Financial Management: Challenges Facing DOD in Meeting the Goals of the
Chief Financial Officers Act (Testimony, 11/14/95, GAO/T-AIMD-96-1).

The Defense Department (DOD) needs accurate financial information and
appropriate internal controls to effectively manage its vast
resources--more than $1 trillion in assets, 3 million in military and
civilian personnel, and a budget of more than $250 billion for fiscal
year 1995. Unfortunately, DOD suffers from serious and pervasive
financial management problems, ranging from the inability to account for
billions of dollars in disbursements to a breakdown in an ability to
protect assets from waste, fraud, and abuse. No military service or
other major DOD component has been able to withstand the scrutiny of an
independent financial statement audit. Although DOD recognizes the
problem, it faces serious challenges in implementing its "blueprint" for
reform. GAO continues to believe that DOD should establish an
independent, outside board of experts to provide counsel, oversight, and
perspective to DOD's reform efforts. Such experts could provide valuable
advice and expertise in three challenging areas: systems development,
personnel needs assessment, and organizational structure.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-AIMD-96-1
     TITLE:  Financial Management: Challenges Facing DOD in Meeting the 
             Goals of the Chief Financial Officers Act
      DATE:  11/14/95
   SUBJECT:  Reengineering (management)
             Financial statement audits
             Federal agency accounting systems
             Financial management systems
             Chief financial officers
             Internal controls
             Accountability
             Data integrity
             Accounting procedures
             Budget outlays
IDENTIFIER:  Defense Business Operations Fund
             DOD Corporate Information Management Initiative
             CIM
             Army General Fund
             DOD Financial Management Blueprint
             
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Cover
================================================================ COVER


Before the Subcommittee on Government Management, Information and
Technology, Committee on Government Reform and Oversight, House of
Representatives

For Release on Delivery
Expected at 2 p.m.
Tuesday,
November 14, 1995

FINANCIAL MANAGEMENT - CHALLENGES
FACING DOD IN MEETING THE GOALS OF
THE CHIEF FINANCIAL OFFICERS ACT

Statement of Gene L.  Dodaro
Assistant Comptroller General
Accounting and Information Management Division

GAO/T-AIMD-96-1

GAO/AIMD-96-1T


(918813)


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the Department of
Defense's (DOD) efforts to implement the Chief Financial Officers
(CFO) Act.  This act has been instrumental in helping the Department
understand the depth and magnitude of its financial management
problems and start on a course towards corrective measures.  Today,
as you asked, we will highlight the results of financial audits since
the passage of the CFO Act and provide our perspective on the major
challenges facing the Department in meeting the act's objectives. 

Achieving the reforms required by the CFO Act is essential because
DOD needs accurate financial information and appropriate internal
controls to effectively manage the Department's vast resources-- over
$1 trillion in assets, 3 million military and civilian personnel, and
a budget of over $250 billion for fiscal year 1995.  Unfortunately,
the Department does not yet have adequate financial management
processes in place to produce the information it needs to support its
decision-making process.  No military service or other major DOD
component has been able to withstand the scrutiny of an independent
financial statement audit. 

As discussed in our high-risk series,\1 this failure has serious
implications.  Good financial management runs deeper than the ability
to develop accurate financial records.  It is being able to provide
managers with clear visibility and control over inventories, being
able to accurately project material needs, and being able to
effectively balance scarce resources with critical needs.  In short,
effective financial management is essential to ensuring that DOD's
resources are productively employed in meeting our nation's defense
objectives. 

The Department has recognized the seriousness of its financial
management problems and the need to take action.  Secretary Perry and
Under Secretary Hamre, who serves as DOD's CFO, have been candid in
their assessments of the status of current processes and practices. 
The Department's financial reform goals--presented in its February
1995 "Blueprint"--offer a good perspective of the corrective actions
which must be taken.  This approach represents an important first
step in committing DOD to real action.  However, very serious
management challenges face the Department as it moves to make the
blueprint a reality. 

Given the serious and pervasive nature of DOD's financial management
problems, and the need for more immediate progress, the Department
needs to consider additional steps to fix its long-standing
weaknesses.  As we testified in May 1995,\2 DOD needs to take several
immediate actions to turn Secretary Perry's blueprint into
substantive improvements, including (1) assessing the number and
skill level of its financial management workforce and (2)
establishing an outside board of experts to provide counsel,
oversight, and perspective to reform efforts.  In addition, we have
questions about whether DOD's systems improvement strategy will
produce the needed improvements in a timely manner and whether enough
actions are planned to address the Department's deep-rooted
organizational impediments to attaining meaningful change. 

We are in the process of more closely examining these issues and
DOD's other specific improvement strategies as requested by the
Chairman of the Subcommittee on Defense, Senate Committee on
Appropriations.  We plan to provide our assessment and
recommendations next spring.  In the interim, we will continue to
work with DOD in providing our views on ways to build upon its
improvement efforts. 

The following sections summarize the serious financial problems
facing the Department, the actions it plans to take, and the
difficult issues that it must address to overcome its problems. 


--------------------
\1 High-Risk Series:  An Overview (GAO/HR-95-1, February 1995). 

\2 Financial Management:  Challenges Confronting DOD's Reform
Initiatives (GAO/T-AIMD-95-146, May 23, 1995). 


   CFO ACT AUDITS HAVE BROUGHT
   GREATER CLARITY TO DOD'S
   FINANCIAL MANAGEMENT PROBLEMS
---------------------------------------------------------- Chapter 0:1

The CFO Act requirements have served as an important catalyst for
focusing attention on the financial problems facing the Department. 
The regular preparation of financial statements and independent audit
opinions, in particular, is bringing greater clarity to the scope and
depth of DOD's financial management problems and needed solutions. 
These annual public report cards also are generating increased
pressure on DOD management to fix its long-standing problems. 

GAO performed the initial financial audit of the Army general fund
operations under the CFO Act pilot program, as well as an early
assessment of the Air Force's ability to meet the act's requirements. 
Also, we will soon release the results of our review of the Navy's
financial reporting.  Throughout our audit work, we developed and
maintained a close working relationship with the DOD Inspector
General (IG) and the military services' audit agencies.  They have
assumed responsibility for the audits of the Air Force and Army
general funds over the past few years and have had responsibility for
audits of the Department's $80 billion Defense Business Operations
Fund (DBOF) operations since 1992.  I want to commend the DOD audit
community for its continuing strong support of the CFO Act.  We are
particularly encouraged that the DOD Inspector General and the
military services' audit organizations recently pledged substantial
resources to meet the expanded requirement for an audit of DOD's
fiscal year 1996 consolidated financial statements resulting from
passage of the Government Management Reform Act of 1994 (GMRA). 

Since 1990, we and the DOD auditors have made over 350
recommendations to help resolve the financial management weaknesses
identified throughout the Department.  These audits have consistently
identified fundamental deficiencies in the Department's financial
operations.  A brief recap of the recurring issues identified by
these audits follows. 

  Serious problems in accounting for billions of dollars in annual
     disbursements.  Without the proper matching of disbursements
     with obligations there is substantial risk that (1) fraudulent
     or erroneous payments may be made without being detected and (2)
     cumulative amounts of disbursements may exceed appropriated
     amounts and other legal limits.  CFO Act audits have shown that
     DOD has paid billions of dollars without being able to determine
     exactly what was purchased.  Also, financial audits of the Air
     Force and Army have shown that existing controls could not be
     relied on to ensure that DOD did not spend more than it was
     authorized--a basic fund control responsibility.\3 Similar
     problems were disclosed in our recent review of the Navy. 

As of August 1995, DOD reported that its problem disbursements
totaled about $28 billion.  Of this amount, $16 billion, or 58
percent, of the problem disbursements had remained unresolved for at
least 180 days.  As we discuss later in this statement, DOD is taking
steps to begin to address this issue. 

Also, we recently reported that DOD could not rely on its own
financial data to detect errors in payments made to contractors.  For
example, in one case, a $7.5 million overpayment was outstanding for
8 years and might not have been recovered if the contractor had not
notified DOD of the overpayment.  When such overpayments were
identified, DOD did not always properly try to recover those
overpayments, costing the government millions of dollars in
additional interest.\4

  Not identifying and disclosing future government costs.  Financial
     audits have reported that DOD has not properly reported billions
     of dollars in potential future liabilities.  Most of these
     future costs are associated with outstanding legal obligations,
     or with environmental cleanup costs at military installations,
     including bases that have been or will be closed. 

This problem was found in both the Army's and Air Force's financial
statements.  For example, a fiscal year 1994 Army Audit Agency report
disclosed that the Army did not properly report an estimated $21
billion in potential future costs the government may incur for the
cost of environmental cleanup.\5

The Air Force Audit Agency's fiscal year 1994 financial audit of the
Air Force also identified almost $28 billion of previously
undisclosed contingent liabilities for items such as contract appeals
and civil law and litigation claims.\6

  Breakdowns in the Department's ability to protect its assets from
     fraud, waste, and abuse.  CFO Act audits have highlighted
     continuing problems in overseeing DOD's multibillion dollar
     investment in government furnished property and equipment in the
     hands of contractors, real property, and inventory and
     equipment.  For example, our report\7 on Army real property
     disclosed instances in which real property maintenance
     requirements for some installations were understated, while
     other installations' requirements were overstated.  In March
     1995, the Army Audit Agency continued to report\8 on breakdowns
     in the process to ensure the accuracy of accounting for the
     Army's reported $30 billion investment in real property.  The
     same report indicated that the Army did not have accurate
     records for its reported $8.5 billion investment in government
     furnished property in the hands of contractors.  As a result,
     relying on contractors' reporting of government furnished
     property in their possession, the Army increased its accounting
     records by $5.6 billion for fiscal year 1994. 

  Continuing problems in reliably reporting on the cost of its
     operations.  Reliable cost information is necessary for the
     Congress to make sound budget decisions and is a key to
     achieving the Department's goal of reducing the cost of its
     operations.  However, financial audits have demonstrated DOD's
     inability to accurately record and report costs.  For example,
     we reported that the life cycle support costs reported to
     decisionmakers in DOD and the Congress for modifications to the
     Blackhawk and Chinook helicopters were understated by at least
     $3.6 billion.\9

Reliable cost information is also vital for DBOF to operate as
intended on a break-even basis.  However, the amount of DBOF's net
operating results for fiscal year 1994 differed by an estimated $4.4
billion between its financial and budgetary reports.  As a result, it
was unclear if DBOF operated at a gain or a loss, or whether it
"broke even."

Beginning in fiscal year 1996, the Navy's general fund operations,
for the first time, will be subject to audit under the expansion of
the CFO Act requirements enacted by GMRA.  We reviewed the Navy's
fiscal year 1994 financial reports as a measure of the Navy's current
ability to prepare reliable financial statements.  In our
soon-to-be-issued report, we conclude that, to an even greater extent
than the other military services, the Navy is plagued by troublesome
financial management deficiencies involving billions of dollars. 

We found that the Navy's financial reports were of little value in
assessing its operations or the execution of its stewardship
responsibilities.  We identified substantial misstatements in almost
all of the Navy's major accounts and $225 billion in errors in the
Navy's fiscal year 1994 financial reports.  For example, our findings
included the following. 

  As of August 31, 1995, the Navy's problem disbursements had grown
     to $18.6 billion and accounted for 67 percent of DOD's total
     problem disbursements. 

  DOD has reported to the Congress and the President that from
     October 1992 through July 1995, the Navy had 15 violations of
     the Antideficiency Act totaling about $87 million. 

  Navy and DOD managers did not have sufficiently reliable
     information to know whether, in fiscal year 1994, Navy's DBOF
     activities operated at a gain or a loss, or whether they broke
     even as intended.  Of the $80 billion in revenue for fiscal year
     1994, the Navy's DBOF activities accounted for $23 billion. 
     Further, since the inception of DBOF in fiscal year 1992, the
     DOD Inspector General has not been able to render a favorable
     audit opinion on DBOF's financial statements.\10

  Navy managers did not consider all excess inventory in their
     budgetary and procurement decision-making.  For example, not all
     of Navy's excess inventories of about $400 million accumulated
     from the overhaul and decommissioning of ships and submarines
     were considered in developing its fiscal year 1996 budget
     request.  As a result, we reported that the Navy's fiscal year
     1996 budget request could be reduced by $38 million.\11

We found the Navy's financial reporting problems could be attributed
in part to the long-standing failure to instill discipline in its
financial operations and follow basic procedures.  For example,
rudimentary controls, such as ensuring the conduct of periodic
physical inventories, reconciling related accounts and records,
documenting adjustments, and reviewing abnormal account balances,
were not routinely carried out. 

We also found flaws in Navy and DOD controls relied on to secure
their vast automated data processing operations.  For example, we
identified weaknesses in restricting access to sensitive data and in
ensuring continuity of computer operations in the event of a
catastrophe or other emergency.  Such deficiencies increase DOD's
exposure to security breaches that could result in the loss of assets
or leaks of sensitive information, such as payroll data. 

The Navy, along with DOD, has not taken full advantage of the 5 years
since the CFO Act's passage, or the lessons learned from the
experiences of the other services in preparing financial statements. 
They must now "play catch up" and earnestly counteract these serious
problems through measures that will lead to successfully preparing
reliable financial statements on the Navy's operations within the
next year.  Our planned reporting on our Navy work will detail
recommendations to the Secretaries of Defense and the Navy to help
correct the problems we identified. 


--------------------
\3 Financial Audit:  Air Force Does Not Effectively Account for
Billions of Dollars of Resources (GAO/AFMD-90-23, February 23, 1990);
Financial Management:  Strong Leadership Needed to Improve Army's
Financial Accountability (GAO/AIMD-94-12, December 22, 1993); and
Major Deficiencies Preventing Auditors From Rendering Audit Opinions
on DOD's General Fund Financial Statements (DOD Inspector General
Report No.  95-301, August 29, 1995). 

\4 DOD Procurement:  Millions in Contract Payment Errors Not Detected
and Resolved Promptly (GAO/NSIAD-96-8, October 6, 1995). 

\5 Audit of the Army's Principal Statements, Fiscal Years 1994 and
1993, Audit Opinion (HQ 95-451, March 23, 1995). 

\6 Review of Contingent Liabilities, FY 1994 Air Force Financial
Statements (94053037, May 1, 1995). 

\7 Financial Management:  Army Real Property Accounting and Reporting
Weaknesses Impede Management Decision-making (GAO/AIMD-94-9, November
2, 1993). 

\8 Audit of the Army's Principal Financial Statements, Fiscal Years
1994 and 1993, Audit Opinion (HQ 95-451, March 23, 1995). 

\9 Financial Management:  Reliability of Weapon System Cost Reports
Is Highly Questionable (GAO/AIMD-94-10, October 28, 1993). 

\10 Major Accounting Deficiencies in the Defense Business Operations
Fund in FY 1994 (Report No.  95-294, August 18, 1995). 

\11 1996 DOD Budget:  Potential Reduction to Operations and
Maintenance Program (GAO/NSIAD-95-200BR, September 26, 1995). 


   DOD'S PROGRESS IN MEETING THE
   CFO ACT OBJECTIVES
---------------------------------------------------------- Chapter 0:2

In laying out his "Blueprint" for reforming the Department's
financial management operations in February 1995, Secretary Perry
took a first step towards resolving the Department's long-standing
problems.  The following five areas were key elements of that
blueprint:  (1) consolidate finance and accounting operations, (2)
consolidate finance and accounting systems, (3) establish
pre-validation for disbursements, (4) reengineer DOD business
practices, and (5) strengthen internal controls.  DOD has cited the
Defense Finance and Accounting Service's (DFAS) "Business Plan" as
the mechanism on which it will rely to implement the blueprint. 

A summary of DOD's improvement initiatives in the blueprint's five
key areas follows. 

  Consolidate Finance and Accounting Operations.  In May 1994, DOD
     announced plans to consolidate over 300 defense accounting
     offices in 5 large existing finance centers\12 and 20 new sites
     called operating locations during the next 5 to 7 years.  The
     plan, which is expected to reduce DOD finance and accounting
     personnel from 46,000 to 23,000, is aimed at streamlining DOD's
     financial operations and setting the stage for future process
     enhancements. 

We see DOD's plans to consolidate and reduce personnel as a necessary
step toward a more effective and efficient finance and accounting
service.  However, as discussed in our September 1995 report, we have
concerns with DOD's planned consolidation efforts.\13 For example,
DOD decided to open 20 new operating locations without first
determining what finance and accounting functions they would perform
or if 20 was the right number to support its operations.  In response
to the report, DOD has committed to reevaluate the number of
locations and personnel required to perform finance and accounting
functions by November 30, 1995.  Further, starting December 15, 1995,
and annually thereafter, DOD has agreed to reassess its
site-selection decisions and report its findings to the Secretary of
Defense. 

  Consolidate Finance and Accounting Systems.  DOD has acknowledged
     that its financial management systems are antiquated and cannot
     be relied upon to provide DOD management and the Congress with
     accurate and reliable financial information for use in
     decision-making.  To date, a number of standard systems have
     been selected, including those used for civilian pay, military
     retiree and annuitant pay, military pay, transportation
     payments, debt management, and contractor payments.  The
     implementation of these standard systems is expected to reduce
     DOD's cost of operating redundant systems.  To illustrate, 3
     years ago, DOD had 18 separate military payroll systems; today,
     there are 11.  By 1996, DOD hopes to reduce the number of
     systems to two or three.  While DOD has made progress in
     reducing the number of payment systems, as discussed later, we
     have concerns with the overall strategy and timing of DOD's
     other systems improvement efforts. 

  DOD Disbursements.  DOD recognizes that it has a serious problem of
     not being able to properly match disbursements with obligations. 
     In attempting to correct this problem, DOD is taking steps to
     implement the legislative mandate limiting the funds that may be
     disbursed before the proposed payments are prematched to the
     obligation data in the official accounting systems.  This
     initiative should help ensure that the (1) disbursements are
     properly matched to the corresponding obligations and (2)
     obligations and disbursements data are recorded accurately in
     the accounting records.  As discussed later, DOD has not yet
     been able to fully implement this initiative. 

  Reengineer Business Practices.  DOD has recognized that its
     financial management structure consists of many organizations
     with each having their own processes.  These often duplicative
     processes have produced business practices that were complex,
     slow, and error-prone.  For example, we have reported that DOD's
     administrative travel processes were extremely complicated.\14
     DOD has recognized that it could save hundreds of millions of
     dollars yearly by reengineering its travel processes and has
     such efforts under way. 

As discussed in our May 1995 testimony, the potential for savings in
other areas may be even greater.  While DOD's mission is unique, many
of its support functions, such as payroll/personnel, are similar to
those carried out in the private sector and could be modeled on
industry best practices.  DOD is now planning to evaluate the
potential for reengineering a number of these areas. 

  Strengthen Internal Controls.  Strong internal controls are
     critical to effectively controlling and accounting for the
     estimated $1 trillion in DOD assets worldwide.  Secretary Perry
     has directed that senior managers play a more active role in
     identifying, reporting, and correcting poor controls.  We
     endorse the thrust of DOD's efforts in this area.  In the past,
     we were critical of DOD's failure to acknowledge its fundamental
     internal control deficiencies in its Federal Managers' Financial
     Integrity Act reporting.  However, more recently, we have been
     encouraged by DOD's more complete and realistic reporting on its
     internal control weaknesses. 

We support DOD's reform initiatives and recognize the difficult
challenge it faces in realizing financial management improvements. 
However, as we testified in May 1995, DOD could take added steps to
help increase the likelihood of turning Secretary Perry's blueprint
into substantive improvements.  We suggested that DOD (1) assess the
number and skill level of its financial management workforce and (2)
establish an outside board of experts to provide counsel, oversight,
and perspective to reform efforts.  As discussed in the following
sections, we also are planning to closely examine DOD's overall
strategy and timing of planned systems improvement efforts and its
efforts to address deep-rooted organizational impediments to
meaningful change. 


--------------------
\12 DOD's five large centers are located in Columbus, Ohio;
Cleveland, Ohio; Denver, Colorado; Indianapolis, Indiana; and Kansas
City, Missouri. 

\13 DOD Infrastructure:  DOD's Planned Finance and Accounting
Structure Is Not Well Justified (GAO/NSIAD-95-127, September 18,
1995). 

\14 Travel Process Reengineering:  DOD Faces Challenges in Using
Industry Practices to Reduce Costs (GAO/AIMD/NSIAD-95-90, March 2,
1995). 


      DOD'S FINANCIAL MANAGEMENT
      SYSTEMS ARE NOT YET CAPABLE
      OF PROVIDING ACCURATE DATA
-------------------------------------------------------- Chapter 0:2.1

Accounting and financial systems are the backbone of any agency's
financial management processes and operations.  The CFO Act requires
that agencies develop integrated systems--meaning budget and
accounting systems--that provide reliable, timely, and consistent
information necessary to conduct agency operations and produce
reliable information on the cost and performance of those operations. 
DOD's financial systems are neither integrated nor do they provide
reliable information. 

DOD operates over 250 financial management systems that are largely
incompatible.  Only 8 percent of those systems are integrated, and
only 9 percent have been designated as DOD-wide systems.  Further,
only three systems comply with the Comptroller General's accounting
principles and standards.\15

This situation causes real problems within the agency, as shown in
the following examples. 

  The problem of properly matching billions of dollars in
     disbursements is exacerbated by poor system performance.  DOD
     has not yet fully implemented an automated process for
     validating invoices prior to disbursement.  In order to comply
     with a legislative mandate to validate all disbursements over $5
     million, the Department had to process most of the transactions
     manually.  Nonstandard systems have also prevented DOD from
     implementing a new pre-validation threshold of $1 million at its
     largest contract-paying facility. 

  Poor cost accounting systems limit the effectiveness of DBOF, which
     was established, in part, to help the Department run on a more
     businesslike basis.  Accurate cost data are needed to properly
     analyze trends, make comparisons, and evaluate the performance
     of DBOF business activities.  Many DOD business activities are
     inefficient, and accurate financial information is needed to
     help pinpoint where cost reductions are needed.  However, DOD is
     experiencing difficulty obtaining such data because the cost
     accounting systems are fragmented, costly to maintain, and do
     not provide the cost information necessary for managers to
     better control costs.  The DOD Inspector General has cited
     system deficiencies as one of the major obstacles to the
     preparation of statements that fairly present DBOF's financial
     position.\16

Further, our analyses of DBOF's budgeting and financial reports have
shown that they differ by billions of dollars for net operating
results.  DBOF's fiscal year 1993 budgeting and financial reports
differed by $5.9 billion, whereas the fiscal year 1994 reports
differed by $4.4 billion.\17 Credible cost data on operating results
are essential because they are needed in setting the prices DBOF will
charge its customers which, in turn, provide the basis for
establishing customers' budget requests. 

A key element of Secretary Perry's reform blueprint was the
consolidation of financial management systems.  Such action is
expected to help eliminate duplication, enhance system performance,
and save money.  The Department is implementing this strategy by
developing a standard financial accounting system for each service
and by consolidating the current 80 DBOF systems into 17 standard
systems. 

However, we are concerned about the pace of needed systems
improvements.  The projected time frames for completion of these
system development efforts are several years away.  According to a
recent DOD IG report,\18 DFAS management has said long-term
corrective actions, including the development of new accounting
systems, will not be completed until September 1998.  According to
the DOD IG, until that date, general fund financial statements will
remain unauditable.  The report goes on to state that the DOD IG will
not be able to render audit opinions on any of the military services'
general fund operations until March 2000 at the earliest. 

Historically, DOD has encountered difficulty in putting effective
financial management systems into place.  For example, in response to
the first GAO audit of the Air Force in 1990,\19 DOD stated that its
Corporate Information Management (CIM) initiative would be partly or
wholly responsive to 17 of the 26 recommendations that were made. 
Unfortunately, we have reported that the overall objectives of CIM,
which in part, was aimed at improving the standardization, quality,
and consistency of data from DOD's multiple automated information
systems, have not been achieved.\20

Because the needed systems improvements are still not in place, the
accuracy and reliability of the data provided by the systems today
remain questionable. 

As part of our ongoing efforts to evaluate DOD's financial
operations, we will be more closely examining DOD's current systems
strategy.  For instance, is the DOD strategy of reducing the number
of accounting systems within each service--the interim migration
approach--appropriate?  Will DOD's planned investment of $200 million
to enhance existing systems produce auditable financial statements
that comply with applicable accounting standards and reporting
requirements?  Will the interim systems as designed be truly
integrated? 

We will also be evaluating DOD's underlying capability to
successfully develop software and manage its contractors.  Standard
software engineering processes are critical to developing and
enhancing systems in a timely and cost-effective manner.  However,
based on a DFAS self-assessment, we believe that it currently lacks
the software engineering capability to provide assurance that systems
enhancements can be effectively carried out, although it has begun
improvement efforts. 

We recently started an assessment of the software process improvement
efforts of the Financial Systems Organization--the information
technology arm of DFAS--and plan to develop detailed recommendations
to assist in these efforts.  We also plan to evaluate the software
engineering capability of other DOD organizations providing software
support to DFAS.  For our evaluations, we are using the Capability
Maturity Model developed by the Software Engineering Institute
(located at Carnegie Mellon University).  The model is used by DOD
and the private sector to assess an organization's software
engineering capability. 

In addition, DOD needs to pursue short-term actions to improve the
quality and reliability of the data in its current systems, such as
(1) following and enforcing current accounting policies and
procedures, (2) reviewing and analyzing its monthly reports to
identify inaccuracies, and (3) taking action to correct the problems
identified.  These actions are not new or revolutionary, but rather
fundamental internal control procedures.  The Director of DFAS has
recognized the need to reinforce these key procedures and issued a
September 1, 1995, directive that called for all DFAS locations to
place increased emphasis on adhering to established internal
controls. 


--------------------
\15 Federal Financial Management Status Report & Five-Year Plan
(Office of Management and Budget, July 1995). 

\16 Major Accounting Deficiencies in the Defense Business Operations
Fund in FY 1994 (Report No.  95-294, August 18, 1995). 

\17 Defense Business Operations Fund:  Improved Pricing Practices and
Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,
June 22, 1994). 

\18 Major Deficiencies Preventing Auditors From Rendering Audit
Opinions on DOD General Fund Financial Statements (Report No. 
95-301, August 29, 1995). 

\19 Financial Audit:  Air Force Does Not Effectively Account for
Billions of Dollars of Resources (GAO/AFMD-90-23, February 23, 1990). 

\20 Defense Management Initiatives:  Limited Progress in Implementing
Management Improvement Initiatives (GAO/T-AIMD-94-105, April 14,
1995). 


      ESTABLISH SKILLED FINANCIAL
      MANAGEMENT WORKFORCE
-------------------------------------------------------- Chapter 0:2.2

Another key responsibility that the CFO Act assigned to agency CFOs
is directing and upgrading the agency's financial management
personnel, including enhancing their professional training. 
Well-qualified personnel with the knowledge and skills required to
carry out existing systems operation and accounting procedures will
be essential if DOD is to make marked strides toward improving its
financial operations. 

While we have not yet done any comprehensive assessment of the
Department's financial personnel, recurring audit findings have
highlighted problems relating to DOD personnel adhering to basic
control requirements.  For example, these audits have consistently
found that DOD personnel did not carry out required supervisory
reviews or reconciliations, nor did they properly document
adjustments to financial records.  In addition, both our financial
audits and those of the DOD Inspector General have raised questions
about the adequacy of DOD's financial management personnel, as shown
in the following examples. 

  Our 1993 review of the Army's financial operations disclosed that
     of its 84 top managers responsible for overseeing the work of
     over 1,500 personnel at its central accounting location, only 7
     had any professional certifications.\21

  Our recent review of the Navy's financial operations disclosed that
     31 percent of the positions at its central accounting facility
     were vacant.  In addition, 30 percent of its mid- and
     senior-level positions were filled with personnel in a job
     series that requires no accounting education. 

  The DOD IG's report on its summary of the major deficiencies that
     prevented the development of reliable DBOF financial statements
     identified personnel as a major problem.\22 For example, it
     highlighted inadequate training and shortages of support
     personnel as factors impeding effective DBOF transaction
     processing. 

In May 1995, we testified\23 that ensuring that DOD has the
appropriate number of staff with the requisite skills is a key to
turning Secretary Perry's blueprint into substantive improvements. 
Unfortunately, DOD has not made enough progress in addressing these
fundamental personnel issues.  DOD needs to comprehensively assess
the personnel levels, skills, and experience necessary to effectively
carry out DOD's financial operations. 

However, we are encouraged by the DOD CFO's recognition of the
importance of professional development for the Department's financial
management workforce.  In August 1995, the DOD CFO established a
Financial Management Community Executive Committee.  The committee is
chaired by the DOD CFO, and its members include the Director of DFAS
and representatives from the military services' assistant secretaries
for financial management.  One of the committee's planned initiatives
is to address the specific competency requirements for the
Department's financial personnel.  If successfully carried out, such
initiatives may help strengthen the professional skills of DOD's
financial management workforce. 

Because of its importance to the overall success of DOD's reform
efforts, we plan to take a closer look at DOD's financial management
workforce needs.  Specifically, we will be looking at whether
additional actions may be needed in (1) ensuring that DOD has the
appropriate number of staff with the requisite skills required to
successfully reform DOD's financial operations, (2) determining the
appropriate training and experience requirements, and (3) developing
and implementing plans to address future financial management needs. 


--------------------
\21 Financial Management:  Strong Leadership Needed to Improve Army's
Financial Accountability (GAO/AIMD-94-12, December 22, 1993). 

\22 Major Accounting Deficiencies in the Defense Business Operations
Fund in FY 1994 (Report No.  95-294, August 18, 1995). 

\23 Financial Management:  Challenges Confronting DOD's Reform
Initiatives (GAO/T-AIMD-95-146, May 23, 1995). 


      BUILD AN EFFECTIVE FINANCIAL
      MANAGEMENT ORGANIZATION
      STRUCTURE WITH CLEAR
      ACCOUNTABILITY
-------------------------------------------------------- Chapter 0:2.3

One of the key objectives of the CFO Act is to establish a CFO in
each agency with the authority to oversee all financial management
activities.  While DOD has established a Chief Financial Officer, we
are concerned that DOD's CFO faces major long-standing organizational
barriers that will be extremely difficult to overcome in making
needed improvements.  In presenting his blueprint for reforming DOD's
financial management, Secretary Perry accurately stated that "DOD's
manifold financial management failures reflect an antiquated
bureaucratic organizational structure coping unsuccessfully with the
complexities of modern government and business."

For example, since the creation of DFAS in 1991, DOD has had
continuing problems in clarifying the relationship between DFAS and
its customers--principally the military services.  DFAS was created
to serve as DOD's "Accounting Service," with its Director reporting
to DOD's CFO.  However, DOD faces significant organizational
challenges, and accountability concerns remain.  In our December 1993
report on the Army's financial operations, we pointed out that the
effectiveness of the Army's financial management was impaired as a
result of the lack of clearly delineated roles and responsibilities
between DFAS and the military services.  Most recently, in our review
of the Navy, we found that DOD still had not yet clearly defined or
strictly enforced accountability between the Navy and DFAS for the
Navy's financial management and reporting operations, or for meeting
the CFO Act's requirements. 

The DOD CFO has issued a draft of a section of its financial
management regulations setting out detailed proposed roles and
responsibilities among the various DOD organizations involved in
financial management.  If effectively implemented, including
establishing individual accountability, the draft policy may help
address many of the failures to follow basic control procedures that
we found.  We have recently recommended that this draft document,
issued for comment in February 1995, be finalized as soon as
possible, and that a follow-up effort be established to ensure its
effective implementation. 

In addition, the responsibility for many of the actions that will be
needed to bring about any major improvements in DOD's financial
management resides with DOD's functional area managers, such as DOD's
procurement, personnel, and logistics functions.  The systems and
procedures that are directed by these DOD functional managers
currently are relied on to provide substantial portions of the data
that is compiled in DOD's accounting systems and financial reports. 
However, these functional managers operate outside the DOD CFO's
sphere of influence.  Consequently, garnering the support and active
involvement of these organizations will be another major challenge
that the DOD CFO must address.  Because overcoming these
organizational impediments are a key to any fundamental improvements
in DOD's financial management, we are also planning additional work
to examine whether additional actions will be needed to help the DOD
CFO achieve the goals of more effective and efficient integration. 


-------------------------------------------------------- Chapter 0:2.4

Reforming DOD's financial management operations is one of the
formidable challenges facing the government today.  Secretary Perry's
blueprint lays out an overall plan to help meet this challenge.  DOD
must now translate the plan into concrete actions that will move the
Department forward and result in measurable progress.  It is
essential that DOD have a world-class financial operation in order to
make sound resource allocation decisions and safeguard the American
public's huge investment in defense. 

As outlined in our May 1995 testimony, we continue to believe that
DOD should consider establishing an independent, outside board of
experts to provide counsel, oversight, and perspective to DOD's
reform efforts.  Such experts could provide valuable advice and
expertise in all three of the challenging areas we have outlined
today:  systems development, personnel needs assessment, and
organizational structure.  We plan to continue working closely with
the Department in its efforts to meet the goals of the CFO Act. 

Mr.  Chairman, this concludes my testimony.  I will be happy to
answer questions that you or Members of the Subcommittee may have. 


*** End of document. ***