Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management
Improvement Efforts at DOD (20-SEP-04, GAO-04-910R).
As the Comptroller General recently testified and as discussed in
our latest financial audit report, the Department of Defense's
(DOD) 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. For example, to date, none of the military
services has passed the test of an independent financial audit
because of pervasive weaknesses in internal control, processes,
and fundamentally flawed business systems. Problems with the
department's financial management operations go far beyond its
accounting and finance processes and systems. The department
continues to rely on a reported 4,000 or more fundamentally
flawed finance, logistics, personnel, acquisition, and other
management information systems to gather the data needed to
support day-to-day management decision making and reporting.
These systems were not designed to be, but rather evolved into
the overly complex and error-prone operation--vulnerable to
fraud, waste, and abuse--that exists today. Further,
inefficiencies in DOD's current business operations, such as (1)
little standardization across DOD components, (2) multiple
systems performing the same tasks, (3) the same data stored in
multiple systems, (4) manual entry of the same data into multiple
systems, and (5) a large number of data transactions, combine to
exacerbate problems with data integrity.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-910R
ACCNO: A12576
TITLE: Financial Management: Further Actions Are Needed to
Establish Framework to Guide Audit Opinion and Business
Management Improvement Efforts at DOD
DATE: 09/20/2004
SUBJECT: Accounting procedures
Data bases
Financial management
Financial statements
Investments
Taxpayers
DOD Business Management Modernization
Program
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GAO-04-910R
United States Government Accountability Office Washington, DC 20548
September 20, 2004
The Honorable Norm Coleman
Chairman
The Honorable Carl Levin
Ranking Minority Member
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate
The Honorable John Ensign
Chairman
The Honorable Daniel K. Akaka
Ranking Minority Member
Subcommittee on Readiness and Management Support
Committee on Armed Services
United States Senate
Subject: Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management Improvement
Efforts at DOD
As the Comptroller General recently testified and as discussed in our
latest financial audit report,1 the Department of Defense's (DOD)
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. For example, to date,
none of the military services has passed the test of an independent
financial audit because of pervasive weaknesses in internal control,
processes, and fundamentally flawed business systems.
Problems with the department's financial management operations go far
beyond its accounting and finance processes and systems. The department
continues to rely on a reported 4,000 or more fundamentally flawed
finance, logistics, personnel, acquisition, and other management
information systems to gather the data needed to
1 GAO, Fiscal Year 2003 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing Our
Nation's Future Fiscal Challenges, GAO04477T (Washington, D.C.: Mar. 3,
2004).
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion
support daytoday management decision making and reporting. These systems
were not designed to be, but rather evolved into the overly complex and
errorprone operation-vulnerable to fraud, waste, and abuse-that exists
today. Further, inefficiencies in DOD's current business operations, such
as (1) little standardization across DOD components, (2) multiple systems
performing the same tasks, (3) the same data stored in multiple systems,
(4) manual entry of the same data into multiple systems, and (5) a large
number of data transactions, combine to exacerbate problems with data
integrity.
On November 6, 2003, the DOD Principal Deputy Under Secretary
(Comptroller) testified before your Subcommittee that the department had a
plan to achieve its goal of an unqualified (clean) audit opinion on its
fiscal year 2007 financial statements. In August and September 2003, the
DOD Comptroller directed the military services and other DOD components to
prepare and submit, by October 31, 2003, comprehensive midrange financial
improvement plans for addressing material financial statement line item
deficiencies and supporting the department's fiscal year 2007 unqualified
audit opinion goal. Further, applicable DOD directives and business rules
emphasized the importance of linking the component's midrange financial
improvement plans to the department's Business Management Modernization
Program (BMMP), the departmentwide initiative responsible for overseeing
the development and implementation of DOD's business enterprise
architecture.2
Concerned about whether DOD's plan to obtain a clean audit opinion by
fiscal year 2007 was a prudent use of taxpayer money, in November 2003 you
requested that we review DOD's plan to determine whether it was consistent
with DOD's longterm business enterprise architecture goals and would
result in sustainable progress toward addressing financial management
deficiencies in key business process areas, such as logistics and finance
and accounting. In December 2003, we contacted DOD Comptroller staff to
make initial inquiries regarding the department's plan for achieving an
unqualified audit opinion on its fiscal year 2007 consolidated financial
statements. At that time, DOD Comptroller staff informed us that they had
not yet received or reviewed all the individual component plans that would
constitute the departmental plan.
As a result, and as agreed to with your staff in December 2003, we delayed
our review until after February 2004 to provide the DOD Comptroller more
time to receive and review the component plans. However, following our
initial fieldwork in April 2004, we determined that it would not be
feasible to perform a detailed review of the major component plans that
constitute the DOD plan, due to their current and continuing state of
development. Instead, we agreed with your staff, that we would answer the
following key questions.
2 In May 2003, the DOD Comptroller changed the architecture name from the
financial management enterprise architecture to the business enterprise
architecture to reflect the transformation of departmentwide business
operations and supporting systems, including accounting and finance,
budget formulation, acquisition, inventory management, logistics,
personnel, and property management systems.
(1) Does DOD have a comprehensive, integrated plan for obtaining an
unqualified audit opinion on the department's fiscal year 2007
consolidated financial statements?
(2) Has the DOD Comptroller established effective processes and procedures
for monitoring the implementation of the plan(s) to increase the
likelihood of sustainable progress and to ensure that component
auditability assertions are supported?
(3) Has DOD established a clear link between DOD component improvement
efforts and the department's BMMP?
Further, as agreed, we will continue reviewing DOD's efforts to address
its financial management deficiencies as part of our continuing DOD
business enterprise architecture work and oversight of DOD's consolidated
financial statement audit. We will provide periodic briefings to you or
your staff as DOD's improvement plans are further refined and implemented
over the next few years.
We performed our work from March 2004 through July 2004 in accordance with
generally accepted government auditing standards. Details of our scope and
methodology are included in enclosure I.
Results in Brief
DOD's goal to obtain an unqualified audit opinion on its fiscal year 2007
consolidated financial statements is not yet supported by a comprehensive
and integrated plan. Although most of the DOD components, including the
Army, Navy, and Air Force, have submitted improvement plans to the DOD
Comptroller, DOD has not yet developed an integrated departmental
strategy, key milestones, accountability mechanisms, or departmental cost
estimates for achieving its fiscal year 2007 audit opinion goal. Further,
there is little evidence of a direct linkage between component midrange
financial improvement plans and the department's BMMP. Importantly, the
department's fiscal year 2007 unqualified audit opinion goal was set
without direct input from all major DOD components. Involving and gaining
a commitment from key DOD stakeholders will be critical to meeting any
calendar year audit goal. Nevertheless, most of the DOD officials we
interviewed, including component officials, said they believed that the
department would achieve significant interim improvements in its business
operations as a result of working toward a stated goal and that a goal
date was needed. However, given the magnitude of DOD's challenges and its
current lack of a comprehensive and integrated departmental plan with
resultsoriented performance measures and complete and reliable cost
estimates, and a corresponding infrastructure to effectively oversee and
monitor component efforts, we do not believe that DOD will be in position
to achieve an unqualified audit opinion by fiscal year 2007.
Our review of key individual component plans revealed that the plans
varied in levels of detail, completeness, and scope, such that it will be
difficult for DOD Comptroller staff to use its departmental database of
component plans to oversee and monitor
component efforts. In this regard, we found that the component plans did
not consistently identify how staff, processes, or business systems would
be changed to implement corrective actions. Such changes are key elements
in assessing the adequacy of a component's plan and in monitoring progress
and sustainability. In fact, after performing a highlevel review, DOD
Comptroller staff returned most of the component plans initially submitted
due to format and content deficiencies. Furthermore, DOD Comptroller staff
indicated that once the department has its infrastructure (including a
database, staffing, processes, and procedures) in place to improve its
oversight and monitoring capability, additional plans would likely be
returned to the components for clarification.
DOD also does not yet have effective oversight and accountability
mechanisms in place to ensure that the plans are implemented and
corrective actions are sustainable. The database the department is
currently using is not integrated electronically with subordinate
component plans. Rather, the department currently relies upon DOD
components to resubmit their plans when revisions are made so the
departmental database can be updated. Because component plans are
continually changing, the information contained in the departmental
database will only be as current as the latest version of component plans
received and input into the database. In addition, we found that the
milestone dates identified in the component plans were based on assertion
dates prescribed by the DOD Comptroller and not on actual estimates of
effort required. Furthermore, task dependencies were not clearly
identified, including critical corrective action tasks that would need to
be completed in order for the fiscal year 2007 audit opinion to be
achieved. As a result, DOD's current database is not an efficient or
effective oversight and monitoring tool. DOD is in the process of
developing and refining its infrastructure to better integrate component
improvement efforts with those of BMMP. The DOD Comptroller's office
recently contracted with a consulting firm to expand the department's
capability to (1) analyze and compare component plans, (2) oversee and
monitor component efforts-including the establishment of a reporting
process and metrics for measuring performance, and (3) coordinate with
BMMP. In addition, the DOD Comptroller issued business rules to guide DOD
components through the various processes and procedures the department has
established. The business rules are intended to minimize the likelihood
that DOD components would request audits of financial line items or
statements before they have made sufficient progress toward ensuring that
their reported financial information is auditable. If implemented as
planned, this control mechanism should help ensure that audit resources
are not wasted.
To date, DOD has not established a clear link between DOD component
improvement efforts and BMMP-the department's longterm improvement
initiative. According to DOD officials, DOD components plan to rely
primarily upon manual workarounds and modifications to existing legacy
business systems rather than on new business system deployments to support
DOD's fiscal year 2007 audit opinion effort. However, we found that the
component plans we reviewed did not consistently identify whether a
proposed corrective action included a manual workaround or business system
modification or deployment. In addition, as we have previously reported,3
the
3 GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability, GAO04615
(Washington, D.C.: May 28, 2004).
department currently lacks a mechanism to effectively identify, monitor,
and oversee business system investments, including modifications,
occurring within the department. Because of this lack of visibility over
how DOD components plan to advance their financial management
functionality, the DOD Comptroller and BMMP may not have sufficient
information to assess the feasibility of a workaround or to review and
approve all modifications to existing legacy business systems to ensure
that they are sound investments, optimize mission performance and
accountability, and are consistent with applicable requirements and key
architectural elements in DOD's business enterprise architecture.
At this stage, an unqualified fiscal year 2007 audit opinion remains
simply a goal for which there is not yet a clearly defined,
welldocumented, and realistic plan to achieve. However, by involving its
components in developing and implementing solutions to longstanding
deficiencies in their business operations, DOD has taken a critical step
toward obtaining the commitment and buyin needed to successfully improve
the timeliness, accuracy, and reliability of its business management
information. DOD Comptroller staff acknowledged that their goal is
ambitious, but believe that they are in the process of laying a framework
to facilitate movement towards sustainable financial management
improvements and eventually obtaining an unqualified audit opinion. The
DOD Comptroller has several initiatives planned or under way to (1) refine
the departmental database and component plans, (2) improve the
department's ability to effectively oversee and monitor component efforts,
(3) ensure the completeness of the department's business enterprise
architecture, and (4) establish clearer links between component midrange
efforts and BMMP.
This report includes four recommendations to the Under Secretary of
Defense (Comptroller) to (1) develop and implement an integrated
departmentlevel plan, including a brief executive level summary, in order
to tie currently disparate improvement efforts at the component and
departmental levels together with accountable personnel, milestones, and
required resources; (2) develop and implement an effective oversight and
monitoring infrastructure, including staffing, processes, procedures, and
performance metrics, to provide assurance that actions taken by DOD
components to address deficiencies are sustainable, costeffective, and
result in timely, accurate, and reliable information for business
management; (3) direct DOD components to develop and implement plans that
include sufficient corrective action information, such as changes
affecting people, process, and business systems, and are electronically
linked to DOD's database tool, with appropriate resultsoriented
performance measures, to facilitate efficient and effective oversight and
monitoring; and (4) direct BMMP to review the plans to identify system
investments occurring at the DOD component level.
In its written comments on a draft of this report, DOD agreed with our
recommendations and outlined its actions to address the deficiencies noted
in our report.
Background
Essential to achieving an opinion on the consolidated financial statements
is resolution of the serious financial management problems at DOD, which
we have
designated as a highrisk area since 1995.4 Based largely on DOD's
assertion that its financial information was not auditable, the DOD
Inspector General (IG) again disclaimed an audit opinion on DOD's
financial statements for fiscal year 2003 as it had for the previous 7
fiscal years. Pursuant to the requirements in section 1008 of the National
Defense Authorization Act for Fiscal Year 2002 (the Act),5 DOD has
asserted for each of the past 3 years that the department was 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 reported that the reliability of its
military retirement health care liability data had improved for fiscal
year 2003, the cost of direct health care provided by DODmanaged military
treatment facilities-a significant amount of DOD's total recorded health
care liability-was based on estimates for which adequate support was not
available.
As previously stated, to date, none of the military services has passed
the test of an independent financial audit. This failure is due primarily
to pervasive weaknesses in DOD's business management systems, operations,
and internal control, including an inability to compile financial
statements that comply with generally accepted accounting principles.
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 over its 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.
In prior years, DOD expended significant resources and made billions of
dollars of financial account adjustments to derive its financial
statements. However, such statements were determined to be unauditable. In
this regard, section 1008 of the Act has offered the department some
relief from the cost and time associated with preparing and auditing its
financial statements. By acknowledging that its financial statements were
unauditable because underlying information was unreliable, DOD is in a
position to redirect its resources from preparing and auditing financial
statements to improving the department's financial management systems and
policies, procedures, and controls.6 Over the past 13 years, DOD leaders
have attempted to address financial management problems in various ways
but have largely been unsuccessful despite good intentions and significant
effort.
4 GAO, High-Risk Series: An Overview, GAO/HR951 (Washington, D.C.:
February 1995), and High-Risk Series: An Update, GAO03119 (Washington,
D.C.: January 2003). 5 National Defense Authorization Act for Fiscal Year
2002, Pub. L. No. 107107, S:1008, 115 Stat. 1012, 1204 (Dec. 28, 2001).
6 Specifically, section 1008 requires that DOD assess its auditability
each year and report the results to the DOD IG and others. If DOD asserts
that its financial information is not auditable, DOD and the DOD IG are
required to limit the work performed to prepare and audit the financial
statements.
Under the leadership of DOD's previous Comptroller, the department began
earnestly addressing a number of its financial management problems as part
of its business transformation effort. One broadbased initiative that is
vital to the department's efforts to transform DOD business operations is
BMMP, which the department established in July 2001. The purpose of BMMP
is to oversee the development and implementation of the departmentwide
business enterprise architecture, a supporting transition plan, and
related efforts. BMMP is then to ensure that DOD business system
investments are consistent with the architecture.7 A welldefined and
properly implemented business enterprise architecture 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.
Recognizing that it would take several years to transform the department's
current business process and systems environment, in August and September
2003 DOD's Comptroller directed the military departments, defense
agencies, and other major DOD fund holders to prepare comprehensive and
costeffective midrange financial improvement plans. According to DOD
officials, the financial improvement plans of the military services and
defense agencies are intended to identify planned improvements,
milestones, and costs required for DOD to achieve its goal of an
unqualified audit opinion for fiscal year 2007.
Further, DOD anticipated reprogramming additional funds from each of the
components to the DOD IG to fund the cost of required financial line item
and statement assessments and audits following assertions by DOD
components that the amounts reported are reliable.
DOD Does Not Yet Have a Comprehensive, Integrated Plan for Achieving Its
Fiscal Year 2007 Audit Opinion Goal
The plan currently under development by DOD was not intended to be an
executivelevel document that integrates the department's various
improvement initiatives into a single strategic plan with clear
objectives, resultsoriented performance measures, and resource
requirements. Rather, the department's plan, when completed, will consist
of a database of information obtained from 52 individual component
midrange plans, including the military services, the Army Corps of
Engineers (the Corps), defense agencies, and other major fund holders. At
the time of our review, component plans varied in length (from 4 pages to
about 150 pages), and focused on the use of workarounds and modifications
to legacy business systems to obtain an unqualified audit opinion by
fiscal year 2007. In addition, the department's database plan lacked
appropriate scope (including clear links to other departmentwide
improvement initiatives), resultsoriented performance measures, and cost
information for Congress and senior DOD management to guide both project
execution and control over departmentwide business management improvement
initiatives.
7 In December 2002, Congress directed DOD to develop and implement a
financial management enterprise architecture and repealed an earlier
requirement that DOD produce a comprehensive biennial financial management
improvement plan. Bob Stump National Defense Authorization Act for Fiscal
Year 2003, Pub. L. No. 107314, S:1004, 116 Stat. 2458, 2629 (Dec. 2,
2002).
The department has said it intends to rely upon the collective efforts of
the DOD components, as shown in their discrete plans, to address its
financial management deficiencies and achieve its fiscal year 2007 audit
opinion goal. According to DOD directives and instructions pertaining to
the plans, each component plan must identify by financial statement and
financial statement line item (1) all major known deficiencies; (2)
corrective actions for eliminating each deficiency; (3) required resources
(people and dollars); (4) estimated completion date (although the
completion date can be no later than the component assertion date
established in the DOD Comptroller's August and September 2003
directives); (5) responsible office/person; (6) links, if any, to BMMP;
and (7) dates when improved financial line items or statements will be
ready for external assessment and audit (although the external assessment
and audit dates provided cannot be any later than the dates established in
the DOD Comptroller's August and September 2003 directives).
DOD is currently in the process of populating and updating its
departmental database plan, as new and revised component plans are
received. Within the database, DOD has grouped components into the
following four tiers to facilitate planned oversight and monitoring of
component improvement efforts.
o Tier 1: Entities, such as the military services and the Corps, that
are directed by the Office of Management and Budget to prepare audited
financial statements and the Medicare Eligible Retiree Health Care Fund.
o Tier 2: Intelligence agencies.
o Tier 3: Entities, such as the Defense Logistics Agency (DLA),
directed by DOD to prepare standalone statements.
o Tier 4: All other DOD agencies, entities, and funds. Although Tier 4
entities are not required to prepare financial statements, they are
required to prepare improvement plans to ensure information provided for
the DOD consolidated financial statements is auditable.
DOD components that have already obtained unqualified audit opinions on
their financial statements, such as the Defense Finance and Accounting
Service (DFAS)8 and the Military Retirement Fund, were not required to
submit financial improvement plans.
As illustrated in table 1, as of July 14, 2004, DOD had received initial
plan submissions from 36 of the 52 components required to submit plans,
including all 11 of its tier 1 components, and was awaiting submissions
from the remaining 16 components. As of July 14, 2004, DOD had requested
revisions to 26 of the 36 plans initially submitted because the plans were
either not in the required format or lacked sufficient detail for
inclusion in DOD's database. While table 1 reflects that the DOD has
received 21 revised plans, the department currently lacks the
infrastructure to perform a thorough review of the plans. Accordingly, DOD
Comptroller staff acknowledged that additional component plans, including
those that were revised and resubmitted,
8 DFAS's financial statements and corresponding unqualified audit opinion
pertain only to the administrative functions of DFAS itself and,
consequently, do not provide any assurance as to the reliability of the
accounting processes and systems DFAS uses to provide services to other
DOD components, including the military services.
would likely be rejected for content deficiencies when the department's
consultant begins to review the plans.
Table 1: Status of DOD Component Financial Improvement Plans as of July
14, 2004
Initial Initial Initial Revision submission
submission submission submission received
Component Requested pending received rejected
Total 52 16 36 26 21
Source: GAO analysis of DOD data.
Our review of eight component plans (consisting of the Corps, DLA, and the
general and working capital funds of the Departments of the Army, Navy,
and Air Force) revealed that none of these plans were comprehensive in
nature. The plans did not consistently address DOD instructions to fully
describe why each identified deficiency affected the auditability of a
line item or statement and how the deficiency would be addressed. For
instance, we found that the plans did not clearly or consistently include
descriptive elements- such as people (human capital), processes, and
systems-that are key to clearly understanding
o the nature of the deficiency and how it occurred;
o how the deficiency affects the timeliness, accuracy, and reliability
of financial management information; and
o how the deficiency will be addressed, including whether the
corrective action relies upon manual workarounds or will require automated
business system changes. This distinction is key to assessing the
sustainability of planned corrective actions and identifying and
monitoring business system investments that are outside the DOD
Comptroller's direct line of responsibility.
The following are some examples of the deficiencies we observed in the
component plans we reviewed.
o Some components submitted "plans to develop plans." For instance, we
found that DLA's and the Corps' plans referred extensively to the
development and implementation of subordinate improvement plans or to
agreements between DLA and the Corps and others regarding corrective
actions intended to address reported deficiencies pertaining to several
key line items. For example, DLA referred to future development of a plan
of action to address deficiencies in key financial statement line items,
including accounts receivable, other assets, inventory, and general
property, plant, and equipment. Similarly, the Corps' plan refers to
memorandums of agreement with the audit community as a key element of its
corrective action process, but does not provide any specifics regarding
those agreements, particularly what actions, if any, the Corps has agreed
to take to address the deficiencies.
o All the plans we reviewed used numerous vague terms such as "ensure,"
"provide," "establish," and "determine" in their corrective action
descriptions. What the plans uniformly lacked were clear descriptions of
intended corrective actions, including how the component would address the
deficiency
through changes to people, processes, and business systems. For instance,
see
the following: The Army's consolidated general and working capital fund
plans identified a deficiency related to the auditability of its fund
balance with Treasury (FBWT) line item that read "lack of longterm
solutions to improve the accountability and reporting of FBWT." The
corresponding corrective actions to address this deficiency included
"establish a long term solution to improve the accountability and
reporting of FBWT."
The Navy's general and working capital fund plans stated that "physical
inventory procedures are not being performed on a consistent and periodic
basis." Corresponding corrective actions were limited to enforcing the
current policy and conducting physical inventories in accordance with
existing policy. Navy did not provide any corresponding detail on who was
accountable, how it intended to ensure compliance, or timelines for making
this happen.
The Air Force's general and working capital fund plans stated that Air
Force "ensure that capital lease liabilities are accurately valued and
reported" and "establish a baseline for capital leases." Air Force did not
provide any additional detail on how it intended to implement or sustain
these corrective actions or measure progress.
o Other than providing training to staff to address a specific
deficiency pertaining to training, none of the component plans reviewed
included actions to address human capital issues, such as size of staff
(including whether contract support would be used), staff turnover,
specific skill mixes, and staff performance. In April 2002, DOD published
a departmentwide strategic plan for its civilian employees that sets forth
its vision to "design, develop, and implement human resources policies,
strategies, systems, and tools to ensure a missionready civilian workforce
that is motivated to excel." Without correcting human capital
deficiencies, sustainability of corrective actions, particularly those
that depend on extensive manual workarounds, is questionable.
o Although most of the component plans implied that business process
and system changes would be needed, they provided little or no information
on what specific changes were planned. Without clear descriptions of
planned business process changes, the DOD Comptroller lacks information to
assess the feasibility, costeffectiveness, and sustainability of the
corrective actions. Further, in May 2004, we reported9 that DOD lacked an
effective and transparent process for overseeing and monitoring system
investments. Clearer descriptions of component system changes needed to
implement corrective actions could aid the department in its efforts to
identify future
9 GAO04615.
business system investments and improve oversight and monitoring of these
activities.
Further, our review of the plans revealed that the milestone
dates-critical for measuring progress-identified in component plans were
generally based on the component assertion and audit opinion dates
established by the DOD Comptroller in August and September 2003. Further,
the plans did not identify task dependencies- key to identifying tasks
that must be finished on schedule if the project is to be completed as
planned. For example, the only dates provided in the Navy's general and
working capital fund plans for addressing Navy's deficiencies were the
assertion and audit opinion dates established by the DOD Comptroller for
the applicable Navy line item or financial statement. As a result, the
milestone dates provided in the plans do not generally depict actual
estimates of the time required to address each deficiency, nor do they
identify critical tasks that must be completed on time in order to achieve
the department's audit opinion goal. The lack of valid resultsoriented
performance measures undermines the department's ability to effectively
monitor and measure progress and hold individuals accountable.
In addition, DOD has not yet calculated the cost of its effort to obtain a
fiscal year 2007 unqualified audit opinion. Although it requested and
received some cost information from DOD components, DOD has not
accumulated this cost information in its database or used it to assess the
costeffectiveness or feasibility of its fiscal year 2007 unqualified audit
opinion goal or component plans (including the use of manual workarounds
and the need for contractors and additional DOD human capital). Without
assessing the cost of component efforts, DOD has little or no assurance
that its resources are being utilized in the most costeffective manner.
As illustrated by previous examples, DOD does not yet have a
comprehensive, integrated strategic plan with resultsoriented performance
measures and cost information for addressing its financial management
deficiencies by fiscal year 2007. Developing and implementing a plan to
overcome the deficiencies in financial and related business operations of
one of the largest and most complex organizations in the world by fiscal
year 2007 represents a huge management challenge. Tasking DOD components
to take an active role in identifying and addressing known deficiencies
systematically is an important step toward obtaining buyin and
establishing responsibility and accountability for corrective actions.
However, DOD must recognize that its deficiencies cannot be addressed in
an insolated, stovepiped, or piecemeal fashion separate from the other
highrisk areas it faces-previous reform efforts have tried this approach
and failed.10
In the past, we have reported that DOD's financial management problems are
the result of longstanding deficiencies related to three factors: its
systems, processes, and people. To successfully address the department's
deficiencies, it is important that the components' plans, as incorporated
in DOD's database, clearly address all three factors and incorporate cost
and valid resultsoriented performance measures aimed
10 The nine interrelated highrisk areas that represent the greatest
challenge to DOD developing worldclass business operations supporting its
forces are financial management, human capital, information security,
systems modernization, weapon system acquisition, contract management,
infrastructure management, real property, and inventory management.
at achieving timely, accurate, and reliable information for business
management rather than solely an audit opinion.
DOD's Infrastructure for Effectively Overseeing and Monitoring Improvement
Efforts Is Not Yet Developed
DOD has not yet developed the ability to effectively oversee and monitor
component efforts to address financial management deficiencies. The
department's capacity, including available resources, processes, and
controls, for overseeing and monitoring the development and implementation
of individual component plans is also evolving. As of July 14, 2004, the
DOD Comptroller had assigned five staff on a parttime basis to review 52
component plans and oversee and monitor component improvement efforts.
However, the department's ability to effectively oversee and monitor
component efforts is reduced because of the lack of sufficient information
pertaining to deficiencies and corrective actions in the component plans,
valid resultsoriented performance measures, and resource requirements.
Further, the lack of electronic integration between the component plans
and the department's database diminishes the utility of the department's
database as an efficient and effective oversight and monitoring tool. As
currently designed, DOD components must resubmit their entire plan if a
revision is made so that DOD Comptroller staff can update the departmental
database. Because component plans and the status of corrective actions are
continually changing, such an onerous process means that DOD's
departmental database will probably never reflect the current status of
component plans and corrective actions.
In July 2004, DOD contracted with a consulting firm to improve component
plans and its own oversight and monitoring efforts. The contractor is
tasked with analyzing DOD component plans to determine if milestones are
sufficient and executable and adequately support attainment of an
unqualified opinion on the department's fiscal year 2007 consolidated
financial statements. Moreover, the contractor is required to (1) refine,
design, and maintain DOD's database plan, which consists of individual
component plans; (2) recommend metrics for use in tracking implementation
of component plans; and (3) prepare various reports to aid the DOD
Comptroller in monitoring component progress. Further, the contractor is
tasked to provide liaison support between component plans and the
department's business enterprise architecture effort. Given that the
contractor only began assisting DOD in late July 2004, it is unknown at
this point what impact the contractor will have on improving DOD's
oversight and monitoring abilities.
On June 23, 2004, DOD issued business rules11 to implement section 1008 of
the Act and guide its components along the path toward obtaining a clean
audit opinion. Simply stated, the business rules describe the oversight
process the DOD Comptroller has established to ensure that the corrective
actions, as described in component plans, are implemented and validated in
order to minimize the department's risk of unsupported claims that
reported financial information is auditable. Further, DOD officials
indicated that the new business rules recognize that management, not the
auditor, is responsible for documenting business processes, systems, and
internal
11 Business rules are statements of fact, policy, law, regulation, or a
combination of these that drive business activities.
control, and for collecting and maintaining transaction data. As of July
22, 2004, no DOD component required to submit an improvement plan has
asserted that its reported financial information is auditable and that it
has completed the process required by the new business rules as described
below. However, DOD Comptroller staff advised us that they expect to
receive several financial line item packages by the end of fiscal year
2004, primarily from Air Force, that support component claims that their
financial information is auditable.
Under DOD's business rules, the department's process for preparing,
implementing, and monitoring component actions toward achieving the
department's fiscal year 2007 audit opinion goal will consist of three
management phases: (1) discovery and correction, (2) validation, and (3)
assertion. Following the assertion phase, the DOD IG will either assess
the auditability of a financial line item or statement or subject it to
audit.
Discovery and correction phase. During the discovery and correction phase,
DOD components are expected to identify deficiencies and prepare and
implement improvement plans with measurable outcomes and milestone dates
for overcoming their deficiencies. Most DOD components are currently in
this phase of the process. Our review of component plans revealed that the
plans focused primarily on addressing previously reported deficiencies and
provided little or no indication that the components were attempting to
identify additional deficiencies. It is important to note that the
discovery of additional deficiencies will likely require additional time
and resources and may adversely affect the ability of DOD components to
achieve their milestones. Further, we found that the milestone dates
identified in most of the plans reviewed were generally based on the
targeted end dates assigned by the DOD Comptroller rather than on actual
estimates of the time required to implement and validate a corrective
action. Therefore, the department's ability to identify critical tasks or
actions that must be completed on time if the department is to achieve its
unqualified audit opinion for fiscal year 2007 is diminished.
Validation phase. Once a DOD component has implemented corrective actions
to resolve identified deficiencies it is required to validate that the
deficiencies in its financial line item or statement were effectively
addressed. According to DOD Comptroller staff, a contractor, a military
service audit organization, or the component itself can validate the
corrective actions. Our review of selected component plans and interviews
with component representatives responsible for developing the plans
revealed that planned approaches for validating corrective actions varied.
Some components, such as DLA, plan to hire contractors to assist in
developing and applying procedures for ensuring that corrective actions
effectively address deficiencies identified in the discovery and
correction phase. Other components, such as the Corps and the Air Force,
stated that at least some of the business process and other improvements
currently being made or recently completed should not require validation
under the new business rules since many of these actions originated from
agreements reached with the auditors to address previously identified
deficiencies.
Assertion phase. Once efforts to address financial statement line item or
statement deficiencies are complete, DOD components are required to submit
an assertion package to the DOD Comptroller for review and approval to
obtain an assessment or
audit. Each assertion package should contain (1) a management letter
asserting the audit readiness of the validated financial line item or
statement, (2) a summary of the validation work performed and an
explanation of corrective actions taken, (3) validation reports, and (4) a
complete assertion package checklist attesting to the availability of
process, procedural, system, and transaction data pertaining to the
financial line item or statement. To further aid in ensuring sufficient
evidential material is available to support financial information, on
October 20, 2003, the DOD Comptroller issued a directive that all
activities retain monthly accounting reports, accompanying system backups
that contain supporting transactions, and related documentation for 1 year
after appropriations cancel.
DOD Comptroller and DFAS staff, as well as a DOD IG advisor, will review
each assertion package to determine whether the corrective actions taken
by the component provide sufficient support for a recommendation that an
assessment or audit be performed on the financial line item or statement.
DOD is utilizing a complicated matrix approach (by component, financial
statement, and financial line item) to identify and address its financial
management deficiencies. As a result, DOD Comptroller staff and
contractors involved in overseeing and monitoring component plans need to
possess a sufficient understanding of pertinent accounting and auditing
standards and component deficiencies to ensure that the corrective actions
will actually accomplish their objective and result in improved financial
management information. After a component has received approval to obtain
an assessment or audit, the DOD IG, in coordination with the component,
will either perform or contract for the assessment or audit.
While full compliance with DOD's new business rules will increase the
level of supporting documentation required to assert that a financial line
item or statement is auditable, successful application of DOD's new rules
offers significant benefits. For example,
o resource requirements for preparing for and conducting an audit would
not be wasted;
o audit efficiency would increase due to improved documentation of
business processes, controls, systems, and transactional data; and
o the documentation submitted by DOD components to support assertions
that their financial information is auditable could be used by components
and BMMP to increase DOD's understanding of existing business processes
and systems in order to transition to more efficient ones in the future.
DOD's business rules clearly reflect management's intent that the
department avoid using its resources to prepare and audit unreliable
financial information. Further, implementation of business rules to guide
components through the process of ensuring that sufficient evidence exists
to support assertions that their financial information is auditable is a
significant step toward clearly communicating expectations. However, it is
critical that DOD establish an adequate infrastructure to effectively and
efficiently oversee and monitor component improvement efforts and ensure
compliance with its business rules.
Clear Links between Midrange and Long-term Efforts to Address Deficiencies
in DOD's Business Operations Are Not Yet Established
The department has not yet integrated its component efforts to obtain a
fiscal year 2007 unqualified audit opinion with the longterm improvement
efforts of BMMP. Although both DOD components and BMMP were directed by
the DOD Comptroller to support the department's fiscal year 2007 audit
opinion goal, the focus of their efforts appears to be quite different.
According to DOD officials, the department will rely primarily on business
process changes, including manual workarounds and modifications to
component legacy business systems, to achieve DOD's fiscal year 2007 audit
opinion goal. In contrast, BMMP's efforts, particularly those of its
functional business process areas (commonly referred to as domains) are
longterm and therefore directed toward sustaining the unqualified opinion
rather than producing auditable financial statements for fiscal year 2007.
However, DOD Comptroller staff told us that they were working closely with
the Finance, Accounting, and Financial Management (Finance and Accounting)
domain to develop an approach that will establish a clearer link between
the two improvement efforts.
At the time of our review, BMMP had only limited involvement in reviewing
DOD component improvement plans. Our interviews with representatives from
three of the nine BMMP domains-Installations and Environment, Logistics,
and Finance and Accounting-revealed that only the Finance and Accounting
domain had performed more than a cursory review of component plans.
According to the Finance and Accounting domain representative, the
domain's objective in reviewing the component plans, which the
representative acknowledged contained insufficient detail regarding
deficiencies and corrective actions planned, was to identify (1) processes
or process changes that were not considered in DOD's business enterprise
architecture and incorporate them in the architecture and (2) manual
workarounds that could potentially be automated in the future. Although
all BMMP officials we interviewed, including domain representatives,
expected to review and approve all modifications to legacy systems that
would result from component improvement efforts, they were adamant in
stating that the DOD Comptroller, rather than BMMP, was responsible for
assessing the completeness, feasibility, and costeffectiveness of
corrective actions identified in component improvement plans. However, as
we previously reported,12 the department does not have efficient and
effective processes and controls in place to identify business system
investments, including modifications to legacy business systems that are
occurring within the department. Further, component plans, which should
identify planned system investments, including modifications to legacy
systems, often lacked sufficient details needed to readily determine that
modifications to legacy business systems are planned. Better integration
of component midrange improvement efforts is needed to not only identify
omissions in the department's business enterprise architecture, but also
to aid the department in managing and controlling business system
investments occurring throughout the department. As we recently
reported,13 if the department is unable to more efficiently and
effectively manage its business system investments, it will continue to
invest billions of dollars in systems that fail to markedly improve its
12 GAO04615. 13 GAO04615.
financial management information and do not comply with its business
enterprise architecture.
The component plans that we reviewed did not consistently provide
information to identify or highlight business systems as a key element of
a planned corrective action. However, Army's midrange improvement plan
indicated that it expects to implement two systems as part of its
improvement effort in support of the fiscal year 2007 goal:
o the Global Combat Support System in fiscal year 2006, to address
deficiencies in recording and reporting operating materials and supplies
for the general fund financial statement; and
o the Defense Medical Logistics Standard Support System in fiscal year
2005, to address compliance deficiencies currently existing in the Army
Medical Department Property Accounting System.
Accordingly, given BMMP's role in sustaining an unqualified audit opinion,
it would be reasonable to expect-though not clearly stated in the Army's
plan-that BMMP would be involved in ensuring that these new systems
complied with the department's business enterprise architecture, including
the new financial reporting business rules that are expected to be in
effect prior to fiscal year 2007. The new financial reporting business
rules, which are intended to standardize financial information processing
in the department, include
o pro forma accounting entries to standardize how transactions are
recorded in the department;
o identification of applicable U.S. Government Standard General Ledger
accounts; and
o a standard fiscal financial information structure that would require
all organizations to capture the same type of information in their systems
(such as contractor or invoice number, appropriation number, and fiscal
year) to facilitate transaction recording within and between
organizations.
While the development and implementation of financial reporting business
rules is an important step in DOD efforts to begin applying its business
enterprise architecture, the impact of these rules on current business
systems will be negligible. To address financial reporting deficiencies in
DOD's current systems until a longterm solution can be implemented, BMMP
plans to utilize software commonly referred to as "middleware" to extract
data from DOD's current inventory of over 4,000 systems and put that data
in the proper format in accordance with the established business rules and
regulations. Middleware may be used successfully to extract, format, and
report data from legacy systems. However, the availability, completeness,
and reliability of the financial data extracted by the middleware from the
legacy systems for financial reporting will depend upon the efficiency and
effectiveness of component efforts to identify and address deficiencies.
Conclusions
Given the magnitude of DOD's challenges and its current lack of a
comprehensive and integrated departmental plan with resultsoriented
performance measures and
complete and reliable cost estimates, and a corresponding infrastructure
to effectively oversee and monitor component efforts, we believe it is
highly unlikely that DOD will be in a position to achieve an unqualified
audit opinion by fiscal year 2007. Further, while we support the intent of
both DOD's midrange and longterm efforts to improve the department's
financial management, DOD has not yet clearly linked these efforts. The
department needs a comprehensive, integrated plan with resultoriented
performance measures to guide project execution and to control
departmentwide business management improvement efforts. In our experience,
efforts aimed primarily at obtaining a financial statement opinion seldom
are a prudent use of taxpayer resources nor do they result in marked
improvements in the timeliness, accuracy, and reliability of business
management information. To the extent that DOD's efforts to obtain an
unqualified audit opinion by fiscal year 2007 result in lasting
improvements in DOD's business operations, they are worth pursuing.
However, focusing improvement efforts on implementing manual workarounds
and patching legacy business systems in order to obtain information
primarily for financial reporting purposes may inadvertently divert
limited resources away from ongoing efforts to develop and implement
longterm solutions and improve data for managing DOD's business
operations. The department should be able to achieve an unqualified audit
opinion on its financial statements as ongoing efforts to transform DOD
business operations mature and the department is able to more effectively
and efficiently support both the warfighter and DOD decision makers.
Recommendations for Executive Action
To expand DOD's ability to effectively oversee and monitor component and
departmental financial improvement initiatives intended to improve the
timeliness, accuracy, and reliability of business management information
for DOD decision makers and financial reporting, we recommend that the
Under Secretary of Defense (Comptroller) take the following four actions:
o Develop an integrated departmental plan, including a brief executive
summary, which ties currently disparate improvements at the component and
departmental levels together with accountable personnel, milestones, and
required resources.
o Establish an infrastructure, including staff, processes, procedures,
and performance metrics, to facilitate efficient and effective oversight
and monitoring of the development and execution of component improvement
plans to ensure that corrective actions are sustainable and will result in
timely, accurate, and reliable business management information.
o Direct DOD components to include in their plans sufficient corrective
action information, such as changes affecting people, process, and
business systems, and to link their plans electronically to a DOD
database, with appropriate resultsoriented performance measures, to
facilitate oversight and monitoring.
o Direct BMMP, including its domains, to use component plans as an aid
in identifying system investments occurring at the DOD component level.
Agency Comments and Our Evaluation
In its written comments, DOD concurred with our recommendations and
identified actions to address identified deficiencies. Specifically, DOD's
response outlined recent actions taken, others that are underway, and
further planned actions with respect to our recommendations. If
effectively implemented, these actions should substantially improve DOD's
management and oversight of its financial management initiatives. DOD's
comments are reprinted in enclosure II.
We are sending copies of this report to interested congressional
committees. We are also sending copies to the Secretary of Defense and the
Under Secretary of Defense (Comptroller). Copies will be made available to
others upon request. In addition, this report will also be available at no
charge on GAO's home page at http://www.gao.gov.
Please contact me at (202) 5129095 or by email at kutzg@gao.gov or Evelyn
Logue, Assistant Director, at (202) 5123881 or by email at loguee@gao.gov
if you or your staffs have any questions concerning this report. Major
contributors to this report were Shawn Ahmed, Molly Boyle, Cherry Clipper,
and Carolyn Voltz.
Gregory D. Kutz
Director, Financial Management and Assurance
Enclosures 2
Enclosure I
Scope and Methodology
We obtained and reviewed individual component plans for the general and
working capital funds of the Defense Logistics Agency (DLA) and the
Departments of the Army, the Navy, and the Air Force. We also reviewed the
component plan for the Army Corps of Engineers (Corps). We did not verify
the reliability of the information provided in the plans beyond
information obtained during interviews with component representatives
responsible for developing the plans. As agreed with our requesters, given
the continuing evolution of the Department of Defense's (DOD) improvement
efforts and corresponding processes and procedures, we limited our work to
determining whether
o DOD had a comprehensive, integrated plan for obtaining an unqualified
opinion on its fiscal year 2007 consolidated financial statements,
o the DOD Comptroller had established effective processes and
procedures for monitoring the implementation of the plan(s) to increase
the likelihood of sustainable progress and to ensure that component
auditability assertions are supported, and
o DOD had established a clear link between DOD component improvement
efforts and the department's Business Management Modernization Program
(BMMP).
To assess the plans, we compared them to the various criteria identified
in DOD Comptroller directives, instructions, and business rules issued to
the components to guide their plan development activities and guide them
through DOD's process for achieving an unqualified audit opinion. In
addition, we interviewed appropriate Army, Navy, Air Force, DLA, and Corps
officials responsible for preparing component midrange financial
improvement plans to increase our understanding of the status of component
plans and corresponding efforts to address audit impediments and
coordination with BMMP and links to DOD's business enterprise
architecture.
We also interviewed pertinent staff of the Under Secretary of Defense
(Comptroller), in Washington, D.C., responsible for (1) the development of
DOD's database plan; (2) review of individual component plans; (3)
development of DOD directives, instructions, and business rules; and (4)
development and implementation of processes and procedures for overseeing
and monitoring component efforts. In addition, we reviewed extracts from
the DOD database to gain an understanding of how it stored information and
what information it contained. We also reviewed the DOD Comptroller's
financial improvement initiative tracking schedule, as of July 14, 2004,
to identify staff assigned to oversee and monitor component plans and the
status of component plans. Furthermore, we reviewed the financial
improvement initiative business rules issued by the department to obtain
an understanding of the processes, procedures, and requirements, including
documentation requirements, DOD had established to minimize the likelihood
of an unsupported auditability assertion. In addition, we reviewed a copy
of the contract DOD issued to obtain oversight and monitoring support.
To assess whether clear links exist between component improvement efforts
and those of BMMP to refine and implement a business enterprise
architecture to guide DOD's business transformation effort, including
overseeing and controlling business system investments, we reviewed
component plans to determine the extent to which business system
investments and related coordination activities with BMMP were identified.
In addition, we interviewed DOD component and Comptroller staff to discuss
coordination of component midrange improvement efforts and BMMP. Further,
we interviewed BMMP staff-including business process area representatives
of the Logistics; Installations and Environment; and Finance, Accounting,
and Financial Management domains (functional business process areas)-to
assess the extent of their involvement in reviewing component plans and
coordination with DOD components in support of DOD's fiscal year 2007
audit opinion goal.
We briefed DOD Comptroller officials on the details of our audit,
including findings and their implications. On August 9, 2004, we requested
comments on a draft of this report. We received comments on September 9,
2004, and have summarized those comments in the "Agency Comments and Our
Evaluation" section of this report. DOD's comments are reprinted in
enclosure II. We conducted our audit work from March 2004 through July
2004 in accordance with generally accepted government auditing standards.
Enclosure II
Comments from the Department of Defense
(192122)
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