1997 Defense Reform Bill: Observations on H.R. 1778 (Testimony, 06/17/97,
GAO/T-NSIAD-97-187).

GAO strongly supports improving the Pentagon's business practices and
further reducing its support infrastructure. The Defense Department
needs to further streamline its operations, consolidate functions,
eliminate duplicative efforts, and improve efficiency if it is to
realize the savings needed to pay for weapon systems modernization and
other spending priorities. This testimony discusses provisions in the
Defense Reform Act of 1997 (H.R. 1778) that relate to defense personnel
reforms, defense business practice reforms, and additional miscellaneous
reforms.

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

 REPORTNUM:  T-NSIAD-97-187
     TITLE:  1997 Defense Reform Bill: Observations on H.R. 1778
      DATE:  06/17/97
   SUBJECT:  Reengineering (management)
             Military budgets
             Military cost control
             Proposed legislation
             Personnel management
             Future budget projections
             Privatization
             Military downsizing
             Defense audits
IDENTIFIER:  DOD Quadrennial Defense Review
             High Risk Series 1997
             
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Cover
================================================================ COVER


Before the Committee on National Security, House of Representatives

For Release on Delivery
Expected at
10:00 a.m., EDT
Tuesday,
June 17, 1997

1997 DEFENSE REFORM BILL -
OBSERVATIONS ON H.R.  1778

Statement of Henry L.  Hinton, Jr.  Assistant Comptroller General,
National Security and International Affairs Division

GAO/T-NSIAD-97-187

GAO/NSIAD-97-187T

1997 Defense Reform Bill

(709275)


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

  DOD - Department of Defense
  DRMS - Defense Reutilization and Marketing Service

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

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to provide my observations on The
Defense Reform Act of 1997 (H.R.  1778).  As requested, my statement
discusses the titles within the bill dealing with defense personnel,
business practices, and miscellaneous reforms.  My observations on
specific sections of the bill focus on those where we have relevant
ongoing or completed work.  Before providing the details of my
statement, I would like to briefly summarize some key points. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:1

We strongly support the need to improve the Department of Defense's
(DOD) business practices and further reduce its support
infrastructure.  Our work has shown significant opportunities remain
to further streamline operations, consolidate functions, eliminate
duplication of effort, and improve efficiency in the department. 
These opportunities must be fully embraced if DOD is to achieve the
level of savings it needs to meet other priorities such as weapon
system modernization and readiness within expected budgets. 

Despite spending reductions that have occurred, our review of DOD's
future years funding plans through fiscal year 2001 indicates that
overall support infrastructure funding as a percentage of the budget
is projected to remain relatively constant in the range of 57-58
percent.  DOD needs to achieve significant savings in its support
infrastructure to help increase funding for weapon system
modernization and meet its aim of increasing procurement funding from
$44.1 billion to $68.3 billion between fiscal year 1997 and 2002. 
DOD is relying on initiatives such as outsourcing and privatization,
acquisition reforms, organizational streamlining and consolidations,
management process reengineering, base realignments and closures,
personnel reductions, and inventory reductions to help produce
savings in its support areas.  We strongly support these initiatives
and encourage DOD to aggressively pursue their implementation. 

Opportunities to improve defense business practices are illustrated
by our February 1997 high-risk series of reports that include six
areas (financial management, information technology, weapon systems
acquisition, contract management, infrastructure, and inventory
management) within DOD.\1 (See app.  I for a list of our 1997
high-risk reports involving DOD.) DOD's inability to effectively
address weaknesses in the high-risk areas has resulted in billions of
dollars being wasted and places billions of dollars in future
spending at similar risk.  For example, our infrastructure report
noted that DOD continues to operate and maintain excessive support
infrastructure and waste billions of dollars annually on inefficient
and unneeded activities.  In order to effectively address the
underlying causes of the high-risk areas, we believe that
senior-level defense managers need to develop a strategic plan. 
Legislative initiatives such as H.R.  1778, and the Government
Performance and Results Act, are important to stimulating long-term
changes needed in DOD. 

Regarding H.R.  1778, the subject of today's hearing, we generally
agree with the aim of the titles relating to defense personnel
reforms, defense business practice reforms, and additional
miscellaneous defense reforms.  My observations on specific sections
of the titles are grouped into four categories.  First, there are a
number of sections where we have no basis upon which to comment and
therefore present no observations.  Second, for the majority of the
sections where we offer a comment, we agree with the sections' aims. 
Third, for some sections, we agree with the sections' aims and offer
suggestions to enhance its effectiveness.  Fourth, in two sections,
we have a question about the sections and suggest the Committee may
want to reconsider the sections. 

  -- Defense Personnel Reforms.  There are opportunities to achieve
     savings by reducing personnel overhead in various DOD
     headquarters and support areas identified in the bill.  Also, it
     is important that such reductions be well planned so that the
     remaining organizational structures are efficient and effective. 
     In that regard, the plans DOD is required to prepare are
     extremely important. 

  -- Defense Business Practice Reforms.  We support increased
     examination of the potential for outsourcing business
     activities.  A primary reason for this support is the savings
     that can accrue from outsourcing's emphasis on a competitive
     process involving public and private sector organizations and
     its emphasis on identifying the most efficient organization. 
     Further, our work shows that there are inefficiencies in various
     defense activities addressed in the bill such as the U.S. 
     Transportation Command, and that there are significant
     opportunities to change business practices in defense agencies
     as suggested by this title.  We also offer several suggestions
     to enhance the effectiveness of certain sections.  The
     suggestions relate to such things as the timing for completing
     certain actions and assuring competition between public and
     private sector activities. 

We have a question about the section that removes the Defense
Automation and Printing Service's surcharge billed to its military
customers.  The requirement to remove the surcharge would be
inconsistent with working capital fund cost accounting principles. 

  -- Miscellaneous Additional Defense Reforms.  For those sections
     where we have some basis to comment, we generally agree with the
     sections' aims.  We question part of the provision creating a
     board to coordinate audits because it would authorize the Under
     Secretary of Defense (Comptroller/Chief Financial Officer) to
     participate in jurisdictional decisions among the service
     auditors and to resolve jurisdictional disputes.  This role
     raises questions regarding the independence of service audit
     organizations. 

Now, let me turn to the specifics of my statement. 


--------------------
\1 In 1990, we began reviewing and reporting on high-risk areas
throughout the federal government, and in February 1997, we issued a
series of reports providing the status of such areas.  Of the 25
areas we identified as high risk, 6 are within DOD. 


   SIGNIFICANT OPPORTUNITIES EXIST
   TO IMPROVE SUPPORT
   INFRASTRUCTURE AND BUSINESS
   PRACTICES
---------------------------------------------------------- Chapter 0:2

There is a need to improve the economy and efficiency of DOD's
business practices and further reduce its support infrastructure. 
While DOD has made progress in downsizing the defense support
structure, it wastes billions of dollars each year because of
long-standing inefficiencies in its support infrastructure and
business practices.  Such waste occurs because DOD has been slow to
take advantage of opportunities to improve business systems and
practices, make further reductions in support infrastructure, and
reduce costs by eliminating duplication and waste.  Expenditures on
wasteful or inefficient activities divert defense funds from other
defense needs such as the modernization of weapon systems.  Although
DOD has identified net support infrastructure savings as a funding
source for weapon systems modernization, it has not achieved the
anticipated savings.  DOD's inability to effectively address problems
in six areas that we have identified as high risk illustrates
opportunities to make billions of dollars available during future
years defense budgets by reforming business practices. 


      SUPPORT INFRASTRUCTURE
      REDUCTIONS ARE NOT BEING
      ACHIEVED
-------------------------------------------------------- Chapter 0:2.1

DOD is faced with transforming its Cold War operating and support
structure in much the same way it has been working to transform its
military force structure.  Making this transition is a complex,
difficult challenge that will affect hundreds of thousands of
civilian and military personnel at U.S.  activities.  If DOD does not
address this challenge now, other needs will go unmet, while defense
resources will be wasted or used inefficiently.  In our view, one
dollar spent on inefficiency is one less dollar available to meet
other DOD priorities. 

In recent years, DOD has substantially downsized its force structure. 
However, it has not achieved commensurate reductions in operations
and support costs.  For fiscal year 1997, DOD estimates that $146
billion, or almost two thirds of its budget, will be for operations
and support activities.  These activities, which DOD generally refers
to as its support infrastructure, include maintaining installation
facilities, providing nonunit training to the force, providing health
care to military personnel and their families, repairing equipment,
and buying and managing spare part inventories. 

DOD officials have repeatedly recognized the importance of using
resources for the highest priority operational and investment needs
rather than maintaining unneeded property, facilities, and overhead. 
However, DOD has found that making support infrastructure reductions
is a difficult and painful process because achieving significant cost
savings requires up-front investments, closure of installations, and
elimination of military and civilian jobs.  Service parochialism, a
cultural resistance to change, and congressional and public concerns
about the effects on local communities and economies as well as the
impartiality of the decisions have historically hindered DOD's
ability to reduce support infrastructure.  DOD has also recognized
that opportunities to streamline and reengineer its business
practices could result in substantial savings, but it has made
limited progress in accomplishing this. 

Despite spending reductions that have occurred already, our review of
DOD's future years funding plans through fiscal year 2001 indicates
that overall support infrastructure funding as a percentage of the
budget is projected to remain relatively constant.  (See table 1.)



                                Table 1
                
                 DOD's Projected Funding Through Fiscal
                               Year 2001

                         (Dollars in billions)

                                                            Percentage
                                               Projected     of budget
                                     Total  infrastructu       that is
                                 projected    re part of  infrastructu
Fiscal year                         budget        budget            re
----------------------------  ------------  ------------  ------------
1997                                  $244          $146            60
1998                                   243           142            58
1999                                   243           141            58
2000                                   244           140            57
2001                                   246           141            57
----------------------------------------------------------------------
Note:  Constant 1997 dollars. 

While we have not completed an in-depth analysis of all the activity
categories of support infrastructure, our work has identified
numerous areas where support infrastructure can be eliminated,
streamlined, or reengineered to be made more efficient.  For example,
our work shows that the defense traffic management processes are
outdated, fragmented, and inefficient, resulting in substantially
higher transportation costs than necessary.  Our work also shows that
DOD could achieve savings in the military personnel accounts by
replacing active duty military personnel, who perform infrastructure
functions, with less costly civilian personnel. 


      DOD HIGH-RISK AREAS
      ILLUSTRATE THE NEED FOR
      IMPROVEMENTS IN BUSINESS
      PRACTICES
-------------------------------------------------------- Chapter 0:2.2

Our work on six high-risk defense areas illustrates the need for DOD
to improve the economy and efficiency of its operations.  For
example, we recently testified before the Senate Committee on
Governmental Affairs about DOD programs and operations we identified
as high risk because of their vulnerabilities to waste, fraud, abuse,
and mismanagement.\2 DOD's inability to effectively address the
underlying causes of the high-risk areas has resulted in billions of
dollars being wasted and places billions of dollars in future
spending at similar risk.  These causes include cultural resistance
to change and service parochialism, inadequate incentives for seeking
change, lack of comprehensive and reliable data, lack of
results-oriented goals and performance measures, and lack of
management accountability for correcting problems and following
through to confirm performance results.  We concluded that
effectively addressing the high-risk areas will require congressional
support and a commitment by senior-level DOD mangers to a strategy
that is based on the framework provided by the Government Performance
and Results Act and other recent legislation. 

The six high-risk areas are financial management, information
technology, weapon systems acquisition, contract management,
infrastructure, and inventory management.  Over the last few years,
we have made hundreds of recommendations to improve the management of
DOD operations and programs that have not been implemented by DOD. 
(See Related GAO Products at the end of this testimony.) DOD has
taken corrective actions and made progress in some areas.  For
example, in response to our recommendations, DOD implemented certain
commercial practices in its inventory management area, such as direct
vendor delivery for medical and food items.  However, problems
remain.  For example: 

  -- Due to its lingering financial management problems, which are
     among the most severe in government, DOD does not have accurate
     information to use in managing its budget of over $250 billion
     and reported $1 trillion in assets. 

  -- DOD's efforts to develop and modernize its computer systems and
     networks have yielded poor returns in reducing its operating
     costs, improving performance, and supporting sound financial
     management. 

  -- DOD could achieve further cost reductions by streamlining the
     command structure of its forces; sharing medical facilities and
     services; reforming acquisition processes; consolidating and
     eliminating research, development, and training facilities;
     using simulators for training and exercises; and reducing
     dependence on government-owned housing. 


--------------------
\2 DOD High-Risk Areas:  Eliminating Underlying Causes Will Avoid
Billions of Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997). 


   OBSERVATIONS ON THE DEFENSE
   REFORM ACT OF 1997
---------------------------------------------------------- Chapter 0:3

As requested, our observations are focused on the titles of the bill
relating to defense personnel reforms, defense business practice
reforms, and miscellaneous additional defense reforms.  We generally
agree with the aim of these titles.  Our observations on specific
sections are grouped into four categories.  First, there are a number
of sections where we have no basis upon which to comment and
therefore present no observations.  Second, for the majority of the
sections where we offer a comment, we agree with the sections' aims. 
Third, for some sections, we agree with the sections' aims and offer
suggestions to enhance its effectiveness.  Fourth, in two sections,
we have questions about the sections and suggest the Committee may
want to reconsider them. 


      DEFENSE PERSONNEL REFORMS
      ARE NEEDED
-------------------------------------------------------- Chapter 0:3.1

Title I of the bill calls for personnel reductions in several areas
and provides for changes in annuity computations of defense
acquisition personnel.  We generally agree with the aim of the title
in seeking to reduce personnel.  In those sections where we have
relevant ongoing or completed work, it shows inefficiencies in these
areas that, if they were eliminated, could result in personnel
reductions.  We have no basis on which to comment on the level of
personnel cuts called for by this title or changes in annuity
computations.\3

Our specific observations regarding title I are as follows: 

  -- Section 101:  Reduction in personnel assigned to management
     headquarters and headquarters support activities. 

We agree with the aim of section 101.  We have no basis on which to
comment on the level of personnel cuts called for by this section but
our work on the U.S.  Transportation Command shows that opportunities
for reductions exist.  DOD must ensure that headquarters functions
are reengineered to meet the needs of a smaller, post-Cold War
military force.  The Secretary of Defense, in discussing the
Quadrennial Defense Review, recognized that reductions in DOD
headquarters were desirable and feasible.  Given our work and the
Secretary's statement, we believe there are areas where some level of
personnel reduction can be made.  Our work has also shown that
leading edge businesses tie personnel reductions to the reengineering
of business processes.  Therefore, as DOD develops its personnel
reduction plan required by this section, it is important that it
considers restructuring of headquarters' organizations and support
activities. 

  -- Section 102:  Additional reduction in defense acquisition
     workforce. 

We agree with the aim of section 102.  We have no basis to comment on
the level of cuts called for in this section.  In April 1997, we
testified before a joint hearing of two Subcommittees of this
Committee that DOD, in contemplating changes to its acquisition
workforce, has not taken the opportunity to improve the acquisition
process and the results it produces.\4 The section's required January
1998 implementation report should address this issue. 

We would like to offer some additional observations based on work we
have just begun at the request of this Committee.  First, DOD is in
the process of redefining its acquisition workforce.  Any changes
made after the October 1997 baseline established in the bill will
make it difficult to track reductions over time.  Second, acquisition
workforce cuts will have a disproportionate effect if divided equally
among the services.  For example, the Air Force's acquisition
workforce contains a larger portion of military personnel and a much
larger complement of support services contractors than the other
services. 

  -- Section 105:  Personnel reductions in the United States
     Transportation Command. 

We agree with the aim of section 105.  In February 1996, we reported
that the U.S.  Transportation Command retained an outdated and
inefficient modally oriented organizational structure.\5 While the
Transportation Command has initiatives underway to reengineer the
defense transportation system, for the most part, these initiatives
have resulted in changes within the component commands and do not
address organizational changes from an overall Transportation Command
perspective.  We are reviewing this issue. 


--------------------
\3 For sections 103 and 104, we have no basis upon which to comment
and therefore present no observations. 

\4 Defense Acquisition Organizations:  Linking Workforce Reductions
With Better Program Outcomes (GAO/T-NSIAD-97-140, Apr.  8, 1997). 

\5 Defense Transportation:  Streamlining of the U.S.  Transportation
Command is Needed (GAO/NSIAD-96-60, Feb.  22, 1996). 


      DEFENSE BUSINESS PRACTICE
      REFORMS ARE NEEDED
-------------------------------------------------------- Chapter 0:3.2

Title II contains several sections designed to increase emphasis on
competitive procurement of services through outsourcing and other
miscellaneous reforms and business practices.  We generally agree
with the aim of the title.  Our work shows that opportunities exist
to improve the business practices addressed in this title.  For
several sections, we have made suggestions to enhance the likely
achievement of the sections' aims.  We have questions about the
section removing the Defense Automation and Printing Service's
surcharge and suggest the Committee may want to reconsider the
section.\6 Our specific observations are as follows: 

  -- Section 201:  Competitive procurement of finance and accounting
     services. 

We agree with the aim of section 201 and offer a suggestion to
enhance its effectiveness.  The massive scope of DOD's finance and
accounting operations, including that 80 percent of its financial
data comes from DOD component organizations, is unparalleled. 

Our ongoing work shows that while many large companies have
considered outsourcing, they often decided not to outsource because
few, if any, vendors were yet capable of providing needed services. 
According to one vendor, existing vendors' capacity to take on large
finance and accounting servicing is a major issue.  For example, one
vendor stated that a payroll the size of DOD's civilian payroll would
be too large to immediately transfer to its payroll system.  Most
private sector organizations we talked with had decided to reengineer
their finance and accounting functions to bring them more in-line
with world-class organizations prior to deciding whether to outsource
any finance and accounting services. 

Our ongoing work also shows that it may be three to five more years
before the needed capacity will be in place in the private sector to
effectively compete finance and accounting services.  We suggest,
therefore, that the Committee may want to consider revising the
section to require a pilot test of one or a few relatively small DOD
finance and accounting activities.  The result of such a pilot test
could be used to develop a strategic plan detailing what and how
DOD's finance and accounting operation can best be outsourced. 

  -- Section 202:  Competitive procurement of services to dispose of
     surplus defense property. 

We agree with the aim of section 202.  DOD has identified the Defense
Reutilization and Marketing Service (DRMS) as a noncore, noninherent
governmental function.  Thus, we believe that the commercial sector
may be able to establish the means to handle DRMS operations for the
sale of surplus property with low risk.  Our ongoing work has shown
that DRMS intends to use the private sector to help perform its
disposal function when it makes good business sense and sees itself
becoming an administrator of contracts.  As part of its initiatives
to promote better business practices, DRMS plans to contract with the
private sector to handle the sales of surplus property.  As discussed
in our 1994 report, this action is in line with DRMS' efforts to
reengineer its disposal operation.\7

  -- Section 203:  Competitive procurement of functions performed by
     Defense Information Systems Agency. 

We agree with the aim of section 203. 

  -- Section 204:  Competitive procurement of printing and
     duplication services. 

We have a question about section 204 and suggest that the Committee
may want to reconsider this section.  Our prior work shows that the
usage of the surcharge appears to make sense because the cost
incurred is passed onto the customer.\8 This is in line with the
working capital fund concept in that the prices should be set to
cover the total costs of the work.  If the surcharge were to be
eliminated, the administrative cost may have to be passed on to all
customers, rather than those particular customers with work performed
by external sources. 

  -- Section 206:  Increase use by Defense Agencies of contractors to
     perform commercial and industrial type functions. 

We agree with the aim of section 206 and offer a suggestion to
enhance its effectiveness.  We believe that clarification is needed
regarding whether the aim is to emphasize outsourcing without
allowing in-house operations to compete, as the current language
suggests.  Historically, government organizations have won many
outsourcing competitions. 

Our work in examining DOD's recently renewed emphasis on outsourcing
showed that most of the renewed emphasis was occurring within the
military services, with a focus on base operation support functions. 
We agree that the defense agencies should also be exploring the
potential for outsourcing to the extent practical. 

  -- Section 211:  Development of standard forms regarding
     performance work statement and request for proposals for
     conversion of certain operational functions of military
     installations. 

We agree with the aim of section 211.  The section mandates the
development and use of standardized performance work statements and
requests for proposals for commercial activities and functions. 
These actions would apply in those instances where DOD activities
have significant experience in defining requirements because 50
percent or more of such activities and functions are already
contracted out. 

Our March 1997 report on outsourcing noted that the services have
various initiatives underway to streamline the Office of Management
and Budget Circular A-76 process, including using work statement
templates and assembling A-76 teams of experts to conduct studies.\9
We endorse the use of such standardized work statements and requests
for proposals where they can appropriately capture the work to be
done.  However, we have not completed sufficient study of this issue
to allow us to conclude that standardized work statements could be
used exclusively where more than 50 percent of a commercial service
or function has been outsourced in the past. 

  -- Section 212:  Study and notification requirements for conversion
     of commercial and industrial type functions to contractor
     performance. 

We agree with the aim of section 212.  It should be noted, however,
that similar provisions typically have been viewed by DOD officials
as inhibitors to greater emphasis on outsourcing.  In our 1997 report
on outsourcing, we noted that reporting requirements may restrict
DOD's use of new waiver authority contained in the Office of
Management and Budget's recently revised A-76 supplemental handbook. 

  -- Section 213:  Collection and retention of cost information data
     on contracting out services and functions. 

We agree with the aim of section 213 and offer a suggestion to
enhance its effectiveness.  We believe that clarification of this
section may be needed if the aim is to obtain net savings data. 
While this section focuses on cost data, our prior work found that
questions more often existed about the extent of "savings" of
contracted services over in-house operations.  Long-term savings,
rather than cost, are the data that have been difficult to obtain. 
Our 1997 report on outsourcing noted that the services are required
to track savings for the first 3 years; however, the services'
databases do not generally reflect savings actually attained beyond 3
years.  While data on continued savings over time are desirable, we
also reported a number of factors that inhibited the ability to
develop the data.  Perhaps most significant is the fact noted by DOD
officials that determining continuing savings is difficult because a
common base line for comparison is typically lost over time as
workload requirements change. 

  -- Section 221:  Reduction in overhead costs of Inventory Control
     Points. 

We agree with the aim of section 221.  Our work shows that one way to
do this is through the consolidation of inventory control points. 
For example in November 1996, DOD reported to congressional
committees that between $2.2 billion and $3.8 billion could be saved
if the management of all DOD inventory control points were
consolidated under the Defense Logistics Agency.  The report
acknowledged that there were some risks associated with such a
consolidation, but that these risks could be mitigated.  The
consolidation issue continues to be reviewed by DOD.  Based on
ongoing work, we have no basis to disagree with DOD's report. 

Further, our work also shows other opportunities exist to reduce
inventory control points overhead costs by introducing more
economical buying practices such as the prime vendor concept the
Defense Logistics Agency is using to procure medical and food
supplies. 


--------------------
\6 For sections 205, 222, and 223, we have no basis upon which to
comment and therefore present no observations. 

\7 Commercial Practices:  Opportunities Exist to Enhance DOD's Sales
of Surplus Aircraft Parts (GAO/NSIAD-94-189, Sept.  23, 1994). 

\8 Government Printing:  Comparison of DOD and GPO Prices for
Printing and Duplicating Work (GAO/NSIAD-95-65, Feb.  17, 1995). 

\9 Base Operations:  Challenges Confronting DOD as It Renews Emphasis
on Outsourcing (GAO/NSIAD-97-86, Mar.  11, 1997). 


      OBSERVATIONS ON
      MISCELLANEOUS ADDITIONAL
      DEFENSE REFORMS
-------------------------------------------------------- Chapter 0:3.3

Title IV of the bill contains a variety of additional initiatives
relating to defense activities.  In the majority of these sections
(sections 401, 402, 405, 406, and 408) we have no prior or ongoing
work to serve as a basis for comment.  For those sections where we
have some basis to comment, we generally agree with the aim of the
sections, except for the section related to creating a board to
coordinate audits.  Our specific observations follow: 

  -- Section 403:  Repeal of requirement for contractor guarantees on
     major weapon systems. 

We agree with the aim of section 403.  In June 1996, we reported that
while warranties may have value to consumers in the commercial world,
the government does not need the insurance coverage provided by a
warranty for a weapon system and generally cannot share the expense
of a warranty with other consumers.\10 Our work has shown that
warranties are often expensive with very little real payback. 

  -- Section 404:  Requirement relating to micro-purchases of
     commercial items. 

We agree with the aim of section 404 and offer a suggestion to
enhance its effectiveness.  We support efforts to streamline and
simplify lower dollar value procurement, particularly for commercial
items, and we believe that expanding the use of purchase cards can
contribute greatly toward that end.  In August 1996, we reported that
use of the purchase card had reduced labor and payment processing
costs for many agencies, often by more than half.\11 Despite
increases in card use, we noted there was still significant growth
potential.  Other studies had identified millions in potential
savings from increased purchase card use.  We recommended that the
Federal Acquisition Regulation be revised to provide clear guidance
on the appropriate uses of the purchase card. 

Section 404 would provide DOD the opportunity to realize significant
savings from greater use of the card, as well as other preferred
purchasing methods.  We believe, however, that purchasing officials
should be allowed to decide that a preferred method is not
appropriate in a given procurement without having to clear that
decision with senior agency officials.  Having senior-level defense
officials involved in procurements at or below $2,500 is an
inefficient use of their time and is inconsistent with efforts to
streamline these lower dollar value procurements. 

  -- Section 407:  Coordination of the Department of Defense criminal
     investigations and audits. 

We have a question about the provision of section 407 to create a
Board on Audits and suggest the Committee may want to reconsider this
provision.  We support coordination and cooperation among defense
auditing organizations in order to avoid duplication of effort and
maximize resources.  We question, however, the need to create an
audit board and suggest the Committee may want to reconsider this
provision.  We believe the proposed Board on Audits may impair the
independence of the service auditors. 

There currently exist a number of mechanisms within DOD to promote
coordination and cooperation among defense auditing organizations. 
For example, to provide overall direction to the Chief Financial
Officers Act audits, the DOD Inspector General, service auditors, and
DOD management participate in various committees and task forces,
including an Executive Steering Committee and Integrated Audit
Process Teams.  At least with respect to the Chief Financial Officers
Act audits, we are unaware of any current study questioning the
effectiveness of those mechanisms.  Accordingly, we cannot be certain
that the proposed Board would be an improvement over those
mechanisms. 

Government auditors' independence is affected by their place within
their respective agencies.  Generally accepted government auditing
standards stipulate that, to help achieve organizational
independence, audit organizations should be accountable directly to
the heads or deputy heads of their respective agencies.  Section 407
may be inconsistent with this concept authorizing the Under Secretary
of Defense (Comptroller/Chief Financial Officer) to participate in
jurisdictional decisions among the service auditors and to resolve
jurisdictional disputes.  This role raises questions regarding the
independence of service audit organizations. 

We have no prior or ongoing work to serve as a basis for comment on
the provision of section 407 dealing with criminal investigations. 


--------------------
\10 Weapons Acquisition:  Warranty Law Should Be Repealed
(GAO/NSIAD-96-88, June 28, 1996). 

\11 Acquisition Reform:  Purchase Card Use Cuts Procurement Costs,
Improves Efficiency (GAO/NSIAD-96-138 (Aug.  6, 1996). 


-------------------------------------------------------- Chapter 0:3.4

Mr.  Chairman, this concludes my prepared remarks.  I would be
pleased to answer questions at this time. 


1997 HIGH-RISK SERIES REPORTS
INVOLVING DOD
=========================================================== Appendix I

Defense Financial Management (GAO/HR-97-3, Feb.  1997). 

Defense Contract Management (GAO/HR-97-4, Feb.  1997). 

Defense Inventory Management (GAO/HR-97-5, Feb.  1997). 

Defense Weapon Systems Acquisition (GAO/HR-97-6, Feb.  1997). 

Defense Infrastructure (GAO/HR-97-7, Feb.  1997). 

Information Management and Technology (GAO/HR-97-9, Feb.  1997). 


RELATED GAO PRODUCTS
=========================================================== Appendix 1

DOD High-Risk Areas:  Eliminating Underlying Causes Will Avoid
Billions of Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997). 

Contract Management:  Fixing DOD's Payment Problems Is Imperative
(GAO/NSIAD-97-37, Apr.  10, 1997). 

Defense Acquisition Organizations:  Linking Workforce Reductions With
Better Program Outcomes (GAO/T-NSIAD-97-140, Apr.  8, 1997). 

Defense IRM:  Investments at Risk for DOD Computer Centers
(GAO/AIMD-97-39, Apr.  4, 1997). 

Defense Budget:  Observations on Infrastructure Activities
(GAO/NSIAD-97-127BR, Apr.  4, 1997). 

Defense Inventory Management:  Problems, Progress, and Additional
Actions Needed (GAO/T-NSIAD-97-109, Mar.  20, 1997). 

Base Operations:  Challenges Confronting DOD as It Renews Emphasis on
Outsourcing (GAO/NSIAD-97-86, Mar.  11, 1997). 

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

Defense Budget:  Analysis of Operation and Maintenance Accounts for
1985-2001 (GAO/NSIAD-97-73, Feb.  28, 1997). 

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

Air Force Depot Maintenance:  Privatization-In-Place Plans Are Costly
While Excess Capacity Exists (GAO/NSIAD-97-13, Dec.  31, 1996). 

Defense IRM:  Strategy Needed for Logistics Information Technology
Improvement Efforts (GAO/AIMD-97-6, Nov.  14, 1996). 

DOD Force Mix Issues:  Converting Some Support Officer Positions to
Civilian Status Could Save Money (GAO/NSIAD-97-15, Oct.  23, 1996). 

Acquisition Reform:  Implementation of Title V of the Federal
Acquisition Streamlining Act of 1994 (GAO/NSIAD-97-22BR, Oct.  31,
1996). 

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

Army Depot Maintenance:  Privatization Without Further Downsizing
Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept.  18, 1996). 

Navy Depot Maintenance:  Cost and Savings Issues Related to
Privatizing-in-Place at the Louisville, Kentucky, Depot
(GAO/NSIAD-96-202, Sept.  18, 1996). 

1997 DOD Budget:  Potential Reductions to Operation and Maintenance
Program (GAO/NSIAD-96-220, Sept.  18, 1996). 

Defense IRM:  Critical Risks Facing New Materiel Management Strategy
(GAO/AIMD-96-109, Sept.  6, 1996). 

Defense Transportation:  Migration Systems Selected Without Adequate
Analysis (GAO/AIMD-96-81, Aug.  29, 1996). 

Best Practices:  Commercial Quality Assurance Practices Offer
Improvements for DOD (GAO/NSIAD-96-162, Aug.  26, 1996). 

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

Acquisition Reform:  Purchase Card Use Cuts Procurement Costs,
Improves Efficiency (GAO/NSIAD-96-138 (Aug.  6, 1996). 

Inventory Management:  Adopting Best Practices Could Enhance Navy
Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July
12, 1996). 

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

Weapons Acquisition:  Warranty Law Should Be Repealed
(GAO/NSIAD-96-88, June 28, 1996). 

Financial Management:  DOD Needs to Lower the Disbursement
Revalidation Threshold (GAO/AIMD-96-82, June 11, 1996). 

Defense Infrastructure:  Costs Projected to Increase Between 1997 and
2001 (GAO/NSIAD-96-174, May 31, 1996). 

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

Military Bases:  Opportunities for Savings in Installation Support
Costs Are Being Missed (GAO/NSIAD-96-108, Apr.  23, 1996). 

Acquisition Reform:  Efforts to Reduce the Cost to Manage and Oversee
DOD Contracts (GAO/NSIAD-96-106, Apr.  18, 1996). 

Defense Depot Maintenance:  Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146, Apr.  16, 1996). 

Defense Business Operations Fund:  DOD Is Experiencing Difficulty in
Managing the Fund's Cash (GAO/AIMD-96-54, Apr.  10, 1996). 

Military Bases:  Closure and Realignment Savings Are Significant, But
Not Easily Quantified (GAO/NSIAD-96-67, Apr.  8, 1996). 

Defense Infrastructure:  Budget Estimates for 1996-2001 Offer Little
Savings for Modernization (GAO/NSIAD-96-131, Apr.  4, 1996). 

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

Defense Logistics:  Requirement Determinations for Aviation Spare
Parts Need to Be Improved (GAO/NSIAD-96-70, Mar.  19, 1996). 

Managing for Results:  Achieving GPRA's Objectives Require Strong
Congressional Role (GAO/T-GGD-96-79, Mar.  6, 1996). 

Defense Transportation:  Streamlining of the U.S.  Transportation
Command Is Needed (GAO/NSIAD-96-60, Feb.  22, 1996). 

Best Management Practices:  Reengineering the Air Force's Logistics
System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb.  21,
1996). 

Defense Acquisition Organization:  Changes in Cost and Size Of
Civilian Workforce (GAO/NSIAD-96-46, Nov.  13, 1995). 

Inventory Management:  DOD Can Build on Progress in Using Best
Practices to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug.  4,
1995). 

Managing for Results:  Status of the Government Performance and
Results Act (GAO/T-GGD-95-193, June 27, 1995). 

Managing for Results:  Critical Actions for Measuring Performance
(GAO/T-GGD/AIMD-95-187, June 20, 1995). 

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

Defense Programs and Spending:  Need for Reforms (GAO/T-NSIAD-95-149,
Apr.  27, 1995). 

Military Bases:  Analysis of DOD's 1995 Process and Recommendations
for Closure and Realignment (GAO/NSIAD-95-133, Apr.  14, 1995). 

Defense Business Operations Fund:  Management Issues Challenge Fund
Implementation (GAO/NSIAD-95-79, Mar.  1, 1995). 

Government Printing:  Comparison of DOD and GPO Prices for Printing
and Duplicating Work (GAO/NSIAD-95-65, Feb.  17, 1995). 

Defense Supply:  Inventories Contain Nonessential and Excessive
Insurance Stocks (GAO/NSIAD-95-1, Jan.  20, 1995). 


*** End of document. ***