DOD Financial Management
Numerous Challenges Must Be Addressed to Achieve Auditability Gao ID: GAO-11-864T July 28, 2011In Process
DOD financial management has been on GAO's high-risk list since 1995 and, despite several reform initiatives, remains on the list today. Pervasive deficiencies in financial management processes, systems, and controls, and the resulting lack of data reliability, continue to impair management's ability to assess the resources needed for DOD operations; track and control costs; ensure basic accountability; anticipate future costs; measure performance; maintain funds control; and reduce the risk of loss from fraud, waste, and abuse. DOD spends billions of dollars each year to maintain key business operations intended to support the warfighter, including systems and processes related to the management of contracts, finances, supply chain, support infrastructure, and weapon systems acquisition. These operations are directly impacted by the problems in financial management. In addition, the long-standing financial management weaknesses have precluded DOD from being able to undergo the scrutiny of a financial statement audit. DOD's past strategies for improving financial management were ineffective, but recent initiatives are encouraging. In 2005, DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan for improving financial management and reporting. In 2009, the DOD Comptroller directed that FIAR efforts focus on financial information in two priority areas: budget and mission-critical assets. The FIAR Plan also has a new phased approach that comprises five waves of concerted improvement activities. The first three waves focus on the two priority areas, and the last two on working toward full auditability. The plan is being implemented largely through the Army, Navy, and Air Force military departments and the Defense Logistics Agency, lending increased importance to the committed leadership in these components. Improving the department's financial management operations and thereby providing DOD management and Congress more accurate and reliable information on the results of its business operations will not be an easy task. It is critical that current initiatives related to improving the efficiency and effectiveness of financial management that have the support of the DOD's Deputy Chief Management Officer and Comptroller continue with sustained leadership and monitoring. Absent continued momentum and necessary future investments, current initiatives may falter. Below are some of the key challenges that DOD must address for its financial management to improve to the point where DOD is able to produce auditable financial statements: (1) committed and sustained leadership, (2) effective plan to correct internal control weaknesses, (3) competent financial management workforce, (4) accountability and effective oversight, (5) well-defined enterprise architecture, and (6) successful implementation of the enterprise resource planning systems.
GAO-11-864T, DOD Financial Management: Numerous Challenges Must Be Addressed to Achieve Auditability
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United States Government Accountability Office:
GAO:
Testimony:
Before the Panel on DOD Financial Management, Committee on Armed
Services, U.S. House of Representatives:
For Release on Delivery:
Expected at 8:00 a.m. EDT:
Thursday July 28, 2011:
DOD Financial Management:
Numerous Challenges Must Be Addressed to Achieve Auditability:
Statement of Asif A. Khan, Director:
Financial Management and Assurance:
GAO-11-864T:
GAO Highlights:
Highlights of GAO-11-864T, a testimony before the Panel on DOD
Financial Management, Committee on Armed Services, U.S. House of
Representatives.
Why GAO Did This Study:
As one of the largest and most complex organizations in the world, the
Department of Defense (DOD) faces many challenges in resolving serious
problems in its financial management and related business operations
and systems. 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.
Over the years, DOD has initiated numerous efforts to improve the
department‘s financial management operations and achieve an
unqualified (clean) opinion on the reliability of its reported
financial information. These efforts have fallen short of sustained
improvement in financial management or financial statement
auditability.
The Panel requested that GAO provide its perspective on the status of
DOD‘s financial management weaknesses and its efforts to resolve them;
the challenges DOD continues to face in improving its financial
management and operations; and the status of its efforts to implement
automated business systems as a critical element of DOD‘s Financial
Improvement and Audit Readiness strategy.
What GAO Found:
DOD financial management has been on GAO‘s high-risk list since 1995
and, despite several reform initiatives, remains on the list today.
Pervasive deficiencies in financial management processes, systems, and
controls, and the resulting lack of data reliability, continue to
impair management‘s ability to assess the resources needed for DOD
operations; track and control costs; ensure basic accountability;
anticipate future costs; measure performance; maintain funds control;
and reduce the risk of loss from fraud, waste, and abuse. DOD spends
billions of dollars each year to maintain key business operations
intended to support the warfighter, including systems and processes
related to the management of contracts, finances, supply chain,
support infrastructure, and weapon systems acquisition. These
operations are directly impacted by the problems in financial
management. In addition, the long-standing financial management
weaknesses have precluded DOD from being able to undergo the scrutiny
of a financial statement audit.
DOD‘s past strategies for improving financial management were
ineffective, but recent initiatives are encouraging. In 2005, DOD
issued its Financial Improvement and Audit Readiness (FIAR) Plan for
improving financial management and reporting. In 2009, the DOD
Comptroller directed that FIAR efforts focus on financial information
in two priority areas: budget and mission-critical assets. The FIAR
Plan also has a new phased approach that comprises five waves of
concerted improvement activities. The first three waves focus on the
two priority areas, and the last two on working toward full
auditability. The plan is being implemented largely through the Army,
Navy, and Air Force military departments and the Defense Logistics
Agency, lending increased importance to the committed leadership in
these components.
Improving the department‘s financial management operations and thereby
providing DOD management and Congress more accurate and reliable
information on the results of its business operations will not be an
easy task. It is critical that current initiatives related to
improving the efficiency and effectiveness of financial management
that have the support of the DOD‘s Deputy Chief Management Officer and
Comptroller continue with sustained leadership and monitoring.
Absent continued momentum and necessary future investments, current
initiatives may falter. Below are some of the key challenges that DOD
must address for its financial management to improve to the point
where DOD is able to produce auditable financial statements:
* committed and sustained leadership,
* effective plan to correct internal control weaknesses,
* competent financial management workforce,
* accountability and effective oversight,
* well-defined enterprise architecture, and,
* successful implementation of the enterprise resource planning
systems.
View [hyperlink, http://www.gao.gov/products/GAO-11-864T] 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 Panel:
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 Panel for holding this hearing and to
acknowledge the important role of such hearings in the oversight of
DOD's financial management efforts.
DOD is one of the largest and most complex organizations in the world.
For fiscal year 2012, the budget requested for the department was
approximately $671 billion--$553 billion in discretionary budget
authority and $118 billion to support overseas contingency operations.
The fiscal year 2012 budget request also noted that DOD employed over
3 million military and civilian personnel--including active and
reserve service members. 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 and joint operational 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, logistics management,
health care management, and procurement. To support its business
functions, DOD has reported that it relies on over 2,200 business
systems,[Footnote 1] including accounting, acquisition, logistics, and
personnel systems.
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 to arrive at a point where the
reliability of its financial statements and related financial
management information would be sufficient to pass an audit with
favorable (clean) audit opinions. To date, DOD has not achieved
effective financial management capabilities or financial statement
auditability.[Footnote 2]
Today, I will discuss the status of DOD's financial management
weaknesses, its efforts to resolve those weaknesses, and the
challenges DOD continues to face in its efforts to improve its
financial management operations. In addition, I will outline the
status of the department's efforts to implement its enterprise
resource planning (ERP) systems,[Footnote 3] 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[Footnote 4] and ERP
implementation efforts.[Footnote 5] Our work was conducted in
accordance with generally accepted government 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:
The department is facing near-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 as well as
significant cost growth in its weapon 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.
[Footnote 6] In fact, all of the DOD programs on GAO's High-Risk List
relate to business operations, including systems and processes related
to management of contracts, finances, supply chain, and support
infrastructure,[Footnote 7] 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 impacted its operational efficiency and
mission performance in areas of major weapons system support and
logistics; and (3) left the department vulnerable to fraud, waste, and
abuse.
Because of the complexity and long-term nature of DOD's transformation
efforts, GAO has reported the need for a chief management officer
(CMO) position and a comprehensive, enterprisewide business
transformation plan. In May 2007, DOD designated the Deputy Secretary
of Defense as the CMO. In addition, the National Defense Authorization
Acts for Fiscal Years 2008 and 2009 contained provisions that codified
the CMO and Deputy CMO (DCMO) positions, required DOD to develop a
strategic management plan, and required the Secretaries of the
military departments to designate their Undersecretaries as CMOs and
to develop business transformation plans.
Overview of DOD's Accounting and Finance Activities:
DOD financial managers are responsible for the functions of budgeting,
financing, accounting for transactions and events, and reporting of
financial and budgetary information. To maintain accountability over
the use of public funds, DOD must carry out financial management
functions such as recording, tracking, and reporting its budgeted
spending, actual spending, and the value of its assets and
liabilities. DOD relies on a complex network of organizations and
personnel to execute these functions. Also, its financial managers
must work closely with other departmental personnel to ensure that
transactions and events with financial consequences, such as awarding
and administering contracts, managing military and civilian personnel,
and authorizing employee travel, are properly monitored, controlled,
and reported, in part, to ensure that DOD does not violate spending
limitations established in legislation or other legal provisions
regarding the use of funds.
Before fiscal year 1991, the military services and defense agencies
independently managed their finance and accounting operations.
According to DOD, these decentralized operations were highly
inefficient and failed to produce reliable information. On November
26, 1990, DOD created the Defense Finance and Accounting Service
(DFAS) as its accounting agency to consolidate, standardize, and
integrate finance and accounting requirements, functions, procedures,
operations, and systems. The military services and defense agencies
pay for finance and accounting services provided by DFAS using their
operations and maintenance appropriations. The military services
continue to perform certain finance and accounting activities at each
military installation. These activities vary by military service
depending on what the services wanted to maintain in-house and the
number of personnel they were willing to transfer to DFAS. As DOD's
accounting agency, DFAS records these transactions in the accounting
records, prepares thousands of reports used by managers throughout DOD
and by the Congress, and prepares DOD-wide and service-specific
financial statements. The military services play a vital role in that
they authorize the expenditure of funds and are the source of most of
the financial information that allows DFAS to make payroll and
contractor payments. The military services also have responsibility
for most of DOD assets and the related information needed by DFAS to
prepare annual financial statements required under the Chief Financial
Officers Act.[Footnote 8]
DOD accounting personnel are responsible for accounting for funds
received through congressional appropriations, the sale of goods and
services by working capital fund businesses, revenue generated through
nonappropriated fund activities, and the sales of military systems and
equipment to foreign governments or international organizations. DOD's
finance activities generally involve paying the salaries of its
employees, paying retirees and annuitants, reimbursing its employees
for travel-related expenses, paying contractors and vendors for goods
and services, and collecting debts owed to DOD. DOD defines its
accounting activities to include accumulating and recording operating
and capital expenses as well as appropriations, revenues, and other
receipts. According to DOD's fiscal year 2012 budget request, in
fiscal year 2010 DFAS:
* processed approximately 198 million payment-related transactions and
disbursed over $578 billion;
* accounted for 1,129 active DOD appropriation accounts; and:
* processed more that 11 million commercial invoices.
Pervasive Financial Management Problems Continue to Affect the
Efficiency and Effectiveness of DOD Operations:
DOD financial management was designated as a high-risk area by GAO in
1995. Pervasive deficiencies in financial management processes,
systems, and controls, and the resulting lack of data reliability,
continue to impair management's ability to assess the resources needed
for DOD operations; track and control costs; ensure basic
accountability; anticipate future costs; measure performance; maintain
funds control; and reduce the risk of loss from fraud, waste, and
abuse.
Other business operations, including the high-risk areas of contract
management, supply chain management, support infrastructure
management, and weapon systems acquisition are directly impacted by
the problems in financial management. We have reported that continuing
weaknesses in these business operations result in billions of dollars
of wasted resources, reduced efficiency, ineffective performance, and
inadequate accountability. Examples of the pervasive weaknesses in the
department's business operations are highlighted below.
* DOD invests billions of dollars to acquire weapon systems, but it
lacks the financial management processes and capabilities it needs to
track and report on the cost of weapon systems in a reliable manner.
We reported on this issue over 20 years ago,[Footnote 9] but the
problems continue to persist. In July 2010, we reported[Footnote 10]
that although DOD and the military departments have efforts underway
to begin addressing these financial management weaknesses, problems
continue to exist and remediation and improvement efforts would
require the support of other business areas beyond the financial
community before they could be fully addressed.
* DOD also requests billions of dollars each year to maintain its
weapon systems, but it has limited ability to identify, aggregate, and
use financial management information for managing and controlling
operating and support costs. Operating and support costs can account
for a significant portion of a weapon system's total life-cycle costs,
including costs for repair parts, maintenance, and contract services.
In July 2010, we reported[Footnote 11] that the department lacked key
information needed to manage and reduce operating and support costs
for most of the weapon systems we reviewed[Footnote 12]--including
cost estimates and historical data on actual operating and support
costs. For acquiring and maintaining weapon systems, the lack of
complete and reliable financial information hampers DOD officials in
analyzing the rate of cost growth, identifying cost drivers, and
developing plans for managing and controlling these costs. Without
timely, reliable, and useful financial information on cost, DOD
management lacks information needed to accurately report on
acquisition costs, allocate resources to programs, or evaluate program
performance.
* In June 2010, we reported[Footnote 13] 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. We found
that an obligation of $200 million in excess of available funds in the
Army's military personnel account violated the Antideficiency Act. The
overobligation likely stemmed, in part, from lack of communication
between Army Budget and program managers so that Army Budget's
accounting records reflected estimates instead of actual amounts until
it was too late to control the incurrence of excessive obligations in
violation of the act. Thus, at any given time in the fiscal year, Army
Budget did not know the actual obligation and expenditure levels of
the account. Army Budget explained that it relies on estimated
obligations--despite the availability of actual data from program
managers--because of inadequate financial management systems. The lack
of adequate process and system controls to maintain effective funds
control impacted the Army's ability to prevent, identify, correct, and
report potential violations of the Antideficiency Act.
* In our February 2011 report[Footnote 14] on the Defense Centers of
Excellence (DCOE), we found that DOD's TRICARE Management Activity
(TMA) had misclassified $102.7 million of the nearly $112 million in
DCOE advisory and assistance contract obligations. The proper
classification and recording of costs are basic financial management
functions that are also key in analyzing areas for potential future
savings.
Without adequate financial management processes, systems, and
controls, DOD components are at risk of reporting inaccurate,
inconsistent, and unreliable data for financial reporting and
management decision making and potentially exceeding authorized
spending limits. The lack of effective internal controls hinders
management's ability to have reasonable assurance that their allocated
resources are used effectively, properly, and in compliance with
budget and appropriations law.
DOD's Past Strategies for Improving Financial Management Were
Ineffective but Recent Initiatives Are Encouraging:
Over the years, DOD has initiated several broad-based reform efforts
to address its long-standing financial management weaknesses. However,
as we have reported, those efforts did not achieve their intended
purpose of improving the department's financial management operations.
In 2005, the DOD Comptroller established the DOD FIAR Directorate to
develop, manage, and implement a strategic approach for addressing the
department's financial management weaknesses for achieving
auditability, and for integrating these efforts with other improvement
activities, such as the department's business system modernization
efforts. In May 2009,[Footnote 15] we identified several concerns with
the adequacy of the FIAR Plan as a strategic and management tool to
resolve DOD's financial management difficulties and thereby position
the department to be able to produce auditable financial statements.
Overall, since the issuance of the first FIAR Plan in December 2005,
improvement efforts have not resulted in the fundamental
transformation of operations necessary to resolve the department's
long-standing financial management deficiencies. However, DOD has made
significant improvements to the FIAR Plan that, if implemented
effectively, could result in significant improvement in DOD's
financial management and progress toward auditability, but progress in
taking corrective actions and resolving deficiencies remains slow.
While none of the military services has obtained an unqualified
(clean) audit opinion, some DOD organizations, such as the Army Corps
of Engineers, DFAS, the Defense Contract Audit Agency, and the DOD
Inspector General, have achieved this goal. Moreover, some DOD
components that have not yet received clean audit opinions are
beginning to reap the benefits of strengthened controls and processes
gained through ongoing efforts to improve their financial management
operations and reporting capabilities. Lessons learned from the Marine
Corps' Statement of Budgetary Resources audit can provide a roadmap to
help other components better stage their audit readiness efforts by
strengthening their financial management processes to increase data
reliability as they develop action plans to become audit ready.
In August 2009, the DOD Comptroller sought to further focus efforts of
the department and components, in order to achieve certain short-and
long-term results, by giving priority to improving processes and
controls that support the financial information most often used to
manage the department. Accordingly, DOD revised its FIAR strategy and
methodology to focus on the DOD Comptroller's two priorities--
budgetary information and asset accountability. The first priority is
to strengthen processes, controls, and systems that produce DOD's
budgetary information and the department's Statements of Budgetary
Resources. The second priority is to improve 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. The DOD Comptroller directed the DOD
components participating in the FIAR Plan--the departments of the
Army, Navy, Air Force and the Defense Logistics Agency--to use a
standard process and aggressively modify their activities to support
and emphasize achievement of the priorities.
GAO supports DOD's current approach of focusing and prioritizing
efforts in order to achieve incremental progress in addressing
weaknesses and making progress toward audit readiness. Budgetary and
asset information is widely used by DOD managers at all levels, so its
reliability is vital to daily operations and management. DOD needs to
provide accountability over the existence and completeness of its
assets. Problems with asset accountability can further complicate
critical functions, such as planning for the current troop withdrawals.
In May 2010, DOD introduced a new phased approach that divides
progress toward achieving financial statement auditability into five
waves (or phases) of concerted improvement activities (see appendix
I). According to DOD, the components' implementation of the
methodology described in the 2010 FIAR Plan is essential to the
success of the department's efforts to ultimately achieve full
financial statement auditability. To assist the components in their
efforts, the FIAR guidance, issued along with the revised plan,
details the implementation of the methodology with an emphasis on
internal controls and supporting documentation that recognizes both
the challenge of resolving the many internal control weaknesses and
the fundamental importance of establishing effective and efficient
financial management. The FIAR Guidance provides the process for the
components to follow, through their individual Financial Improvement
Plans, in assessing processes, controls, and systems; identifying and
correcting weaknesses; assessing, validating, and sustaining
corrective actions; and achieving full auditability. The guidance
directs the components to identify responsible organizations and
personnel and resource requirements for improvement work. In
developing their plans, components use a standard template that
comprises data fields aligned to the methodology. The consistent
application of a standard methodology for assessing the components'
current financial management capabilities can help establish valid
baselines against which to measure, sustain, and report progress.
Numerous Challenges Must Be Addressed in Order for DOD to Successfully
Reform Financial Management:
Improving the department's financial management operations and thereby
providing DOD management and the Congress more accurate and reliable
information on the results of its business operations will not be an
easy task. It is critical that the current initiatives being led by
the DOD Deputy Chief Management Officer and the DOD Comptroller be
continued and provided with sufficient resources and ongoing
monitoring in the future. Absent continued momentum and necessary
future investments, the current initiatives may falter, similar to
previous efforts. Below are some of the key challenges that the
department must address in order for the financial management
operations of the department to improve to the point where DOD may be
able to produce auditable financial statements.
Committed and sustained leadership. The FIAR Plan is in its sixth year
and continues to evolve based on lessons learned, corrective actions,
and policy changes that refine and build on the plan. The DOD
Comptroller has expressed commitment to the FIAR goals, and
established a focused approach that is intended to help DOD achieve
successes in the near term. But the financial transformation needed at
DOD, and its removal from GAO's high-risk list, is a long-term
endeavor. Improving financial management will need to be a cross-
functional endeavor. It requires the involvement of DOD operations
performing other business functions that interact with financial
management--including those in the high-risk areas of contract
management, supply chain management, support infrastructure
management, and weapon systems acquisition. As acknowledged by DOD
officials, sustained and active involvement of the department's Chief
Management Officer, the Deputy Chief Management Officer, the military
departments' Chief Management Officers, the DOD Comptroller, and other
senior leaders is critical. Within every administration, there are
changes at the senior leadership; therefore, it is paramount that the
current initiative be institutionalized throughout the department--at
all working levels--in order for success to be achieved.
Effective plan to correct internal control weaknesses. In May 2009, we
reported[Footnote 16] that the FIAR Plan did not establish a baseline
of the department's state of internal control and financial management
weaknesses as its starting point. Such a baseline could be used to
assess and plan for the necessary improvements and remediation to be
used to measure incremental progress toward achieving estimated
milestones for each DOD component and the department. DOD currently
has efforts underway to address known internal control weaknesses
through three interrelated programs: (1) Internal Controls over
Financial Reporting (ICOFR) program, (2) ERP implementation, and (3)
FIAR Plan. However, the effectiveness of these three interrelated
efforts at establishing a baseline remains to be seen. Furthermore,
DOD has yet to identify the specific control actions that need to be
taken in Waves 4 and 5 of the FIAR Plan, which deal with asset
accountability and other financial reporting matters. Because of the
department's complexity and magnitude, developing and implementing a
comprehensive plan that identifies DOD's internal control weaknesses
will not be an easy task. But it is a task that is critical to
resolving the long-standing weaknesses and will require consistent
management oversight and monitoring for it to be successful.
Competent financial management workforce. Effective financial
management in DOD will require a knowledgeable and skilled workforce
that includes individuals who are trained and certified in accounting,
well versed in government accounting practices and standards, and
experienced in information technology. Hiring and retaining such a
skilled workforce is a challenge DOD must meet to succeed in its
transformation to efficient, effective, and accountable business
operations. The National Defense Authorization Act for Fiscal Year
2006[Footnote 17] directed DOD to develop a strategic plan to shape
and improve the department's civilian workforce. The plan was to,
among other things, include assessments of (1) existing critical
skills and competencies in DOD's civilian workforce, (2) future
critical skills and competencies needed over the next decade, and (3)
any gaps in the existing or future critical skills and competencies
identified. In addition, DOD was to submit a plan of action for
developing and reshaping the civilian employee workforce to address
any identified gaps, as well as specific recruiting and retention
goals and strategies on how to train, compensate, and motivate
civilian employees. In developing the plan, the department identified
financial management as one of its enterprisewide mission-critical
occupations.
In July 2011, we reported[Footnote 18] that DOD's 2009 overall
civilian workforce plan had addressed some legislative requirements,
including assessing the critical skills of its existing civilian
workforce. Although some aspects of the legislative requirements were
addressed, DOD still has significant work to do. For example, while
the plan included gap analyses related to the number of personnel
needed for some of the mission-critical occupations, the department
had only discussed competency gap analyses for 3 mission-critical
occupations--language, logistics management, and information
technology management. A competency gap for financial management was
not included in the department's analysis. Until DOD analyzes
personnel needs and gaps in the financial management area, it will not
be in a position to develop an effective financial management
recruitment, retention, and investment strategy to successfully
address its financial management challenges.
Accountability and effective oversight. The department established a
governance structure for the FIAR Plan, which includes review bodies
for governance and oversight. The governance structure is intended to
provide the vision and oversight necessary to align financial
improvement and audit readiness efforts across the department. To
monitor progress and hold individuals accountable for progress, DOD
managers and oversight bodies need reliable, valid, meaningful metrics
to measure performance and the results of corrective actions. In May
2009, we reported[Footnote 19] that the FIAR Plan did not have clear
results-oriented metrics. 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--including the
components' control over the accuracy of supporting data--or their
usefulness in monitoring and redirecting actions.
Ensuring effective monitoring and oversight of progress--especially by
the leadership in the components--will be key to bringing about
effective implementation, through the components' Financial
Improvement Plans, of the department's financial management and
related business process reform. If the department's future FIAR Plan
updates provide a comprehensive strategy for completing Waves 4 and 5,
the plan can serve as an effective tool to help guide and direct the
department's financial management reform efforts.
Effective oversight holds individuals accountable for carrying out
their responsibilities. DOD has introduced incentives such as
including FIAR goals in Senior Executive Service Performance Plans,
increased reprogramming thresholds granted to components that receive
a positive audit opinion on their Statement of Budgetary Resources,
audit costs funded by the Office of the Secretary of Defense after a
successful audit, and publicizing and rewarding components for
successful audits. The challenge now is to evaluate and validate these
and other incentives to determine their effectiveness and whether the
right mix of incentives has been established.
Well-defined enterprise architecture. For decades, DOD has been
challenged in modernizing its timeworn business systems. Since 1995,
we have designated DOD's business systems modernization program as
high risk. Between 2001 and 2005, we reported that the modernization
program had spent hundreds of millions of dollars on an enterprise
architecture and investment management structures that had limited
value. Accordingly, we made explicit architecture and investment
management-related recommendations. Congress included provisions in
the Ronald W. Reagan National Defense Authorization Act for Fiscal
Year 2005 that were consistent with our recommendations. In response,
DOD continues to take steps to comply with the act's provisions and to
satisfy relevant system modernization management guidance.
Collectively, these steps address best practices in implementing the
statutory provisions concerning the business enterprise architecture
and review of systems costing in excess of $1 million. However, long-
standing challenges that we previously identified remain to be
addressed. Specifically, while DOD continues to release updates to its
corporate enterprise architecture, the architecture has yet to be
federated[Footnote 20] through development of aligned subordinate
architectures for each of the military departments. In this regard,
each of the military departments has made progress in managing its
respective architecture program, but there are still limitations in
the scope and completeness, as well as the maturity of the military
departments' architecture programs. For example, while each department
has established or is in the process of establishing an executive
committee with responsibility and accountability for the enterprise
architecture, none has fully developed an enterprise architecture
methodology or a well-defined business enterprise architecture and
transition plan to guide and constrain business transformation
initiatives. In addition, while DOD continues to establish investment
management processes, the DOD enterprise and the military departments'
approaches to business systems investment management still lack the
defined policies and procedures to be considered effective investment
selection, control, and evaluation mechanisms. Until DOD fully
implements these longstanding institutional modernization management
controls, its business systems modernization will likely remain a high-
risk program.
Successful implementation of the ERPs. The department has invested
billions of dollars and will invest billions more to implement the
ERPs. DOD officials have said that successful implementation of ERPs
is key to transforming the department's business operations, including
financial management, and in improving the department's capability to
provide DOD management and Congress with accurate and reliable
information on the results of DOD's operations. DOD has stated that
the ERPs will replace over 500 legacy systems. The successful
implementation of the ERPs is not only critical for addressing long-
standing weaknesses in financial management, but equally important for
helping to resolve weaknesses in other high-risk areas such as
business transformation, business system modernization, and supply
chain management.
Over the years we have reported[Footnote 21] that the department has
not effectively employed acquisition management controls to help
ensure the ERPs deliver the promised capabilities on time and within
budget. Delays in the successful implementation of ERPs have extended
the use of existing duplicative, stovepiped systems, and continued
funding of the existing legacy systems longer than anticipated.
Additionally, the continued implementation problems can erode savings
that were estimated to accrue to DOD as a result of modernizing its
business systems and thereby reduce funds that could be used for other
DOD priorities.
To help improve the department's management oversight of its ERPs, we
have recommended[Footnote 22] that DOD define success for ERP
implementation in the context of business operations and in a way that
is measurable. Accepted practices in system development include
testing the system in terms of the organization's mission and
operations--whether the system performs as envisioned at expected
levels of cost and risk when implemented within the organization's
business operations. Developing and using specific performance
measures to evaluate a system effort should help management understand
whether the expected benefits are being realized. Without 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 investments to
determine whether the individual programs are helping DOD achieve
business transformation and thereby improve upon its primary mission
of supporting the warfighter.
Another key element in DOD efforts to modernize its business systems
is investment management policies and procedures. We reported in June
2011[Footnote 23] that DOD's oversight process does not provide
sufficient visibility into the military department's investment
management activities, including its reviews of systems that are in
operations and maintenance made and smaller investments. As discussed
in our information technology investment management framework and
previous reports on DOD's investment management of its business
systems,[Footnote 24] adequately documenting both policies and
associated procedures that govern how an organization manages its
information technology projects and investment portfolios is important
because doing so provides the basis for rigor, discipline, and
repeatability in how investments are selected and controlled across
the entire organization. Until DOD fully defines missing policies and
procedures, it is unlikely that the department's over 2,200 business
systems will be managed in a consistent, repeatable, and effective
manner that, among other things, maximizes mission performance while
minimizing or eliminating system overlap and duplication. To this
point, there is evidence showing that DOD is not managing its systems
in this manner. For example, DOD reported that of its 79 major
business and other IT investments, about a third are encountering
cost, schedule, and performance shortfalls requiring immediate and
sustained management attention. In addition, we have previously
reported[Footnote 25] that DOD's business system environment has been
characterized by (1) little standardization, (2) multiple systems
performing the same tasks, (3) the same data stored in multiple
systems, and (4) manual data entry into multiple systems. Because DOD
spends billions of dollars annually on its business systems and
related IT infrastructure, the potential for identifying and avoiding
the costs associated with duplicative functionality across its
business system investments is significant.
Closing Comments:
In closing, I am encouraged by the recent efforts and commitment DOD's
leaders have shown toward improving the department's financial
management. Progress we have seen includes recently issued guidance to
aid DOD components in their efforts to address their financial
management weaknesses and achieve audit readiness; standardized
component financial improvement plans to facilitate oversight and
monitoring; and the sharing of lessons learned. In addition, the DCMO
and the DOD Comptroller have shown commitment and leadership in moving
DOD's financial management improvement efforts forward.
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 with regard to sustained
commitment, leadership, and oversight, before the department and its
military components are fully auditable, and DOD financial management
is no longer considered high risk. However, the department is heading
in the right direction and making progress. Some of the most difficult
challenges ahead lie in the effective implementation of the
department's strategy by the Army, Navy, Air Force, and DLA, including
successful implementation of ERP systems and integration of financial
management improvement efforts with other DOD initiatives.
GAO will continue to monitor the progress of 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 and efforts toward auditability.
As a final point, I want to emphasize the value of sustained
congressional interest in the department's financial management
improvement efforts, as demonstrated by this Panel's leadership.
Mr. Chairman and Members of the Panel, this concludes my prepared
statement. I would be pleased to respond to any questions that you or
other members of the Panel 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; F.
Abe Dymond, Assistant Director; Gayle Fischer, Assistant Director;
Greg Pugnetti, Assistant Director; Darby Smith, Assistant Director;
Steve Donahue; Keith McDaniel; Maxine Hattery; Hal Santarelli; and
Sandy Silzer.
[End of section]
Appendix I: FIAR Plan Waves:
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. Each wave
focuses on assessing and strengthening internal controls and business
systems related to the stage of auditability addressed in the wave.
Wave 1--Appropriations Received Audit focuses on the appropriations
receipt and distribution process, including funding appropriated by
Congress for the current fiscal year and related apportionment/
reapportionment activity by the OMB, as well as allotment and sub-
allotment activity within the department.
Wave 2--Statement of Budgetary Resources Audit focuses on supporting
the budget-related data (e.g., status of funds received, obligated,
and expended) used for management decision making and reporting,
including the Statement of Budgetary Resources. In addition to fund
balance with Treasury reporting and reconciliation, other 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 on ensuring that all assets (including military equipment,
general equipment, real property, inventory, and operating materials
and supplies) that 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 includes the
valuation assertion over new asset acquisitions and validation of
management's assertion regarding new asset acquisitions, and it
depends on remediation of the existence and completeness assertions in
Wave 3. Also, proper contract structure for cost accumulation and cost
accounting data must be in place prior to completion of the valuation
assertion for new acquisitions. It involves the budgetary transactions
covered by the Statement of Budgetary Resources effort in Wave 2,
including accounts receivable, revenue, accounts payable, expenses,
environmental liabilities, and other liabilities.
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.
In the context of this phased approach, DOD's dual focus on budgetary
and asset information offers the potential to obtain preliminary
assessments regarding the effectiveness of current processes and
controls and identify potential issues that may adversely impact
subsequent waves.
[End of section]
Footnotes:
[1] 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.
[2] DOD's auditors 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) Environmental
Liabilities, (10) Statement of Net Cost, (11) Intragovernmental
Eliminations, (12) Other Accounting Entries, and (13) Reconciliation
of Net Cost of Operations to Budget.
[3] An ERP system uses 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.
[4] 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).
[5] GAO, DOD Business Transformation: Improved Management and
Oversight of Business Modernization Efforts Needed, [hyperlink,
http://www.gao.gov/products/GAO-11-53] (Washington, D.C.: Oct. 7,
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] DOD bears responsibility, in whole or in part, for 14 of the 30
federal programs or activities that GAO has identified as being at
high risk of waste, fraud, abuse, and mismanagement. The seven
specific DOD high-risk areas are (1) approach to business
transformation, (2) business systems modernization, (3) contract
management, (4) financial management, (5) supply chain management, (6)
support infrastructure management, and (7) 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.
[7] Support infrastructure includes categories such as installations,
central logistics, the defense health program, and central training.
[8] See 31 U.S.C. § 3515(a), (c); OMB Bulletin No. 07-04, Audit
Requirements for Federal Financial Statements, Appendix B (Sept. 4,
2007).
[9] 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).
[10] 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).
[11] 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).
[12] 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.
[13] 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).
[14] GAO, Defense Health: Management Weaknesses at Defense Centers of
Excellence for Psychological Health and Traumatic Brain Injury Require
Attention, [hyperlink, http://www.gao.gov/products/GAO-11-219]
(Washington, D.C.: Feb. 28, 2011).
[15] 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).
[16] [hyperlink, http://www.gao.gov/products/GAO-09-373].
[17] Pub. L. No. 109-163, div. A, § 1122, 119 Stat. 3136, 3452 (Jan.
6, 2006). The National Defense Authorization Act for Fiscal Year 2010
made this strategic plan submission into a permanent annual
requirement. Pub. L. No. 111-84, div. A, § 1108, 123 Stat. 2190, 2488
(Oct. 28, 2009), codified at 10 U.S.C. § 115b.
[18] GAO, DOD Civilian Personnel: Competency Gap Analysis and Other
Actions Needed to Enhance DOD's Strategic Workforce Plans, [hyperlink,
http://www.gao.gov/products/GAO-11-827T] (Washington, D.C.: July 14,
2011).
[19] [hyperlink, http://www.gao.gov/products/GAO-09-373].
[20] A federated architecture consists of a family of coherent but
distinct member architectures in which subsidiary architectures
conform to an overarching corporate architectural view and rule set.
[21] [hyperlink, http://www.gao.gov/products/GAO-10-461]; 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); GAO-08-896; [hyperlink,
http://www.gao.gov/products/GAO-08-866]; 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); [hyperlink, http://www.gao.gov/products/GAO-07-860].
[22] GAO, DOD Business Transformation: Improved Management and
Oversight of Business Modernization Efforts Needed, [hyperlink,
http://www.gao.gov/products/GAO-11-53] (Washington, D.C.: Oct. 7,
2010).
[23] GAO, Department of Defense: Further Actions Needed to
Institutionalize Key Business Systems Modernization Management
Control, [hyperlink, http://www.gao.gov/products/GAO-11-684]
(Washington, D.C.: June 29, 2011).
[24] GAO, Business Systems Modernization: DOD Needs to Fully Define
Policies and Procedures for Institutionally Managing Investments,
[hyperlink, http://www.gao.gov/products/GAO-07-538] (Washington, D.C.:
May 11, 2007); Business Systems Modernization: Air Force Needs to
Fully Define Policies and Procedures for Institutionally Managing
Investments, [hyperlink, http://www.gao.gov/products/GAO-08-52]
(Washington D.C.: Oct. 31, 2007); Business Systems Modernization:
Department of the Navy Needs to Establish Management Structure and
Fully Define Policies and Procedures for Institutionally Managing
Investments, [hyperlink, http://www.gao.gov/products/GAO-08-53]
(Washington, D.C.: Oct. 31, 2007).
[25] GAO, Opportunities to Reduce Potential Duplication in Government
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink,
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1,
2011).
[End of section]
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