Department of Defense

Financial management problems at the Defense Department (DOD)--which oversees an estimated $1 trillion in assets, has nearly $1 trillion in reported liabilities, and had a net cost of operations of $378 billion in fiscal year 1999--represent the single largest obstacle that must be overcome before an unqualified opinion can be rendered on the U.S. government consolidated financial statements. So far, no major part of DOD has been able to pass the test of an independent audit. Pervasive weaknesses in DOD financial management systems, operations, and controls led GAO to put DOD financial management on its 1995 list of government areas at high risk for waste, fraud, abuse, and mismanagement. DOD has made genuine progress in many areas. GAO has seen a strong commitment by the DOD Comptroller and his counterparts in the military services to address deeply rooted problems. This testimony outlines the most difficult financial management challenges and describes the initiatives that are in place or planned to deal with them.

GAO noted that: (1) challenges include DOD's inability to: (a) properly account for and report billions of dollars of inventory and property, plant, equipment, and national defense assets, primarily weapon systems and support equipment; (b) estimate and report material amounts of environmental and disposal liabilities and their related costs; (c) determine the liability associated with post-retirement health benefits for military employees; (d) accurately report the net costs of its operations and produce accurate budget data; and (e) provide adequate controls over sensitive computer information; (2) DOD has hundreds of initiatives under way to address these key challenges, with many of the planned fixes designed to result in a one-time, year-end number for financial statement purposes; (3) however, achieving an unqualified or clean financial audit opinion, while an important milestone, is not the final goal and must be accomplished through real improvements in the underlying financial management systems and operations that affect DOD's ability to manage its day-to-day activities effectively; and (4) the substantial efforts needed to work around DOD's serious systems and control weaknesses to derive year-end balances will not produce the timely and reliable financial and performance information DOD needs to manage its operations every day.