Congressional Record, Volume 140 Issue 51 (Tuesday, May 3, 1994)

[Congressional Record Volume 140, Number 51 (Tuesday, May 3, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

DOD FINANCIAL CRISIS

Mr. GRASSLEY. Madam President, there is a continuing and a dangerous
crisis in financial management at the Department of Defense [DOD] and
someone needs to be held accountable for what's going on.
The financial mess at the Pentagon was the subject of an excellent
hearing before Senator Glenn's Governmental Affairs Committee on April
12, 1994.
The testimony and discussion were devastating.
I would like to briefly review what was said at the hearing and then
followup on the need for accountability.
The worst problem addressed at the hearing were unmatched
disbursements.
The easiest way to understand unmatched disbursements is to compare
them to something the average American does every day like handling a
credit card account.
If we just go ahead and pay the amount shown in the box ``total due''
on our monthly statements without ever checking the items listed
against our customer slips, we have something like DOD unmatched
disbursements.
If the matches are not made each month--and this becomes common
knowledge like at DOD, then our credit card account could become
vulnerable to fraudulent or erroneous charges by a crooked merchant.
The same thing is going on at DOD but on a massive scale.
The GAO says that DOD has at least $41 billion of unmatched
disbursements; $41 billion in unmatched disbursements means millions
and millions of DOD checks have not or cannot be linked to supporting
documentation and contracts.
Comptroller General Bowsher and Deputy DOD IG Vander Schaaf confirm
one simple fact: If a check is not matched with an obligation, we do
not know what happened to the money.
Unmatched disbursements leave accounts vulnerable to theft and abuse.
We know some of DOD's unmatched payments are legitimate. But some
were fraudulent.
We had the case of Mr. James Lugas at Reese Air Force Base, TX, last
year, and the case of Mr. James McGill at the Navy's Military Sealift
Command this year.
Lugas and McGill were able to rip into the taxpayer's pockets
undetected to the tune of $5,119,989.49. These payments could not be
matched with anything.
In both cases, the money was stolen from DBOF--the Defense Business
Operations Fund.
Both Lugas and McGill were caught by chance and not because of
effective internal financial controls.
We do not know how many others, like Lugas and McGill, have tapped
into the DOD money pipe undetected.
We also know that unmatched disbursements produce duplicate and
erroneous payments.
Mr. Bowsher testified that DOD made about $1.5 billion in
overpayments to contractors in fiscal year 1993 and that the
overpayments are continuing.
Again, these erroneous payments were not detected because of
effective internal controls. There were detected when the contractors
voluntarily returned the money.
How many overpayments were not returned? DOD does not know.
To make matters worse, DFAS--the Defense Finance and Accounting
Service--the organization in charge of the DOD check writing operation,
appears to condone and coverup overpayments.
DFAS wants to avoid the administrative headache and embarrassment of
processing returned checks.
Instead of recovering overpayments, DFAS is telling the
contractors: just hold on to the money and work off the overpayment
down the road against unspecified future work.

So, DFAS is making unauthorized interest-free loans to the defense
industry.
Senator Glenn said and I quote:

This would, in effect, give the company a loan, no
interest, no nothing; just keep the money and use it for your
own investment for a while if you want to.''

DOD could be sitting on billions of dollars of fraudulent and
erroneous payments. We will not know how bad it is until all payments
are properly matched.
This is a very dangerous mess, Madam President. I think it stinks.
Mr. Bowsher, keeps saying:

* * * the breakdown of financial control and discipline in
accounting for taxpayers' dollars at DOD is inexcusable and
must not be tolerated.

Responsible officials must be held accountable and disciplined for
what has happened. Gross, continuing financial mismanagement must have
consequences.
As I told the committee on April 12, accountability is not on the
way. Rather, rewards for business as usual are being dished out.
I have here a DOD memo dated March 9, 1994, signed by D.O. Cooke,
Director of Administration and Management. I ask unanimous consent that
it be printed in the Record.
There being no objection, the letter was ordered to be printed in the
Record, as follows:

[From the Office of the Secretary of Defense, Washington, DC, Mar. 9,
1994]

Memorandum on 1993 Senior Executive Service Presidential Rank Awards

An original and integral part of the Senior Executive
Service (SES) established by the Civil Services Reform Act of
1978, the Presidential rank awards are the most significant
means of recognizing contributions by Federal career senior
executives. Each year the President can confer the rank of
Distinguished Executive on not more than one percent of the
SES and the rank of Meritorious Executive on not more than
five percent of the SES.
The Distinguished Executive rank and $20,000 were presented
to the following career executives in the Office of the
Secretary of Defense (OSD) and the Defense Agencies for 1993:
Kenneth Bruce Boheim, Defense Information Systems Agency;
James D. Carlson, Ballistic Missile Defense Organization;
Gary L. Denman, Advanced Research Projects Agency; L. Paul
Dube, Office of the Comptroller; Frank Kendall, Office of the
Under Secretary of Defense for Acquisition; and Homer Diehl
McKalip, office of the Under Secretary of Defense (Policy).
Following is a list of career executives in OSD, the
Defense Agencies, and the Office of the Inspector General who
were awarded the Meritorious Executive rank award and $10,000
for 1993:
Alan J. Andereoni, Defense Medical Programs Activity;
Glenwood E. Bradley, Defense Information Systems Agency;
Carolyn A. Carmack, Office of the Comptroller; Nathaniel M.
Cavallini, Office of the Assistant Secretary of Defense
(Command, Control, Communications, and Intelligence); Jeremy
C. Clark, Office of the Assistant Secretary of Defense
(Command, Control, Communications, and Intelligence); Carol
Frick Covey, Office of the Under Secretary of Defense for
Acquisition; Sheila G. Dryden, Office of the Assistant
Secretary of Defense (Command, Control, Communications, and
Intelligence); Arthur H. Ehlers, Jr., Office of the Director,
Administration and Management; Thomas E. Ewald, Defense
Investigative Service; Douglas B. Hansen, Office of the Under
Secretary of Defense for Acquisition; Richard G. Howe, Office
of the Assistant Secretary of Defense (Command, Control,
Communications and Intelligence); Clyde E. Jeffcoat, Defense
Information Systems Agency; Edward R. Jones, Office of the
Inspector General; Lorraine F. Lechner, Defense Finance and
Accounting Services; Belkis Leong-Hong, Defense Information
Systems Agency; David L. McNicol, Office of the Director,
Program Analysis and Evaluation; Patrick J. Meehan, Jr.,
Office of the Under Secretary of Defense for Acquisition;
John S. Nabil, Defense Finance and Accounting Service; Earl
W. Phillips, Defense Mapping Agency; John P. Springett,
Defense Finance and Accounting Service; Frank A. Tapparo,
Office of the Director, Program Analysis and Evaluation; and
Charles C. Wilson, Jr., Office of the Under Secretary of
Defense (Policy).
D.O. Cooke,
Director.

Mr. GRASSLEY. The memo announces the recipients of the 1993
Presidential Rank Awards.
Four recipients of the award and $10,000 cash bonuses are senior
officials of the Defense Finance and Accounting Service or DFAS as
follows: John P. Springett, DFAS Director; Lorraine F. Lechner, DFAS
Deputy Director; John S. Nabil, Director, Denver Center; and Clyde E.
Jeffcoat, Director, Denver Center, 1991-92.
The Defense Finance and Accounting Service is directly responsible
for many of the problems that were the focus of the April 12 hearing.
All four officials have held top management positions at DFAS since
day one--November 26, 1990--the day DFAS was created.
Mr. Springett--first as Principal Deputy Director then as Director;
Ms. Lechner as Deputy Director for Resource Management and Chief
Financial Officer; and Mr. Nabil and Jeffcoat as Directors of major
financial centers at Kansas City and Denver.
Three of the four continue to occupy top positions today. They run
the show. They are in charge. They are accountable.
Mr. Jeffcoat has retired, but he ran the Denver Center when $649.1
million in M account money was used to plug a gaping hole in Air Force
accounting records to make the books balance.
These rewards send the wrong signal to the rest of the financial
management community.
We say that fixing the problem is a top priority. Yet we reward the
big wheels at the top who are responsible for the mess--who conduct
business as usual--who do nothing more than write ``cover-your-fanny''
memos while the accounting system lies in shambles at their feet.
At the April 12 hearing, I recommended that: ``responsible officials
should be identified and removed from office; and that the Presidential
awards be reviewed and reconsidered.''
Mr. Hamre was very disappointed in my remarks. The next day he wrote
me a letter, defending the three DFAS officials.
I ask unanimous consent that this letter be printed in the Record.
There being no objection, the letter was ordered to be printed in the
Record, as follows:

Comptroller of the

Department of Defense,

Washington, DC, April 13, 1994.
Hon. Charles E. Grassley,
U.S. Senate, Washington, DC.
Dear Senator Grassley: I am writing as a follow up to
yesterday's hearing before Senator Glenn on the issue of
financial management reform in the Department of Defense. I
am sorry I was not able to be at the hearing at the time you
testified. Conflicts in schedule precluded me from arriving
until about 10:30.
When I arrived I learned something that bothered me. I
learned that in your statement you criticized four
individuals, three of whom worked at the Defense Finance and
Accounting Service, for receiving awards when we have been
having so many problems in the financial management area.
From the tone of the comments I received, it appears people
concluded that we have rewarded these individuals for poor
behavior when we should have disciplined them or fired them.
I take responsibility for this serious misunderstanding.
These three individuals continue to work in DFAS and received
the awards just last year. I was not here at the time they
were nominated for their awards, but had I been here I would
have nominated them myself. These individuals were rewarded
for their efforts during the past year, not because of the
problems but because they have been leading the fight to
overcome the 40-year old problems they inherited.
The case of the fellow who fraudulently billed $3 million
to the Military Sealift Command is a good case in point. That
case predated the creation of the Defense Finance and
Accounting Service. Even before he learned of the case, John
Springett initiated a tightening of the internal controls in
the various centers. After the case was revealed, he added
new procedures to try to avoid similar occurances in other
centers. I have enclosed some memoranda he authored as
evidence of his efforts.
These individuals were rewarded for leading the fight to
correct our problems, not for their work in causing the
problems. Like me, they recently moved into these positions
of responsibility, and their heroic efforts in these jobs led
us to recommend them for bonuses. That is precisely what we
should be doint--rewarding the courageous civil servants who
are working overtime to correct the systemic problems we all
inherited.
May I ask of you a favor? I would like to get on your
calendar and bring over these three individuals and have them
brief you on the actions that they have taken during the past
two years to correct some of our most serious problems. I
invite you to judge them at that point, but I am convinced
you will conclude as I have that these three people do indeed
deserve commendation for their efforts. I will call Charlie
Murphy soon to arrange for that meeting.
Sincerely,
John J. Hamre.
Enclosures.

[From the Defense Finance and Accounting Service, Arlington, VA, Oct.
28, 1993]

Memorandum for Center Directors, Defense Finance and
Accounting Service.
Subject: Finance and Accounting Operational Review Program.
Finance and accounting activities have always been
associated with high levels of risk. Turmoil in the workplace
resulting from the defense drawdown and base realignment and
closure activities has increased the challenge of managing
this risk. Our traditional role as custodians of the public
trust demands that we be certain we are managing our risk as
effectively as possible.
The Defense Finance and Accounting Service assumed a higher
level of risk as a result of the capitalization and
consolidation of finance and accounting functions. Confidence
in the effectiveness of programs assimilated by
capitalization must be improved as soon as possible.
Acceptable confidence levels can best be assured by the
consistent application throughout DFAS of a clearly defined
operational review program.
Recent instances of reported fraud serve to remind us that
we must be constantly vigilant to any compromise and quick to
apply well formulated corrective action. It is imperative we
begin this important work immediately. We must be able to
thoroughly demonstrate continuous verification of the
integrity of our operations at all levels--including the
lowest operating levels. The work we recently undertook
together through the Corporate Management Advisory Board to
develop a comprehensive and consistent finance and accounting
quality assurance program for DFAS was the first step in
achieving appropriate confidence levels in this vital area.
The next step is to implement the embedded program portion
of the operational review program beginning December 1, 1993.
The following implementing instructions are provided to
ensure program consistency throughout DFAS:
Defense Accounting Offices. Reviews of all finance and/or
accounting functions within the Defense Accounting Office
(DAO) will be performed once every 12 months at a minimum.
Each Defense Accounting Officer will prepare an annual review
plan, with a copy provided to their Center management support
activity. Reviews will be conducted by personnel who are not
directly associated with the function itself. The reviews
will include all operations to support the function, to
include validation and testing of internal controls. Each
review will be completed with a written report to the Defense
Accounting Officer, to include recommendations for
improvements for identified deficiencies. DAOs will
provide a quarterly status report on their review plan
progress to their Center management support activity; this
report may be incorporated into current quarterly
reporting requirements.
Centers. Reviews of all finance and/or accounting
functional operations, to include the office which provides
liaison support between DAOs and DFAS-CO, will be performed
once every 12 months at a minimum. Each operating director
will submit to the Center Director an annual review plan
which schedules the review of each process or group of
processes, to include validation and testing of internal
controls. Reviews will be conducted by personnel who are not
directly associated with the daily management of the process
or group of processes. A written report of each review will
be provided to the operational Director. The report will
include recommendations for corrective actions or
improvements. The operating directors will provide to the
Center Director a quarterly status report on their review
plan progress. Coordination of Center operation reviews with
the Center Internal Review program manager is essential to
ensure no duplication.
I am confident you will take the necessary proactive steps
to ensure the timely completion of the milestones established
in your implementation plans. Attached for your information
is a summary by Center of the not to exceed approved additive
resources.
I have tasked the Deputy Director for Customer Service and
Performance Assessment to monitor our progress in this
essential program area.
John P. Springett,
Director.
Attachment.

Summary of Additive Resource Requirements Operational Review Program
(Embedded)

Not to
exceed
Kansas City..........................................................29
Denver................................................................2
Columbus.............................................................10
Indianapolis......................................................\1\ 0
Cleveland.............................................................0
________

Total..............................................................41
\1\ Note for DFAS-IN: Increment for DFAS-IN is included in FY 1993
capitalization agreement with Army.
____

[From the Defense Finance and Accounting Service, Arlington, VA, Mar.
14, 1994]

Memorandum for Center Directors, Defense Finance and
Accounting Service.
Subject: Finance and Accounting Independent Operational
Review Program.
On October 28, 1993, the Defense Finance and Accounting
Service initiated the embedded Operational Review Program,
the initial step to address the high level of risk inherent
in the finance and accounting business area. Each of you took
immediate action to make this a viable and effective program.
To further amplify our responsibilities in the reduction of
fraud, waste, and abuse in daily operations, DFAS will now
implement the independent phase of the Operational Review
Program. The independent Operational Review Program will be
functionally independent of operations (an honest broker) and
will have the authority, responsibility, and technical
expertise to conduct reviews both externally (Defense
Accounting Office network) and internally (Center finance
and/or accounting operations) under the direct staff control
of the Center Director.
The effective date for the independent review program is
March 1, 1994. The following implementing instructions are
provided to ensure program consistency throughout DFAS:
DFAS Headquarters. Program management for the Operational
Review Program is the responsibility of the Deputy Director
for Customer Service and Performance Assessment (DFAS-HQ/P).
Policies and procedures for independent reviews of functional
operations, review criteria and techniques, and program
progress oversight will be developed and published by HQ/P.
The Operational Review and Management Directorate (HQ/PF)
will provide direct oversight for your progress in program
implementation.
DFAS Centers. Independent review of all DAOs will be
performed at least once every 18 months. Each Center finance
and/or accounting functional operations will be independently
reviewed at least once every 24 months. Each Center Director
will ensure an annual review plan is developed, approved, and
provided to DFAS-HQ/P not later than June of the prior fiscal
year. Reviews will be conducted by personnel who are not
associated with the daily management of the DAO or function
scheduled for review. The reviews will include either all of
the operations within the DAO or Center functional
operations, or any selected group of operations as determined
by the Center's independent review program manager or team
leader. The reviews will include validation and testing of
internal controls. In most cases, reviews will be
completed in one week, depending on size and complexity of
the activity scheduled for review. The team leader will
conduct an exit briefing with the appropriate line
manager(s) highlighting positive recognition for
commendable actions as well as deficiencies which require
corrective action. A written report to the line manager
will be completed within seven calendar days after
completion of the review. Reports which identify
deficiencies will require a response from the line manager
with a plan of corrective action; responses must be
completed within 30 days after receipt of the review
report. Center independent review program managers are
responsible for reporting to the Center Director at least
quarterly on the program results; some situations may
require immediate reporting.
I am confident you will take the necessary proactive steps
to ensure timely planning and development of milestones for
this portion of the operational review program. The
Operational Review and Measurement Directorate will contact
you within a few days to initiate the planning process. As
before, the Deputy Director for Customer Service and
Performance Assessment will monitor our progress in this
essential program area.
John P. Springett,
Director.
Attachment.

Summary of Additive Resource Requirements Operational Review Program

Independent Program

Not to
exceed
Kansas City...........................................................4
Denver................................................................0
Columbus..............................................................0
Indianapolis..........................................................0
Cleveland.............................................................4
________

Total...............................................................8

Embedded Program

(Previously approved by Director on Oct. 28, 1993)

Total..............................................................41

\1\ Note for DFAS-IN: Increment for DFAS-IN is included in FY 1993
agreement with Army.

Attachment.

Independent Operational Review Program Concept

Independent review DAO/Center Operations: Center Directors
responsible for implementation, program managers at each
center orchestrate program under the direct staff control of
the Center Director.
Establish an annual plan.
Team leaders/members from DAOs for DAO reviews--ad hoc.
Team Leaders/members from each center for center reviews--
also ad hoc.
Frequency of reviews: At least once every 18 months,
reviews generally completed in 1 week.
Reporting:
Verbal report provided at exit briefing.
Formal written report issued within 7 calendar days to DAO/
line manager of center functions (activity reviewed).
Formal reply by DAO/line manager required on all findings.
Reply submitted to the center independent program manager
from DAOs through network management channels, or directly
from line managers for center functions, within 30 calendar
days after receiving written report.
Program manager provides monthly update to center director;
sooner if situations dictate.
DFAS--headquarters monitors program progress.
Mr. GRASSLEY. In a nutshell, this is what Mr. Hamre said: ``They have
been leading the fight to overcome the 40-year-old problems they
inherited * * * Like me, they recently moved into these positions of
responsibility, and their heroic efforts in these jobs led us to
recommend them for bonuses.''
Madam President, I do not agree with Mr. Hamre's assessment.
Mr. Hamre's position is based on the assumption that Mr. Springett
and company are helping him fix the problem. I would like to try to put
Mr. Hamre's belief in better perspective.
DFAS was created in November 1990. It was one of the famous DMR or
Defense Management Report initiatives.
To that extent, it was the brainchild of the late Mr. Donald J.
Atwood, who was Deputy Secretary of Defense at the time.
I have a document signed by Mr. Atwood. It is dated April 14, 1992.
In this document, Mr. Atwood outlines DFAS's million.
One of DFAS's most important jobs, according to Mr. Atwood, was to
eliminate unmatched disbursements.
I would like to quote from pages 6 and 12 of the April 1992 document
signed by Mr. Atwood:

On October 24, 1991, guidance was issued requiring the DOD
Components, under the leadership of the Defense Finance and
Accounting Service, to develop a plan for eliminating
unmatched disbursements. The Components were requested to
identify future actions that will preclude unmatched
disbursements in the future. The Defense Finance and
Accounting Service is tasked with implementing those plans
and actions.

That order went out in October 1991.
Mr. Springett and company held senior management posts at DFAS in
October 1991.
The DMR, Mr. Atwood, and the Comptroller all told Springett and
company to get on the stick; clean up the mess; and eliminate unmatched
disbursements.
They have had plenty of time--several years--but did nothing.
Today's $41 billion in unmatched disbursements is monument to Mr.
Springett's do-nothingness. Under the leadership of Mr. Springett and
company, the unmatched disbursements have continued to pile up.
I cannot help but wonder what Mr. Springett and company said to the
last Comptroller when he ordered them to get rid of unmatched
disbursements. I can just imagine. It may have gone something like
this: ``Yea boss, don't worry, we'll help you fix it. Consider it
done.''
However, a series of recent IG and GAO audit reports suggest things
are still getting worse--not better.
I am told, for example, that disbursements are not being forced into
the wrong accounts just to get the numbers down.
I think Mr. Springett and company are accountable. Heads must roll.
All the participants at the April 12 hearing thought someone should
be held accountable.
Senator Glenn said: ``Somebody must be held accountable on this.''
Senator Dorgan asked: ``Who is really responsible for allowing things
to happen that first-year accounting students would understand are
fundamentally wrong?''
Mr. Bowsher and Mr. Vander Schaaf were helpful in pinpointing
responsibility.
Mr. Bowsher said: ``I think accountability should start at the top
and that this committee ought to hold senior financial people at DOD
responsible * * * It is the people in charge of these accounting and
finance centers.''
Mr. Vander Schaaf was more specific. He said: ``It is not the GS-5
accounting clerk. It is further up the line,'' and I ``certainly don't
walk away from'' Senator Grassley's recommendations. ``I think that
people in the finance and accounting business should be held
accountable.'' That is Mr. Vander Schaaf talking.
I think Mr. Bowsher and Vander Schaaf are trying to tell us
something. I think they are telling us that Mr. Springett and company
are responsible. There may be others, too.
If they are not responsible, who is?
Madam President, Mr. Bowsher offered to help us determine more
precisely where accountability lies. This is what he said: ``This
committee could easily ask the leadership of the Defense Department who
are the responsible people at the key points, and we could go out and
review that for you.''
Madam President, I would like to call on Senator Glenn and the
committee to take Mr. Bowsher up on his offer.
Responsible officials need to be identified and removed from office.
Without accountability, nothing else Congress does will count for
much.
Mr. MURKOWSKI addressed the Chair.
The PRESIDING OFFICER. The Senator from Alaska [Mr. Murkowski] is
recognized for 15 minutes.

____________________