Department of Defense: Financial Audits Highlight Continuing Challenges
to Correct Serious Financial Management Problems (Testimony, 04/16/1998,
GAO/T-AIMD/NSIAD-98-158).

Serious financial management problems continue to plague the Defense
Department. Recent audits of the military's financial statements for
fiscal year 1997 done by the DOD Inspector General and the service audit
agencies, as well as GAO's audit of the U.S. government's financial
statements, provide further evidence of the scope and magnitude of the
Pentagon's problems. DOD cannot properly account for billions of dollars
worth of property and equipment, estimate its costs to clean up
contaminated military facilities and dispose of chemical weapons,
determine its liability for the future cost of health care benefits for
military retirees, or accurately report disbursements and account for
basic transactions. These problems leave DOD highly vulnerable to the
loss of assets and inefficient operations. Outlays for wasteful or
inefficient operations also divert scarce resources from military
priorities, such as weapon systems modernization and readiness. This
testimony also discusses two key areas that will affect the ultimate
resolution of these long-standing problems: financial management
personnel training and financial systems improvement. GAO also touches
on DOD's efforts to deal with the Year 2000 problem and steps needed to
counter computer security threats.

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

 REPORTNUM:  T-AIMD/NSIAD-98-158
     TITLE:  Department of Defense: Financial Audits Highlight
	     Continuing Challenges to Correct Serious Financial
	     Management Problems
      DATE:  04/16/1998
   SUBJECT:  Accounting procedures
	     Financial management systems
	     Internal controls
	     Military inventories
	     Financial statement audits
	     Government liability (legal)
	     Accountability
	     Cost analysis
	     Federal agency accounting systems
	     Inventory control systems
IDENTIFIER:  Army Continuing Balance System-Expanded
	     Air Force Reliability and Maintainability Information
	     System
	     DOD TRICARE Program
	     CHAMPUS
	     Civilian Health and Medical Program of the Uniformed
	     Services

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************
GAO/T-AIMD/NSIAD-98-158

Cover
================================================================ COVER
GAO/T-AIMD/NSIAD-98-158

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

For Release on Delivery
Expected at
10 a.m.
Thursday,
April 16, 1998

DEPARTMENT OF DEFENSE - FINANCIAL
AUDITS HIGHLIGHT CONTINUING
CHALLENGES TO CORRECT SERIOUS
FINANCIAL MANAGEMENT PROBLEMS

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

GAO/T-AIMD/NSIAD-98-158

GAO/AIMD/NSIAD-98-158T

(918931)

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

  AVENGER -
  CBSS -
  CBSX -
  CFO -
  CHAMPUS -
  DFAS -
  DOD -
  DPAS -
  HMMWV -
  HMO -
  IG -
  OMB -
  PP&E -
  REMIS -

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

Mr.  Chairman and Members of the Subcommittee:

Thank you for the opportunity to participate in this important
hearing to discuss the status of financial management at the
Department of Defense (DOD).  This discussion is timely in light of
our recent report on the first-ever consolidated financial statements
of the U.S.  government subjected to audit.\1 The Chief Financial
Officers (CFO) Act of 1990, as expanded by the Government Management
Reform Act of 1994, also requires annual audited financial statements
for DOD, along with other major individual departments and agencies
across the executive branch.  The goals of these acts are to promote
greater accountability in managing government finances by improving
financial systems, strengthening financial personnel qualifications,
and generating more reliable, timely information on the costs and
financial performance of government operations.

Material financial management deficiencies identified at DOD, taken
together, 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 encompass a reported over $1 trillion in assets, nearly $1
trillion in liabilities, 3 million military and civilian personnel,
and outlays of $262 billion in fiscal year 1997, or about 48 percent
of total discretionary spending for the entire government.
Consequently, DOD's operations have a tremendous impact on the
government's consolidated reporting.

No major part of DOD has 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
operations.  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.\2

The audits of DOD's and individual military services' financial
statements for fiscal year 1997 performed by the DOD Inspector
General (IG) and the service audit agencies, as well as our audit of
the U.S.  government's financial statements, have provided further
clarification of the scope and magnitude of the Department's
problems, and recommendations to correct them.  These problems range
from an inability to properly account for billions of dollars in
assets, to not properly estimating the full extent of the
government's liabilities, to not being able to accurately report
disbursements and account for basic transactions.  Collectively,
these problems leave DOD highly vulnerable to the loss of assets and
inefficient operations.

Expenditures on wasteful or inefficient operations divert scarce
resources from defense priorities such as weapon systems
modernization and readiness.  Financial management weaknesses also
greatly impede DOD's ability to have reliable and timely information
needed to make sound resource decisions.  Moreover, such weaknesses
prevent DOD from routinely generating the type of management
information needed to effectively and efficiently manage its
day-to-day operations.

DOD recognizes these problems and has many efforts underway or
planned to address them.  However, the Department is struggling to
meet the many challenges brought about by decades of neglect and an
inability to fully institute sound financial management practices.
Achieving the financial management goals established by the CFO Act,
particularly in light of the serious and widespread nature of DOD's
long-standing financial management problems, will only be possible
with the sustained, demonstrated commitment of the Department's top
leaders.

I will focus my remarks today on the serious material weaknesses now
confronting the Department, the resulting impact on DOD's ability to
effectively carry out its programs and operations, and the efforts
underway to address these deficiencies.  These material deficiencies
include DOD's inability to

  -- properly account for and report billions of dollars of property,
     equipment, inventory, and supplies;

  -- estimate and report material amounts of environmental and
     disposal liabilities and related costs;

  -- determine the liability associated with the future cost of
     post-retirement health benefits for military employees;

  -- accurately report the net costs of its operations;

  -- properly account for billions of dollars of basic transactions,
     especially those between DOD component organizations and between
     DOD and other federal government entities; and

  -- ensure that all disbursements are properly recorded and
     reconciled.

I will also discuss two key areas that affect the ultimate resolution
of DOD's long-standing financial management deficiencies:  financial
management personnel training and financial systems improvement.
Finally, my statement touches upon two serious governmentwide
problems that are critical areas at DOD--preparations to handle the
Year 2000 problem and actions needed to address computer security
threats.

--------------------
\1 Financial Audit:  1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, March 31, 1998).

\2 High-Risk Series:  An Overview (GAO/HR-95-1, February 1995) and
High-Risk Series:  Defense Financial Management (GAO/HR-97-3,
February 1997).

   DEFICIENCIES RELATED TO
   PROPERTY, PLANT AND EQUIPMENT
   AND INVENTORIES
---------------------------------------------------------- Chapter 0:1

As discussed in our recent report on the fiscal year 1997
consolidated financial statements, the federal government--one of the
world's largest holders of physical assets--does not have accurate
information about the amount of assets held to support its domestic
and global operations.  Hundreds of billions of dollars of the more
than $1.2 trillion of these reported assets are not adequately
supported by financial and/or logistical records.

With an estimated $1 trillion in physical assets, DOD is by far the
largest holder of physical assets in the federal government.  DOD
relies primarily on various logistical systems both to maintain
accountability and visibility over its assets to meet its military
objectives and readiness goals, as well as to report information on
these assets in its financial statements.  As part of the fiscal year
1997 financial statement audit work, auditors tested the reliability
of the information in these systems.  As discussed in the following
sections, serious material weaknesses were found in DOD systems and
processes relied on to maintain accountability and to control
physical assets under its purview, including military equipment;
general property, plant and equipment (PP&E); and inventories.  In
addition, included in these physical assets is a reported $90 billion
of government material in the hands of contractors.  Accurately
accounting for and controlling these contractor-held assets has been
a long-standing issue in DOD.  The DOD IG has issued numerous reports
on this problem and is actively working with the agency to develop
controls and processes to improve the accuracy of this information.

Overall, these problems impair DOD's ability to (1) know the location
and condition of all its assets, including those used for deployment,
(2) safeguard assets from physical deterioration, theft, or loss, (3)
prevent the purchase of assets already on hand, and (4) determine the
full costs of the programs that use these assets.  DOD's deficiencies
in these areas will also have an adverse affect on its ability to
measure progress against the indicators set out in its recent
Performance Plan, covering fiscal year 1999, prepared in response to
the requirements of the Government Performance and Results Act.  For
example, in its plan, DOD sets out indicators of (1) achieving a 90
percent visibility rate for materiel and (2) reducing secondary
inventories\3 from $70 billion to $48 billion.  Weaknesses identified
in DOD's logistical systems, as well as its inability to accurately
determine costs, may hamper its ability to reliably determine its
performance against either of these and other indicators.

--------------------
\3 Secondary inventories are repairable and consumable items in
storage at depots and installations.

      MILITARY EQUIPMENT
      ACCOUNTABILITY AND
      VISIBILITY
-------------------------------------------------------- Chapter 0:1.1

DOD's investment in military weapons systems represents an estimated
$635 billion of the federal government's total property, plant, and
equipment reported at about $1 trillion.  Accountability over these
critical assets entails knowing, for each asset category, how many
exist, where they are located, and their value.  Overall, the
auditors found that DOD's logistical systems could not be relied upon
to provide this basic information.  DOD relies on these systems to
support not only the services' financial reports, but also to provide
data on the number and location of military equipment and support
operational requirements as well.

As a result, senior DOD officials did not have accurate information
to use in making operational decisions or for financial reporting.
To further test the accuracy of this critical logistical information,
GAO, along with auditors from the offices of the DOD Inspector
General and the military service audit agencies jointly conducted
tests of logistical systems supporting about 80 percent of DOD's
reported military equipment, by attempting to trace selected military
equipment items recorded in those systems to the assets in the field.
Because of the sensitive nature of the equipment selected from the
systems for these existence tests, the tests were designed to either
"pass" or "fail." For a number of critical systems being tested, it
was agreed with the military leaders who use those systems, that a
"pass" would result only where all assets selected from the system
were found.  For other systems, which generally carry information on
less critical assets, it was agreed that up to two errors could be
identified with the system still receiving a passing grade.  The
results of auditors' reviews and tests of the reliability of
information on the numbers and locations of military equipment and
each of the military service's key logistical systems are described
below.

         NAVY
------------------------------------------------------ Chapter 0:1.1.1

The Navy does not have a central system that supports both financial
reporting and worldwide visibility over various categories of
military equipment.  Instead, it relies on various systems and
publications to provide this information.  As part of the joint
tests, described previously, of DOD's reported military equipment,
these systems and publications were tested to determine if reported
assets actually existed.

Auditors tested recorded information for 11 categories of Navy
military equipment.  The Navy's systems failed for three of the 11
categories of tested military equipment--active boats, inactive
service craft, and uninstalled engines.  This means that the systems
used to provide visibility over these mission critical items were not
reliable.

  -- Active boats.  The Combatant Craft and Boat Support System
     (CBSS), is used to provide senior Navy military officials
     visibility over the number and location of the Navy's "boats."
     These boats range in value up to $8 million and include landing
     craft and other boats used to assist in carrying out activities
     such as amphibious operations, aircraft rescues, drone
     recoveries, and mine countermeasures.  The tests for these
     mission critical assets-- for which a "pass" allowed zero
     errors--found that 2 of the 45 boats selected for examination
     were included in CBSS as available for use, even though they had
     been disposed of or sold.

  -- Uninstalled engines.  The Navy uses information from its
     logistical system for engines--Aircraft Engine Management
     System--to track all Navy aircraft engines, both installed and
     uninstalled.  In testing this system--for which a "pass" allowed
     up to two errors--auditors were unable to verify the existence
     of 10 of the 105 sampled uninstalled engines.  These 10 engines
     were valued at up to $4 million each.

  -- Service craft.  Service craft are waterborne utilitarian craft
     not classified as ships or boats, which provide services to the
     fleet in harbors, ports, and at sea.  The Navy uses the Naval
     Vessel Register--an electronic publication updated weekly that
     includes custodian, fleet assignment, and condition information
     on the Navy's ships and service craft.  This publication is
     relied on to maintain visibility of these assets.  Auditors'
     tests--for which a "pass" allowed up to two errors--revealed
     that 6 of the 79 inactive service craft tested could not be
     located.  Fifteen other service craft were sold or otherwise
     disposed of prior to the audit testing, but remained in the
     Naval Vessel Register coded as "Inactive." An "Inactive" coding
     indicates that an item was taken out of active service but was
     retained for possible use in meeting rapid mobilization
     requirements.  An asset may also be placed in this category
     pending disposal.  Table 1 shows the service craft that were no
     longer in the Navy's possession.

                                Table 1

                 Service Craft Erroneously Included in
                       the Naval Vessel Register

                                    Reported Value         Number Sold
Type of Service Craft               (in thousands)         or Disposed
------------------------------  ------------------  ------------------
Harbor Tugs                             $583 -$873                   3
Barges and Lighters\a                    $20 -$414                  16
Ferry Boat or Launch                          $843                   1
Floating Crane                                $468                   1
======================================================================
Total                                                               21
----------------------------------------------------------------------
\a Lighters are barges which are used in port to transport personnel,
goods, etc., from ship to ship or ship to shore.

In addition, auditors' tests of systems supporting inactive ships and
boats, which were permitted up to two errors before the systems
failed due to the less critical nature of these military equipment
categories, showed that these systems included one inactive cargo
ship and two inactive boats which had been disposed of or sold.  The
Naval Audit Service is in the process of developing a report
containing recommendations for actions to address these critical
issues.

         ARMY
------------------------------------------------------ Chapter 0:1.1.2

The Army relies on a central logistics system, the Continuing Balance
System-Expanded (CBSX), to maintain worldwide visibility for all
military equipment, including the Army's most critical war fighting
equipment (national defense assets including tanks, cannons, armored
personnel carriers, and aircraft).  The system is intended to provide
accurate, timely, and auditable equipment status information
necessary for direct troop support.  The central system should mirror
the official accountable records of equipment balances, such as
property book records maintained by various Army activities,
including Army divisions that may be deployed, depots that repair or
upgrade equipment, and storage sites.

The Army calculates a compatibility rate to measure the extent to
which the central system and the property book records agree--with a
98 percent compatibility rate as a goal.\4 As of July 1997, the Army
reported an Army-wide compatibility rate of about 92 percent.
However, in January 1998, we reported that the 92 percent rate is
overstated because Army does not include all the adjustments that are
made to records.\5 If these adjustments were included in the
calculation, the Army-wide rate would fall to about 87 percent.

In addition, we reported that the compatibility rate calculation does
not provide a complete indicator of the central system's accuracy
because it does not include errors associated with equipment that is
in-transit between locations.  These in-transit errors are
significant--when they occur, the Army loses visibility over this
equipment.  In June 1996, the Army Audit Agency reported that as of
July 31, 1995, 69 percent of the 1,135 open in-transit records in the
central system it analyzed were invalid.  The auditors identified a
number of reasons for the invalid in-transit records, including
system interface problems, use of duplicate unit identification
codes, and shipments that were redirected to another destination
after the shipment was initiated.\6

We recently analyzed a statistically projectable sample of
adjustments made to data in the central system to bring it into
agreement with data in the Army's primary property book system.  Our
analysis showed that over 40 percent of the adjustments were needed
because of transactions that had been recorded in unit level property
books, but not received by the central system.  Until these
adjustments were made, assets including Howitzer cannons, M-16
rifles, and cargo trucks were not reflected in the central system.
For example, one of the adjustments was for a Howitzer M-119 cannon,
used for firing shells at a high angle of elevation to reach a target
behind cover or in a trench and valued at approximately $423,000,
that had been recorded in a deployed unit's property book, but the
transaction was not received by the central logistical system.

These problems are long-standing.  In a 1993 study,\7 we found that
the Army did not maintain reliable information on the types,
quantities, and locations of its equipment.  For example, we found
that one unit's equipment records indicated having 220 more tanks
than were being reported in the central system.  In another instance,
a unit reported 18 advanced attack helicopters which were not
recorded in the central system.  Such discrepancies not only result
in financial reporting misstatements, but, as DOD acknowledged in its
"Lessons Learned" report following Desert Storm, inaccurate or
unreliable central system data can impair equipment distribution
decisions.  As a result, some units received equipment in excess of
their authorized levels, while other units were not provided
critically needed equipment.  Our recent report identified specific
reasons for discrepancies between central system and unit
accountability records and made nearly 20 detailed recommendations,
including suggestions to (1) ensure that the central system receives
applicable property book transactions, (2) correct software problems,
(3) improve the transaction audit trail, and (4) enhance the training
of property book officers.\8

Because of the known problems with the Army's central system, the
auditors focused the existence tests, described previously, of the
Army's recorded assets on its unit-level property books which are
used to provide information to the central system, and on other
logistical systems containing asset information.  The tests were
designed to validate the existence of assets for the five categories
of military equipment that comprised 70 percent of the reported value
of Army mission assets.  These categories are aircraft, combat
tracked vehicles, communication equipment, missiles, and missile
support equipment.  The data in the Army's property books passed the
auditors' tests for existence for each of the five asset categories.
However, the auditors found two errors in the missile support
category, one of which was a critical military equipment item.

Specifically, one missile launcher for an AVENGER weapon system could
not be located.  The AVENGER weapon system is a lightweight, highly
mobile surface-to-air missile/gun system which can be mounted on a
High Mobility MultiPurpose Wheeled Vehicle (HMMWV).  Each AVENGER
launch system costs approximately $1 million.  Army officials'
explanation for problems in locating the missile launcher was that
the serial number listed in the Army's records for the AVENGER
missile launcher was in fact the serial number of the HMMWV and that
the launcher had been removed from the HMMWV.  As of April 9, 1998,
this launcher had not been located.  The Army Audit Agency's draft
report on "Accountability for Army Mission Equipment" recommends that
the Deputy Chief of Staff for Logistics establish specific criteria
and procedures for recording serial numbers in unit property books
for high-dollar value components of equipment items.

--------------------
\4 Army calculates the compatibility rate as a ratio of the total
number of adjusted equipment items to the total number of equipment
items on hand, expressed as a percentage.

\5 Army Logistics Systems:  Opportunities to Improve the Accuracy of
the Army's Major Equipment Item System (GAO/AIMD-98-17, January 23,
1998).

\6 Financial Reporting of Equipment In Transit (U.S.  Army Audit
Agency, AA 96-156, June 17, 1996).

\7 Financial Management:  Army Lacks Accountability and Control Over
Equipment (GAO/AIMD-93-31, September 30, 1993).

\8 Army Logistics Systems:  Opportunities to Improve the Accuracy of
the Army's Major Equipment Item System (GAO/AIMD-98-17, January 23,
1998).

         AIR FORCE
------------------------------------------------------ Chapter 0:1.1.3

Our recent work identified problems with the Air Force's Reliability
and Maintainability Information System (REMIS), which is intended to
provide worldwide visibility over its equipment, such as aircraft and
missiles, and timely maintenance and logistical information.  This
central logistical system is used to support Air Force field and
operational commanders.  Over 1,700 users have access to various
modules of the central system to support a variety of activities
including strategic planning, asset accountability, and budgeting.
As with the Army's central logistical system, the accuracy of the
data in the Air Force system is important not only for financial
reporting, but also for effective asset control and program
management.  The Air Force central system includes three databases:
(1) an inventory table, which identifies equipment by serial number
and type, (2) an assignment table, which shows the assigned command
and mission for aircraft and missiles by serial number, and (3) a
possession table, which identifies the physical location of aircraft
and missiles by serial number.  These databases generally should be
consistent.  However, we reported\9 in August 1997 that our analyses
of these three databases identified a number of inconsistencies in
the number of aircraft and missiles reported.  For example, our
findings included the following.

  -- Over 200 ground launched cruise missiles were identified in the
     assignment table that were not included in either of the other
     central system databases.  According to the system program
     office, these missiles were destroyed years ago as part of a
     treaty with the Soviet Union.

  -- Twelve aircraft and missile records were erroneously included in
     the inventory table (they did not appear in the assignment or
     possession table).  It was determined that these records did not
     represent actual equipment and therefore should have not been in
     the central system inventory table.

  -- Twenty-five aircraft and eight air-launched cruise missiles were
     included in the central system inventory and assignment tables,
     but were not in the possession table.  These assets were not
     reflected in the possession table because the table had not been
     updated to reflect asset transfers from one location to another.

  -- Duplicate records for 10 helicopters were included in the
     central system inventory database.  This error occurred as the
     result of improper data entry when making modifications to
     type/model/series information.

We recommended short-term actions the Air Force could take to improve
the accuracy of aircraft and missile data in its central logistical
system.  Such actions included making regular comparisons and
analyses of the central system databases and researching and
correcting any inconsistencies, such as the mismatches we identified.

In addition, the systems the Air Force relied on to account for and
control military equipment "passed" the existence tests described
previously.  However, the auditors identified errors, which, although
within the acceptable limits of the auditors' tests for a passing
mark on the equipment reported in the system, may raise concerns over
the reliability of location information on critical items in the Air
Force's arsenal of military equipment.  Specifically, as part of the
auditors' tests, they determined that (1) two engines included in the
logistical system records as uninstalled engines were actually
installed in aircraft several years ago, and (2) an older model C-130
cargo plane remained in the logistical records even though the
aircraft had been destroyed a few years ago at a contractor facility
during corrosion testing.  In addition, while not specifically part
of the auditors' financial audit testing, they noted that the Air
Force's logistical records on the location of 46 engines, valued at
$91,000 each, were incorrect.  Air Force officials informed the
auditors that erroneous information was included in the logistical
systems primarily because the contractors had not updated the records
when these assets were transferred from the contractor's facility.
The auditors offered specific suggestions to correct these
deficiencies noted as part of their audit tests.

--------------------
\9 Financial Management:  Accuracy of Air Force and Missile Data
Could Be Improved (GAO/AIMD-97-141R, August 15, 1997).

         IMPROVEMENT EFFORTS
------------------------------------------------------ Chapter 0:1.1.4

Both the Army and Air Force have indicated that they either have
taken, or are taking, actions to address auditor concerns and improve
these critical systems.  To improve its central logistical system,
the Army established an Improvement Team to develop initiatives
related to data accuracy in its central logistical system and hired a
contractor to carry out those initiatives.  Defense Finance and
Accounting Service and Air Force officials indicated that they had
completed actions to address our recommendations on specific actions
to improve the Air Force system.  We plan to follow up the
effectiveness of these actions as part of our fiscal year 1998
financial audit work at DOD.  The Navy has not yet indicated what
actions it will take.

         EQUIPMENT VALUATION
------------------------------------------------------ Chapter 0:1.1.5

Auditors have had long-standing concerns that the reported value of
DOD's military weapons systems was inaccurate.  Recent audit results
demonstrate that DOD continues to experience problems in this area.
For example, Army auditors recently reported that limited testing of
the recorded value of selected military equipment items revealed an
understatement of more than $10 billion as a result of the Army not
updating unit price information to reflect standard price.  The Army
adjusted its financial statements for that amount, but Army auditors
reported that the account balance was still misstated by an unknown
amount for the equipment items that were not tested.

The Department's most recent annual report to the President and the
Congress describes the significance of DOD's inability to develop
reliable cost information.  Specifically, the report cited the lack
of a cost accounting system as the single, largest impediment to
controlling and managing weapon system life-cycle costs, which
include acquisition costs, as part of DOD's acquisition reform
initiative to acquire products "that work better and cost less." In
this regard, DOD identified as a specific goal, establishing an
implementation plan for a cost accounting system that provides
visibility over weapon system life-cycle costs.  Without accurate
information on the acquisition costs of weapon systems, neither DOD
officials nor the Congress can make fully-informed decisions about
which weapons or how many to buy.  Moreover, DOD management needs
accurate cost information to monitor costs as weapon systems are
being built, especially for those weapons for which Congress imposes
cost limits.

      UNRELIABLE AMOUNTS REPORTED
      FOR GENERAL PROPERTY, PLANT
      AND EQUIPMENT
-------------------------------------------------------- Chapter 0:1.2

In addition to military equipment, DOD is responsible for almost
one-half of the government's general property, plant and equipment
(PP&E).\10 Long-standing issues affecting the reliability of reported
general property amounts include DOD's inability to ensure that all
its assets are properly reported and valued.  DOD auditors restated
again in recent audit reports that the billions of dollars reported
for real property (land, buildings, facilities, capital leases, and
improvements to those assets) and non-military equipment, such as
trucks, telecommunications systems, and computers, were unreliable
due to valuation errors, omissions of assets, system deficiencies, or
other recording errors, such as duplicate reporting.

With regard to valuation, auditors were unable to verify the reported
amount of DOD's property.  In general, documentation supporting these
values no longer exists or cannot be located.  In addition, obviously
erroneous valuation data are not being corrected.  For example

  -- At one location tested, Navy auditors identified 49 buildings
     valued at a total of $25 million that were recorded at a zero or
     one dollar value in the system used to obtain the plant property
     values for the Navy's fiscal year 1997 financial statements.

  -- The Air Force's fiscal year 1997 financial statements were
     understated by $189 million because of pricing errors entered
     into the system for fire trucks.  The fire truck amounts were
     based on a unit price of $1.03 instead of the actual cost of
     over $470,000.

In certain cases, some DOD general property is being omitted from
reports.  For example, DOD auditors reported problems at each
military service related to DOD's inability to properly identify and
report its capital leases.  Air Force and Navy auditors determined
that capital leases with an estimated total value at $493 million
were omitted from Air Force and Navy fiscal year 1997 financial
statements.

Finally, DOD auditors have identified the lack of integration of
financial accounting and property accounting systems as a major
factor contributing to unreliable general property reporting.
Accordingly, the DOD Comptroller designated the Defense Property and
Accountability System (DPAS) as the property accounting system for
all DOD real and personal property in order to bring DOD assets under
proper accountability and financial control.  We recently reported\11
that the DOD-wide system, as functionally designed, can provide
financial control and generate information to account for most
general property.  However, we also reported that if not properly
implemented, as was the situation at the Defense agency we reviewed,
the DOD-wide system would not ensure financial control and accurate
reporting of general property.  Furthermore, while the DOD
Comptroller has stated that this system must be implemented across
DOD by the year 2000, no specific plans to accomplish this goal have
been developed.  The responsibility for implementing this system was
recently turned over to the Defense Logistics Agency.  Our report
made 10 detailed recommendations to ensure that financial control and
accountability over general property is attained.  These include
developing an implementation plan with milestones for DPAS, revising
the handbook accompanying the system, and modifying the software to
update it for new accounting standards.

--------------------
\10 Statement of Federal Financial Accounting Standards No.  6 states
that general PP&E is any property, plant, and equipment used in
providing goods and services.  It typically has one or more of the
following characteristics:  (1) it could be used for alternative
purposes (e.g., by other Federal programs, state, or local
governments, or non-governmental entities) but is used to produce
goods or services, or to support the mission of the entity, (2) it is
used in business-type activities, or (3) it is used by entities in
activities whose costs can be compared to those of other entities
performing similar activities (e.g., Federal hospital services in
comparison to other hospitals).

\11 Financial Management:  DOD's Approach to Financial Control Over
Property Needs Structure (GAO/AIMD-97-150, September 30, 1997).

      CAPITALIZATION THRESHOLD
-------------------------------------------------------- Chapter 0:1.3

DOD's ability to accurately report its property, plant, and equipment
values has been further hampered by the 20-fold increase in its
capitalization threshold from $5,000 in 1991 to $100,000 in 1996.
Prior to fiscal year 1998, DOD policy required DOD components to
capitalize an asset when its acquisition cost or similar cost
exceeded the capitalization threshold in effect at the time of
acquisition.  Beginning in fiscal year 1998, however, DOD
components--other than working capital fund activities--are required
to apply a single $100,000 capitalization threshold to assets,
irrespective of the threshold that existed at the time of purchase.
Under this policy, all general PP&E assets, previously capitalized by
non-working capital fund activities at thresholds less than $100,000,
will be expensed in fiscal year 1998.  Recognizing the effect this
policy would have on operations, working capital fund activities are
required to apply the capitalization threshold only to newly acquired
assets, beginning in fiscal year 1998, and to retain, on their
financial records, existing capitalized assets even though the assets
may have been capitalized at a level of less than $100,000.

Prior audit reports have disclosed that higher capitalization
thresholds have not been uniformly applied throughout DOD, resulting
in inconsistencies in asset reporting and the omission of billions of
dollars in assets from DOD financial reports.  As a result of the
higher capitalization threshold, billions of dollars of assets have
been expensed--effectively removing them from accounting control.
For example, Navy auditors estimate that if the $100,000
capitalization threshold were applied to the Navy's March 1996
nonmilitary equipment balance of $6 billion, over $1 billion would be
eliminated.  In a letter to DOD in March 1997, we estimated that at
least $5 billion of the Army's equipment would have been excluded
from the Army's fiscal year 1996 financial statements if the $100,000
threshold was retroactively applied.  Eliminating these items from
financial control and the accountability imposed by annual audits is
particularly detrimental because, as discussed earlier, financial
audits have repeatedly found that DOD's detailed property records are
not accurate.

Further, use of this high capitalization threshold adversely affects
the measurement of operating costs.  Billions of dollars of assets
are expensed in their year of acquisition, as opposed to the cost of
those assets being allocated over the life of the asset.  For
example, as a result of implementation of high capitalization
thresholds, thousands of tractors costing at least $70,000 each and
numerous types of industrial equipment have been written off in the
year of acquisition.  In addition, expensing these costs makes it
harder for DOD to compare its cost to the private sector, which is
required to capitalize such items.  For example, this impairs the
ability of DOD and oversight officials to make informed decisions on
issues where comparative costs are a significant factor, such as in
deciding whether to outsource specific functions.

We are analyzing the effect of DOD's capitalization policy on its
operational and program costs and asset accountability and will be
continuing to discuss our views with DOD managers.

      INVENTORY CANNOT BE VERIFIED
-------------------------------------------------------- Chapter 0:1.4

DOD inventory\12 includes ammunition (such as machine gun cartridges,
rocket motors, and grenades), consumables (such as clothing, bolts,
and medical supplies), stockpile materials (such as industrial
diamonds, rubber, and tungsten), and repairable items (such as
navigational computers, landing gear, and hydraulic pumps).  DOD's
inability to effectively account for and control its reported $170
billion investment in inventories has been an ongoing area of major
concern.  We are continuing to monitor DOD inventory management as
one of the areas that we consider as high risk because of its
vulnerability to waste, fraud, and abuse.  One area of inventory
management that has been a long-standing concern is excess
inventories.  In February 1997, we reported our estimate that about
half of DOD's $70 billion in secondary item inventories\13 at the end
of fiscal year 1995 was excess to current operating requirements and
war reserves.\14

Auditors continue to find that DOD's inventory management and control
systems and practices are plagued with serious problems, including

  -- on-hand quantities that do not agree with the records,

  -- an inability to reliably determine inventory values,

  -- deficiencies in information on the condition of inventories,

  -- a significant amount of inventory excluded from overall
     logistics management visibility as well as financial reporting,
     and

  -- an inability to effectively account for and control in-transit
     inventories.

--------------------
\12 Statement of Federal Financial Accounting Standards No.  3
defines several categories of inventory.  DOD primarily has inventory
held for sale, operating materials and supplies, and stockpile
materials.  For purposes of this testimony, we refer to all
categories as inventory.

\13 Secondary inventories are repairable and consumable items in
storage at depots and installations.

\14 High-Risk Series:  Defense Inventory Management (GAO/HR-97-5,
February 1997).

         ON-HAND QUANTITIES DO NOT
         AGREE WITH RECORDS
------------------------------------------------------ Chapter 0:1.4.1

Auditors have issued a number of reports over the past several years
detailing extensive discrepancies between the results of physical
counts of inventories actually on hand and quantity information
recorded in inventory records.  For example, in their fiscal year
1997 audit opinion on the Army's Working Capital Fund, Army auditors
cited unacceptable error rates in prior years' testing of inventory
records.\15 The DOD IG reported an overall 24 percent error rate at
DOD's primary storage locations as a result of physical counts it
performed in fiscal year 1996.\16 The auditors' examination of
inventories in the fiscal year 1997 financial statements found this
condition continued.  For example:

  -- Navy auditors performed physical counts at 13 major Navy storage
     locations.  Their preliminary results indicate that the
     quantities actually on hand differed from inventory records 23
     percent of the time.  Out of 652 stock numbers tested, 150 had
     count quantities that differed from the inventory record
     quantities.

  -- Air Force auditors found that Air Force records showed $4.5
     billion of Air Force ammunition was stored at Army locations as
     of the end of fiscal year 1997, but Army records showed only
     $2.5 billion.\17 Of the $2 billion difference, the auditors
     could only resolve $864 million, which was the result of Air
     Force records showing that it had 14.5 million smoke rockets
     (used to mark targets) at an Army storage location, while only
     1,450 were actually on hand at that location.  The item manager
     was not aware of this difference until the auditors pointed it
     out.

As a result of these deficiencies in recorded inventory quantities,
DOD managers do not have reliable information to make purchase
decisions or to fully recognize and eliminate excess inventories and
related storage costs.  For example, in February 1997, we reported
that DOD had ordered $11.3 million in additional items, such as
circuit card assemblies, computers, and hydraulic pump valves, that
already were in excess supply.\18 In June 1996, we reported that
about $31 billion of DOD's reported $80 billion of ammunition was
excess.\19 In January 1997, we reported that DOD could save about
$382 million annually in holding costs by eliminating an estimated
$2.7 billion in inventories not needed to meet current operating and
war reserve requirements.\20

--------------------
\15 Army Working Capital Fund Principal Financial Statements for
Fiscal Year 1997 (AAA Report No.  AA 98-111, February 13, 1998).

\16 Inventory Record Accuracy and Management Controls of the Defense
Logistics Agency Distribution Depots (DOD IG Report No.  98-019,
November 10, 1997).

\17 Opinion on Fiscal Year 1997 Air Force Consolidated Financial
Statements (AFAA Report No.  97053009, February 27, 1998).

\18 Defense Logistics:  Much of the Inventory Exceeds Current Needs
(GAO/NSIAD-97-71, February 28, 1997).

\19 Defense Ammunition:  Significant Problems Left Unattended Will
Get Worse (GAO/NSIAD-96-129, June 21, 1996).

\20 Defense Inventory:  Spare and Repair Parts Inventory Costs Can Be
Reduced (GAO/NSIAD-97-47, January 17, 1997).

         INVENTORY VALUES
         QUESTIONABLE
------------------------------------------------------ Chapter 0:1.4.2

Federal accounting standards require inventories to be valued based
on historical cost or a method that will approximate historical cost.
DOD does not have historical cost data on inventories.  Accordingly,
DOD developed an agencywide model in 1994 to approximate historical
cost.  The model requires adjustments to recorded inventory values to
arrive at the estimated historical cost.  These adjustments are a key
factor in determining the working capital funds' cost of operations.

Auditors have been unable to evaluate the reasonableness of reported
inventory values due to errors and wide swings in the dollar value of
adjustments made to value inventory at historical cost using this
model.  For example, the application of the model in Navy for its
fiscal year 1996 financial statement reporting resulted in about an
$8 billion adjustment to Navy's Working Capital Fund inventory and in
a net loss of $3.4 billion.  However, during 1997, DFAS later
identified a $3.9 billion error in how the model was applied to the
fiscal year 1996 inventory balances, which caused that year's ending
inventory balance to be understated by the same amount.

Further, the model has undergone frequent changes that have not been
well documented and, therefore, the impact of the changes has been
difficult to follow.  Nevertheless, the changes could have been one
reason that the Navy's reported inventory balances fluctuated
significantly between fiscal years 1995 and 1997.  For example, the
Navy's Working Capital Fund reported inventory balances were about
$13 billion in fiscal year 1995, $10 billion in fiscal year 1996, and
$13 billion again in fiscal year 1997.

As a result, the model DOD is using to value inventories has yet to
demonstrate that it can reliably approximate historical cost as
required by standards.  DOD's September 1997 working capital funds
improvement plan recognized the need to properly value inventories at
historical cost.  However, until DOD can develop and validate such a
model or capture its inventory costs, DOD will continue to have
little assurance that it can develop and report accurate net
operating result information--a key factor in setting the prices
DOD's working capital fund operations charge their customers.
Auditors are working with DOD to determine if the model can be
modified to provide more accurate estimates as an interim measure
until DOD obtains actual inventory costs.

         ASSETS WITH UNKNOWN
         CONDITION
------------------------------------------------------ Chapter 0:1.4.3

DOD's financial statements are required to provide information on the
condition of inventories.  For example, items held for repair should
be segregated and reported at values reduced by the costs of bringing
those assets up to serviceable condition.  However, Army auditors
reported that the Army's fiscal year 1997 Working Capital Fund
financial statements did not properly report inventory held for
repair.\21 In addition, we reported in December 1997 that the Air
Force had over 400,000 secondary items valued at $2.4 billion for
which it had not determined the usability or condition.\22 For about
64 percent of the almost 2,000 items we reviewed, we found that Air
Force records were not updated to reflect the item condition for over
1 year and in some instances had not been updated for over 6 years.
Lacking reliable information on inventory condition, DOD may not have
an accurate picture of the amount needed to bring these items to a
serviceable state, which could affect readiness or may result in DOD
incurring unnecessary storage costs for those items for which it is
not economically feasible to repair and should be disposed of.

--------------------
\21 Army Working Capital Fund Principal Financial Statements for
Fiscal Year 1997 (AAA Report No.  98-111, February 13, 1998).

\22 Defense Inventory:  Inadequate Controls Over Air Force Suspended
Stocks (GAO/NSIAD-98-29, December 22, 1997).

         INVENTORIES NOT REPORTED
------------------------------------------------------ Chapter 0:1.4.4

As disclosed in our recent report on the results of our audit of the
U.S.  government's consolidated financial statements, an estimated $9
billion of known military operating materials and supplies were not
reported, including inventories on Army installations, at Navy
facilities, and on Navy ships.  Further, as part of their fiscal year
1997 audit, Army auditors found that Army records were understated by
$248.9 million because munitions balances in Kuwait and those held by
a contractor were not reported.\23 In the case of the contractor, the
auditors confirmed that the contractor's records showed 3,873 more
rocket pods (a rocket pod contains 12 surface-to-surface rockets and
is part of a mobile rocket launching system) than the Army's records.
This variance, representing about 14 percent of the total 27,766
rocket pods the Army has in its inventory, occurred because the Army
relied on manual reporting procedures from the contractor.  This is
not a new problem.  For example, in its fiscal year 1996 audit, the
Naval Audit Service found that the Navy's reported ammunition
balances were understated by $20.4 billion because the source Navy
used to prepare its financial statements did not include all
ammunition owned by the Navy.\24

The adverse effect of not having information on these inventories was
highlighted in our March 1998 report on our analysis of Navy
financial data deficiencies.\25 We discussed a number of areas in
which logistics systems' financial deficiencies not only adversely
affected the reliability and usefulness of the Navy's financial
reporting but also had significant programmatic or budgetary
implications.  For example, to determine Navy-wide inventory
requirements, responsible managers must have accurate, reliable
information on the quantities of inventories on ships, including any
quantities in excess of needs.  However, we reported that information
on almost $8 billion of inventories on-board ships were omitted from
the data used from financial statement reporting and as the starting
point for the development of budget requests for additional
inventories.

As a result, there was a substantially increased risk that Navy may
have requested funds to obtain additional unnecessary inventories
because responsible managers did not receive information on excess
inventories that were already on hand in other locations.  For
example, in our August 1996 report, we identified unnecessary Navy
spending of at least $27 million in fiscal year 1995 and forecasted
spending which could result in the Navy incurring another
approximately $38 million in the future for items already available
at other locations.\26

--------------------
\23 Army's Principal Financial Statements for Fiscal Year 1997 and
1996--Financial Reporting of Wholesale Munitions (AAA Report No.
98-98, February 5, 1998).

\24 Department of the Navy Fiscal Year 1996 Annual Financial Report:
Report on Internal Controls and Compliance With Laws and Regulations
(NAS Report No.  029-97, April 5, 1997).

\25 CFO Act Financial Audits:  Programmatic and Budgetary
Implications of Navy Financial Data Deficiencies (GAO/AIMD-98-56,
March 16, 1998).

\26 Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, August 16, 1996).

         POOR ACCOUNTING FOR
         IN-TRANSIT INVENTORIES
------------------------------------------------------ Chapter 0:1.4.5

In their audits of fiscal year 1997 working capital fund financial
statements, auditors were not able to confirm the in-transit
inventory balances, which are included in the reported overall
inventory balance on hand.  For example, Army auditors found that a
reported $598 million of inventory in-transit from vendors was
misstated by an unknown but material amount due to problems with
processing receipt notifications.\27 Air Force auditors could not
validate $11 billion of inventories at contractor repair facilities
and in transit between contractors and Air Force installations
because the systems did not maintain supporting records.\28

We also recently reported on problems with verifying in-transit
inventory balances.  In February 1998, we reported that the $5.2
billion of in-transit secondary item inventory shown in DOD's fiscal
year 1996 Supply System Inventory Report is questionable because (1)
the Air Force did not include $1.3 billion of in-transit repairable
items, and (2) DOD did not have receipt notifications for 12.4
million shipments outstanding for an average of 145
days--approximately 1.4 billion items--out of 21 million shipments it
initiated.\29 The logistical systems supporting this report also are
the source of financial information.

Taken together, these inventory control and accountability
deficiencies also serve to undermine the Department's ability to
reliably meet established performance objectives.  For example,
performance indicators were set out in the Department's recent
performance plan, including reductions in retail-level inventories,
such as repairable and consumable items at bases, from $14 billion in
fiscal year 1996 to $10 billion in fiscal year 2001, and reductions
in supply inventories, such as repairable and consumable items in
storage, from $70 billion in fiscal year 1995 to $48 billion in 2003.
These performance indicators do not address the remaining balance of
the reported $170 billion of inventory, including ammunition and
other operating supplies.  Until DOD can reliably account for both
the quantity and value of its substantial investment in inventories,
its ability to assess its progress in meeting such goals will be
impaired.

--------------------
\27 Army Working Capital Fund Principal Financial Statements for
Fiscal Year 1997 (AAA Report No.  98-111, February 13, 1998).

\28 Opinion on Fiscal Year 1997 Air Force Working Capital Fund
Financial Statements (AFAA Report No.  97068043, February 27, 1998).

\29 Department of Defense In-Transit Inventory (GAO/NSIAD-98-80R,
February 27, 1998).

   REPORTED ENVIRONMENTAL/DISPOSAL
   LIABILITY IS SIGNIFICANTLY
   UNDERSTATED
---------------------------------------------------------- Chapter 0:2

DOD has not yet fully implemented the federal accounting standard
that requires it to recognize and report liabilities associated with
environmental cleanup and/or disposal of its assets, including
ammunition, national defense assets,\30 military training ranges, and
chemical weapons.  While DOD reported $38.7 billion in estimated
environmental cleanup and disposal liabilities in its fiscal year
1997 financial statements for environmental restoration of active and
inactive bases, cleanup of formerly used sites, and cleanup and
disposal of certain chemical weapons, it did not estimate
environmental cleanup and disposal costs associated with military
weapons systems or training ranges.  As a result, DOD's undisclosed
liability in this area is likely understated by tens of billions of
dollars.

One of the new accounting standards\31 requires recognition of a
liability for any probable and measurable future outflow of resources
arising from past transactions, if those costs can be reasonably
estimated.  These requirements apply to many DOD assets, including
its weapons systems, which contain hazardous materials and waste that
must be removed and disposed of when inactivated.  The new federal
accounting standard was issued more that 2 years ago to allow
agencies ample time to develop implementing policies and procedures
prior to its fiscal year 1997 implementation date.  The Congress has
also recognized the importance of accumulating and considering such
information.  The National Defense Authorization Act for Fiscal Year
1995 requires the Secretary of Defense to determine, as early in the
acquisition process as feasible, the life-cycle environmental costs
for major defense acquisitions programs, including the materials to
be used and methods of disposal.  The life-cycle cost estimates are
required before proceeding with the major acquisition.

Because of the importance of this information and because of our
responsibility to audit the U.S.  government's consolidated financial
statements beginning with fiscal year 1997, we undertook a series of
reviews to assist DOD in its efforts to meet the requirements of the
new federal accounting standard.  We found that, while DOD has not
yet estimated its disposal liability for all assets, including
national defense assets, information is available to estimate these
costs.  We have reported the following.

  -- DOD regularly disposes of missiles and includes disposal costs
     for missiles as part of its annual budget request.  Using
     available information, the military services were able to
     provide us with estimated disposal costs, ranging from $102 to
     almost $500,000 per missile for each of four missile types we
     selected for review.\32

  -- Navy management information systems contain data on the costs to
     inactivate and dispose of nuclear submarines and ships.  For
     example, these systems show that estimated environmental costs
     associated with inactivation and disposal activities related to
     a nuclear submarine could range, at a minimum, from $19 million
     to $61 million.  Navy officials also provided a cost estimate
     that ranged from $807 million to $942 million for the
     inactivation and disposal of the first Nimitz-class nuclear
     carrier, if work was begun in fiscal year 1998.\33 Subsequently,
     they stated that as the Navy gains experience in defueling
     during the refueling cycles of Nimitz-class carriers, they
     expect the cost estimate for inactivating and disposing of
     Nimitz-class carriers could be reduced to about $500 million for
     the tenth Nimitz-class carrier.  Although the Navy has not
     provided a basis for us to assess the reasonableness of the $500
     million estimate, we acknowledge that as the Navy gains
     experience in the inactivation and disposal of aircraft
     carriers, cost efficiencies could occur.  Ultimately, the
     estimate will need to be adjusted to reflect actual experience.

  -- DOD's designated aircraft storage, reclamation, and disposal
     facility could provide data to compute estimated costs for the
     demilitarization (ranging from about $7,000 to $105,000 for
     three of the aircraft we reviewed) and hazardous material
     removal (ranging from $313 to $123,000 for the five aircraft
     reviewed) for aircraft systems.\34

  -- DOD can use historical cost information on ammunition disposal
     already compiled as a starting point for estimating its
     ammunition disposal liability.  Using these data, along with
     inventory quantities provided by the Army, we estimated that the
     Army's ammunition disposal liability alone could range from
     about $1.3 billion to $2.1 billion.\35

DOD also faces significant cleanup and disposal costs for its
military training ranges.  These costs, which are related to clearing
the land of unexploded ordnance and other chemical wastes, are also
estimable.  In a July 1996 study, DOD estimated that $19.5 billion
would likely be needed to secure and/or clear inactive, closed, or
transferring ranges under current legal requirements; however, DOD
did not include any estimate for these costs in its fiscal year 1997
financial statements.  Also, this amount should have been, but was
not, included in DOD's 1996 Defense Environmental Restoration Program
Annual Report to the Congress.

In response to our reports, DOD has stated that, while it generally
agreed that estimates could be developed for certain assets,
estimates covering all assets would take some time.  It added that it
has delayed reporting of most of these liabilities because of the
time required to develop and implement policy and specific
application procedures and reporting guidance.

As the Department begins developing needed policy and specific
guidance for the military services on estimating and reporting the
disposal liability for assets, our reports identify certain factors
that need to be addressed.  In addition, because environmental and
disposal liabilities represent future outlays, DOD should also
consider ways to make this information even more meaningful to
decisionmakers.  One way to provide a proper context for
environmental liabilities would be to provide a table showing
estimated outlays by budget period in a footnote to the financial
statements.  Such a table would show congressional and other budget
decisionmakers the potential annual impact of DOD's actions on
various budget periods, including those outside the annually
submitted Future Years Defense Program.  This information could also
provide a link between budgetary and accounting information, one of
the key objectives of the CFO Act.

--------------------
\30 Includes weapons systems such as submarines, ships, aircraft,
missiles, and combat vehicles.

\31 Statement of Federal Financial Accounting Standards No.  5,
Accounting for Liabilities of the Federal Government.

\32 Financial Management:  DOD's Liability for Missile Disposal Can
Be Estimated (GAO/AIMD-98-50R, January 7, 1998).

\33 Financial Management:  Factors to Consider in Estimating
Environmental Liabilities for Removing Hazardous Material in Nuclear
Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997).

\34 Financial Management:  DOD's Liability for Aircraft Disposal Can
Be Estimated (GAO/AIMD-98-9, November 20, 1997).

\35 Financial Management:  DOD's Liability for the Disposal of
Conventional Ammunition Can Be Estimated (GAO/AIMD-98-32, December
19, 1997).

   REPORTED LIABILITY FOR
   POST-RETIREMENT HEALTH CARE IS
   UNSUPPORTED
---------------------------------------------------------- Chapter 0:3

Under the new accounting standards, DOD is required to calculate and
report its estimated liability for providing health care benefits to
military retirees and their beneficiaries.  DOD provides these
benefits through free care at Military Treatment Facilities and
through the Tricare program, which is comprised of fee-for-service
(CHAMPUS), preferred provider, and HMO plans.

DOD did not accumulate the data necessary to accurately estimate its
military post-retirement health benefits liability.  Specifically,
DOD used unaudited budget information, instead of the required cost
data, to calculate its $218 billion estimated liability.  In
addition, DOD did not accumulate current or complete historical
claims data to support its calculation.  These problems significantly
impair DOD's ability to determine the full cost of its current
operations or the extent of its actual liabilities.

According to both DOD actuaries and independent actuaries under
contract to DOD, the current cost of providing health care cost is
very significant to the liability calculation--if costs are
understated or overstated by a percentage point, the liability will
be understated or overstated by approximately the same percentage.
However, DOD did not accumulate actual cost data for its Military
Treatment Facilities.  Instead, DOD estimated health care spending
using budget obligation data and used this information in the
calculation.  While budget obligations represent funds committed
during a period, they are not equivalent to full cost data.  For
example, the costs of the treatment facilities themselves may not be
fully captured nor some personnel costs such as future pension
expenses.

DOD did not obtain a significant portion of health care claims data.
For outpatient claims, which comprise over one-third of the dollar
value of all claims, data were available from only 15 of the 121
Military Treatment Facilities.  The actuaries assumed that the 15
were representative of the entire 121, which resulted in an
unquantifiable error in the liability calculation.  Finally, the
actuaries did not obtain the most current data available; instead,
claims data from fiscal year 1994 were the most recent used in the
calculations for the fiscal year 1997 liability.

   COST OF DOD OPERATIONS NOT
   ACCURATE
---------------------------------------------------------- Chapter 0:4

As stated in our report on the results of our audit of the U.S.
government's consolidated financial statements, the government was
unable to support significant portions of the more than $1.6 trillion
reported as the total net costs of government operations.  DOD
accounts for about $250 billion of this amount.  The previously
discussed material deficiencies in DOD's ability to report assets and
liabilities and the lack of effective reconciliations, as discussed
later, all affect the department's reported net costs.  Specifically,
as previously discussed, the accuracy of DOD's operating costs is
materially affected by DOD's inability to (1) properly value and
capitalize its facilities and equipment, (2) properly value its
inventory, (3) identify its environmental and disposal costs, and (4)
determine its costs associated with post-retirement health care for
military personnel.  Further, as discussed in the following sections,
DOD's inability to properly identify and eliminate interagency
transactions, reconcile balances with Treasury, and record all of its
disbursements are additional factors in the incomplete picture of
DOD's costs.

   DOD CANNOT IDENTIFY INTERAGENCY
   TRANSACTIONS
---------------------------------------------------------- Chapter 0:5

To make the consolidated governmentwide financial statements balance,
Treasury had to record a net $12 billion item on the Statement of
Changes in Net Position, which it labeled unreconciled transactions.
This out-of-balance amount was the net of more than $100 billion of
unreconciled transactions--both positive and negative amounts--which
Treasury attributed largely to the government's inability to properly
identify and eliminate transactions between federal government
entities.

In order to portray DOD as a single entity and the federal government
as a single economic unit, certain transactions that occur between
entity components must be identified and eliminated.  Without proper
eliminations, certain assets, liabilities, revenues and expenses are
double counted or otherwise misstated.  However, DOD has acknowledged
that it cannot reliably identify and eliminate interagency
transactions, whether between individual DOD components or between
DOD and other federal government entities.

For the consolidated governmentwide financial statements, DOD
identified its side of interagency transactions for elimination
without reconciling its accounts with other federal government
entities.  Therefore, DOD had no assurance that it had identified the
correct amounts and that a corresponding revenue, expense, asset or
liability had been identified by the transaction partner.  Improper
eliminations can result in significant errors in financial statement
reports.  For example, as part of the nearly $300 billion of
interagency transactions reported to Treasury, DOD identified $59
billion of program and operating expenses for elimination but later
could not justify $42 billion as interagency transactions.  As a
result, Treasury had to adjust the consolidated net cost statement to
correct this error.  If Treasury had not made the necessary
adjustment, the consolidated Statement of Changes in Net Position,
which currently shows the government's costs exceeded its revenues by
$15 billion, would have indicated that the government's revenues
exceeded its costs by $27 billion for fiscal year 1997.

Because improving DOD systems will be a long-term endeavor, we are
continuing to work with DOD, OMB, and Treasury to develop an
acceptable interim process to resolve problems in accurately
accounting for and reporting interagency transactions.

   DOD HAS BILLIONS OF
   UNRECONCILED CASH ACTIVITY
---------------------------------------------------------- Chapter 0:6

As discussed in our report on the results of our consolidated audit
of the federal government, several major agencies are not effectively
reconciling their transactions.  DOD, with nearly half of the federal
government's discretionary spending, is one of those agencies.  These
reconciliations--similar in concept to individuals reconciling
personal checkbooks with a bank's records each month--are a key
control to ensure that agencies' and Treasury's records agree on the
amount of funds spent and that remain available, as well as to ensure
that all transactions are recorded to capture the costs of an
agency's activities.

As important as these reconciliations are to all federal agencies,
these are critical for DOD.  This is because authorized transactions
are often charged to DOD's appropriation accounts by entities not
directly responsible for the appropriations.  For example, the Army
may write a check to pay a Navy vendor and cite a Navy appropriation
account.

An effective reconciliation of DOD's and Treasury's records requires
not only identifying differences, but researching and recording
appropriate adjustments in the accounting systems.  DOD has been
unable to carry out these critical reconciliations because of

  -- at least $4 billion in differences between checks issued by DOD
     and reported to Treasury,

  -- an indeterminable dollar amount of transactions in suspense
     accounts, which are to be used to hold transactions temporarily
     until the agency can determine the appropriate accounting
     treatment, and

  -- a reported $22 billion in problem disbursements.

      DIFFERENCES IN CHECKS ISSUED
-------------------------------------------------------- Chapter 0:6.1

DOD disbursing offices write thousands of checks daily to pay the
Department's bills.  Each month, the disbursing offices provide
Treasury with an accountability report that shows the total amount of
checks disbursed, by appropriation, for that reporting period.  For
the total reported amount of checks disbursed, offices provide
Treasury with computer listings of individual checks written and
their amounts throughout the month and after each month end.
Treasury compares the accountability report totals to the total of
the computer listings.  Treasury also compares the individual checks
on the computer listings to the individual checks that have been paid
by the Federal Reserve System.  Treasury reports any discrepancies to
DOD for follow-up and correction.

Discrepancies between DOD records and Treasury records can occur
because of the following situations:  (1) the disbursing office makes
an error in the accountability report, (2) the computer tapes are
incomplete or are not processed by Treasury, and (3) DOD's recorded
amount for a check is different from the amount that is paid by the
Federal Reserve.

At September 30, 1997, DOD and Treasury records differed by more than
$4 billion--$1.4 billion for Army, $1.7 billion for Air Force, $0.7
billion for Navy, and $0.4 billion for other DOD components.
However, this $4 billion represents only the net difference of all
the positive and negative discrepancies that existed at year-end.
For example, any errors in reporting on accountability reports have
been offset against errors caused by submission of incomplete
computer check listings.  Although auditors were unable to determine
the total value of the discrepancies, it is likely to be much larger
than the reported net amount.

Because DOD had not performed a proper reconciliation with Treasury
records, auditors were also unable to determine whose records needed
to be adjusted for the differences.  While some of these
discrepancies could be timing differences, others could be due to
errors in DOD recorded amounts or result from an error by Treasury.
Furthermore, until these differences are identified, and it is
determined whose records require adjustment, DOD is not recording
these differences or maintaining control accounts to accumulate these
amounts to ensure that all corrections are made.

      INDETERMINABLE AMOUNTS HELD
      IN SUSPENSE ACCOUNTS
-------------------------------------------------------- Chapter 0:6.2

In addition to the cash activity discussed above which is not being
properly reconciled to Treasury's records, DOD is not properly
reconciling its suspense accounts.  DOD maintains suspense accounts
to record receipt or disbursement transactions for which it is either
unable to determine, or has not yet attempted to determine, the
correct fund or appropriation citation.  When the disbursing office
cannot identify the correct fund or appropriation account to provide
to Treasury for a receipt or disbursement transaction, the
transaction is placed in a suspense account in both DOD's and
Treasury's records.  These suspense accounts are to be temporary
holding accounts that are quickly cleared to permit proper
accounting.  Until the individual transactions are properly recorded,
DOD's budgetary accounts, which tell DOD the status of its available
funds, and its accounting records, which provide information on the
cost of its programs and activities as well as its assets and
liabilities, do not include this information and are therefore
inaccurate.

At the end of fiscal year 1997, these suspense accounts totaled $769
million when collections and adjustments were netted against all
disbursements.  However, this significantly understates the magnitude
of the problem.  For example, 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.  As a result of not properly recording
the $5.9 billion in transactions, the cost of individual programs and
activities may be understated because of unprocessed disbursements,
while the cost of other programs and activities may be overstated by
the unprocessed collections.  We have been working with DOD officials
and auditors to identify actions DOD should take effectively address
this issue in fiscal year 1998.

      PROBLEMS IN ACCOUNTING FOR
      DISBURSEMENTS
-------------------------------------------------------- Chapter 0:6.3

Problem disbursements is the term used to refer to specific DOD
disbursements that have not been matched with corresponding
obligations and include the suspense accounts previously discussed as
well as unmatched disbursements, in-transit disbursements, and
negative unliquidated obligations.\36 Unlike suspense accounts, other
problem disbursement categories have been charged to a particular
appropriation account in Treasury and in DOD's records when the
disbursement is made.  However, as with suspense accounts, these
other problem disbursement categories may not be reflected in the
cost of DOD's programs and activities, nor properly reflected in
DOD's status of funds because accurate accounting information beyond
the appropriation is not available.  While DOD has made progress in
this area, it still faces a considerable challenge if it is to
effectively resolve long-standing deficiencies.

In February 1995, at the date of our 1995 High-Risk report,\37 DOD
reported $25 billion of problem disbursements.  In May of the
following year, DOD reported a reduction in that balance to $18
billion.  Examining that reported balance, we issued a report in May
1997 which showed that the balance was understated by at least $25
billion and should actually have been reported at over $43
billion.\38 This occurred primarily because DOD was not reporting all
transactions that needed to be resolved, but instead was offsetting
collections and adjustments against unrelated disbursements.

In June 1997, DOD began reporting all of its problem disbursements
without those offsets.  At that time, it reported a balance of over
$31 billion in problem transactions.  In its latest report, January
1998, DOD reported $22.6 billion in problem transactions.  DOD's
reports for problem disbursements show that the decrease resulted
primarily from actions to clean up old problems.  For example, as of
January 31, 1998, the Navy had discontinued research and recorded
$2.6 billion in obligations to reduce problem disbursements.  While
we have not tested DOD's January 1998 problem disbursement report,
our work on the financial audit has raised questions about whether
all problem disbursements are being reported.  We have ongoing work
in these areas to determine the extent to which this is occurring and
the effect on the financial and budgetary reports.

Because systems problems contribute to the volume of problem
disbursements, DOD has identified seven technological initiatives as
key elements of its efforts to improve the contract payment
process.\39 However, as we reported in our May 1997 report, DOD has
not performed the in-depth analysis necessary to fully determine the
underlying causes of these problems and therefore identify the most
effective solutions and rank specific reforms.  As a result, as with
its other initiatives, the extent to which these seven technology
initiatives will resolve DOD's long-standing disbursement problems is
unclear.

--------------------
\36 Unmatched disbursements occur when disbursement transactions are
received by the accounting station, but attempts to match them to an
obligation are unsuccessful.  In-transits are disbursements that have
been reported to Treasury but have either not been received or have
not been processed by the accounting station.  Negative unliquidated
obligations occur when disbursement transactions are received,
matched to an obligation, and posted to the appropriation by the
accounting station, but the recorded disbursements exceed recorded
obligations.

\37 High-Risk Series:  An Overview (GAO-HR-95-1, February 1995).

\38 Financial Management:  Improved Reporting Needed for DOD Problem
Disbursements (GAO/AIMD-97-59, May 1, 1997).

\39 Financial Management:  Seven DOD Initiatives That Affect the
Contract Payment Process (GAO/AIMD-98-40, January 30, 1998).

   CRITICAL AREAS MUST BE
   ADDRESSED TO MEET FINANCIAL
   REPORTING GOALS
---------------------------------------------------------- Chapter 0:7

We and the military service auditors have made hundreds of
recommendations in the last 2 years alone to help correct DOD's
long-standing financial management deficiencies.  These
recommendations have ranged from specific and detailed actions, such
as system edits that could be implemented to prevent certain errors,
to broad suggestions to reengineer entire segments of DOD's
operations, such as developing a concept of operations for how the
department plans to conduct its financial management operations now
and in the future.  Going forward, we believe that two key issues are
critical to DOD's ability to achieve the wide-ranging reforms
necessary to address its long-standing financial management
deficiencies.  Until DOD upgrades the skills of its financial
personnel and successfully integrates and consolidates its
information systems, the Department may be able to accomplish some
slow incremental improvements as we have seen in the past, but the
sweeping changes needed to ultimately resolve its long-standing
problems will remain outside its grasp.

      ESTABLISHING A SKILLED
      FINANCIAL MANAGEMENT
      WORKFORCE
-------------------------------------------------------- Chapter 0:7.1

One of the key issues facing DOD under the CFO Act is the need to
ensure that its financial management staff has the knowledge and
skills required to carry out the Department's complex financial
management operations.  DOD's challenge in this area has been
increased by the new set of federal accounting standards and other
recent legislative requirements, including the mandate now in place
for the development of performance measures that will rely, in part,
on financial data.  These challenges have highlighted the critical
need for targeted technical financial- and accounting-related
training to supplement the on-the-job experiences of DOD's financial
managers, if DOD is going to have the cadre of financial managers
needed to pass the test of a financial statement audit and comply
with the CFO Act.

DOD estimates that it has about 32,000 financial management
personnel.  The Defense Finance and Accounting Service (DFAS), which
employs about 15,000 of these individuals and had a fiscal year 1998
budget exceeding $1.6 billion, is primarily responsible for managing
the accounting and finance operations of one of the nation's largest
and most complex entities.  Adding to the difficulty of carrying out
financial operations in DOD is the continuing effort to downsize DOD.

Because DOD did not have reliable workforce profile information
(including formal education, professional work experience, training,
and professional certifications) available, we conducted a recent
series of studies to obtain information on key financial managers
from five DOD organizations.\40 Our surveys covered over 1,400
financial managers identified by DOD and military service officials
as being their key financial managers.  They often served as (1)
comptrollers, deputy comptrollers, or budget officers at DOD and
military service headquarters or field activities and (2) managers of
accounting or finance operations at the DFAS.

Over half (53 percent) of the key DOD financial managers who
responded to our surveys had received no financial or
accounting-related training during 1995 and 1996.  One in five
respondents had received no training at all during that time.  In
contrast, many state government and private sector organizations we
surveyed placed a strong emphasis on training as a means of upgrading
workforce knowledge of current financial management, accounting, and
reporting requirements.\41 It was also noteworthy that some
organizations set internal training requirements for their personnel,
while others stressed--and sometimes required--professional
certifications in their hiring and promotion decisions--a vehicle
which would help ensure that personnel holding such certificates kept
abreast of emerging financial management developments.

In October 1997, based on its audit of the department's support
operations that are intended to operate on a business-like basis, the
DOD Inspector General reported\42

continuing pervasive weaknesses in the personnel area, including
incomplete or no training, insufficient management oversight, and an
inability to respond to a rapidly changing accounting environment.
The Inspector General also pointed out the critical linkage between
training and the successful introduction and use of new accounting
systems.  In addition, the DOD Inspector General's report documented
a widespread failure of accounting personnel to understand basic
accounting theories and principles that support transaction entries.

DOD leadership has acknowledged that it needs to improve the
capabilities of its financial managers, and DFAS is developing a
program intended to identify the kinds of skills and developmental
activities needed to improve the competencies of financial personnel.
In addition, officials with each of the military services told us
that they have implemented or are planning a number of programs to
enhance the skills and competencies of their respective financial
managers.  However, DOD could enhance its plans to improve the
professional skills of its financial managers by taking actions to
ensure that (1) all critical competencies are addressed and applied,
not just to DFAS, but to all DOD financial personnel, (2) financial
personnel receive a minimum amount of annual financial management
technical training, and (3) a specific curriculum to support the
competencies is developed.

--------------------
\40 Financial Management:  Profile of DOD Comptroller/CFO Financial
Managers (GAO/AIMD-97-97, June 27, 1997); Financial Management:
Profile of Air Force Financial Managers (GAO/AIMD-98-4, November 28,
1997); Financial Management:  Profile of Army Financial Managers
(GAO/AIMD-98-58, February 25, 1998); and Financial Management:
Profile of Navy and Marine Corps Financial Managers (GAO/AIMD-98-86,
April 15, 1998).  We are finalizing our audit work on the profile of
DFAS financial managers.

\41 Financial Management:  Profile of Financial Personnel in Large
Private Sector Corporations and State Governments (GAO/AIMD-98-34,
January 2, 1998).

\42 A Status Report on the Major Accounting and Management Control
Deficiencies in the Defense Business Operations Fund for FY 1996,
Audit Report of the Office of the Inspector General, Department of
Defense (Report No.  98-002, October 3, 1997).

      DEVELOPING INTEGRATED
      FINANCIAL MANAGEMENT SYSTEMS
-------------------------------------------------------- Chapter 0:7.2

In our recent report, we stated that the U.S.  government has
ineffective internal controls due in part to poorly designed
financial systems.  In addition, we noted that widespread computer
control weaknesses are placing enormous amounts of federal assets at
risk of fraud and misuse and exposing agencies' computer systems to
exploitation by outside intruders as well as authorized users with
malicious intent.  Nowhere in the federal government are financial
systems design and computer control weaknesses more challenging and
more serious than in DOD.  Furthermore, DOD's approach to dealing
with the Year 2000 issue is seriously hampering DOD's chances of
successfully meeting the Year 2000 deadline for mission-critical
systems.

         FINANCIAL SYSTEMS DESIGN
------------------------------------------------------ Chapter 0:7.2.1

DOD has a vast number of financial management systems.  In 1995, DOD
had identified and reported on 249 financial management systems in
its annual financial systems inventory to OMB.  By 1996, that number
had declined to 217 financial systems.  In the latest report for
1997, DOD indicated a continued decline to 156 financial systems.
DOD's performance plan has a long-term goal of reducing the number of
finance systems to 9 and, by fiscal year 2003, of reducing the number
of accounting systems to no more than 23.

However, DOD does not identify and report on the total number of
financial management systems it uses.  Specifically, as we reported
in January 1997,\43 DOD excluded major financial management systems,
such as acquisition, logistics, and personnel systems, because they
are generally not within the CFO (Comptroller) organization .  In
fact, the Army's (CBSX) and the Air Force's (REMIS) systems which
provide information for financial reporting on a large portion of
DOD's fiscal year 1997 $635.5 billion in military equipment, are not
included in those counts.

A comprehensive inventory of systems used to record, accumulate,
classify, and report on DOD's financial management information is a
critical step if DOD is to (1) effectively manage its existing
systems, (2) prioritize and coordinate efforts to correct
longstanding financial systems deficiencies, and (3) develop a
reliable, integrated financial management system.  Army and Air Force
officials have indicated that they are in the process of identifying
the "critical" systems that provide information to the finance and
accounting systems owned and operated by DOD's accounting
organization--the Defense Finance and Accounting Service.

In addition to not having a complete inventory of its financial
management systems, DOD has not documented how it conducts its
financial management operations now and plans to in the future.  A
concept of operations is needed to provide the foundation upon which
the rest of the systems planning process is built.  A concept of
operations is a particularly critical step at DOD because of the
organizational complexity of its financial management activities.
According to the DFAS September 1996 Chief Financial Officer
Financial Management 5-Year Plan, it is estimated that the DOD
financial community is reliant on data captured by other functional
areas, such as logistics and acquisition, for about 80 percent of the
data used in its processes.  Without careful planning that includes
these other communities, system development efforts are likely to
fail to meet DOD's needs.  In recognition of this critical planning
process, the 1998 Defense Authorization Act requires DOD to submit a
concept of operations as part of a biennial financial management
improvement plan--the first of which is to be submitted by September
30, 1998.

Without adequate financial management systems, DOD's operations will
continue to be burdened with costly, error prone systems that do not
provide financial controls to ensure that DOD's assets are
safeguarded, its resources appropriately used, or the cost of its
activities accurately measured.  In fact, the DOD IG recently
concluded that DOD's financial systems did not meet the requirements
of the Federal Financial Managers Improvement Act of 1996.  DOD must,
within 120 days of the DOD IG report, submit a remediation plan to
OMB to address these deficiencies.

--------------------
\43 Financial Management:  Comments on DFAS' Draft Federal Accounting
Standards and Requirements (GAO/AIMD-97-108R, June 16, 1997).

         COMPUTER SECURITY
------------------------------------------------------ Chapter 0:7.2.2

Also, serious concerns exist over the security of the Department's
computer systems containing unclassified information.  In a 1996
report, which was limited in distribution because of the sensitive
nature of the specific findings, we reported serious weaknesses that
would allow both hackers and hundreds of thousands of legitimate
users with valid access privileges to improperly modify, steal,
inappropriately disclose, and destroy sensitive DOD data.  That same
year, we issued another report which stated that DOD experienced as
many as 250,000 hacker attacks on its computer systems in 1995 and
that 65 percent of the attacks were successful.\44 Based upon our
work performed for fiscal year 1997, these vulnerabilities continue
to exist.  Specifically, computer controls do not provide adequate
protection of significant financial applications involving personnel,
payroll, disbursements, and inventory information maintained in DOD's
computer systems.  While DOD has corrected some weaknesses underlying
our recommendations from prior reports--thereby improving
controls--responses to the recommendations remain incomplete.  DOD
has announced its intention to develop and implement an integrated,
comprehensive information assurance program by August 1998.

--------------------
\44 Information Security:  Computer Attacks at Department of Defense
Pose Increasing Risks (GAO/AIMD-96-84, May 22, 1996).

         YEAR 2000
------------------------------------------------------ Chapter 0:7.2.3

DOD relies on computer systems for virtually all aspects of its
operations, including strategic and tactical operations, weaponry,
intelligence, and security.  This reliance extends to its business
operations that support the Department including financial
management.  Most of Defense's automated information systems are
vulnerable to the Year 2000 problem, which is rooted in the way dates
are recorded, computed, and transmitted in these systems.\45 Failure
to successfully address the Year 2000 problem in time could severely
degrade or disrupt any of these operations.

DOD faces a formidable task in providing assurance that its thousands
of systems will be compliant and that the data exchanged among these
systems will be accurate.  At your request, we have issued a number
of reports on the Year 2000 activities of several DOD components, and
our comprehensive report will be issued later this month.  We are
concerned that the Department has not made adequate progress in
addressing Year 2000 issues.  While DOD has taken many positive steps
to increase awareness and promote information sharing, it lacks key
management and oversight controls to enforce good management
practices, direct resources, and establish a good picture of overall
progress in fixing key systems.  As a result, the Department has
increased its risk that errors will be propagated from one
organization's systems to another's, that all system interfaces will
not be thoroughly tested, and that all components will not be
prepared to carry on essential business and mission operations in the
event of system failures.

--------------------
\45 For the past several decades, DOD systems have typically used two
digits to represent the year--such as 97 representing 1997--in order
to conserve electronic data storage space.  With this format, the
computer cannot distinguish the year 2000 from the year 1900.  Any
uncorrected system using dates to compute or generate data will
produce erroneous data or in some cases completely fail.

   FUTURE PROSPECTS
---------------------------------------------------------- Chapter 0:8

DOD has a number of financial management reform efforts planned or
underway.  In our recent report on the first ever set of consolidated
financial statements of the U.S.  government, we noted that DOD had
stated that it planned to complete a new accounting systems
architecture, review its inventory accounting processes, and develop
a departmentwide property accounting system.  Also, OMB has
recognized that resolving DOD's financial management difficulties is
critical to the development of auditable consolidated U.S.
government financial statements.  As part of the President's Budget
of the United States Government, Fiscal Year 1999, OMB identified, as
one of its Priority Management Objectives, development of "a plan
with specific milestones to obtain an unqualified audit opinion on
Defense's financial statement." OMB's continuing strong oversight and
support of DOD's efforts to put together and implement a well thought
out, comprehensive plan for addressing DOD's many, serious financial
management challenges is extremely important.

For our part, we will continue to work with DOD and OMB, as well as
with the DOD Inspector General and each of the military service audit
agencies, in further defining and identifying solutions for the many
difficult financial management challenges the Department faces.  We
also plan to follow up on DOD's efforts to implement the numerous
recommendations we have already made.  For example, we have issued a
series of reports on the factors to be considered and the data that
must be available to meet accounting standards for Defense's
environmental and disposal liabilities.  Going forward, we plan to
further evaluate Defense's property and logistical systems to
recommend additional corrective actions to address weaknesses in
accounting for major asset categories on the financial statements.

-------------------------------------------------------- Chapter 0:8.1

In closing, Mr.  Chairman, sustained congressional attention to the
governmentwide implementation of financial management reform
legislation now in place, such as that provided by this hearing, will
be critical to instilling expected accountability in DOD and other
agencies across government.

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

RELATED GAO PRODUCTS

   PROPERTY, PLANT, AND EQUIPMENT
---------------------------------------------------------- Chapter 0:9

Army Logistics Systems:  Opportunities to Improve the Accuracy of the
Army's Major Equipment Item System (GAO/AIMD-98-17, January 23,
1998).

Financial Management:  DOD's Approach to Financial Control Over
Property Needs Structure (GAO/AIMD-97-150, September 30, 1997).

Financial Management:  Air Force Budget Request Could Be Enhanced
with More Complete Aircraft Data (GAO/AIMD-97-137R, August 21, 1997).

Financial Management:  Accuracy of Air Force Aircraft and Missile
Data Could Be Improved (GAO/AIMD-97-141R, August 15, 1997).

CFO Act Financial Audits:  Navy Plant Property Accounting and
Reporting Is Unreliable (GAO/AIMD-96-65, July 8, 1996).

Financial Management:  Army Lacks Accountability and Control Over
Equipment (GAO/AIMD-93-31, September 30, 1993).

   INVENTORY
--------------------------------------------------------- Chapter 0:10

Department of Defense In-Transit Inventory (GAO/NSIAD-98-80R,
February 27, 1998).

Financial Reporting:  DOD's Fiscal Year 1996 Financial Statements
Inventory Reporting Does Not Meet Standards (GAO/AIMD-98-16, December
24, 1997).

Defense Inventory:  Inadequate Controls Over Air Force Suspended
Stocks (GAO/NSIAD-98-29, December 22, 1997).

Defense Logistics:  Much of the Inventory Exceeds Current Needs
(GAO/NSIAD-97-71, February 28, 1997).

Defense Inventory:  Spare and Repair Parts Inventory Costs Can Be
Reduced (GAO/NSIAD-97-47, January 17, 1997).

Defense Ammunition:  Significant Problems Left Unattended Will Get
Worse (GAO/NSIAD-96-129, June 21, 1996).

   ENVIRONMENT
--------------------------------------------------------- Chapter 0:11

Financial Management:  DOD's Liability for Missile Disposal Can Be
Estimated (GAO/AIMD-98-50R, January 7, 1998).

Financial Management:  DOD's Liability for Disposal of Conventional
Ammunition Can Be Estimated (GAO/AIMD-98-32, December 19, 1997).

Financial Management:  DOD's Liability for Aircraft Disposal Can Be
Estimated (GAO/AIMD-98-9, November 20, 1997).

Financial Management:  Factors to Consider in Estimating
Environmental Liabilities for Removing Hazardous Materials in Nuclear
Submarines and Ships (GAO/AIMD-97-135R, August 8, 1997).

   DISBURSEMENTS
--------------------------------------------------------- Chapter 0:12

Financial Management:  Seven DOD Initiatives That Affect the Contract
Payment Process (GAO/AIMD-98-40, January 30, 1998).

Financial Management:  DOD Progress Payment Distribution Procedures
(GAO/AIMD-97-107R, June 21, 1997).

Financial Management:  The Prompt Payment Act and DOD Problem
Disbursements (GAO/AIMD-97-71, May 23, 1997).

Financial Management:  Improved Reporting Needed for DOD Problem
Disbursements (GAO/AIMD-97-59, May 1, 1997).

DOD Problem Disbursements Contract Modifications Not Properly
Recorded in Payment System (GAO/AIMD-97-69R, April 3, 1997).

Financial Management:  Improved Management Needed for DOD
Disbursement Process Reforms (GAO/AIMD-97-45, March 31, 1997).

DOD Problem Disbursements (GAO/AIMD-97-36R, February 20, 1997).

Navy Anti-Deficiency Act Training (GAO/AIMD-96-53R, April 12, 1996).

Navy Negative Undelivered Orders (GAO/AIMD-96-37R, January 12, 1996).

   PERSONNEL
--------------------------------------------------------- Chapter 0:13

Financial Management:  Profile of Navy and Marine Corps Financial
Managers (GAO/AIMD-98-86, April 15, 1998).

Financial Management:  Profile of Army Financial Managers
(GAO/AIMD-98-58, February 25, 1998).

Financial Management:  Profile of Financial Personnel in Large
Private Sector Corporations and State Governments (GAO/AIMD-98-34,
January 2, 1998).

Financial Management:  Profile of Air Force Financial Managers
(GAO/AIMD-98-4, November 28, 1997).

Financial Management:  Outsourcing Finance and Accounting
(GAO/AIMD/NSIAD-98-43, October 17, 1997).

Financial Management:  Profile of DOD Comptroller/CFO Financial
Managers (GAO/AIMD-97-97, June 27, 1997).

Financial Management:  Opportunities to Improve Experience and
Training of Key Navy Comptrollers (GAO/AIMD-97-58, May 5, 1997).

Financial Management:  An Overview of Finance and Accounting
Activities in DOD (GAO/AIMD/NSIAD-61, February 19, 1997).

DFAS Hiring Opportunities (GAO/AIMD-96-916R, July 18, 1996).

   SYSTEMS
--------------------------------------------------------- Chapter 0:14

Financial Management:  Comments on DFAS's Draft Federal Accounting
Standards and Requirements (GAO/AIMD-97-108R, June 13, 1997).

Financial Management:  DOD Inventory of Financial Management Systems
is Incomplete (GAO/AIMD-97-29, January 31, 1997).

DOD Accounting Systems:  Efforts to Improve System for Navy Need
Structure (GAO/AIMD-96-99, September 30, 1996).

Information Security:  Computer Attacks at Department of Defense Pose
Increasing Risks (GAO/AIMD-96-84, May 22, 1996).

   OTHER
--------------------------------------------------------- Chapter 0:15

Financial Audit:  1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, March 31, 1998).

CFO Act Financial Audits:  Programmatic and Budgetary Implications of
Navy Financial Data Deficiencies (GAO/AIMD-98-56, March 16, 1998).

Financial Management:  Issues To Be Considered by DOD in Developing
Guidance for Disclosing Deferred Maintenance on Ships
(GAO/AIMD-98-46, February 6, 1998).

Financial Management:  Issues to Be Considered by DOD in Developing
Guidance for Disclosing Deferred Maintenance on Aircraft
(GAO/AIMD-98-25, December 30, 1997).

Financial Management:  DOD Needs to Expedite Plans to Implement
Deferred Maintenance Accounting Standard (GAO/AIMD-97-159R, September
30, 1997).

DOD High-Risk Areas:  Eliminating Underlying Causes Will Avoid
Billions of Dollars in Waste (GAO/T-AIMD/NSIAD-143, May 1, 1997).

High Risk Area:  Actions Needed to Solve Pressing Management Problems
(GAO/T-AIMD/GGD-97-60, March 5, 1997).

High-Risk Series:  Benefits to Be Gained by Continued Emphasis on
Addressing High-Risk Areas (GAO/T-AIMD-97-54, March 4, 1997).

High Risk Area:  Update & Progress & Remaining Challenges
(GAO/T-HR-97-22, February 13, 1997).

High-Risk Series:  Defense Inventory Management (GAO/HR-97-5,
February 1997).

High-Risk Series:  Defense Financial Management (GAO/HR-97-3,
February 1997).

Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, August 16, 1996).

CFO Act Financial Audits:  Increased Attention Must Be Given to
Preparing Navy's Financial Reports (GAO/AIMD-96-7, March 27, 1996).

DFAS-Kansas City Financial Reporting (GAO/AIMD-96-34R, January 12,
1996).

High-Risk Series:  An Overview (GAO/HR-95-1, February 1995).
*** End of document ***