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Testimony :

Before the Subcommittee on Government Efficiency and Financial 
Management, Commitee on Government Reform, House of Representatives:

For Release on Delivery Expected at 2:30 p.m. EST Wednesday, June 25, 
2003:

Department of Defense:

Status of Financial Management Weaknesses and Progress Toward Reform:

Statement of Gregory D. Kutz, Director Financial Management and 
Assurance:

GAO-03-931T:

GAO Highlights:

Highlights of GAO-03-931T, a testimony to the Subcommittee on Government Efficiency and Financial Management, Committee on Government Reform, 
House of Representatives 


Why GAO Did This Study:

As seen again in Iraq, the excellence of our military forces is 
unparalleled. This same level of excellence is not yet evident in the 
Department of Defense’s (DOD) financial management and other business 
areas, impeding DOD’s ability to provide complete, reliable, and 
timely information to the Congress, DOD managers, and other decision 
makers. The Subcommittee asked GAO to testify on the status of DOD’s 
financial management and business process reform efforts. 
Specifically, GAO was asked to provide an overview of the long-
standing financial management weaknesses facing DOD and a summary of 
the underlying causes of DOD’s financial management challenges. In 
addition, GAO’s testimony focused on (1) key actions necessary to 
correct DOD’s financial management problems and (2) the progress DOD 
is making toward business process reform.

What GAO Found:

Overhauling DOD’s financial management represents a major challenge 
that goes far beyond financial accounting to the very fiber of the 
department’s range of business operations and management culture. Of 
the 25 areas on GAO’s governmentwide “high risk” list, 6 are DOD 
program areas, and the department shares responsibility for 3 other 
high-risk areas that are governmentwide in scope. Key financial 
management weaknesses include the lack of effective and efficient 
asset management and accountability; unreliable estimates of 
environmental and disposal liabilities; lack of accurate budget and 
cost information; nonintegrated and proliferating financial management 
systems; and fundamental flaws in DOD’s overall control environment. 

GAO has identified four underlying causes for DOD’s inability to 
resolve its long-standing financial management problems:

* a lack of sustained top-level leadership and management 
accountability for correcting problems;

* deeply embedded cultural resistance to change, including military 
service parochialism and stovepiped operations;

* a lack of results-oriented goals and performance measures and 
monitoring; and

* inadequate incentives for seeking change.

The following are elements that GAO has identified as key to a 
successful approach to financial management and business process 
reform:

* addressing financial management challenges as part of a 
comprehensive, integrated, DOD-wide business reform;

* providing for sustained leadership by the Secretary of Defense and 
resource control to implement needed financial management reforms;

* establishing clear lines of responsibility, authority, and 
accountability for such reform tied to the Secretary;

* incorporating results-oriented performance measures and monitoring 
tied to financial management reforms;

* providing appropriate incentives or consequences for action or 
inaction;

* establishing and implementing an enterprise architecture to guide 
and direct financial management modernization investments; and

* ensuring effective executive and congressional oversight and 
monitoring. 

DOD has taken positive steps in many of these key areas. For example, 
the Secretary of Defense has included improving DOD’s financial 
management as one of his top 10 priorities, and DOD has already taken 
a number of actions under its Business Transformation Program, 
including its efforts to develop an enterprise architecture to guide 
operational and technological changes. However, these are beginning 
steps and formidable challenges remain in each of the key reform 
areas.  

[End of section]

Dear Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to discuss the status of financial 
management and business process reform efforts at the Department of 
Defense (DOD). DOD faces financial and related management problems that 
are pervasive, complex, long standing, and deeply rooted in virtually 
all business operations throughout the department. These problems have 
impeded the department's ability to provide complete, reliable, and 
timely business operations information to the Congress, DOD managers, 
and other decision makers. In addition, DOD's financial management 
weaknesses have resulted in the failure of the department, its military 
services, and its major components from passing the test of an 
independent financial audit and are a significant obstacle to achieving 
an unqualified opinion on the U.S. government's consolidated financial 
statements. Overhauling DOD's financial management represents a major 
challenge that goes far beyond financial accounting to the very fiber 
of the department's range of business operations and management 
culture. Of the 25 areas on GAO's governmentwide "high risk" list, 6 
are DOD program areas, and the department shares responsibility for 3 
other high-risk areas that are government wide in scope.[Footnote 1] 
Central to effectively addressing DOD's financial management problems 
will be understanding that these 9 areas are interrelated and cannot be 
addressed in an isolated, stovepiped, or piecemeal fashion. While 
Secretary of Defense Rumsfeld has initiated a program to transform 
DOD's business processes, including establishing a new management 
structure to oversee reform efforts, DOD has not yet developed an 
overarching plan tying key reform efforts together in an integrated 
program.

DOD's size, structure, and diversity of activities increase the 
difficulty and complexity of reform efforts. For example, DOD is the 
nation's largest employer, with:

* 1.4 million men and women currently on active duty,

* 1.2 million serving in the Reserve and Guard components, and:

* 675,000 civilians.

DOD operates more than 600,000 individual buildings and structures 
located at more than 6,000 different locations and using more than 30 
million acres. For fiscal year 2002, DOD expended approximately $371 
billion to operate and maintain about 250,000 vehicles, over 15,000 
aircraft, more than 1,000 oceangoing vessels, and some 550 public 
utility systems.[Footnote 2]

DOD's financial management problems are the result of long-standing 
deficiencies related to its systems, processes, and people. Therefore, 
to be successful, reform efforts will need to address all three 
factors. In recognition of the far-reaching nature of DOD's financial 
management problems, on September 10, 2001, Secretary Rumsfeld 
announced a broad, top-priority initiative intended to "transform the 
way the department works and what it works on." This new broad-based 
business transformation initiative, led by DOD's Senior Executive 
Council and the Business Initiative Council, incorporates a number of 
defense reform initiatives begun under previous administrations but 
also encompasses additional fundamental business reform proposals. In 
announcing his initiative, Secretary Rumsfeld recognized that 
transformation would be difficult and expected that needed changes 
would take 8 or more years to complete.

As we have seen again in Iraq, the excellence of our military forces is 
unparalleled. This same level of excellence is not yet evident in the 
department's financial management and other business areas. This is 
particularly problematic because effective financial and related 
management operations are critical to achieving the department's 
mission in a reasonably economical, efficient, and effective manner and 
to providing reliable, timely financial information on a routine basis 
to support management decision making at all levels throughout DOD. 
Transforming DOD's business operations would free up resources that 
could be used to enhance readiness, improve the quality of life for our 
troops and their families, and reduce the gap between "wants" and 
available funding in connection with major weapon systems. In fact, 
Secretary Rumsfeld has estimated that successful business process 
reform could save DOD 5 percent of its budget or $20 billion a year.

Today, I will focus mainly on the key actions necessary to correct 
DOD's financial management problems and the progress DOD is making 
toward business process reform. But first, I want to provide you with 
an overview of the long-standing financial management weaknesses facing 
DOD--as highlighted by the results of audit work performed over the 
past few years--and a summary of the underlying causes of DOD's 
financial management challenges. My statement is based on previous GAO 
reports as well as on our review of DOD Inspector General (IG) reports 
and recent DOD reports and studies.

Long-standing Financial Management Weaknesses:

DOD continues to confront pervasive, decades-old financial management 
problems related to its systems, processes (including internal 
controls), and people (human capital). These problems have (1) resulted 
in a lack of reliable information needed to make sound decisions and 
report the status of DOD's activities through financial and other 
reports, (2) hindered its operational efficiency, (3) impacted mission 
performance, and (4) left the department vulnerable to fraud, waste, 
and abuse.

DOD's serious financial management and related business systems 
problems led us in 1995 to put both DOD financial management and 
systems modernization on our list of high-risk[Footnote 3] areas in the 
federal government, a designation that continues today.[Footnote 4] As 
discussed in the results of our audit of the fiscal year 2002 Financial 
Statements of the U.S. Government,[Footnote 5] DOD's financial 
management deficiencies, taken together, continue to represent one of 
the largest obstacles to achieving an unqualified opinion on the U.S. 
government's consolidated financial statements. To date, none of the 
military services or major DOD components has passed the test of an 
independent financial audit because of pervasive weaknesses in 
financial management systems, processes, and controls. These weaknesses 
not only hamper the department's ability to produce timely and accurate 
financial management information but also impact mission performance 
and make mission costs unnecessarily high. Ineffective asset 
accountability and the lack of effective controls continue to adversely 
affect visibility over its estimated $1 trillion investment in 
inventories and property, plant, and equipment (including weapon 
systems and other property). Such information is key to meeting 
military objectives and readiness goals. Further, unreliable cost and 
budget information related to a reported $700 billion of liabilities, 
particularly $59 billion of reported environmental liabilities, and 
about $380 billion of reported costs negatively affects DOD's ability 
to effectively project funding needs, maintain adequate funds control, 
reduce costs, and measure performance. DOD has invested, and continues 
to invest, significant resources--in terms of dollars, time, and 
people--in its systems without demonstrated improvement in its business 
operations and adequate management and oversight, thereby continuing to 
perpetuate a proliferation of systems that do not adequately address 
the department's needs. Finally, DOD's weak overall control environment 
has left the department vulnerable to fraud, waste, and abuse. As the 
results of the department's fiscal year 2002 financial audit and other 
audit work demonstrate, DOD continues to confront serious weaknesses in 
these areas.

Asset Management and Accountability:

Of the $776 billion of inventory and related property and general 
property, plant, and equipment (PP&E)[Footnote 6] assets reported by 
federal entities for fiscal year 2002, DOD is responsible for about 
half--approximately $146 billion in inventory and related property and 
$226 billion of general PP&E, comprised of $162 billion in real 
property (land, buildings, facilities, capital leases, and improvements 
to those assets); $37 billion in personal property (such as vehicles, 
equipment, telecommunications systems, computers, and software); and 
$27 billion in construction-in-progress, the largest amount of which 
belongs to the Corps of Engineers. While DOD is not presently required 
to report dollar values for its weapons systems and support PP&E used 
in the performance of military missions, such reporting will be 
required beginning October 1, 2002.[Footnote 7] The amount subject to 
reporting will likely be significant considering that DOD has estimated 
an acquisition cost of over $64 billion for only three of its major 
weapons systems acquisition programs.

Effective and efficient asset management and accountability is crucial 
to DOD's defense of our national interests. While the department has 
undertaken several initiatives over the years to improve its asset 
management and accountability systems, processes, and controls, 
material weaknesses persist. As a result, DOD lacks reliable 
information about the quantity, location, condition, and value of 
inventory and property--including military equipment--critical to the 
department's ability to effectively meet military objectives and 
readiness goals. Ineffective and inefficient asset management and 
accountability leave the department vulnerable to fraud, waste, and 
abuse. Over the past 2 years, the DOD Inspector General (IG) and we 
have issued numerous reports detailing problems with asset management 
and accountability, including the following examples.

* DOD and its military services and units did not know how many Joint 
Service Lightweight Integrated Suit Technology (JSLIST)[Footnote 8]--
commonly referred to as "chem-bio suits"--they had, their condition, 
and where they were located.[Footnote 9] This lack of visibility was 
due to several factors, including the use of nonstandard, 
nonintegrated, stovepiped systems. Nonintegrated systems are unable to 
share data across business applications and therefore, multiple manual 
data entries must be made into numerous stand-alone systems, which 
result in errors, add significantly to administrative costs, and 
generally exacerbate asset visibility problems. The methods used to 
control and maintain visibility over JSLIST ranged from stand-alone 
automated systems, to spreadsheet applications, to pen and paper, to 
nothing at all. For JSLIST, the result was that DOD was excessing and 
selling these suits on the Internet for pennies on the dollar, while at 
the same time procuring hundreds of thousands of new garments annually. 
Similarly, a few years ago, the Defense Logistics Agency (DLA) had 
problems identifying and removing from its inventory defective Battle 
Dress Overgarments (BDO)--the JSLIST predecessor. As a result, some of 
the defective suits were shipped to U.S. forces in high-threat areas. 
In a June 2000 testimony, the DOD IG pointed out that a physical count 
of BDOs could not locate 420,000 protective suits that were recorded in 
DLA's accountability database.

* DOD lacked effective processes and controls to ensure that easily 
pilferable and sensitive items were properly recorded and safeguarded. 
For example, we found that the military services failed to record all 
of the pilferable and sensitive items acquired through purchase card 
transactions, including the Navy's failure to record a $757,000 
purchase comprised of 430 computers, 213 flat panel monitors, and other 
computer hardware and software.[Footnote 10] The Navy was unable to 
provide us with evidence confirming the location of 187 of those 
computers and 87 of the flat panel monitors. Similarly, in our recent 
review[Footnote 11] of property controls at three military treatment 
facilities, we found that items such as a laptop computer, a Sony 
monitor, and a sterilizer were not recorded in the property records. We 
also found that numerous recorded items could not be located. Most of 
these were lower priced (under $5,000) or pilferable items such as a 
personal digital assistant, a cellular telephone, computer monitors, 
color printers, a handheld radio, and various pieces of medical 
equipment such as a stretcher, electric beds, and intravenous pumps.

Environmental and Disposal Liabilities:

Under federal, state, and international law, DOD faces a major funding 
requirement associated with environmental cleanup and disposal 
resulting from prior and current operations and from the production of 
weapons systems. In its fiscal year 2002 financial statements, DOD 
reported an estimated liability of $59 billion to manage and clean up 
or contain a diverse population of environmental contamination 
comprised of:

* $22 billion for closed and open sites where past and current waste 
disposal practices, leaks, spills, and other activities have created a 
risk to public health or the environment;

* $14 billion for closed, transferring, and active military ranges 
where contamination and unexploded ordnance create environmental 
hazards; and:

* $23 billion for cleanup, demilitarization, and disposal of nuclear 
and non-nuclear weapons systems, chemical weapons, and munitions.

DOD's reported cost represents the current value of estimated future 
cash outlays that will need to be paid from appropriations; therefore, 
the Congress needs reliable information in order to plan how much and 
when to provide funding for cleanup activities. In past years, we and 
the DOD IG have repeatedly reported that the environmental liability 
amounts presented in DOD's financial statements were not reliable 
because the department did not have (1) sufficient guidance for 
identifying and categorizing cleanup activities whose costs must be 
included in the liability calculation, (2) complete inventories of the 
sites and weapons systems that will require cleanup or containment, and 
(3) valid cost estimating models that produce consistent and 
supportable liability estimates. These deficiencies were not systems 
related but rather resulted from inadequate policies and processes and 
a lack of leadership.

We have also issued individual reports on several environmental cleanup 
categories, including training ranges and on-going 
operations.[Footnote 12] In those reports, we specifically cite 
weaknesses related to DOD's lack of complete site inventories, which 
means that the department's reported liability amount is likely 
understated. In line with our findings, the Air Force has recently 
confirmed that it is investigating possible radioactive waste buried at 
more than 80 former and current air bases around the country. According 
to the Air Force, it lost track of the waste burial sites because of 
poor record keeping and is now trying to identify and inspect the lands 
for safety concerns. Costs for cleaning up these sites are not 
currently included in the Air Force's reported liability amounts. In 
addition, incomplete identification of cleanup sites on installations 
that are currently being used by the military could have negative 
consequences for future base reutilization, alignment, and closure 
decisions.

Budget and Cost Information:

DOD's appropriation for fiscal year 2002 represented 18 percent of the 
total U.S. budget and 48 percent of discretionary funds. For fiscal 
year 2002, DOD reported disbursing $347 billion to, among other things, 
make payments to 5.7 million military and civilian personnel and 
annuitants, process and pay 11.2 million contractor invoices, and make 
7.3 million travel payments. The magnitude of the dollars and number of 
transactions involved makes it imperative that DOD maintain accurate 
fund balances and properly account for costs; however, DOD financial 
management systems and processes continue to be significant impediments 
to reporting complete and accurate information with respect to 
budgetary and disbursement activities.

Weaknesses in DOD's accounting for its funds include (1) the inability 
to reconcile its balances to Treasury's, a process similar in concept 
to individuals reconciling their checkbooks with their bank statements, 
(2) payment recording errors, including disbursements that are not 
properly matched to specific obligations recorded in the department's 
records, and (3) limited ability to track the use of funds appropriated 
for contingency purposes. For example,

* For fiscal year 2002, we found that DOD had at least $7.5 billion in 
unexplained differences between Treasury and DOD fund activity records. 
Many of these differences represent disbursements made and reported to 
Treasury that had not yet been properly matched to obligations and 
recorded in DOD accounting records. In addition to these unreconciled 
amounts, DOD identified and reported an additional $3.6 billion in 
payment recording errors. These include disbursements that DOD has 
specifically identified as containing erroneous or missing information 
and that cannot be properly recorded and charged against the correct, 
valid fund account. DOD records many of these payment problems in 
suspense accounts and made $1.6 billion in unsupported adjustments to 
its fund balances at the end of fiscal year 2002 to account for a 
portion of these payment recording errors. These adjustments did not 
resolve the related errors.

* In June 2001, we reported that DOD's financial systems could not 
adequately track and report on whether the $1.1 billion in earmarked 
funds that the Congress provided to DOD for spare parts and associated 
logistical support were actually used for their intended 
purpose.[Footnote 13] The vast majority of the funds--92 percent--were 
transferred to the military services operation and maintenance 
accounts. Once transferred, the department could not separately track 
the use of the funds. As a result, DOD lost its ability to assure the 
Congress that the funds it received for spare parts purchases were used 
for, and only for, the designated purpose.

* In April 2003, we reported[Footnote 14] that DOD was not able to 
separately track Emergency Response Funds provided under appropriations 
in fiscal years 2002 and 2003 ($20.5 billion). These funds were 
commingled in DOD's regular appropriations accounts with funds 
appropriated for other purposes. Because DOD's accounting system only 
captures data on total obligations and does not distinguish among 
original sources of funds, DOD is not able to identify those 
obligations that are funded from emergency response funds.

* In December 2000, we reported[Footnote 15] that our review of DOD 
functions that were studied over the past 5 years for potential 
outsourcing under OMB Circular A-76 showed that while DOD reported that 
savings had occurred as a result of these studies, we could not 
determine the precise amount of any such savings because the department 
lacked actual cost data. Further, in March 2002, we testified[Footnote 
16] that while significant savings were being achieved, it has been 
difficult to determine the magnitude of those savings.

DOD's continuing inability to capture and report the full cost of its 
programs represents one of the most significant impediments facing the 
department. DOD does not have the systems and processes in place to 
capture the required cost information from the hundreds of millions of 
transactions it processes each year. Lacking complete and accurate 
overall life-cycle cost information for weapon systems impairs DOD's 
and congressional decision makers' ability to make fully informed 
judgments about which weapons, or how many, to buy. DOD has 
acknowledged that the lack of a cost accounting system is its largest 
impediment to controlling and managing weapon systems costs.

An April 2001 report on the results of an independent study of DOD's 
financial operations commissioned by the Secretary of Defense concluded 
that DOD lacked the ability to routinely generate cost-based metrics to 
link financial management to DOD's goals.[Footnote 17] For example, 
DOD's reporting under the Government Performance and Results Act of 
1993 (GPRA)[Footnote 18] often did not address the cost-based 
efficiency aspect of performance, making it difficult for DOD to fully 
assess the efficiency of its performance. DOD's most recent performance 
plan (fiscal year 2001) included 45 unclassified metrics but only a few 
of those contained efficiency measures based on costs.

Financial Management Systems:

For fiscal year 2003, DOD estimated that it would spend approximately 
$18 billion[Footnote 19] to operate, maintain, and develop business 
systems. Of that amount, $5.2 billion relates directly to business 
systems and the remaining $12.8 billion relates to the infrastructure 
that supports the systems. While funding system development and 
modernization activities is crucial, it is only part of the solution 
needed to improve DOD's current business systems and operating 
environment. Key ingredients to successful systems development and 
modernization include effective management and oversight of ongoing and 
planned investments.

However, in February 2003,[Footnote 20] we reported that DOD had yet to 
establish the necessary departmental investment governance structure 
and process controls needed to adequately align ongoing investments 
with its architectural goals and direction. An effective governance 
structure should include:

* a hierarchy of investment review boards composed of representatives 
from across the department who are assigned investment selection and 
control responsibilities based on project threshold criteria;

* a standard set of investment review and decision-making criteria for 
use by all boards, including criteria to ensure compliance and 
consistency with its newly developed enterprise architecture or 
"blueprint for reform"; and:

* a specified, near term date by which ongoing investments have to be 
subject to this standard investment review process, and by which 
decisions should be made as to whether to proceed with each investment.

DOD's lack of effective oversight and process controls over IT 
investments perpetuates the existence of an incompatible, duplicative, 
and overly costly systems environment, which undermines its ability to 
optimally support mission performance. For example,

* In March 2003, we reported[Footnote 21] that DOD did not effectively 
manage and oversee its planned investment of over $1 billion in four 
Defense Finance and Accounting Service (DFAS) systems modernization 
efforts. DOD invested approximately $316 million in these projects 
without first demonstrating that they would markedly improve the 
information needed for decision-making and financial reporting 
purposes. The DOD Comptroller terminated one of the four projects we 
reviewed after an investment of over $126 million, citing poor program 
performance and increasing costs. Investments in the other three 
projects continue despite the absence of the requisite analyses of 
costs, benefits, and risks to demonstrate that the projects will 
produce value commensurate with the cost being incurred.

* In March 2002, the DOD IG reported that DOD's Joint Total Asset 
Visibility Program (JTAV) system provided incomplete asset visibility 
to military commanders in chief (CINCs) and joint task force 
commanders.[Footnote 22] Required capabilities were not developed 
before the program was placed into service, including asset and 
personnel visibility for the warfighter, accurate and timely source 
data, and data links to critical data in other DOD systems. As a 
result, CINCs and joint task force commanders did not have access, 
through the program, to all required data on the location, movement, 
status, and identity of military units, personnel, equipment, and 
supplies as intended.

* In June 2002, DOD reported[Footnote 23] that shortcomings in existing 
nonintegrated personnel and pay systems caused delays in military 
payroll payments (some as much as 6 or more months after the event 
occurred) and resulted in errors (both under-and overpayments). DOD 
estimated that system input errors ranged from 5 to 15 percent and that 
these errors necessitated complex retroactive computations, data 
reconciliation and corrections, losses due to overpayments, debt 
processing, and costs to recoup overpayments.

* As of October 2002, DOD reported that its current business systems 
environment consisted of 1,731 systems and system acquisition projects 
(a number that has since risen to about 2,300 as DOD has identified 
additional systems). DOD reported that it had 374 systems to support 
civilian and military personnel matters, 335 systems to support finance 
and accounting functions, and 310 systems that produce information for 
management decision making.

As we have previously reported,[Footnote 24] these numerous systems 
have evolved into the overly complex and error-prone operation that 
exists today, including (1) little standardization across DOD 
components, (2) multiple systems performing the same tasks, (3) the 
same data stored in multiple systems, (4) manual data entry into 
multiple systems, and (5) a large number of data transactions and 
interfaces that combine to exacerbate the problems of data integrity. 
While the department recognizes the uncontrolled proliferation of 
systems and the need to eliminate as many systems as possible and to 
integrate and standardize those that remain, DOD components continue to 
receive and control their own IT investment funding.

Weak Control Environment:

Fundamental flaws in DOD's systems, processes, and overall control 
environment leave the department at risk of fraud, waste, and abuse. 
Over the past few years, we have reported numerous instances of 
breakdowns in--or lack of--internal control that have had serious 
economic and legal consequences for the department, including:

* government travel card delinquency rates for the Army and the Navy 
that were nearly double those of federal civilian agencies;[Footnote 
25]

* pervasive purchase and travel card control breakdowns that resulted 
in numerous instances of potentially fraudulent, improper, and abusive 
transactions and increased DOD's vulnerability to theft and misuse of 
government property;[Footnote 26]

* inadequate management and reporting on the funding associated with 
the Air Force's contracted depot maintenance that resulted in 
understating the dollar value of year-end carryover work by tens of 
millions of dollars;[Footnote 27]

* adjustments to DOD's closed appropriations that resulted in about 
$615 million in adjustments that should not have been made, including 
$146 million that was illegal;[Footnote 28]

* hundreds of millions of dollars of over-and underpayments to 
contractors;[Footnote 29] and:

* lost opportunities to collect millions of dollars of reimbursements 
for services performed in military treatment facilities because not all 
patients with third party insurance coverage were identified or because 
those insurers were not billed.

In general, DOD does not have the necessary control processes and 
procedures in place to identify problem situations like the ones listed 
above. However, DOD usually takes action to try to correct and then 
prevent these problems once they have been identified by auditors.

Underlying Causes of Financial and Related Business Process Reform 
Challenges:

In the past, DOD initiated a number of departmentwide reform 
initiatives to improve its financial operations as well as other key 
business support processes. While these initiatives produced some 
incremental improvements, they did not result in the fundamental reform 
necessary to resolve these long-standing management challenges. For 
example, in 1989, DOD began the Corporate Information Management (CIM) 
initiative, which was expected to save billions of dollars by 
streamlining operations and implementing standard information systems 
across the department to support common business operations. DOD 
intended CIM to reform all of its functional areas--including finance, 
procurement, material management, and human resources--through the 
consolidation, standardization, and integration of its numerous, 
duplicative information systems. DOD spent billions of dollars on this 
initiative with little sound analytical justification. Rather than 
relying on a rigorous decision-making process for information 
technology investments, as used in leading private and public 
organizations we studied, DOD made systems decisions without (1) 
appropriately analyzing cost, benefits, and technical risks, (2) 
establishing realistic project schedules, or (3) considering how 
business process improvements could affect information technology 
investments. For one effort alone, DOD spent about $700 million trying 
to develop and implement a single system for the material management 
business area--but this effort proved unsuccessful. After 8 years and 
about $20 billion in expenditures, DOD abandoned the CIM initiative. 
However, some of the conditions that led to its defeat remain today.

We first identified underlying causes for the department's inability to 
resolve its long-standing financial management problems, as well as the 
other areas of its operations most vulnerable to waste, fraud, abuse, 
and mismanagement, in our May 1997 testimony.[Footnote 30] We have 
continued to highlight in various testimonies what we believe are the 
underlying reasons for the department's inability to fundamentally 
reform its business operations. There are four underlying causes:

* a lack of sustained top-level leadership and management 
accountability for correcting problems;

* deeply embedded cultural resistance to change, including military 
service parochialism and stovepiped operations;

* a lack of results-oriented goals and performance measures and 
monitoring; and:

* inadequate incentives for seeking change.

Lack of Leadership and Accountability:

Historically, DOD has not routinely assigned accountability for 
performance to specific organizations or individuals who have 
sufficient authority to accomplish desired goals. For example, under 
the Chief Financial Officers Act (CFO) of 1990,[Footnote 31] it is the 
responsibility of the agency CFO to establish the mission and vision 
for the agency's future financial management and to direct, manage, and 
provide oversight of financial management operations. However, at DOD, 
the Comptroller--who is by statute the department's CFO--has direct 
responsibility for only an estimated 20 percent of the data relied on 
to carry out the department's financial management operations. The 
other 80 percent comes from DOD's other business operations. In 
addition, DOD's past experience has suggested that top management has 
not had a proactive, consistent, and continuing role in building 
capacity, integrating daily operations for achieving performance goals, 
and creating incentives. Major improvement initiatives must have the 
direct, active support and involvement of the Secretary and Deputy 
Secretary of Defense to ensure that daily activities throughout the 
department remain focused on achieving shared, agencywide outcomes and 
success. Furthermore, sustaining top management commitment to 
performance goals is a particular challenge for DOD because the average 
1.7-year tenure of the department's top political appointees has served 
to hinder long-term planning and follow-through. Based on our survey of 
best practices of world-class financial management 
organizations,[Footnote 32] strong executive leadership is essential to 
(1) making financial management an entitywide priority, (2) redefining 
the role of finance, (3) providing meaningful information to decision 
makers, and (4) building a team of people that delivers results.

Cultural Resistance and Parochialism:

Cultural resistance to change, military service parochialism, and 
stovepiped operations have also played a significant role in impeding 
previous attempts to implement broad-based management reforms at DOD. 
The department has acknowledged that it confronts decades-old problems 
deeply grounded in the bureaucratic history and operating practices of 
a complex, multifaceted organization. For example, the effectiveness of 
the Defense Management Council, established in 1997 to help break down 
organizational stovepipes and overcome cultural resistance to change, 
was impaired because members were not able to put their individual 
military services' or DOD agencies' interests aside to focus on 
departmentwide approaches to long-standing problems.[Footnote 33] 
DOD's stovepiped approach is most evident in its current financial 
management systems environment, which DOD recently estimated to include 
approximately 2,300 systems and system development projects--many of 
which were developed in piecemeal fashion and evolved to accommodate 
different organizations, each with its own policies and procedures.

Unclear Goals and Performance Measures:

Lack of clear, linked goals and performance measures has handicapped 
DOD's past reform efforts. As a result, DOD managers lack 
straightforward road maps showing how their work contributes to 
attaining the department's strategic goals, and they risk operating 
autonomously rather than collectively. According to its fiscal year 
2002 Performance and Accountability report, DOD is still in the process 
of developing measurable annual performance goals and objectives.

In our assessment of DOD's Fiscal Year 2000 Financial Management 
Improvement Plan[Footnote 34]--its most recent plan--we found that it 
presented the military services' and DOD components' individual 
improvement initiatives for reforming financial management but did not 
clearly articulate how their individual efforts would result in a 
collective, integrated DOD-wide approach to financial management 
improvement. In addition, the product did not include performance 
measures that could be used to assess DOD's progress in resolving its 
financial management problems. As a result, the product was more a 
compilation of a data call than a strategic plan. Furthermore, while 
DOD plans to invest billions of dollars in modernizing its financial 
management systems, it currently does not have effective management 
governance and controls in place to guide and direct these investments. 
We will discuss DOD's work to develop an initial business enterprise 
architecture later in our testimony.

Lack of Incentives for Change:

The final underlying cause of the department's long-standing inability 
to carry out needed fundamental reform has been the lack of incentives 
for making more than incremental change to existing "business-as-usual" 
processes, systems, and structures. Traditionally, DOD has focused on 
justifying its need for more funding rather than on the outcomes its 
programs have produced. DOD generally measures its performance by the 
amount of money spent, people employed, or number of tasks completed. 
Incentives for its decision makers to implement changed behavior have 
been minimal or nonexistent. Secretary Rumsfeld perhaps said it best in 
announcing his planned transformation at DOD: "There will be real 
consequences from, and real resistance to, fundamental change.":

The lack of incentive has been most evident in the department's 
acquisition area. In DOD's culture, the success of a manager's career 
has depended more on moving programs and operations through the DOD 
process than on achieving better program outcomes. The fact that a 
given program may have cost more than estimated, taken longer to 
complete, and not generated results or performed as promised was 
secondary to fielding a new program. To effect real change, actions are 
needed to (1) break down parochialism and reward behaviors that meet 
DOD-wide and congressional goals, (2) develop incentives that motivate 
decision makers to initiate and implement efforts that are consistent 
with better program outcomes, including saying "no" or pulling the plug 
on a system or program that is failing, and (3) facilitate a 
congressional focus on results-oriented management, particularly with 
respect to resource-allocation decisions.

Keys to Fundamental Financial Management Reform and Progress to Date:

Successful reform of DOD's fundamentally flawed financial management 
operations must simultaneously focus on its systems, processes, and 
people. While DOD has made some encouraging progress in addressing 
specific challenges, it is still in the very early stages of a 
departmentwide reform that will take many years to accomplish. As a 
result, it is not possible to predict when--or even whether--the effort 
will be successful.

Our experience has shown there are several key elements that 
collectively would enable the department to effectively address the 
underlying causes of its inability to resolve its long-standing 
financial management problems. For the most part, these elements, which 
should not be viewed as independent actions but rather a set of 
interrelated and interdependent actions, are consistent with those 
discussed in the department's April 2001 financial management 
transformation report.[Footnote 35] These elements, which we believe 
are key to any successful approach to financial management reform, 
include:

* addressing the department's financial management challenges as part 
of a comprehensive, integrated, DOD-wide business reform;

* providing for sustained leadership by the Secretary of Defense and 
resource control to implement needed financial management reforms;

* establishing clear lines of responsibility, authority, and 
accountability for such reform tied to the Secretary;

* incorporating results-oriented performance measures and monitoring 
tied to financial management reforms;

* providing appropriate incentives or consequences for action or 
inaction;

* establishing and implementing an enterprise architecture to guide and 
direct financial management modernization investments; and:

* ensuring effective executive and congressional oversight and 
monitoring.

While DOD still has a long way to go, it has made serious efforts to 
address many of the key areas over the past 2 years. We will discuss 
each of the areas and provide examples of improvement actions--long-
term and/or short-term--where relevant. Both long-term actions focused 
on the Secretary's envisioned business transformation and short-term 
actions focused on improvements within existing systems and processes 
are critical to forward movement.

Integrated Business Reform Strategy:

As we previously reported,[Footnote 36] establishing the right goal is 
essential for success. Central to effectively addressing DOD's 
financial management problems will be the recognition that they cannot 
be addressed in an isolated fashion separate from the other high-risk 
areas and management challenges facing the department. Further, 
successfully reforming the department's operations--which consist of 
people, business processes, and technology--will be critical if DOD is 
to effectively address the deep-rooted organizational emphasis on 
maintaining business-as-usual across the department. DOD has recently 
taken important steps to begin improving its people, processes, and 
systems.

We have reported[Footnote 37] that many of DOD's financial management 
shortcomings were attributable in part to human capital issues. In 
April 2002, DOD published a departmentwide strategic plan for its 
civilian employees, which sets forth its vision to "design, develop and 
implement:

human resources policies, strategies, systems, and tools to ensure a 
mission-ready civilian workforce that is motivated to excel." Although 
a positive step, the plan needs further refinement to achieve the 
Secretary of Defense's transformation initiatives, including (1) 
integration of component-level plans with the department-level plan, 
(2) development of key elements, such as results-oriented performance 
measures, and (3) integration with military personnel planning and 
sourcing decisions.[Footnote 38] Recently, DOD proposed a National 
Security Personnel System that would provide for wide-ranging changes 
in DOD's civilian personnel pay and performance management. While we 
strongly support the concept of modernizing and making more flexible 
federal human capital policies, we have warned that the appropriate 
infrastructure and adequate safeguards need to be in place for 
successful implementation and to prevent abuse.[Footnote 39] In 
addition, in its fiscal year 2003 Defense Authorization Act, DOD sought 
and obtained authorization to prescribe certification and credential 
standards for its professional accounting positions and is currently 
drafting the relevant regulations. These are important steps in DOD's 
plans to develop a human capital investment strategy and plan.

The department recently renamed its Financial Management Modernization 
Program to the Business Management Modernization Program, a move that 
recognizes that financial management is a crosscutting issue that 
affects virtually all DOD business areas. For example, improving its 
financial management operations so that they can produce timely, 
reliable, and useful cost information is essential to effectively 
measure its progress towards achieving many key outcomes and goals 
across virtually the entire spectrum of DOD's business areas. At the 
same time, the department's financial management problems--and, most 
importantly, the keys to their resolution--are deeply rooted in and 
dependent upon developing solutions to a wide variety of management 
problems across DOD's various organizations and business areas. In line 
with this, DOD has designated:

owners of seven key department business lines,[Footnote 40] or domains, 
to transform the department's business operations and implement its 
enterprise architecture.

As we mentioned earlier, and it deserves emphasis, the department has 
reported that an estimated 80 percent of the data needed for sound 
financial management comes not from the Comptroller's operations but 
from its other business operations, such as its acquisition and 
logistics communities. DOD's vast array of costly, nonintegrated, 
duplicative, and inefficient financial management systems reflects its 
lack of an integrated approach to addressing management challenges. DOD 
has acknowledged that one of the reasons for the lack of clarity in its 
reporting under the Government Performance and Results Act has been 
that most of the program outcomes the department is striving to achieve 
are interrelated, while its management systems are not integrated. In 
fact, DOD is redefining its performance metrics and program outcomes as 
they relate to four risk areas: (1) force management, (2) operations, 
(3) future challenges, and (4) institutional.

Secretary of Defense Rumsfeld recognized the far-reaching nature of 
DOD's financial management problems and, on September 10, 2001, he 
announced a broad, top-priority initiative intended to "transform the 
way the department works and what it works on." This new broad-based 
business transformation program incorporates a number of defense reform 
initiatives begun under previous administrations but also encompasses 
additional fundamental business reform proposals. However, like defense 
reform initiatives begun under the previous administration, the 
transformation program has not yet developed an overarching plan tying 
all the individual reform efforts together. The development of an 
overarching plan could take on increased importance, particularly where 
initiatives are interrelated and up-front investments are required.

DOD has already taken a number of actions under its business 
transformation program. In this context, the Secretary established a 
number of top-level councils, committees, and boards, including the 
Senior Executive Council, the Business Initiative Council, and the 
Defense Business Practice Implementation Board. The Senior Executive 
Council was established to help guide efforts across the department to 
improve its business practices. This council--chaired by the Secretary 
of Defense, and with membership to include the Deputy Secretary, the 
military service secretaries, and the Under Secretary of Defense for 
Acquisition, Technology and Logistics (AT&L)--was established to 
function as the "board of directors" for the department. The Business 
Initiative Council--comprised of senior DOD and military service 
officials and headed by the Under Secretary of Defense for Acquisition, 
Technology and Logistics--was established to encourage the military 
services to explore new money-saving business practices to help offset 
funding requirements for transformation and other initiatives. The 
Defense Business Practice Implementation Board is an advisory board 
whose mission is to make recommendations to the Senior Executive 
Committee on strategies for implementing best business practices in 
matters relating to management, acquisition, production, logistics, 
personnel leadership, and the defense industrial base.

Our research of successful public and private sector organizations 
shows that such entities, comprised of enterprisewide executive 
leadership, provide valuable guidance and direction when pursuing 
integrated solutions to corporate problems. Inclusion of the 
department's top leadership could help to break down the cultural 
barriers to change and result in an integrated DOD approach for 
business reform.

Sustained Leadership and Resource Control:

The department's successful Year 2000 effort illustrated, and our 
survey of leading financial management organizations[Footnote 41] 
captured, the importance of strong leadership from top management. As 
we have stated many times before, strong, sustained executive 
leadership is critical to changing a deeply rooted corporate culture--
such as the existing "business-as-usual" culture at DOD--and to 
successfully implementing financial management reform. For example, in 
the case of the Year 2000 computer challenge, the personal, active 
involvement of the Deputy Secretary of Defense played a key role in 
building entitywide support and focus. Given the long-standing and 
deeply entrenched nature of the department's financial management 
problems--combined with the numerous competing DOD organizations, each 
operating with varying, often parochial views and incentives--such 
visible, sustained top-level leadership will be critical.

In discussing their April 2001 report to the Secretary of Defense on 
transforming financial management,[Footnote 42] the authors stated 
that, "unlike previous failed attempts to improve DOD's financial 
practices, there is a new push by DOD leadership to make this issue a 
priority." To demonstrate his commitment towards reforming the 
department, Secretary Rumsfeld designated improving financial 
management operations, which included not only finance and accounting 
but also such business areas as logistics, acquisition, and personnel 
management, as 1 of the department's top 10 priorities for 
reform.[Footnote 43] While the commitment of the Secretary is vital to 
the success of any DOD-wide reform effort, strong, sustained executive 
leadership--over a number of years and administrations--will be key to 
changing a deeply rooted culture and to truly transforming DOD's 
business systems and operations so that the department can meet the 
mandate of the CFO Act and achieve the President's Management Agenda 
goal of improved financial management performance.

Additionally, the tenure of the department's top political appointees 
has generally been short in duration and as a result, it is sometimes 
difficult to maintain the focus and momentum that are needed to resolve 
the management challenges facing DOD. This is particularly evident with 
the postwar reconstruction of Iraq along with DOD's substantial 
commitment to the continuing war on terrorism. The resolution of the 
array of interrelated business system management challenges that DOD 
faces is likely to span several administrations. As we have proposed in 
previous congressional testimonies,[Footnote 44] one option to address 
the continuity issue would be the establishment of the position of 
chief operating or management officer. This position could be filled by 
an individual appointed for a set term of 5 to 7 years with the 
potential for reappointment. Such an individual should have a proven 
track record as a business process change agent for large, diverse 
organizations--experience necessary to spearhead business process 
transformation across the department and serve as an integrator for 
business reform.

Clear Lines of Responsibility and Accountability:

Another key to reform is the establishment of clear lines of 
responsibility, decision-making authority, and resource control for 
actions across the department tied to the Secretary. As we previously 
reported,[Footnote 45] such an accountability structure should emanate 
from the highest levels and include the secretary of each of the 
military services as well as heads of the department's various major 
business areas.

The Secretary of Defense has taken action to vest responsibility and 
accountability for financial management modernization with the DOD 
Comptroller. In October 2001, the DOD Comptroller established the 
Financial Management Modernization Executive[Footnote 46] and Steering 
Committees as the governing bodies that oversee the activities related 
to the modernization effort. The Executive Committee is to advise the 
DOD Comptroller on the modernization effort and provide strategic 
direction, whereas the Steering Committee is to advise the Executive 
Committee on the program's performance and provide guidance to the 
program management office.

Results-oriented Performance:

As discussed in our January 2003 report on DOD's major performance and 
accountability challenges,[Footnote 47] establishing a results 
orientation is another key element of any approach to reform. Such an 
orientation should draw upon results that could be achieved through 
commercial best practices, including outsourcing and shared servicing 
concepts. Personnel throughout the department must share the common 
goal of establishing financial management operations that not only 
produce financial statements that can withstand the test of an audit 
but more importantly, routinely generate useful, reliable, and timely 
financial information for day-to-day management purposes. To its 
credit, DOD has initiated a number of improvement actions to address 
accountability and financial information deficiencies.

* In its most recent performance and accountability report, DOD stated 
that it had (1) validated cost-estimating models used in calculating 
environmental liability costs, (2) developed a methodology for 
estimating liabilities associated with nuclear powered ships and 
submarines, and (3) issued improved guidance--for all areas except 
ongoing operations--to help components compile complete, accurate, and 
fully substantiated environmental liability data. In addition, DOD 
claimed that it is developing and maintaining supporting documentation 
and audit trails for 30,000 closed contamination sites, including open 
and closed installations and base reutilization and alignment sites.

* Through training and implementation of more efficient and effective 
processes, DOD is improving its fund accounting and disbursement 
activities. During fiscal year 2002, DOD improved its disbursement 
activity reporting and its procedures for reconciling its fund balance 
records with similar information maintained by the Department of 
Treasury. As a result, the number and amount of disbursement 
disparities between DOD's records and Treasury's records decreased from 
the previous year. DOD is taking the necessary first steps to 
identifying and eliminating payment recording problems.

* DOD's major components must now prepare quarterly financial 
statements along with extensive footnotes that explain any improper 
balances or significant variances from previous year quarterly 
statements. In addition, the midyear and end-of-year financial 
statements must be briefed to the DOD Comptroller by the service 
Assistant Secretary for Financial Management or the head of the defense 
agency. We have observed several of the midyear briefings and have 
noted that the practice of preparing and explaining interim financial 
statements is instilling discipline into DOD's financial reporting 
processes, which will help improve the reliability of DOD's financial 
data.

* DOD has begun to develop methodologies for valuing and depreciating 
the cost of its weapons systems and other equipment used to support its 
military operations. The department completed a similar effort to 
obtain a baseline for the majority of its real property assets in 
fiscal year 1999. These valuation efforts represent important steps 
toward obtaining cost data for management decision making and financial 
reporting. However, in order for the department to reap the full 
benefits of these and similar efforts, it must develop and implement 
efficient and effective systems, processes, and controls--consistent 
with its enterprise architecture--to sustain the calculated baselines 
and capture subsequent additions, modifications, and deletions of 
property assets.

Since the Secretary has established an overall business process 
transformation goal that will require a number of years to achieve, 
going forward it is especially critical for managers throughout the 
department to focus on specific metrics that, over time, collectively 
will translate to achieving this overall goal. It is important for the 
department to refocus its annual accountability reporting on this 
overall goal of fundamentally transforming the department's financial 
management systems and related business processes to include 
appropriate interim annual measures for tracking progress toward this 
goal.

In the short term, it is important to focus on actions that can be 
taken using existing systems and processes. It is critical to establish 
interim measures to both track performance against the department's 
overall transformation goals and facilitate near-term successes using 
existing systems and processes. The department has established an 
initial set of metrics intended to evaluate financial performance and 
it has seen improvements. For example,

* With respect to closed appropriation accounts, during the first 6 
months of fiscal year 2002, DOD reported a reduction in the dollar 
value of adjustments to closed appropriation accounts of about 80 
percent from the same 6-month period in fiscal year 2001.

* For DOD individually billed travel cards, the delinquency rate 
dropped from 8.9 percent in March 2002 to 5.7 percent in March 2003.

* From March 2001 through March 2003, DOD reduced its commercial pay 
backlogs (payment delinquencies) by 46 percent and its payment 
recording errors by 43 percent.

While DOD's metrics show significant improvements from 2001 to today, 
statistics for the last few months show that progress has slowed or 
even taken a step backward for payment recording errors and commercial 
pay backlogs. Our report on DOD's metrics program[Footnote 48] included 
a caution that, without modern integrated systems and the streamlined 
processes they engender, reported progress may not be sustainable if 
workload is increased. It could be that DOD is experiencing problems 
accounting for the additional volume of transactions resulting from 
contingency funding and increased appropriations amounts.

We note that DOD is still formulating departmentwide performance goals 
and measures to align with the outcomes described in its strategic 
plan--the September 2001 Quadrennial Defense Review. We agree with the 
department's efforts to expand the use of appropriate metrics to guide 
its financial management reform efforts. However, it is important for 
DOD to synchronize its development of these metrics with it efforts to 
develop departmentwide goals and measures, including nonfinancial 
metrics, to ensure consistency.

Incentives and Consequences:

Another key to breaking down the parochial interests and stovepiped 
approaches that have plagued previous reform efforts is establishing 
mechanisms to reward organizations and individuals for behaviors that 
comply with DOD-wide and congressional goals. Such mechanisms should be 
geared to providing appropriate incentives and penalties to motivate 
decision makers to initiate and implement efforts that result in 
fundamentally reformed financial management and other business support 
operations.

In addition, such incentives and consequences are essential if DOD is 
to break down the parochial interests that have plagued previous reform 
efforts. Incentives driving traditional ways of doing business, for 
example, must be changed, and cultural resistance to new approaches 
must be overcome. Simply put, DOD must convince people throughout the 
department that they must change from business-as-usual systems and 
practices or they are likely to face serious consequences, 
organizationally and personally.

If people are to be held more accountable for achieving desired 
outcomes, then DOD must make sure that such outcomes are in fact, 
achievable. Along these lines, DOD has taken a positive step to reform 
its acquisition process by revising part of its acquisition regulations 
related to weapons systems. The revisions have focused primarily on (1) 
making sure technologies are demonstrated to a high level of maturity 
before beginning a weapon system program and (2) taking an 
evolutionary, or phased, approach to developing a system. Separating 
technology development from a weapons system development program would 
help curb incentives to over-promise the capabilities of a new weapon 
system and to rely on immature technologies. Also, an evolutionary 
approach to developing requirements and making improvements to a 
system's capabilities is different from the historical approach of 
trying to deliver all desired capabilities in one "big bang." In 
addition, it has been reported that DOD plans to begin using program 
cost estimates from the Office of the Secretary of Defense's Cost 
Analysis Improvement Group, rather than those prepared by the military 
services, which may lead to more realistic cost estimates when pricing 
programs.

Enterprise Architecture:

Enterprise architecture development, implementation, and maintenance 
are a basic tenet of effective IT management. Used in concert with 
other IT management controls, an architecture can increase the chances 
for optimal mission performance. We have found that attempting to 
modernize operations and systems without an architecture leads to 
operational and systems duplication, lack of integration, and 
unnecessary expense. Our best practices research of successful public 
and private sector organizations has similarly identified enterprise 
architectures as essential to effective business and technology 
transformation.[Footnote 49]

Following our May 2001 report,[Footnote 50] the Secretary of Defense 
directed the development and implementation of a departmentwide 
enterprise architecture, and established a program to accomplish this. 
In doing so, the Secretary assigned responsibility for the program to 
the DOD Comptroller, in coordination with the Under Secretary of 
Defense for AT&L and the DOD Chief Information Officer. To assist in 
overseeing and guiding the program, the DOD Comptroller established the 
Financial Management Modernization Executive Committee to oversee the 
architecture and systems modernization efforts, and the Financial 
Management Modernization Steering Committee to advise and guide the 
program. Efforts began in earnest in April 2002 when DOD hired a 
contractor to develop the department's enterprise architecture.

The Clinger-Cohen Act of 1996[Footnote 51] requires major departments 
and agencies to develop, implement, and maintain an integrated 
architecture. As we previously reported,[Footnote 52] such an 
architecture can help ensure that the department invests only in 
integrated business system solutions and, conversely, will help move 
resources away from non-value-added legacy business systems and 
nonintegrated business system development efforts. Without a complete 
enterprise architecture to guide information technology investments, 
and adequate oversight of IT investments to ensure compliance, DOD runs 
the serious risk that its investments will perpetuate the existing 
systems environment that suffers from systems duplication, limited 
interoperability, and unnecessarily costly operations and maintenance.

The fiscal year 2003 National Defense Authorization Act (the 
Act),[Footnote 53] enacted on December 2, 2002, required DOD to develop 
by May 1, 2003, a financial management enterprise architecture and a 
transition plan for implementing the architecture that meet certain 
requirements. The Act also requires DOD to control expenditures for 
financial system improvements while the architecture and transition 
plan are being developed and after they are completed. According to 
DOD, the Comptroller approved the initial version of the department's 
business enterprise architecture in May 2003. Developing and 
implementing a business enterprise architecture for an organization as 
large and complex as DOD is a formidable challenge but it is key to 
achieving the Secretary's vision of relevant, reliable, and timely 
financial information needed to support the department's vast 
operations. We plan to report on DOD's progress in developing its 
architecture and its transition efforts in the near future.

As part of its ongoing business system modernization effort and 
consistent with our past recommendations,[Footnote 54] DOD is creating 
a repository of information about its existing systems environment. To 
accomplish this, DOD initiated an extensive effort to document its 
business systems currently relied upon to carry out financial 
management operations throughout the department. To date, the 
department has identified approximately 2,300 systems that support its 
business operations. In developing its systems inventory, DOD has 
recognized that financial management is broader than just accounting 
and finance systems. Rather, it includes the department's acquisition, 
budget formulation, inventory management, logistics, personnel, and 
property management systems.

DOD is investing billions of dollars in financial management solutions 
and business process reform. In moving forward with the implementation 
of its business enterprise architecture, DOD needs to ensure that the 
multitude of systems efforts currently underway are designed as an 
integral part of the architecture. The effort to implement the 
architecture will be further complicated as the department strives to 
develop multiple architectures across its various business areas and 
organizational components. In this regard, it is critical that DOD has 
the management structure and processes in place to effectively control 
the estimated $19 billion that will be spent on its business systems in 
fiscal year 2004. However, as we have previously reported,[Footnote 55] 
the department has yet to establish the requisite investment governance 
structure and process controls needed to adequately align ongoing 
investments with its architectural goals and direction. To its credit, 
the department has recognized that it cannot continue with the 
proliferation of duplicative, nonstandard, and nonintegrated systems 
and is in the process of developing policies and procedures to obtain 
better visibility and accountability over its IT business system 
investments. A key to success will be DOD's ability to effectively 
manage and oversee its investments in systems. DOD can ill afford to 
invest billions of dollars in systems that are not capable of providing 
DOD management and the Congress with more accurate, timely, and 
reliable information on the results of the department's business 
operations.

Monitoring and Oversight:

Ensuring effective monitoring and oversight of progress will also be 
key to bringing about effective implementation of the department's 
financial management and related business process reform. We have 
previously testified[Footnote 56] that periodic reporting of status 
information to department top management, the Office of Management and 
Budget, the Congress, and the audit community is another key lesson 
learned from the department's successful effort to address its Year 
2000 challenge.

Previous submissions of the department's Financial Management 
Improvement Plan have simply been compilations of data call information 
on the stovepiped approaches to financial management improvements 
received from the various DOD components. It is our understanding that 
DOD plans to change its approach and anchor the plan in the enterprise 
architecture. If the department's future plans are upgraded to provide 
a departmentwide strategic view of the financial management challenges 
facing the department, along with planned corrective actions and 
milestones, these plans can serve as an effective tool not only to help 
guide and direct the department's financial management reform efforts, 
but also to help maintain oversight of the department's financial 
management operations. Going forward, this Subcommittee's oversight 
hearings, as well as the active interest and involvement of the defense 
appropriations and authorization committees, will continue to be key to 
effectively achieving and sustaining DOD's financial management and 
related business process reform milestones and goals.

:

In conclusion, we support Secretary Rumsfeld's vision for transforming 
the department's financial and business related operations. The 
continued leadership and support of the Secretary and other DOD top 
executives will be essential to successfully change the DOD culture 
that has over time perpetuated the status quo and been resistant to a 
transformation of the magnitude envisioned by the Secretary. As noted 
throughout this testimony, DOD is taking steps to begin transformation; 
however, the events of September 11, 2001, the continuing war on 
terrorism, and the reconstruction of Iraq may dilute the focused 
attention and sustained action that are necessary to fully realize the 
Secretary's transformation goal, a situation that is understandable 
given the circumstances. At the same time, with waste and 
inefficiencies potentially costing $20 billion or more annually, true 
reform is needed to restore public confidence that taxpayer dollars are 
well spent in meeting our national defense objectives.

Mr. Chairman, this concludes my statement. I would be pleased to answer 
any questions you or other members of the Subcommittee may have at this 
time.

Contacts and Acknowledgments:

For further information about this testimony, please contact Gregory D. 
Kutz at (202) 512-9095 or kutzg@gao.gov or Molly Boyle at (202) 512-
9524 or boylem@gao.gov. Other key contributors to this testimony 
include Evelyn Logue and Cherry Clipper.

(192096):

FOOTNOTES

[1] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
03-119 (Washington, D.C.: January 2003). The nine interrelated high-
risk areas that represent the greatest challenge to DOD's development 
of world-class business operations to support its forces are: contract 
management, financial management, human capital, information security, 
infrastructure management, inventory management, real property, 
systems modernization, and weapon system acquisition.

[2] Department of Defense, Performance and Accountability Report: 
Fiscal Year 2002 (Washington, D.C.: January 2003).

[3] GAO has designated government operations and programs as "high 
risk" because of either their greater vulnerabilities to waste, abuse, 
and mismanagement or major challenges associated with their economy, 
efficiency, or effectiveness.

[4] U.S. General Accounting Office, High-Risk Series: An Overview, GAO/
HR-95-1 (Washington, D.C.: February 1995); High-Risk Series: Defense 
Financial Management, GAO/HR-97-3 (Washington, D.C.: February 1997); 
High-Risk Series: An Update, GAO-01-263 (Washington, D.C.: January 
2001); and High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: 
January 2003). 

[5] U.S. General Accounting Office, Fiscal Year 2002 U.S. Government 
Financial Statements: Sustained Leadership and Oversight Needed for 
Effective Implementation of Financial Management Reform, GAO-03-572T 
(Washington, D.C.: Apr. 8, 2003).

[6] Statement of Federal Financial Accounting Standards No. 6 states 
that general PP&E is any property, plant, and equipment used in 
providing goods and services. 

[7] Statement of Federal Financial Accounting Standards No. 23, 
Eliminating the Category National Defense Property, Plant and 
Equipment, was issued on May 8, 2003, and is effective for periods 
beginning after September 30, 2002.

[8] JSLIST is a universal, lightweight, two-piece garment (coat and 
trousers) that when combined with footwear, gloves, and protective mask 
and breathing device, forms the war fighter's protective ensemble. 
Together the ensemble is to provide maximum protection to the war 
fighter against chemical and biological contaminants without negatively 
impacting the ability to perform mission tasks. 

[9] U.S. General Accounting Office, DOD Management: Examples of 
Inefficient and Ineffective Business Processes, GAO-02-873T 
(Washington, D.C.: June 25, 2002). 

[10] U.S. General Accounting Office, Purchase Cards: Navy Is Vulnerable 
to Fraud and Abuse but Is Taking Action to Resolve Control Weaknesses, 
GAO-02-1041 (Washington, D.C.: Sept. 27, 2002).

[11] U.S. General Accounting Office, Military Treatment Facilities: 
Internal Control Activities Need Improvement, GAO-03-168 (Washington, 
D.C.: Oct. 25, 2002).

[12] U.S. General Accounting Office, Environmental Liabilities: DOD 
Training Range Cleanup Cost Estimates Are Likely Understated, GAO-01-
479 (Washington, D.C.: Apr. 11, 2001) and Environmental Liabilities: 
Cleanup Costs From Certain DOD Operations Are Not Being Reported, GAO-
02-117 (Washington, D.C.: Dec. 14, 2001).

[13] U.S. General Accounting Office, Defense Inventory: Information on 
the Use of Spare Parts Funding Is Lacking, GAO-01-472 (Washington, 
D.C.: June 11, 2001).

[14] U.S. General Accounting Office, Defense Budget: Tracking of 
Emergency Response Funds for the War on Terrorism, GAO-03-346 
(Washington, D.C.: Apr. 30, 2003).

[15] U.S. General Accounting Office, DOD Competitive Sourcing: Results 
of A-76 Studies Over the Past 5 Years, GAO-01-20 (Washington, D.C.: 
Dec. 7, 2000).

[16] U.S. General Accounting Office, Competitive Sourcing: Challenges 
in Expanding A-76 Governmentwide, GAO-02-498T (Washington, D.C.: Mar. 
6, 2002).

[17] Department of Defense, Transforming Department of Defense 
Financial Management: A Strategy for Change (Washington, D.C.: Apr. 13, 
2001).

[18] Government Performance and Results Act of 1993, Pub. L. 103-62, 
107 Stat. 285, Aug. 3, 1993. Pertinent performance planning and 
reporting requirements have been codified, as amended, at 31 U.S.C. 
sections 1115 and 1116.

[19] U.S. General Accounting Office, DOD Business Systems 
Modernization: Continued Investment in Key Accounting Systems Needs to 
be Justified, GAO-03-465 (Washington, D.C.: Mar. 28, 2003).

[20] U.S. General Accounting Office, DOD Business Systems 
Modernization: Improvements to Enterprise Architecture Development and 
Implementation Efforts Needed, GAO-03-458 (Washington, D.C.: Feb. 28, 
2003).

[21] GAO-03-465.

[22] DOD Inspector General, Information Technology: Effectiveness of 
the Joint Total Asset Visibility Program; Audit Report D-2002-057 
(Arlington, Va.; Mar. 11, 2002).

[23] Department of Defense, Report to Congress: Defense Integrated 
Military Human Resources System (Personnel and Pay), June 2002. 

[24] U.S. General Accounting Office, DOD Financial Management: 
Important Steps Underway But Reform Will Require a Long-term 
Commitment, GAO-02-784T (Washington, D.C.: June 4, 2002).

[25] U.S. General Accounting Office, Travel Cards: Control Weaknesses 
Leave Navy Vulnerable to Fraud and Abuse, GAO-03-147 (Washington, D.C.: 
Dec. 23, 2002); Air Force Management Has Reduced Delinquencies, but 
Improvements in Controls Are Needed, GAO-03-298 (Washington, D.C.: Dec. 
20, 2002); Travel Cards: Control Weaknesses Leave Army Vulnerable to 
Potential Fraud and Abuse, GAO-03-169 (Washington, D.C.: Oct. 11, 
2002).

[26] U.S. General Accounting Office, Purchase Cards: Control Weaknesses 
Leave the Air Force Vulnerable to Fraud, Waste, and Abuse, GAO-03-292 
(Washington, D.C.: Dec. 20, 2002); Purchase Cards: Navy Is Vulnerable 
to Fraud and Abuse but Is Taking Action to Resolve Control Weaknesses, 
GAO-02-1041 (Washington, D.C.: Sept. 27, 2002); Purchase Cards: Control 
Weaknesses Leave Army Vulnerable to Fraud, Waste, and Abuse, GAO-02-732 
(Washington, D.C.: June 27, 2002); Purchase Cards: Control Weaknesses 
Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO-02-32 
(Washington, D.C.: Nov. 30, 2001).

[27] U.S. General Accounting Office, Air Force Depot Maintenance: 
Management Improvements Needed for Backlog of Funded Contract 
Maintenance Work, GAO-02-623 (Washington, D.C.: June 20, 2002).

[28] U.S. General Accounting Office, Canceled DOD Appropriations: $615 
Million of Illegal or Otherwise Improper Adjustments, GAO-01-697 
(Washington, D.C.: July 26, 2001). 

[29] U.S. General Accounting Office, DOD Contract Management: 
Overpayments Continue and Management and Accounting Issues Remain, GAO-
02-635 (Washington, D.C.: May 30, 2002).

[30] U.S. General Accounting Office, DOD High-Risk Areas: Eliminating 
Underlying Causes Will Avoid Billions of Dollars in Waste, GAO/T-NSIAD/
AIMD-97-143 (Washington, D.C.: May 1, 1997).

[31] Chief Financial Officers Act of 1990, Pub. L. 101-576, 104 Stat. 
2842, Nov. 15, 1990 (codified as amended in scattered sections of 31 
U.S.C.).

[32] U.S. General Accounting Office, Executive Guide: Creating Value 
Through World-class Financial Management, GAO/AIMD-00-134 (Washington, 
D.C.: Apr. 1, 2000).

[33] U.S. General Accounting Office, Defense Management: Actions Needed 
to Sustain Reform Initiatives and Achieve Greater Results, GAO/NSIAD-
00-72 (Washington, D.C.: July 25, 2000).

[34] U.S. General Accounting Office, Financial Management: DOD 
Improvement Plan Needs Strategic Focus, GAO-01-764 (Washington, D.C.: 
Aug. 15, 2001).

[35] Department of Defense, Transforming Department of Defense 
Financial Management: A Strategy for Change, (Washington, D.C.: Apr. 
13, 2001).

[36] U.S. General Accounting Office, Department of Defense: Progress in 
Financial Management Reform, GAO/T-AIMD/NSIAD-00-163 (Washington, 
D.C.: May 9, 2000).

[37] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-01-244 (Washington, D.C.: 
Jan.1, 2001).

[38] U.S. General Accounting Office, DOD Personnel: DOD Actions Needed 
to Strengthen Civilian Human Capital Strategic Planning and Integration 
with Military Personnel and Sourcing Decisions, GAO-03-475 (Washington, 
D.C.: Mar. 28, 2003).

[39] U.S. General Accounting Office, Human Capital: DOD's Civilian 
Personnel Strategic Management and the Proposed National Security 
Personnel System, GAO-03-493T (Washington, D.C.: May 12, 2003).

[40] DOD's seven business process areas include: (1) acquisition/
procurement, (2) finance, accounting operations, and financial 
management, (3) human resource management, (4) logistics, (5) strategic 
planning and budgeting, (6) installations and environment, and (7) 
technical infrastructure.

[41] GAO/AIMD-00-134.

[42] Department of Defense, Transforming Department of Defense 
Financial Management: A Strategy for Change (Washington, D.C.: Apr. 13, 
2001).

[43] The Secretary's top ten priorities: successfully pursue the global 
war on terrorism, strengthen joint warfighting capabilities, transform 
the joint force, optimize intelligence capabilities, improve force 
manning, new concepts of global engagement, counter the proliferation 
of weapons of mass destruction, homeland security, streamline DOD 
business processes, and improve interagency processes, focus, and 
integration.

[44] U.S. General Accounting Office, DOD Financial Management: 
Integrated Approach, Accountability, Transparency, and Incentives Are 
Keys to Effective Reform, GAO-02-497T (Washington, D.C.: Mar. 6, 2002); 
U.S. General Accounting Office, DOD Financial Management: Important 
Steps Underway But Reform Will Require a Long-term Commitment, GAO-02-
784T (Washington, D.C.: June 4, 2002).

[45] GAO/NSIAD-00-72 and GAO-03-458.

[46] Effective December 28, 2001, Sec. 1009 of the Floyd D. Spence 
National Defense Authorization Act for Fiscal Year 2001, Pub. L. No. 
107-107, 115 Stat. 1012, 1206 (codified at 10 U.S.C. Sec. 185), 
required the Secretary of Defense to establish a Financial Management 
Modernization Executive Committee.

[47] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 
1, 2003).

[48] U.S. General Accounting Office, Financial Management: DOD's 
Metrics Program Provides Focus for Improving Performance, GAO-03-457 
(Washington, D.C.: Mar. 28, 2003).

[49] U.S. General Accounting Office, Executive Guide: Improving Mission 
Performance through Strategic Information Management and Technology, 
GAO/AIMD-94-115 (Washington, D.C.: May 1, 1994).

[50] U.S. General Accounting Office, Information Technology: 
Architecture Needed to Guide Modernization of DOD's Financial 
Operations, GAO-01-525 (Washington, D.C.: May 17, 2001).

[51] Clinger-Cohen Act of 1996, Pub. L. 104-106, Div. E, 110 Stat. 679, 
Feb. 10, 1996 (codified as amended at scattered sections of the 
U.S.C.).

[52] GAO/T-AIMD/NSIAD-00-163.

[53] Bob Stump National Defense Authorization Act for Fiscal Year 2003, 
Pub. L. 107-314, Sec. 1004, 116 Stat. 2458, 2629, Dec. 2, 2002.

[54] U.S. General Accounting Office, Financial Management: Analysis of 
DOD's Inventory of Financial Management Systems Is Incomplete, GAO/
AIMD-97-39 (Washington, D.C.; Jan. 29, 1997); Financial Management: DOD 
Improvement Plan Needs Strategic Focus, GAO-01-764 (Washington, D.C.: 
Aug. 17, 2001).

[55] GAO-03-458.

[56] GAO-01-244.