Department of Defense: Status of Financial Management Weaknesses 
and Progress Toward Reform (25-JUN-03, GAO-03-931T).		 
                                                                 
As seen again in Iraq, the excellence of our military forces is  
unparalleled. This same level of excellence is not yet evident in
the Department of Defense's (DOD) financial management and other 
business areas, impeding DOD's ability to provide complete,	 
reliable, and timely information to the Congress, DOD managers,  
and other decision makers. Congress asked GAO to testify on the  
status of DOD's financial management and business process reform 
efforts. Specifically, GAO was asked to provide an overview of	 
the long-standing financial management weaknesses facing DOD and 
a summary of the underlying causes of DOD's financial management 
challenges. In addition, GAO's testimony focused on (1) key	 
actions necessary to correct DOD's financial management problems 
and (2) the progress DOD is making toward business process	 
reform. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-931T					        
    ACCNO:   A07363						        
  TITLE:     Department of Defense: Status of Financial Management    
Weaknesses and Progress Toward Reform				 
     DATE:   06/25/2003 
  SUBJECT:   Accountability					 
	     Financial management				 
	     Internal controls					 
	     Performance measures				 
	     Strategic planning 				 

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GAO-03-931T

                                       A

Test i mony Before the Subcommittee on Government Efficiency and Financial
Management, Commitee on Government Reform, House of Representatives

For Release on Delivery Expected at 2: 30 p. m. EST DEPARTMENT OF
Wednesday, June 25, 2003 DEFENSE

Status of Financial Management Weaknesses and Progress Toward Reform

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

GAO- 03- 931T

Dear Mr. Chairman and Members of the Subcommittee: I appreciate the
opportunity to discuss the status of financial management and business
process reform efforts at the Department of Defense (DOD). DOD faces
financial and related management problems that are pervasive,

complex, long standing, and deeply rooted in virtually all business
operations throughout the department. These problems have impeded the
department*s ability to provide complete, reliable, and timely business
operations information to the Congress, DOD managers, and other decision
makers. In addition, DOD*s financial management weaknesses have resulted
in the failure of the department, its military services, and its major

components from passing the test of an independent financial audit and are
a significant obstacle to achieving an unqualified opinion on the U. S.
government*s consolidated financial statements. Overhauling DOD*s
financial management represents a major challenge that goes far beyond

financial accounting to the very fiber of the department*s range of
business operations and management culture. Of the 25 areas on GAO*s
governmentwide *high risk* list, 6 are DOD program areas, and the

department shares responsibility for 3 other high- risk areas that are
government wide in scope. 1 Central to effectively addressing DOD*s
financial management problems will be understanding that these 9 areas are
interrelated and cannot be addressed in an isolated, stovepiped, or
piecemeal fashion. While Secretary of Defense Rumsfeld has initiated a

program to transform DOD*s business processes, including establishing a
new management structure to oversee reform efforts, DOD has not yet
developed an overarching plan tying key reform efforts together in an
integrated program.

DOD*s size, structure, and diversity of activities increase the difficulty
and complexity of reform efforts. For example, DOD is the nation*s largest
employer, with  1. 4 million men and women currently on active duty,

 1. 2 million serving in the Reserve and Guard components, and 1 U. S.
General Accounting Office, High- Risk Series: An Update, GAO- 03- 119
(Washington, D. C.: January 2003). The nine interrelated high- risk areas
that represent the greatest challenge to DOD*s development of world- class
business operations to support its forces are: contract management,
financial management, human capital, information security, infrastructure
management, inventory management, real property, systems modernization,
and weapon system acquisition.

 675,000 civilians. DOD operates more than 600, 000 individual buildings
and structures located at more than 6,000 different locations and using
more than 30 million acres. For fiscal year 2002, DOD expended
approximately $371 billion to operate and maintain about 250, 000
vehicles, over 15,000 aircraft, more than 1,000 oceangoing vessels, and
some 550 public utility systems. 2

DOD*s financial management problems are the result of long- standing
deficiencies related to its systems, processes, and people. Therefore, to
be successful, reform efforts will need to address all three factors. In
recognition of the far- reaching nature of DOD*s financial management
problems, on September 10, 2001, Secretary Rumsfeld announced a broad,
top- priority initiative intended to *transform the way the department
works

and what it works on.* This new broad- based business transformation
initiative, led by DOD*s Senior Executive Council and the Business
Initiative Council, incorporates a number of defense reform initiatives
begun under previous administrations but also encompasses additional
fundamental business reform proposals. In announcing his initiative,
Secretary Rumsfeld recognized that transformation would be difficult and
expected that needed changes would take 8 or more years to complete.

As we have seen again in Iraq, the excellence of our military forces is
unparalleled. This same level of excellence is not yet evident in the
department*s financial management and other business areas. This is
particularly problematic because effective financial and related
management operations are critical to achieving the department*s mission
in a reasonably economical, efficient, and effective manner and to
providing reliable, timely financial information on a routine basis to

support management decision making at all levels throughout DOD.
Transforming DOD*s business operations would free up resources that could
be used 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. In fact, Secretary
Rumsfeld has estimated that successful business process reform could save
DOD 5 percent of its budget or $20 billion a year.

2 Department of Defense, Performance and Accountability Report: Fiscal
Year 2002 (Washington, D. C.: January 2003).

Today, I will focus mainly on the key actions necessary to correct DOD*s
financial management problems and the progress DOD is making toward
business process reform. But first, I want to provide you with an overview

of the long- standing financial management weaknesses facing DOD* as
highlighted by the results of audit work performed over the past few
years* and a summary of the underlying causes of DOD*s financial
management challenges. My statement is based on previous GAO reports as
well as on our review of DOD Inspector General (IG) reports and recent DOD
reports and studies.

Long- standing DOD continues to confront pervasive, decades- old financial
management

Financial Management problems related to its systems, processes (including
internal controls),

and people (human capital). These problems have (1) resulted in a lack of
Weaknesses

reliable information needed to make sound decisions and report the status
of DOD*s activities through financial and other reports, (2) hindered its
operational efficiency, (3) impacted mission performance, and (4) left the
department vulnerable to fraud, waste, and abuse.

DOD*s serious financial management and related business systems problems
led us in 1995 to put both DOD financial management and systems
modernization on our list of high- risk 3 areas in the federal government,
a designation that continues today. 4 As discussed in the results of our
audit of the fiscal year 2002 Financial Statements of the U. S.
Government, 5 DOD*s financial management deficiencies, taken together,
continue to represent one of the largest obstacles 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
has passed the test of an independent financial audit because

3 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.

4 U. S. General Accounting Office, High- Risk Series: An Overview, GAO/
HR- 95- 1 (Washington, D. C.: February 1995); High- Risk Series: Defense
Financial Management, GAO/ HR- 97- 3 (Washington, D. C.: February 1997);
High- Risk Series: An Update, GAO- 01- 263 (Washington, D. C.: January
2001); and High- Risk Series: An Update, GAO- 03- 119 (Washington, D. C.:
January 2003). 5 U. S. General Accounting Office, Fiscal Year 2002 U. S.
Government Financial Statements: Sustained Leadership and Oversight Needed
for Effective Implementation of Financial Management Reform, GAO- 03- 572T
(Washington, D. C.: Apr. 8, 2003).

of pervasive weaknesses in financial management systems, processes, and
controls. These weaknesses not only hamper the department*s ability to
produce timely and accurate financial management information but also
impact mission performance and make mission costs unnecessarily high.
Ineffective asset accountability and the lack of effective controls
continue

to adversely affect visibility over its estimated $1 trillion investment
in inventories and property, plant, and equipment (including weapon
systems and other property). Such information is key to meeting military
objectives and readiness goals. Further, unreliable cost and budget
information related to a reported $700 billion of liabilities,
particularly $59 billion of reported environmental liabilities, and about
$380 billion of reported costs negatively affects DOD*s ability to
effectively project funding needs, maintain adequate funds control, reduce
costs, and measure performance. DOD has invested, and continues to invest,
significant resources* in terms of dollars, time, and people* in its
systems without demonstrated improvement in its business operations and
adequate management and oversight, thereby continuing to perpetuate a
proliferation of systems that do not adequately address the department*s
needs. Finally, DOD*s weak overall control environment has left the
department vulnerable to fraud, waste, and abuse. As the results of the
department*s fiscal year 2002 financial audit and other audit work
demonstrate, DOD continues to

confront serious weaknesses in these areas.

Asset Management and Of the $776 billion of inventory and related property
and general property, Accountability

plant, and equipment (PP& E) 6 assets reported by federal entities for
fiscal year 2002, DOD is responsible for about half* approximately $146
billion in inventory and related property and $226 billion of general PP&
E, comprised of $162 billion in real property (land, buildings,
facilities, capital leases, and improvements to those assets); $37 billion
in personal property (such as vehicles, equipment, telecommunications
systems, computers, and software); and $27 billion in construction- in-
progress, the largest amount of which belongs to the Corps of Engineers.
While DOD is not presently required to report dollar values for its
weapons systems and support PP& E used in the performance of military
missions, such reporting will be required beginning October 1, 2002. 7 The
amount subject to reporting will likely be significant considering that
DOD has estimated an acquisition cost of over $64 billion for only three
of its major weapons systems acquisition programs.

Effective and efficient asset management and accountability is crucial to
DOD*s defense of our national interests. While the department has
undertaken several initiatives over the years to improve its asset
management and accountability systems, processes, and controls, material
weaknesses persist. As a result, DOD lacks reliable information about the
quantity, location, condition, and value of inventory and property*
including military equipment* critical to the department*s ability to
effectively meet military objectives and readiness goals. Ineffective and
inefficient asset management and accountability leave the department
vulnerable to fraud, waste, and abuse. Over the past 2 years, the DOD
Inspector General (IG) and we have issued numerous reports detailing
problems with asset management and accountability, including the following
examples.

6 Statement of Federal Financial Accounting Standards No. 6 states that
general PP& E is any property, plant, and equipment used in providing
goods and services. 7 Statement of Federal Financial Accounting Standards
No. 23, Eliminating the Category National Defense Property, Plant and
Equipment, was issued on May 8, 2003, and is

effective for periods beginning after September 30, 2002.

 DOD and its military services and units did not know how many Joint
Service Lightweight Integrated Suit Technology (JSLIST) 8 *commonly
referred to as *chem- bio suits** they had, their condition, and where
they were located. 9 This lack of visibility was due to several factors,
including the use of nonstandard, nonintegrated, stovepiped systems.
Nonintegrated systems are unable to share data across business
applications and therefore, multiple manual data entries must be made into
numerous stand- alone systems, which result in errors, add significantly
to administrative costs, and generally exacerbate asset visibility
problems. The methods used to control and maintain visibility over JSLIST
ranged from stand- alone automated systems, to spreadsheet applications,
to pen and paper, to nothing at all. For JSLIST, the result was that DOD
was excessing and selling these suits on the Internet for pennies on the
dollar, while at the same time procuring hundreds of thousands of new
garments annually. Similarly, a few years ago, the Defense Logistics
Agency (DLA) had problems identifying and removing from its inventory
defective Battle Dress Overgarments (BDO)* the JSLIST predecessor. As a
result, some of the defective suits were shipped to U. S. forces in high-
threat areas. In a June 2000 testimony, the DOD IG pointed out that a
physical count of BDOs could

not locate 420, 000 protective suits that were recorded in DLA*s
accountability database.

8 JSLIST is a universal, lightweight, two- piece garment (coat and
trousers) that when combined with footwear, gloves, and protective mask
and breathing device, forms the war fighter*s protective ensemble.
Together the ensemble is to provide maximum protection to the war fighter
against chemical and biological contaminants without negatively impacting
the ability to perform mission tasks.

9 U. S. General Accounting Office, DOD Management: Examples of Inefficient
and Ineffective Business Processes, GAO- 02- 873T (Washington, D. C.: June
25, 2002).

 DOD lacked effective processes and controls to ensure that easily
pilferable and sensitive items were properly recorded and safeguarded. For
example, we found that the military services failed to record all of

the pilferable and sensitive items acquired through purchase card
transactions, including the Navy*s failure to record a $757,000 purchase
comprised of 430 computers, 213 flat panel monitors, and other

computer hardware and software. 10 The Navy was unable to provide us with
evidence confirming the location of 187 of those computers and 87 of the
flat panel monitors. Similarly, in our recent review 11 of property
controls at three military treatment facilities, we found that items such
as a laptop computer, a Sony monitor, and a sterilizer were not recorded
in the property records. We also found that numerous recorded items could
not be located. Most of these were lower priced (under $5,000) or
pilferable items such as a personal digital assistant, a cellular
telephone, computer monitors, color printers, a handheld radio, and
various pieces

of medical equipment such as a stretcher, electric beds, and intravenous
pumps.

Environmental and Disposal Under federal, state, and international law,
DOD faces a major funding

Liabilities requirement associated with environmental cleanup and disposal
resulting from prior and current operations and from the production of
weapons

systems. In its fiscal year 2002 financial statements, DOD reported an
estimated liability of $59 billion to manage and clean up or contain a
diverse population of environmental contamination comprised of

 $22 billion for closed and open sites where past and current waste
disposal practices, leaks, spills, and other activities have created a
risk to public health or the environment;

 $14 billion for closed, transferring, and active military ranges where
contamination and unexploded ordnance create environmental hazards; and

10 U. S. General Accounting Office, Purchase Cards: Navy Is Vulnerable to
Fraud and Abuse but Is Taking Action to Resolve Control Weaknesses, GAO-
02- 1041 (Washington, D. C.: Sept. 27, 2002). 11 U. S. General Accounting
Office, Military Treatment Facilities: Internal Control Activities Need
Improvement, GAO- 03- 168 (Washington, D. C.: Oct. 25, 2002).

 $23 billion for cleanup, demilitarization, and disposal of nuclear and
non- nuclear weapons systems, chemical weapons, and munitions.

DOD*s reported cost represents the current value of estimated future cash
outlays that will need to be paid from appropriations; therefore, the
Congress needs reliable information in order to plan how much and when to
provide funding for cleanup activities. In past years, we and the DOD IG
have repeatedly reported that the environmental liability amounts
presented in DOD*s financial statements were not reliable because the
department did not have (1) sufficient guidance for identifying and
categorizing cleanup activities whose costs must be included in the
liability calculation, (2) complete inventories of the sites and weapons
systems that will require cleanup or containment, and (3) valid cost
estimating models that produce consistent and supportable liability
estimates. These deficiencies were not systems related but rather resulted
from inadequate policies and processes and a lack of leadership. We have
also issued individual reports on several environmental cleanup

categories, including training ranges and on- going operations. 12 In
those reports, we specifically cite weaknesses related to DOD*s lack of
complete site inventories, which means that the department*s reported
liability amount is likely understated. In line with our findings, the Air
Force has recently confirmed that it is investigating possible radioactive
waste buried at more than 80 former and current air bases around the
country. According to the Air Force, it lost track of the waste burial
sites because of

poor record keeping and is now trying to identify and inspect the lands
for safety concerns. Costs for cleaning up these sites are not currently
included in the Air Force*s reported liability amounts. In addition,
incomplete identification of cleanup sites on installations that are
currently being used by the military could have negative consequences for
future base reutilization, alignment, and closure decisions.

Budget and Cost DOD*s appropriation for fiscal year 2002 represented 18
percent of the total

Information U. S. budget and 48 percent of discretionary funds. For fiscal
year 2002,

DOD reported disbursing $347 billion to, among other things, make 12 U. S.
General Accounting Office, Environmental Liabilities: DOD Training Range
Cleanup Cost Estimates Are Likely Understated, GAO- 01- 479 (Washington,
D. C.: Apr. 11, 2001) and Environmental Liabilities: Cleanup Costs From
Certain DOD Operations Are Not Being Reported, GAO- 02- 117 (Washington,
D. C.: Dec. 14, 2001).

payments to 5.7 million military and civilian personnel and annuitants,
process and pay 11.2 million contractor invoices, and make 7.3 million
travel payments. The magnitude of the dollars and number of transactions
involved makes it imperative that DOD maintain accurate fund balances and
properly account for costs; however, DOD financial management systems and
processes continue to be significant impediments to reporting complete and
accurate information with respect to budgetary and disbursement
activities.

Weaknesses in DOD*s accounting for its funds include (1) the inability to
reconcile its balances to Treasury*s, a process similar in concept to
individuals reconciling their checkbooks with their bank statements, (2)
payment recording errors, including disbursements that are not

properly matched to specific obligations recorded in the department*s
records, and (3) limited ability to track the use of funds appropriated
for contingency purposes. For example,  For fiscal year 2002, we found
that DOD had at least $7.5 billion in unexplained differences between
Treasury and DOD fund activity records. Many of these differences
represent disbursements made and reported to Treasury that had not yet
been properly matched to

obligations and recorded in DOD accounting records. In addition to these
unreconciled amounts, DOD identified and reported an additional $3.6
billion in payment recording errors. These include disbursements that DOD
has specifically identified as containing erroneous or missing information
and that cannot be properly recorded and charged against the correct,
valid fund account. DOD records many of these payment problems in suspense
accounts and made $1.6 billion in unsupported adjustments to its fund
balances at the end of fiscal year 2002 to account for a portion of these
payment recording errors. These adjustments did not resolve the related
errors.

 In June 2001, we reported that DOD*s financial systems could not
adequately track and report on whether the $1.1 billion in earmarked funds
that the Congress provided to DOD for spare parts and associated
logistical support were actually used for their intended purpose. 13 The
vast majority of the funds* 92 percent* were transferred to the military
services operation and maintenance accounts. Once transferred, the

13 U. S. General Accounting Office, Defense Inventory: Information on the
Use of Spare Parts Funding Is Lacking, GAO- 01- 472 (Washington, D. C.:
June 11, 2001).

department could not separately track the use of the funds. As a result,
DOD lost its ability to assure the Congress that the funds it received for
spare parts purchases were used for, and only for, the designated purpose.

 In April 2003, we reported 14 that DOD was not able to separately track
Emergency Response Funds provided under appropriations in fiscal years
2002 and 2003 ($ 20. 5 billion). These funds were commingled in DOD*s
regular appropriations accounts with funds appropriated for other
purposes. Because DOD*s accounting system only captures data on total
obligations and does not distinguish among original sources of

funds, DOD is not able to identify those obligations that are funded from
emergency response funds.

 In December 2000, we reported 15 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 amount of
any such savings because the department lacked actual cost

data. Further, in March 2002, we testified 16 that while significant
savings were being achieved, it has been difficult to determine the
magnitude of those savings.

DOD*s 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 have the systems and processes in place to
capture the required cost information from the hundreds of millions of

transactions it processes each year. Lacking complete and accurate overall
life- cycle cost information for weapon systems impairs DOD*s and
congressional decision makers* ability to make fully informed judgments
about which weapons, or how many, to buy. DOD has acknowledged that the
lack of a cost accounting system is its largest impediment to controlling
and managing weapon systems costs.

14 U. S. General Accounting Office, Defense Budget: Tracking of Emergency
Response Funds for the War on Terrorism, GAO- 03- 346 (Washington, D. C.:
Apr. 30, 2003). 15 U. S. General Accounting Office, DOD Competitive
Sourcing: Results of A- 76 Studies Over the Past 5 Years, GAO- 01- 20
(Washington, D. C.: Dec. 7, 2000).

16 U. S. General Accounting Office, Competitive Sourcing: Challenges in
Expanding A- 76 Governmentwide, GAO- 02- 498T (Washington, D. C.: Mar. 6,
2002).

An April 2001 report on the results of an independent study of DOD*s
financial operations commissioned by the Secretary of Defense concluded
that DOD lacked the ability to routinely generate cost- based metrics to
link financial management to DOD*s goals. 17 For example, DOD*s reporting
under the Government Performance and Results Act of 1993 (GPRA) 18 often
did not address the cost- based efficiency aspect of performance,

making it difficult for DOD to fully assess the efficiency of its
performance. DOD*s most recent performance plan (fiscal year 2001)
included 45 unclassified metrics but only a few of those contained
efficiency measures based on costs.

Financial Management For fiscal year 2003, DOD estimated that it would
spend approximately $18

Systems billion 19 to operate, maintain, and develop business systems. Of
that

amount, $5.2 billion relates directly to business systems and the
remaining $12.8 billion relates to the infrastructure that supports the
systems. While funding system development and modernization activities is
crucial, it is only part of the solution needed to improve DOD*s current
business systems and operating environment. Key ingredients to successful
systems development and modernization include effective management and
oversight of ongoing and planned investments.

However, in February 2003, 20 we reported that DOD had yet to establish
the necessary departmental investment governance structure and process
controls needed to adequately align ongoing investments with its
architectural goals and direction. An effective governance structure
should include

17 Department of Defense, Transforming Department of Defense Financial
Management: A Strategy for Change (Washington, D. C.: Apr. 13, 2001). 18
Government Performance and Results Act of 1993, Pub. L. 103- 62, 107 Stat.
285, Aug. 3, 1993. Pertinent performance planning and reporting
requirements have been codified, as amended, at 31 U. S. C. sections 1115
and 1116.

19 U. S. General Accounting Office, DOD Business Systems Modernization:
Continued Investment in Key Accounting Systems Needs to be Justified, GAO-
03- 465 (Washington, D. C.: Mar. 28, 2003). 20 U. S. General Accounting
Office, DOD Business Systems Modernization: Improvements to Enterprise
Architecture Development and Implementation Efforts Needed, GAO- 03- 458
(Washington, D. C.: Feb. 28, 2003).

 a hierarchy of investment review boards composed of representatives from
across the department who are assigned investment selection and control
responsibilities based on project threshold criteria;

 a standard set of investment review and decision- making criteria for
use by all boards, including criteria to ensure compliance and consistency
with its newly developed enterprise architecture or *blueprint for
reform*; and

 a specified, near term date by which ongoing investments have to be
subject to this standard investment review process, and by which decisions
should be made as to whether to proceed with each

investment. DOD*s lack of effective oversight and process controls over IT
investments perpetuates the existence of an incompatible, duplicative, and
overly costly systems environment, which undermines its ability to
optimally support mission performance. For example,  In March 2003, we
reported 21 that DOD did not effectively manage and

oversee its planned investment of over $1 billion in four Defense Finance
and Accounting Service (DFAS) systems modernization efforts. DOD invested
approximately $316 million in these projects without first

demonstrating that they would markedly improve the information needed for
decision- making and financial reporting purposes. The DOD Comptroller
terminated one of the four projects we reviewed after an investment of
over $126 million, citing poor program performance and increasing costs.
Investments in the other three projects continue despite the absence of
the requisite analyses of costs, benefits, and risks to demonstrate that
the projects will produce value commensurate with the cost being incurred.

 In March 2002, the DOD IG reported that DOD*s Joint Total Asset
Visibility Program (JTAV) system provided incomplete asset visibility to
military commanders in chief (CINCs) and joint task force commanders. 22
Required capabilities were not developed before the

21 GAO- 03- 465. 22 DOD Inspector General, Information Technology:
Effectiveness of the Joint Total Asset Visibility Program; Audit Report D-
2002- 057 (Arlington, Va.; Mar. 11, 2002).

program was placed into service, including asset and personnel visibility
for the warfighter, accurate and timely source data, and data links to
critical data in other DOD systems. As a result, CINCs and joint task
force commanders did not have access, through the program, to all required
data on the location, movement, status, and identity of military units,
personnel, equipment, and supplies as intended.  In June 2002, DOD
reported 23 that shortcomings in existing

nonintegrated personnel and pay systems caused delays in military payroll
payments (some as much as 6 or more months after the event occurred) and
resulted in errors (both under- and overpayments). DOD estimated that
system input errors ranged from 5 to 15 percent and that these errors
necessitated complex retroactive computations, data reconciliation and
corrections, losses due to overpayments, debt processing, and costs to
recoup overpayments.

 As of October 2002, DOD reported that its current business systems
environment consisted of 1,731 systems and system acquisition projects (a
number that has since risen to about 2,300 as DOD has identified
additional systems). DOD reported that it had 374 systems to support
civilian and military personnel matters, 335 systems to support finance
and accounting functions, and 310 systems that produce information for
management decision making.

As we have previously reported, 24 these numerous systems have 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 transactions and interfaces that combine to exacerbate the
problems of data integrity. While the department recognizes the

uncontrolled proliferation of systems and the need to eliminate as many
systems as possible and to integrate and standardize those that remain,
DOD components continue to receive and control their own IT investment
funding.

23 Department of Defense, Report to Congress: Defense Integrated Military
Human Resources System (Personnel and Pay), June 2002. 24 U. S. General
Accounting Office, DOD Financial Management: Important Steps Underway But
Reform Will Require a Long- term Commitment, GAO- 02- 784T (Washington, D.
C.: June 4, 2002).

Weak Control Fundamental flaws in DOD*s systems, processes, and overall
control Environment

environment leave the department at risk of fraud, waste, and abuse. Over
the past few years, we have reported numerous instances of breakdowns in*
or lack of* internal control that have had serious economic and legal

consequences for the department, including  government travel card
delinquency rates for the Army and the Navy

that were nearly double those of federal civilian agencies; 25  pervasive
purchase and travel card control breakdowns that resulted in

numerous instances of potentially fraudulent, improper, and abusive
transactions and increased DOD*s vulnerability to theft and misuse of
government property; 26  inadequate management and reporting on the
funding associated with

the Air Force*s contracted depot maintenance that resulted in understating
the dollar value of year- end carryover work by tens of millions of
dollars; 27  adjustments to DOD*s closed appropriations that resulted in
about $615

million in adjustments that should not have been made, including $146
million that was illegal; 28

25 U. S. General Accounting Office, Travel Cards: Control Weaknesses Leave
Navy Vulnerable to Fraud and Abuse, GAO- 03- 147 (Washington, D. C.: Dec.
23, 2002); Air Force Management Has Reduced Delinquencies, but
Improvements in Controls Are Needed,

GAO- 03- 298 (Washington, D. C.: Dec. 20, 2002); Travel Cards: Control
Weaknesses Leave Army Vulnerable to Potential Fraud and Abuse, GAO- 03-
169 (Washington, D. C.: Oct. 11, 2002). 26 U. S. General Accounting
Office, Purchase Cards: Control Weaknesses Leave the Air Force Vulnerable
to Fraud, Waste, and Abuse, GAO- 03- 292 (Washington, D. C.: Dec. 20,
2002);

Purchase Cards: Navy Is Vulnerable to Fraud and Abuse but Is Taking Action
to Resolve Control Weaknesses, GAO- 02- 1041 (Washington, D. C.: Sept. 27,
2002); Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud,
Waste, and Abuse, GAO- 02- 732 (Washington, D. C.: June 27, 2002);
Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to
Fraud and Abuse, GAO- 02- 32 (Washington, D. C.: Nov. 30, 2001). 27 U. S.
General Accounting Office, Air Force Depot Maintenance: Management
Improvements Needed for Backlog of Funded Contract Maintenance Work, GAO-
02- 623 (Washington, D. C.: June 20, 2002).

28 U. S. General Accounting Office, Canceled DOD Appropriations: $615
Million of Illegal or Otherwise Improper Adjustments, GAO- 01- 697
(Washington, D. C.: July 26, 2001).

 hundreds of millions of dollars of over- and underpayments to
contractors; 29 and  lost opportunities to collect millions of dollars of
reimbursements for services performed in military treatment facilities
because not all patients with third party insurance coverage were
identified or because those insurers were not billed.

In general, DOD does not have the necessary control processes and
procedures in place to identify problem situations like the ones listed
above. However, DOD usually takes action to try to correct and then
prevent these problems once they have been identified by auditors.

Underlying Causes of In the past, DOD initiated a number of departmentwide
reform initiatives to

Financial and Related improve its financial operations as well as other
key business support

processes. While these initiatives produced some incremental Business
Process

improvements, they did not result in the fundamental reform necessary to
Reform Challenges

resolve these long- standing management challenges. For example, in 1989,
DOD began the Corporate Information Management (CIM) initiative, which was
expected to save billions of dollars by streamlining operations and
implementing standard information systems across the department to

support common business operations. DOD intended CIM to reform all of its
functional areas* including finance, procurement, material management, and
human resources* through the consolidation, standardization, and
integration of its numerous, duplicative information systems. DOD spent
billions of dollars on this initiative with little sound analytical
justification. Rather than relying on a rigorous decision- making process
for information technology investments, as used in leading private

and public organizations we studied, DOD made systems decisions without
(1) appropriately analyzing cost, benefits, and technical risks, (2)
establishing realistic project schedules, or (3) considering how business

process improvements could affect information technology investments. For
one effort alone, DOD spent about $700 million trying to develop and
implement a single system for the material management business area*

but this effort proved unsuccessful. After 8 years and about $20 billion
in 29 U. S. General Accounting Office, DOD Contract Management:
Overpayments Continue and Management and Accounting Issues Remain, GAO-
02- 635 (Washington, D. C.: May 30, 2002).

expenditures, DOD abandoned the CIM initiative. However, some of the
conditions that led to its defeat remain today.

We first identified underlying causes for the department*s inability to
resolve its long- standing financial management problems, as well as the
other areas of its operations most vulnerable to waste, fraud, abuse, and
mismanagement, in our May 1997 testimony. 30 We have continued to
highlight in various testimonies what we believe are the underlying
reasons for the department*s inability to fundamentally reform its
business operations. 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. Lack of Leadership and

Historically, DOD has not routinely assigned accountability for
Accountability

performance to specific organizations or individuals who have sufficient
authority to accomplish desired goals. For example, under the Chief
Financial Officers Act (CFO) of 1990, 31 it is the responsibility of the
agency CFO to establish the mission and vision for the agency*s future
financial management and to direct, manage, and provide oversight of
financial management operations. 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 other 80 percent comes from DOD*s
other business operations. In addition, DOD*s past experience has
suggested that top management has not had a proactive, consistent, and

30 U. S. General Accounting Office, DOD High- Risk Areas: Eliminating
Underlying Causes Will Avoid Billions of Dollars in Waste, GAO/ T- NSIAD/
AIMD- 97- 143 (Washington, D. C.: May 1, 1997). 31 Chief Financial
Officers Act of 1990, Pub. L. 101- 576, 104 Stat. 2842, Nov. 15, 1990
(codified as amended in scattered sections of 31 U. S. C.).

continuing role in building capacity, integrating daily operations for
achieving performance goals, and creating incentives. Major improvement
initiatives must have the direct, active support and involvement of the
Secretary and Deputy Secretary of Defense to ensure that daily activities
throughout the department remain focused on achieving shared, agencywide
outcomes and success. Furthermore, sustaining top management commitment to
performance goals is a particular challenge

for DOD because the average 1.7- year tenure of the department*s top
political appointees has served to hinder long- term planning and
followthrough. Based on our survey of best practices of world- class
financial management organizations, 32 strong executive leadership is
essential to (1) making financial management an entitywide priority, (2)
redefining the

role of finance, (3) providing meaningful information to decision makers,
and (4) building a team of people that delivers results.

Cultural Resistance and Cultural resistance to change, military service
parochialism, and

Parochialism stovepiped operations 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. For example, the effectiveness of the
Defense Management Council, established in 1997 to help break down

organizational stovepipes and overcome cultural resistance to change, 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. 33 DOD*s stovepiped approach is
most evident in its current financial management systems environment,
which DOD recently estimated to include approximately 2, 300 systems and
system development projects* many of which were developed in piecemeal
fashion and evolved to accommodate different organizations,

each with its own policies and procedures. 32 U. S. General Accounting
Office, Executive Guide: Creating Value Through World- class Financial
Management, GAO/ AIMD- 00- 134 (Washington, D. C.: Apr. 1, 2000). 33 U. 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).

Unclear Goals and Lack of clear, linked goals and performance measures has
handicapped

Performance Measures DOD*s past reform efforts. 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. According to its fiscal year 2002 Performance and
Accountability report, DOD is still in the process of developing
measurable annual performance goals and objectives.

In our assessment of DOD*s Fiscal Year 2000 Financial Management
Improvement Plan 34 *its most recent plan* we found that it presented the
military services* and DOD components* individual improvement initiatives
for reforming financial management but did not clearly articulate how
their individual efforts would result in a collective, integrated DOD-
wide approach to financial management improvement. In addition, the
product did not include performance measures that could be used to assess
DOD*s progress in resolving its financial management problems. As a
result, the product was more a compilation of a data call than a strategic
plan. Furthermore, while DOD plans to invest billions of dollars in
modernizing its financial management systems, it currently does not have
effective management governance and controls in place to guide and direct
these investments. We will discuss DOD*s work to develop an initial
business enterprise architecture later in our testimony.

Lack of Incentives for The final underlying cause of the department*s
long- standing inability to

Change 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 its decision makers 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.* 34 U. S.
General Accounting Office, Financial Management: DOD Improvement Plan
Needs Strategic Focus, GAO- 01- 764 (Washington, D. C.: Aug. 15, 2001).

The lack of incentive has 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
than on achieving better program outcomes. The fact that a given program
may have cost more than estimated, taken longer to complete, and not

generated results or performed 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 decision makers 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.
Keys to Fundamental

Successful reform of DOD*s fundamentally flawed financial management
Financial Management

operations must simultaneously focus on its systems, processes, and
people. While DOD has made some encouraging progress in addressing Reform
and Progress

specific challenges, it is still in the very early stages of a
departmentwide to Date

reform that will take many years to accomplish. As a result, it is not
possible to predict when* or even whether* the effort will be successful.

Our experience has shown there are several key elements that collectively
would enable the department to effectively address the underlying causes
of its inability to resolve its long- standing financial management
problems. For the most part, these elements, which should not be viewed as
independent actions but rather a set of interrelated and interdependent
actions, are consistent with those discussed in the department*s April
2001 financial management transformation report. 35 These elements, which
we believe are 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 reform;  providing for
sustained leadership by the Secretary of Defense and resource control to
implement needed financial management reforms;

35 Department of Defense, Transforming Department of Defense Financial
Management: A Strategy for Change, (Washington, D. C.: Apr. 13, 2001).

 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 and implementing an enterprise architecture to guide and

direct financial management modernization investments; and  ensuring
effective executive and congressional oversight and

monitoring. While DOD still has a long way to go, it has made serious
efforts to address many of the key areas over the past 2 years. We will
discuss each of the areas and provide examples of improvement actions*
long- term and/ or short- term* where relevant. Both long- term actions
focused on the Secretary*s envisioned business transformation and short-
term actions focused on improvements within existing systems and processes
are critical to forward movement.

Integrated Business Reform As we previously reported, 36 establishing the
right goal is essential for

Strategy success. Central to effectively addressing DOD*s financial
management

problems will be the recognition that they cannot be addressed in an
isolated fashion separate from the other high- risk areas and management
challenges facing the department. Further, successfully reforming the
department*s operations* which consist of people, business processes, and
technology* will be critical if DOD is to effectively address the
deeprooted organizational emphasis on maintaining business- as- usual
across the department. DOD has recently taken important steps to begin
improving its people, processes, and systems.

We have reported 37 that many of DOD*s financial management shortcomings
were attributable in part to human capital issues. In April 2002, DOD
published a departmentwide strategic plan for its civilian employees,
which sets forth its vision to *design, develop and implement

36 U. S. General Accounting Office, Department of Defense: Progress in
Financial Management Reform, GAO/ T- AIMD/ NSIAD- 00- 163 (Washington, D.
C.: May 9, 2000).

human resources policies, strategies, systems, and tools to ensure a
mission- ready civilian workforce that is motivated to excel.* Although a
positive step, the plan needs further refinement to achieve the Secretary
of Defense*s transformation initiatives, including (1) integration of
component- level plans with the department- level plan, (2) development of
key elements, such as results- oriented performance measures, and (3)
integration with military personnel planning and sourcing decisions. 38
Recently, DOD proposed a National Security Personnel System that would
provide for wide- ranging changes in DOD*s civilian personnel pay and

performance management. While we strongly support the concept of
modernizing and making more flexible federal human capital policies, we
have warned that the appropriate infrastructure and adequate safeguards
need to be in place for successful implementation and to prevent abuse. 39
In addition, in its fiscal year 2003 Defense Authorization Act, DOD sought

and obtained authorization to prescribe certification and credential
standards for its professional accounting positions and is currently
drafting the relevant regulations. These are important steps in DOD*s
plans to develop a human capital investment strategy and plan.

The department recently renamed its Financial Management Modernization
Program to the Business Management Modernization Program, a move that
recognizes that financial management is a crosscutting issue that affects
virtually all DOD business areas. For example, improving its financial
management operations so that they can produce timely, reliable, and
useful cost information is essential to effectively measure its progress
towards achieving many key outcomes and goals across virtually the entire

spectrum of DOD*s business areas. 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. In line with this, DOD has designated

37 U. S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO- 01- 244 (Washington, D. C.:
Jan. 1, 2001). 38 U. S. General Accounting Office, DOD Personnel: DOD
Actions Needed to Strengthen Civilian Human Capital Strategic Planning and
Integration with Military Personnel and Sourcing Decisions, GAO- 03- 475
(Washington, D. C.: Mar. 28, 2003).

39 U. S. General Accounting Office, Human Capital: DOD*s Civilian
Personnel Strategic Management and the Proposed National Security
Personnel System, GAO- 03- 493T (Washington, D. C.: May 12, 2003).

owners of seven key department business lines, 40 or domains, to transform
the department*s business operations and implement its enterprise
architecture. As we mentioned earlier, and it deserves emphasis, the
department has reported that an estimated 80 percent of the data needed
for sound financial management comes not from the Comptroller*s operations
but 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 reflects its
lack of an integrated approach to addressing 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. In fact,
DOD is redefining its performance metrics and program outcomes as they
relate to four risk areas: (1) force management, (2) operations, (3)
future challenges, and (4) institutional.

Secretary of Defense Rumsfeld recognized the far- reaching nature of DOD*s
financial management problems and, on September 10, 2001, he announced a
broad, top- priority initiative intended to *transform the way the
department works and what it works on.* This new broad- based business
transformation program incorporates a number of defense reform initiatives
begun under previous administrations but also encompasses additional
fundamental business reform proposals. However, like defense reform
initiatives begun under the previous administration, the transformation
program has not yet developed an overarching plan tying all the individual
reform efforts together. The development of an overarching plan could take
on increased importance, particularly where initiatives are interrelated
and up- front investments are required.

DOD has already taken a number of actions under its business
transformation program. In this context, the Secretary established a
number of top- level councils, committees, and boards, including the
Senior Executive Council, the Business Initiative Council, and the Defense

40 DOD*s seven business process areas include: (1) acquisition/
procurement, (2) finance, accounting operations, and financial management,
(3) human resource management, (4) logistics, (5) strategic planning and
budgeting, (6) installations and environment, and (7) technical
infrastructure.

Business Practice Implementation Board. The Senior Executive Council was
established to help guide efforts across the department to improve its
business practices. This council* 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,
Technology and Logistics (AT& L)* was established to function as the
*board of directors* for the department. The Business Initiative Council*
comprised of senior DOD and military service officials and headed by the
Under Secretary of Defense for Acquisition, Technology and Logistics* was
established to encourage the military services to explore new moneysaving
business practices to help offset funding requirements for transformation
and other initiatives. The Defense Business Practice Implementation Board
is an advisory board whose mission is to make

recommendations to the Senior Executive Committee on strategies for
implementing best business practices in matters relating to management,
acquisition, production, logistics, personnel leadership, and the defense
industrial base.

Our research of successful public and private sector organizations shows
that such entities, comprised of enterprisewide executive leadership,
provide valuable guidance and direction when pursuing integrated

solutions to corporate problems. Inclusion of the department*s top
leadership could help to break down the cultural barriers to change and
result in an integrated DOD approach for business reform.

Sustained Leadership and The department*s successful Year 2000 effort
illustrated, and our survey of

Resource Control leading financial management organizations 41 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 to successfully implementing financial
management reform. For example, in the case of the Year 2000 computer
challenge, the personal, active involvement of the Deputy Secretary of
Defense played a key role in building entitywide support and focus. Given
the long- standing and deeply entrenched nature of the department*s
financial management

problems* combined with the numerous competing DOD organizations, 41 GAO/
AIMD- 00- 134.

each operating with varying, 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, 42 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.* To demonstrate
his commitment towards reforming the department, Secretary Rumsfeld
designated improving financial management operations, which included

not only finance and accounting but also such business areas as logistics,
acquisition, and personnel management, as 1 of the department*s top 10
priorities for reform. 43 While the commitment of the Secretary is vital
to the success of any DOD- wide reform effort, strong, sustained executive
leadership* over a number of years and administrations* will be key to
changing a deeply rooted culture and to truly transforming DOD*s business
systems and operations so that the department can meet the mandate of the
CFO Act and achieve the President*s Management Agenda goal of improved
financial management performance. Additionally, the tenure of the
department*s top political appointees has

generally been short in duration and as a result, it is sometimes
difficult to maintain the focus and momentum that are needed to resolve
the management challenges facing DOD. This is particularly evident with
the

postwar reconstruction of Iraq along with DOD*s substantial commitment to
the continuing war on terrorism. The resolution of the array of
interrelated business system management challenges that DOD faces is
likely to span several administrations. As we have proposed in previous
congressional testimonies, 44 one option to address the continuity issue
would be the establishment of the position of chief operating or

42 Department of Defense, Transforming Department of Defense Financial
Management: A Strategy for Change (Washington, D. C.: Apr. 13, 2001). 43
The Secretary*s top ten priorities: successfully pursue the global war on
terrorism, strengthen joint warfighting capabilities, transform the joint
force, optimize intelligence capabilities, improve force manning, new
concepts of global engagement, counter the proliferation of weapons of
mass destruction, homeland security, streamline DOD business processes,
and improve interagency processes, focus, and integration.

44 U. S. General Accounting Office, DOD Financial Management: Integrated
Approach, Accountability, Transparency, and Incentives Are Keys to
Effective Reform, GAO- 02- 497T (Washington, D. C.: Mar. 6, 2002); U. S.
General Accounting Office, DOD Financial Management: Important Steps
Underway But Reform Will Require a Long- term

Commitment, GAO- 02- 784T (Washington, D. C.: June 4, 2002).

management officer. This position could be filled by an individual
appointed for a set term of 5 to 7 years with the potential for
reappointment. Such an individual should have a proven track record as a
business process change agent for large, diverse organizations* experience
necessary to spearhead business process transformation across the
department and serve as an integrator for business reform.

Clear Lines of Another key to reform is the establishment of clear lines
of responsibility, Responsibility and

decision- making authority, and resource control for actions across the
department tied to the Secretary. As we previously reported, 45 such an
Accountability

accountability structure should emanate from the highest levels and
include the secretary 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 46 and Steering Committees as
the governing bodies that oversee the activities related to the
modernization effort. The Executive Committee is to advise the DOD
Comptroller on the modernization effort and provide strategic direction,
whereas the Steering Committee is to advise the Executive Committee on the
program*s performance and provide guidance to the program

management office. Results- oriented

As discussed in our January 2003 report on DOD*s major performance and
Performance

accountability challenges, 47 establishing a results orientation is
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

45 GAO/ NSIAD- 00- 72 and GAO- 03- 458. 46 Effective December 28, 2001,
Sec. 1009 of the Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001, Pub. L. No. 107- 107, 115 Stat. 1012, 1206 (codified at
10 U. S. C. Sec. 185), required the Secretary of Defense to establish a
Financial Management Modernization Executive Committee.

47 U. S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO- 03- 98 (Washington, D. C.: Jan.
1, 2003).

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 dayto- day
management purposes. To its credit, DOD has initiated a number of
improvement actions to address accountability and financial information

deficiencies.  In its most recent performance and accountability report,
DOD stated

that it had (1) validated cost- estimating models used in calculating
environmental liability costs, (2) developed a methodology for estimating
liabilities associated with nuclear powered ships and submarines, and (3)
issued improved guidance* for all areas except ongoing operations* to help
components compile complete, accurate, and fully substantiated
environmental liability data. In addition, DOD claimed that it is
developing and maintaining supporting documentation and audit trails for
30,000 closed contamination sites, including open and closed installations
and base reutilization and alignment sites.

 Through training and implementation of more efficient and effective
processes, DOD is improving its fund accounting and disbursement
activities. During fiscal year 2002, DOD improved its disbursement
activity reporting and its procedures for reconciling its fund balance
records with similar information maintained by the Department of Treasury.
As a result, the number and amount of disbursement disparities between
DOD*s records and Treasury*s records decreased from the previous year. DOD
is taking the necessary first steps to identifying and eliminating payment
recording problems.

 DOD*s major components must now prepare quarterly financial statements
along with extensive footnotes that explain any improper balances or
significant variances from previous year quarterly statements. In
addition, the midyear and end- of- year financial

statements must be briefed to the DOD Comptroller by the service Assistant
Secretary for Financial Management or the head of the defense agency. We
have observed several of the midyear briefings and have noted that the
practice of preparing and explaining interim

financial statements is instilling discipline into DOD*s financial
reporting processes, which will help improve the reliability of DOD*s
financial data.

 DOD has begun to develop methodologies for valuing and depreciating the
cost of its weapons systems and other equipment used to support its
military operations. The department completed a similar effort to obtain a
baseline for the majority of its real property assets in fiscal year 1999.
These valuation efforts represent important steps toward obtaining cost
data for management decision making and financial

reporting. However, in order for the department to reap the full benefits
of these and similar efforts, it must develop and implement efficient and
effective systems, processes, and controls* consistent with its enterprise
architecture* to sustain the calculated baselines and capture subsequent
additions, modifications, and deletions of property assets.

Since the Secretary has established an overall business process
transformation goal that will require a number of years to achieve, going
forward it is especially critical for managers throughout the department
to focus on specific metrics that, over time, collectively will translate
to achieving this overall goal. It is 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 for tracking progress toward this goal.

In the short term, it is important to focus on actions that can be taken
using existing systems and processes. It is critical to establish interim
measures to both track performance against the department*s overall
transformation goals and facilitate near- term successes using existing
systems and processes. The department has established an initial set of
metrics intended to evaluate financial performance and it has seen
improvements. For example,

 With respect to closed appropriation accounts, during the first 6 months
of fiscal year 2002, DOD reported a reduction in the dollar value of
adjustments to closed appropriation accounts of about 80 percent from the
same 6- month period in fiscal year 2001.

 For DOD individually billed travel cards, the delinquency rate dropped
from 8.9 percent in March 2002 to 5.7 percent in March 2003.  From March
2001 through March 2003, DOD reduced its commercial pay

backlogs (payment delinquencies) by 46 percent and its payment recording
errors by 43 percent.

While DOD*s metrics show significant improvements from 2001 to today,
statistics for the last few months show that progress has slowed or even
taken a step backward for payment recording errors and commercial pay
backlogs. Our report on DOD*s metrics program 48 included a caution that,
without modern integrated systems and the streamlined processes they

engender, reported progress may not be sustainable if workload is
increased. It could be that DOD is experiencing problems accounting for
the additional volume of transactions resulting from contingency funding
and increased appropriations amounts.

We note that DOD is still formulating departmentwide performance goals and
measures to align with the outcomes described in its strategic plan* the
September 2001 Quadrennial Defense Review. We agree with the department*s
efforts to expand the use of appropriate metrics to guide its financial
management reform efforts. However, it is important for DOD to synchronize
its development of these metrics with it efforts to develop departmentwide
goals and measures, including nonfinancial metrics, to ensure consistency.

Incentives and Another key to breaking down the parochial interests and
stovepiped Consequences

approaches that have plagued previous reform efforts is 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
decision makers to initiate and implement efforts that result in
fundamentally reformed financial management and other business support

operations. In addition, such incentives and consequences are 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.

48 U. S. General Accounting Office, Financial Management: DOD*s Metrics
Program Provides Focus for Improving Performance, GAO- 03- 457
(Washington, D. C.: Mar. 28, 2003).

If people are to be held more accountable for achieving desired outcomes,
then DOD must make sure that such outcomes are in fact, achievable. Along
these lines, DOD has taken a positive step to reform its acquisition
process by revising part of its acquisition regulations related to weapons

systems. The revisions have focused primarily on (1) making sure
technologies are demonstrated to a high level of maturity before beginning
a weapon system program and (2) taking an evolutionary, or phased,
approach to developing a system. Separating technology development from a
weapons system development program would help curb incentives to over-
promise the capabilities of a new weapon system and to rely on immature
technologies. Also, an evolutionary approach to developing

requirements and making improvements to a system*s capabilities is
different from the historical approach of trying to deliver all desired
capabilities in one *big bang.* In addition, it has been reported that DOD
plans to begin using program cost estimates from the Office of the
Secretary of Defense*s Cost Analysis Improvement Group, rather than those
prepared by the military services, which may lead to more realistic cost
estimates when pricing programs. Enterprise Architecture Enterprise
architecture development, implementation, and maintenance

are a basic tenet of effective IT management. Used in concert with other
IT management controls, an architecture can increase the chances for
optimal mission performance. We have found that attempting to modernize
operations and systems without an architecture leads to operational and
systems duplication, lack of integration, and unnecessary expense. Our
best practices research of successful public and private sector
organizations has similarly identified enterprise architectures as
essential to effective business and technology transformation. 49

Following our May 2001 report, 50 the Secretary of Defense directed the
development and implementation of a departmentwide enterprise
architecture, and established a program to accomplish this. In doing so,
the Secretary assigned responsibility for the program to the DOD

49 U. S. General Accounting Office, Executive Guide: Improving Mission
Performance through Strategic Information Management and Technology, GAO/
AIMD- 94- 115 (Washington, D. C.: May 1, 1994). 50 U. 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).

Comptroller, in coordination with the Under Secretary of Defense for AT& L
and the DOD Chief Information Officer. To assist in overseeing and guiding
the program, the DOD Comptroller established the Financial Management
Modernization Executive Committee to oversee the architecture and systems
modernization efforts, and the Financial Management Modernization Steering
Committee to advise and guide the program. Efforts began in earnest in
April 2002 when DOD hired a contractor to develop the department*s
enterprise architecture.

The Clinger- Cohen Act of 1996 51 requires major departments and agencies
to develop, implement, and maintain an integrated architecture. As we
previously reported, 52 such an architecture can help ensure that the

department invests only in integrated business system solutions and,
conversely, will help move resources away from non- value- added legacy
business systems and nonintegrated business system development efforts.
Without a complete enterprise architecture to guide information

technology investments, and adequate oversight of IT investments to ensure
compliance, DOD runs the serious risk that its investments will perpetuate
the existing systems environment that suffers from systems duplication,
limited interoperability, and unnecessarily costly operations and
maintenance.

The fiscal year 2003 National Defense Authorization Act (the Act), 53
enacted on December 2, 2002, required DOD to develop by May 1, 2003, a
financial management enterprise architecture and a transition plan for
implementing the architecture that meet certain requirements. The Act also
requires DOD to control expenditures for financial system improvements
while the architecture and transition plan are being developed and after
they are completed. According to DOD, the Comptroller approved the initial
version of the department*s business enterprise architecture in May 2003.
Developing and implementing a business enterprise architecture for an
organization as large and complex as DOD is a formidable challenge but it
is key to achieving the Secretary*s vision of relevant, reliable, and
timely financial information needed to

51 Clinger- Cohen Act of 1996, Pub. L. 104- 106, Div. E, 110 Stat. 679,
Feb. 10, 1996 (codified as amended at scattered sections of the U. S. C.).
52 GAO/ T- AIMD/ NSIAD- 00- 163.

53 Bob Stump National Defense Authorization Act for Fiscal Year 2003, Pub.
L. 107- 314, Sec. 1004, 116 Stat. 2458, 2629, Dec. 2, 2002.

support the department*s vast operations. We plan to report on DOD*s
progress in developing its architecture and its transition efforts in the
near future.

As part of its ongoing business system modernization effort and consistent
with our past recommendations, 54 DOD is creating a repository of
information about its existing systems environment. To accomplish this,

DOD initiated an extensive effort to document its business systems
currently relied upon to carry out financial management operations
throughout the department. To date, the department has identified
approximately 2,300 systems that support its business operations. In

developing its systems inventory, DOD has recognized that financial
management is broader than just accounting and finance systems. Rather, it
includes the department*s acquisition, budget formulation, inventory

management, logistics, personnel, and property management systems. DOD is
investing billions of dollars in financial management solutions and
business process reform. In moving forward with the implementation of its
business enterprise architecture, DOD needs to ensure that the multitude
of systems efforts currently underway are designed as an integral part of
the architecture. The effort to implement the architecture will be further
complicated as the department strives to develop multiple architectures
across its various business areas and organizational components. In this
regard, it is critical that DOD has the management structure and processes
in place to effectively control the estimated $19 billion that will be
spent on its business systems in fiscal year 2004. However, as we have
previously reported, 55 the department has yet to establish the requisite
investment governance structure and process controls needed to adequately
align

ongoing investments with its architectural goals and direction. To its
credit, the department has recognized that it cannot continue with the
proliferation of duplicative, nonstandard, and nonintegrated systems and
is in the process of developing policies and procedures to obtain better

visibility and accountability over its IT business system investments. A
key to success will be DOD*s ability to effectively manage and oversee its
investments in systems. DOD can ill afford to invest billions of dollars
in 54 U. S. General Accounting Office, Financial Management: Analysis of
DOD*s Inventory of

Financial Management Systems Is Incomplete, GAO/ AIMD- 97- 39 (Washington,
D. C.; Jan. 29, 1997); Financial Management: DOD Improvement Plan Needs
Strategic Focus, GAO01- 764 (Washington, D. C.: Aug. 17, 2001). 55 GAO-
03- 458.

systems that are not capable of providing DOD management and the Congress
with more accurate, timely, and reliable information on the results of the
department*s business operations.

Monitoring and Oversight Ensuring effective monitoring and oversight of
progress will also be key to bringing about effective implementation of
the department*s financial management and related business process reform.
We have previously testified 56 that periodic reporting of status
information to department top management, the Office of Management and
Budget, the Congress, and the audit community is another key lesson
learned from the department*s successful effort to address its Year 2000
challenge.

Previous submissions of the department*s Financial Management Improvement
Plan 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 the plan in the enterprise architecture. If
the department*s future plans are upgraded to provide a departmentwide
strategic view of the financial management challenges facing the
department, along with planned corrective actions and milestones, these
plans can serve as an effective tool not only to help guide and direct the
department*s financial management reform efforts, but also to help
maintain oversight of the department*s financial management operations.
Going forward, this Subcommittee*s oversight hearings, as well as the
active interest and involvement of the defense appropriations and
authorization committees, will continue to be key to effectively achieving
and sustaining DOD*s financial management and related business process
reform milestones and goals.

In conclusion, we support Secretary Rumsfeld*s vision for transforming the
department*s financial and business related operations. The continued
leadership and support of the Secretary and other DOD top executives will
be essential to successfully change the DOD culture that has over time
perpetuated the status quo and been resistant to a transformation of the

magnitude envisioned by the Secretary. As noted throughout this testimony,
DOD is taking steps to begin transformation; however, the

56 GAO- 01- 244.

events of September 11, 2001, the continuing war on terrorism, and the
reconstruction of Iraq may dilute the focused attention and sustained
action that are necessary to fully realize the Secretary*s transformation
goal, a situation that is understandable given the circumstances. At the

same time, with waste and inefficiencies potentially costing $20 billion
or more annually, true reform is needed to restore public confidence that
taxpayer dollars are well spent in meeting our national defense
objectives.

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
Gregory D. Acknowledgments

Kutz at (202) 512- 9095 or kutzg@ gao. gov or Molly Boyle at (202) 512-
9524 or boylem@ gao. gov. Other key contributors to this testimony include
Evelyn Logue and Cherry Clipper.

(192096)

GAO United States General Accounting Office

A

Overhauling DOD*s financial management represents a major challenge that
goes far beyond financial accounting to the very fiber of the department*s
range of business operations and management culture. Of the 25 areas on
GAO*s governmentwide *high risk* list, 6 are DOD program areas, and the
department shares responsibility for 3 other high- risk areas that are
governmentwide in scope. Key financial management weaknesses include the
lack of effective and efficient asset management and accountability;

unreliable estimates of environmental and disposal liabilities; lack of
accurate budget and cost information; nonintegrated and proliferating
financial management systems; and fundamental flaws in DOD*s overall
control environment.

GAO has identified four underlying causes for DOD*s inability to resolve
its long- standing financial management problems:

 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.

The following are elements that GAO has identified as key to a successful
approach to financial management and business process reform:

 addressing financial management challenges as part of a comprehensive,
integrated, DOD- wide business reform;  providing for sustained
leadership by the Secretary of Defense and

resource control to implement needed financial management reforms; 
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 and implementing an
enterprise architecture to guide and

direct financial management modernization investments; and  ensuring
effective executive and congressional oversight and monitoring.

DOD has taken positive steps in many of these key areas. For example, the
Secretary of Defense has included improving DOD*s financial management as
one of his top 10 priorities, and DOD has already taken a number of
actions under its Business Transformation Program, including its efforts
to develop an enterprise architecture to guide operational and
technological changes. However, these are beginning steps and formidable
challenges remain in each of the key reform areas. As seen again in Iraq,
the

excellence of our military forces is unparalleled. This same level of
excellence is not yet evident in the Department of Defense*s (DOD)

financial management and other business areas, impeding DOD*s ability to
provide complete, reliable, and timely information to the Congress, DOD
managers, and other decision makers. The Subcommittee asked GAO to testify

on the status of DOD*s financial management and business process reform
efforts. Specifically, GAO

was asked to provide an overview of the long- standing financial
management weaknesses facing DOD and a summary of the underlying causes of
DOD*s financial management challenges. In addition, GAO*s testimony
focused on (1) key actions necessary to correct DOD*s financial management
problems

and (2) the progress DOD is making toward business process reform.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 931T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Gregory D. Kutz at (202) 512- 9095 or kutzg@ gao.
gov.

Highlights of GAO- 03- 931T, a testimony to the Subcommittee on Government
Efficiency and Financial Management,

Committee on Government Reform, House of Representatives June 25, 2003

DEPARTMENT OF DEFENSE

Status of Financial Management Weaknesses and Progress Toward Reform

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