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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Subcommittee on Readiness and Management Support, Committee 
on Armed Services, U.S. Senate: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Wednesday, July 27, 2011: 

DOD Financial Management: 

Numerous Challenges Must Be Addressed to Improve Reliability of 
Financial Information: 

Statement of Asif A. Khan, Director:
Financial Management and Assurance: 

GAO-11-835T: 

GAO Highlights: 

Highlights of GAO-11-835T, a testimony before the Subcommittee on 
Readiness and Management Support, Committee on Armed Services, U.S. 
Senate. 

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 
departmentís 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 Subcommittee has asked GAO to provide its perspective on the 
status of DODís 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 DODís 
Financial Improvement and Audit Readiness strategy. 

What GAO Found: 

DOD financial management has been on GAOís 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 managementís 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. 

DODís 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 departmentís 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 DODís 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-11-835T] or key 
components. For more information, contact Asif A. Khan at (202) 512-
9095 or khana@gao.gov. 

[End of section] 

Chairman McCaskill, Ranking Member Ayotte, 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 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 Subcommittee's leadership. 

Chairman McCaskill and Ranking Member Ayotte, 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; F. 
Abe Dymond, Assistant Director; Gayle Fischer, Assistant Director; 
Greg Pugnetti, Assistant Director; Darby Smith, Assistant Director; 
Beatrice Alff; 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. ß 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, ß 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, ß 1108, 123 Stat. 2190, 2488 
(Oct. 28, 2009), codified at 10 U.S.C. ß 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); [hyperlink, 
http://www.gao.gov/products/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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