DOD Financial Management
Integrated Approach, Accountability, Transparency, and Incentives Are Keys to Effective Reform Gao ID: GAO-02-537T March 20, 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-02-537T, 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 Government Efficiency, Financial
Management, and Intergovernmental Relations, House Committee on
Government Reform:
For Release on Delivery:
Expected at 1 p.m.
Wednesday, March 20, 2002:
DOD Financial Management:
Integrated Approach, Accountability, Transparency, and Incentives Are
Keys to Effective Reform:
Statement of Gregory D. Kutz:
Director, Financial Management and Assurance:
GAO-02-537T:
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“ which 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 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 have invited 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 that it
gets the most from every dollar spent. The department must be able to
effectively carry out its stewardship responsibilities for the funding
it receives and 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, maintaining 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 to providing reliable, timely financial
information on a routine basis to support management decision-making
at all levels throughout DOD. This level of excellence will also be
critical in order to enhance overall transparency and accountability.
Success in this area will 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, the Comptroller General shared
with Secretary Rumsfeld and Comptroller Zakheim a business
transformation paper. This paper provided an overview of GAO‘s views
on the current challenges facing the department, 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. 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 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.
In this regard, I would like to briefly highlight three of our recent
products that exemplify the adverse impact of DOD‘s reliance on
fundamentally flawed financial management systems and processes and a
weak overall internal control environment.
* In a testimony before your subcommittee last week,[Footnote 2] we
highlighted continuing problems with internal controls over
approximately $64 million in fiscal year 2001 purchase card
transactions involving two Navy activities. Consistent with our
testimony last July[Footnote 3] on fiscal year 2000 purchase card
transactions at these locations, our follow-up review demonstrated
that continuing control problems left these Navy activities vulnerable
to fraudulent, improper, and abusive purchases and theft and misuse of
government property. We are currently auditing purchase card usage
across the department.
* In a testimony before your Subcommittee in July 2001, we reported
[Footnote 4] that DOD did not have adequate systems, controls, and
managerial attention to ensure that $2.7 billion of adjustments to
closed appropriations were legal and otherwise proper. Our review of
$2.2 billion of these adjustments found that about $615 million of
them should not have been made, including about $146 million that were
illegal.
* In June 2001, we reported[Footnote 5] that DOD‘s current financial
systems could not adequately track and report on whether the $1.1
billion in earmarked funds that the Congress provided to DOD for spare
parts and associated logistical support were actually used for the
intended purpose. The vast majority of the funds”92 percent”were
transferred to the military services operation and maintenance
accounts. We found that once these funds were transferred, DOD lost
its ability to assure the Congress that the funds it received for
spare parts purchases were used for, and only for, that purpose.
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 decisionmaking. This network was not designed to be,
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 that combine to exacerbate problems with data integrity.
DOD has 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, while implemented in
1968, the department still relies on the Mechanization of Contract
Administration Services (MOCAS) system to process a substantial
portion of the contract payment transactions for all DOD
organizations. In fiscal year 2001, MOCAS processed an estimated $78
billion in contract payments. 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 6] 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 7] 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 have 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 8] 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 9] that while DRI got off to a good start and
made progress in implementing many of the component initiatives, it
did not meet expected time frames 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 DOD‘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 repeated 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 businesses 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, the
Comptroller General 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,
agencywide 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 an entitywide priority, (2) redefining
the role of finance, (3) providing meaningful information to
decisionmakers, and (4) building a team of people that deliver
results.[Footnote 10]
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 11] the
department encountered resistance to developing departmentwide
solutions under the then Secretary‘s broad-based DRI.[Footnote 12] 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 not only in financial
management, but also in other business areas, such as weapon system
acquisition and inventory management. For example, as we reported
[Footnote 13] 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 14] 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 would
collectively result in an integrated DOD-wide approach to financial
management improvement. In addition, we reported that the department‘s
plan did not include 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 future years‘ updates will
reflect a more strategic, departmentwide vision and provide a more
effective tool for financial management reform.
As it moves to modernize its systems, the department faces a
formidable challenge in responding to technological advances that are
changing traditional approaches to business management. 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 DOD business functions. As we have reported,[Footnote 15]
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
16] 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 its decision makers 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 lack of incentive 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, taken longer to complete, and not generated results or
performed 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 Management Reform:
As we testified before your Subcommittee last May,[Footnote 17] our
experience has shown there are several key elements that, collectively
would enable the DOD Financial department to effectively address the
underlying causes of its inability to resolve its long-standing
financial management problems. These elements, which are 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
and 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 decisionmaking 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 daunting.
Integrated Business Process Reform Strategy:
As we have reported in the past,[Footnote 18] 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 19]
Successfully reengineering the department‘s processes supporting its
financial management and other business support operations will be
critical if DOD is to effectively address the 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 20] 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 its lack of an enterprisewide, integrated
approach to addressing 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 discussed previously, 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 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--comprising 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.
Active Leadership and Resource Control:
The department‘s successful Year 2000 effort illustrated, and our
survey of leading financial management organizations[Footnote 21]
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 to
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, 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 22] 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 23] we recommended that 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 the Comptroller General met with Secretary Rumsfeld,
he 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 24] such an accountability
structure should emanate from the highest levels and include the
secretary 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 that oversee the activities related to this
modernization effort and also established a supporting working group
to provide day-to-day guidance and direction in 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 is important that the Comptroller have
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 are
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, challenges that 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 agents for large, diverse organizations
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 25] establishing a results
orientation is 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 26] 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
interrelationships 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 is 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 is
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 for tracking
progress toward this goal.
In the short term, it is important to focus on actions that can be
taken using existing systems and processes. It is critical to
establish interim measures to both track performance against the
department‘s overall transformation goals and facilitate near-term
successes using existing systems and processes. The department has
established an initial set of metrics intended to evaluate financial
performance, and it 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 the parochial interests and stovepiped
approaches that have plagued previous reform efforts is 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 decision makers to initiate and implement efforts that result
in fundamentally reformed financial management and other business
support operations.
In addition, such incentives and consequences are 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 is essential for the department to effectively manage its
large, complex system modernization effort now under way. The Clinger-
Cohen Act requires agencies to develop, implement, and maintain an
integrated system architecture. As we previously reported,[Footnote
27] 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 perpetuate the existing system
environment that suffers from systems duplication, limited
interoperability, and unnecessarily costly operations and maintenance.
In our May 2001 report,[Footnote 28] 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 carry out 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 29] 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 30] that DOD
develop an enterprise architecture for its logistics operations. As I
discussed previously, an integrated reform strategy is 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 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 31] that periodic reporting of status
information to department top management, the Office of Management and
Budget (OMB), the Congress, and the audit community is another key
lesson learned from the department‘s successful effort to address its
Year 2000 challenge.
Previous submissions of its Financial Management Improvement Plan 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
architecture. If the department‘s future plans are upgraded to provide
a departmentwide strategic view of the financial management challenges
facing the department, 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 also to help
maintain oversight of the department‘s financial management
operations. 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. In this context, the Congress recently enacted
the fiscal year 2002 National Defense Authorization Act, which
contains provisions that will provide a framework for redirecting the
department‘s resources from the preparation and audit of financial
statements, which 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 to change the DOD culture that has over time
perpetuated the status quo and been resistant to a 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 are
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 work
constructively 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 Gregory
D. Kutz at (202) 512-9095 or kutzg@gao.gov. Other key contributors to
this testimony include Jack Brock, Geoffrey Frank, 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, Purchase Cards: Continued Control
Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse,
[hyperlink, http://www.gao.gov/products/GAO-02-504T] (Washington,
D.C.: Mar. 13, 2002).
[3] U.S. General Accounting Office, Purchase Cards: Control Weaknesses
Leave Two Navy Units Vulnerable to Fraud and Abuse, [hyperlink,
http://www.gao.gov/products/GAO-01-995T] (Washington, D.C.: July 30,
2001).
[4] U.S. General Accounting Office, Canceled DOD Appropriations: $615
Million of Illegal or Otherwise Improper Adjustments, [hyperlink,
http://www.gao.gov/products/GAO-01-994T] (Washington, D.C.: July 26,
2001).
[5] U.S. General Accounting Office, Defense Inventory: Information on
the Use of Spare Parts Funding Is Lacking, [hyperlink,
http://www.gao.gov/products/GAO-01-472] (Washington, D.C.: June 11,
2001).
[6] 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).
[7] 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).
[8] 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.: Feb. 1997).
[9] 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).
[10] 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).
[11] [hyperlink, http://www.gao.gov/products/GAO/NSIAD-00-72].
[12] 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.
[13] 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).
[14] 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).
[15] 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).
[16] 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).
[17] U.S. General Accounting Office, DOD Financial Management:
Integrated Approach, Accountability, and Incentives Are Keys to
Effective Reform, [hyperlink, http://www.gao.gov/products/GAO-01-681T]
(Washington, D.C.: May 8, 2001).
[18] 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).
[19] The eight interrelated high-risk areas that represent the
greatest challenge to DOD‘s 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.
[20] [hyperlink, http://www.gao.gov/products/GAO-01-244].
[21] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-134].
[22] Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change, (Washington, D.C.: Apr.
13, 2001).
[23] [hyperlink, http://www.gao.gov/products/GAO-01-525].
[24] [hyperlink, http://www.gao.gov/products/GAO/NSIAD-00-72].
[25] [hyperlink, http://www.gao.gov/products/GAO-01-244].
[26] [hyperlink, http://www.gao.gov/products/GAO/T-AIMD/NSIAD-00-163].
[27] [hyperlink, http://www.gao.gov/products/GAO/T-AIMD/NSIAD-00-163].
[28] [hyperlink, http://www.gao.gov/products/GAO-01-525].
[29] [hyperlink, http://www.gao.gov/products/GAO-01-525].
[30] 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).
[31] [hyperlink, http://www.gao.gov/products/GAO-01-244].
[End of section]
