[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                                   
                         [H.A.S.C. No. 115-64]

                    DEPARTMENT OF DEFENSE UPDATE ON

          THE FINANCIAL IMPROVEMENT AND AUDIT REMEDIATION PLAN

                               __________

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                            JANUARY 10, 2018


                                     
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                      COMMITTEE ON ARMED SERVICES
                     One Hundred Fifteenth Congress

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

WALTER B. JONES, North Carolina      ADAM SMITH, Washington
JOE WILSON, South Carolina           ROBERT A. BRADY, Pennsylvania
FRANK A. LoBIONDO, New Jersey        SUSAN A. DAVIS, California
ROB BISHOP, Utah                     JAMES R. LANGEVIN, Rhode Island
MICHAEL R. TURNER, Ohio              RICK LARSEN, Washington
MIKE ROGERS, Alabama                 JIM COOPER, Tennessee
BILL SHUSTER, Pennsylvania           MADELEINE Z. BORDALLO, Guam
K. MICHAEL CONAWAY, Texas            JOE COURTNEY, Connecticut
DOUG LAMBORN, Colorado               NIKI TSONGAS, Massachusetts
ROBERT J. WITTMAN, Virginia          JOHN GARAMENDI, California
DUNCAN HUNTER, California            JACKIE SPEIER, California
MIKE COFFMAN, Colorado               MARC A. VEASEY, Texas
VICKY HARTZLER, Missouri             TULSI GABBARD, Hawaii
AUSTIN SCOTT, Georgia                BETO O'ROURKE, Texas
MO BROOKS, Alabama                   DONALD NORCROSS, New Jersey
PAUL COOK, California                RUBEN GALLEGO, Arizona
JIM BRIDENSTINE, Oklahoma            SETH MOULTON, Massachusetts
BRAD R. WENSTRUP, Ohio               COLLEEN HANABUSA, Hawaii
BRADLEY BYRNE, Alabama               CAROL SHEA-PORTER, New Hampshire
SAM GRAVES, Missouri                 JACKY ROSEN, Nevada
ELISE M. STEFANIK, New York          A. DONALD McEACHIN, Virginia
MARTHA McSALLY, Arizona              SALUD O. CARBAJAL, California
STEPHEN KNIGHT, California           ANTHONY G. BROWN, Maryland
STEVE RUSSELL, Oklahoma              STEPHANIE N. MURPHY, Florida
SCOTT DesJARLAIS, Tennessee          RO KHANNA, California
RALPH LEE ABRAHAM, Louisiana         TOM O'HALLERAN, Arizona
TRENT KELLY, Mississippi             THOMAS R. SUOZZI, New York
MIKE GALLAGHER, Wisconsin            JIMMY PANETTA, California
MATT GAETZ, Florida
DON BACON, Nebraska
JIM BANKS, Indiana
LIZ CHENEY, Wyoming
(Vacancy)

                      Jen Stewart, Staff Director
                Jack Schuler, Professional Staff Member
                 Brian Greer, 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

Norquist, David L., Under Secretary of Defense (Comptroller) and 
  Chief Financial Officer, Department of Defense.................     2

                                APPENDIX

Prepared Statements:

    Norquist, David L............................................    41
    Smith, Hon. Adam.............................................    40
    Thornberry, Hon. William M. ``Mac''..........................    39

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    Mr. Conaway..................................................    53
    Mr. Langevin.................................................    53
 
. 
 DEPARTMENT OF DEFENSE UPDATE ON THE FINANCIAL IMPROVEMENT AND AUDIT 
                            REMEDIATION PLAN

                              ----------                              

                          House of Representatives,
                               Committee on Armed Services,
                       Washington, DC, Wednesday, January 10, 2018.
    The committee met, pursuant to call, at 10:00 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

    Chairman Thornberry. The committee will come to order.
    The committee welcomes Mr. David Norquist, the Under 
Secretary of Defense, Comptroller, and Chief Financial Officer 
as our witness today. The topic is the audit of the Department 
of Defense which, by law, begins this fiscal year. And I would 
just say it is not by accident that the committee will start 
our year on this topic.
    Requiring that the Department conduct an audit has been a 
bipartisan priority of this committee for some time. The Chief 
Financial Officer Act of 1990 required all Federal departments 
conduct an annual financial audit, and partly out of 
frustration with the lack of progress toward that end at the 
Department of Defense, the 2010 NDAA [National Defense 
Authorization Act] required the financial statements of the 
Department be ready for audit by September 30, 2017.
    This committee's Panel on Defense Financial Management and 
Auditability Reform put close scrutiny on the Department's 
efforts and issued a number of recommendations that have 
enabled us to arrive at this point. The 2014 NDAA again 
required a full audit be conducted of the Department's fiscal 
year 2018 financial statements, the results of which are to be 
delivered next year.
    I want to commend Chairman Conaway for his expertise and 
his persistence on this issue, as well as Mr. Courtney, who was 
also a member of the audit panel several years ago. They will 
both be glad to know that we have had additional members join 
this committee in recent years, who can also contribute their 
background and experience to this issue as it moves ahead.
    This issue is important. Members of this committee hear 
evidence every week that we are not providing our military with 
the funding they need to carry out the missions they have been 
assigned. We must spend more. At the same time, we have a 
responsibility to the American people to see that each of their 
tax dollars being spent to protect them is being spent in a 
transparent way with appropriate accountability.
    We should never assume that an audit will solve all the 
problems of waste and inefficiency, but it seems to me that an 
essential requirement of spending money smarter is knowing with 
certainty how it is being spent.
    It is likely that the result of the first audit will not be 
pretty. But those results will help direct us all, Congress and 
the Department, on where we need to apply our efforts to 
improve.
    This issue is important. And this committee will continue 
to pursue it. The ranking member is recognized.
    [The prepared statement of Mr. Thornberry can be found in 
the Appendix on page 39.]

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

    Mr. Smith. Thank you, Mr. Chairman.
    And by and large, I would simply repeat word for word the 
opening statement of the chairman, so in the interest of time I 
will not do that. And will simplify it by saying that this is 
enormously important. There are a lot of concerns at the 
Pentagon, and there are really two big issues here. One, as the 
chairman mentioned, we are in a time of very tight resources 
and very great needs. And that means we have to get everything 
we can out of every dollar we spend. There are many, many 
issues that this committee has covered to make that clear.
    And second, if we cannot explain where we spend the money 
in the Pentagon, we are failing in that first mission. I know 
it is a lot of money. I know it is a big bureaucracy. I know 
there is a lot going on, but we ought to be able to do an audit 
that tells us where we are spending the money. It is just that 
simple. And, you know, that is your mission. That is the 
Pentagon's mission.
    I too want to specifically thank Mr. Conaway for his great 
leadership on this issue. Who knew having an accountant on the 
committee would be critical. Well, actually, most people should 
have known that. But he has done a great job on this issue, and 
appreciate his leadership. And I just hope that--you know, I 
think everybody on this committee would just feel great if at 
some point this year we can say the Pentagon has been audited. 
It has happened some 20 years after we started trying to make 
it happen. I think we are close. I think we can get there.
    I look forward to hearing your testimony about how we are 
progressing in that. And I thank the chairman for his 
leadership on this very important issue.
    [The prepared statement of Mr. Smith can be found in the 
Appendix on page 40.]
    Chairman Thornberry. I thank the gentleman.
    Mr. Norquist, welcome. Without objection, your full written 
statement will be made part of the record, and you are 
recognized to make any oral comments you wish to make.

  STATEMENT OF DAVID L. NORQUIST, UNDER SECRETARY OF DEFENSE 
   (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, DEPARTMENT OF 
                            DEFENSE

    Secretary Norquist. Thank you, Mr. Chairman.
     Chairman Thornberry, Ranking Member Smith, and members of 
the committee, thank you for the opportunity to provide an 
overview of the Department's financial statement audit progress 
and plans. I appreciate your committee's long and unwavering 
support for this effort. I also want to thank Congressman 
Conaway for his leadership over the years related to the audit. 
His direction of the committee's 2011 Panel on Financial 
Management and Auditability helped the Department maintain its 
focus on audit.
    When the President made a promise to the American people to 
rebuild the U.S. Armed Forces, he also made a commitment to 
start the audit. Inside the Department of Defense, Secretary 
Mattis and Deputy Secretary Shanahan have set a tone from the 
top that embraces the audit as part of their vision to bring 
business reform to the Department of Defense. I know you have 
had many hearings where witnesses have told you that they 
support the start of an audit eventually. This hearing is 
different. We have started the audit.
    But we are only able to have today's hearing with the 
Department of Defense under its first full financial statement 
audit because of this committee's continued support. I should 
note that audits themselves are not new to the Department of 
Defense. Numerous audits covering program performance and 
contract costs are completed each year by the Government 
Accountability Office, the Defense Contract Audit Agency 
[DCAA], the Department of Defense Office of the Inspector 
General, and the service audit agencies.
    For example, DCAA employs over 4,000 auditors to perform 
contract audits that are focused on identifying inappropriate 
charges by contractors to the government. However, this is the 
first time that the Department is undergoing a full financial 
statement audit. A financial statement audit is comprehensive, 
it occurs annually, and it covers more than financial 
management.
    For example, financial statement audits include verifying 
count, location, and condition of military equipment, real 
property, and inventory. It tests the security vulnerabilities 
of our business systems, and it validates the accuracy of 
personnel records and actions, such as promotions and 
separations.
    The Department of Defense anticipates that this spring and 
early summer we will have approximately 1,200 financial 
statement auditors assessing whether our books and records 
present a true and accurate picture of our financial condition 
and results of our operations in accordance with accounting 
standards. These financial statement audits complement but are 
distinct from program performance or contract audits.
    Based on my experience at the Department of Homeland 
Security, it will take time to implement all the processes and 
system changes necessary to pass the audit. It took the 
Department of Homeland Security, a relatively new and smaller 
enterprise, about 10 years to get its first clean opinion. But 
we do not have to wait for a clean opinion to see the benefits 
of the audit. The financial statement audit helps drive 
enterprise-wide improvements to standardize our business 
processes and improve the quality of our data.
    Just like private sector companies and other Federal 
agencies, the Department of Defense [DOD] prepares financial 
statements every year to report its assets, liabilities, 
revenues, and expenses. Though not a corporation, DOD owes 
accountability to the American people. The taxpayers deserve 
the same level of confidence as a shareholder that DOD's 
financial statements present a true and accurate position--
picture of its financial condition and operations. 
Transparency, accountability, and business process reform are 
some of the benefits of a financial statement audit.
    Regarding transparency, the audit improves the quality of 
our financial statements and the underlying data that we make 
available to the public, including a reliable picture of our 
assets, liabilities, and spending. And DOD's progress towards a 
positive audit opinion will also directly contribute to an 
audit opinion on the entire Federal Government's assets and 
liabilities.
    With regard to accounting, the audit will highlight areas 
where we need to improve our accountability over assets and 
resources. For example, during initial audit, the Army found 39 
Black Hawk helicopters that had not been properly recorded in 
its property system. The Air Force identified 478 buildings and 
structures at 12 installations that were not in its real 
property system. By fixing the property records, we can help 
demonstrate the accountability of our assets.
    In other cases, as the Department invests in new business 
systems, we will be able to obtain independent auditor feedback 
on that system's compliance so we can better hold those vendors 
accountable for their solutions.
    Third, the combination of better data, business process 
reengineering, and the use of modern data analytics directly 
supports Congress' vision of the chief management officer 
position and the Department's effort to bring business reforms 
to its operations. These reforms will lead to business 
operation savings that can be reinvested in lethality.
    The cost of performing the audit will be about $367 million 
in fiscal year 2018. This amount covers the audit fees to the 
independent public accounting firms, about $181 million, and 
the infrastructure, including the cost of the government 
salaries of the people supporting the audit of about $186 
million. The $181 million in audit contract costs is 1/30th of 
1 percent of the DOD budget. And as a percentage of revenue, it 
is equal to or less than what a Fortune 100 company such as 
General Electric, Procter & Gamble, or IBM [International 
Business Machines] pays for their auditors. In addition, we 
anticipate spending about $551 million in 2018 fixing problems 
identified by the auditors.
    The DOD consolidated audit will likely be one of the 
largest audits ever undertaken, and comprises more than 24 
standalone audits and an overarching, consolidated audit. DOD 
is currently sustaining clean opinions for nine standalone 
audits. Our audits are conducted by IPA [independent public 
accounting] firms with the DOD IG [Department of Defense 
Inspector General] performing the consolidated audit, and all 
the contract audits have been awarded and the auditors have 
begun to arrive.
    In order to track progress, the Department has established 
a tool and a process to capture, prioritize, assign 
responsibility for, and develop corrective actions for audit 
findings. Each year, the auditors will assess and report on 
whether the Department has successfully addressed the findings. 
Going forward, we will measure progress and report on it 
towards achieving a positive opinion by using the number of 
findings resolved.
    In closing, I want to thank this committee for its 
continued focus on the importance of a DOD audit. Your insight 
through the years has been--your oversight through the years 
has been a catalyst, and we appreciate the partnership we enjoy 
with you and with the committee staff on this important 
process. With your oversight and under this administration's 
leadership, we are now and will continue to be a department 
that is not only under audit, but improving year after year.
    As we move forward, your continued support for budget 
stability, related information technology and funding to 
remediate audit findings remains critical in moving the 
Department towards achieving a positive opinion. I thank you 
and I look forward to your questions.
    [The prepared statement of Secretary Norquist can be found 
in the Appendix on page 41.]
    Chairman Thornberry. Thank you, sir. And I appreciate your 
differentiating what we are talking about here, a full 
financial audit with contract audits. I might just highlight 
that we had a number of provisions to reform the contract audit 
process in the last year's defense authorization bill, and 
hopefully that will improve as well.
    I just want to ask you one question. I was interested to 
read where a retired general says basically this audit is not 
worth doing.
    Secretary Norquist. Uh-huh.
    Chairman Thornberry. As you highlight, it requires going 
and checking the real property, you have got to check and see 
whether all the weapons and equipment are accounted for, the 
various records and so forth, it is going to be expensive. And 
as--his point basically is it is not worth the cost.
    Now, you are doing it because the law requires you to, I 
understand. But what would be your response to the argument 
that the cost is more than the benefit of doing a full 
financial audit of the Department?
    Secretary Norquist. Sure. I would first respond, he noted 
that the--referred to the audit as costing over $800 to $900 
million. The amount we are paying the IPAs, $181 million, is 1/
30th of 1 percent of the budget. This is not a significant--I 
mean, any number then in the millions is a large number, but on 
the scale of the enterprise, that type of money for 
accountability is money well spent.
    The additional money, the $500 to $600 million we have 
talked about, is to fix problems that we find. Now, this is 
always a choice going forward. If we can live with the problem, 
we can fix it. But I do not think operating in ignorance of the 
problem is the right way forward.
    I fully support the committee and the legislative 
direction. Conduct the audit, do the findings. Some of the 
things I will point out is the article said that it is 
expensive because it covers so much. And the answer is, yes, 
that is the point.
    You know, one of the things that the law requires is that 
we do information security of our business systems. This is the 
FISMA [Federal Information Security Management Act] and FISCAM 
[Federal Information System Controls Audit Manual] standards. 
The audits are done to those. We will be able to understand the 
weaknesses and do more to hold people accountable for closing 
cybersecurity vulnerabilities in our systems. You would want 
that anyhow. You would want that done under any circumstance. 
And when we find those, you will want the Department to be 
closing them.
    The other comment that he talked about, there are other 
ways to do this. Yes, there are. And you talked about contract 
audits. While the defense financial statement is large, 1,200 
auditors, we have 4,000 who look at contractors. So on the 
scale of what we spend looking at contractors, the size of the 
team that will be looking at the government is appropriate and 
proportionate.
    Lastly, I think the biggest concern I have is the statement 
that they make that the Department is not a corporation and 
does not need to undergo a strict financial audit. Well, first 
of all, the law requires a financial audit. And more 
importantly, I think the taxpayers deserve at least the same 
level of confidence as a shareholder in the use of their money.
    Chairman Thornberry. Thank you.
    Mr. Smith.
    Mr. Smith. I do not have a question. I just want to totally 
agree with your remarks that you just made. You know, to say 
that it is not worth doing is like saying, hey, we have screwed 
it up so bad for so long that, you know, the cost of fixing it 
has just become overwhelming, so just let us keep screwing it 
up. And I get that the upfront cost is going to be enormous.
    Secretary Norquist. Uh-huh.
    Mr. Smith. But long term, the benefits are exactly as you 
described. You know, if we got to sort of suck it up for a 
couple of years and absorb some cost to get back on track, it 
is going to make significant improvements. All of the work on 
acquisition reform that I know the chairman and I and many 
others have done can be so much better informed if we have this 
information. All right. We can say, well, gosh, here is an area 
that we--instead of--so when we pass legislation aimed at 
making the acquisition process better, if we have this full 
audit, that legislation has a much better chance of actually 
accomplishing that task.
    So, yeah, it is pretty bad, and in some ways you would like 
to just sort of close your eyes and say, let us just not deal 
with it. But it is just too important for all the reasons you 
stated.
    Secretary Norquist. Uh-huh.
    Mr. Smith. So I completely agree with that statement. I 
applaud your commitment to doing this, and stand ready to have 
the committee help you in any way we can.
    So I will yield back my time. If you have a comment, you 
may, but I have nothing further.
    Secretary Norquist. My only comment is to reinforce your 
point about the better data to support information. I mean, the 
primary thing an audit promises is better data accuracy and 
accountability. And when many of the other reforms depend on 
the accuracy of that data, not having it complicates those 
efforts.
    Chairman Thornberry. Mr. Jones.
    Mr. Jones. Mr. Chairman, thank you.
    I have been here 22 years, and this is the best news of 
hoping for something good to come from this effort. And I 
commend my friends on my side and other side who worked with 
the chairman and ranking member to put this effort together.
    I never will forget Donald Rumsfeld, the former Secretary 
of State--excuse me, Defense, Defense--sitting where you are 
telling this committee that he will account for every dollar of 
the taxpayer and how it is going to be spent at the Department 
of Defense. He might have meant well, but it never happened, 
obviously, because that is why you are here today. Because we 
have never been able to do anything to take a problem and even 
in a small way make it better.
    I got one question. It does deal not directly with you, but 
because of your position and your oversight. Of all the 
articles I have seen about waste----
    Secretary Norquist. Uh-huh.
    Mr. Jones [continuing]. In the 22 years I have been here, 
probably this is in the top four or five. It is from 2 years 
ago. ``U.S. Army fudged its accounts by trillions of dollars, 
auditors found.'' ``The Defense Department Inspector General in 
a June report [2 years ago] said the Army made a $2.8 trillion 
in wrongful adjustments to accounting entries in one quarter 
alone in 2015, and $6.5 trillion for the year. Yet the Army 
lacked receipts and invoices to support these numbers or simply 
made them up.''
    This would be something, I would think, would be under your 
department's jurisdiction, if it happened within the system. 
This is one of those things that I would like to ask you, how 
in the world do you fix a problem when you keep funding the 
problem?
    And there has got to be--you fellows, CPAs [certified 
public accountants] and accountants, can give me some assurance 
that when stories like this go public and the taxpayer reads 
it, Mr. Norquist, that is why they are so frustrated with 
Congress and why we have an 18 percent approval rating.
    So I would hope that this would be a kind of a situation 
that you can, in a short period of time, give me some hope that 
this would be dealt with, and somebody--instead of saying that, 
well, this happened and that happened, but we keep funding it. 
I just do not know how you catch up when you keep funding the 
problem.
    Secretary Norquist. So let me address that, because that is 
a very important one. One of the issues you are talking about 
relates to journal vouchers, which occurs after the money is 
spent. So when you see an article that says trillions of 
dollars, and you realize we only receive about $600 billion in 
a year, there is something--there is a mismatch in the story. 
And what this refers to is, we have systems that do not 
automatically pass data from one to the other. So the Army goes 
in, and others, at the end of their financial statements, finds 
the number from their property book, and writes it into their 
general ledger. That is called a journal voucher entry. 
Depending on the amount of property, that can be hundreds of 
billions of dollars.
    Because they do not have adequate support for that journal 
voucher, the whole entry is considered unsupported. Now, from a 
management point of view, this is bad. It is not the same thing 
as not being able to account for money that Congress has given 
you to spend, but it is still a problem that needs to be fixed. 
And part of that relates to systems that were built as 
stovepipes. In the private sector, they would all talk to each 
other. You would not let them field the system that did not 
automatically pass up its data. So we are addressing exactly 
that type of challenge.
    And one of my concerns is, only by eliminating the types of 
ones that are just an entry issue can you find underlying 
issues that are hidden among inaccurate data. So it is 
important. I would not want the taxpayer to confuse that with 
not--with a loss of something like a trillion dollars. That 
would not be accurate. But it is an accounting problem that 
does need to be solved because it can help hide other 
underlying issues.
    Mr. Jones. Thank you very much. I am going to tell you that 
I might not be here when you resolve the problem, but I will 
still be reading the paper. I wish you and your staff the very 
best. Thank you.
    Secretary Norquist. Thank you, sir.
    Chairman Thornberry. Mr. Carbajal.
    Mr. Carbajal. Thank you, Mr. Chairman.
    Thank you, Mr. Norquist, for being here today. You know, 
this is my first year in Congress, and I will tell you that 
oftentimes I am asked for my observations. I served in local 
government for over 24 years. And the most shocking thing about 
being in Congress is that there has never been a comprehensive 
audit of the DOD.
    Secretary Norquist. Uh-huh.
    Mr. Carbajal. It is just outright ridiculous. There is no 
other way of putting it. And it has been said that if you 
cannot measure it, you cannot evaluate it.
    Secretary Norquist. Uh-huh.
    Mr. Carbajal. And I think this is one of the most 
significant issues facing the American people and having trust 
in our being able to adequately fund our military and our 
Department of Defense. I think if we do not get it together, we 
are going to lose the American people's trust in what we are 
trying to do here.
    There is no question as to how daunting this task is going 
to be. The stakes are high. Last year, Congress approved almost 
$700 billion for the Department of Defense, and we owe it to 
the taxpayers to provide oversight and accountability over 
their tax dollars.
    Mr. Norquist, in your written testimony, you mentioned that 
for years, the Department has received disclaimer of opinion on 
DOD-wide financial statements because it was not able to 
provide the evidence to support its financial information, and 
that these disclaimers were based on management's assertions 
and not based on independent audit testing.
    Can you provide some clarification and detail on this 
issue? What do you mean when you say it was based on management 
assertions and not independent audit testing? Because, it is my 
understanding, audits such as the one conducted for fiscal year 
2015 was conducted by independent public accountants. If you 
could shed some light on that I would greatly appreciate it.
    Secretary Norquist. Sure, I would be happy to. There are a 
number of parts of the Department of Defense that have been 
under audit for a number of years, Defense Finance and 
Accounting Service, the commissaries, our pension plan and so 
forth, and many of those receive clean audit opinions, but it 
is not the entire Department. It is not even the majority of 
the Department. And so when you do not have an auditor's 
opinion, management is not able to represent that everything is 
in order. And so the IG [Inspector General] does not even begin 
the testing. They just said, then you failed.
    This is one of the reasons why I have been a strong 
advocate and supporter of the audit. When I was at the 
Department of Homeland Security, when I arrived as a CFO [chief 
financial officer] there, they had actually already had the 
audit the first year. With the amount of information you 
received from the audit as management in order to fix things 
was tremendous. And so I understand your concern of, you know, 
an entity that does not have an audit, that will provide a lot 
of useful information. And I think operating without it, there 
is a limit to how much you can reform and fix without that 
independent check validating that what was done was done 
correctly and effectively. And I think that is the biggest 
transition that we are going to see from this year to previous 
years.
    Mr. Carbajal. Thank you. Once we see a Department of 
Defense audit for fiscal year 2018, how will DOD track its 
process for correcting errors? Specifically, how will the audit 
remediation process be executed? And what is the timeline for 
analysis, execution, and implementation of lessons learned from 
the audit?
    Secretary Norquist. So here is how we will do that. We have 
set up a dataset where every time there is a finding by the 
auditor, what they call an NFR, notice of finding and 
recommendations, and it is made up of several conditions, the 
auditors will enter that into the database. So we will have 
their view for every entity of each of the findings. And they 
will have codes according to the type. Was it against an IT 
[information technology] system? Was it related to property? We 
will then have an organization or individual associated with 
that NFR and the responsibility to correct it.
    This is important because it gets us past the habit of 
saying, does the Department have a clean opinion? No. And then 
no one feeling that they individually are accountable. Here, 
all these findings will be associated with an organization, 
office, or individual who will be responsible for the 
corrective action plan. And I will be able to come back and 
report to you each year which of those were closed and which of 
those were not, who we should write to and say, well done, good 
job, and who either needs more help or more encouragement to 
get their piece of it done. But we will be able to track it 
finding by finding and hold accountable over time. And this is, 
again, one of the tools that the audit gives us.
    As we move from the higher level, it is hard to solve to 
very specific things. One of the things I like about that is 
you may have a large number of findings, and somebody says, 
well, why do I need to fix my piece, look at how big the 
problem is. And this is--yes, but there are two assigned to 
you. If you can fix those two, that is all that you need to do. 
And then as more people do that, the whole organization moves 
in the right direction. So we will have that information for 
you, sir.
    Mr. Carbajal. Thank you. Mr. Chairman, I yield back.
    Chairman Thornberry. Mr. LoBiondo.
    Mr. LoBiondo. Thank you, Mr. Chairman.
    I would like to join with my colleagues in saying how much 
we look forward to your efforts and wish you good luck.
    Secretary Norquist. Thank you.
    Mr. LoBiondo. It is certainly long overdue. And I want to 
take the opportunity to thank and applaud Mr. Conaway for being 
so dogged in this with his hard work.
    And with that, I yield my time to Mr. Conaway.
    Mr. Conaway. Thank you, Frank.
    David, please pass on to your team a thank you for where 
you have gotten us to today. The thousands and thousands of 
man-hours, people-hours, however you want to refer to it, that 
got you to--however flawed we are at this point, we are far, 
far better off than when I first took up this task, and I for 
one have seen that progress. And so thank your team for it. Got 
a long, long way to go.
    We do not want to overpromise and under-deliver. The 2018 
audit is unlikely to be a clean opinion, given the scope of 
what all has to be done, but we are so much further along based 
on the leadership that you and your team have provided and the 
hard work of the folks who every day get up and go to work to 
face this daunting problem that does not--it is like Sisyphus, 
trying to push that rock up the hill every day and you get up 
the next morning and it is all the way back down at the bottom. 
So please tell--thank you.
    Secretary Norquist. Sure.
    Mr. Conaway. Part of what we will try to do is to keep that 
process moving forward and not, you know, do anything that 
hampers, from a legislative standpoint, because we are 
frustrated that it had not gotten done sooner. We just have to 
recognize that it is getting done.
    Would you--you talked about findings, and that has got a 
certain definition to you. Would you explain to the committee 
what a finding really is, what that means from an auditor's 
standpoint and why that is important that those get fixed?
    Secretary Norquist. Sure. So what the auditor does is, they 
are holding the Department accountable against certain well-
recognized standards. And so the finding can consist of, you 
were unable to produce the records to support this transaction. 
Or we looked at your property system and it indicated you 
should have 100 of these, and when we walked the floor and 
looked at inventory, there were 95. They are basically things 
that are wrong in the way that either we are accounting for our 
assets or recording. And so then those are items that are 
priorities for us to fix.
    Mr. Conaway. So would those also include weaknesses in 
internal controls? You mentioned a circumstance where you had 
trillions of dollars of journal entries going back and forth. 
That is typically a failure of internal controls. So the 
auditors are looking at your internal control system. Those 
findings would include weaknesses or failures within the 
internal control system?
    Secretary Norquist. Correct.
    Mr. Conaway. All right. While we are not going to get all 
the way to a clean opinion soon----
    Secretary Norquist. Uh-huh.
    Mr. Conaway [continuing]. You mentioned a couple of reasons 
why we have made--why it was important that we do this add 
value along the way. Can you expand on the 39 helicopters or 
the 400 buildings and----
    Secretary Norquist. Sure.
    Mr. Conaway [continuing]. And why not knowing--I mean, we 
obviously knew--the pilots that were flying those 39 
helicopters knew they were there, but somewhere further up the 
management chain they disappeared from the inventory and may 
not have been known that they were there. Four hundred 
buildings may not seem like a big deal because they were not 
moving, but at some point in time we have to address, you know, 
a BRAC [base realignment and closure] or something of that 
nature.
    Can you talk to us about value added along this path over 
the next couple of years that we will get as a result of doing 
these audits?
    Secretary Norquist. Absolutely. You know, in order to get a 
clean opinion, there is a number of steps you have to solve. 
But even along the way, fixing the pieces along the way produce 
a tremendous benefit. So if you think of the inventory in a 
warehouse of how many spare parts or munitions that you have, 
or the helicopters. Those had been delivered by the vendor but 
had not been recorded in the property system, which meant folks 
who were anticipating using them were waiting to take advantage 
of it. Or if you have, the case of the buildings, the person on 
the base may know they are there, but somebody at headquarters 
trying to figure out do we have enough square footage where we 
need to do things, is operating with incomplete information. So 
as the leadership mentioned at the beginning, accurate data 
helps drive more accurate decision making.
    There is a couple other benefits. For example, DISA 
[Defense Information System Agency], one of the agencies that 
received a clean opinion on one of its funds, a modified on the 
other, was able to return $230 million to the services. It 
lowered its bills to them and allowed them to spend that money 
on operations and readiness, because it had a more accurate 
understanding and better management of its finances.
    Likewise, in terms of identifying errors, the Navy changed 
its process of how it handed information to DFAS [Defense 
Finance and Accounting Services] to be more automated, reducing 
how much work DFAS had to do for them. That saved them $65 
million.
    So while we are focused primarily on data accuracy, there 
are financial savings that come, and then there are other 
things, which is just a benefit for the men and women of the 
Armed Forces.
    The Air Force, when they were doing a walk-through, 
discovered their enlistment records were being set up 
incorrectly for new recruits, as to whether they were 6- or 4-
year enlistment. So they were updating, manually, hundreds of 
records every year as people arrived basically because the 
entry was done incorrectly at the beginning.
    They went back into the system change to try--to make sure 
that did not happen, freed up a lot of labor hours, reduced by 
80 percent the manpower accuracy issues. So it benefits the 
troops in better pay and benefits accuracy.
    Mr. Conaway. Thank you. Mr. Chairman, I yield back.
    Chairman Thornberry. Mr. O'Halleran.
    Mr. O'Halleran. Thank you, Mr. Chairman.
    First of all, I want to thank all those that have worked on 
this over the past decades. And as a new person, just like Mr. 
Carbajal and all us front row people, I am kind of--after 
having read the information on this, I am kind of shocked.
    Secretary Norquist. Uh-huh.
    Mr. O'Halleran. You know, as a new person here, to look at 
decade after decade and trillions of dollars after trillions of 
dollars, and apparently no real rush to get to the point where 
we have an audit, a meaningful audit, is disturbing. But I do 
want to thank you for being here today to discuss this critical 
issue for our warfighters and American taxpayers, and thank you 
for your service.
    I want to echo my colleagues who have rightfully stated 
that proper financial oversight is long overdue at DOD. Waste, 
fraud, abuse have no place in any agency, especially not when 
it comes to guaranteeing our national security and readiness. 
Every dollar wasted or fraudulently spent is a dollar lost to 
our warfighters. They deserve better. And I look forward to 
working with you and the rest of this committee to increase 
transparency and financial integrity.
    I also share concerns about what we can expect from this 
process. As you know, the GAO [Government Accountability 
Office] has stated DOD has not yet demonstrated that its 
leadership has the ability to achieve effective financial 
management reform. The DOD lacks a sufficient cadre of 
financial managers with qualifications and level of expertise 
needed to lead reform throughout the Department.
    Additionally, having looked at what occurred in the 
financial industry over time----
    Secretary Norquist. Uh-huh.
    Mr. O'Halleran [continuing]. I have concerns about how we 
are going about--go about guaranteeing that this marriage 
between the DOD and the different auditors is one that is going 
to be transparent enough for us to understand that the taxpayer 
is getting the appropriate audits that we should be getting. 
Because, as you know, what occurred in the financial industry 
was that, basically, the auditors did what the people being 
audited wanted them to do so that they can get the next 
contract the next time it was around or keep that contract. I 
really want to know how we are going to watch that issue.
    And, Mr. Norquist, has DOD developed not only a process to 
guarantee that we are getting what we say we are going to get, 
but brought on additional personnel who demonstrated financial 
management experience? What barriers continue to impact DOD's 
ability to attract, retain, and develop qualified personnel? 
And retain is a very important issue when it comes to these 
types of things. And how will we verify the audits in the long 
term?
    Secretary Norquist. So let me cover a couple of points that 
you brought up, and I will start first with the independence of 
the auditors, because that is a central one that we had to 
address at the very beginning. The auditors do not report to 
the Army, the Navy, Air Force. They do not report to me. They 
report to the IG. The IG is the contracting officer, oversees 
them, and makes the decisions about what they do, and so they 
have the same protected independence of the IG.
    But it is also a reason why we split the audit into lots of 
pieces. One is an auditor cannot audit an agency if they have 
consulting work there. And so finding an audit firm who had no 
consulting work anywhere in the Department of Defense would be 
somewhat limited. But if you break it Army, Navy, Air Force, 
DISA, Working Capital Fund, so forth, you will find firms that 
are, and you will find multiple ones so you can have 
competition.
    So part of the having the 24 or more separate audits is, 
first, you get people who are independent. And second, we have 
sustained the competition, that if there is an auditor who is 
not performing, the IG has multiple other auditors with DOD 
audit experience that they can go look to. So we thought 
through--because there was the question, why do you not just 
use one large audit? And my answer is, you have created a 
monopoly. We would never, after they learned our business 
process, be able to find another auditor who could compete, and 
then I would be explaining to you why the audit costs went 
through the ceiling.
    So I think we tried to pay attention to the concerns that 
you have raised, and I think the IG function is a tremendous 
help for us in maintaining that independence.
    Mr. O'Halleran. Just to that point, because my time is 
running short. I appreciate the IG and its independence, but in 
the long run, the IG has been around for a long time.
    Secretary Norquist. Uh-huh.
    Mr. O'Halleran. And a lot of things have been going on for 
a long time, whether it is fraud or abuse or just lack of 
information.
    Secretary Norquist. Uh-huh.
    Mr. O'Halleran. And it has not come to anybody's attention 
of how to correct that. And so just the idea that the IG is 
going to be the independent evaluator of the process does not 
guarantee the taxpayer of America that this relationship is not 
going to be one that is controlled by those that know and can 
manipulate the system versus those that are responsible for 
making sure that we get what we are paying for, and it is 
verifiable. So I would like to talk to you a little bit more in 
depth about just where that goes.
    And I yield back.
    Chairman Thornberry. Chairman Conaway.
    Mr. Conaway. So thank you.
    David, DFAS is an integral part of several of the 
accounting systems. Can you talk to the committee about the 
audit of DFAS per se, but also the conflict between the 
services that DFAS provided to the Army, Navy, Marine Corps, 
that on a standalone basis, if those were audited separately 
going into DFAS, to audit that service that was provided would 
be really disruptive and inefficient? Can you talk to the 
committee about how the team is looking at solving that issue 
with respect to DFAS?
    Secretary Norquist. Sure. So we have a number of places 
where an audit of one of our entities would extend into 
another. So if you think of the Army, Navy, and the Air Force 
have financial management processes that extend into the 
Defense Finance and Accounting Service. So the way that we 
address that is we have what--the acronym is SSAE [Statement on 
Standards for Attestation Engagements] 16. It is basically an 
audit of that organization's support to the others that 
external auditors can rely on. Otherwise, we would be paying 
for the three or four different auditors to all show up and re-
audit a single step.
    It is interesting it shows up in DFAS. It also shows up 
with ammunition storage where the--several different services' 
ammunition are held in one place, and the answer is rather than 
each auditor coming in, we will do a similar thing over 
ammunition storage and say, you can all rely on this audit 
piece so you do not have duplication of work.
    Mr. Conaway. So you talked about the accountability that 
you are going to create with this database findings that are 
out there. Can you talk to us about the accountability piece? 
You have got two groups of folks that will be responsible for 
correcting or addressing the findings. You have got civilian 
folks as well as uniform people. Can you talk to us about the 
carrots and sticks that you have got available to you to hold 
people accountable within your system for getting those 
findings resolved to the satisfaction of the auditor?
    Secretary Norquist. Absolutely. I think there is a limit to 
them, and we may need to work with this committee on 
alternatives and additions going forward. But this is actually 
one of the first things that the Secretary of Defense brought 
up with me, even before I was nominated, to say, ``How do you 
motivate people in a Federal agency to stay focused on fixing 
things when you lack some of the incentives and controls you 
have in the private sector?''
    So I think there is a couple things. One is being able to 
clearly identify who is accountable is one of the first steps, 
and so that is the part of it that the database gives us so the 
people know who it is on. The second is audit support shows up 
in people's performance evaluations, so there is no way around 
that comment being made about your contribution or your 
success. So that helps to drive it. Both the civilian and the 
military will have--there are limits to how far we can go, 
compared to a private sector, but I think the transparency and 
the accountability, knowing--one of your biggest challenges, no 
one thinks it is their responsibility. And so fixing that and 
being very clear whose responsibility it is helps to drive that 
performance improvement. But there are limits to this that I 
recognize.
    Mr. Conaway. Well, it is a--that database has been--is a 
big improvement from where we have been in the past, because 
sometimes the tasks are just so daunting that you could get 
away with not addressing it. But having it broken down into, 
relatively speaking, bite-size pieces, I think we will see 
progress over the coming future.
    To Mr. O'Halleran's issue. These CPA firms that provide the 
audit are held to professional standards by their own industry 
and by the very State boards of accountancy. So it is not like 
you have got a group of folks out there who are not without 
oversight from professional standards that they would have to 
ascribe to if they working in a private secretary audit as 
well?
    Secretary Norquist. Correct. And they are, in fact, audited 
on whether or not they met those audit standards. And they will 
have to produce, to an external firm, evidence that they did 
their audits to an acceptable standard.
    Mr. Conaway. So while not perfect, we are all humans and 
there have been some audit failures in the past. Nevertheless, 
there are professionals and professional standards that those 
folks are held to?
    Secretary Norquist. Correct.
    Mr. Conaway. Just a quick anecdote. Part of the issue has 
been over this timeframe is making sure you had the right tone 
from the top. Leon Panetta started that, and I think it has 
been transitioned to the new administration this time really, 
really well.
    I was encouraged by the experience I had in Hawaii awhile 
back. I was at a--touring the USS Texas, which is a submarine. 
We were in the galley doing a townhall meeting for the enlisted 
guys, and somewhere during that conversation one of the petty 
officers asked me, he said, Congressman, how is the audit going 
of the Department of Defense? Which I thought was--two things: 
you guys planted that guy down there because you knew I was 
going to be onboard that ship, or you have got some really 
bright enlisted guys who are paying attention to conversations 
that are going on throughout the food chain of the Department 
of Defense. And if the issue of auditability has gotten all the 
way down to a petty officer in the bowels of the USS Texas, 
then we must be making some progress.
    So, with that, I yield back.
    Chairman Thornberry. Mrs. Davis.
    Mrs. Davis. Thank you very much, Chairman. And thank you as 
well, Mr. Norquist, in the efforts that are going in there. It 
has been a longstanding problem, and we all know that.
    I wanted you to just speak a little bit, and I think we 
have addressed a few of the process issues, but particularly 
the concerns around cultural resistance to change. And if you 
could, I think one of the things that we are very aware of 
right now in any large bureaucracy, that there are a lot of 
issues, retribution for people who are trying to do the right 
thing and other people do not want them to is a concern. Sexual 
harassment at the Pentagon is a big concern, as you have 
probably noticed through numerous reports.
    So I wonder if you could just speak to--you know, there are 
all these issues that go on in people's workplaces, and that 
cultural resistance to change is one that really has to be 
monitored closely. And how are you dealing with that? How are 
you expecting to be able to bring everybody to the table on 
these issues and get the kind of buy-in that is necessary 
without individuals picking one another off.
    Secretary Norquist. The cultural resistance--I mean, no one 
wants to be audited. I do not know how many witnesses you have 
had come excitedly, tell you, hey, I am under audit today. But 
it is also that in order to fix the findings, we are taking 
systems and processes that were built to maximize support to 
one thing and requiring them to pay attention to the functions 
around them that they work with. And that can be a challenge 
because somebody says, well, this is how it disrupts it.
    So there is a couple of factors that go into this. The 
first is the tone from the top, and that comes from the 
Secretary and the Deputy Secretary who are unambiguously clear, 
this is about accountability, and they have sent letters to the 
workforce that emphasize, this is about doing your job the way 
you are supposed to. These are what the accounting standards 
and the property standards and everything come from. You are 
responsible for this. So it is very clear, running up your 
chain, to say, I do not want to do this is not going to run 
into success.
    The other one is Congress has been very clear. Because the 
other place you go is to say, tell them to make them stop, 
right? And the likelihood of someone coming to Congress and 
saying, please make them stop the audit, and getting a warm and 
fuzzy hearing is pretty limited. So those two things help 
create the realization that the organization will need to 
change.
    The second part of that process is explaining to them the 
benefit of the change. In many cases, we have labor-intensive 
processes where data is transferred from one place to the 
other, and you have to fix errors because it was not done right 
at the beginning. Or it was only filled in with the fields the 
people at the beginning needed. Well, if you can explain that 
when you get that fixed, you are going to spend less time doing 
this and more time on the things that you believe is your core 
mission.
    So, yes, it is a little bit of work, and certainly the 
first year of an audit, when you are asked for records you do 
not necessarily have easy access to and you have to spend some 
time finding them, is a challenge. But over time, this will 
make your life easier. And we have to work that office by 
office and organization by organization. But, as you pointed 
out, this is as much changing people's views about how to do 
things so that they understand the importance.
    The third factor is the audit is annual. You know, if you 
did this once and came back in 10 years, I do not know you have 
the same incentive to cultural change as the realization is 
they are coming back in 6 to 9 months. So you can make the 
change or you can watch them find the same things again. So 
that third factor--what makes the financial statement a lot 
different is it repeats. And they are not going to change the 
questions; they are just expecting you to change your ability 
to provide an answer.
    Mrs. Davis. Do you anticipate any need for a feedback 
system so everyone who is engaged in this can be giving their 
input all along the way, and some of that may be anonymous?
    Secretary Norquist. Yes. We need a feedback. And one of the 
things that I have tried to draw attention to is, because the 
audit is going to repeat, what is important is that we be able 
to sustain this. So if you are given a task where the 
resistance is this is just way too labor intensive, stop. Let 
us figure out why answering that auditor request is labor 
intensive and fix the way we store the data or do the check so 
we can answer them efficiently every year. I would rather take 
the finding the first year than do some Herculean expensive 
effort that I am going to have to repeat the next year.
    So if we are not able to find the records efficiently, let 
us create a data warehouse, let us put the records where they 
can be easily searched so next year it is a very quick process. 
We want to make this efficient over time, and that is another 
way of reducing some of the resistance so it is not--you know, 
the people have a way of saying, hey, I do not understand why 
this is happening this way. And the answer is maybe we can do 
it differently. But we are still going to have to meet the 
standards of the audit.
    Mrs. Davis. Thank you. And just speaking of the auditors--
and obviously you are going to be using a lot of different ways 
of responding to some of the concerns that have been existing 
for some time. Is there anything in the training or preparation 
as you move forward that needs to be changed and that you are 
addressing as it relates to the way that people are approaching 
it?
    Secretary Norquist. So there has been a lot of effort on 
that. My predecessor, Bob Hale, set up a relatively robust 
training program for the financial management community that 
has been focused on introducing audits and audit readiness as a 
result of the input from committees and others. Extending that 
thoroughly through the logistics and the other organizations is 
probably one of our challenges. There has been some training, 
but those areas are as equally affected.
    Chairman Thornberry. Mrs. Hartzler.
    Mrs. Hartzler. Thank you, Mr. Chairman.
    Thank you, Mr. Norquist. This is a very encouraging day. It 
is a day that we have been waiting on for a long time. I 
certainly want to commend the chairman and ranking member and 
certainly my colleague, Representative Conaway, for his 
leadership on this, because certainly we are facing so many 
threats around the world, and we need more dollars to modernize 
and to increase our readiness. But at the same time, I hear 
back home concerns about waste. And any time there is waste, we 
need to make sure that it is rooted out, and that we are 
investing our precious defense dollars where they need to go. 
And so this process that you are leading is critical in this 
effort.
    And so you noted that one of the chief benefits of the 
audit process is improved accountability of the assets and 
resources. So I was wondering, are classified assets part of 
the audit process?
    Secretary Norquist. Yes. Classified programs are included. 
I will also tell you that--all of the intelligence, defense 
intelligence agencies, have standalone full-scope audits, and 
most of them have been under audit for 3 years. But being a 
classified program does not exempt you from the scope of the 
audit.
    Mrs. Hartzler. Okay. And then will there be a separate 
addendum then that we in Congress will be able to access to 
look at that portion or how will that--how will there be 
accountability for the classified side?
    Secretary Norquist. Sure. So for the standalone audits, 
those are classified, the ones of an intelligence organization. 
For the others, how that shows up, I would rather talk to you 
in a closed forum.
    Mrs. Hartzler. Okay.
    Secretary Norquist. But we address all of the classified 
programs as they are in the scope of the audit.
    Mrs. Hartzler. How about OCO [overseas contingency 
operations]?
    Secretary Norquist. OCO would be in the scope of the audit, 
yes.
    Mrs. Hartzler. Okay. Very good. In your testimony, you said 
something here that caught my attention, and of course, the 
cost you anticipate is $367 million, which we have already 
talked about the long-term benefit of that investment in 
getting this--a handle on everything. But you go on to say, you 
anticipate spending about $551 million this year, in fiscal 
year 2018, fixing problems identified.
    So could you expound on what problems you anticipate and 
what the presumptions were to come up with that figure? Where 
do you get $551 [million] for fixing problems?
    Secretary Norquist. Sure. So the number comes from talking 
to the services about what funding they have planned for this 
year and what did they have in the budget to address these 
requirements. And the types of requirements we are talking 
about is systems that have been already fielded for whom the--
either they are not storing the data properly or they are not 
transmitting it properly, reducing manual passages between 
systems. So some of those changes are in there. Improvements in 
the way they inventory or store things.
    One of the steps that is involved, the accuracy of the 
property records. So each one of those places where they are 
improving their process or changing the underlying system or 
clearing up old records so that--those are the things that are 
driving those types of costs.
    Mrs. Hartzler. So it sounds like the services already have 
a handle on what they know are problems?
    Secretary Norquist. Correct.
    Mrs. Hartzler. And then they put a price tag to that. So 
most of that, it sounds like, is computer software?
    Secretary Norquist. Not most of it. That is just a piece of 
it.
    Mrs. Hartzler. What?
    Secretary Norquist. It is a piece of it. It is not most of 
it, but the systems are certainly a piece of it.
    Mrs. Hartzler. Can you give a more specific breakdown on 
that? So you anticipate you are going to have to purchase so 
many more computer systems that talk to each other, and you say 
record management. So are you putting man-hours? Do you 
anticipate additional personnel to create written records? I 
mean, get more specific, please.
    Secretary Norquist. Sure. So I may have to give you some of 
this for the record, but I will try and talk you through what I 
can at this level.
    So when you are going through the audit and you--for many 
of them, they have either done some work in advance or, in some 
cases, the auditors have done preliminary work on their 
statement of budget activities, other pieces, before we got to 
the full scope audit. So they have some indication of the types 
of challenges they face, and they have developed corrective 
action plans for those.
    Some of those corrective action plans include modifying one 
system to allow them to be audit compliant and allow them to 
turn off systems that are not. So there are financial system 
costs that improve the accuracy of the data, and in the long 
term may save us money as we turn off the legacy systems.
    The second is improving their processes that allow them to 
be more accountable for their property. And so they may be 
changing the way they store the information or they store the 
assets to support the accountability, depending on some of them 
may be switching to barcoding things that were not, so that 
they can have clearer accountability of the status of each 
asset, where they know where they are. Some of it is the 
documentation behind it, making sure that is centralized in a 
way that they can respond and make sure it is complete.
    If you need it broken down further, I will probably have to 
go back and get the details behind it, but that is the types 
of--at a high level, the changes they are doing.
    Mrs. Hartzler. My time is almost gone. I would just say we 
need to watch this.
    Secretary Norquist. Uh-huh.
    Mrs. Hartzler. And do not let them get more money for 
something that simply should be their job--doing their job.
    Secretary Norquist. Correct. Uh-huh.
    Mrs. Hartzler. Okay. Thank you.
    I yield back.
    Chairman Thornberry. Ms. Shea-Porter.
    Ms. Shea-Porter. Thank you.
    And I also want to thank you, Mr. Norquist. I am very 
excited about this. We have hoped this and--for this for years, 
and I wanted to ask you a couple of questions about it. In, I 
think it was 2007 maybe, I was sitting here on this committee, 
and we had found out that a lot of the weapons, the guns, that 
had been sent to Iraq were not traceable anymore. I remember 
the person, I cannot recall his name, but saying, well, we did 
not have enough auditors. And I said something along the lines 
of, well, should we not have auditors in order--when we are 
spending this kind of money? So this sounds familiar to you, I 
am sure.
    So how did you decide on the number of auditors, and what 
will you do if you discover that you need more?
    Secretary Norquist. Sure. So the number of auditors is our 
estimate based on what the contractors have proposed to do. 
They were given the scope of it. Those contracts, I believe, 
allow for them to make adjustments over time so that if there 
is a requirement for more. One of the things we want to do is 
make the best use of their time and their benefit to the 
taxpayer.
    So unlike some audits where as soon as they run into a 
problem they get to stop and say, there is a problem, I am 
done, the IG can say, hey, you know, it would be useful to us 
if you dug deeper into the root cause behind it, and that way 
we make sure we are not just fixing the symptoms and so they 
can drill down.
    And so my view is, the auditor piece of this is like the 
reconnaissance; it is the guys who go out front and find you 
the issues, and that is a tremendous value to us. So if we need 
additional ones, I am not hesitant to make sure we can get 
access to that.
    Ms. Shea-Porter. So they will not be constrained 
financially if they need that. You will not run up against a 
wall where there is just no money left in the budget for them 
to put more people in if they need to?
    Secretary Norquist. It would have to be something in the 
way that the contract had been written, but we would realign 
funds if we needed to. If the IG said they needed additional 
resources, I will help the IG.
    Ms. Shea-Porter. Okay. That is pretty essential, because I 
have a feeling it is going to be deeper and longer than you 
think.
    Secretary Norquist. Absolutely. Correct.
    Ms. Shea-Porter. Now, my understanding is, right now, you 
are talking about $870 million, and that is just for 2018?
    Secretary Norquist. That is for 2018.
    Ms. Shea-Porter. Okay. So how is the CR [continuing 
resolution] going to be impacting that?
    Secretary Norquist. So the CR creates pressure on us 
funding-wise. And so I am not going to stand in front of you 
and say if I do not get it, we are going to stop the audits. We 
will not. We are going to go ahead with the audit.
    What it does, disruption-wise, is many of the people that I 
need focused on audit remediation are focused on trying to 
split contracts to accommodate the funding levels of the CR and 
the next increment. And so many of the people that we need to 
have focusing on this are the ones who are also affected by the 
incremental nature of a CR. It also creates pressure more on 
the remediation side than the audit because we are 
significantly below either what this committee recommended or 
the President, and we have to make tradeoffs within that space. 
But we will still proceed with the audit.
    Ms. Shea-Porter. Okay. And then the other question I had is 
you talked about contractors having growing pains. Now--and I 
think this article, you also said, that we should not be 
looking for like billions of savings, but there has always been 
kind of one of those understandings that if we actually did 
monitor these contracts over time, that the waste and fraud and 
et cetera, delays, actually does add up to billions.
    So how will they experience growing pains? And why do you 
not think that ultimately, over a period of time, we actually 
could save really significant numbers?
    Secretary Norquist. Okay. Are you talking about saving 
numbers by auditing contractors or----
    Ms. Shea-Porter. If we do this work now. And so what will 
you be doing to make sure, for example, that contractors come 
in on time, we do not have cost delays?
    Secretary Norquist. Okay.
    Ms. Shea-Porter. I know that we have our work to do for the 
oversight, but I just want to know how you think your role will 
play out.
    Secretary Norquist. Sure. So let me break that into three 
parts. First is the piece, which is the program manager 
overseeing it. That is not in the scope of the financial 
statement audit, but we support them with better quality data.
    The second, not inside this audit, but we have the Defense 
Contract Audit Agency that looks directly at billing. And they 
recovered in 2016, I think, like $3.6 billion by looking at 
billings that were coming in and questioning charges. That 
keeps up. That we will continue to do.
    The third is the financial statement audit, which focuses 
really on the Department and indirectly on the contractors, but 
it is our payments to them. That one I think the place you are 
going to see the biggest opportunity reform over time is by 
allowing us to operate more like a business.
    And so you think about improvements and the accuracy and 
the completeness of financial systems and the role of the chief 
management officer [CMO] in trying to bring business reforms, 
being able to put in front of the CMO information closer to 
what their commercial counterpart would have, allows them to 
make decisions. You are a $600 billion enterprise, better 
decision making can make you make better use of the dollars on 
a very large scale.
    So I think you will see that type of advantage in driving 
reform within the organization as we are able to do more in 
estimating costs or reforming the way we do something 
internally. So I think those are some of the three. There will 
be some cost avoidance when you have better security of your 
systems against intrusion. You will avoid costs that you 
otherwise would have inflicted.
    Ms. Shea-Porter. I am hoping that we will have more clarity 
when we have to make decisions. We will have more data to help 
us, right?
    Secretary Norquist. Yes, yes.
    Ms. Shea-Porter. Okay. Thank you very much. I yield back.
    The Chairman. Mr. Byrne.
    Mr. Byrne. Thank you, Mr. Norquist. Many of us are familiar 
with the audit function in the private sector. In preparing for 
this, I came across an acronym called an IPA, which, from my 
understanding, is a really good type of beer. But I think you 
mean something different. These are major, highly reputable, 
private sector accounting firms to perform audits for large 
organizations across the world. Have I got that right?
    Secretary Norquist. Correct. Ernst & Young, KPMG. Large 
recognized firms.
    Mr. Byrne. And there is a set of auditing standards that is 
peculiar to the Pentagon and peculiar to government. In 
general, what standards do they use when they perform their 
audit?
    Secretary Norquist. So there is a Federal board that sets 
the auditing standards, and they basically start with the 
commercial standards and then they add some modifications. For 
example, to defend the power of the purse of Congress, we have 
budgetary rules that do not exist in the private sector.
    Mr. Byrne. Right.
    Secretary Norquist. They have a series of accounting 
standards for how we account for obligations, disbursements, 
commitments, things that matter to us in managing the money 
inconsistent with Congress. So there are changes. All the other 
Federal agencies follow them as well, but there is an 
accounting standards board that does that.
    Mr. Byrne. Okay. Let me talk you to about continuing 
resolutions for a second.
    Recently, the Secretary of the Navy has said publicly that 
since the Budget Control Act was passed, the Navy itself, the 
Navy alone, has lost--or we have wasted $4 billion as a result 
of continuing resolutions and budget uncertainty.
    Do you believe the audit will show inefficiencies like this 
in business operations across the Department due to continuing 
resolutions?
    Secretary Norquist. I think the audit will show you some of 
the--yes, the problems that will come out of business, out of 
the disruption from the CR. And I think one of the ways that 
that shows up, if you think about it is, normally, you have a 
year to spend money. And one of the things we tend not to like 
about Federal agencies is that the 4th quarter, because the way 
Federal money works, if you do not spend it, you lose it. This 
sort of unusual thing that we do in the Federal Government.
    Well, the CR says wait, wait, wait. And then when you are 
down to only a couple months left in the year, okay, here, have 
it all.
    Mr. Byrne. Right.
    Secretary Norquist. Spend, spend, spend. And that, if you 
negotiate a good price, you may now be outside the window of 
when you negotiate an effective price. Your plans for 
contracting, and so forth, get compressed.
    So I think some of those disruptions that you see that are 
driven by the CR, the audit will help be able to figure out, 
either how to manage it or what the consequences are.
    Mr. Byrne. Well, it would be helpful to us as the people 
that pass continuing resolutions to have that highlighted in 
your audit report so that we know that continuing resolutions 
have tangible, negative results, not just to the operations, 
but to the expenditure of money for the entire Pentagon in each 
of the constituent services.
    I might add that during another part of my life, I was 
asked to take over the Alabama 2-year college system at a time 
in which there were two criminal investigations going on and 
the Birmingham News won the Pulitzer Prize reporting on 
corruption in it. And we used both the internal audit function 
and the external audit function, not just to remedy what had 
happened, but also to change the culture within the Alabama 2-
year college system.
    Do you believe that there will be some, I am not saying 
wholesale change, but some change in the culture of the 
Pentagon as a result of these audits?
    Secretary Norquist. Absolutely. That is the point.
    Mr. Byrne. Good. Can you elaborate a little bit about how 
that would manifest itself?
    Secretary Norquist. Sure. I think that what you find is 
there are folks who are doing their mission, and at least one 
of their missions is to make sure information is updated for 
others to use. When their time is tight, that step gets 
skipped, and they do the others. Well, then others who rely on 
the information have to either redo it themselves, or function 
with incomplete information. Knowing that that is going to be 
audited and somebody is going to point out that difference 
creates an incentive to make sure that you do the complete 
function and you get those items done. It should reduce the 
amount of phone calls the person gets to answer the question 
because somebody can rely on the system now, but that type of 
culture change is important in an organization that has such a 
spread of functions and has to rely on those types of datasets 
to be able to make decisions.
    Mr. Byrne. Well, I just want to say, Dr. Wenstrup and I 
were just talking. This may be one of the most important things 
that we accomplish during our terms here in Congress. So I 
think you will see a lot of support for your activities here on 
this committee and throughout Congress. And I appreciate what 
you are doing.
    With that, Mr. Chairman, I yield back.
    Secretary Norquist. Thank you for your support. I 
appreciate it.
    The Chairman. Mr. Suozzi.
    Mr. Suozzi. Thank you, Mr. Chairman. Mr. Norquist, I am 
very excited about the work that you are doing. It is a 
gargantuan, mammoth, really big task that you have ahead of 
you. And, you know, I am trained as a CPA and as an attorney, 
and I was a mayor of a small city and a county executive of a 
large county that did not have proper inventory or procedures 
and processes in place. I went through this on a much smaller 
scale.
    And when I first came to Congress, I would hear my 
colleagues asking about different weapon systems and different 
pieces of equipment. And I did not know what we owned. And I 
tried to get my staff to figure out what we owned by working 
together with the DOD and other people, and it was very hard to 
get the limited information we got. There is 14,500 aircraft in 
the U.S. military, for example. You know, how many ships do we 
have, how many armored vehicles, so on and so forth. Will we 
have a comprehensive inventory at the end of this process that 
tells us what we own?
    Secretary Norquist. So this is the important way of how we 
implement the audit. It is possible to have that without making 
it easily accessible, and my concern is you miss some of the 
benefit of the audit. So one of the changes we want to drive is 
not only to have the accurate count, but to have it easily 
researchable. In other words, in the dataset where somebody can 
run the report and say to the Secretary of Defense, here is 
what you have, here is where they are, and here is whether or 
not they are in maintenance because they are not working, or 
here is whether they are working.
    Mr. Suozzi. Go ahead. Finish what you----
    Secretary Norquist. So the idea is we will have the count, 
but what we want to do is be more like a business, which is, go 
beyond the mere standards of the audit to using that to drive 
business intelligence so that the leadership will have timely 
and accurate information, not just about the dollars, but about 
the facilities, the equipment, the military supplies behind 
those dollars.
    Mr. Suozzi. So each piece of equipment will be rated, for 
example, as far as its condition?
    Secretary Norquist. I am not quite sure. I think the audit 
has to do with impaired or not impaired, meaning is it usable 
but we will have those. Now, it has to be material enough, 
right? The audit does not worry----
    Mr. Suozzi. Yeah.
    Secretary Norquist [continuing]. About small items. But the 
larger-end items would certainly be things that we should be 
able to have timely and accurate reporting on.
    Mr. Suozzi. What percentage of the overall audit would you 
say is going to be devoted to inventory as opposed to procedure 
and process and financial statements?
    Secretary Norquist. Well, if you walk through, they will do 
inventory, they will do property, meaning buildings and other 
large items. They will also do pay and personnel, some of those 
types of things. So over time, that may be more labor intensive 
than most of the other pieces.
    Mr. Suozzi. Yeah.
    Secretary Norquist. But it is one of many items, but it is 
on our property line as one of our largest.
    Mr. Suozzi. So is it half the task? Is it a quarter of the 
task?
    Secretary Norquist. I am guessing, but probably a quarter 
of the labor hours would be spent looking at those types of 
items, yes.
    Mr. Suozzi. And will there be a physical visiting of the 
sites to actually identify the pieces by the auditors or will 
that be done by our in-house, by the people who work for the 
DOD?
    Secretary Norquist. By the auditors. And they will do it 
two ways, what they call book to floor and floor to book, which 
is, they will look at what your records says----
    Mr. Suozzi. Yeah.
    Secretary Norquist [continuing]. And then they will see if 
that is what you really have in inventory.
    Mr. Suozzi. Right.
    Secretary Norquist. And they will look at what you have in 
inventory and see if that is what your records say. That way 
they are checking it both directions to make sure that they 
both align.
    Mr. Suozzi. This is a very exciting task that you are going 
to accomplish. Do you think that the audit of the inventory of 
equipment, of properties, of buildings, will be conducted by 
the end of the calendar year of 2018, or it will be some time 
off into the future after that?
    Secretary Norquist. So they will go through the audit this 
spring and summer. They will publish their reports starting 
about November 15, this being a first year audit, may take them 
a little bit of extra time. And they will do this every year. 
So they will do a sample. So they may pick certain pieces of 
equipment the first year, and then pick a different set the 
next year. But the findings they have on one are often the same 
for the other. So as soon as we see them, it gives the agency a 
clear idea of what they----
    Mr. Suozzi. Oh, so they only give you a sample inventory of 
what we own?
    Secretary Norquist. It is statistically significant. And 
the way they do their sample----
    Mr. Suozzi. Yeah, I know.
    Secretary Norquist [continuing]. Is use statistical 
sampling to be able to have a level of confidence in it. So 
that they will be on site, counting things, checking numbers.
    Mr. Suozzi. Will we be able to find out from you, if I 
reach out to you afterwards, what you are going to be doing, 
what the sample size will be and what it will be of?
    Secretary Norquist. We should be able to have the 
information and the sample size. I do not know if it will tell 
us exactly what they counted, but it will tell us the sample 
sizes, yes.
    Mr. Suozzi. Okay. All right. Thank you very much.
    I yield back.
    The Chairman. Mr. Kelly.
    Mr. Kelly. Thank you, Mr. Chairman. And thank you, Mr. 
Norquist, for being here. I, again, want to echo a thank you to 
Chairman Conaway for his efforts in getting this to come. It is 
a massive undertaking, long overdue. It is going to be very, 
very difficult.
    I hope that we will focus on the things that improve the 
processes going forward. And some of those, number one, is OCO. 
There is a lot of room, even when people are trying to do that 
right, for abuses that are intentional and unintentional, and I 
am more concerned about the unintentional where people just do 
not know. How far back are you going to the start of the audit, 
like as far as OCO and those things?
    Secretary Norquist. So when you look at dollars in fiscal 
year 2018, they will be auditing money received in fiscal year 
2018. When you look at assets acquired, it does not matter when 
the asset was acquired. They will look for existence in 
completeness of those assets.
    Mr. Kelly. Okay. Very good. And then just from having 
served quite a long time, I understand the process, ``at the 
end of the year, spend all the money or you lose it.'' That 
needs to be a recommendation that you do not lose it so that we 
can spend that money wisely. Maybe not in operations or 
maintenance, but there is some things, acquisitions, that it is 
important to be able to carry that money forward as long as it 
is earmarked or allocated to a source, even though it is not 
spent yet, rather than having to rush and spend it on things 
that you do not need. Because you do not need to go buy all 
these pens to stack up somewhere for people to pilfer, because 
those little things add up.
    And I guess my final point is, I am sure you will look at 
things like OCIE [organizational clothing and individual 
equipment] turn-in, where we turn in equipment and those kinds 
of things, and the write-offs and how you do that, and also 
like tool droppages. Those things that, you know, you come back 
from a field exercise in the Guard, and you do all these tool 
droppages to make sure that you get your equipment back, when 
maybe that is not the right way.
    So you will be looking at processes like that to make sure 
that people are adhering to the right way to do that and 
holding people accountable when they are accountable or service 
members as opposed to just saying, ``Okay, it is within the 
dollars.'' Is that correct?
    Secretary Norquist. It will hold people accountable because 
we will look at disposable equipment. It depends on the size of 
the equipment. The audit does not go down to very small items. 
But did you properly dispose of it? Did you record it? And, you 
know, and then we will start to be able to clearly see, did you 
get paid for the disposal, because some of this equipment we do 
get money for when we dispose of it.
    Mr. Kelly. I guess my final question goes as to, the GAO 
indicates that the DOD lacks a sufficient number of financial 
managers. And what are you doing or what areas has the 
Department done to take care of, or to acquire these?
    Secretary Norquist. So this is a challenge. I mean, when 
you have an organization that most of it has never been under 
audit, and Federal employees do not, themselves, conduct 
financial statement audits the way commercial enterprises do. 
So you may have CPAs, but you often have CPAs who do not have 
exposure to some of those other practices. And so over time, we 
have been able to grow that a couple of ways.
    The first is, the agencies that went under audit first, 
like the Corps of Engineers, Corps of Engineers has a clean 
opinion. It had a number of people who have now been through an 
audit multiple times, know what it looks like, have been part 
of fixing things, they are now helping the Army get through the 
larger audits. So some of them we have grown by leading with 
certain examples. Some we have just gone out and hired, and 
then the third focus is training. We have a robust training 
program where we have been emphasizing audit standards, audit 
readiness, internal controls, all of those pieces, whereas in, 
you know, a decade or two ago, it all would have been budget 
type of topics and not accounting-related topics because that 
was the almost exclusive focus of a lot of the financial 
management community.
    Mr. Kelly. Mr. Chairman, I have no more questions. I yield 
back my time.
    The Chairman. Mr. Norquist, I want to interject on one 
point Mr. Kelly raised. I am also very concerned that we are 
going to be so late in the fiscal year with a final 
appropriation. And the needs are so great that there is going 
to be inevitable problems as a result. And I am thinking about 
the audit. You are going to find things and you may not have, 
there may not be enough time to fix the things you find by the 
time the money is--so I think my staff has reached out to yours 
to work together to see about some greater flexibility in 
spending money after the end of the fiscal year.
    I think about our maintenance problems. They are enormous. 
And we do not want to waste money, but we also have got to get 
our ships and planes fixed.
    Secretary Norquist. Absolutely.
    The Chairman. And so I think this is an area--and there is 
a lot of concern in Congress about accountability for the money 
and, you know, I understand that. But I think this is an area 
where a number of us in Congress working with you and the 
Department can have a better--especially this year, because we 
are going to be so late. So I just want to mention that because 
you all were discussing it, even though it is a little 
different from the topic here.
    Mr. Panetta.
    Mr. Panetta. Thank you, Mr. Chairman.
    Mr. Norquist, thank you very much for being here, taking 
the time, your testimony. But also thank you for helping us do 
our job and giving the people, providing them with 
accountability, providing the accountability to the American 
taxpayer. I appreciate that. Obviously, you have a tremendous 
amount of experience in doing what you are doing, 28 years. You 
actually were the CFO. You audited the DHS [Department of 
Homeland Security].
    Secretary Norquist. Mm-hmm.
    Mr. Panetta. That is correct. In the 6 months that you have 
been in this position, what has been the biggest lesson you 
have learned so far? And do you foresee any other potential 
delays besides the worrying about budget stability and funding, 
as you mentioned in your last sentence, in your last paragraph 
of your statement. Is there any other delays that you foresee 
that will prevent you from doing your job?
    Secretary Norquist. Sir, I will tell you, the thing that 
surprised me the most was how many people who have been working 
this issue were eager for it to finally start. I have to tell 
you, for an accountant to be told to put together all these 
controls and all this stuff, and then say we are not doing the 
audit this year. And then each year you repeat that. You start 
to get to wondering, is it ever going to happen? So this built-
up sense of ``No, it is happening, it is happening this year, 
and everything that you have done up until now matters.'' The 
reaction I would get in rooms from the folks who have been 
working on this was really reenergizing, right. The sense of 
excellent, right. There have been a lot of folks wondering if 
they have been working in vain, but now the realization, No, 
everything that you did to get ready to get these pieces in 
place will matter and pay off. So I think that was a very 
pleasant surprise on moving forward.
    I think the biggest concern in the long run is going to be 
the systems because they take the longest to fix. Policies, 
procedures, even cultural changes we can do more quickly, but 
some of the system interfaces may take some more time. And so 
one of the things I would encourage the committee, as you go 
through each year's budget review, when somebody comes in and 
asks for money for a business system, make sure you understand, 
is it compliant? Have they prioritized the things related to 
the audit? Or have they sort of pushed those things down on 
their to-do list in place of something else?
    So often they do not give--I do not want to say they do not 
get much attention because I know there are staff who spend a 
tremendous amount of time on this, but they are not sexy or 
glamorous, but making sure that the funding for those and the 
things that are being done, the system is phased out, those are 
the ones that will take us some time. But I think they have 
some tremendous long-term improvements for the Department.
    Mr. Panetta. Great. Once again, thank you, and good luck.
    Secretary Norquist. Well, thank, you sir.
    Mr. Panetta. I yield back. Thank you, Mr. Chairman.
    The Chairman. Mr. Lamborn.
    Mr. Lamborn. Thank you, Mr. Chairman. Thank you for having 
this hearing. And Mr. Norquist, I apologize, I am probably 
going to be covering ground you have already covered. I was in 
another committee where we had a markup and I just got here 
now. But from the 30,000-foot level, I really like that the 
audit will result in more accountability and more transparency, 
but the other thing that I think would be accomplished, I think 
is real important, and I would like to get your thoughts, and 
that is, reform. Uncovering where maybe we do not have the best 
practices in place, where there might be waste or duplication.
    Can you reassure, not just the members of this committee, 
but by extension, the rest of our colleagues in Congress and 
the American taxpayers that you think that this audit will 
uncover where we are not spending money in the best way 
possible, so we can either lower the budget and accomplish the 
same thing or invest in more lethal capability for the DOD.
    Secretary Norquist. I think it is very essential in its 
contribution to reform. And I am very excited about the 
possibility and how it is going to reinforce reform. So Deputy 
Secretary Shanahan has got the lead for bringing business 
process reform to the Department. He set up organizations 
within the Department that are working on this issue. I support 
them through the audit by helping to make sure that they have 
the business data they need to make those reform decisions. So 
as you look across organizations and you are comparing what do 
we pay in electrical rates across all of our different 
facilities? Why? What are the highest ones, why are they paying 
a higher rate, and what is the difference? What are the lower? 
So instead of somebody saying, everyone, cut your number by 10 
percent, we focus on those places where the costs seem out of 
line with the rest of the enterprise.
    That type of financial data, the accuracy of that, being 
able to pull it from multiple systems and have confidence in it 
is what the audit gives you, and it is an enabler to reform. 
And so I am sure we will find within the financial processes by 
removing places where we have to rework data because the 
accuracy will allow it to go faster, savings. But I am more 
excited, in the long run, about what it allows the Department 
to do to function like a business.
    Mr. Lamborn. Thank you. And I know that chairman and my 
colleague on my left here and many others have really been 
pushing for greater effectiveness and efficiency in how the 
dollars are spent. We have that trust to the American taxpayer. 
So will the outcome be not just that we find, hopefully, these 
efficiencies, but it is done in a way that the American people 
know that we are finding these, and the entire Congress knows 
that we are finding these efficiencies?
    Secretary Norquist. Yes. So we will make sure, I mean, the 
financial statement is public, so what the auditors find and 
what they then announce is closed, meaning what they fixed, 
will be known. But I will also make a point of letting the 
committee know, here is how the reform has changed things, and 
here is the way that our businesses run differently.
    For some of them, like the working capital funds, they bill 
for their services so we can look at the rates they charge. Are 
they able to reduce their cost of operating because those are 
set up closer to a business-type function, and we will be able 
to use that there as well.
    Mr. Lamborn. Well, thank you for that. And I really 
appreciate it. The military of our country is held in the 
highest esteem by the American people. The only criticism that 
I will sometimes hear is, are we spending the dollars the most 
effective way. And people are concerned about that. So thank 
you so much for what you are doing.
    Mr. Chairman, I yield back.
    The Chairman. Mr. Veasey.
    Mr. Veasey. Thank you, Mr. Chairman. Mr. Norquist, I wanted 
to specifically ask you about just some of the issues that the 
outside auditors have that were brought in. Someone had asked 
the question a little bit earlier, but one of the reports that 
I read said that they, I guess, that they were having some 
challenges being able to make final conclusions. Can you talk 
about some of the issues that the outside auditors that were 
brought in had?
    Secretary Norquist. Okay. So is there a particular one that 
you are thinking about or you just want me to walk through the 
challenges they face in general?
    Mr. Veasey. Yes, just in general.
    Secretary Norquist. Okay. So the first challenge an auditor 
faces in general is--and this is true for government and 
commercial--they are required to be independent, which means 
the people showing up did not used to work for you, so they 
have got to understand your business processes. And, so, we 
have put together, in our different organizations, guides that 
welcome them and say, here is how we are structured. Here is 
what we do. When we spend money, the document looks like this, 
so they can start to recognize them, that they know what they 
are testing for the adequacy of.
    We have been doing the security clearances because a lot of 
them require security clearances to be able to do their work 
and get them through. A number of them are out doing site 
visits to get to understand what is going on at the different 
places. The Air Force auditor is at Tinker Air Force Base this 
week. The Navy auditor is at Naval Air Station Jacksonville and 
others in the fall to just see what the operations look like.
    So there is an orientation that they go through before they 
plan the audit to make sure that their audit is consistent, and 
then there are security clearances that we have been getting 
them through so they can start in a timely manner. Those are 
all some of the key pieces. There will be a challenge on the 
volume. You know, this is not just a large audit for us, it is 
a large audit for them, but they have all scaled up for that 
challenge.
    Mr. Veasey. What about training and sustaining a workforce 
to be able to work specifically on financial management, and 
what have you, within DOD? Like, what are some of challenges 
around that? Because I would think just being able to have a 
full-time staff, you know, work solely on this, because this is 
obviously a big issue, must be a challenge in and of itself.
    Secretary Norquist. It is. And we have had to realign folks 
internally to be able to provide the time and attention on this 
to support them. You know, these are some of the functions that 
over time when people took cuts, they sort of said, Well, I can 
reduce this, because it is not an audit and accountability. 
Some of those functions are being restored.
    When we are doing internal tradeoffs on that, we are 
basically operating underneath the reduction accounts that the 
legislation has put in place. But those are realigning forces 
within it. I will tell you that over time, what I likely come 
back to you with is shifting some of the work where we hired an 
outside firm as a consultant to something run by a Federal 
employee by trading off contracting dollars for Federal 
employer dollars, because we are going to need those 
capabilities in house.
    So in some cases, we hired the expertise and we may change 
the balance of that over time as we realize this function is 
going to stay, and we want to make sure a Federal employee is 
able to do that on a sustained basis.
    There still is always a use for skilled experts on the 
outside on particular topics, but you want to change that 
dependency over time.
    Mr. Veasey. Thank you. Mr. Chairman, I yield back.
    The Chairman. Mr. Conaway.
    Mr. Conaway. Thank you. Two other things real quick. The 
Department is constantly facing funding challenges, et cetera, 
et cetera. David, do you think you have got the right position 
or strength in position to be able to maintain and protect the 
funding to get all of this done? Because it is going to be 
setting priorities and trading these dollars that are going to 
be needed to get this done over time versus spending them 
somewhere else of importance within the Department.
    Do you think you have the right support from the Secretary 
and others to be able to make a cogent argument that you need 
these funds to continue the audits and continue the fixes?
    Secretary Norquist. I do. I have the full support of the 
Secretary and the Deputy Secretary. I will tell you at the 
President's budget level or the committee level, I am very 
comfortable. If you start talking about a CR that runs through 
the year, we are in a very different place, and that just 
creates challenges because of very tough tradeoffs across the 
Department. I will fight to protect this, but we have readiness 
issues and others that I would have to be paying attention to 
as well.
    Mr. Conaway. And at the BCA [Budget Control Act] levels 
would be disaster.
    Secretary Norquist. That would be a disaster.
    Mr. Conaway. Okay. And on the database of findings, there 
will be some findings that are more important than others.
    Secretary Norquist. Hmm-hmm.
    Mr. Conaway. So when it first comes out, just the scope of 
the number of findings will probably be startling. Will the CPA 
firms grade those findings as to ones that are, for lack of a 
better phrase, really critical or systemic versus ones that are 
easily fixed that should go away shortly? Is there going to be 
some sort of a grade there that would help bifurcate it into 
places so we could better understand just the sheer number?
    Secretary Norquist. So they will score it and weight it 
with terms like material deficiencies and others that relate to 
its size compared to the financial statement. That is not 
necessarily its importance to the Department in terms of 
fixing. They may decide that there is a cyber vulnerability 
that has very little dollar value that we think is a security 
issue that makes it one of the first things we fix, or we may 
see a change where the savings are there, and we want to do 
that fix first.
    So we will have their scores in terms of how they 
categorize it, but then we will need to prioritize, within the 
Department, which of these reforms are most important to get 
done to support the chief management officer to save the 
taxpayers money. And some of the later ones, even if they are 
large dollar values, like valuation of old military equipment, 
if we do not think that is data that people are going to use 
right away, we may wait on some of those reforms to prioritize 
the other things first.
    Mr. Conaway. So on the assignment of responsibility to fix, 
it will come with a timeframe that is rational and expected to 
be met?
    Secretary Norquist. Generally, I would expect the timeframe 
to come from the corrective action plan, where we will check, 
is this a reasonable timeframe? But some of these will take 
some period of time, but you can see the reductions and the 
conditions within it that will show you they are making 
progress.
    Mr. Conaway. Thank you. Mr. Chairman, I yield back.
    The Chairman. Mr. Langevin.
    Mr. Langevin. Thank you, Mr. Chairman.
    Mr. Norquist, thank you for your testimony and for the work 
that you are doing, and will continue to do. I think it is 
vitally important for the Department, and ultimately for the 
taxpayer, to make sure that we are spending dollars the way 
they should be spent, and we are getting the most for them. And 
this auditing function is something that I have had a 
longstanding interest in. And I remember years ago serving on 
the Intelligence Committee, and we had somebody from DOD there. 
And I asked the question, ``well, you know, what about the 
auditing function to make sure that we are spending dollars 
wisely?'' And it was then that I became aware that we do not do 
the auditing function.
    So, long overdue, and I'm glad we are finally getting to 
this point. So many of the questions I had have, for the most 
part, been addressed, but I did have one area I just wanted to 
delve into just a little deeper.
    And so while conducting an audit of this magnitude, I guess 
I want to know how you plan to deal with the significant 
complexities that it may present dealing with, for example, old 
contracts, or contracts for systems not designed with an audit 
in mind, or auditing, particularly, the classified portion of 
the budget. This is a particular area of interest that I would 
have, and where there is, you know, by design, there is not 
much transparency into black projects and programs for security 
reasons.
    How do you deal with those issues, and does guidance for 
new contracts provide for the eventuality of an audit? So if 
you can take those on.
    Secretary Norquist. Sure. So there are a couple of pieces. 
So the first one you bring up is in contracts. And there are 
some issues where in order to, for example, property value, 
military equipment, we need the contractor to give us their 
invoices set up a certain way so we can see the pieces that are 
included. Older contracts do not have that. So you look at 
which ones do you modify, which ones do you build on, and are 
there some places where you do an alternate way of valuing that 
equipment. There is different methodologies you can do to do 
valuation. And you try and decide from an accuracy and a 
taxpayer point of view, what is the best use of taxpayer money, 
how do we do that most efficiently?
    Some equipment, if you think it is going to go out of 
inventory, you might decide I am not going to spend a lot of 
energy on it over the next couple of years. It will not be here 
anymore. So that is not as essential, it is not a highest 
priority.
    With regard to systems, I think you have to look at each 
system and ask the question, Can I fix it to do what we need it 
to do through a software patch or upgrade? Can I replace it by 
moving its work to something else? Or do I have to work around 
it in some sort of manual form until that system is eventually 
retired and a follow-on? Each of the services, each of the 
organizations is going through that.
    Defense DAI [Defense Agencies Initiative] is the name of an 
accounting system that has been implemented across 20 defense-
wide organizations. So in that case, the answer was just turn 
them all off. We are just going across the defense-wide 
entities and we are just turning off and replacing those. In 
the services, there is a lot more of consolidating. They are 
going from several accounting systems down to fewer that are 
compliant and support an opinion.
    With regard to the classified, I may need to talk to you 
offline about how we handle that. I would just assure you a 
couple things: One is, classified programs are included in the 
audit. We have cleared auditors and cleared IGs and others who 
can do this. And as you mentioned, from the intelligence 
community, they always see standalone opinions, and so they 
actually have been under audit for 3 years now. And I have been 
meeting with them, getting an update on their lessons learned 
and their issues and how they have been progressing. But those 
are published on a classified form, and the Members of Congress 
are entitled to look at those.
    Mr. Langevin. And for the classified programs going 
forward, will those all be in-house auditors, and not outside 
contractors?
    Secretary Norquist. Can I address all of those in a 
different format? At a certain point, I am going to run into 
classification concerns, so let me just assure you that they 
are included, and then we can talk about the mechanics of it in 
a different way.
    Mr. Langevin. Sure. I would like to do that. Very good. 
Well, thank you very much for the work you are doing.
    With that, Mr. Chairman, I yield back.
    The Chairman. Mr. McEachin.
    Mr. McEachin. Thank you, Mr. Chairman, and thank you, Mr. 
Norquist, for being here.
    It is my understanding that the Army, Navy, Air Force, 
Defense Health Programs, Defense Logistics Agency, U.S. Special 
Operations Command, and Transportation Command still have not 
received a clean audit opinion from the DOD IG. Can you talk 
about how you approach auditing these divisions of DOD over the 
course of fiscal year 2018 in doing the audit process?
    Secretary Norquist. Sure. As you pointed out, there are 
some that have and then there is a series that have not. Some 
of those like DLA [Defense Logistics Agency] have begun the 
audit. So DLA was under audit this previous year in fiscal year 
2017, as was--DISA [Defense Information Systems Agency] was 
under audit in 2016, and the U.S. Marine Corps went under audit 
this year for the first time in 2017.
    So some of them have a year or two of experience. The Army, 
Navy, and Air Force, what they are doing is they are splitting 
their audits into two parts. They basically have a section of 
the Army that is funded through what are called general funds, 
meaning appropriations directly from Congress. And another that 
is what is called working capital fund, meaning it bills for 
its services so it looks more like a company.
    These have different accounting systems. And so while the 
same auditor does both, they have split the opinion into two 
parts, because the way they function is different. But that 
will also allow us to see the progress within each of those 
organizations. So that split occurs in the Army, the Navy, and 
the Air Force. The other ones, most of them get standalones. If 
they are too small, they will be covered by the IG rather than 
get a standalone opinion. They will all be rolled together by 
the IG to give an opinion on the Department as a whole.
    Mr. McEachin. Thank you, Mr. Chairman. I yield back.
    The Chairman. Mr. Norquist, you referenced this earlier but 
I want to ask again. In these efforts, do you have the support 
of the Secretary of Defense and the Deputy Secretary? Because 
what you have talked about is cultural change, it is 
prioritizing dollars, it involves a number of things that, if 
they are not supported by the top leadership, are not going to 
happen.
    Secretary Norquist. Absolutely. The tone from the top is 
excellent.
    The Chairman. Well, the first conversation I had with the 
Secretary after he was nominated to be Secretary, he brought 
this up on his own. So my experience with him is that he 
believes this is very important, and I just think it is, you 
have got to have that support from him to make this successful, 
I think.
    You good? Mr. Conaway.
    Mr. Conaway. I just want to brag on the chairman for having 
the very first hearing of calendar 2018 on this issue, and 
highlight that. And I appreciate your keen continued support 
for getting this done. And that tone from the top that you set 
is much appreciated. So I yield back.
    The Chairman. Well, I appreciate it, but I think all 
members, as I said at the beginning, this has been a bipartisan 
priority for years, and we are going to stand there right with 
you, Mr. Norquist, to make sure it actually occurs.
    Secretary Norquist. Thank you, Mr. Chairman.
    The Chairman. With that, the hearing is adjourned.
    [Whereupon, at 11:34 a.m., the committee was adjourned.]

      
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                            A P P E N D I X

                            January 10, 2018

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                            January 10, 2018

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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                            January 10, 2018

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                  QUESTIONS SUBMITTED BY MR. LANGEVIN

    Mr. Langevin. While conducting an audit of this magnitude, how do 
you plan to deal with the significant complexities it may present--for 
example, contracts and systems not designed with an audit in mind, or 
auditing the classified portion of the budget? Does guidance for new 
contracts provide for the eventuality of an audit?
    Secretary Norquist. The consolidated Department of Defense (DOD or 
Department) audit will likely be one of the largest audits ever 
undertaken. The Department has been working for many years to 
appropriately plan for this audit. To prepare for the significant 
complexities that come with an audit of this size, DOD has specifically 
focused on:
    a) Breaking the audit down into manageable pieces: To help manage 
the audit of a large-scale organization with operations around the 
world, the Department's audit will be divided into more than 24 stand-
alone audits of major components, and an overarching consolidated 
audit. This structure will allow larger DOD components to directly 
manage their individual stand-alone audits, and will allow the DOD's 
consolidated auditor to rely on the work performed by stand-alone 
auditors. Given the large number of audit requests and the complexities 
and findings expected during the initial audits, distributing and 
tracking the responsibility to respond to all of these items across the 
individual stand-alone audits are critical to success. Utilizing a pool 
of qualified independent public accounting firms to perform the various 
stand-alone audits also fosters competition, driving down audit costs 
for the Department and preserving auditor independence restrictions.
    b) Establishing an infrastructure to support the audit: The 
Department has put people, processes, and systems in place to directly 
support the audit. Furthermore, this infrastructure includes protocols 
for ensuring classified programs are also subject to audit, while 
maintaining appropriate safeguards over our classified information. My 
staff will reach out to yours to arrange a secure meeting to discuss 
the details on how our classified programs will be audited. In recent 
years, the Military Services and select defense agencies have undergone 
limited-scope financial audits or examinations that tested this 
infrastructure and provided feedback on areas for improvement. DOD will 
only be able to take full advantage of the audit by having adequate 
audit infrastructure in place.
    c) Leveraging audit results to drive necessary changes to our 
contracts, systems and processes: To take full advantage of the 
independent auditor feedback, the Department has established a tool and 
a process to capture, prioritize, assign responsibility for, and 
develop corrective actions to address audit findings. This tool and 
process will allow leaders to track and demonstrate progress 
implementing fixes that respond to auditor findings while improving 
management and data for the Department. For example, the Department is 
using auditor feedback to explore methods for standardizing the 
structure of future contracts to facilitate greater accountability over 
equipment in the possession of contractors and accounting for the value 
of our property and inventory.
                                 ______
                                 
                   QUESTIONS SUBMITTED BY MR. CONAWAY
    Mr. Conaway. Section 803 of the fiscal year 2018 NDAA authorizes 
the Secretary of Defense to use qualified private audit companies, as 
opposed to the Defense Contract Audit Agency, for performance of 
certain incurred cost audits. a) Do you see value to this approach? b) 
How does leveraging qualified private entities to conduct the incurred 
cost audits of defense contractors support the Department of Defense's 
vision of an audit? c) Please provide an update on how the Department 
is implementing section 803 of the fiscal year 2018 NDAA.
    Secretary Norquist. a) Do you see value to this approach? I do see 
value in the Congressional approach and DCAA is committed to executing 
the Congressional intent to establish private sector audit capacity for 
the performance of incurred cost audits. Although DCAA already had 
processes in place to eliminate the incurred cost backlog, this 
provision will also allow DCAA to draw on this private audit capacity 
if they experience a surge in audit requirements to avoid future 
backlogs. DCAA will be able to accomplish its high risk more complex 
effort supporting the contracting community. The Department will 
monitor its cost/benefit to ensure the expected value is received.
    b) How does leveraging qualified private entities to conduct the 
incurred cost audits of defense contractors support the Department of 
Defense's vision of an audit? The objectives are different between the 
DOD financial audits and the DCAA contract audits. In addition to 
evaluating the DOD financial statements, the financial audits look at 
DOD systems and processes to ensure that we have reliable financial 
information to use for decision-making. Contract audits evaluate DOD 
contractor books and records to ensure the Department is paying fair 
and reasonable prices for its goods and services. The DOD incurred cost 
audit does indirectly support the financial audit as it facilitates 
more timely and effective contract closeout that supports the 
Department's financial statement audit. As stated above, by leveraging 
the qualified private auditors, DCAA will maintain currency on its 
incurred cost audit requirements facilitating more timely contract 
close-out and reduce expiring funds.
    c) Please provide an update on how the Department is implementing 
section 803 of the fiscal year 2018 NDAA. The Department is currently 
developing a plan to include qualified private auditors in the incurred 
cost audit process to maintain an appropriate mix of Government and 
private sector capacity to eliminate any backlog of incurred cost 
audits and remain current. The plan to implement Section 803 also 
includes DCAA coordinating with DCMA and the services to develop a 
comprehensive plan for executing the Section 803 requirements and the 
identification of additional resources needed for the development of an 
infrastructure to support the use of qualified private auditors. DCAA 
has already provided initial guidance to its staff on the one-year 
requirement for completing its incurred cost audits and the 60-day 
requirement for completing its adequacy review of the incurred cost 
proposals
    Mr. Conaway. The fiscal year 2017 House Armed Services Committee 
NDAA Report called on the Department of Defense to ``leverage greater 
certified public accountant experience and Federal financial management 
experience'' for follow-on contract awards supporting ``implementation, 
operation, and full utilization'' of Enterprise Resource Planning 
(``ERP'') systems with the Army, Navy, and Air Force. This remains an 
important area of focus with the emphasis on audit reform. a) Can you 
comment on this approach and on the advantages of the federal 
government leveraging contractors who are certified public accountants? 
b) Are there particular advantages in using auditors with federal 
financial management experience?
    Secretary Norquist. a) Leveraging greater certified public 
accountant experience and federal financial management experience to 
support the success of ERP implementation and operations is important 
to the Department of Defense. Because sustainable audit success 
depends, to a great extent, on compliant auditable business feeder and 
financial systems, having experienced contractor support versed in 
federal accounting and audit standards will enable the Department to 
have better insight into ERP performance, gaps in compliance, and root-
cause analysis. This, combined with independent auditor feedback on the 
systems' compliance, means that the Department can respond to audit 
findings that much more quickly and adroitly.
    b) There are advantages in using auditors with federal financial 
management experience to perform the Department's financial statement 
audit. Federal agencies must follow accounting standards, promulgated 
by the Federal Accounting Standards Advisory Board, that are specific 
to the federal government. Additionally, the Office of Management and 
Budget prescribes the form and content of federal financial statements, 
which are different from both commercial and state and local reporting 
formats. Also, auditors performing federal financial statement audits 
must comply with Generally Accepted Government Auditing Standards 
issued by the Government Accountability Office. Experience with these 
federal-specific requirements allows auditors to better identify 
findings and to provide best-practice based recommendations based on 
their prior experience working with federal agencies.

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