DOD Financial Management: Integrated Approach, Accountability,	 
and Incentives Are Keys to Effective Reform (08-MAY-01, 	 
GAO-01-681T).							 
								 
There has been long-standing financial management weaknesses	 
facing the Department of Defense (DOD), as highlighted by the	 
recent results of the fiscal year 2000 financial audit. These	 
weaknesses not only hamper the department's ability to produce	 
timely and accurate financial management information, but also	 
make the cost of carrying out missions unnecessarily high. While 
DOD has made incremental improvement, it has a long way to go to 
address its long-standing, serious financial management 	 
weaknesses as part of a comprehensive, integrated reform of the  
department's business support operations. Such an overhaul must  
include not only DOD's financial management and other management 
challenges, but also its high-risk areas of information 	 
technology and human capital management. Personnel throughout the
department must share the common goal of reforming the		 
department's business support structure. Without reengineering,  
DOD will have little chance of radically improving its existing  
cumbersome and bureaucratic processes.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-681T					        
    ACCNO:   A00962						        
  TITLE:     DOD Financial Management: Integrated Approach,	      
             Accountability, and Incentives Are Keys to Effective Reform      
     DATE:   05/08/2001 
  SUBJECT:   Financial management				 
	     Financial statement audits 			 
	     Strategic planning 				 
	     Reengineering (management) 			 
	     Internal controls					 
	     Accountability					 

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GAO-01-681T
     
Testimony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10 a. m. Tuesday, May 8, 2001

DOD FINANCIAL MANAGEMENT

Integrated Approach, Accountability, and Incentives Are Keys to Effective
Reform

Statement of Gregory D. Kutz Director, Financial Management and Assurance

GAO- 01- 681T

Page 1 GAO- 01- 681T

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity
to discuss the status of financial management at the Department of Defense
(DOD). Mr. Chairman, I want to commend you for holding this hearing today.
As our nation moves into the 21st century, the 107th Congress and the new
administration face an array of challenges and opportunities to enhance the
performance and assure the accountability of the federal government for the
benefit of all Americans. For DOD, changing security threats, increased
globalization, and rapid technological advances are prompting fundamental
changes in the environment in which it operates. These trends are placing a
premium on increasing strategic planning, using integrated approaches,
enhancing results- orientation, and ensuring accountability.

With DOD spending currently representing about 16 percent of the federal
budget- down from about 50 percent in 1962, it is increasingly important
that it get the most from every Defense dollar spent. Each Defense dollar
that is spent inefficiently is a dollar that is unavailable to meet other
departmental priorities, such as weapon system modernization and readiness,
or to meet other governmentwide needs. Over the past few years, DOD has made
incremental improvements in financial management. However, the results of
the department?s fiscal year 2000 financial audit are one indicator of the
continuing serious and pervasive weaknesses in its financial management
systems, operations, and internal controls that have impeded the development
of useful, reliable, and timely financial information for day- to- day
management and decision- making.

The department?s financial management problems are closely tied to its other
seven major management challenges- strategic planning, human capital,
information technology, acquisition, contract management, support
infrastructure, and logistics. An estimated 80 percent of the data needed
for sound financial management comes from the department?s other business
operations, such as acquisitions and logistics. As discussed in our January
2001 reports 1 addressing the major performance and accountability
challenges and high- risk areas facing DOD, while our military forces are
second to none, this same level of excellence is not evident in many of the
business processes that are critical to achieving the department?s mission
in a reasonably economical, efficient, and effective

1 Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244, January 2001) and High- Risk Series (GAO- 01- 263, January 2001 ).

Page 2 GAO- 01- 681T

manner. These eight key interrelated areas represent the department?s
greatest challenge to developing world- class business operations to support
its forces.

Today, I will focus on (1) an overview of the long- standing financial
management weaknesses facing DOD- as highlighted by the recent results of
the fiscal year 2000 financial audit, (2) the underlying causes of DOD?s
financial management challenges, and (3) key actions necessary to correct
DOD?s financial management problems as part of a fundamental business
process reform.

We have been reporting on the department?s financial management as an area
of high risk since 1995. 2 As discussed in our recent report on the results
of our review of the fiscal year 2000 Financial Report of the U. S.
Government, 3 DOD?s financial management deficiencies, taken together,
continue to represent the single largest obstacle to achieving an
unqualified opinion on the U. S. government?s consolidated financial
statements. To date, none of the military services or major DOD components
have passed the test of an independent financial audit because of pervasive
weaknesses in financial management systems, operations, and controls.

These weaknesses not only hamper the department?s ability to produce timely
and accurate financial management information, but also make the cost of
carrying out missions unnecessarily high. Ineffective asset accountability
and the lack of effective internal controls continue to adversely affect
visibility over its estimated $1 trillion investment in weapon systems and
inventories. Such information is key to meeting military objectives and
readiness goals. Further, unreliable cost and budget information related to
nearly a reported $1 trillion of liabilities and about $347 billion of net
costs negatively affects DOD?s ability to effectively measure performance,
reduce costs, and maintain adequate funds control. As the results of the
department?s fiscal year 2000 financial

2 GAO has designated government operations and programs as ?high risk?
because of either their greater vulnerabilities to waste, abuse, and
mismanagement or major challenges associated with their economy, efficiency,
or effectiveness.

3 U. S. Government Financial Statements: FY 2000 Reporting Underscores the
Need to Accelerate Federal Financial Management Reform (GAO- 01- 570T, March
30, 2001). Long- standing

Financial Management Weaknesses Continue

Page 3 GAO- 01- 681T

audit and other recent auditors? reports demonstrate, DOD continues to
confront serious weaknesses in the following areas.

Budget execution accounting. The department was unable to reconcile an
estimated $3.5 billion difference between its available fund balances
according to its records and Treasury?s at the end of fiscal year 2000-
similar in concept to individuals reconciling their checkbooks with their
bank statements. In addition, the department made frequent adjustments of
recorded payments between appropriation accounts, including adjustments to
cancelled appropriation accounts 4 of at least $2.7 billion during fiscal
year 2000. In addition, a number of obligations were incorrect or
unsupported. For example, auditors found that $517 million of the $891
million in recorded Air Force fiscal year 2000 obligations tested were not
supported. Further, the department could not fully and accurately account
for an estimated $1.8 billion of transactions that were held in suspense
accounts 5 at the end of fiscal year 2000.

The net effect of DOD?s problems in this area is that it does not know with
certainty the amount of funding it has available. Until the department can
effectively reconcile its available fund balances and Treasury?s, ensure
that payments are posted to the correct appropriation accounts, and post
amounts held in suspense accounts to the proper appropriation accounts, the
department will have little assurance that reported appropriation balances
are correct. Such information is essential for DOD and the Congress to
determine if funds are available that could be used to reduce current
funding requirements or that could be reprogrammed or transferred to meet
other critical program needs.

Environmental and disposal liabilities. The amounts of environmental and
disposal liabilities the department has reported over the last few years has
varied by tens of billions of dollars- from $34 billion in fiscal year 1998,
up to $80 billion in fiscal year 1999, and down to $63 billion in fiscal
year 2000. However, these reported amounts potentially excluded billions of
dollars of future liabilities associated with DOD?s non- nuclear weapons;
conventional munitions; training ranges; and other property, plant and

4 Agencies are required to account for obligated and unobligated balances of
their appropriations for 5 years after the expiration of their period of
availability. At the end of 5 years, appropriation balances, both obligated
and unobligated, are cancelled.

5 A suspense account is a temporary holding account for problem
transactions- for example, those rejected because of system edit controls.

Page 4 GAO- 01- 681T

equipment- such as landfills. For example, we recently reported 6 that while
DOD reported a fiscal year 2000 liability of $14 billion associated with its
environmental cleanup of training ranges, other DOD estimates show that this
liability could exceed $100 billion. Obtaining reliable estimates of the
department?s environmental liability is an important factor for DOD managers
and oversight officials to consider with respect to the likely timing of
related funding requests and DOD?s ability to carry out its environmental
cleanup and disposal responsibilities.

Asset accountability. DOD has continued to experience problems in properly
accounting for and reporting on its weapon systems and support equipment.
Material weaknesses continue in the central systems DOD relies on to
maintain visibility over assets critical to meeting military objectives and
readiness goals. For example, in fiscal year 1999, auditors found that
Army?s central visibility system excluded information on 56 airplanes, 32
tanks, and 36 Javelin command- launch units. Auditors? fiscal year 2000
financial audit testing showed that previously identified problems in the
systems and processes that DOD relied on to account for and control its
large investment in weapon systems had not yet been corrected.

In addition, DOD?s inability to account for and control its huge investment
in inventories has been an area of major concern for many years. 7 For
example, auditors? fiscal year 2000 reviews revealed that (1) Army did not
perform required physical counts for wholesale munitions with an estimated
value of $14 billion and (2) central accountability and visibility records
at four Army test facilities excluded data on about 62,000 missiles,
rockets, and other ammunition items that were on hand. In addition, physical
counts at the Defense Logistics Agency?s 20 distribution depots showed that
none of the depots achieved the department?s goal of 95 percent inventory
record accuracy- with error rates ranging from 6 to 26 percent.

As a result of continuing problems in this area, the department continues to
spend more than necessary to procure inventory and at the same time,
experience equipment readiness problems because of the lack of key spare
parts. For example, we reported that because of long- standing

6 Environmental Liabilities: DOD Training Range Cleanup Cost Estimates Are
Likely Understated (GAO- 01- 479, April 11, 2001). 7 GAO- 01- 263.

Page 5 GAO- 01- 681T

weaknesses in controls over shipments, the department?s inventories are at
high risk for undetected loss and theft. At the same time, and for a number
of years, insufficient spare parts have been recognized as a major
contributor to aircraft performing at lower mission capable rates than
expected. Our recent reporting 8 disclosed that inaccurate, inconsistent,
and missing pricing data for weapon system spare parts undermined military
units? ability to buy needed spare parts.

Net cost information unreliable. A continuing inability to capture and
report the full cost of its programs represents one of the most significant
impediments facing the department. DOD does not yet have the systems and
processes in place to capture the required cost information from the
hundreds of millions of transactions it processes each year. Consequently,
while DOD reported $347 billion in total net costs for its fiscal year 2000
operations, it was unable to support this amount.

The lack of reliable, cost- based information hampers DOD across nearly all
its programs and operations. For example, recent reporting highlights the
adverse impact the lack of such information has had on the department?s
studies conducted under Office of Management and Budget (OMB) Circular A- 76
and its performance measurement and cost reduction efforts. For example, in
December 2000, we reported 9 that our review of DOD functions that were
studied over the past 5 years for potential outsourcing under OMB Circular
A- 76 showed that while DOD reported that savings had occurred as a result
of these studies, we could not determine the precise amounts of any such
savings because the department lacks actual cost data.

Lacking complete and accurate overall life- cycle cost information for
weapon systems impairs DOD and congressional decisionmakers? ability to make
fully informed judgments on funding comparable weapon systems. DOD has
acknowledged that the lack of a cost accounting system is the single largest
impediment to controlling and managing weapon

8 Defense Acquisitions: Prices of Marine Corps Spare Parts Have Increased
(NSIAD- 00- 123, July 31, 2000), Defense Acquisitions: Price Trends for
Defense Logistics Agency?s Weapon System Parts (GAO- 01- 22, November 3,
2000), and Navy Aviation Spare Parts Billing Transaction Issues (GAO- 01-
178R, January 11, 2001).

9 DOD Competitive Sourcing: Results of A- 76 Studies Over the Past 5 Years
(GAO- 01- 20, December 7, 2000).

Page 6 GAO- 01- 681T

system costs, including the cost of acquiring, managing, and disposing of
weapon systems.

In addition, the measures used in the department?s reporting under the
Government Performance and Results Act (GPRA) often did not address the
cost- based efficiency aspect of performance, making it difficult for DOD to
fully assess the efficiency of its performance. For example, we reported 10
that while DOD?s performance plan for 2001 included 45 unclassified metrics,
few metrics contained efficiency measures based on costs.

Financial management systems. DOD lacks integrated, transactiondriven,
double entry accounting systems that are necessary to properly control
assets and control costs. DOD has acknowledged that, overall, its reported
network of 167 critical financial management systems does not comply with
the Federal Financial Management Improvement Act?s federal financial
management systems requirements.

DOD?s transaction processing, using a large network of systems relied on to
carry out its financial management operations, is overly complex and error-
prone. Each of the military services continue to operate many standalone,
nonstandard financial processes and systems. As a result, millions of
transactions must be manually keyed and rekeyed into the vast number of
systems involved in any given DOD business process. To further complicate
processing, transactions must be recorded using a coding structure that, as
illustrated in the following figure, can exceed 50 digits.

10 Observations on the Department of Defense?s Fiscal Year 1999 Performance
Report and Fiscal Year 2001 Performance Plan (GAO/ NSIAD- 00- 188R, June 30,
2000).

Page 7 GAO- 01- 681T

Figure 1: Example of DOD?s Accounting Coding

Source: DOD.

DOD uses such coding- which according to DOD can exceed 75 digits- to
accumulate appropriation, budget, and management information for contract
payments. In addition, such accounting coding often differs- in terms of
type, quantity, and format of data required- by military service and fund
type.

As a result, financial accountability is lacking and financial management
information available for day- to- day decision- making is poor. Weak
systems and controls leave the department vulnerable to fraud and improper
payments. For example, DOD continues to overpay contractors. Although the
full extent of overpayments is not known, the department has an annual
budget for purchases involving contractors of over $130 billion. In October
2000, we reported 11 that of the $3.6 billion DOD reported in its fiscal
year 1999 financial statements as uncollected debt related to a variety of
contract payment problems, at least $225 million represented improper
payments, including duplicate payments, overpayments, and payments for goods
not received. Without effective controls over this important area, DOD will
continue to risk erroneously

11 Financial Management: Billions in Improper Payments Continue to Require
Attention (GAO- 01- 44, October 27, 2000).

Appropriation Command

Budget Activity Weapons System

Suballotment Appropriation

Accounting Station Transaction Type

Project Directive Line Item and Suffix for Management Oversight ( e. g. ,
engine accessory)

ACRN Service

Beginning Fiscal Year

Ending Fiscal Year

Office of Management and Budget Cost Code

Participating Manager

Requiring Financial Manager

Receiving Activity Project Unit ( e. g. , engine)

Contractor Support Cost Code

AA 17 9395 1506 4 1 AV 031 BZ 276 0 068342 2B 000000 01030 MAS 0020

Page 8 GAO- 01- 681T

paying contractors millions of dollars and incur additional, unnecessary
costs to collect amounts owed from contractors.

DOD has initiated a number of departmentwide reform initiatives to improve
its financial operations as well as other key business support processes.
These initiatives have produced some incremental improvements, but have not
resulted in the fundamental reform necessary to resolve these long- standing
management challenges.

The underlying causes for the department?s inability to resolve its
longstanding financial management problems, as well as the other areas of
its operations most vulnerable to waste, fraud, abuse, and mismanagement
were first identified in our May 1997 testimony. 12 These conditions remain
largely unchanged today. Specifically, we believe the underlying reasons for
the department?s inability to put fundamental reforms of its business
operations in place are

 a lack of top- level leadership and management accountability for
correcting problems;

 cultural resistance to change, including service parochialism and
stovepiped operations;

 a lack of results- oriented goals and performance measures and monitoring;
and

 inadequate incentives for seeking change.

Lack of leadership and accountability. DOD has not routinely established
accountability for performance to specific organizations or individuals that
have sufficient authority to accomplish desired goals. For example, under
the CFO Act, it is the responsibility of agency CFOs to establish the
mission and vision for the agency?s future financial management. However, at
DOD, the Comptroller- who is by statute the department?s CFO- has direct
responsibility for only an estimated 20 percent of the data relied on to
carry out the department?s financial management operations. The department
has learned through its efforts to meet the Year 2000 computing challenge
that to be successful, major improvement initiatives must have the direct,
active support and involvement of the Secretary and Deputy Secretary of
Defense. Such top

12 DOD High- Risk Areas: Eliminating Underlying Causes Will Avoid Billions
of Dollars in Waste (GAO/ T- NSIAD/ AIMD- 97- 143, May 1, 1997 ). Underlying
Causes of

Financial and Related Business Process Reform Challenges

Page 9 GAO- 01- 681T

level support helps guarantee that daily activities throughout the
department remain focused on achieving shared, agency- wide outcomes.

DOD experience has suggested that top management has not had a proactive,
consistent, and continuing role in building capacity, integrating daily
operations for achieving performance goals, and in creating incentives.
Sustaining top management commitment to performance goals is a particular
challenge for DOD. In the past, a turnover rate among the department?s top
political appointees of 1.7 years hindered long- term planning and follow-
through.

Cultural resistance and parochialism. Cultural resistance to change and
service parochialism have also played a significant role in impeding DOD
management reforms. DOD has acknowledged that it confronts decades- old
problems deeply grounded in the bureaucratic history and operating practices
of a complex, multifaceted organization, and that many of these practices
were developed piecemeal and evolved to accommodate different organizations,
each with its own policies and procedures.

For example, as discussed in our July 2000 report, 13 the department has
encountered resistance to developing departmentwide solutions under the
Secretary?s broad- based Defense Reform Initiative (DRI). 14 The department
established a Defense Management Council- including high- level
representatives from each of the military services- which was intended to
serve as the ?board of directors? to help break down organizational
stovepipes and overcome cultural resistance to changes called for under DRI.
However, we found that the council?s effectiveness was impaired because
members were not able to put their individual military services? or DOD
agencies? interests aside to focus on departmentwide approaches to long-
standing problems.

We have also seen an inability to put aside parochial views and cultural
resistance to change impeding reforms in the department?s weapon system
acquisition and inventory management areas. For example, as we recently

13 Defense Management: Actions Needed to Sustain Reform Initiatives and
Achieve Greater Results (GAO/ NSIAD- 00- 72, July 25, 2000). 14 Announced by
the Secretary of Defense in 1997, DRI represents a set of actions aimed at
reforming the department?s major business processes and support operations.

Page 10 GAO- 01- 681T

reported, 15 while the individual military services conduct considerable
analyses justifying major acquisitions, these analyses can be narrowly
focused and do not consider joint acquisitions with the other services. In
the inventory management area, DOD?s culture has supported buying and
storing multiple layers of inventory rather than managing with just the
amount of stock needed.

Unclear goals and performance measures. Further, DOD?s reform efforts have
been handicapped by the lack of clear, hierarchically linked goals and
performance measures. As a result, DOD managers lack straightforward road
maps showing how their work contributes to attaining DOD?s strategic goals,
and they risk operating autonomously rather than collectively. In some
cases, DOD had not yet developed appropriate strategic goals, and in other
cases, its strategic goals and objectives were not linked to those of the
military services and defense agencies.

As part of our assessment of DOD?s Fiscal Year 1999 Performance Report, we
reported 16 that it did not include goals or measures for addressing its
contracting challenge, and it was not clear whether the department had
achieved identified key program outcomes. The department?s 1999 performance
report did not provide any information on whether DOD is achieving any
reduction in the important area of erroneous payments to contractors nor did
it provide any cost- based measures for whether the department had achieved
its desired outcome of putting in place a more efficient and cost- effective
infrastructure and associated operating procedures.

Many of the department?s business processes in operation today are mired in
old, inefficient processes and systems, many of which are based on 1950s and
1960s technology. The department faces a formidable challenge in responding
to technological advances that are changing traditional approaches to
business management as it moves to modernize its systems. For fiscal year
2000, DOD reported total information technology investments of over $21
billion supporting a wide range of military operations as well as its
business functions, including an estimated $7.6 billion in major information
system projects. While DOD plans to

15 Major Management Challenges and Program Risks: Department of Defense
(GAO- 01- 244, January 2001). 16 GAO/ NSIAD- 00- 188R, June 30, 2000.

Page 11 GAO- 01- 681T

invest billions of dollars in modernizing its financial management and other
business support systems, it does not yet have an overall blueprint- or
enterprise architecture- in place to guide and direct these investments.

Lack of incentives for change. The final underlying cause of the
department?s inability to carry out needed fundamental reform is the lack of
incentives for making more than incremental change to existing

?business as usual? processes, systems, and structures. Traditionally, DOD
has focused on justifying its need for more funding rather than on the
outcomes its programs produced. DOD generally measures its performance by
the amount of money spent, people employed, or number of tasks completed.
Incentives for DOD decisionmakers to implement changed behavior have been
minimal or nonexistent.

This underlying problem has perhaps been most evident in the department?s
acquisition area. In DOD?s culture, the success of a manager?s career has
depended more on moving programs and operations through the DOD process
rather than on achieving better program outcomes. The fact that a given
program may have cost more than estimated, took longer to complete, and did
not generate results or perform as promised is secondary to fielding a new
program. To effect real change, actions are needed to (1) break down
parochialism and reward behaviors that meet DOD- wide and congressional
goals, (2) develop incentives that motivate decisionmakers to initiate and
implement efforts that are consistent with better program outcomes, and (3)
facilitate a congressional focus on results- oriented management,
particularly with respect to resource allocation decisions.

The new Secretary of Defense has stated that he intends to include financial
management reform among his top priorities. The Secretary faces a monumental
task in putting in place such a fundamental reform. The size and complexity
of DOD?s operations are unparalleled. DOD is not only responsible for an
estimated $1 trillion in assets and liabilities, but also for supporting
personnel on an estimated 500 bases in 137 countries and territories
throughout the world. It has also estimated that it makes $24 billion in
monthly disbursements, and that in a given fiscal year, the department may
have as many as 500 or more active appropriations. Given the unparalleled
nature of DOD?s operations, combined with its deeply entrenched financial
management weaknesses, it will not be possible to fully resolve these
problems overnight. Changing how DOD carries out its financial management
operations is going to be tough work. Keys to Fundamental

DOD Business Process Reform

Page 12 GAO- 01- 681T

Going forward, various approaches could be used to address the underlying
causes of DOD?s financial management challenges. But, consistent with our
previous testimony before your subcommittee, as well as the results of our
survey of world- class financial management organizations and other recent
reviews, 17 there are several elements that will be key to any successful
approach to reform

 address the department?s financial management challenges as part of a
comprehensive, integrated, DOD- wide business process reform;

 provide for active leadership by the Secretary of Defense and resource
control to implement needed financial management reforms;

 establish clear lines of responsibility, authority, and accountability for
such reform tied to the Secretary;

 incorporate results- oriented performance measures tied to financial
management reforms;

 provide appropriate incentives or consequences for action or inaction;

 establish an enterprisewide architecture to guide and direct financial
management modernization investments; and

 ensure effective oversight and monitoring.

Integrated business process reform strategy. As we have reported in the
past, 18 establishing the right goal is essential for success. Central to
effectively addressing DOD?s financial management problems will be the
recognition that they cannot be addressed in an isolated or piecemeal
fashion separate from the other major management challenges and highrisk
areas facing the department. 19 Successfully reengineering the department?s
processes supporting its business operations will be critical if DOD is to
effectively address deep- rooted organizational emphasis on maintaining
?business as usual? across the department.

Financial management is a crosscutting issue that affects virtually all of
DOD?s business processes. For example, improving its financial

17 Department of Defense: Progress in Financial Management Reform (GAO/ T-
AIMD/ NSIAD- 00- 163, May 9, 2001) and Executive Guide: Creating Value
Through World- class Financial Management (GAO/ AIMD- 00- 134, April 2000).
18 GAO/ T- AIMD/ NSIAD- 00- 163. 19 As discussed previously, the eight
interrelated areas that represent the greatest challenge to DOD developing
world- class business operations supporting its forces are: strategic
planning, human capital, financial management, information technology,
acquisition, contract management, support infrastructure, and logistics.

Page 13 GAO- 01- 681T

management operations so that they can produce useful, reliable, and timely
cost information will be essential if the department is to effectively
measure its progress toward achieving many key outcomes and goals across
virtually the entire spectrum of DOD?s business operations. At the same
time, the department?s financial management problems- and, most importantly,
the keys to their resolution- are deeply rooted in and dependent upon
developing solutions to a wide variety of management problems across DOD?s
various organizations and business functions. The department has reported
that an estimated 80 percent of the data needed for sound financial
management comes from the department?s other business operations, such as
its acquisition and logistics communities. DOD?s vast array of costly, non-
integrated, duplicate, inefficient financial management systems is
reflective of the lack of an enterprise wide, integrated approach to
addressing its management challenges. DOD has acknowledged that one of the
reasons for the lack of clarity in its reporting under the GPRA was that
most of the program outcomes the department is striving to achieve are
interrelated.

Active leadership and resource control. The department?s successful Year
2000 effort illustrated and our survey of leading financial management
organizations 20 captured the importance of strong leadership from top
management. As we have stated many times before, strong, sustained executive
leadership is critical to changing a deeply rooted corporate culture- such
as the existing ?business as usual? culture at DOD- and successfully
implementing financial management reform. The personal, active involvement
of the Deputy Secretary of Defense played an important role in building
entity wide support for the department?s Year 2000 initiatives. Given the
long- standing and deeply entrenched nature of the department?s financial
management problems combined with the numerous competing DOD organizations,
each operating with varying and often parochial views and incentives, such
visible, sustained top- level leadership will be critical.

Clear lines of responsibility and accountability. Establishing clear lines
of responsibility, decision- making authority, and resource control for
actions across the department tied to the Secretary will also be a key to
reform. As we reported 21 with respect to the department?s implementation

20 Executive Guide: Creating Value Through World- class Financial Management
(GAO/ AIMD- 00- 134 , Apr. 2000). 21 GAO/ NSIAD- 00- 72.

Page 14 GAO- 01- 681T

of its DRI, such an accountability structure should emanate from the highest
levels and include the secretaries of each of the military services as well
as heads of the department?s various business areas.

Results- oriented performance. As discussed in our report on DOD?s major
performance and accountability challenges, 22 establishing a
resultsorientation will be another key element of any approach to reform.
Such an orientation should draw upon results that could be achieved through
commercial best practices, including outsourcing and shared servicing
concepts. Personnel throughout the department must share the common goal of
establishing financial management operations that not only produce financial
statements that can withstand the test of an audit but, more importantly,
also routinely generate useful, reliable, and timely financial information
for day- to- day management purposes.

In addition, we have previously testified 23 that DOD?s financial management
improvement efforts should be measured against an overall goal of
effectively supporting DOD?s basic business processes, including
appropriately considering related business process system
interrelationships, rather than determining system- by- system compliance.
Such a results- oriented focus is also consistent with an important lesson
learned from the department?s Year 2000 experience. DOD?s initial Year 2000
focus was geared toward ensuring compliance on a system- by- system basis
and did not appropriately consider the interrelationship of systems and
business areas across the department. It was not until the department
shifted to a core mission and function review approach that it was able to
achieve the desired result- greatly reducing its Year 2000 risk.

Incentives and consequences. Another key to breaking down parochial
interests and stovepiped approaches that have plagued previous reform
efforts will be establishing mechanisms to reward organizations and
individuals for behaviors that comply with DOD- wide and congressional
goals. Such mechanisms should provide appropriate incentives and penalties
to motivate decisionmakers to initiate and implement efforts that result in
fundamentally reformed financial management operations.

Enterprise architecture. Establishing an enterprise wide financial
management architecture will be essential for the department to

22 GAO- 01- 244. 23 GAO/ T- AIMD/ NSIAD- 00- 163.

Page 15 GAO- 01- 681T

effectively manage its large, complex system modernization effort now
underway. As we testified last year, 24 the Clinger- Cohen Act requires
agencies to develop and maintain an integrated system architecture. Such an
architecture can help ensure that the department invests only in integrated,
enterprise wide business system solutions, and conversely, will help move
resources away from non- value added legacy business systems and
nonintegrated business system development efforts. In addition, without an
architecture, DOD runs the serious risk that its system efforts will result
in perpetuating the existing system environment that suffers from systems
duplication, limited interoperability, and unnecessarily costly operations
and maintenance. In a soon to be issued report, we point out that DOD lacks
a financial management enterprise architecture to guide and constrain the
billions of dollars it plans to spend to modernize its financial management
operations and systems.

Monitoring and oversight. Ensuring effective monitoring and oversight of
progress will also be a key to bringing about effective implementation of
the department?s financial management and related business process reform.
We have previously testified 25 that periodic reporting of status
information to OMB, the Congress, and the audit community was another key
lesson learned from the department?s successful effort to address its Year
2000 challenge. Finally, this Subcommittee?s annual oversight hearings, as
well the active interest and involvement of other cognizant Defense
committees, will continue to be key to effectively achieving and sustaining
DOD?s financial management and related business process reform milestones
and goals.

In closing, while DOD has made incremental improvement, it has a long way to
go to address its long- standing, serious financial management weaknesses as
part of a comprehensive, integrated reform of the department?s business
support operations. Such an overhaul must include not only DOD?s financial
management and other management challenges, but also its high- risk areas of
information technology and human capital management. Personnel throughout
the department must share the common goal of reforming the department?s
business support structure.

24 GAO/ T- AIMD/ NSIAD- 00- 163. 25 GAO- 01- 244.

Page 16 GAO- 01- 681T

The transition to modern performance management and, along with it, to
strategic human capital and information technology management, will require
a cultural transformation throughout the department that will take time. DOD
will need to be more partnerial, results oriented, integrated, and
externally focused in the future. Without reengineering, DOD will have
little chance of radically improving its existing cumbersome and
bureaucratic processes. Such a fundamental reform will require sustained
commitment from the highest levels of DOD leadership and changes throughout
all levels of the department as well as vigorous congressional oversight. We
stand ready to help the Congress and the administration put in place world-
class business operations in support of our forces by providing
professional, objective, and constructive assistance.

Mr. Chairman, this concludes my statement. I will be happy to respond to any
questions you or other members of the Subcommittee may have.

(192012)
*** End of document. ***