Financial Management
Further Actions Are Needed to Establish Framework to Guide Audit Opinion and Business Management Improvement Efforts at DOD Gao ID: GAO-04-910R September 20, 2004As the Comptroller General recently testified and as discussed in our latest financial audit report, the Department of Defense's (DOD) financial management deficiencies, taken together, continue to represent the single largest obstacle to achieving an unqualified opinion on the U.S. government's consolidated financial statements. For example, to date, none of the military services has passed the test of an independent financial audit because of pervasive weaknesses in internal control, processes, and fundamentally flawed business systems. Problems with the department's financial management operations go far beyond its accounting and finance processes and systems. The department continues to rely on a reported 4,000 or more fundamentally flawed finance, logistics, personnel, acquisition, and other management information systems to gather the data needed to support day-to-day management decision making and reporting. These systems were not designed to be, but rather evolved into the overly complex and error-prone operation--vulnerable to fraud, waste, and abuse--that exists today. Further, inefficiencies in DOD's current business operations, such as (1) little standardization across DOD components, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, (4) manual entry of the same data into multiple systems, and (5) a large number of data transactions, combine to exacerbate problems with data integrity. This report answers the following questions: (1) Does DOD have a comprehensive, integrated plan for obtaining an unqualified audit opinion on the department's fiscal year 2007 consolidated financial statements? (2) Has the DOD Comptroller established effective processes and procedures for monitoring the implementation of the plan(s) to increase the likelihood of sustainable progress and to ensure that component auditability assertions are supported? (3) Has DOD established a clear link between DOD component improvement efforts and the department's BMMP?
DOD's goal to obtain an unqualified audit opinion on its fiscal year 2007 consolidated financial statements is not yet supported by a comprehensive and integrated plan. Although most of the DOD components, including the Army, Navy, and Air Force, have submitted improvement plans to the DOD Comptroller, DOD has not yet developed an integrated departmental strategy, key milestones, accountability mechanisms, or departmental cost estimates for achieving its fiscal year 2007 audit opinion goal. Further, there is little evidence of a direct linkage between component midrange financial improvement plans and the department's Business Management Modernization Program (BMMP). Our review of key individual component plans revealed that the plans varied in levels of detail, completeness, and scope, such that it will be difficult for DOD Comptroller staff to use its departmental database of component plans to oversee and monitor component efforts. In this regard, we found that the component plans did not consistently identify how staff, processes, or business systems would be changed to implement corrective actions. Such changes are key elements in assessing the adequacy of a component's plan and in monitoring progress and sustainability. DOD also does not yet have effective oversight and accountability mechanisms in place to ensure that the plans are implemented and corrective actions are sustainable. The database the department is currently using is not integrated electronically with subordinate component plans. Rather, the department currently relies upon DOD components to resubmit their plans when revisions are made so the departmental database can be updated. Because component plans are continually changing, the information contained in the departmental database will only be as current as the latest version of component plans received and input into the database. To date, DOD has not established a clear link between DOD component improvement efforts and BMMP--the department's long-term improvement initiative. According to DOD officials, DOD components plan to rely primarily upon manual work-arounds and modifications to existing legacy business systems rather than on new business system deployments to support DOD's fiscal year 2007 audit opinion effort. However, we found that the component plans we reviewed did not consistently identify whether a proposed corrective action included a manual work-around or business system modification or deployment. In addition, the department currently lacks a mechanism to effectively identify, monitor, and oversee business system investments, including modifications, occurring within the department.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-910R, Financial Management: Further Actions Are Needed to Establish Framework to Guide Audit Opinion and Business Management Improvement Efforts at DOD
This is the accessible text file for GAO report number GAO-04-910R
entitled 'Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management Improvement
Efforts at DOD' which was released on September 20, 2004.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
September 20, 2004:
The Honorable Norm Coleman:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Permanent Subcommittee on Investigations:
Committee on Governmental Affairs:
United States Senate:
The Honorable John Ensign:
Chairman:
The Honorable Daniel K. Akaka:
Ranking Minority Member:
Subcommittee on Readiness and Management Support:
Committee on Armed Services:
United States Senate:
Subject: Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management Improvement
Efforts at DOD:
As the Comptroller General recently testified and as discussed in our
latest financial audit report,[Footnote 1] the Department of Defense's
(DOD) financial management deficiencies, taken together, continue to
represent the single largest obstacle to achieving an unqualified
opinion on the U.S. government's consolidated financial statements. For
example, to date, none of the military services has passed the test of
an independent financial audit because of pervasive weaknesses in
internal control, processes, and fundamentally flawed business systems.
Problems with the department's financial management operations go far
beyond its accounting and finance processes and systems. The department
continues to rely on a reported 4,000 or more fundamentally flawed
finance, logistics, personnel, acquisition, and other management
information systems to gather the data needed to support day-to-day
management decision making and reporting. These systems were not
designed to be, but rather evolved into the overly complex and error-
prone operation--vulnerable to fraud, waste, and abuse--that exists
today. Further, inefficiencies in DOD's current business operations,
such as (1) little standardization across DOD components, (2) multiple
systems performing the same tasks, (3) the same data stored in multiple
systems, (4) manual entry of the same data into multiple systems, and
(5) a large number of data transactions, combine to exacerbate problems
with data integrity.
On November 6, 2003, the DOD Principal Deputy Under Secretary
(Comptroller) testified before your Subcommittee that the department
had a plan to achieve its goal of an unqualified (clean) audit opinion
on its fiscal year 2007 financial statements. In August and September
2003, the DOD Comptroller directed the military services and other DOD
components to prepare and submit, by October 31, 2003, comprehensive
midrange financial improvement plans for addressing material financial
statement line item deficiencies and supporting the department's fiscal
year 2007 unqualified audit opinion goal. Further, applicable DOD
directives and business rules emphasized the importance of linking the
component's midrange financial improvement plans to the department's
Business Management Modernization Program (BMMP), the departmentwide
initiative responsible for overseeing the development and
implementation of DOD's business enterprise architecture.[Footnote 2]
Concerned about whether DOD's plan to obtain a clean audit opinion by
fiscal year 2007 was a prudent use of taxpayer money, in November 2003
you requested that we review DOD's plan to determine whether it was
consistent with DOD's long-term business enterprise architecture goals
and would result in sustainable progress toward addressing financial
management deficiencies in key business process areas, such as
logistics and finance and accounting. In December 2003, we contacted
DOD Comptroller staff to make initial inquiries regarding the
department's plan for achieving an unqualified audit opinion on its
fiscal year 2007 consolidated financial statements. At that time, DOD
Comptroller staff informed us that they had not yet received or
reviewed all the individual component plans that would constitute the
departmental plan.
As a result, and as agreed to with your staff in December 2003, we
delayed our review until after February 2004 to provide the DOD
Comptroller more time to receive and review the component plans.
However, following our initial fieldwork in April 2004, we determined
that it would not be feasible to perform a detailed review of the major
component plans that constitute the DOD plan, due to their current and
continuing state of development. Instead, we agreed with your staff,
that we would answer the following key questions.
(1) Does DOD have a comprehensive, integrated plan for obtaining an
unqualified audit opinion on the department's fiscal year 2007
consolidated financial statements?
(2) Has the DOD Comptroller established effective processes and
procedures for monitoring the implementation of the plan(s) to increase
the likelihood of sustainable progress and to ensure that component
auditability assertions are supported?
(3) Has DOD established a clear link between DOD component improvement
efforts and the department's BMMP?
Further, as agreed, we will continue reviewing DOD's efforts to address
its financial management deficiencies as part of our continuing DOD
business enterprise architecture work and oversight of DOD's
consolidated financial statement audit. We will provide periodic
briefings to you or your staff as DOD's improvement plans are further
refined and implemented over the next few years.
We performed our work from March 2004 through July 2004 in accordance
with generally accepted government auditing standards. Details of our
scope and methodology are included in enclosure I.
Results in Brief:
DOD's goal to obtain an unqualified audit opinion on its fiscal year
2007 consolidated financial statements is not yet supported by a
comprehensive and integrated plan. Although most of the DOD components,
including the Army, Navy, and Air Force, have submitted improvement
plans to the DOD Comptroller, DOD has not yet developed an integrated
departmental strategy, key milestones, accountability mechanisms, or
departmental cost estimates for achieving its fiscal year 2007 audit
opinion goal. Further, there is little evidence of a direct linkage
between component midrange financial improvement plans and the
department's BMMP. Importantly, the department's fiscal year 2007
unqualified audit opinion goal was set without direct input from all
major DOD components. Involving and gaining a commitment from key DOD
stakeholders will be critical to meeting any calendar year audit goal.
Nevertheless, most of the DOD officials we interviewed, including
component officials, said they believed that the department would
achieve significant interim improvements in its business operations as
a result of working toward a stated goal and that a goal date was
needed. However, given the magnitude of DOD's challenges and its
current lack of a comprehensive and integrated departmental plan with
results-oriented performance measures and complete and reliable cost
estimates, and a corresponding infrastructure to effectively oversee
and monitor component efforts, we do not believe that DOD will be in
position to achieve an unqualified audit opinion by fiscal year 2007.
Our review of key individual component plans revealed that the plans
varied in levels of detail, completeness, and scope, such that it will
be difficult for DOD Comptroller staff to use its departmental database
of component plans to oversee and monitor component efforts. In this
regard, we found that the component plans did not consistently identify
how staff, processes, or business systems would be changed to implement
corrective actions. Such changes are key elements in assessing the
adequacy of a component's plan and in monitoring progress and
sustainability. In fact, after performing a high-level review, DOD
Comptroller staff returned most of the component plans initially
submitted due to format and content deficiencies. Furthermore, DOD
Comptroller staff indicated that once the department has its
infrastructure (including a database, staffing, processes, and
procedures) in place to improve its oversight and monitoring
capability, additional plans would likely be returned to the components
for clarification.
DOD also does not yet have effective oversight and accountability
mechanisms in place to ensure that the plans are implemented and
corrective actions are sustainable. The database the department is
currently using is not integrated electronically with subordinate
component plans. Rather, the department currently relies upon DOD
components to resubmit their plans when revisions are made so the
departmental database can be updated. Because component plans are
continually changing, the information contained in the departmental
database will only be as current as the latest version of component
plans received and input into the database. In addition, we found that
the milestone dates identified in the component plans were based on
assertion dates prescribed by the DOD Comptroller and not on actual
estimates of effort required. Furthermore, task dependencies were not
clearly identified, including critical corrective action tasks that
would need to be completed in order for the fiscal year 2007 audit
opinion to be achieved. As a result, DOD's current database is not an
efficient or effective oversight and monitoring tool. DOD is in the
process of developing and refining its infrastructure to better
integrate component improvement efforts with those of BMMP. The DOD
Comptroller's office recently contracted with a consulting firm to
expand the department's capability to (1) analyze and compare component
plans, (2) oversee and monitor component efforts--including the
establishment of a reporting process and metrics for measuring
performance, and (3) coordinate with BMMP. In addition, the DOD
Comptroller issued business rules to guide DOD components through the
various processes and procedures the department has established. The
business rules are intended to minimize the likelihood that DOD
components would request audits of financial line items or statements
before they have made sufficient progress toward ensuring that their
reported financial information is auditable. If implemented as planned,
this control mechanism should help ensure that audit resources are not
wasted.
To date, DOD has not established a clear link between DOD component
improvement efforts and BMMP--the department's long-term improvement
initiative. According to DOD officials, DOD components plan to rely
primarily upon manual work-arounds and modifications to existing legacy
business systems rather than on new business system deployments to
support DOD's fiscal year 2007 audit opinion effort. However, we found
that the component plans we reviewed did not consistently identify
whether a proposed corrective action included a manual work-around or
business system modification or deployment. In addition, as we have
previously reported,[Footnote 3] the department currently lacks a
mechanism to effectively identify, monitor, and oversee business system
investments, including modifications, occurring within the department.
Because of this lack of visibility over how DOD components plan to
advance their financial management functionality, the DOD Comptroller
and BMMP may not have sufficient information to assess the feasibility
of a work-around or to review and approve all modifications to existing
legacy business systems to ensure that they are sound investments,
optimize mission performance and accountability, and are consistent
with applicable requirements and key architectural elements in DOD's
business enterprise architecture.
At this stage, an unqualified fiscal year 2007 audit opinion remains
simply a goal for which there is not yet a clearly defined, well-
documented, and realistic plan to achieve. However, by involving its
components in developing and implementing solutions to long-standing
deficiencies in their business operations, DOD has taken a critical
step toward obtaining the commitment and buy-in needed to successfully
improve the timeliness, accuracy, and reliability of its business
management information. DOD Comptroller staff acknowledged that their
goal is ambitious, but believe that they are in the process of laying a
framework to facilitate movement towards sustainable financial
management improvements and eventually obtaining an unqualified audit
opinion. The DOD Comptroller has several initiatives planned or under
way to (1) refine the departmental database and component plans, (2)
improve the department's ability to effectively oversee and monitor
component efforts, (3) ensure the completeness of the department's
business enterprise architecture, and (4) establish clearer links
between component midrange efforts and BMMP.
This report includes four recommendations to the Under Secretary of
Defense (Comptroller) to (1) develop and implement an integrated
department-level plan, including a brief executive level summary, in
order to tie currently disparate improvement efforts at the component
and departmental levels together with accountable personnel,
milestones, and required resources; (2) develop and implement an
effective oversight and monitoring infrastructure, including staffing,
processes, procedures, and performance metrics, to provide assurance
that actions taken by DOD components to address deficiencies are
sustainable, cost-effective, and result in timely, accurate, and
reliable information for business management; (3) direct DOD components
to develop and implement plans that include sufficient corrective
action information, such as changes affecting people, process, and
business systems, and are electronically linked to DOD's database tool,
with appropriate results-oriented performance measures, to facilitate
efficient and effective oversight and monitoring; and (4) direct BMMP
to review the plans to identify system investments occurring at the DOD
component level.
In its written comments on a draft of this report, DOD agreed with our
recommendations and outlined its actions to address the deficiencies
noted in our report.
Background:
Essential to achieving an opinion on the consolidated financial
statements is resolution of the serious financial management problems
at DOD, which we have designated as a high-risk area since
1995.[Footnote 4] Based largely on DOD's assertion that its financial
information was not auditable, the DOD Inspector General (IG) again
disclaimed an audit opinion on DOD's financial statements for fiscal
year 2003 as it had for the previous 7 fiscal years. Pursuant to the
requirements in section 1008 of the National Defense Authorization Act
for Fiscal Year 2002 (the Act),[Footnote 5] DOD has asserted for each
of the past 3 years that the department was not able to provide
adequate evidence supporting material amounts in its financial
statements. Specifically, DOD stated that it was unable to comply with
applicable financial reporting requirements for (1) property, plant,
and equipment; (2) inventory and operating materials and supplies; (3)
environmental liabilities; (4) intragovernmental eliminations and
related accounting entries; (5) disbursement activity; and (6) cost
accounting by responsibility segment. Although DOD reported that the
reliability of its military retirement health care liability data had
improved for fiscal year 2003, the cost of direct health care provided
by DOD-managed military treatment facilities--a significant amount of
DOD's total recorded health care liability--was based on estimates for
which adequate support was not available.
As previously stated, to date, none of the military services has passed
the test of an independent financial audit. This failure is due
primarily to pervasive weaknesses in DOD's business management systems,
operations, and internal control, including an inability to compile
financial statements that comply with generally accepted accounting
principles. Recent audits and investigations by GAO and DOD auditors
continue to confirm the existence of pervasive weaknesses in DOD's
financial management and related business processes and systems. These
problems have (1) resulted in a lack of reliable information needed to
make sound decisions and report on the status of DOD activities,
including accountability over its assets, through financial and other
reports to Congress and DOD decision makers; (2) hindered its
operational efficiency; (3) adversely affected mission performance; and
(4) left the department vulnerable to fraud, waste, and abuse.
In prior years, DOD expended significant resources and made billions of
dollars of financial account adjustments to derive its financial
statements. However, such statements were determined to be unauditable.
In this regard, section 1008 of the Act has offered the department some
relief from the cost and time associated with preparing and auditing
its financial statements. By acknowledging that its financial
statements were unauditable because underlying information was
unreliable, DOD is in a position to redirect its resources from
preparing and auditing financial statements to improving the
department's financial management systems and policies, procedures, and
controls.[Footnote 6] Over the past 13 years, DOD leaders have
attempted to address financial management problems in various ways but
have largely been unsuccessful despite good intentions and significant
effort.
Under the leadership of DOD's previous Comptroller, the department
began earnestly addressing a number of its financial management
problems as part of its business transformation effort. One broad-based
initiative that is vital to the department's efforts to transform DOD
business operations is BMMP, which the department established in July
2001. The purpose of BMMP is to oversee the development and
implementation of the departmentwide business enterprise architecture,
a supporting transition plan, and related efforts. BMMP is then to
ensure that DOD business system investments are consistent with the
architecture.[Footnote 7] A well-defined and properly implemented
business enterprise architecture can provide assurance that the
department invests in integrated enterprisewide business solutions and,
conversely, can help move resources away from nonintegrated business
system development efforts.
Recognizing that it would take several years to transform the
department's current business process and systems environment, in
August and September 2003 DOD's Comptroller directed the military
departments, defense agencies, and other major DOD fund holders to
prepare comprehensive and cost-effective midrange financial
improvement plans. According to DOD officials, the financial
improvement plans of the military services and defense agencies are
intended to identify planned improvements, milestones, and costs
required for DOD to achieve its goal of an unqualified audit opinion
for fiscal year 2007.
Further, DOD anticipated reprogramming additional funds from each of
the components to the DOD IG to fund the cost of required financial
line item and statement assessments and audits following assertions by
DOD components that the amounts reported are reliable.
DOD Does Not Yet Have a Comprehensive, Integrated Plan for Achieving
Its Fiscal Year 2007 Audit Opinion Goal:
The plan currently under development by DOD was not intended to be an
executive-level document that integrates the department's various
improvement initiatives into a single strategic plan with clear
objectives, results-oriented performance measures, and resource
requirements. Rather, the department's plan, when completed, will
consist of a database of information obtained from 52 individual
component midrange plans, including the military services, the Army
Corps of Engineers (the Corps), defense agencies, and other major fund
holders. At the time of our review, component plans varied in length
(from 4 pages to about 150 pages), and focused on the use of work-
arounds and modifications to legacy business systems to obtain an
unqualified audit opinion by fiscal year 2007. In addition, the
department's database plan lacked appropriate scope (including clear
links to other departmentwide improvement initiatives), results-
oriented performance measures, and cost information for Congress and
senior DOD management to guide both project execution and control over
departmentwide business management improvement initiatives.
The department has said it intends to rely upon the collective efforts
of the DOD components, as shown in their discrete plans, to address its
financial management deficiencies and achieve its fiscal year 2007
audit opinion goal. According to DOD directives and instructions
pertaining to the plans, each component plan must identify by financial
statement and financial statement line item (1) all major known
deficiencies; (2) corrective actions for eliminating each deficiency;
(3) required resources (people and dollars); (4) estimated completion
date (although the completion date can be no later than the component
assertion date established in the DOD Comptroller's August and
September 2003 directives); (5) responsible office/person; (6) links,
if any, to BMMP; and (7) dates when improved financial line items or
statements will be ready for external assessment and audit (although
the external assessment and audit dates provided cannot be any later
than the dates established in the DOD Comptroller's August and
September 2003 directives).
DOD is currently in the process of populating and updating its
departmental database plan, as new and revised component plans are
received. Within the database, DOD has grouped components into the
following four tiers to facilitate planned oversight and monitoring of
component improvement efforts.
* Tier 1: Entities, such as the military services and the Corps, that
are directed by the Office of Management and Budget to prepare audited
financial statements and the Medicare Eligible Retiree Health Care
Fund.
* Tier 2: Intelligence agencies.
* Tier 3: Entities, such as the Defense Logistics Agency (DLA),
directed by DOD to prepare stand-alone statements.
* Tier 4: All other DOD agencies, entities, and funds. Although Tier 4
entities are not required to prepare financial statements, they are
required to prepare improvement plans to ensure information provided
for the DOD consolidated financial statements is auditable.
DOD components that have already obtained unqualified audit opinions on
their financial statements, such as the Defense Finance and Accounting
Service (DFAS)[Footnote 8] and the Military Retirement Fund, were not
required to submit financial improvement plans.
As illustrated in table 1, as of July 14, 2004, DOD had received
initial plan submissions from 36 of the 52 components required to
submit plans, including all 11 of its tier 1 components, and was
awaiting submissions from the remaining 16 components. As of July 14,
2004, DOD had requested revisions to 26 of the 36 plans initially
submitted because the plans were either not in the required format or
lacked sufficient detail for inclusion in DOD's database. While table 1
reflects that the DOD has received 21 revised plans, the department
currently lacks the infrastructure to perform a thorough review of the
plans. Accordingly, DOD Comptroller staff acknowledged that additional
component plans, including those that were revised and resubmitted,
would likely be rejected for content deficiencies when the department's
consultant begins to review the plans.
Table 1: Status of DOD Component Financial Improvement Plans as of July
14, 2004:
[See PDF for image]
Source: GAO analysis of DOD data.
[End of table]
Our review of eight component plans (consisting of the Corps, DLA, and
the general and working capital funds of the Departments of the Army,
Navy, and Air Force) revealed that none of these plans were
comprehensive in nature. The plans did not consistently address DOD
instructions to fully describe why each identified deficiency affected
the auditability of a line item or statement and how the deficiency
would be addressed. For instance, we found that the plans did not
clearly or consistently include descriptive elements--such as people
(human capital), processes, and systems--that are key to clearly
understanding:
* the nature of the deficiency and how it occurred;
* how the deficiency affects the timeliness, accuracy, and reliability
of financial management information; and:
* how the deficiency will be addressed, including whether the
corrective action relies upon manual work-arounds or will require
automated business system changes. This distinction is key to assessing
the sustainability of planned corrective actions and identifying and
monitoring business system investments that are outside the DOD
Comptroller's direct line of responsibility.
The following are some examples of the deficiencies we observed in the
component plans we reviewed.
Some components submitted "plans to develop plans." For instance, we
found that DLA's and the Corps' plans referred extensively to the
development and implementation of subordinate improvement plans or to
agreements between DLA and the Corps and others regarding corrective
actions intended to address reported deficiencies pertaining to several
key line items. For example, DLA referred to future development of a
plan of action to address deficiencies in key financial statement line
items, including accounts receivable, other assets, inventory, and
general property, plant, and equipment. Similarly, the Corps' plan
refers to memorandums of agreement with the audit community as a key
element of its corrective action process, but does not provide any
specifics regarding those agreements, particularly what actions, if
any, the Corps has agreed to take to address the deficiencies.
All the plans we reviewed used numerous vague terms such as "ensure,"
"provide," "establish," and "determine" in their corrective action
descriptions. What the plans uniformly lacked were clear descriptions
of intended corrective actions, including how the component would
address the deficiency through changes to people, processes, and
business systems. For instance, see the following:
The Army's consolidated general and working capital fund plans
identified a deficiency related to the auditability of its fund balance
with Treasury (FBWT) line item that read "lack of long-term solutions
to improve the accountability and reporting of FBWT." The corresponding
corrective actions to address this deficiency included "establish a
long term solution to improve the accountability and reporting of
FBWT."
The Navy's general and working capital fund plans stated that "physical
inventory procedures are not being performed on a consistent and
periodic basis." Corresponding corrective actions were limited to
enforcing the current policy and conducting physical inventories in
accordance with existing policy. Navy did not provide any corresponding
detail on who was accountable, how it intended to ensure compliance, or
timelines for making this happen.
* The Air Force's general and working capital fund plans stated that
Air Force "ensure that capital lease liabilities are accurately valued
and reported" and "establish a baseline for capital leases." Air Force
did not provide any additional detail on how it intended to implement
or sustain these corrective actions or measure progress.
Other than providing training to staff to address a specific deficiency
pertaining to training, none of the component plans reviewed included
actions to address human capital issues, such as size of staff
(including whether contract support would be used), staff turnover,
specific skill mixes, and staff performance. In April 2002, DOD
published a departmentwide strategic plan for its civilian employees
that 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." Without
correcting human capital deficiencies, sustainability of corrective
actions, particularly those that depend on extensive manual work-
arounds, is questionable.
* Although most of the component plans implied that business process
and system changes would be needed, they provided little or no
information on what specific changes were planned. Without clear
descriptions of planned business process changes, the DOD Comptroller
lacks information to assess the feasibility, cost-effectiveness, and
sustainability of the corrective actions. Further, in May 2004, we
reported[Footnote 9] that DOD lacked an effective and transparent
process for overseeing and monitoring system investments. Clearer
descriptions of component system changes needed to implement corrective
actions could aid the department in its efforts to identify future
business system investments and improve oversight and monitoring of
these activities.
Further, our review of the plans revealed that the milestone dates--
critical for measuring progress--identified in component plans were
generally based on the component assertion and audit opinion dates
established by the DOD Comptroller in August and September 2003.
Further, the plans did not identify task dependencies--key to
identifying tasks that must be finished on schedule if the project is
to be completed as planned. For example, the only dates provided in the
Navy's general and working capital fund plans for addressing Navy's
deficiencies were the assertion and audit opinion dates established by
the DOD Comptroller for the applicable Navy line item or financial
statement. As a result, the milestone dates provided in the plans do
not generally depict actual estimates of the time required to address
each deficiency, nor do they identify critical tasks that must be
completed on time in order to achieve the department's audit opinion
goal. The lack of valid results-oriented performance measures
undermines the department's ability to effectively monitor and measure
progress and hold individuals accountable.
In addition, DOD has not yet calculated the cost of its effort to
obtain a fiscal year 2007 unqualified audit opinion. Although it
requested and received some cost information from DOD components, DOD
has not accumulated this cost information in its database or used it to
assess the cost-effectiveness or feasibility of its fiscal year 2007
unqualified audit opinion goal or component plans (including the use of
manual workarounds and the need for contractors and additional DOD
human capital). Without assessing the cost of component efforts, DOD
has little or no assurance that its resources are being utilized in the
most cost-effective manner.
As illustrated by previous examples, DOD does not yet have a
comprehensive, integrated strategic plan with results-oriented
performance measures and cost information for addressing its financial
management deficiencies by fiscal year 2007. Developing and
implementing a plan to overcome the deficiencies in financial and
related business operations of one of the largest and most complex
organizations in the world by fiscal year 2007 represents a huge
management challenge. Tasking DOD components to take an active role in
identifying and addressing known deficiencies systematically is an
important step toward obtaining buy-in and establishing responsibility
and accountability for corrective actions. However, DOD must recognize
that its deficiencies cannot be addressed in an insolated, stovepiped,
or piecemeal fashion separate from the other high-risk areas it faces-
-previous reform efforts have tried this approach and failed.[Footnote
10]
In the past, we have reported that DOD's financial management problems
are the result of long-standing deficiencies related to three factors:
its systems, processes, and people. To successfully address the
department's deficiencies, it is important that the components' plans,
as incorporated in DOD's database, clearly address all three factors
and incorporate cost and valid results-oriented performance measures
aimed at achieving timely, accurate, and reliable information for
business management rather than solely an audit opinion.
DOD's Infrastructure for Effectively Overseeing and Monitoring
Improvement Efforts Is Not Yet Developed:
DOD has not yet developed the ability to effectively oversee and
monitor component efforts to address financial management deficiencies.
The department's capacity, including available resources, processes,
and controls, for overseeing and monitoring the development and
implementation of individual component plans is also evolving. As of
July 14, 2004, the DOD Comptroller had assigned five staff on a part-
time basis to review 52 component plans and oversee and monitor
component improvement efforts. However, the department's ability to
effectively oversee and monitor component efforts is reduced because of
the lack of sufficient information pertaining to deficiencies and
corrective actions in the component plans, valid results-oriented
performance measures, and resource requirements. Further, the lack of
electronic integration between the component plans and the department's
database diminishes the utility of the department's database as an
efficient and effective oversight and monitoring tool. As currently
designed, DOD components must resubmit their entire plan if a revision
is made so that DOD Comptroller staff can update the departmental
database. Because component plans and the status of corrective actions
are continually changing, such an onerous process means that DOD's
departmental database will probably never reflect the current status of
component plans and corrective actions.
In July 2004, DOD contracted with a consulting firm to improve
component plans and its own oversight and monitoring efforts. The
contractor is tasked with analyzing DOD component plans to determine if
milestones are sufficient and executable and adequately support
attainment of an unqualified opinion on the department's fiscal year
2007 consolidated financial statements. Moreover, the contractor is
required to (1) refine, design, and maintain DOD's database plan, which
consists of individual component plans; (2) recommend metrics for use
in tracking implementation of component plans; and (3) prepare various
reports to aid the DOD Comptroller in monitoring component progress.
Further, the contractor is tasked to provide liaison support between
component plans and the department's business enterprise architecture
effort. Given that the contractor only began assisting DOD in late July
2004, it is unknown at this point what impact the contractor will have
on improving DOD's oversight and monitoring abilities.
On June 23, 2004, DOD issued business rules[Footnote 11] to implement
section 1008 of the Act and guide its components along the path toward
obtaining a clean audit opinion. Simply stated, the business rules
describe the oversight process the DOD Comptroller has established to
ensure that the corrective actions, as described in component plans,
are implemented and validated in order to minimize the department's
risk of unsupported claims that reported financial information is
auditable. Further, DOD officials indicated that the new business rules
recognize that management, not the auditor, is responsible for
documenting business processes, systems, and internal control, and for
collecting and maintaining transaction data. As of July 22, 2004, no
DOD component required to submit an improvement plan has asserted that
its reported financial information is auditable and that it has
completed the process required by the new business rules as described
below. However, DOD Comptroller staff advised us that they expect to
receive several financial line item packages by the end of fiscal year
2004, primarily from Air Force, that support component claims that
their financial information is auditable.
Under DOD's business rules, the department's process for preparing,
implementing, and monitoring component actions toward achieving the
department's fiscal year 2007 audit opinion goal will consist of three
management phases: (1) discovery and correction, (2) validation, and
(3) assertion. Following the assertion phase, the DOD IG will either
assess the auditability of a financial line item or statement or
subject it to audit.
Discovery and correction phase. During the discovery and correction
phase, DOD components are expected to identify deficiencies and prepare
and implement improvement plans with measurable outcomes and milestone
dates for overcoming their deficiencies. Most DOD components are
currently in this phase of the process. Our review of component plans
revealed that the plans focused primarily on addressing previously
reported deficiencies and provided little or no indication that the
components were attempting to identify additional deficiencies. It is
important to note that the discovery of additional deficiencies will
likely require additional time and resources and may adversely affect
the ability of DOD components to achieve their milestones. Further, we
found that the milestone dates identified in most of the plans reviewed
were generally based on the targeted end dates assigned by the DOD
Comptroller rather than on actual estimates of the time required to
implement and validate a corrective action. Therefore, the department's
ability to identify critical tasks or actions that must be completed on
time if the department is to achieve its unqualified audit opinion for
fiscal year 2007 is diminished.
Validation phase. Once a DOD component has implemented corrective
actions to resolve identified deficiencies it is required to validate
that the deficiencies in its financial line item or statement were
effectively addressed. According to DOD Comptroller staff, a
contractor, a military service audit organization, or the component
itself can validate the corrective actions. Our review of selected
component plans and interviews with component representatives
responsible for developing the plans revealed that planned approaches
for validating corrective actions varied. Some components, such as DLA,
plan to hire contractors to assist in developing and applying
procedures for ensuring that corrective actions effectively address
deficiencies identified in the discovery and correction phase. Other
components, such as the Corps and the Air Force, stated that at least
some of the business process and other improvements currently being
made or recently completed should not require validation under the new
business rules since many of these actions originated from agreements
reached with the auditors to address previously identified
deficiencies.
Assertion phase. Once efforts to address financial statement line item
or statement deficiencies are complete, DOD components are required to
submit an assertion package to the DOD Comptroller for review and
approval to obtain an assessment or audit. Each assertion package
should contain (1) a management letter asserting the audit readiness of
the validated financial line item or statement, (2) a summary of the
validation work performed and an explanation of corrective actions
taken, (3) validation reports, and (4) a complete assertion package
checklist attesting to the availability of process, procedural, system,
and transaction data pertaining to the financial line item or
statement. To further aid in ensuring sufficient evidential material is
available to support financial information, on October 20, 2003, the
DOD Comptroller issued a directive that all activities retain monthly
accounting reports, accompanying system backups that contain supporting
transactions, and related documentation for 1 year after appropriations
cancel.
DOD Comptroller and DFAS staff, as well as a DOD IG advisor, will
review each assertion package to determine whether the corrective
actions taken by the component provide sufficient support for a
recommendation that an assessment or audit be performed on the
financial line item or statement. DOD is utilizing a complicated matrix
approach (by component, financial statement, and financial line item)
to identify and address its financial management deficiencies. As a
result, DOD Comptroller staff and contractors involved in overseeing
and monitoring component plans need to possess a sufficient
understanding of pertinent accounting and auditing standards and
component deficiencies to ensure that the corrective actions will
actually accomplish their objective and result in improved financial
management information. After a component has received approval to
obtain an assessment or audit, the DOD IG, in coordination with the
component, will either perform or contract for the assessment or audit.
While full compliance with DOD's new business rules will increase the
level of supporting documentation required to assert that a financial
line item or statement is auditable, successful application of DOD's
new rules offers significant benefits. For example,
* resource requirements for preparing for and conducting an audit would
not be wasted;
* audit efficiency would increase due to improved documentation of
business processes, controls, systems, and transactional data; and:
* the documentation submitted by DOD components to support assertions
that their financial information is auditable could be used by
components and BMMP to increase DOD's understanding of existing
business processes and systems in order to transition to more efficient
ones in the future.
DOD's business rules clearly reflect management's intent that the
department avoid using its resources to prepare and audit unreliable
financial information. Further, implementation of business rules to
guide components through the process of ensuring that sufficient
evidence exists to support assertions that their financial information
is auditable is a significant step toward clearly communicating
expectations. However, it is critical that DOD establish an adequate
infrastructure to effectively and efficiently oversee and monitor
component improvement efforts and ensure compliance with its business
rules.
Clear Links between Midrange and Long-term Efforts to Address
Deficiencies in DOD's Business Operations Are Not Yet Established:
The department has not yet integrated its component efforts to obtain a
fiscal year 2007 unqualified audit opinion with the long-term
improvement efforts of BMMP. Although both DOD components and BMMP were
directed by the DOD Comptroller to support the department's fiscal year
2007 audit opinion goal, the focus of their efforts appears to be quite
different. According to DOD officials, the department will rely
primarily on business process changes, including manual work-arounds
and modifications to component legacy business systems, to achieve
DOD's fiscal year 2007 audit opinion goal. In contrast, BMMP's efforts,
particularly those of its functional business process areas (commonly
referred to as domains) are long-term and therefore directed toward
sustaining the unqualified opinion rather than producing auditable
financial statements for fiscal year 2007. However, DOD Comptroller
staff told us that they were working closely with the Finance,
Accounting, and Financial Management (Finance and Accounting) domain to
develop an approach that will establish a clearer link between the two
improvement efforts.
At the time of our review, BMMP had only limited involvement in
reviewing DOD component improvement plans. Our interviews with
representatives from three of the nine BMMP domains--Installations and
Environment, Logistics, and Finance and Accounting--revealed that only
the Finance and Accounting domain had performed more than a cursory
review of component plans. According to the Finance and Accounting
domain representative, the domain's objective in reviewing the
component plans, which the representative acknowledged contained
insufficient detail regarding deficiencies and corrective actions
planned, was to identify (1) processes or process changes that were not
considered in DOD's business enterprise architecture and incorporate
them in the architecture and (2) manual work-arounds that could
potentially be automated in the future. Although all BMMP officials we
interviewed, including domain representatives, expected to review and
approve all modifications to legacy systems that would result from
component improvement efforts, they were adamant in stating that the
DOD Comptroller, rather than BMMP, was responsible for assessing the
completeness, feasibility, and cost-effectiveness of corrective
actions identified in component improvement plans. However, as we
previously reported,[Footnote 12] the department does not have
efficient and effective processes and controls in place to identify
business system investments, including modifications to legacy business
systems that are occurring within the department. Further, component
plans, which should identify planned system investments, including
modifications to legacy systems, often lacked sufficient details needed
to readily determine that modifications to legacy business systems are
planned. Better integration of component midrange improvement efforts
is needed to not only identify omissions in the department's business
enterprise architecture, but also to aid the department in managing and
controlling business system investments occurring throughout the
department. As we recently reported,[Footnote 13] if the department is
unable to more efficiently and effectively manage its business system
investments, it will continue to invest billions of dollars in systems
that fail to markedly improve its financial management information and
do not comply with its business enterprise architecture.
The component plans that we reviewed did not consistently provide
information to identify or highlight business systems as a key element
of a planned corrective action. However, Army's midrange improvement
plan indicated that it expects to implement two systems as part of its
improvement effort in support of the fiscal year 2007 goal:
* the Global Combat Support System in fiscal year 2006, to address
deficiencies in recording and reporting operating materials and
supplies for the general fund financial statement; and:
* the Defense Medical Logistics Standard Support System in fiscal year
2005, to address compliance deficiencies currently existing in the Army
Medical Department Property Accounting System.
Accordingly, given BMMP's role in sustaining an unqualified audit
opinion, it would be reasonable to expect--though not clearly stated in
the Army's plan--that BMMP would be involved in ensuring that these new
systems complied with the department's business enterprise
architecture, including the new financial reporting business rules that
are expected to be in effect prior to fiscal year 2007. The new
financial reporting business rules, which are intended to standardize
financial information processing in the department, include:
* pro forma accounting entries to standardize how transactions are
recorded in the department;
* identification of applicable U.S. Government Standard General Ledger
accounts; and:
* a standard fiscal financial information structure that would require
all organizations to capture the same type of information in their
systems (such as contractor or invoice number, appropriation number,
and fiscal year) to facilitate transaction recording within and between
organizations.
While the development and implementation of financial reporting
business rules is an important step in DOD efforts to begin applying
its business enterprise architecture, the impact of these rules on
current business systems will be negligible. To address financial
reporting deficiencies in DOD's current systems until a long-term
solution can be implemented, BMMP plans to utilize software commonly
referred to as "middleware" to extract data from DOD's current
inventory of over 4,000 systems and put that data in the proper format
in accordance with the established business rules and regulations.
Middleware may be used successfully to extract, format, and report data
from legacy systems. However, the availability, completeness, and
reliability of the financial data extracted by the middleware from the
legacy systems for financial reporting will depend upon the efficiency
and effectiveness of component efforts to identify and address
deficiencies.
Conclusions:
Given the magnitude of DOD's challenges and its current lack of a
comprehensive and integrated departmental plan with results-oriented
performance measures and complete and reliable cost estimates, and a
corresponding infrastructure to effectively oversee and monitor
component efforts, we believe it is highly unlikely that DOD will be in
a position to achieve an unqualified audit opinion by fiscal year 2007.
Further, while we support the intent of both DOD's midrange and long-
term efforts to improve the department's financial management, DOD has
not yet clearly linked these efforts. The department needs a
comprehensive, integrated plan with result-oriented performance
measures to guide project execution and to control departmentwide
business management improvement efforts. In our experience, efforts
aimed primarily at obtaining a financial statement opinion seldom are a
prudent use of taxpayer resources nor do they result in marked
improvements in the timeliness, accuracy, and reliability of business
management information. To the extent that DOD's efforts to obtain an
unqualified audit opinion by fiscal year 2007 result in lasting
improvements in DOD's business operations, they are worth pursuing.
However, focusing improvement efforts on implementing manual
workarounds and patching legacy business systems in order to obtain
information primarily for financial reporting purposes may
inadvertently divert limited resources away from ongoing efforts to
develop and implement long-term solutions and improve data for managing
DOD's business operations. The department should be able to achieve an
unqualified audit opinion on its financial statements as ongoing
efforts to transform DOD business operations mature and the department
is able to more effectively and efficiently support both the warfighter
and DOD decision makers.
Recommendations for Executive Action:
To expand DOD's ability to effectively oversee and monitor component
and departmental financial improvement initiatives intended to improve
the timeliness, accuracy, and reliability of business management
information for DOD decision makers and financial reporting, we
recommend that the Under Secretary of Defense (Comptroller) take the
following four actions:
* Develop an integrated departmental plan, including a brief executive
summary, which ties currently disparate improvements at the component
and departmental levels together with accountable personnel,
milestones, and required resources.
* Establish an infrastructure, including staff, processes, procedures,
and performance metrics, to facilitate efficient and effective
oversight and monitoring of the development and execution of component
improvement plans to ensure that corrective actions are sustainable and
will result in timely, accurate, and reliable business management
information.
* Direct DOD components to include in their plans sufficient corrective
action information, such as changes affecting people, process, and
business systems, and to link their plans electronically to a DOD
database, with appropriate results-oriented performance measures, to
facilitate oversight and monitoring.
* Direct BMMP, including its domains, to use component plans as an aid
in identifying system investments occurring at the DOD component level.
Agency Comments and Our Evaluation:
In its written comments, DOD concurred with our recommendations and
identified actions to address identified deficiencies. Specifically,
DOD's response outlined recent actions taken, others that are underway,
and further planned actions with respect to our recommendations. If
effectively implemented, these actions should substantially improve
DOD's management and oversight of its financial management initiatives.
DOD's comments are reprinted in enclosure II.
We are sending copies of this report to interested congressional
committees. We are also sending copies to the Secretary of Defense and
the Under Secretary of Defense (Comptroller). Copies will be made
available to others upon request. In addition, this report will also be
available at no charge on GAO's home page at http://www.gao.gov.
Please contact me at (202) 512-9095 or by e-mail at kutzg@gao.gov or
Evelyn Logue, Assistant Director, at (202) 512-3881 or by e-mail at
loguee@gao.gov if you or your staffs have any questions concerning this
report. Major contributors to this report were Shawn Ahmed, Molly
Boyle, Cherry Clipper, and Carolyn Voltz.
Signed by:
Gregory D. Kutz:
Director, Financial Management and Assurance:
Enclosures - 2:
Enclosure I:
Scope and Methodology:
We obtained and reviewed individual component plans for the general and
working capital funds of the Defense Logistics Agency (DLA) and the
Departments of the Army, the Navy, and the Air Force. We also reviewed
the component plan for the Army Corps of Engineers (Corps). We did not
verify the reliability of the information provided in the plans beyond
information obtained during interviews with component representatives
responsible for developing the plans. As agreed with our requesters,
given the continuing evolution of the Department of Defense's (DOD)
improvement efforts and corresponding processes and procedures, we
limited our work to determining whether:
* DOD had a comprehensive, integrated plan for obtaining an unqualified
opinion on its fiscal year 2007 consolidated financial statements,
* the DOD Comptroller had established effective processes and
procedures for monitoring the implementation of the plan(s) to increase
the likelihood of sustainable progress and to ensure that component
auditability assertions are supported, and:
DOD had established a clear link between DOD component improvement
efforts and the department's Business Management Modernization Program
(BMMP).
To assess the plans, we compared them to the various criteria
identified in DOD Comptroller directives, instructions, and business
rules issued to the components to guide their plan development
activities and guide them through DOD's process for achieving an
unqualified audit opinion. In addition, we interviewed appropriate
Army, Navy, Air Force, DLA, and Corps officials responsible for
preparing component midrange financial improvement plans to increase
our understanding of the status of component plans and corresponding
efforts to address audit impediments and coordination with BMMP and
links to DOD's business enterprise architecture.
We also interviewed pertinent staff of the Under Secretary of Defense
(Comptroller), in Washington, D.C., responsible for (1) the development
of DOD's database plan; (2) review of individual component plans; (3)
development of DOD directives, instructions, and business rules; and
(4) development and implementation of processes and procedures for
overseeing and monitoring component efforts. In addition, we reviewed
extracts from the DOD database to gain an understanding of how it
stored information and what information it contained. We also reviewed
the DOD Comptroller's financial improvement initiative tracking
schedule, as of July 14, 2004, to identify staff assigned to oversee
and monitor component plans and the status of component plans.
Furthermore, we reviewed the financial improvement initiative business
rules issued by the department to obtain an understanding of the
processes, procedures, and requirements, including documentation
requirements, DOD had established to minimize the likelihood of an
unsupported auditability assertion. In addition, we reviewed a copy of
the contract DOD issued to obtain oversight and monitoring support.
To assess whether clear links exist between component improvement
efforts and those of BMMP to refine and implement a business enterprise
architecture to guide DOD's business transformation effort, including
overseeing and controlling business system investments, we reviewed
component plans to determine the extent to which business system
investments and related coordination activities with BMMP were
identified. In addition, we interviewed DOD component and Comptroller
staff to discuss coordination of component midrange improvement efforts
and BMMP. Further, we interviewed BMMP staff--including business
process area representatives of the Logistics; Installations and
Environment; and Finance, Accounting, and Financial Management domains
(functional business process areas)--to assess the extent of their
involvement in reviewing component plans and coordination with DOD
components in support of DOD's fiscal year 2007 audit opinion goal.
We briefed DOD Comptroller officials on the details of our audit,
including findings and their implications. On August 9, 2004, we
requested comments on a draft of this report. We received comments on
September 9, 2004, and have summarized those comments in the "Agency
Comments and Our Evaluation" section of this report. DOD's comments are
reprinted in enclosure II. We conducted our audit work from March 2004
through July 2004 in accordance with generally accepted government
auditing standards.
Enclosure II: Comments from the Department of Defense:
UNDER SECRETARY OF DEFENSE:
1100 DEFENSE PENTAGON:
WASHINGTON DC 20301-1100:
COMPTROLLER:
SEP 8:
Mr. Gregory D. Kutz:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Kutz:
This is the Department of Defense (DoD) response to the U.S. Government
Accountability Office (GAO) draft report, GAO-04-910R, "Financial
Management: Further Actions Are Needed to Establish Framework to Guide
Audit Opinion and Business Management Improvement Efforts at DoD,"
dated August 9, 2004 (GAO Code 192122).
The Department concurs with the results of the GAO review and the
recommendations. However, the GAO draft report does not reflect recent
decisions and actions by the Office of the Under Secretary of Defense
(Comptroller) (OUSD(C)) that address the problems and recommendations
identified in the draft report. The enclosure to this letter provides
information on such decisions and actions, and also addresses the
problems and recommendations identified in the GAO draft report.
To date, much has been accomplished to improve DoD financial
management. Nevertheless, much more needs to be done, and the
Department understands the critical importance of having one
comprehensive, integrated DoD-wide financial improvement plan. As
indicated in the GAO draft report, the Department required the DoD
Components to develop Mid-Range Financial Improvement Plans (MRFIPs)
that were submitted last fall. There have been numerous lessons learned
from this requirement, as well as benefits. We have plans that identify
requirements needed at various levels within the Department. We
established business rules and a process for collecting and evaluating
plans that focus improvement efforts within the Components. With the
assistance of a recently acquired support contractor and based on the
lessons learned, the Department is currently taking steps to
significantly revise and improve the process for developing and
monitoring the improvement plans.
The revised process for a comprehensive, integrated DoD-wide financial
improvement plan will identify additional deficiencies, corrective
actions, accountable organizations and personnel, milestones, and
required resources. The revised process and plan will provide various
levels of management within the OUSD(C) and Components
the real-time ability to track progress within each Component, as well
as across Components by deficiency. It will also provide the Components
with cross-Component visibility of corrective actions thereby resulting
in more standard solutions and less redundancy. In addition, the
revised plan is being linked to the Business Enterprise Architecture
(BEA) of the Business Management Modernization Program (BMMP) to
utilize and capitalize on reengineered process steps and compliance
requirements in the BEA and to provide a mechanism to validate the
architecture. The revised plan will also capture essential information
on financial and business systems to assist in more effective portfolio
management of information technology systems by the BMMP Domains and
Components. The revised integrated DoD-wide plan will provide the
ability to better assess the Department's ability to achieve an
unqualified audit opinion of the DoD Consolidated Financial Statements.
The Department appreciates the opportunity to comment on the subject
report. My staff point of contact on this matter is Mr. James Ariail.
He may be contacted by e-mail: james.ariail @ osd.mil or by telephone
at (703) 602-6988, extension 108.
Sincerely,
Signed by:
Robert J. Henke:
Principal Deputy and Deputy Under Secretary of Defense (Management
Reform):
Enclosure As stated:
GAO DRAFT REPORT DATED AUGUST 9, 2004 GAO-04-910R (GAO CODE 192122):
"FINANCIAL MANAGEMENT: FURTHER ACTIONS ARE NEEDED TO ESTABLISH
FRAMEWORK TO GUIDE AUDIT OPINION AND BUSINESS MANAGEMENT IMPROVEMENT
EFFORTS AT DOD"
DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Under Secretary of
Defense (Comptroller) develop an integrated departmental plan,
including a brief executive summary, which ties currently disparate
improvements at the component and departmental levels together with
accountable personnel, milestones, and required resources. (Page 33/GAO
Draft Report):
DoD RESPONSE: Concur. On August 11, 2004, the Deputy Chief Financial
Officer (DCFO) of the Office of the Under Secretary of Defense
(Comptroller) (OUSD(C)), approved the development of a web-based tool
for mandatory use by the DoD Components to plan, manage, and report
their efforts to improve financial management deficiencies.
The web-based tool will result in the following improvements to the
existing financial improvement plan process:
* There will be one DoD-wide comprehensive, integrated financial
improvement plan utilizing a standard plan framework, process, and
procedures.
* Real-time access will be provided to various levels of management
within the OUSD(C), Business Management Modernization Program (BMMP)
Domains, and the Components to the financial improvement plans,
deficiencies, corrective actions, milestones, requirements, and
progress.
* Cross-Component visibility of deficiencies, corrective actions,
solutions, and progress will be provided to the DoD Components to
facilitate corrective actions and solution sharing and reduce
unnecessary duplicative efforts, as well as encourage more competition
among the Components to show progress and achieve success. *
Implementation of standard and meaningful metrics at Department and
Component levels will be more readily available through the use of a
standard plan framework.
* Plan review, analysis, and feedback will be performed more timely and
facilitated through automated analyses and consistent, standard plans.
* Expensive, time consuming and labor intensive data calls for plan
information will be eliminated.
The web-based tool will be developed collaboratively with the DoD
Components to ensure that requirements they need to properly plan and
execute the corrective actions necessary to resolve their financial
deficiencies are incorporated into the tool. The web-based tool will be
developed in a phased approach to enable rapid development and
deployment of an initial capability by November 15, 2004. Among other
requirements, the initial phase and capability:
Enclosure:
will include requirements for identifying responsible Component
organizations and personnel, milestones, and required resources, as
recommended by the GAO. After an initial capability is operational in
November, the contractor will develop in subsequent phases automated
progress and reporting tools to include a "dashboard" for OUSD(C) and
Component senior management with the ability to drill down into the
plans for additional information, linkages to the BMMP Enterprise
Business Process Model (EBPM), information on critical financial and
business information systems, and information pertaining to plans,
assessments, and audits of the Office of the DoD Inspector General.
RECOMMENDATION 2: The GAO recommended that the Under Secretary of
Defense (Comptroller) establish an infrastructure, including staff,
processes, procedures, and performance metrics, to facilitate efficient
and effective oversight and monitoring of the development and execution
of component improvement plans to ensure that corrective actions are
sustainable and will result in timely, accurate, and reliable business
management information. (Page 33/GAO Draft Report):
DoD RESPONSE: Concur. Recently, the OUSD(C) created and filled a new
Senior Executive Service position to serve as the Associate Director
for Financial Improvement. The Associate Director for Financial
Improvement reports through the Director for Accounting and Finance
Policy and Analysis to the Deputy CFO and is responsible for managing
and overseeing the Department's Financial Improvement Initiative
(1711). Among other requirements, the FII includes ensuring that the
DoD Components develop and execute comprehensive financial improvement
plans that address near-term and long-term corrective actions. The
Associate Director for Financial Improvement has an infrastructure with
dedicated staff accountant positions and a support contract that was
awarded on July 7, 2004. However, the Department believes that this
infrastructure is not sufficient to effectively manage and oversee the
Components' improvement plans. The Department is currently assessing
the amount of additional resources needed, until such time as an
unqualified audit opinion is achieved, and is committed to adding
resources.
The FII staff and contractor team are thoroughly reviewing the
Components' existing plans to identify problems and to provide feedback
to the Components. In addition, two individuals from the Defense
Finance and Accounting Service were detailed to the FII for several
months to review the Component plans. The reviews included assessing
deficiencies and corrective actions to ensure that the corrective
actions provide sufficient detail and sustainable solutions. The
reviews also included analyzing the milestone dates in the plans to
ensure that the dates appear reasonable and achievable. For corrective
actions and milestone dates that do not appear correct, or where
sufficient detail does not exist, follow-up action is taking place and
plan adjustments will be made. The FII staff and contractor team expect
to have thoroughly reviewed all of the Component plans received to
date, while reviewing more detailed Component plans as they are made
available, and to have provided feedback to the Components for those
reviews completed prior to November 15, 2004, when the web-based tool
is operational. A primary goal of these reviews is to have taken the
steps necessary to have as much reliable information as possible when
the web-based tool becomes operational in November, or as soon
thereafter for those Components requiring more time to update their
plans.
Enclosure:
The OUSD(C) understands the importance of meaningful and measurable
performance metrics and intends to develop metrics that will be useful
to various levels of management both within the OUSD(C) and the
Components. Two basic overall performance metrics have been developed
and are currently being monitored. The support contractor has been
tasked to develop additional performance metrics and several
recommendations are being considered. Additionally, as the requirements
are being collaboratively developed with the BMMP Domains and DoD
Components, as explained below, additional performance metrics will be
considered.
RECOMMENDATION 3: The GAO recommended that the Under Secretary of
Defense (Comptroller) ensure that DoD Component plans include
sufficient corrective action information, such as changes affecting
people, processes, and business systems, and are linked electronically
to a DoD database, with appropriate results-oriented performance
measures, to facilitate oversight and monitoring. (Page 33/GAO Draft
Report):
DoD RESPONSE: Concur. As indicated in the above DoD responses, the
Department is thoroughly reviewing the DoD Component plans, and such
reviews include assessing them to ensure that they properly reflect the
level of detail necessary to verify that the corrective actions will
resolve the deficiencies, and that the plans adequately identify
changes that affect people, processes, and systems. In addition, during
the collaborative effort to develop requirements for the web-based
tool, the OUSD(C) will ensure that the web-based tool requires
additional information to be associated with corrective actions to
identify changes affecting people, processes and systems. System
requirements have been determined to be an essential requirement for
the plans.
To ensure processes are considered in the corrective actions, the
financial deficiencies identified in the web-based tool will be linked
to the process steps in the BMMP EBPM. Linking the deficiencies to the
EBPM process steps was started by the Accounting and Finance Domain on
the existing Mid-Range Financial Improvement Plans and will continue in
the web-based tool. Linking the financial deficiencies to the EBPM
process steps will provide benefits to both the Components and to the
BMMP. As the deficiencies are being worked by the Components,
applicable EBPM process steps and requirements necessary to achieve a
favorable audit opinion will be provided to the Components for their
use in building corrective actions. In addition, as the Components are
correcting deficiencies, they will supply important feedback
information essential to future transformation.
RECOMMENDATION 4: The GAO recommended that the Under Secretary of
Defense (Comptroller) direct BMMP, including domains, to use component
plans as an aid in identifying system investments occurring at the DoD
Component level. (Page 33/GAO Draft Report):
DoD RESPONSE: Concur. The Department knows that accurate and timely
information on financial and business (non-financial feeder)
Information Technology (IT) systems (e.g., planned changes to the
system to achieve compliance or plans to migrate to a compliant system,
whether such plans are funded, milestone dates for the system changes
or migration) is essential to
resolving many financial deficiencies and knows that capturing such
information and providing it to decision-makers will greatly improve IT
system Portfolio Management and the Department's ability to achieve an
unqualified audit opinion. Therefore, the Department's plan for the
web-based tool includes a capability to capture essential IT system
information.
The identification of the specific IT system information requirements
will be determined through a collaborative development effort with the
Business Management and Systems Integration Office, BMMP Domains and
Components, since it is anticipated that they will be the users of this
information. Additionally as users of the information, it is expected
that they will assist in ensuring that IT Program Managers keep this
information up to date through access to the web-based tool. The
Department is evaluating the level of Information Technology system
information to be included in the web-based tool.
[End of section]
(192122):
FOOTNOTES
[1] GAO, Fiscal Year 2003 U.S. Government Financial Statements:
Sustained Improvement in Federal Financial Management Is Crucial to
Addressing Our Nation's Future Fiscal Challenges, GAO-04-477T
(Washington, D.C.: Mar. 3, 2004).
[2] In May 2003, the DOD Comptroller changed the architecture name from
the financial management enterprise architecture to the business
enterprise architecture to reflect the transformation of departmentwide
business operations and supporting systems, including accounting and
finance, budget formulation, acquisition, inventory management,
logistics, personnel, and property management systems.
[3] GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability, GAO-
04-615 (Washington, D.C.: May 28, 2004).
[4] GAO, High-Risk Series: An Overview, GAO/HR-95-1 (Washington, D.C.:
February 1995), and High-Risk Series: An Update, GAO-03-119
(Washington, D.C.: January 2003).
[5] National Defense Authorization Act for Fiscal Year 2002, Pub. L.
No. 107-107, §1008, 115 Stat. 1012, 1204 (Dec. 28, 2001).
[6] Specifically, section 1008 requires that DOD assess its
auditability each year and report the results to the DOD IG and others.
If DOD asserts that its financial information is not auditable, DOD and
the DOD IG are required to limit the work performed to prepare and
audit the financial statements.
[7] In December 2002, Congress directed DOD to develop and implement a
financial management enterprise architecture and repealed an earlier
requirement that DOD produce a comprehensive biennial financial
management improvement plan. Bob Stump National Defense Authorization
Act for Fiscal Year 2003, Pub. L. No. 107-314, §1004, 116 Stat. 2458,
2629 (Dec. 2, 2002).
[8] DFAS's financial statements and corresponding unqualified audit
opinion pertain only to the administrative functions of DFAS itself
and, consequently, do not provide any assurance as to the reliability
of the accounting processes and systems DFAS uses to provide services
to other DOD components, including the military services.
[9] GAO-04-615.
[10] The nine interrelated high-risk areas that represent the greatest
challenge to DOD developing world-class business operations supporting
its forces are financial management, human capital, information
security, systems modernization, weapon system acquisition, contract
management, infrastructure management, real property, and inventory
management.
[11] Business rules are statements of fact, policy, law, regulation, or
a combination of these that drive business activities.
[12] GAO-04-615.
[13] GAO-04-615.
