Human Capital
DOD Needs Better Internal Controls and Visibility over Costs for Implementing Its National Security Personnel System Gao ID: GAO-07-851 July 16, 2007Given a large-scale organizational change initiative, such as the Department of Defense's (DOD) National Security Personnel System (NSPS), is a substantial commitment that will take years to complete, it is important that DOD and Congress be kept informed of the full cost of implementing NSPS. Under the Comptroller General's authority to conduct evaluations on his own initiative, GAO analyzed the extent to which DOD has (1) fully estimated total costs associated with the implementation of NSPS and (2) expended or obligated funds to design and implement NSPS through fiscal year 2006. GAO interviewed department officials and analyzed the NSPS Program Executive Office's (PEO), and the military services' and the Washington Headquarters Services' (hereafter referred to as the components) cost estimates and reports of expended and obligated funds.
DOD's November 2005 estimate that it will cost $158 million to implement NSPS does not include the full cost that the department expects to incur as a result of implementing the new system. Federal financial accounting standards state that reliable information on the costs of federal programs and activities is crucial for effective management of government operations and recommend that full costs of programs and their outputs be provided to assist Congress and executives in making informed decisions on program resources and to ensure that programs get expected and efficient results. The full cost includes both those costs specifically identifiable to carry out the program, or direct costs, and those costs that are common to multiple programs but cannot be specifically identified with any particular program, or indirect costs. While the standards emphasize that full cost information is essential for managing federal programs, their activities, and outputs, the standards also provide that items may be omitted from cost information if that omission would not change or influence the judgment of a reasonable person relying on the cost information. Based on GAO's review of documentation provided by DOD and discussions with department officials, GAO found that DOD's estimate includes some direct costs, such as the start-up and operation of the NSPS PEO and the development and delivery of new NSPS training courses, but it does not include other direct costs such as the full salary costs of all civilian and military personnel who directly support NSPS activities departmentwide. Before developing its estimate, DOD had not fully defined all the direct and indirect costs needed to manage the program. Without a better estimate, decision makers--within DOD and Congress--will not have complete information about whether adequate resources are being provided for implementing NSPS. The total amount of funds DOD has expended or obligated to design and implement NSPS during fiscal years 2005 through 2006 cannot be determined because DOD has not established an oversight mechanism to ensure that these costs are fully captured. In May 2005, the NSPS Senior Executive established guidance for tracking and reporting NSPS implementation costs that requires the components to develop mechanisms to capture these costs and to report quarterly their costs to the NSPS PEO. However, this guidance does not define the direct and indirect costs DOD requires that the components capture. DOD's pervasive financial management deficiencies have been the basis for GAO's designation of this as a high-risk area since 1995. GAO's review of submitted reports from the components found that their official accounting systems do not capture the total funds expended or obligated to design and implement NSPS. Without an effective oversight mechanism to ensure that the official accounting systems capture all appropriate costs, DOD and Congress do not have visibility over the actual cost to design and implement NSPS.
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-07-851, Human Capital: DOD Needs Better Internal Controls and Visibility over Costs for Implementing Its National Security Personnel System
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2007:
Human Capital:
DOD Needs Better Internal Controls and Visibility over Costs for
Implementing Its National Security Personnel System:
GAO-07-851:
GAO Highlights:
Highlights of GAO-07-851, a report to congressional committees
Why GAO Did This Study:
Given a large-scale organizational change initiative, such as the
Department of Defense‘s (DOD) National Security Personnel System
(NSPS), is a substantial commitment that will take years to complete,
it is important that DOD and Congress be kept informed of the full cost
of implementing NSPS. Under the Comptroller General‘s authority to
conduct evaluations on his own initiative, GAO analyzed the extent to
which DOD has (1) fully estimated total costs associated with the
implementation of NSPS and (2) expended or obligated funds to design
and implement NSPS through fiscal year 2006. GAO interviewed department
officials and analyzed the NSPS Program Executive Office‘s (PEO), and
the military services‘ and the Washington Headquarters Services‘
(hereafter referred to as the components) cost estimates and reports of
expended and obligated funds.
What GAO Found:
DOD‘s November 2005 estimate that it will cost $158 million to
implement NSPS does not include the full cost that the department
expects to incur as a result of implementing the new system. Federal
financial accounting standards state that reliable information on the
costs of federal programs and activities is crucial for effective
management of government operations and recommend that full costs of
programs and their outputs be provided to assist Congress and
executives in making informed decisions on program resources and to
ensure that programs get expected and efficient results. The full cost
includes both those costs specifically identifiable to carry out the
program, or direct costs, and those costs that are common to multiple
programs but cannot be specifically identified with any particular
program, or indirect costs. While the standards emphasize that full
cost information is essential for managing federal programs, their
activities, and outputs, the standards also provide that items may be
omitted from cost information if that omission would not change or
influence the judgment of a reasonable person relying on the cost
information. Based on GAO‘s review of documentation provided by DOD and
discussions with department officials, GAO found that DOD‘s estimate
includes some direct costs, such as the start-up and operation of the
NSPS PEO and the development and delivery of new NSPS training courses,
but it does not include other direct costs such as the full salary
costs of all civilian and military personnel who directly support NSPS
activities departmentwide. Before developing its estimate, DOD had not
fully defined all the direct and indirect costs needed to manage the
program. Without a better estimate, decision makers”within DOD and
Congress”will not have complete information about whether adequate
resources are being provided for implementing NSPS.
The total amount of funds DOD has expended or obligated to design and
implement NSPS during fiscal years 2005 through 2006 cannot be
determined because DOD has not established an oversight mechanism to
ensure that these costs are fully captured. In May 2005, the NSPS
Senior Executive established guidance for tracking and reporting NSPS
implementation costs that requires the components to develop mechanisms
to capture these costs and to report quarterly their costs to the NSPS
PEO. However, this guidance does not define the direct and indirect
costs DOD requires that the components capture. DOD‘s pervasive
financial management deficiencies have been the basis for GAO‘s
designation of this as a high-risk area since 1995. GAO‘s review of
submitted reports from the components found that their official
accounting systems do not capture the total funds expended or obligated
to design and implement NSPS. Without an effective oversight mechanism
to ensure that the official accounting systems capture all appropriate
costs, DOD and Congress do not have visibility over the actual cost to
design and implement NSPS.
What GAO Recommends:
GAO recommends that DOD define all costs needed to manage NSPS, prepare
a revised estimate of those costs for implementing the system in
accordance with federal financial accounting standards, and develop a
comprehensive oversight framework to ensure that all funds expended or
obligated to design and implement NSPS are fully captured and reported.
In reviewing a draft of this report, DOD generally concurred with GAO‘s
recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-851].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Derek Stewart at (202)
512-5559 or stewartd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DOD's Estimated Costs to Implement NSPS Do Not Fully Represent Its
Total Resource Needs:
Total Funds Expended or Obligated to Design and Implement NSPS Cannot
Be Determined:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Table:
Table 1: DOD Fiscal Year 2005-2008 Estimate of Cost to Implement NSPS:
Figure:
Figure 1: NSPS Design and Implementation Team Organization:
Abbreviations:
DOD: Department of Defense:
NSPS: National Security Personnel System:
OPM: Office of Personnel Management:
PEO: Program Executive Office:
United States Government Accountability Office:
Washington, DC 20548:
July 16, 2007:
Congressional Committees:
Given a large-scale organizational change initiative, such as the
National Security Personnel System (NSPS), is a substantial commitment
that will take years to complete, it is important that the Department
of Defense (DOD) and Congress be kept informed of the full cost of
implementing NSPS. In November 2003, Congress authorized the Secretary
of Defense to establish NSPS, a new human resources management system.
On November 1, 2005, DOD and the Office of Personnel Management (OPM)
jointly released the final regulations on NSPS. Successful
implementation of NSPS is essential for DOD because this new human
resources management system, if properly designed and effectively
implemented, could serve as a model for governmentwide human capital
transformation.
We have undertaken a number of human capital engagements to track how
DOD began to make use of its new human capital authorities.[Footnote 1]
This body of work highlighted multiple implementation challenges DOD
would face in both the early and later stages of NSPS implementation.
These challenges include, among other things, providing adequate
resources to implement NSPS, especially in times of increased fiscal
constraints.
We prepared this report under the Comptroller General's authority to
conduct evaluations on his own initiative and are providing it to you
because of your continued interest in this issue. This report analyzes
the extent to which DOD has (1) fully estimated total costs associated
with the implementation of NSPS and (2) expended or obligated funds to
design and implement NSPS through fiscal year 2006.
To determine the extent to which DOD has fully estimated the total
costs associated with the implementation of NSPS, we obtained and
analyzed DOD's estimate that was published in the NSPS Final
Regulations in November 2005. We interviewed officials from the NSPS
Program Executive Office (PEO) and the NSPS Program Management Offices
for the Department of the Navy (which is also responsible for the
Marine Corps), the Army, the Air Force, and the Washington Headquarters
Services[Footnote 2] to discuss how they had interpreted PEO guidance
on how to estimate NSPS costs. To determine what costs should be
included in NSPS estimates, we analyzed DOD guidance, government
accounting standards, and other government regulations and manuals. To
determine the extent to which DOD expended or obligated funds to design
and implement NSPS through fiscal year 2006, we obtained quarterly
reports collected by the PEO and consolidated for fiscal years 2005 and
2006. We compared the quarterly reports to data from the components'
official accounting systems to determine what NSPS cost data had been
captured in these accounting systems. To obtain criteria for tracking
and managing the costs of programs, activities, and their outputs, we
compared the PEO's management of the reporting of NSPS costs with
internal control factors described in Internal Control Management and
Evaluation Tool and Standards for Internal Control in the Federal
Government.[Footnote 3] We conducted our review from June 2006 through
June 2007 in accordance with generally accepted government auditing
standards.
Results in Brief:
DOD's November 2005 estimate that it will cost $158 million to
implement NSPS between 2005 and 2008 does not include the full cost
that the department expects to incur as a result of implementing the
new system. Federal financial accounting standards state that reliable
information on the costs of federal programs and activities is crucial
for effective management of government operations and recommend that
full costs of programs be reported to assist Congress and executives in
making informed decisions on program resources and to ensure that
programs get expected and efficient results.[Footnote 4] According to
the standards, the full cost of a program includes both those costs
specifically identifiable to carry out the program, or direct costs,
and those costs which are common to multiple programs but cannot be
specifically identified with any particular program, or indirect
costs.[Footnote 5] While the federal financial accounting standards
emphasize that full cost information is essential for managing federal
programs, their activities, and outputs, the standards provide that
costs may be omitted from cost information if that omission would not
change or influence the judgment of a reasonable person relying on the
cost information. DOD's $158 million estimate includes $51 million for
the Program Executive Office and $107 million for the military
services' and the Washington Headquarters Services' NSPS program
management offices. However, PEO and component officials could not
provide us with complete supporting documentation that identifies the
specific costs included in these estimates although internal control
standards require such documentation. Based on our review of the
documentation provided and discussions with PEO and component
officials, however, the estimate does not include all direct costs of
implementing the system. For example, PEO and component officials
agreed that the estimate does not include the full salary costs of all
civilian and military personnel who directly support NSPS activities
departmentwide. Furthermore, PEO and component officials acknowledge
that the estimate does not include any of the typical indirect costs
associated with the design and implementation of NSPS such as general
administrative services, general research and technical support, rent,
and operating and maintenance costs for buildings, equipment, and
utilities. Before developing its estimate, DOD had not fully defined
all the direct and indirect costs needed to manage NSPS. Without a cost
estimate that includes all costs that the department expects to incur
as a result of implementing the new system, decision makers--within DOD
and Congress--will not have the complete cost information they need to
make decisions about whether adequate resources are being provided for
implementing NSPS. Moreover, component officials told us that certain
categories of the estimated costs provided by the components do not
contain comparable cost elements. One of DOD's key financial management
regulation principles--comparability--requires the reporting of
financial management data in the same manner throughout DOD, using
common definitions when necessary.[Footnote 6] The PEO did not provide
detailed instructions to the components on the specific types of costs
to be included in the estimate and appropriate costing methodologies.
The PEO required the components to estimate costs in several broad cost
categories.[Footnote 7] As a result, the Departments of the Army, Navy,
and Air Force and the Washington Headquarters Services used different
approaches to estimate their NSPS funding requirements. For example,
Army and Navy officials told us that they estimated civilian personnel
costs under the category of "Program Office Operations"; Air Force
officials noted that they estimated civilian personnel costs under four
other categories; and Washington Headquarters Services said that they
did not estimate their NSPS costs in any of the cost categories.
Without comparable cost estimates, DOD and congressional decision
makers cannot contrast and compare or otherwise evaluate implementation
costs across the various DOD components.
The total funds DOD has expended or obligated to design and implement
NSPS during fiscal years 2005 through 2006 cannot be determined because
DOD has not established an effective oversight mechanism to ensure that
all these costs are fully captured in the components' official
accounting systems. In May 2005, the NSPS Senior Executive established
a requirement for tracking and reporting NSPS implementation costs that
requires the components to develop appropriate mechanisms to capture
these costs and send them to the NSPS PEO on a quarterly basis.
Components were given flexibility to establish the desired level of
specificity to track NSPS costs, provided the established mechanism
allowed complete visibility of all costs. However, this guidance does
not define the direct and indirect costs DOD requires that the
components capture. DOD's pervasive financial management deficiencies
have been the basis for GAO's designation of this as a high-risk area
since 1995. GAO's review of the components' submitted quarterly NSPS
cost reports in fiscal years 2005 and 2006 found that their official
appropriation accounting systems do not capture the total amount of
funds they reported that they had expended or obligated to design and
implement NSPS. While the quarterly reports are intended to provide DOD
with visibility over NSPS implementation costs, the PEO does not have
an effective oversight mechanism or internal controls in place to
ensure that the information contained in the reports is complete and
accurate. The PEO relies on the components to follow the guidance for
capturing NSPS costs in their official accounting systems, but it does
not conduct an independent verification of the completeness or accuracy
of financial data reported by the component. Without an effective
oversight and quality control mechanism and internal controls to ensure
that the official accounting systems capture all appropriate costs, DOD
and Congress do not have adequate visibility over the actual cost to
design and implement NSPS.
We are recommending that DOD define all direct and indirect costs
needed to manage NSPS, prepare a revised estimate of these costs for
implementing NSPS in accordance with the established definitions and
federal financial accounting standards, and develop a comprehensive
oversight framework to ensure that all funds expended or obligated to
design and implement NSPS are fully captured and reported. In written
comments on a draft of this report, DOD generally concurred with our
recommendations. DOD's comments are reprinted in appendix II.
Background:
The National Defense Authorization Act for Fiscal Year 2004 provided
DOD with the authority to establish (1) a pay-for-performance
management system, (2) an appeals process, and (3) a labor relations
system--which together comprise the major components of NSPS.[Footnote
8] The legislation permits DOD significant flexibility in designing
NSPS, allowing for a new framework of rules, regulations, and processes
to govern how defense civilian employees are hired, compensated,
promoted, and disciplined. The law grants DOD certain exemptions from
laws governing federal civilian personnel management found in Title 5
of the U.S. Code.[Footnote 9] Congress provided these flexibilities in
response to DOD's position that the inflexibility of federal personnel
systems was one of the most important constraints to the department's
ability to attract, retain, reward, and develop a civilian workforce to
meet the national security mission of the 21st century.
On November 1, 2005, DOD and OPM jointly developed and issued the final
NSPS regulations in the Federal Register.[Footnote 10] In the Federal
Register, DOD estimated the overall costs associated with implementing
NSPS to be approximately $158 million through 2008. The components'
estimates projected that over 700,000 civilian employees would be
converted to the new system over a period of 4 years. By component, the
Army projected converting 235,000 civilian employees between fiscal
years 2005 and 2008; the Navy, 185,985; the Air Force, 128,408; and the
Washington Headquarters Services, 156,454.
DOD established a team to design and implement NSPS and manage the
transformation process. In April 2004, the Secretary of Defense
appointed an NSPS Senior Executive to, among other things, design,
develop, and establish NSPS. Under the Senior Executive's authority,
the PEO was established as the central policy and program office to
design, plan, develop, deploy, assess, and fully implement NSPS.
Specifically, the PEO's responsibilities include designing the labor
relations, appeals, and human resource/pay-for-performance systems;
developing communication and training strategies; modifying personnel
information technology; and drafting joint enabling regulations and
internal DOD implementing regulations. As the central DOD-wide program
office, the PEO directs and oversees the components' NSPS program
managers, who report to their parent components and the NSPS PEO. These
program managers also serve as their components' NSPS action officers
and participate in the development, planning, implementation, and
deployment of NSPS. Figure 1 shows the organization of the NSPS design
and implementation team.
Figure 1: Figure 1: NSPS Design and Implementation Team Organization:
[See PDF for image]
Source: DOD.
[A] Includes the U.S. Navy and the U.S. Marine Corps.
[B] The Washington Headquarters Services is a field activity that
reports to the Director of Administration and Management, which has
oversight responsibility for DOD's "Fourth Estate" entities. "Fourth
Estate" entities are all organizational entities in DOD that are not in
the military departments or the combatant commands. These include the
Office of the Secretary of Defense, the Joint Staff, the Office of the
Inspector General of DOD, the defense agencies, and DOD field
activities.
[C] This group is responsible for satisfying human resources
information technology (and related) system requirements and
integrating the resulting systems.
[End of figure]
DOD's Estimated Costs to Implement NSPS Do Not Fully Represent Its
Total Resource Needs:
DOD's estimate that it will cost $158 million to implement NSPS between
2005 and 2008 does not include the full cost that the department
expects to incur as a result of implementing the new system.
Federal financial accounting standards state that reliable information
on the costs of federal programs and activities is crucial for
effective management of government operations and recommend that full
costs of programs be reported so that decision makers have information
necessary to make informed decisions on resources for programs,
activities, and outputs, and to ensure that they get expected and
efficient results. According to the standards, the full cost of a
program or activity includes both those costs that are specifically
identifiable to carry them out, or direct costs, and those costs that
are common to multiple programs or activities but cannot be
specifically identified with any particular program or activity, or
indirect costs. While the standards emphasize that cost information is
essential for managing federal programs, their activities, and outputs,
the standards also provide that items may be omitted from cost
information if that omission would not change or influence the judgment
of a reasonable person relying on the cost information.
To implement NSPS, the PEO estimated costs of about $51 million for the
start-up and operation of its office and the start-up of the National
Security Labor Relations Board. The components estimated costs of about
$23 million in fiscal year 2005, about $27 million in fiscal year 2006,
about $35 million in fiscal year 2007, and $22 million in fiscal year
2008, as shown in table 1. Typical direct costs include salaries and
benefits for employees who work directly on NSPS activities; materials
and supplies used in the work; various costs associated with office
space, equipment, facilities, and utilities that are used exclusively
to produce the output; and the costs of goods and services received
from other segments or entities that are used to produce the output.
Table 1: DOD Fiscal Year 2005-2008 Estimate of Cost to Implement NSPS:
Dollars in thousands.
DOD Component: Army;
Fiscal year 2005: $6,627;
Fiscal year 2006: $9,897;
Fiscal year 2007: $17,199;
Fiscal year 2008: $10,213;
Total: $43,936.
DOD Component: Navy;
Fiscal year 2005: 4,161;
Fiscal year 2006: 5,597;
Fiscal year 2007: 5,430;
Fiscal year 2008: 4,552;
Total: 19,740.
DOD Component: Air Force;
Fiscal year 2005: 7,300;
Fiscal year 2006: 5,731;
Fiscal year 2007: 4,704;
Fiscal year 2008: 2,070;
Total: 19,805.
DOD Component: Washington Headquarters Services;
Fiscal year 2005: 5,230;
Fiscal year 2006: 5,943;
Fiscal year 2007: 7,845;
Fiscal year 2008: 4,755;
Total: 23,773.
DOD Component: NSPS Program Executive Office;
Fiscal year 2005: 0;
Fiscal year 2006: 0;
Fiscal year 2007: 0;
Fiscal year 2008: 0;
Total: 51,000[A].
DOD Component: Total;
Fiscal year 2005: $23,318;
Fiscal year 2006: $27,168;
Fiscal year 2007: 35,178;
Fiscal year 2008: 21,590;
Total: $158,000.
Source: NSPS PEO.
Note: Numbers may not total due to rounding.
[A] The NSPS Program Executive Office estimated $38 million for the
start-up and operation of its office and $13 million for the start-up
of the National Security Labor Relations Board.
[End of table]
DOD's estimate included several broad cost categories. These categories
are (1) design and implementation, (2) training, (3) evaluation, (4)
human resources automated systems, and (5) program office operations.
DOD's estimate contained some examples of the types of costs included
in each of these broad categories. However, before calculating its
estimate, DOD had not fully defined what direct and indirect costs
should be included for it to effectively manage NSPS. Neither could DOD
provide us with complete supporting documentation that identifies the
specific types of costs included in its estimate. The Standards for
Internal Controls in the Federal Government require that all
transactions and other significant events, such as cost estimates, be
clearly documented.[Footnote 11]
Based on our review of the documentation provided by DOD and
discussions with PEO and component officials, however, the estimate
does not include all direct costs of implementing the system. For
example, PEO and component officials stated that the estimate includes
direct costs for the start-up and operation of the Program Executive
Office and the National Security Labor Relations Board; development and
delivery of training materials, Web-based courses, and classroom
sessions by DOD contractor and civilian instructors; modification of
existing automated personnel and payroll transaction processing
systems--the Defense Civilian Personnel Data System and the Defense
Civilian Pay System--to accommodate changes brought about by NSPS;
travel costs for NSPS trainers and training participants; outreach with
employees and other parties; and collaboration activities with employee
representatives. However, PEO and component officials agreed that the
estimate does not include all direct costs of implementing the system.
For example, PEO and component officials agreed that the estimate does
not include the full salary costs of all civilian and military
personnel who directly support NSPS activities departmentwide and any
of the direct costs that the various organizations and defense agencies
expect to incur to implement the system, such as salaries and benefits
for employees who work directly on NSPS activities and materials and
supplies used in NSPS activities. Furthermore, PEO and component
officials acknowledge that the estimate did not include any of the
typical indirect costs associated with the design and implementation of
NSPS such as costs of general administrative services, general
research, and technical support. Without a cost estimate that includes
all costs that the department expects to incur as a result of
implementing the new system, decision makers--within DOD and Congress-
-will not have the complete cost information they need to make
decisions about whether adequate resources are being provided for
implementing NSPS.
Moreover, component officials told us that certain categories of the
estimated costs provided by the components do not contain comparable
cost elements. One of DOD's key financial management regulation
principles--comparability--requires the reporting of financial
management data in the same manner throughout DOD, using common
definitions when necessary.[Footnote 12] However, officials from the
Departments of the Army, Navy, and Air Force and the Washington
Headquarters Services told us that they used different approaches to
estimate NSPS funding requirements when calculating this cost estimate.
While the PEO issued general instructions to the military services and
the Washington Headquarters Services for estimating the costs
associated with the design and implementation of NSPS, this office did
not provide a description of the specific types of direct and indirect
costs to be included in the estimate or a cost-estimating methodology
containing assumptions and approaches. The PEO guidance provided a
general reporting template with broad cost categories but did not
contain detailed instructions for ensuring comprehensive and comparable
cost estimates. Army and Navy officials told us that they estimated
civilian personnel costs under the category of "Program Office
Operations"; the Air Force officials noted that they estimated civilian
personnel costs under four other categories; and Washington
Headquarters Services officials stated that they did not estimate their
NSPS design and implementation costs in any of the eight categories.
Without comparable cost estimates, DOD and congressional decision
makers cannot contrast and compare or otherwise evaluate NSPS
implementation costs across the various DOD components.
Total Funds Expended or Obligated to Design and Implement NSPS Cannot
Be Determined:
The total amount of funds DOD has expended or obligated to design and
implement NSPS during fiscal years 2005 through 2006 cannot be
determined because DOD has not established an effective oversight
mechanism to ensure that all these costs are fully captured. In May
2005, the NSPS Senior Executive established guidance intended to
provide the PEO with visibility over NSPS expenditures. The guidance
requires the components to develop appropriate mechanisms to capture
these costs within their official appropriation accounting systems and
allows them flexibility to establish the desired level of specificity
to track NSPS costs--such as a job order number and cost account code-
-provided the established mechanism allows complete visibility of all
costs. In addition, the guidance requires the components to submit
reports quarterly of their NSPS obligations to the NSPS PEO. This
guidance does not, however, define the direct and indirect costs that
DOD requires the components to capture. Our prior work on DOD's
financial and related business management and systems has revealed
pervasive deficiencies that affect its ability to control costs; ensure
basic accountability; anticipate future costs and claims on the budget;
measure performance; maintain funds control; prevent and detect fraud,
waste, and abuse; and address pressing management issues. GAO first
designated DOD financial management as high risk in 1995.
Based on discussions with PEO and component officials and our review of
the quarterly reports of NSPS implementation costs submitted for fiscal
years 2005 and 2006, the components' official appropriation accounting
systems do not capture the total amount of funds reported expended or
obligated to design and implement NSPS. By component, the Army's
quarterly reports indicated that $9.8 million had been obligated to
implement NSPS; however, just $6.0 million of these costs were captured
in the Army's official accounting system. The remaining $3.8 million
was not captured in the Army's official accounting system, and Army
officials could not provide sufficient evidence supporting the amount.
The Air Force's quarterly reports indicated that $21.7 million had been
obligated to implement NSPS, of which $3.8 million was captured in its
official accounting system. According to Air Force officials, the
remaining reported amount, $17.9 million, was an estimate of expended
and obligated funds Air Force-wide. The Navy and the Washington
Headquarters Services reported $21.6 million and $13.1 million,
respectively, but neither component was able to provide any evidence
that these obligated funds had been captured in their official
accounting systems.
While the quarterly NSPS cost reports are intended to provide DOD with
visibility over NSPS implementation costs, the PEO does not have an
effective oversight mechanism or internal controls in place to ensure
that the information contained in the reports is complete and accurate.
The Standards for Internal Controls in the Federal Government sets out
management controls for all aspects of an agency's operations. The
Standards emphasize the importance of management oversight and review
to ensure that programs, their activities, and outputs continue to meet
their intended goals and comply with the law and policies and recommend
that agencies establish internal controls to monitor and review
operations and programs to provide reasonable assurance that they meet
their goals. Moreover, although the PEO relies on the components to
follow its guidance for capturing NSPS costs in their official
accounting systems, it does not conduct an independent verification of
the completeness or accuracy of financial data reported by the
components. Although independent verification is an important internal
control activity under segregation of duties designed to reduce the
risk of errors, PEO officials told us that none of the reports
submitted by the components are reviewed by an independent or second
reviewer to ensure that the information reported is accurate or
complete. Federal internal control standards require that data control
activities, such as verification and reconciliation, be conducted and
documented to help provide reasonable assurance that the objectives of
a program and its activities are being met.[Footnote 13] Moreover, we
consider establishing such controls, including policies and oversight
mechanisms, a best practice that can ensure greater visibility over the
total costs associated with the design and implementation of NSPS.
Without an effective oversight mechanism and internal controls, DOD and
Congress do not have adequate visibility over the actual cost to design
and implement NSPS.
Conclusions:
At a time when DOD is competing for resources in an increasingly
fiscally constrained environment, it is critically important that DOD
and Congress know the full cost to design and implement NSPS. Defining
what direct and indirect costs are needed to effectively manage NSPS is
a crucial first step for the department and Congress to lay a
foundation for future decisions. Without a full cost estimate, decision
makers within DOD and Congress will not have the complete cost
information they need to make decisions about whether adequate
resources are being provided for implementing NSPS. Moreover, the cost
information that makes up the components' portion of the overall DOD
cost estimate was prepared using different approaches and is therefore
not comparable. Without comparable cost estimates, DOD and
congressional decision makers cannot contrast and compare or otherwise
evaluate NSPS implementation costs across the various DOD components.
Although the components are reporting NSPS implementation costs, the
total amount of funds DOD has expended or obligated to design and
implement the system cannot be determined. Until the PEO establishes an
effective oversight mechanism with reporting requirements and
independent verification processes, DOD cannot ensure that the
components track and report cost information that includes funds that
they have expended or obligated to design and implement NSPS. Without
an effective oversight mechanism, DOD and Congress do not have adequate
visibility over the actual cost to design and implement NSPS.
Recommendations for Executive Action:
To provide decision makers in DOD and Congress with improved visibility
and internal controls over the costs of NSPS, we recommend that the
Secretary of Defense direct the National Security Personnel System
Senior Executive to take the following three actions:
* Direct the NSPS Program Executive Office to define all direct and
indirect costs necessary to effectively manage NSPS, in accordance with
internal control standards, federal financial accounting standards, and
DOD's financial management regulation principle related to
comparability.
* Direct the NSPS Program Executive Office to prepare a revised
estimate of the full costs of implementing NSPS in accordance with the
established definitions, internal control standards, federal financial
accounting standards, and DOD's financial management regulation
principle related to comparability.
* Develop a comprehensive oversight framework to ensure that all funds
expended or obligated to design and implement NSPS are fully captured
and reported. Such a framework should establish quality controls,
including independent reviews of the data being reported by the
components in the quarterly reports, to ensure the accuracy and
completeness of the reported information.
Agency Comments and Our Evaluation:
DOD provided written comments on a draft of this report and generally
agreed with our recommendations. In an overall comment, DOD noted that
NSPS is not a program; however, it also noted that DOD modeled the
development and implementation of NSPS on the acquisition model. Also,
the department noted that costing and accounting requirements for NSPS
were never intended to be the same as those for the acquisition model.
We believe DOD raises this point because we used the federal financial
accounting standards to analyze DOD's costs associated with the
implementation of NSPS. We note in our report that federal financial
accounting standards not only apply to the cost of programs, but also
to the cost of activities such as NSPS. Therefore, we believe that the
same costing and accounting rigor and discipline that are applied to
major acquisition programs should apply to NSPS.
DOD partially concurred with our recommendation to define all direct
and indirect costs necessary to effectively manage the program, its
activities, and outputs, in accordance with internal control standards,
federal financial accounting standards, and DOD's financial management
regulation principle related to comparability. DOD stated that the PEO
is reconstituting the Financial Integrated Product Team (IPT) to define
all direct and indirect costs necessary to effectively manage the
program; relook at the original cost categories to determine if they
are still appropriate and change if appropriate; and stipulate the
costs included in each category. If the PEO follows through with its
effort, we believe that it will be responsive to our recommendation.
Regarding indirect costs, DOD stated that a test of reasonableness was
applied. The department explained that the components were allowed to
weigh the cost/benefit of collecting, tracking, and reporting indirect
costs. While we agree that it is indeed appropriate for the components
to apply a test of reasonableness to weigh the cost/benefit of
collecting, tracking, and reporting indirect costs, it is important to
note that a crucial first step for the department to lay a foundation
for such decisions about reasonableness is to define what direct and
indirect costs are needed to effectively manage NSPS. It is also
important to note that we cannot verify DOD's statement that the
components applied a reasonableness test because DOD did not provide
documentation to reflect this during our review. DOD further stated
that the PEO had tracked both direct and indirect costs. While the PEO
does capture funds it expended or obligated to design and implement
NSPS, we continue to believe that the total amount of funds DOD has
expended or obligated to design and implement NSPS cannot be determined
because DOD has not established an effective oversight mechanism to
ensure that the cost information reported is accurate and complete.
Regarding our recommendation to prepare a revised estimate of the full
costs of implementing NSPS in accordance with established definitions,
internal control standards, federal financial accounting standards, and
DOD's financial management regulation principle related to
comparability, the department concurred, noting that the PEO will
develop an estimate covering fiscal years 2008 through 2011.
DOD concurred with our recommendation that the NSPS Senior Executive
develop a comprehensive oversight framework to ensure that NSPS funds
that are expended or obligated are fully captured and reported, noting
that the department should leverage existing policies and procedures to
ensure oversight of these costs. However, in the absence of more
specific details on its planned actions to leverage existing policies
and procedures to ensure oversight of NSPS costs, we continue to
emphasize the department's need for a comprehensive oversight framework
because without it DOD and Congress do not have adequate visibility
over the actual cost to design and implement NSPS.
We are sending copies of this report to the appropriate congressional
committees. We will make copies available to others upon request. This
report will be available at no charge on GAO's Web site at
http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-5559 or by e-mail at stewartd@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made major
contributions to the report are listed in appendix III.
Signed by:
Derek B. Stewart:
Director, Defense Capabilities and Management:
List of Congressional Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Daniel Inouye:
Chairman:
The Honorable Ted Stevens:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Daniel K. Akaka:
Chairman:
The Honorable George V. Voinovich:
Ranking Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Duncan Hunter:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable John P. Murtha:
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To determine the extent to which the Department of Defense (DOD) has
estimated the current and future total costs associated with the
implementation of the National Security Personnel System (NSPS), we
reviewed the estimate that was published in the NSPS Final
Regulations.[Footnote 14] We also analyzed guidance the NSPS Program
Executive Office (PEO) provided to the components that would be
providing input to this estimate. We interviewed officials from the PEO
and the NSPS Program Management Offices for the Navy (which is also
responsible for the Marine Corps), the Army, the Air Force, and the
Washington Headquarters Services to discuss how they had interpreted
the guidance directing them to estimate NSPS costs, and we obtained and
reviewed documents of the estimates provided by the NSPS Program
Management Offices to the PEO. To determine what costs should be
included in NSPS estimates, we analyzed government accounting standards
defined in the following documents: DOD Financial Management Regulation
7000.14-R, vol. 1, chapter 2, Conceptual Framework, December 1998, and
"Managerial Cost Accounting Concepts and Standards for the Federal
Government," Number 4, July 31, 1995.
To determine the extent to which DOD expended or obligated funds to
design and implement NSPS through fiscal year 2006, we obtained
quarterly reports collected by the PEO and consolidated for fiscal
years 2005 and 2006. To gain an understanding of the roles and
responsibilities of the various organizations in tracking NSPS cost
data, we reviewed pertinent NSPS documents, including the NSPS
Requirements Document, the Charter for the PEO, and the memorandum sent
out by the PEO directing that the components report their NSPS costs on
a quarterly basis. We reviewed quarterly reports provided by the
components and the PEO for the 2-year period and interviewed officials
from each of the component PMO offices to gather documentation showing
how the reported data had been captured. We compared the quarterly
reports to data from the components' official accounting systems to
determine what NSPS cost data had been captured in these accounting
systems. To obtain criteria for tracking and managing the costs of
programs, activities, and outputs, we compared the PEO's management of
the reporting of NSPS costs with internal control factors described in
Internal Control Management and Evaluation Tool and Standards for
Internal Control in the Federal Government.
We conducted our review from June 2006 through June 2007 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Defense:
Department Of Defense:
National Security Personnel System:
Program Executive Office:
1400 Key Boulevard Suite B200:
Arlington, VA 22209- 5144:
June 18, 2007:
Mr. Derek B. Stewart:
Director, Defense Capabilities and Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Stewart:
Enclosed is the Department of Defense (DoD) response to the GAO draft
report, "Human Capital: DoD Needs Better Internal Controls and
Visibility over Costs for Implementing Its National Security Personnel
System," dated June 7, 2007, (GAO Code GAO-07-851). I thank you for the
opportunity to review and comment on the draft report.
Generally, we believe that the report adequately portrays our efforts
to capture costs for the design and implementation of the National
Security Personnel System (NSPS). Responses to specific recommendations
include comments on items in the report we would like to clarify or
correct.
NSPS is not a program but a personnel system that, when fully
implemented, will replace the current General Schedule (GS) personnel
system for a majority of the Department's civilian employees. While the
Department decided to model the development and implementation of this
system based on the acquisition model, the costing and accounting
requirements were never intended to be the same.
Again, thank you for the opportunity to comment and respond. We
appreciate the thorough and professional job performed by you and your
team and your recognition of the challenges faced in implementing NSPS.
If you have any questions regarding this response, please do not
hesitate to contact me.
Sincerely,
Signed by:
Mary E. Lacey:
Program Executive Officer:
Enclosure:
GAO Draft Report - Dated June 7, 2407 GAO Code GAO-07-851.
"Human Capital: DoD Needs Better Internal Controls and Visibility over
Costs for Implementing the National Security Personnel System"
DOD Responses To Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the National Security Personnel System (NSPS) Senior Executive
to direct the NSPS Program Executive Office to define all direct and
indirect costs necessary to effectively manage the program, its
activities, and outputs, in accordance with internal control standards,
federal financial accounting standards, and DoD's financial management
regulation principle related to comparability.
DOD Response: Partially Concur. The NSPS Senior Executive, in a May 4,
2005 memorandum, communicated the requirement to establish internal
procedures for tracking and reporting NSPS design and implementation
costs to include capturing the costs within their official appropriate
accounting system. Significant effort was expended to identify and
collect costs that could assist management officials with making good
business decisions regarding the design and implementation of NSPS.
The following categories were determined critical:
- Design and Implementation:
- Training Development, Support and Execution:
- HR Automated Systems:
- Program Evaluation:
- Program Office Operations:
In regard to indirect costs, a test of reasonableness was applied. If a
cost already existed to support prescribed Departmental business, such
as a training facility used to conduct a wide variety of training, and
NSPS utilized some of the rooms for training purposes, the Department
did not capture a portion of the utility or facility maintenance cost
and report it as a NSPS cost. However, Components were allowed to weigh
the cost/benefit of collecting, tracking, and reporting indirect costs
and although not reflected in the GAO Draft Report, the PEO NSPS did
track both direct and indirect costs.
The Program Executive Officer is reconstituting the Financial IPT to:
define all direct and indirect costs necessary to effectively manage
the program; relook the original cost categories to determine if they
are still appropriate and change if appropriate; and stipulate the
costs included in each category to eliminate ambiguity.
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the NSPS Senior Executive to direct the NSPS Program Executive
Office to prepare a revised estimate of the full costs of implementing
NSPS in accordance with the established definitions, internal control
standards, federal financial accounting standards, and DoD's financial
management regulation principle related to comparability.
DOD Response: Concur. The Program Executive Office will develop a
revised estimate of applicable costs for implementing NSPS covering
fiscal years 2008 through 2011, the year the NSPS Program Executive
Office sunsets. As is true for the first estimate for the costs of
implementing NSPS, the revised estimate could be affected by
Congressional changes to the authorities that govern the system, and
any changes to the NSPS implementation schedule.
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the NSPS Senior Executive to develop a comprehensive oversight
framework to ensure that all funds expended or obligated to design and
implement NSPS are fully captured and reported. Such a framework should
establish quality controls, including independent reviews of the data
being reported by the components in the quarterly reports, to ensure
the accuracy and completeness of the reported information.
DOD Response: Concur. The Department should leverage existing policies
and procedures to ensure oversight of those costs that assist
management officials with making good business decisions regarding the
design and implementation of NSPS.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Derek B. Stewart, (202) 512-5559 or stewartd@gao.gov:
Acknowledgments:
In addition to the contact named above, John Needham, Acting Director;
Sandra Burrell, Assistant Director; Margaret Braley; Renee Brown;
Nicolaas Cornelisse; William Doherty; Cara Kochheiser; Julia Matta;
Donald Neff; Charles Perdue; Beverly Schladt; Rebecca Shea; and John
Warner made key contributions to this report.
[End of section]
Related GAO Products:
Human Capital: Observations on Final Regulations for DOD's National
Security Personnel System. GAO-06-227T. Washington, D.C.: November 17,
2005.
Human Capital: DOD's National Security Personnel System Faces
Implementation Challenges. GAO-05-730. Washington, D.C.: July 14, 2005.
Questions for the Record Related to the Department of Defense's
National Security Personnel System. GAO-05-771R. Washington, D.C.: June
14, 2005.
Questions for the Record Regarding the Department of Defense's National
Security Personnel System. GAO-05-770R: Washington, D.C.: May 31, 2005.
Post-hearing Questions Related to the Department of Defense's National
Security Personnel System. GAO-05-641R. Washington, D.C.: April 29,
2005.
Defense Management: Key Elements Needed to Successfully Transform DOD
Business Operations. GAO-05-629T. Washington, D.C.: April 28, 2005.
Human Capital: Preliminary Observations on Proposed Department of
Defense National Security Personnel System Regulations. GAO-05-559T.
Washington, D.C.: April 14, 2005.
Human Capital: Preliminary Observations on Proposed Department of
Defense National Security Personnel System Regulations. GAO-05-517T.
Washington, D.C.: April 12, 2005.
Human Capital: Preliminary Observations on Proposed DOD National
Security Personnel System Regulations. GAO-05-432T. Washington, D.C.:
March 15, 2005.
Department of Defense: Further Actions Are Needed to Effectively
Address Business Management Problems and Overcome Key Business
Transformation Challenges. GAO-05-140T. Washington, D.C.: November 18,
2004.
DOD Civilian Personnel: Comprehensive Strategic Workforce Plans Needed.
GAO-04-753. Washington, D.C.: June 30, 2004.
Results-Oriented Cultures: Implementation Steps to Assist Mergers and
Organizational Transformations. GAO-03-669. Washington, D.C.: July 2,
2003.
Human Capital: Building on DOD's Reform Efforts to Foster
Governmentwide Improvements. GAO-03-851T. Washington, D.C.: June 4,
2003.
Human Capital: DOD's Civilian Personnel Strategic Management and the
Proposed National Security Personnel System. GAO-03-493R. Washington,
D.C.: May 12, 2003.
Defense Transformation: DOD's Proposed Civilian Personnel System and
Governmentwide Human Capital Reform. GAO-03-741T. Washington, D.C.: May
1, 2003.
Defense Transformation: Preliminary Observations on DOD's Proposed
Civilian Personnel Reforms. GAO-03-717T. Washington, D.C.: April 29,
2003.
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.: March 28, 2003.
FOOTNOTES
[1] GAO, Human Capital: Observations on Final Regulations for DOD's
National Security Personnel System, GAO-06-227T (Washington, D.C.: Nov.
17, 2006); Human Capital: DOD's National Security Personnel System
Faces Implementation Challenges, GAO-05-730 (Washington, D.C.: July 14,
2005); Human Capital: Preliminary Observations on Proposed DOD National
Security Personnel System Regulations, GAO-05-432T (Washington, D.C.:
Mar. 15, 2005); Human Capital: Preliminary Observations on Proposed
Department of Defense National Security Personnel System Regulations,
GAO-05-559T (Washington, D.C.: Apr. 14, 2005); Human Capital:
Preliminary Observations on Proposed Department of Defense National
Security Personnel System Regulations, GAO-05-517T (Washington, D.C.:
Apr. 12, 2005).
[2] The Washington Headquarters Services is a field activity that
reports to the Director of Administration and Management, which has
oversight responsibility for DOD's "Fourth Estate" entities. "Fourth
Estate" entities are all organizational entities in DOD that are not in
the military departments or the combatant commands. These include the
Office of the Secretary of Defense, the Joint Staff, the Office of the
Inspector General of DOD, the defense agencies, and DOD field
activities. In this report, we will use "Washington Headquarters
Services" to mean the "Fourth Estate," as defined by DOD.
[3] GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G
(Washington, D.C.: August 2001) and Standards for Internal Controls in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
[4] Statement of Federal Financial Accounting Standards No. 4,
Managerial Cost Accounting Concepts and Standards for the Federal
Government, establishes standards for managerial cost accounting
information at federal agencies.
[5] Typical direct costs include salaries and benefits for employees
who work directly on NSPS activities; materials and supplies used in
the work; various costs associated with office space, equipment,
facilities, and utilities that are used exclusively to produce the
output; and the costs of goods and services received from other
segments or entities that are used to produce the output. Typical
indirect costs include, among other things, general administrative
services, general research, and technical support.
[6] DOD Financial Management Regulation 7000.14-R, vol. 1, chapter 2,
Conceptual Framework (December 1998).
[7] (1) NSPS Design Support, (2) Training Development and Support, (3)
Training Execution, (4) Communications/Website, (5) General
Implementation Support, (6) NSPS Evaluation, (7) Conversion Cost, (8)
HR Automated Systems, and (9) Program Office Operations.
[8] Pub. L. No. 108-136, section 1101 (2003) (codified at 5 U.S.C.
sections 9901-9904).
[9] Congress did not exempt DOD from provisions of Title 5, U.S. Code,
pertaining to veterans' preference, merit systems principles,
prohibited personnel practices, and equal employment opportunity.
[10] Department of Defense Human Resources Management and Labor
Relations System, 70 Fed. Reg. 66,116 (Nov. 1, 2005) (codified at 5
C.F.R. pt. 9901).
[11] GAO-01-1008G and GAO/AIMD-00-21.3.1.
[12] DOD Financial Management Regulation 7000.14-R, vol. 1, chapter 2,
Conceptual Framework (December 1998).
[13] GAO-01-1008G and GAO/AIMD-00-21.3.1.
[14] 70 Fed. Reg. 66,187 (Nov. 1, 2005).
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