    Human Capital: DOD Needs Better Internal Controls and Visibility
    over Costs for Implementing Its National Security Personnel
    System (16-JUL-07, GAO-07-851).

    Given a large-scale organizational change initiative, such as the
    Department of Defense's (DOD) National Security Personnel System
    (NSPS), is a substantial commitment that will take years to
    complete, it is important that DOD and Congress be kept informed
    of the full cost of implementing NSPS. Under the Comptroller
    General's authority to conduct evaluations on his own initiative,
    GAO analyzed the extent to which DOD has (1) fully estimated
    total costs associated with the implementation of NSPS and (2)
    expended or obligated funds to design and implement NSPS through
    fiscal year 2006. GAO interviewed department officials and
    analyzed the NSPS Program Executive Office's (PEO), and the
    military services' and the Washington Headquarters Services'
    (hereafter referred to as the components) cost estimates and
    reports of expended and obligated funds.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-851
        ACCNO:   A72727
      TITLE:     Human Capital: DOD Needs Better Internal Controls and
    Visibility over Costs for Implementing Its National Security
    Personnel System
         DATE:   07/16/2007
      SUBJECT:   Cost analysis
    	     Defense cost control
    	     Defense procurement
    	     Internal controls
    	     National security personnel system
    	     Needs assessment
    	     Program evaluation
    	     Program management
    	     Standards
    	     Strategic planning
    	     Cost estimates
    	     Program implementation

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    GAO-07-851

         * [1]Results in Brief
         * [2]Background
         * [3]DOD's Estimated Costs to Implement NSPS Do Not Fully Represe
         * [4]Total Funds Expended or Obligated to Design and Implement NS
         * [5]Conclusions
         * [6]Recommendations for Executive Action
         * [7]Agency Comments and Our Evaluation
         * [8]GAO Contact
         * [9]Acknowledgments
         * [10]GAO's Mission
         * [11]Obtaining Copies of GAO Reports and Testimony

              * [12]Order by Mail or Phone

         * [13]To Report Fraud, Waste, and Abuse in Federal Programs
         * [14]Congressional Relations
         * [15]Public Affairs

    Report to Congressional Committees

    United States Government Accountability Office

    GAO

    July 2007

    HUMAN CAPITAL

    DOD Needs Better Internal Controls and Visibility over Costs for
    Implementing Its National Security Personnel System

    GAO-07-851

    Contents

    Letter 1

    Results in Brief 2
    Background 5
    DOD's Estimated Costs to Implement NSPS Do Not Fully Represent Its Total
    Resource Needs 8
    Total Funds Expended or Obligated to Design and Implement NSPS Cannot Be
    Determined 11
    Conclusions 13
    Recommendations for Executive Action 13
    Agency Comments and Our Evaluation 14
    Appendix I Scope and Methodology 18
    Appendix II Comments from the Department of Defense 20
    Appendix III GAO Contact and Staff Acknowledgments 23
    Related GAO Products 24

    Table

    Table 1: DOD Fiscal Year 2005-2008 Estimate of Cost to Implement NSPS 9

    Figure

    Figure 1: NSPS Design and Implementation Team Organization 7
    Abbreviations

    DOD Department of Defense

    NSPS National Security Personnel System

    OPM Office of Personnel Management

    PEO Program Executive Office

    This is a work of the U.S. government and is not subject to copyright
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    separately.

    United States Government Accountability Office
    Washington, DC 20548

    July 16, 2007 July 16, 2007

    Congressional Committees

    Given a large-scale organizational change initiative, such as the National
    Security Personnel System (NSPS), is a substantial commitment that will
    take years to complete, it is important that the Department of Defense
    (DOD) and Congress be kept informed of the full cost of implementing NSPS.
    In November 2003, Congress authorized the Secretary of Defense to
    establish NSPS, a new human resources management system. On November 1,
    2005, DOD and the Office of Personnel Management (OPM) jointly released
    the final regulations on NSPS. Successful implementation of NSPS is
    essential for DOD because this new human resources management system, if
    properly designed and effectively implemented, could serve as a model for
    governmentwide human capital transformation. Given a large-scale
    organizational change initiative, such as the National Security Personnel
    System (NSPS), is a substantial commitment that will take years to
    complete, it is important that the Department of Defense (DOD) and
    Congress be kept informed of the full cost of implementing NSPS. In
    November 2003, Congress authorized the Secretary of Defense to establish
    NSPS, a new human resources management system. On November 1, 2005, DOD
    and the Office of Personnel Management (OPM) jointly released the final
    regulations on NSPS. Successful implementation of NSPS is essential for
    DOD because this new human resources management system, if properly
    designed and effectively implemented, could serve as a model for
    governmentwide human capital transformation.

    We have undertaken a number of human capital engagements to track how DOD
    began to make use of its new human capital authorities.^11 This body of
    work highlighted multiple implementation challenges DOD would face in both
    the early and later stages of NSPS implementation. These challenges
    include, among other things, providing adequate resources to implement
    NSPS, especially in times of increased fiscal constraints. We have
    undertaken a number of human capital engagements to track how DOD began to
    make use of its new human capital authorities. This body of work
    highlighted multiple implementation challenges DOD would face in both the
    early and later stages of NSPS implementation. These challenges include,
    among other things, providing adequate resources to implement NSPS,
    especially in times of increased fiscal constraints.

    We prepared this report under the Comptroller General's authority to
    conduct evaluations on his own initiative and are providing it to you
    because of your continued interest in this issue. This report analyzes the
    extent to which DOD has (1) fully estimated total costs associated with
    the implementation of NSPS and (2) expended or obligated funds to design
    and implement NSPS through fiscal year 2006. We prepared this report under
    the Comptroller General's authority to conduct evaluations on his own
    initiative and are providing it to you because of your continued interest
    in this issue. This report analyzes the extent to which DOD has (1) fully
    estimated total costs associated with the implementation of NSPS and (2)
    expended or obligated funds to design and implement NSPS through fiscal
    year 2006.

    ^1 GAO, Human Capital: Observations on Final Regulations for DOD's
    National Security Personnel System, [16]GAO-06-227T (Washington, D.C.:
    Nov. 17, 2006); Human Capital: DOD's National Security Personnel System
    Faces Implementation Challenges, [17]GAO-05-730 (Washington, D.C.: July
    14, 2005); Human Capital: Preliminary Observations on Proposed DOD
    National Security Personnel System Regulations, [18]GAO-05-432T
    (Washington, D.C.: Mar. 15, 2005); Human Capital: Preliminary Observations
    on Proposed Department of Defense National Security Personnel System
    Regulations, [19]GAO-05-559T (Washington, D.C.: Apr. 14, 2005); Human
    Capital: Preliminary Observations on Proposed Department of Defense
    National Security Personnel System Regulations, [20]GAO-05-517T
    (Washington, D.C.: Apr. 12, 2005).

    To determine the extent to which DOD has fully estimated the total costs
    associated with the implementation of NSPS, we obtained and analyzed DOD's
    estimate that was published in the NSPS Final Regulations in November
    2005. We interviewed officials from the NSPS Program Executive Office
    (PEO) and the NSPS Program Management Offices for the Department of the
    Navy (which is also responsible for the Marine Corps), the Army, the Air
    Force, and the Washington Headquarters Services^2 to discuss how they had
    interpreted PEO guidance on how to estimate NSPS costs. To determine what
    costs should be included in NSPS estimates, we analyzed DOD guidance,
    government accounting standards, and other government regulations and
    manuals. To determine the extent to which DOD expended or obligated funds
    to design and implement NSPS through fiscal year 2006, we obtained
    quarterly reports collected by the PEO and consolidated for fiscal years
    2005 and 2006. We compared the quarterly reports to data from the
    components' official accounting systems to determine what NSPS cost data
    had been captured in these accounting systems. To obtain criteria for
    tracking and managing the costs of programs, activities, and their
    outputs, we compared the PEO's management of the reporting of NSPS costs
    with internal control factors described in Internal Control Management and
    Evaluation Tool and Standards for Internal Control in the Federal
    Government.^3 We conducted our review from June 2006 through June 2007 in
    accordance with generally accepted government auditing standards.

    Results in Brief

    DOD's November 2005 estimate that it will cost $158 million to implement
    NSPS between 2005 and 2008 does not include the full cost that the
    department expects to incur as a result of implementing the new system.
    Federal financial accounting standards state that reliable information on
    the costs of federal programs and activities is crucial for effective
    management of government operations and recommend that full costs of
    programs be reported to assist Congress and executives in making informed
    decisions on program resources and to ensure that programs get expected
    and efficient results.^4 According to the standards, the full cost of a
    program includes both those costs specifically identifiable to carry out
    the program, or direct costs, and those costs which are common to multiple
    programs but cannot be specifically identified with any particular
    program, or indirect costs.^5 While the federal financial accounting
    standards emphasize that full cost information is essential for managing
    federal programs, their activities, and outputs, the standards provide
    that costs may be omitted from cost information if that omission would not
    change or influence the judgment of a reasonable person relying on the
    cost information. DOD's $158 million estimate includes $51 million for the
    Program Executive Office and $107 million for the military services' and
    the Washington Headquarters Services' NSPS program management offices.
    However, PEO and component officials could not provide us with complete
    supporting documentation that identifies the specific costs included in
    these estimates although internal control standards require such
    documentation. Based on our review of the documentation provided and
    discussions with PEO and component officials, however, the estimate does
    not include all direct costs of implementing the system. For example, PEO
    and component officials agreed that the estimate does not include the full
    salary costs of all civilian and military personnel who directly support
    NSPS activities departmentwide. Furthermore, PEO and component officials
    acknowledge that the estimate does not include any of the typical indirect
    costs associated with the design and implementation of NSPS such as
    general administrative services, general research and technical support,
    rent, and operating and maintenance costs for buildings, equipment, and
    utilities. Before developing its estimate, DOD had not fully defined all
    the direct and indirect costs needed to manage NSPS. Without a cost
    estimate that includes all costs that the department expects to incur as a
    result of implementing the new system, decision makers--within DOD and
    Congress--will not have the complete cost information they need to make
    decisions about whether adequate resources are being provided for
    implementing NSPS. Moreover, component officials told us that certain
    categories of the estimated costs provided by the components do not
    contain comparable cost elements. One of DOD's key financial management
    regulation principles--comparability--requires the reporting of financial
    management data in the same manner throughout DOD, using common
    definitions when necessary.^6 The PEO did not provide detailed
    instructions to the components on the specific types of costs to be
    included in the estimate and appropriate costing methodologies. The PEO
    required the components to estimate costs in several broad cost
    categories.^7 As a result, the Departments of the Army, Navy, and Air
    Force and the Washington Headquarters Services used different approaches
    to estimate their NSPS funding requirements. For example, Army and Navy
    officials told us that they estimated civilian personnel costs under the
    category of "Program Office Operations"; Air Force officials noted that
    they estimated civilian personnel costs under four other categories; and
    Washington Headquarters Services said that they did not estimate their
    NSPS costs in any of the cost categories. Without comparable cost
    estimates, DOD and congressional decision makers cannot contrast and
    compare or otherwise evaluate implementation costs across the various DOD
    components.

    ^2 The Washington Headquarters Services is a field activity that reports
    to the Director of Administration and Management, which has oversight
    responsibility for DOD's "Fourth Estate" entities. "Fourth Estate"
    entities are all organizational entities in DOD that are not in the
    military departments or the combatant commands. These include the Office
    of the Secretary of Defense, the Joint Staff, the Office of the Inspector
    General of DOD, the defense agencies, and DOD field activities. In this
    report, we will use "Washington Headquarters Services" to mean the "Fourth
    Estate," as defined by DOD.

    ^3 GAO, Internal Control Management and Evaluation Tool, [21]GAO-01-1008G
    (Washington, D.C.: August 2001) and Standards for Internal Controls in the
    Federal Government, [22]GAO/AIMD-00-21 .3.1 (Washington, D.C.: November
    1999).

    ^4 Statement of Federal Financial Accounting Standards No. 4, Managerial
    Cost Accounting Concepts and Standards for the Federal Government,
    establishes standards for managerial cost accounting information at
    federal agencies.

    ^5 Typical direct costs include salaries and benefits for employees who
    work directly on NSPS activities; materials and supplies used in the work;
    various costs associated with office space, equipment, facilities, and
    utilities that are used exclusively to produce the output; and the costs
    of goods and services received from other segments or entities that are
    used to produce the output. Typical indirect costs include, among other
    things, general administrative services, general research, and technical
    support.

    The total funds DOD has expended or obligated to design and implement NSPS
    during fiscal years 2005 through 2006 cannot be determined because DOD has
    not established an effective oversight mechanism to ensure that all these
    costs are fully captured in the components' official accounting systems.
    In May 2005, the NSPS Senior Executive established a requirement for
    tracking and reporting NSPS implementation costs that requires the
    components to develop appropriate mechanisms to capture these costs and
    send them to the NSPS PEO on a quarterly basis. Components were given
    flexibility to establish the desired level of specificity to track NSPS
    costs, provided the established mechanism allowed complete visibility of
    all costs. However, this guidance does not define the direct and indirect
    costs DOD requires that the components capture. DOD's pervasive financial
    management deficiencies have been the basis for GAO's designation of this
    as a high-risk area since 1995. GAO's review of the components' submitted
    quarterly NSPS cost reports in fiscal years 2005 and 2006 found that their
    official appropriation accounting systems do not capture the total amount
    of funds they reported that they had expended or obligated to design and
    implement NSPS. While the quarterly reports are intended to provide DOD
    with visibility over NSPS implementation costs, the PEO does not have an
    effective oversight mechanism or internal controls in place to ensure that
    the information contained in the reports is complete and accurate. The PEO
    relies on the components to follow the guidance for capturing NSPS costs
    in their official accounting systems, but it does not conduct an
    independent verification of the completeness or accuracy of financial data
    reported by the component. Without an effective oversight and quality
    control mechanism and internal controls to ensure that the official
    accounting systems capture all appropriate costs, DOD and Congress do not
    have adequate visibility over the actual cost to design and implement
    NSPS.

    ^6 DOD Financial Management Regulation 7000.14-R, vol. 1, chapter 2,
    Conceptual Framework (December 1998).

    ^7 (1) NSPS Design Support, (2) Training Development and Support, (3)
    Training Execution, (4) Communications/Website, (5) General Implementation
    Support, (6) NSPS Evaluation, (7) Conversion Cost, (8) HR Automated
    Systems, and (9) Program Office Operations.

    We are recommending that DOD define all direct and indirect costs needed
    to manage NSPS, prepare a revised estimate of these costs for implementing
    NSPS in accordance with the established definitions and federal financial
    accounting standards, and develop a comprehensive oversight framework to
    ensure that all funds expended or obligated to design and implement NSPS
    are fully captured and reported. In written comments on a draft of this
    report, DOD generally concurred with our recommendations. DOD's comments
    are reprinted in appendix II.

    Background

    The National Defense Authorization Act for Fiscal Year 2004 provided DOD
    with the authority to establish (1) a pay-for-performance management
    system, (2) an appeals process, and (3) a labor relations system--which
    together comprise the major components of NSPS.^8 The legislation permits
    DOD significant flexibility in designing NSPS, allowing for a new
    framework of rules, regulations, and processes to govern how defense
    civilian employees are hired, compensated, promoted, and disciplined. The
    law grants DOD certain exemptions from laws governing federal civilian
    personnel management found in Title 5 of the U.S. Code.^9 Congress
    provided these flexibilities in response to DOD's position that the
    inflexibility of federal personnel systems was one of the most important
    constraints to the department's ability to attract, retain, reward, and
    develop a civilian workforce to meet the national security mission of the
    21st century.

    ^8 Pub. L. No. 108-136, section 1101 (2003) (codified at 5 U.S.C. sections
    9901-9904).

    ^9 Congress did not exempt DOD from provisions of Title 5, U.S. Code,
    pertaining to veterans' preference, merit systems principles, prohibited
    personnel practices, and equal employment opportunity.

    On November 1, 2005, DOD and OPM jointly developed and issued the final
    NSPS regulations in the Federal Register.^10 In the Federal Register, DOD
    estimated the overall costs associated with implementing NSPS to be
    approximately $158 million through 2008. The components' estimates
    projected that over 700,000 civilian employees would be converted to the
    new system over a period of 4 years. By component, the Army projected
    converting 235,000 civilian employees between fiscal years 2005 and 2008;
    the Navy, 185,985; the Air Force, 128,408; and the Washington Headquarters
    Services, 156,454.

    DOD established a team to design and implement NSPS and manage the
    transformation process. In April 2004, the Secretary of Defense appointed
    an NSPS Senior Executive to, among other things, design, develop, and
    establish NSPS. Under the Senior Executive's authority, the PEO was
    established as the central policy and program office to design, plan,
    develop, deploy, assess, and fully implement NSPS. Specifically, the PEO's
    responsibilities include designing the labor relations, appeals, and human
    resource/pay-for-performance systems; developing communication and
    training strategies; modifying personnel information technology; and
    drafting joint enabling regulations and internal DOD implementing
    regulations. As the central DOD-wide program office, the PEO directs and
    oversees the components' NSPS program managers, who report to their parent
    components and the NSPS PEO. These program managers also serve as their
    components' NSPS action officers and participate in the development,
    planning, implementation, and deployment of NSPS. Figure 1 shows the
    organization of the NSPS design and implementation team.

    ^10 Department of Defense Human Resources Management and Labor Relations
    System, 70 Fed. Reg. 66,116 (Nov. 1, 2005) (codified at 5 C.F.R. pt.
    9901).

    Figure 1: NSPS Design and Implementation Team Organization

    aIncludes the U.S. Navy and the U.S. Marine Corps.

    bThe Washington Headquarters Services is a field activity that reports to
    the Director of Administration and Management, which has oversight
    responsibility for DOD's "Fourth Estate" entities. "Fourth Estate"
    entities are all organizational entities in DOD that are not in the
    military departments or the combatant commands. These include the Office
    of the Secretary of Defense, the Joint Staff, the Office of the Inspector
    General of DOD, the defense agencies, and DOD field activities.

    cThis group is responsible for satisfying human resources information
    technology (and related) system requirements and integrating the resulting
    systems.

    DOD's Estimated Costs to Implement NSPS Do Not Fully Represent Its Total
    Resource Needs

    DOD's estimate that it will cost $158 million to implement NSPS between
    2005 and 2008 does not include the full cost that the department expects
    to incur as a result of implementing the new system.

    Federal financial accounting standards state that reliable information on
    the costs of federal programs and activities is crucial for effective
    management of government operations and recommend that full costs of
    programs be reported so that decision makers have information necessary to
    make informed decisions on resources for programs, activities, and
    outputs, and to ensure that they get expected and efficient results.
    According to the standards, the full cost of a program or activity
    includes both those costs that are specifically identifiable to carry them
    out, or direct costs, and those costs that are common to multiple programs
    or activities but cannot be specifically identified with any particular
    program or activity, or indirect costs. While the standards emphasize that
    cost information is essential for managing federal programs, their
    activities, and outputs, the standards also provide that items may be
    omitted from cost information if that omission would not change or
    influence the judgment of a reasonable person relying on the cost
    information.

    To implement NSPS, the PEO estimated costs of about $51 million for the
    start-up and operation of its office and the start-up of the National
    Security Labor Relations Board. The components estimated costs of about
    $23 million in fiscal year 2005, about $27 million in fiscal year 2006,
    about $35 million in fiscal year 2007, and $22 million in fiscal year
    2008, as shown in table 1. Typical direct costs include salaries and
    benefits for employees who work directly on NSPS activities; materials and
    supplies used in the work; various costs associated with office space,
    equipment, facilities, and utilities that are used exclusively to produce
    the output; and the costs of goods and services received from other
    segments or entities that are used to produce the output.

    Table 1: DOD Fiscal Year 2005-2008 Estimate of Cost to Implement NSPS

    Dollars in thousands
                           Fiscal year Fiscal year Fiscal year    Fiscal
    DOD component              2005        2006        2007 year 2008    Total
    Army                     $6,627      $9,897     $17,199   $10,213  $43,936
    Navy                      4,161       5,597       5,430     4,552   19,740
    Air Force                 7,300       5,731       4,704     2,070   19,805
    Washington                5,230       5,943       7,845     4,755   23,773
    Headquarters
    Services
    NSPS Program                  0           0           0         0 51,000^a
    Executive Office
    Total                   $23,318     $27,168      35,178    21,590 $158,000

    Source: NSPS PEO.

    Note: Numbers may not total due to rounding.

    aThe NSPS Program Executive Office estimated $38 million for the start-up
    and operation of its office and $13 million for the start-up of the
    National Security Labor Relations Board.

    DOD's estimate included several broad cost categories. These categories
    are (1) design and implementation, (2) training, (3) evaluation, (4) human
    resources automated systems, and (5) program office operations. DOD's
    estimate contained some examples of the types of costs included in each of
    these broad categories. However, before calculating its estimate, DOD had
    not fully defined what direct and indirect costs should be included for it
    to effectively manage NSPS. Neither could DOD provide us with complete
    supporting documentation that identifies the specific types of costs
    included in its estimate. The Standards for Internal Controls in the
    Federal Government require that all transactions and other significant
    events, such as cost estimates, be clearly documented.^11

    Based on our review of the documentation provided by DOD and discussions
    with PEO and component officials, however, the estimate does not include
    all direct costs of implementing the system. For example, PEO and
    component officials stated that the estimate includes direct costs for the
    start-up and operation of the Program Executive Office and the National
    Security Labor Relations Board; development and delivery of training
    materials, Web-based courses, and classroom sessions by DOD contractor and
    civilian instructors; modification of existing automated personnel and
    payroll transaction processing systems--the Defense Civilian Personnel
    Data System and the Defense Civilian Pay System--to accommodate changes
    brought about by NSPS; travel costs for NSPS trainers and training
    participants; outreach with employees and other parties; and collaboration
    activities with employee representatives. However, PEO and component
    officials agreed that the estimate does not include all direct costs of
    implementing the system. For example, PEO and component officials agreed
    that the estimate does not include the full salary costs of all civilian
    and military personnel who directly support NSPS activities departmentwide
    and any of the direct costs that the various organizations and defense
    agencies expect to incur to implement the system, such as salaries and
    benefits for employees who work directly on NSPS activities and materials
    and supplies used in NSPS activities. Furthermore, PEO and component
    officials acknowledge that the estimate did not include any of the typical
    indirect costs associated with the design and implementation of NSPS such
    as costs of general administrative services, general research, and
    technical support. Without a cost estimate that includes all costs that
    the department expects to incur as a result of implementing the new
    system, decision makers--within DOD and Congress--will not have the
    complete cost information they need to make decisions about whether
    adequate resources are being provided for implementing NSPS.

    ^11 [23]GAO-01-1008G and [24]GAO/AIMD-00-21.3.1 .

    Moreover, component officials told us that certain categories of the
    estimated costs provided by the components do not contain comparable cost
    elements. One of DOD's key financial management regulation
    principles--comparability--requires the reporting of financial management
    data in the same manner throughout DOD, using common definitions when
    necessary.^12 However, officials from the Departments of the Army, Navy,
    and Air Force and the Washington Headquarters Services told us that they
    used different approaches to estimate NSPS funding requirements when
    calculating this cost estimate. While the PEO issued general instructions
    to the military services and the Washington Headquarters Services for
    estimating the costs associated with the design and implementation of
    NSPS, this office did not provide a description of the specific types of
    direct and indirect costs to be included in the estimate or a
    cost-estimating methodology containing assumptions and approaches. The PEO
    guidance provided a general reporting template with broad cost categories
    but did not contain detailed instructions for ensuring comprehensive and
    comparable cost estimates. Army and Navy officials told us that they
    estimated civilian personnel costs under the category of "Program Office
    Operations"; the Air Force officials noted that they estimated civilian
    personnel costs under four other categories; and Washington Headquarters
    Services officials stated that they did not estimate their NSPS design and
    implementation costs in any of the eight categories. Without comparable
    cost estimates, DOD and congressional decision makers cannot contrast and
    compare or otherwise evaluate NSPS implementation costs across the various
    DOD components.

    ^12 DOD Financial Management Regulation 7000.14-R, vol. 1, chapter 2,
    Conceptual Framework (December 1998).

    Total Funds Expended or Obligated to Design and Implement NSPS Cannot Be
    Determined

    The total amount of funds DOD has expended or obligated to design and
    implement NSPS during fiscal years 2005 through 2006 cannot be determined
    because DOD has not established an effective oversight mechanism to ensure
    that all these costs are fully captured. In May 2005, the NSPS Senior
    Executive established guidance intended to provide the PEO with visibility
    over NSPS expenditures. The guidance requires the components to develop
    appropriate mechanisms to capture these costs within their official
    appropriation accounting systems and allows them flexibility to establish
    the desired level of specificity to track NSPS costs--such as a job order
    number and cost account code--provided the established mechanism allows
    complete visibility of all costs. In addition, the guidance requires the
    components to submit reports quarterly of their NSPS obligations to the
    NSPS PEO. This guidance does not, however, define the direct and indirect
    costs that DOD requires the components to capture. Our prior work on DOD's
    financial and related business management and systems has revealed
    pervasive deficiencies that affect its ability to control costs; ensure
    basic accountability; anticipate future costs and claims on the budget;
    measure performance; maintain funds control; prevent and detect fraud,
    waste, and abuse; and address pressing management issues. GAO first
    designated DOD financial management as high risk in 1995.

    Based on discussions with PEO and component officials and our review of
    the quarterly reports of NSPS implementation costs submitted for fiscal
    years 2005 and 2006, the components' official appropriation accounting
    systems do not capture the total amount of funds reported expended or
    obligated to design and implement NSPS. By component, the Army's quarterly
    reports indicated that $9.8 million had been obligated to implement NSPS;
    however, just $6.0 million of these costs were captured in the Army's
    official accounting system. The remaining $3.8 million was not captured in
    the Army's official accounting system, and Army officials could not
    provide sufficient evidence supporting the amount. The Air Force's
    quarterly reports indicated that $21.7 million had been obligated to
    implement NSPS, of which $3.8 million was captured in its official
    accounting system. According to Air Force officials, the remaining
    reported amount, $17.9 million, was an estimate of expended and obligated
    funds Air Force-wide. The Navy and the Washington Headquarters Services
    reported $21.6 million and $13.1 million, respectively, but neither
    component was able to provide any evidence that these obligated funds had
    been captured in their official accounting systems.

    While the quarterly NSPS cost reports are intended to provide DOD with
    visibility over NSPS implementation costs, the PEO does not have an
    effective oversight mechanism or internal controls in place to ensure that
    the information contained in the reports is complete and accurate. The
    Standards for Internal Controls in the Federal Government sets out
    management controls for all aspects of an agency's operations. The
    Standards emphasize the importance of management oversight and review to
    ensure that programs, their activities, and outputs continue to meet their
    intended goals and comply with the law and policies and recommend that
    agencies establish internal controls to monitor and review operations and
    programs to provide reasonable assurance that they meet their goals.
    Moreover, although the PEO relies on the components to follow its guidance
    for capturing NSPS costs in their official accounting systems, it does not
    conduct an independent verification of the completeness or accuracy of
    financial data reported by the components. Although independent
    verification is an important internal control activity under segregation
    of duties designed to reduce the risk of errors, PEO officials told us
    that none of the reports submitted by the components are reviewed by an
    independent or second reviewer to ensure that the information reported is
    accurate or complete. Federal internal control standards require that data
    control activities, such as verification and reconciliation, be conducted
    and documented to help provide reasonable assurance that the objectives of
    a program and its activities are being met.^13 Moreover, we consider
    establishing such controls, including policies and oversight mechanisms, a
    best practice that can ensure greater visibility over the total costs
    associated with the design and implementation of NSPS. Without an
    effective oversight mechanism and internal controls, DOD and Congress do
    not have adequate visibility over the actual cost to design and implement
    NSPS.

    ^13 [25]GAO-01-1008G and [26]GAO/AIMD-00-21 .3.1.

    Conclusions

    At a time when DOD is competing for resources in an increasingly fiscally
    constrained environment, it is critically important that DOD and Congress
    know the full cost to design and implement NSPS. Defining what direct and
    indirect costs are needed to effectively manage NSPS is a crucial first
    step for the department and Congress to lay a foundation for future
    decisions. Without a full cost estimate, decision makers within DOD and
    Congress will not have the complete cost information they need to make
    decisions about whether adequate resources are being provided for
    implementing NSPS. Moreover, the cost information that makes up the
    components' portion of the overall DOD cost estimate was prepared using
    different approaches and is therefore not comparable. Without comparable
    cost estimates, DOD and congressional decision makers cannot contrast and
    compare or otherwise evaluate NSPS implementation costs across the various
    DOD components.

    Although the components are reporting NSPS implementation costs, the total
    amount of funds DOD has expended or obligated to design and implement the
    system cannot be determined. Until the PEO establishes an effective
    oversight mechanism with reporting requirements and independent
    verification processes, DOD cannot ensure that the components track and
    report cost information that includes funds that they have expended or
    obligated to design and implement NSPS. Without an effective oversight
    mechanism, DOD and Congress do not have adequate visibility over the
    actual cost to design and implement NSPS.

    Recommendations for Executive Action

    To provide decision makers in DOD and Congress with improved visibility
    and internal controls over the costs of NSPS, we recommend that the
    Secretary of Defense direct the National Security Personnel System Senior
    Executive to take the following three actions:

               o Direct the NSPS Program Executive Office to define all direct
               and indirect costs necessary to effectively manage NSPS, in
               accordance with internal control standards, federal financial
               accounting standards, and DOD's financial management regulation
               principle related to comparability.
               o Direct the NSPS Program Executive Office to prepare a revised
               estimate of the full costs of implementing NSPS in accordance with
               the established definitions, internal control standards, federal
               financial accounting standards, and DOD's financial management
               regulation principle related to comparability.
               o Develop a comprehensive oversight framework to ensure that all
               funds expended or obligated to design and implement NSPS are fully
               captured and reported. Such a framework should establish quality
               controls, including independent reviews of the data being reported
               by the components in the quarterly reports, to ensure the accuracy
               and completeness of the reported information.

    Agency Comments and Our Evaluation

    DOD provided written comments on a draft of this report and generally
    agreed with our recommendations. In an overall comment, DOD noted that
    NSPS is not a program; however, it also noted that DOD modeled the
    development and implementation of NSPS on the acquisition model. Also, the
    department noted that costing and accounting requirements for NSPS were
    never intended to be the same as those for the acquisition model. We
    believe DOD raises this point because we used the federal financial
    accounting standards to analyze DOD's costs associated with the
    implementation of NSPS. We note in our report that federal financial
    accounting standards not only apply to the cost of programs, but also to
    the cost of activities such as NSPS. Therefore, we believe that the same
    costing and accounting rigor and discipline that are applied to major
    acquisition programs should apply to NSPS.

    DOD partially concurred with our recommendation to define all direct and
    indirect costs necessary to effectively manage the program, its
    activities, and outputs, in accordance with internal control standards,
    federal financial accounting standards, and DOD's financial management
    regulation principle related to comparability. DOD stated that the PEO is
    reconstituting the Financial Integrated Product Team (IPT) to define all
    direct and indirect costs necessary to effectively manage the program;
    relook at the original cost categories to determine if they are still
    appropriate and change if appropriate; and stipulate the costs included in
    each category. If the PEO follows through with its effort, we believe that
    it will be responsive to our recommendation. Regarding indirect costs, DOD
    stated that a test of reasonableness was applied. The department explained
    that the components were allowed to weigh the cost/benefit of collecting,
    tracking, and reporting indirect costs. While we agree that it is indeed
    appropriate for the components to apply a test of reasonableness to weigh
    the cost/benefit of collecting, tracking, and reporting indirect costs, it
    is important to note that a crucial first step for the department to lay a
    foundation for such decisions about reasonableness is to define what
    direct and indirect costs are needed to effectively manage NSPS. It is
    also important to note that we cannot verify DOD's statement that the
    components applied a reasonableness test because DOD did not provide
    documentation to reflect this during our review. DOD further stated that
    the PEO had tracked both direct and indirect costs. While the PEO does
    capture funds it expended or obligated to design and implement NSPS, we
    continue to believe that the total amount of funds DOD has expended or
    obligated to design and implement NSPS cannot be determined because DOD
    has not established an effective oversight mechanism to ensure that the
    cost information reported is accurate and complete.

    Regarding our recommendation to prepare a revised estimate of the full
    costs of implementing NSPS in accordance with established definitions,
    internal control standards, federal financial accounting standards, and
    DOD's financial management regulation principle related to comparability,
    the department concurred, noting that the PEO will develop an estimate
    covering fiscal years 2008 through 2011.

    DOD concurred with our recommendation that the NSPS Senior Executive
    develop a comprehensive oversight framework to ensure that NSPS funds that
    are expended or obligated are fully captured and reported, noting that the
    department should leverage existing policies and procedures to ensure
    oversight of these costs. However, in the absence of more specific details
    on its planned actions to leverage existing policies and procedures to
    ensure oversight of NSPS costs, we continue to emphasize the department's
    need for a comprehensive oversight framework because without it DOD and
    Congress do not have adequate visibility over the actual cost to design
    and implement NSPS.

    We are sending copies of this report to the appropriate congressional
    committees. We will make copies available to others upon request. This
    report will be available at no charge on GAO's Web site at
    [27]http://www.gao.gov .

    If you or your staff have any questions about this report, please contact
    me at (202) 512-5559 or by e-mail at [28]stewartd@gao.gov . Contact points
    for our Offices of Congressional Relations and Public Affairs may be found
    on the last page of this report. GAO staff who made major contributions to
    the report are listed in appendix III.

    Derek B. Stewart
    Director, Defense Capabilities and Management

    List of Congressional Committees

    The Honorable Carl Levin
    Chairman
    The Honorable John McCain
    Ranking Member
    Committee on Armed Services
    United States Senate

    The Honorable Daniel Inouye
    Chairman
    The Honorable Ted Stevens
    Ranking Member
    Subcommittee on Defense
    Committee on Appropriations
    United States Senate

    The Honorable Joseph I. Lieberman
    Chairman
    The Honorable Susan M. Collins
    Ranking Member
    Committee on Homeland Security and Governmental Affairs
    United States Senate

    The Honorable Daniel K. Akaka
    Chairman
    The Honorable George V. Voinovich
    Ranking Member
    Subcommittee on Oversight of Government Management, the
      Federal Workforce, and the District of Columbia
    Committee on Homeland Security and Governmental Affairs
    United States Senate

    The Honorable Ike Skelton
    Chairman
    The Honorable Duncan Hunter
    Ranking Member
    Committee on Armed Services
    House of Representatives

    The Honorable John P. Murtha
    Chairman
    The Honorable C.W. Bill Young
    Ranking Member
    Subcommittee on Defense
    Committee on Appropriations
    House of Representatives

    Appendix I: Scope and Methodology

    To determine the extent to which the Department of Defense (DOD) has
    estimated the current and future total costs associated with the
    implementation of the National Security Personnel System (NSPS), we
    reviewed the estimate that was published in the NSPS Final Regulations.^1
    We also analyzed guidance the NSPS Program Executive Office (PEO) provided
    to the components that would be providing input to this estimate. We
    interviewed officials from the PEO and the NSPS Program Management Offices
    for the Navy (which is also responsible for the Marine Corps), the Army,
    the Air Force, and the Washington Headquarters Services to discuss how
    they had interpreted the guidance directing them to estimate NSPS costs,
    and we obtained and reviewed documents of the estimates provided by the
    NSPS Program Management Offices to the PEO. To determine what costs should
    be included in NSPS estimates, we analyzed government accounting standards
    defined in the following documents: DOD Financial Management Regulation
    7000.14-R, vol. 1, chapter 2, Conceptual Framework, December 1998, and
    "Managerial Cost Accounting Concepts and Standards for the Federal
    Government," Number 4, July 31, 1995.

    To determine the extent to which DOD expended or obligated funds to design
    and implement NSPS through fiscal year 2006, we obtained quarterly reports
    collected by the PEO and consolidated for fiscal years 2005 and 2006. To
    gain an understanding of the roles and responsibilities of the various
    organizations in tracking NSPS cost data, we reviewed pertinent NSPS
    documents, including the NSPS Requirements Document, the Charter for the
    PEO, and the memorandum sent out by the PEO directing that the components
    report their NSPS costs on a quarterly basis. We reviewed quarterly
    reports provided by the components and the PEO for the 2-year period and
    interviewed officials from each of the component PMO offices to gather
    documentation showing how the reported data had been captured. We compared
    the quarterly reports to data from the components' official accounting
    systems to determine what NSPS cost data had been captured in these
    accounting systems. To obtain criteria for tracking and managing the costs
    of programs, activities, and outputs, we compared the PEO's management of
    the reporting of NSPS costs with internal control factors described in
    Internal Control Management and Evaluation Tool and Standards for Internal
    Control in the Federal Government.

    ^1 70 Fed. Reg. 66,187 (Nov. 1, 2005).

    We conducted our review from June 2006 through June 2007 in accordance
    with generally accepted government auditing standards.

    Appendix II: Comments from the Department of Defense

    Appendix III: GAO Contact and Staff Acknowledgments

    GAO Contact

    Derek B. Stewart, (202) 512-5559 or [29]stewartd@gao.gov

    Acknowledgments

    In addition to the contact named above, John Needham, Acting Director;
    Sandra Burrell, Assistant Director; Margaret Braley; Renee Brown; Nicolaas
    Cornelisse; William Doherty; Cara Kochheiser; Julia Matta; Donald Neff;
    Charles Perdue; Beverly Schladt; Rebecca Shea; and John Warner made key
    contributions to this report.

    Related GAO Products

    Human Capital: Observations on Final Regulations for DOD's National
    Security Personnel System. [30]GAO-06-227T . Washington, D.C.: November
    17, 2005.

    Human Capital: DOD's National Security Personnel System Faces
    Implementation Challenges. [31]GAO-05-730 . Washington, D.C.: July 14,
    2005.

    Questions for the Record Related to the Department of Defense's National
    Security Personnel System. [32]GAO-05-771R . Washington, D.C.: June 14,
    2005.

    Questions for the Record Regarding the Department of Defense's National
    Security Personnel System. [33]GAO-05-770R : Washington, D.C.: May 31,
    2005.

    Post-hearing Questions Related to the Department of Defense's National
    Security Personnel System. [34]GAO-05-641R . Washington, D.C.: April 29,
    2005.

    Defense Management: Key Elements Needed to Successfully Transform DOD
    Business Operations. [35]GAO-05-629T . Washington, D.C.: April 28, 2005.

    Human Capital: Preliminary Observations on Proposed Department of Defense
    National Security Personnel System Regulations. [36]GAO-05-559T .
    Washington, D.C.: April 14, 2005.

    Human Capital: Preliminary Observations on Proposed Department of Defense
    National Security Personnel System Regulations. [37]GAO-05-517T .
    Washington, D.C.: April 12, 2005.

    Human Capital: Preliminary Observations on Proposed DOD National Security
    Personnel System Regulations. [38]GAO-05-432T . Washington, D.C.: March
    15, 2005.

    Department of Defense: Further Actions Are Needed to Effectively Address
    Business Management Problems and Overcome Key Business Transformation
    Challenges. [39]GAO-05-140T . Washington, D.C.: November 18, 2004.

    DOD Civilian Personnel: Comprehensive Strategic Workforce Plans Needed.
    [40]GAO-04-753 . Washington, D.C.: June 30, 2004.

    Results-Oriented Cultures: Implementation Steps to Assist Mergers and
    Organizational Transformations. [41]GAO-03-669 . Washington, D.C.: July 2,
    2003.

    Human Capital: Building on DOD's Reform Efforts to Foster Governmentwide
    Improvements. [42]GAO-03-851T . Washington, D.C.: June 4, 2003.

    Human Capital: DOD's Civilian Personnel Strategic Management and the
    Proposed National Security Personnel System. [43]GAO-03-493R . Washington,
    D.C.: May 12, 2003.

    Defense Transformation: DOD's Proposed Civilian Personnel System and
    Governmentwide Human Capital Reform. [44]GAO-03-741T . Washington, D.C.:
    May 1, 2003.

    Defense Transformation: Preliminary Observations on DOD's Proposed
    Civilian Personnel Reforms. [45]GAO-03-717T . Washington, D.C.: April 29,
    2003.

    DOD Personnel: DOD Actions Needed to Strengthen Civilian Human Capital
    Strategic Planning and Integration with Military Personnel and Sourcing
    Decisions. [46]GAO-03-475 . Washington, D.C.: March 28, 2003.

    (350787)

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    Highlights of [54]GAO-07-851 , a report to congressional committees

    July 2007

    HUMAN CAPITAL

    DOD Needs Better Internal Controls and Visibility over Costs for
    Implementing Its National Security Personnel System

    Given a large-scale organizational change initiative, such as the
    Department of Defense's (DOD) National Security Personnel System (NSPS),
    is a substantial commitment that will take years to complete, it is
    important that DOD and Congress be kept informed of the full cost of
    implementing NSPS. Under the Comptroller General's authority to conduct
    evaluations on his own initiative, GAO analyzed the extent to which DOD
    has (1) fully estimated total costs associated with the implementation of
    NSPS and (2) expended or obligated funds to design and implement NSPS
    through fiscal year 2006. GAO interviewed department officials and
    analyzed the NSPS Program Executive Office's (PEO), and the military
    services' and the Washington Headquarters Services' (hereafter referred to
    as the components) cost estimates and reports of expended and obligated
    funds.

    [55]What GAO Recommends

    GAO recommends that DOD define all costs needed to manage NSPS, prepare a
    revised estimate of those costs for implementing the system in accordance
    with federal financial accounting standards, and develop a comprehensive
    oversight framework to ensure that all funds expended or obligated to
    design and implement NSPS are fully captured and reported. In reviewing a
    draft of this report, DOD generally concurred with GAO's recommendations.

    DOD's November 2005 estimate that it will cost $158 million to implement
    NSPS does not include the full cost that the department expects to incur
    as a result of implementing the new system. Federal financial accounting
    standards state that reliable information on the costs of federal programs
    and activities is crucial for effective management of government
    operations and recommend that full costs of programs and their outputs be
    provided to assist Congress and executives in making informed decisions on
    program resources and to ensure that programs get expected and efficient
    results. The full cost includes both those costs specifically identifiable
    to carry out the program, or direct costs, and those costs that are common
    to multiple programs but cannot be specifically identified with any
    particular program, or indirect costs. While the standards emphasize that
    full cost information is essential for managing federal programs, their
    activities, and outputs, the standards also provide that items may be
    omitted from cost information if that omission would not change or
    influence the judgment of a reasonable person relying on the cost
    information. Based on GAO's review of documentation provided by DOD and
    discussions with department officials, GAO found that DOD's estimate
    includes some direct costs, such as the start-up and operation of the NSPS
    PEO and the development and delivery of new NSPS training courses, but it
    does not include other direct costs such as the full salary costs of all
    civilian and military personnel who directly support NSPS activities
    departmentwide. Before developing its estimate, DOD had not fully defined
    all the direct and indirect costs needed to manage the program. Without a
    better estimate, decision makers--within DOD and Congress--will not have
    complete information about whether adequate resources are being provided
    for implementing NSPS.

    The total amount of funds DOD has expended or obligated to design and
    implement NSPS during fiscal years 2005 through 2006 cannot be determined
    because DOD has not established an oversight mechanism to ensure that
    these costs are fully captured. In May 2005, the NSPS Senior Executive
    established guidance for tracking and reporting NSPS implementation costs
    that requires the components to develop mechanisms to capture these costs
    and to report quarterly their costs to the NSPS PEO. However, this
    guidance does not define the direct and indirect costs DOD requires that
    the components capture. DOD's pervasive financial management deficiencies
    have been the basis for GAO's designation of this as a high-risk area
    since 1995. GAO's review of submitted reports from the components found
    that their official accounting systems do not capture the total funds
    expended or obligated to design and implement NSPS. Without an effective
    oversight mechanism to ensure that the official accounting systems capture
    all appropriate costs, DOD and Congress do not have visibility over the
    actual cost to design and implement NSPS.

    References

    Visible links
      16. http://www.gao.gov/cgi-bin/getrpt?GAO-06-227T
      17. http://www.gao.gov/cgi-bin/getrpt?GAO-05-730
      18. http://www.gao.gov/cgi-bin/getrpt?GAO-05-432T
      19. http://www.gao.gov/cgi-bin/getrpt?GAO-05-559T
      20. http://www.gao.gov/cgi-bin/getrpt?GAO-05-517T
      21. http://www.gao.gov/cgi-bin/getrpt?GAO-01-1008G
      22. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21
      23. http://www.gao.gov/cgi-bin/getrpt?GAO-01-1008G
      24. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
      25. http://www.gao.gov/cgi-bin/getrpt?GAO-01-1008G
      26. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.31
      27. http://www.gao.gov/
      28. mailto:stewartd@gao.gov
      29. mailto:stewartd@gao.gov
      30. http://www.gao.gov/cgi-bin/getrpt?GAO-06-227T
      31. http://www.gao.gov/cgi-bin/getrpt?GAO-05-730
      32. http://www.gao.gov/cgi-bin/getrpt?GAO-05-771R
      33. http://www.gao.gov/cgi-bin/getrpt?GAO-05-770R
      34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-641R
      35. http://www.gao.gov/cgi-bin/getrpt?GAO-05-629T
      36. http://www.gao.gov/cgi-bin/getrpt?GAO-05-559T
      37. http://www.gao.gov/cgi-bin/getrpt?GAO-05-517T
      38. http://www.gao.gov/cgi-bin/getrpt?GAO-05-432T
      39. http://www.gao.gov/cgi-bin/getrpt?GAO-05-140T
      40. http://www.gao.gov/cgi-bin/getrpt?GAO-04-753
      41. http://www.gao.gov/cgi-bin/getrpt?GAO-03-669
      42. http://www.gao.gov/cgi-bin/getrpt?GAO-03-851T
      43. http://www.gao.gov/cgi-bin/getrpt?GAO-03-493R
      44. http://www.gao.gov/cgi-bin/getrpt?GAO-03-741T
      45. http://www.gao.gov/cgi-bin/getrpt?GAO-03-717T
      46. http://www.gao.gov/cgi-bin/getrpt?GAO-03-475
      47. http://www.gao.gov/
      48. http://www.gao.gov/
      49. http://www.gao.gov/fraudnet/fraudnet.htm
      50. mailto:fraudnet@gao.gov
      51. mailto:JarmonG@gao.gov
      52. mailto:AndersonP1@gao.gov
      53. http://www.gao.gov/cgi-bin/getrpt?GAO-07-851
      54. http://www.gao.gov/cgi-bin/getrpt?GAO-07-851
    *** End of document. ***