This is the accessible text file for GAO report number GAO-04-551T 
entitled 'Department of Defense: Further Actions Needed to Establish 
and Implement a Framework for Successful Financial and Business 
Management Transformation' which was released on March 23, 2004.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.


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

United States General Accounting Office:


For Release on Delivery Expected at 2:30 p.m. EST:

Tuesday, March 23, 2004:


Further Actions Needed to Establish and Implement a Framework for 
Successful Financial and Business Management Transformation:

Statement of David M. Walker, Comptroller General of the United States:


GAO Highlights:

Highlights of GAO-04-551T, a testimony before the Subcommittee on 
Readiness and Management Support, Committee on Armed Services, U.S. 

Why GAO Did This Study:

In March 2002, GAO testified before this Subcommittee on the Department 
of Defense’s (DOD) financial management problems and key elements 
necessary for successful reform. Although the underlying conditions 
remain fundamentally unchanged, within the past 2 years DOD has begun a 
number of initiatives intended to address previously reported problems 
and transform its business operations. The Subcommittee asked GAO to 
provide a current status report on DOD’s progress to date and 
suggestions for improvement. Specifically, GAO was asked to provide (1) 
an overview of the impact of financial and related-business weaknesses 
on DOD operations, (2) the underlying causes of DOD business 
transformation challenges, and (3) the status of DOD reform efforts. In 
addition, GAO reiterates the key elements to successful reform: (1) an 
integrated business transformation strategy, (2) sustained leadership 
and resource control, (3) clear lines of responsibility and 
accountability, (4) results-oriented performance, (5) appropriate 
incentives and consequences, (6) an enterprise architecture to guide 
reform efforts, and (7) effective monitoring and oversight. GAO also 
offers two suggestions for legislative consideration which are intended 
to improve the likelihood of meaningful, broad-based financial 
management and related business reform at DOD. 

What GAO Found:

DOD’s senior civilian and military leaders are committed to 
transforming the department and improving its business operations and 
have taken positive steps to begin this effort. However, overhauling 
the financial management and related business operations of one of the 
largest and most complex organizations in the world represents a huge 
management challenge. Six DOD program areas are on GAO’s “high risk” 
list, and the department shares responsibility for three other 
governmentwide high-risk areas. DOD’s substantial financial and 
business management weaknesses adversely affect not only its ability to 
produce auditable financial information, but also to provide timely, 
reliable information for management and Congress to use in making 
informed decisions. Further, the lack of adequate transparency and 
appropriate accountability across all of DOD’s major business areas 
results in billions of dollars in annual wasted resources in a time of 
increasing fiscal constraint. 

Four underlying causes impede reform: (1) lack of sustained leadership, 
(2) cultural resistance to change, (3) lack of meaningful metrics and 
ongoing monitoring, and (4) inadequate incentives and accountability 
mechanisms. To address these issues, GAO reiterates the keys to 
successful business transformation and makes two additional suggestions 
for legislative action. First, GAO suggests that a senior management 
position be established to spearhead DOD-wide business transformation 
efforts. Second, GAO proposes that the leaders of DOD’s functional 
areas, referred to as domains, receive and control the funding for 
system investments, as opposed to the military services. Domain leaders 
would be responsible for managing business system and process reform 
efforts within their business areas and would be accountable to the new 
senior management official for ensuring their efforts comply with DOD’s 
business enterprise architecture.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Gregory Kutz at (202) 
512-9095 or ( or Randolph Hite, (202) 512-3439 

[End of section]

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be back again to discuss financial management and 
related business transformation efforts at the Department of Defense 
(DOD). At the outset, I would like to thank the Subcommittee for having 
this hearing and acknowledge the important role hearings such as this 
one serve in providing a catalyst for business transformation at DOD. 
The involvement of this Subcommittee is critical to ultimately assuring 
public confidence in DOD as a steward that is accountable for its 
finances. DOD's substantial long-standing financial and business 
management problems adversely affect the economy, effectiveness, and 
efficiency of its operations, and have resulted in a lack of adequate 
transparency and appropriate accountability across all major business 
areas. As a result, DOD does not have timely, reliable information for 
management to use in making informed decisions. Further, as our reports 
continue to show, these problems result in significant fraud, waste, 
and abuse and hinder DOD's attempts to develop world-class operations 
and activities to support its forces. 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.[Footnote 1] The problems we continue to 
identify relate to human capital challenges, ineffective internal 
control and processes, and duplicative and stovepiped business systems. 
The seriousness of DOD's financial management weaknesses underscores 
the importance of no longer condoning "status quo" business operations 
at DOD.

Although the underlying operational conditions remain fundamentally 
unchanged since I last testified before this Subcommittee in March 
2002, DOD has taken action to begin addressing a number of these 
challenges as part of its business transformation effort. Business 
transformation has been a priority of Secretary Rumsfeld. For example, 
DOD has been granted additional human capital flexibilities and is in 
the process of developing a new personnel management system for its 
civilian employees. In addition, through its Business Management 
Modernization Program (BMMP), DOD is continuing its efforts to develop 
and implement a business enterprise architecture and establish 
effective management and control over its business system modernization 
investments. To date, however, tangible evidence of improvements in DOD 
business operations remains limited to specific business process areas, 
such as DOD's purchase card program, where improvements have generally 
resulted from increased management focus and better internal control 
rather than from major modifications to automated systems. It is 
important to note that some of the key elements I highlight in this 
testimony as necessary for successful business transformation were 
critical to the success of several narrowly defined initiatives that I 
will discuss today.

Because DOD is one of the largest and most complex organizations in the 
world, overhauling its financial management and related business 
operations represents a huge management challenge. In fiscal year 2003, 
DOD reported that its operations involved over $1 trillion in assets, 
nearly $1.6 trillion in liabilities, approximately 3.3 million military 
and civilian personnel, and disbursements of over $416 billion. 
Moreover, execution of DOD operations spans a wide range of defense 
organizations, including the military services and their respective 
major commands and functional activities, numerous large defense 
agencies and field activities, and various combatant and joint 
operational commands that are responsible for military operations for 
specific geographic regions or theaters of operations. To execute these 
military operations, the department performs an assortment of 
interrelated and interdependent business process areas, including 
logistics management, procurement, healthcare management, and 
financial management. Secretary Rumsfeld has estimated that successful 
improvements to DOD's business operations could save the department 5 
percent of its budget a year. Using DOD's reported fiscal year 2004 
budget amounts, this percentage would equate to approximately $22 
billion a year in savings.

Two years ago, I testified on the challenges DOD faces in transforming 
its financial management and related business operations and systems 
and I discussed several key elements necessary for reform to 
succeed.[Footnote 2] If the past has taught us anything, it is that 
addressing the department's serious financial and related business 
process weaknesses will not be easy. For several years, we have 
reported on DOD's efforts to improve the effectiveness and efficiency 
of its business operations and actions needed to achieve and sustain 
reform. Many of the same underlying causes, such as lack of sustained 
leadership, cultural resistance to change, parochialism, and stovepiped 
operations, that impeded the success of previous administrations in 
addressing DOD's problems continue today. If DOD is unable to address 
these underlying causes that have resulted in the failure of previous 
broad-based reform efforts, improvements will remain marginal, confined 
to narrowly defined business process areas and incremental improvements 
in human capital policies, business processes, internal control 
systems, and information technologies.

Today, I will provide my perspectives on (1) the impact that long-
standing financial management and related business process weaknesses 
continue to have on DOD's business operations, (2) underlying causes 
that have impeded the success of prior efforts, (3) keys to successful 
reform, and (4) the status of current DOD business transformation 
efforts. In addition, I will offer two suggestions for legislative 
consideration, which I believe will provide the sustained top-level 
leadership and accountability necessary for the overall business 
transformation effort to succeed. My statement is based on previous GAO 
reports as well as on our review of the work of other DOD auditors and 
recent DOD reports and studies.

Impact of Financial Management and Related Business Process Weaknesses:

As I previously stated, and we have reported on for several years, DOD 
faces a range of financial management and related business process 
challenges that are complex, long-standing, pervasive, and deeply 
rooted in virtually all business operations throughout the department. 
As I recently testified and as discussed in our latest financial audit 
report,[Footnote 3] DOD's financial management deficiencies, taken 
together, continue to 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 has passed 
the test of an independent financial audit because of pervasive 
weaknesses in internal control and processes and fundamentally flawed 
business systems.

In identifying improved financial performance as one of its five 
governmentwide initiatives, the President's Management Agenda 
recognized that obtaining a clean (unqualified) financial audit opinion 
is a basic prescription for any well-managed organization. At the same 
time, it recognized that without sound internal control and accurate 
and timely financial and performance information, it is not possible to 
accomplish the President's agenda and secure the best performance and 
highest measure of accountability for the American people. The Joint 
Financial Management Improvement Program (JFMIP)[Footnote 4] 
principals have defined certain measures, in addition to receiving an 
unqualified financial statement audit opinion, for achieving financial 
management success. These additional measures include (1) being able to 
routinely provide timely, accurate, and useful financial and 
performance information, (2) having no material internal control 
weaknesses or material noncompliance with laws and regulations, and (3) 
meeting the requirements of the Federal Financial Management 
Improvement Act of 1996 (FFMIA). Unfortunately, DOD does not meet any 
of these conditions. For example, for fiscal year 2003, the DOD 
Inspector General issued a disclaimer of opinion on DOD's financial 
statements, citing 11 material weaknesses in internal control and 
noncompliance with FFMIA requirements.

Recent audits and investigations by GAO and DOD auditors continue to 
confirm the existence of pervasive weaknesses in DOD's financial 
management and related business processes and systems. These problems 
have (1) resulted in a lack of reliable information needed to make 
sound decisions and report on the status of DOD activities, including 
accountability of assets, through financial and other reports to 
Congress and DOD decision makers, (2) hindered its operational 
efficiency, (3) adversely affected mission performance, and (4) left 
the department vulnerable to fraud, waste, and abuse. For example,

* 450 of the 481 mobilized Army National Guard soldiers from six GAO 
case study Special Forces and Military Police units[Footnote 5] had at 
least one pay problem associated with their mobilization. DOD's 
inability to provide timely and accurate payments to these soldiers, 
many of whom risked their lives in recent Iraq or Afghanistan missions, 
distracted them from their missions, imposed financial hardships on the 
soldiers and their families, and has had a negative impact on 
retention. (GAO-04-89, Nov. 13, 2003):

* DOD incurred substantial logistical support problems as a result of 
weak distribution and accountability processes and controls over 
supplies and equipment shipments in support of Operation Iraqi Freedom 
activities, similar to those encountered during the prior gulf war. 
These weaknesses resulted in (1) supply shortages, (2) backlogs of 
materials delivered in theater but not delivered to the requesting 
activity, (3) a discrepancy of $1.2 billion between the amount of 
materiel shipped and that acknowledged by the activity as received, (4) 
cannibalization of vehicles, and (5) duplicate supply requisitions. 
(GAO-04-305R, Dec. 18, 2003):

* Inadequate asset visibility and accountability resulted in DOD 
selling new Joint Service Lightweight Integrated Suit Technology 
(JSLIST)--the current chemical and biological protective garment used 
by our military forces--on the internet for $3 each (coat and trousers) 
while at the same time buying them for over $200 each. DOD has 
acknowledged that these garments should have been restricted to DOD use 
only and therefore should not have been available to the public. (GAO-
02-873T, June 25, 2002):

* Inadequate asset accountability also resulted in DOD's inability to 
locate and remove over 250,000 defective Battle Dress Overgarments 
(BDOs)--the predecessor of JSLIST--from its inventory. Subsequently, we 
found that DOD had sold many of these defective suits to the public, 
including 379 that we purchased in an undercover operation. In 
addition, DOD may have issued over 4,700 of the defective BDO suits to 
local law enforcement agencies. Although local law enforcement agencies 
are most likely to be the first responders to a terrorist attack, DOD 
failed to inform these agencies that using these BDO suits could result 
in death or serious injury. (GAO-04-15NI, Nov. 19, 2003):

* Tens of millions of dollars are not being collected each year by 
military treatment facilities from third-party insurers because key 
information required to effectively bill and collect from third-party 
insurers is often not properly collected, recorded, or used by the 
military treatment facilities. (GAO-04-322R, Feb. 20, 2004):

* Our analysis of data on more than 50,000 maintenance work orders 
opened during the deployments of six battle groups indicated that about 
29,000 orders (58 percent) could not be completed because the needed 
repair parts were not available on board ship. This condition was a 
result of inaccurate ship configuration records and incomplete, 
outdated, or erroneous historical parts demand data. Such problems not 
only have a detrimental impact on mission readiness, they may also 
increase operational costs due to delays in repairing equipment and 
holding unneeded spare parts inventory. (GAO-03-887, Aug. 29, 2003):

* DOD sold excess biological laboratory equipment, including a 
biological safety cabinet, a bacteriological incubator, a centrifuge, 
and other items that could be used to produce biological warfare 
agents. Using a fictitious company and fictitious individual 
identities, we were able to purchase a large number of new and usable 
equipment items over the Internet from DOD. Although the production of 
biological warfare agents requires a high degree of expertise, the ease 
with which these items were obtained through public sales increases the 
risk that terrorists could obtain and use them to produce biological 
agents that could be used against the United States. (GAO-04-81TNI, 
Oct. 7, 2003):

* Based on statistical sampling, we estimated that 72 percent of the 
over 68,000 premium class airline tickets DOD purchased for fiscal 
years 2001 and 2002 was not properly authorized and that 73 percent was 
not properly justified. During fiscal years 2001 and 2002, DOD spent 
almost $124 million on premium class tickets that included at least one 
leg in premium class--usually business class. Because each premium 
class ticket cost the government up to thousands of dollars more than a 
coach class ticket, unauthorized premium class travel resulted in 
millions of dollars of unnecessary costs being incurred annually. (GAO-
04-229T, Nov. 6, 2003):

* Some DOD contractors have been abusing the federal tax system with 
little or no consequence, and DOD is not collecting as much in unpaid 
taxes as it could. Under the Debt Collection Improvement Act of 1996, 
DOD is responsible--working with the Treasury Department--for 
offsetting payments made to contractors to collect funds owed, such as 
unpaid federal taxes. However, we found that DOD had collected only 
$687,000 of unpaid taxes over the last 6 years. We estimated that at 
least $100 million could be collected annually from DOD contractors 
through effective implementation of levy and debt collection programs. 
(GAO-04-95, Feb. 12, 2004):

* DOD continues to lack a complete inventory of contaminated real 
property sites, which affects not only DOD's ability to assess the 
potential environmental impact and to plan, estimate costs, and fund 
cleanup activities, as appropriate, but also its ability to minimize 
the risk of civilian exposure to unexploded ordnance. The risk of such 
exposure is expected to grow with the increase in development and 
recreational activities on land once used by the military for 
munitions-related activities (e.g., live fire testing and training). 
(GAO-04-147, Dec. 19, 2003):

* DOD's Space and Naval Warfare Systems Command working capital fund 
activities used accounting entries to manipulate the amount of customer 
orders for the sole purpose of reducing the actual dollar amounts 
reported to Congress for work that had been ordered and funded 
(obligated) by customers but not yet completed by fiscal year end. As a 
result, congressional and DOD decision makers did not have the reliable 
information they needed to make decisions regarding the level of 
funding to be provided to working capital fund customers. (GAO-03-668, 
July 1, 2003):

* Our review of fiscal year 2002 data revealed that about $1 of every 
$4 in contract payment transactions in DOD's Mechanization of Contract 
Administration Services (MOCAS) system was for adjustments to 
previously recorded payments--$49 billion of adjustments out of $198 
billion in disbursement, collection, and adjustment transactions. 
According to DOD, the cost of researching and making adjustments to 
accounting records was about $34 million in fiscal year 2002, primarily 
to pay hundreds of DOD and contractor staff. (GAO-03-727, Aug. 8, 

* DOD and congressional decision makers lack reliable data upon which 
to base sourcing decisions due to weaknesses in DOD's data-gathering, 
reporting, and financial systems. As in the past, we have identified 
significant errors and omissions in the data submitted to Congress 
regarding the amount of each military service's depot maintenance work 
out-sourced or performed in-house. As a result, both DOD and Congress 
lack assurances that the dollar amounts of public-private sector 
workloads reported by military services are reliable. (GAO-03-1023, 
Sept. 15, 2003):

* DOD's information technology (IT) budget submission to Congress for 
fiscal year 2004 contained material inconsistencies, inaccuracies, or 
omissions that limited its reliability. For example, we identified 
discrepancies totaling about $1.6 billion between two primary parts of 
the submission--the IT budget summary report and the detailed Capital 
Investments Reports on each IT initiative. These problems were largely 
attributable to insufficient management attention and limitations in 
departmental policies and procedures, such as guidance in DOD's 
Financial Management Regulations, and to shortcomings in systems that 
support budget-related activities. (GAO-04-115, Dec. 19, 2003):

* Since the mid 1980s, we have reported that DOD uses overly optimistic 
planning assumptions to estimate its annual budget request. These same 
assumptions are reflected in its Future Years Defense Program, which 
reports projected spending for the current budget year and at least 4 
succeeding years. In addition, in February 2004 the Congressional 
Budget Office projected that DOD's demand for resources would grow to 
about $473 billion a year by fiscal year 2009. DOD's own estimate for 
that same year was only $439 billion.[Footnote 6] As a result of DOD's 
continuing use of optimistic assumptions, DOD has too many programs for 
the available dollars, which often leads to program instability, costly 
program stretch-outs, and program termination. Over the past few years, 
the mismatch between programs and budgets has continued, particularly 
in the area of weapons systems acquisition. For example, in January 
2003, we reported that the estimated costs of developing eight major 
weapons systems had increased from about $47 billion in fiscal year 
1998 to about $72 billion by fiscal year 2003.[Footnote 7] (GAO-03-98, 
January 2003):

* DOD did not know the size of its security clearance backlog at the 
end of September 2003 and had not estimated a backlog since January 
2000. Using September 2003 data, we estimated that DOD had a backlog of 
roughly 360,000 investigative and adjudicative cases, but the actual 
backlog size is uncertain. DOD's failure to eliminate and accurately 
assess the size of its backlog may have adverse affects. For example, 
delays in updating overdue clearances for personnel doing classified 
work may increase national security risks and slowness in issuing new 
clearances can increase the costs of doing classified government work. 
(GAO-04-344, Feb. 9, 2004):

These examples clearly demonstrate not only the severity of DOD's 
current problems, but also the importance of reforming financial 
management and related business operations to improve mission support 
and the economy and efficiency of DOD's operations, and to provide for 
transparency and accountability to Congress and American taxpayers.

Underlying Causes of Financial and Related Business Process 
Transformation Challenges:

The underlying causes of DOD's financial management and related 
business process and system weaknesses are generally the same ones I 
outlined in my prior testimony before this Subcommittee 2 years ago. 
For each of the problems cited in the previous section, we found that 
one or more of these causes were contributing factors. Over the years, 
the department has undertaken many initiatives intended to transform 
its business operations departmentwide and improve the reliability of 
information for decision making and reporting but has not had much 
success because it has not addressed the following four underlying 

* 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 and accountability mechanisms relating to 
business transformation efforts.

If not properly addressed, these root causes will likely result in the 
failure of current DOD initiatives.

Lack of Sustained Leadership and Adequate Accountability:

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 of 1990,[Footnote 8] it is the responsibility of the 
agency Chief Financial Officer (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 and is under the control and authority of other DOD 

In addition, DOD's past experience has suggested that top management 
has not had a proactive, consistent, and continuing role in integrating 
daily operations for achieving business transformation related 
performance goals. It is imperative that major improvement initiatives 
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. While the current DOD leadership, such as the Secretary, 
Deputy Secretary, and Comptroller have certainly demonstrated their 
commitment to reforming the department, the magnitude and nature of 
day-to-day demands placed on these leaders following the events of 
September 11, 2001, clearly affect the level of oversight and 
involvement in business transformation efforts that these leaders can 
sustain. Given the importance of DOD's business transformation effort, 
it is imperative that it receive the sustained leadership needed to 
improve the economy, efficiency, and effectiveness of DOD's business 
operations. Based on our surveys of best practices of world-class 
organizations,[Footnote 9] strong executive CFO and Chief Information 
Officer leadership is essential to (1) making financial management an 
entitywide priority, (2) providing meaningful information to decision 
makers, (3) building a team of people that delivers results, and (4) 
effectively leveraging technology to achieve stated goals and 

Cultural Resistance and Parochialism:

Cultural resistance to change, military service parochialism, and 
stovepiped operations have all contributed significantly to the failure 
of 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. Recent audits reveal 
that DOD has made only small inroads in addressing these challenges. 
For example, the Bob Stump National Defense Authorization Act for 
Fiscal Year 2003[Footnote 10] requires the DOD Comptroller to determine 
that each financial system improvement meets the specific conditions 
called for in the act before DOD obligates funds in amounts exceeding 
$1 million. However, we found that most system improvement efforts were 
not reviewed by the DOD Comptroller, as required, and that DOD 
continued to lack a mechanism for proactively identifying system 
improvement initiatives. We asked for, but DOD did not provide, 
comprehensive data for obligations in excess of $1 million for business 
system modernization. Based on the limited information provided, we 
found that as of December 2003, business system modernization efforts 
with reported obligations totaling over $479 million were not referred 
to the DOD Comptroller for review for fiscal years 2003 and 2004.

In addition, in September 2003,[Footnote 11] we reported that DOD 
continues to use a stovepiped approach to develop and fund its business 
system investments. Specifically, we found that DOD components receive 
and control funding for business systems investments without being 
subject to the scrutiny of the DOD Comptroller. DOD's ability to 
address its current "business-as-usual" approach to business system 
investments is further hampered by its lack of (1) a complete inventory 
of business systems (a condition we first highlighted in 1998), (2) a 
standard definition of what constitutes a business system, (3) a well-
defined enterprise architecture, and (4) an effective approach for 
controlling financial system improvements before making obligations 
exceeding $1 million. Until DOD develops and implements an effective 
strategy for overcoming resistance, parochialism, and stovepiped 
operations, reform will fail and "business-as-usual" will continue at 
the department.

Lack of Goals and Performance Measures:

At a programmatic level, the lack of clear, linked goals and 
performance measures handicapped DOD's past reform efforts. As a 
result, DOD managers lacked straightforward roadmaps showing how their 
work contributed to attaining the department's strategic goals, and 
they risked operating autonomously rather than collectively. As of 
March 2004, DOD has formulated departmentwide performance goals and 
measures and continues to refine and align them with the outcomes 
described in its strategic plan--the September 2001 Quadrennial Defense 
Review (QDR). The QDR outlined a new risk management framework, 
consisting of four dimensions of risk--force management, operational, 
future challenges, and institutional--to use in considering trade-offs 
among defense objectives and resource constraints. According to DOD's 
Fiscal Year 2003 Annual Report to the President and the Congress, these 
risk areas are to form the basis for DOD's annual performance goals. 
They will be used to track performance results and will be linked to 
resources. As of March 2004, the department is still in the process of 
implementing this approach on a departmentwide basis.

DOD currently has plans to institutionalize performance management by 
aligning management activities with the President's Management Agenda. 
As part of this effort, DOD linked its fiscal year 2004 budget 
resources with metrics for broad program areas, e.g., air combat, 
airlift, and basic research in the Office of Management and Budget's 
(OMB) Program Assessment Rating Tool.[Footnote 12] We have not reviewed 
DOD's efforts to link resources to metrics; however, some of our recent 
work notes the lack of clearly defined performance goals and measures 
in the management of such areas as defense inventory and military 
pay.[Footnote 13]

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" 
operations, systems, and organizational structures. Traditionally, DOD 
has focused on justifying its need for more funding rather than on the 
outcomes its programs have produced. DOD has historically measured 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.

The lack of incentive to change is evident in the business systems 
modernization area. Despite DOD's acknowledgement that many of its 
systems are error prone, duplicative, and stovepiped, DOD continues to 
allow its component organizations to make their own investment 
decisions, following different approaches and criteria. These 
stovepiped decision-making processes have contributed to the 
department's current complex, error-prone environment of approximately 
2,300 systems. In March 2003, we reported that ineffective program 
management and oversight, as well as a lack of accountability, resulted 
in DOD continuing to invest hundreds of millions of dollars in system 
modernization efforts without any assurance that the projects will 
produce operational improvements commensurate with the amount 
invested.[Footnote 14] For example, the estimated cost of one of the 
business system investment projects that we reviewed increased by as 
much as $274 million, while its schedule slipped by almost 4 years. 
After spending $126 million, DOD terminated that project in December 
2002, citing poor performance and increasing costs. GAO and the DOD 
Inspector General (DOD IG) have identified numerous business system 
modernization efforts that cost more than planned, take years longer 
than planned, and fall short of delivering planned or needed 
capabilities. Despite this track record, DOD continues to increase 
spending on business systems while at the same time it lacks the 
effective management and oversight needed to achieve real results. 
Without appropriate incentives to improve their project management, 
ongoing oversight, and adequate accountability mechanisms, DOD 
components will continue to develop duplicative and nonintegrated 
systems that are inconsistent with the Secretary's vision for reform.

To effect real change, actions are needed to (1) break down 
parochialism and reward behaviors that meet DOD-wide 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 

Keys to Successful Reform and Current Status of Reform Efforts:

Over the years, we have given DOD credit for beginning numerous 
initiatives intended to improve its business operations. Unfortunately, 
most of these initiatives failed to achieve their intended objective in 
part, we believe, because they failed to incorporate key elements that 
in our experience shows are critical to successful reform. Today, I 
would like to discuss two very important broad-based initiatives DOD 
currently has underway that, if properly developed and implemented, 
will result in significant improvements in DOD's business operations. 
In addition to these broad-based initiatives, DOD has undertaken 
several interim initiatives in recent years that have resulted in 
tangible, although limited, improvements. We believe that these 
tangible improvements were possible because DOD incorporated many of 
the key elements critical for reform. Furthermore, I would like to 
offer two suggestions for legislative consideration that I believe 
could significantly increase the likelihood of a successful business 
transformation effort at DOD.

Keys to Successful Reform:

As I have previously testified,[Footnote 15] and the success of the 
more narrowly defined DOD initiatives I will discuss later illustrate, 
the following key elements collectively will enable the department to 
effectively address the underlying causes of its inability to resolve 
its long-standing financial and business management problems. These 
elements are:

* addressing the department's financial management and related business 
operational challenges as part of a comprehensive, integrated, DOD-wide 
strategic plan for business reform;

* providing for sustained and committed leadership by top management, 
including but not limited to the Secretary of Defense,

* establishing resource control over business systems investments;

* establishing clear lines of responsibility, authority, and 

* incorporating results-oriented performance measures and monitoring 
progress tied to key financial and business transformation objectives;

* providing appropriate incentives or consequences for action or 

* establishing an enterprise architecture to guide and direct business 
systems modernization investments; and:

* ensuring effective oversight and monitoring.

For the most part, these elements, which should not be viewed as 
independent actions but rather as a set of interrelated and 
interdependent actions, are consistent with those discussed in the 
department's April 2001 financial management transformation 
report.[Footnote 16] The degree to which DOD incorporates them into its 
current reform efforts--both long and short term--will be a deciding 
factor in whether these efforts are successful.

Human Capital Initiative:

Human capital challenges at DOD are crosscutting and impact the 
effectiveness of all of its business operations. Effective human 
capital strategies are necessary for any business transformation to 
succeed at DOD. For several years, we have reported [Footnote 17] that 
many of DOD's business process and control weaknesses were attributable 
in part to human capital issues. Recent audits of DOD's military 
payroll and the individually billed travel card program further 
highlight the adverse impact that outdated and inadequate human capital 
practices, such as insufficient staffing, training, and monitoring of 
performance, continue to have on DOD business operations.

I strongly support the need for modernizing federal human capital 
policies both within DOD and for the federal government at large. We 
have found that a critical success factor for overall organizational 
transformation is the use of a modern, effective, credible, and 
integrated performance management system to define responsibility and 
assure accountability for achieving desired goals and objectives. Such 
a performance management system can help manage and direct the 
transformation process by linking performance expectations to an 
employee's role in the transformation process. GAO has found that there 
are significant opportunities to use the performance management system 
to explicitly link senior executive expectations for performance to 
results-oriented goals. There is a need to hold senior executives 
accountable for demonstrating competencies in leading and facilitating 
change and fostering collaboration both within and across 
organizational boundaries to achieve results. Setting and meeting 
expectations such as these will be critical to achieving needed 
transformation changes. Simply put, DOD must convince people throughout 
the department that they must change business-as-usual practices or 
they are likely to face serious consequences, personally and 
organizationally. DOD has already applied this principle at the Defense 
Finance and Accounting Service (DFAS). For example, DFAS managers--and 
sometimes staff--are rated and rewarded based on their ability to reach 
specific annual performance goals. But linking employee pay to the 
achievement of measurable performance goals must be done within the 
context of a credible human capital system that includes adequate 

The National Defense Authorization Act for Fiscal Year 2004 [Footnote 
18] authorized DOD to establish a National Security Personnel System 
for its civilian employees that is modern, flexible, and consistent 
with the merit principles outlined by the act. This legislation 
requires DOD to develop a human capital system that is consistent with 
many of the practices that we have laid out for an effective human 
capital system, including a modern and results-oriented performance 
management system. However, in our opinion, DOD does not yet have the 
necessary institutional infrastructure in place within its organization 
to support an effective human capital transformation effort. This 
institutional infrastructure must include, at a minimum,

* a human capital planning process that integrates the department's 
human capital policies, strategies, and programs for both civilian 
(including contractors) and military personnel, with its program goals, 
mission, and desired outcomes;

* the capabilities to effectively develop and implement a new human 
capital system, and:

* a modern, effective, credible, and hopefully validated performance 
management system that includes a set of adequate safeguards, including 
reasonable transparency and appropriate accountability mechanisms, to 
ensure the fair, effective, and credible implementation of the system.

The results of our review of DOD's strategic human capital planning 
efforts along with the use of human capital flexibilities and related 
human capital efforts across government underscore the importance of 
such an institutional infrastructure in developing and effectively 
implementing new personnel authorities. In the absence of this critical 
element, the new human capital authorities will provide little 
advantage and could actually end up doing damage if not properly 

As DOD develops regulations to implement its new civilian personnel 
system, the department needs to do the following.

* Ensure the active involvement of the Office of Personnel Management 
(OPM) in the development process, given the significant implications 
that changes in DOD regulations may have on governmentwide human 
capital policies.[Footnote 19]

* Ensure the involvement of civilian employees and unions in the 
development of a new personnel system. The law calls for DOD to involve 
employees, especially in the design of its new performance management 
system. Involving employees in planning helps to develop agency goals 
and objectives that incorporate insights about operations from a front-
line perspective. It can also serve to increase employees' 
understanding and acceptance of organizational goals and improve 
motivation and morale.

* Use a phased approach to implementing the system in recognition that 
different parts of the organization will have different levels of 
readiness and different capabilities to implement new authorities. 
Moreover, a phased approach allows for learning so that appropriate 
adjustments and midcourse corrections can be made before the 
regulations are fully implemented departmentwide. In this regard, DOD 
has indicated that it plans to implement its new human capital system 
for 300,000 civilian employees by October 1, 2004. It is highly 
unlikely that DOD will have employed an appropriate process and 
implemented an appropriate infrastructure to achieve this objective.

It is worth mentioning here that the Department of Homeland Security 
(DHS) is also currently developing a new human capital system. DHS is 
using a collaborative process that facilitates participation from all 
levels of DHS, and directly involves OPM. We found that the DHS process 
to date has generally reflected the important elements of a successful 
transformation, including effective communication and employee 
involvement.[Footnote 20] In addition, DHS plans to implement the job 
evaluation, pay, and performance management system in phases to allow 
time for final design, training, and careful implementation. I believe 
that DOD could benefit from employing a more inclusive process and 
phased implementation approach similar to the process used by DHS.

Business Management Modernization Program:

Another broad-based initiative that is vital to the department's 
efforts to transform DOD business operations is the BMMP, which the 
department established in July 2001. The purpose of the BMMP is to 
oversee development and implementation of a departmentwide business 
enterprise architecture (BEA), transition plan, and related efforts to 
ensure that DOD business system investments are consistent with the 
architecture. A well-defined and properly implemented business 
enterprise architecture can provide assurance that the department 
invests in integrated enterprisewide business solutions and, 
conversely, can help move resources away from nonintegrated business 
system development efforts. As we reported in July 2003,[Footnote 21] 
within 1 year DOD developed an initial version of its departmentwide 
architecture for modernizing its current financial and business 
operations and systems. Thus far, DOD has expended tremendous effort 
and resources and has made important progress towards complying with 
legislative requirements. However, substantial work remains before the 
architecture will begin to have a tangible impact on improving DOD's 
overall business operations. I cannot overemphasize the degree of 
difficulty DOD faces in developing and implementing a well-defined 
architecture to provide the foundation that will guide its overall 
business transformation effort.

On the positive side, during its initial efforts to develop the 
architecture, the department established some of the architecture 
management capabilities advocated by best practices and federal 
guidance,[Footnote 22] such as establishing a program office, 
designating a chief architect, and using an architecture development 
methodology and automated tool. Further, DOD's initial version of its 
BEA provides a foundation on which to build and ultimately produce a 
well-defined business enterprise architecture. For example, in 
September 2003,[Footnote 23] we reported that the "As Is" descriptions 
within the BEA include an inventory of about 2,300 systems in operation 
or under development and their characteristics. The "To Be" 
descriptions address, to at least some degree, how DOD intends to 
operate in the future, what information will be needed to support these 
future operations, and what technology standards should govern the 
design of future systems.

While some progress has been made, DOD has not yet taken important 
steps that are critical to its ability to successfully use the 
enterprise architecture to drive reform throughout the department's 
overall business operations. For example, DOD has not yet defined and 
implemented the following.

* Detailed plans to extend and evolve its initial architecture to 
include the missing scope and detail required by the Bob Stump National 
Defense Authorization Act for Fiscal Year 2003 and other relevant 
architectural requirements. Specifically, (1) the initial version of 
the BEA excluded some relevant external requirements, such as 
requirements for recording revenue, and lacked or provided little 
descriptive content pertaining to its "As Is" and "To Be" environments 
and (2) DOD had not yet developed the transition plan needed to provide 
a temporal road map for moving from the "As Is" to the "To Be" 

* An effective approach to select and control business system 
investments[Footnote 24] for obligations exceeding $1 million. As I 
previously stated, and it bears repeating here, DOD components 
currently receive direct funding for their business systems and 
continue to make their own parochial decisions regarding those 
investments without having received the scrutiny of the DOD Comptroller 
as required by the Bob Stump National Defense Authorization Act for 
Fiscal Year of 2003. Later, I will offer a suggestion for improving the 
management and oversight of the billions of dollars DOD invests 
annually in system modernization efforts.

Until DOD completes its efforts to refine and implement its enterprise 
architecture and transition plan, and develop and implement an 
effective approach for selecting and controlling business system 
investments, DOD will continue to lack (1) a comprehensive and 
integrated strategy to guide its business process and system changes, 
and (2) results-oriented measures to monitor and measure progress, 
including whether system development and modernization investment 
projects adequately incorporate leading practices used by the private 
sector and federal requirements and achieve performance and efficiency 
commensurate with the cost. These elements are critical to the success 
of DOD's BMMP.

Developing and implementing a business enterprise architecture for an 
organization as large and complex as DOD is a formidable challenge but 
it is critical to effecting the change required to achieve the 
Secretary's vision of relevant, reliable, and timely financial and 
other management information to support the department's vast 
operations. As mandated, we plan to continue to report on DOD's 
progress in developing the next version of its architecture, developing 
its transition plan, validating its "As Is" systems inventory, and 
controlling its system investments.

Interim Initiatives:

Since DOD's overall business process transformation is a long-term 
effort, in the interim it is important for the department to focus on 
improvements that can be made using, or requiring only minor changes 
to, existing automated systems and processes. As demonstrated by the 
examples I will highlight in this testimony, leadership, real 
incentives, accountability, and oversight and monitoring--key elements 
to successful reform--have brought about improvements in some DOD 
operations, such as more timely commercial payments, reduced payment 
recording errors, and significant reductions in individually billed 
travel card delinquency rates.

To help achieve the department's goal of improved financial 
information, the DOD Comptroller has developed a Financial Management 
Balanced Scorecard that is intended to align the financial community's 
strategy, goals, objectives, and related performance measures with the 
departmentwide risk management framework established as part of DOD's 
QDR, and with the President's Management Agenda. To effectively 
implement the balanced scorecard, the Comptroller is planning to 
cascade the performance measures down to the military services and 
defense agency financial communities, along with certain specific 
reporting requirements. DOD has also developed a Web site where 
implementation information and monthly indicator updates will be made 
available for the financial communities' review. At the departmentwide 
level, certain financial metrics will be selected, consolidated, and 
reported to the top levels of DOD management for evaluation and 
comparison. These "dashboard" metrics are intended to provide key 
decision makers, including Congress, with critical performance 
information at a glance, in a consistent and easily understandable 

DFAS has been reporting the metrics cited below for several years, 
which, under the leadership of DFAS' Director and DOD's Comptroller, 
have reported improvements, including:

* From April 2001 to January 2004, DOD reduced its commercial pay 
backlogs (payment delinquencies) by 55 percent.

* From March 2001 to December 2003, DOD reduced its payment recording 
errors by 33 percent.

* The delinquency rate for individually billed travel cards dropped 
from 18.4 percent in January 2001 to 10.7 percent in January 2004.

Using DFAS' metrics, management can quickly see when and where problems 
are arising and can focus additional attention on those areas. While 
these metrics show significant improvements from 2001 to today, 
statistics for the last few months show that progress has slowed or 
even taken a few steps backward for payment recording errors and 
commercial pay backlogs. Our report last year on DOD's metrics 
program[Footnote 25] included a caution that, without modern integrated 
systems and the streamlined processes they engender, reported progress 
may not be sustainable if workload is increased.

Since we reported problems with DOD's purchase card program, DOD and 
the military services have taken actions to address all of our 109 
recommendations. In addition, we found that DOD and the military 
services took action to improve the purchase card program consistent 
with the requirements of the Bob Stump National Defense Authorization 
Act for Fiscal Year 2003 and the DOD Appropriation Act for Fiscal Year 
2003.[Footnote 26] Specifically, we found that DOD and the military 
services had done the following.

* Substantially reduced the number of purchase cards issued. According 
to GSA records, DOD had reduced the total number of purchase cards from 
about 239,000 in March 2001 to about 134,609 in January 2004. These 
reductions have the potential to significantly improve the management 
of this program.

* Issued policy guidance to field activities to (1) perform periodic 
reviews of all purchase card accounts to reestablish a continuing bona 
fide need for each card account, (2) cancel accounts that were no 
longer needed, and (3) devise additional controls over infrequently 
used accounts to protect the government from potential cardholder or 
outside fraudulent use.

* Issued disciplinary guidelines, separately, for civilian and military 
employees who engage in improper, fraudulent, abusive, or negligent use 
of a government charge card.

In addition, to monitor the purchase card program, the DOD IG and the 
Navy have prototyped and are now expanding a data-mining capability to 
screen for and identify high-risk transactions (such as potentially 
fraudulent, improper, and abusive use of purchase cards) for subsequent 
investigation. On June 27, 2003, the DOD IG issued a report[Footnote 
27]summarizing the results of an in-depth review of purchase card 
transactions made by 1,357 purchase cardholders. The report identified 
182 cardholders who potentially used their purchase cards 
inappropriately or fraudulently.

We believe that consistent oversight played a major role in bringing 
about these improvements in DOD's purchase and travel card programs. 
During 2001, 2002, and 2003, seven separate congressional hearings were 
held on the Army and Navy purchase and individually billed travel card 
programs. Numerous legislative initiatives aimed at improving DOD's 
management and oversight of these programs also had a positive impact.

Another important initiative underway at the department pertains to 
financial reporting. Under the leadership of Comptroller Zakheim, DOD 
is working to instill discipline into its financial reporting processes 
to improve the reliability of the department's financial data. 
Resolution of serious financial management and related business 
management weaknesses is essential to achieving any opinion on the DOD 
consolidated financial statements. Pursuant to the requirements in 
section 1008 of the National Defense Authorization Act for Fiscal Year 
2002,[Footnote 28] DOD has reported for the past 3 years on the 
reliability of the department's financial statements, concluding that 
the department is not able to provide adequate evidence supporting 
material amounts in its financial statements. Specifically, DOD stated 
that it was unable to comply with applicable financial reporting 
requirements for (1) property, plant, and equipment (PP&E), (2) 
inventory and operating materials and supplies, (3) environmental 
liabilities, (4) intragovernmental eliminations and related accounting 
entries, (5) disbursement activity, and (6) cost accounting by 
responsibility segment. Although DOD represented that the military 
retirement health care liability data had improved for fiscal year 
2003, the cost of direct health care provided by DOD-managed military 
treatment facilities was a significant amount of DOD's total recorded 
health care liability and was based on estimates for which adequate 
support was not available. DOD has indicated that by acknowledging its 
inability to produce reliable financial statements, as required by the 
act, the department saves approximately $23 million a year through 
reduction in the level of resources needed to prepare and audit 
financial statements. However, DOD has set the goal of obtaining a 
favorable opinion on its fiscal year 2007 departmentwide financial 
statements. To this end, DOD components and agencies have been tasked 
with addressing material line item deficiencies, in conjunction with 
the BMMP. This is an ambitious goal and we have been requested by 
Congress to review the feasibility and cost effectiveness of DOD's 
plans for obtaining such an opinion within the stated time frame.

To instill discipline in its financial reporting process, the DOD 
Comptroller requires DOD's major components to prepare quarterly 
financial statements along with extensive footnotes that explain any 
improper balances or significant variances from previous year quarterly 
statements. All of the statements and footnotes are analyzed by 
Comptroller office staff and reviewed by the Comptroller. In addition, 
the midyear and end-of-year financial statements must be briefed to the 
DOD Comptroller by the military service Assistant Secretary for 
Financial Management or the head of the defense agency. We have 
observed several of these briefings and have noted that the practice of 
preparing and explaining interim financial statements has led to the 
discovery and correction of numerous recording and reporting errors.

If DOD continues to provide for active leadership, along with 
appropriate incentives and accountability mechanisms, improvements 
will continue to occur in its programs and initiatives.

Suggestions for Legislative Consideration:

I would like to offer two suggestions for legislative consideration 
that I believe could contribute significantly to the department's 
ability to not only address the impediments to DOD success but also to 
incorporate needed key elements to successful reform. These suggestions 
would include the creation of a chief management official and the 
centralization of responsibility and authority for business system 
investment decisions with the domain[Footnote 29] leaders responsible 
for the department's various business process areas, such as logistics 
and human resource management.

Chief Management Official:

Previous failed attempts to improve DOD's business operations 
illustrate the need for sustained involvement of DOD leadership in 
helping to assure that the DOD's financial and overall business process 
transformation efforts remain a priority. While the Secretary and other 
key DOD leaders have certainly demonstrated their commitment to the 
current business transformation efforts, the long-term nature of these 
efforts requires the development of an executive position capable of 
providing the strong and sustained executive leadership--over a number 
of years and various administrations. The day-to-day demands placed on 
the Secretary, the Deputy Secretary, and others make it difficult for 
these leaders to maintain the oversight, focus, and momentum needed to 
resolve the weaknesses in DOD's overall business operations. This is 
particularly evident given the demands that the Iraq and Afghanistan 
postwar reconstruction activities and the continuing war on terrorism 
have placed on current leaders. Likewise, the breadth and complexity of 
the problems preclude the Under Secretaries, such as the DOD 
Comptroller, from asserting the necessary authority over selected 
players and business areas.

While sound strategic planning is the foundation upon which to build, 
sustained leadership is needed to maintain the continuity needed for 
success. One way to ensure sustained leadership over DOD's business 
transformation efforts would be to create a full-time executive level 
II position for a chief management official who would serve as the 
Principal Under Secretary of Defense for Management.[Footnote 30] This 
position would provide the sustained attention essential for addressing 
key stewardship responsibilities such as strategic planning, 
performance and financial management, and business systems 
modernization in an integrated manner, while also facilitating the 
overall business transformation operations within DOD. This position 
could be filled by an individual, appointed by the President and 
confirmed by the Senate, for a set term of 7 years with the potential 
for reappointment. Such an individual should have a proven track record 
as a business process change agent in large, complex, and diverse 
organizations--experience necessary to spearhead business process 
transformation across the department and serve as an integrator for the 
needed business transformation efforts. In addition, this individual 
would enter into an annual performance agreement with the Secretary 
that sets forth measurable individual goals linked to overall 
organizational goals in connection with the department's overall 
business transformation efforts. Measurable progress towards achieving 
agreed upon goals would be a basis for determining the level of 
compensation earned, including any related bonus. In addition, this 
individual's achievements and compensation would be reported to 
Congress each year.

Central Control Over System Investments:

We have made numerous recommendations to DOD intended to improve the 
management oversight and control of its business systems modernization 
investments. However, as previously mentioned, progress in achieving 
this control has been slow and, as a result, DOD has little or no 
assurance that current business systems modernization investment money 
is being spent in an economically efficient and effective manner. DOD's 
current systems investment process has contributed to the evolution of 
an overly complex and error-prone information technology environment 
containing duplicative, nonintegrated, and stovepiped systems. Given 
that DOD plans to spend $19 billion on business systems and related 
infrastructure for fiscal year 2004--including an estimated $5 billion 
in modernization money--it is critical that actions be taken to gain 
more effective control over such business systems investments.

One suggestion we have for legislative action to address this issue 
that is consistent with our open recommendations to DOD, is to 
establish specific management oversight, accountability, and control of 
funding with the "owners" of the various functional areas or domains. 
This legislation would define the scope of the various business areas 
(e.g., acquisition, logistics, finance and accounting) and establish 
functional responsibility for management of the portfolio of business 
systems in that area with the relevant Under Secretary of Defense for 
the six departmental domains and the Chief Information Officer for the 
Enterprise Information Environment Mission (information technology 
infrastructure). For example, planning, development, acquisition, and 
oversight of DOD's portfolio of logistics business systems would be 
vested in the Under Secretary of Defense for Acquisition, Technology, 
and Logistics.

We believe it is critical that funds for DOD business systems be 
appropriated to the domain owners in order to provide for 
accountability, transparency, and the ability to prevent the continued 
parochial approach to systems development that exists today. The 
domains would establish a hierarchy of investment review boards with 
DOD-wide representation, including the military services and Defense 
agencies. These boards would be responsible for reviewing and approving 
investments to develop, operate, maintain, and modernize business 
systems for the domain portfolio, including ensuring that investments 
were consistent with DOD's BEA. All domain owners would be responsible 
for coordinating their business system modernization efforts with the 
chief management official who would chair the Defense Business Systems 
Modernization Executive Committee. Domain leaders would also be 
required to report to Congress through the chief management official 
and the Secretary of Defense, on applicable business systems that are 
not compliant with review requirements and to include a summary 
justification for noncompliance.


As seen again in Iraq, the excellence of our military forces is 
unparalleled. However, that excellence is often achieved in the face of 
enormous challenges in DOD's financial management and other business 
areas, which have serious and far-reaching implications related to the 
department's operations and critical national defense mission. Our 
recent work has shown that DOD's long-standing financial management and 
business problems have resulted in fundamental operational problems, 
such as failure to properly pay mobilized Army Guard soldiers and the 
inability to provide adequate accountability and control over supplies 
and equipment shipments in support of Operation Iraqi Freedom. Further, 
the lack of adequate transparency and appropriate accountability across 
all business areas has resulted in certain fraud, waste, and abuse and 
hinders DOD's attempts to develop world-class operations and activities 
to support its forces. As our nation continues to be challenged with 
growing budget deficits and increasing pressure to reduce spending 
levels, every dollar that DOD can save through improved economy and 
efficiency of its operations is important.

DOD's senior leaders have demonstrated a commitment to transforming the 
department and improving its business operations and have taken 
positive steps to begin this effort. We believe that our two suggested 
legislative initiatives will greatly improve the likelihood of 
meaningful, broad-based reform at DOD. The continued involvement and 
monitoring by congressional committees will be critical to ensure that 
DOD's initial transformation actions are sustained and extended and 
that the department achieves its goal of securing the best performance 
and highest measure of accountability for the American people. I 
commend the Subcommittee for holding this hearing and I encourage you 
to use this vehicle, on an annual basis, as a catalyst for long overdue 
business transformation at DOD.

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 

Contacts and Acknowledgments:

For further information about this testimony, please contact Gregory D. 
Kutz at (202) 512-9095 or, Randolph Hite at (202) 512-
3439 or, or Evelyn Logue at 202-512-3881. Other key 
contributors to this testimony include Sandra Bell, Meg Best, Molly 
Boyle, Mary Ellen Chervenic, Cherry Clipper, Francine Delvecchio, Abe 
Dymond, Gayle Fischer, Geoff Frank, John Kelly, Elizabeth Mead, John 
Ryan, Cary Russell, Lisa Shames, Darby Smith, Edward Stephenson, 
Derrick B. Stewart, Carolyn Voltz, Marilyn Wasleski, and Jenniffer 


[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 
management, information security, support infrastructure management, 
inventory management, real property, systems modernization, and weapon 
systems acquisition. 

[2] 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).

[3] U.S. General Accounting Office, Fiscal Year 2003 U.S. Government 
Financial Statements: Sustained Improvement in Federal Financial 
Management Is Crucial to Addressing Our Nation's Future Fiscal 
Challenges, GAO-04-477T (Washington, D.C.: Mar. 3, 2004).

[4] JFMIP is a joint undertaking of the Office of Management and 
Budget, GAO, the Department of Treasury, and the Office of Personnel 
Management, working in cooperation with each other and with operating 
agencies to improve financial management practices throughout the 

[5] The six case study units reviewed include the Colorado B Company, 
Virginia B Company, West Virginia C Company, Mississippi 114th Military 
Police Company, California 49th Military Police Headquarters and 
Headquarters Detachment, and the Maryland 200th Military Police 
Company. In addition, our limited review of pay experiences of soldiers 
in the Colorado Army Guard's 220th Military Police Company, who 
recently returned from Iraq, indicated that some of the same types of 
pay problems that we found in our case studies had also affected them. 

[6] Congressional Budget Office, The Long-Term Implications of Current 
Defense Plans: Detailed Update for Fiscal Year 2004 ( MACROBUTTON 
HtmlResAnchor, February 2004). Figures from this report are 
in constant fiscal year 2004 dollars.

[7] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: 
January 2003). Figures from this report are in constant fiscal year 
2003 dollars.

[8] Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 
Stat. 2842, Nov. 15, 1990 (codified, as amended in scattered sections 
of title 31, United States Code).

[9] U.S. General Accounting Office, Executive Guide: Creating Value 
Through World-class Financial Management, GAO/AIMD-00-134 (Washington, 
D.C.: April 2000) and U.S. General Accounting Office, Executive Guide: 
Maximizing the Success of Chief Information Officers: Learning From 
Leading Organizations, GAO-01-376G (Washington, D.C.: February 2001).

[10] Bob Stump National Defense Authorization Act for Fiscal Year 2003, 
Pub. L. No. 107-314, § 1004 (d), 116 Stat. 2458, 2629, Dec. 2, 2002.

[11] U.S. General Accounting Office, DOD Business Systems 
Modernization: Important Progress Made to Develop Business Enterprise 
Architecture, but Much Work Remains, GAO-03-1018 (Washington, D.C.: 
Sept. 19, 2003).

[12] OMB developed the Program Assessment Rating Tool to strength the 
process for assessing the effectiveness of programs across the federal 
government. For fiscal year 2004, OMB rated the following 12 defense 
program areas: Air Combat; Airlift; Basic Research; Chemical 
Demilitarization; Communications Infrastructure; Defense Health; 
Energy Conservation Improvement; Facilities Sustainment, Restoration, 
Modernization, and Demolition; Housing; Missile Defense; Recruiting; 
and Shipbuilding. DOD linked metrics for these program areas, which 
represent 20 percent of the department's fiscal year 2004 budget; it 
linked another 20 percent in the 2005 budget and 30 percent in the 2006 
budget, for a total of 70 percent.

[13] In July 2003, we reported that DOD and the military services do 
not have an effective approach to prevent and mitigate equipment 
corrosion, and that DOD's strategic plan should contain clearly defined 
goals; measurable, outcome-oriented objectives; and performance 
measures. (U.S. General Accounting Office, Defense Management: 
Opportunities to Reduce Corrosion Costs and Increase Readiness, 
GAO-03-753 (Washington, D.C.: July 7, 2003)). Similarly, in January 
2004 we testified that existing processes and controls used to provide 
pay and allowances to mobilized Army Guard personnel prevented DOD from 
being able to reasonably assure timely and accurate payroll payments. 
We stated that DOD needs to establish a unified set of policies and 
procedures, as well as performance measures in the pay area (U.S. 
General Accounting Office, Military Pay: Army National Guard Personnel 
Mobilized to Active Duty Experienced Significant Pay Problems, 
GAO-04-413T (Washington, D.C.: Jan. 28, 2004)).

[14] 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).

[15] GAO-02-497T.

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

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

[18] National Defense Authorization Act for Fiscal Year 2004, Pub. L. 
No. 108-136, § 1101, 117 Stat. 1392, 1621, Nov. 24, 2003 (amending 
subpart I of part III of title 5, United States Code).

[19] U.S. General Accounting Office, Defense Transformation: 
Preliminary Observations on DOD's Proposed Civilian Personnel Reforms, 
GAO-03-717T (Washington, D.C.: Apr. 29, 2003).

[20] U.S. General Accounting Office, Human Capital: DHS Personnel 
System Design Effort Provides for Collaboration and Employee 
Participation, GAO-03-1099 (Washington, D.C.: Sep. 30, 2003).

[21] U.S. General Accounting Office, Business Systems Modernization: 
Summary of GAO's Assessment of the Department of Defense's Initial 
Business Enterprise Architecture, GAO-03-877R (Washington, D.C.: July 
7, 2003).

[22] U.S. General Accounting Office, Information Technology: A 
Framework for Assessing and Improving Enterprise Architecture 
Management (Version 1.1), GAO-03-584G (Washington, D.C.: April 2003).

[23] GAO-03-1018.

[24] Business systems include financial and nonfinancial systems, such 
as civilian personnel, finance, health, logistics, military personnel, 
procurement, and transportation, with the common element being the 
generation or use of financial data to support DOD's business 

[25] 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).

[26] The Department of Defense Appropriations Act for Fiscal Year 2003, 
Pub. L. No. 107-248, § 8149, 116 Stat. 1519, 1572, Oct. 23, 2002.

[27] Department of Defense, Office of the Inspector General, Summary 
Report on Joint Review of Selected DOD Purchase Card Transactions, 
D2003-109 (Washington, D.C.: June 27, 2003).

[28] National Defense Authorization Act for Fiscal Year 2003, Pub. L. 
No. 107-107, §1008, 115 Stat. 1012, 1204, Dec. 28, 2001.

[29] DOD has one Enterprise Information Environment Mission, and six 
departmental domains including (1) acquisition/ procurement, (2) 
finance, accounting, and financial management, (3) human resource 
management, (4) logistics, (5) strategic planning and budgeting, and 6) 
installations and environment. 

[30] On September 9, 2002, GAO convened a roundtable of executive 
branch leaders and management experts to discuss the Chief Operating 
Officer concept. For more information see U.S. General Accounting 
Office, Highlights of a GAO Roundtable: The Chief Operating Officer 
Concept: A Potential Strategy to Address Federal Governance Challenges, 
GAO-03-192SP (Washington, D.C.: Oct. 4, 2002).