Department of Defense: Sustained Leadership Is Critical to
Effective Financial and Business Management Transformation
(03-AUG-06, GAO-06-1006T).
The Department of Defense (DOD) bears sole responsibility for
eight DOD-specific high-risk areas and shares responsibility for
six governmentwide high-risk areas. These high-risk areas reflect
the pervasive weaknesses that cut across all of DOD's major
business operations. Several of the high-risk areas are
inter-related, including, but not limited to, financial
management, business systems modernization, and DOD's overall
approach to business transformation. Billions of dollars provided
to DOD are wasted each year because of ineffective performance
and inadequate accountability. DOD has taken some positive steps
to successfully transform its business operations and address
these high-risk areas, but huge challenges remain. This testimony
discusses (1) pervasive, long-standing financial and business
management weaknesses that affect DOD's efficiency; (2) some
examples that highlight a need for improved business systems
development and implementation oversight; (3) DOD's key
initiatives to improve financial management, related business
processes, and systems; and (4) actions needed to enhance the
success of DOD's financial and business transformation efforts.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-1006T
ACCNO: A57959
TITLE: Department of Defense: Sustained Leadership Is Critical
to Effective Financial and Business Management Transformation
DATE: 08/03/2006
SUBJECT: Accountability
Business cycles
Defense economic analysis
Financial management
Financial management systems
Internal controls
Strategic planning
Systems conversions
Business operations
Business planning
Business transformation
Global War on Terrorism
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GAO-06-1006T
* Summary
* Background
* Pervasive Financial and Business Management Problems Affect
* Improved Oversight of DOD Business Systems Needed
* DOD's Key Initiatives to Improve Financial Management Proces
* DOD Issued Its Financial Improvement and Audit Readiness Pla
* DOD Developed an Initial Standard Financial Information Stru
* DOD Efforts to Control Business Systems Investments
* Key Elements Needed to Guide DOD Transformation Efforts
* Comprehensive, Integrated, and Enterprisewide Business Trans
* Sustained Leadership Is Needed
* Conclusion
* GAO's Mission
* Obtaining Copies of GAO Reports and Testimony
* Order by Mail or Phone
* To Report Fraud, Waste, and Abuse in Federal Programs
* Congressional Relations
* Public Affairs
Testimony
Before the Subcommittee on Federal Financial Management, Government
Information, and International Security, Committee on Homeland Security
and Governmental Affairs, U.S. Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 2:30 p.m. EDT
Thursday, August 3, 2006
DEPARTMENT OF DEFENSE
Sustained Leadership Is Critical to Effective Financial and Business
Management Transformation
Statement of David M. Walker Comptroller General of the United States
GAO-06-1006T
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be here to discuss key aspects of business
transformation efforts at the Department of Defense (DOD). At the outset,
I 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 ensuring 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 26 areas on GAO's
governmentwide "high-risk" list, 8 are DOD program areas, and the
department shares responsibility for 6 other high-risk areas that are
governmentwide in scope.1 These problems serve to, among other things,
preclude the department from producing accurate, reliable, and timely
information with which to make sound decisions and accurately report on
its trillions of dollars of assets and liabilities. Further, DOD's
financial management deficiencies continue to represent the single largest
obstacle to achieving an unqualified opinion on the U.S. government's
consolidated financial statements. In an effort to better manage DOD's
resources, the Secretary of Defense has appropriately placed a high
priority on transforming key business processes to improve their
efficiency and effectiveness in supporting the department's military
mission.
As per your request, my testimony will touch on three of the high-risk
areas-financial management, business systems modernization, and DOD's
overall approach to business transformation. I will provide perspectives
on (1) some of the pervasive, long-standing financial and business
management weaknesses that affect DOD's efficiency; (2) some examples that
highlight a need for improved business systems development and
implementation oversight; (3) DOD's key initiatives to improve financial
management, related business processes, and systems; and (4) actions
needed to enhance the success of DOD's financial and business
transformation efforts. My statement is based on our previous reports and
testimonies. Our work was performed in accordance with generally accepted
government auditing standards.
1 GAO, GAO's High-Risk Program, GAO-06-497T (Washington, D.C.: Mar. 15,
2006). DOD bears responsibility for the following eight high-risk areas:
(1) DOD's overall approach to business transformation, (2) business
systems modernization, (3) financial management, (4) the personnel
security clearance process, (5) supply chain management, (6) support
infrastructure management, (7) weapon systems acquisition, and (8)
contract management. The department shares responsibility for the
following six governmentwide high-risk areas: (1) disability programs, (2)
interagency contracting, (3) information systems and critical
infrastructure, (4) information sharing for homeland security, (5) human
capital, and (6) real property.
Summary
DOD's pervasive financial and business management 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. 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. The
following examples indicate the magnitude and severity of the problems.
o We found that hundreds of separated battle-injured soldiers
were pursued for collection of military debts incurred through no
fault of their own, including 74 soldiers whose debts had been
reported to credit bureaus, private collection agencies, and the
Treasury Offset Program. Overpayment of pay and allowances
(entitlements), pay calculation errors, and erroneous leave
payments caused 73 percent of the reported debts.2
o We found numerous problems with DOD's processes for recording
and reporting costs for the Global War on Terrorism (GWOT),
raising significant concerns about the overall reliability of
DOD's reported cost data. As noted in our September 2005 report,
neither DOD nor Congress know how much the war was costing and how
appropriated funds were spent, or have historical data useful in
considering future funding needs.3 In at least one case, the
reported costs may have been materially overstated. Specifically,
DOD's reported obligations for mobilized Army reservists in fiscal
year 2004 were based primarily on estimates rather than actual
information and differed from related payroll information by as
much as $2.1 billion, or 30 percent of the amount DOD reported in
its cost report.
2 GAO, Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have
Struggled to Resolve Military Debts, GAO-06-494 (Washington, D.C.: Apr.
27, 2006).
3 GAO, Global War on Terrorism: DOD Needs to Improve the Reliability of
Cost Data and Provide Additional Guidance to Control Costs, GAO-05-882
(Washington, D.C.: Sept. 21, 2005).
Additionally, the department invests billions of dollars each year to
operate, maintain, and modernize its business systems. But despite this
significant annual investment, the department has been continually
confronted with the difficult task of implementing business systems on
time, within budget, and with the promised capability. For example, in
December 2005,4 we reported that the Army had not economically justified
its investment in the Transportation Coordinators' Automated Information
for Movement System (TC-AIMS) II, on the basis of reliable estimates of
costs and benefits. TC-AIMS II was intended to be the single integrated
system to automate transportation management function areas for the
military services. As noted in our report, the most recent economic
justification included cost and benefit estimates based on all four
military services using the system. However, the Air Force and the Marine
Corps have stated that they do not intend to use TC-AMIS II. Even with
costs and benefits for all four services included, the analysis showed a
marginal return on investment; that is, for each dollar spent on the
system, slightly less than one dollar of benefit would be returned. The
Army estimates the total life cycle cost of TC-AIMS II to be $1.7 billion
over 25 years, including $569 million for acquisition and $1.2 billion for
operation and maintenance. The Army reports that it has spent
approximately $751 million on TC-AIMS II since its inception in 1995.
This example and others highlight the need for improved oversight of the
billions of dollars DOD invests annually in the operation, maintenance,
and modernization of its business systems. Further, in the past the
department has also struggled with developing a business enterprise
architecture to guide its business system development efforts. We reported
in July 2005, that DOD, after almost 4 years and investing approximately
$318 million, the architecture was not sufficient to effectively guide and
constrain ongoing and planned systems investments.5 To its credit, DOD has
recognized these weaknesses and taken actions to improve its management
control and accountability over business system investments.
4 GAO, DOD Systems Modernization: Uncertain Joint Use and Marginal
Expected Value of Military Asset Deployment System Warrant Reassessment of
Planned Investment, GAO-06-171 (Washington, D.C.: Dec. 15, 2005).
5 GAO, DOD Business Systems Modernization: Long-standing Weaknesses in
Enterprise Architecture Development Need to Be Addressed, GAO-05-702
(Washington, D.C.: July 22, 2005).
Successful reform of DOD's fundamentally flawed financial and business
management operations must simultaneously focus on its systems, processes,
and people. DOD's top management has demonstrated a commitment to
transforming the department and has launched key initiatives to improve
its financial management processes and related business systems. For
example, in December 2005, DOD issued its Financial Improvement and Audit
Readiness (FIAR) Plan, to guide financial improvement and financial audit
efforts within the department. Also, DOD has developed an initial Standard
Financial Information Structure (SFIS), which is DOD's enterprisewide data
standard for categorizing financial information. 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.
DOD continues to make progress in several areas in its overall business
transformation efforts. For example, DOD established the Defense Business
System Management Committee (DBSMC) as DOD's primary transformation
leadership and oversight mechanism, and created the Business
Transformation Agency (BTA) to support the DBSMC. However, I believe that
DOD still lacks several key elements that are needed to ensure a
successful and sustainable transformation effort. In this regard, I would
like to reiterate two critical elements needed if DOD is to succeed.
First, as we have previously recommended, DOD should develop and implement
an integrated and strategic business transformation plan. The lack of a
comprehensive, integrated, enterprisewide action plan linked with
performance goals, objectives, and rewards has been a continuing weakness
in DOD's business management transformation. Second, we continue to
support the creation of a chief management officer (CMO) at the right
level of the organization to provide the sustained leadership needed to
achieve a successful and sustainable transformation effort. The CMO would
serve as a strategic integrator to elevate and institutionalize the
attention essential for addressing key stewardship responsibilities, such
as strategic planning, enterprise architecture development and
implementation, business systems, and financial management, while
facilitating the overall business management transformation within DOD.
Background
DOD is a massive and complex organization. Overhauling its business
operations will take years to accomplish and represents a huge management
challenge. In fiscal year 2005, the department reported that its
operations involved $1.3 trillion in assets and $1.9 trillion in
liabilities, more than 2.9 million military and civilian personnel, and
$635 billion in net cost of operations. For fiscal year 2005, the
department was appropriated approximately $525 billion.6
Large differences between the net cost of operations and amounts
appropriated for any given fiscal year are not unusual in DOD. For the
most part, they are attributed to timing differences. For example, net
cost is calculated using an accrual basis of accounting (revenues and
expenses are recorded when earned and owed, respectively) whereas
appropriations are recorded on a cash basis (revenues and expenses are
recorded when cash is received or paid.) Using the accrual basis versus
the cash basis can result in DOD's reporting of revenues and expenses in
different periods. For instance, DOD may have received in 2005 an
appropriation for the acquisition of a weapon system but may not incur
expenses or make payments from the appropriation until several years
later. Also, DOD's net cost of operations includes non-cash expenses, such
as depreciation related to buildings and equipment that will not require
cash outlays until several years after the funds were appropriated. In
addition, the department's recording of expenses related to environmental
cleanups and pension and retiree health cost liabilities can occur many
years before the appropriations to fund payment of those liabilities are
received.
Execution of DOD's 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 support DOD's operations, the department
performs an assortment of interrelated and interdependent business
functions-using more than 3,700 business systems-related to major business
areas such as weapon systems management, supply chain management,
procurement, health care management, and financial management. The ability
of these systems to operate as intended affects the lives of our
warfighters both on and off the battlefield. For fiscal year 2006,
Congress appropriated approximately $16 billion to DOD to operate,
maintain, and modernize these business systems, and for fiscal year 2007,
DOD has requested another $16 billion for this purpose.
6 Of the fiscal year 2005 appropriation, approximately $78 billion was for
the Global War on Terrorism and tsunami and hurricane relief efforts and
about $39 billion was for permanent indefinite appropriations for retiree
pensions and health care.
To assist DOD in addressing its modernization management challenges,
Congress included provisions in the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005 7 that were consistent with our
recommendations for establishing and implementing effective business
system investment management structures and processes. During the past
year, DOD has embarked on a series of efforts to transform its business
operations and further comply with the act. In February 2005, DOD
chartered the DBSMC to oversee transformation. As the senior most
governing body overseeing business transformation, the DBSMC consists of
senior leaders who meet monthly under the personal direction of the Deputy
Secretary of Defense to set business transformation priorities and
recommend policies and procedures required to attain DOD-wide
interoperability of business systems and processes.
In October 2005, DOD also established the BTA that is intended to advance
DOD-wide business transformation efforts in general, but particularly with
regard to business systems modernization. DOD believes it can better
address agencywide business transformation-which includes planning,
management, organizational structures, and processes related to all key
business areas-by first transforming business operations that support the
warfighter while also enabling financial accountability across DOD. The
BTA reports directly to the vice chair of the DBSMC-the Under Secretary of
Defense for Acquisition, Technology and Logistics-and includes an
acquisition executive who is responsible for 28 DOD-wide business
projects, programs, systems, and initiatives. The BTA is responsible for
integrating and supporting the work of the Office of the Secretary of
Defense principal staff assistants, some of whom function as the approval
authorities and who chair the business system investment review boards
(IRB). The IRBs serve as the oversight and investment decision-making
bodies for those business capabilities that support activities in their
designated areas of responsibility.
7 Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, S: 332, 118 Stat. 1811, 1851-1856 (Oct. 28,
2004) (codified in part at 10 U.S.C. S: 2222).
Pervasive Financial and Business Management Problems Affect DOD's Efficiency and
Effectiveness
Since the first GAO report on the financial statement audit of a major DOD
component over 16 years ago,8 we have repeatedly reported that weaknesses
in business management systems, processes, and internal controls not only
adversely affect the reliability of reported financial data, but also the
management of DOD operations. In March 2006,9 I testified that 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. These issues were
also discussed in the latest consolidated financial audit report.10 To
date, none of the military services or major DOD components has passed the
test of an independent financial audit because of pervasive weaknesses in
internal control and processes and fundamentally flawed business systems.
DOD's financial management problems are pervasive, complex, long-standing,
deeply rooted in virtually all of its business operations, and challenging
to resolve. The nature and severity of DOD's financial management,
business operations, and system deficiencies not only affect financial
reporting, but also impede the ability of DOD managers to receive the full
range of information needed to effectively manage day-to-day operations.
Such weaknesses have adversely affected the ability of DOD to control
costs, ensure basic accountability, anticipate future costs and claims on
the budget, measure performance, maintain funds control, and prevent
fraud, as the following examples illustrate.
o We found that hundreds of separated battle-injured soldiers
were pursued for collection of military debts incurred through no
fault of their own, including 74 soldiers whose debts had been
reported to credit bureaus, private collection agencies, and the
Treasury Offset Program. Overpayment of pay and allowances
(entitlements), pay calculation errors, and erroneous leave
payments caused 73 percent of the reported debts.11
o We identified numerous problems with DOD's processes for
recording and reporting costs for the Global War on Terrorism
raising significant concerns about the overall reliability of
DOD's reported cost data. As discussed in our September 2005
report, neither DOD nor Congress know how much the war was costing
and how appropriated funds were spent, or have historical data
useful in considering future funding needs. 12 In at least one
case, the reported costs may have been materially overstated.
Specifically, DOD's reported obligations for mobilized Army
reservists in fiscal year 2004 were based primarily on estimates
rather than actual information and differed from related payroll
information by as much as $2.1 billion, or 30 percent of the
amount DOD reported in its cost report.
o In March 2006, we reported that DOD's policies and procedures
for determining, reporting, and documenting cost estimates
associated with environmental cleanup or containment activities
were not consistently followed. Further, none of the military
services had adequate controls in place to help ensure that all
identified contaminated sites were included in their environmental
liability cost estimates. DOD's reported liability of $64 billion
is primarily for the cleanup of hazardous wastes at training
ranges, military bases, and former defense sites; disposal of
nuclear ships and submarines; and disposal of chemical weapons.
These weaknesses not only affected the reliability of DOD's
environmental liability estimate, but also that of the federal
government as a whole. Uncertainties in environmental liabilities
could materially affect the ultimate cost and timing of cleanup
activities.13
o In December 2005, we reported that the Army had not maintained
accurate accountability over inventory shipped to repair
contractors, thereby placing these assets at risk of loss or
theft. Although DOD policy requires the military services to
confirm receipt of all assets shipped to contractors, we found
that the Army did not consistently record shipment receipts in its
inventory management systems. In an analysis of fiscal year 2004
shipment data obtained from two Army inventory control points, we
could not reconcile shipment records with receipt records for 42
percent of the unclassified secondary repair item shipments, with
a value of $481.7 million, or for 37 percent of the classified
secondary repair item shipments, with a value of $8.1 million.
These weaknesses in the Army's ability to account for inventory
shipped to repair contractors increase the risk of undetected loss
or theft because the Army cannot ensure control over assets after
they have been shipped from its supply system. Moreover,
inaccurate and incomplete receipt records diminish asset
visibility and can distort on-hand inventory balances, leading to
unnecessary procurement of items.14
o Over the years, DOD recorded billions of dollars of
disbursements and collections in suspense accounts because the
proper appropriation accounts could not be identified and charged.
Because documentation needed to resolve these payment recording
problems could not be found after so many years, DOD requested and
received authority to write off certain aged suspense
transactions. While DOD reported that it wrote off an absolute
value of $35 billion or a net value of $629 million using the
legislative authority, neither of these amounts accurately
represents the true value of all the individual transactions that
DOD had not correctly recorded in its financial records. Many of
DOD's accounting systems and processes routinely offset individual
disbursements, collections, adjustments, and correction entries
against each other and, over time, amounts might even have been
netted more than once. This netting and summarizing misstated the
total value of the write-offs and made it impossible for DOD to
identify what appropriations may have been under- or overcharged
or to determine whether individual transactions were valid.15
o In May 2006, we reported that some DOD inventory management
centers had not followed DOD-wide and individual policies and
procedures to ensure they were retaining the right amount of
contingency retention inventory. While policies require the
centers to (1) use category codes to describe why they are
retaining items in contingency inventory, (2) hold only those
items needed to meet current and future needs, and (3) perform
annual reviews of their contingency inventory decisions, one or
more centers had not followed these policies. For example, the
Army's Aviation and Missile Command was not properly assigning
category codes that described the reasons they were holding items
in contingency inventory because the inventory system was not
programmed to use the codes. We found that items valued at $193
million did not have codes to identify the reasons why they were
being held, and therefore we were unable to determine the items'
contingency retention category. We also found that some inventory
centers have held items such as gears, motors, and electronic
switches, even though there have been no requests for some of them
by the services in over 10 years. By not following policies for
managing contingency inventory, DOD's centers may be retaining
items that are needlessly consuming warehouse space, and they are
unable to know if their inventories most appropriately support
current and future operational needs.16
o In June 2006, we reported that the military services had not
consistently implemented DOD's revised policy in calculating
carryover.17 Instead, the military services used different
methodologies for calculating the reported actual amount of
carryover and the allowable amount of carryover since DOD changed
its carryover policy in December 2002. Specifically, (1) the
military services did not consistently calculate the allowable
amount of carryover that was reported in their fiscal year 2004,
2005, and 2006 budgets because they used different tables (both
provided by DOD) that contained different outlay rates for the
same appropriation; (2) the Air Force did not follow DOD's
regulation on calculating carryover for its depot maintenance
activity group, which affected the amount of allowable carryover
and actual carryover by tens of millions of dollars as well as
whether the actual amount of carryover exceeded the allowable
amount as reported in the fiscal year 2004, 2005, and 2006
budgets; and (3) the Army depot maintenance and ordnance activity
groups' actual carryover was understated in fiscal years 2002 and
2003 because carryover associated with prior year orders was not
included in the carryover calculation as required. As a result,
year-end carryover data provided to decision makers who review and
use the data for budgeting were erroneous and not comparable
across the three military services.18
8 GAO, Financial Audit: Air Force Does Not Effectively Account for
Billions of Dollars of Resources, GAO/AFMD-90-23 (Washington, D.C.: Feb.
23, 1990).
9 GAO, Fiscal Year 2005 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing Our
Nation's Financial Condition and Long-term Fiscal Imbalance, GAO-06-406T
(Washington, D.C.: Mar. 1, 2006).
10 Department of the Treasury, 2005 Financial Report of the United States
Government (Washington, D.C.: Dec. 15, 2005).
11 GAO-06-494 .
12 GAO-05-882 .
13 GAO, Environmental Liabilities: Long-Term Fiscal Planning Hampered by
Control Weaknesses and Uncertainties in the Federal Government's
Estimates, GAO-06-427 (Washington, D.C.: Mar. 31, 2006).
14 GAO, Defense Inventory: Army Needs to Strengthen Internal Controls for
Items Shipped to Repair Contractors, GAO-06-209 (Washington, D.C.: Dec.
13, 2005).
15 GAO, DOD Problem Disbursements: Long-standing Accounting Weaknesses
Result in Inaccurate Records and Substantial Write-offs, GAO-05-521
(Washington, D.C.: June 2, 2005).
16 GAO, Defense Inventory: Actions Needed to Improve Inventory Retention
Management, GAO-06-512 (Washington, D.C.: May 25, 2006).
17 Carryover is the dollar value of work that has been ordered and funded
(obligated) by customers but not completed by working capital fund
activities at the end of the fiscal year. Carryover consists of both the
unfinished portion of work started but not completed as well as requested
work that has not yet commenced.
Improved Oversight of DOD Business Systems Needed
The department is provided billions of dollars annually to operate,
maintain, and modernize its stovepiped, duplicative, legacy business
systems. Despite this significant investment, the department is severely
challenged in implementing business systems on time, within budget, and
with the promised capability. The Clinger-Cohen Act of 199619 and Office
of Management and Budget guidance provide an effective framework for
information technology (IT) investment management. They emphasize the need
to have investment management processes and information to help ensure
that IT projects are being implemented at acceptable costs and within
reasonable and expected time frames and that they are contributing to
tangible, observable improvements in mission performance. Effective
project management and oversight will be critical to the department's
success in transforming its business management systems and operations.
Many of the problems related to DOD's inability to effectively implement
its business systems on time, within budget, and with the promised
capability can be attributed to its failure to implement the disciplined
processes20 necessary to reduce the risks associated with these projects
to acceptable levels.21 Disciplined processes have been shown to reduce
the risks associated with software development and acquisition efforts and
are fundamental to successful systems acquisition. While the department
invests billions of dollars annually in its business systems, the
following examples highlight the continuing problem faced by the
department in successfully implementing business systems.
o Logistics Modernization Program (LMP). In May 2004, we first
reported our concerns with the requirements management and testing
processes used by the Army in the implementation of LMP and the
problems being encountered after it became operational in July
2003.22 At the time of our initial report, the Army decided that
future deployments would not occur until it had reasonable
assurance that the system would operate as expected for a given
deployment. However, as we reported in June 2005, the Army's
inability to effectively address the requirements management and
testing problems hampered its ability to field LMP to other
locations.23 Our analysis disclosed that LMP could not properly
recognize revenue or bill customers. Furthermore, data conversion
problems resulted in general ledger account balances not being
properly converted when LMP became operational in July 2003. These
differences remained unresolved almost 18 months later. These
weaknesses adversely affected the Army's ability to set the prices
for the work performed at the Tobyhanna Army Depot. In addition,
data conversion problems resulted in excess items being ordered
and shipped to Tobyhanna. As noted in our June 2005 report, three
truckloads of locking washers (for bolts) were mistakenly ordered
and received and subsequently returned because of data conversion
problems. At the request of the Chairman and Ranking Minority
Member of the Subcommittee on Readiness and Management Support,
Senate Committee on Armed Services, we have initiated an audit of
the Army's efforts to achieve financial management visibility over
its assets. One aspect of this audit will be to ascertain the
Army's progress in resolving the previously identified problems
with LMP.
o Navy Enterprise Resource Planning (ERP). We reported in
September 2005 that the Navy had invested approximately $1 billion
in four pilot ERP efforts, without marked improvement in its
day-to-day operations.24 The four pilots were limited in scope and
were not intended to be a corporate solution for resolving any of
the Navy's long-standing financial and business management
problems. The lack of a coordinated effort among the pilots led to
a duplication of efforts in implementing many business functions
and resulted in ERP solutions that carry out similar functions in
different ways from one another. In essence, the pilots resulted
in four more DOD stovepiped systems that did not enhance DOD's
overall efficiency and resulted in $1 billion being largely
wasted. While the current Navy ERP effort has the potential to
address some of the Navy's financial management weaknesses, its
planned functionality will not provide an all-inclusive,
end-to-end corporate solution for the Navy. For example, the scope
of the ERP project does not provide for real-time asset visibility
of shipboard inventory. Asset visibility has been and continues to
be a long-standing problem within the department. Furthermore, the
project has a long way to go, with a current estimated completion
date of 2011, at an estimated cost of $800 million.
o Defense Travel System (DTS). As we reported in January 2006,25
DTS continues to face implementation challenges, particularly with
respect to testing key functionality to ensure that the system
will perform as intended. Our analysis of selected requirements
for one key area disclosed that system testing was not effective
in ensuring that the promised capability was delivered as
intended. For example, we found that DOD did not have reasonable
assurance that flight information was properly displayed.26 This
problem was not detected prior to deployment of DTS because DOD
did not properly test the system interfaces through which the data
are accessed for display. As a result, those travelers using the
system may not have received accurate information on available
flights, which could have resulted in higher travel costs. Our
report also identified key challenges facing DTS in becoming DOD's
standard travel system, including the development of needed
interfaces and underutilization of DTS at sites where it has been
deployed. While DTS has developed 36 interfaces with various DOD
business systems, it will have to develop interfaces with at least
18 additional business systems-not a trivial task. Additionally,
the continued use of the existing legacy travel systems at
locations where DTS is already deployed results in
underutilization of DTS and affects the savings that DTS was
planned to achieve.
o Naval Tactical Command Support System (NTCSS). The Navy
initiated the NTCSS program in 1995 to enhance the combat
readiness of ships, submarines, and aircraft. To accomplish this,
NTCSS was to provide unit commanding officers and crews with
information about maintenance activities, parts inventories,
finances, technical manuals and drawings, and personnel. According
to the Navy, it spent approximately $1.1 billion for NTCSS from
its inception through fiscal year 2005 and expects to spend
another $348 million from fiscal years 2006 through 2009, for a
total of approximately $1.45 billion. As discussed in our December
2005 report,27 the Navy has not economically justified its ongoing
and planned investment in NTCSS on the basis of reliable estimates
of future costs and benefits. The most recent economic
justification's cost estimates were not reliably derived, and
return on investment was not properly calculated. In addition,
independent reviews of the economic justification to determine its
reliability did not occur, and the Navy has not measured whether
already deployed and operating components of the system are
producing expected value.
o TC-AIMS II. In December 2005, we reported that the Army had not
economically justified its investment in TC-AIMS II on the basis
of reliable estimates of costs and benefits. TC-AIMS II was
intended to be the single integrated system to automate
transportation management function areas for the military
services.28 As noted in our report, the most recent economic
justification included cost and benefit estimates predicated on
all four military services using the system. However, the Air
Force and the Marine Corps have stated that they do not intend to
use TC-AMIS II. Even with costs and benefits for all four services
included, the analysis showed a marginal return on investment;
that is, for each dollar spent on the system, slightly less than
one dollar of benefit would be returned. The Army estimates the
total life cycle cost of TC-AIMS II to be $1.7 billion over 25
years, including $569 million for acquisition and $1.2 billion for
operation and maintenance. The Army reports that it has spent
approximately $751 million on TC-AIMS II since its inception in
1995.
18 GAO, Defense Working Capital Fund: Military Services Did Not Calculate
and Report Carryover Amounts Correctly, GAO-06-530 (Washington, D.C.: June
27, 2006).
19 Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996).
20 Disciplined processes include a wide range of activities, including
project planning and management, requirements management, risk management,
quality assurance, and testing.
21 Acceptable levels refer to the fact that any systems acquisition effort
will have risks and will suffer the adverse consequences associated with
defects in the processes. However, effective implementation of disciplined
processes reduces the possibility of the potential risks actually
occurring and prevents significant defects from materially affecting the
cost, timeliness, and performance of the project.
22 GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability,
GAO-04-615 (Washington, D.C.: May. 27, 2004).
23 GAO, Army Depot Maintenance: Ineffective Oversight of Depot Maintenance
Operations and System Implementation Efforts, GAO-05-441 (Washington,
D.C.: June 30, 2005).
24 GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best
Business Practices Critical to Avoid Past Failures, GAO-05-858
(Washington, D.C.: Sept. 29, 2005).
25 GAO, DOD Business Transformation: Defense Travel System Continues to
Face Implementation Challenges, GAO-06-18 (Washington, D.C.: Jan. 18,
2006).
26 Flight information includes items such as departure and arrival times,
airports, and the cost of the airline ticket.
To effectively and efficiently modernize its nonintegrated and duplicative
business operations and systems, it is essential for DOD to develop and
use a well-defined business enterprise architecture. In July 2001, the
department initiated a business management modernization program to, among
other things, develop the architecture. We have previously reported on
DOD's long-standing architecture management weaknesses.29 Despite spending
almost 4 years and about $318 million, the architecture did not provide
sufficient content and utility to effectively guide and constrain ongoing
and planned business systems investments. DOD recognized the weaknesses
that needed to be addressed and assigned a new business transformation
leadership team in 2005. More specifically, as previously noted, in
October 2005, DOD established BTA to advance DOD-wide business
transformation efforts in general, but particularly with regard to
business systems modernization.
27 GAO, DOD Systems Modernization: Planned Investment in the Navy Tactical
Command Support System Needs to Be Reassessed, GAO-06-215 (Washington,
D.C.: Dec. 5, 2005).
28 GAO-06-171 .
DOD's Key Initiatives to Improve Financial Management Processes and Business
Systems
DOD's complex and pervasive weaknesses cannot be fixed with short-term
solutions, but require ongoing and sustained top management attention and
resources. DOD's top management has demonstrated a commitment to
transforming the department and has launched key initiatives to improve
its financial management processes and related business systems, as well
as made important progress in complying with legislation pertaining to its
business systems modernization and financial management improvement
efforts. For example, we reported in May 200630 that DOD released an
update to its business enterprise architecture on March 15, 2006,
developed an updated enterprise transition plan, and issued its annual
report to Congress describing steps taken and planned with regard to
business transformation, among other things. These steps address several
of the missing elements we previously identified relative to the
legislative provisions concerning the architecture, transition plan,
budgetary reporting of business system investments, and investment review.
Further, we testified31 that in December 2005 DOD had issued its FIAR
Plan, a major component of its business transformation strategy, to guide
financial management improvement and audit efforts within the department.
In addition, DOD developed SFIS that will be its enterprisewide data
standard for categorizing financial information to support financial
management and reporting functions. While this progress better positions
the department to address the business systems modernization and financial
management high-risk areas, significant challenges remain, particularly in
implementing its tiered accountability investment approach.
29 GAO-05-702 .
30 GAO, Business Systems Modernization: DOD Continues to Improve
Institutional Approach, but Further Steps Needed, GAO-06-658 .
(Washington, D.C.: May 15, 2006).
31 GAO-06-406T .
DOD Issued Its Financial Improvement and Audit Readiness Plan
A major component of DOD's business transformation strategy is its FIAR
Plan, issued in December 2005. The FIAR Plan was issued pursuant to
section 376 of the National Defense Authorization Act for Fiscal Year
2006,32 which for fiscal year 2006 limited DOD's ability to obligate or
expend funds for financial improvement activities until the department
submitted a comprehensive and integrated financial management improvement
plan to congressional defense committees that (1) described specific
actions to be taken to correct deficiencies that impair the department's
ability to prepare timely, reliable, and complete financial management
information; and (2) systematically tied such actions to process and
control improvements and business systems modernization efforts described
in the business enterprise architecture and transition plan. Further,
section 376 required a written determination that each financial
management improvement activity undertaken be (1) consistent with the
financial management improvement plan and (2) likely to improve internal
controls or otherwise result in sustained improvement in DOD's ability to
produce timely, reliable, and complete financial management information.
The act also required that each written determination be submitted to the
congressional defense committees.
The FIAR Plan is intended to provide DOD components with a road map for
achieving the following objectives: (1) resolving problems affecting the
accuracy, reliability, and timeliness of financial information, and (2)
obtaining clean financial statement audit opinions. Similar to the
Financial Improvement Initiative, an earlier DOD improvement effort, the
FIAR Plan uses an incremental approach to structure its process for
examining operations, diagnosing problems, planning corrective actions,
and preparing for audit. However, unlike the previous initiative, the FIAR
Plan does not establish a specific target date for achieving a clean audit
opinion on the departmentwide financial statements. Target dates under the
prior plan were not credible. Rather, the FIAR Plan recognizes that it
will take several years before DOD is able to implement the systems,
processes, and other changes necessary to fully address its financial
management weaknesses. This plan is an important and positive step that
will help key department personnel to better understand and address its
financial management deficiencies.
32 Pub. L. No. 109-163, S: 376, 119 Stat. 3136, 3213 (Jan. 6, 2006).
As outlined in its FIAR Plan, DOD has established business rules and an
oversight structure to guide improvement activities and audit preparation
efforts. In December 2005, the U.S. Army Corps of Engineers, Civil Works,
became the first major DOD component to assert, under DOD's new process
and business rules, that its fiscal year 2006 financial statement
information was reliable. An independent public accounting firm has been
hired to perform this component's financial statement audit, under the
oversight and direction of the DOD Inspector General. However, the
effectiveness of DOD's FIAR Plan, as well as the department's leadership
and business rules, in addressing DOD's financial management deficiencies
will be ultimately measured by the department's ability to provide timely,
reliable, accurate, and useful information for day-to-day management and
decision making.
DOD Developed an Initial Standard Financial Information Structure
Another key initiative is SFIS, which is DOD's enterprisewide data
standard for categorizing financial information to support financial
management and reporting functions. DOD has recently completed phase I of
the SFIS initiative, which focused on standardizing general ledger and
external financial reporting requirements. SFIS includes a standard
accounting classification structure that can allow DOD to standardize
financial data elements necessary to support budgeting, accounting, cost
management, and external reporting; it also incorporates many of the
Department of the Treasury's U. S. Standard General Ledger attributes.
Additional SFIS efforts remain under way, and the department plans to
further define key data elements, such as those relating to the planning,
programming, and budgeting business process area.
DOD intends to implement SFIS using three approaches. One approach
requires legacy accounting systems to submit detail-level accounting
transactions that are to be converted to SFIS-equivalent data elements.
The second approach applies to business feeder systems and will require
incorporation of SFIS data elements within systems that create the
business transactions. Lastly, accounting systems under development,
including new enterprise resource planning systems, are required to have
the ability to receive SFIS data as part of source transactions and
generate appropriate general ledger entries in accordance with the U.S.
Standard General Ledger.
DOD Efforts to Control Business Systems Investments
To help improve the department's control and accountability over its
business systems investments, provisions in the fiscal year 2005 national
defense authorization act directed DOD to put in place a specifically
defined structure that is responsible and accountable for controlling
business systems investments to ensure compliance and consistency with the
business enterprise architecture. More specifically, the act directs the
Secretary of Defense to delegate responsibility for review, approval, and
oversight of the planning, design, acquisition, deployment, operation,
maintenance, and modernization of defense business systems to designated
approval authorities or "owners" of certain business missions.33 DOD has
satisfied this requirement under the act. On March 19, 2005, the Deputy
Secretary of Defense issued a memorandum that delegated the authority in
accordance with the criteria specified in the act, as described above. Our
research and evaluation of agencies' investment management practices have
shown that clear assignment of senior executive investment management
responsibilities and accountabilities is crucial to having an effective
institutional approach to IT investment management.34
The fiscal year 2005 national defense authorization act also required DOD
to establish investment review structures and processes, including a
hierarchy of IRBs, each with representation from across the department,
and a standard set of investment review and decision-making criteria for
these boards to use to ensure compliance and consistency with DOD's
business enterprise architecture. In this regard, the act required the
establishment of the DBSMC-which serves as the highest ranking governance
body for business system modernization activities within the department.
As of April 2006, DOD identified 3,717 business systems and assigned
responsibility for these systems to IRBs. Table 1 shows the systems by the
responsible IRB and component.
33 Approval authorities, including the Under Secretary of Defense for
Acquisition, Technology and Logistics; the Under Secretary of Defense
(Comptroller); the Under Secretary of Defense for Personnel and Readiness;
the Assistant Secretary of Defense for Networks and Information
Integration/Chief Information Officer of the Department of Defense; and
the Deputy Secretary of Defense or an Under Secretary of Defense, as
designated by the Secretary of Defense, are responsible for the review,
approval, and oversight of business systems and must establish investment
review processes for systems under their cognizance.
34 GAO, Information Technology Investment Management: A Framework for
Assessing and Improving Process Maturity, GAO-04-394G (Washington, D.C.:
March 2004).
Table 1: DOD Systems by Investment Review Board and Component
Defense
Finance and Other
Air Accounting defense
Investment Review Board Force Army Navy Service agencies Total
Financial Management 67 161 148 72 35 483
Human Resources Management 164 320 174 20 114 792
Weapon System Life Cycle
Management and Materiel Supply
and Service Management 780 730 406 1 168 2,085
Real Property and
Installations Life Cycle
Management 71 122 44 0 17 254
Other 65 0 26 0 12 103
Total 1,147 1,333 798 93 346 3,717
Source: GAO analysis of DOD data.
A key element of the department's approach to reviewing and approving
business systems investments is the use of what it refers to as tiered
accountability. DOD's tiered accountability approach involves an
investment control process that begins at the component level and works
its way through a hierarchy of review and approval authorities, depending
on the size and significance of the investment. Military service officials
emphasized that the success of the process depends on them performing a
thorough analysis of each business system before it is submitted for
higher-level review and approval. Through this process, the department
reported in March 2006 that 226 business systems, representing about $3.6
billion in modernization investment funding, had been approved by the
DBSMC-the department's highest-ranking approval body for business systems.
According to the department's March 2006 report, this process also
identified more than 290 systems for phaseout or elimination and
approximately 40 business systems for which the requested funding was
reduced and the funding availability periods were shortened to fewer than
the number of years requested. For example, one business system investment
that has been eliminated is the Forward Compatible Payroll (FCP) system.
In reviewing the program status, the IRB determined that FCP would
duplicate the functionality contained in the Defense Integrated Military
Human Resources System, and it was unnecessary to continue investing in
both systems. According to the department's fiscal year 2007 IT budget
request, approximately $33 million was sought for fiscal year 2007 and
about $31 million was estimated for fiscal year 2008 for FCP. Eliminating
this duplicative system will enable DOD to use this funding for other
priorities. The funding of multiple systems that perform the same function
is one reason the department has thousands of business systems.
Identifying and eliminating duplicative systems helps optimize mission
performance and accountability and supports the department's
transformation goals.
Furthermore, based on information provided by BTA program officials, there
was a reduction of funding and the number of years that funding will be
available for 14 Army business systems, 8 Air Force business systems, and
8 Navy business systems. For example, the Army's Future Combat Systems
Advanced Collaborative Environment program requested funding of $100
million for fiscal years 2006 to 2011, but the amount approved was reduced
to approximately $51 million for fiscal years 2006 to 2008. Similarly,
Navy's Military Sealift Command Human Resources Management System
requested funding of about $19 million for fiscal years 2006 to 2011, but
the amount approved was approximately $2 million for the first 6 months of
fiscal year 2006. According to Navy officials, this system initiative will
be reviewed to ascertain whether it has some of the same functionality as
the Defense Civilian Personnel Data System. Funding system initiatives for
shorter time periods can help reduce the financial risk by providing
additional opportunities for monitoring a project's progress against
established milestones and help ensure that the investment is properly
aligned with the architecture and the department's overall goals and
objectives.
Besides limiting funding as part of the investment review and approval
process, this process is also resulting in conditions being placed on
system investments. These conditions identify specific actions to be taken
and when the actions must be completed. For example, in the case of the
Army's LMP initiative, one of the noted conditions was that the Army had
to address the issues discussed in our previous reports.35 In our May 2004
report, we recommended that the department establish a mechanism that
provides for tracking all business systems modernization conditional
approvals to provide reasonable assurance that all specific actions are
completed on time.36 The department's action is consistent with the intent
of our recommendations.
Notwithstanding the department's efforts to control its business system
investments, formidable challenges remain. In particular, the reviews of
those business systems that have modernization funding of less than $1
million, which represent the majority of the department's reported 3,717
business systems, are only now being started on an annual basis. The
extent to which the review structures and processes will be applied to the
department's 3,717 business systems is still evolving. Given the large
number of systems involved, it is important that an efficient system
review and approval process be effectively implemented for all systems. As
indicated in table 1, there are numerous systems across the department in
the same functional area. Such large numbers of systems indicate a real
possibility for eliminating unnecessary duplication and avoiding
unnecessary spending on the department's multiple business systems.
35 GAO-04-615 and GAO-05-441 .
36 GAO-04-615 .
Key Elements Needed to Guide DOD Transformation Efforts
While DOD's recent efforts represent positive steps toward improving
financial management and changing DOD's business systems environment, the
department still lacks key elements that are needed to ensure a successful
and sustainable business transformation effort. We reiterate two major
elements necessary for successful business transformation: (1) a
comprehensive, integrated, and enterprisewide business transformation plan
and (2) a CMO with the right skills and at the right level of the
department for providing the sustained leadership needed to achieve a
successful and sustainable transformation effort.
Comprehensive, Integrated, and Enterprisewide Business Transformation Plan Not
Developed
Although some progress has been made in business transformation planning,
DOD still has not developed a comprehensive, integrated, and
enterprisewide strategy or action plan for managing its overall business
transformation effort. The lack of a comprehensive, integrated,
enterprisewide action plan linked with performance goals, objectives, and
rewards has been a continuing weakness in DOD's business management
transformation.
Since 1999, GAO has recommended a comprehensive, integrated strategy and
action plan for reforming DOD's major business operations and support
activities.37 DOD's efforts to plan and organize itself to achieve
business transformation are continuing to evolve. Critical to the success
of these efforts will be top management attention and structures that
focus on transformation from a broad perspective and a clear,
comprehensive, integrated, and enterprisewide plan that at a summary
level, addresses all of the department's major business areas. This
strategic plan should cover all of DOD's key business functions; contain
results-oriented goals, measures, and expectations that link
institutional, unit, and individual performance goals and expectations to
promote accountability; identify people with needed skills, knowledge,
experience, responsibility, and authority to implement the plan; and
establish an effective process and related tools for implementation. Such
an integrated business transformation plan would be instrumental in
establishing investment priorities and guiding the department's key
resource decisions.
37 GAO, Defense Reform Initiative: Organization, Status, and Challenges,
GAO/NSIAD-99-87 (Washington, D.C.: Apr. 21, 1999).
DOD's leadership has recognized the need to transform the department's
business operations. DOD released a major update to its business
enterprise architecture in September 2005 and developed an updated
transition plan in March 2006 for modernizing its business processes and
supporting IT assets. The business enterprise architecture provides a
foundational blueprint for modernizing business operations, information,
and systems, while the enterprise transition plan provides a road map and
management tool that sequences business systems investments in the areas
of personnel, logistics, real property, acquisition, purchasing, and
financial requirements.
However, while the enterprise transition plan is an important step toward
developing a strategic plan for the department's overall business
transformation efforts, it is still focused primarily on business systems.
Business transformation is much broader; it encompasses areas such as
support infrastructure, human capital, financial management, planning and
budgeting, and supply chain management. DOD officials acknowledge that the
enterprise transition plan may not have all of the elements of an
overarching business transformation plan as we envision it. However, they
consider the plan to be evolving.
Sustained Leadership Is Needed
DOD continues to lack the sustained leadership at the right level to
achieve successful and lasting transformation. We have testified on the
need for a CMO on numerous occasions.38 Because of the complexity and
long-term nature of DOD's business transformation efforts, we reiterate
the need for a CMO to provide sustained leadership and maintain momentum.
Without formally designating responsibility and accountability for
results, choosing among competing demands for scarce resources and
resolving differences in priorities between various DOD organizations will
be difficult and could impede DOD's ability to transform in an efficient,
effective, and reasonably timely manner. In addition, it may be
particularly difficult for DOD to sustain transformation progress when key
personnel changes occur. The National Defense Authorization Act for Fiscal
Year 200639 directs the department to study the feasibility of a CMO
position in DOD. In this regard, the Institute for Defense Analysis has
initiated a study and the results are due by December 2006. Further, in
May 2006, the Defense Business Board recommended the creation of a
Principal Under Secretary of Defense, with a 5 year term appointment, to
serve as CMO. Additionally, in July 2006, a major global consulting firm
recommended the concept of a chief operating officer be instituted in many
federal agencies as the means to help achieve the transformation that many
agencies have undertaken.40
38 GAO, Department of Defense: Long-standing Problems Continue to Impede
Financial and Business Management Transformation, GAO-04-907T (Washington,
D.C.: July 7, 2004); Department of Defense: Financial and Business
Management Transformation Hindered by Long-standing Problems, GAO-04-941T
, (Washington, D.C.: July 8, 2004); Department of Defense: Further Actions
Are Needed to Effectively Address Business Management Problems and
Overcome Key Business Transformation Challenges, GAO-05-140T (Washington,
D.C.: Nov. 18, 2004); and DOD's High-Risk Areas: Successful Business
Transformation Requires Sound Strategic Planning and Sustained Leadership,
GAO-05-520T (Washington, D.C.: Apr. 13, 2005).
To provide for senior-level leadership, the CMO would serve as the
strategic, enterprisewide integrator of DOD's overall efforts to transform
its business operations. The CMO would be an executive level II
appointment, with a tenure of 5 to7 years and serve as the Deputy
Secretary or Principal Under Secretary of Defense for Management. This
position would elevate integrate, and institutionalize the attention
essential for addressing key stewardship responsibilities, such as
strategic planning, enterprise architecture development and
implementation, IT management, financial management reform, and human
capital reform while facilitating the overall business management
transformation effort within DOD. It is important to note that theCMO
would not assume the responsibilities of the undersecretaries of defense,
the service secretaries, or other DOD officials for the day-to-day
management of the department. Rather, the CMO would be responsible and
accountable for planning, integrating, and executing the overall business
transformation effort. The CMO also would develop and implement a
strategic plan for the overall business transformational efforts.
39 National Defense Authorization Act for Fiscal Year 2006, Pub. L. No.
109-163, S: 907, 119 Stat. 3136, 3403 (Jan. 6, 2006).
40 Tony Danker, Thomas Dohrmann, Nancy Killefer, and Lenny Mendonca, How
can American government meet its productivity challenge? (Washington,
D.C.: McKinsey & Company, 2006).
The Secretary of Defense, Deputy Secretary of Defense, and other senior
leaders have clearly shown a commitment to business transformation and
addressing deficiencies in the department's business operations. During
the past year, DOD has taken additional steps to address certain
provisions and requirements of the fiscal year 2005 national defense
authorization act, including establishing the DBSMC as DOD's primary
transformation leadership and oversight mechanism, and creating the BTA to
support the DBSMC, a decision-making body. However, these organizations do
not provide the sustained leadership needed to successfully achieve
business transformation. The DBSMC's representatives consist of political
appointees whose terms expire when administrations change. Furthermore, it
is important to remember that committees do not lead, people do. Thus, DOD
still needs to designate a person to provide sustained leadership and have
overall responsibility and accountability for this effort.
Conclusion
DOD continues to face two formidable challenges. Externally, it must
combat the global war on terrorism, and internally, it must address the
long-standing problems of fraud, waste, and abuse. Pervasive, decades-old
management problems related to its business operations affect all of DOD's
major business areas. While DOD has taken several positive steps to
address these problems, our previous work has uncovered a persistent
pattern among DOD's reform initiatives that limits their overall impact on
the department. These initiatives have not been fully implemented in a
timely fashion because of the absence of comprehensive, integrated
strategic planning; inadequate transparency and accountability; and the
lack of sustained leadership. In this time of growing fiscal constraints,
every dollar that DOD can save through improved economy and efficiency of
its operations is important to the well-being of our nation and the
legitimate needs of our warfighters. Until DOD resolves the numerous
problems and inefficiencies in its business operations, billions of
dollars will continue to be wasted every year. Furthermore, without strong
and sustained leadership, both within and across administrations, DOD will
likely continue to have difficulties in maintaining the oversight, focus,
and momentum needed to implement and sustain the needed reforms to its
business operations. In this regard, I would like to reiterate the need
for a CMO to serve as the strategic and enterprisewide integrator to
oversee the overall transformation of the department's business
operations.
Mr. Chairman and Members of the Subcommittee, this concludes my prepared
statement. I would be happy to answer any questions you may have at this
time.
(195097)
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August 3, 2006
www.gao.gov/cgi-bin/getrpt? GAO-06-1006T .
To view the full product, click on the link above. For more information,
contact McCoy Williams at (202) 512-9095 or [email protected].
Highlights of GAO-06-1006T , a testimony before the Subcommittee on
Federal Financial Management, Government Information and International
Security, Committee on Homeland Security and Governmental Affairs, U.S.
Senate
DEPARTMENT OF DEFENSE
Sustained Leadership Is Critical to Effective Financial and Business
Management Transformation
The Department of Defense (DOD) bears sole responsibility for eight
DOD-specific high-risk areas and shares responsibility for six
governmentwide high-risk areas. These high-risk areas reflect the
pervasive weaknesses that cut across all of DOD's major business
operations. Several of the high-risk areas are inter-related, including,
but not limited to, financial management, business systems modernization,
and DOD's overall approach to business transformation. Billions of dollars
provided to DOD are wasted each year because of ineffective performance
and inadequate accountability. DOD has taken some positive steps to
successfully transform its business operations and address these high-risk
areas, but huge challenges remain.
This testimony discusses
(1) pervasive, long-standing financial and business management weaknesses
that affect DOD's efficiency; (2) some examples that highlight a need for
improved business systems development and implementation oversight;
(3) DOD's key initiatives to improve financial management, related
business processes, and systems; and (4) actions needed to enhance the
success of DOD's financial and business transformation efforts.
DOD's pervasive financial and business management 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. 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. The
following examples indicate the magnitude and severity of the problems.
Illustrative Weaknesses in DOD's Financial Management and Business
Operations
Business area Problem identified
Military personnel Hundreds of separated battle-injured soldiers were
pursued for collection of military debts incurred
through no fault of their own. Overpayment of pay and
allowances (entitlements), pay calculation errors,
and erroneous leave payments caused 73 percent of the
reported debts.
Inventory The Army had not maintained accurate accountability
over inventory shipped to repair contractors.
Financial management DOD's processes for recording and reporting costs for
the Global War on Terrorism were inadequate, raising
significant concerns about the overall reliability of
DOD's reported cost data.
Source: GAO.
To support its business operations, DOD invests billions of dollars each
year to operate, maintain, and modernize its business systems. But despite
this significant annual investment, GAO has continued to identify business
system projects that have failed to be implemented on time, within budget,
and with the promised capability. For example, in January 2006, GAO
reported on problems with the implementation of the Defense Travel
System-a project that was initiated in September 1998.
DOD's many high-risk challenges are years in the making and will take time
to effectively address. Top management has demonstrated a commitment to
transforming the department's business processes. In December 2005, DOD
issued its Financial Improvement and Audit Readiness Plan to guide its
financial management improvement efforts. Also, DOD has developed an
initial Standard Financial Information Structure, which is DOD's
enterprisewide data standard for categorizing financial information.
Because of the complexity and long-term nature of DOD transformation
efforts, GAO would like to reiterate two missing critical elements that
need to be in place if DOD's transformation efforts are to be successful.
First, DOD should develop and implement a comprehensive, integrated, and
enterprisewide business transformation plan. Second, GAO continues to
support the creation of a chief management officer, with the right skills
and at the right level within the department, to provide the needed
sustained leadership to oversee the department's overall business
transformation process.
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