DOD Financial Management

Effective financial management is essential if the Pentagon is to achieve accountability over its vast assets and resources. However, pervasive financial management weaknesses have led GAO to include the Defense Department (DOD) on its list of government operations at high-risk for waste, fraud, abuse, and mismanagement. Collectively, the material weaknesses in DOD's financial operations represent the single, largest obstacle to getting an unqualified opinion on the U.S. government's financial statements. DOD has started to devote additional resources to correct its long-standing financial management problems. The atmosphere of "business as usual" at DOD has changed to one of marked effort at real reform. DOD is working on short-term measures to improve financial reporting and to help meet the President's goal of obtaining an unqualified opinion on the government's financial statements. Also, DOD recently submitted to Congress its Biennial Financial Management Improvement Plan--a blueprint for long-term financial management reform. However, DOD's problems are widespread and entrenched in a huge, decentralized organization. It will take considerable time and effort, along with sustained attention from top management, to turn reform efforts into a day-to-day management reality. This testimony discusses (1) the impact of financial management weaknesses on DOD's ability to carry out its operations efficiently and economically; (2) DOD's efforts to improve financial management systems and controls in the short term, as well as additional measures that are needed; and (3) enhancements needed to update DOD's Financial Management Improvement Plan.

GAO noted that: (1) DOD primarily relies on various logistical systems to carry out its important stewardship responsibility over an estimated $1 trillion in physical assets; (2) these systems are the primary source of information for: (a) maintaining visibility over assets to meet military objectives and readiness goals; and (b) financial reporting; (3) however, these systems have material weaknesses that, in addition to hampering financial reporting, impair DOD's ability to: (a) maintain central visibility over its assets; (b) safeguard assets from physical deterioration, theft, or loss; and (c) prevent the purchase of assets already on hand; (4) these weaknesses can seriously diminish the efficiency and economy of the military services' support operations; (5) in response to this problem, the department initiated programs or renewed its emphasis on implementing existing measures that would improve asset visibility and tracking; (6) in addition, DOD renewed its Total Asset Visibility initiative to provide department-level access to timely, accurate information on the status, location, and movement of its personnel, equipment and supplies--including weapon systems, secondary inventory, and ammunition; (7) DOD Comptroller has been developing and implementing short-term steps in collaboration with DOD's functional and audit communities, the Office of Management and Budget, and GAO; (8) several of the actions included in DOD's short-term plan, along with additional short-term actions necessary to provide a solid foundation for the department's financial management improvement efforts, include: (a) ensuring feeder system data accuracy; (b) implementing accounting policy procedures; (c) instilling fundamental controls; and (d) training financial management personnel; (9) DOD's Biennial Plan represents a significant landmark because it includes a discussion of the importance of the programmatic functions of personnel, acquisition, property management, and inventory management to the department's ability to support consistent, accurate information flows to all information users; (10) modifications to the plan are needed if DOD is to achieve the full range of reforms needed; and (11) to accomplish this, DOD's planned update should include: (a) a revised concept of operations to reflect the full range of DOD's financial management operations; (b) specific plans on shared servicing and outsourcing strategies; and (c) concepts established in the Clinger-Cohen Act for effectively implementing the technology initiatives contained in the plan.