Department of Defense: Further Actions Needed to Establish and	 
Implement a Framework for Successful Business Transformation	 
(31-MAR-04, GAO-04-626T).					 
                                                                 
GAO has issued several reports pertaining to the Department of	 
Defense's (DOD) architecture and systems modernization efforts	 
which revealed that many of the underlying conditions that	 
contributed to the failure of prior DOD efforts to improve its	 
business systems remain fundamentally unchanged. The Subcommittee
on Terrorism, Unconventional Threats and Capabilities, House	 
Committee on Armed Services, asked GAO to provide its		 
perspectives on (1) the impact long-standing financial and	 
related business weaknesses continue to have on DOD, (2) the	 
underlying causes of DOD business transformation challenges, and 
(3) DOD business transformation efforts. In addition, GAO	 
reiterates the key elements to successful reform: (1) an	 
integrated business transformation strategy, (2) sustained	 
leadership and resource control, (3) clear lines of		 
responsibility and accountability, (4) results-oriented 	 
performance, (5) appropriate incentives and consequences, (6) an 
enterprise architecture to guide reform efforts, and (7)	 
effective monitoring and oversight. GAO also offers two 	 
suggestions for legislative consideration that are intended to	 
improve the likelihood of meaningful, broad-based financial	 
management and related business reform at DOD.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-626T					        
    ACCNO:   A09630						        
  TITLE:     Department of Defense: Further Actions Needed to	      
Establish and Implement a Framework for Successful Business	 
Transformation							 
     DATE:   03/31/2004 
  SUBJECT:   Accountability					 
	     Accounting procedures				 
	     Best practices					 
	     Defense economic analysis				 
	     Employee incentives				 
	     Federal agency reorganization			 
	     Financial management				 
	     Financial management systems			 
	     Information resources management			 
	     Internal controls					 
	     Management information systems			 
	     Performance measures				 
	     Best practices methodology 			 
	     Enterprise architecture				 
	     DOD Business Management Modernization		 
	     Program						 
                                                                 

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GAO-04-626T

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Terrorism, Unconventional Threats and
Capabilities, Committee on Armed Services, U.S. House of Representatives

For Release on Delivery

Expected at 1:30 p.m. EST DEPARTMENT OF

Wednesday, March 31, 2004

DEFENSE

  Further Actions Needed to Establish and Implement a Framework for Successful
                            Business Transformation

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

Randolph C. Hite
Director, Information Technology Architecture and Systems

GAO-04-626T

Highlights of GAO-04-626T, a testimony before the Subcommittee on
Terrorism, Unconventional Threats and Capabilities, Committee on Armed
Services, U.S. House of Representatives

GAO has issued several reports pertaining to the Department of Defense's
(DOD) architecture and systems modernization efforts which revealed that
many of the underlying conditions that contributed to the failure of prior
DOD efforts to improve its business systems remain fundamentally
unchanged. The Subcommittee asked GAO to provide its perspectives on (1)
the impact long-standing financial and related business weaknesses
continue to have on DOD, (2) the underlying causes of DOD business
transformation challenges, and (3) DOD business transformation efforts. In
addition, GAO reiterates the key elements to successful reform: (1) an
integrated business transformation strategy, (2) sustained leadership and
resource control, (3) clear lines of responsibility and accountability,
(4) results-oriented performance, (5) appropriate incentives and
consequences, (6) an enterprise architecture to guide reform efforts, and
(7) effective monitoring and oversight. GAO also offers two suggestions
for legislative consideration that are intended to improve the likelihood
of meaningful, broad-based financial management and related business
reform at DOD.

www.gao.gov/cgi-bin/getrpt?GAO-04-626T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory Kutz at (202)
512-9095 or ([email protected]) or Randolph Hite, (202) 512-3439

March 31, 2004

DEPARTMENT OF DEFENSE

Further Actions Needed to Establish and Implement a Framework for Successful
Business Transformation

DOD's senior civilian and military leaders are committed to transforming
the department and improving its business operations and have taken
positive steps to begin this effort. However, overhauling the financial
management and related business operations of one of the largest and most
complex organizations in the world represents a huge management challenge.
Six DOD program areas are on GAO's "high risk" list, and the department
shares responsibility for three other governmentwide high-risk areas.
DOD's substantial financial and business management weaknesses adversely
affect not only its ability to produce auditable financial information,
but also to provide timely, reliable information for management and
Congress to use in making informed decisions. Further, the lack of
adequate transparency and appropriate accountability across all of DOD's
major business areas results in billions of dollars in annual wasted
resources in a time of increasing fiscal constraint.

Impact of Weaknesses in Human Capital Management, Internal Control, and
Systems

Business area
affected Problem identified
Military pay Ninety-four percent of mobilized Army National Guard soldiers
GAO

investigated had pay problems. These problems distracted soldiers from
their missions, imposed financial hardships on their families, and had a
negative impact on retention.

Logistics 	Asset visibility and other logistical support problems hampered
mission readiness during Operation Iraqi Freedom, including
cannibalization of vehicles for parts and duplication of requisitions.

Travel	Seventy-two percent of the over 68,000 premium class airline
tickets DOD purchased for fiscal years 2001 and 2002 were not properly
authorized and 73 percent were not properly justified.

Property 	New JSLIST chem-bio suits sold on the Internet for $3 while at
the same time DOD was buying them for over $200. Further, thousands of
defective suits, declared excess by DOD, were improperly issued to local
law enforcement agencies-which are likely to be first responders in case
of a terrorist attack.

Contract Some DOD contractors were abusing the federal tax system, with
little or no

payments 	consequence. As of September 2003, DOD had collected only
$687,000 of unpaid federal taxes through a mandated levy program. GAO
estimated that at least $100 million could be collected annually through
effective implementation of the levy on DOD contract payments.

Source: GAO.

Four underlying causes impede reform: (1) lack of sustained leadership,
(2) cultural resistance to change, (3) lack of meaningful metrics and
ongoing monitoring, and (4) inadequate incentives and accountability
mechanisms. To address these issues, GAO reiterates the keys to successful
business transformation and offers two suggestions for legislative action.
First GAO suggests that a senior management position be established to
spearhead DOD-wide business transformation efforts. Second, GAO proposes
that the leaders of DOD's functional areas, referred to as departmentwide
domains, receive and control the funding for system investments, as
opposed to the military services. Domain leaders would be responsible for
managing business system and process reform efforts within their business
areas and would be accountable to the new senior management official for
ensuring their efforts comply with DOD's business enterprise architecture.

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be here to discuss key aspects of business
transformation efforts at the Department of Defense (DOD). At the outset,
we would like to thank the Subcommittee for having this hearing and
acknowledge the important role hearings such as this one serve. The
involvement of this Subcommittee is critical to ultimately assuring public
confidence in DOD as a steward that is accountable for its finances. DOD's
substantial long-standing business management systems and related problems
adversely affect the economy, effectiveness, and efficiency of its
operations, and have resulted in a lack of adequate transparency and
appropriate accountability across all major business areas. As a result,
DOD does not have timely, reliable information for management to use in
making informed decisions. Further, as our reports continue to show, these
problems result in significant fraud, waste, and abuse and hinder DOD's
attempts to develop world-class operations and activities to support its
forces. 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.1 The problems we
continue to identify relate to human capital challenges, ineffective
internal control and processes, and duplicative and stovepiped business
systems. The seriousness of DOD's business management weaknesses
underscores the importance of no longer condoning "status quo" business
operations at DOD.

Over the last 3 years, DOD has taken action to begin addressing a number
of these challenges as part of its business transformation effort.
Business transformation has been a priority of Secretary Rumsfeld. For
example, DOD has been granted additional human capital flexibilities and
is in the process of developing a new personnel management system for its
civilian employees. In addition, through its Business Management
Modernization Program (BMMP), DOD is continuing its efforts to develop and
implement a business enterprise architecture and establish effective
management and control over its business system modernization investments.
To date, however, the underlying operational conditions remain
fundamentally

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 management, information security,
support infrastructure management, inventory management, real property,
systems modernization, and weapon systems acquisition.

unchanged and tangible evidence of improvements in DOD business operations
remains limited to specific business process areas, such as DOD's purchase
card program, where improvements have generally resulted from increased
management focus and better internal control rather than from major
modifications to automated systems. It is important to note that some of
the key elements we highlight in this testimony as necessary for
successful business transformation were critical to the success of several
of the interim initiatives that we will discuss today.

Because DOD is one of the largest and most complex organizations in the
world, overhauling its business operations represents a huge management
challenge. In fiscal year 2003, DOD reported that its operations involved
over $1 trillion in assets, nearly $1.6 trillion in liabilities,
approximately 3.3 million military and civilian personnel, and
disbursements of over $416 billion. Moreover, execution of DOD operations
spans a wide range of defense organizations, including the military
services and their respective major commands and functional activities,
numerous large defense agencies and field activities, and various
combatant and joint operational commands that are responsible for military
operations for specific geographic regions or theaters of operations. To
execute these military operations, the department performs an assortment
of interrelated and interdependent business process areas, including
logistics management, procurement, healthcare management, and financial
management. Secretary Rumsfeld has estimated that successful improvements
to DOD's business operations could save the department 5 percent of its
budget a year. Using DOD's reported fiscal year 2004 budget authority
amounts, this percentage would equate to approximately $22 billion a year
in savings.

Over the last 3 years, we have made a series of recommendations to DOD and
suggestions for legislative changes that provide a framework for
effectively addressing the challenges DOD faces in transforming its
financial management and related business operations and systems and

offered several key elements necessary for reform to succeed.2 This
framework recognizes the complexity of the challenge and the long-term
nature of overcoming it. Moreover, it recognizes the underlying causes of
the challenge, such as lack of sustained leadership, cultural resistance
to change, parochialism, and stovepiped operations, that impeded the
success of previous administrations in addressing DOD's problems that
continue today. DOD has agreed with our recommendations and launched
efforts intended to implement them, but progress has been slow. If DOD is
unable to address these underlying causes that have resulted in the
failure of previous broad-based reform efforts, improvements will remain
marginal, confined to narrowly defined business process areas and
incremental improvements in human capital policies, business processes,
internal control systems, and information technologies.

Today, we will provide our perspectives on (1) the impact that
longstanding financial management and related business process weaknesses
continue to have on DOD, (2) underlying causes that have impeded the
success of prior efforts, (3) keys to successful reform, and (4) DOD's
business transformation efforts. In addition, we will offer two
suggestions for legislative consideration, which we believe will provide
the sustained top-level leadership and accountability necessary for the
business transformation effort to succeed. Our statement is based on
previous GAO reports as well as on our review of the work of other DOD
auditors and recent DOD reports and studies.

2 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),
Information Technology: Architecture Needed to Guide Modernization of
DOD's Financial Operations, GAO-01-525 (Washington, D.C.: May 17, 2001),
DOD Business Systems Modernization: Improvements to Enterprise
Architecture Development and Implementation Efforts Needed, GAO-03-458
(Washington, D.C.: Feb. 28, 2003), DOD Business Systems Modernization:
Continued Investment in Key Accounting Systems Needs to be Justified,
GAO-03-465 (Washington, D.C.: March 28, 2003), DOD Business Systems
Modernization: Long-standing Management and Oversight Weaknesses Continue
to Put Investments at Risk, GAO-03-553T (Washington, D.C.: Mar. 31, 2003),
Business Systems Modernization: Summary of GAO's Assessment of the
Department of Defense's Initial Business Enterprise Architecture,
GAO-03-877R (Washington, D.C.: July 7, 2003), and DOD Business Systems
Modernization: Important Progress Made to Develop Business Enterprise
Architecture, but Much Work Remains, GAO-03-1018 (Washington, D.C.: Sept.
19, 2003).

  Impact of Financial Management and Related Business Process Weaknesses

For several years we have reported that DOD faces a range of financial
management and related business process challenges that are complex,
long-standing, pervasive, and deeply rooted in virtually all business
operations throughout the department. As the Comptroller General recently
testified and as discussed in our latest financial audit report,3 DOD's
financial management deficiencies, taken together, continue to represent
the single largest obstacle to achieving an unqualified opinion on the
U.S. government's consolidated financial statements. To date, none of the
military services has passed the test of an independent financial audit
because of pervasive weaknesses in internal control and processes and
fundamentally flawed business systems.

In identifying improved financial performance as one of its five
governmentwide initiatives, the President's Management Agenda recognized
that obtaining a clean (unqualified) financial audit opinion is a basic
prescription for any well-managed organization. At the same time, it
recognized that without sound internal control and accurate and timely
financial and performance information, it is not possible to accomplish
the President's agenda and secure the best performance and highest measure
of accountability for the American people. The Joint Financial Management
Improvement Program (JFMIP)4 principals have defined certain measures, in
addition to receiving an unqualified financial statement audit opinion,
for achieving financial management success. These additional measures
include (1) being able to routinely provide timely, accurate, and useful
financial and performance information, (2) having no material internal
control weaknesses or material noncompliance with laws and regulations,
and (3) meeting the requirements of the Federal Financial Management
Improvement Act of

3 U.S. General Accounting Office, Fiscal Year 2003 U.S. Government
Financial Statements: Sustained Improvement in Federal Financial
Management Is Crucial to Addressing Our Nation's Future Fiscal Challenges,
GAO-04-477T (Washington, D.C.: Mar. 3, 2004) and our report contained in
the U.S. Department of the Treasury, Financial Report of the United States
Government (Washington, D.C.: Feb. 27, 2004).

4 JFMIP is a joint undertaking of the Office of Management and Budget,
GAO, the Department of Treasury, and the Office of Personnel Management,
working in cooperation with each other and with operating agencies to
improve financial management practices throughout the government.

1996 (FFMIA).5 Unfortunately, DOD does not meet any of these conditions.
For example, for fiscal year 2003, the DOD Inspector General (DOD IG)
issued a disclaimer of opinion on DOD's financial statements, citing 11
material weaknesses in internal control and noncompliance with FFMIA
requirements.

Recent audits and investigations by GAO and DOD auditors continue to
confirm the existence of pervasive weaknesses in DOD's financial
management and related business processes and systems. These problems have
(1) resulted in a lack of reliable information needed to make sound
decisions and report on the status of DOD activities, including
accountability of assets, through financial and other reports to Congress
and DOD decision makers, (2) hindered its operational efficiency, (3)
adversely affected mission performance, and (4) left the department
vulnerable to fraud, waste, and abuse, as the following examples
illustrate.

o  Four hundred and fifty of the 481 mobilized Army National Guard
soldiers from six GAO case study Special Forces and Military Police units6
had at least one pay problem associated with their mobilization. DOD's
inability to provide timely and accurate payments to these soldiers, many
of whom risked their lives in recent Iraq or Afghanistan missions,
distracted them from their missions, imposed financial hardships on the
soldiers and their families, and has had a negative impact on retention.
(GAO-04-89, Nov. 13, 2003)

o  DOD incurred substantial logistical support problems as a result of
weak distribution and accountability processes and controls over supplies
and equipment shipments in support of Operation Iraqi Freedom activities,
similar to those encountered during the prior gulf war. These weaknesses
resulted in (1) supply shortages, (2) backlogs of materials delivered in
theater but not delivered to the requesting activity, (3) a discrepancy of

5 FFMIA, Pub. L. No. 104-208, Div. A., title VIII, 110 Stat.
3009-389-3009-393, Sept. 30, 1996, requires the 23 major departments and
agencies covered by the Chief Financial Officers Act of 1990, Pub. L. No.
101-576, 104 Stat. 2838, Nov. 15, 1990 (as amended), to implement and
maintain financial management systems that comply substantially with (1)
federal financial management systems requirements, (2) applicable federal
accounting standards, and (3) U.S. Standard General Ledger (SGL) at the
transaction level.

6 The six case study units reviewed include the Colorado B Company,
Virginia B Company, West Virginia C Company, Mississippi 114th Military
Police Company, California 49th Military Police Headquarters and
Headquarters Detachment, and the Maryland 200th Military Police Company.
In addition, our limited review of pay experiences of soldiers in the
Colorado Army Guard's 220th Military Police Company, who recently returned
from Iraq, indicated that some of the same types of pay problems that we
found in our case studies had also affected them.

$1.2 billion between the amount of materiel shipped and that acknowledged
by the activity as received, (4) cannibalization of vehicles, and (5)
duplicate supply requisitions. (GAO-04-305R, Dec. 18, 2003)

o  Inadequate asset visibility and accountability resulted in DOD selling
new Joint Service Lightweight Integrated Suit Technology (JSLIST)-the
current chemical and biological protective garment used by our military
forces-on the internet for $3 each (coat and trousers) while at the same
time buying them for over $200 each. DOD has acknowledged that these
garments should have been restricted to DOD use only and therefore should
not have been available to the public. (GAO-02-873T, June 25, 2002)

o  Inadequate asset accountability also resulted in DOD's inability to
locate and remove over 250,000 defective Battle Dress Overgarments (BDOs)-
the predecessor of JSLIST-from its inventory. Subsequently, we found that
DOD had sold many of these defective suits to the public, including 379
that we purchased in an undercover operation. In addition, DOD may have
issued over 4,700 of the defective BDO suits to local law enforcement
agencies. Although local law enforcement agencies are most likely to be
the first responders to a terrorist attack, DOD failed to inform these
agencies that using these BDO suits could result in death or serious
injury. (GAO-04-15NI, Nov. 19, 2003)

o  Tens of millions of dollars are not being collected each year by
military treatment facilities from third-party insurers because key
information required to effectively bill and collect from third-party
insurers is often not properly collected, recorded, or used by the
military treatment facilities. (GAO-04-322R, Feb. 20, 2004)

o  Our analysis of data on more than 50,000 maintenance work orders opened
during the deployments of six battle groups indicated that about 29,000
orders (58 percent) could not be completed because the needed repair parts
were not available on board ship. This condition was a result of
inaccurate ship configuration records and incomplete, outdated, or
erroneous historical parts demand data. Such problems not only have a
detrimental impact on mission readiness, they may also increase
operational costs due to delays in repairing equipment and holding
unneeded spare parts inventory. (GAO-03-887, Aug. 29, 2003)

o  DOD sold excess biological laboratory equipment, including a biological
safety cabinet, a bacteriological incubator, a centrifuge, and other items
that could be used to produce biological warfare agents. Using a
fictitious company and fictitious individual identities, we were able to
purchase a large number of new and usable equipment items over the
Internet from DOD. Although the production of biological warfare agents
requires a high degree of expertise, the ease with which these items were
obtained through public sales increases the risk that terrorists could
obtain and use them to produce biological agents that could be used
against the United States. (GAO-04-81TNI, Oct. 7, 2003)

o  Based on statistical sampling, we estimated that 72 percent of the over
68,000 premium class airline tickets DOD purchased for fiscal years 2001
and 2002 was not properly authorized and that 73 percent was not properly
justified. During fiscal years 2001 and 2002, DOD spent almost $124
million on premium class tickets that included at least one leg in premium
class-usually business class. Because each premium class ticket cost the
government up to thousands of dollars more than a coach class ticket,
unauthorized premium class travel resulted in millions of dollars of
unnecessary costs being incurred annually. (GAO-04-229T, Nov. 6, 2003)

o  Some DOD contractors have been abusing the federal tax system with
little or no consequence, and DOD is not collecting as much in unpaid
taxes as it could. Under the Debt Collection Improvement Act of 1996, DOD
is responsible-working with the Treasury Department-for offsetting
payments made to contractors to collect funds owed, such as unpaid federal
taxes. However, we found that DOD had collected only $687,000 of unpaid
taxes as of September 2003. We estimated that at least $100 million could
be collected annually from DOD contractors through effective
implementation of levy and debt collection programs. (GAO-0495, Feb. 12,
2004)

o  Our review of fiscal year 2002 data revealed that about $1 of every $4
in contract payment transactions in DOD's Mechanization of Contract
Administration Services (MOCAS) system was for adjustments to previously
recorded payments-$49 billion of adjustments out of $198 billion in
disbursement, collection, and adjustment transactions. According to DOD,
the cost of researching and making adjustments to accounting records was
about $34 million in fiscal year 2002, primarily to pay hundreds of DOD
and contractor staff. (GAO-03-727, Aug. 8, 2003)

o  DOD's information technology (IT) budget submission to Congress for
fiscal year 2004 contained material inconsistencies, inaccuracies, or
omissions that limited its reliability. For example, we identified
discrepancies totaling about $1.6 billion between two primary parts of the
submission-the IT budget summary report and the detailed Capital
Investments Reports on each IT initiative. These problems were largely
attributable to insufficient management attention and limitations in
departmental policies and procedures, such as guidance in DOD's Financial
Management Regulation, and to shortcomings in systems that support
budget-related activities. (GAO-04-115, Dec. 19, 2003)

o  Since the mid 1980s, we have reported that DOD uses overly optimistic
planning assumptions to estimate its annual budget request. These same
assumptions are reflected in its Future Years Defense Program, which
reports projected spending for the current budget year and at least 4
succeeding years. In addition, in February 2004 the Congressional Budget
Office projected that DOD's demand for resources could grow to about

  Underlying Causes of Financial and Related Business Process Transformation
  Challenges

$490 billion in fiscal year 2009. DOD's own estimate for that same year
was only $439 billion.7 As a result of DOD's continuing use of optimistic
assumptions, DOD has too many programs for the available dollars, which
often leads to program instability, costly program stretch-outs, and
program termination. Over the past few years, the mismatch between
programs and budgets has continued, particularly in the area of weapons
systems acquisition. For example, in January 2003, we reported that the
estimated costs of developing eight major weapons systems had increased
from about $47 billion in fiscal year 1998 to about $72 billion by fiscal
year 2003.8 (GAO-03-98, January 2003)

These examples clearly demonstrate not only the severity of DOD's current
problems, but also the importance of business systems modernization as a
critical element in the department's transformation efforts to improve the
economy, efficiency, and effectiveness of it's operations, and to provide
for transparency and accountability to Congress and American taxpayers.

Since May 1997,9 we have highlighted in various testimonies and reports
what we believe are the underlying causes of the department's inability to
resolve its long-standing financial management and related business
management weaknesses and fundamentally reform its business operations. We
found that one or more of these causes were contributing factors to the
financial management and related business process weaknesses we just
described. Over the years, the department has undertaken many initiatives
intended to transform its business operations departmentwide and improve
the reliability of information for decision making and reporting but has
not had much success because it has not addressed the following four
underlying causes:

7 Congressional Budget Office, The Long-Term Implications of Current
Defense Plans: Detailed Update for Fiscal Year 2004 (www.cbo.gov, February
2004). Figures from this report are in constant fiscal year 2004 dollars.

8 U.S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Defense, GAO-03-98 (Washington, D.C.: January 2003).
Figures from this report are in constant fiscal year 2003 dollars.

9U.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).

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

o  deeply embedded cultural resistance to change, including military
service parochialism and stovepiped operations;

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

o  inadequate incentives and accountability mechanisms relating to
business transformation efforts.

If not properly addressed, these root causes will likely result in the
failure of current DOD initiatives.

    Lack of Sustained Leadership and Adequate Accountability

DOD has not routinely assigned accountability for performance to specific
organizations or individuals who have sufficient authority to accomplish
desired goals. For example, under the Chief Financial Officers Act of
1990,10 it is the responsibility of the agency Chief Financial Officer
(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 and is under the control and authority of other
DOD officials.

In addition, DOD's past experience has suggested that top management has
not had a proactive, consistent, and continuing role in integrating daily
operations for achieving business transformation related performance
goals. It is imperative that major improvement initiatives 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. While the current DOD leadership, such as the Secretary, Deputy
Secretary, and Comptroller, have certainly demonstrated their commitment
to reforming the department, the magnitude and nature of day-to-day
demands placed on these leaders following the events of September 11,
2001, clearly affect the level of oversight and involvement in business
transformation efforts

10 Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 Stat.
2842, Nov. 15, 1990 (codified, as amended in scattered sections of title
31, United States Code).

that these leaders can sustain. Given the importance of DOD's business
transformation effort, it is imperative that it receive the sustained
leadership needed to improve the economy, efficiency, and effectiveness of
DOD's business operations. Based on our surveys of best practices of
world-class organizations,11 strong executive CFO and Chief Information
Officer (CIO) leadership and centralized control over systems investments
are essential to (1) making financial management an entitywide priority,
(2) providing meaningful information to decision makers, (3) building a
team of people that delivers results, and (4) effectively leveraging
technology to achieve stated goals and objectives.

    Cultural Resistance and Parochialism

Cultural resistance to change, military service parochialism, and
stovepiped operations have all contributed significantly to the failure of
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. Recent audits reveal that DOD has made only
small inroads in addressing these challenges. For example, the Bob Stump
National Defense Authorization Act for Fiscal Year 200312 requires the DOD
Comptroller to determine that each financial system improvement meets the
specific conditions called for in the act before DOD obligates funds in
amounts exceeding $1 million. However, we found that most system
improvement efforts involving obligations over $1 million were not
reviewed by the DOD Comptroller for the purpose of making that
determination and that DOD continued to lack a mechanism for proactively
identifying system improvement initiatives. We asked for, but DOD did not
provide, comprehensive data for obligations in excess of $1 million for
business system modernization. Based on a comparison of the limited
information available for fiscal years 2003 and 2004, we identified $479
million in reported obligations by the military services that were not
submitted to the DOD Comptroller for review.

11 U.S. General Accounting Office, Executive Guide: Creating Value Through
World-class Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April
2000) and U.S. General Accounting Office, Executive Guide: Maximizing the
Success of Chief Information Officers: Learning From Leading
Organizations, GAO-01-376G (Washington, D.C.: February 2001).

12 Bob Stump National Defense Authorization Act for Fiscal Year 2003, Pub.
L. No. 107-314, S: 1004 (d), 116 Stat. 2458, 2629, Dec. 2, 2002.

In addition, in September 2003,13 we reported that DOD continued to use a
stovepiped approach to develop and fund its business system investments.
Specifically, we found that DOD components receive and control funding for
business systems investments without being subject to the scrutiny of the
DOD Comptroller. DOD's ability to address its current "business-asusual"
approach to business system investments is further hampered by its lack of
(1) a complete inventory of business systems (a condition we first
highlighted in 1998), (2) a standard definition of what constitutes a
business system, (3) a well-defined enterprise architecture, and (4) an
effective approach for the control and accountability over business system
investments. Until DOD develops and implements an effective strategy for
overcoming resistance, parochialism, and stovepiped operations, its
transformation efforts will not be successful.

    Lack of Results-Oriented Goals and Performance Measures

A key element of any major program is its ability to establish clearly
defined goals and performance measures to monitor and report its progress
to management. However, DOD has not yet established measurable,
results-oriented goals to evaluate BMMP's cost, schedule and performance
outcomes and results, or explicitly defined performance measures to
evaluate the architecture quality, content, and utility of subsequent
major updates to its initial business enterprise architecture (BEA). For
example, in our September 2003 report,14 we stated that DOD had not
defined specific plans outlining how it intends to extend and evolve the
initial BEA to include the missing scope and details that we identified.
Instead, DOD's primary BEA goal was to complete as much of the
architecture as it could within a set period of time. According to DOD, it
intends to refine the initial BEA through at least six different major
updates of its architecture between February 2004 and the second quarter
of 2005. However, it remains unclear what these major updates will
individually or collectively provide and how they contribute to achieving
DOD's goals.

13 U.S. General Accounting Office, DOD Business Systems Modernization:
Important Progress Made to Develop Business Enterprise Architecture, but
Much Work Remains, GAO-03-1018 (Washington, D.C.: Sept. 19, 2003).

14 GAO-03-1018.

    DOD recognizes that it needs to define measurable goals and performance
    measures

In its March 15, 2004, progress report to defense congressional committees
on the status of BMMP's business transformation efforts, DOD reported that
it plans to establish an initial approved program baseline to evaluate the
cost, schedule, and performance of the BMMP. Given that DOD has reported
disbursements of $111 million since development efforts began in fiscal
year 2002, it is critical that it establish meaningful, tangible, and
measurable program goals and objectives-short-term and long-term.

Until DOD develops and implements clearly defined results-oriented goals
for the overall program, including the architecture content of each major
update of its architecture, the department will continue to lack a clear
measure of the BMMP's progress in transforming the department's business
operations and in providing the Congress reasonable assurance that funds
are being directed towards resolving the department's longstanding
business operational problems.

    Lack of Incentives for Change

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"
operations, systems, and organizational structures. Traditionally, DOD has
focused on justifying its need for more funding rather than on the
outcomes its programs have produced. DOD has historically measured its
performance by resource components such as 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.

The lack of incentive to change is evident in the business systems
modernization area. Despite DOD's acknowledgement that many of its systems
are error prone, duplicative, and stovepiped, DOD continues to allow its
component organizations to make their own investments independently of one
another and implement different system solutions to solve the same
business problems. These stovepiped decision-making processes have
contributed to the department's current complex, errorprone environment.
The DOD Comptroller recently testified that DOD's actual systems inventory
could be twice as many as the number of systems the department currently
recognizes as its systems inventory. In March 2003, we reported that
ineffective program management and oversight, as well as a lack of
accountability, resulted in DOD continuing to invest

hundreds of millions of dollars in system modernization efforts without
any assurance that the projects will produce operational improvements
commensurate with the amount invested.15

For example, the estimated cost of one of the business system investment
projects that we reviewed increased by as much as $274 million, while its
schedule slipped by almost 4 years. After spending $126 million, DOD
terminated that project in December 2002, citing poor performance and
increasing costs. GAO and the DOD IG have identified numerous business
system modernization efforts that are not economically justified on the
basis of cost, benefits and risk; take years longer than planned; and fall
short of delivering planned or needed capabilities. Despite this track
record, DOD continues to increase spending on business systems while at
the same time it lacks the effective management and oversight needed to
achieve real results. Without appropriate incentives to improve their
project management, ongoing oversight, and adequate accountability
mechanisms, DOD components will continue to develop duplicative and
nonintegrated systems that are inconsistent with the Secretary's vision
for reform.

To effect real change, actions are needed to (1) break down parochialism
and reward behaviors that meet DOD-wide 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 early 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 have previously reported,16 and the success of the more narrowly
defined DOD initiatives we will discuss later illustrate, the following
key elements collectively will enable the department to effectively
address the underlying causes of its inability to resolve its
long-standing financial and business management problems. These elements
are

o  addressing the department's financial management and related business
operational challenges as part of a comprehensive, integrated, DOD-wide
strategic plan for business reform;

  Keys to Successful Reform

15 GAO-03-465. 16 GAO-02-497T.

o  providing for sustained and committed leadership by top management,
including but not limited to the Secretary of Defense;

o  establishing resource control over business systems investments;

o  establishing clear lines of responsibility, authority, and
accountability;

o  incorporating results-oriented performance measures and monitoring
progress tied to key financial and business transformation objectives;

o  providing appropriate incentives or consequences for action or
inaction;

o  establishing an enterprise architecture to guide and direct business
systems modernization investments; and

o  ensuring effective oversight and monitoring.

These elements, which should not be viewed as independent actions but
rather as a set of interrelated and interdependent actions, are reflected
in the recommendations we have made to DOD and are consistent with those
actions discussed in the department's April 2001 financial management
transformation report.17 The degree to which DOD incorporates them into
its current reform efforts-both long and short term-will be a deciding
factor in whether these efforts are successful. Thus far, the department's
progress in implementing our recommendations has been slow.

  DOD Business Transformation Efforts

Over the years, we have given DOD credit for beginning numerous
initiatives intended to improve its business operations. Unfortunately,
most of these initiatives failed to achieve their intended objective in
part, we believe, because they failed to incorporate key elements that in
our experience are critical to successful reform. Today, we would like to
discuss one very important broad-based initiative, the BMMP, DOD currently
has underway that, if properly developed and implemented, will result in
significant improvements in DOD's business operations. Within the next few
months we intend to issue a report on the status of DOD's efforts to
refine and implement its enterprise architecture and the results of our
review of two on going DOD system initiatives. In addition to the BMMP,
DOD has undertaken several interim initiatives in recent years that have
resulted in tangible, although limited, improvements. We believe that
these tangible improvements were possible because DOD has accepted our
recommendations and incorporated many of the key elements critical for
reform. Furthermore, we would like to offer two suggestions for
legislative consideration that we believe could significantly increase the
likelihood of a successful business transformation effort at DOD.

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

    Business Management Modernization Program

The BMMP, which the department established in July 2001 following our
recommendation that DOD develop and implement an enterprise architecture,
is vital to the department's efforts to transform its business
operations.18 The purpose of the BMMP is to oversee development and
implementation of a departmentwide BEA, transition plan, and related
efforts to ensure that DOD business system investments are consistent with
the architecture. A well-defined and properly implemented BEA can provide
assurance that the department invests in integrated enterprisewide
business solutions and, conversely, can help move resources away from
nonintegrated business system development efforts. As we reported in July
2003,19 DOD had developed an initial version of its departmentwide
architecture for modernizing its current financial and business operations
and systems and had expended tremendous effort and resources in doing so.
However, substantial work remains before the architecture will be
sufficiently detailed and the means for implementing it will be adequately
established to begin to have a tangible impact on improving DOD's overall
business operations. We cannot overemphasize the degree of difficulty DOD
faces in developing and implementing a welldefined architecture to provide
the foundation that will guide its overall business transformation effort.

On the positive side, during its initial efforts to develop the
architecture, the department established some of the architecture
management capabilities advocated by best practices and federal
guidance,20 such as establishing a program office, designating a chief
architect, and using an architecture development methodology and automated
tool. Further, DOD's initial version of its business enterprise
architecture provided a foundation on which to build and ultimately
produce a well-defined business enterprise architecture. For example, in
September 2003,21 we reported that the "To Be" descriptions address, to at
least some degree, how DOD intends to operate in the future, what
information will be

18 GAO-01-525.

19 GAO-03-877R.

20 U.S. General Accounting Office, Information Technology: A Framework for
Assessing and Improving Enterprise Architecture Management (Version 1.1),
GAO-03-584G (Washington, D.C.: April 2003).

21 GAO-03-1018.

needed to support these future operations, and what technology standards
should govern the design of future systems.

While some progress has been made, DOD has not yet taken important steps
that are critical to its ability to successfully use the enterprise
architecture to drive reform throughout the department's overall business
operations. For example, DOD has not yet defined and implemented the
following.

o  Detailed plans to extend and evolve its initial architecture to include
the missing scope and detail required by the Bob Stump National Defense
Authorization Act for Fiscal Year 2003 and other relevant architectural
requirements. Specifically, (1) the initial version of the BEA excluded
some relevant external requirements, such as requirements for recording
revenue, and lacked or provided little descriptive content pertaining to
its "As Is" and "To Be" environments and (2) DOD had not yet developed the
transition plan needed to provide a temporal road map for moving from the
"As Is" to the "To Be" environment.

o  An effective approach to select and control business system
investments22 for obligations exceeding $1 million. As we previously
stated, and it bears repeating here, DOD components currently receive
direct funding for their business systems and continue to make their own
parochial decisions regarding those investments without having received
the scrutiny of the DOD Comptroller as required by the Bob Stump National
Defense Authorization Act for Fiscal Year of 2003. Later, we will offer a
suggestion for improving the management and oversight of the billions of
dollars DOD invests annually in business systems.

DOD invests billions of dollars annually to operate, maintain, and
modernize its business systems. For fiscal year 2004, the department
requested approximately $28 billion in IT funding to support a wide range
of military operations as well as DOD business systems operations, of
which approximately $18.8 billion23-$5.8 billion for business systems and
$13 billion for business systems infrastructure-relates to the operation,

22 Business systems include financial and nonfinancial systems, such as
civilian personnel, finance, health, logistics, military personnel,
procurement, and transportation, with the common element being the
generation or use of financial data to support DOD's business operations.

23The remaining $9 billion is for National Security Systems. These systems
are intelligence systems, cryptologic activities related to national
security, military command and control systems, and equipment that is an
integral part of a weapon or weapons system or is critical to the direct
fulfillment of military or intelligence mission.

maintenance, and modernization of the department's reported thousands of
business systems. The $18.8 billion is spread across the military services
and defense agencies, with each receiving its own funding for IT
investments.

However, as we reported,24 DOD lacked an efficient and effective process
for managing, developing, and implementing its business systems. These
long-standing problems continue despite the significant investments in
business systems by DOD components each year. For example, in March 2003
we reported that DOD's oversight of four DFAS projects we reviewed had
been ineffective.25 Investment management responsibility for the four
projects rested with the Defense Finance and Accounting Service (DFAS),
the DOD Comptroller, and the DOD CIO. In discharging this responsibility,
each had allowed project investments to continue year after year, even
through the projects had been marked by cost increases, schedule
slippages, and capability changes. As a result DOD had invested
approximately $316 million in four DFAS system modernization projects
without demonstrating that this substantial investment would markedly
improve DOD financial management information for decision making and
financial reporting purposes.

Specifically, we found that four DFAS projects reviewed lacked an approved
economic analysis that reflected the fact that expected project costs had
increased, while in some cases the benefits had decreased. For instance as
we previously stated, the estimated cost of one project- referred to as
the Defense Procurement Payment System (DPPS)- had increased by as much as
$274 million, while its schedule slipped by almost 4 years. Such project
analyses provide the requisite justification for decision makers to use in
determining whether to invest additional resources in anticipation of
receiving commensurate benefits and mission value. For each of the four
projects we reviewed we found that DOD oversight entities-DFAS, the DOD
Comptroller, and the DOD CIO-did not question the impact of the cost
increases and schedule delays, and allowed the projects to proceed in the
absence of the requisite analytical justification. Furthermore, in one
case, they allowed a project estimated to cost $270 million, referred to
as the DFAS Corporate Database/DFAS Corporate Warehouse (DCD/DCW), to
proceed without an economic

24 GAO-03-465 and GAO-03-553T. 25 GAO-03-465.

analysis. In another case, they allowed DPPS to continue despite known
concerns about the validity of the project's economic analysis.

DOD subsequently terminated two-DPPS and the Defense Standard Disbursing
System (DSDS)-of the four DFAS system modernization projects reviewed. As
we previous mentioned, DPPS was terminated due to poor program performance
and increasing costs after 7 years of effort and an investment of over
$126 million. DFAS terminated DSDS after approximately 7 years of effort
and an investment of about $53 million, noting that a valid business case
for continuing the effort could not be made. These two terminated projects
were planned to provide DOD the capability to address some of DOD's
long-standing contract and vendor payment problems.

In addition to project management issues that continue to result in
systems that do not perform as expected and cost more than planned, we
found that DOD continues to lack a complete and reliable inventory of its
current systems. In September 2003, we reported that DOD had created a
repository of information about its existing systems inventory of
approximately 2,300 business systems (up from 1,731 in October 2002) as
part of its ongoing business systems modernization program, and consistent
with our past recommendation.26 Due to its lack of visibility over systems
departmentwide, DOD had to rely upon data calls to obtain its information.
Unfortunately, due to its lack of an effective methodology and process for
identifying business systems, including a clear definition of what
constitutes a business system, DOD continues to lack assurance that its
systems inventory is reliable and complete. In fact, the DOD Comptroller
testified last week before the Senate Armed Services Subcommittee on
Readiness and Management Support that the size of DOD's actual systems
inventory could be twice the size currently reported. This lack of
visibility over current business systems in use throughout the department
hinders DOD's ability to identify and eliminate duplicate and
nonintegrated systems and transition to its planned systems environment in
an efficient and effective manner.

Of the 2,274 business systems recorded in DOD's systems inventory
repository, the department reportedly has 665 systems to support human
resource management, 565 systems to support logistical functions, 542

26 U.S. General Accounting Office, Financial Management: DOD Improvement
Plan Needs Strategic Focus, GAO-01-764 (Washington, D.C.: Aug. 17, 2001).

systems to perform finance and accounting functions, and 210 systems to
support strategic planning and budget formulation. Table 1, which presents
the composition of DOD business systems by functional area, reveals the
numerous and redundant systems operating in the department today.

Table 1: Reported DOD Business Systems by Domain and Functional Area

                                    Air               Navy/             
                          Domain  Force Army  Marine Corps  DFAS  Other Total 
                     Acquisition     27    31            61     3    21   143 
          Accounting and finance     43    88           195   165    51   542 
                  Human resource                                        
                      management     71   387            86    33    88   665 
               Installations and                                        
                     environment     12    98             9     1     8   128 
                       Logistics    180   191           104    11    79   565 
          Strategic planning and                                        
                       budgeting     23    63            98    15    11   210 
          Enterprise information                                        
                     environment      1     5             2     3    10 
                           Total    357   863           555   231   268 2,274 

Source: GAO analysis of BMMP data.

As we have previously reported,27 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 translations and interfaces that combine to exacerbate problems with
data integrity. The department has recognized the uncontrolled
proliferation of systems and the need to eliminate as many systems as
possible and integrate and standardize those that remain. In fact, the two
terminated DFAS projects were intended to reduce the number of systems or
eliminate a portion of different systems that perform the same function.
For example, DPPS was intended to consolidate eight

27 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).

contract and vendor pay systems and DSDS was intended to eliminate four
different disbursing systems.

Until DOD completes its efforts to refine and implement its enterprise
architecture and transition plan, and develop and implement an effective
approach for selecting and controlling business system investments, DOD
will continue to lack (1) a comprehensive and integrated strategy to guide
its business process and system changes, and (2) results-oriented measures
to monitor and measure progress, including whether system development and
modernization investment projects adequately incorporate leading practices
used by the private sector and federal requirements and achieve
performance and efficiency commensurate with the cost. These elements are
critical to the success of DOD's BMMP.

Developing and implementing a BEA for an organization as large and complex
as DOD is a formidable challenge, but it is critical to effecting the
change required to achieve the Secretary's vision of relevant, reliable,
and timely financial and other management information to support the
department's vast operations. As mandated, we plan to continue to report
on DOD's progress in developing the next version of its architecture,
developing its transition plan, validating its "As Is" systems inventory,
and controlling its system investments.

                              Interim Initiatives

Since DOD's overall business process transformation is a long-term effort,
in the interim it is important for the department to focus on improvements
that can be made using, or requiring only minor changes to, existing
automated systems and processes. As demonstrated by the examples we will
highlight in this testimony, leadership, real incentives, accountability,
and oversight and monitoring-key elements to successful reform-have
brought about improvements in some DOD operations, such as more timely
commercial payments, reduced payment recording errors, and significant
reductions in individually billed travel card delinquency rates.

To help achieve the department's goal of improved financial information,
the DOD Comptroller has developed a Financial Management Balanced
Scorecard that is intended to align the financial community's strategy,
goals, objectives, and related performance measures with the
departmentwide risk management framework established as part of DOD's
Quadrennial Defense Review, and with the President's Management Agenda. To
effectively implement the balanced scorecard, the Comptroller is planning
to cascade the performance measures down to the military services and
defense agency financial communities, along with certain

specific reporting requirements. DOD has also developed a Web site where
implementation information and monthly indicator updates will be made
available for the financial communities' review. At the departmentwide
level, certain financial metrics will be selected, consolidated, and
reported to the top levels of DOD management for evaluation and
comparison. These "dashboard" metrics are intended to provide key decision
makers, including Congress, with critical performance information at a
glance, in a consistent and easily understandable format.

DFAS has been reporting the metrics cited below for several years, which,
under the leadership of DFAS' Director and DOD's Comptroller, have
reported improvements, including the following.

o  From April 2001 to January 2004, DOD reduced its commercial pay
backlogs (payment delinquencies) by 55 percent.

o  From March 2001 to December 2003, DOD reduced its payment recording
errors by 33 percent.

o  The delinquency rate for individually billed travel cards dropped from
18.4 percent in January 2001 to 10.7 percent in January 2004.

Using DFAS' metrics, management can quickly see when and where problems
are arising and can focus additional attention on those areas. While these
metrics show significant improvements from 2001 to today, statistics for
the last few months show that progress has slowed or even taken a few
steps backward for payment recording errors and commercial pay backlogs.
Our report last year on DOD's metrics program28 included a caution that,
without modern integrated systems and the streamlined processes they
engender, reported progress may not be sustainable if workload is
increased.

Since we reported problems with DOD's purchase card program, DOD and the
military services have taken actions to address all of our 109
recommendations. In addition, we found that DOD and the military services
took action to improve the purchase card program consistent with the
requirements of the Bob Stump National Defense Authorization Act for
Fiscal Year 2003 and the DOD Appropriations Act for Fiscal Year

28 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).

2003.29 Specifically, we found that DOD and the military services had done
the following.

o  Substantially reduced the number of purchase cards issued. According to
GSA records, DOD had reduced the total number of purchase cards from about
239,000 in March 2001 to about 134,609 in January 2004. These reductions
have the potential to significantly improve the management of this
program.

o  Issued policy guidance to field activities to (1) perform periodic
reviews of all purchase card accounts to reestablish a continuing bona
fide need for each card account, (2) cancel accounts that were no longer
needed, and (3) devise additional controls over infrequently used accounts
to protect the government from potential cardholder or outside fraudulent
use.

o  Issued disciplinary guidelines, separately, for civilian and military
employees who engage in improper, fraudulent, abusive, or negligent use of
a government charge card.

In addition, to monitor the purchase card program, the DOD IG and the Navy
have prototyped and are now expanding a data-mining capability to screen
for and identify high-risk transactions (such as potentially fraudulent,
improper, and abusive use of purchase cards) for subsequent investigation.
On June 27, 2003, the DOD IG issued a report30summarizing the results of
an in-depth review of purchase card transactions made by 1,357 purchase
cardholders. The report identified 182 cardholders who potentially used
their purchase cards inappropriately or fraudulently.

We believe that consistent oversight played a major role in bringing about
these improvements in DOD's purchase and travel card programs. During
2001, 2002, and 2003, seven separate congressional hearings were held on
the Army and Navy purchase and individually billed travel card programs.
Numerous legislative initiatives aimed at improving DOD's management and
oversight of these programs also had a positive impact.

Another important initiative underway at the department pertains to
financial reporting. Under the leadership of DOD Comptroller, the
department is working to instill discipline into its financial reporting

29 The Department of Defense Appropriations Act for Fiscal Year 2003, Pub.
L. No. 107-248, S: 8149, 116 Stat. 1519, 1572, Oct. 23, 2002.

30 Department of Defense, Office of the Inspector General, Summary Report
on Joint Review of Selected DOD Purchase Card Transactions, D2003-109
(Washington, D.C.: June 27, 2003).

processes to improve the reliability of the department's financial data.
Resolution of serious financial management and related business management
weaknesses is essential to achieving any opinion on the DOD consolidated
financial statements. Pursuant to the requirements in section 1008 of the
National Defense Authorization Act for Fiscal Year 2002,31 DOD has
reported for the past 3 years on the reliability of the department's
financial statements, concluding that the department is not able to
provide adequate evidence supporting material amounts in its financial
statements. Specifically, DOD stated that it was unable to comply with
applicable financial reporting requirements for (1) property, plant, and
equipment, (2) inventory and operating materials and supplies, (3)
environmental liabilities, (4) intragovernmental eliminations and related
accounting entries, (5) disbursement activity, and (6) cost accounting by
responsibility segment. Although DOD represented that the military
retirement health care liability data had improved for fiscal year 2003,
the cost of direct health care provided by DOD-managed military treatment
facilities was a significant amount of DOD's total recorded health care
liability and was based on estimates for which adequate support was not
available. DOD has indicated that by acknowledging its inability to
produce reliable financial statements, as required by the act, the
department saves approximately $23 million a year through reduction in the
level of resources needed to prepare and audit financial statements.
However, DOD has set the goal of obtaining a favorable opinion on its
fiscal year 2007 departmentwide financial statements. To this end, DOD
components and agencies have been tasked with addressing material line
item deficiencies in conjunction with the BMMP. This is an ambitious goal
and we have been requested by Congress to review the feasibility and cost
effectiveness of DOD's plans for obtaining such an opinion within the
stated time frame.

To instill discipline in its financial reporting process, the DOD
Comptroller requires DOD's major components to prepare quarterly financial
statements along with extensive footnotes that explain any improper
balances or significant variances from previous year quarterly statements.
All of the statements and footnotes are analyzed by Comptroller office
staff and reviewed by the Comptroller. In addition, the midyear and
end-ofyear financial statements must be briefed to the DOD Comptroller by
the military service Assistant Secretary for Financial Management or the
head

31 National Defense Authorization Act for Fiscal Year 2003, Pub. L. No.
107-107, S:1008, 115 Stat. 1012, 1204, Dec. 28, 2001.

of the defense agency. We have observed several of these briefings and
have noted that the practice of preparing and explaining interim financial
statements has led to the discovery and correction of numerous recording
and reporting errors.

If DOD continues to provide for active leadership, along with appropriate
incentives and accountability mechanisms, improvements will continue to
occur in its programs and initiatives.

    Suggestions for Legislative Consideration

      Chief Management Official