Department of Defense: Implications of Financial Management Issues
(Testimony, 07/20/2000, GAO/T-AIMD/NSIAD-00-264).

Pursuant to a congressional request, GAO discussed financial management
issues at the Department of Defense (DOD).

GAO noted that: (1) to date no major part of DOD has yet been able to
pass the test of an independent audit--auditors consistently have issued
disclaimers of opinion because of pervasive weaknesses in DOD's
financial management systems, operations, and controls; (2) such
problems led GAO in 1995 to put DOD financial management on a list of
high-risk areas vulnerable to waste, fraud, abuse, and mismanagement, a
designation that continued in last year's update; (3) lacking such key
controls and information not only hampers the department's ability to
produce timely and accurate financial information, but also
significantly impairs efforts to improve the economy and efficiency of
its operations; (4) unreliable cost and budget information affects DOD's
ability to effectively measure performance, reduce costs, and maintain
adequate funds control, while ineffective asset accountability and
control adversely affect DOD's visibility over weapons systems and
inventory; (5) establishing an integrated financial management
system--including both automated and manual processes--will be key to
reforming DOD;s financial management operations; (6) DOD has
acknowledged that its present system has long-standing inadequacies and
does not, for the most part, comply with the federal system standards;
(7) DOD has set out an integrated financial management system goal; and
(8) further, the department is now well-positioned to adapt the lessons
learned from addressing the year 2000 issue and GAO's recently issued
survey of the best practices of world class financial management
organizations and to use the information technology investment criteria
included in the Clinger-Cohen Act of 1996.

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

 REPORTNUM:  T-AIMD/NSIAD-00-264
     TITLE:  Department of Defense: Implications of Financial
	     Management Issues
      DATE:  07/20/2000
   SUBJECT:  Financial management systems
	     Financial statement audits
	     Accountability
	     Internal controls
	     Federal agency accounting systems
	     Data integrity
	     Accounting procedures
	     Defense budgets
IDENTIFIER:  Defense Integrated Financial System
	     DOD Financial Management Improvement Plan

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GAO/T-AIMD/NSIAD-00-264

   * For Release on Delivery
     Expected at
     10 a.m.

Thursday,

July 20, 2000

GAO/T-AIMD/NSIAD-00-264

department of defense

Implications of Financial Management Issues

        Statement of Jeffrey C. Steinhoff

Assistant Comptroller General

Accounting and Information Management Division

Testimony

Before the Task Force on Defense and International Relations, Committee on
the Budget, House of Representatives

United States General Accounting Office

GAO

Mr. Chairman and Members of the Task Force:

I appreciate the opportunity to discuss financial management issues at the
Department of Defense (DOD) and their implications for the budget process.
We recently testified before the House Subcommittee on Government
Management, Information and Technology on the status of DOD's efforts to
address its long-standing pervasive weaknesses in financial management
systems, operations, and controls. Material financial management
deficiencies identified at DOD, taken together, continue to represent the
single largest obstacle that must be effectively addressed to achieve an
unqualified opinion on the U.S. government's consolidated financial
statements. DOD's vast operations-with an estimated $1 trillion in assets,
nearly $1 trillion in reported liabilities and a reported net cost of
operations of $378 billion in fiscal year 1999-have a tremendous impact on
the government's consolidated reporting.

To date, no major part of DOD has yet been able to pass the test of an
independent audit; auditors consistently have issued disclaimers of opinion
because of pervasive weaknesses in DOD's financial management systems,
operations, and controls. Such problems led us in 1995 to put DOD financial
management on our list of high-risk areas vulnerable to waste, fraud, abuse,
and mismanagement, a designation that continued in last year's update.
Lacking such key controls and information not only hampers the department's
ability to produce timely and accurate financial information, but also
significantly impairs efforts to improve the economy and efficiency of its
operations. Unreliable cost and budget information affects DOD's ability to
effectively measure performance, reduce costs, and maintain adequate funds
control, while ineffective asset accountability and control adversely affect
DOD's visibility over weapons systems and inventory.

DOD has made genuine progress in many areas throughout the department, both
larger steps forward and smaller incremental improvements. We have seen a
strong commitment by the DOD Comptroller and his counterparts in the
military services to address the department's serious financial management
problems. At the same time, DOD has a long way to go. Major problems
remain-problems that are pervasive, long-standing, deeply rooted, and
complex in nature. Our previous testimony outlined DOD's most difficult
financial management challenges and described the many initiatives that are
under way or planned to address them.

Today, I will highlight certain of those ongoing challenges, with a focus on
those that affect the reliability of budget execution data as well as other
areas where accurate and complete financial management information could
provide a useful perspective to decisionmakers related to budget requests,
performance measures, costs, and other key decision points.

Finally, I will discuss DOD's plans and actions to develop an integrated
financial management system that complies with federal system standards. To
achieve what the Comptroller General has referred to as the "end
game"-systems and processes that routinely generate good financial
information for day-to-day management purposes-will require a major systems
and reengineering effort. Integrated financial management systems, along
with marshaling the human capital needed to achieve results, have long been
cited as major components to the final resolution of DOD's financial
management problems. The successful Year 2000 effort demonstrated that DOD
can resolve complex, entitywide problems through top management leadership
working across functional lines. Applying the Year 2000 lessons learned to
the department's financial management system integration effort will require
similar leadership and commitment to a disciplined systems development
approach.

Reliability of Budget Execution Data Impaired

As a result of these weaknesses, auditors have been unable to verify DOD's
Fund Balance With Treasury and its major components-obligated and
unobligated balances. This means that DOD does not know with certainty the
amount of funding that is available. This information is essential for DOD
and the Congress to be able to determine the status of funds and if
unobligated balances are available that could be used to reduce current
funding requirements or that could be reprogrammed to meet other critical
program needs.

Significant Differences Between DOD's and Treasury's Records

DOD made the reduction of differences a high priority in its short-term
improvement plans last year. There was a drop in the amount of the
unresolved differences from $9.6 billion at September 30, 1998, to
$7.3 billion at September 30, 1999. Although some of the differences may be
due to the timing of transaction processing at Treasury versus DOD, an aging
of the difference suggests that significant reconciliation issues remain.
For example, of the $7.3 billion difference, $2.5 billion is 60 days or
older. Differences over 60 days old are generally not attributable to
timing.

At least some of the decrease in the total differences as of September 30,
1999, can be attributed to the practice of some Defense Finance and
Accounting Service (DFAS) center staff to routinely adjust their records
each month to match those at Treasury without first identifying whether the
adjustment is proper. This practice results in fewer differences on the
reports but does not necessarily mean that the reconciliation process has
actually improved or that the causes of the differences, such as Treasury or
DOD errors in recording transactions, have been addressed and resolved. For
example, one Army disbursing station recorded $608 million in differences to
a suspense account. At year-end, DOD charged the differences to Army's
Operations and Maintenance appropriation, without documentation to support
that these transactions should be recorded to this account. This resulted in
financial reports to the Congress and OMB that show a reduction in the
obligated balance in that account available for disbursement. However, DOD
has little assurance that the charge should not have been properly assessed
against, for example, some other Army appropriation or even to another
entity's appropriation. Further, at the beginning of the next fiscal year,
DOD reversed the Operations and Maintenance charges and returned the amounts
to suspense accounts.

Finally, DOD records show that an estimated $1.6 billion of transactions
held in suspense accounts at the end of fiscal year 1999 have not been
properly reported to Treasury and may also affect the fund balance with
Treasury amount. Until suspense account transactions are posted to the
proper appropriation account, the department will have little assurance that
appropriation balances are accurate, and that it has a right to any
collections, that adjustments are valid, and that the disbursements do not
exceed appropriated amounts. Moreover, the reported amounts in suspense
accounts represent the offsetting (netting) of collections and adjustments
against disbursements, thus understating the magnitude of the unrecorded
amounts in suspense accounts. To illustrate the magnitude of this issue, we
previously testified that audit work for fiscal year 1997 found that while
the Navy had a net balance of $464 million in suspense accounts recorded in
its records, the individual transactions-collections as well as
disbursements-totaled about $5.9 billion.

Frequent Adjustments Affect Reliability

In the National Defense Authorization Act for Fiscal Year 1991, the Congress
changed the government's account closing procedures. The intent of the
changes was to impose the discipline of the Antideficiency Act and the bona
fide needs rule to expired appropriations and to ensure that expired
appropriations do not remain open on the government's books indefinitely.

Subsequent to the amendment of the account closing law, DOD requested that
Treasury reopen hundreds of closed accounts to permit the posting of
adjustments. Treasury asked us whether it had authority to correct reporting
or accounting errors in closed accounts. In 1993, we determined that
Treasury had authority to correct these errors. The decision concluded that
Treasury may adjust the records of canceled appropriations to record
disbursements that were in fact made before the cancellation. However,
Treasury can make these adjustments only if DOD can establish that a
disbursement was a liquidation of a valid obligation, recorded or
unrecorded, that was properly chargeable against the account before it
closed.

Adjusting disbursements previously recorded to current accounts by moving
those transactions to canceled accounts can increase balances available for
obligation in the current accounts. Since the 1991 account closing law was
enacted, DOD has requested that Treasury reopen 333 closed accounts,
totaling $26 billion. These accounts remained open as of September 30, 1999.
By comparison, all other federal agencies combined have requested that
Treasury reopen 21 closed accounts, totaling
$5 million. According to Treasury's records, DOD made $576 million in net
adjustments to canceled accounts in fiscal year 1999. DOD has indicated that
it has controls in place to ensure that adjustments to canceled accounts are
proper. Chairman Kasich and Chairman Horn recently asked us to review DOD's
practice of making adjustments to canceled accounts, and our work has just
begun.

Disbursements Not Properly Recorded

Of the $10.5 billion, DOD reported that about $1.5 billion were problem
unmatched disbursements and negative unliquidated obligations (NULOs) over
180 days old. DOD's problem disbursement policy requires that obligations be
recorded for amounts paid that are unmatched to a recorded obligation or
exceed recorded obligated balances after 180 days. However, the policy makes
an exception if sufficient funds are not available for obligation. In that
case, DOD's policy permits the department to delay recording an obligation
or adjustment until the funds cancel-up to 5 years after expiration of the
account. DOD believes that by delaying the recording of the obligation,
funds will become available-for example, through de-obligation-thus
permitting the obligation to be recorded without raising an Antideficiency
Act concern and ensuing investigation. If DOD had recorded this $1.5 billion
after the transactions remained unmatched for 180 days, the related account
balances would have reflected potential Antideficiency Act violations and
required an investigation and report to the Congress if the appropriation is
ultimately determined to be overobligated or overspent.

An agency may not avoid the requirements of the Antideficiency Act,
including its reporting requirements, by failing to record obligations or to
investigate potential violations. To ensure sound funds control and
compliance with the Antideficiency Act, an agency's fund control system must
record transactions as they occur. We and the DOD IG have previously
reported on this issue and recommended that DOD revise its problem
disbursement policies and procedures to ensure that accurate and reliable
balances are maintained.

Finally, the process and control problems that result in the problem
disbursement issues previously discussed also contribute to improper
payments by the department. For example, our work continues to identify
problems with overpayments and erroneous payments to contractors. For fiscal
years 1994 through 1999, according to DFAS records, defense contractors
returned over $5.3 billion to the DFAS Columbus Center, including about $670
million during fiscal year 1999, due to contract administration actions and
payment processing errors. However, these amounts do not reflect the true
magnitude of this problem because many overpayments are returned through
billing offsets. We are currently working to estimate the scope of the
overpayment problem, including these offsets.

Obligated Balances Were Incorrect and Unsupported

   * The Army Audit Agency found that internal controls over the recording
     of obligations were not adequate to ensure that reported obligated
     balances were accurate. In a sample of 60 1999 transactions, the
     auditors found that 21 could not be supported.
   * For fiscal year 1999, audit results show that the Air Force Working
     Capital Fund had $211 million of obligations out of approximately
     $1 billion tested, that is 700 out of 2,526 transactions that were
     incorrect, inadequately supported, or not supported. In addition, Air
     Force's general fund audit continued to identify inaccurate or
     unsupported obligated balances as of September 30, 1999. Specifically,
     Air Force auditors identified an estimated $1.3 billion in inaccurate
     or unsupported obligated balances, a significant improvement over the
     prior year when an estimated $4 billion in obligated balances were
     inaccurate or unsupported.

In addition to auditors' reports, the Department of the Navy identified its
unliquidated and invalid obligations as a material management control
weakness in its fiscal year 1999 annual assurance statement issued pursuant
to the Federal Managers' Financial Integrity Act. For example, the Navy
reported that within the Operation and Maintenance-Navy appropriation, some
activities were not verifying that only valid obligations were entered into
the accounting system. As a result, funding may have been available but not
used. In addition, the Navy had more than $1 billion in expired budget
authority that was allowed to cancel at the end of fiscal year 1999,
including more than $750 million that had been obligated but not disbursed.
According to Treasury data, at the end of fiscal year 1999, the department
had $3.8 billion in expired budget authority that canceled.

Accurate and reliable information would permit the Congress to review DOD
year-end unobligated and unexpended balances and identify opportunities for
possible funding reductions. For example, as a result of our analysis of
unobligated balances in the military personnel appropriation, the House
Appropriations Committee recommended a reduction of $96 million in the
fiscal year 2001 request for this account. Since the military services'
account data have shown a pattern of not spending all of their appropriated
funds, the Committee concluded that the fiscal year 2001 military personnel
budget request is overstated and can be reduced.

Improved Data on Environmental/
Disposal Liability Would Be an Important Oversight Tool

Under federal, state, and international law, DOD faces a major funding
requirement associated with environmental cleanup and disposal. These
environmental costs result from the production of weapons systems and prior
and current operations. Even when current operations are carried out in full
compliance with existing environmental regulations, future cleanup costs for
certain operations will still result due to the nature of these DOD
activities. DOD has taken important steps to implement the federal
accounting standards requiring recognition and reporting of these
liabilities and has made noteworthy progress. For example, DOD's reported
estimated liabilities increased from $34 billion in its fiscal year 1998
financial statements to $80 billion in fiscal year 1999. However, the full
magnitude and timing of these costs are not yet known because (1) all
potential liabilities were not considered in the reported estimates,
(2) estimates were not based on the consistent application of assumptions
and methodologies across the services, and (3) support for the basis of
reported estimates continues to be inadequate.

A reliable estimate of DOD's environmental liability would be an important
factor in determining the cost of its operations and specific programs and
for resource planning. To effectively, efficiently, and economically manage
DOD's programs, its managers and oversight officials need reliable cost
information for the following key decision points.

Evaluating programs-Long-term liabilities that affect program costs must be
accurately measured and considered in evaluating the status of programs. For
example, the liability for disposal activity is part of the overall
life-cycle cost of weapon systems and can contribute to the ongoing dialogue
on funding comparable weapons. The National Defense Authorization Act for
Fiscal Year 1995 required that the Secretary of Defense analyze the
environmental costs of major defense acquisitions as part of the life-cycle
costs of the programs. However, recent IG audits of several major weapons
systems programs, including the Black Hawk helicopter and F-15 aircraft,
have found that life-cycle cost estimates did not include costs for
demilitarization, disposal, and associated cleanup. In addition, the Senate
Committee on Appropriations has required that DOD develop disposal cost
estimates for munitions.

Making current economic choices-DOD's decisions on whether to outsource
specific functions require accurate and complete supporting cost data. Yet
DOD, as well as other government agencies, has historically been unable to
provide actual data on the costs associated with functions to be considered
for outsourcing. For example, environmental and disposal costs must be
considered in the department's plans to analyze its more than 2,000 utility
systems for privatization. If these costs prove significant to DOD, they
should be considered in any cost-benefit analyses developed by the
department in deciding to retain or privatize these functions.

Resource planning-Reliable information on the full extent of the
environmental liability that DOD faces under current law and the likely
timing of funding requests would enable DOD and the Congress to make
informed judgments about DOD's ability to carry out those requirements. As
the Comptroller General recently testified before the Senate Budget
Committee, although we are currently enjoying a period of budget surplus, it
does not signal the end of fiscal challenges. Long-term cost pressures from
programs such as Social Security and Medicare will consume an ever-larger
share of the economy and squeeze the resources available for other
commitments and contingencies, such as federal insurance programs and
cleanup costs from federal operations known to result in hazardous waste,
including defense facilities and weapons systems. Accurate and complete
information on the magnitude and timing of DOD's environmental liability
would permit DOD and the Congress to strategically plan for this long-term
liability and set realistic priorities among the competing challenges that
we will face in the future. Further, quantifying this enormous liability and
providing a breakdown of the costs by the approximate time periods the
disposal costs are expected to be incurred would add an important context
for congressional and other decisionmakers on the timing of resource needs,
including those that are more near-term. For example, we estimated that
approximately
$1.6 billion of the $5.6 billion estimate for the disposal of nuclear
powered submarines was for submarines that are already decommissioned and
awaiting disposal.

In summary, the most significant issues faced by the department in
determining and verifying its environmental/disposal liability include
incomplete estimates, inconsistent methodologies, and inadequate
documentation.

Incomplete estimates-To date, DOD has focused on what it expects will be its
most significant liabilities, those associated with nuclear weapons and
training ranges. It has not yet considered the magnitude of costs associated
with other weapon systems, conventional munitions, or its ongoing
operations, although these costs may also be billions of dollars. For
example, the department's costs to dispose of conventionally powered ships
would be at least $2.4 billion, based on applying the Navy's estimated
average cost of $500 per ton of displacement used to estimate disposal costs
for its inactive fleet. In addition, we previously estimated that the
conventional munitions disposal liability for Army alone could exceed
$1 billion.

Also, the costs of cleaning up and disposing of assets used in ongoing
operations may be significant. Significant environmental and disposal costs
are required to be recognized over the life of the related assets to capture
the full cost of operations. We are working with DOD to assess whether
operations, such as landfills and utilities (including wastewater treatment
and power generation facilities), will ultimately have significant
environmental costs associated with closure. For example, Edwards Air Force
Base officials provided us with a landfill closure cost estimate of
approximately $8 million. This estimate excluded post-closure maintenance
costs (such as monitoring) which are estimated to exceed $200,000 annually
over 30 years. To provide some perspective on the potential scope of these
operations, the Army alone reported 65 landfills that, based on the Air
Force estimated cost data, could cost nearly
$1 billion to close and monitor.

Cost estimates should also be refined for changes in cleanup/disposal
schedules. For example, DOD reported a liability of approximately
$8.9 billion in its fiscal year 1999 financial statements for chemical
weapons disposal. Initial estimates to comply with the United
Nations-sponsored Chemical Weapons Convention were based on a 2007
completion date. However, we recently reported that while 90 percent of the
stockpile could be destroyed by the 2007 deadline, schedule slippages
associated with the remaining 10 percent are likely to occur because of
additional time required to validate, certify, and obtain approval of
technologies to dispose of the remaining stockpile of chemical weapons.
These schedule slippages will likely result in additional program costs.
Historically, schedule delays have been found to increase costs such as
labor, emergency preparedness, and program management.

Inconsistent methodologies and inadequate documentation-Each military
service independently estimated its liabilities with, in some cases,
significantly different results, and the lack of documentation hampered
auditors' ability to verify the estimates. For example, although the Air
Force reported twice as many aircraft as the Navy, it has not yet reported
environmental and disposal liabilities for its aircraft. The Navy's
financial statements included an initial estimate of $331 million in fiscal
year 1999 for its disposal of fixed- and rotary-wing aircraft. In addition,
our limited analysis of DOD's first-time effort to develop complete cleanup
cost estimates for training ranges, which we view as an important step
forward, showed that the reported amount of $34 billion was comprised
primarily of cost estimates for active, inactive, and closed Navy/Marine
Corps ranges of approximately $31 billion. The Navy reported this to be a
minimum estimate based on assumptions of "low" contamination and
cleanup/remediation to "limited public access" levels, for uses such as
livestock grazing or wildlife preservation but not for human habitation.
Based on these assumptions, the Navy used a cost factor of $10,000 per acre.
Although the Army also has significant exposure for training range cleanup
liabilities, it reported only $2.4 billion for ranges on formerly used
defense sites and closed ranges on active installations. The Army assumed
one closed training range per base for the active installations. However,
because the Army has not developed a complete range inventory nor recorded
any liability for active or inactive ranges, this approach may have
significantly understated its liability. To illustrate the potential
magnitude of Army training range cleanup, applying the cost factor used by
the Navy to estimated range acreage of the Army's National Training Center
at

Ft. Irwin, California, would result in a cleanup cost estimate of
approximately $4 billion for that installation alone.

Further, DOD has had ongoing problems in adequately documenting its reported
liability-an important control in ensuring its reliability. Last year, the
DOD IG reported that the basis of estimates for significant recorded
liabilities-primarily those related to restoration (cleanup) of sites
contaminated from prior operations-was not adequately supported, and those
problems persist. Military service auditors continue to find that
significant portions of the reported restoration liabilities lack adequate
support for the basis of cost estimates. For example, the Army Audit Agency
found that the Army lacked support for its estimates and attributed it to
the fact that recent guidance on documentation requirements was not properly
disseminated to project managers and others preparing project cost
estimates.

Better Estimates of Retiree Health Care Benefits Could Assist DOD and the
Congress

DOD estimates that, based on its current benefit programs, the cost of
providing future health care benefits for military retirees and their
dependents will be $196 billion; however, we have previously testified that
this estimate is unreliable because DOD does not have accurate or complete
cost and patient care information. DOD developed its estimate using an
actuarial model that relies on historical information about the retiree
population and the numbers, types, and costs of medical services provided to
them. The model also uses economic, actuarial, and other assumptions, such
as future interest rates and projected rate increases for medical costs.
Improvements to the underlying data or assumptions can significantly change
the liability estimate. DOD has made meaningful progress in improving the
processes and underlying data on which its liability is based. For example,
when better and more complete data about DOD's population, medical care
costs, and outpatient clinic usage were used in the model in fiscal year
1999, the revised estimate was lower by $37.5 billion, or nearly 17 percent,
than the fiscal year 1998 estimate.

DOD has used its health care model to determine the long-term impacts of
some benefit changes; for example, DOD recently calculated the long-term
change in the liability of a proposal to provide eligibility for purchased
care to retirees over 65. With better underlying data and some refinements
to its methodology, DOD's model could be a valuable tool to both the
department and the Congress for estimating the short-term, as well as
long-term, budgetary impacts of complex changes to the retiree health
benefits program. DOD has been using a similar model to calculate its
long-term liability for military retiree pensions for many years, and both
DOD and the Congressional Budget Office rely on the model to analyze the
impact of changes to the retirement program.

As we testified in May 2000, DOD needs to improve the underlying data used
by the model. First, DOD needs actual cost data for its military treatment
facilities. DOD has been using budget obligation information as a surrogate;
however, obligations do not reflect the full cost of providing health care
because they do not, for example, include civilian employee retirement
benefits that are paid directly out of the Civil Service Retirement and
Disability Fund rather than by DOD. Nor do obligations include depreciation
costs for medical facilities and equipment. In addition, DOD needs to
improve the accessibility and reliability of its patient workload
information. The DOD IG has reported that medical services could not be
validated either because the medical records were not available or
outpatient visits were not adequately documented. The DOD IG also reported
that outpatient visits are often double counted and that many telephone
consultations have been incorrectly counted as visits. An accurate count of
patient visits by clinic and type is necessary for DOD to make the proper
allocations of medical personnel, supplies, and funding. DOD has been
working with the audit community on health care cost and workload data
deficiencies and currently has several improvement efforts underway. DOD has
been using examples of blatant data errors, such as negative costs for some
surgery clinics and obstetric services provided to male patients, to stress
to its own staff and to health care contractors the importance of its
improvement efforts.

We are currently working with a contractor to assess DOD's retiree health
benefits estimation methodology, and preliminary results indicate several
areas where the model could be refined. DOD is currently assessing the
feasibility and impact of making the following types of refinements.

   * Pharmacy costs for retirees are currently not segregated from those of
     non-retirees, even though preliminary evidence suggests that retirees
     use more outpatient pharmacy resources. Also, the future trend rate
     used by DOD for pharmacy costs is the same as that for general medical
     costs, even though we previously estimated that DOD pharmacy costs
     increased 13 percent from 1995 through 1997 while its overall health
     care costs increased only 2 percent for the same period.
   * In the past, DOD has assumed that numbers and types of clinic visits
     are adequate measures of outpatient health care usage for purposes of
     allocating health care costs to retiree and active duty populations;
     however, additional work may show that diagnosis related information is
     a better indicator of health resources usage because retirees may have
     more complicated diseases and therefore require longer and more
     resource intensive procedures.
   * DOD's model currently does not calculate separate liabilities for
     retirees under and over 65 years old. DOD applies the same cost and
     economic assumptions to the two groups even though Medicare eligible
     retirees are offered different benefits than retirees under age 65 and
     therefore, their behavior, needs, and costs could be quite different.

Control and Accountability for Assets Impaired

DOD relies on various information systems to carry out its important
stewardship responsibility over an estimated $1 trillion in physical assets,
ranging from multimillion dollar weapon systems to enormous inventories of
ammunition, stockpile materials, and other military items. These systems are
the primary source of information for (1) maintaining visibility over assets
to meet military objectives and readiness goals and
(2) financial reporting. However, these systems have material weaknesses
that, in addition to hampering financial reporting, impair DOD's ability to
maintain central visibility over its assets and prevent the purchase of
assets already on hand. Overall, these weaknesses can seriously diminish the
efficiency and economy of the military services' support operations. In
addition, DOD's systems are not designed to capture the full cost of its
assets, a major component in determining the total costs of its programs and
activities. If reliable, such costs could be important tools for oversight
and performance measurement.

Significant weaknesses in accountability and cost information for DOD's
three major categories of assets include the following.

Weapons systems- The reported cost of this equipment in fiscal year 1997-the
last year for which such information was reported on DOD's balance sheet-was
more than $600 billion. We have previously testified that many of the
military services' logistics information systems used to track and support
weapon systems and support equipment were unable to be relied on. DOD
continues to experience problems in accumulating and reporting accurate
information on its national defense equipment.

For example, because the military services cannot identify all of their
assets through a centralized system, each service had to supplement its
automated data with manual procedures to collect the information. Items
identified as a result of the fiscal year 1999 data call that were not
included in the Army's centralized systems included 56 airplanes, 32 tanks,
and 36 Javelin command-launch units. In addition, the military services have
historically been unable to maintain information on additions and deletions
for most of their national defense assets. While some progress has been made
toward improving this data, auditors found that much of it was still
unreliable for fiscal year 1999. Reliable information on additions and
deletions is an important internal control to ensure accountability over
assets. Without integrated accounting, acquisition, and logistics systems to
provide accounting controls over asset balances, this control is even more
important. For example, property managers should be able to review
information on additions to ensure that all assets acquired are reported in
logistics systems. If such a control is not in place, DOD cannot have
assurance that all items purchased are received and properly recorded.

Because of the recognized problems with national defense asset information,
the audit community in the past year focused on supporting and reviewing
improvement efforts, rather than conducting any significant tests of data
and systems. Under the National Defense Authorization Act for Fiscal Year
2000, the DOD Inspector General is required to review national defense asset
data submitted to the Congress for fiscal year 1999. Such a review should
help determine the success of DOD's improvement efforts so far, as well as
identify those areas requiring further improvement.

In addition, DOD has acknowledged that the lack of a cost accounting system
is the single largest impediment to controlling and managing weapon systems
costs, including costs of acquiring, managing, and disposing of weapons
systems. Accurate information on the life-cycle costs of weapon systems
would allow DOD officials and the Congress to make more fully informed
decisions about which weapons, or how many, to buy.

Properly accounting for the revenue associated with the sale of these assets
has also been a significant financial management challenge. Since October
1998, we have issued four reports identifying internal control weaknesses in
DOD's foreign military sales program that includes sales of national defense
assets and services to eligible foreign countries. Most recently, on May 3,
2000, we reported that the Air Force did not have adequate controls over its
foreign military sales to ensure that foreign customers were properly
charged. Specifically, our analysis of data contained in the Defense Finance
and Accounting Service's Defense Integrated Financial System as of July
1999, indicated that the Air Force might not have charged FMS customer trust
fund accounts for $540 million of delivered goods and services.

In performing a detailed review of $96.5 million of these transactions, we
found that the Air Force was able to reconcile about $20.9 million. However,
of the remaining $75.6 million, the Air Force had either

   * failed to charge customer accounts ($5.1 million, 22 transactions);
   * made errors, such as incorrectly estimating delivery prices ($44
     million, 11 transactions); or
   * could not explain differences between the recorded value of delivered
     goods and services and corresponding value of charges to customer
     accounts. ($26.5 million or 19 transactions).

Inventory- DOD's inability to account for and control its huge investment in
inventories effectively has been an area of major concern for many years. In
its fiscal year 1999 financial statements, DOD reported
$128 billion in inventory and related property. The sheer volume of DOD's
on-hand inventories impedes the department's efforts to accumulate and
report accurate inventory data. We reported in our January 1999 high-risk
report on defense inventory management that the department needs to avoid
burdening its supply system with large inventories not needed to support
current operations or war reserves. For example, our analysis of
approximately $63 billion of DOD's reported secondary inventory at September
30, 1999, showed that 58 percent of the reviewed items, or an estimated
$36.9 billion, exceeded these requirements. Further, during the fourth
quarter of fiscal year 1999, only 2 of the Defense Logistics Agency's (DLA)
20 distribution depots reported accuracy rates above 90 percent, and overall
accuracy was reported at 83 percent, with error rates ranging from 6 percent
to 28 percent. DLA's goal is 95 percent accuracy. The lack of complete
visibility over inventories increases the risk that responsible inventory
item managers may request funds to obtain additional, unnecessary items that
may be on-hand but not reported.

Control weaknesses over inventory can lead to inaccurate reported balances,
which could affect supply responsiveness and purchase decisions, and result
in a loss of accountability. For example, during a December 1999 visit to
one Army ammunition depot, we found weak internal controls over
self-contained, ready-to-fire, handheld rockets, a sensitive item requiring
strict controls and serial number accountability. As detailed in our
recently issued report, we and depot personnel identified 835 quantity and
location discrepancies associated with 3,272 rocket and launcher units
contained in two storage igloos. The depot had more items on hand than shown
in its records because of control weaknesses over receipt of items, and, in
some cases, the records had location errors. Depot management responded
immediately to our findings, and the depot subsequently accounted for and
corrected the inventory records of all the rocket and launcher units.
Regarding this problem, we identified potentially systemic weaknesses in
controls and lack of compliance with federal accounting standards and
inventory system requirements and made recommendations to the Army to
establish and verify operating procedures to help ensure that systemic
weaknesses are corrected.

DOD has long-standing problems accumulating and reporting the full costs
associated with working capital fund operations that provide goods and
services in support of the military services, its primary customers. The
foundation for achieving the goals of these business-type funds is accurate
cost data, which are critical for management to operate efficiently, measure
performance, and maintain national defense readiness.

With regard to inventory cost information, federal accounting standards
require inventories to be valued based on historical costs or a method that
approximates historical costs. However, DOD systems do not capture the
information needed to report historical cost. Instead, inventory records and
accounting transactions are maintained at a latest acquisition cost or a
standard selling price. Inventory levels are also reported to the Congress
at latest acquisition cost. Although latest acquisition cost data may be
important for budget projection and purchase decisions, this information may
not be appropriate for performance measurement. Latest acquisition cost can
substantially differ from the cost paid for the item. To illustrate how this
occurs, assume a military service had 10 items that cost $10 each, so each
item would be valued at $10, or at $100 in total. However, if the service
then purchased 1 new item at $25, all 11 items would be valued based upon
the latest purchase price of $25, or $275 in total. The former Commander of
Air Force Materiel Command testified in October 1999 that such valuation
practices distort DOD's progress toward reducing inventory levels and impact
Congressional funding decisions. The Commander stated the following.

"Part of the problem was accounting policy. ...Each year, inventories of old
spare parts were increased in value to reflect their latest acquisition
price (the normal commercial practice is to deflate, not inflate, the value
of long term assets). Many supply managers who faithfully disposed of
unneeded inventory were surprised at the end of the year to see their total
inventory value increase. As a result, they were subject to great pressure
to further reduce inventory levels. . . .The new spares were needed but
funding restrictions prevented purchase of these parts for several years."

Overall, the effect of increasing prices can be demonstrated by noting that
the Air Force's $32.6 billion of inventory at latest acquisition cost is
revalued to $18.3 billion to reflect estimated historical costs.

Real and personal property-Audit tests of real property transactions,
additions, deletions, and modifications that occurred during fiscal year
1999 indicated that DOD continues to lack the necessary systems and
processes to ensure that its real property assets are promptly and properly
recorded in its accountability databases. For example, Army auditors
reviewed about $408 million in real property transactions recorded during
fiscal year 1999 and determined that $113 million of those transactions
should have been posted in prior fiscal years. Army auditors also identified
$43 million in unrecorded real property transactions. In addition, recent
audits by the military service auditors have continued to find that while
DOD regulations require periodic physical inventories and inspections-a
critical control in safeguarding assets-they are not always performed as
required. Air Force auditors reported that real property personnel did not
perform required inventories at 34 of 99 installations audited in fiscal
year 1999. To illustrate the benefit of physical inventories, while
implementing the Navy's new accountability system, the number of assets
recorded in the accountability database at one Marine Corps location alone
increased by over 35 percent as result of wall-to-wall inventories.

In addition, because DOD does not have the systems and processes in place to
reliably accumulate costs, it is unable to account for several significant
costs of its operations, including its facilities and equipment.
Comprehensive and reliable asset financial information is necessary for
determining the full cost of operations and can be useful for anticipating
the need for additional budgetary resources.

An analysis of reported asset balances and related depreciation can provide
additional information to review specific budget requests. For example, the
Navy reported that 85 percent, or approximately $1.2 billion of its $1.4
billion of depreciated equipment reported on its fiscal year 1998 financial
statements, was fully depreciated. If Navy's financial information
accurately reflected asset accountability and utilization periods, this
information could be used as a factor in analyzing Navy's funding requests.
Specifically, if the Navy's fiscal year 1998 information were accurate, it
would indicate that most of the Navy's equipment is at or beyond its
anticipated utilization period. This type of information could help support
a funding request or, absent such a request, could be used to question
whether operations would be impaired by the lack of needed capital
equipment.

DOD Net Cost Information Is Unreliable

DOD needs reliable systems and processes to appropriately capture the
required cost information from the hundreds of millions of transactions it
processes each year. To do so, DOD must perform the basic accounting
activities of entering these transactions into systems that conform to
established systems requirements, properly classifying transactions,
analyzing data processed in its systems, and reporting in accordance with
requirements. As I will discuss later, this will require properly trained
personnel, simplified processes, modern integrated systems supporting
operational and accounting needs, and a disciplined approach for
accomplishing these steps.

Because it does not have the systems and processes in place to reliably
accumulate costs, DOD is unable to account for several significant costs of
its operations, as discussed in this testimony. As I have highlighted today,
the accuracy of the department's reported operating costs was affected by
DOD's inability to

   * complete the reconciliation of its records with those of the Department
     of the Treasury,
   * identify the full extent of its environmental and disposal liability,
   * determine its liability associated with post-retirement health care for
     military personnel,
   * properly value and capitalize its facilities and equipment, and
   * properly account for and value its inventory.

In addition, DOD did not have adequate managerial cost accounting systems in
place to collect, process, and report its $378 billion in total reported
fiscal year 1999 net operating costs by program area consistent with federal
accounting standards. Instead it used budget classifications, such as
military construction, procurement, and research and development, to present
its cost data. In general, the data DOD reported in its financial statements
represented disbursement data for those budgetary accounts, adjusted for
estimated asset purchases and accruals. For financial reports other than the
financial statements, DOD typically uses obligation data as a substitute for
cost. As I stated earlier, DOD budget data are also unreliable.

To manage DOD's programs effectively and efficiently, its managers need
reliable cost information. This information is necessary to (1) evaluate
programs, such as by measuring actual results of management's actions
against expected savings or determining the effect of long-term liabilities
created by current programs, (2) make economic choices, such as whether to
outsource specific activities and how to improve efficiency through
technology choices, (3) control costs for its weapons systems and business
activities funded through the working capital funds, and
(4) measure performance.

The lack of reliable, cost-based information hampers DOD in each of these
areas as illustrated by the following examples.

   * DOD is unable to provide actual data to fully account for the costs
     associated with functions studied for potential outsourcing under OMB
     Circular A-76. We reported last year on a long-standing concern over
     how accurately DOD's in-house cost estimates used in A-76 competitions
     reflect actual costs.
   * DOD has acknowledged that its Defense Reform Initiative efforts have
     been hampered by limited visibility into true ownership costs of its
     weapons systems. Specifically, the department cited inconsistent
     methods used by the military services to capture support cost data and
     failure to include certain costs as limiting the utility of existing
     weapons system cost data. As noted previously, DOD has also
     acknowledged that the lack of a cost accounting system is the single
     largest impediment to controlling and managing weapon systems costs,
     including costs of acquiring, managing, and disposing of weapon
     systems.
   * DOD has long-standing problems accumulating and reporting the full
     costs associated with its working capital fund operations, which
     provide goods and services in support of the military services. Cost is
     a key performance indicator to assess the efficiency of working capital
     fund operations. For example, we recently reported that the Air Force's
     Air Mobility Command-which operated using a working capital fund-lacked
     accurate cost information needed to set rates to charge its customers
     and assess the economy and efficiency of its operations. We separately
     reported that Air Force depot maintenance officials acknowledged that
     they lack all the data needed to effectively manage their material
     costs. As a result, DOD is unable to reliably assess the economy and
     efficiency of its business-like activities financed with working
     capital funds.

Integrated Financial Management System Using Year 2000 Approach

Establishing an integrated financial management system-including both
automated and manual processes-will be key to reforming DOD's financial
management operations. DOD has acknowledged that its present system has
long-standing inadequacies and does not, for the most part, comply with
federal system standards. DOD has set out an integrated financial management
system goal. Further, the department is now well-positioned to adapt the
lessons learned from addressing the Year 2000 issue and our recently issued
survey of the best practices of world-class financial management
organizations and to use the information technology investment criteria
included in the Clinger-Cohen Act of 1996.

Integrated Financial Management System Needed

The department faces a significant challenge in integrating its financial
management systems because of its size and complexity and the condition of
its current financial management operations. DOD is not only responsible for
an estimated $1 trillion in assets and liabilities, but also for providing
financial management support to personnel on an estimated 500 bases in 137
countries and territories throughout the world. DOD has also estimated that
it makes $24 billion in monthly disbursements, and that in any given fiscal
year, the department may have as many as 500 or more active appropriations.
Each service operates unique, nonstandard financial processes and systems.
In describing the scope of its challenge in this area, DOD recognized that
it will not be possible to reverse decades-old problems overnight.

DOD submitted its first Financial Management Improvement Plan to the
Congress on October 26, 1998. We reported that DOD's plan represented a
great deal of effort and provided a first-ever vision of the department's
future financial management environment. In developing this overall concept
of its envisioned financial management environment, DOD took an important
first step in improving its financial management operations. DOD's 1999
update to its Financial Management Improvement Plan set out an integrated
financial management system as the long-term solution for establishing
effective financial management. As part of its 1999 plan, DOD reported that
it relies on an inventory of 168 systems to carry out its financial
management responsibilities. This financial management systems inventory
includes 98 finance and accounting systems and 70 critical feeder
systems-systems owned and operated by functional communities throughout DOD,
such as personnel, acquisition, property management, and inventory
management. The inclusion of feeder systems in the department's inventory of
financial management systems is a significant landmark because of the
importance of the programmatic functions to the department's ability to
carry out not only its financial reporting but also its asset accountability
responsibilities. The department has reported that an estimated 80 percent
of the data needed for sound financial management comes from these feeder
systems. However, DOD has also acknowledged that, overall, its financial
management systems do not comply with the FFMIA federal financial management
systems requirements.

DOD presently lacks the integrated, transaction-driven, double entry
accounting systems that are necessary to properly control assets and
accumulate costs. As a result, millions of transactions must be keyed and
rekeyed into the vast number of systems involved in a given business
process. To illustrate the degree of difficulty that DOD faces in managing
these complex systems, the following figure shows for one business
area-contract and vendor payments-the number of systems involved and their
relationship to one another.

Source: Department of Defense.

In addition to the 22 financial systems involved in the contract payment
process that are shown in figure 1, DFAS has identified many other critical
acquisition systems used in the contract payment process that are not shown
on this diagram. To further complicate the processing of these transactions,
each transaction must be recorded using a nonstandard, complex line of
accounting that accumulates appropriation, budget, and management
information for contract payments. Moreover, the line of accounting code
structure differs by service and fund type. For example, the following line
of accounting is used for the Army's Operations and Maintenance
appropriation.

2162020573106325796.BD26FBQSUPCA200GRE12340109003AB22WORNAAS34030

Because DOD's payment and accounting processes are complex, and generally
involve separate functions carried out by separate offices using different
systems, the line of accounting must be manually entered multiple times,
which compounds the likelihood of errors. An error in any one character in
such a line of code can delay payment processing or affect the reliability
of data used to support management and budget decisions. In either case,
time-consuming research must then be conducted by DOD staff or by contractor
personnel to identify and correct the error. Over a period of 3 years, one
DOD payment center spent
$28.6 million for a contractor to research such errors.

The combination of nonintegrated systems, extremely complex coding of
transactions, and poor business processes have resulted in billions of
dollars of adjustments to correct transactions processed for functions such
as inventory and contract payments. As stated previously, during fiscal year
1999, almost one of every three dollars in contract payment transactions was
made to adjust a previously recorded transaction. In addition, the DOD IG
found that $7.6 trillion of adjustments to DOD's accounting transactions
were required last year to prepare DOD's financial statements.

DOD Adopts Year 2000 Approach

To successfully adapt this structured, disciplined process to DOD's current
financial management improvement initiatives, DOD must ensure that the
lessons learned in addressing the Year 2000 effort and from our financial
management best practices survey are effectively applied. In this regard,
two important lessons should be drawn from the Year 2000 experience-the
importance of (1) focusing on process improvement instead of systems
compliance and (2) strong leadership at the highest levels of the department
to ensure the reform effort becomes an entitywide priority.

End-to-End Business Process Focus

Establishing the right goal is essential for success. Initially, DOD's Year
2000 focus was on information technology and systems compliance. This
process was geared toward ensuring compliance system by system and did not
appropriately consider the interrelationship of all systems within a given
business process. However, DOD eventually shifted to a core mission and
function approach and greatly reduced its Year 2000 risk through a series of
risk mitigation measures including 123 major process end-to-end evaluations.
Through the Year 2000 experience, DOD has learned that the goal of systems
improvement initiatives should be improving end-to-end business processes,
not systems compliance.

This concept is also consistent with provisions of the Clinger-Cohen Act of
1996 and related system and software engineering best practices, which
provide federal agencies with a framework for effectively managing large,
complex system modernization efforts. This framework is designed to help
agencies establish the information technology management capability and
controls necessary to effectively build modernized systems. For example, the
act requires agency chief information officers to develop and maintain an
integrated system architecture. Such an architecture can guide and constrain
information system investments, providing a systematic means to preclude
inconsistent system design and development decisions and the resulting
suboptimal performance and added cost associated with incompatible systems.
The act also requires agencies to establish effective information technology
investment management processes whereby
(1) alternative solutions are identified, (2) reliable estimates of project
costs and benefits are developed, and (3) major projects are structured into
a series of smaller increments to ensure that each constitutes a wise
investment.

The financial management concept of operations included in DOD's Financial
Management Improvement Plan should fit into the overall system architecture
for the department developed under the provisions of the Clinger-Cohen Act.
In addition, the goal of DOD's Financial Management Improvement Plan should
be to improve DOD's business processes in order to provide better
information to decisionmakers and ensure greater control and accountability
over the department's assets. However, we reported last year, the vision and
goals the department established in its Financial Management Improvement
Plan fell short of achieving basic financial management accountability and
control and did not position DOD to adopt financial management best
practices in the future.

Although the 1999 improvement plan includes more detailed information on the
department's hundreds of improvement initiatives, the fundamental challenges
we highlighted last year remain. Specifically, a significant effort will be
needed to ensure that future plans address (1) how financial management
operations will effectively support not only financial reporting but also
asset accountability and control, (2) how financial management ties to
budget formulation, (3) how the planned and ongoing improvement initiatives
will result in the target financial management environment, and (4) how
feeder systems' data integrity will be improved-an acknowledged major
deficiency in the current environment.

For example, to effectively support accountability and control, DOD's plan
needs to define each of its business processes and discuss the
interrelationships among the functional areas and related systems. To
illustrate, the plan should address the entire business process for property
from acquisition to disposal and the interrelationships among the functional
areas of acquisition, property management, and property accounting.

In its 1999 Financial Management Improvement Plan, dated September 1999, the
department announced its intention to develop a "Y2K like" approach for
tracking and reporting the CFO compliance of its financial management
systems, including critical feeder systems. However, the department
currently has hundreds of individual initiatives aimed at improving
financial management, many of which were begun prior to the decision that a
Year 2000 approach would be used for financial management reform. These
decentralized, individual efforts must now be brought under the disciplined
structure envisioned by the Clinger-Cohen Act and used previously during the
department's Year 2000 effort. Doing so will ensure that further investments
in these initiatives will be consistent with Clinger-Cohen Act investment
criteria and that the department's financial management reform efforts focus
on entire business processes and needed process improvements.

Because of the extraordinarily short time frames involved for the Year 2000
effort, the department rarely had the opportunity to evaluate alternatives
such as eliminating systems and reengineering related processes. DOD has
established a goal of September 30, 2003, for completing its financial
management systems improvement effort. This time frame provides a greater
opportunity to consider all available alternatives, including reengineering
business processes in conjunction with the implementation of new technology,
which was envisioned by the Clinger-Cohen Act.

Strong Department-Level Leadership

Lessons learned from the Year 2000 effort and from our survey of leading
financial management organizations also stressed the importance of strong
leadership from top leaders. Both these efforts pointed to the critical role
of strong leadership in making any goal-such as financial management and
systems improvements-an entitywide priority. As we have testified many times
before, strong, sustained executive leadership is critical to changing the
culture and successfully reforming financial management at DOD. Although it
is the responsibility of the DOD Comptroller, under the CFO Act, to
establish the mission and vision for the future of DOD financial management,
the department has learned through its Year 2000 effort that major
initiatives that cut across DOD components must have the leadership of the
Secretary and Deputy Secretary of Defense to succeed. In addition, our best
practices work has shown that chief executives similarly need to
periodically assess investments in major projects in order to prioritize
projects and make sound funding decisions.

Improving DOD financial management is a managerial, as well as technical,
challenge. The personal involvement of the Deputy Secretary played an
important role in building entitywide support for Year 2000 initiatives by
linking these improvements to the warfighting mission. To energize DOD, the
Secretary of Defense directed the DOD leadership to treat Year 2000 as a
readiness issue. This turning point ensured that all DOD components
understood the need for cooperation to achieve success in preparing for Year
2000 and it galvanized preparedness efforts.

Similarly, to gain DOD-wide support for financial management systems
initiatives, DOD's top leadership must link the improvement of financial
management to DOD's mission. For example, DOD stated in its Defense Reform
Initiative that improved business practices will eventually provide a major
source of funding for weapon system modernization. This can occur through
reductions in the cost of performing these activities as well as through
efficiencies gained through better information. To ensure that this mission
objective is realized will require top leadership involvement to reinforce
the relationship between good financial management and improved mission
performance. To build this support across the organization, many leading
organizations have developed education programs that provide financial
managers a better understanding of the business problems and nonfinancial
managers an appreciation of the value of financial information to improved
decision-making. As discussed below, DOD is taking these first steps in
providing training to its financial personnel, and DOD officials have
recently stated that their next annual financial management improvement plan
will begin to address the need for financial management training for
nonfinancial managers.

Strategic Human Capital Investment Integral to Reform

An integral part of financial and information management is building,
maintaining, and marshaling the human capital needed to achieve results.
While DOD has several initiatives underway directed at improving the
competencies and professionalism of its financial management workforce, it
has not yet embraced a strategic approach to improving its financial
management human capital. Our recently issued guide on the results of our
survey of the best practices of recognized world-class financial management
organizations shows that a strategic approach to human capital is essential
to reaching and maintaining maximum performance.

DOD's 1999 Financial Management Improvement Plan recognized the key role of
financial management training in ensuring that the department has a
qualified and competent workforce. The DOD Comptroller recently issued a
memorandum to the department's financial management community emphasizing
the importance of professional training and certification in helping to
ensure that its financial managers are well-qualified professionals.
Consistent with this recent emphasis, the department has begun several
initiatives aimed at improving the professionalism of its financial
management workforce. For example, DFAS contracted to have government
financial manager training developed by the Association of Government
Accountants provided to several thousand of its employees over the next 5
years. This training is aimed at enhancing participants' knowledge of
financial management and can then be used to prepare for a standardized exam
to obtain a professional certification, such as the Certified Government
Financial Manager (CGFM)-a designation being encouraged by DOD management.

In another initiative, undertaken in conjunction with the American Society
of Military Comptrollers, the department reports that it expects to have its
own examination-based certification program for a defense financial manager
in place in the near future. The department has contracted with the USDA
Graduate School-a continuing education institution-to provide financial
management training to an estimated 2,000 DOD financial personnel in fiscal
year 2000 and thousands more over the next 5 years. The department reports
that this training will be directed at helping participants to develop
sufficient knowledge so that they can demonstrate competencies in
governmentwide accounting and financial management systems requirements as
they are applied in the DOD financial management environment.

The department is faced with a considerable challenge if it is to improve
its financial management human capital to the performance-based level of
financial management personnel operating as partners in the management of
world-class organizations. While DOD's financial personnel are now
struggling to effectively carry out day-to-day transaction processing,
personnel in world-class financial management organizations are providing
analysis and insight about the financial implications of program decisions
and the impact of those decisions on agency performance goals and
objectives. To help agencies better implement performance-based management,
we have identified common principles that underlie the human capital
strategies and practices of leading private sector organizations. Further,
we have issued a human capital self-assessment checklist for agency leaders
to use in taking practical steps to improve their human capital practices.

Mr. Chairman, this concludes my statement. We will be glad to answer any
questions you or the other Members of the Task Force may have at this time.

(924050)

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