[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
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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
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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.
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\1\ The charts referenced by Senator Coburn appear in the Appendix
on page 136 and 137.
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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.
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\1\ The prepared statement of Mr. Hale appears in the Appendix on
page 60.
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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.
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\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.
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\1\ The prepared statement of Ms. Rabern appears in the Appendix on
page 78.
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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.
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\1\ The prepared statement of Mr. Morin appears in the Appendix on
page 85.
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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.
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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.
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\1\ The chart referenced by Senator Coburn appears in the Appendix
on page 135.
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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.
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\1\ Information submitted by Mr. Hale appears in the Appendix on
page 154.
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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.]
A P P E N D I X
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