[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                         [H.A.S.C. No. 114-126]

                    DEPARTMENT OF DEFENSE UPDATE ON

                     THE FINANCIAL IMPROVEMENT AND

                          AUDIT READINESS PLAN

                               __________

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                             JUNE 15, 2016


                                     
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                      COMMITTEE ON ARMED SERVICES
                    One Hundred Fourteenth Congress

             WILLIAM M. ``MAC'' THORNBERRY, Texas, Chairman

WALTER B. JONES, North Carolina      ADAM SMITH, Washington
J. RANDY FORBES, Virginia            LORETTA SANCHEZ, California
JEFF MILLER, Florida                 ROBERT A. BRADY, Pennsylvania
JOE WILSON, South Carolina           SUSAN A. DAVIS, California
FRANK A. LoBIONDO, New Jersey        JAMES R. LANGEVIN, Rhode Island
ROB BISHOP, Utah                     RICK LARSEN, Washington
MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
JOHN KLINE, Minnesota                MADELEINE Z. BORDALLO, Guam
MIKE ROGERS, Alabama                 JOE COURTNEY, Connecticut
TRENT FRANKS, Arizona                NIKI TSONGAS, Massachusetts
BILL SHUSTER, Pennsylvania           JOHN GARAMENDI, California
K. MICHAEL CONAWAY, Texas            HENRY C. ``HANK'' JOHNSON, Jr., 
DOUG LAMBORN, Colorado                   Georgia
ROBERT J. WITTMAN, Virginia          JACKIE SPEIER, California
DUNCAN HUNTER, California            JOAQUIN CASTRO, Texas
JOHN FLEMING, Louisiana              TAMMY DUCKWORTH, Illinois
MIKE COFFMAN, Colorado               SCOTT H. PETERS, California
CHRISTOPHER P. GIBSON, New York      MARC A. VEASEY, Texas
VICKY HARTZLER, Missouri             TULSI GABBARD, Hawaii
JOSEPH J. HECK, Nevada               TIMOTHY J. WALZ, Minnesota
AUSTIN SCOTT, Georgia                BETO O'ROURKE, Texas
MO BROOKS, Alabama                   DONALD NORCROSS, New Jersey
RICHARD B. NUGENT, Florida           RUBEN GALLEGO, Arizona
PAUL COOK, California                MARK TAKAI, Hawaii
JIM BRIDENSTINE, Oklahoma            GWEN GRAHAM, Florida
BRAD R. WENSTRUP, Ohio               BRAD ASHFORD, Nebraska
JACKIE WALORSKI, Indiana             SETH MOULTON, Massachusetts
BRADLEY BYRNE, Alabama               PETE AGUILAR, California
SAM GRAVES, Missouri
RYAN K. ZINKE, Montana
ELISE M. STEFANIK, New York
MARTHA McSALLY, Arizona
STEPHEN KNIGHT, California
THOMAS MacARTHUR, New Jersey
STEVE RUSSELL, Oklahoma

                  Robert L. Simmons II, Staff Director
                Jack Schuler, Professional Staff Member
                 Katy Quinn, Professional Staff Member
                         Britton Burkett, Clerk
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page

              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Smith, Hon. Adam, a Representative from Washington, Ranking 
  Member, Committee on Armed Services............................     2
Thornberry, Hon. William M. ``Mac,'' a Representative from Texas, 
  Chairman, Committee on Armed Services..........................     1

                               WITNESSES

Aguilera, Hon. Ricardo A., Assistant Secretary of the Air Force, 
  Financial Management and Comptroller...........................     8
McCord, Hon. Mike, Under Secretary of Defense (Comptroller) and 
  Chief Financial Officer, Department of Defense.................     2
Rabern, Hon. Susan J., Assistant Secretary of the Navy, Financial 
  Management and Comptroller.....................................     6
Speer, Hon. Robert M., Assistant Secretary of the Army, Financial 
  Management and Comptroller.....................................     4

                                APPENDIX

Prepared Statements:

    McCord, Hon. Mike, joint with Hon. Robert M. Speer, Hon. 
      Susan J. Rabern, and Hon. Ricardo A. Aguilera..............    37

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    Mr. Conaway..................................................    63
    Mr. Gibson...................................................    63

Questions Submitted by Members Post Hearing:

    [There were no Questions submitted post hearing.]
  
 
  DEPARTMENT OF DEFENSE UPDATE ON THE FINANCIAL IMPROVEMENT AND AUDIT 
                             READINESS PLAN

                              ----------                              

                          House of Representatives,
                               Committee on Armed Services,
                          Washington, DC, Wednesday, June 15, 2016.
    The committee met, pursuant to call, at 10:05 a.m., in room 
2118, Rayburn House Office Building, Hon. William M. ``Mac'' 
Thornberry (chairman of the committee) presiding.

  OPENING STATEMENT OF HON. WILLIAM M. ``MAC'' THORNBERRY, A 
    REPRESENTATIVE FROM TEXAS, CHAIRMAN, COMMITTEE ON ARMED 
                            SERVICES

    The Chairman. The committee will come to order. Today, the 
committee meets to receive an update on the Department of 
Defense's Financial Improvement and Audit Readiness [FIAR] 
plan. This issue has been a high priority for this committee 
for some time, and as the September 2017 deadline approaches, 
we need to understand how much progress has been made and what 
obstacles lie ahead.
    The Department of Defense [DOD] is the largest single 
entity of the Federal Government, and it is charged, in my 
view, with its foremost responsibility. Taxpayers deserve to 
know that their money is being spent with appropriate checks 
and controls. That public confidence is essential as the men 
and women of DOD work to safeguard our Nation.
    The processes which enable annual audits also enable better 
decisionmaking by the Department and by this committee, which 
will be of growing importance in this dynamic complex threat 
environment.
    The fiscal year 2010 NDAA [National Defense Authorization 
Act] codified the requirement that the Department be fully 
audit ready by September 2017. In 2011, this committee's Panel 
on Defense Financial Management and Auditability Reform, led by 
Mr. Conaway, made a number of findings and recommendations that 
have been incorporated, and in some cases, executed by the 
Office of the Comptroller. Many significant challenges have 
been identified, and undoubtedly, more will be uncovered. The 
chances of success are greatest when the Department, the 
services, and other DOD organizations resolve with this 
committee to overcome those obstacles, whatever they may be.
    We look forward to discussing the progress made by the 
Department in executing the plan, how successes have allowed 
the plan to move forward, and where lessons learned from prior 
missteps have altered that plan. The committee remains 
dedicated to keeping the Department on its course toward fiscal 
responsibility in being good stewards of the taxpayer dollars.
    I yield to the distinguished ranking member.

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM WASHINGTON, 
          RANKING MEMBER, COMMITTEE ON ARMED SERVICES

    Mr. Smith. Thank you, Mr. Chairman. I agree with everything 
you said. I will submit my statement for the record and just be 
brief and say that it is enormously important that we get to 
the September goal of next year and have the full ability to 
audit the Department of Defense.
    We have worked on this committee a great deal on 
acquisition reform, which is all part of how do we spend our 
money more wisely, but the greater transparency that we have 
with how the Department of Defense spends all of its money, the 
more, you know, efficiently we are going to spend that money 
and the better we can understand how to conduct oversight 
properly, and the time has come for us to achieve that goal. I 
thank Mr. Conaway for his leadership on this issue, and I look 
forward to your testimony. Thank you.
    The Chairman. Thank you. We are pleased to welcome the 
Under Secretary of Defense Honorable Mike McCord, as well as 
Honorable Robert Speer, Assistant Secretary of the Army, 
Honorable Susan Rabern, Assistant Secretary of the Navy, and 
Honorable Ricardo Aguilera, Assistant Secretary of the Air 
Force, all for financial management and comptrollers of their 
individual departments.
    Without objection, any written statements you would like to 
submit will be made part of the record.
    And, Mr. McCord, you are recognized for any comments you 
would like to make.

   STATEMENT OF HON. MIKE McCORD, UNDER SECRETARY OF DEFENSE 
   (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, DEPARTMENT OF 
                            DEFENSE

    Secretary McCord. Thank you, Mr. Chairman.
    Mr. Chairman, Ranking Member Smith, and members of the 
committee, thank you for the opportunity to update you on DOD's 
audit readiness. I appreciate your support for our efforts, and 
I especially want to commend the contributions of Congressman 
Conaway. He led your committee's panel on all the oversight, as 
you mentioned, which played a key role in focusing the 
Department's efforts and continues to keep us on the right 
path.
    Inside the Department, achieving auditability is an 
important part of Secretary Carter's reform agenda. You might 
remember, when he testified before this committee in March, he 
laid out his plan to ensure we are ready for the future as well 
as ready today.
    There was really four major parts that I talked about when 
we described his strategy. First, it is connecting the 
Department to the full spectrum of American technological 
innovation. That is probably the most noted. Second is force 
for the future initiatives to find new ways to attract and 
retain the best people. Third is innovation in the way we think 
operationally, including planning and wargaming. And then 
fourth is reforming how we do business, which is where audit 
effort and acquisition reform come in on our top priority.
    Mr. Chairman, I especially want to recognize your 
leadership on acquisition reform. The Department greatly 
appreciates the ability to work with you on that complex issue. 
While they are important subjects, and we tend to talk about 
them and the Secretary tends to talk about them one at a time 
in individual speeches often because they are so important, 
these efforts are all connected to the Secretary and, 
therefore, they are connected to us. These are our top 
management priorities, but even as we focus on the five 
strategic challenges, I think the members of this committee 
know well that the Secretary has described.
    With me today, as you said, are my colleagues, the 
assistant secretaries of the Army, Navy, and Air Force who have 
been heading up the military departments' efforts to get this 
audit ready, and I would like to thank them for their 
leadership. My office has been the focal point for the overall 
policy and for defense agency audits, but my colleagues here 
and their chief management officers in the services have done 
the heavy lifting that has gotten the Army, Navy, Air Force, 
and Marines mobilized for this long endeavor.
    This audit effort has been a team effort even beyond those 
that are sitting at this table today. I also want to highlight 
the contributions from the DOD Inspector General [IG], GAO 
[Government Accountability Office], and OMB [Office of 
Management and Budget]. While obviously we respect the 
independence of the IG and the fact that GAO works for you, not 
for the executive branch, we have been working together to 
achieve a common goal, and we have been benefiting from their 
advice. I would also like to recognize the DCMO [Deputy Chief 
Management Officer] organization inside the DOD who are key 
partners with us on this effort.
    Our focus on the audit has yielded substantial and 
measurable results over the last couple of years. For the first 
time ever, the military services audited their annual budgets 
for fiscal year 2015, combined with the successful recurring 
audits of other parts of the Department that we have had for 
several years. About 90 percent of our fiscal year 2015 budget 
was audited. Those audits did not produce a clean opinion the 
first time out for the services, but still, we learned a great 
deal from our initial effort, and we will be back at it for 
fiscal year 2016, back at it for fiscal year 2017. We are 
putting the contracts in place now to enable us to audit our 
full financial statements in fiscal year 2018, as planned, 
according to the common goal that we have.
    For those of you who don't work with these terms regularly, 
I just want to clarify briefly that a financial audit is 
different from a program audit. There are hundreds of audits 
done by inspector generals usually in DOD in any one year. A 
financial audit examines our financial and business processes, 
and a successful audit confirms that the information on the 
financial statements is clearly and fairly presented.
    A financial statement audit does not necessarily tell you 
that those funds were spent wisely. That is part of what--you 
know, the joint responsibility that we both have that is 
separate from the audit itself. The absence of a clean opinion 
does not equal waste, fraud, and abuse, nor does having a clean 
opinion prevent there being waste, fraud, or abuse. The lack of 
an audit opinion means that your systems and controls don't 
meet audit standards. We are working hard to change that, and a 
substantial progress has been made, especially in the last 5 
years.
    Fixing the audit findings that we do have continues to be 
our biggest priority. My written statement, as well as the 
report that we provide to this committee twice a year, the FIAR 
plan report, gives you more detail in the nature of the 
challenges in how we are addressing the specifics. The good 
news is that we now have, because of the audits that these 
services have done, have the baseline of auditor findings that 
provides an independent assessment of where the problems are as 
opposed to our own assessments of where the problems are, and 
helps us focus our efforts.
    Preparing our huge global enterprise for its first full 
audit is a challenging task. Our department, as the chairman 
noted, is not just another Federal agency. In terms of the 
scope of our resources, our responsibilities, and complexity, 
we are more like an economy. Indeed, each of my colleagues here 
individually is responsible for the financial management of 
annual resources that exceed the GDP [gross domestic product] 
of about 100 of the member nations of the IMF [International 
Monetary Fund].
    While this is a major management challenge, we have a sound 
plan on the audit. We are sticking to it. We are making 
progress and we are fully committed to getting it done. I thank 
the members of this committee for your leadership and support. 
I am proud of the progress we have, and I am confident the 
Department is on the right track to achieve a positive opinion.
    [The joint prepared statement of Secretary McCord, 
Secretary Speer, Secretary Rabern, and Secretary Aguilera can 
be found in the Appendix on page 37.]
    The Chairman. Great. Mr. Speer.

 STATEMENT OF HON. ROBERT M. SPEER, ASSISTANT SECRETARY OF THE 
           ARMY, FINANCIAL MANAGEMENT AND COMPTROLLER

    Secretary Speer. Chairman Thornberry, Ranking Member Smith, 
and distinguished members of this committee, I thank you for 
the opportunity to appear before you today to discuss the Army 
status, efforts, and accomplishments towards achieving 
auditable financial statements.
    In addition, I want to convey to you that Secretary of the 
Army Fanning, Chief of Staff Milley, and the Under Secretary 
and Chief Management Officer Murphy, and I are committed to 
improving the Army's financial management and meeting the 
requirements to be audit ready by September 2017.
    It is good to be here this week as we celebrate the Army 
and the Army financial management corps' 241st birthday. These 
birthdays recognize the contributions and longstanding 
outstanding traditions and customs and excellence of both. 
Unfortunately, our history does not include being audit ready. 
It is not yet in our DNA.
    However, we are changing and building a culture of 
accountability and understanding audit. It is not easy to 
derive the significant change, yet despite the operational and 
fiscal challenges the Army faces, our soldiers and civilians 
remain dedicated to improving the business processes and using 
our resources efficiently and effectively as we generate 
readiness.
    The current fiscal environment and operational demands 
present a unique challenge for audit readiness. However, this 
environment also affords us the opportunity to evaluate 
technology, organizations, and training, as well as our 
business processes. We see the value to being auditable. Such 
information of accountable stewardship have never been more 
important than they are today.
    The Army's financial improvement plan for achieving our 
audit readiness milestones includes an iterative external 
audits and examinations by independent public accounting firm, 
or an IPA, to inform and focus our Army's audit efforts. These 
audits and exams provide us feedback on areas requiring 
additional corrective actions and focus our efforts to improve 
progress towards a financial statement audit.
    The independent public accounting firms completed an audit 
in 2015 on our scheduled budgetary activities. Although we 
received a disclaimer, the accounting firm was able to complete 
the audit and provide the Army valuable feedback. In response, 
the Army has developed corrective action plans and we are in 
the midst of remediating and implementing those 
recommendations. We also are repeating a similar audit in 2016.
    Clearly, important to achieving success is leadership 
involvement. As such, your Under Secretary of the Army chairs 
our enterprise audit committee. He increased the frequencies of 
these meetings from quarterly to monthly. During these 
meetings, we monitor the progress of those corrective action 
plans and we hold leaders accountable for where they are 
attaining and meeting milestones. We also hold senior 
executives responsible and accountable for achieving their 
audit readiness milestones with inclusion of financial 
improvement metrics in their annual performance assessments.
    Audits have indicated we need to improve and enforce our 
systems of access controls. The Army continues to achieve 
success with our enterprise resource planning system. The 
General Fund Enterprise Business System, known as GFEBS, is our 
core business and accounting system. GFEBS enables the Army's 
audit readiness progress while simultaneously modernizing and 
improving the Army's business processes.
    The Global Combat Support System-Army and Logistics 
Modernization Program, our retail and wholesale supply systems 
respectively, effectively complement the auditable features 
achieved in GFEBS. The future delivery of the Integrated Pay 
Personnel System-Army, will be important to sustaining the 
audit, but more importantly, they also provide effective total 
human resource and pay operations.
    Finally, our dedicated team of professionals is our most 
important and valuable resource to achieving audit readiness. 
Under a program Congress approved, we are implementing a DOD-
based certification program. Our committed management workforce 
has improved their skills with nearly 90 percent having 
achieved certification.
    In summary, we continue to improve across all business 
areas. Our annual exams have expanded in size and scope, while 
providing valuable insights to remediation while we develop a 
culture of auditability. The strong commitment of leaders and 
dedicated workforce is the Army's greatest asset and will 
enable us to achieve our goals. I sincerely look forward to 
continuing our work with members of this committee, GAO, and 
DOD to ensure that we continue to achieve success and reach our 
goal of financial audit readiness. Thank you.
    The Chairman. Thank you.
    Dr. Rabern.

 STATEMENT OF HON. SUSAN J. RABERN, ASSISTANT SECRETARY OF THE 
           NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER

    Secretary Rabern. Chairman Thornberry, Ranking Member 
Smith, distinguished members of the committee, thank you for 
the opportunity today to discuss the Department of Navy's 
progress towards auditability. After years of preparation, we 
eagerly enter the audit environment, along with Army and Air 
Force, as private sector accountants began an engagement on 
Navy's fiscal year 2015 schedule of budgetary activity.
    The disclaimer we received at the end of our inaugural 
audit was not unexpected, given other government agencies' 
experience. Our Navy team endured the rigors of a first year 
audit, learned a great deal, and our department-wide team is 
aggressively tackling the deficiencies the auditors identified. 
We are on course navigating toward an audit of all Department 
of Navy financial statements in fiscal year 2018.
    I would like to begin by noting our successes. Navy 
commands produced, on time, over 95 percent of the 
documentation requested by the auditors. Given the global 
magnitude of that effort, their careful preparation, teamwork, 
and dedication to task were clearly demonstrated.
    We have an aggressive enterprise-wide approach to 
correcting deficiencies. A flag officer or senior executive has 
been appointed to remediate each finding. I personally monitor 
progress demanding sustainable corrective action while 
preparing for full audit in 2018.
    Characteristically, the Marine Corps is aggressively moving 
out ahead. The Marine Corps has been under audit for several 
cycles now and has made great progress in improving its 
business environment, strengthening its accountability through 
increased compliance with accounting standards. The Marines 
have provided many lessons learned for the other services to 
follow. We expect them to stay on present course asserting 
auditability on all four financial statements at the end of 
2016, a year ahead of the congressional mandate to do so.
    While I remain optimistic, I don't want to minimize the 
challenges we are facing. The auditors found significant 
internal control weaknesses in our systems, business processes, 
and in the statement compilation process. These findings make 
it absolutely imperative that we immediately strengthen 
internal control environments in every one of our business 
systems. The first year audit identified 220 major 
deficiencies, 82 percent of them related to IT [information 
technology] system weaknesses. Simply stated, we have too many 
systems and most of them were not originally configured to 
conform to auditability standards.
    To overcome these challenges, we are taking several 
actions. First, we will continue to downsize our current suite 
of systems, eliminating redundant capabilities. During the 
implementation of Navy ERP [enterprise resource planning], 
almost 100 business systems were eliminated. We now plan to 
reduce the number of general fund Department of Navy accounting 
systems from three to two while eliminating all other non-
auditable legacy systems, avoiding maintenance costs, and 
streamlining IT controls.
    Second, during our audit readiness preparations, we 
discovered that we could not guarantee the integrity of the 
data resident in many of our systems. Auditors identified 
ineffective controls over access and security and noted that we 
often fail to ensure proper separation of duties among users. 
The audit highlighted these weaknesses and systems managers are 
now strengthening those controls in earnest ensuring and 
documenting compliance.
    Third, we are putting procedures in place that will 
identify and document every accounting adjustment made 
throughout the year, requiring all Navy organizations to record 
and retain documentation supporting every adjustment. At the 
same time, we are identifying the root causes of these 
adjustments with the goal to eliminate them at every step and 
every business process.
    Fourth, we are working with our primary service provider, 
the Defense Finance and Accounting Service, to strengthen 
controls governing their compilation of our departmental 
financial statements. DFAS has undergone an independent 
assessment of the controls for which they are responsible and 
they are addressing deficiencies which contribute to statement 
inaccuracies, including unsupported accounting adjustments 
created in their processes. Our collaboration is demonstrating 
the need for a well-documented business partnership in which 
roles and responsibilities are clearly understood and adhered 
to on a daily basis.
    Finally, we have confirmed what we have long suspected. 
Absolute uncompromising protection of business and financial 
data generated by classified programs challenges the efficiency 
of the audit process. For the first year audit, DOD 
classification authorities restricted the number of data 
elements that were shared with IG audit teams. This restriction 
increased sample sizes resulting in a larger volume of 
documentation that Navy organizations were required to produce 
eliminating the auditor's ability to analyze transaction data.
    We are revisiting this issue with urgency, mindful that the 
solution must ensure protection of these very important 
programs which serve as the cornerstone of our national 
security. Beyond our near-term emphasis on the 2015 SBA 
[Schedule of Budgetary Activity] audit results, we have 
identified actions necessary for the audit of all our financial 
statements in fiscal year 2018, and we are aggressively 
tackling them as an enterprise. Our approach is consistent with 
DOD guidance, emphasizing a line-by-line survey of each 
statement with a focus on beginning balances.
    Over and above the implementation of effective tools that 
will allow Navy to sustain the gains already made, I believe 
that the greatest positive contribution to come from the first 
year audit has been within the Department of Navy culture. 
Audit deficiencies now receive the highest level of visibility 
and attention, including Secretary Mabus, the Chief of Naval 
Operations, and the Commandant of the Marine Corps. Audit is 
now a talking point at every level of the Department from 
senior flag officers and civilians to the most junior personnel 
and an integral part of the Department-wide managers' internal 
control program.
    As we attend to the detailed work that will ultimately 
result in a clean opinion, we remind ourselves not to lose 
sight of the real objective. Complying with audit standards 
will result in greater accountability for the public funds 
appropriated for the Navy and Marine Corps critical 
contribution to the defense of this Nation. Thank you.
    The Chairman. Thank you.
    Mr. Aguilera.

 STATEMENT OF HON. RICARDO A. AGUILERA, ASSISTANT SECRETARY OF 
      THE AIR FORCE, FINANCIAL MANAGEMENT AND COMPTROLLER

    Secretary Aguilera. Thank you.
    Mr. Chairman, Ranking Member Smith, members of the 
committee, thanks for the opportunity to address this issue 
with the committee. I want to share our progress and challenges 
towards achieving the audit readiness mandate.
    We have a strong support from across the enterprise. We are 
continuing to imbed auditability in our way of doing business. 
We have a governing structure that is actively engaged in 
monitoring our progress and assessing roadblocks and the 
challenges when they arrive.
    The 2015 Schedule of Budgetary Activity audit has re-
enforced that we are on the right track regarding our approach 
to balancing our checkbook, reconciling our universe of 
transactions, and implementing information technology controls. 
We are actively applying the lessons learned from the 2015 SBA 
audit as we prepare for the full financial statement audit.
    Overall, we are pleased with our progress. We have received 
positive feedback from our auditors. We are focused on the 
critical tasks that remain to get us to full auditability, and 
we are addressing the following key challenges at this stage.
    Number one, reconciling our universe of transactions. Many 
of our transactions rest in legacy systems. For the SBA audit, 
we have reconciled 45 of those systems and we are adding an 
additional 28 systems that need to be reconciled for the full 
financial statement audit. These reconciliations are heavily 
logistics related and require more effort than our financial 
systems and represent one-third of our system's efforts.
    Two, institutionalizing our IT controlled discipline. 
Seventy-three percent of our IT notice of findings and 
recommendations in the SBA audit were related to compliance 
with existing internal controls. These findings represent a 
significant change to our management efforts, and we are 
addressing that through training and field support. 
Additionally, we are applying lessons learned from our SBA 
notice of findings and recommendations to all of our systems to 
prepare for the full financial statement audit.
    Three, to complete our asset valuation activities. The 
FASAB [Federal Accounting Standards Advisory Board] and OSD 
[Office of the Secretary of Defense] have issued valuation 
policies that we need. The new policies align with our military 
equipment methodology and we are well underway with that 
valuation effort. Our teams are working with both existence and 
completeness and evaluation of real property among other things 
and should complete their work in the fall.
    Four, we want to accelerate the progress that we are making 
in our Air Force working capital funds area. The bottom line is 
that the Air Force working capital funds effort started later 
than our general funds effort, but we have established a solid 
team led by our Air Force Materiel Command and are quickly 
closing the gap with our progress on the general fund side.
    DFAS has helped us by establishing a dedicated team to 
support the working capital fund effort, and we are leveraging 
the lessons learned from the general fund to accelerate our 
progress. We fully expect that working capital fund to be on 
par with the general fund by the end of this fiscal year.
    And five, we are going to continue with the rollout of the 
Defense Enterprise Accounting and Management System, or DEAMS. 
We recently reported to the Congress that DEAMS is in a 
critical change status. Ironically, it is precisely the audit 
control attributes of this enterprise resource planning, or ERP 
system, that have created the challenges for our users. We 
opted to retain the front-end audit controls that made this 
Oracle commercial solution successful in the private sector, 
but this has required a significant focus of change management 
as we shift our audit controls from the end of the financial 
process to the beginning.
    We are beginning to see success from this approach as our 
user community has developed new ways to embed auditability in 
their daily work. We actively include these lessons in the 
critical change plan that is currently being developed.
    So in summary, the Air Force is fully committed to being 
audit ready in September of 2017. We expect there to be 
challenges over the next year of preparation, and based on the 
history of other Federal agencies, we expect the timeline to 
achieve an unmodified opinion of our financial statement to 
take many years. However, the process of preparing for an audit 
has led to significant improvements in our financial 
operations, and we fully expect that trend to continue.
    Again, thank you for your leadership and your support on 
this issue.
    The Chairman. Thank you.
    Mr. McCord, Mr. Smith and I have all acknowledged the 
persistent leadership of Mr. Conaway on this area, and I wanted 
to yield my question time to him.
    Mr. Conaway. Well, thank you, Chairman, and I want to thank 
the chairman as well. Full committee slot hearings are finite, 
and I appreciate him dedicating one to this issue. I also want 
to thank, collectively, your teams and all those hundreds and 
hundreds of folks behind you that do this heavy lift. It is 
hard, it is complicated, and there is just a lot of it, and I 
appreciate that.
    One thing that does concern me is on the future horizon is 
a change in administration, which everyone knows is going to 
happen. A couple aspects of that. One, how do we make sure the 
new team coming in is properly briefed and understands exactly 
where we are, and if they--and also, through the Senate, 
confirm how important this issue is to keep it going, keep it 
on track, and then also comments that--what are the risks of 
the existing political leadership going on autopilot over the 
last 4 months of the administration and not finishing strong, 
and then properly resourced the overall efforts, given these 
budget strains and the strength in the Department of Defense 
budgets, can you talk to us a little bit about the resourcing 
of this?
    And then in the Senate NDAA, there is a section 811 that 
would make structural changes, with respect to many of the 
organizations, putting them under a new system. My personal 
view is that would complicate an already difficult 
circumstance, so any comments you have on that as well.
    So if we could just go down the line and speak to us about 
the change in leadership and the risks to keeping this momentum 
going.
    Secretary McCord. Thank you, Mr. Conaway. We have already 
had a couple of meetings of--led by the deputy secretary on 
transition. It is too early for us to actually communicate with 
the two candidates, under the law, but as soon as that is 
possible, starting probably in August, we will be providing 
information, on an equal basis, to either side that wants it, 
and then obviously at a higher level in November once there is 
a President-elect. So we are going to be ready for that.
    We are focused, first and foremost, per the Secretary and 
the deputy, on our day jobs of executing the mission today, but 
we are very focused also that we are going to be ready to do a 
solid transition.
    I will tell you that when I came in with the previous team, 
the transition was pretty much about the budget, because when 
you arrive as the comptroller, there is a budget that has been 
left to the 80 percent mark, say, and the new administration 
has to come make their priorities and finish it off and submit 
it. So that dominated the transition materials that we received 
that, years ago, there was very little on this subject. And we 
are going to do a much better job of making sure that the new 
team is aware of this issue, which has moved a good bit in the 
8 years since then.
    Obviously, we can't speak to what the new folks, what the 
new team, what priority they might place on this issue or 
whether they might come in and decide that our strategy doesn't 
make sense to them. We have followed the same strategy for 
years and we have benefited from the support of this committee 
and the Senate Armed Services Committee. To be able to follow 
one strategy for a number of years, I think, is a key element 
of why we have made progress, but it is not a given that the 
new team will decide that what we are doing makes sense. We 
will certainly try and present them all the facts and make our 
case as to why they should continue to implement the strategy 
that we have laid out.
    With respect to resources, obviously, that is something we 
can talk about. Constrained resources are a strain on a number 
of subjects, as is the mandate to reduce headquarters personnel 
by 25 percent. All of us and all of our teams are headquarters 
people, by definition, it is a headquarters function that we 
do, and so we are trying to deal with the budget uncertainty of 
the current climate and do this at the same time.
    Final point, and I would be happy to expand on this, maybe 
not to use all of your time later. The administration is 
concerned, the Department is concerned, the Secretary is 
concerned as the statement of administration policy on the 
Senate bill says with the enormous scope of both the management 
changes, many of which we see as unhelpful in the Senate bill, 
coming, especially in the acquisition realm, a year after that 
were already significant changes in last year's NDAA on this 
subject.
    One of particular concern to me, the Senate bill moves DFAS 
out from under the CFO [chief financial officer], disrupts what 
I see as an end-to-end financial management process that I 
think should be under the CFO, but that is only one of the many 
changes which we think are excessive in the Senate bill. And 
the Secretary will be happy to communicate, as again the SAP 
[Statement of Administration Policy] does, some of the concerns 
we have about the many changes being thrown at us right as 
there is a transition of administrations under the Senate bill.
    Secretary Speer. I would like to take that also and--first 
of all, I would like to take this opportunity too, Congressman 
Conaway, you came and sat down with us in our group in terms of 
leadership a couple of years ago. And I think we saw the 
interest over here, and I think the interest here and the push 
here will keep leadership focused. I can't speak to the 
incoming political leadership that we will come into, but the 
culture and how we are--I said it is not in our DNA, but we are 
starting to build that. We are starting to build it within our 
leadership, the understanding of the value of the audit, the 
understanding that the resources produce outcomes. And tying 
the resources to the outcomes is what we are also trying to do 
through the audit, if we can better show better data for 
decisionmaking, so we are doing that.
    But I will point out the Corps of Engineers went about this 
back in early 2000. They achieved a successful audit now for 
about 8 years in a row now. I stole their leader. He is sitting 
behind me here. Mr. Wes Miller was a leader who led and guided 
that. I brought him in. So when I walk out the door, that type 
of leadership remains. They understand what it takes to get to 
audit. They understand the importance of the control, the 
environment, and what the education and training of a dedicated 
workforce is.
    So I think that will be significantly important to the 
sustainment of it and bringing it to that, but also 
understanding that the value of good, solid, timely, and 
accurate information is what part of the--is being brought 
right now to the senior executives as well as the generals 
within that part.
    I think the current involvement of the current political 
leadership, as Secretary McCord mentioned, in the fall, 
Secretary Work is going to pull us back together and ensure 
where we are, that we are still on track before we head into 
the end of the year, and I think that drive will keep us 
focused through this part. And then the folks who are behind us 
will also do so. And I look forward for the continued 
involvement of this committee and yourself to also come back on 
over and meet with folks to identify the value of what their 
stewardship provides to outcomes.
    Secretary Rabern. With regard to the three parts of your 
question, first, with regard to the transition. I really have 
taken a very strong stand about embedding the change within the 
careerists in the civilian side and the active duty. They will 
be those who carry through not only this transition but others 
in the future.
    I learned my lesson about this when I was the assistant 
director and chief financial officer of the FBI [Federal Bureau 
of Investigation]. It was about embedding into the DNA and 
those who would carry on the lessons learned, the business 
practices, the changes, and I do believe we have done that. I 
went through the same challenge as the chief financial officer 
of the U.S. Customs Service when it was integrated into the 
Department of Homeland Security. Again, it was about embedding 
into, as my colleague from Army likes to say, the DNA. And once 
you have that embedded, it becomes just a part of the fiber of 
the organization, and I do believe we are doing that.
    With regard to resources, I would echo Mr. McCord's 
comments about the headquarters reduction, so I won't belabor 
that, I would just echo it very strongly. We are part of the 
headquarters reductions and we have a team in place that is 
actively doing very important and very positive business.
    With regard to resources, the other thing I would say is we 
need stability. We need stability with regard to resourcing, 
especially as the OPTEMPO [operational tempo] with the fleet 
has been so demanding and has taken a toll. So it is a very 
careful balance of our resources with regard to the emphasis we 
place on audit and the very expensive audit requirements that 
our IT system changes require and the maintenance of the fleet 
so that it can fight the fight.
    With regard to structural changes, I would again echo Mr. 
McCord and say that I believe any structural changes at this 
point would be very disruptive. We now have in place the 
systems, the people, the processes. It has taken us years to 
get to that point, and I do believe that structural changes at 
this point would be adverse to our progress. Thank you.
    Secretary Aguilera. And, sir, again, let me echo my thanks 
for your leadership in this issue and working with this 
committee. We look forward to doing that as we continue to get 
through audit readiness.
    The three parts to your question substantially have been 
answered. I would echo the comments that have been put forward 
by my colleagues. I would offer with you--with the Air Force 
the commitment that I see is, as a former auditor, what I would 
think is almost irreversible. I am really pleased when I go 
into senior level decisionmaking meetings on the audit, and I 
am sitting side by side with my counterparts in the personnel 
arena, in the civil engineering community, and the logistics 
community and to see their commitment in getting all of their 
areas, all of their portfolios ready for audit as well. So in 
terms of momentum, I feel as though in the Air Force, it is 
almost irreversible and baked into the DNA, as Mr. Speer said.
    So in terms of transition, I would echo my comments--my 
colleagues with in particular. Resources, again, I believe 
headquarters reductions have allowed us to move--have not been 
favorable to us but have impeded us in the SBA audit, but we 
would look toward stability. We want to see more stability--
signals with more stability in the future. And any structural 
changes that the NDAA on the Senate side might be proposing 
again, I would echo. We have all of the equipment we believe 
that we need and anything more than that would be disruptive to 
our efforts.
    Mr. Conaway. Well, thank you for your answers, and I 
appreciate that. One quick anecdote. About a year and a half 
ago, I was aboard the USS Texas and taking a tour of that 
submarine. I was doing a mini town hall meeting in the galley, 
and a young seaman out of nowhere asked me, said: Congressman, 
how is that audit thing working?
    And I don't know if you guys planted him there, planted 
that question or what, but it gave me some comfort that the 
importance of this is working its way down through the uniform 
service piece of this, and I appreciate the hard work. There 
are a lot of trials and tribulations between here and where we 
all want to get to, and I appreciate what your team has gotten 
us to this point.
    With that, Mr. Chairman, I appreciate your indulgence, and 
I would yield back.
    The Chairman. I thank the gentleman.
    Mrs. Davis.
    Mrs. Davis. Thank you, Mr. Chairman, and I appreciate you 
all being here. I know this is difficult, time consuming, but 
important, and so you have really represented that.
    I wonder, particularly Secretary Rabern, if you could speak 
a little bit more, you talked about the procedures documenting 
the root causes. Can you go from your perspective in having 
been on this and other lateral moves, I think, what you see as 
the root causes? You did talk about, you know, the DNA, 
basically the culture of the organization. What more can you 
tell us about those root causes and how you are getting at 
that?
    Secretary Rabern. I would be delighted to do that. From my 
point of view, regardless of the organization where I have had 
the honor to serve, it is about recognizing the operational 
mission of the organization and that that is what is driving 
the people who work there.
    So when I was at the FBI, we were tackling some very 
difficult issues. Suffice it to say, audit was not the number 
one thought on every FBI agent's mind every day. So it was 
about teaching them, using their own language, what we were 
trying to do so that we would be able to identify areas of 
redundancy and find ways to get them additional resources by 
eliminating those bad practices.
    One of the things that I have learned, as I have come back 
now to the Department of Navy, is that first it is about the 
mindset. So again, it goes to speaking to people in their own 
language. Once you do that, as my colleagues have indicated, it 
really becomes part of their DNA. So if you are talking to a 
nuclear submariner and you speak to that nuclear submariner 
about an operational inspection, and you talk about the audit 
in those terms, they have an aha moment, and they tackle it in 
exactly the same way that they would tackle that zero defect 
mindset at sea.
    So much of what I would say is the answer to your question 
is, the root cause is that we are warfighting organizations. We 
are not accustomed to this. The systems that were developed 
years and decades ago by very well-intentioned people were not 
developed with the audit in mind.
    The other thing that I would add has to do with the 
creation of the Defense Finance and Accounting Service. The 
migration of talent to DFAS has allowed them to perform the 
functions that they provide as our support service, but at the 
same time, it was a loss of talent from the Department of Navy.
    So in an environment where it is a competition for talent, 
you know, it is a buyer's market, so we are all, my colleagues, 
the IGs, the private sector firms are competing for the same 
talent. So the initiatives that may be on some of your minds to 
help us with that kind of direct hiring authority and those 
kinds of things would be very welcome.
    So that is just the tip of the iceberg, from my point of 
view, as to the root causes. And if I haven't answered your 
question, I would be glad to provide more information.
    Mrs. Davis. You know, I know that you are looking to find 
the best people to fill positions, and you need authorities to 
do that, especially to be able to hire perhaps on a fast track, 
if you will, when you see people who have the talent to be able 
to progress towards or to enter into a separate area. And that 
may raise questions as well because you are saying as you are 
talking to people in the language that they understand this, in 
fact, when you are trying to get somebody even from a different 
discipline, in some cases, how does that work and how have you 
found that to be helpful?
    Secretary Rabern. I will tell you, frankly, that much of it 
has to do with the sense of providing an important service to 
the security of our Nation. So if we are talking about 
recruiting young people, I found this in every organization 
where I had the honor to serve, they want to serve this 
mission. They want to serve. But they also are--especially the 
generation that is coming up just graduating from college, they 
have a different sort of mentality about moving from job to job 
to job. So we have to open our minds to allowing them to grow 
in that process, be willing to hire them, train them, track 
them, and bring them back by appealing to that sense of service 
to a higher cause.
    Mrs. Davis. Yeah. I appreciate that because I think what I 
am learning and I think what you have all shared is that really 
wasn't the way people performed in the past, particularly in 
leadership positions. So I think that we would like to give you 
that opportunity, those authorities so--to understand that 
better and to get at what sort of has held a lot of people back 
in the past, maybe women, young people, and people of color 
perhaps as well. And I think that is critically important, so I 
appreciate your dealing with that.
    I am going to go ahead and, I think, turn it just back to 
the chairman. I wondered if there is any other, you know, 
guidance that you have implemented regarding actions to resolve 
financial weaknesses within your services. What else have you 
all found in terms of the accurate reporting? What is it--is 
there something else that you can address within this area 
where you have gotten guidance and been able to use that or not 
use that perhaps in the past?
    Secretary Speer. I can take parts of that. One is there is 
no real quick fix to the material weaknesses and the weaknesses 
that we found. You have got to make it in something that is 
sustainable. And so quite often in the past, we tried to do a 
checkbook mentality, you know, check the block, fix it, and 
move on, but it wasn't really fixed.
    So you have got to go to the root causes you talked about 
and see why either a control is not working, who, you know, and 
looking more holistic end to end. And quite often, what we did 
is we turned to the resource manager, the comptroller and said, 
it is your responsibility, but we didn't bring in, as my 
colleague said, what the mission and the outcomes were supposed 
to be along the way, and that is really where the material 
weakness is embedded.
    So you have got to fix the control environment, you have 
got to train and make sure people are properly--to do their 
job, and then you have got to hold them accountable. And then 
you have got to make sure they get the proper feedback and the 
mechanisms that--within the tools.
    Going back to early 2000s, the tools weren't in place, the 
systems weren't in place, so they didn't allow their internal 
controls. And so between the systems, the improvement in 
internal controls with people knowing and understanding their 
job and being properly trained across the board, we are 
removing the material weaknesses they tie around the total 
process, not just financial management. You know, human 
resources, logistics, running of installations all feed into 
the financial statements, and quite often, the material 
weakness is embedded in the outcome of how people perform their 
mission, and they weren't even doing it how they had defined 
how they are supposed to do it.
    Mrs. Davis. Yeah.
    Secretary Speer. And so we think now we have tied those two 
together and people better understand that the resources we 
give them is to those outcomes, and that as long as they are 
trained properly with the proper tools and given the ability to 
do it, they will execute properly.
    Mrs. Davis. Okay. Thank you.
    I am going to turn it back to the chairman at this point. 
Thank you.
    The Chairman. I thank the gentlelady.
    Mr. Franks.
    Mr. Franks. Well, thank you, Mr. Chairman.
    Mr. Chairman, I am especially mindful of the fact that this 
effort to move toward a more auditable services posture is in 
large measure due to your leadership, and I think this gives a 
lot of us great credibility. But I especially want to point out 
that there is probably no one on this dais that has the 
knowledge and the understanding of just the entire audit 
philosophy and mechanism in general than one Mike Conaway. He 
is far ahead of all of us. And I think that the effort that we 
are involved in here is going to give many of us trying to 
advocate for a stronger military budget a lot more fire power, 
and I really appreciate all that is being done here.
    And I suppose many of us here recognize the profound impact 
this sequester has had on the military, and I hope that this 
process that we are involved in right now will really help us 
in the debate going forward to turn back some of that, in my 
judgment, unwise policy.
    So with that, I just have some, again, very simple 
questions, and I will address Mr. McCord.
    Mr. McCord, how long has--I should just say how has the 
plan changed over time as you have executed? What has 
significantly changed since 2005 or since 2009, respectively?
    Secretary McCord. Thank you, Mr. Franks. The main change 
that really my predecessor Bob Hale made in 2009 was to focus, 
first and foremost, on the budgetary side, which is the 
information that people use to manage most. The thought process 
was that this would get it into people's heads quicker that 
this is information--that doing this audit effort will help you 
manage better. And I think there is a key psychological part 
there, and the Marine Corps I think has demonstrated that they 
got this first and foremost ahead of everyone else maybe, is 
that when you stop thinking of audit as something like eating 
your vegetables that you are doing only because someone told 
you it is good for you, but you don't quite get it yourself 
that you want to do it, then you approach it mentally as a 
chore as opposed to getting the buy-in that, oh, this is 
actually going to help me run my organization better. That is 
the big breakthrough, I think, that the Marine Corps made in 
being the first service out there.
    And I think that having the budget be the first--the annual 
budget that we get from Congress be the first thing we focus on 
auditing enabled that mental lead that people connect the audit 
effort with goodness for themselves, goodness for their 
organization, and being able to be on top of their own 
resources better.
    Subsequent to that time, we really haven't changed the plan 
significantly very much. When I succeeded Mr. Hale, my thought 
was to keep, you know, the plan, as long as I saw that it was 
working. I still believe that it is. The main new information 
now, of course, is that each of my colleagues here in each of 
the military departments has had a--each of the services has 
had an independent audit now. So we have somebody else, an 
independent company, independent audit firm telling them what 
you need to work on, and so, of course, we are reacting to that 
now.
    And Dr. Rabern mentioned the large number that the Navy 
had, for example, but many of those were the same thing 
repeated a bunch of times. So it wasn't as bad as it sounds 
that there was 200 different problems, but there were many 
cases of the same problem. So the focus now, naturally, shifts 
to as you go from years of planning to get this done and 
preparing to get this done to actually being in and having the 
independent firms tell you where you are weak. That is 
necessarily going to focus us on the specific things that the 
independent firms have now said, you need to fix this the next 
time I come back, because in general it will be the same firm 
that comes back the next year. Obviously, they are going to be 
looking to see if you corrected the deficiency that they 
identified the first time.
    Mr. Franks. Well, Mr. Chairman, I guess I have already made 
the point that I think this is a significant moment and that 
your leadership and that of Mike Conaway will be a legacy both 
for the military and for each of you. And so I would just ask 
the last question, just a quick thought. If there is anyone 
there on the panel that would suggest if there is one thing 
Congress and this committee could do to assist you in the 
endeavor to ensure success, what would that be?
    Secretary McCord. I would say that--I think I may repeat a 
comment I made briefly earlier that I think the ability to work 
with this committee and your partners in the Senate to follow 
pretty much the same plan for a couple of years in a row now, 4 
or 5 years, has really helped us a lot, and that that is 
something that I would request, that unless you--obviously, in 
your judgment, if you think that we are not going in the right 
direction, then of course we need to talk about changing the 
plan, but if you think we are, to let us continue to kind of 
move in the direction that we are, I think that has been of 
enormous help to us
    Budget instability, obviously we all want that to be fixed, 
and that is something that requires the entire body, you know, 
to get together to figure out how to deal with sequester. That 
is an enormous drain on the time and mental energy of 
leadership, not just in the FM community but the Secretary, the 
deputy. You know, that is a larger problem that weighs on us 
and is a big distractor, but----
    Mr. Franks. Well, thank you, Mr. Chairman. I thank all of 
you.
    The Chairman. Thank you.
    Mrs. Hartzler.
    Mrs. Hartzler. Thank you, Mr. Chairman. I would like to 
echo the words of my colleague, the appreciation for the 
leadership of the chairman and Mike Conaway on this. This is a 
vital, vital project that you are embarked on, and I want to 
thank you all for your tireless efforts.
    And this isn't just about, you know, spreadsheets and the 
mundane parts of accounting here. This directly impacts the 
readiness of our soldiers, and we are fighting a fight here to 
try to ensure that our men and women have the resources they 
need.
    You know, we are facing a readiness crisis. We have had 
cuts to our defense, and many of us here in this room have been 
advocating for more dollars to be invested to address the 
threats in the world. But time and time again we are facing 
challenges here by people saying: Well, the DOD can't have an 
audit, so they don't--you know, if they can't audit, then why 
should we give any more money? And so this is putting men and 
women's lives at risk, and it is imperative that we get this 
done certainly by next September, but sooner better.
    And I enjoyed hearing your testimony. I appreciate 
especially, Dr. Rabern, your getting prescriptive and telling 
what you are doing after the results, the steps. Some of them I 
jotted down here. You have decreased the number of systems by 
100, the accounting systems. That makes sense. If they are 
not--everybody is operating on a different accounting system 
and they are not talking, they can't guarantee the security. We 
need documentation for every adjustment, makes sense, 
unsupported documentation.
    I wanted to ask about the classified problem. It just seems 
offhand that you could have auditors who are specifically of 
the classified level to do that portion. Is it as simple as 
that or what do we need to do to address the classified 
problem?
    Secretary Rabern. I will describe as generically as I can 
for obvious reasons. Some of it has to do with what I refer to 
in terms of the competition for talent. So to have people who, 
first of all, are able to obtain the level of security 
clearance that is required is very time consuming. So there is 
very few things more disheartening than having one or two 
people who are allowed access to these programs for one of 
either the IG or the independent audit firm, then leave to take 
another job. So that is one component.
    The other component has to do with ensuring the protection 
for the information within those systems, and I probably should 
not elaborate beyond that. I would be happy to come by and talk 
with you in greater detail about that. It is something that has 
brought the financial community and intelligence communities to 
a point where now, I think, we are starting to have the 
discussions that will allow us to protect the integrity of the 
data but also provide meaningful information so that the 
auditors can conclude that the opinion is well earned.
    Mrs. Hartzler. Well, keep up the great work.
    Secretary Rabern. Thank you.
    Mrs. Hartzler. Mr. Speer, I didn't hear in your testimony, 
but I was involved in a couple of other things as you were 
talking here, so maybe I missed it, but did you get as 
prescriptive as Dr. Rabern did, listing specifically what needs 
to be done to be able to do an audit and what you are working 
on? Could you outline five of those things that you 
specifically are working on again?
    Secretary Speer. Yeah, absolutely. And I am sorry if I get 
passionate about it too, because it is more than five.
    Along the same lines, we had 290 corrective actions that we 
are working right now.
    Mrs. Hartzler. Ninety?
    Secretary Speer. Two hundred ninety.
    Mrs. Hartzler. Two hundred ninety.
    Secretary Speer. Two hundred ninety findings that were from 
the auditors, of which were shared between us and DFAS, and we 
are working those corrective actions already. We have got a 
good portion of those already underway or already corrected. 
Many of them were very similar across, as Mike McCord said, to 
where you will find them in one system, but they are iterative 
across all systems. And we needed to fix, for instance, access 
control, the similar access control in one system.
    We had similarly--when we fielded our general fund 
enterprise, business system had over 200 systems. We are down 
to 70. We got actually down to 60, but a couple grew back. And 
the way they grow back is you have minor micro-applications 
being applied. So those are examples of definitive type things.
    The other piece of it is just training. Part of the aspect 
of getting at it is that we found folks are not necessarily 
intentionally doing the wrong thing and that there is not 
standardized across. So as the auditors identify those, they 
weren't necessarily notice of findings, but we found that, for 
instance, our commands needed additional training in some of 
the aspects that they do, so we are focusing training towards 
those as we go through.
    I would like to also go back to what we found in terms of 
all. I think each of us saw this problem, and you got to it in 
terms of the sensitive activity of classified data. It is not 
only the training on that and the access from the auditors, but 
it is also the case to where as we reduce the number of 
systems--the good part of having bad systems was nobody could 
see and couldn't aggregate the sensitive activity that was 
going on in there, was we start reducing and make very 
transparent type systems in the audits. That is one of the 
things in terms of keeping the data classified we are having to 
do.
    So one of the things that the Army will be asking for help 
for in continuing the support of some of our additional systems 
called GFEB [General Fund Enterprise Business System] sensitive 
activities that we are fielding is very necessary to sustain 
the audit. And so we have added people to classified programs 
to be able to do manual sorts through the data, and that is 
very important and it has enabled us to get through.
    So you know, not only at reducing the number of systems, 
training, getting up the corrective action plans, understanding 
how to aggregate the data so the auditors can get that was one 
of the challenges we all got to called the universe of 
transactions.
    And then lastly, the reconciliation of the way that the 
manual processes are. What we found is that everybody focused a 
lot on the system that didn't look at the manual controls, and 
a lot of the manual controls were some of the things from 
lessons learned that we found that individuals were non-
standardized and were not keeping sustained across the 
commands. So we have got a heavy effort right now going through 
under our optimization effort to standardize those business 
processes across it so we can better align the training and 
make sure for policy. We then update the policy to make sure 
folks understand what is expected of them across those and that 
leaders then make sure that it will be done properly within 
their business areas.
    Mrs. Hartzler. Thank you. Thank you.
    The Chairman. Mr. Gibson.
    Mr. Gibson. Thanks, Mr. Chairman, and I appreciate the 
panelists.
    This certainly is a very important hearing, and you know, 
we have heard time and again how important this is to the 
integrity of all of our efforts, this reform. And I want to 
associate myself with the remarks of Mr. Conaway.
    Years ago, I spent 3 years on the faculty at West Point, 
and among the issue areas that was studied and brought 
highlight to the cadets were the vulnerabilities, the 
challenges of transition. So, you know, I appreciated the 
remarks that you made on that.
    So much effort has been put into this in recent years, and 
it really needs to be successful, and knowing that we have this 
period of vulnerability or challenge and the fact that 
leadership is putting effort against that is encouraging.
    Towards that end, you know, assuming we get there in 2017, 
what has been done to SOPs [standard operating procedures] and 
software systems to ensure that we stay there once we get 
there? So, you know, what comes to mind is, you know, 
oftentimes when you bring a new endeavor forward and you are 
working on something online, you will have to fill out a series 
of boxes and submit, and you submit and it is missing two 
categories. It stops you. You didn't even get accepted. You 
have to go back and you get a red box that says you haven't 
done this.
    So, you know, assuming we get there, what have we done to 
our code, our software system so that, you know, even down at 
the battalion task force level, although I--you know, I know 
that that is generally not the problem but, you know, as we 
work at our financial officers across the DOD, as they enter in 
data that, you know, they will get stopped and have to, you 
know, provide full view of things before they go forward.
    I guess we can start with the DOD and go to the services. I 
am really just interested, assuming we get there, what have we 
done to SOPs and software systems that once we get to a full 
audit, that as we bring on new--it is often the case in the 
services that you change jobs about every year or two. What 
have we done in the superstructure to make sure that we don't 
get off track going forward?
    Secretary McCord. I guess at our level, Mr. Gibson, we 
primarily approach that as management practices to make sure we 
stay on track. I probably have to get you for the record a more 
specific software answer. I am not a software expert myself. 
But the primary focus that we have is on making sure that 
procedures, are both holding managers accountable and their 
performance ratings and those systems that we set up are going 
to sustain the effort. But I couldn't--I would have to get back 
to you for the record on software-specific coding.
    [The information referred to can be found in the Appendix 
on page 63.]
    Secretary Rabern. I have a couple of what I consider to be 
really good examples, one for Marine Corps and one for Navy. As 
you peel back the layers of these processes as you have 
described, it is amazing what you find. Just recently, the 
Marine Corps realized that they had coded an automated system 
for separations that was, for lack of a better word, foolproof. 
So as you described, stop you here, you can't go further until 
you do it right.
    And what we discovered, as we respond to audit, is they had 
reinserted a human being into the process which was then adding 
errors. So they have modified the SOPs. No longer is a human 
being allowed to interfere with the hard coding in those 
systems. That is one example.
    For the Navy, we have learned, as a result of the findings 
of our first year audit, that we had hundreds exam--hundreds of 
instances of a supply system, so every ship had developed their 
own version of a system. So right now we have a flag officer 
reporting to me every other week on the progress to get to one 
system where the coding will not allow any other changes to be 
made.
    So that is kind of where we are at. And again, I would say 
I applaud the efforts of the independent audit firms in helping 
us find these things, and holding people accountable for fixing 
them is what is going to get us there.
    Mr. Gibson. Well, thank you. That is exactly the kind of 
response I was looking for.
    Mr. McCord, what I would recommend is--and I have got scars 
in my past, in my body to--I mean, it would probably be 
worthwhile to sort of capture these points across the services 
because so much effort has been put into getting--and I 
certainly--Mr. McCord, I certainly understand your point. You 
are not going to micromanage this. You are going to manage 
practices and people. But, you know, the services are really 
learning some hard lessons in this to make sure that we stay on 
track, and I think it would be worthwhile to have a repository 
of best practices so that we can socialize that across all the 
services.
    Secretary McCord. Your point is well taken, Mr. Gibson.
    Secretary Speer. Can I add one thing to that, because I 
mean, we were jumping on that earlier. But first of all, we are 
deficient in it. One of the findings from the auditors was the 
documentation was insufficient. We thought that in the European 
environment we had fixed a lot of it and found that there is 
still the human in the loop and that we had not properly 
documented and/or where documented, there were more than one 
instance, and it wasn't standard.
    So when you--part of what we are trying to do right now is 
make a repository through knowledge management as part of our 
effort right now of ongoing. One of our corrective actions is 
to provide where those SOPs and where those standard business 
practices are.
    And so we have got, as one of the efforts to be done, 
within the next 6 months to do so. We have found that there are 
best practices amongst the different commands, and we are using 
that to streamline and identify where those best practices are. 
That is part--again, I point to Mr. Wes Miller. He had done 
that at the Corps of Engineers. And so we are trying to do 
that.
    And it is not all automated, though. What you find is that 
a lot of the SOPs over time, they exist, but folks have gotten 
away from using either those, you know, tactics, techniques, 
and procedures and SOPs, and getting back now out of a deployed 
environment. They have gone to what had worked for them in a 
deployed environment, and now we are trying to identify those 
and make sure the policies direct them to it.
    Mr. Gibson. Absolutely. I thank all the panelists.
    And, Chairman, thank you for your indulgence. My time has 
expired.
    The Chairman. Thank you.
    Mr. McCord, I have got a few questions. But if the other 
three of you have something to add, I don't mean to exclude 
you.
    So is there any doubt, Mr. McCord, that DOD will be ready 
to meet the statutory deadline of being audit ready by 
September 30, 2017?
    Secretary McCord. We are pretty confident that we are on 
the path to get there. Obviously, on that date, there will, 
absent some very unusual series of events, be different people 
holding these jobs who will actually be the ones to make the 
assertions at that time.
    As I alluded to briefly before, we will be--the contracting 
to hire the independent firms to make that deadline has to take 
place near the end of our watch this year. And so I think the 
confluence of timing will work pretty well.
    The deputy secretary is going to get us together again in 
the fall about the time that we will be able to transition--
pardon the use of the word there--to move from talking to both 
candidates to talking to the President-elect will be about the 
timeframe when we will need to make those decisions. So we 
might be able to have a little overlap with the next team to 
say, here is what we see, we think we are ready to go. We will 
want to push the button and go on contract in the fall of 2016 
to start the process for the fall of 2017. We might be able to 
have enough interaction to have an informed decision that the 
next team will have some ability to comment on; otherwise, we 
will just make the best decision, of course, that we are able 
to, based on our information, this fall on our watch.
    The Chairman. Okay. I think Dr. Rabern said that as they 
analyze the weaknesses so far, 82 percent of the problems 
related to IT weaknesses, at least I wrote that down. So that 
leads me to have a question. Are we going to get a bill or a 
budget request from DOD or any of the services to have a big IT 
purchase or upgrade in order to comply with that deadline?
    Secretary McCord. I would say, in general, no. There will 
be specific examples. There have been and there may continue to 
be. We are working now on an omnibus program, and there may be 
examples where we ask for a specific amount to fix a particular 
thing. But as Dr. Rabern alluded to, changing systems at this 
point is not in the cards, not--of any of us to do, kind of a 
fundamental throw this out start something new. That is not at 
all what we think--we think that we have the systems that are 
going to work for us, and there may be tweaks needed but not 
fundamental change-outs.
    Secretary Rabern. If I could just add----
    The Chairman. Yes, ma'am.
    Secretary Rabern [continuing]. To perhaps calm your fears. 
Of the 220 findings, 149 will be remediated by the 30th of this 
month. This goes to Mr. McCord's comment about the redundancy 
of some of the findings. We are also being very harsh with our 
systems owners. It is about eliminating systems. It is not 
about anything other than that, unless we find ourselves with 
no alternative. So we would only come back if we find ourselves 
in that place.
    And I would say I am very excited about the pace of 
learning as folks in uniform and our civilians learn how to 
respond rapidly to this new environment.
    The Chairman. Well--and I don't know nearly as much about 
this as Mr. Conaway or you all. What my memory is when we talk 
about this before, is part of the problem was business systems 
that didn't talk to each other have created part of the 
difficulty in getting to an audit. So that is part of the 
reason I ask, okay, are we on track to have this thing work 
together or are there going to be big expenditures? But you 
have made me feel better.
    And I presume you all don't have a substantially different 
answer for the Army or the Air Force?
    Secretary Speer. I don't have a substantially different 
answer, but we do need the funding that we requested to the 
modernization of the systems we do have. For instance, our 
integrated pay personnel system helps sustain the audit. It 
helps eliminate hundreds of human resource systems to allow the 
integrity of the data within that, but also improves the 
ability to look at the total force and allows us to integrate 
the personnel pay of our military folks into that.
    We have a single and fully filled now General Fund 
Enterprise Business System throughout the Army, and we won't be 
asking for a new one. We do have funding that we requested for 
the sensitive activities I mentioned earlier, which allows us 
to protect the classified data that we didn't see. We didn't 
realize that these transparent open systems back 8 years ago 
would allow people to see what was going on in the classified 
community. And so those are the limited types of things, but 
not new financial systems is not coming down the pike.
    The Chairman. Okay.
    Anything different for the Air Force?
    Secretary Aguilera. In the Air Force, there are no new 
financial systems, but the critical change process that we are 
undergoing right now for the Defense Enterprising Accounting 
and Management System, DEAMS, we will able to give you a full 
report at the end of July on what is required for that system 
going forward.
    The Chairman. In other words, it is possible you all may 
have more budget requests?
    Secretary Aguilera. Right now, it looks like probably 
reorganizing within the budget for that. So perhaps a 
reprogramming of some kind.
    The Chairman. Okay.
    Ma'am, do you have something else?
    Secretary Rabern. I am sorry, I would be remiss if I did 
not credit the Marine Corps. Because the Marine Corps has been 
so far ahead of Navy, we have had lessons learned. And included 
in that is the use of Marine Corps systems that have passed the 
audit and having the Navy start using those systems. We have 
some--at least one very good example of that and we are hoping 
we will find others.
    The Chairman. Okay. Can that extend to the other services, 
do you think?
    Secretary Rabern. Absolutely.
    The Chairman. Are you all willing to look at a Marine Corps 
system?
    Secretary Speer. We did look at it. We looked at it before 
we went to General Fund Enterprise Business System, and now we 
have fully filled this system. It is more modern and capable 
also. So part of the issue we all have is the feeder systems 
that feed it from other non-financials. And we have got to get 
rid of some of those interfaces that feed that are hard to 
maintain. So that is part of what we are reducing within the 
General Fund Enterprise Business System.
    Our system is fully compliant, so I think GFEBS is the 
right answer for us. And it is integrated with the rest of 
already logistics modernization and our Global Combat Support 
System which provides our other logistical support.
    The Chairman. Okay. I am just saying it is okay to look 
across to other services, though, when appropriate.
    Mr. McCord, one of the questions as you all were talking 
about having these independent agencies evaluate your systems 
was, for me at least, do you believe DOD can internally rectify 
all of the issues that they identified or are there situations 
where an outside entity can help come correct some of the 
weaknesses that have been identified?
    Secretary McCord. I think that we are and need to be open 
to outside input. And when I mentioned in my opening statement 
that we have been meeting on--I have been meeting with Gene 
Dodaro, the head of GAO, on a periodic basis, with OMB 
officials present, with the inspector general present the last 
time we met, many of these folks have experience from other 
agencies that have seen things before that we haven't gotten to 
that yet. And I found this with the OMB folks, for example, 
that have useful insights for us.
    In addition, some of the things--again, from having that 
broad view, GAO has the same ability to inform us with things 
that they have seen with advice. And we have tried to get them 
to be more partners with us, recognizing that they do have to 
stand apart from us at the same time a little bit.
    We also have--I guess I lost my train of thought here. We 
have to learn from what the independent auditors say. One of 
the concerns that we have is that the scope of what we do may 
make it hard to get audit firms on contract with us for the 
scale of work that we have to do. As you know, there are the 
so-called big four. Two of those firms really aren't doing 
audits right now. They are doing the consulting side, which 
makes it hard for them to then be independent auditors. And so 
having sort of two of them in and two of them out constrains us 
already.
    The amount of work that we have, I mean, it would be 
attractive work, I think, given the size of it, but it is 
also--you know, there is limited number of people that can 
handle the size of the work that we do, and that would be one 
the concerns we have is sort of the capacity of independent 
firms that have this outside expertise to work with us.
    The Chairman. Okay. Again, my memory may be fuzzy, but I 
recall that in some of our past discussions that there was 
concern about the DOD agencies being able to get audit ready 
and that some of their issues might even affect whether the 
services were ready. Can you address that?
    Secretary McCord. Yes. That is a fair observation. The 
Fourth Estate, as we call the defense agencies in general, are 
not as far ahead as my colleagues in the military departments 
are. Some of them are. And that is not a blanket statement, 
because there is about two dozen of them. Some of them have 
been passing an audit for years. Defense Finance and Accounting 
Service as an entity in and of itself has passed an audit, I 
believe it is 14 or 15 times in a row now. But there are many 
that have never done so and are not as far along as the 
services. That is correct.
    What we are--the strategy that we are following, and we 
have described in our plan is we are basically, as you might 
expect, taking the biggest and most important ones first, the 
most material in audit terminology. So that would be the ones 
that are businesslike, DISA [Defense Information Systems 
Agency], DLA [Defense Logistics Agency], the ones that you 
would probably expect. Two combatant commands: SOCOM [Special 
Operations Command], because they are service-like and control 
their own funds; TRANSCOM [Transportation Command], because 
they are a businesslike entity; and then our health--Defense 
Health Agency. So those are kind of the biggest ones that we 
are focused on first and then we will move to smaller and 
smaller ones as we go.
    Ideally--and this gets back to the sort of auditor capacity 
point I was making. Ideally, you might like to have just one 
firm audit all of that, but because people have these 
consulting relationships, some of them are sort of conflicted 
out. They can't--it would be hard to find a firm that has no 
consulting relationship with any of two dozen defense agencies. 
That argues against bundling them all together, which would 
make it easier contractually maybe to get a handle on them as 
one entity. So that is kind of the tension that we have.
    The inspector general, if I could speak for them on this 
point, would prefer to have as, you know, one big contract or 
maybe one contract just for all defense agencies. We don't 
think we are going to be able to do it that way because of the 
need to get independence and have people that haven't consulted 
for SOCOM, say. So we can't have any package that includes 
SOCOM, include--you know, no one would bid on it if it has done 
any consulting. So that is the tension we have.
    But we do recognize--you are correct, Mr. Chairman, that we 
have some work to do on the Fourth Estate to catch up to where 
the services are. All of them, as we said, have done an audit, 
they are full budget this year, which only some of the defense 
agencies could claim that.
    The Chairman. And I think finally for me at this moment, 
there have been press reports--and I don't mean to pick on 
anybody in particular, but I think it was DLA had some--had 
bought some things and, you know, lost track of how many it had 
or disposed of various items. And, obviously, it is an enormous 
enterprise.
    I am trying to get to the question of what an audit gets 
us. And so in the--just taking that hypothetical example, if 
DLA is able to pass an audit, should it theoretically be 
possible, then, that someone could go and keep track of what 
they buy, where it is, how it is disposed of and--you know, 
with any of the items for which they are responsible?
    Secretary McCord. The way I would respond is, is one of the 
most important benefits of audit is cleaning up the way you do 
business to attempt to go into audit and attempt to get a clean 
opinion. So it is almost--I will try a trite kind of phrase, 
you know, that it is the journey as well as the destination. It 
is what--cleaning up your operation----
    The Chairman. It is the systems and processes necessary to 
get to a clean audit, right?
    Secretary McCord. Necessary even to show up for the audit 
and especially necessary to pass the audit----
    The Chairman. Yeah.
    Secretary McCord [continuing]. Then provide that better 
information about your organization. It doesn't mean that, for 
example, there couldn't be fraud. Right? Someone could collude 
to alter the records and steal a piece of equipment. That can 
happen whether you are passing an audit or not. But it reduces 
the chance of--having better controls means you are more likely 
to catch any particular thing.
    And, again, I think Susan Rabern could maybe comment from 
the Marine Corps experience as the service that went first, 
that that was where the light bulb went on, I think, first with 
the Marines is the things that I have to do to get in the game 
for audit and to pass an audit allow me to run my business 
better, increase the chances that I will find ways to redirect 
resources within my own organization from things that are lower 
priorities or things where I can find efficiencies. It does 
help you run the business better.
    Dr. Rabern may want to give some example from the Marine 
Corps particularly.
    Secretary Rabern. I don't know whether I would emphasize 
the Marine Corps examples because I feel I have some other 
examples that might be better. So with apologies, the things 
that come to mind really are my experience at the FBI. And I 
would say that the work we have done is hard. It is labor 
intensive. We have made amazing progress. But that said, there 
is a lot of really hard work ahead of us.
    And the thing that I worry most about has to do with 
assets. So when you are talking about the Navy, it is about--it 
is a capital intensive institution, as was the FBI. So when you 
are asking people to count and cost things, that becomes very, 
very difficult. And to your DLA example, these are massive 
enterprises. And so having the IT systems that are ready, 
sustainable, permanent, eliminating the bad business practices, 
those are the things that are going to be the really--the next 
very steep learning curve that we will have to climb.
    The other thing I would add is, with regard to the other 
agencies, to elaborate on Mr. McCord's comments, in addition to 
the clean opinions that he cited for the Fourth Estate 
entities, we have the issue of what is called the SSAE 
[Statement on Standards for Attestation Engagements] 16 
reports. And this really goes to the nature of service being 
provided to the Army, Navy, Air Force, and Marine Corps.
    So we have been working together on a very collaborative 
way, first with DFAS as our ready partner. We have made 
tremendous progress with them, and we are tackling those 
similar kinds of things with the other elements of the Fourth 
Estate.
    The Chairman. Well, I will just comment, finally, I think 
the way you started--Mr. McCord, the way you started out your 
comments, it is important to say what an audit is and what it 
is not, and what it--but what it enables managers to do, which 
to me is the key thing. So that is part of the reason for that 
question.
    Mr. Conaway had another question. I yield to him.
    Mr. Conaway. Real quickly. Mr. Speer, you mentioned that 
one of the recommendations out of the 2012 audit panel was that 
performance evaluation documents include specific items as to 
what needs to be accomplished for the next year. And you 
mentioned that you have baked that into the Army's evaluation 
so that you understood if the other agencies, other services 
have done the same thing with respect to their personnel. And 
then on an annual basis, have we actually--obviously, you are 
not going to say who, but have you actually disciplined anyone 
who failed to meet the standard that was set in their--you 
know, ahead of their evaluation?
    So, Mr. Speer, any experience actually using the 
evaluations to improve performance?
    Secretary Speer. I can't definitively say what the outcomes 
of any specific individual was. I just know that we are now 
monitoring, there is incorporating in each of the senior 
executive's performance plans. So it should be if they are not 
maintaining and achieving that objective that is in their 
performance plan, it will impact both in terms of their 
feedback as well as their performance and their performance-
based evaluation where they receive monetary compensation or 
otherwise for it. And we certainly can go back and see if there 
is--you know, whether it is within some of those.
    We talk about it. We certainly provide feedback on it to 
individuals, and we provide feedback to individual commands. We 
then go through, and as I said in the audit committees, monitor 
and provide commands feedback as how the individual commands 
are doing for feedback to those performance statements.
    Mr. Conaway. Ms. Rabern. Dr. Rabern.
    Secretary Rabern. Specifically answering your question have 
we held anybody accountable? Yes, we have. Two examples I would 
be happy to talk with you about privately. It is all about 
sending the message that this is serious business; we mean it, 
and those who aren't performing, we will find someone who can. 
The time is of the essence. We have to have people who can do 
this job. It is not fair to anyone to have someone in the job 
who can't do it, and it is not fair to those around them. So 
the answer to your question is yes, sir, we have.
    Mr. Conaway. All right. Thank you.
    Mr. Aguilera.
    Secretary Aguilera. And I echo the comments. Yeah, our SES 
[Senior Executive Service] corps also has those audit 
requirements in their performance evaluations. I don't know of 
any particular instance where we have had to discipline anyone. 
I can get that for the record.
    [The information referred to can be found in the Appendix 
on page 63.]
    Secretary Aguilera. But I would also like to comment on 
the--and commend the Department for the FM certification 
program to elevate the level of financial management and 
expertise in the entire staff. And all of the services are 
complying with that, and the Air Force is taking the lead on 
that. And we are very proud of the achievements of our airmen 
in that regard as well.
    Mr. Conaway. I appreciate that.
    Mr. McCord, you started down that path about the limited 
resources with respect to audit firms and firms big enough to 
do the job. In 2018, will there be another firm needed for the 
overall DOD rollup or will that be able to do that with--in 
other words, how are you going to do the consolidation, in 
effect, of all these disparate agencies under one roof? Is that 
a different firm?
    Secretary McCord. You know, I get the challenge. I think 
that would be helpful and we would desire it, but we can't 
create the supply. Right? I mean, if the two firms--the two of 
the big four firms that aren't in that business right now 
choose not to, you know, to bid, then we will have to do it 
another way. And one possibility is to have not--probably the 
real-life possibility is to have the Government Accountability 
Office do the audit. That is, you know, something we have 
discussed a little bit, if we can't get a public firm to do it.
    I don't think the Inspector General of the Department of 
Defense has the capacity or would likely have the capacity to 
do the entire thing themselves without--certainly, not with any 
less IPA support than there is now.
    Mr. Conaway. Thank you, Mr. Chairman. I yield back.
    The Chairman. Mrs. Davis.
    Mrs. Davis. Thank you, Mr. Chairman.
    And just briefly, you talked about the DHA [Defense Health 
Agency] are along the list of those agency specific areas 
within the Defense that have to be looked at, have to be 
audited. And I wondered if you could--I mean, there has got to 
be something that is actually unique from one to the other, I 
would assume. And is that true that you are looking at some 
different things?
    We have obviously had a number of reports, commissions, et 
cetera, looking at expenses within the DHA. And I am--and as we 
consolidate that more or have DHA more as a focus as we look at 
new ways of making sure that our men and women are covered and 
their families, is that different?
    Is that going to add--and even in terms of who you bring in 
to take a look at those, knowing that we have many, many 
private entities as well within health care? How do you see 
that moving forward? Where will that fit?
    And there is also a--you know, a concern about retention 
for the services as we look at health care. Can you just very 
briefly--and we can look at this again. I am just wondering how 
that fits in, obviously, within the personnel committee in 
trying to continue and work with you as you move forward in 
that area.
    Secretary McCord. Well, Ms. Davis, as you know, the 
management of the health enterprise is on the table, I believe, 
in both authorization bills.
    Mrs. Davis. Right.
    Secretary McCord. So we recognize that that is something 
that may be coming. I don't see us right now altering our audit 
strategy for DHA. But, you know, it is something we would take 
a look at, depending on how this comes out at the end of the 
year in the final NDAA. But, yes, I do----
    We have, of course a number of years, we have had changes 
in TRICARE that we requested that have been agreed sometimes in 
part and sometimes not. But then there is a more fundamental 
management change that is on the table this time. Again, I 
don't see that, though, having us--it needs to be audited. 
However it is run, however it is managed, it needs to be 
audited. So I think that we are going to probably press ahead 
basically unless we see, you know, the management changes would 
require us to do something else. But at this time I think that 
we would probably stick with the plan of having the DHA be one 
of those corps defense agencies, along with DLA, DISA, that are 
the first things that we need to get done.
    In terms of having the whole Department be audited, you 
know, you cannot overlook the big defense agencies. There is an 
agency here or there that is so small and specialized, maybe 
the folks--the system, the POW/MIA [prisoner of war/missing in 
action] effort, that you could possibly pass an audit if they--
you know, they would be so small. But DHA is not one of those.
    Mrs. Davis. Right.
    Secretary McCord. So I think that we are going to probably 
just continue to press, unless we see that the management 
changes that might be--ensue out of the NDAA or otherwise would 
cause us to revisit, but I don't anticipate that at this time.
    Mrs. Davis. Okay. Thank you.
    The Chairman. Mr. Lamborn.
    Mr. Lamborn. Thank you, Mr. Chairman. And excuse me for 
being late. I was in another committee having a markup on a 
number of bills. But thank you for having this hearing.
    And I hope I am not duplicating anything that may have been 
asked or answered earlier. In fact, I know this is related--not 
the same, but related to what Representative Conaway was just 
asking you about. But this is for any one of you.
    In your written statement, you identified that auditors 
found noncompliance with IT controls to be an issue. You cite 
that remediation actions have focused on the accreditation 
processes for these systems, yet in reality, these are 
typically one-time activities that have been valid for several 
years. Your stated course of action does not address the human 
aspect of this noncompliance.
    So why are administrators throughout the enterprise not 
removing users' access when they leave an organization? Are 
administrators receiving additional training or losing their 
privileges? This is a huge vulnerability that our adversaries 
can and most likely have exploited.
    Secretary Speer. I will take that one on first. Because, 
you know, we had a false sense of security. We implemented a 
brand new ERP across the Department of the Army and GFEBS in 
the control mechanisms, and we had documented as to what folks 
needed to do in terms of access controls. But, again, the human 
in the loop wasn't enforcing it. So we brought folks together 
and we found out what was wrong, and we are now identifying 
both the further controls to ensure it is being done properly. 
And we found not only had it not been done inside of that ERP, 
the feeder systems.
    So when we talked earlier about having multiple findings, 
we had 290 findings in the Army. Of the findings, 32 percent of 
our findings from the audit through an SBA dealt with systems. 
So many of those were duplicates across. And so we have to go 
through and now start putting in the regular checks to make 
sure folks are, in fact, clearing people out when they out-
process.
    Many of those are manual processes that individuals have to 
make sure they are done. But some of those are just making 
sure, again, that their standard processes are understood. They 
are being held accountable for those, and that who has to hold 
those folks accountable. And so we are putting a reemphasis 
focus on those. So it is many of the control mechanisms that we 
talk about that are being violated when the auditors came 
through.
    Secretary Rabern. I would just add four points. We are, in 
fact, removing access in those cases where we find that it is 
necessary and required.
    I would just echo your concern about the exploitability of 
this problem, and it is imperative that we get it fixed at a 
return. We are standardizing our SOPs and requiring adherence 
to those SOPs. And then the final point I would make is that in 
every case, we are holding a flag officer or an SES career 
civilian accountable for the correction.
    Mr. Lamborn. And as a follow-up, although--I will wait--I 
will stand back and wait.
    Mr. Aguilera or Mr. McCord, do you have something to add? 
Then I have a follow-up.
    Secretary Aguilera. I would echo the comments. We are 
pursuing a lot of the same policies.
    Mr. Lamborn. Okay.
    Secretary Aguilera. Not all of them have to do with--not 
all of those notice of findings and recommendations have to do 
with ghost employees that are still logging onto systems. Also 
things like the person--a separation of duties, the person who 
enters an obligation isn't the same person that approves the 
obligations. So we are taking steps in those arenas as well.
    Mr. Lamborn. Thank you.
    And, Mr. McCord, do you have anything to add?
    Secretary McCord. No, not on this one.
    Mr. Lamborn. Okay. And then my follow-up question, then, is 
did you find any of the departments more susceptible to this 
kind of lack of compliance or not? Are you able to comment on 
that? Or was it the same across the board?
    Secretary McCord. The IT issues were pretty similar across 
the three. It was a major finding in every case.
    Mr. Lamborn. Okay. Thank you very much.
    Mr. Chairman, I yield back.
    The Chairman. Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman.
    And, witnesses, thank you for your testimony today, and 
thank you for your service to the Nation.
    The need to improve business and financial oversight and 
transparency in the Department of Defense will help support 
efficiencies in your operations and strengthen controls to 
deter waste, fraud, and abuse. This is something that the 
American people will hold us as their elected representatives 
accountable for, and so we must hold you all accountable for 
it.
    And I know that the Department is committed to full 
financial audit readiness by September 30, 2017. So over the 
next 15 months, DOD will be preparing its financial statements 
for a full audit. And what I would like to ask, and I hope that 
this question has not been asked and answered--I am just 
arriving at the hearing. I had prior business, so I apologize 
for not being here to listen to all of the testimony and 
questions and answers.
    But if punitive actions are taken by Congress, do you 
believe that this will help ensure the future preparation and 
readiness of the Department of Defense for an audit or will it 
hinder it? And I will ask each one of you that question.
    Secretary McCord. Thank you for that question, Mr. Johnson. 
When you say ``punitive actions,'' I guess the first thing that 
comes to mind to me are the several versions of what has been 
called Audit the Pentagon Act that have been introduced in the 
House or the Senate over the last couple of Congresses. And 
often the penalty or the stick in those bills is to take 
funding away from a department or some part of a department 
that doesn't have a clean opinion and give it maybe--and there 
might be a carrot aspect where the money would flow to someone 
who has a better audit performance.
    And the fundamental concern I have about that is that each 
of our military departments or each of our parts of the 
department has a mission to perform, and taking funding away 
from them because of their audit performance or lack of audit 
performance doesn't change the fact that they still have a 
mission to do. And on the flip side, to give money to--to make 
up an example, to give money to DTRA [Defense Threat Reduction 
Agency] because DTRA passed an audit over and above what they 
request and what they need, to me, is not a good use of 
taxpayer resources either.
    I mean, I understand that money is an incentive in life, 
but to--the biggest stick that has been out there in the 
various iterations of this bill has been to take money or to 
take milestone authority or other--to make acquisition 
decisions harder is the other one. But, similarly, I mean, the 
reason that we have these programs and the reason that we 
request funding for particular agencies within the Department 
is because they have a mission to perform, and I would sort of 
hate to divorce the funding--you know, you should evaluate that 
on the merits, whether you think what DTRA or some other part 
of the agency is doing is needed or not needed based on 
requirements, not based on as a regard for performance, as 
important as it is, on the audit.
    Mr. Johnson. I understand. Any of the other witnesses have 
anything to add to that?
    Secretary Speer. You know, I would add the same thing to 
that. I think it is more holding accountable instead of 
disincentivizing. Because I think some of the--I will call them 
punitive measures or disincentives. It is like failing a class 
and then saying, well, you don't go to class then. The people 
who need the funding need to be able to fix and rectify some 
things that some of the folks will be pulling the funding from 
and completing the mission they need to.
    I think we definitely need to hold a level of 
accountability, but in terms of what this committee is doing to 
us right now is, you know, identifying and then recognizing 
those folks who do achieve and providing some sort of incentive 
to do so and providing the value of what they need to do.
    I think that some of the things we have seen in terms of 
those--for instance, I can't do the work without DFAS. Taking 
DFAS away from the Department of Defense would not help us.
    Mr. Johnson. All right.
    Secretary Speer. We need to share the responsibility for 
those things, identify what is not being done, then rectify 
those things.
    Mr. Johnson. All right.
    Doctor.
    Secretary Rabern. I would echo my colleagues, but I would 
add that these kinds of punitive actions would potentially 
further degrade readiness at a time when our personnel tempo is 
quite severe. And the last thing I would say is I believe it 
would further--it would demoralize our workforce who have 
worked so hard to get us to the point where we are now.
    Mr. Johnson. All right.
    Mr. Aguilera.
    Secretary Aguilera. I would echo the comments already made. 
It would damage readiness. And then, as I said before, as an 
auditor I have been heartened by seeing the cooperation among 
the different communities in the Air Force, civil engineers, 
logisticians, engaged in our auditability. And so punitive 
actions like that would actually retard the whole audit process 
because they wouldn't have the manpower, they wouldn't have the 
resources available to them to help us reach audit. So in the 
end, it would actually set us back.
    Mr. Johnson. All right. Thank you, and I yield back.
    The Chairman. My understanding is there are no more 
questions. So I want to thank you all for being here. I think 
it is important to also express appreciation for the progress 
that has been made so far.
    It seems that we went a long time with fits and starts and 
restarts on this audit issue, but now we are making progress. 
And I think that is credit to the leadership of the departments 
involved and especially to the people you all work with every 
day. And I know you will understand, if we work to continue to 
hold the Department's feet to the fire, that we meet the 
statutory requirement and can ultimately have a successful 
audit.
    As we talked about, it is important for public confidence, 
it is important for better decisionmaking, and then--so there 
is a lot that stems from the controls and systems that are put 
in place when you can have a successful audit.
    So, again, thank you all for being here and answering our 
questions. And we will look forward to further conversations on 
this in the future.
    The hearing stands adjourned.
    [Whereupon, at 11:40 a.m., the committee was adjourned.]

     
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                            A P P E N D I X

                             June 15, 2016

      
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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                             June 15, 2016

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              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                             June 15, 2016

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             RESPONSE TO QUESTION SUBMITTED BY MR. CONAWAY

    Secretary Aguilera. At the Air Force Senior Executive Service (SES) 
level, Financial Improvement and Audit Readiness (FIAR) has been 
incorporated into performance plans. We have performed a review of the 
performance objectives for senior leaders and we are currently not 
aware of any specific disciplinary actions taken as it relates to FIAR. 
In response to audit findings and readiness activities, corrective 
actions focus on developing and disseminating to the technical level 
process and policy changes, and implementing the training to support 
awareness and compliance with those changes.   [See page 27.]
                                 ______
                                 
              RESPONSE TO QUESTION SUBMITTED BY MR. GIBSON
    Secretary McCord. Mr. Gibson, you've highlighted one of our primary 
vulnerabilities in the way we do business today, and also some of the 
key elements of our strategy for sustainment of financial auditability. 
The vulnerability comes from decentralizing most of the decisions on 
exactly how business is done across our massive enterprise, often 
differently for the same basic task and frequently using multiple 
business systems that feed information into our financial systems. 
Every one of these varied processes and systems should have a Standard 
Operating Procedure (SOP) that's been tested for effectiveness. This 
makes the audit more time consuming (and expensive) and creates the 
need for much more manual intervention to adequately monitor 
compliance. Simply stated, our approach in these matters is to simplify 
and standardize processes. One element of this approach involves 
reducing the number of legacy systems and standardizing both systems 
and data, automating controls where possible. We have issued policies 
enforcing upfront controls (such as system access control) and edit 
checks in the systems along the way to strengthen data integrity, 
eliminate need for manual corrections, and prevent inaccurate data from 
processing. As a result, there will be fewer manual processes and work-
arounds required allowing us to sustain our remediation and 
auditability. The best example of this is in the Procure-to-Pay process 
where we are automating the interfaces between financial and 
contracting systems, and minimizing the number of systems involved in 
this process that supports spending streams of hundreds of billions of 
dollars each year.   [See page 20.]

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