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
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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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[53]www.gao.gov/cgi-bin/getrpt?GAO-07-851 .
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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
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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
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