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United States General Accounting Office: 


Before the Subcommittee on Government Efficiency, Financial 
Management, and Intergovernmental Relations, House Committee on 
Government Reform: 

For Release on Delivery: 
Expected at 1 p.m. 
Wednesday, March 20, 2002: 

DOD Financial Management: 

Integrated Approach, Accountability, Transparency, and Incentives Are 
Keys to Effective Reform: 
Statement of Gregory D. Kutz: 
Director, Financial Management and Assurance: 


Mr. Chairman and Members of the Subcommittee: 

It is a pleasure to be here to discuss financial management at the 
Department of Defense (DOD). Today, DOD faces financial management 
problems that are pervasive, complex, long-standing, and deeply rooted 
in virtually all business operations throughout the department. DOD’s 
financial management deficiencies, taken together, represent the 
single largest obstacle 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 have passed the test of 
an independent financial audit because of pervasive weaknesses in 
financial management systems, operations, and controls. 

Overhauling financial management represents a major management 
challenge that goes far beyond financial accounting to the very fiber 
of the department’s range of business operations and management 
culture. Previous administrations over the past several decades have 
tried to address these problems in various ways but have largely been 
unsuccessful. In this regard, on September 10, 2001, Secretary of 
Defense Rumsfeld announced a broad initiative intended to “transform 
the way the department works and what it works on” which he estimated 
could save 5 percent of DOD’s budget—or an estimated $15 to $18 
billion annually. The Secretary recognized that transformation would 
be difficult and expected the needed changes would take 8 or more 
years to complete. 

The President’s Management Agenda includes improved financial 
management performance as one of his five governmentwide management 
goals. In addition, in August 2001, the Principals of the Joint 
Financial Management Improvement Program—the Secretary of the 
Treasury, the Director of the Office of Management and Budget, the 
Director of the Office of Personnel Management, and the Comptroller 
General—began a series of quarterly meetings that marked the first 
time all four of the Principals had gathered together in over 10 
years. To date, these sessions have resulted in substantive 
deliberations and agreements focused on key issues such as better 
defining measures for financial management success. These measures 
include being able to routinely provide timely, reliable, and useful 
financial information and having no material internal control 
weaknesses. Success on these measures will be a significant challenge 
to DOD. The principals have invited Defense Comptroller Zakheim to 
their upcoming April 2002 meeting to discuss the department’s 
transformation effort and to begin a constructive engagement with DOD 
on this important initiative. 

With the events of September 11, and the federal government’s short-
and long-term budget challenges, it is more important than ever that 
DOD effectively transform its business processes to ensure that it 
gets the most from every dollar spent. The department must be able to 
effectively carry out its stewardship responsibilities for the funding 
it receives and for the vast amount of equipment and inventories used 
in support of military operations. Even before the events of September 
11, increased globalization, changing security threats, and rapid 
technological advances were prompting fundamental changes in the 
environment in which DOD operates. These trends place a premium on 
increasing strategic planning, enhancing results orientation, ensuring 
effective accountability, maintaining transparency, and using 
integrated approaches. Six of the 22 areas on GAO’s governmentwide 
“high-risk” list are DOD program areas, and DOD shares responsibility 
for 2 other high-risk areas that are governmentwide in scope. 
[Footnote 1] Central to effectively addressing DOD’s financial 
management problems will be the understanding that these eight areas 
are interrelated and cannot be addressed in an isolated, stovepiped, 
or piecemeal fashion. 

The recent success of our forces in Afghanistan has again demonstrated 
the unparalleled excellence of our military forces. This same level of 
excellence is not yet evident in the department’s financial management 
and other business processes. This is particularly problematic because 
effective financial 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. This level of excellence will also be 
critical in order to enhance overall transparency and accountability. 
Success in this area will serve to free up resources that can be 
redeployed 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. 

Today, I will provide my perspectives on (1) how Defense got where it 
is today and the underlying causes of the department’s longstanding 
inability to effectively reform its financial management and other 
business systems and processes and (2) the keys to successfully 
carrying out the Secretary’s business process transformation and DOD’s 
plans and actions to date. Last summer, the Comptroller General shared 
with Secretary Rumsfeld and Comptroller Zakheim a business 
transformation paper. This paper provided an overview of GAO’s views 
on the current challenges facing the department, the keys to effective 
reform, and detailed one option for addressing these challenges. 

Long-Standing Financial Management Problems and Attempts at Reform: 

History is a good teacher. To solve the problems of today, it is 
instructive to look to the past. The problems with the department’s 
financial management operations date back decades, and previous 
attempts at reform have largely proven unsuccessful. These problems 
adversely affect DOD’s ability to control costs, ensure basic 
accountability, anticipate future costs and claims on the budget (such 
as for health care, weapon systems, and environmental liabilities), 
measure performance, maintain funds control, prevent fraud, and 
address pressing management issues. 

In this regard, I would like to briefly highlight three of our recent 
products that exemplify the adverse impact of DOD’s reliance on 
fundamentally flawed financial management systems and processes and a 
weak overall internal control environment. 

* In a testimony before your subcommittee last week,[Footnote 2] we 
highlighted continuing problems with internal controls over 
approximately $64 million in fiscal year 2001 purchase card 
transactions involving two Navy activities. Consistent with our 
testimony last July[Footnote 3] on fiscal year 2000 purchase card 
transactions at these locations, our follow-up review demonstrated 
that continuing control problems left these Navy activities vulnerable 
to fraudulent, improper, and abusive purchases and theft and misuse of 
government property. We are currently auditing purchase card usage 
across the department. 

* In a testimony before your Subcommittee in July 2001, we reported 
[Footnote 4] that DOD did not have adequate systems, controls, and 
managerial attention to ensure that $2.7 billion of adjustments to 
closed appropriations were legal and otherwise proper. Our review of 
$2.2 billion of these adjustments found that about $615 million of 
them should not have been made, including about $146 million that were 

* In June 2001, we reported[Footnote 5] that DOD’s current 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 the 
intended purpose. The vast majority of the funds—92 percent—were 
transferred to the military services operation and maintenance 
accounts. We found that once these funds were transferred, DOD lost 
its ability to assure the Congress that the funds it received for 
spare parts purchases were used for, and only for, that purpose. 

Problems with the department’s financial management operations go far 
beyond its accounting and finance systems and processes. The 
department continues to rely on a far-flung, complex network of 
finance, logistics, personnel, acquisition, and other management 
information systems— 80 percent of which are not under the control of 
the DOD Comptroller—to gather the financial data needed to support day-
to-day management decisionmaking. This network was not designed to be, 
but rather has 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 translations and 
interfaces that combine to exacerbate problems with data integrity. 
DOD has determined, for example, that efforts to reconcile a single 
contract involving 162 payments resulted in an estimated 15,000 

Many of the department’s business processes in operation today are 
mired in old, inefficient processes and legacy systems, some of which 
go back to the 1950s and 1960s. For example, while implemented in 
1968, the department still relies on the Mechanization of Contract 
Administration Services (MOCAS) system to process a substantial 
portion of the contract payment transactions for all DOD 
organizations. In fiscal year 2001, MOCAS processed an estimated $78 
billion in contract payments. Past efforts to replace MOCAS have 
failed. Most recently, in 1994, DOD began acquiring the Standard 
Procurement System (SPS) to replace the contract administration 
functions currently performed by MOCAS. However, our July 2001 and 
February 2002 reporting[Footnote 6] on DOD’s $3.7 billion investment 
in SPS showed that this substantial investment was not economically 
justified and raised questions as to whether further investment in SPS 
was justified. For the foreseeable future, DOD will continue to be 
saddled with MOCAS. 

Moving to the 1970s, we, the Defense Inspector General, and the 
military service audit organizations, issued numerous reports 
detailing serious problems with the department’s financial management 
operations. For example, between 1975 and 1981, we issued more than 75 
reports documenting serious problems with DOD’s existing cost, 
property, fund control, and payroll accounting systems. In the 1980s, 
we found that despite the billions of dollars invested in individual 
systems, these efforts, too, fell far short of the mark, with 
extensive schedule delays and cost overruns. For example, in 1989, our 
report[Footnote 7] on eight major DOD system development efforts—
including two major accounting systems--under way at that time, showed 
that system development cost estimates doubled, two of the eight 
efforts were abandoned, and the remaining six efforts experienced 
delays of from 3 to 7 years. 

Beginning in the 1990s, following passage of the Chief Financial 
Officers (CFO) Act of 1990, there was a recognition in DOD that broad-
based financial management reform was needed. Over the past 12 years, 
the department has initiated several departmentwide reform initiatives 
intended to fundamentally reform its financial operations as well as 
other key business support processes, including the Corporate 
Information Management initiative, the Defense Business Operations 
Fund, and the Defense Reform Initiative. These efforts, which I will 
highlight today, have proven to be unsuccessful despite good 
intentions and significant effort. The conditions that led to these 
previous attempts at reform remain largely unchanged today. 

Corporate Information Management. The Corporate Information Management 
(CIM), initiative, begun in 1989, was expected to save billions of 
dollars by streamlining operations and implementing standard 
information systems. CIM was expected to reform all DOD’s functional 
areas--including finance, procurement, material management, and human 
resources--through consolidating, standardizing, and integrating 
information systems. DOD also expected CIM to replace approximately 
2,000 duplicative systems. Over the years, we have made numerous 
recommendations to improve CIM’s management, but these recommendations 
were largely not addressed. Instead, DOD spent billions of dollars 
with little sound analytical justification. We reported in 1997, 
[Footnote 8] that 8 years after beginning CIM, and spending about $20 
billion on the initiative, expected savings had yet to materialize. 
The initiative was eventually abandoned. 

Defense Business Operations Fund. In October 1991, DOD established a 
new entity, the Defense Business Operations Fund by consolidating nine 
existing industrial and stock funds and five other activities operated 
throughout DOD. Through this consolidation, the fund was intended to 
bring greater visibility and management to the overall cost of 
carrying out certain critical DOD business operations. However, from 
its inception, the fund was plagued by management problems. In 1996, 
DOD announced the fund’s elimination. In its place, DOD established 
four working capital funds. These new working capital funds inherited 
their predecessor’s operational and financial reporting problems. 

Defense Reform Initiative (DRI). In announcing the DRI program in 
November 1997, the then Secretary of Defense stated that his goal was 
“to ignite a revolution in business affairs.” DRI represented a set of 
proposed actions aimed at improving the effectiveness and efficiency 
of DOD’s business operations, particularly in areas that have been 
long-standing problems—including financial management. In July 2000, 
we reported[Footnote 9] that while DRI got off to a good start and 
made progress in implementing many of the component initiatives, it 
did not meet expected time frames and goals, and the extent to which 
savings from these initiatives will be realized is yet to be 
determined. GAO is currently examining the extent to which DRI efforts 
begun under the previous administration are continuing. 

The past has clearly taught us that addressing DOD’s serious financial 
management problems will not be easy. Early in his tenure, Secretary 
Rumsfeld commissioned a new study of the department’s financial 
management operations. The report on the results of the study,
Transforming Department of Defense Financial Management: A Strategy 
for Change, was issued on April 13, 2001. The report recognized that 
the department will have to undergo “a radical financial management 
transformation” and that it would take more than a decade to achieve. 
The report concluded that many studies and interviews with current and 
former leaders in DOD point to the same problems and frustrations, and 
that repeated audit reports verify systemic problems illustrating the 
need for radical transformation in order to achieve success. Secretary 
Rumsfeld further confirmed the need for a fundamental transformation 
of DOD in his “top-down” Quadrennial Defense Review. Specifically, his 
September 30, 2001, Quadrennial Defense Review Report concluded that 
the department must transform its outdated support structure, 
including decades-old financial systems that are not well 
interconnected. The report summed up the challenge well in stating: 
“While America’s businesses have streamlined and adopted new business 
models to react to fast-moving changes in markets and technologies, 
the Defense Department has lagged behind without an overarching 
strategy to improve its business practices.” 

Underlying Causes of Financial and Related Business Process Reform 

As part of our constructive engagement approach with DOD, the 
Comptroller General met with Secretary Rumsfeld last summer to provide 
our perspectives on the underlying causes of the problems that have 
impeded past reform efforts at the department and to discuss options 
for addressing these challenges. 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 that have 
sufficient authority to accomplish desired goals. For example, under 
the CFO Act, it is the responsibility of agency CFOs to establish the 
mission and vision for the agency’s future financial management. 
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 department has learned through its efforts to meet the 
Year 2000 computing challenge that to be successful, major improvement 
initiatives must have the direct, active support and involvement of 
the Secretary and Deputy Secretary of Defense. In the Year 2000 case, 
the then Deputy Secretary of Defense was personally and substantially 
involved and played a major role in the department’s success. Such top-
level support and attention helps ensure that daily activities 
throughout the department remain focused on achieving shared, 
agencywide outcomes. A central finding from our report on our survey 
of best practices of world-class financial management organizations---
Boeing; Chase Manhattan Bank; General Electric; Pfizer; Hewlett-
Packard; Owens Corning; and the states of Massachusetts, Texas, and 
Virginia—was that clear, strong executive leadership was essential to 
(1) making financial management an entitywide priority, (2) redefining 
the role of finance, (3) providing meaningful information to 
decisionmakers, and (4) building a team of people that deliver 
results.[Footnote 10] 

DOD 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. Sustaining top management commitment to 
performance goals is a particular challenge for DOD. In the past, the 
average 1.7--year tenure of the department’s top political appointees 
has served to hinder long-term planning and follow-through. 

Cultural Resistance and Parochialism: 

Cultural resistance to change and military service parochialism 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, and that many of these practices were 
developed piecemeal and evolved to accommodate different 
organizations, each with its own policies and procedures. 

For example, as discussed in our July 2000 report,[Footnote 11] the 
department encountered resistance to developing departmentwide 
solutions under the then Secretary’s broad-based DRI.[Footnote 12] In 
1997, the department established a Defense Management Council—
including high-level representatives from each of the military 
services and other senior executives in the Office of the Secretary of 
Defense—which was intended to serve as the “board of directors” to 
help break down organizational stovepipes and overcome cultural 
resistance to changes called for under DRI. However, we found that the 
council’s effectiveness was impaired because members were not able to 
put their individual military services’ or DOD agencies’ interests 
aside to focus on department-wide approaches to long-standing problems. 

We have also seen an inability to put aside parochial views. Cultural 
resistance to change has impeded reforms not only in financial 
management, but also in other business areas, such as weapon system 
acquisition and inventory management. For example, as we reported 
[Footnote 13] last year, while the individual military services 
conduct considerable analyses justifying major acquisitions, these 
analyses can be narrowly focused and do not consider joint 
acquisitions with the other services. In the inventory management 
area, DOD’s culture has supported buying and storing multiple layers 
of inventory rather than managing with just the amount of stock needed. 

Unclear Goals and Performance Measures: 

Further, DOD’s past reform efforts have been handicapped by the lack 
of clear, linked goals and performance measures. 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. In some cases, 
DOD had not yet developed appropriate strategic goals, and in other 
cases, its strategic goals and objectives were not linked to those of 
the military services and defense agencies. 

As part of our assessment of DOD’s Fiscal Year 2000 Financial 
Management Improvement Plan, we reported[Footnote 14] that, for the 
most part, the plan represented the military services’ and Defense 
components’ stovepiped approaches to reforming financial management 
and did not clearly articulate how these various efforts would 
collectively result in an integrated DOD-wide approach to financial 
management improvement. In addition, we reported that the department’s 
plan did not include performance measures that could be used to assess 
DOD’s progress in resolving its financial management problems. DOD 
officials have informed us that they are now working to revise the 
department’s approach to this plan so that future years’ updates will 
reflect a more strategic, departmentwide vision and provide a more 
effective tool for financial management reform. 

As it moves to modernize its systems, the department faces a 
formidable challenge in responding to technological advances that are 
changing traditional approaches to business management. For fiscal 
year 2001, DOD’s reported total information technology investments of 
almost $23 billion supporting a wide range of military operations as 
well as DOD business functions. As we have reported,[Footnote 15] 
while DOD plans to invest billions of dollars in modernizing its 
financial management and other business support systems, it does not 
yet have an overall blueprint—or enterprise architecture—in place to 
guide and direct these investments. As we recently testified,[Footnote 
16] our review of practices at leading organizations showed they were 
able to make sure their business systems addressed corporate—rather 
than individual business unit—objectives by using enterprise 
architectures to guide and constrain investments. Consistent with our 
recommendation, DOD is now working to develop a financial management 
enterprise architecture, which is a very positive development. 

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.” 

This lack of incentive has perhaps 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 rather 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 decisionmakers 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 

Keys To Fundamental Management Reform: 

As we testified before your Subcommittee last May,[Footnote 17] our 
experience has shown there are several key elements that, collectively 
would enable the DOD Financial department to effectively address the 
underlying causes of its inability to resolve its long-standing 
financial management problems. These elements, which 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 process 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 

* establishing an enterprisewide system architecture to guide and 
direct financial management modernization investments; and; 

* ensuring effective oversight and monitoring. 

Actions on many of the key areas central to successfully achieving 
desired financial management and related business process 
transformation goals-—particularly those that rely on longer term 
systems improvements—-will take a number of years to fully implement. 
Secretary Rumsfeld has estimated that his envisioned transformation 
may take 8 or more years to complete. Consequently, both long-term 
actions focused on the Secretary’s envisioned business transformation 
and short-term actions focused on improvements within existing systems 
and processes will be critical going forward. Short-term actions in 
particular will be critical if the department is to achieve the 
greatest possible accountability over existing resources and more 
reliable data for day-to-day decisionmaking while longer-term systems 
and business process reengineering efforts are under way. 

Beginning with the Secretary’s recognition of a need for a fundamental 
transformation of the department’s business processes, and building on 
some of the work begun under past administrations, DOD has taken a 
number of positive steps in many of these key areas. At the same time, 
the challenges remaining in each of these key areas are daunting. 

Integrated Business Process Reform Strategy: 

As we have reported in the past,[Footnote 18] 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, stovepiped, or piecemeal fashion separate 
from the other high-risk areas facing the department.[Footnote 19] 
Successfully reengineering the department’s processes supporting its 
financial management and other business support operations will be 
critical if DOD is to effectively address the deep-rooted 
organizational emphasis on maintaining business-as-usual across the 

Financial management is a crosscutting issue that affects virtually 
all of DOD’s business areas. For example, improving its financial 
management operations so that they can produce timely, reliable, and 
useful cost information will be essential if the department is to 
effectively measure its progress toward achieving many key outcomes 
and goals across virtually the entire spectrum of DOD’s business 
operations. 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. For example, we have reported[Footnote 20] that many 
of DOD’s financial management shortcomings were attributable in part 
to human capital issues. The department does not yet have a strategy 
in place for improving its financial management human capital. This is 
especially critical in connection with DOD’s civilian workforce, since 
DOD has generally done a much better job in conjunction with human 
capital planning for its military personnel. In addition, DOD’s 
civilian personnel face a variety of size, shape, skills, and 
succession-planning challenges that need to be addressed. 

As I mentioned earlier, and it bears repetition, the department has 
reported that an estimated 80 percent of the data needed for sound 
financial management comes 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 is reflective of its lack of an enterprisewide, 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. 

As I discussed previously, the Secretary of Defense has made the 
fundamental transformation of business practices throughout the 
department a top priority. In this context, the Secretary established 
a number of top-level committees, councils, and boards, including the 
Senior Executive Committee, Business Initiative Council, and Defense 
Business Practices Implementation Board. The Senior Executive 
Committee was established to help guide efforts across the department 
to improve its business practices. This committee--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, Logistics and Technology—was established 
to function as the board of directors for the department. The Business 
Initiative Council--comprising the military service secretaries 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 Secretary 
also established the Defense Business Practices Implementation Board, 
composed of business leaders from the private sector. The board is 
intended to tap outside expertise to advise the department on its 
efforts to improve business practices. 

Active Leadership and Resource Control: 

The department’s successful Year 2000 effort illustrated, and our 
survey of leading financial management organizations[Footnote 21] 
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. As I mentioned 
earlier, the personal, active involvement of the Deputy Secretary of 
Defense played a key role in building entitywide support and focus for 
the department’s Year 2000 initiatives. 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 22] 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.” With respect to the key area of investment control, the 
Secretary took action to set aside $100 million for financial 
modernization. Strong, sustained executive leadership—over a number of 
years and administrations—will be key to changing a deeply rooted 
culture. In addition, given that significant investments in 
information systems and related processes have historically occurred 
in a largely decentralized manner throughout the department, 
additional actions will likely be required to implement a centralized 
IT investment control strategy. For example, in our May 2001 report, 
[Footnote 23] we recommended that DOD take action to establish 
centralized control over transformation investments to ensure that 
funding is provided for only those proposed investments in systems and 
business processes that are consistent with the department’s overall 
business process transformation strategy. 

Clear Lines of Responsibility and Accountability: 

Last summer, when the Comptroller General met with Secretary Rumsfeld, 
he stressed the importance of establishing clear lines of 
responsibility, decision-making authority, and resource control for 
actions across the department tied to the Secretary as a key to 
reform. As we previously reported,[Footnote 24] 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 and Steering Committees 
as the governing bodies that oversee the activities related to this 
modernization effort and also established a supporting working group 
to provide day-to-day guidance and direction in these efforts. DOD 
reports that the executive and steering committees met for the first 
time in January 2002. 

It is clear to us that the Comptroller has the full support of the 
Secretary and that the Secretary is committed to making meaningful 
change. To make this work, it is important that the Comptroller have 
sufficient authority to bring about the full, effective participation 
of the military services and business process owners across the 
department. The Comptroller has direct control of 20 percent of the 
data needed for sound financial management and has historically had 
limited ability to control information technology investments across 
the department. Addressing issues such as centralization of authority 
for information systems investments and continuity of leadership are 
critical to successful business process transformation. 

In addition to DOD, a number of other federal departments and agencies 
are facing an array of interrelated business system management 
challenges for which resolution is likely to require a number of 
years, challenges that could span administrations. One option that may 
have merit would be the establishment of chief operating officers, who 
could be appointed for a set term of 5 to 7 years with the potential 
for reappointment. These individuals should have a proven track record 
as a business process change agents for large, diverse organizations 
and would spearhead business process transformation across the 
department or agency. 

Results-Oriented Performance: 

As discussed in our January 2001 report on DOD’s major performance and 
accountability challenges,[Footnote 25] 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. 

In addition, we have previously testified[Footnote 26] that DOD’s 
financial management improvement efforts should be measured against an 
overall goal of effectively supporting DOD’s basic business processes, 
including appropriately considering related business process system 
interrelationships, rather than determining system-by-system 
compliance. Such a results-oriented focus is also consistent with an 
important lesson learned from the department’s Year 2000 experience. 
DOD’s initial Year 2000 focus was geared toward ensuring compliance on 
a system-by-system basis and did not appropriately consider the 
interrelationships of systems and business areas across the 
department. It was not until the department, under the direction of 
the then Deputy Secretary, shifted to a core mission and function 
review approach that it was able to achieve the desired result of 
greatly reducing its Year 2000 risk. 

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 measurable 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 reports that it has seen improvements. For 
example, with respect to closed appropriation accounts, DOD reported 
during the first 4 months of fiscal year 2002 a reduction in the 
dollar value of adjustments to closed appropriation accounts of about 
51 percent from the same 4-month period in fiscal year 2001. Other 
existing metrics concern cash and funds management, contract and 
vendor payments, and disbursement accounting. DOD also reported that 
it is working to develop these metrics into higher-level measures more 
appropriate for senior management. We agree with the department’s 
efforts to expand the use of appropriate metrics to guide its 
financial management reform efforts. 

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. 

Enterprise Architecture: 

Establishing and implementing an enterprisewide financial management 
architecture is essential for the department to effectively manage its 
large, complex system modernization effort now under way. The Clinger-
Cohen Act requires agencies to develop, implement, and maintain an 
integrated system architecture. As we previously reported,[Footnote 
27] such an architecture can help ensure that the department invests 
only in integrated, enterprisewide business system solutions and, 
conversely, will help move resources away from non-value-added legacy 
business systems and nonintegrated business system development 
efforts. In addition, without an architecture, DOD runs the serious 
risk that its system efforts will perpetuate the existing system 
environment that suffers from systems duplication, limited 
interoperability, and unnecessarily costly operations and maintenance. 
In our May 2001 report,[Footnote 28] we pointed out that DOD lacks a 
financial management enterprise architecture to guide and constrain 
the billions of dollars it plans to spend to modernize its financial 
management operations and systems. 

DOD has reported that it is in the process of contracting for the 
development of a DOD-wide financial management enterprise architecture 
to “achieve the Secretary’s vision of relevant, reliable and timely 
financial information needed to support informed decision-making.” 
Consistent with our previous recommendations in this area, DOD has 
begun an extensive effort to document the department’s current as-is 
financial management architecture by inventorying systems now relied 
on to carry out financial management operations throughout the 
department. DOD has identified 674 top-level systems and at least 997 
associated interfaces thus far and estimates that this inventory could 
include up to 1,000 systems when completed. 

While DOD’s beginning efforts at developing a financial management 
enterprise architecture are off to a good start, the challenges yet 
confronting the department in its efforts to fully develop, implement, 
and maintain a DOD-wide financial management enterprise architecture 
are unprecedented. Our May 2001 report[Footnote 29] details a series 
of recommended actions directed at ensuring DOD employs recognized 
best practices for enterprise architecture management. This effort 
will be further complicated as the department strives to develop 
multiple enterprise architectures across its various business areas. 
For example, in June 2001, we recommended[Footnote 30] that DOD 
develop an enterprise architecture for its logistics operations. As I 
discussed previously, an integrated reform strategy is critical. In 
this context, it is essential that DOD closely coordinate and 
integrate the development and implementation of these, as well as 
other, architectures. By following this integrated approach and our 
previous recommendations, DOD will be in the best position to avoid 
the serious risk that, after spending billions of dollars on systems 
modernization, it will perpetuate the existing systems environment 
that suffers from duplication of systems, limited interoperability, 
and unnecessarily costly operations and maintenance. 

Monitoring and Oversight: 

Ensuring effective monitoring and oversight of progress will also be a 
key to bringing about effective implementation of the department’s 
financial management and related business process reform. We have 
previously testified[Footnote 31] that periodic reporting of status 
information to department top management, the Office of Management and 
Budget (OMB), 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 its 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 its plans in an 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, 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 annual oversight 
hearings, as well the active interest and involvement of other 
cognizant defense and oversight committees in the Congress, will 
continue to be key to effectively achieving and sustaining DOD’s 
financial management and related business process reform milestones 
and goals. 

Given the size, complexity, and deeply engrained nature of the 
financial management problems facing DOD, heroic end-of-the year 
efforts relied on by some agencies to develop auditable financial 
statement balances are not feasible at DOD. Instead, a sustained focus 
on the underlying problems impeding the development of reliable 
financial data throughout the department will be necessary and is the 
best course of action. In this context, the Congress recently enacted 
the fiscal year 2002 National Defense Authorization Act, which 
contains provisions that will provide a framework for redirecting the 
department’s resources from the preparation and audit of financial 
statements, which are acknowledged by DOD leadership to be 
unauditable, to the improvement of DOD’s financial management systems 
and financial management policies, procedures, and internal controls. 
Under this new legislation, the department will also be required to 
report to the Congress on how resources have been redirected and the 
progress that has been achieved. This reporting will provide an 
important vehicle for the Congress to use in assessing whether DOD is 
using its available resources to best bring about the development of 
timely and reliable financial information for daily decision making 
and transform its financial management as envisioned by the Secretary 
of Defense. 

In conclusion, we support Secretary Rumsfeld’s vision for transforming 
the department’s full range of business processes. Substantial 
personal involvement by the Secretary and other DOD top executives 
will be essential to 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. Comptroller Zakheim, as the 
Secretary’s leader for financial management modernization, will need 
to have the ability to make the tough choices on systems, processes, 
and personnel, and to control spending for new systems across the 
department, especially where new systems development is involved. 
Processes will have to be reengineered, and hierarchical, process-
oriented, stovepiped, and internally focused approaches will have to 
be put aside. The past has taught us that well-intentioned initiatives 
will only succeed if there are the right incentives, transparency, and 
accountability mechanisms in place. 

The events of September 11 and other funding and asset accountability 
issues associated with the war on terrorism, at least in the short 
term, may dilute the focused attention and sustained action that are 
necessary to fully realize the Secretary’s transformation goal, which 
is understandable given the circumstances. At the same time, the 
demand for increased Defense spending, when combined with the government
’s long-range fiscal challenges, means that solutions to DOD’s 
business systems problems are even more important. As the Secretary 
has noted, billions of dollars of resources could be freed up for 
national defense priorities by eliminating waste and inefficiencies in 
DOD’s existing business processes. Only time will tell if the Secretary’
s current transformation efforts will come to fruition. Others have 
attempted well-intentioned reform efforts in the past. Today, the 
momentum exists for reform. But, the real question remains, will this 
momentum continue to exist tomorrow, next year, and throughout the 
years to make the necessary cultural, systems, human capital, and 
other key changes a reality? For our part, we will continue to work 
constructively with the department and the Congress in this important 

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 Other key contributors to 
this testimony include Jack Brock, Geoffrey Frank, Randolph Hite, 
Jeffrey Jacobson, Darby Smith, and David Warren. 

[End of section] 


[1] U.S. General Accounting Office, High-Risk Series: An Update, 
[hyperlink,] (Washington, D.C.: 
Jan. 2001). 

[2] U.S. General Accounting Office, Purchase Cards: Continued Control 
Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse, 
[hyperlink,] (Washington, 
D.C.: Mar. 13, 2002). 

[3] U.S. General Accounting Office, Purchase Cards: Control Weaknesses 
Leave Two Navy Units Vulnerable to Fraud and Abuse, [hyperlink,] (Washington, D.C.: July 30, 

[4] U.S. General Accounting Office, Canceled DOD Appropriations: $615 
Million of Illegal or Otherwise Improper Adjustments, [hyperlink,] (Washington, D.C.: July 26, 

[5] U.S. General Accounting Office, Defense Inventory: Information on 
the Use of Spare Parts Funding Is Lacking, [hyperlink,] (Washington, D.C.: June 11, 

[6] U.S. General Accounting Office, DOD Systems Modernization: 
Continued Investment in the Standard Procurement System Has Not Been 
Justified, [hyperlink,] 
(Washington, D.C.: July 31, 2001) and DOD’s Standard Procurement 
System: Continued Investment Has Yet to Be Justified, [hyperlink,] (Washington, D.C.: Feb. 7, 

[7] U.S. General Accounting Office, Automated Information Systems: 
Schedule Delays and Cost Overruns Plague DOD Systems, [hyperlink,] (Washington, D.C.: May 
10, 1989). 

[8] U.S. General Accounting Office, High-Risk Series: Information 
Management and Technology, [hyperlink,] (Washington, D.C.: Feb. 1997). 

[9] U.S. General Accounting Office, Defense Management: Actions Needed 
to Sustain Reform Initiatives and Achieve Greater Results, [hyperlink,] (Washington, D.C.: July 
25, 2000). 

[10] U.S. General Accounting Office, Executive Guide: Creating Value 
Through World-class Financial Management, [hyperlink,] (Washington, D.C.: Apr. 

[11] [hyperlink,]. 

[12] Announced by the Secretary of Defense in 1997, DRI represents a 
set of actions aimed at reforming the department’s major business 
processes and support operations. 

[13] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, [hyperlink,] (Washington D.C.: Jan. 2001). 

[14] U.S. General Accounting Office, Financial Management: DOD 
Improvement Plan Needs Strategic Focus, [hyperlink,] (Washington D.C.: Aug. 17, 

[15] U.S. General Accounting Office, Information Technology: 
Architecture Needed to Guide Modernization of DOD’s Financial 
Operations, [hyperlink,] 
(Washington, D.C.: May 17, 2001). 

[16] U.S. General Accounting Office, Defense Acquisitions: DOD Faces 
Challenges in Implementing Best Practices, [hyperlink,] (Washington, D.C.: Feb. 27, 

[17] U.S. General Accounting Office, DOD Financial Management: 
Integrated Approach, Accountability, and Incentives Are Keys to 
Effective Reform, [hyperlink,] 
(Washington, D.C.: May 8, 2001). 

[18] U.S. General Accounting Office, Department of Defense: Progress 
in Financial Management Reform, [hyperlink,] (Washington, 
D.C.: May 9, 2000). 

[19] The eight interrelated high-risk areas that represent the 
greatest challenge to DOD’s developing world-class business operations 
supporting its forces are: financial management, human capital, 
information security, systems modernization, weapon system 
acquisition, contract management, infrastructure management, and 
inventory management. 

[20] [hyperlink,]. 

[21] [hyperlink,]. 

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

[23] [hyperlink,]. 

[24] [hyperlink,]. 

[25] [hyperlink,]. 

[26] [hyperlink,]. 

[27] [hyperlink,]. 

[28] [hyperlink,]. 

[29] [hyperlink,]. 

[30] U.S. General Accounting Office, Information Technology: DLA 
Should Strengthen Business Systems Modernization Architecture and 
Investment Activities, [hyperlink,] (Washington, D.C.: June 29, 

[31] [hyperlink,]. 

[End of section]