DOD Financial Management: Integrated Approach, Accountability,
Transparency, and Incentives Are Keys to Effective Reform
(06-MAR-02, GAO-02-497T).
The Department of Defense (DOD) financial management problems are
pervasive, complex, long-standing, and deeply rooted in virtually
all its business operations. DOD's financial management
deficiencies, taken together, 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 financial
management systems, operations, and controls weaknesses. These
problems date back decades, and previous attempts at reform have
been unsuccessful. DOD continues to rely on a far-flung, complex
network of finance, logistics, personnel, acquisition, and other
management information systems for financial data to support
day-to-day management and decision-making. This network has
evolved into the overly complex and error-prone operation that
exists today, including (1) little standardization across DOD
components, (2) multiple systems performing the same tasks, (3)
the same data stored in multiple systems, (4) manual data entry
into multiple systems, and (5) a large number of data
translations and interfaces, which combine to exacerbate problems
with data integrity. There are several key elements that
collectively will enable DOD to effectively address its
long-standing financial management problems. Actions on many of
the key areas central to successfully achieving desired financial
management and related business process transformation
goals--particularly those that rely on longer term systems
improvements--will take a number of years to fully implement.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-497T
ACCNO: A02862
TITLE: DOD Financial Management: Integrated Approach,
Accountability, Transparency, and Incentives Are Keys to
Effective Reform
DATE: 03/06/2002
SUBJECT: Financial management
Performance measures
Accounting
Computer networks
Federal agency reorganization
Best practices
Financial statements
Internal controls
Defense Business Operations Fund
DOD Corporate Information Management
Initiative
DOD Defense Reform Initiative
DOD Financial Management Improvement
Plan
DFAS Mechanization of Contract
Administration Services System
DOD Standard Procurement System
DOD Quadrennial Defense Review
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GAO-02-497T
United States General Accounting Office
GAO Testimony Before the Subcommittee on Readiness and
Management Support, Committee on Armed Services, U.S. Senate
For Release on Delivery
Expected at 10 a.m. DOD FINANCIAL
Wednesday, March 6, 2002
MANAGEMENT
Integrated Approach, Accountability, Transparency, and Incentives Are Keys
to Effective Reform
Statement of David M. Walker Comptroller General of the United States
GAO-02-497T
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be here to discuss financial management at the
Department of Defense (DOD). Today, DOD faces financial management problems
that are pervasive, complex, long-standing, and deeply rooted in virtually
all business operations throughout the department. DOD's financial
management deficiencies, taken together, 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.
Overhauling financial management represents a major management challenge
that goes far beyond financial accounting to the very fiber of the
department's range of business operations and management culture. Previous
administrations over the past several decades have tried to address these
problems in various ways but have largely been unsuccessful. In this regard,
on September 10, 2001, Secretary of Defense Rumsfeld announced a broad
initiative intended to "transform the way the department works and what it
works on" that he estimated could save 5 percent of DOD's budget-or an
estimated $15 to $18 billion annually. The Secretary recognized that
transformation would be difficult and expected the needed changes would take
8 or more years to complete.
The President's Management Agenda includes improved financial management
performance as one of his five governmentwide management goals. In addition,
in August 2001, the Principals of the Joint Financial Management Improvement
Program-the Secretary of the Treasury, the Director of the Office of
Management and Budget, the Director of the Office of Personnel Management,
and I, in my role as the Comptroller General-began a series of quarterly
meetings that marked the first time all four of the Principals had gathered
together in over 10 years. To date, these sessions have resulted in
substantive deliberations and agreements focused on key issues such as
better defining measures for financial management success. These measures
include being able to routinely provide timely, reliable, and useful
financial information and having no material internal control weaknesses.
Success on these measures will be a significant challenge to DOD. The
Principals plan to invite Defense Comptroller Zakheim to their upcoming
April 2002 meeting to discuss the department's transformation effort and to
begin a constructive engagement with DOD on this important initiative.
With the events of September 11, and the federal government's short-and
long-term budget challenges, it is more important than ever that DOD
effectively transform its business processes to ensure it gets the most from
every dollar spent. The department must be able to effectively account for
the funding it receives and carry out its stewardship responsibilities for
the vast amount of equipment and inventories used in support of military
operations. Even before the events of September 11, increased globalization,
changing security threats, and rapid technological advances were prompting
fundamental changes in the environment in which DOD operates. These trends
place a premium on increasing strategic planning, enhancing results
orientation, ensuring effective accountability, transparency, and using
integrated approaches. Six of the 22 areas on GAO's governmentwide
"high-risk" list are DOD program areas, and DOD shares responsibility for 2
other high-risk areas that are governmentwide in scope.1 Central to
effectively addressing DOD's financial management problems will be the
understanding that these eight areas are interrelated and cannot be
addressed in an isolated, stovepiped, or piecemeal fashion.
The recent success of our forces in Afghanistan has again demonstrated the
unparalleled excellence of our military forces. This same level of
excellence is not yet evident in the department's financial management and
other business processes. This is particularly problematic because effective
financial management operations are critical to achieving the department's
mission in a reasonably economical, efficient, and effective manner and
providing reliable, timely financial information on a routine basis to
support management decision-making at all levels throughout DOD. This will
also be critical in order to enhance overall transparency and
accountability. Success in this area will also serve to free-up resources
that can be redeployed to enhance readiness, improve the quality of life for
our troops and their families, and reduce the gap between wants and
available funding in connection with major weapon systems.
Today, I will provide my perspectives on (1) how Defense got where it is
today and the underlying causes of the department's longstanding inability
to effectively reform its financial management and other business systems
and processes and (2) the keys to successfully carrying out the Secretary's
business process transformation and DOD's plans and actions to date. Last
summer, I shared with Secretary Rumsfeld and Comptroller Zakheim a
1U.S. General Accounting Office, High-Risk Series: An Update, GAO-01-263
(Washington, D.C.: Jan. 2001).
business transformation paper, which provided an overview of our views on
the current challenges facing the department and the keys to effective
reform, and detailed one option for addressing these challenges.
Long-Standing Financial Management Problems and Attempts at Reform
History is a good teacher, and to solve the problems of today, it is
instructive to look to the past. The problems with the department's
financial management operations date back decades, and previous attempts at
reform have largely proven to be unsuccessful. These problems adversely
affect DOD's ability to control costs, ensure basic accountability,
anticipate future costs and claims on the budget, such as for health care,
weapon systems, and environmental liabilities, measure performance, maintain
funds control, prevent fraud, and address pressing management issues.
Problems with the department's financial management operations go far beyond
its accounting and finance systems and processes. The department continues
to rely on a far-flung, complex network of finance, logistics, personnel,
acquisition, and other management information systems- 80 percent of which
are not under the control of the DOD Comptroller- to gather the financial
data needed to support day-to-day management decision-making. This network
was not designed, but rather has evolved into the overly complex and
error-prone operation that exists today, including (1) little
standardization across DOD components, (2) multiple systems performing the
same tasks, (3) the same data stored in multiple systems, (4) manual data
entry into multiple systems, and (5) a large number of data translations and
interfaces which combine to exacerbate problems with data integrity. DOD
determined, for example, that efforts to reconcile a single contract
involving 162 payments resulted in an estimated 15,000 adjustments.
Many of the department's business processes in operation today are mired in
old, inefficient processes and legacy systems, some of which go back to the
1950s and 1960s. For example, the department relies on the Mechanization of
Contract Administration Services (MOCAS) system to process a substantial
portion of DOD contract payment transactions for all DOD organizations,
which totaled about $78 billion in fiscal year 2001. When MOCAS was first
implemented in 1968, "mechanization" was a high tech word. Past efforts to
replace MOCAS have failed. Most recently, in 1994, DOD began acquiring the
Standard Procurement System (SPS) to
replace the contract administration functions currently performed by MOCAS.
However, our July 2001 and February 2002 reporting2 on DOD's $3.7 billion
investment in SPS showed that this substantial investment was not
economically justified and raised questions as to whether further investment
in SPS was justified. For the foreseeable future, DOD will continue to be
saddled with MOCAS.
Moving to the 1970s, we, the Defense Inspector General, and the military
service audit organizations, issued numerous reports detailing serious
problems with the department's financial management operations. For example,
between 1975 and 1981, we issued more than 75 reports documenting serious
problems with DOD's existing cost, property, fund control, and payroll
accounting systems. In the 1980s, we found that despite the billions of
dollars invested in individual systems, these efforts too fell far short of
the mark, with extensive schedule delays and cost overruns. For example, in
1989, our report3 on eight major DOD system development efforts-including
two major accounting systems-under way at that time, showed that system
development cost estimates doubled, two of the eight efforts were abandoned,
and the remaining six efforts experienced delays of from 3 to 7 years.
Beginning in the 1990s, following passage of the Chief Financial Officers
(CFO) Act of 1990, there was a recognition in DOD that broad-based financial
management reform was needed. Over the past 12 years, the department has
initiated several departmentwide reform initiatives intended to
fundamentally reform its financial operations as well as other key business
support processes, including the Corporate Information Management
initiative, the Defense Business Operations Fund, and the Defense Reform
Initiative. These efforts, which I will highlight today, have proven to be
unsuccessful despite good intentions and significant effort. The conditions
that led to these previous attempts at reform remain largely unchanged
today.
2U.S. General Accounting Office, DOD Systems Modernization: Continued
Investment in the Standard Procurement System Has Not Been Justified,
GAO-01-682 (Washington, D.C.: July 31, 2001) and DOD's Standard Procurement
System: Continued Investment Has Yet to Be Justified, GAO-02-392T
(Washington, D.C.: Feb. 7, 2002).
3U.S. General Accounting Office, Automated Information Systems: Schedule
Delays and Cost Overruns Plague DOD Systems, GAO/IMTEC-89-36 (Washington,
D.C.: May 10, 1989).
Corporate Information Management. The Corporate Information Management
(CIM), initiative, begun in 1989, was expected to save billions of dollars
by streamlining operations and implementing standard information systems.
CIM was expected to reform all DOD's functional areas, including finance,
procurement, material management, and human resources through consolidating,
standardizing, and integrating information systems. DOD also expected CIM to
replace approximately 2,000 duplicative systems. Over the years, we made
numerous recommendations to improve CIM's management, but these
recommendations were largely not addressed. Instead, DOD spent billions of
dollars with little sound analytical justification. We reported in 1997,4
that 8 years after beginning CIM, and spending about $20 billion on the
initiative, expected savings had yet to materialize. The initiative was
eventually abandoned.
Defense Business Operations Fund. In October 1991, DOD established a new
entity, the Defense Business Operations Fund by consolidating nine existing
industrial and stock funds and five other activities operated throughout
DOD. Through this consolidation, the fund was intended to bring greater
visibility and management to the overall cost of carrying out certain
critical DOD business operations. However, from its inception, the fund was
plagued by management problems. In 1996, DOD announced the fund's
elimination. In its place, DOD established four working capital funds. These
new working capital funds inherited their predecessor's operational and
financial reporting problems.
Defense Reform Initiative (DRI). In announcing the DRI program in November
1997, the then Secretary of Defense stated that his goal was "to ignite a
revolution in business affairs." DRI represented a set of proposed actions
aimed at improving the effectiveness and efficiency of DOD's business
operations, particularly in areas that have been long-standing
problems-including financial management. In July 2000, we reported5 that
while DRI got off to a good start and made progress in implementing many of
the component initiatives, DRI did not meet expected timeframes and goals,
and the extent to which savings from these initiatives will be
4U.S. General Accounting Office, High-Risk Series: Information Management
and Technology, GAO/HR-97-9 (Washington, D.C.: February 1997).
5U.S. General Accounting Office, Defense Management: Actions Needed to
Sustain Reform Initiatives and Achieve Greater Results, GAO/NSIAD-00-72
(Washington, D.C.: July 25, 2000).
realized is yet to be determined. GAO is currently examining the extent to
which DRI efforts begun under the previous administration are continuing.
The past has clearly taught us that addressing the department's serious
financial management problems will not be easy. Early in his tenure,
Secretary Rumsfeld commissioned a new study of the department's financial
management operations. The report on the results of the study, Transforming
Department of Defense Financial Management: A Strategy for Change, was
issued on April 13, 2001. The report recognized that the department will
have to undergo "a radical financial management transformation" and that it
would take more than a decade to achieve. The report concluded that many
studies and interviews with current and former leaders in DOD point to the
same problems and frustrations, and that repetitive audit reports verify
systemic problems illustrating the need for radical transformation in order
to achieve success. Secretary Rumsfeld further confirmed the need for a
fundamental transformation of DOD in his "top-down" Quadrennial Defense
Review. Specifically, his September 30, 2001, Quadrennial Defense Review
Report concluded that the department must transform its outdated support
structure, including decades old financial systems that are not well
interconnected. The report summed up the challenge well in stating: "While
America's business have streamlined and adopted new business models to react
to fast-moving changes in markets and technologies, the Defense Department
has lagged behind without an overarching strategy to improve its business
practices."
As part of our constructive engagement approach with DOD, I met with
Secretary Rumsfeld last summer to provide our perspectives on the underlying
causes of the problems that have impeded past reform efforts at the
department and to discuss options for addressing these challenges. There are
four underlying causes
* a lack of sustained top-level leadership and management accountability for
correcting problems;
* deeply embedded cultural resistance to change, including military service
parochialism and stovepiped operations;
* a lack of results-oriented goals and performance measures and monitoring;
and
* inadequate incentives for seeking change.
Underlying Causes of Financial and Related Business Process Reform
Challenges
Lack of Leadership and Historically, DOD has not routinely assigned
accountability for
Accountability 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. In
the Year 2000 case, the then Deputy Secretary of Defense was personally and
substantially involved and played a major role in the department's success.
Such top-level support and attention helps ensure that daily activities
throughout the department remain focused on achieving shared, agency-wide
outcomes. A central finding from our report on our survey of best practices
of world-class financial management organizations-Boeing, Chase Manhattan
Bank, General Electric, Pfizer, Hewlett-Packard, Owens Corning, and the
states of Massachusetts, Texas and Virginia-was that clear, strong executive
leadership was essential to (1) making financial management and entitywide
priority, (2) redefining the role of finance, (3) providing meaningful
information to decision-makers, and (4) building a team of people that
deliver results.6
DOD past 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 creating incentives.
Sustaining top management commitment to performance goals is a particular
challenge for DOD. In the past, the average 1.7 year tenure of the
department's top political appointees has served to hinder long-term
planning and follow-through.
Cultural Resistance and Parochialism
Cultural resistance to change and military service parochialism have also
played a significant role in impeding previous attempts to implement
broad-based management reforms at DOD. The department 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
6U.S. General Accounting Office, Executive Guide: Creating Value Through
World-class Financial Management, GAO/AIMD-00-134 (Washington, D.C.: Apr.
2000).
developed piecemeal and evolved to accommodate different organizations, each
with its own policies and procedures.
For example, as discussed in our July 2000 report,7 the department
encountered resistance to developing departmentwide solutions under the then
Secretary's broad-based DRI.8 In 1997, the department established a Defense
Management Council-including high-level representatives from each of the
military services and other senior executives in the Office of the Secretary
of Defense-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
department-wide approaches to long-standing problems.
We have also seen an inability to put aside parochial views. Cultural
resistance to change has impeded reforms in not only financial management,
but also in other business areas, such as weapon system acquisition and
inventory management. For example, as we reported9 last year, 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 past reform efforts have been handicapped by the lack of
clear, linked goals and performance measures. As a result, DOD managers lack
straightforward road maps showing how their work contributes to attaining
the department'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
7U.S. General Accounting Office, Defense Management: Actions Needed to
Sustain Reform Initiatives and Achieve Greater Results, GAO/NSIAD-00-72
(Washington D.C.: July 25, 2000).
8Announced 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.
9U.S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Defense, GAO-01-244 (Washington D.C.: Jan. 2001).
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 2000 Financial Management
Improvement Plan, we reported10 that, for the most part, the plan
represented the military services' and Defense components' stovepiped
approaches to reforming financial management, and did not clearly articulate
how these various efforts will collectively result in an integrated DOD-wide
approach to financial management improvement. In addition, we reported the
department's plan did not have performance measures that could be used to
assess DOD's progress in resolving its financial management problems. DOD
officials have informed us that they are now working to revise the
department's approach to this plan so that it in future years' updates it
will reflect a more strategic, department-wide vision and tool for financial
management reform.
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 2001, DOD's reported
total information technology investments of almost $23 billion, supporting a
wide range of military operations as well as its business functions. As we
have reported,11 while DOD plans to 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. As we recently testified,12 our
review of practices at leading organizations showed they were able to make
sure their business systems addressed corporate-rather than individual
business unit-objectives by using enterprise architectures to guide and
constrain investments. Consistent with our recommendation, DOD is now
working to develop a financial management enterprise architecture, which is
a very positive development.
10U.S. General Accounting Office, Financial Management: DOD Improvement Plan
Needs Strategic Focus, GAO-01-764 (Washington D.C.: Aug. 17, 2001).
11U.S. General Accounting Office, Information Technology: Architecture
Needed to Guide Modernization of DOD's Financial Operations, GAO-01-525
(Washington, D.C.: May 17, 2001).
12U.S. General Accounting Office, Defense Acquisitions: DOD Faces Challenges
in Implementing Best Practices, GAO-02-469T (Washington, D.C.: Feb. 27,
2002).
Lack of Incentives for Change
Keys to Fundamental DOD Financial Management Reform
The final underlying cause of the department's long-standing inability to
carry out needed fundamental reform has been 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 have 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. Secretary Rumsfeld perhaps said it best in announcing his
planned transformation at DOD, "...there will be real consequences from, and
real resistance to, fundamental change."
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 was 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,
including saying "no" or "pulling the plug" on a system or program that is
failing, and (3) facilitate a congressional focus on results-oriented
management, particularly with respect to resource allocation decisions.
As we testified in May 2001,13 our experience has shown there are several
key elements that, collectively will enable the department to effectively
address the underlying causes of DOD's inability to resolve its
long-standing financial management problems. These elements, which will be
key to any successful approach to financial management reform include
* addressing the department's financial management challenges as part of a
comprehensive, integrated, DOD-wide business process reform;
* providing for sustained leadership by the Secretary of Defense and
resource control to implement needed financial management reforms;
13GAO-01-681T.
* establishing clear lines of responsibility, authority, and accountability
for such reform tied to the Secretary;
* incorporating results-oriented performance measures and monitoring tied to
financial management reforms;
* providing appropriate incentives or consequences for action or inaction;
* establishing an enterprisewide system architecture to guide and direct
financial management modernization investments; and
* ensuring effective oversight and monitoring.
Actions on many of the key areas central to successfully achieving desired
financial management and related business process transformation goals
-particularly those that rely on longer term systems improvements-will take
a number of years to fully implement. Secretary Rumsfeld has estimated that
his envisioned transformation may take 8 or more years to complete.
Consequently, both long-term actions focused on the Secretary's envisioned
business transformation, as well as short-term actions, focused on
improvements within existing systems and processes, will be critical going
forward. Short-term actions in particular will be critical if the department
is to achieve the greatest possible accountability over existing resources
and more reliable data for day-to-day decision-making while longer term
systems and business process reengineering efforts are under way.
Beginning with the Secretary's recognition of a need for a fundamental
transformation of the department's business processes, and building on some
of the work begun under past administrations, DOD has taken a number of
positive steps in many of these key areas. At the same time, the challenges
remaining in each of these key areas are somewhat daunting.
Integrated Business As we have reported in the past,14 establishing the
right goal is essential for
Process Reform Strategy success. Central to effectively addressing DOD's
financial management problems will be the recognition that they cannot be
addressed in an isolated, stovepiped, or piecemeal fashion separate from the
other high-risk areas facing the department.15 Successfully reengineering
the
14U.S. General Accounting Office, Department of Defense: Progress in
Financial Management Reform, GAO/T-AIMD/NSIAD-00-163 (Washington, D.C.: May
9, 2000).
15The eight interrelated high-risk areas that represent the greatest
challenge to DOD developing world-class business operations supporting its
forces are: financial management, human capital, information security,
systems modernization, weapon system acquisition, contract management,
infrastructure management, and inventory management.
department's processes supporting its financial management and other
business support 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 areas. For example, improving its financial management
operations so that they can produce timely, reliable, and useful 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 areas. For example, we have reported16 that many
of DOD's financial management shortcomings were attributable in part to
human capital issues. The department does not yet have a strategy in place
for improving its financial management human capital. This is especially
critical in connection with DOD's civilian workforce, since DOD has
generally done a much better job in conjunction with human capital planning
for its military personnel. In addition, DOD's civilian personnel face a
variety of size, shape, skills, and succession planning challenges that need
to be addressed.
As I mentioned earlier, and it bears repetition, the department has reported
that an estimated 80 percent of the data needed for sound financial
management comes from its other business operations, such as its acquisition
and logistics communities. DOD's vast array of costly, nonintegrated,
duplicative, and inefficient financial management systems is reflective of
the lack of an enterprisewide, 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 Government Performance and
Results Act has been that most of the program outcomes the department is
striving to achieve are interrelated, while its management systems are not
integrated.
As I mentioned earlier, the Secretary of Defense has made the fundamental
transformation of business practices throughout the department a top
priority. In this context, the Secretary established a number of top-level
16GAO-01-244.
committees, councils and boards, including the Senior Executive Committee,
Business Initiative Council, and the Defense Business Practices
Implementation Board. The Senior Executive Committee was established to help
guide efforts across the department to improve its business practices. This
committee, chaired by the Secretary of Defense, and with membership to
include the Deputy Secretary, the military service secretaries and the Under
Secretary of Defense for Acquisition, Logistics and Technology, was
established to function as the board of directors for the department. The
Business Initiative Council, comprised of the military service secretaries
and headed by the Under Secretary of Defense for Acquisition, Technology and
Logistics, was established to encourage the military services to explore new
money saving business practices to help offset funding requirements for
transformation and other initiatives. The Secretary also established the
Defense Business Practices Implementation Board, composed of business
leaders from the private sector. The board is intended to tap outside
expertise to advise the department on its efforts to improve business
practices.
Active Leadership and Resource Control
The department's successful Year 2000 effort illustrated and our survey of
leading financial management organizations17 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. As I
mentioned earlier, the personal, active involvement of the Deputy Secretary
of Defense played a key role in building entitywide support and focus 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.
In discussing their April 2001 report to the Secretary of Defense on
transforming financial management,18 the authors stated that, "unlike
previous failed attempts to improve DOD's financial practices, there is a
new push by DOD leadership to make this issue a priority." With respect to
17GAO/AIMD-00-134.
18 Department of Defense, Transforming Department of Defense Financial
Management: A Strategy for Change, (Washington, D.C.: Apr. 13, 2001).
the key area of investment control, the Secretary took action to set aside
$100 million for financial modernization. Strong, sustained executive
leadership-over a number of years and administrations-will be key to
changing a deeply rooted culture. In addition, given that significant
investments in information systems and related processes have historically
occurred in a largely decentralized manner throughout the department,
additional actions will likely be required to implement a centralized IT
investment control strategy. For example, in our May 2001 report,19 we
recommended DOD take action to establish centralized control over
transformation investments to ensure that funding is provided for only those
proposed investments in systems and business processes that are consistent
with the department's overall business process transformation strategy.
Clear Lines of Responsibility and Accountability
Last summer, when I met with Secretary Rumsfeld, I stressed the importance
of establishing clear lines of responsibility, decision-making authority,
and resource control for actions across the department tied to the Secretary
as a key to reform. As we previously reported,20 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 major business areas.
The Secretary of Defense has taken action to vest responsibility and
accountability for financial management modernization with the DOD
Comptroller. In October 2001, the DOD Comptroller established the Financial
Management Modernization Executive and Steering Committees as the governing
bodies to oversee the activities related to this modernization effort and
also established a supporting working group to provide day-to-day guidance
and direction on these efforts. DOD reports that the executive and steering
committees met for the first time in January 2002.
It is clear to us that the Comptroller has the full support of the Secretary
and that the Secretary is committed to making meaningful change. To make
this work, it will be important that the Comptroller has sufficient
authority to bring about the full, effective participation of the military
services and business process owners across the department. The
19GAO-01-525. 20GAO/NSIAD-00-72.
Comptroller has direct control of 20 percent of the data needed for sound
financial management and has historically had limited ability to control
information technology investments across the department. Addressing issues
such as centralization of authority for information systems investments and
continuity of leadership will be critical to successful business process
transformation.
In addition to DOD, a number of other federal departments and agencies are
facing an array of interrelated business system management challenges for
which resolution is likely to require a number of years and could span
administrations. One option that may have merit would be the establishment
of chief operating officers, who could be appointed for a set term of 5 to 7
years, with the potential for reappointment. These individuals should have a
proven track record as a business process change agent for a large, diverse
organization and would spearhead business process transformation across the
department or agency.
Results-Oriented Performance
As discussed in our January 2001 report on DOD's major performance and
accountability challenges,21 establishing a results orientation 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, routinely generate
useful, reliable, and timely financial information for day-to-day management
purposes.
In addition, we have previously testified22 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
21GAO-01-244. 22GAO/T-AIMD/NSIAD-00-163.
and business areas across the department. It was not until the department,
under the direction of the then Deputy Secretary, shifted to a core mission
and function review approach that it was able to achieve the desired result
of greatly reducing its Year 2000 risk.
Since the Secretary has established an overall business process
transformation goal that will require a number of years to achieve, going
forward, it will be especially critical for managers throughout the
department to focus on specific measurable metrics that, over time,
collectively will translate to achieving this overall goal. It will be
important for the department to refocus its annual accountability reporting
on this overall goal of fundamentally transforming the department's
financial management systems and related business processes to include
appropriate interim annual measures to track progress toward this goal.
In the short term, it will be important to focus on actions that can be
taken using existing systems and processes. Establishing interim measures to
both track performance against the department's overall transformation goals
and facilitate near term successes using existing systems and processes will
be critical. The department has established an initial set of metrics
intended to evaluate financial performance, and reports that it has seen
improvements. For example, with respect to closed appropriation accounts,
DOD reported during the first 4 months of fiscal year 2002, a reduction in
the dollar value of adjustments to closed appropriation accounts of about 51
percent from the same 4-month period in fiscal year 2001. Other existing
metrics concern cash and funds management, contract and vendor payments, and
disbursement accounting. DOD also reported that it is working to develop
these metrics into higher level measures more appropriate for senior
management. We agree with the department's efforts to expand the use of
appropriate metrics to guide its financial management reform efforts.
Incentives and Another key to breaking down parochial interests and
stovepiped
Consequences 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 be geared to providing appropriate incentives and penalties to
motivate decisionmakers to initiate and implement efforts that result in
fundamentally reformed financial management and other business support
operations.
In addition, such incentives and consequences will be essential if DOD is to
break down the parochial interests that have plagued previous reform
efforts. Incentives driving traditional ways of doing business, for example,
must be changed, and cultural resistance to new approaches must be overcome.
Simply put, DOD must convince people throughout the department that they
must change from "business as usual" systems and practices or they are
likely to face serious consequences, organizationally and personally.
Enterprise Architecture
Establishing and implementing an enterprisewide financial management
architecture will be essential for the department to effectively manage its
large, complex system modernization effort now underway. The Clinger-Cohen
Act requires agencies to develop, implement, and maintain an integrated
system architecture. As we previously reported,23 such an architecture can
help ensure that the department invests only in integrated, enterprisewide
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
our May 2001 report,24 we pointed 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.
DOD has reported that it is in the process of contracting for the
development of a DOD-wide financial management enterprise architecture to
"achieve the Secretary's vision of relevant, reliable and timely financial
information needed to support informed decision-making." Consistent with our
previous recommendations in this area, DOD has begun an extensive effort to
document the department's current "as-is" financial management architecture
by inventorying systems now relied on to carryout financial management
operations throughout the department. DOD has identified 674 top-level
systems and at least 997 associated interfaces thus far and estimates that
this inventory could include up to 1,000 systems when completed.
23GAO/T-AIMD/NSIAD-00-163. 24GAO-01-525.
While DOD's beginning efforts at developing a financial management
enterprise architecture are off to a good start, the challenges yet
confronting the department in its efforts to fully develop, implement, and
maintain a DOD-wide financial management enterprise architecture are
unprecedented. Our May 2001 report25details a series of recommended actions
directed at ensuring DOD employs recognized best practices for enterprise
architecture management. This effort will be further complicated as the
department strives to develop multiple enterprise architectures across its
various business areas. For example, in June 2001, we recommended26 that DOD
develop an enterprise architecture for its logistics operations. As I
discussed previously, an integrated reform strategy will be critical. In
this context, it is essential that DOD closely coordinate and integrate the
development and implementation of these, as well as other, architectures. By
following this integrated approach and our previous recommendations, DOD
will be in the best position to avoid the serious risk that after spending
billions of dollars on systems modernization, it will continue to perpetuate
the existing systems environment that suffers from duplication of systems,
limited interoperability, and unnecessarily costly operations and
maintenance.
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
testified27 that periodic reporting of status information to department top
management, the Office of Management and Budget (OMB), the Congress, and the
audit community was another key lesson learned from the department's
successful effort to address its Year 2000 challenge.
Previous Financial Management Improvement Plans DOD submitted to the
Congress have simply been compilations of data call information on the
stovepiped approaches to financial management improvements received from the
various DOD components. It is our understanding that DOD plans to change its
approach and anchor its plans in an enterprise system architecture. If the
department's future plans are upgraded to provide a
25GAO-01-525.
26U.S. General Accounting Office, Information Technology: DLA Should
Strengthen Business Systems Modernization Architecture and Investment
Activities, GAO-01-631 (Washington, D.C.: June 29, 2001).
27GAO-01-244.
department-wide strategic view of the financial management challenges facing
the DOD along with planned corrective actions, these plans can serve as an
effective tool not only to help guide and direct the department's financial
management reform efforts, but a tool for oversight. Going forward, this
Subcommittee's annual oversight hearings, as well the active interest and
involvement of other cognizant defense and oversight committees in the
Congress, will continue to be key to effectively achieving and sustaining
DOD's financial management and related business process reform milestones
and goals.
Given the size, complexity, and deeply engrained nature of the financial
management problems facing DOD, heroic end-of-the year efforts relied on by
some agencies to develop auditable financial statement balances are not
feasible at DOD. Instead, a sustained focus on the underlying problems
impeding the development of reliable financial data throughout the
department will be necessary and is the best course of action. I applaud the
proposals spearheaded by the Senate Armed Services Committee, and
subsequently enacted as part of the fiscal year 2002 National Defense
Authorization Act, to provide a framework for redirecting the department's
resources from the preparation and audit of financial statements that are
acknowledged by DOD leadership to be unauditable to the improvement of DOD's
financial management systems and financial management policies, procedures
and internal controls. Under this new legislation, the department will also
be required to report to the Congress on how resources have been redirected
and the progress that has been achieved. This reporting will provide an
important vehicle for the Congress to use in assessing whether DOD is using
its available resources to best bring about the development of timely and
reliable financial information for daily decisionmaking and transform its
financial management as envisioned by the Secretary of Defense.
In conclusion, we support Secretary Rumsfeld's vision for transforming the
department's full range of business processes. Substantial personal
involvement by the Secretary and other DOD top executives will be essential
for success to change the DOD culture that has over time perpetuated the
status quo and been resistant to transformation of the magnitude envisioned
by the Secretary. Comptroller Zakheim, as the Secretary's leader for
financial management modernization, will need to have the ability to make
the tough choices on systems, processes, and personnel, and to control
spending for new systems across the department, especially where new systems
development is involved. Processes will have to be reengineered, and
hierarchical, process-oriented,
stovepiped, and internally focused approaches will have to be put aside. The
past has taught us that well-intentioned initiatives will only succeed if
there are the right incentives, transparency, and accountability mechanisms
in place.
The events of September 11 and other funding and asset accountability issues
associated with the war on terrorism, at least in the short term, may dilute
the focused attention and sustained action that will be necessary to fully
realize the Secretary's transformation goal, which is understandable given
the circumstances. At the same time, the demand for increased Defense
spending, when combined with the government's long-range fiscal challenges,
means that solutions to DOD's business systems problems are even more
important. As the Secretary has noted, billions of dollars of resources
could be freed up for national defense priorities by eliminating waste and
inefficiencies in DOD's existing business processes. Only time will tell if
the Secretary's current transformation efforts will come to fruition. Others
have attempted well-intentioned reform efforts in the past. Today, the
momentum exists for reform. But, the real question remains, will this
momentum continue to exist tomorrow, next year, and throughout the years to
make the necessary cultural, systems, human capital, and other key changes a
reality? For our part, we will continue to constructively work with the
department and the Congress in this important area.
Mr. Chairman, this concludes my statement. I would be pleased to answer any
questions you or other members of the Subcommittee may have at this time.
Contacts and For further information about this testimony, please contact
Jeffrey C. Steinhoff at (202) 512-2600 or [email protected], Henry L.
Hinton, Jr. at
Acknowledgments (202) 512-4300 or [email protected], or Gregory D. Kutz at
(202) 512-9095 or [email protected]. Other key contributors to this testimony
include Jack Brock, Geoffrey Frank, William Hill, Randolph Hite, Jeffrey
Jacobson, Darby Smith, and David Warren.
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