Department of Defense
Financial Management Improvement and Audit Readiness Efforts Continue to Evolve Gao ID: GAO-10-1059T September 29, 2010As one of the largest and most complex organizations in the world, the Department of Defense (DOD) faces many challenges in resolving its pervasive and long-standing financial management and related business operations and systems problems. DOD is required by various statutes to (1) improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and (2) produce audited financial statements. DOD has initiated numerous efforts over the years to improve the department's financial management operations and ultimately achieve unqualified (clean) opinions on the reliability of reported financial information. The Subcommittee has asked GAO to provide its perspective on DOD's current efforts to address its financial management weaknesses and achieve auditability, including the status of its Enterprise Resource Planning (ERP) system implementations. GAO's testimony is based on its prior work related to DOD's financial improvement and audit readiness strategy and related activities, including its ERP implementation efforts.
DOD has initiated numerous efforts over the years to address its financial management weaknesses and achieve audit readiness. In 2005, DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan to define the department's strategy and methodology for improving financial management operations and controls, and reporting its progress. In 2009, DOD Comptroller directed that the department's FIAR efforts be focused on improving processes and controls supporting information most often used to manage operations, while continuing to work toward achieving financial statement auditability. To support these objectives, DOD established two priority focus areas: budget information and information pertaining to mission-critical assets. In 2010, DOD revised its FIAR strategy, governance framework, and methodology to support the DOD Comptroller's direction and priorities and to comply with fiscal year 2010 defense authorizing legislation, which incorporated GAO recommendations intended to improve the FIAR Plan as a strategic plan. Based on what GAO has seen to date, DOD's revised FIAR Plan strategy and methodology reflects a reasonable approach. Moreover, GAO supports prioritizing focus areas for improvement and is hopeful that a consistent focus provided through shared FIAR priorities will increase incremental progress toward improved financial management operations. However, developing sound plans and methodology, and getting leaders and organizations in place is only a start. DOD needs to define specific roles and responsibilities for the Chief Management Officers (CMO)--including when and how the CMOs are expected to become involved in problem resolution and in ensuring cross-functional area commitment to financial improvement activities. A key element of the FIAR strategy is successful implementation of the ERPs. According to DOD, as of December 2009, it had invested approximately $5.8 billion to develop and implement these ERPs and will invest additional billions before these efforts are complete. However, as GAO has previously reported inadequate requirements management, systems testing, ineffective oversight over business system investments, and other challenges have hindered the department's efforts to implement these systems on schedule and within cost. Whether DOD's FIAR strategy will ultimately lead to improved financial management capabilities and audit readiness depends on DOD leadership and oversight to help achieve successful implementation. Sustained effort and commitment at the department and component levels will be needed to address weaknesses and produce financial management information that is timely, reliable, and useful for managers throughout DOD. GAO will continue to monitor DOD's progress and provide feedback on the status of DOD's financial management improvement efforts.
GAO-10-1059T, Department of Defense: Financial Management Improvement and Audit Readiness Efforts Continue to Evolve
This is the accessible text file for GAO report number GAO-10-1059T
entitled 'Department Of Defense: Financial Management Improvement and
Audit Readiness Efforts Continue to Evolve' which was released on
September 29, 2010.
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.
Testimony before the Subcommittee on Federal Financial Management,
Government Information, Federal Services, and International Security,
Committee on Homeland Security and Government Affairs, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 2:30 p.m. EDT:
Wednesday, September 29, 2010:
Department Of Defense:
Financial Management Improvement and Audit Readiness Efforts Continue
to Evolve:
Statement of Asif A. Khan, Director:
Financial Management and Assurance:
GAO-10-1059T:
GAO Highlights:
Highlights of GAO-10-1059T, a testimony before the Subcommittee on
Federal Financial Management, Government Information, Federal
Services, and International Security. Committee on Homeland Security
and Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
As one of the largest and most complex organizations in the world, DOD
faces many challenges in resolving its pervasive and long-standing
financial management and related business operations and systems
problems. The Department of Defense (DOD) is required by various
statutes to (1) improve its financial management processes, controls,
and systems to ensure that complete, reliable, consistent, and timely
information is prepared and responsive to the financial information
needs of agency management and oversight bodies, and (2) produce
audited financial statements.
DOD has initiated numerous efforts over the years to improve the
department‘s financial management operations and ultimately achieve
unqualified (clean) opinions on the reliability of reported financial
information.
The Subcommittee has asked GAO to provide its perspective on DOD‘s
current efforts to address its financial management weaknesses and
achieve auditability, including the status of its Enterprise Resource
Planning (ERP) system implementations.
GAO‘s testimony is based on its prior work related to DOD‘s financial
improvement and audit readiness strategy and related activities,
including its ERP implementation efforts.
What GAO Found:
DOD has initiated numerous efforts over the years to address its
financial management weaknesses and achieve audit readiness. In 2005,
DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan
to define the department‘s strategy and methodology for improving
financial management and controls and reporting its progress. In 2009,
DOD Comptroller directed that the department‘s FIAR efforts be focused
on improving processes and controls supporting information most often
used to manage operations, while continuing to work toward achieving
financial statement auditability. To support these objectives, DOD
established two priority focus areas: budget information and
information pertaining to mission-critical assets. In 2010, DOD
revised its FIAR strategy, governance framework, and methodology to
support the DOD Comptroller‘s direction and priorities and to comply
with fiscal year 2010 defense authorizing legislation, which
incorporated GAO recommendations intended to improve the FIAR Plan as
a strategic plan.
Based on what GAO has seen to date, DOD‘s revised FIAR Plan strategy
and methodology reflects a reasonable approach. Moreover, GAO supports
prioritizing focus areas for improvements and is hopeful that a
consistent focus provided through shared FIAR priorities will increase
incremental progress toward improved financial management operations.
However, developing sound plans and methodology, and getting leaders
and organizations in place is only a start. DOD needs to define
specific roles and responsibilities for the Chief Management Officers
(CMO)”including when and how the CMOs are expected to become involved
in problem resolution and in ensuring cross-functional area commitment
to financial improvement activities.
A key element of the FIAR strategy is successful implementation of
Enterprise Resource Planning (ERP) systems. According to DOD, as of
December 2009, it had invested approximately $5.8 billion to develop
and implement these ERPs and will invest additional billions before
these efforts are complete. However, as GAO has previously reported
inadequate requirements management, systems testing, ineffective
oversight over business system investments, and other challenges have
hindered the department‘s efforts to implement these systems on
schedule and within cost.
Whether DOD‘s FIAR strategy will ultimately lead to improved financial
management capabilities and audit readiness depends on DOD leadership
and oversight to help achieve successful implementation. Sustained
effort and commitment at the department and component levels will be
needed to address weaknesses and produce financial management
information that is timely, reliable, and useful for managers
throughout DOD. GAO will continue to monitor DOD‘s progress and
provide feedback on the status of DOD‘s financial management
improvement efforts.
View [hyperlink, http://www.gao.gov/products/GAO-10-1059T] or key
components. For more information, contact Asif A. Khan at (202) 512-
9095 or khana@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be here today to discuss the status of the
Department of Defense's (DOD) efforts to improve its financial
management operations and achieve audit readiness. At the outset, I
would like to thank the Subcommittee for having this hearing and
acknowledge the important role hearings such as this one serve.
DOD is one of the largest and most complex organizations in the world.
In fiscal year 2009, DOD reported that it had over $947 billion in
disbursements, $1.8 trillion in assets, and approximately 3.2 million
military and civilian personnel--including active and reserve
components.[Footnote 1] DOD operations span a wide range of defense
organizations, including the military departments and their respective
major commands and functional activities, large defense agencies and
field activities, and various combatant commands that are responsible
for military operations for specific geographic regions or theaters of
operation. To execute its operations, the department performs
interrelated and interdependent business functions, including
financial management, acquisition and contract management, logistics
management, and human resource management. According to DOD officials,
the department relies on about 2,080 business systems,[Footnote 2]
including accounting, acquisition, logistics, and personnel systems,
to support its business functions.
The department's sheer size and complexity contribute to the many
challenges DOD faces in resolving its pervasive, complex, and long-
standing financial management and related business operations and
systems problems. Numerous initiatives and efforts have been
undertaken by DOD and its components to improve the department's
financial management operations and achieve favorable (clean) audit
opinions on the reliability of reported financial information. To
date, DOD has not implemented effective financial management
capabilities or achieved financial statement auditability.[Footnote 3]
Today, I will describe the department's current strategy to address
its financial management weaknesses and achieve audit readiness and
provide GAO's perspective on DOD's efforts and progress. In addition,
I will outline the status of the department's efforts to implement its
Enterprise Resource Planning (ERP) systems,[Footnote 4] which
represent a critical element of the department's financial improvement
and audit readiness (FIAR) strategy.
My statement today is based on our prior work related to the
department's FIAR Plan and related financial management improvement
activities, including our assessment of the department's ability to
manage and control operations and support costs associated with its
weapon systems,[Footnote 5] and our ongoing oversight of selected DOD
financial statement audits and ERP implementation efforts. Our work
was conducted in accordance with generally accepted auditing standards
and our previously published reports contain additional details on the
scope and methodology for those reviews. Those standards require that
we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
Background:
DOD is one of the largest federal agencies with its budget
representing over half of the entire federal government's
discretionary spending.[Footnote 6] For fiscal year 2010, Congress
appropriated over $694 billion for DOD. This included $530 billion in
regular appropriations for base needs and about $164 billion in
regular and supplemental appropriations for contingency operations in
Iraq, Afghanistan, and other locations. As of June 2010, DOD had
received about $1 trillion since 2001 to support contingency
operations. The department is currently facing near-term and long-term
internal fiscal pressures as it attempts to balance competing demands
to support ongoing operations, rebuild readiness following extended
military operations, and manage increasing personnel and health care
costs and significant cost growth in its weapons systems programs.
For more than a decade, DOD has dominated GAO's list of federal
programs and operations at high-risk of being vulnerable to fraud,
waste, abuse, and mismanagement.[Footnote 7] In fact, all the DOD
programs on GAO's High-Risk List relate to business operations,
including systems and processes related to management of contracts,
finances, the supply chain, and support infrastructure,[Footnote 8] as
well as weapon systems acquisition. Long-standing and pervasive
weaknesses in DOD's financial management and related business
processes and systems have (1) resulted in a lack of reliable
information needed to make sound decisions and report on the financial
status and cost of DOD activities to Congress and DOD decision makers;
(2) adversely affected its operational efficiency in business areas,
such as major weapons system acquisition and support and logistics;
and (3) left the department vulnerable to fraud, waste, and abuse.
Detailed examples of these effects are presented in appendix I.
DOD is required by various statutes[Footnote 9] to improve its
financial management processes, controls, and systems to ensure that
complete, reliable, consistent, and timely information is prepared and
responsive to the financial information needs of agency management and
oversight bodies, and to produce audited financial statements.
Collectively these statues required DOD to do the following:
* Establish a leadership and governance framework and process,
including a financial management improvement plan or strategy (over
time the department's strategy evolved into the FIAR Plan, which
ultimately became a subordinate plan to the department's Strategic
Management Plan)[Footnote 10] for addressing its financial management
weaknesses and report to Congress and others semi-annually on its
progress.
* Concentrate the department's efforts and resources on improving the
department's financial management information.
* Systematically tie actions to improve processes and controls with
business system modernization efforts described in the business
enterprise architecture[Footnote 11] and enterprise transition plan
required by 10 U.S.C. § 2222.
* Limit the resources the department spend each year to develop,
compile, report, and audit unreliable financial statements.[Footnote
12]
* Submit an annual report[Footnote 13] to defense committees, the
Office of Management and Budget (OMB), the Department of the Treasury
(Treasury), GAO, and the DOD Inspector General (DOD IG) concluding on
whether DOD policies, procedures, and systems support financial
statement reliability, and the expected reliability of each DOD
financial statement.
* Certify to the DOD IG whether a component or DOD financial statement
for a specific fiscal year is reliable. Following DOD's assertion that
a financial statement is reliable, DOD may expend resources to
develop, compile, report, and audit the statement and the statements
of subsequent fiscal years.
Because of the complexity and magnitude of the challenges facing the
department in improving its business operations, GAO has long
advocated the need for a senior management official to provide strong
and sustained leadership.[Footnote 14]Recognizing that executive-level
attention and a clear strategy were needed to put DOD on a sustainable
path toward successfully transforming its business operations,
including financial management, the National Defense Authorization Act
(NDAA) for fiscal year 2008 designated the Deputy Secretary of Defense
as the department's Chief Management Officer (CMO), created a Deputy
CMO position, and designated the undersecretaries of each military
department as CMOs for their respective departments.[Footnote 15] The
act also required the Secretary of Defense, acting through the CMO, to
develop a strategic management plan that among other things would
provide a detailed description of performance goals and measures for
improving and evaluating the overall efficiency and effectiveness of
the department's business operations and actions underway to improve
operations.
To further draw the department's attention to the need to improve its
strategy for addressing financial management weaknesses and achieve
audit readiness the NDAA for Fiscal Year 2010[Footnote 16] made the
FIAR Plan a statutory mandate, requiring the FIAR Plan to include,
among other things:
* specific actions to be taken and costs associated with (a)
correcting the financial management deficiencies that impair DOD's
ability to prepare timely, reliable, and complete financial management
information; and (b) ensuring that DOD's financial statements are
validated as ready for audit by no later than September 30, 2017, and:
* actions taken to correct and link financial management deficiencies
with process and control improvements and business system
modernization efforts described in the business enterprise
architecture and enterprise transition plan required by 10 U.S.C. §
2222.
Consistent with the priorities announced by the DOD Comptroller in
August 2009, the act also focused the department's improvement efforts
on first ensuring the reliability of the department's budgetary
information and property accountability records for mission-critical
assets.[Footnote 17] In addition, the act directed DOD to report to
congressional defense committees no later than May 15 and November 15
each year on the status of its FIAR Plan implementation. Furthermore,
the act required that the first FIAR Plan issued following enactment
of this legislation (1) include a mechanism to conduct audits of the
military intelligence programs and agencies and submit the audited
financial statements to Congress in a classified manner and (2)
identify actions taken or to be taken by the department to address the
issues identified in our May 2009 report[Footnote 18] on DOD's efforts
to achieve financial statement auditability.
DOD's Strategy for Improving Its Financial Management Operations and
Achieving Audit Readiness Continues to Evolve:
Over the years, the department has initiated several broad-based
reform efforts, including the 1998 Biennial Strategic Plan for the
Improvement of Financial Management within the Department of Defense
and the 2003 Financial Improvement Initiative, intended to
fundamentally transform its financial management operations and
achieve clean financial statement audit opinions. In 2005, DOD's
Comptroller established the DOD FIAR Directorate to develop, manage,
and implement a strategic approach for addressing the department's
financial management weaknesses and achieving auditability and to
integrate those efforts with other improvement activities, such as the
department's business system modernization efforts. The first FIAR
Plan was issued in December 2005. DOD's FIAR Plan defines DOD's
strategy and methodology for improving financial management and
controls, and summarizes and reports the results of the department's
improvement activities and progress toward achieving financial
statement auditability. Further, the FIAR Plan has focused on
achieving three goals: (1) implement sustained improvements in
business processes and controls to address internal control
weaknesses, (2) develop and implement financial management systems
that support effective financial management, and (3) achieve and
sustain financial statement audit readiness.
To date, the department's improvement efforts have not resulted in the
fundamental transformation of DOD's financial management operations
necessary to resolve the department's long-standing financial
management weaknesses; [Footnote 19] however, some progress has been
made and the department's strategy has continued to evolve. While none
of the military services have obtained unqualified (clean) audit
opinions on their financial statements, some DOD organizations, such
as the Army Corps of Engineers, Defense Finance Accounting Service,
the Defense Contract Audit Agency, and the DOD IG, have achieved this
goal. Moreover, some DOD components that have not yet received clean
audit opinions, such as the Defense Information Service Agency (DISA),
are beginning to reap the benefits of strengthened controls and
processes gained through ongoing efforts to improve their financial
management operations and reporting capabilities. For example,
according to DISA's Comptroller, the agency was able to resolve over
$270 million in Treasury mismatches through reconciliations of over
$12 billion in disbursement and collection activities. In addition,
DISA's efforts to improve processes and controls over its accounts
receivable and payable accounts have resulted in improvements in its
ability to (1) substantiate the validity of DISA's customer billings
and collect funds due to DISA, and (2) identify areas where funds
could be deobligated and put to better use. Moreover, DISA management
has gained increased assurance over its reported cash availability
balance, thereby improving mission-critical decision making.
Since its inception, the FIAR Plan has followed an incremental
approach to structure its process for examining operations, diagnosing
problems, planning corrective actions, and preparing for audit.
Moreover, the FIAR Plan has continued to evolve and mature as a
strategic plan. Initially, DOD components independently established
their own financial management improvement priorities and
methodologies and were responsible for implementing the corrective
actions they determined were needed to address weaknesses and achieve
financial statement auditability. However, as we reported in May 2009,
it was difficult to link corrective actions or accomplishments
reported by the FIAR Plan to FIAR goals and measure progress.[Footnote
20] In addition, we reported that as the department's strategic plan
and management tool for guiding and reporting on incremental progress
toward achieving these goals, the FIAR Plan could be improved in
several areas. Specifically, we found the following.
* Clear guidance was needed in developing and implementing improvement
efforts.
* A baseline of the department's and/or key component's current
financial management weaknesses and capabilities was needed to
effectively measure and report on incremental progress.
* Linkage between FIAR Plan goals and corrective actions and reported
accomplishments was needed.
* Clear results-oriented metrics for measuring and reporting
incremental progress were needed.
* Accountability should be clearly defined and resources budgeted and
consumed should be identified.
We made several recommendations in our May 2009 report to increase the
FIAR Plan's effectiveness as a strategic and management tool for
guiding, monitoring, and reporting on financial management improvement
efforts and increasing the likelihood of meeting the department's goal
of financial statement auditability, which were incorporated into the
NDAA for fiscal year 2010. In its May 2010 FIAR Status Report and
Guidance, the department identified steps taken to address our
recommendations to strengthen its FIAR Plan strategy and chances of
sustained financial management improvements and audit readiness. For
example, DOD has established shared priorities and methodology,
including guidance to develop component financial improvement plans,
and an improved governance framework.
In August 2009, DOD's Comptroller directed that the department focus
on improving processes and controls supporting information that is
most often used to manage the department, while continuing to work
toward achieving financial improvements aimed at achieving unqualified
audit opinions on the department's financial statements. As a result,
in 2010 DOD revised its FIAR strategy, governance framework, and
methodology to support these objectives and focus financial management
improvement efforts primarily on achieving two interim departmentwide
priorities--first, strengthening processes, controls, and systems that
produce budgetary information and support the department's Statements
of Budgetary Resources;[Footnote 21] and second, improving the
accuracy and reliability of management information pertaining to the
department's mission-critical assets, including military equipment,
real property, and general equipment, and validating improvement
through existence and completeness testing. In addition, the DOD
Comptroller directed DOD components to use a standard financial
improvement plan template to support and emphasize achievement of the
two FIAR priorities.
The department intends to progress toward achieving financial
statement auditability in five waves (or phases) of concerted
improvement activities within groups of end-to-end business processes.
[Footnote 22] According to DOD's May 2010, FIAR Plan Status Report,
the lack of resources dedicated to financial improvement activities at
DOD components has been a serious impediment to progress, except in
the Navy and the Defense Logistics Agency (DLA). As a result, the
components are at different levels of completing the waves. For
example, the Air Force has already received a positive validation by
the DOD IG on the Air Force Appropriations Received account (wave 1)
and the Navy is currently undergoing a similar review of its account.
Army and DLA, are expected to complete wave 1 and be ready for
validation by the end of fiscal year 2010. However, DOD is only
beginning wave 1 work at other defense agencies to ensure that
transactions affecting their appropriations received accounts are
properly recorded and reported. The first three waves focus on
achieving the DOD Comptroller's interim budgetary and asset
accountability priorities, while the remaining two waves are intended
to complete actions needed to achieve full financial statement
auditability. However, the department has not yet fully defined its
strategy for completing waves 4 and 5. The focus and scope of each
wave include the following:
Wave 1--Appropriations Received Audit focuses efforts on assessing and
strengthening, as necessary, internal controls and business systems
involved in appropriations receipt and distribution process, including
funding appropriated by Congress for the current fiscal year and
related apportionment/reapportionment activity by OMB, as well as
allotment and sub-allotment activity within the department.[Footnote
23]
Wave 2--Statement of Budgetary Resources (SBR) Audit focuses efforts
on assessing and strengthening, as necessary, the internal controls,
processes, and business systems supporting the budgetary-related data
(e.g., status of funds received, obligated, and expended) used for
management decision making and reporting, including the SBR. In
addition to fund balance with Treasury reporting and reconciliation,
significant end-to-end business processes in this wave include procure-
to-pay, hire-to-retire, order-to-cash, and budget-to-report.
Wave 3--Mission-Critical Assets Existence and Completeness Audit
focuses efforts on assessing and strengthening, as necessary, internal
controls and business systems involved in ensuring that all assets
(including military equipment, general equipment, real property,
inventory, and operating materials and supplies) are recorded in the
department's accountable property systems of record exist, all of the
reporting entities' assets are recorded in those systems of record,
reporting entities have the right (ownership) to report these assets,
and the assets are consistently categorized, summarized, and reported.
Wave 4--Full Audit Except for Legacy Asset Valuation focuses efforts
on assessing and strengthening, as necessary, internal controls,
processes, and business systems involved in the proprietary side of
budgetary transactions covered by the Statement of Budgetary Resources
effort of wave 2, including accounts receivable, revenue, accounts
payable, expenses, environmental liabilities, and other liabilities.
This wave also includes efforts to support valuation and reporting of
new asset acquisitions.
Wave 5--Full Financial Statement Audit focuses efforts on assessing
and strengthening, as necessary, internal controls, processes, and
business systems involved in supporting the valuations reported for
legacy assets once efforts to ensure control over the valuation of new
assets acquired and the existence and completeness of all mission
assets are deemed effective on a go-forward basis. Given the lack of
documentation to support the values of the department's legacy assets,
federal accounting standards allow for the use of alternative methods
to provide reasonable estimates for the cost of these assets.
According to DOD, critical to the success of each wave and the
department's efforts to ultimately achieve full financial statement
auditability will be departmentwide implementation of the FIAR
methodology as outlined in DOD's FIAR Guidance document.[Footnote 24]
Issued in May 2010, the FIAR Guidance document, which DOD intends to
update annually, defines in a single document the department's FIAR
goals, strategy, and methodology (formerly referred to as business
rules) for becoming audit ready. The FIAR methodology prescribes the
process components should follow in executing efforts to assess
processes, controls, and systems; identify and correct weaknesses;
assess, validate, and sustain corrective actions; and achieve full
auditability. Key changes introduced in 2010 to the FIAR methodology
include an emphasis on internal controls[Footnote 25] and supporting
documentation. Utilization of standard financial improvement plans and
methodology should also aid both DOD and its components in assessing
current financial management capabilities in order to establish
baselines against which to measure, sustain, and report progress. More
specifically, the standard financial improvement plan and FIAR
Guidance outline key control objectives and capabilities that
components must successfully achieve to complete each wave (or phase)
of the FIAR strategy for achieving audit readiness. For example, to
successfully complete wave 2 (SBR audit) one of the capabilities that
each component must be able to demonstrate is that it is capable of
performing Fund Balance with Treasury reconciliations at the
transaction level.
The Success of DOD's Current Strategy Is Dependent Upon Effective
Implementation:
Based on what we've seen of the revised FIAR Plan strategy and
methodology to date, we believe the current strategy reflects a
reasonable approach. We are hopeful that a consistent focus provided
through the shared priorities of the FIAR strategy will increase the
department's ability to show incremental progress toward achieving
auditability in the near term, if the strategy is implemented
properly. In the long term, while improved budgetary and asset
accountability information is an important step in demonstrating
incremental progress, it will not be sufficient to achieve full
financial statement auditability. Additional work will be required to
ensure that transactions are recorded and reported in accordance with
generally accepted accounting principles. At this time, it is not
possible to predict when DOD's efforts to achieve audit readiness will
be successful. The department continues to face significant challenges
in providing and sustaining the leadership and oversight needed to
ensure that improvement efforts, including ERP implementation efforts,
result in the sustained improvements in process, control, and system
capabilities necessary to transform financial management operations.
We will continue to monitor DOD's progress in addressing its financial
management weaknesses and transforming its business operations. As
part of this effort, we plan to assess implementation of DOD's FIAR
strategy and guidance, as part of our review of the military
departments' financial improvement plans.
GAO supports DOD's current approach of prioritizing efforts, focusing
first on information management views as most important in supporting
its operations, to demonstrate incremental progress to addressing
weaknesses and achieving audit readiness. There are advantages to this
approach, including building commitment and support throughout the
department and the potential to obtain preliminary assessments on the
effectiveness of current processes and controls and identify potential
issues that may adversely affect subsequent waves. For example,
testing expenditures in wave 2 will also touch on property
accountability issues, as DOD makes significant expenditures for
property. Identifying and resolving potential issues related to
expenditures for property in wave 2 will assist the department as it
enters subsequent waves dealing with its ability to reliably and
completely identify, aggregate, and account for the cost of the assets
it acquires through various acquisition and construction programs.
We also support efforts to first address weaknesses in the
department's ability to timely, reliably, and completely record the
cost of assets as they are acquired over efforts to value legacy
assets. Prior efforts to achieve auditability of DOD's mission assets
failed, in large part, because these efforts were focused primarily on
deriving values for financial statement reporting and not on assessing
and addressing the underlying weaknesses that impaired the
department's ability to reliably identify, aggregate, and account for
current transactions affecting these assets. GAO is willing to work
with the department to revisit the question of how DOD reports assets
in its financial statements to address unique aspects of military
assets not currently reflected in traditional financial reporting
models.
Developing sound plans and a methodology and getting leaders and
organizations in place is only a start. Consistent with our previous
reports regarding the department's CMO positions, including the CMO,
Deputy CMO and military department CMOs,[Footnote 26] and our May 2009
recommendations to improve DOD's FIAR Plan as a strategic and
management tool for addressing financial management weaknesses and
achieving and sustaining audit readiness,[Footnote 27] DOD needs to
define specific roles and responsibilities--including when and how the
CMO and military department CMOs and other leaders are expected to
become involved in problem resolution or efforts to ensure cross-
functional area commitment and support to financial management
improvement efforts; effectively execute its plans; gauge actual
progress against goals; strengthen accountability; and make
adjustments as needed. In response to our report, DOD expanded its
FIAR governance framework to include the CMOs. While expansion of the
FIAR governance framework to include the CMOs is also encouraging, the
specific roles and responsibilities of these important leaders have
not yet been fully defined. As acknowledged by DOD officials,
sustained and active involvement of the CMOs and other senior leaders
is critical in enabling a process by which DOD can more timely
identify and address cross-functional issues and ensure that other
business functions, such as acquisition and logistics, fully
acknowledge and are held accountable for their roles and
responsibilities in achieving the department's financial management
improvement goals and audit readiness.
Sustained and active leadership and effective oversight and monitoring
at both the department and component levels are critical to ensuring
accountability for progress and targeting resources in a manner that
results in sustained improvements in the reliability of data for use
in supporting and reporting on operations. As part of GAO's prior work
pertaining to DOD's key ERP implementation efforts and the FIAR Plan,
we have seen a lack of focus on developing and using interim
performance measures to measure progress and the impact of actions
taken. For example, our review of DOD's ERP implementation efforts,
which we plan to report on in October 2010, found that DOD has not yet
defined success for ERP implementation in the context of business
operations and in a way that is measurable. In May 2009 we reported
[Footnote 28] that the FIAR Plan does not use clear results-oriented
metrics to measure and report corrective actions and accomplishments
in a manner that clearly demonstrates how they contribute individually
or collectively to addressing a defined weakness, providing a specific
capability, or achieving a FIAR goal. To its credit, DOD has taken
action to begin defining results-oriented FIAR metrics it intends to
use to provide visibility of component-level progress in assessment
and testing and remediation activities, including progress in
identifying and addressing supporting documentation issues. We have
not yet had an opportunity to assess implementation of these metrics
or their usefulness in monitoring and redirecting actions.
In the past, DOD has had many initiatives and plans that failed due to
a lack of sustained leadership focus and effective oversight and
monitoring. Without sustained leadership focus and effective oversight
and monitoring, DOD's current efforts to achieve audit readiness by a
defined date are at risk of following the path of the department's
prior efforts and fall short of obtaining sustained substantial
improvements in DOD's financial management operations and capabilities
or achieving validation through independent audits.
Effective Implementation of Business Systems Is Essential to Improving
and Sustaining DOD Financial Management and Related Business
Operations:
DOD officials have said that successful implementation of ERPs is key
to resolving the long-standing weaknesses in the department's business
operations in areas such as business transformation, financial
management, and supply chain management,[Footnote 29] and improving
the department's capability to provide DOD management and Congress
with accurate and reliable information on the results of DOD's
operations. For example in 2010, we reported[Footnote 30] that the
Army Budget Office lacked an adequate funds control process to provide
it with ongoing assurance that obligations and expenditures do not
exceed funds available in the Military Personnel, Army (MPA)
appropriation. These weaknesses resulted in a shortfall of $200
million in 2008. Army Budget Office personnel explained that they rely
on estimated obligations, rather than actual data from program
managers, to record the initial obligation or adjust the estimated
obligation due to inadequate financial management systems.
DOD has identified 10 ERPs,[Footnote 31] 1 of which has been fully
implemented,[Footnote 32] as essential to its efforts to transform its
business operations. Appendix II contains a description of each of the
remaining 9 ERPs currently being implemented within the department.
According to DOD, as of December 2009, it had invested approximately
$5.8 billion to develop and implement these ERPs and will invest
additional billions before the remaining 9 ERPs are fully implemented.
The department has noted that the successful implementation of these
10 ERPs will replace over 500 legacy systems that reportedly cost
hundreds of millions of dollars to operate annually.
However, our prior reviews of several ERPs have found that the
department has not effectively employed acquisition management
controls or delivered the promised capabilities on time and within
budget.[Footnote 33] More specifically, significant leadership and
oversight challenges, as illustrated by the Logistics Modernization
Program (LMP) example discussed appendix I, have hindered the
department's efforts to implement these systems on schedule, within
cost, and with the intended capabilities. Based upon the information
provided by the program management offices (PMOs), six of the ERPs
have experienced schedule slippages, as shown in table 1, based on
comparing the estimated date that each program was originally
scheduled to achieve full deployment[Footnote 34] to the full
deployment date as of December 2009. For the remaining three ERPs, the
full deployment date has either remained unchanged or has not been
established. The GFEBS PMO noted that the acquisition program baseline
approved in November 2008, established a full deployment date in
fiscal year 2011 and that date remains unchanged. Additionally,
according to the GCSS-Army PMO a full deployment date has not been
established for this effort. The PMO noted that a full deployment date
will not be established for the program until a full deployment
decision has been approved by the department. A specific timeframe has
not been established for when the decision will be made. Further, in
the case of DAI, the original full deployment date was scheduled for
fiscal year 2012, but the PMO is in the process of reevaluating the
date and a new date has not yet been established.
Table 1: Reported Full Deployment Schedule Slippage for Each ERP as of
December 31, 2009:
Army:
Component/system name: General Fund Enterprise Business System (GFEBS);
Originally scheduled fiscal year for full deployment: 2011;
Actual or latest estimated fiscal year for full deployment: 2011;
Schedule slippage: None.
Component/system name: Global Combat Support System-Army (GCSS-Army);
Originally scheduled fiscal year for full deployment: [A];
Actual or latest estimated fiscal year for full deployment: [A];
Schedule slippage: Not known.
Component/system name: Logistics Modernization Program (LMP);
Originally scheduled fiscal year for full deployment: 2005;
Actual or latest estimated fiscal year for full deployment: 2011;
Schedule slippage: 6 years.
Navy:
Component/system name: Navy ERP;
Originally scheduled fiscal year for full deployment: 2011;
Actual or latest estimated fiscal year for full deployment: 2013;
Schedule slippage: 2 years.
Component/system name: Global Combat Support System-Marine Corps (GCSS-
MC);
Originally scheduled fiscal year for full deployment: 2010;
Actual or latest estimated fiscal year for full deployment: 2013;
Schedule slippage: 3 years[B].
Air Force:
Component/system name: Defense Enterprise Accounting and Management
System (DEAMS);
Originally scheduled fiscal year for full deployment: 2014;
Actual or latest estimated fiscal year for full deployment: 2017;
Schedule slippage: 3 years.
Component/system name: Expeditionary Combat Support System (ECSS);
Originally scheduled fiscal year for full deployment: 2012;
Actual or latest estimated fiscal year for full deployment: 2016;
Schedule slippage: 4 years.
DOD:
Component/system name: Service Specific Integrated Personnel and Pay
Systems;
Originally scheduled fiscal year for full deployment: 2006;
Actual or latest estimated fiscal year for full deployment: Army--2014;
Navy--2017; Air Force--2018;
Schedule slippage: 12 years[C].
Component/system name: Defense Agencies Initiative (DAI);
Originally scheduled fiscal year for full deployment: 2012;
Actual or latest estimated fiscal year for full deployment: [D];
Schedule slippage: Not known.
Source: DOD program management offices.
[A] The program management office (PMO) has not yet determined the
full deployment date, although the program was initiated in December
2003.
[B] The PMO stated that the estimated full deployment date is only for
phase 1. The full deployment date for the entire program has not yet
been determined.
[C] Originally this ERP was referred to as the Defense Integrated
Military Human Resources System (DIMHRS) and was intended to provide a
joint, integrated, standardized personnel/pay system for all military
personnel departmentwide. The original full deployment date represents
the estimated date for DIMHRS. As previously discussed, each military
service is now responsible for developing its own integrated personnel
and pay system.
[D] As of December 2009, the DAI PMO had not determined the revised
full deployment date.
[End of table]
Prior work by GAO and the U.S. Army Test and Evaluation Command found
that delays in implementing the ERPs have occurred, in part, due to
inadequate requirements management and system testing, and data
quality issues.[Footnote 35] These delays have contributed not only to
increased implementation costs in at least five of the nine ERPS, as
shown in table 2, they have also resulted in DOD having to fund the
operation and maintenance of the legacy systems longer than
anticipated, thereby reducing funds that could be used for other DOD
priorities.
Table 2: Reported Original and Current Life-Cycle Cost Estimate for
Each ERP as of December 31, 2009 (dollars in millions):
Army:
Component/system name: GFEBS;
Original life cycle cost estimate: $1,354;
Current life cycle cost estimate: $1,337;
Reported cost increase: $(17).
Component/system name: GCSS-Army;
Original life cycle cost estimate: $3,900;
Current life cycle cost estimate: $3,900;
Reported cost increase: 0.
Component/system name: LMP;
Original life cycle cost estimate: $2,630;
Current life cycle cost estimate: $2,630[A];
Reported cost increase: 0.
Navy:
Component/system name: Navy ERP;
Original life cycle cost estimate: $1,870;
Current life cycle cost estimate: $2,400;
Reported cost increase: $530.
Component/system name: GCSS-MC;
Original life cycle cost estimate: $126;
Current life cycle cost estimate: $934;
Reported cost increase: $808[B].
Air Force:
Component/system name: DEAMS;
Original life cycle cost estimate: $1,100;
Current life cycle cost estimate: $2,048;
Reported cost increase: $948.
Component/system name: ECSS;
Original life cycle cost estimate: $3,000;
Current life cycle cost estimate: $5,200;
Reported cost increase: $2,200[C].
DOD:
Component/system name: Service Specific Integrated Personnel and Pay
Systems;
Original life cycle cost estimate: $577[D];
Current life cycle cost estimate: Army[D]; Navy-$1.3; Air Force-$1.7;
Reported cost increase: At least $2,423.
Component/system name: DAI;
Original life cycle cost estimate: $209;
Current life cycle cost estimate: [E];
Reported cost increase: Not applicable.
Source: DOD program management offices.
[A] At the time LMP was designated as a major automated information
systems (MAIS) program in December 2007, it was required to comply
with the DOD guidance for MAIS programs. This guidance requires, among
other things, that a MAIS program have a completed and approved
acquisition program baseline--the baseline description of the program,
including the life-cycle cost estimate--prior to Milestone B approval.
The $2.6 billion is the only life cycle cost estimate that has been
developed for the program.
[B] The current life-cycle cost estimate for GCSS-MC is for phase one.
The remaining two phases will have separate baselines.
[C] Originally, ECSS was to be implemented in three phases, but now,
it will be implemented in four phases.
[D] The original life-cycle cost estimate represents the estimate for
DIMHRS. While the Navy and Air Force have estimated their respective
life-cycle cost estimate, the Army is in the process of completing its
life-cycle cost estimate.
[E] As of December 2009, the life-cycle cost estimate for DAI had not
been finalized. According to the PMO, the life cycle cost estimate is
expected to be approved at Milestone B in fiscal year 2011.
[End of table]
Effective and sustained leadership and oversight of the department's
ERP implementations is needed to ensure that these important
initiatives are implemented on schedule, within budget, and result in
the integrated capabilities needed to transform the department's
financial management and related business operations.
Closing Comments:
In closing, I am encouraged by continuing congressional oversight of
DOD's financial management improvement efforts and the commitment
DOD's leaders have expressed to improving the department's financial
management and achieving financial statement audit readiness.
For instance, we have seen positive short-term progress on the part of
DOD in moving forward. In its May 2010 FIAR status report, DOD
reported actions it had taken in response to the 2010 NDAA and our
prior recommendations to enhance effectiveness of the FIAR Plan as a
strategic plan and management tool for guiding, monitoring, and
reporting on the department's efforts to resolve its financial
management weaknesses and achieve audit readiness. The department has
expanded the FIAR governance body to include the Chief Management
Officer, issued guidance to aid DOD components in their efforts to
address their financial management weaknesses and achieve audit
readiness, and standardized component financial improvement plans to
facilitate oversight and monitoring, as well as sharing lessons
learned. In addition, DOD has revised its FIAR strategy to focus its
financial management improvement efforts on departmentwide priorities,
first on budgetary information and preparing the department's
Statements of Budgetary Resources for audit and second on
accountability over the department's mission-critical assets as a way
of improving information used by DOD leaders to manage operations and
to more effectively demonstrate incremental progress toward achieving
audit readiness.
Whether promising signs, such as shared priorities and approaches,
develop into sustained progress will ultimately depend on DOD
leadership and oversight to help achieve successful implementation.
The expanded FIAR governance framework, including the CMOs, is a
start; but their specific roles and responsibilities toward the
department's financial management improvement efforts still need to be
defined. Importantly, sustained and effective leadership, oversight,
and accountability at the department and component levels will be
needed in order to help ensure that DOD's current efforts to achieve
auditability by a defined date don't follow the path of the
department's prior efforts and fall short of obtaining sustained
substantial improvement.
The revised FIAR strategy is still in the early stages of
implementation, and DOD has a long way and many long-standing
challenges to overcome, particularly in regard to active and sustained
leadership and oversight, before its military components and the
department are fully auditable, and financial management is no longer
considered high risk. However, the department is heading in the right
direction. Some of the most difficult challenges ahead lie in
effectively implementing the department's strategy, including
successful implementation of ERP systems and integration of financial
management improvement efforts with other DOD initiatives. We will be
issuing a report on DOD's business system modernization efforts in
October 2010 that discusses in greater detail the cost, schedule, and
other issues that have hindered the success of important efforts.
GAO will continue to monitor progress of the department's financial
management improvement efforts and provide feedback on the status of
DOD's financial management improvement efforts. We currently have work
in progress to assess implementation of the department's FIAR strategy
through ongoing or recently initiated engagements related to (1) the
U.S. Marine Corps' (USMC) efforts to achieve an audit opinion on its
Statement of Budgetary Resources, which regardless of its success
should provide lessons learned that can be shared with other
components, (2) the military departments' implementation of the FIAR
strategy and guidance, and (3) the department's efforts to develop and
implement ERPs. In addition, we will continue our oversight and
monitoring of DOD's financial statement audits, including the Army
Corps of Engineers and DOD consolidated financial statements.
Mr. Chairman and Ranking Member McCain, this concludes my prepared
statement. I would be pleased to respond to any questions that you or
other members of the Subcommittee may have at this time.
For further information regarding this testimony, please contact Asif
A. Khan, (202) 512-9095 or khana@gao.gov. Key contributors to this
testimony include J. Christopher Martin, Senior-Level Technologist;
Evelyn Logue, Assistant Director; Darby Smith, Assistant Director;
Paul Foderaro, Assistant Director; Gayle Fischer, Assistant Director;
F. Abe Dymond, Assistant General Counsel; Beatrice Alff; Maxine
Hattery; Crystal Lazcano; and Omar Torres.
[End of section]
Appendix I: Impact of Financial Management and Related Weaknesses on
DOD Operations:
Despite years of improvement efforts since 2002, DOD has annually
reported to Congress that the department is unable to provide
reasonable assurance that the information reported in its financial
statements is reliable due to long-standing weaknesses in its
financial management and related business processes, controls, and
systems.[Footnote 36] Importantly, these weaknesses not only affect
the reliability of the department's financial reports, as illustrated
in the following examples, they also adversely affect the department's
ability to assess resource requirements; control costs; ensure basic
accountability; anticipate future costs and claims on the budget;
measure performance; maintain funds control; prevent fraud waste,
abuse, and mismanagement; and address pressing management issues, as
the following examples illustrate,
* The Army Budget Office lacks an adequate funds control process to
provide it with ongoing assurance that obligations and expenditures do
not exceed funds available in the Military Personnel, Army (MPA)
appropriation.[Footnote 37] In June 2010, we reviewed Army obligation
and expenditure reports pertaining to Army's fiscal year 2008 MPA
appropriation and confirmed[Footnote 38] that the Army had violated
the Antideficiency Act,[Footnote 39] as evidenced by the Army's need
to transfer $200 million from the Army working capital fund to cover
the shortfall.[Footnote 40] This shortfall stemmed, in part, from a
lack of reliable financial information on enlistment and reenlistment
contracts, which provide specified bonuses to service members. Army
Budget personnel explained that they rely on estimated obligations,
rather than actual data from program managers, to record the initial
obligation or adjust the estimated obligation due to inadequate
financial management systems. Without adequate processes, controls,
and systems to establish and maintain effective funds control, the
Army's ability to prevent, identify, and report potential
Antideficiency Act violations is impaired.
* While DOD has invested over a trillion of dollars to acquire weapon
systems, also referred to as military equipment,[Footnote 41] the
department continues to lack the processes and system capabilities to
reliably identify, aggregate and report the full cost of its
investment in these assets. We reported this as an issue to the Air
Force over 20 years ago.[Footnote 42] In July 2010, we reported
[Footnote 43] that although DOD and the military departments have
efforts underway to begin addressing these financial management
weaknesses, DOD officials acknowledged that additional actions were
needed that will require the support of other business areas beyond
the financial community, before they will be fully addressed. Without
timely, reliable, and useful financial information on the full cost
[Footnote 44] associated with acquiring assets, both DOD management
and Congress lack key information needed for use in effective decision
making, such as determining how to allocate resources to programs or
evaluating program performance to help strengthen oversight and
accountability.
* The department's ability to identify, aggregate, and use financial
management information to develop plans for managing and controlling
operating and support costs for major weapons systems is limited. DOD
spends billions of dollars each year to sustain its weapon systems.
These operating and support (O&S) costs can account for a significant
portion of a weapon's system's total life-cycle costs and include
costs for, among other things, repair parts, maintenance, and contract
services. However, in July 2010 we reported that the department lacked
key information needed to effectively manage and reduce O&S costs for
most of the weapon systems we reviewed--including life-cycle O&S cost
estimates and consistent and complete historical data on actual O&S
costs.[Footnote 45] Specifically, we found that the military
departments lacked (1) life-cycle O&S cost estimates developed at the
production milestone for five of the seven aviation systems we
reviewed and (2) complete data on actual O&S costs.[Footnote 46]
Without historical life-cycle O&S cost estimates and complete data on
actual O&S costs, DOD officials lack important data for analyzing the
rate of O&S cost growth for major weapon systems, identifying cost
drivers, and developing plans for managing and controlling these costs.
* The department and military services continue to have difficultly
effectively deploying business systems, on time, within budget, and
with the functionality intended to significantly transform business
operations. For example, in April 2010, we reported that the
management processes the Army established prior to the second
deployment of its Logistics Modernization Program (LMP)[Footnote 47]
were not effective in managing and overseeing the second deployment of
this system.[Footnote 48] Specifically, we found that due to data
quality issues, the Army was unable to ensure that the data used by
LMP were of sufficient quality to enable the Corpus Christi and
Letterkenny Army depots to perform their day-to-day missions after LMP
became operational at these locations. For example, LMP could not
automatically identify the materials needed to support repairs and
ensure that parts would be available in time to carry out the repairs.
Labor rates were also missing for some stages of repair, thereby
precluding LMP from computing labor costs for the repair projects. As
a result of these data issues, manual work-around processes had to be
developed and used in order for the depots to accomplish their repair
missions. Furthermore, the performance measures the Army used to
assess implementation failed to detect that manual work-arounds rather
than LMP were used to support repair missions immediately following
LMP's implementation at the depots. Without adequate performance
measures to evaluate how well these systems are accomplishing their
desired goals, DOD decision makers including program managers do not
have all the information they need to evaluate their systems
investments to determine the extent to which individual programs are
helping DOD achieve business transformation, including financial
management, and whether additional remediation is needed.
* In addition to the DOD IG reports on internal controls and
compliance with laws and regulations included in DOD and military
department annual financial reports, the DOD IG has other reports
highlighting a variety of internal controls weaknesses[Footnote 49]in
the department's financial management that affect DOD operations
[Footnote 50] as the following illustrate.
- In January 2010, the DOD IG evaluated the internal controls over the
USMC transactions processed through the Deployable Disbursing System
(DDS)[Footnote 51] and determined that USMC did not maintain adequate
internal controls to ensure the reliability of the data processed.
[Footnote 52] Specifically, the DOD IG found that USMC disbursing
personnel had not complied with the statute when authorizing vouchers
for payment or segregated certifying duties from disbursing when
making payments. Further, the DOD IG found that USMC personnel had
circumvented internal controls restricting access to DDS information.
As a result, the DOD IG concluded that USMC was at risk of incurring
unauthorized, duplicate, and improper payments.
- In June 2009, the DOD IG reported that the Army did not have
adequate internal controls over accountability for approximately
$169.6 million of government-furnished property at two Army locations
reviewed.[Footnote 53] Specifically, the DOD IG found that Army
personnel had not ensured the proper recording of transfers of
property accountability to contractors, physical inventories and
reconciliation, or the identification of government property at these
locations. As a result, the DOD IG concluded that the Army's property
accountability databases at these two locations were misstated and
these two Army locations were at risk of unauthorized use, destruction
or loss of government property.
[End of section]
Appendix II: Description of Key Enterprise Resource Planning Efforts:
The department stated that implementation of the following nine ERPs
are critical to transforming the department's business operations and
addressing some of its long-standing weaknesses. A brief description
of each ERP is presented below.
The General Fund Enterprise Business System (GFEBS) is intended to
support the Army's standardized financial management and accounting
practices for the Army's general fund,[Footnote 54] with the exception
of that related to the Army Corps of Engineers which will continue to
use its existing financial system, the Corps of Engineers Financial
Management System.[Footnote 55] GFEBS will allow the Army to share
financial, asset and accounting data across the active Army, the Army
National Guard, and the Army Reserve. The Army estimates that when
fully implemented, GFEBS will be used to control and account for about
$140 billion in spending.
The Global Combat Support System-Army (GCSS-Army) is expected to
integrate multiple logistics functions by replacing numerous legacy
systems and interfaces. The system will provide tactical units with a
common authoritative source for financial and related non-financial
data, such as information related to maintenance and transportation of
equipment. The system is also intended to provide asset visibility for
accountable items. GCSS-Army will manage over $49 billion in annual
spending by the active Army, National Guard, and the Army Reserve.
The Logistics Modernization Program (LMP) is intended to provide order
fulfillment, demand and supply planning, procurement, asset
management, material maintenance, and financial management
capabilities for the Army's working capital fund. The Army has
estimated that LMP will be populated with 6 million Army-managed
inventory items valued at about $40 billion when it is fully
implemented.
The Navy Enterprise Resource Planning System (Navy ERP) is intended to
standardize the acquisition, financial, program management,
maintenance, plant and wholesale supply, and workforce management
capabilities at six Navy commands.[Footnote 56] Once it is fully
deployed, the Navy estimates that the system will control and account
for approximately $71 billion (50 percent), of the Navy's estimated
appropriated funds--after excluding the appropriated funds for the
Marine Corps and military personnel and pay.
The Global Combat Support System-Marine Corps (GCSS-MC) is intended to
provide the deployed warfighter enhanced capabilities in the areas of
warehousing, distribution, logistical planning, depot maintenance, and
improved asset visibility. According to the PMO, once the system is
fully implemented, it will control and account for approximately $1.2
billion of inventory.
The Defense Enterprise Accounting and Management System (DEAMS) is
intended to provide the Air Force the entire spectrum of financial
management capabilities, including collections, commitments and
obligations, cost accounting, general ledger, funds control, receipts
and acceptance, accounts payable and disbursement, billing, and
financial reporting for the general fund. According to Air Force
officials, when DEAMS is fully operational, it is expected to maintain
control and accountability for about $160 billion.
The Expeditionary Combat Support System (ECSS) is intended to provide
the Air Force a single, integrated logistics system--including
transportation, supply, maintenance and repair, engineering and
acquisition--for both the Air Force's general and working capital
funds. Additionally, ECSS is intended to provide the financial
management and accounting functions for the Air Force's working
capital fund operations. When fully implemented, ECSS is expected to
control and account for about $36 billion of inventory.
The Service Specific Integrated Personnel and Pay Systems are intended
to provide the military departments an integrated personnel and pay
system.[Footnote 57]
Defense Agencies Initiative (DAI) is intended to modernize the defense
agencies' financial management processes by streamlining financial
management capabilities and transforming the budget, finance, and
accounting operations. When DAI is fully implemented, it is expected
to have the capability to control and account for all appropriated,
working capital and revolving funds at the defense agencies
implementing the system.
[End of section]
Footnotes:
[1] The reported amounts are not audited. In November 2009, the DOD
Inspector General reported that because of long-standing internal
control weaknesses, DOD's annual financial statements, which included
these reported amounts, were not accurate and reliable.
[2] DOD excludes from its business systems those designated as
national security systems under section 2222 (j) of Title 10, United
States Code. National security systems are intelligence systems,
cryptologic activities related to national security, military command
and control systems, and equipment that is an integral part of a
weapon or weapons system or is critical to the direct fulfillment of
military or intelligence missions.
[3] DOD's auditor have reported material financial management
weaknesses in the following areas: (1) Financial Management Systems,
(2) Fund Balance with Treasury, (3) Accounts Receivable, (4)
Inventory, (5) Operating Materials and Supplies, (6) General Property,
Plant, and Equipment, (7) Government-Furnished Material and Contractor-
Acquired Material, (8) Accounts Payable, (9) Environment Liabilities,
(10) Statement of Net Cost, (11) Intragovernmental Eliminations, (12)
Other Accounting Entries, and (13) Reconciliation of Net Cost of
Operations to Budget.
[4] An ERP solution is an automated system using commercial off-the-
shelf (COTS) software consisting of multiple, integrated functional
modules that perform a variety of business-related tasks such as
general ledger accounting, payroll, and supply chain management.
[5] GAO, Financial Management: Achieving Financial Statement
Auditability in the Department of Defense, [hyperlink,
http://www.gao.gov/products/GAO-09-373] (Washington, D.C.: May 6,
2009), Department of Defense: Additional Actions Needed to Improve
Financial Management of Military Equipment, [hyperlink,
http://www.gao.gov/products/GAO-10-695] (Washington, D.C. July 26,
2010), Defense Management: DOD Needs Better Information to More
Effectively Manage and Reduce Operating and Support Costs of Major
Weapon Systems, [hyperlink, http://www.gao.gov/products/GAO-10-717]
(Washington, D.C.: July 20, 2010), Business Systems Modernization:
Scope and Content of DOD's Congressional Report and Executive
Oversight of Investments Need to Improve, [hyperlink,
http://www.gao.gov/products/GAO-10-663] (Washington, D.C.: May 24,
2010), Defense Logistics: Actions Needed to Improve Implementation of
the Army Logistics Modernization Program, [hyperlink,
http://www.gao.gov/products/GAO-10-461] (Washington, D.C.: Apr. 30,
2010), DOD Business Transformation: Air Force's Current Approach
Increases Risk That Asset Visibility Goals and Transformation
Priorities Will Not Be Achieved, [hyperlink,
http://www.gao.gov/products/GAO-08-866] (Washington, D.C.: Aug. 8,
2008), DOD Business Systems Modernization: Important Management
Controls Being Implemented on Major Navy Program, but Improvements
Needed in Key Areas, [hyperlink,
http://www.gao.gov/products/GAO-08-896] (Washington, D.C.: Sept. 8,
2008), and DOD Business Transformation: Lack of an Integrated Strategy
Puts the Army's Asset Visibility System Investments at Risk,
[hyperlink, http://www.gao.gov/products/GAO-07-860] (Washington, D.C.:
July 27, 2007).
[6] Discretionary spending refers to outlays from budget authority
that is provided in and controlled by appropriation acts, unlike
mandatory spending, such as Medicare and other entitlement programs.
[7] DOD bears responsibility, in whole or in part, for 15 of the 30
federal programs or activities that GAO has identified as being at
high risk of waste, fraud, abuse, and mismanagement. The eight
specific DOD high-risk areas are (1) approach to business
transformation; (2) business systems modernization; (3) contract
management; (4) financial management; (5) personnel security clearance
program; (6) supply chain management; (7) support infrastructure
management; and (8) weapon systems acquisition. The seven
governmentwide high risk areas that include DOD are: (1) disability
programs; (2) interagency contracting; (3) information systems and
critical infrastructure; (4) information sharing for homeland
security; (5) human capital; (6) real property; and (7) ensuring the
effective protection of technologies critical to U.S. national
security interests.
[8] Support infrastructure includes categories, such as force
installation, central logistics, the defense health program, and
central training.
[9] These statutes include the Chief Financial Officers Act of 1990,
the Government Management Reform Act of 1994, the Federal Financial
Management Improvement Act of 1996, and various annual authorization
and appropriations act provisions.
[10] DOD's Strategic Management Plan is intended to provide an
executive overview of the department's overall strategic planning and
management framework, and establishes DOD's priorities for business
operations and improvement efforts.
[11] An enterprise architecture is a modernization blueprint of an
organization or a functional or mission area, which together with an
enterprise transition plan, provides a road map for moving between the
current state of operations to the intended state.
[12] The limitation regarding the authority to obligate or expend
funds does not apply to activities directed at assessing the adequacy
of internal controls and remediating any inadequacy identified
pursuant to such an assessment.
[13] DOD refers to this annual report as The Report to Congress on the
Reliability of Department of Defense Financial Statements.
[14] GAO, Defense Business Transformation: Status of Department of
Defense Efforts to Develop a Management Approach to Guide Business
Transformation, [hyperlink, http://www.gao.gov/products/GAO-09-272R]
(Washington, D.C.: Jan. 9, 2009), Defense Business Transformation:
Sustaining Progress Requires Continuity of Leadership and an
Integrated Approach, [hyperlink,
http://www.gao.gov/products/GAO-08-462T] (Washington, D.C.: Feb. 7,
2008), and Defense Business Transformation: Achieving Success Requires
a Chief Management Officer to Provide Focus and Sustained Leadership,
[hyperlink, http://www.gao.gov/products/GAO-07-1072] (Washington,
D.C.: Sept. 5, 2007).
[15] Pub. L. No. 110-181, §904, 122 Stat. 3, 273 (Jan 28, 2008).
[16] National Defense Authorization Act for Fiscal Year 2010, Pub. L.
No. 111-84, § 1003, 123 Stat. 2190, 2439 (Oct. 28, 2009).
[17] According to the DOD Comptroller's August 2009 memorandum,
mission-critical assets include military and general equipment, real
property, inventory, and operating materials and supplies.
[18] [hyperlink, http://www.gao.gov/products/GAO-09-373].
[19] Department of Defense Inspector General, Summary of DOD Office of
the Inspector General Audits of Financial Management, D-2010-002
(Arlington, Va: Oct. 19, 2009) and Independent Auditor's Report on the
DOD Agency-Wide FY 2009 and FY 2008 Basic Financial Statements, D-2010-
016 (Arlington, Va: Nov. 12, 2009).
[20] [hyperlink, http://www.gao.gov/products/GAO-09-373].
[21] The Statement of Budgetary Resources (SBR) provides information
about how budgetary resources were made available as well as their
status at the end of the period. Information on the SBR such as
budgetary resources, obligations incurred, and outlays should be
reconcilable to the related actual balances reported in the Budget of
the United States Government.
[22] DOD has identified seven key end-to-end business processes:
acquire to retire, hire to retire, procure to pay, order to cash, plan
to stock, environmental liabilities, and budget to report.
[23] The Antideficiency Act generally requires that all appropriations
to DOD be apportioned by the President, who has delegated this
authority to the Office of Management and Budget (OMB), and that all
appropriations, apportionments, and re-apportionments be controlled by
DOD through an OMB approved system of funds control under which DOD
makes allotments or further subdivisions of apportionments, such as
sub-allotments. See 31 U.S.C. § § 1513, 1514.
[24] DOD, Fiscal Year 2010 Financial Improvement and Audit Readiness
(FIAR) Guidance (May 15, 2010).
[25] Internal control is synonymous with management control and covers
all aspects of an agency's operations (programmatic, financial, and
compliance). Internal control comprises the plans, methods, and
procedures used to meet mission goals and objectives and, in doing so,
support performance-based management. Internal control also serves as
the first line of defense in safeguarding assets and preventing and
detecting errors and fraud.
[26] [hyperlink, http://www.gao.gov/products/GAO-09-272R], [hyperlink,
http://www.gao.gov/products/GAO-08-462T], and [hyperlink,
http://www.gao.gov/products/GAO-07-1072].
[27] [hyperlink, http://www.gao.gov/products/GAO-09-373].
[28] [hyperlink, http://www.gao.gov/products/GAO-09-373].
[29] These areas were designated as high risk in 2005, 1995, and 1990,
respectively.
[30] GAO, Department of the Army--The Fiscal Year 2008 Military
Personnel, Army Appropriation and the Antideficiency Act, B-318724
(Washington, D.C.: June 22, 2010).
[31] The 10 ERPs are as follows: Army--General Fund Enterprise
Business System (GFEBS), Global Combat Support System-Army (GCSS-
Army), and Logistics Modernization Program (LMP); Navy--Navy
Enterprise Resource Planning (Navy ERP) and Global Combat Support
System-Marine Corps (GCSS-MC); Air Force--Defense Enterprise
Accounting and Management System (DEAMS) and Expeditionary Combat
Support System (ECSS); Defense--Service Specific Integrated Personnel
and Pay Systems and Defense Agencies Initiative (DAI); and DLA--
Business System Modernization (BSM). According to DOD, BSM was fully
implemented in July 2007.
[32] According to DOD, BSM was fully implemented at DLA in July 2007.
[33] GAO, Defense Logistics: Actions Needed to Improve Implementation
of the Army Logistics Modernization Program, [hyperlink,
http://www.gao.gov/products/GAO-10-461] (Washington, D.C.: Apr. 30,
2010); DOD Business Systems Modernization: Navy Implementing a Number
of Key Management Controls on Enterprise Resource Planning System, but
Improvements Still Needed, [hyperlink,
http://www.gao.gov/products/GAO-09-841] (Washington, D.C.: Sept. 15,
2009); DOD Business Systems Modernization: Important Management
Controls Being Implemented on Major Navy Program, but Improvements
Needed in Key Areas, [hyperlink,
http://www.gao.gov/products/GAO-08-896] (Washington, D.C.: Sept. 8,
2008); DOD Business Transformation: Air Force's Current Approach
Increases Risk That Asset Visibility Goals and Transformation
Priorities Will Not Be Achieved, [hyperlink,
http://www.gao.gov/products/GAO-08-866] (Washington, D.C.: Aug. 8,
2008); DOD Business Systems Modernization: Key Marine Corps System
Acquisition Needs to Be Better Justified, Defined, and Managed,
[hyperlink, http://www.gao.gov/products/GAO-08-822] (Washington, D.C.:
July 28, 2008); and DOD Business Transformation: Lack of an Integrated
Strategy Puts the Army's Asset Visibility System Investments at Risk,
[hyperlink, http://www.gao.gov/products/GAO-07-860] (Washington, D.C.:
July 27, 2007).
[34] Full deployment means with respect to a major automated
information system program, the fielding of an increment of the
program in accordance with the terms of a full deployment decision--
the final decision made by the MDA authorizing an increment of the
program to deploy software for operational use. Pub. L. No. 111-84,
October 28, 2009, the National Defense Authorization Act for Fiscal
Year 2010 directed that the terminology be changed from full
operational capability to full deployment.
[35] GAO, Defense Logistics: Actions Needed to Improve Implementation
of the Army Logistics Modernization Program, [hyperlink,
http://www.gao.gov/products/GAO-10-461] (Washington, D.C.: Apr. 30,
2010); DOD Business Systems Modernization: Navy Implementing a Number
of Key Management Controls on Enterprise Resource Planning System, but
Improvements Still Needed, [hyperlink,
http://www.gao.gov/products/GAO-09-841] (Washington, D.C.: Sept. 15,
2009); DOD Business Systems Modernization: Important Management
Controls Being Implemented on Major Navy Program, but Improvements
Needed in Key Areas, [hyperlink, http://www.gao.gov/products/GAO-08-
896] (Washington, D.C.: Sept. 8, 2008); DOD Business Transformation:
Air Force's Current Approach Increases Risk That Asset Visibility
Goals and Transformation Priorities Will Not Be Achieved, [hyperlink,
http://www.gao.gov/products/GAO-08-866] (Washington, D.C.: Aug. 8,
2008); DOD Business Systems Modernization: Key Marine Corps System
Acquisition Needs to Be Better Justified, Defined, and Managed,
[hyperlink, http://www.gao.gov/products/GAO-08-822] (Washington, D.C.:
July 28, 2008); DOD Business Transformation: Lack of an Integrated
Strategy Puts the Army's Asset Visibility System Investments at Risk,
[hyperlink, http://www.gao.gov/products/GAO-07-860] (Washington, D.C.:
July 27, 2007) and U.S. Army Test and Evaluation Command, Operational
Test Agency Evaluation Report for the General Fund Enterprise Business
System (Alexandria, Va: Dec. 16, 2009).
[36] A life-cycle cost estimate provides an accounting of all
resources and associated cost elements required to develop, produce,
deploy, and sustain a particular program. The life-cycle cost estimate
encompasses all past, present, and future costs for every aspect of
the program, regardless of funding source.
[37] An obligation is a definite commitment that creates a legal
liability of the government for the payment of appropriated funds for
goods and services ordered and received, or a legal duty on the part
of the United States that could mature into a legal liability by
virtue of actions on the part of the other party beyond the control of
the United States. Obligations include, for example, the awarding of
contracts and grants.
[38] GAO, Department of the Army--The Fiscal Year 2008 Military
Personnel, Army Appropriation and the Antideficiency Act, B-318724
(Washington, D.C.: June 22, 2010).
[39] 31 U.S.C. §§ 1341-42, 1349-51, 1511-19. The Antideficiency Act
prohibits any DOD officer or employee from incurring obligations or
making expenditures in excess or in advance of appropriations or
apportionments.
[40] In September 2006, the DOD IG reported a similar factual
situation to the one addressed in GAO's report when it evaluated the
Army's use of its fiscal year 2005 MPA appropriation. See Department
of Defense, Office of the Inspector General, Selected Controls Over
the Military Personnel, Army Appropriation, D-2006-112 (Arlington Va.:
Sept. 22, 2006).
[41] Military equipment are weapons systems that can be used directly
by the Armed Forces to carry out battlefield missions.
[42] GAO, Financial Audit: Air Force Does Not Effectively Account for
Billions of Dollars of Resources, [hyperlink,
http://www.gao.gov/products/GAO/AFMD-90-23] (Washington, D.C.: Feb.
23, 1990).
[43] GAO, Department of Defense: Additional Actions Needed to Improve
Financial Management of Military Equipment, [hyperlink,
http://www.gao.gov/products/GAO-10-695] (Washington, D.C. July 26,
2010).
[44] Full cost is the sum of direct and indirect costs. Direct costs
are costs that can be specifically identified with an output,
including salaries and benefits for employees working directly on the
output, materials, supplies, and costs with facilities and equipment
used exclusively to produce the output. Indirect costs are costs that
are not specifically identifiable with any output and may include
costs for general administration, research and technical support, and
operations and maintenance for buildings and equipment. See Statement
of Federal Financial Accounting Standards (SFFAS) 4, Managerial Cost
Accounting Standards and Concepts (Washington, D.C.: July 31, 1995).
[45] GAO, Defense Management: DOD Needs Better Information and
Guidance to More Effectively Manage and Reduce Operating and Support
Costs of Major Weapon Systems, [hyperlink,
http://www.gao.gov/products/GAO-10-717] (Washington, D.C.: July 20,
2010).
[46] GAO reviewed the following seven major aviation systems: the
Navy's F/A-18E/F; the Air Force's F-22A, B-1B, and F-15E; and the
Army's AH-64D, CH-47D, and UH-60L.
[47] LMP is an Army business system that is intended to replace aging
Army systems than manage inventory and depot repair operations. LMP
was originally scheduled to be completed by 2005, but after the first
deployment in July 2003, the Army delayed fielding because of
significant problems, including data quality and testing issues.
[48] GAO, Defense Logistics: Actions Needed to Improve Implementation
of the Army Logistics Modernization Program, [hyperlink,
http://www.gao.gov/products/GAO-10-461] (Washington, D.C.: Apr. 30,
2010).
[49] DOD auditors have reported material financial management
weaknesses in the following areas: (1) Financial Management Systems;
(2) Fund Balance with Treasury; (3) Account Receivable, (4) Inventory,
(5) Operating Materials and Supplies; (6) General Property, Plant, and
Equipment; (7) Government-Furnished Material and Contractor-Acquired
Material; (8) Accounts Payable; (9) Environment Liabilities; (10)
Statement of Net Cost; (11) Intragovernmental Eliminations, (12) Other
Accounting Entries, and (13) Reconciliation of Net Cost of Operations
to Budget.
[50] See the DOD IG's report on internal controls included in the
annual Department of Defense Financial Reports.
[51] DDS is a system that automates a variety of disbursing office
functions including travel, military, commercial, and miscellaneous
payments; accounts payable; collection processes; and financial
reporting requirements.
[52] DOD Inspector General, Internal Controls Over United States
Marine Corps Commercial and Miscellaneous Payments Processed Through
the Deployable Disbursing System, D-2010-037 (Arlington, Va: Jan. 25,
2010).
[53] DOD Inspector General, Internal Controls Over Government Property
in the Possession of Contractors at Two Army Locations, D-2009-089
(Arlington, Va: June 18, 2009).
[54] The general fund can be defined as the fund into which receipts
are deposited, except those from specific sources required by law to
be deposited into other designated funds and from which appropriations
are made by Congress to carry on the general and ordinary operations
of the government.
[55] According to the GFEBS PMO, once the system is fully operational
the Army will assess the feasibility of GFEBS becoming the system of
record for the Corps of Engineers.
[56] The six Navy commands are the Naval Air Systems Command, the
Naval Supply Systems Command, the Space and Naval Warfare Systems
Command, the Naval Sea Systems Command, the Strategic Systems Program,
and the Office of Naval Research and Strategic Systems Planning.
[57] The military services integrated personnel and pay systems are
replacement systems for the Defense Integrated Military Human
Resources System that was intended to provide a joint, integrated,
standardized personnel and pay system for all military personnel.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
