Department of Defense: Financial and Business Management	 
Transformation Hindered by Long-standing Problems (08-JUL-04,	 
GAO-04-941T).							 
                                                                 
GAO has previously reported on the Department of Defense's (DOD) 
financial management and business related problems and key	 
elements necessary for successful reform. Although the underlying
conditions remain fundamentally unchanged, DOD continues to be	 
confronted with pervasive problems related to its systems,	 
processes (including internal controls), and people (human	 
capital). These problems impede DOD's ability to operate its	 
numerous business operations in an efficient and effective	 
manner. The Subcommittee asked GAO to provide its views on (1)	 
the impact that long-standing financial management and related	 
business process weaknesses continue to have on DOD, (2) the	 
underlying causes of DOD business transformation challenges, and 
(3) DOD's business transformation efforts. In addition, GAO	 
reiterates the key elements to successful reform: (1) an	 
integrated business management transformation strategy, (2)	 
sustained leadership and resource control, (3) clear lines of	 
responsibility and accountability, (4) results-oriented 	 
performance measures, (5) appropriate incentives and		 
consequences, (6) an enterprise architecture to guide reform	 
efforts, and (7) effective monitoring and oversight.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-941T					        
    ACCNO:   A10893						        
  TITLE:     Department of Defense: Financial and Business Management 
Transformation Hindered by Long-standing Problems		 
     DATE:   07/08/2004 
  SUBJECT:   Accountability					 
	     Defense economic analysis				 
	     Defense procurement				 
	     Federal agency reorganization			 
	     Financial management				 
	     Financial management systems			 
	     Internal audits					 
	     Internal controls					 
	     Systems conversions				 
	     Enterprise architecture				 
	     Joint Financial Management Improvement		 
	     Program						 
                                                                 

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GAO-04-941T

United States General Accounting Office

GAO Testimony

Subcommittee on Financial Management, the Budget, and International
Security, Committee on Governmental Affairs, U. S. Senate

For Release on Delivery Expected at 10:30 a.m. EDT Thursday, July 8, 2004

DEPARTMENT OF DEFENSE

    Financial and Business ManagementTransformation Hindered by Longstanding
                                    Problems

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

GAO-04-941T

Highlights of GAO-04-941T, a testimony before the Subcommittee on
Financial Management, the Budget, and International Security, Committee on
Governmental Affairs, United States Senate

GAO has previously reported on the Department of Defense's (DOD) financial
management and business related problems and key elements necessary for
successful reform. Although the underlying conditions remain fundamentally
unchanged, DOD continues to be confronted with pervasive problems related
to its systems, processes (including internal controls), and people (human
capital). These problems impede DOD's ability to operate its numerous
business operations in an efficient and effective manner. The Subcommittee
asked GAO to provide its views on (1) the impact that long-standing
financial management and related business process weaknesses continue to
have on DOD, (2) the underlying causes of DOD business transformation
challenges, and (3) DOD's business transformation efforts.

In addition, GAO reiterates the key

elements to successful reform: (1) an integrated business management
transformation strategy, (2) sustained leadership and resource control,
(3) clear lines of responsibility and accountability, (4) results-oriented
performance measures, (5) appropriate incentives and consequences, (6) an
enterprise architecture to guide reform efforts, and (7) effective
monitoring and oversight.

www.gao.gov/cgi-bin/getrpt?GAO-04-941T

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory Kutz, (202) 512-9505
([email protected])

July 8, 2004

DEPARTMENT OF DEFENSE

Financial and Business Management Transformation Hindered by Longstanding
Problems

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 daunting 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 accurate and timely information for management and Congress to
use in making informed decisions. Further, the lack of adequate
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

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

Military pay 	impact on retention. Asset visibility and other logistical
support problems hampered mission readiness during Operation Iraqi
Freedom, resulting in a discrepancy of $1.2 billion between the materiel
shipped and the acknowledgement by the activity

Logistics 	that the materiel was received. 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

Travel 	percent were not properly justified. 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

Property 	agencies-which are likely to be first responders in case of a
terrorist attack. Some DOD contractors were abusing the federal tax
system, with little or no consequence. As of September 2003, DOD had
collected only $687,000 of unpaid federal taxes through a mandated levy
program. GAO estimated that at

Contract least $100 million could be collected annually through effective
implementation payments of the levy on DOD contract payments. The
department invested $179 million on two failed system efforts that were
Systems intended to resolve its long-standing disbursement problems.

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 offers two suggestions for
legislative action. First, a senior management position should be
established to manage and oversee DOD's financial and business management
transformation efforts. Second, in a recent report GAO proposes that
Congress shift the control and accountability for business systems
investments from the DOD components to the recently created functional
areas known as domains. DOD disagrees and stated that its portfolio
management process would provide the needed control over business system
investments. In GAO's view, providing the funding to the domains would be
one way of overcoming DOD's parochial operations and help preclude
spending billions on nonintegrated systems.

Mr. Chairman and Members of the Subcommittees:

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
continues to confront pervasive decades-old financial management and
business problems related to its systems, processes (including internal
controls), and people (human capital). 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 These problems preclude the department from
producing accurate, reliable, and timely information to make sound
decisions and to accurately report on its trillions of dollars of assets
and liabilities. Further, 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.

Today, we will provide our perspectives on (1) the impact that
long-standing financial management and related business process weaknesses
continue to have on DOD, (2) the underlying causes that have impeded the
success of prior reform efforts, and (3) DOD's business systems
transformation efforts. In addition, we will offer two suggestions for
legislative consideration, which we believe improve the chances that DOD
business systems transformation efforts will succeed. Our statement is
based on previous GAO reports and testimonies.

Summary

DOD's substantial long-standing business management systems and related
problems adversely affect the economy, efficiency, and effectiveness of
its operations, and have resulted in a lack of adequate accountability
across all major business areas. These problems have left the department
vulnerable to billions of dollars of fraud, waste, and abuse annually, at
a time of increasing fiscal constraint. Secretary Rumsfeld has estimated
that successful improvements to DOD's business operations could save the
department 5 percent of its budget a year, which equates to over $20
billion a year in savings. The following examples indicate the magnitude
and severity of the problems.

o  	Ninety-four percent of mobilized Army National Guard soldiers from the
six units we reviewed had pay problems. According to the individuals we
interviewed, these problems distracted from the soldiers missions, imposed
financial hardships on their families, and had a negative impact on
retention.2 For example, the commander of an Army National Guard Special
Forces unit stated in January 28, 2004, testimony that 25 soldiers left
his unit as a

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

2 U.S. General Accounting Office, Military Pay: Army National Guard
Personnel Mobilized to Active DutyExperienced Significant Pay Problems,
GAO-04-89 (Washington, D.C.: Nov. 13, 2003).

direct result of the pay problems they experienced and that another 15
asked for transfers to the inactive National Guard.

o  	DOD sold new Joint Service Logistics Integrated Suit
Technology-chem-bio suits-on the Internet for $3 while at the same time
DOD was buying them for over $200.3 Ineffective supply chain management
resulted in thousands of defective suits being declared excess by DOD and
then improperly issued to local law enforcement agencies-which are likely
to be first responders in case of a terrorist attack.4

o  	Asset visibility and other logistical support problems hampered
mission readiness during Operation Iraqi Freedom, including
cannibalization of vehicles for parts and duplication of requisitions.5

Further evidence of DOD's problems is the long-standing inability of any
military service or major defense component to pass the test of an
independent financial audit because of pervasive weaknesses in financial
management systems, operations, and controls.

Over the years, the department has initiated several broad-based reform
efforts intended to fundamentally reform its business operations. However,
these efforts have not resulted in the fundamental reform necessary to
resolve the department's long-standing management challenges because the
department has not addressed the four underlying causes that have impeded
meaningful reform:

o  lack of sustained leadership and management accountability;

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

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

o  inadequate incentives and accountability mechanisms for business
transformation efforts.

These four issues, to a large degree, have impeded DOD's efforts to
modernize its business systems-a critical factor in its transformation
efforts. DOD's stovepiped, duplicative, and nonintegrated systems
environment contributes to its operational problems and costs the
taxpayers billions of dollars each year. For fiscal year 2004, DOD
requested approximately $19 billion to operate, maintain, and modernize
its reported 2,274 business systems. The existing systems environment
evolved over time as DOD components-each receiving their own
funding-developed narrowly focused parochial solutions to their business
problems. Unfortunately, however, these system solutions have not been
implemented on time, within budget, and delivered the promised capability.
Two systems discussed in our recent report6-the

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

4 U.S. General Accounting Office, DOD Excess Property: Risk Assessment
Needed on Public Sales of Equipment That Could Be Used to Make Biological
Agents, GAO-04-81TNI (Washington, D.C.: Oct. 7, 2003).

5 U.S. General Accounting Office, Defense Logistics: Preliminary
Observations on the Effectiveness of Logistics Activities during Operation
Iraqi Freedom, GAO-04-305R (Washington, D.C.: Dec. 18, 2003).

6 U.S. General Accounting Office, DOD Business Systems Modernization:
Billions Continue to Be Invested with Inadequate Management Oversight and
Accountability, GAO-04-615 (Washington, D.C.: May 27, 2004).

Defense Logistics Agency's Business Systems Modernization (BSM) effort and
the Army's Logistics Modernization Program (LMP)-are no exception.

Successful reform of DOD's fundamentally flawed financial and business
management operations must simultaneously focus on its systems, processes,
and people. While DOD has made some encouraging progress in addressing
specific challenges, it is still in the very early stages of a
departmentwide reform that will take many years to accomplish. Secretary
Rumsfeld has made business transformation a priority. For example, through
its Business Management Modernization Program (BMMP), DOD is continuing
its efforts to develop and implement a business enterprise architecture
(BEA) and establish effective management oversight and control over its
business systems modernization investments. However, after about 3 years
of effort and over $203 million in reported obligations, we have not seen
significant change in the content of DOD's architecture or in its approach
to investing billions of dollars annually in existing and new systems. We
have made numerous recommendations aimed at improving DOD's plans for
developing the next version of the architecture and implementing controls
for selecting and managing business systems investments.7 To date, DOD has
not addressed 22 of our 24 recommendations.

The seriousness of DOD's business management weaknesses underscores the
importance of no longer condoning "status quo" business operations at DOD.
To improve the likelihood that the department's current business
transformation efforts will be successful, we have previously suggested8
that a chief management official9 position be created. The individual
would be responsible for overseeing key areas such as strategic planning,
performance and financial management, and business systems modernization,
while also facilitating the overall business transformation effort within
the department.

Further, in a recent report10 we also suggest that to improve management
oversight, accountability, and control of the department's business system
funding, Congress may wish to consider providing the funds to operate,
maintain, and modernize DOD's business systems to the functional areas,
known as domains, rather than the military services and the defense
agencies. Currently, each military service and defense agency receives its
own funding and is largely autonomous in deciding how to spend these
funds, thereby hindering the development of broad-based, integrated
corporate system solutions to common DOD-wide problems. Transforming DOD's
business operations and making them more efficient would free up resources
that could

7 See Related Reports.

8 U.S. General Accounting Office, Department of Defense: Further Actions
Needed to Establish and Implement a Framework for Successful Financial and
Business Management Transformation, GAO-04-551T (Washington, D.C.: Mar.
23, 2004) and U.S. General Accounting Office, Department of Defense:
Further Actions Needed to Establish and Implement a Framework for
Successful Business Transformation, GAO-04-626T (Washington, D.C.: Mar.
31, 2004).

9 On September 9, 2002, GAO convened a roundtable of executive branch
leaders and management experts to discuss the Chief Operating Officer
concept. For more information see U.S. General Accounting Office,
Highlights of a GAO Roundtable: The Chief Operating Officer Concept: A
Potential Strategy to Address Federal Governance Challenges, GAO-03-192SP
(Washington, D.C.: Oct. 4, 2002).

10 GAO-04-615.

be used to support the department's core mission, enhance readiness, and
improve the quality of life for our troops and their families.

Background

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. For fiscal year 2004, the department
was appropriated more than $425 billion, which included approximately $65
billion for contingency operations. 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 operation. To execute these
military operations, the department performs an assortment of interrelated
and interdependent business processes, including logistics management,
procurement, healthcare management, and financial management.

Transformation of DOD's business systems and operations is critical to the
department providing Congress and DOD management with accurate and timely
information for use in decision making. One of the key elements we have
reported11 as necessary to successfully execute the transformation is
establishing and implementing an enterprise architecture. In this regard,
the department has undertaken a daunting challenge to modernize its
existing business systems environment through the development and
implementation of a business enterprise architecture (BEA)-a modernization
blueprint. This effort is an essential part of the Secretary of Defense's
broad initiative to "transform the way the department works and what it
works on."

Pervasive Financial and Business Management Problems Affect DOD's
Efficiency and Effectiveness

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 testified
in March 2004 and as discussed in our latest financial audit report,12
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

11 U.S. General Accounting Office, Department of Defense: Status of
Financial Management Weaknesses and Progress Toward Reform, GAO-03-931T
(Washington, D.C.: June 25, 2003).

12 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).

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)13 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 1996 (FFMIA).14 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.

Pervasive weaknesses in DOD's financial management and related business
processes and systems 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  	Of the 481 mobilized Army National Guard soldiers from six GAO case
study Special Forces and Military Police units,15 450 had at least one pay
problem associated with their mobilization. According to the individuals
we interviewed, 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

13 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.

14 FFMIA, Pub. L. No. 104-208, div. A., S:101(f), title VIII, 110 Stat.
3009, 3009-389 (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
accountingstandards, and (3) U.S. Standard General Ledger (SGL) at the
transaction level.

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

the soldiers and their families, and has had a negative impact on
retention.16 More specifically, in January 28, 2004, testimony, the
commander of a special forces unit stated that 25 soldiers left the unit
as a direct result of the pay problems they experienced and that another
15 asked for transfers to the inactive National Guard. He also stated that
because it would take an estimated 2 years and $250,000 to train each
replacement, these losses have had a significant negative impact on the
unit's mission capability-one of only six such units in the nation.

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
$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.17

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.18

o  	Inadequate asset visibility and accountability resulted in DOD selling
new Joint Service Lightweight Integrated Suit Technology-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.19 DOD has acknowledged that these garments should
have been restricted to DOD use only and therefore should not have been
available to the public.

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 agents. Using a
fictitious company and fictitious individual identities, we were able to
purchase a large number of new and usable equipment items and protective
gear 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

16 GAO-04-89.

17 GAO-04-305R.

18 U.S. General Accounting Office, Defense Inventory: Opportunities Exist
to Improve Spare Parts Support Aboard Deployed Navy Ships, GAO-03-887
(Washington, D.C.: Aug. 29, 2003).

19 GAO-02-873T.

could be used against the United States.20

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. We also found
numerous instances of abusive or potentially criminal activity21 related
to the federal tax system during our audit and investigation of 47 DOD
contractor case studies. The 34 case studies involving businesses with
employees had primarily unpaid payroll taxes, some dating to the early
1990s and some for as many as 62 tax periods.22 The other 13 case studies
involved individuals who had unpaid income taxes dating as far back as the
1980s. Several of these contractors provided parts or services supporting
weapons and other sensitive military programs.23

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 were not properly authorized and that 73 percent were not
properly justified. During fiscal years 2001 and 2002, DOD spent almost
$124 million on airline tickets that included at least one leg in premium
class- usually business class. Because each premium class ticket costs 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.24

o  	Control breakdowns resulted in DOD paying for airline tickets that
were not used and not processed for refund-amounting to about 58,000
tickets totaling more $21 million for fiscal years 2001 and 2002. DOD was
not aware of this problem before our audit and did not maintain any data
on unused tickets. Based on limited data provided by the airlines, it is
possible that the unused value of the fully and partially unused tickets
DOD purchased from

20 U.S. General Accounting Office, DOD Excess Property: Risk Assessment
Needed on Public Sales of Equipment That Could Be Used to Make Biological
Agents, GAO-04-81TNI (Washington, D.C.: Oct. 7, 2003).

21 We characterized as "potentially criminal" any activity related to
federal tax liability that may be a crime under a specific provision of
the Internal Revenue Code. Depending on the potential penalty provided by
statute, the activitycould be a felony (punishable by imprisonment of more
than 1 year) or a misdemeanor (punishable by imprisonment of 1 year or
less). Some potential crimes under the Internal Revenue Code constitute
fraud because of the presenceof intent to defraud, intentional
misrepresentation or deception, or other required legal elements.

22 A "tax period" varies by tax type. For example, the tax period for
payroll and excise taxes is one quarter of a year. The taxpayer is
required to file quarterly returns with IRS for these types of taxes,
although payment of the taxes occurs throughout the quarter. In contrast,
for income, corporate, and unemployment taxes, a tax period is 1 year.

23 U.S. General Accounting Office, Financial Management: Some DOD
Contractors Abuse the Federal Tax System with Little Consequence,
GAO-04-95 (Washington, D.C.: Feb. 12, 2004).

24 U.S. General Accounting Office, Travel Cards: Internal Control
Weaknesses at DOD Led to Improper Use of First and Business Class Travel,
GAO-04-229T (Washington, D.C.: Nov. 6, 2003), and U.S. General
AccountingOffice, Travel Cards: Internal Control Weaknesses at DOD Led to
Improper Use of First and Business Class Travel, GAO-04-88 (Washington,
D.C.: Oct. 24, 2003).

fiscal years 1997 through 2003 with DOD's centrally billed account could
be at least $115 million.25

o  	We found that DOD sometimes paid twice for the same airline
ticket-first to the Bank of America for the monthly credit and bill, and
second to the traveler, who was reimbursed for the same ticket. Based on
our mining of limited data, the potential magnitude of the improper
payments was 27,000 transactions for over $8 million. For example, DOD
paid a Navy GS-15 civilian employee $10,000 for 13 airline tickets he had
not purchased.26

o  	We found27 that 38 of 105 travel cardholders we reviewed who had their
accounts charged-off due to nonpayment still had active secret or
top-secret clearances as of June 2002. Some of the Army personnel holding
security clearances who have had difficulty paying their travel card bills
may present security risks to the Army. Army regulations provide that an
individual's finances are one of the key factors to be considered in
determining whether an individual should continue to be entrusted with a
secret or top-secret clearance. However, we found that Army security
officials were unaware of these financial issues and consequently could
not consider their potential effect on whether these individuals should
continue to have security clearances.

o  	Our review of fiscal year 2002 data revealed that about $1 of every $4
in contract payment transactions in DOD's 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.28

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.29

o  	DOD cannot provide reasonable assurance to the Congress that its IT
budget request includes all funding for the department's business systems.
We have reported30 that DOD's IT budget

25 U.S. General Accounting Office, DOD Travel Cards: Control Weaknesses
Led to Millions of Dollars of Wasted on Unused Airline Tickets, GAO-04-398
(Washington, D.C.: Mar. 31, 2004).

26 U.S. General Accounting Office, DOD Travel Cards: Control Weaknesses
Resulted in Millions of Dollars of Improper Payments, GAO-04-576
(Washington, D.C.: June 9, 2004).

27 U.S. General Accounting Office, Travel Cards: Control Weaknesses Leave
Army Vulnerable to Potential Fraud and Abuse, GAO-03-169 (Washington,
D.C.: Oct. 11, 2002).

28 U.S. General Accounting Office, DOD Contract Payments: Management
Action Needed to Reduce Billions in Adjustments to Contract Payment
Records, GAO-03-727 (Washington, D.C.: Aug. 8, 2003).

29 U.S. General Accounting Office, Military Treatment Facilities:
Improvements Needed to Increase DOD Third-Party Collections, GAO-04-322R
(Washington, D.C.: Feb. 20, 2004).

30 U.S. General Accounting Office, Information Technology: Improvements
Needed in the Reliability of Defense Budget Submissions, GAO-04-115
(Washington, D.C.: Dec. 19, 2003).

submission to Congress for fiscal year 2004 contained material
inconsistencies, inaccuracies, or omissions that limited its reliability.
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.

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 its operations, and to provide
for accountability to Congress and American taxpayers.

Underlying Causes of Financial and Related Business Process Transformation
Challenges

Since May 1997,31 we have highlighted in various reports and testimonies
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 previously
discussed. Over the years, the department has initiated several
broad-based reform efforts intended to fundamentally reform its business
operations and improve the reliability of information used in the
decision-making process. Unfortunately, these initiatives have generally
proven to be less successful than anticipated because DOD has not
addressed the following four underlying causes:

o  	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  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, which I will now highlight,
will likely result in the failure of current DOD transformation efforts
and continue to hinder the department's ability to produce accurate,
reliable, and timely information to make sound decisions and to accurately
report on its billions of dollars of assets, such as inventory.

Lack of Sustained Leadership and Adequate Accountability

Historically, DOD has not routinely assigned accountability for financial
management performance to specific organizations or individuals who have
sufficient authority to accomplish desired goals. For example, under the
Chief Financial Officers Act of 1990,32 it is the

31 U.S. General Accounting Office, DOD High-Risk Areas: Eliminating
Underlying Causes Will Avoid Billions of Dollars in Waste,
GAO/T-NSIAD/AIMD-97-143 (Washington, D.C.: May 1, 1997).

32 Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 Stat.
2838, 2843 (Nov. 15, 1990) (codified, as amended, in scattered sections of
title 31, United States Code).

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 remaining 80 percent comes from DOD's other business areas such as
acquisition and personnel, which are not under the control and authority
of the DOD Comptroller.

Further, 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 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 DOD leadership
has demonstrated its commitment to reforming the department's business
operations, the magnitude and nature of day-to-day demands placed on these
leaders, given the current world events associated with fighting the war
on terrorism, clearly affect the level of oversight, commitment, and
involvement they can devote to the transformation efforts. Given the
importance of DOD's business transformation efforts, it is imperative that
it receives 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,33 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 and that many of these practices were developed
piecemeal and evolved to accommodate different organizations, each with
its own policies and procedures. Recent audits reveal that DOD has made
only small inroads in addressing these challenges. For example, as
discussed in our May 2004 report,34 DOD does not have the processes and
controls in place to provide reasonable assurance that it is in compliance
with the fiscal year 2003 defense

33 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).

34 U.S. General Accounting Office, DOD Business Systems Modernization:
Limited Progress in Development of Business Enterprise Architecture and
Oversight of Information Technology Investments, GAO-04-731R (Washington,
D.C.: May 17, 2004).

authorization act,35 which requires the DOD Comptroller to review all
system improvements with obligations exceeding $1 million. As a result,
DOD was not able to satisfy our request for information on all obligations
in excess of $1 million for system modernizations since passage of the
act. Based upon a comparison of limited information provided by the
military services and defense agencies for fiscal years 200336 and 2004,
as of December 2003, we identified a total of $863 million in obligations
that exceeded $1 million for system improvements that were not submitted
to the DOD Comptroller for required review.

Additionally, as discussed in our recent report,37 DOD continued to use a
stovepiped approach to develop and fund its business system investments.
As shown in table 1, DOD requested approximately $18.8 billion for fiscal
year 2004 to operate, maintain, and modernize its reported 2,274
nonintegrated, duplicative, stovepiped business systems. The table also
shows how business system funding is spread across various DOD components.

Table 1: DOD Fiscal Year 2004 Information Technology Budget Request for
Business Systems by DOD Component

(Dollars in millions) Component          Total 
Army                                    $3,652 
Navy                                     3,778 
Air Force                                3,737 
DISAa                                    3,938 
TRICAREb                                   980 
DLAc                                       774 
DFASd                                      502 
Other DOD componentse                    1,440 
Total                                  $18,801 

Source: GAO analysis based on DOD's fiscal year 2004 IT budget request.

a The Defense Information Systems Agency provides DOD and other
organizations with a wide range of information
services, such as data processing, telecommunications services, and
database management.
bTRICARE is the health care system for DOD's active duty personnel, their
dependents, and retirees.
cDLA is DOD's logistics manager for all consumable and some repair items;
its primary business function is
providing supply support to sustain military operations and readiness.
dDefense Finance and Accounting Services is the centralized accounting
agency for DOD.
e Other DOD components include entities such as the Office of the
Secretary of Defense and the Defense Contract
Management Agency.

35 Subsection 1004 (d) of the Bob Stump National Defense Authorization Act
for Fiscal Year 2003, Pub. L. No. 107-314, 116 Stat. 2629 (Dec. 2, 2002),
provides that any amount in excess of $1 million may be obligated for
financial system improvements before approval of its enterprise
architecture and a supporting transition plan only if the DOD Comptroller
makes a determination that the improvement is necessary for (1) critical
national security capability orcritical safety and security requirements
or (2) prevention of significant adverse effect on a project that is
needed to achieve an essential capability. The act further provides that
after the architecture is approved, the DOD Comptroller must determine
before making obligations that exceed $1 million for system improvements
that such improvements are consistent with the enterprise architecture and
the transition plan.

36 We requested obligational data for fiscal year 2003 for the period
December 2, 2002, the date of the enactment of the act, through September
30, 2003.

37 GAO-04-615.

The existing systems environment evolved over time as DOD components-each
receives its own system funding and follows decentralized acquisition and
investment practices-developed narrowly focused parochial solutions to
their business problems. DOD's ability to address its current
"business-as-usual" approach to business system investments is further
hampered by its lack of

o  	a complete inventory of business systems-a condition we first
highlighted in 1998. In fact, the DOD Comptroller testified in March
200438 that the size of DOD's actual systems inventory could be twice the
size currently reported;

o  a standard definition of what constitutes a business system;

o  a well-defined BEA; and

o  	an effective approach for the control and accountability over business
system modernization investments.

Until DOD develops and implements an effective strategy for overcoming
resistance, parochialism, and stovepiped operations, its transformation
efforts will not be successful. Further, there can be little confidence
that it will not continue to spend billions of dollars on stovepiped,
duplicative, and nonintegrated systems that do not optimize mission
performance and support the warfighter.

Lack of Results-Oriented Goals and Performance Measures

At a programmatic level, the lack of clear, linked goals and performance
measures handicapped DOD's past reform efforts. As a result, DOD managers
lacked straightforward road maps showing how their work contributed to
attaining the department's strategic goals, and they risked operating
autonomously rather than collectively. As of March 2004, DOD formulated
departmentwide performance goals and measures and continued to refine and
align them with the outcomes described in its strategic plan-the September
2001 Quadrennial Defense Review (QDR). The QDR outlined a new risk
management framework, consisting of four dimensions of risk-force
management, operational, future challenges, and institutional-to use in
considering trade-offs among defense objectives and resource constraints.
According to DOD's Fiscal Year 2003 Annual Report to the President and the
Congress, these risk areas are to form the basis for DOD's annual
performance goals. They will be used to track performance results and will
be linked to resources. As of March 2004, DOD was still in the process of
implementing this approach on a departmentwide basis.

DOD currently has plans to institutionalize performance management by
aligning management activities with the President's Management Agenda. As
part of this effort, DOD linked its fiscal year 2004 budget resources with
metrics for broad program areas, e.g., air combat, airlift, and basic
research in the Office of Management and Budget's (OMB) Program Assessment
Rating

38 U.S. General Accounting Office, Department of Defense: Further Actions
Needed to Establish and Implement a Framework for Successful Business
Transformation, GAO-04-626T (Washington, D.C.: Mar. 31, 2004).

Tool.39 We have not reviewed DOD's efforts to link resources to metrics;
however, some of our recent work notes the lack of clearly defined
performance goals and measures in the management of such areas as defense
inventory and military pay.40 Further, without modern integrated systems
and streamlined business processes, the accuracy and reliability of DOD's
performance data will be questionable.

One program that has yet to establish measurable, results-oriented goals
is the BMMP.41 The BMMP is the department's business transformation
initiative encompassing defense policies, processes, people, and systems
that guide, perform, or support all aspects of business management,
including development and implementation of the BEA. 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.
Since DOD has yet to develop performance measures for the BMMP, it is
difficult to evaluate and track, on an ongoing basis, specific program
progress, outcomes, and results, such as explicitly defining performance
measures to evaluate the architecture's quality, content, and utility of
subsequent major updates. Given that DOD has reported obligations of over
$203 million since architecture development efforts began 3 years ago,
this is a serious performance management weakness.

DOD recognizes that it needs to develop detailed plans and establish
performance metrics to measure and track program progress to determine
what it planned to accomplish by a certain point in time, what it actually
accomplished at that point in time, and what has been spent thus far. In
its March 15, 2004, progress report on the implementation of the BEA, DOD
reported that it plans to establish an initial approved program metrics
baseline to evaluate the cost, schedule, and performance of the BMMP and
that, beginning with the fourth quarter of fiscal year 2004, it plans to
begin formal tracking and reporting of specific program goals, objectives,
and measures. Without explicitly defined program baselines, detailed
plans, and performance measures, it is difficult to validate or justify
the $122 million requested for fiscal year 2005 and the $494 million
estimated to be needed for fiscal years 2006 through 2009.

39 OMB developed the Program Assessment Rating Tool to strengthen the
process for assessing the effectiveness of programs across the federal
government. For fiscal year 2004, OMB rated the following 12 defense
program areas: Air Combat; Airlift; Basic Research; Chemical
Demilitarization; Communications Infrastructure; Defense Health; Energy
Conservation Improvement; Facilities Sustainment, Restoration,
Modernization, and Demolition; Housing; Missile Defense; Recruiting; and
Shipbuilding. DOD linked metrics for these program areas, which represent
20 percent of the department's fiscal year 2004 budget; it linked another
20 percent in the 2005 budget and 30 percent in the 2006 budget, for a
total of 70 percent.

40 In July 2003 we reported that DOD and the military services do not have
an effective approach to prevent and mitigate equipment corrosion, and
that DOD's strategic plan should contain clearly defined goals,
measurable, outcome-oriented objectives, and performance measures. (U.S.
General Accounting Office, Defense Management: Opportunities to Reduce
Corrosion Costs and Increase Readiness, GAO-03-753 (Washington, D.C.: July
7, 2003)).Similarly, in January 2004 we testified that existing processes
and controls used to provide pay and allowances to mobilized Army Guard
personnel prevented DOD from being able to reasonably assure timely and
accurate payroll payments. We stated that DOD needs to establish a unified
set of policies and procedures, as well as performance measures in the pay
area. (U.S. General Accounting Office, Military Pay: Army National Guard
Personnel Mobilized to Active Duty Experienced Significant Pay Problems,
GAO-04-413T (Washington, D.C.: Jan. 28, 2004)).

41 GAO-04-731R.

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.

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, error-prone environment.
For example, our March 2003 report42 noted that DOD had not effectively
managed and overseen its planned investment of over $1 billion in four
Defense Finance and Accounting Service (DFAS) system modernization
efforts. One project's estimated cost had increased by as much as $274
million, while the schedule slipped by almost 4 years. For each of these
projects, DOD oversight entities-DFAS, the DOD Comptroller, and the DOD
CIO-could not provide documentation that indicated they had questioned the
impact of the cost increases and schedule delays, and allowed the projects
to proceed in the absence of the requisite analytical justification. Such
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. Two of the four
projects-the Defense Procurement Payment System and the Defense Standard
Disbursing System-were terminated in December 2002 and December 2003,
respectively, after an investment of approximately $179 million that did
not improve the department's business operations.

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 invest billions of dollars in business systems modernization,
while at the same time it lacks the effective management and oversight
needed to achieve 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.

Keys to Successful Reform

Successful reform of DOD's fundamentally flawed financial and business
management operations must simultaneously focus on its systems, processes,
and people. While DOD has

42 GAO-03-465.

made some encouraging progress in addressing specific challenges, it is
still in the very early stages of a departmentwide reform that will take
many years to accomplish. At this time, it is not possible to predict
when-or even whether-DOD's reform effort will be successful. Our
experience has shown there are several key elements that collectively
would enable the department to effectively address the underlying causes
of its inability to resolve its long-standing financial management
problems. These elements, which we believe are key to any successful
approach to transforming the department's business operations, include

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;

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.43 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. Further, as
will be discussed in more detail later, we have not yet seen a
comprehensive, cohesive strategy that details how some of the ongoing
efforts are being integrated. For example, we have not seen how the
department plans to integrate its objective of obtaining an unqualified
audit opinion in fiscal year 2007 with the BMMP. It appears as if these
two key efforts are being conducted in a stovepiped manner.

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-that DOD
currently has underway and, if properly developed and implemented, will
result in significant improvements in DOD's business systems and
operations.

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

Effectively managing and overseeing the department's $19 billion
investment in its business systems is key to the successful transformation
of DOD's business operations. The transformation also depends on the
ability of the department to develop and implement business systems that
provide users and department management with accurate and timely
information on the results of operations and that help resolve the
numerous long-standing weaknesses. As DOD moves forward with BMMP, it
needs to ensure that the department's business systems modernization
projects-such as BSM and LMP, discussed in our recently issued report-are
part of a corporate solution to DOD long-standing business problems. To
assist the department with it ongoing efforts, 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.

Business Management Modernization Program

The BMMP, which the department established in July 2001 following our
recommendation that DOD develop and implement an enterprise
architecture,44 is vital to the department's efforts to transform its
business operations.45 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 systems investments are consistent
with the architecture and provide world class mission support to the
fighting force. 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.

However, we recently reported46 that since our last review,47 and after
about 3 years of effort and over $203 million in reported obligations, we
have not seen significant change in the content of DOD's architecture or
in DOD's approach to investing billions of dollars annually in existing
and new systems. Few actions have been taken to address the
recommendations we made in our previous reports,48 which were aimed at
improving DOD's plans for developing the next version of the architecture
and implementing the institutional means for selecting and controlling
both planned and ongoing business systems investments. To date, DOD has
not yet addressed 22 of our 24 recommendations.

Further, DOD has not yet developed either near-term or long-term plans for
developing the architecture that explicitly identify and establish a
baseline for the actions to be taken, milestones

44 DOD has one Enterprise Information Environment Mission, and six
departmental domains including(1) acquisition/ procurement; (2) finance,
accounting, and financial management; (3) human resource management; (4)
logistics; (5) strategic planning and budgeting; and (6) installations and
environment.

45 GAO-01-525.

46 GAO-04-731R.

47 GAO-03-1018.

48 GAO-03-458 and GAO-03-1018.

to be achieved, cost estimates to be met, and targeted outcomes to be
achieved. DOD has adopted an incremental approach to developing the
architecture, including the transition plan, and plans to refine and
extend the architecture in three increments, the first of which includes
in part the department's efforts to obtain an unqualified audit opinion of
DOD's consolidated fiscal year 2007 financial statements.

However, it is unclear what the increments individually or collectively
mean, and what they will provide or allow DOD to achieve in the near and
long term, because, as previously discussed, DOD has yet to develop
detailed performance measures. Although the three increments were
identified in November 2003, program officials do not expect to have a
plan for increment one until the next version of the transition plan is
completed in August 2004. According to program officials, the goals and
scope for the second and third increments were only recently approved and,
therefore, detailed plans of action and milestones do not yet exist.

Currently, DOD has three initiatives under way to support increment one.
First, the program office is developing a plan of action for increment one
and intends to complete the plan by August 2004. Second, the accounting
and finance domain is conducting workshops to develop needed business
rules and requirements for extending and evolving version 2.0 of the
architecture. Last, DOD components are developing individual plans
detailing their respective efforts for supporting increment one. However,
there is no evidence that the program office is coordinating with the
components and that the components are coordinating amongst themselves.
Because there are not yet detailed plans guiding the program's activities,
it is unclear whether and how these activities support each other and
whether they support the department's goal of achieving an unqualified
audit opinion in 2007.

As DOD moves forward with the BEA, it will be essential that the
department have the management structure and processes in place to (1)
improve the control and accountability over its billions of dollars of
business systems investments; (2) develop corporate solutions to common
business problems; and (3) implement system projects within budget, on
time, and deliver the promised capability. The failure of the department
to have the appropriate management structure and processes could result in
billions of dollars continuing to be at risk of being spent on more
systems that are duplicative, are not interoperable, cost more to maintain
than necessary, and do not optimize mission performance and
accountability.

Control and Accountability Over Business System Investments

As previously discussed, DOD continues to lack adequate control and
accountability over its billions of dollars of business systems
investments. Each DOD component continues to make its own investment
decisions, which has led to the proliferation of systems. As shown in
table 2, the department has reported that it has at least 2,274 business
systems. For example, the department reportedly has 665 systems to support
human resource management, 565 systems to support logistical functions,49
542 systems to perform finance and accounting functions, and 210 systems
to support strategic planning and budget formulation.

49 According to logistics domain officials, there are currently about
3,000 systems just within the logistics domain. Of that amount, about
1,900 systems have been validated by the DOD components as logistics
systems-that is, they are not merely a spreadsheet or a report. Such a
determination has not been made for the other 1,100.

           Table 2: Reported DOD                                              
      Business Systems by Domain                Navy/ Marine            
      and Functional Area Domain Air Force Army 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        23      63       98       15   11    210  
             budgeting                                                  
      Enterprise information                                                  
            environment              1      5        2        3    10    21
               Total                357    863      555      231   268  2,274 

Source: GAO analysis of BMMP data.

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 proliferation of systems has resulted because DOD components are
largely autonomous and each receives its own business system funding.

DOD has recognized the need to improve its control and accountability of
its business system investments and has various initiatives underway and
planned. For example, in response to our recommendations,50 DOD issued a
policy in March 2004 that assigns the domains the responsibility for IT
portfolio management. However, the procedures to be followed to implement
the policy are currently being developed and no time frames for completion
have been provided. In addition, specific roles and responsibilities of
the domains have not yet been formalized, standard criteria for performing
the system reviews have not been developed, and explicit authority for
fulfilling roles and responsibilities has not been assigned. Although DOD
recognizes the need to clarify the roles and responsibilities associated
with managing the domains' portfolios of business systems and ensuring
compliance with the architecture, it has not yet established time frames
for completing these activities.

While DOD is continuing to work toward establishing the structure and
processes to manage its business systems investments, it has not yet
conducted a comprehensive system review of its ongoing IT investments to
ensure that they are consistent with its BEA efforts. Additionally,
execution of a comprehensive review of all modernization efforts by DOD
before billions of dollars have been invested will reduce the risk of
continuing the department's track record of business systems modernization
efforts that cost more than anticipated, take longer than expected, and
fail to deliver intended capabilities.

50 GAO-01-525 and GAO-03-458.

Corporate Solutions to Common Problems

The department's business transformation also depends on its ability to
develop and implement business systems that provide corporate solutions to
DOD's numerous long-standing problems. This approach should help preclude
the continued proliferation of duplicative, stovepiped systems and reduce
spending on multiple systems that are supposed to perform the same
function. However, as discussed in our recently released report,51 DOD is
still developing systems that are not designed to solve corporatewide
problems. BSM and LMP were initiated in November 1999 and February 1998,
respectively, prior to DOD undertaking the BEA and establishing the
domains. As such, they were not directed towards a corporate solution to
the department's long-standing weaknesses in the inventory and logistics
management areas, such as total asset visibility. Rather, both projects
are more focused on DLA's and the Army's respective inventory and
logistics management operations. Today, I would like to focus on one of
those issues-total asset visibility, because of its significant impact on
DOD's operational effectiveness.

In October 2002, a DLA official testified52 that BSM would provide
improved control and accountability over the Joint Services Lightweight
Integrated Suit Technology (JSLIST), which is a lightweight, two-piece
garment-coat and trousers-designed to provide maximum protection against
chemical and biological contaminants. Total asset visibility is critical
for sensitive items such as the JSLIST. For example, tracking the specific
location of each suit by lot number is necessary if for any reason they
have to be recalled, as was the case with the JSLIST predecessor the
Battle Dress Overgarment (BDO).

Over 700,000 of the BDOs were found to be defective and were recalled.
Since DOD's systems did not provide the capability to identify the exact
location of each suit, a series of data calls were conducted, which proved
to be ineffective. We reported in September 200153 that DOD was unable to
locate approximately 250,000 of the defective suits and therefore was
uncertain if the suits were still in the possession of the military
forces, or whether they had been destroyed or sold. Subsequently, we found
that DOD had sold many of these defective suits to the public as excess,
including 379 that we purchased in an undercover operation.54 In addition,
DOD may have issued over 4,700 of the defective BDO suits to local law
enforcement agencies. This is particularly significant because local law
enforcement agencies are most likely to be the first responders to a
terrorist attack, yet DOD failed to inform these agencies that using these
suits could result in death or serious injury.

At the October 2002 hearing, the DLA official stated that JSLIST would be
included in BSM at the earliest practicable date, which was estimated to
be December 2003. BSM, however, is not

51 GAO-04-615.

52 Chemical and Biological Equipment: Preparing for a Toxic Battlefield:
Hearing Before the House Committee on Government Reform, Subcommittee on
National Security, Veterans Affairs and International Relations, 107th
Cong.119 (Oct. 1, 2002) (statement of Deputy Commander, Defense Supply
Center Philadelphia, Mr. George H. Allen).

53 U.S. General Accounting Office, Chemical and Biological Defense:
Improved Risk Assessment and Inventory Management Are Needed, GAO-01-667
(Washington, D.C.: Sept. 28, 2001).

54 U.S. General Accounting Office, DOD Excess Property: Risk Assessment
Needed on Public Sales of Equipment That Could Be Used to Make Biological
Agents, GAO-04-81TNI (Washington, D.C.: Oct. 7, 2003).

designed to provide the corporate total asset visibility necessary to
locate and track the suits
throughout DOD's supply chain. While the suits are expected to be included
in a future
deployment of BSM, at the time of our review program officials had not yet
specified a date
when they will be included. Even when the suits are included, BSM is
designed to provide
visibility over the suits only within the DLA environment-something DLA
has stated already
exists within its current system environment.

As we have previously reported,55 the lack of integrated systems hinders
DOD's ability to know
how many JSLIST it has on hand and where they are located once they leave
the DLA
warehouse. For example, we found that military units that receive JSLIST
from DLA
warehouses maintained inventory data in nonstandard, stovepiped systems
that did not share data
with DLA or other DOD systems. The methods used to control and maintain
visibility over
JSLIST at the units we visited ranged from stand-alone automated systems,
to spreadsheet
applications, to pen and paper. One military unit we visited did not have
any inventory system
for tracking JSLIST. BSM does not address asset visibility outside of
DLA's supply chain for
the JSLIST, and thus cannot provide DOD with the capability to readily
locate JSLIST for any
reason, including any potential need for a recall of defective suits.

Similarly, we recently reported56 that LMP will not provide the Army with
total asset visibility
until a suite of other systems has been developed and implemented.
Specifically, Army officials
have stated that LMP will require integration with other Army systems that
are under
development in order to achieve total asset visibility within the Army.
These additional systems
are the Product Lifecycle Management Plus (PLM+) and Global Combat Support
System-
Army (GCSS-A). According to the Army, PLM+ is to integrate LMP and GCSS-A
to create
end-to-end solution for Army logistics. However, time frames and cost
estimates have not been
developed for these two additional system initiatives.

Further, to help provide for departmentwide total asset visibility, DLA is
undertaking the
implementation of the Integrated Data Environment (IDE) program. According
to DLA, this
initiative is intended to provide the capability for routing data from
multiple systems within DLA
and DOD into one system. According to DLA, IDE is expected to reach full
operational
capability in August 2007, with a current estimated cost of approximately
$30 million.
However, successfully meeting this completion depends on other
departmental efforts being
completed on time, such as PLM+, for which a completion date had not been
established.

Project Management and Oversight

While the success of BMMP and improved control and accountability of
business system investments are critical aspects of the department's
transformation efforts, equally important is the ability of DOD to
implement chosen systems solutions on time, within budget, and with the
promised capability. The department has not demonstrated the ability to
achieve these goals.

55 GAO-02-873T.

56 GAO-04-615.

As discussed in our recently released report,57 BSM and LMP have
experienced cost increases, schedule slippages, and did not deliver
planned system capabilities in their first release. Our analysis indicated
that many of the operational problems experienced by BSM and LMP can be
attributed to DOD's inability to effectively implement the disciplined
processes necessary to reduce the risks associated with these projects to
acceptable levels. Disciplined processes have been shown to reduce the
risks associated with software development and acquisition efforts to
acceptable levels and are fundamental to successful systems acquisition.

Specifically, in the case of these two projects, they had significant
deficiencies in defining requirements and testing-two areas that form the
foundation for a project's success or failure. In fact, DLA and Army
program officials acknowledged that requirements and testing defects were
factors contributing to the operational problems and stated that they are
working to develop more effective processes. To their credit, DLA and the
Army have decided that future deployments of BSM and LMP will not go
forward until they have reasonable assurance that the deployed systems
will operate as expected for a given deployment. Our analysis of selected
BSM and LMP key requirements58 and testing processes found that (1) the
functionality to be delivered was not adequately described or stated to
allow for quantitative evaluation; (2) the traceability among the various
process documents (e.g., operational requirements documents, functional or
process scenarios, and test cases) was not maintained; and (3) system
testing was ineffective.

In commenting on the report,59 the department acknowledged that the
initial implementation of BSM and LMP experienced problems that could be
attributed to the lack of adequate requirements determination and system
testing. To address these inadequacies, the department noted that
requirements analysis had been expanded to include greater specificity and
that the successful completion of comprehensive testing would be required
prior to further implementation of either system.

Suggestions for Legislative Consideration

We would like to offer two suggestions for legislative consideration that
we believe could contribute significantly to the department's ability to
not only address the impediments to DOD's success but also to incorporate
needed key elements to successful reform. These suggestions would include
the (1) creation of a chief management official and (2) centralization of
the funding business systems investments with the domain leaders
responsible for the department's various business areas, such as logistics
and human resource management. We provided similar views in our
testimonies on March 23, 2004,60 before the Subcommittee on Readiness and

57 GAO-04-615.

58 BSM and LMP have identified and documented 202 and 293 system
requirements, respectively. For BSM, we reviewed 13 requirements related
to finance, order fulfillment, planning, and procurement. For LMP, we
reviewed 12 requirements related to planning and budget development, asset
management, inventory management, and maintenance analysis and planning.

59 GAO-04-615.

60 GAO-04-551T.

Management Support, Senate Committee on Armed Services, on March 31,
2004,61 before the Subcommittee on Terrorism, Unconventional Threats, and
Capabilities, House Committee on Armed Services, and yesterday62 before a
joint hearing of the Subcommittee on National Security, Emerging Threats,
and International Relations, the Subcommittee on Technology, Information
Policy, Intergovernmental Relations, and the Census, and the Subcommittee
on Government Efficiency and Financial Management, House Committee on
Government Reform.

Chief Management Official

I will now discuss our first matter for consideration. Previous failed
attempts to improve DOD's business operations illustrate the need for
sustained involvement of DOD leadership in helping to assure that DOD's
financial and overall business process transformation efforts remain a
priority. While the Secretary and other key DOD leaders have demonstrated
their commitment to the current business transformation efforts, the
long-term nature of these efforts requires the development of an executive
position capable of providing strong and sustained executive leadership
over a number of years and various administrations.

However, the tenure of the department's top political appointees has
generally been short in duration and as a result, it is sometimes
difficult to maintain the focus and momentum that are needed to resolve
the management challenges facing DOD. For example, the former DOD
Comptroller, who was very supportive of the current transformation effort,
and one of its principal leaders, served as the DOD Comptroller for
slightly over 3 years. Further, within the office of the DOD Comptroller,
the current Principal Deputy/Deputy Under Secretary of Defense for
Management Reform will soon be leaving the department. He also was in that
position for slightly over 3 years. Additionally, leadership voids have
existed in other key positions such as the program manager for BMMP. From
May 2003 to February 2004, there was no program manager to identify,
direct, and execute program activities.63 The resolution of the array of
interrelated business system management challenges that DOD faces is
likely to span several administrations and require sustained leadership to
maintain the continuity needed for success.

One way to ensure sustained leadership over DOD's business transformation
efforts would be to create a full-time executive level II position for a
chief management official64 who would serve as the Principal Under
Secretary of Defense for Management. This position would provide the
sustained attention essential for addressing key stewardship
responsibilities such as strategic planning, performance and financial
management, and business systems modernization in an integrated manner.
This position could be filled by an individual, appointed by the President
and confirmed by the Senate, for a set term of 7 years with the potential
for reappointment. Such an individual should have a proven track record as
a business process change agent in large, complex, and diverse
organizations-experience necessary to spearhead business process

61 GAO-04-626T.

62 U. S. General Accounting Office, Department of Defense: Long-standing
Problems Continue to Impede Financial and Business Management
Transformation, GAO-04-907T (Washington, D.C.: July 7, 2004).

63 GAO-04-731R.

64 GAO-03-192SP.

transformation across the department, and potentially administrations, and
serve as an integrator for the needed business transformation efforts. In
addition, this individual would enter into an annual performance agreement
with the Secretary that sets forth measurable individual goals linked to
overall organizational goals. Measurable progress towards achieving
agreed-upon goals would be a basis for determining the level of
compensation earned, including any related bonus. In addition, this
individual's achievements and compensation would be reported to Congress
each year.

 Functional Domain Control and Accountability Over Business System Investments

We have made numerous recommendations to DOD intended to improve the
management oversight and control of its business systems investments.
However, progress in achieving this control has been slow and, as a
result, DOD has little or no assurance that current business systems
investments are being spent in an economically efficient and effective
manner. DOD's current systems funding process has contributed to the
evolution of an overly complex and error-prone information technology
environment containing duplicative, nonintegrated, and stovepiped systems.
Given that DOD spends billions of dollars annually on business systems and
related infrastructure, it is critical that actions be taken to gain more
effective control over such business systems funding.

The second suggestion we have for legislative action to address this
issue, as discussed in our report65 and consistent with our open
recommendations to DOD, is to establish specific management oversight,
accountability, and control of funding with the "owners" of the various
functional areas or domains. This legislation would define the scope of
the various business areas (e.g., accounting, acquisition, logistics, and
personnel) and establish functional responsibility for management of the
portfolio of business systems in that area with the relevant Under
Secretary of Defense for the six departmental domains and the CIO for the
Enterprise Information Environment Mission (information technology
infrastructure). For example, planning, development, acquisition, and
oversight of DOD's portfolio of logistics business systems would be vested
in the Under Secretary of Defense for Acquisition, Technology and
Logistics.

We believe it is critical that funds for DOD business systems be
appropriated to the domain owners in order to provide for accountability
and the ability to prevent the continued parochial approach to systems
investment that exists today. The domains would establish a hierarchy of
investment review boards with DOD-wide representation, including the
military services and defense agencies. These boards would be responsible
for reviewing and approving investments to develop, operate, maintain, and
modernize business systems for the domain portfolio, including ensuring
that investments were consistent with DOD's BEA. All domain owners would
be responsible for coordinating their business systems investments with
the chief management official who would chair the proposed Defense
Business Systems Modernization Executive Committee and provide a
cross-domain perspective. Domain leaders would also be required to report
to Congress through the chief management official and the Secretary of
Defense on applicable business systems that are not compliant with review
requirements and to include a summary justification for noncompliance.

65 GAO-04-615.

In commenting on our report, DOD stated that it did not agree with this
funding concept. The department stated that the portfolio management
process being established-to include investment review boards-would
provide the appropriate control and accountability over business system
investments. DOD also stated that beginning with the fiscal year 2006
budget review process, the domains will be actively involved in business
system investment decisions. DOD stated that the military services
implement their own statutory authorities for acquisition and IT systems
development in consultation with DOD. While the establishment of the
investment review boards is consistent with our previous recommendations,
we continue to believe that appropriating funds for DOD business systems
to the domains, rather than the various DOD entities, will significantly
improve accountability over business system investments. DOD's comments
indicate that the domains will be more accountable for making business
system investment decisions, but unless they control the funding, they
will not have the means to effect real change. Continuing to provide
business system funding to the military services and defense agencies is
an example of the department's embedded culture and parochial operations.
As a result of DOD's intent to maintain the status quo, there can be
little confidence that it will not continue to spend billions of dollars
on duplicative, nonintegrated, stovepiped, and overly costly systems that
do not optimize mission performance and accountability and, therefore, do
not support the department's transformation goals.

Conclusion

The excellence of our military forces is unparalleled. However, that
excellence is often achieved in the face of enormous challenges in DOD's
financial management and other business areas, which have serious and
far-reaching implications related to the department's operations and
critical national defense mission. Our recent work has shown that DOD's
long-standing financial management and business problems have resulted in
fundamental operational problems, such as failure to properly pay
mobilized Army Guard soldiers and the inability to provide adequate
accountability and control over supplies and equipment shipments in
support of Operation Iraqi Freedom. Further, the lack of appropriate
accountability across all business areas has resulted in fraud, waste, and
abuse and hinders DOD's attempts to develop world-class operations and
activities to support its forces. Additionally, DOD cannot provide
Congress reasonable assurance that the billions of dollars spent annually
on business systems modernizations are not being wasted on projects that
will perpetuate the current costly, nonintegrated, duplicative systems
environment. If DOD is unable to address the underlying causes that have
resulted in the failure of previous broad-based reform efforts,
improvements will remain marginal, confined to narrowly defined
incremental improvements.

As our nation continues to be challenged with growing budget deficits and
increasing pressure to reduce spending levels, every dollar that DOD can
save through improved economy and efficiency of its operations is
important. As previously noted, the Secretary has stated that the
department could save approximately 5 percent of its budget annually-which
equal about $20 billion-through improved business operations. DOD's senior
leaders have demonstrated a commitment to transforming the department and
improving its business operations and have taken positive steps to begin
this effort. We believe that implementation of our open recommendations
and our suggested legislative initiatives would greatly improve the
likelihood of meaningful, broad-based reform at DOD.

The continued involvement and monitoring by congressional committees will
also be critical to ensure that DOD's transformation actions are sustained
and extended and that the department achieves its goal of securing the
best performance and highest measure of accountability for the American
people. We commend the Subcommittee for holding this hearing and we
encourage you to use this vehicle, on at least an annual basis, as a
catalyst for long overdue business transformation at DOD.

Mr. Chairman, this concludes our statement. We would be pleased to answer
any questions you or other members of the Subcommittee may have at this
time.

Contacts and Acknowledgments

For further information about this testimony, please contact Gregory D.
Kutz at (202) 512-9505 or [email protected]. The following individuals
contributed to the various reports and testimonies that were the basis for
this testimony: Beatrice Alff, Molly Boyle, Art Brouk, Cherry Clipper,
Mary Ellen Chervenic, Francine Delvecchio, Stephen Donahue, Francis
Dymond, Eric Essig, Gayle Fischer, Geoff Frank, John Kelly, Randolph Hite,
Cynthia Jackson, Neelaxi Lakhmani, Evelyn Logue, John Martin, Elizabeth
Mead, Mai Nguyen, Michael Peacock, David Plocher, Gregory Pugnetti, Cary
Russell, John Ryan, Katherine Schirano, Darby Smith, Carolyn Voltz,
Marilyn Wasleski, and Jenniffer Wilson.

Selected GAO Products Related to DOD's Business Systems Modernization

_____________________________________________________________________________
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).

U.S. General Accounting Office, 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).

U.S. General Accounting Office, DOD Business Systems Modernization:
Longstanding Management and Oversight Weaknesses Continue to Put
Investments at Risk, GAO-03-553T (Washington, D.C.: Mar. 31, 2003).

U.S. General Accounting Office, DOD Business Systems Modernization:
Continued Investment in Key Accounting Systems Needs to be Justified,
GAO-03-465 (Washington, D.C.: March 28, 2003).

U.S. General Accounting Office, DOD Business Systems Modernization:
Improvements to Enterprise Architecture Development and Implementation
Efforts Needed, GAO-03-458 (Washington, D.C.: Feb. 28, 2003).

U.S. General Accounting Office, DOD Financial Management: Integrated
Approach, Accountability, Transparency, and Incentives Are Keys to
Effective Reform, GAO-02-497T (Washington, D.C.: Mar. 6, 2002).

U.S. General Accounting Office, Information Technology: Architecture
Needed to Guide Modernization of DOD's Financial Operations, GAO-01-525
(Washington, D.C.: May 17, 2001).

(192138)

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