[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)

                                                                 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 
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.

                          ____________________