, and I think he would 
agree with this--on the details of audit and accounting and all 
these acronyms. I did, too. I am not an accountant or an 
auditor. But I think we have good people. One of them is 
sitting behind me, Mark Easton, my Deputy Chief Financial 
Officer, who knows this well.
    I think he will be there to help Mike and I think he will 
do a great job if he is confirmed.
    Chairman Carper. Before we head to the next panel, two 
things. One, again, Mr. Hale, thank you. As we say in the Navy, 
fair winds and a following sea as you weigh anchor. To the 
others, I would say, for the work that is being done, we are 
appreciative of that. We do not mean to appear to be 
unappreciative. But for those of you who are at refusal speed, 
we want to keep going. We want to get this airplane in the air. 
And we have just seen from DHS again and again what a great 
example they have provided for all of us, including for you.
    If you are not drilling down with them, Jane Holl Lute is 
still reachable. Ophil Morris is still reachable, others are. 
They can be a great resource, use them. I am sure they would be 
happy to help.
    With that, there are going to be a number of questions we 
have, followup questions to ask of you. We just ask that you 
respond to those in a timely way. Again, thank you, and have a 
good day.
    Mr. Hale. Mr. Chairman, I am going to do our darndest to 
stay, as you both requested. I am running short of time. I do 
want to tell you that I have fairly frequent contact with the 
DOD IG and my Deputy Chief Financial Officer has regular 
contact with both the GAO and the IG, and I have talked to Gene 
Dodaro several times on this topic. But I will stay as long as 
I can. And my colleagues, I think, will do the same.
    Chairman Carper. All right. We appreciate that. Thank you. 
All right. Our first panel is excused.
    Our second panel will come on, please. Welcome. Jon Rymer, 
Asif Khan, it is very nice to see you again. I am not going to 
give your introductions. We are running way late and I want to 
make sure we have time to hear from you and to ask questions, 
so I am just going to--we will do all of that for the record in 
terms of introduction. Delighted to see you. Thank you for 
being here and thank you for helping us as we deal with these 
difficult and challenging issues. Mr. Rymer, why do you not 
lead off, please? Thank you.

  TESTIMONY OF THE HON. JON D. RYMER, INSPECTOR GENERAL, U.S. 
                     DEPARTMENT OF DEFENSE

    Mr. Rymer. Yes, sir. Thank you, Chairman Carper, Ranking 
Member Coburn, and distinguished Members of the Committee. 
Thank you for this opportunity to appear before you today to 
discuss the role of the Office of the Inspector General in the 
Department of Defense efforts to reach audit deadlines of 2014 
and 2017. Hearings such as this are an important means of 
providing visibility to the Congress, the Department, and the 
taxpayer of the efforts to achieve financial accountability. 
These efforts, however, have been underway at the Department 
for over 20 years.
    In my prepared statement,\1\ which I request be submitted 
for the record, I discuss areas requiring continued focus----
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    \1\ The prepared statement of Mr. Rymer appears in the Appendix on 
page 92.
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    Chairman Carper. Let me say, both of your entire statements 
will be made part of the record.
    Mr. Rymer. Yes, sir.
    Chairman Carper. Just feel free to go ahead and summarize. 
Thank you.
    Mr. Rymer. But to emphasize, in that statement, I emphasize 
that data quality, timeliness, internal controls, and 
Enterprise Resource Planning Systems are critical. I would also 
like to highlight some of the achievements we have observed in 
the last few years. Achieving auditable financial statements is 
a team effort which will require extensive cooperation among 
all stakeholders.
    While the Department has the ultimate responsibility to 
produce auditable financial statements, the Office of Inspector 
General, under the IG Act, is responsible for providing 
independent and objective oversight of the Department's efforts 
to improve its financial management and to provide an opinion 
on the financial statements.
    Independent accounting firms provide support and work under 
the supervision of my office. As the Department produces 
auditable financial statements, the Government Accountability 
Office will ultimately rely on the work of my office to develop 
its opinion about the financial statements of the United 
States.
    Transforming the financial management of the Department has 
proven to be a complex and difficult undertaking. The 
Department's senior leadership have recognized some of the 
difficulties related to the Department's financial management 
data, problems with internal controls and related financial 
systems. For example, to work around difficulties in obtaining 
adequate supporting documentation for prior year balances, the 
Department has asserted audit readiness on its Schedule of 
Budgetary Activity versus the full Statement of Budgetary 
Resources.
    While this incremental approach is a step forward, it does 
not meet the statutory requirements because the schedule is a 
subset of the information required by the Statement of 
Budgetary Resources.
    Through our oversight role, we will continue to work with 
the Department and GAO on moving toward auditable financial 
statements. The Department must maintain its commitment and may 
actually need to increase its efforts to meet the 2014 and 2017 
deadlines.
    The Department's efforts cannot just be an exercise to get 
a clean opinion. Rather, it needs to be about obtaining quality 
data that can be relied upon to make critical decisions 
regarding the operations of the Department. This concludes my 
opening remarks. I look forward to answering your questions. 
Thank you.
    Chairman Carper. Thank you, sir. Mr. Kahn.

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

    Mr. Khan. Mr. Chairman, Ranking Member Coburn, thank you 
for the opportunity to discuss the challenges faced by the 
Department of Defense in improving its financial 
accountability. Given the Federal Government's continuing 
fiscal challenges, it is a more important than ever that 
Congress, the Administration, and Federal managers have 
reliable, useful, and timely financial and performance 
information to help ensure fiscal responsibility and 
demonstrate accountability, particularly for the government's 
largest department.
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    \1\ The prepared statement of Mr. Khan appears in the Appendix on 
page 102.
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    Today, I will first discuss the effects of ongoing 
financial management weaknesses on DOD management and 
operations, and then DOD's actions to improve its financial 
management and achieve audit results. My testimony is based on 
our past and ongoing work at DOD.
    DOD faces continuing challenges in establishing sound 
financial management processes and operations that can 
routinely generate timely, complete, and reliable financial and 
other business information for day to day decisionmaking. 
Operational impact of these weaknesses include, first, DOD's 
inability to properly account for and report DOD's total assets 
which are about 33 percent of the Federal Government's reported 
total assets, including inventory of $254 billion dollars and 
property, plant, and equipment, with an approximate value of 
$1.3 trillion.
    Second, its inability to accurately estimate the extent of 
its improper payments because of a flawed estimating 
methodology that also limits corrective action. Finally, 
reports of Antideficiency Act violations, 75 violations 
reported from fiscal year 2007 through fiscal year 2012 total 
nearly $1.1 billion.
    To correct its financial management weaknesses, DOD has 
numerous efforts underway. Congress has played a major role 
through its oversight and mandates. Important progress has been 
made, but key challenges remain. For example, in August 2013, 
we reported that DOD's audit readiness efforts would benefit 
from a risk management strategy to help program managers and 
stakeholders make decisions about assessing risk, allocating 
resources, and taking actions under conditions of uncertainty.
    DOD has identified several risks. However, they were not 
comprehensive. Without effective Department-wide risk 
management, DOD is vulnerable for not achieving its audit 
readiness goals. DOD is monitoring its component agencies' 
progress toward readiness. As the September 30, 2014 date for 
asserting audit readiness on a Statement of Budgetary Resources 
approaches, DOD has emphasized asserting audit readiness by 
this date over ensuring the effectiveness of its processes, 
systems, and controls.
    Nevertheless, DOD reports milestone dates that have slipped 
and timelines that have been compressed, making it questionable 
whether the corrective actions necessary for audit readiness 
will be completed by September 2014.
    Our ongoing work at the Army and DFAS illustrates this 
issue. While the Army asserted audit readiness on various 
assessable units of its SBR, preliminary results from our 
ongoing review indicate that the Army did not complete key 
tasks to ensure that its SBR will be audit ready as planned. 
The deficiencies and gaps in Army's efforts demonstrate a focus 
on meeting scheduled milestone dates and asserting audit 
readiness before completing actions to resolve extensive 
control deficiencies.
    DOD has identified contract pay as a key element of SBR. 
DFAS, the service provider responsible for disbursing nearly 
$200 billion annually and the Department's contract pay, has 
asserted that its processes, systems, and controls over 
contract pay are audit ready. However, preliminary results from 
our ongoing assessments indicate that DFAS also has numerous 
deficiencies that have not been remediated. Until DFAS corrects 
these weaknesses, its ability to process, record, and maintain 
accurate and reliable contract pay transaction data is 
questionable.
    Timeframes are important for measuring progress, but DOD 
must not lose sight of its ultimate goal of implementing 
lasting financial management reform. Regarding business 
information systems, DOD has identified several multifunctional 
enterprise resource planning systems as critical to its 
financial management improvement efforts.
    In a report on four of these systems, we found deficiencies 
in areas such as data quality, data conversion, system 
interface, and training that affect their capability to perform 
essential business functions.
    DFAS personnel, who are major users of the systems, have 
reported difficulty in using them to perform day-to-day 
activities. Without the intended capability of these systems 
and trained users, DOD's goals of establishing effective 
financial management operations and becoming audit ready could 
be jeopardized.
    The commitment of DOD leadership to improving the 
Department's financial management continues to be encouraging, 
but implementation of DOD's audit readiness strategy 
Department-wide is an ambitious undertaking that will require 
the commitment and resources and efforts at all levels in all 
components and across all DOD financial and business operations 
such as those in the high risk functional areas of contract 
management, supply chain management, infrastructure management, 
and weapon systems acquisition.
    To support this Committee's oversight, GAO will continue 
monitoring and reporting on the Department's financial 
management improvement efforts. Mr. Chairman, this concludes my 
prepared statement. I will be happy to answer any questions 
that you and the others may have.
    Chairman Carper. Thank you, Mr. Khan. Our colleagues have 
heard me quote more than a few times Dr. Alan Blinder, who was 
the Vice Chairman of the Federal Reserve for a number of years 
when Alan Greenspan was Chairman. Dr. Blinder is back now 
teaching economics at Princeton.
    I asked him once at a hearing before the Finance Committee 
last year when he and others were testifying on deficit 
reduction, and the question before them was, what do we need to 
do to make real progress, additional progress on deficit 
reduction? Dr. Blinder said the 800-pound gorilla in the room 
is healthcare costs in this country. Medicare and Medicaid 
eating us alive, making our companies uncompetitive given how 
much we spend and how relatively little the job pays and other 
expenses.
    So in the Q and A, I asked him, Well, you point this out as 
a big problem, the 800-pound gorilla in the room, costs of 
healthcare, what should we do about it? And I will never forget 
what he said. He said, Find out what works and do more of that. 
That is all he said. I said, you mean find out what does not 
work and do less of that? He said yes.
    For the folks who have been before us today and for the 
Department of Defense at large, I have said this several times. 
I am just going to keep saying it. We have an idea of what 
works because we have seen the Department of Homeland Security 
go through this successfully. I asked them repeatedly, What can 
you learn from from the Department of Homeland Security and 
some answered and some did not.
    What can they learn from the Department of Homeland 
Security? What can the Department of Defense take for action 
and improve their opportunities to actually get to refusal 
speed and carry on beyond that? You want to go first, please?
    Mr. Khan. Senator Carper, I am somewhat familiar with the 
Department of Homeland Security. One of the key elements is 
leadership. While DOD has leadership at the highest level, I 
think it is very important for the key tenets of accountability 
and audit readiness to go down the second layer and it becoming 
institutionalized.
    That is what the example was at DHS, where it was not only 
at the top levels, but it was institutionalized as the 
components who did all the heavy lifting to get audit ready.
    Chairman Carper. All right. Thank you. Mr. Rymer.
    Mr. Rymer. Yes, I would agree with Asif. The issue that I 
see is, as someone said earlier this morning, about driving 
accountability down through the ranks. I think there is no 
question there is commitment at the executive and the 
leadership levels, but I think it must be made apparent that 
readily accessible, believable numbers are important day to day 
in running a business operation or running a military unit. So 
I think it is driving that accountability down and driving that 
understanding down.
    Chairman Carper. OK. I think a lot about culture, and what 
you are essentially saying is really a culture change. I like 
to say there are three things we need to do to continue making 
progress on deficit reduction, and this is really from the 
Bowles-Simpson Commission. No. 1, entitlement reform that saves 
these programs for the long haul, saves money, does not savage 
old people or poor people. That is No. 1.
    No. 2, tax reform that lowers the top corporate rates, but 
it actually generates some revenues for deficit reduction. And 
No. 3 is literally to look at everything we do and say, How do 
we get a better result for less money? It is really a culture 
change. And it cannot just be at the secretarial level or the 
deputy secretary. It needs to be pushed down to the others.
    We are an oversight Committee, as you know, and we are an 
authorizing Committee for Homeland Security Department. We are 
an oversight Committee for the whole government. And I am going 
to ask you with my next question to help us be a guided missile 
as opposed to an unguided missile.
    You have heard the previous panel talk about progress that 
is being made, some areas where maybe it is not so much the 
case. Make us, as we proceed doing our oversight mission going 
forward as we approach September 2014 and beyond, make us a 
guided missile in some of the stuff that you heard here, some 
of the testimony that you heard here that maybe you do not feel 
entirely comfortable with that should raise caution flags for 
us. But just direct us to that, if you will. Direct us to 
points of concern, please.
    Mr. Rymer. I think the biggest concern that I would have, 
and it is an ongoing concern, are the Enterprise Resource 
Planning Systems. The reliability of data or the unreliability 
of data certainly complicates the audit process, makes it 
extraordinarily difficult to get done. If we cannot take 
information from systems on its face value, if we have to spend 
an excessive amount of time verifying data, that, in many 
cases, makes audits undoable.
    So the continued focus by not just the financial 
leadership, but by the operating leadership, and the IT 
leadership of the Department on implementing those systems as 
those systems become operationally accurate is critical. So I 
think the focus has to be on improvement in IT capabilities, 
not just financial management.
    Mr. Khan. I agree with Mr. Rymer. I mean, just for the 
record, these weaknesses are long-standing weaknesses like you 
and Senator Coburn mentioned. These are long-standing 
weaknesses. Getting an auditor in at this point in time is not 
going to reveal any new information. I think what is more 
important is to make corrective actions to rectify these 
weaknesses so there could be an efficient and effective audit.
    The issue of system certainly is an important one. The 
other one is also the capability of the workforce. I think 
Secretary Hale had mentioned that they have invested a fair 
amount of money in training programs. It is going to be 
important for the workforce to be trained, to get audit ready. 
It is going to take about 2 years to get that done and be 
running against the time for that to happen.
    Chairman Carper. All right. Thank you. One last question 
and then I will yield to Dr. Coburn. Three years ago in, I 
think, 2011, Dr. Coburn and I chaired a similar hearing. We 
asked whether the Department of Defense would meet 
Congressionally mandated goals of being able to audit all of 
its finances by 2017.
    What is the likelihood that the Department of Defense and 
the military services will actually meet that 2017 audit goal? 
Also, what should the Department do in order to increase their 
chances of meeting those audit deadlines? I think you just 
talked about it a little bit, but just go ahead. Anything you 
would like to add or take away?
    Mr. Khan. Yes. I mean, it looks increasingly unlikely that 
DOD is going to be able to meet the auditability goal for 2014 
on the complete Statement of Budgetary Resources for the reason 
I mentioned earlier on. There is not enough time to make 
corrective actions to have an efficient audit of the entire SBR 
like the NDAA asked for.
    Some of these time slippages are also going to impact the 
2017 data as well. More importantly, like Mr. Rymer mentioned, 
the system issues are going to get in the way if they are not 
implemented successfully before then. And the other one is the 
workforce issue. They have to be trained and be ready to 
support an audit.
    Chairman Carper. Good. Thank you. Mr. Rymer, just very 
briefly, please.
    Mr. Rymer. I would agree it is going to be difficult, but I 
would not say impossible. I mean, I have to look back and I 
think it is obvious that the Department can, with the right 
focus and continued focus, the Department can change the course 
of history. So I will not say anything is impossible. But it 
will be a very difficult, in my view, a very difficult road 
over the next 3 years with a lot of attention on system 
improvement. And to me the unpredictable part, is how much 
improvement we have in the systems.
    Chairman Carper. With that thought, 3 years, 4 years ago, I 
would not have bet my paycheck that the Department of Homeland 
Security would become auditable, not just auditable, but 
actually get a clean audit, and it has shown that it can be 
done. Again, leadership is the key in making sure we have the 
right resources. Dr. Coburn, I may have to slip out of here, as 
I said earlier. My thanks to you very much for being here. It 
is a good hearing.
    Senator Coburn [presiding]. Let us take a little case 
study, the ERP program that the Air Force canceled, that I 
called for them to cancel 2\1/2\ years before they canceled it. 
And let us talk about accountability. Has anybody done an 
after-the-fact scrub of that? You all are talking about these 
ERP programs are going to be big. If they have complications, 
it is going to markedly impact auditability. Has there been an 
after-the-fact review of that and was anybody held accountable?
    I noticed that we settled for $150 million to the 
contractor. So to me, that says we did not know what we want, 
we were not managing the project right. Otherwise, we should 
have had the contractor paying us. What have we learned from 
that and what has happened inside in terms of the Inspector 
General's Office looking at that? And what does GAO see in 
terms of that as a prime example of how not to do it?
    Mr. Khan. Senator Coburn, we have not done a followup study 
on ECSS. That is the Air Force system you had mentioned. One of 
the lessons learned is not to have too big a system be put out 
there in one increment. You should implement them in smaller 
chunks so there are various gates which are tried and tested 
before you move forward. That was one of the key elements.
    Senator Coburn. So continuous improvement.
    Mr. Khan. Absolutely. That was one of the elements that was 
lacking. Based on the study that we had done several years ago, 
on your request, they were not following best practices on cost 
and schedule. That is an early indicator that there are 
problems with a particular program.
    Mr. Rymer. Sir, I am not familiar specifically with the Air 
Force situation, but I can tell you that we have done a number 
of audits of the ERP implementation, continue to do audits of 
the ERP implementation, and it seems to me that what the 
Department is trying to do is, find a way to connect over 140 
feeder systems to these ERP systems.
    There seems often to be a reluctance in changing those 
entry-level systems because that creates a ripple effect of 
significant amounts of training and volatility of record 
keeping. So I think what we have to do is learn from each 
implementation effort. The one other thing I would mention is 
that a lot of the core systems or the legacy systems, 140 
systems that are out there, were really built for purposes 
other than financial management. And I think that is sort of 
the core takeaway that I have learned in the 7-months that I 
have been the IG.
    Those systems were built to account for people and account 
for things, not to always account for dollars. So what we are 
doing now with these ERP systems is essentially trying to build 
an IT structure that is also accounting for dollars, not just 
the movement of people and equipment like the Department has 
historically tried to manage.
    Senator Coburn. Some of the times when we bring in a big 
system, what I have noticed, especially in the Defense 
Department--not exclusively--is we modify a proven system that 
we are buying to fit our needs, rather than modifying, much as 
you said, General Rymer, modify the system so that--and once 
you modify a proven system, you create holes, defects, and 
problems.
    And so, the decisionmaking process and the knowledge about 
how to buy IT--buying IT is hard. The other thing is, is you 
have to really know what you want before you order it, and I 
think some of the biggest problems is, is we do not know what 
we really want. And we place a contract and then all of a 
sudden we are changing what our needs are during the contract.
    You mentioned, Asif, that a lot of the timelines have 
slipped. Can you give us some details on that?
    Mr. Khan. Based on the declaration by Secretary Panetta 
back in 2011, the timelines were compressed. I mean, the 
timelines before the declaration were made was way beyond--
well, somewhat beyond 2014, so they were pulled back. One of 
the timelines that I want to highlight, and Dr. Morin did not 
mention, was the Air Force timeline. That is in the first 
quarter of 2015 for achieving the audit readiness for their 
SBR.
    So the point I was getting at, it is a big question about 
the compressed timelines and timelines getting extended, 
whether or not the work is going to be done to make the 
corrective actions to reach audit readiness.
    Senator Coburn. OK. Secretary Hale, Mr. Rymer, said that 
the ADA violations were a very small percent, 20 cents on 
$1,000 of the Department's total budget. Do you agree that it 
is an insignificant level?
    Mr. Rymer. I would not say it is an insignificant level, 
sir. I do not know specifically the amount, sir, but I do not 
think it is an insignificant level, and any ADA violation, I 
think, is significant in and of itself.
    Senator Coburn. What are the primary causes of their 
violations?
    Mr. Rymer. I would say fundamentally that the basic ADA 
violation is using money that is not appropriated for a 
particular use.
    Senator Coburn. Right. That is management.
    Mr. Rymer. It is management and accounting and financial 
record keeping, yes, sir.
    Senator Coburn. Are some of the ADA violations that have 
been seen erroneous, in other words, bad reporting that says 
they spent money on something that was not appropriated? In 
other words, are they false ADA violations?
    Mr. Rymer. I am not aware of intentional violations, if 
that is what you are asking, sir.
    Senator Coburn. No, just accidental. In other words, paid 
it out of the wrong account or paid it----
    Mr. Rymer. I would say that is probably the nature of most 
of them, yes, sir.
    Senator Coburn. So it is, again, financial integrity and 
accounting systems that are leading to this?
    Mr. Rymer. Systems. A good deal of it could, yes, sir, be 
system problems.
    Senator Coburn. You all have talked about this. Mr. Rymer, 
can you talk to me about which ERPs right now do you think are 
most at risk of being unable to support an audit?
    Mr. Rymer. No, sir, I cannot give you that. I will be happy 
to supply that for the record.\1\
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    \1\ The information submitted by Mr. Rymer for the Record appears 
in the Appendix on page 138.
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    Senator Coburn. Can you supply that for the record?
    Mr. Rymer. Yes, sir, I will.
    Senator Coburn. I made the point earlier with Secretary 
Hale. Hagel ought to have on his desk every day every major 
acquisition program, once a week at least, where they are on 
their timelines, where they are on their budgets, where they 
are in terms of changes of requirements. I mean, if you really 
want to manage that--and it is not for him to know it. It is 
that if everybody else works together to prepare that, they are 
going to know it and fix it so he does not have to say 
anything.
    So it is this upward mobility of financial information. 
That is why you want an audit. I mean, who cares if we have an 
audit. If you have great financial systems and you know they 
are right, the audit is just a confirming nature. So the whole 
purpose for getting an audit is to change the financial systems 
within the DOD so that they have a system that they can 
utilize, to actually hone and improve and make more efficient 
everything that they do. Would you agree with that?
    Mr. Rymer. Yes, sir, I would. I spent a good deal of my 
early career, in the banking industry and I can tell you that 
certainly that industry relies on financial data--I remember 
every day getting a balance sheet. I knew exactly where my 
business was every morning. And I think we need to get to the 
level in the Department where the availability of financial 
information is critical.
    And financial information is used in the decisionmaking 
process more often, I believe, than it is now, and I think it 
is probably not used as much simply because it is not there at 
someone's fingertips.
    Senator Coburn. You have reported that without fully 
deployed ERPs, the DOD will be unable to produce reliable 
financial data and auditable financial statements without 
resorting to heroic efforts such as data calls or manual 
workarounds.
    Can you explain what these manual workarounds would look 
like and why they are not ideal? And did the Navy have any 
financial workarounds in their last audit?
    Mr. Rymer. I would say, sir, that the inability to produce 
reliable data in a timely fashion is a red flag in and of 
itself. Given the fact that we were working on a Schedule of 
Budgetary Activity, as opposed to a Statement of Budgetary 
Resources, I do not think we have really made that distinction 
well enough today, although it has been talked about. I would 
like to point out that Statements of Budgetary Resources 
means--that it is something management is asserting and it is 
auditable. The Schedule of Budgetary Activity is just a 
schedule. Some of the difficulty we had with the Marine Corps 
audit was, we were auditing a schedule. We were not auditing a 
statement.
    This means that starting points were difficult to 
establish, in some cases reliability was difficult. But what it 
really means, sir, is because we were working on a Schedule of 
Budgetary Activity that had no Office of Management and Budget 
(OMB)-required deadlines, or delivery dates. There are, I 
think, within the Department 10 OMB reportable units that would 
trigger the November 15 audit report date.
    Certainly the Marine Corps is not even a reportable unit 
and the Schedule of Budgetary Activity is not a report that has 
to be sent up. So what we did was essentially to show the 
Marine Corps what it takes to finish the race. We essentially 
left the audit open for what I believe is an extraordinarily 
long amount of time to allow them to get the data, to learn 
where the data was and how difficult it was to get.
    Senator Coburn. Were those workarounds?
    Mr. Rymer. Well, yes. The systems could not provide data as 
we needed it, essentially the Marine Corps needed to spend a 
great deal of time researching on who owned and could provide 
the support for the transactions and, sometime had to develop 
the information.
    Senator Coburn. So, but what that taught them was, is, Here 
is what you are going to have to do to perform.
    Mr. Rymer. Yes, sir.
    Senator Coburn. So here are where the problems are, here is 
where we are going to direct our efforts, right?
    Mr. Rymer. Yes, sir.
    Senator Coburn. Going back to Senator Johnson, do the audit 
to find out what it is?
    Mr. Rymer. Right.
    Senator Coburn. And that is exactly what you did with the 
Navy, correct?
    Mr. Rymer. With the Marine Corps.
    Senator Coburn. I mean, with the Marine Corps.
    Mr. Rymer. Yes, sir.
    Senator Coburn. Let me go to Senator Johnson.
    Senator Johnson. Thank you, Senator Coburn. I agree. You 
need to use the audit as a tool. My background is in 
manufacturing where you realize you have to have a process that 
is in control in order to produce a good product. I want to 
talk about accountability in a manufacturing setting because 
that is the kind of accountability I am trying to talk about in 
driving this process here.
    I'm not so much talking about when something goes wrong and 
you hold somebody accountable by firing them. I am talking 
about accountability up front to maintain and keep the process 
in control. In my plastics manufacturing business, the most 
significant thing we ever did in terms of improving quality and 
maintaining quality is we required every operator to attach 
their initials to every roll of plastic they produced. They 
were going to be accountable. If that was not high enough 
quality, if that piece of plastic was rejected, they knew they 
were going to be held accountable. It was amazing how that 
worked in terms of quality product.
    And so, that is the point I am trying to drive in terms of 
what is the level of accountability? What is the report that is 
generated by audit ready? How do you hold anybody accountable 
for not being audit ready? Who is being held accountable? At 
what levels? General Rymer.
    Mr. Rymer. Well, sir, as I said a moment ago, in my view--
and I spent a good deal of time in the active and reserve 
components of the Army, so I think I can speak to some of this 
firsthand--is that when, at the lowest level, data is entered, 
whether it is financial data or payroll data, when it is 
entered, it should be complete, and commanders--the first level 
supervisors, in my view, should be looking at data to make sure 
it is complete.
    What we find oftentimes is that it is not. We may see a 
number not accompanied by a description and then we have a 
difficult----
    Senator Johnson. I understand. That is a detail problem. 
But again, I am talking about this overall issue of how do we 
actually get this management information system up and running 
and being be able to use an audit as a tool. When we are 
talking about audit ready, how do we hold anybody accountable 
for not being audit ready other than, I guess, the Secretary of 
Defense saying, Well, you are still not audit ready? How do we 
hold those individual component parts, accountable units, 
accountable?
    Mr. Rymer. Well, it ultimately has to become a personnel 
process as well. It has to be built into the performance 
expectations of managers and everybody else.
    Senator Johnson. Is there a report that is being generated 
that says that your unit, your service is not audit ready?
    Mr. Rymer. Nothing other, sir, than the disclaimers that we 
issue after the audit is complete.
    Senator Johnson. Precisely. That is my point about what an 
audit would bring.
    Mr. Rymer. Yes, sir.
    Senator Johnson. It is going to be a report that holds 
people accountable so you can work through that process to 
actually squeeze efficiencies out of this process, prevent the 
problems of the Antideficiency Act. You need the audit. The 
sooner we do it, the better, from my standpoint.
    Let us talk about those reportable units. In the private 
sector--again, that is my background--you get little companies 
and they go through an audit. Sometimes those little companies 
then get bought by larger organizations and we do not 
necessarily throw out that audit firm. That audit firm 
continues to audit that unit. You can have an assembly of 
hundreds of individual divisions all being audited, all being 
held accountable, but in the end, you do need information 
flowing up to the center so that the consolidated set of books 
can be audited as well.
    That is basically what you are talking about in terms of 
140 different feedable systems into an ERP system, which, by 
the way, I have seen, whether the Material Resource Planning 
(MRP) or ERP systems, be a disaster in the private sector. It 
is incredibly difficult unless you really look at the component 
parts and understand exactly what information needs to feed in 
to that overall system.
    That is what I want to talk about, where are we breaking 
down, in terms of component parts in the Department of Defense, 
to make this a manageable process? It has been going on for 20 
years. It does not seem like it is a manageable process yet. Is 
that part of the problem? General Rymer.
    Mr. Rymer. Well, I would start, sir, that last year we 
conducted 12 financial statement audits in the Department of 
Defense.
    Senator Johnson. Let me stop you right there. How many of 
those do you think there should be? How many different 
component part audits do you believe there should be in order 
to drive accountability down? Should it be 12? Should it be 
100? Should it be 1,000?
    Mr. Rymer. Well----
    Senator Johnson. Can I tell you what my bias would be? 
About 1,000.
    Mr. Rymer. 1,000 sounds like a good number then, sir. 
[Laughter.]
    Senator Johnson. Do you understand my point?
    Mr. Rymer. Yes, sir, I do.
    Senator Johnson. OK. Is that off base? Does that seem 
reasonable to you? And again, I am not really looking for----
    Mr. Rymer. No, sir. I mean, one thing that Mr. Hale was 
saying and I would agree with, audits are incredibly expensive 
and we do need to make sure that the scope of work is 
meaningful--that there is a bang for the buck.
    Senator Johnson. How much are we spending trying to get 
audit ready? Do you get my drift? You were spending all kinds 
of time and energy to get this audit readiness to do what? 
Where is the accountability? When are we ever going to get the 
audit?
    So I guess I would argue, I would rather spend money on the 
audit, realize what a disaster a particular unit is, or how 
successful a particular unit is. Then you can lift up the best 
practice and show, Hey, look here in the Marines, they are 
doing it. Hey, Army, why are you not doing it? Or even within 
the Army, the different divisions. This commander over here, he 
can do it, why can you not? Why are we not utilizing this as a 
real management tool?
    But again, getting back to the component parts, I do not 
want you using my answer. Just think about it. Should we be 
talking about hundreds, thousands, tens? I mean, what would be 
the appropriate level to have individual audits to drive that 
accountability?
    Mr. Rymer. Well, sir, one way to look at it might be a 
unit, who commands the unit, who owns the unit, does that 
person actually have control over the numbers? Are they 
managing with the numbers? So look at it organizationally. Is 
it 10? Ten is the OMB requirement for audits of DOD financial 
statement. Right now, I think 10 reportable units, if I am not 
mistaken. Ten, I think, probably is too few, but frankly, we 
are conducting a lot more than 10 audits in financial 
management, but they are not necessarily financial statement 
audits.
    I would explain that there is a lot of financial auditing 
that are not necessarily financial audits, attestation audits, 
that are going on. So there is financial accountability beyond 
just the financial statement audits.
    Senator Johnson. Well, again, try to and look at a private 
sector model and transfer that over to the Department of 
Defense and think, how can we break this up into accountable 
component parts and then utilize that process in terms of 
figuring out whether the audit should occur, how many audits, 
how would those feed into the 10 big OMB audits and then in the 
end, an overall audit for the Defense Department.
    Get off of this idea that we are not going to conduct an 
audit until we know we are going to have a clean audit, and 
instead, use an audit as a real management tool, which is what 
it really should be. Thank you, Senator Coburn. I thank the 
witnesses.
    Senator Coburn. Well, thank you all again. I have a lot of 
questions still to ask, but I am not going to ask them. I am 
going to let you go eat lunch. The record will stay open for 15 
days, until May 28, and I would very much appreciate responses 
to questions, especially both of you, and we will move from 
there. My hope is is that we will have another little followup 
on this in September or October on how it is going.
    The other thing that I think is really important, and, 
General, I hope you will do this. I know GAO is going to be 
looking at this, this ERP is a big deal. If it flubs, 
everything flubs. And so, that ought to be right on the top 
target list.
    Mr. Rymer. Yes, sir. There is quite a bit of work going on. 
What we will do is, I will make sure we get with your staff and 
give you a summary of all the ERP work that we have done and 
that is ongoing.
    Senator Coburn. All right. Thank you both for your service. 
The meeting is adjourned.
    [Whereupon, at 1:14 p.m., the hearing was adjourned.]

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