DOD Financial Management
Integrated Approach, Accountability, Transparency, and Incentives Are Keys to Effective Reform Gao ID: GAO-02-497T March 6, 2002Financial management problems at the Department of Defense (DOD) are complex, long-standing, and deeply rooted throughout its business operations. DOD's financial management deficiencies represent the single largest obstacle to achieving an unqualified opinion on the U.S. government's consolidated financial statements. So far, none of the military services or major DOD components have passed the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations, and controls. These problems go back decades, and earlier attempts at reform have been unsuccessful. DOD continues to rely on a far-flung, complex network of finance, logistics, personnel, acquisition, and other management information systems for financial data to support day-to-day management and decision-making. This network has evolved into an overly complex and error-prone operation with (1) little standardization across DOD components, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, (4) manual data entry into multiple systems, and (5) a large number of data translations and interfaces, which combine to exacerbate problems with data integrity. Many of the elements that are crucial to financial management reform and business process transformation--particularly those that rely on long-term systems improvements--will take years to fully implement.
GAO-02-497T, DOD Financial Management: Integrated Approach, Accountability, Transparency, and Incentives Are Keys to Effective Reform
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Readiness and Management Support, Committee
on Armed Services, U.S. Senate:
For Release on Delivery:
Expected at 10 a.m.
Wednesday, March 6, 2002:
DOD Financial Management:
Integrated Approach, Accountability, Transparency, and Incentives Are
Keys to Effective Reform:
Statement of David M. Walker:
Comptroller General of the United States:
GAO-02-497T:
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be here to discuss financial management at the
Department of Defense (DOD). Today, DOD faces financial management
problems that are pervasive, complex, long-standing, and deeply rooted
in virtually all business operations throughout the department. DOD's
financial management deficiencies, taken together, represent the
single largest obstacle to achieving an unqualified opinion on the
U.S. government's consolidated financial statements. To date, none of
the military services or major DOD components have passed the test of
an independent financial audit because of pervasive weaknesses in
financial management systems, operations, and controls.
Overhauling financial management represents a major management
challenge that goes far beyond financial accounting to the very fiber
of the department's range of business operations and management
culture. Previous administrations over the past several decades have
tried to address these problems in various ways but have largely been
unsuccessful. In this regard, on September 10, 2001, Secretary of
Defense Rumsfeld announced a broad initiative intended to "transform
the way the department works and what it works on" that he estimated
could save 5 percent of DOD's budget”or an estimated $15 to $18
billion annually. The Secretary recognized that transformation would
be difficult and expected the needed changes would take 8 or more
years to complete.
The President's Management Agenda includes improved financial
management performance as one of his five governmentwide management
goals. In addition, in August 2001, the Principals of the Joint
Financial Management Improvement Program”the Secretary of the
Treasury, the Director of the Office of Management and Budget, the
Director of the Office of Personnel Management, and I, in my role as
the Comptroller General”began a series of quarterly meetings that
marked the first time all four of the Principals had gathered together
in over 10 years. To date, these sessions have resulted in substantive
deliberations and agreements focused on key issues such as better
defining measures for financial management success. These measures
include being able to routinely provide timely, reliable, and useful
financial information and having no material internal control
weaknesses. Success on these measures will be a significant challenge
to DOD. The Principals plan to invite Defense Comptroller Zakheim to
their upcoming April 2002 meeting to discuss the department's
transformation effort and to begin a constructive engagement with DOD
on this important initiative.
With the events of September 11, and the federal government's short-
and long-term budget challenges, it is more important than ever that
DOD effectively transform its business processes to ensure it gets the
most from every dollar spent. The department must be able to
effectively account for the funding it receives and carry out its
stewardship responsibilities for the vast amount of equipment and
inventories used in support of military operations. Even before the
events of September 11, increased globalization, changing security
threats, and rapid technological advances were prompting fundamental
changes in the environment in which DOD operates. These trends place a
premium on increasing strategic planning, enhancing results
orientation, ensuring effective accountability, transparency, and
using integrated approaches. Six of the 22 areas on GAO's
governmentwide "high-risk" list are DOD program areas, and DOD shares
responsibility for 2 other high-risk areas that are governmentwide in
scope.[Footnote 1] Central to effectively addressing DOD's financial
management problems will be the understanding that these eight areas
are interrelated and cannot be addressed in an isolated, stovepiped,
or piecemeal fashion.
The recent success of our forces in Afghanistan has again demonstrated
the unparalleled excellence of our military forces. This same level of
excellence is not yet evident in the department's financial management
and other business processes. This is particularly problematic because
effective financial management operations are critical to achieving
the department's mission in a reasonably economical, efficient, and
effective manner and providing reliable, timely financial information
on a routine basis to support management decision-making at all levels
throughout DOD. This will also be critical in order to enhance overall
transparency and accountability. Success in this area will also serve
to free-up resources that can be redeployed to enhance readiness,
improve the quality of life for our troops and their families, and
reduce the gap between wants and available funding in connection with
major weapon systems.
Today, I will provide my perspectives on (1) how Defense got where it
is today and the underlying causes of the department's longstanding
inability to effectively reform its financial management and other
business systems and processes and (2) the keys to successfully
carrying out the Secretary's business process transformation and DOD's
plans and actions to date. Last summer, I shared with Secretary
Rumsfeld and Comptroller Zakheim a business transformation paper,
which provided an overview of our views on the current challenges
facing the department and the keys to effective reform, and detailed
one option for addressing these challenges.
Long-Standing Financial Management Problems and Attempts at Reform:
History is a good teacher, and to solve the problems of today, it is
instructive to look to the past. The problems with the department's
financial management operations date back decades, and previous
attempts at reform have largely proven to be unsuccessful. These
problems adversely affect DOD's ability to control costs, ensure basic
accountability, anticipate future costs and claims on the budget, such
as for health care, weapon systems, and environmental liabilities,
measure performance, maintain funds control, prevent fraud, and
address pressing management issues.
Problems with the department's financial management operations go far
beyond its accounting and finance systems and processes. The
department continues to rely on a far-flung, complex network of
finance, logistics, personnel, acquisition, and other management
information systems-80 percent of which are not under the control of
the DOD Comptroller”to gather the financial data needed to support day-
to-day management decision-making. This network was not designed, but
rather has evolved into the overly complex and error-prone operation
that exists today, including (1) little standardization across DOD
components, (2) multiple systems performing the same tasks, (3) the
same data stored in multiple systems, (4) manual data entry into
multiple systems, and (5) a large number of data translations and
interfaces which combine to exacerbate problems with data integrity.
DOD determined, for example, that efforts to reconcile a single
contract involving 162 payments resulted in an estimated 15,000
adjustments.
Many of the department's business processes in operation today are
mired in old, inefficient processes and legacy systems, some of which
go back to the 1950s and 1960s. For example, the department relies on
the Mechanization of Contract Administration Services (MOCAS) system
to process a substantial portion of DOD contract payment transactions
for all DOD organizations, which totaled about $78 billion in fiscal
year 2001. When MOCAS was first implemented in 1968, "mechanization"
was a high tech word. Past efforts to replace MOCAS have failed. Most
recently, in 1994, DOD began acquiring the Standard Procurement System
(SPS) to replace the contract administration functions currently
performed by MOCAS. However, our July 2001 and February 2002
reporting[Footnote 2] on DOD's $3.7 billion investment in SPS showed
that this substantial investment was not economically justified and
raised questions as to whether further investment in SPS was
justified. For the foreseeable future, DOD will continue to be saddled
with MOCAS.
Moving to the 1970s, we, the Defense Inspector General, and the
military service audit organizations, issued numerous reports
detailing serious problems with the department's financial management
operations. For example, between 1975 and 1981, we issued more than 75
reports documenting serious problems with DOD's existing cost,
property, fund control, and payroll accounting systems. In the 1980s,
we found that despite the billions of dollars invested in individual
systems, these efforts too fell far short of the mark, with extensive
schedule delays and cost overruns. For example, in 1989, our report
[Footnote 3] on eight major DOD system development efforts”including
two major accounting systems”under way at that time, showed that
system development cost estimates doubled, two of the eight efforts
were abandoned, and the remaining six efforts experienced delays of
from 3 to 7 years.
Beginning in the 1990s, following passage of the Chief Financial
Officers (CFO) Act of 1990, there was a recognition in DOD that broad-
based financial management reform was needed. Over the past 12 years,
the department has initiated several departmentwide reform initiatives
intended to fundamentally reform its financial operations as well as
other key business support processes, including the Corporate
Information Management initiative, the Defense Business Operations
Fund, and the Defense Reform Initiative. These efforts, which I will
highlight today, have proven to be unsuccessful despite good
intentions and significant effort. The conditions that led to these
previous attempts at reform remain largely unchanged today.
Corporate Information Management. The Corporate Information Management
(CIM), initiative, begun in 1989, was expected to save billions of
dollars by streamlining operations and implementing standard
information systems. CIM was expected to reform all DOD's functional
areas, including finance, procurement, material management, and human
resources through consolidating, standardizing, and integrating
information systems. DOD also expected CIM to replace approximately
2,000 duplicative systems. Over the years, we made numerous
recommendations to improve CIM's management, but these recommendations
were largely not addressed. Instead, DOD spent billions of dollars
with little sound analytical justification. We reported in 1997,
[Footnote 4] that 8 years after beginning CIM, and spending about $20
billion on the initiative, expected savings had yet to materialize.
The initiative was eventually abandoned.
Defense Business Operations Fund. In October 1991, DOD established a
new entity, the Defense Business Operations Fund by consolidating nine
existing industrial and stock funds and five other activities operated
throughout DOD. Through this consolidation, the fund was intended to
bring greater visibility and management to the overall cost of
carrying out certain critical DOD business operations. However, from
its inception, the fund was plagued by management problems. In 1996,
DOD announced the fund's elimination. In its place, DOD established
four working capital funds. These new working capital funds inherited
their predecessor's operational and financial reporting problems.
Defense Reform Initiative (DRI). In announcing the DRI program in
November 1997, the then Secretary of Defense stated that his goal was
"to ignite a revolution in business affairs." DRI represented a set of
proposed actions aimed at improving the effectiveness and efficiency
of DOD's business operations, particularly in areas that have been
long-standing problems”including financial management. In July 2000,
we reported[Footnote 5] that while DRI got off to a good start and
made progress in implementing many of the component initiatives, DRI
did not meet expected timeframes and goals, and the extent to which
savings from these initiatives will be realized is yet to be
determined. GAO is currently examining the extent to which DRI efforts
begun under the previous administration are continuing.
The past has clearly taught us that addressing the department's
serious financial management problems will not be easy. Early in his
tenure, Secretary Rumsfeld commissioned a new study of the
department's financial management operations. The report on the
results of the study, Transforming Department of Defense Financial
Management: A Strategy for Change, was issued on April 13, 2001. The
report recognized that the department will have to undergo "a radical
financial management transformation" and that it would take more than
a decade to achieve. The report concluded that many studies and
interviews with current and former leaders in DOD point to the same
problems and frustrations, and that repetitive audit reports verify
systemic problems illustrating the need for radical transformation in
order to achieve success. Secretary Rumsfeld further confirmed the
need for a fundamental transformation of DOD in his "top-down"
Quadrennial Defense Review. Specifically, his September 30, 2001,
Quadrennial Defense Review Report concluded that the department must
transform its outdated support structure, including decades old
financial systems that are not well interconnected. The report summed
up the challenge well in stating: "While America's business have
streamlined and adopted new business models to react to fast-moving
changes in markets and technologies, the Defense Department has lagged
behind without an overarching strategy to improve its business
practices."
Underlying Causes of Financial and Related Business Process Reform
Challenges:
As part of our constructive engagement approach with DOD, I met with
Secretary Rumsfeld last summer to provide our perspectives on the
underlying causes of the problems that have impeded past reform
efforts at the department and to discuss options for addressing these
challenges. There are four underlying causes:
* a lack of sustained top-level leadership and management
accountability for correcting problems;
* deeply embedded cultural resistance to change, including military
service parochialism and stovepiped operations;
* a lack of results-oriented goals and performance measures and
monitoring; and;
* inadequate incentives for seeking change.
Lack of Leadership and Accountability Historically, DOD has not
routinely assigned accountability for performance to specific
organizations or individuals that have sufficient authority to
accomplish desired goals. For example, under the CFO Act, it is the
responsibility of agency CFOs to establish the mission and vision for
the agency's future financial management. However, at DOD, the
Comptroller”who is by statute the department's CFO”has direct
responsibility for only an estimated 20 percent of the data relied on
to carry out the department's financial management operations. The
department has learned through its efforts to meet the Year 2000
computing challenge that to be successful, major improvement
initiatives must have the direct, active support and involvement of
the Secretary and Deputy Secretary of Defense. In the Year 2000 case,
the then Deputy Secretary of Defense was personally and substantially
involved and played a major role in the department's success. Such top-
level support and attention helps ensure that daily activities
throughout the department remain focused on achieving shared, agency-
wide outcomes. A central finding from our report on our survey of best
practices of world-class financial management organizations”Boeing,
Chase Manhattan Bank, General Electric, Pfizer, Hewlett-Packard, Owens
Corning, and the states of Massachusetts, Texas and Virginia”was that
clear, strong executive leadership was essential to (1) making
financial management and entitywide priority, (2) redefining the role
of finance, (3) providing meaningful information to decision-makers,
and (4) building a team of people that deliver results.[Footnote 6]
DOD past experience has suggested that top management has not had a
proactive, consistent, and continuing role in building capacity,
integrating daily operations for achieving performance goals, and
creating incentives. Sustaining top management commitment to
performance goals is a particular challenge for DOD. In the past, the
average 1.7 year tenure of the department's top political appointees
has served to hinder long-term planning and follow-through.
Cultural Resistance and Parochialism:
Cultural resistance to change and military service parochialism have
also played a significant role in impeding previous attempts to
implement broad-based management reforms at DOD. The department has
acknowledged that it confronts decades-old problems deeply grounded in
the bureaucratic history and operating practices of a complex,
multifaceted organization, and that many of these practices were
developed piecemeal and evolved to accommodate different
organizations, each with its own policies and procedures.
For example, as discussed in our July 2000 report,[Footnote 7] the
department encountered resistance to developing departmentwide
solutions under the then Secretary's broad-based DRI.[Footnote 8] In
1997, the department established a Defense Management Council”
including high-level representatives from each of the military
services and other senior executives in the Office of the Secretary of
Defense”which was intended to serve as the "board of directors" to
help break down organizational stovepipes and overcome cultural
resistance to changes called for under DRI. However, we found that the
council's effectiveness was impaired because members were not able to
put their individual military services' or DOD agencies' interests
aside to focus on department-wide approaches to long-standing problems.
We have also seen an inability to put aside parochial views. Cultural
resistance to change has impeded reforms in not only financial
management, but also in other business areas, such as weapon system
acquisition and inventory management. For example, as we reported
[Footnote 9] last year, while the individual military services conduct
considerable analyses justifying major acquisitions, these analyses
can be narrowly focused and do not consider joint acquisitions with
the other services. In the inventory management area, DOD's culture
has supported buying and storing multiple layers of inventory rather
than managing with just the amount of stock needed.
Unclear Goals and Performance Measures:
Further, DOD's past reform efforts have been handicapped by the lack
of clear, linked goals and performance measures. As a result, DOD
managers lack straightforward road maps showing how their work
contributes to attaining the department's strategic goals, and they
risk operating autonomously rather than collectively. In some cases,
DOD had not yet developed appropriate strategic goals, and in other
cases, its strategic goals and objectives were not linked to those of
the military services and defense agencies.
As part of our assessment of DOD's Fiscal Year 2000 Financial
Management Improvement Plan, we reported[Footnote 10] that, for the
most part, the plan represented the military services' and Defense
components' stovepiped approaches to reforming financial management,
and did not clearly articulate how these various efforts will
collectively result in an integrated DOD-wide approach to financial
management improvement. In addition, we reported the department's plan
did not have performance measures that could be used to assess DOD's
progress in resolving its financial management problems. DOD officials
have informed us that they are now working to revise the department's
approach to this plan so that it in future years' updates it will
reflect a more strategic, department-wide vision and tool for
financial management reform.
The department faces a formidable challenge in responding to
technological advances that are changing traditional approaches to
business management as it moves to modernize its systems. For fiscal
year 2001, DOD's reported total information technology investments of
almost $23 billion, supporting a wide range of military operations as
well as its business functions. As we have reported,[Footnote 11]
while DOD plans to invest billions of dollars in modernizing its
financial management and other business support systems, it does not
yet have an overall blueprint”or enterprise architecture”in place to
guide and direct these investments. As we recently testified,[Footnote
12] our review of practices at leading organizations showed they were
able to make sure their business systems addressed corporate”rather
than individual business unit”objectives by using enterprise
architectures to guide and constrain investments. Consistent with our
recommendation, DOD is now working to develop a financial management
enterprise architecture, which is a very positive development.
Lack of Incentives for Change:
The final underlying cause of the department's long-standing inability
to carry out needed fundamental reform has been the lack of incentives
for making more than incremental change to existing "business as
usual" processes, systems, and structures. Traditionally, DOD has
focused on justifying its need for more funding rather than on the
outcomes its programs have produced. DOD generally measures its
performance by the amount of money spent, people employed, or number
of tasks completed. Incentives for DOD decisionmakers to implement
changed behavior have been minimal or nonexistent. Secretary Rumsfeld
perhaps said it best in announcing his planned transformation at DOD,
"...there will be real consequences from, and real resistance to,
fundamental change."
This underlying problem has perhaps been most evident in the
department's acquisition area. In DOD's culture, the success of a
manager's career has depended more on moving programs and operations
through the DOD process rather than on achieving better program
outcomes. The fact that a given program may have cost more than
estimated, took longer to complete, and did not generate results or
perform as promised was secondary to fielding a new program. To effect
real change, actions are needed to (1) break down parochialism and
reward behaviors that meet DOD-wide and congressional goals,
(2) develop incentives that motivate decisionmakers to initiate and
implement efforts that are consistent with better program outcomes,
including saying "no" or "pulling the plug" on a system or program
that is failing, and (3) facilitate a congressional focus on results-
oriented management, particularly with respect to resource allocation
decisions.
Keys to Fundamental DOD Financial Management Reform:
As we testified in May 2001,[Footnote 13] our experience has shown
there are several key elements that, collectively will enable the
department to effectively address the underlying causes of DOD's
inability to resolve its longstanding financial management problems.
These elements, which will be key to any successful approach to
financial management reform include:
* addressing the department's financial management challenges as part
of a comprehensive, integrated, DOD-wide business process reform;
* providing for sustained leadership by the Secretary of Defense and
resource control to implement needed financial management
reforms;
* establishing clear lines of responsibility, authority, and
accountability for such reform tied to the Secretary;
* incorporating results-oriented performance measures and monitoring
tied to financial management reforms;
* providing appropriate incentives or consequences for action or
inaction;
* establishing an enterprisewide system architecture to guide and
direct financial management modernization investments; and;
* ensuring effective oversight and monitoring.
Actions on many of the key areas central to successfully achieving
desired financial management and related business process
transformation goals-”particularly those that rely on longer term
systems improvements”-will take a number of years to fully implement.
Secretary Rumsfeld has estimated that his envisioned transformation
may take 8 or more years to complete. Consequently, both long-term
actions focused on the Secretary's envisioned business transformation,
as well as short-term actions, focused on improvements within existing
systems and processes, will be critical going forward. Short-term
actions in particular will be critical if the department is to achieve
the greatest possible accountability over existing resources and more
reliable data for day-to-day decision-making while longer term systems
and business process reengineering efforts are under way.
Beginning with the Secretary's recognition of a need for a fundamental
transformation of the department's business processes, and building on
some of the work begun under past administrations, DOD has taken a
number of positive steps in many of these key areas. At the same time,
the challenges remaining in each of these key areas are somewhat
daunting.
Integrated Business Process Reform Strategy:
As we have reported in the past,[Footnote 14] establishing the right
goal is essential for success. Central to effectively addressing DOD's
financial management problems will be the recognition that they cannot
be addressed in an isolated, stovepiped, or piecemeal fashion separate
from the other high-risk areas facing the department.[Footnote 15]
Successfully reengineering the department's processes supporting its
financial management and other business support operations will be
critical if DOD is to effectively address deep-rooted organizational
emphasis on maintaining "business as usual" across the department.
Financial management is a crosscutting issue that affects virtually
all of DOD's business areas. For example, improving its financial
management operations so that they can produce timely, reliable, and
useful cost information will be essential if the department is to
effectively measure its progress toward achieving many key outcomes
and goals across virtually the entire spectrum of DOD's business
operations. At the same time, the department's financial management
problems”and, most importantly, the keys to their resolution”are
deeply rooted in and dependent upon developing solutions to a wide
variety of management problems across DOD's various organizations and
business areas. For example, we have reported[Footnote 16] that many
of DOD's financial management shortcomings were attributable in part
to human capital issues. The department does not yet have a strategy
in place for improving its financial management human capital. This is
especially critical in connection with DOD's civilian workforce, since
DOD has generally done a much better job in conjunction with human
capital planning for its military personnel. In addition, DOD's
civilian personnel face a variety of size, shape, skills, and
succession planning challenges that need to be addressed.
As I mentioned earlier, and it bears repetition, the department has
reported that an estimated 80 percent of the data needed for sound
financial management comes from its other business operations, such as
its acquisition and logistics communities. DOD's vast array of costly,
nonintegrated, duplicative, and inefficient financial management
systems is reflective of the lack of an enterprisewide, integrated
approach to addressing its management challenges. DOD has acknowledged
that one of the reasons for the lack of clarity in its reporting under
the Government Performance and Results Act has been that most of the
program outcomes the department is striving to achieve are
interrelated, while its management systems are not integrated.
As I mentioned earlier, the Secretary of Defense has made the
fundamental transformation of business practices throughout the
department a top priority. In this context, the Secretary established
a number of top-level committees, councils and boards, including the
Senior Executive Committee, Business Initiative Council, and the
Defense Business Practices Implementation Board. The Senior Executive
Committee was established to help guide efforts across the department
to improve its business practices. This committee, chaired by the
Secretary of Defense, and with membership to include the Deputy
Secretary, the military service secretaries and the Under Secretary of
Defense for Acquisition, Logistics and Technology, was established to
function as the board of directors for the department. The Business
Initiative Council, comprised of the military service secretaries and
headed by the Under Secretary of Defense for Acquisition, Technology
and Logistics, was established to encourage the military services to
explore new money saving business practices to help offset funding
requirements for transformation and other initiatives. The Secretary
also established the Defense Business Practices Implementation Board,
composed of business leaders from the private sector. The board is
intended to tap outside expertise to advise the department on its
efforts to improve business practices.
The department's successful Year 2000 effort illustrated and our
survey of leading financial management organizations[Footnote 17]
captured the importance of strong leadership from top management. As
we have stated many times before, strong, sustained executive
leadership is critical to changing a deeply rooted corporate culture”
such as the existing "business as usual" culture at DOD”and
successfully implementing financial management reform. As I mentioned
earlier, the personal, active involvement of the Deputy Secretary of
Defense played a key role in building entitywide support and focus for
the department's Year 2000 initiatives. Given the long-standing and
deeply entrenched nature of the department's financial management
problems combined with the numerous competing DOD organizations, each
operating with varying and often parochial views and incentives, such
visible, sustained top-level leadership will be critical.
In discussing their April 2001 report to the Secretary of Defense on
transforming financial management,[Footnote 18] the authors stated
that, "unlike previous failed attempts to improve DOD's financial
practices, there is a new push by DOD leadership to make this issue a
priority." With respect to the key area of investment control, the
Secretary took action to set aside $100 million for financial
modernization. Strong, sustained executive leadership”over a number of
years and administrations”will be key to changing a deeply rooted
culture. In addition, given that significant investments in
information systems and related processes have historically occurred
in a largely decentralized manner throughout the department,
additional actions will likely be required to implement a centralized
IT investment control strategy. For example, in our May 2001 report,
[Footnote 19] we recommended DOD take action to establish centralized
control over transformation investments to ensure that funding is
provided for only those proposed investments in systems and business
processes that are consistent with the department's overall business
process transformation strategy.
Clear Lines of Responsibility and Accountability:
Last summer, when I met with Secretary Rumsfeld, I stressed the
importance of establishing clear lines of responsibility, decision-
making authority, and resource control for actions across the
department tied to the Secretary as a key to reform. As we previously
reported,[Footnote 20] such an accountability structure should emanate
from the highest levels and include the secretaries of each of the
military services as well as heads of the department's various major
business areas.
The Secretary of Defense has taken action to vest responsibility and
accountability for financial management modernization with the DOD
Comptroller. In October 2001, the DOD Comptroller established the
Financial Management Modernization Executive and Steering Committees
as the governing bodies to oversee the activities related to this
modernization effort and also established a supporting working group
to provide day-to-day guidance and direction on these efforts. DOD
reports that the executive and steering committees met for the first
time in January 2002.
It is clear to us that the Comptroller has the full support of the
Secretary and that the Secretary is committed to making meaningful
change. To make this work, it will be important that the Comptroller
has sufficient authority to bring about the full, effective
participation of the military services and business process owners
across the department. The Comptroller has direct control of 20
percent of the data needed for sound financial management and has
historically had limited ability to control information technology
investments across the department. Addressing issues such as
centralization of authority for information systems investments and
continuity of leadership will be critical to successful business
process transformation.
In addition to DOD, a number of other federal departments and agencies
are facing an array of interrelated business system management
challenges for which resolution is likely to require a number of years
and could span administrations. One option that may have merit would
be the establishment of chief operating officers, who could be
appointed for a set term of 5 to 7 years, with the potential for
reappointment. These individuals should have a proven track record as
a business process change agent for a large, diverse organization and
would spearhead business process transformation across the department
or agency.
Results-Oriented Performance:
As discussed in our January 2001 report on DOD's major performance and
accountability challenges,[Footnote 21] establishing a results
orientation will be another key element of any approach to reform.
Such an orientation should draw upon results that could be achieved
through commercial best practices, including outsourcing and shared
servicing concepts. Personnel throughout the department must share the
common goal of establishing financial management operations that not
only produce financial statements that can withstand the test of an
audit but, more importantly, routinely generate useful, reliable, and
timely financial information for day-to-day management purposes.
In addition, we have previously testified[Footnote 22] that DOD's
financial management improvement efforts should be measured against an
overall goal of effectively supporting DOD's basic business processes,
including appropriately considering related business process system
interrelationships, rather than determining system-by-system
compliance. Such a results-oriented focus is also consistent with an
important lesson learned from the department's Year 2000 experience.
DOD's initial Year 2000 focus was geared toward ensuring compliance on
a system-by-system basis and did not appropriately consider the
interrelationship of systems and business areas across the department.
It was not until the department, under the direction of the then
Deputy Secretary, shifted to a core mission and function review
approach that it was able to achieve the desired result of greatly
reducing its Year 2000 risk.
Since the Secretary has established an overall business process
transformation goal that will require a number of years to achieve,
going forward, it will be especially critical for managers throughout
the department to focus on specific measurable metrics that, over
time, collectively will translate to achieving this overall goal. It
will be important for the department to refocus its annual
accountability reporting on this overall goal of fundamentally
transforming the department's financial management systems and related
business processes to include appropriate interim annual measures to
track progress toward this goal.
In the short term, it will be important to focus on actions that can
be taken using existing systems and processes. Establishing interim
measures to both track performance against the department's overall
transformation goals and facilitate near term successes using existing
systems and processes will be critical. The department has established
an initial set of metrics intended to evaluate financial performance,
and reports that it has seen improvements. For example, with respect
to closed appropriation accounts, DOD reported during the first 4
months of fiscal year 2002, a reduction in the dollar value of
adjustments to closed appropriation accounts of about 51 percent from
the same 4-month period in fiscal year 2001. Other existing metrics
concern cash and funds management, contract and vendor payments, and
disbursement accounting. DOD also reported that it is working to
develop these metrics into higher level measures more appropriate for
senior management. We agree with the department's efforts to expand
the use of appropriate metrics to guide its financial management
reform efforts.
Incentives and Consequences:
Another key to breaking down parochial interests and stovepiped
approaches that have plagued previous reform efforts will be
establishing mechanisms to reward organizations and individuals for
behaviors that comply with DOD-wide and congressional goals. Such
mechanisms should be geared to providing appropriate incentives and
penalties to motivate decisionmakers to initiate and implement efforts
that result in fundamentally reformed financial management and other
business support operations.
In addition, such incentives and consequences will be essential if DOD
is to break down the parochial interests that have plagued previous
reform efforts. Incentives driving traditional ways of doing business,
for example, must be changed, and cultural resistance to new
approaches must be overcome. Simply put, DOD must convince people
throughout the department that they must change from "business as
usual" systems and practices or they are likely to face serious
consequences, organizationally and personally.
Enterprise Architecture:
Establishing and implementing an enterprisewide financial management
architecture will be essential for the department to effectively
manage its large, complex system modernization effort now underway.
The Clinger-Cohen Act requires agencies to develop, implement, and
maintain an integrated system architecture. As we previously
reported,[Footnote 23] such an architecture can help ensure that the
department invests only in integrated, enterprisewide business system
solutions and, conversely, will help move resources away from non-
value added legacy business systems and nonintegrated business system
development efforts. In addition, without an architecture, DOD runs
the serious risk that its system efforts will result in perpetuating
the existing system environment that suffers from systems duplication,
limited interoperability, and unnecessarily costly operations and
maintenance. In our May 2001 report,[Footnote 24] we pointed out that
DOD lacks a financial management enterprise architecture to guide and
constrain the billions of dollars it plans to spend to modernize its
financial management operations and systems.
DOD has reported that it is in the process of contracting for the
development of a DOD-wide financial management enterprise architecture
to "achieve the Secretary's vision of relevant, reliable and timely
financial information needed to support informed decision-making."
Consistent with our previous recommendations in this area, DOD has
begun an extensive effort to document the department's current "as-is"
financial management architecture by inventorying systems now relied
on to carryout financial management operations throughout the
department. DOD has identified 674 top-level systems and at least 997
associated interfaces thus far and estimates that this inventory could
include up to 1,000 systems when completed.
While DOD's beginning efforts at developing a financial management
enterprise architecture are off to a good start, the challenges yet
confronting the department in its efforts to fully develop, implement,
and maintain a DOD-wide financial management enterprise architecture
are unprecedented. Our May 2001 report[Footnote 25] details a series
of recommended actions directed at ensuring DOD employs recognized
best practices for enterprise architecture management. This effort
will be further complicated as the department strives to develop
multiple enterprise architectures across its various business areas.
For example, in June 2001, we recommended[Footnote 26] that DOD
develop an enterprise architecture for its logistics operations. As I
discussed previously, an integrated reform strategy will be critical.
In this context, it is essential that DOD closely coordinate and
integrate the development and implementation of these, as well as
other, architectures. By following this integrated approach and our
previous recommendations, DOD will be in the best position to avoid
the serious risk that after spending billions of dollars on systems
modernization, it will continue to perpetuate the existing systems
environment that suffers from duplication of systems, limited
interoperability, and unnecessarily costly operations and maintenance.
Monitoring and Oversight:
Ensuring effective monitoring and oversight of progress will also be a
key to bringing about effective implementation of the department's
financial management and related business process reform. We have
previously testified[Footnote 27] that periodic reporting of status
information to department top management, the Office of Management and
Budget (OMB), the Congress, and the audit community was another key
lesson learned from the department's successful effort to address its
Year 2000 challenge.
Previous Financial Management Improvement Plans DOD submitted to the
Congress have simply been compilations of data call information on the
stovepiped approaches to financial management improvements received
from the various DOD components. It is our understanding that DOD
plans to change its approach and anchor its plans in an enterprise
system architecture. If the department's future plans are upgraded to
provide a department-wide strategic view of the financial management
challenges facing the DOD along with planned corrective actions, these
plans can serve as an effective tool not only to help guide and direct
the department's financial management reform efforts, but a tool for
oversight Going forward, this Subcommittee's annual oversight
hearings, as well the active interest and involvement of other
cognizant defense and oversight committees in the Congress, will
continue to be key to effectively achieving and sustaining DOD's
financial management and related business process reform milestones
and goals.
Given the size, complexity, and deeply engrained nature of the
financial management problems facing DOD, heroic end-of-the year
efforts relied on by some agencies to develop auditable financial
statement balances are not feasible at DOD. Instead, a sustained focus
on the underlying problems impeding the development of reliable
financial data throughout the department will be necessary and is the
best course of action. I applaud the proposals spearheaded by the
Senate Armed Services Committee, and subsequently enacted as part of
the fiscal year 2002 National Defense Authorization Act, to provide a
framework for redirecting the department's resources from the
preparation and audit of financial statements that are acknowledged by
DOD leadership to be unauditable to the improvement of DOD's financial
management systems and financial management policies, procedures and
internal controls. Under this new legislation, the department will
also be required to report to the Congress on how resources have been
redirected and the progress that has been achieved. This reporting
will provide an important vehicle for the Congress to use in assessing
whether DOD is using its available resources to best bring about the
development of timely and reliable financial information for daily
decision making and transform its financial management as envisioned
by the Secretary of Defense.
In conclusion, we support Secretary Rumsfeld's vision for transforming
the department's full range of business processes. Substantial
personal involvement by the Secretary and other DOD top executives
will be essential for success to change the DOD culture that has over
time perpetuated the status quo and been resistant to transformation
of the magnitude envisioned by the Secretary. Comptroller Zakheim, as
the Secretary's leader for financial management modernization, will
need to have the ability to make the tough choices on systems,
processes, and personnel, and to control spending for new systems
across the department, especially where new systems development is
involved. Processes will have to be reengineered, and hierarchical,
process-oriented, stovepiped, and internally focused approaches will
have to be put aside. The past has taught us that well-intentioned
initiatives will only succeed if there are the right incentives,
transparency, and accountability mechanisms in place.
The events of September 11 and other funding and asset accountability
issues associated with the war on terrorism, at least in the short
term, may dilute the focused attention and sustained action that will
be necessary to fully realize the Secretary's transformation goal,
which is understandable given the circumstances. At the same time, the
demand for increased Defense spending, when combined with the
government's long-range fiscal challenges, means that solutions to
DOD's business systems problems are even more important. As the
Secretary has noted, billions of dollars of resources could be freed
up for national defense priorities by eliminating waste and
inefficiencies in DOD's existing business processes. Only time will
tell if the Secretary's current transformation efforts will come to
fruition. Others have attempted well-intentioned reform efforts in the
past. Today, the momentum exists for reform. But, the real question
remains, will this momentum continue to exist tomorrow, next year, and
throughout the years to make the necessary cultural, systems, human
capital, and other key changes a reality? For our part, we will
continue to constructively work with the department and the Congress
in this important area.
Mr. Chairman, this concludes my statement. I would be pleased to
answer any questions you or other members of the Subcommittee may have
at this time.
Contacts and Acknowledgments:
For further information about this testimony, please contact Jeffrey C.
Steinhoff at (202) 512-2600 or steinhoffj@gao.gov, Henry L. Hinton,
Jr. at (202) 512-4300 or hintonh@gao.gov, or Gregory D. Kutz at (202)
512-9095 or kutzg@gao.gov. Other key contributors to this testimony
include Jack Brock, Geoffrey Frank, William Hill, Randolph Hite,
Jeffrey Jacobson, Darby Smith, and David Warren.
[End of section]
Footnotes:
[1] U.S. General Accounting Office, High-Risk Series: An Update,
[hyperlink, http://www.gao.gov/products/GAO-01-263] (Washington, D.C.:
Jan. 2001).
[2] U.S. General Accounting Office, DOD Systems Modernization:
Continued Investment in the Standard Procurement System Has Not Been
Justified, [hyperlink, http://www.gao.gov/products/GAO-01-682]
(Washington, D.C.: July 31, 2001) and DOD's Standard Procurement
System: Continued Investment Has Yet to Be Justified, [hyperlink,
http://www.gao.gov/products/GAO-02-392T] (Washington, D.C.: Feb. 7,
2002).
[3] U.S. General Accounting Office, Automated Information Systems:
Schedule Delays and Cost Overruns Plague DOD Systems, [hyperlink,
http://www.gao.gov/products/GAO/IMTEC-89-36] (Washington, D.C.: May
10, 1989).
[4] U.S. General Accounting Office, High-Risk Series: Information
Management and Technology, [hyperlink,
http://www.gao.gov/products/GAO/HR-97-9] (Washington, D.C.: February
1997).
[5] U.S. General Accounting Office, Defense Management: Actions Needed
to Sustain Reform Initiatives and Achieve Greater Results, [hyperlink,
http://www.gao.gov/products/GAO/NSIAD-00-72] (Washington, D.C.: July
25, 2000).
[6] U.S. General Accounting Office, Executive Guide: Creating Value
Through World-class Financial Management, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-134] (Washington, D.C.: Apr.
2000).
[7] U.S. General Accounting Office, Defense Management: Actions Needed
to Sustain Reform Initiatives and Achieve Greater Results, [hyperlink,
http://www.gao.gov/products/GAO/NSIAD-00-72] (Washington D.C.: July
25, 2000).
[8] Announced by the Secretary of Defense in 1997, DRI represents a
set of actions aimed at reforming the department's major business
processes and support operations.
[9] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, [hyperlink,
http://www.gao.gov/products/GAO-01-244] (Washington D.C.: Jan. 2001).
[10] U.S. General Accounting Office, Financial Management: DOD
Improvement Plan Needs Strategic Focus, [hyperlink,
http://www.gao.gov/products/GAO-01-764] (Washington D.C.: Aug. 17,
2001).
[11] U.S. General Accounting Office, Information Technology:
Architecture Needed to Guide Modernization of DOD's Financial
Operations, [hyperlink, http://www.gao.gov/products/GAO-01-525]
(Washington, D.C.: May 17, 2001).
[12] U.S. General Accounting Office, Defense Acquisitions: DOD Faces
Challenges in Implementing Best Practices, [hyperlink,
http://www.gao.gov/products/GAO-02-469T] (Washington, D.C.: Feb. 27,
2002).
[13] [hyperlink, http://www.gao.gov/products/GA0-01-681T].
[14] U.S. General Accounting Office, Department of Defense: Progress
in Financial Management Reform, [hyperlink,
http://www.gao.gov/products/GAO/T-AIMD/NSIAD-00-163] (Washington,
D.C.: May 9, 2000).
[15] The eight interrelated high-risk areas that represent the
greatest challenge to DOD developing world-class business operations
supporting its forces are: financial management, human capital,
information security, systems modernization, weapon system
acquisition, contract management, infrastructure management, and
inventory management.
[16] [hyperlink, http://www.gao.gov/products/GA0-01-244].
[17] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-134].
[18] Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change, (Washington, D.C.: Apr.
13, 2001).
[19] [hyperlink, http://www.gao.gov/products/GA0-01-525].
[20] [hyperlink, http://www.gao.gov/products/GAO/NSIAD-00-72].
[21] [hyperlink, http://www.gao.gov/products/GA0-01-244].
[22] [hyperlink, http://www.gao.gov/products/GAO/T-AIMD/NSIAD-00-163].
[23] [hyperlink, http://www.gao.gov/products/GAO/T-AIMD/NSIAD-00-163].
[24] [hyperlink, http://www.gao.gov/products/GA0-01-525].
[25] [hyperlink, http://www.gao.gov/products/GA0-01-525].
[26] U.S. General Accounting Office, Information Technology: DLA
Should Strengthen Business Systems Modernization Architecture and
Investment Activities, [hyperlink,
http://www.gao.gov/products/GAO-01-631] (Washington, D.C.: June 29,
2001).
[27] [hyperlink, http://www.gao.gov/products/GA0-01-244].
