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DOD Financial Management

This information appears as published in the 2015 High Risk Report.

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The Department of Defense (DOD) is responsible for more than half of the federal government’s discretionary spending. Significant financial and related business management systems and control weaknesses have adversely affected DOD’s ability to control costs; ensure basic accountability; anticipate future costs and claims on the budget; measure performance; maintain funds control; prevent and detect fraud, waste, and abuse; address pressing management issues; and prepare auditable financial statements.

Without accurate, timely, and useful financial information, DOD is severely hampered in making sound decisions affecting the department’s operations. Further, to the extent that current budget constraints and fiscal pressures continue, the reliability of DOD’s financial information and ability to maintain effective accountability for its resources will be increasingly important to the federal government’s ability to make sound resource allocation decisions. Effective financial management is also fundamental to achieving DOD’s broader business transformation goals.

Successful transformation of DOD’s financial management processes and operations will allow DOD to routinely generate timely, complete, and reliable financial and other information for day-to-day decision making, including the information needed to effectively (1) manage assets, (2) assess program performance and make budget decisions, (3) make cost-effective operational choices, and (4) provide accountability over the use of public funds.

DOD Financial Management

Since 2013, DOD’s progress in improving its financial management processes and operations has been mixed. DOD has made partial progress toward demonstrating leadership commitment and developing capacity and action plans. For example, DOD’s senior-level leadership continues its efforts to address its financial management challenges through (1) implementation of the Financial Improvement and Audit Readiness (FIAR) Plan and the accompanying FIAR Guidance, which provides the standard methodology for DOD’s components to implement the FIAR Plan, (2) implementation of certain of its planned enterprise resource planning (ERP) systems to establish modern business information systems, and (3) development of training programs to build a skilled workforce. However, DOD continues to face challenges in monitoring corrective actions and demonstrating progress. It needs to address such key challenges as identifying and mitigating risks to achieving the goals of DOD’s FIAR effort, and successfully implementing the FIAR Guidance at the DOD component level. Specifically, risk management policies associated with preparing auditable financial statements through the FIAR Plan are not in accordance with widely recognized guiding principles for effective risk management. Although DOD has identified several risks that could hinder its efforts to achieve financial statement auditability, it has not identified or addressed additional key risks reported in external audit reports, such as (1) components’ reliance on service providers for significant aspects of their financial operations—processing and recording financial transactions, and (2) lack of ability to maintain documentation to support transactions.

Leadership Commitment. Since the last high-risk update in 2013, the commitment of DOD’s senior leadership to improving the department’s financial management has continued to be encouraging, with statements, testimony, and actions emphasizing the importance of effective financial management and audit readiness to DOD’s stewardship over the substantial funding and other resources entrusted to the department.

DOD’s leadership directives have set out a strategy and methodology for improving DOD’s financial management through the FIAR Plan Status Reports and FIAR Guidance, consistent with statutory requirements. The FIAR Guidance requires components to perform procedures to verify that corrective action plans have been implemented and that they have successfully remediated system, process, and internal control deficiencies. The FIAR Directorate meets regularly with us for a constructive exchange of information on the status of DOD and component actions and to help sustain progress toward the FIAR goals.

However, as we have previously reported, DOD continued to identify the need for qualified and experienced personnel—not only at working levels, but also in senior leadership positions— as a risk to achieving its financial improvement and audit readiness goals. In its May 2014 FIAR Plan Status Report, DOD stated that budgetary pressures from recent years have severely impeded its progress in addressing its financial management deficiencies.

Capacity. DOD is making efforts to increase its capacity in business information systems and workforce knowledge and skills. It has identified several, multifunctional ERP systems as critical to its financial management improvement efforts. DOD is in the process of implementing various ERP systems to establish an audit ready systems environment, but the components’ plans for ERP deployment vary, and some projected deployment dates have either not been determined or extend into fiscal year 2017. As it relates to workforce knowledge and skills, DOD is addressing financial management workforce competencies and training through complementary efforts by (1) the Office of the Under Secretary of Defense for Personnel and Readiness (DOD Personnel and Readiness) to develop a strategic civilian workforce plan that includes financial management, pursuant to requirements in the National Defense Authorization Act (NDAA) for Fiscal Year 2010[1] and (2) the DOD Comptroller to develop and implement a training program for financial managers.[2] DOD has established a training program for its financial management workforce known as the Financial Manager Certification Program, which will guide training and development for DOD’s financial management workforce.

We have reported that substantive results are not yet apparent from DOD’s efforts in building its capacity. We and the DOD Office of Inspector General (DOD IG) have found deficiencies in the capability of the ERPs to perform essential business functions in areas such as data quality, data conversion, system interfaces, and compliance with laws and regulations. In September 2014, we found that the Army’s Global Combat Support System (GCSS-Army) program had still not fully met best practices in developing schedule and cost estimates.[3] By incorporating best practices for developing reliable schedule and cost estimates for the GCSS Army, DOD would increase the probability of GCSS-Army successfully achieving full deployment by the fourth quarter of fiscal year 2017 to provide needed functionality for financial improvement and audit readiness. We also reported on continuing delays in the deployment of other key ERP systems. In addition, the DOD IG has reported that four component ERP systems did not have the capability to record and track transaction data.[4] This weakness impairs the reliability of DOD’s budgetary and financial reports, including periodic reports to Congress. In addition, the DOD IG reported that transactions originating in feeder systems are not always supported, which will hinder DOD’s audit readiness efforts. Further, the DOD IG stated that because of schedule delays and cost increases, DOD will continue using outdated legacy systems and ERP systems that have not been fully developed or implemented, increasing the risk that it will not meet its goal of full financial statement auditability by September 30, 2017. In DOD’s fiscal year 2014 Agency Financial Report, the DOD IG reiterated this concern and noted that the department has not reengineered its business processes to the extent necessary, stating that instead it has often customized commercial ERPs to accommodate existing processes.

Regarding DOD’s financial management workforce, we have reported that DOD has not met statutory requirements for assessing the gap between existing and future critical-skill needs. DOD will need to fulfill the mandated critical-skill requirements for its financial management workforce to ensure that it has the capacity to make lasting improvements in its financial management. In addition, DOD will need to effectively implement its Financial Manager Certification Program to help ensure that the components have knowledgeable and skilled managers to implement the FIAR Guidance.

Action Plan. DOD has set out a strategy for financial management reform efforts (through the FIAR Plan Status Reports) and a methodology for achieving such reform (through the FIAR Guidance). The FIAR Guidance provides the components with a standard methodology to use in implementing the FIAR Plan. It continues to focus on strengthening processes, controls, and systems to improve the accuracy, reliability, and reporting of (1) budgetary information and (2) management information that pertains to mission-critical assets. However, the guidance does not fully define the actions to be taken to resolve other long-standing financial management weaknesses. For example, DOD is not able to accurately account for its assets and continues to have significant funds control weaknesses that leave it at risk of overobligating and overexpending its appropriations.

The efforts of DOD components to date to implement the FIAR Guidance have not resulted in a fundamental transformation of systems and operations necessary to resolve the department’s long-standing financial management deficiencies. Resolution of these deficiencies will be crucial to DOD’s efforts to meet the September 30, 2017, statutorily mandated target date for validating audit readiness of DOD’s full financial statements.

Monitoring. DOD has identified the key capabilities (e.g., sufficient, relevant, and accurate supporting documentation that is readily available) that its components must achieve to demonstrate audit readiness with respect to the budgetary information reported in its Statement of Budgetary Resources (SBR).[5] It uses metrics (e.g., percentage of supporting documents deemed sufficient) to monitor the components’ progress toward audit readiness. DOD’s intent with respect to monitoring and oversight of the metrics is to demonstrate visible component-level progress in assessing and testing controls and remediation of control deficiencies.

However, the lack of effective monitoring and oversight of the metrics used to assess controls and the remediation of control deficiencies has contributed to DOD’s lack of progress in implementing the FIAR Guidance effectively. For example, we recently reported that DOD did not fully implement the FIAR Guidance in the areas of planning, testing, and corrective actions. Specifically, DOD did not adequately (1) perform certain planning activities associated with its processing of payments to contractors (contract pay), (2) perform required testing of its contract pay controls, processes, and balances, and (3) provide documentation to support the department’s claim that it had remediated all of the identified control deficiencies with respect to contract pay. We also reported that, for the Army, DOD did not ensure that all significant budgetary processes, systems, and risks were adequately considered and identified deficiencies were resolved.

DOD has not effectively monitored the risks in remediating its financial management challenges. As we noted in a recent report, DOD’s risk management policies and procedures associated with preparing auditable financial statements through the FIAR Plan were not in accordance with widely recognized guiding principles for effective risk management. Without effective monitoring and management of risk at the department level, DOD is at increased risk of not fully resolving its financial management challenges.

Demonstrated Progress. In response to component difficulties in preparing for a full SBR audit, DOD made a significant change to its FIAR Guidance that will limit the scope of the first year SBR audits for DOD components. As outlined in the November 2014 FIAR Plan Status Report and the November 2013 revised FIAR Guidance, the scope of initial SBR audits, beginning in fiscal year 2015, will be on current-year budget activity, to be reported on a Schedule of Budgetary Activity (SBA).[6] This would be an interim step toward achieving an audit of multiple-year budget activity required for an SBR. In making this strategic change, DOD officials concluded—based on the difficulties encountered in obtaining documentation for prior-year transactions on the United States Marine Corps SBR audit—that the most effective path to a full SBR audit would be to start with reporting and auditing only current-year activity for fiscal year 2015 appropriations and expanding subsequent audits to include current-year appropriations and prior appropriations going back to fiscal year 2015. Although the NDAA for Fiscal Year 2010, as amended by the NDAA for Fiscal Year 2013, set September 30, 2014, as the target date for validating the audit readiness of the SBR,[7] the most current FIAR Plan Status Report acknowledges that DOD has not met that date.

DOD has continued its efforts towards an auditable SBA. The military departments and other defense organizations asserted that their documentation and internal controls are sufficient to support an audit of their SBA on September 30, 2014, and started first-year SBA audits during fiscal year 2015. DOD has also reported that six DOD organizations[8] received unmodified audit opinions on their fiscal year 2013 financial statements, and one DOD organization[9] has received a modified opinion. DOD components are in the process of implementing their financial improvement plans for the existence and completeness of mission-critical assets, such as ships, aircraft, and real property. In its May 2014 FIAR Plan Status Report, DOD stated that 69 percent of property and equipment and 26 percent of inventory have been asserted as audit ready.

DOD has efforts under way to address its long-standing financial management weaknesses. Also, Congress has played a major role by establishing statutory goals and requirements that have helped lead to many of the corrective actions. Congressional oversight committees have continued to press for increased progress at DOD through legislation and hearings in 2013 and 2014. We will continue to support Congress in its oversight.

Congressional Action

To encourage financial management reform, Congress passed the NDAA for Fiscal Year 2010 requiring that DOD develop and maintain the FIAR Plan, which includes the specific actions to be taken and costs associated with correcting the financial management deficiencies that impair its ability to prepare timely, reliable, and complete financial management information and ensuring that its financial statements are validated as ready for audit by September 30, 2017. The NDAA for Fiscal Year 2013 established certain requirements for the FIAR Plan, including actions taken to ensure audit readiness of DOD’s SBR no later than September 30, 2014, and an assessment of readiness. The November 2014 FIAR Plan Status Report acknowledges that DOD did not achieve the above noted requirement for the SBR to be validated as ready for audit by September 30, 2014. Further, the NDAA for Fiscal Year 2014 mandates a full audit of DOD’s fiscal year 2018 financial statements, and that those results be submitted to Congress by March 31, 2019.[10] Congressional oversight committees have continued to press for increased progress at DOD through legislation and hearings in 2013 and 2014. We will continue to support Congress in its oversight.



[1] Pub. L. No. 111-84, § 1108(a)(1), (Oct. 28, 2009), codified as amended at 10 U.S.C. § 115b(e).

[2] The National Defense Authorization Act for Fiscal Year 2012 requires the Secretary of Defense to prescribe professional certification and credential standards for financial management positions within the Department of Defense. Pub. L. No. 112-81, § 1051, (Dec. 31, 2011), codified at 10 U.S.C. § 1599d.

[3] GCSS-Army was initiated in December 2003 and is intended to provide all active Army, National Guard, and Army Reserve tactical units with the capability to track supplies, spare parts, and organizational equipment. The system is also intended to track unit maintenance, total cost of ownership, and other financial transactions related to logistics for all Army units—about 160,000 users.

[4] General Fund Enterprise Business System, Logistics Modernization Program, Navy Enterprise Resource Planning, and Defense Enterprise Accounting and Management System.

[5] SBR is the only financial statement predominantly derived from an entity’s budgetary accounts in accordance with budgetary accounting rules, which are incorporated into generally accepted accounting principles for the federal government. SBR is designed to provide information on authorized budgeted spending authority and links to the Budget of the United States Government, including budgetary resources, availability of budgetary resources, and how obligated resources have been used. Budgetary resources include the amount available to enter into new obligations and to liquidate them. Budgetary resources are made up of new budget authority (including direct spending authority provided in existing statute and obligation limitations) and unobligated balances of budget authority provided in previous years.

[6] Beginning in fiscal year 2015, DOD components will undergo examinations of component SBAs. Unlike the SBR, which reflects multiple-year budget activity, the SBA will reflect the balances and associated activity related only to funding approved on or after October 1, 2014. As a result, the SBAs will exclude unobligated and unexpended amounts carried over from prior years’ funding as well as information on the status and use of such funding in subsequent years (e.g., obligations incurred, outlays). 

[7] Pub. L. No. 112-39, § 1005(a), codified at 10 U.S.C. § 2222 note.

[8] The six DOD agencies that received unmodified opinions are U.S. Army Corps of Engineers – Civil Works, Defense Finance and Accounting Service, Defense Contract Audit Agency, Defense Commissary Agency, Defense Health Agency – Contract Resource Management, and Military Retirement Fund.

[9] Medicare-Eligible Retiree Health Care Fund.

[10] Pub. L. No. 113-66 § 1003, codified at 10 U.S.C. § 2222 note.

Leadership. DOD needs to assure the sustained involvement of leadership at all levels of the department in addressing financial management reform and business transformation. DOD leadership says it is committed to achieving effective funds controls to support financial accountability and reliable information for day-to-day management decision making and auditable financial statements. However, because some of the corrective actions on long-standing funds control weaknesses are not expected to be completed until 2017, these weaknesses, until fully resolved, will continue to adversely affect DOD’s ability to achieve its goals for financial accountability. DOD leadership needs to ensure that DOD components adhere to the disciplined processes in the FIAR Plan and the accompanying FIAR Guidance to ensure that components have effective leadership, processes, systems, and controls in place for sustainable improvement of DOD’s financial management operations and audit readiness. Sustained leadership commitment is critical to DOD’s success in achieving financial accountability and in providing reliable information for day-to-day management decision making as well as financial audit readiness. Also, DOD will need to ensure key leadership positions are filled with qualified people.

Capacity. DOD needs to meet statutory requirements for assessing the gap between existing and future critical-skill needs of the financial management workforce.[1] Once DOD has identified critical skills and competencies, it can develop strategies to address gaps in the number of personnel, needed skills and competencies, and deployment of the workforce. In addition, DOD will also need to fully and effectively implement its Financial Manager Certification Program, which began phased implementation in June 2013.

DOD also needs to continue to develop and deploy ERPs as a critical component of DOD’s financial improvement and audit readiness strategy. DOD needs to adopt best practices in cost estimation and scheduling to address cost, schedule, and capability issues in the development and implementation of its ERPs. For example, we reported in February 2014 that the Air Force did not meet best practices in developing a schedule for the Defense Enterprise Accounting and Management System (DEAMS).[2] As a result, this raises questions about the credibility of the deadline for acquiring and implementing DEAMS to provide needed functionality for financial improvement and audit readiness.

The DOD IG has reported that DOD continues to have schedule delays in effectively implementing its ERPs. These delays in implementing ERP systems increase the risk that DOD will not meet its goal for readiness for a full financial statement audit by the end of fiscal year 2017. DOD also needs to ensure that four component ERP systems have the capability to record and track transaction data.[3]

Action Plan. DOD needs to continue to implement its FIAR Plan and FIAR Guidance to focus on strengthening processes, controls, and systems to improve the accuracy, reliability, and reporting for the SBA and the SBR, and to assess the existence and completeness of mission-critical assets. It also needs to fully define in the FIAR Guidance the actions that need to be taken to resolve the department and its components’ long-standing financial management weaknesses and to address full financial statement auditability. While implementing the guidance, DOD should not lose sight of the ultimate goal of implementing lasting and sustainable financial management reform which provides useful, reliable, and timely information for decision making as a routine part of financial management operations. Auditable financial statements would be a natural byproduct of their success.

Monitoring. In effectively monitoring its components’ implementation of the FIAR Guidance and component-level progress in assessing and testing controls and in remediating control deficiencies, DOD needs to gain assurance that the components have implemented their financial improvement plans effectively prior to asserting audit readiness. For example, DOD should take such actions as the following:

  • require the Defense Finance and Accounting Service (DFAS) and Army to complete corrective actions in response to our recommendations for improving the implementation of their financial improvement plans (i.e., contract payments and budgetary execution) in accordance with the FIAR Guidance. Other DOD components also need to consider how these recommendations apply to their own efforts.
  • design and implement policies and procedures for FIAR Plan risk management that fully incorporate the five risk management guiding principles and consider the Navy’s and Defense Logistics Agency’s risk management practices.[4]
  • follow best practices in cost and schedule management to allow better oversight for timely development, within cost, of ERP systems that deliver the intended capabilities.

A useful guide for DOD in its efforts going forward to address financial management reform would be the effective implementation of the recommendations made by the House Armed Services Committee Panel on Defense Financial Management and Auditability Reform.[5]

Demonstrated Progress. Improving the department’s financial management operations—and thereby providing DOD management and the Congress with more accurate and more reliable information on the results of its business operations—will not be an easy task. Key challenges remain, such as identifying and mitigating risks to achieving the goals of DOD’s FIAR effort, successfully implementing the FIAR Guidance at the DOD component level, modernizing DOD’s business information systems, and improving the financial management workforce.

As DOD moves forward with asserting audit readiness, our work has shown that effective processes, systems, and controls are not yet in place to ensure that its components have adequately improved financial management information for day-to-day decision making. For example, we issued two reports to DOD in 2014 with recommendations to help DOD fully implement its FIAR Guidance with respect to DFAS contract pay and Army budget execution. In its approach to implementation of the FIAR Plan, DOD has emphasized asserting audit readiness by set dates over assuring that processes, systems, and controls are effective, reliable, and sustainable. In DOD’s fiscal year 2014 Agency Financial Report, the DOD IG stated that DOD must continue to develop and implement a comprehensive plan that identifies the interim objectives and schedule of milestones to achieve audit readiness of the (1) full SBR, (2) existence and completeness of mission critical assets, and (3) full financial statements. While time frames are important for measuring progress, DOD should not lose sight of the ultimate goal of implementing lasting financial management reform to ensure that it can routinely generate reliable financial management and other information critical to decision making and effective operations.



[1] See NDAA for Fiscal Year 2010 and NDAA for Fiscal Year 2012.

[2] DEAMS was initiated in August 2003 and is intended to provide the Air Force with the entire spectrum of financial management capabilities, including collections, commitments and obligations, cost accounting, general ledger, funds control, receipt and acceptance, accounts payable and disbursement, billing, and financial reporting for the general fund.

[3] DEAMS, the General Fund Enterprise Business System, the Logistics Modernization Program, and Navy ERP.

[4] The five risk management guiding principles include; (1) identifying risks that could prevent it from achieving its goals, (2) assessing the magnitude of those risks, (3) developing risk mitigation plans, (4) implementing mitigating actions to address the risks, and (5) monitoring the effectiveness of those mitigating actions.

[5] House Armed Services Committee Panel on Defense Financial Management and Auditability Reform, Findings and Recommendations (Washington, D.C.: Jan. 24, 2012).

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  • portrait of Asif Khan
    • Asif Khan
    • Director, Financial Management and Assurance
    • khana@gao.gov
    • (202) 512-9869