Financial Management: Analysis of DOD's First Biennial Financial
Management Improvement Plan (Letter Report, 01/29/99, GAO/AIMD-99-44).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) Biennial Financial Management Improvement Plan to
determine whether: (1) the concept of operations included the critical
elements necessary for producing sustainable financial management
improvement over the long term; (2) the transition plan provided a
strategic-level road map from the current environment to DOD's planned
future financial management environment; and (3) the implementation of
the department's future financial management environment is practical,
cost-effective, and feasible.

GAO noted that: (1) in developing this overall concept of its envisioned
financial management environment, the DOD has taken an important first
step in improving its financial management operations; (2) the
department's Biennial Plan also represents a significant landmark
because it includes, for the first time, a discussion of the importance
of the programmatic functions of personnel, acquisition, property
management, and inventory management to the department's ability to
support consistent, accurate information flows to all information users;
(3) in addition, DOD's Biennial Plan includes an impressive array of
initiatives intended to move the department from its current state to
its envisioned financial management environment; (4) while the
initiatives discussed should result in some improvements in DOD's
financial management operations, the department's Biennial Plan lacks
critical elements necessary for producing sustainable financial
management improvement over the long term; (5) specifically, the Plan's
discussion of how DOD's financial management operations will work in the
future--its concept of operations--does not address: (a) how its
financial management operations will effectively support not only
financial reporting but also asset accountability and control; and (b)
budget formulation; (6) in addition, the transition plan, while an
ambitious statement of DOD's planned improvement efforts, has two
critical flaws: (a) links are not provided between the envisioned future
operations and the over 200 planned improvement initiatives to determine
whether the proposed transition will result in the target financial
management environment; and (b) actions to ensure feeder systems' data
integrity are not addressed--an acknowledged major deficiency in the
current environment; (7) without identifying specific actions that will
ensure feeder system data integrity, it is unclear whether the
department will be able to effectively carry out not only its financial
reporting, but also its other financial management responsibilities; (8)
additional detailed information would be necessary to determine whether
implementation of the department's future financial management
environment is practical, cost-effective, and feasible; (9) such details
are appropriately not included in the strategic financial management
improvement plan that DOD was asked to provide; and (10) DOD officials
have stated that they recognize that additional information will be
necessary and that they are developing further details on these issues.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-99-44
     TITLE:  Financial Management: Analysis of DOD's First Biennial 
             Financial Management Improvement Plan
      DATE:  01/29/99
   SUBJECT:  Financial management systems
             Federal agency accounting systems
             Strategic planning
             Data integrity
             Accountability
             Internal controls
             Systems compatibility
IDENTIFIER:  Joint Financial Management Improvement Program
             DOD Biennial Financial Management Improvement Plan
             DOD Defense Procurement Payment System
             
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Cover
================================================================ COVER


Report to Congressional Committees

January 1999

FINANCIAL MANAGEMENT - ANALYSIS OF
DOD'S FIRST BIENNIAL FINANCIAL
MANAGEMENT IMPROVEMENT PLAN

GAO/AIMD-99-44

DOD Biennial Plan

(918950)


Abbreviations
=============================================================== ABBREV

  CFO - chief financial officer
  DFAS - Defense Finance and Accounting Service
  DOD - Department of Defense
  DPPS - Defense Procurement Payment System
  FFMIA - Federal Financial Management Improvement Act
  GAO - General Accounting Office
  JFMIP - Joint Financial Management Improvement Program
  OMB - Office of Management and Budget
  PPBS - Planning, Programming, and Budgeting System

Letter
=============================================================== LETTER


B-281573

January 29, 1999

The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Floyd D.  Spence
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives

Section 1008 of the National Defense Authorization Act for Fiscal
Year 1998 (Public Law 105-85) required that the Secretary of Defense
submit to the Congress a biennial strategic plan for the improvement
of financial management within the Department of Defense (DOD).  The
plan is to be submitted not later than September 30 of each
even-numbered year and is to address all aspects of financial
management within DOD, including the finance systems, accounting
systems, and data feeder systems that support its financial
functions.  Each plan is to include a statement of the Secretary of
Defense's concept of operations for financial management.  In
addition, the act directed that the first plan include a discussion
of 12 specific financial management topics.  Section 912 of the Strom
Thurmond National Defense Authorization Act for Fiscal Year 1999
(Public Law 105-261) required GAO to analyze DOD's Biennial Plan and
discuss the extent to which it is a workable plan for addressing
DOD's financial management problems. 

DOD submitted its Biennial Plan to the Congress on October 26, 1998. 
Volume I of the Biennial Plan includes three main sections:  the
concept of operations, the current environment, and the transition
plan intended to describe the department's goals for achieving the
target financial management environment and to identify the
strategies and corrective actions necessary to move through the
transition.  Volume II of the Plan provided information on the
specific financial management improvement initiatives intended to
implement the transition plan.  To address the section 912
requirements, our objectives were to determine whether (1) the
concept of operations included the critical elements necessary for
producing sustainable financial management improvement over the long
term and (2) the transition plan provided a strategic-level "road
map" from the current environment to DOD's planned future financial
management environment.  This report also includes a discussion of
additional technical details that would be needed to determine
whether implementation of the department's future financial
management environment is practical, cost-effective, and feasible. 

We are continuing to review the 12 specific financial management
areas that DOD included in its first plan and will provide any
observations concerning DOD's discussion of these topics at a later
date.  Further details on our scope and methodology are in appendix
I. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOD's Biennial Plan represents a great deal of effort and provides a
first-ever vision of the department's future financial management
environment.  In developing this overall concept of its envisioned
financial management environment, DOD has taken an important first
step in improving its financial management operations.  The
department's Biennial Plan also represents a significant landmark
because it includes, for the first time, a discussion of the
importance of the programmatic functions of personnel, acquisition,
property management, and inventory management to the department's
ability to support consistent, accurate information flows to all
information users.  In addition, DOD's Biennial Plan includes an
impressive array of initiatives intended to move the department from
its current state to its envisioned financial management environment. 

If effectively implemented, the initiatives discussed should result
in some improvements in DOD's financial management operations. 
However, the department's Biennial Plan lacks certain critical
elements necessary for producing sustainable financial management
improvement over the long term.  Specifically, the Plan's discussion
of how DOD's financial management operations will work in the
future--its concept of operations--does not address (1) how its
financial management operations will effectively support not only
financial reporting but also asset accountability and control and (2)
budget formulation. 

In addition, the transition plan, while an ambitious statement of
DOD's planned improvement efforts, has two important limitations: 
(1) links are not provided between the envisioned future operations
and the over 200 planned improvement initiatives to determine whether
the proposed transition will result in the target financial
management environment and (2) actions to ensure feeder systems' data
integrity are not addressed--an acknowledged major deficiency in the
current environment.  Without identifying specific actions that will
ensure feeder system data integrity, it is unclear whether the
department will be able to effectively carry out not only its
financial reporting, but also its other financial management
responsibilities. 

Finally, additional detailed information would be necessary to
determine whether implementation of the department's future financial
management environment is practical, cost-effective, and feasible. 
Such details are appropriately not included in the strategic
financial management improvement plan that DOD was asked to provide. 
For example, a systems architecture--consisting of information such
as the portfolio of desired systems, detailed information flows, and
specific technical requirements--would not be expected as part of a
strategic improvement plan.  However, developing the architecture,
and other additional detailed information, would be the next step
toward achieving the department's target financial management
environment.  DOD officials have stated that they recognize that
additional information will be necessary and that they are developing
further details on these issues. 

In commenting on a draft of this report, the Under Secretary of
Defense (Comptroller) stated that DOD took issue with each of the
report's major findings and with all of the recommendations.  DOD
stated that it appreciated the recognition that the report provides
regarding the magnitude of the effort that the department expended in
the preparation of the report and the challenges that the department
will face in implementing its ambitious financial management reform
initiatives.  However, DOD disagreed that the Biennial Plan lacked
critical elements and stated that parts of the report appear to
reflect a lack of awareness of the department's actions for improving
its financial management.  In addition, DOD stated that the draft
report contained misleading statements and used inflammatory
language. 

We disagree with DOD's comments.  The department's comments reflect a
basic disagreement with us over the role and definition of financial
management and how this function should support various critical
program functions.  Our views on the scope and requirements of
accounting, finance, and feeder systems are fully supported by the
mandates and goals of the CFO Act of 1990 and the Federal Financial
Management Improvement Act of 1996, as well as by OMB and JFMIP
guidance, reports, and pronouncements.  As shown in the report, most
of our responses to DOD's comments can be traced to this fundamental
disagreement over the role of financial management in supporting the
agency's operations. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The primary objective of the Chief Financial Officers (CFO) Act of
1990 Public Law (101-576) is improving the financial management of
federal agencies.  Among the specific requirements of the CFO Act is
that each agency CFO develop an integrated agency accounting and
financial management system, including financial reporting and
internal controls.  Such systems are to comply with applicable
principles and standards and provide complete, reliable, consistent,
and timely information that is responsive to the agency's financial
information needs.  DOD's Financial Management Regulation\1 also
specifies that the department's CFO is to develop and maintain an
integrated DOD accounting and financial management system, including
financial reporting and internal controls, that provides for the
integration of accounting and budgeting information.  In addition,
the Joint Financial Management Improvement Program (JFMIP)\2
Framework for Federal Financial Management Systems states that the
financial management system should not only support the basic
accounting functions for accurately recording and reporting financial
transactions, but must also be the vehicle for integrated budget,
financial, and performance information that managers use to make
decisions on their programs. 

Further, the Federal Financial Management Improvement Act (FFMIA) of
1996 requires agencies to implement and maintain financial management
systems that substantially comply with federal financial management
systems requirements, applicable accounting standards, and the
standard general ledger.  The legislative history of FFMIA expressly
refers to JFMIP requirements and Office of Management and Budget
(OMB) Circular A-127 as sources of the financial management systems
requirements. 

JFMIP's Framework for Federal Financial Management Systems defined an
agency's financial management operations to encompass the
relationships among the program delivery financing function, the
budget formulation/transaction tracking function, and the financial
accountability function.  The integration of systems is a key element
to achieving these functional relationships.  OMB Circular A-127,
Financial Management Systems, requires federal agencies to ".  .  . 
establish and maintain a single, integrated financial management
system."


--------------------
\1 DOD's Financial Management Regulation (volume I, chapter 1). 

\2 JFMIP is a cooperative undertaking of the U.S.  Department of the
Treasury, the U.S.  General Accounting Office, the Office of
Management and Budget (OMB), and the Office of Personnel Management
and was organized to improve governmentwide financial management. 
JFMIP's Framework for Federal Financial Management Systems (January
1995) defines the scope of an agency's financial management systems. 


      BENEFITS OF A SINGLE
      INTEGRATED FINANCIAL
      MANAGEMENT SYSTEM
---------------------------------------------------------- Letter :2.1

A single integrated financial management system ensures that adequate
financial controls are in place through the linkage of the budget
formulation, financial accountability, and transaction processes.  In
addition, an integrated financial management system provides for
improvements in efficiency, including reductions in the potential for
errors and rework.  Figure 1 is a simplified example of how a single
integrated financial management system for asset acquisition can help
achieve greater control and accountability. 

   Figure 1:  Example of How
   Systems Integration Helps
   Achieve Greater Control

   (See figure in printed
   edition.)

As shown in this example, integration would allow contract data to be
entered initially by acquisition personnel when an asset was ordered. 
This information would be available to accounting personnel to record
the obligation and property management to recognize that an asset is
to be delivered.  Upon asset receipt, property management personnel
enter the asset in property management records.  Those records are
available for accounting personnel for payment purposes, for
acquisition personnel to monitor contract delivery, and for property
management personnel to monitor program results and the use of
budgetary resources.  Under a single integrated financial management
system, greater asset control and accountability is achieved because
data associated with assets acquired are available simultaneously to
accounting, property management, and acquisition personnel. 

Alternatively, in the absence of a single integrated system, OMB
Circular A-127 permits a unified set of financial systems that are
planned for and managed together, operated in an integrated fashion,
and linked together electronically in an efficient and effective
manner to provide agencywide financial system support necessary to
carry out an agency's mission and support its financial management
needs.  Under a unified integrated system, data reside in multiple
systems that are linked by interfaces.  Data integrity can be ensured
by compensating controls, such as reconciliation.  For example, if
property management records do not include data on an asset for which
the accounting records indicate payment has been made, the necessary
steps can be taken to determine if the asset was in fact acquired and
to determine its current location, or if the accounting records need
to be corrected. 

DOD's audited financial statements prepared under the CFO Act provide
for an annual scorecard on the department's progress in resolving its
financial management deficiencies.  To date, DOD has not passed this
test of its ability to produce reliable financial information.  The
most recent audits of DOD's financial statements identified pervasive
weaknesses across virtually the full spectrum of the department's
systems and controls, including material weaknesses in DOD's ability
to

  -- maintain accountability and control over virtually every
     category of physical assets, including military equipment;

  -- account for the full cost of its operations and the extent of
     its liabilities; and

  -- properly record and reconcile disbursements, which has resulted
     in numerous erroneous and several fraudulent payments. 

Correcting the department's long-standing systems' weaknesses will be
critical if DOD is to resolve these serious financial management
weaknesses.  Until the department can successfully integrate its
information systems, its ability to efficiently and effectively
maintain accountability over its vast resources, prevent wasted
resources, and achieve broader management reforms will continue to be
impaired. 


      CONCEPT OF OPERATIONS KEY TO
      IMPROVING FINANCIAL
      MANAGEMENT
---------------------------------------------------------- Letter :2.2

Another key element of improving an agency's financial management is
the development of a high-level description of how it carries out its
financial management responsibilities--a concept of operations.  The
importance of this step was emphasized by the Congress in including
this requirement in DOD's fiscal year 1998 authorization act. 

A concept of operations defines how an entity's operations are (or
will be) carried out.  It includes a high-level description of the
operations that must be performed and who must perform them.  As we
noted in a June 1997 letter,\3 for the concept of operations to be
useful, it should encompass (1) all of DOD financial management, not
just the finance and accounting functions performed by the Defense
Finance and Accounting Service (DFAS), and (2) both current and
future financial management operations to document how the department
is working today and to obtain mutual agreement from all parties on
how DOD will conduct its financial management operations in the
future. 


--------------------
\3 Financial Management:  Comments on DFAS' Draft Federal Accounting
Standards and Requirements (GAO/AIMD-97-108R, June 16, 1997). 


   FIRST BIENNIAL PLAN IMPORTANT
   STEP TOWARD IMPROVING FINANCIAL
   MANAGEMENT
------------------------------------------------------------ Letter :3

In developing its concept of operations as part of its Biennial Plan,
DOD has taken an important step in improving its financial management
operations.  DOD has reported, for the first time, the importance of
the programmatic functions of personnel, acquisition, property
management, and inventory management to the department's ability to
support consistent, accurate information flows to all information
users.  Specifically, the department's Biennial Plan recognizes that
approximately 80 percent of its financial data is derived from
program functions and identifies the integrity of these data as
critical to the success of the future financial improvement efforts. 
Recognizing the root of the problem is the first step towards finding
the appropriate solution. 

DOD's Biennial Plan is an ambitious undertaking.  The 1998
authorizing legislation requires that the department's Biennial Plan
address all aspects of financial management.  The Biennial Plan
encompasses over 900 pages of text and provides information on over
200 separate financial management improvement initiatives.  In
addition, according to DOD, the Biennial Plan incorporates the
department's response to the annual financial reporting requirements
specified in other regulatory legislation, including the following: 

  -- the CFO Act requirement for a CFO Five Year Plan,

  -- the Federal Financial Management Improvement Act requirement for
     a Remediation Plan for correcting systems deficiencies, and

  -- the Federal Managers' Financial Integrity Act requirement for a
     Statement of Assurance for the agency's financial management
     systems. 

The DOD Inspector General, in the DOD financial statement audit
report, must provide his opinion on whether the Biennial Plan
satisfies the FFMIA requirements for a systems remediation plan.  For
the purposes of this analysis, we did not evaluate whether the plan
meets the other legislative requirements. 

Because of the range and amount of detailed information contained in
the department's Biennial Plan, it is divided into two volumes. 
Volume I of the Biennial Plan includes an executive summary followed
by three main sections on the concept of operations, the current
environment, and the transition plan intended to describe the
department's goals for achieving the target financial management
environment and to identify the strategies and corrective actions
necessary to move through the transition.  A section on the 12
specific topics that are required to be addressed is also included. 
Volume II of the Plan provided information on the specific financial
management improvement initiatives that, according to the department,
are intended to implement the transition plan.  The initiatives
include improvements to existing systems, development of new systems,
and studies to develop strategies and goals for specific problem
areas. 


   DOD'S CONCEPT OF OPERATIONS
   MISSING KEY ELEMENTS
------------------------------------------------------------ Letter :4

In its Biennial Plan, DOD stated that the purpose of its concept of
operations was to describe how the department will structure and
manage financial operations in the future to be in compliance with
applicable regulatory requirements.\4 The Biennial Plan further
stated that the department will use this concept of operations to
guide the evolution of its financial management policies, systems,
functions, and improvement initiatives by specifying the target
environment needed to meet regulatory requirements and produce
auditable financial statements. 

However, the concept of operations does not address two critical
elements that are necessary for producing sustainable financial
management improvement over the long term.  Specifically, the concept
of operations does not address (1) how its financial management
operations effectively support not only financial reporting but also
asset accountability and control, and (2) budget formulation. 

First, the department's concept of operations does not clearly
address the department's fundamental financial management
responsibilities for asset accountability and control.  DOD's concept
of operations appears to focus primarily on financial reporting and
the information needed from the program managers to prepare auditable
financial statements.  The flow of information among functional
areas, such as how acquisition will provide information to property
management is not clear.  This flow of information helps promote
accountability.  Maintaining financial accountability over DOD's
assets is an area of continuing concern because, in the current
environment, the department must rely on fundamentally weak controls. 
DOD currently obtains the data needed by the department's accounting
personnel for financial reporting from its property management
systems after items are received and entered into those systems. 
There is no reconciliation of that information with acquisition and
payment data.  Without such reconciliations, DOD's ability to
maintain effective asset accountability and control is impaired. 

While acknowledging the importance of integration, the plan
enumerates the costs and disadvantages of integration.  These include
(1) data structures would need to be standardized across integrated
systems, (2) maintenance of shared data must be timely and well
executed since many integrated systems may be affected, and (3)
business processes, procedures, and practices must be modified
commensurate with the integrated network.  These could all be viewed
as advantages of integration, and including them as disadvantages
sends mixed messages on the department's intentions to integrate its
systems.  Defining the needed integrated relationships is vital to
ensuring that adequate financial controls not only facilitate
financial reporting, but also help maintain effective asset
accountability.  As stated, under an integrated system, DOD's
accounting and logistic functions would obtain data on asset
acquisitions from the department's acquisition community data.  These
data could then be reconciled with subsequent logistics records as
the assets are placed in service at DOD locations around the world. 

Second, the department's concept of its financial operations does not
include the budget formulation processes.  The DOD plan states that
it intentionally excluded budget formulation because it is performed
as part of the department's Planning, Programming, and Budgeting
System (PPBS).  However, budget formulation is one of the central
processes involved in any agency's financial management operations
and must be included in the department's concept of operations to
develop a fully integrated financial management system. 

One of the primary goals of the CFO Act is to better integrate budget
and accounting information.  The CFO Act requires each agency CFO to
monitor budget execution and to develop and maintain systems which
integrate accounting and budget information.  The integration of
budget formulation with budget execution and accounting is necessary
to help ensure that budgets consider financial implications and that
policy decisions are based on sound financial information. 
Furthermore, JFMIP's Framework document identified the integration of
budgeting and accounting as the first step to establishing a firm
financial management information foundation.  Such integration would
provide a record of historical costs and performance data that is key
to reliably estimating future costs. 

Therefore, it is important for DOD to determine how actual cost and
financial management data from other systems will flow to PPBS, which
incorporates DOD's budget formulation systems and processes, and be
used in the budget process.  DOD stated in its Government Performance
and Results Act Annual Performance Plan for Fiscal Year 1999 that it
will use existing data systems and reports supporting the PPBS
process to verify and validate performance information.\5 However, as
discussed in a June 1998 report on the results of our review of DOD's
Annual Performance Plan for Fiscal Year 1999, the DOD performance
plan does not address known system deficiencies.\6 For example, we
previously reported\7 that the weaknesses in the Army's systems used
to account for and control major equipment items and real property,
adversely affected its ability to make reliable budget requests for
procurement and real property maintenance.  However, because budget
formulation is excluded from DOD's concept of operations, it does not
discuss how PPBS will be supported by these systems and how known
deficiencies will be addressed. 


--------------------
\4 The regulatory requirements DOD referred to were the CFO Act, the
Federal Managers' Financial Integrity Act of 1982, and FFMIA. 

\5 The Government Performance and Results Act of 1993 requires each
agency to prepare an annual performance plan covering each program
activity set forth in the budget of the agency.  The performance plan
is to include a description of how the agency will verify and
validate the reported information. 

\6 Observations on DOD's Annual Performance Plan (GAO/NSIAD-98-188R,
June 5, 1998). 

\7 Financial Management:  Army Real Property Accounting and Reporting
Weaknesses Impede Management Decision-making (GAO/AIMD-94-9, November
2, 1993) and Army Logistics Systems:  Opportunities to Improve the
Accuracy of the Army's Major Equipment Item System (GAO/AIMD-98-17,
January 23, 1998). 


   TRANSITION PLAN DOES NOT
   PROVIDE A ROAD MAP FROM THE
   CURRENT ENVIRONMENT TO DOD'S
   FUTURE FINANCIAL MANAGEMENT
   SYSTEM
------------------------------------------------------------ Letter :5

The transition plan, while an ambitious statement of DOD's planned
improvement efforts, has two important limitations:  (1) clear links
are not provided between the envisioned future operations and the
numerous planned improvement initiatives to determine whether the
proposed transition will result in the target financial management
environment and (2) actions to ensure feeder systems' data integrity
are not addressed. 


      LINKS NOT FULLY DESCRIBED
---------------------------------------------------------- Letter :5.1

A vital part of any transition plan is a description of how the
specific initiatives in the plan bridge the gap between the current
environment and the envisioned environment.  Thus, describing how the
current environment operates is an important step in being able to
choose and implement the improvement initiatives.  In other words,
DOD needs to know where it stands now to help it map out how it will
get to its final destination--improved financial management. 

The plan's discussion of the current environment included key
information such as (1) the roles and responsibilities of the Under
Secretary of Defense (Comptroller), DFAS, military departments, the
defense agencies and the DOD management oversight structure, (2) the
operational structure of finance and accounting including DFAS
functions, the military departments' and defense agencies' finance
and accounting functions, and the DOD technical supporting structure,
and (3) the status of impediments to auditable financial statements,
including inadequate program feeder and core systems.  In addition,
Volume II of the department's Biennial Plan includes overview
information on over 200 specific initiatives. 

However, Volume II does not discuss how each of these discrete
initiatives will contribute to DOD's ability to achieve its
envisioned concept for its financial management operations.  In
addition, the transition plan generally does not provide a high-level
description of how information currently flows from one function to
another.  While DOD's planned concept of operations and transition
plan are organized by function, information by function on the
current environment is generally not included.  These omissions make
it difficult to track from the current environment to the target
financial management environment by function and to determine how the
many initiatives included in the transition plan will move the
department from the "as is" to the future.  A clear link between the
department's envisioned concept for its financial operations and each
of its specific initiatives by function will be essential if DOD is
to ensure that each of these initiatives receives the proper priority
attention and resources. 

However, based on information included in the various sections of the
Biennial Plan, we were able to identify one example of a specific
function for which DOD depicted how it was planning to move from the
current environment to the target environment.  This type of
high-level description of how the department plans to move from its
current "as is" to the envisioned future financial environment could
serve as a model for the department's other functional areas. 

Specifically, the type of high-level "road map" provided in the plan
for the transition from the department's "as is" contract payment
function to its envisioned operation of that function is illustrated
by excerpts from the plan shown in figures 2 through 4.  Figure 2
illustrates the transition of the contract payment function to the
target procurement payment system. 

   Figure 2:  DOD's Planned
   Transition to DPPS

   (See figure in printed
   edition.)

   Source:  DOD's Biennial Plan.

   (See figure in printed
   edition.)

Figure 2 indicates that there are 16 existing systems supporting the
contract payment function.  The figure illustrates that DOD will move
from the 16 existing systems to 8, and finally to a single contract
payment system, the Defense Procurement Payment System (DPPS). 
Figure 3 shows DPPS as part of the target environment and illustrates
how data from DPPS will become part of the DFAS database and will be
available to run DFAS' accounting and finance applications. 

   Figure 3:  DOD's Planned
   Financial and Accounting
   Systems Structure

   (See figure in printed
   edition.)

   Source:  DOD's Biennial Plan.

   (See figure in printed
   edition.)

Figure 4, which is included in DOD's concept of operations, provides
a different view of the planned financial and accounting structure
illustrated in figure 3.  This is one instance in the plan where
users can follow a specific function from the current environment
through the DFAS' planned financial and accounting system
architecture to the DFAS' Corporate Database as illustrated and
discussed in the concept of operations. 

   Figure 4:  DFAS' Corporate
   Database

   (See figure in printed
   edition.)

   Source:  DOD's Biennial Plan.

   (See figure in printed
   edition.)

However, even for this one instance, the high-level information is
lacking some key details.  For example, the plan does not identify
the 16 existing systems illustrated in figure 2, their owners, or
where they operate.  Therefore, we could not determine whether these
systems are included in the inventory, although the plan acknowledges
that it is critical that an accurate inventory be maintained of all
feeder systems required to provide program data to DOD's financial
management systems.  The plan indicates that there are currently 109
finance and accounting systems and 83 feeder systems for a total of
192 DOD financial management systems.  The plan states that the 109
finance and accounting systems will be reduced to 32 by fiscal year
2003.  However, the transition plan does not provide a clear
description of what systems will be eliminated and how--even at a
high-level--nor does the plan discuss how the number of feeder
systems will be reduced. 


      ACTIONS NOT DEFINED FOR
      ENSURING DATA INTEGRITY
---------------------------------------------------------- Letter :5.2

DOD's transition plan acknowledges that it relies on feeder systems'
data accuracy to ensure that the data ultimately used for financial
management is accurate.  Specifically, DOD stated: 

     "As an estimated 80 percent of the data needed for financial
     management come from program systems, the use of modern,
     fully-integrated, and fully-interfaced program feeder systems is
     necessary for the Department to be able to provide its managers
     with the information they need to make informed decisions.  The
     current use of a variety of non-integrated databases precludes
     the easy or reliable interfacing of information from program
     functional areas (i.e., personnel, acquisition, and logistics)
     with the Department's core finance and accounting systems."

The department has also acknowledged problems with the accuracy of
data from these feeder systems.  In addition, financial statement
audit reports have confirmed significant problems with the accuracy
of the data produced by the department's supporting logistical,
budgetary, and program operating systems.  However, the department's
transition plan does not explicitly address how these acknowledged
significant feeder system data integrity problems will be resolved. 
Ideally, data should be processed at the original point of entry in a
manner to ensure that only accurate, complete data are entered into
all systems that subsequently process that data.  Without identifying
specific actions that will ensure feeder system data integrity, it is
unclear whether the department will be able to effectively carry out
not only its financial reporting, but also its other financial
management responsibilities. 


   FURTHER DETAILS WILL BE NEEDED
   TO EVALUATE THE WORKABILITY OF
   DOD'S PLANNED FINANCIAL
   MANAGEMENT ENVIRONMENT
------------------------------------------------------------ Letter :6

Certain additional detailed information would be necessary to
determine whether implementation of the department's future financial
management environment is "workable"--that is, whether the planned
environment is practical, cost-effective, and feasible.  Such details
are not within the scope of the high-level, strategic financial
management improvement plan that DOD was asked to provide and we were
asked to analyze.  The additional, detailed information that would be
necessary includes the systems architecture, which is comprised of
logical and technical components.  DOD officials have stated that
they recognize that additional information will be necessary and that
they are developing further details on these issues. 

The Congress and OMB have recognized the importance of a systems
architecture.  For example, the Clinger-Cohen Act of 1996 requires
that the department-level Chief Information Officers develop,
maintain, and facilitate integrated system architectures.  Also, in
an October 25, 1996, memorandum, "Funding Information Systems
Investments," the Director of OMB stated that "investments in major
information systems proposed for funding in the President's budget
should be consistent with Federal, agency, and bureau information
architectures which:  integrate agency work processes and information
flows with technology to achieve the agency's strategic goals .  . 
."

As we have described in other reports,\8 the purpose of the logical
architecture is to ensure that the systems meet the business needs of
an organization.  Therefore, the logical architecture should be
further detailed information fleshing out DOD's concept for its
financial management operations.  For example, while the concept of
operations may describe, at a high level, how acquisition must share
information with accounting and logistics, the logical model would,
among other things, describe the specific data and how the data will
be manipulated.  For each business function required to carry out the
mission, it defines the specific information needed to perform the
function, and describes the individual systems that produce the
information.  In addition, an essential element of the logical
architecture is the definition of specific information flows.  After
the logical architecture is defined, DOD will have an understanding
of both its portfolio of desired systems and how these systems will
collectively carry out the department's objectives. 

A technical architecture is necessary to detail specific information
technology and communications standards and approaches that will be
used to build systems, including those that address critical
hardware, software, communications, data management, security, and
performance characteristics.  The purpose of a technical architecture
is to ensure that systems are interoperable, function together
efficiently, and are cost-effective over their life cycles. 


--------------------
\8 Strategic Information Planning:  Framework for Designing and
Developing System Architectures (GAO/IMTEC-92-51, June 1992) and Air
Traffic Control:  Complete and Enforced Architecture Needed for FAA
Systems Modernization (GAO/AIMD-97-30, February 3, 1997). 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

Until DOD amends its Biennial Plan to incorporate budget formulation
and functional information sharing, the Congress will have little
assurance that DOD's efforts to reform its acknowledged deficient
financial operations are likely to be successful.  Ensuring that
accounting data are used to formulate budgets and that program
information is shared among functional areas is a fundamental concept
that underpins an effective financial management structure.  Further,
until DOD precisely documents its current environment, clearly links
its initiatives to bridge the gap between its current environment and
its concept of how it intends to operate in the future, and develops
initiatives to address feeder systems' data accuracy problems, the
Congress cannot be sure that DOD has a workable, clear transition
plan to achieve its vision.  Finally, further details will be needed
to assess whether implementation of DOD's envisioned future concept
for its financial management operations is practical, cost-effective,
and feasible, including documentation of the logical and technical
architectures that will support its future concept of operations. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

In order to help ensure that DOD's first-ever Biennial Plan provides
a sound foundation for fundamentally reforming the department's
financial management operations, we recommend that the Secretary of
Defense take the following immediate actions to develop and issue a
supplemental plan. 

  -- Revise the concept of operations to reflect, at a high level,
     the full range of the department's financial management
     operations, including its key asset accountability and budget
     formulation responsibilities. 

  -- Describe how, at a high level, data will be shared among the
     various DOD functional areas to ensure that the benefits of full
     systems integration will be realized in accordance with relevant
     legislative requirements and JFMIP guidance. 

  -- Clarify the role of each of the described initiatives in
     bridging the gap between the current environment and the
     envisioned future concept of operations. 

  -- Identify the steps the department will take to ensure that it
     will build reliability into the data provided by its feeder
     systems. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

In commenting on a draft of this report, the Under Secretary of
Defense (Comptroller) indicated that DOD took issue with each of the
report's major findings and with all of the recommendations.  The
department's comments reflect a basic disagreement with us over the
role and definition of financial management and how this function
should support various critical program functions.  Our views on the
scope and requirements of accounting, finance, and feeder systems are
fully supported by the mandates and goals of the CFO Act of 1990 and
the Federal Financial Management Information Act of 1996, as well as
by OMB and JFMIP guidance, reports, and pronouncements. 

In its overall comments on a draft of this report, DOD stated that it
appreciated the recognition that the report provides regarding the
magnitude of the effort that the department expended in the
preparation of the report and the challenges that the department will
face in implementing its ambitious financial management reform
initiatives.  However, DOD disagreed that the Biennial Plan lacked
critical elements and stated that parts of the report appear to
reflect a lack of awareness of the Department's actions for improving
its financial management.  In addition, DOD stated that the draft
report contained misleading statements and used inflammatory
language. 

We disagree with DOD's comments.  As shown in the following
discussion, most of our responses to them can be traced to this
fundamental disagreement over the role of financial management in
supporting the agency's operations.  First, with respect to our
concern that its plan lacks critical elements relative to asset
accountability and control, or to budget formulation, DOD stated that
the plan was explicitly limited to accounting and finance functions
and that the department considers both asset accountability and
budget formulation to be outside the scope of accounting and finance
functions.  DOD's response further stated that the department does
not perform accountability for its nonfinancial resources through its
finance and accounting systems and that to do so would, among other
things, require an investment of hundreds of millions, perhaps
billions, of dollars in new systems or system changes. 

Moreover, the Under Secretary of Defense (Comptroller) in his opening
statement stated that the plan "addresses both its financial systems
and program feeder systems that originate and provide the majority of
the financial source data." The Biennial Plan itself explicitly
refers to feeder systems and includes initiatives that are intended
to address the need for feeder systems to be fully integrated with
accounting and finance systems.  For example, the plan included
information on initiatives to improve CBSX and REMIS--two systems
that provide data on mission critical assets of the Army and Air
Force, respectively.  Because financial information in such systems
includes data on units and condition of assets, those feeder systems
must ensure data integrity and be easily reconciled with the
accounting and finance systems. 

Our concern is that the Biennial Plan does not explain how the feeder
systems will meet accounting and internal control requirements, such
as those related to asset accountability and budget formulation. 
Among the specific requirements of the CFO Act is that each agency
CFO ensure that agency accounting and financial management systems
include adequate financial reporting and internal controls.  Such
systems are to comply with applicable principles and standards and
provide complete, reliable, consistent, and timely information that
is responsive to the agency's financial information needs. 

In addition, if the plan were limited to a narrow view of accounting
and finance functions, it could not be used to meet additional
regulatory requirements, as DOD intended.  For example, FFMIA
requires agencies to implement and maintain financial management
systems that substantially comply with federal financial management
systems requirements, applicable accounting standards, and the
standard general ledger.  FFMIA defines financial management systems
to include the financial systems and financial portions of mixed
systems\9 (feeder systems) necessary to support financial management. 
OMB reinforced these concepts in its June 1998 Federal Financial
Management Status Report and Five-Year Plan, where it stated a goal
of providing high quality financial information on federal government
operations which fully supports financial and performance reporting. 
Further, the Authorization Act that mandated the plan explicitly
required that it "address all aspects of financial management within
the Department of Defense, including the finance systems, accounting
systems, and data feeder systems of the Department that support
financial functions of the Department."

Further, our report outlines the potential benefits of modern systems
in helping to achieve accountability, including the integration of
logistics, accounting, and acquisition data.  OMB Circular A-127,
which prescribes policies and standards to be followed by executive
departments and agencies in developing, operating, evaluating, and
reporting on financial management systems, describes a unified set of
financial systems as those that are "planned for and managed
together, operated in an integrated fashion, and linked together
electronically in an efficient and effective manner to provide
agency-wide support necessary to carry out an agency's mission and
support its financial management needs." Thus, OMB requires that a
financial management improvement plan include efforts to address
asset accountability. 

Moreover, by DOD's own estimates, the logistics and other feeder
systems necessary to properly account for and to ensure
accountability over assets supply over 80 percent of the data used to
support DOD's financial reporting and management.  We agree fully
with DOD's comment that commanders, not accountants, should remain
responsible for the department's physical assets.  Our point is that
improved accuracy of feeder system data, with the benefits of
controls incorporated into sound financial accounting and reporting,
could assist commanders and program managers in fulfilling their
asset accountability responsibilities.  Systems improvements would
not only help DOD comply with accounting and reporting requirements,
but would also help provide better information and assurance to
program managers to improve efficiency and strengthen accountability. 

Regarding the costs of new systems or systems changes to meet
financial management requirements, we asked DOD for support of its
estimate of "hundreds of millions, perhaps billions, of dollars," but
DOD indicated that the number is not supported by a documented cost
estimate; but rather an informed approximation based on experience. 
In this regard, DOD is already spending huge sums to upgrade its
feeder systems as well as its accounting and finance systems.  For
example, our analysis of DOD's fiscal year 1999 Information
Technology Exhibits, which support the department's overall budget
request, showed that DOD has requested a total of about $6 billion
for fiscal years 1998 and 1999 to develop new or modify existing
systems supporting functions that are likely to include feeder
systems.  Our point is that these ongoing efforts, with their large
investments, should incorporate the requirements needed to achieve an
integrated financial management system that meets legislative
mandates and implementing guidance. 

With regard to budget formulation, we did not say or imply the
process used to formulate the budget was deficient or that any
changes were needed in PPBS.  Our focus was on the need to have that
process supported by accurate and timely budget execution and
accounting data.  This will only happen if the systems are originally
designed to include the requirement to link accounting data to
support the budget formulation process.  Because budget formulation
is excluded from DOD's concept of operations, the plan does not
address how the Department's Planning, Programming, and Budgeting
System will be supported by existing systems, nor how known
deficiencies in those systems will be addressed. 

As stated in our report, such budgeting and accounting integration is
called for by the CFO Act, DOD's regulations, JFMIP, and FFMIA. 
DOD's Financial Management Regulation mirrors the requirements in the
CFO Act by specifying that the department's CFO is to develop and
maintain an integrated DOD accounting and financial management
system, including financial reporting and internal controls, that
provides for the integration of accounting and budgeting information. 
JFMIP's Framework for Federal Financial Management Systems states
that the financial management system should not only support the
basic accounting functions for accurately recording and reporting
financial transactions, but must also be the vehicle for integrated
budget, financial, and performance information that managers use to
make decisions on their programs.  As stated previously, FFMIA
requires that agencies implement and maintain financial management
systems that substantially comply with federal financial management
systems requirements. 

The integration of budgeting and accounting is also a key tenet of
OMB's efforts to improve financial management across government. 
Specifically, as part of its June 1998 Federal Financial Management
Status Report and Five-Year Plan, OMB set out a vision of an
environment where "Program and financial managers work in partnership
to achieve the full integration of financial (finance, budget, and
cost), program, and oversight information and processes." Supporting
its overall vision, OMB set out a number of goals, including
"Building a partnership to ensure the functioning together of
information resource management, program management, and financial
management, including budgeting." DOD's approach, however, unless
broadened, will unfortunately ensure continued isolation of
functional systems.  The approach is inefficient, does not
effectively utilize advances in technology, and misses opportunities
to better support program managers. 

Second, DOD stated that it does not agree that the Biennial Plan is
critically flawed by the exclusion of a detailed discussion of the
(1) links between the over 200 planned improvements and the
envisioned future operations to determine whether the proposed
transition plan will result in achievement of the target financial
management environment and (2) actions to ensure feeder systems' data
integrity.  DOD stated that many of the initiatives are intended to
improve the department's financial management in the interim period
and others are geared more to the implementation of new processes or
systems to replace outdated processes or noncompliant systems.  The
department stated that more details on each of the individual
initiatives are in other documents that supported the initiative and
should not be duplicated in the plan. 

DOD's response to our draft report reinforces our point that the plan
does not present an easily understood explanation of the transition
from its current "as is" to the envisioned future financial
environment.  The catalog of initiatives in the plan does not
indicate which initiatives are intended to be interim fixes and which
are long-term efforts.  The plan also does not indicate how those
that are interim initiatives will fit in with the long-term
initiatives.  We have previously reported\10 on this issue in regard
to DOD's technological initiatives identified as key elements of its
efforts to improve the contract payment process.  In that report, we
stated that DOD had not defined how its short- and long-term
initiatives, which were independently managed, would work in tandem. 
The relationship of such tasks or initiatives needs to be articulated
clearly to provide a useful strategic vision.  As we stated in our
draft report, a vital part of any transition plan is a description of
how the specific initiatives in the plan bridge the gap between the
current environment and the envisioned environment. 

Third, DOD stated that several characterizations in the report are
subjective, misleading, and unnecessarily inflammatory.  All of the
statements DOD referred to are supported by the results of numerous
audit reports produced by us and the DOD audit community.  For
example, DOD took exception to our statement that the most recent
audits of DOD's financial statements identified material weaknesses
in DOD's ability to maintain accountability and control over
virtually every category of physical assets, including military
equipment.  The DOD Inspector General was unable to render an opinion
on DOD's consolidated financial statements for fiscal years 1996 and
1997 as a result of these material weaknesses.  As we stated in our
April 1998 testimony\11 on DOD's serious financial management
problems, material financial management deficiencies identified at
DOD, taken together, represent the single largest obstacle that must
be effectively addressed to achieve an unqualified opinion on the
U.S.  government's consolidated financial statements.  No major part
of DOD has been able to pass the test of an independent audit.  In
the area of critical military weapons systems, we testified that for
fiscal year 1997, the auditors found that DOD's logistical systems
could not be relied upon to provide basic information, such as, for
each asset category, how many exist, where they are located, and
their value.  We considered our draft report to be accurate, but we
have carefully considered the department's comments regarding our
characterizations and made wording revisions where appropriate. 

Finally, DOD's comments are not fully responsive to our
recommendations.  Overall, DOD indicated that it did not believe that
a supplemental plan was necessary because it was already working on
detailed follow-on reports.  We agree with the department that
financial management is an ongoing process that requires continuous
attention and updates.  However, the items that we identified in our
draft report that are currently not covered in the Biennial Plan are
so critical to its viability that we continue to believe that the
plan should be amended, especially in light of the need for the plan
to support investments in systems initiatives. 


--------------------
\9 "Mixed system means an information system that supports both
financial and nonfinancial functions of the Federal Government or
components thereof." Federal Financial Management Improvement Act of
1996, Sec.  806 (6). 

\10 Financial Management:  Seven DOD Initiatives That Affect the
Contract Payment Process (GAO/AIMD-98-40, January 30, 1998). 

\11 Department of Defense:  Financial Audits Highlight Continuing
Challenges to Correct Serious Financial Management Problems
(GAO/T-AIMD/NSIAD-98-158, April 16, 1998). 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Secretary of Defense, the
Under Secretary of Defense (Comptroller), and the Director of the
Defense Finance and Accounting Service.  We are also sending copies
to the Director of the Office of Management and Budget and interested
congressional committees and members.  Copies will be available to
others upon request.  If you or your offices have any questions
concerning this report, please contact me at (202) 512-9095.  Major
contributors to this report are listed in appendix III. 

Lisa G.  Jacobson
Director, Defense Audits


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

To address the requirements of section 912 of the Strom Thurmond
National Defense Authorization Act for Fiscal Year 1999 (Public Law
105-261), our objectives were to determine (1) whether DOD's concept
of operations included the critical elements necessary for producing
sustainable financial management improvement over the long term and
(2) whether the transition plan provided a "road map" from the
current environment to DOD's planned future financial management
environment.  This report also includes a discussion of additional
technical details that would be needed to determine whether
implementation of the department's future financial management
environment is practical, cost-effective, and feasible. 

To accomplish our objectives, we obtained the DOD Biennial Plan and
compared its contents to the requirements of the National Defense
Authorization Act of 1998 and to relevant laws, regulations and
standards, and policy guidance documents to determine the plan's
responsiveness to the act's requirements and the plan's workability. 
Specifically, we analyzed the plan's description of the Secretary of
Defense's concept of how the department carries out its financial
management operations.  This analysis included whether the
Secretary's concept covered all aspects of integrated financial
management, including an integrated financial management system as
defined by

  -- The Chief Financial Officers Act of 1990,

  -- The Federal Financial Management Improvement Act of 1996,

  -- The Clinger-Cohen Act of 1996,

  -- The JFMIP Framework for Federal Financial Management Systems
     (January 1995), and

  -- OMB Circular A-127, Financial Management Systems. 

We also compared the Secretary's concept for the department's
financial management operations with the essential elements of a
concept of operations identified in our reports, Financial
Management:  Comments on DFAS' Draft Federal Accounting Standards and
Requirements (GAO/AIMD-97-108R, June 16, 1997) and Strategic
Information Planning:  Framework for Designing and Developing System
Architectures (GAO/IMTEC-92-51, June 1992). 

We conducted our review from October 1998 to December 1998 in
accordance with generally accepted government auditing standards. 

We requested written comments on a draft of this report from the
Under Secretary of Defense (Comptroller).  These comments are
presented and evaluated in the "Agency Comments and Our Evaluation"
section and are reprinted in appendix II. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of Defense's
letter dated January 11, 1999. 

GAO COMMENTS

1.  See the "Agency Comments and Our Evaluation" section of this
report. 

2.  DOD's comments misstate our position.  We did not say or imply
that the process used to formulate the budget was deficient.  Our
focus was on the need to have that process supported by accurate and
timely budget execution and accounting data.  We believe that DOD's
budget formulation process can only be as good as the information on
which it is based.  Audit reports by us and the DOD audit community
have identified problems in the accuracy, reliability, and timeliness
of that budgetary source information.  For example, in our March 1998
report\1 on the implications of Navy audit results, we stated that
the financial reporting errors disclosed by the Naval Audit Service
affect the budget process because the same incomplete inventory data
are used both for the financial statements and as the starting point
for the Navy's process to develop budget requests for additional
inventory.  We have also reported\2 that inaccurate management
information in the Army's Installation Facilities System resulted in
unreliable budget requests.  Further, this report stated that
inadequate guidance and inconsistent reporting of information used in
the budget development process added to the unreliability of the
budget requests.  In another example, we reported\3 that errors in
CBSX--the system that provides worldwide asset visibility over the
Army's reportable equipment items, including the Army's most critical
war fighting equipment--directly affect whether too few or too many
of these critical items are procured. 

3.  We could not find any explicit reference to a 1999 financial
management improvement plan in the 1998 Biennial Plan.  Further, we
continue to believe that the 1998 plan was deficient in not
addressing, at a high-level, how known data accuracy problems in
feeder systems will be resolved. 

4.  DOD's inability to account for the full cost of its operations
and the extent of its liabilities has been documented in numerous
reports prepared by us and the DOD audit community.  Further, DOD's
inability to ensure that the financial resources entrusted to it are
used for the purpose intended by the Congress has been repeatedly
documented in these reports, including our recent report, Financial
Management:  Problems in Accounting for Navy Transactions Impair
Funds Control and Financial Reporting (GAO/AIMD-99-19, January 19,
1999).  In addition, the "new" accounting requirements for the
reporting of environmental and disposal liabilities were issued in
1995 and became effective for fiscal year 1997.  Moreover, the
Congress has required lifecycle environmental costs, including
disposal costs, for major defense acquisition programs in DOD's
fiscal year 1995 Authorization Act.  As we reported in a series of
recent reports\4 (with which the department concurred), DOD has the
disposal cost information available to make these estimates for major
weapons systems and other assets in a systematic manner, rather than
on a case-by-case basis.  To date, however, the department has only
developed draft policy guidance for addressing these issues. 

5.  DOD's problems in properly accounting for its disbursements
remain a serious problem, as we have reported in the past.  For
example, we reported that DOD's $18 billion total in problem
disbursements as of May 31, 1996, was understated by at least $25
billion.  We concluded that neither the Congress nor DOD management
can rely on DOD's reported amount to determine the extent of problem
disbursements or to monitor progress made in resolving them. 
Further, without adequate documentation to support its
disbursements--one of the major factors contributing to its inability
to resolve its problem disbursements, DOD cannot know the extent to
which its payments are fraudulent and improper.  In addition, our
recent report and testimony\5 on several serious fraud incidents
detail the ongoing control weaknesses over the department's
disbursement processes that contributed to the embezzlement of
millions of dollars from DOD. 

6.  As stated in our draft report, we believe that the Biennial Plan
should identify specific actions that will ensure feeder system data
integrity, rather than the specific details indicated in DOD's
response.  As we stated, certain detailed information needed to
determine whether the planned environment is practical,
cost-effective, and feasible are not within the scope of the
high-level strategic financial management plan that DOD was asked to
provide and we were asked to analyze. 

7.  In the Biennial Plan, the department itself acknowledged that
improving its financial management operations represents "a
monumental challenge." As we stated in our April 1998 testimony,\6 no
major part of DOD has been able to pass the test of an independent
audit; auditors consistently have issued disclaimers of opinion
because of pervasive weaknesses in DOD's financial management
operations.  Such problems led us in 1995 to put DOD financial
management on our list of high-risk areas vulnerable to waste, fraud,
abuse, and mismanagement.\7 This designation continued in our recent
high-risk update.\8

While we consider our draft report to be accurate, we have carefully
considered the department's comments regarding our characterizations
and made wording revisions where appropriate. 

Further, while DOD takes issue with focusing unwarranted negative
attention on problems, we believe that fully identifying the problem
and its context is the first and crucial step in properly
implementing solutions that will work.  For example, we have
previously reported\9 that DOD did not develop adequate information
to effectively diagnose the causes of problem disbursements,
implement solutions, and evaluate progress. 

8.  We continue to believe that without addressing the critical flaws
we have identified, the improvements that can be achieved will be
limited relative to the department's total financial management
operations, including asset accountability and budget formulation. 
While we consider our draft report to be accurate, we have carefully
considered the department's comments regarding our characterizations
and made wording revisions where appropriate. 

9.  The department's description of the DFAS Corporate Database and
Corporate Data Warehouse does not explain, at a high-level, how
information will be shared between functional areas such as
acquisition and logistics.  Such sharing is a critical element of a
financial management system. 


--------------------
\1 CFO Act Financial Audits:  Programmatic and Budgetary Implications
of Navy Financial Data Deficiencies (GAO/AIMD-98-56, March 16, 1998). 

\2 Financial Management:  Army Real Property Accounting and Reporting
Weaknesses Impede Management Decision-making (GAO/AIMD-94-9, November
2, 1993). 

\3 Army Logistics Systems:  Opportunities to Improve the Accuracy of
the Army's Major Equipment Item System (GAO/AIMD-98-17, January 23,
1998). 

\4 Financial Management:  Accounting Implications of DOD's Facilities
Demolition Programs (GAO/AIMD-98-194R, August 28, 1998); Financial
Management:  DOD's Liability for Missile Disposal Can Be Estimated
(GAO/AIMD-98-50R, January 7, 1998); Financial Management:  DOD's
Liability for the Disposal of Conventional Ammunition Can Be
Estimated (GAO/AIMD-98-32, December 19, 1997); Financial Management: 
DOD's Liability for Aircraft Disposal Can Be Estimated
(GAO/AIMD-98-9, November 20, 1997); and Financial Management: 
Factors to Consider in Estimating Environmental Liabilities for
Removing Hazardous Material in Nuclear Submarines and Ships
(GAO/AIMD-97-135R, August 7, 1997). 

\5 Financial Management:  Improvements Needed in Air Force Vendor
Payment Systems and Controls (GAO/AIMD-98-274, September 28, 1998),
Financial Management:  Improvements Needed in Air Force Vendor
Payment Systems and Controls (GAO/T-AIMD-98-308, September 28, 1998). 

\6 Department of Defense:  Financial Audits Highlight Continuing
Challenges to Correct Serious Financial Management Problems
(GAO/T-AIMD/NSIAD-98-158, April 16, 1998). 

\7 High-Risk Series:  An Overview (GAO/HR-95-1, February 1995). 

\8 High-Risk Series:  An Update (GAO/HR-99-1, January 1999). 

\9 Financial Management:  Improved Management Needed for DOD
Disbursement Process Reforms (GAO/AIMD-97-45, March 31, 1997). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Janett Smith, Assistant Director
Geoffrey Frank, Assistant Director
John Martin, Assistant Director
Gary Davis, Senior Auditor
Tarunkant Mithani, Senior Auditor
Francine DelVecchio, Communications Analyst

NORFOLK FIELD OFFICE

Robert Wagner, Senior Evaluator
Susan Mason, Evaluator


*** End of document. ***