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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