Department of Defense
Status of Financial Management Weaknesses and Progress Toward Reform Gao ID: GAO-03-931T June 25, 2003As seen again in Iraq, the excellence of our military forces is unparalleled. This same level of excellence is not yet evident in the Department of Defense's (DOD) financial management and other business areas, impeding DOD's ability to provide complete, reliable, and timely information to the Congress, DOD managers, and other decision makers. Congress asked GAO to testify on the status of DOD's financial management and business process reform efforts. Specifically, GAO was asked to provide an overview of the long-standing financial management weaknesses facing DOD and a summary of the underlying causes of DOD's financial management challenges. In addition, GAO's testimony focused on (1) key actions necessary to correct DOD's financial management problems and (2) the progress DOD is making toward business process reform.
Overhauling DOD's financial management represents a major challenge that goes far beyond financial accounting to the very fiber of the department's range of business operations and management culture. Of the 25 areas on GAO's governmentwide "high risk" list, 6 are DOD program areas, and the department shares responsibility for 3 other high-risk areas that are governmentwide in scope. Key financial management weaknesses include the lack of effective and efficient asset management and accountability; unreliable estimates of environmental and disposal liabilities; lack of accurate budget and cost information; nonintegrated and proliferating financial management systems; and fundamental flaws in DOD's overall control environment. GAO has identified four underlying causes for DOD's inability to resolve its long-standing financial management problems: (1) a lack of sustained top-level leadership and management accountability for correcting problems; (2) deeply embedded cultural resistance to change, including military service parochialism and stovepiped operations; (3) a lack of results-oriented goals and performance measures and monitoring; and (4) inadequate incentives for seeking change. The following are elements that GAO has identified as key to a successful approach to financial management and business process reform: (1) addressing financial management challenges as part of a comprehensive, integrated, DOD-wide business reform; (2) providing for sustained leadership by the Secretary of Defense and resource control to implement needed financial management reforms; (3) establishing clear lines of responsibility, authority, and accountability for such reform tied to the Secretary; (4) incorporating results-oriented performance measures and monitoring tied to financial management reforms; (5) providing appropriate incentives or consequences for action or inaction; (6) establishing and implementing an enterprise architecture to guide and direct financial management modernization investments; and (7) ensuring effective executive and congressional oversight and monitoring. DOD has taken positive steps in many of these key areas. For example, the Secretary of Defense has included improving DOD's financial management as one of his top 10 priorities, and DOD has already taken a number of actions under its Business Transformation Program, including its efforts to develop an enterprise architecture to guide operational and technological changes. However, these are beginning steps and formidable challenges remain in each of the key reform areas.
GAO-03-931T, Department of Defense: Status of Financial Management Weaknesses and Progress Toward Reform
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Testimony :
Before the Subcommittee on Government Efficiency and Financial
Management, Commitee on Government Reform, House of Representatives:
For Release on Delivery Expected at 2:30 p.m. EST Wednesday, June 25,
2003:
Department of Defense:
Status of Financial Management Weaknesses and Progress Toward Reform:
Statement of Gregory D. Kutz, Director Financial Management and
Assurance:
GAO-03-931T:
GAO Highlights:
Highlights of GAO-03-931T, a testimony to the Subcommittee on Government Efficiency and Financial Management, Committee on Government Reform,
House of Representatives
Why GAO Did This Study:
As seen again in Iraq, the excellence of our military forces is
unparalleled. This same level of excellence is not yet evident in the
Department of Defense‘s (DOD) financial management and other business
areas, impeding DOD‘s ability to provide complete, reliable, and
timely information to the Congress, DOD managers, and other decision
makers. The Subcommittee asked GAO to testify on the status of DOD‘s
financial management and business process reform efforts.
Specifically, GAO was asked to provide an overview of the long-
standing financial management weaknesses facing DOD and a summary of
the underlying causes of DOD‘s financial management challenges. In
addition, GAO‘s testimony focused on (1) key actions necessary to
correct DOD‘s financial management problems and (2) the progress DOD
is making toward business process reform.
What GAO Found:
Overhauling DOD‘s financial management represents a major challenge
that goes far beyond financial accounting to the very fiber of the
department‘s range of business operations and management culture. Of
the 25 areas on GAO‘s governmentwide ’high risk“ list, 6 are DOD
program areas, and the department shares responsibility for 3 other
high-risk areas that are governmentwide in scope. Key financial
management weaknesses include the lack of effective and efficient
asset management and accountability; unreliable estimates of
environmental and disposal liabilities; lack of accurate budget and
cost information; nonintegrated and proliferating financial management
systems; and fundamental flaws in DOD‘s overall control environment.
GAO has identified four underlying causes for DOD‘s inability to
resolve its long-standing financial management problems:
* 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.
The following are elements that GAO has identified as key to a
successful approach to financial management and business process
reform:
* addressing financial management challenges as part of a
comprehensive, integrated, DOD-wide business 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 and implementing an enterprise architecture to guide
and direct financial management modernization investments; and
* ensuring effective executive and congressional oversight and
monitoring.
DOD has taken positive steps in many of these key areas. For example,
the Secretary of Defense has included improving DOD‘s financial
management as one of his top 10 priorities, and DOD has already taken
a number of actions under its Business Transformation Program,
including its efforts to develop an enterprise architecture to guide
operational and technological changes. However, these are beginning
steps and formidable challenges remain in each of the key reform
areas.
[End of section]
Dear Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to discuss the status of financial
management and business process reform efforts at the Department of
Defense (DOD). DOD faces financial and related management problems that
are pervasive, complex, long standing, and deeply rooted in virtually
all business operations throughout the department. These problems have
impeded the department's ability to provide complete, reliable, and
timely business operations information to the Congress, DOD managers,
and other decision makers. In addition, DOD's financial management
weaknesses have resulted in the failure of the department, its military
services, and its major components from passing the test of an
independent financial audit and are a significant obstacle to achieving
an unqualified opinion on the U.S. government's consolidated financial
statements. Overhauling DOD's financial management represents a major
challenge that goes far beyond financial accounting to the very fiber
of the department's range of business operations and management
culture. Of the 25 areas on GAO's governmentwide "high risk" list, 6
are DOD program areas, and the department shares responsibility for 3
other high-risk areas that are government wide in scope.[Footnote 1]
Central to effectively addressing DOD's financial management problems
will be understanding that these 9 areas are interrelated and cannot be
addressed in an isolated, stovepiped, or piecemeal fashion. While
Secretary of Defense Rumsfeld has initiated a program to transform
DOD's business processes, including establishing a new management
structure to oversee reform efforts, DOD has not yet developed an
overarching plan tying key reform efforts together in an integrated
program.
DOD's size, structure, and diversity of activities increase the
difficulty and complexity of reform efforts. For example, DOD is the
nation's largest employer, with:
* 1.4 million men and women currently on active duty,
* 1.2 million serving in the Reserve and Guard components, and:
* 675,000 civilians.
DOD operates more than 600,000 individual buildings and structures
located at more than 6,000 different locations and using more than 30
million acres. For fiscal year 2002, DOD expended approximately $371
billion to operate and maintain about 250,000 vehicles, over 15,000
aircraft, more than 1,000 oceangoing vessels, and some 550 public
utility systems.[Footnote 2]
DOD's financial management problems are the result of long-standing
deficiencies related to its systems, processes, and people. Therefore,
to be successful, reform efforts will need to address all three
factors. In recognition of the far-reaching nature of DOD's financial
management problems, on September 10, 2001, Secretary Rumsfeld
announced a broad, top-priority initiative intended to "transform the
way the department works and what it works on." This new broad-based
business transformation initiative, led by DOD's Senior Executive
Council and the Business Initiative Council, incorporates a number of
defense reform initiatives begun under previous administrations but
also encompasses additional fundamental business reform proposals. In
announcing his initiative, Secretary Rumsfeld recognized that
transformation would be difficult and expected that needed changes
would take 8 or more years to complete.
As we have seen again in Iraq, the excellence of our military forces is
unparalleled. This same level of excellence is not yet evident in the
department's financial management and other business areas. This is
particularly problematic because effective financial and related
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.
Transforming DOD's business operations would free up resources that
could be used 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. In fact,
Secretary Rumsfeld has estimated that successful business process
reform could save DOD 5 percent of its budget or $20 billion a year.
Today, I will focus mainly on the key actions necessary to correct
DOD's financial management problems and the progress DOD is making
toward business process reform. But first, I want to provide you with
an overview of the long-standing financial management weaknesses facing
DOD--as highlighted by the results of audit work performed over the
past few years--and a summary of the underlying causes of DOD's
financial management challenges. My statement is based on previous GAO
reports as well as on our review of DOD Inspector General (IG) reports
and recent DOD reports and studies.
Long-standing Financial Management Weaknesses:
DOD continues to confront pervasive, decades-old financial management
problems related to its systems, processes (including internal
controls), and people (human capital). These problems have (1) resulted
in a lack of reliable information needed to make sound decisions and
report the status of DOD's activities through financial and other
reports, (2) hindered its operational efficiency, (3) impacted mission
performance, and (4) left the department vulnerable to fraud, waste,
and abuse.
DOD's serious financial management and related business systems
problems led us in 1995 to put both DOD financial management and
systems modernization on our list of high-risk[Footnote 3] areas in the
federal government, a designation that continues today.[Footnote 4] As
discussed in the results of our audit of the fiscal year 2002 Financial
Statements of the U.S. Government,[Footnote 5] DOD's financial
management deficiencies, taken together, continue to represent one of
the largest obstacles 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 has passed the test of an
independent financial audit because of pervasive weaknesses in
financial management systems, processes, and controls. These weaknesses
not only hamper the department's ability to produce timely and accurate
financial management information but also impact mission performance
and make mission costs unnecessarily high. Ineffective asset
accountability and the lack of effective controls continue to adversely
affect visibility over its estimated $1 trillion investment in
inventories and property, plant, and equipment (including weapon
systems and other property). Such information is key to meeting
military objectives and readiness goals. Further, unreliable cost and
budget information related to a reported $700 billion of liabilities,
particularly $59 billion of reported environmental liabilities, and
about $380 billion of reported costs negatively affects DOD's ability
to effectively project funding needs, maintain adequate funds control,
reduce costs, and measure performance. DOD has invested, and continues
to invest, significant resources--in terms of dollars, time, and
people--in its systems without demonstrated improvement in its business
operations and adequate management and oversight, thereby continuing to
perpetuate a proliferation of systems that do not adequately address
the department's needs. Finally, DOD's weak overall control environment
has left the department vulnerable to fraud, waste, and abuse. As the
results of the department's fiscal year 2002 financial audit and other
audit work demonstrate, DOD continues to confront serious weaknesses in
these areas.
Asset Management and Accountability:
Of the $776 billion of inventory and related property and general
property, plant, and equipment (PP&E)[Footnote 6] assets reported by
federal entities for fiscal year 2002, DOD is responsible for about
half--approximately $146 billion in inventory and related property and
$226 billion of general PP&E, comprised of $162 billion in real
property (land, buildings, facilities, capital leases, and improvements
to those assets); $37 billion in personal property (such as vehicles,
equipment, telecommunications systems, computers, and software); and
$27 billion in construction-in-progress, the largest amount of which
belongs to the Corps of Engineers. While DOD is not presently required
to report dollar values for its weapons systems and support PP&E used
in the performance of military missions, such reporting will be
required beginning October 1, 2002.[Footnote 7] The amount subject to
reporting will likely be significant considering that DOD has estimated
an acquisition cost of over $64 billion for only three of its major
weapons systems acquisition programs.
Effective and efficient asset management and accountability is crucial
to DOD's defense of our national interests. While the department has
undertaken several initiatives over the years to improve its asset
management and accountability systems, processes, and controls,
material weaknesses persist. As a result, DOD lacks reliable
information about the quantity, location, condition, and value of
inventory and property--including military equipment--critical to the
department's ability to effectively meet military objectives and
readiness goals. Ineffective and inefficient asset management and
accountability leave the department vulnerable to fraud, waste, and
abuse. Over the past 2 years, the DOD Inspector General (IG) and we
have issued numerous reports detailing problems with asset management
and accountability, including the following examples.
* DOD and its military services and units did not know how many Joint
Service Lightweight Integrated Suit Technology (JSLIST)[Footnote 8]--
commonly referred to as "chem-bio suits"--they had, their condition,
and where they were located.[Footnote 9] This lack of visibility was
due to several factors, including the use of nonstandard,
nonintegrated, stovepiped systems. Nonintegrated systems are unable to
share data across business applications and therefore, multiple manual
data entries must be made into numerous stand-alone systems, which
result in errors, add significantly to administrative costs, and
generally exacerbate asset visibility problems. The methods used to
control and maintain visibility over JSLIST ranged from stand-alone
automated systems, to spreadsheet applications, to pen and paper, to
nothing at all. For JSLIST, the result was that DOD was excessing and
selling these suits on the Internet for pennies on the dollar, while at
the same time procuring hundreds of thousands of new garments annually.
Similarly, a few years ago, the Defense Logistics Agency (DLA) had
problems identifying and removing from its inventory defective Battle
Dress Overgarments (BDO)--the JSLIST predecessor. As a result, some of
the defective suits were shipped to U.S. forces in high-threat areas.
In a June 2000 testimony, the DOD IG pointed out that a physical count
of BDOs could not locate 420,000 protective suits that were recorded in
DLA's accountability database.
* DOD lacked effective processes and controls to ensure that easily
pilferable and sensitive items were properly recorded and safeguarded.
For example, we found that the military services failed to record all
of the pilferable and sensitive items acquired through purchase card
transactions, including the Navy's failure to record a $757,000
purchase comprised of 430 computers, 213 flat panel monitors, and other
computer hardware and software.[Footnote 10] The Navy was unable to
provide us with evidence confirming the location of 187 of those
computers and 87 of the flat panel monitors. Similarly, in our recent
review[Footnote 11] of property controls at three military treatment
facilities, we found that items such as a laptop computer, a Sony
monitor, and a sterilizer were not recorded in the property records. We
also found that numerous recorded items could not be located. Most of
these were lower priced (under $5,000) or pilferable items such as a
personal digital assistant, a cellular telephone, computer monitors,
color printers, a handheld radio, and various pieces of medical
equipment such as a stretcher, electric beds, and intravenous pumps.
Environmental and Disposal Liabilities:
Under federal, state, and international law, DOD faces a major funding
requirement associated with environmental cleanup and disposal
resulting from prior and current operations and from the production of
weapons systems. In its fiscal year 2002 financial statements, DOD
reported an estimated liability of $59 billion to manage and clean up
or contain a diverse population of environmental contamination
comprised of:
* $22 billion for closed and open sites where past and current waste
disposal practices, leaks, spills, and other activities have created a
risk to public health or the environment;
* $14 billion for closed, transferring, and active military ranges
where contamination and unexploded ordnance create environmental
hazards; and:
* $23 billion for cleanup, demilitarization, and disposal of nuclear
and non-nuclear weapons systems, chemical weapons, and munitions.
DOD's reported cost represents the current value of estimated future
cash outlays that will need to be paid from appropriations; therefore,
the Congress needs reliable information in order to plan how much and
when to provide funding for cleanup activities. In past years, we and
the DOD IG have repeatedly reported that the environmental liability
amounts presented in DOD's financial statements were not reliable
because the department did not have (1) sufficient guidance for
identifying and categorizing cleanup activities whose costs must be
included in the liability calculation, (2) complete inventories of the
sites and weapons systems that will require cleanup or containment, and
(3) valid cost estimating models that produce consistent and
supportable liability estimates. These deficiencies were not systems
related but rather resulted from inadequate policies and processes and
a lack of leadership.
We have also issued individual reports on several environmental cleanup
categories, including training ranges and on-going
operations.[Footnote 12] In those reports, we specifically cite
weaknesses related to DOD's lack of complete site inventories, which
means that the department's reported liability amount is likely
understated. In line with our findings, the Air Force has recently
confirmed that it is investigating possible radioactive waste buried at
more than 80 former and current air bases around the country. According
to the Air Force, it lost track of the waste burial sites because of
poor record keeping and is now trying to identify and inspect the lands
for safety concerns. Costs for cleaning up these sites are not
currently included in the Air Force's reported liability amounts. In
addition, incomplete identification of cleanup sites on installations
that are currently being used by the military could have negative
consequences for future base reutilization, alignment, and closure
decisions.
Budget and Cost Information:
DOD's appropriation for fiscal year 2002 represented 18 percent of the
total U.S. budget and 48 percent of discretionary funds. For fiscal
year 2002, DOD reported disbursing $347 billion to, among other things,
make payments to 5.7 million military and civilian personnel and
annuitants, process and pay 11.2 million contractor invoices, and make
7.3 million travel payments. The magnitude of the dollars and number of
transactions involved makes it imperative that DOD maintain accurate
fund balances and properly account for costs; however, DOD financial
management systems and processes continue to be significant impediments
to reporting complete and accurate information with respect to
budgetary and disbursement activities.
Weaknesses in DOD's accounting for its funds include (1) the inability
to reconcile its balances to Treasury's, a process similar in concept
to individuals reconciling their checkbooks with their bank statements,
(2) payment recording errors, including disbursements that are not
properly matched to specific obligations recorded in the department's
records, and (3) limited ability to track the use of funds appropriated
for contingency purposes. For example,
* For fiscal year 2002, we found that DOD had at least $7.5 billion in
unexplained differences between Treasury and DOD fund activity records.
Many of these differences represent disbursements made and reported to
Treasury that had not yet been properly matched to obligations and
recorded in DOD accounting records. In addition to these unreconciled
amounts, DOD identified and reported an additional $3.6 billion in
payment recording errors. These include disbursements that DOD has
specifically identified as containing erroneous or missing information
and that cannot be properly recorded and charged against the correct,
valid fund account. DOD records many of these payment problems in
suspense accounts and made $1.6 billion in unsupported adjustments to
its fund balances at the end of fiscal year 2002 to account for a
portion of these payment recording errors. These adjustments did not
resolve the related errors.
* In June 2001, we reported that DOD's 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 their intended
purpose.[Footnote 13] The vast majority of the funds--92 percent--were
transferred to the military services operation and maintenance
accounts. Once transferred, the department could not separately track
the use of the funds. As a result, DOD lost its ability to assure the
Congress that the funds it received for spare parts purchases were used
for, and only for, the designated purpose.
* In April 2003, we reported[Footnote 14] that DOD was not able to
separately track Emergency Response Funds provided under appropriations
in fiscal years 2002 and 2003 ($20.5 billion). These funds were
commingled in DOD's regular appropriations accounts with funds
appropriated for other purposes. Because DOD's accounting system only
captures data on total obligations and does not distinguish among
original sources of funds, DOD is not able to identify those
obligations that are funded from emergency response funds.
* In December 2000, we reported[Footnote 15] that our review of DOD
functions that were studied over the past 5 years for potential
outsourcing under OMB Circular A-76 showed that while DOD reported that
savings had occurred as a result of these studies, we could not
determine the precise amount of any such savings because the department
lacked actual cost data. Further, in March 2002, we testified[Footnote
16] that while significant savings were being achieved, it has been
difficult to determine the magnitude of those savings.
DOD's continuing inability to capture and report the full cost of its
programs represents one of the most significant impediments facing the
department. DOD does not have the systems and processes in place to
capture the required cost information from the hundreds of millions of
transactions it processes each year. Lacking complete and accurate
overall life-cycle cost information for weapon systems impairs DOD's
and congressional decision makers' ability to make fully informed
judgments about which weapons, or how many, to buy. DOD has
acknowledged that the lack of a cost accounting system is its largest
impediment to controlling and managing weapon systems costs.
An April 2001 report on the results of an independent study of DOD's
financial operations commissioned by the Secretary of Defense concluded
that DOD lacked the ability to routinely generate cost-based metrics to
link financial management to DOD's goals.[Footnote 17] For example,
DOD's reporting under the Government Performance and Results Act of
1993 (GPRA)[Footnote 18] often did not address the cost-based
efficiency aspect of performance, making it difficult for DOD to fully
assess the efficiency of its performance. DOD's most recent performance
plan (fiscal year 2001) included 45 unclassified metrics but only a few
of those contained efficiency measures based on costs.
Financial Management Systems:
For fiscal year 2003, DOD estimated that it would spend approximately
$18 billion[Footnote 19] to operate, maintain, and develop business
systems. Of that amount, $5.2 billion relates directly to business
systems and the remaining $12.8 billion relates to the infrastructure
that supports the systems. While funding system development and
modernization activities is crucial, it is only part of the solution
needed to improve DOD's current business systems and operating
environment. Key ingredients to successful systems development and
modernization include effective management and oversight of ongoing and
planned investments.
However, in February 2003,[Footnote 20] we reported that DOD had yet to
establish the necessary departmental investment governance structure
and process controls needed to adequately align ongoing investments
with its architectural goals and direction. An effective governance
structure should include:
* a hierarchy of investment review boards composed of representatives
from across the department who are assigned investment selection and
control responsibilities based on project threshold criteria;
* a standard set of investment review and decision-making criteria for
use by all boards, including criteria to ensure compliance and
consistency with its newly developed enterprise architecture or
"blueprint for reform"; and:
* a specified, near term date by which ongoing investments have to be
subject to this standard investment review process, and by which
decisions should be made as to whether to proceed with each investment.
DOD's lack of effective oversight and process controls over IT
investments perpetuates the existence of an incompatible, duplicative,
and overly costly systems environment, which undermines its ability to
optimally support mission performance. For example,
* In March 2003, we reported[Footnote 21] that DOD did not effectively
manage and oversee its planned investment of over $1 billion in four
Defense Finance and Accounting Service (DFAS) systems modernization
efforts. DOD invested approximately $316 million in these projects
without first demonstrating that they would markedly improve the
information needed for decision-making and financial reporting
purposes. The DOD Comptroller terminated one of the four projects we
reviewed after an investment of over $126 million, citing poor program
performance and increasing costs. Investments in the other three
projects continue despite the absence of the requisite analyses of
costs, benefits, and risks to demonstrate that the projects will
produce value commensurate with the cost being incurred.
* In March 2002, the DOD IG reported that DOD's Joint Total Asset
Visibility Program (JTAV) system provided incomplete asset visibility
to military commanders in chief (CINCs) and joint task force
commanders.[Footnote 22] Required capabilities were not developed
before the program was placed into service, including asset and
personnel visibility for the warfighter, accurate and timely source
data, and data links to critical data in other DOD systems. As a
result, CINCs and joint task force commanders did not have access,
through the program, to all required data on the location, movement,
status, and identity of military units, personnel, equipment, and
supplies as intended.
* In June 2002, DOD reported[Footnote 23] that shortcomings in existing
nonintegrated personnel and pay systems caused delays in military
payroll payments (some as much as 6 or more months after the event
occurred) and resulted in errors (both under-and overpayments). DOD
estimated that system input errors ranged from 5 to 15 percent and that
these errors necessitated complex retroactive computations, data
reconciliation and corrections, losses due to overpayments, debt
processing, and costs to recoup overpayments.
* As of October 2002, DOD reported that its current business systems
environment consisted of 1,731 systems and system acquisition projects
(a number that has since risen to about 2,300 as DOD has identified
additional systems). DOD reported that it had 374 systems to support
civilian and military personnel matters, 335 systems to support finance
and accounting functions, and 310 systems that produce information for
management decision making.
As we have previously reported,[Footnote 24] these numerous systems
have 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 transactions and
interfaces that combine to exacerbate the problems of data integrity.
While the department recognizes the uncontrolled proliferation of
systems and the need to eliminate as many systems as possible and to
integrate and standardize those that remain, DOD components continue to
receive and control their own IT investment funding.
Weak Control Environment:
Fundamental flaws in DOD's systems, processes, and overall control
environment leave the department at risk of fraud, waste, and abuse.
Over the past few years, we have reported numerous instances of
breakdowns in--or lack of--internal control that have had serious
economic and legal consequences for the department, including:
* government travel card delinquency rates for the Army and the Navy
that were nearly double those of federal civilian agencies;[Footnote
25]
* pervasive purchase and travel card control breakdowns that resulted
in numerous instances of potentially fraudulent, improper, and abusive
transactions and increased DOD's vulnerability to theft and misuse of
government property;[Footnote 26]
* inadequate management and reporting on the funding associated with
the Air Force's contracted depot maintenance that resulted in
understating the dollar value of year-end carryover work by tens of
millions of dollars;[Footnote 27]
* adjustments to DOD's closed appropriations that resulted in about
$615 million in adjustments that should not have been made, including
$146 million that was illegal;[Footnote 28]
* hundreds of millions of dollars of over-and underpayments to
contractors;[Footnote 29] and:
* lost opportunities to collect millions of dollars of reimbursements
for services performed in military treatment facilities because not all
patients with third party insurance coverage were identified or because
those insurers were not billed.
In general, DOD does not have the necessary control processes and
procedures in place to identify problem situations like the ones listed
above. However, DOD usually takes action to try to correct and then
prevent these problems once they have been identified by auditors.
Underlying Causes of Financial and Related Business Process Reform
Challenges:
In the past, DOD initiated a number of departmentwide reform
initiatives to improve its financial operations as well as other key
business support processes. While these initiatives produced some
incremental improvements, they did not result in the fundamental reform
necessary to resolve these long-standing management challenges. For
example, in 1989, DOD began the Corporate Information Management (CIM)
initiative, which was expected to save billions of dollars by
streamlining operations and implementing standard information systems
across the department to support common business operations. DOD
intended CIM to reform all of its functional areas--including finance,
procurement, material management, and human resources--through the
consolidation, standardization, and integration of its numerous,
duplicative information systems. DOD spent billions of dollars on this
initiative with little sound analytical justification. Rather than
relying on a rigorous decision-making process for information
technology investments, as used in leading private and public
organizations we studied, DOD made systems decisions without (1)
appropriately analyzing cost, benefits, and technical risks, (2)
establishing realistic project schedules, or (3) considering how
business process improvements could affect information technology
investments. For one effort alone, DOD spent about $700 million trying
to develop and implement a single system for the material management
business area--but this effort proved unsuccessful. After 8 years and
about $20 billion in expenditures, DOD abandoned the CIM initiative.
However, some of the conditions that led to its defeat remain today.
We first identified underlying causes for the department's inability to
resolve its long-standing financial management problems, as well as the
other areas of its operations most vulnerable to waste, fraud, abuse,
and mismanagement, in our May 1997 testimony.[Footnote 30] We have
continued to highlight in various testimonies what we believe are the
underlying reasons for the department's inability to fundamentally
reform its business operations. 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 who have
sufficient authority to accomplish desired goals. For example, under
the Chief Financial Officers Act (CFO) of 1990,[Footnote 31] it is the
responsibility of the agency CFO to establish the mission and vision
for the agency's future financial management and to direct, manage, and
provide oversight of financial management operations. 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
other 80 percent comes from DOD's other business operations. In
addition, DOD's 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. Major improvement initiatives must have the
direct, active support and involvement of the Secretary and Deputy
Secretary of Defense to ensure that daily activities throughout the
department remain focused on achieving shared, agencywide outcomes and
success. Furthermore, sustaining top management commitment to
performance goals is a particular challenge for DOD because the average
1.7-year tenure of the department's top political appointees has served
to hinder long-term planning and follow-through. Based on our survey of
best practices of world-class financial management
organizations,[Footnote 32] strong executive leadership is essential to
(1) making financial management an entitywide priority, (2) redefining
the role of finance, (3) providing meaningful information to decision
makers, and (4) building a team of people that delivers results.
Cultural Resistance and Parochialism:
Cultural resistance to change, military service parochialism, and
stovepiped operations 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. For example, the effectiveness of
the Defense Management Council, established in 1997 to help break down
organizational stovepipes and overcome cultural resistance to change,
was impaired because members were not able to put their individual
military services' or DOD agencies' interests aside to focus on
departmentwide approaches to long-standing problems.[Footnote 33]
DOD's stovepiped approach is most evident in its current financial
management systems environment, which DOD recently estimated to include
approximately 2,300 systems and system development projects--many of
which were developed in piecemeal fashion and evolved to accommodate
different organizations, each with its own policies and procedures.
Unclear Goals and Performance Measures:
Lack of clear, linked goals and performance measures has handicapped
DOD's past reform efforts. 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. According to its fiscal year
2002 Performance and Accountability report, DOD is still in the process
of developing measurable annual performance goals and objectives.
In our assessment of DOD's Fiscal Year 2000 Financial Management
Improvement Plan[Footnote 34]--its most recent plan--we found that it
presented the military services' and DOD components' individual
improvement initiatives for reforming financial management but did not
clearly articulate how their individual efforts would result in a
collective, integrated DOD-wide approach to financial management
improvement. In addition, the product did not include performance
measures that could be used to assess DOD's progress in resolving its
financial management problems. As a result, the product was more a
compilation of a data call than a strategic plan. Furthermore, while
DOD plans to invest billions of dollars in modernizing its financial
management systems, it currently does not have effective management
governance and controls in place to guide and direct these investments.
We will discuss DOD's work to develop an initial business enterprise
architecture later in our testimony.
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.":
The lack of incentive has 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 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
decision makers 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 Financial Management Reform and Progress to Date:
Successful reform of DOD's fundamentally flawed financial management
operations must simultaneously focus on its systems, processes, and
people. While DOD has made some encouraging progress in addressing
specific challenges, it is still in the very early stages of a
departmentwide reform that will take many years to accomplish. As a
result, it is not possible to predict when--or even whether--the effort
will be successful.
Our experience has shown there are several key elements that
collectively would enable the department to effectively address the
underlying causes of its inability to resolve its long-standing
financial management problems. For the most part, these elements, which
should not be viewed as independent actions but rather a set of
interrelated and interdependent actions, are consistent with those
discussed in the department's April 2001 financial management
transformation report.[Footnote 35] These elements, which we believe
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 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 and implementing an enterprise architecture to guide and
direct financial management modernization investments; and:
* ensuring effective executive and congressional oversight and
monitoring.
While DOD still has a long way to go, it has made serious efforts to
address many of the key areas over the past 2 years. We will discuss
each of the areas and provide examples of improvement actions--long-
term and/or short-term--where relevant. Both long-term actions focused
on the Secretary's envisioned business transformation and short-term
actions focused on improvements within existing systems and processes
are critical to forward movement.
Integrated Business Reform Strategy:
As we previously reported,[Footnote 36] 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 fashion separate from the other high-risk
areas and management challenges facing the department. Further,
successfully reforming the department's operations--which consist of
people, business processes, and technology--will be critical if DOD is
to effectively address the deep-rooted organizational emphasis on
maintaining business-as-usual across the department. DOD has recently
taken important steps to begin improving its people, processes, and
systems.
We have reported[Footnote 37] that many of DOD's financial management
shortcomings were attributable in part to human capital issues. In
April 2002, DOD published a departmentwide strategic plan for its
civilian employees, which sets forth its vision to "design, develop and
implement:
human resources policies, strategies, systems, and tools to ensure a
mission-ready civilian workforce that is motivated to excel." Although
a positive step, the plan needs further refinement to achieve the
Secretary of Defense's transformation initiatives, including (1)
integration of component-level plans with the department-level plan,
(2) development of key elements, such as results-oriented performance
measures, and (3) integration with military personnel planning and
sourcing decisions.[Footnote 38] Recently, DOD proposed a National
Security Personnel System that would provide for wide-ranging changes
in DOD's civilian personnel pay and performance management. While we
strongly support the concept of modernizing and making more flexible
federal human capital policies, we have warned that the appropriate
infrastructure and adequate safeguards need to be in place for
successful implementation and to prevent abuse.[Footnote 39] In
addition, in its fiscal year 2003 Defense Authorization Act, DOD sought
and obtained authorization to prescribe certification and credential
standards for its professional accounting positions and is currently
drafting the relevant regulations. These are important steps in DOD's
plans to develop a human capital investment strategy and plan.
The department recently renamed its Financial Management Modernization
Program to the Business Management Modernization Program, a move that
recognizes that financial management is a crosscutting issue that
affects virtually all DOD business areas. For example, improving its
financial management operations so that they can produce timely,
reliable, and useful cost information is essential to effectively
measure its progress towards achieving many key outcomes and goals
across virtually the entire spectrum of DOD's business areas. 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. In line
with this, DOD has designated:
owners of seven key department business lines,[Footnote 40] or domains,
to transform the department's business operations and implement its
enterprise architecture.
As we mentioned earlier, and it deserves emphasis, the department has
reported that an estimated 80 percent of the data needed for sound
financial management comes not from the Comptroller's operations but
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 reflects its
lack of an 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. In
fact, DOD is redefining its performance metrics and program outcomes as
they relate to four risk areas: (1) force management, (2) operations,
(3) future challenges, and (4) institutional.
Secretary of Defense Rumsfeld recognized the far-reaching nature of
DOD's financial management problems and, on September 10, 2001, he
announced a broad, top-priority initiative intended to "transform the
way the department works and what it works on." This new broad-based
business transformation program incorporates a number of defense reform
initiatives begun under previous administrations but also encompasses
additional fundamental business reform proposals. However, like defense
reform initiatives begun under the previous administration, the
transformation program has not yet developed an overarching plan tying
all the individual reform efforts together. The development of an
overarching plan could take on increased importance, particularly where
initiatives are interrelated and up-front investments are required.
DOD has already taken a number of actions under its business
transformation program. In this context, the Secretary established a
number of top-level councils, committees, and boards, including the
Senior Executive Council, the Business Initiative Council, and the
Defense Business Practice Implementation Board. The Senior Executive
Council was established to help guide efforts across the department to
improve its business practices. This council--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, Technology and Logistics (AT&L)--was established to
function as the "board of directors" for the department. The Business
Initiative Council--comprised of senior DOD and military service
officials 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
Defense Business Practice Implementation Board is an advisory board
whose mission is to make recommendations to the Senior Executive
Committee on strategies for implementing best business practices in
matters relating to management, acquisition, production, logistics,
personnel leadership, and the defense industrial base.
Our research of successful public and private sector organizations
shows that such entities, comprised of enterprisewide executive
leadership, provide valuable guidance and direction when pursuing
integrated solutions to corporate problems. Inclusion of the
department's top leadership could help to break down the cultural
barriers to change and result in an integrated DOD approach for
business reform.
Sustained Leadership and Resource Control:
The department's successful Year 2000 effort illustrated, and our
survey of leading financial management organizations[Footnote 41]
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. For example, in
the case of the Year 2000 computer challenge, the personal, active
involvement of the Deputy Secretary of Defense played a key role in
building entitywide support and focus. 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 42] 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." To demonstrate his commitment towards reforming the
department, Secretary Rumsfeld designated improving financial
management operations, which included not only finance and accounting
but also such business areas as logistics, acquisition, and personnel
management, as 1 of the department's top 10 priorities for
reform.[Footnote 43] While the commitment of the Secretary is vital to
the success of any DOD-wide reform effort, strong, sustained executive
leadership--over a number of years and administrations--will be key to
changing a deeply rooted culture and to truly transforming DOD's
business systems and operations so that the department can meet the
mandate of the CFO Act and achieve the President's Management Agenda
goal of improved financial management performance.
Additionally, the tenure of the department's top political appointees
has generally been short in duration and as a result, it is sometimes
difficult to maintain the focus and momentum that are needed to resolve
the management challenges facing DOD. This is particularly evident with
the postwar reconstruction of Iraq along with DOD's substantial
commitment to the continuing war on terrorism. The resolution of the
array of interrelated business system management challenges that DOD
faces is likely to span several administrations. As we have proposed in
previous congressional testimonies,[Footnote 44] one option to address
the continuity issue would be the establishment of the position of
chief operating or management officer. This position could be filled by
an individual appointed for a set term of 5 to 7 years with the
potential for reappointment. Such an individual should have a proven
track record as a business process change agent for large, diverse
organizations--experience necessary to spearhead business process
transformation across the department and serve as an integrator for
business reform.
Clear Lines of Responsibility and Accountability:
Another key to reform is the establishment of clear lines of
responsibility, decision-making authority, and resource control for
actions across the department tied to the Secretary. As we previously
reported,[Footnote 45] 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[Footnote 46] and Steering
Committees as the governing bodies that oversee the activities related
to the modernization effort. The Executive Committee is to advise the
DOD Comptroller on the modernization effort and provide strategic
direction, whereas the Steering Committee is to advise the Executive
Committee on the program's performance and provide guidance to the
program management office.
Results-oriented Performance:
As discussed in our January 2003 report on DOD's major performance and
accountability challenges,[Footnote 47] 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. To its
credit, DOD has initiated a number of improvement actions to address
accountability and financial information deficiencies.
* In its most recent performance and accountability report, DOD stated
that it had (1) validated cost-estimating models used in calculating
environmental liability costs, (2) developed a methodology for
estimating liabilities associated with nuclear powered ships and
submarines, and (3) issued improved guidance--for all areas except
ongoing operations--to help components compile complete, accurate, and
fully substantiated environmental liability data. In addition, DOD
claimed that it is developing and maintaining supporting documentation
and audit trails for 30,000 closed contamination sites, including open
and closed installations and base reutilization and alignment sites.
* Through training and implementation of more efficient and effective
processes, DOD is improving its fund accounting and disbursement
activities. During fiscal year 2002, DOD improved its disbursement
activity reporting and its procedures for reconciling its fund balance
records with similar information maintained by the Department of
Treasury. As a result, the number and amount of disbursement
disparities between DOD's records and Treasury's records decreased from
the previous year. DOD is taking the necessary first steps to
identifying and eliminating payment recording problems.
* DOD's major components must now prepare quarterly financial
statements along with extensive footnotes that explain any improper
balances or significant variances from previous year quarterly
statements. In addition, the midyear and end-of-year financial
statements must be briefed to the DOD Comptroller by the service
Assistant Secretary for Financial Management or the head of the defense
agency. We have observed several of the midyear briefings and have
noted that the practice of preparing and explaining interim financial
statements is instilling discipline into DOD's financial reporting
processes, which will help improve the reliability of DOD's financial
data.
* DOD has begun to develop methodologies for valuing and depreciating
the cost of its weapons systems and other equipment used to support its
military operations. The department completed a similar effort to
obtain a baseline for the majority of its real property assets in
fiscal year 1999. These valuation efforts represent important steps
toward obtaining cost data for management decision making and financial
reporting. However, in order for the department to reap the full
benefits of these and similar efforts, it must develop and implement
efficient and effective systems, processes, and controls--consistent
with its enterprise architecture--to sustain the calculated baselines
and capture subsequent additions, modifications, and deletions of
property assets.
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 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 has seen improvements. For example,
* With respect to closed appropriation accounts, during the first 6
months of fiscal year 2002, DOD reported a reduction in the dollar
value of adjustments to closed appropriation accounts of about 80
percent from the same 6-month period in fiscal year 2001.
* For DOD individually billed travel cards, the delinquency rate
dropped from 8.9 percent in March 2002 to 5.7 percent in March 2003.
* From March 2001 through March 2003, DOD reduced its commercial pay
backlogs (payment delinquencies) by 46 percent and its payment
recording errors by 43 percent.
While DOD's metrics show significant improvements from 2001 to today,
statistics for the last few months show that progress has slowed or
even taken a step backward for payment recording errors and commercial
pay backlogs. Our report on DOD's metrics program[Footnote 48] included
a caution that, without modern integrated systems and the streamlined
processes they engender, reported progress may not be sustainable if
workload is increased. It could be that DOD is experiencing problems
accounting for the additional volume of transactions resulting from
contingency funding and increased appropriations amounts.
We note that DOD is still formulating departmentwide performance goals
and measures to align with the outcomes described in its strategic
plan--the September 2001 Quadrennial Defense Review. We agree with the
department's efforts to expand the use of appropriate metrics to guide
its financial management reform efforts. However, it is important for
DOD to synchronize its development of these metrics with it efforts to
develop departmentwide goals and measures, including nonfinancial
metrics, to ensure consistency.
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.
If people are to be held more accountable for achieving desired
outcomes, then DOD must make sure that such outcomes are in fact,
achievable. Along these lines, DOD has taken a positive step to reform
its acquisition process by revising part of its acquisition regulations
related to weapons systems. The revisions have focused primarily on (1)
making sure technologies are demonstrated to a high level of maturity
before beginning a weapon system program and (2) taking an
evolutionary, or phased, approach to developing a system. Separating
technology development from a weapons system development program would
help curb incentives to over-promise the capabilities of a new weapon
system and to rely on immature technologies. Also, an evolutionary
approach to developing requirements and making improvements to a
system's capabilities is different from the historical approach of
trying to deliver all desired capabilities in one "big bang." In
addition, it has been reported that DOD plans to begin using program
cost estimates from the Office of the Secretary of Defense's Cost
Analysis Improvement Group, rather than those prepared by the military
services, which may lead to more realistic cost estimates when pricing
programs.
Enterprise Architecture:
Enterprise architecture development, implementation, and maintenance
are a basic tenet of effective IT management. Used in concert with
other IT management controls, an architecture can increase the chances
for optimal mission performance. We have found that attempting to
modernize operations and systems without an architecture leads to
operational and systems duplication, lack of integration, and
unnecessary expense. Our best practices research of successful public
and private sector organizations has similarly identified enterprise
architectures as essential to effective business and technology
transformation.[Footnote 49]
Following our May 2001 report,[Footnote 50] the Secretary of Defense
directed the development and implementation of a departmentwide
enterprise architecture, and established a program to accomplish this.
In doing so, the Secretary assigned responsibility for the program to
the DOD Comptroller, in coordination with the Under Secretary of
Defense for AT&L and the DOD Chief Information Officer. To assist in
overseeing and guiding the program, the DOD Comptroller established the
Financial Management Modernization Executive Committee to oversee the
architecture and systems modernization efforts, and the Financial
Management Modernization Steering Committee to advise and guide the
program. Efforts began in earnest in April 2002 when DOD hired a
contractor to develop the department's enterprise architecture.
The Clinger-Cohen Act of 1996[Footnote 51] requires major departments
and agencies to develop, implement, and maintain an integrated
architecture. As we previously reported,[Footnote 52] such an
architecture can help ensure that the department invests only in
integrated business system solutions and, conversely, will help move
resources away from non-value-added legacy business systems and
nonintegrated business system development efforts. Without a complete
enterprise architecture to guide information technology investments,
and adequate oversight of IT investments to ensure compliance, DOD runs
the serious risk that its investments will perpetuate the existing
systems environment that suffers from systems duplication, limited
interoperability, and unnecessarily costly operations and maintenance.
The fiscal year 2003 National Defense Authorization Act (the
Act),[Footnote 53] enacted on December 2, 2002, required DOD to develop
by May 1, 2003, a financial management enterprise architecture and a
transition plan for implementing the architecture that meet certain
requirements. The Act also requires DOD to control expenditures for
financial system improvements while the architecture and transition
plan are being developed and after they are completed. According to
DOD, the Comptroller approved the initial version of the department's
business enterprise architecture in May 2003. Developing and
implementing a business enterprise architecture for an organization as
large and complex as DOD is a formidable challenge but it is key to
achieving the Secretary's vision of relevant, reliable, and timely
financial information needed to support the department's vast
operations. We plan to report on DOD's progress in developing its
architecture and its transition efforts in the near future.
As part of its ongoing business system modernization effort and
consistent with our past recommendations,[Footnote 54] DOD is creating
a repository of information about its existing systems environment. To
accomplish this, DOD initiated an extensive effort to document its
business systems currently relied upon to carry out financial
management operations throughout the department. To date, the
department has identified approximately 2,300 systems that support its
business operations. In developing its systems inventory, DOD has
recognized that financial management is broader than just accounting
and finance systems. Rather, it includes the department's acquisition,
budget formulation, inventory management, logistics, personnel, and
property management systems.
DOD is investing billions of dollars in financial management solutions
and business process reform. In moving forward with the implementation
of its business enterprise architecture, DOD needs to ensure that the
multitude of systems efforts currently underway are designed as an
integral part of the architecture. The effort to implement the
architecture will be further complicated as the department strives to
develop multiple architectures across its various business areas and
organizational components. In this regard, it is critical that DOD has
the management structure and processes in place to effectively control
the estimated $19 billion that will be spent on its business systems in
fiscal year 2004. However, as we have previously reported,[Footnote 55]
the department has yet to establish the requisite investment governance
structure and process controls needed to adequately align ongoing
investments with its architectural goals and direction. To its credit,
the department has recognized that it cannot continue with the
proliferation of duplicative, nonstandard, and nonintegrated systems
and is in the process of developing policies and procedures to obtain
better visibility and accountability over its IT business system
investments. A key to success will be DOD's ability to effectively
manage and oversee its investments in systems. DOD can ill afford to
invest billions of dollars in systems that are not capable of providing
DOD management and the Congress with more accurate, timely, and
reliable information on the results of the department's business
operations.
Monitoring and Oversight:
Ensuring effective monitoring and oversight of progress will also be
key to bringing about effective implementation of the department's
financial management and related business process reform. We have
previously testified[Footnote 56] that periodic reporting of status
information to department top management, the Office of Management and
Budget, 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 the department's 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 the plan in the 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 and
milestones, 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 oversight
hearings, as well as the active interest and involvement of the defense
appropriations and authorization committees, will continue to be key to
effectively achieving and sustaining DOD's financial management and
related business process reform milestones and goals.
:
In conclusion, we support Secretary Rumsfeld's vision for transforming
the department's financial and business related operations. The
continued leadership and support of the Secretary and other DOD top
executives will be essential to successfully 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. As noted
throughout this testimony, DOD is taking steps to begin transformation;
however, the events of September 11, 2001, the continuing war on
terrorism, and the reconstruction of Iraq may dilute the focused
attention and sustained action that are necessary to fully realize the
Secretary's transformation goal, a situation that is understandable
given the circumstances. At the same time, with waste and
inefficiencies potentially costing $20 billion or more annually, true
reform is needed to restore public confidence that taxpayer dollars are
well spent in meeting our national defense objectives.
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 or Molly Boyle at (202) 512-
9524 or boylem@gao.gov. Other key contributors to this testimony
include Evelyn Logue and Cherry Clipper.
(192096):
FOOTNOTES
[1] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
03-119 (Washington, D.C.: January 2003). The nine interrelated high-
risk areas that represent the greatest challenge to DOD's development
of world-class business operations to support its forces are: contract
management, financial management, human capital, information security,
infrastructure management, inventory management, real property,
systems modernization, and weapon system acquisition.
[2] Department of Defense, Performance and Accountability Report:
Fiscal Year 2002 (Washington, D.C.: January 2003).
[3] GAO has designated government operations and programs as "high
risk" because of either their greater vulnerabilities to waste, abuse,
and mismanagement or major challenges associated with their economy,
efficiency, or effectiveness.
[4] U.S. General Accounting Office, High-Risk Series: An Overview, GAO/
HR-95-1 (Washington, D.C.: February 1995); High-Risk Series: Defense
Financial Management, GAO/HR-97-3 (Washington, D.C.: February 1997);
High-Risk Series: An Update, GAO-01-263 (Washington, D.C.: January
2001); and High-Risk Series: An Update, GAO-03-119 (Washington, D.C.:
January 2003).
[5] U.S. General Accounting Office, Fiscal Year 2002 U.S. Government
Financial Statements: Sustained Leadership and Oversight Needed for
Effective Implementation of Financial Management Reform, GAO-03-572T
(Washington, D.C.: Apr. 8, 2003).
[6] Statement of Federal Financial Accounting Standards No. 6 states
that general PP&E is any property, plant, and equipment used in
providing goods and services.
[7] Statement of Federal Financial Accounting Standards No. 23,
Eliminating the Category National Defense Property, Plant and
Equipment, was issued on May 8, 2003, and is effective for periods
beginning after September 30, 2002.
[8] JSLIST is a universal, lightweight, two-piece garment (coat and
trousers) that when combined with footwear, gloves, and protective mask
and breathing device, forms the war fighter's protective ensemble.
Together the ensemble is to provide maximum protection to the war
fighter against chemical and biological contaminants without negatively
impacting the ability to perform mission tasks.
[9] U.S. General Accounting Office, DOD Management: Examples of
Inefficient and Ineffective Business Processes, GAO-02-873T
(Washington, D.C.: June 25, 2002).
[10] U.S. General Accounting Office, Purchase Cards: Navy Is Vulnerable
to Fraud and Abuse but Is Taking Action to Resolve Control Weaknesses,
GAO-02-1041 (Washington, D.C.: Sept. 27, 2002).
[11] U.S. General Accounting Office, Military Treatment Facilities:
Internal Control Activities Need Improvement, GAO-03-168 (Washington,
D.C.: Oct. 25, 2002).
[12] U.S. General Accounting Office, Environmental Liabilities: DOD
Training Range Cleanup Cost Estimates Are Likely Understated, GAO-01-
479 (Washington, D.C.: Apr. 11, 2001) and Environmental Liabilities:
Cleanup Costs From Certain DOD Operations Are Not Being Reported, GAO-
02-117 (Washington, D.C.: Dec. 14, 2001).
[13] U.S. General Accounting Office, Defense Inventory: Information on
the Use of Spare Parts Funding Is Lacking, GAO-01-472 (Washington,
D.C.: June 11, 2001).
[14] U.S. General Accounting Office, Defense Budget: Tracking of
Emergency Response Funds for the War on Terrorism, GAO-03-346
(Washington, D.C.: Apr. 30, 2003).
[15] U.S. General Accounting Office, DOD Competitive Sourcing: Results
of A-76 Studies Over the Past 5 Years, GAO-01-20 (Washington, D.C.:
Dec. 7, 2000).
[16] U.S. General Accounting Office, Competitive Sourcing: Challenges
in Expanding A-76 Governmentwide, GAO-02-498T (Washington, D.C.: Mar.
6, 2002).
[17] Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change (Washington, D.C.: Apr. 13,
2001).
[18] Government Performance and Results Act of 1993, Pub. L. 103-62,
107 Stat. 285, Aug. 3, 1993. Pertinent performance planning and
reporting requirements have been codified, as amended, at 31 U.S.C.
sections 1115 and 1116.
[19] U.S. General Accounting Office, DOD Business Systems
Modernization: Continued Investment in Key Accounting Systems Needs to
be Justified, GAO-03-465 (Washington, D.C.: Mar. 28, 2003).
[20] U.S. General Accounting Office, DOD Business Systems
Modernization: Improvements to Enterprise Architecture Development and
Implementation Efforts Needed, GAO-03-458 (Washington, D.C.: Feb. 28,
2003).
[21] GAO-03-465.
[22] DOD Inspector General, Information Technology: Effectiveness of
the Joint Total Asset Visibility Program; Audit Report D-2002-057
(Arlington, Va.; Mar. 11, 2002).
[23] Department of Defense, Report to Congress: Defense Integrated
Military Human Resources System (Personnel and Pay), June 2002.
[24] U.S. General Accounting Office, DOD Financial Management:
Important Steps Underway But Reform Will Require a Long-term
Commitment, GAO-02-784T (Washington, D.C.: June 4, 2002).
[25] U.S. General Accounting Office, Travel Cards: Control Weaknesses
Leave Navy Vulnerable to Fraud and Abuse, GAO-03-147 (Washington, D.C.:
Dec. 23, 2002); Air Force Management Has Reduced Delinquencies, but
Improvements in Controls Are Needed, GAO-03-298 (Washington, D.C.: Dec.
20, 2002); Travel Cards: Control Weaknesses Leave Army Vulnerable to
Potential Fraud and Abuse, GAO-03-169 (Washington, D.C.: Oct. 11,
2002).
[26] U.S. General Accounting Office, Purchase Cards: Control Weaknesses
Leave the Air Force Vulnerable to Fraud, Waste, and Abuse, GAO-03-292
(Washington, D.C.: Dec. 20, 2002); Purchase Cards: Navy Is Vulnerable
to Fraud and Abuse but Is Taking Action to Resolve Control Weaknesses,
GAO-02-1041 (Washington, D.C.: Sept. 27, 2002); Purchase Cards: Control
Weaknesses Leave Army Vulnerable to Fraud, Waste, and Abuse, GAO-02-732
(Washington, D.C.: June 27, 2002); Purchase Cards: Control Weaknesses
Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO-02-32
(Washington, D.C.: Nov. 30, 2001).
[27] U.S. General Accounting Office, Air Force Depot Maintenance:
Management Improvements Needed for Backlog of Funded Contract
Maintenance Work, GAO-02-623 (Washington, D.C.: June 20, 2002).
[28] U.S. General Accounting Office, Canceled DOD Appropriations: $615
Million of Illegal or Otherwise Improper Adjustments, GAO-01-697
(Washington, D.C.: July 26, 2001).
[29] U.S. General Accounting Office, DOD Contract Management:
Overpayments Continue and Management and Accounting Issues Remain, GAO-
02-635 (Washington, D.C.: May 30, 2002).
[30] U.S. General Accounting Office, DOD High-Risk Areas: Eliminating
Underlying Causes Will Avoid Billions of Dollars in Waste, GAO/T-NSIAD/
AIMD-97-143 (Washington, D.C.: May 1, 1997).
[31] Chief Financial Officers Act of 1990, Pub. L. 101-576, 104 Stat.
2842, Nov. 15, 1990 (codified as amended in scattered sections of 31
U.S.C.).
[32] U.S. General Accounting Office, Executive Guide: Creating Value
Through World-class Financial Management, GAO/AIMD-00-134 (Washington,
D.C.: Apr. 1, 2000).
[33] U.S. General Accounting Office, Defense Management: Actions Needed
to Sustain Reform Initiatives and Achieve Greater Results, GAO/NSIAD-
00-72 (Washington, D.C.: July 25, 2000).
[34] U.S. General Accounting Office, Financial Management: DOD
Improvement Plan Needs Strategic Focus, GAO-01-764 (Washington, D.C.:
Aug. 15, 2001).
[35] Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change, (Washington, D.C.: Apr.
13, 2001).
[36] U.S. General Accounting Office, Department of Defense: Progress in
Financial Management Reform, GAO/T-AIMD/NSIAD-00-163 (Washington,
D.C.: May 9, 2000).
[37] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-01-244 (Washington, D.C.:
Jan.1, 2001).
[38] U.S. General Accounting Office, DOD Personnel: DOD Actions Needed
to Strengthen Civilian Human Capital Strategic Planning and Integration
with Military Personnel and Sourcing Decisions, GAO-03-475 (Washington,
D.C.: Mar. 28, 2003).
[39] U.S. General Accounting Office, Human Capital: DOD's Civilian
Personnel Strategic Management and the Proposed National Security
Personnel System, GAO-03-493T (Washington, D.C.: May 12, 2003).
[40] DOD's seven business process areas include: (1) acquisition/
procurement, (2) finance, accounting operations, and financial
management, (3) human resource management, (4) logistics, (5) strategic
planning and budgeting, (6) installations and environment, and (7)
technical infrastructure.
[41] GAO/AIMD-00-134.
[42] Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change (Washington, D.C.: Apr. 13,
2001).
[43] The Secretary's top ten priorities: successfully pursue the global
war on terrorism, strengthen joint warfighting capabilities, transform
the joint force, optimize intelligence capabilities, improve force
manning, new concepts of global engagement, counter the proliferation
of weapons of mass destruction, homeland security, streamline DOD
business processes, and improve interagency processes, focus, and
integration.
[44] U.S. General Accounting Office, DOD Financial Management:
Integrated Approach, Accountability, Transparency, and Incentives Are
Keys to Effective Reform, GAO-02-497T (Washington, D.C.: Mar. 6, 2002);
U.S. General Accounting Office, DOD Financial Management: Important
Steps Underway But Reform Will Require a Long-term Commitment, GAO-02-
784T (Washington, D.C.: June 4, 2002).
[45] GAO/NSIAD-00-72 and GAO-03-458.
[46] Effective December 28, 2001, Sec. 1009 of the Floyd D. Spence
National Defense Authorization Act for Fiscal Year 2001, Pub. L. No.
107-107, 115 Stat. 1012, 1206 (codified at 10 U.S.C. Sec. 185),
required the Secretary of Defense to establish a Financial Management
Modernization Executive Committee.
[47] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: Jan.
1, 2003).
[48] U.S. General Accounting Office, Financial Management: DOD's
Metrics Program Provides Focus for Improving Performance, GAO-03-457
(Washington, D.C.: Mar. 28, 2003).
[49] U.S. General Accounting Office, Executive Guide: Improving Mission
Performance through Strategic Information Management and Technology,
GAO/AIMD-94-115 (Washington, D.C.: May 1, 1994).
[50] U.S. General Accounting Office, Information Technology:
Architecture Needed to Guide Modernization of DOD's Financial
Operations, GAO-01-525 (Washington, D.C.: May 17, 2001).
[51] Clinger-Cohen Act of 1996, Pub. L. 104-106, Div. E, 110 Stat. 679,
Feb. 10, 1996 (codified as amended at scattered sections of the
U.S.C.).
[52] GAO/T-AIMD/NSIAD-00-163.
[53] Bob Stump National Defense Authorization Act for Fiscal Year 2003,
Pub. L. 107-314, Sec. 1004, 116 Stat. 2458, 2629, Dec. 2, 2002.
[54] U.S. General Accounting Office, Financial Management: Analysis of
DOD's Inventory of Financial Management Systems Is Incomplete, GAO/
AIMD-97-39 (Washington, D.C.; Jan. 29, 1997); Financial Management: DOD
Improvement Plan Needs Strategic Focus, GAO-01-764 (Washington, D.C.:
Aug. 17, 2001).
[55] GAO-03-458.
[56] GAO-01-244.
