Department of Defense

Financial management problems at the Defense Department represent the single largest obstacle to obtaining an unqualified opinion on the government's consolidated financial statements. Without more reliable financial and other information, DOD cannot adequately account for its vast operations--nearly $1 trillion in assets and a net cost of operations totaling $280 billion in fiscal year 1998. This testimony outlines DOD's most serious financial management weaknesses, describes their impact on the military's ability to effectively carry out its programs and operations, and highlights efforts under way to address these deficiencies.

GAO noted that: (1) as part of the fiscal year (FY) 1998 financial statement audits, auditors continued to find that DOD's inventory management and control systems and practices are plagued with serious problems that affect its ability to maintain accurate and complete inventory data; (2) audit findings for FY 1998 include problems in verifying inventory quantities and value, reporting all inventory, and accounting for in-transit inventory; (3) DOD has not yet fully implemented the federal accounting standard that requires it to recognize and report liabilities associated with environmental cleanup and disposal of its assets; (4) as a result, DOD's undisclosed liability in this area is likely understated by tens of billions of dollars; (5) GAO previously reported that DOD did not accumulate the data necessary to accurately estimate its military post-retirement health benefits liability, and this remained a problem in FY 1998; (6) DOD does not have the basic, transaction driven, double-entry accounting systems that are necessary to properly control assets and accumulative costs; (7) auditors found several areas in which the systems and controls over DOD's use of its budgetary resources were ineffective; (8) significant weaknesses have been identified in contractor and vendor payments as well as health care provider payments; (9) it is essential that DOD establish a well-trained cadre of financial management personnel, a short-term improvement action that will help address the financial management weaknesses previously identified as well as help ensure that the improvement actions cited are implemented as efficiently and effectively as possible; (10) longer term actions addressed in DOD's first Biennial Financial Management Improvement Plan also will be essential for the Department to prepare reliable financial statements as well as to make planned major financial management system improvements throughout DOD's large and complex organization; and (11) this plan presents DOD's concept of operations, the current environment, and the transition plan intended to describe the goals of the Department for achieving the target financial management environment and to identify the strategies and corrective actions necessary to move through the transition.