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United States General Accounting Office: 


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

For Release on Delivery: 
Expected at 10 a.m. 
Wednesday, March 6, 2002: 

DOD Financial Management: 

Integrated Approach, Accountability, Transparency, and Incentives Are 
Keys to Effective Reform: 

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


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" that 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 I, in my role as 
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 plan to invite 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 it gets the 
most from every dollar spent. The department must be able to 
effectively account for the funding it receives and carry out its 
stewardship responsibilities 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, 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 providing reliable, timely financial information 
on a routine basis to support management decision-making at all levels 
throughout DOD. This will also be critical in order to enhance overall 
transparency and accountability. Success in this area will also 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, I shared with Secretary 
Rumsfeld and Comptroller Zakheim a business transformation paper, 
which provided an overview of our views on the current challenges 
facing the department and 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, and 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 to be 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. 

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 decision-making. This network was not designed, 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 which combine to exacerbate problems with data integrity. 
DOD 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, the department relies on 
the Mechanization of Contract Administration Services (MOCAS) system 
to process a substantial portion of DOD contract payment transactions 
for all DOD organizations, which totaled about $78 billion in fiscal 
year 2001. When MOCAS was first implemented in 1968, "mechanization" 
was a high tech word. 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 2] 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 3] 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 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 4] 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 5] that while DRI got off to a good start and 
made progress in implementing many of the component initiatives, DRI 
did not meet expected timeframes 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 the department'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 repetitive 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 business 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 

Underlying Causes of Financial and Related Business Process Reform 

As part of our constructive engagement approach with DOD, I 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, agency-
wide 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 and entitywide priority, (2) redefining the role 
of finance, (3) providing meaningful information to decision-makers, 
and (4) building a team of people that deliver results.[Footnote 6] 

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 7] the 
department encountered resistance to developing departmentwide 
solutions under the then Secretary's broad-based DRI.[Footnote 8] 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 in not only financial 
management, but also in other business areas, such as weapon system 
acquisition and inventory management. For example, as we reported 
[Footnote 9] 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 10] 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 will 
collectively result in an integrated DOD-wide approach to financial 
management improvement. In addition, we reported the department's plan 
did not have 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 it in future years' updates it will 
reflect a more strategic, department-wide vision and tool for 
financial management reform. 

The department faces a formidable challenge in responding to
technological advances that are changing traditional approaches to 
business management as it moves to modernize its systems. 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 its business functions. As we have reported,[Footnote 11] 
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 
12] 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 DOD decisionmakers 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 underlying problem 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, took longer to complete, and did not generate results or 
perform 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 DOD Financial Management Reform: 

As we testified in May 2001,[Footnote 13] our experience has shown 
there are several key elements that, collectively will enable the 
department to effectively address the underlying causes of DOD's 
inability to resolve its longstanding financial management problems. 
These elements, which will be 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 

* 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, 
as well as 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 decision-making 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 somewhat 

Integrated Business Process Reform Strategy: 

As we have reported in the past,[Footnote 14] 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 15] 
Successfully reengineering the department's processes supporting its 
financial management and other business support operations will be 
critical if DOD is to effectively address deep-rooted organizational 
emphasis on maintaining "business as usual" across the department. 

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 16] 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 the lack of an enterprisewide, integrated 
approach to addressing its 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 mentioned earlier, 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 the 
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, comprised of 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. 

The department's successful Year 2000 effort illustrated and our 
survey of leading financial management organizations[Footnote 17] 
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 
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 and 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 18] 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 19] we recommended 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 I met with Secretary Rumsfeld, I 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 20] such an accountability structure should emanate 
from the highest levels and include the secretaries 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 to oversee the activities related to this 
modernization effort and also established a supporting working group 
to provide day-to-day guidance and direction on 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 will be important that the Comptroller 
has 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 will be 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 
and 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 agent for a large, diverse organization 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 21] establishing a results 
orientation will be 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 22] 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 
interrelationship 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 will be 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 
will be 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 to 
track progress toward this goal. 

In the short term, it will be important to focus on actions that can 
be taken using existing systems and processes. Establishing interim 
measures to both track performance against the department's overall 
transformation goals and facilitate near term successes using existing 
systems and processes will be critical. The department has established 
an initial set of metrics intended to evaluate financial performance, 
and 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 parochial interests and stovepiped 
approaches that have plagued previous reform efforts will be 
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 decisionmakers to initiate and implement efforts 
that result in fundamentally reformed financial management and other 
business support operations. 

In addition, such incentives and consequences will be 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 will be essential for the department to effectively 
manage its large, complex system modernization effort now underway. 
The Clinger-Cohen Act requires agencies to develop, implement, and 
maintain an integrated system architecture. As we previously 
reported,[Footnote 23] 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 result in perpetuating 
the existing system environment that suffers from systems duplication, 
limited interoperability, and unnecessarily costly operations and 
maintenance. In our May 2001 report,[Footnote 24] 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 carryout 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 25] 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 26] that DOD 
develop an enterprise architecture for its logistics operations. As I 
discussed previously, an integrated reform strategy will be 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 continue to 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 27] that periodic reporting of status 
information to department top management, the Office of Management and 
Budget (OMB), the Congress, and the audit community was another key 
lesson learned from the department's successful effort to address its 
Year 2000 challenge. 

Previous Financial Management Improvement Plans DOD submitted to the 
Congress 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 
system architecture. If the department's future plans are upgraded to 
provide a department-wide strategic view of the financial management 
challenges facing the DOD 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 a tool for 
oversight 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. I applaud the proposals spearheaded by the 
Senate Armed Services Committee, and subsequently enacted as part of 
the fiscal year 2002 National Defense Authorization Act, to provide a 
framework for redirecting the department's resources from the 
preparation and audit of financial statements that 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 for success to change the DOD culture that has over 
time perpetuated the status quo and been resistant to 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 will 
be 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 constructively work with the department and the Congress 
in this important area. 

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 Jeffrey C.
Steinhoff at (202) 512-2600 or, Henry L. Hinton, 
Jr. at (202) 512-4300 or, or Gregory D. Kutz at (202) 
512-9095 or Other key contributors to this testimony 
include Jack Brock, Geoffrey Frank, William Hill, 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, 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, 

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

[4] U.S. General Accounting Office, High-Risk Series: Information 
Management and Technology, [hyperlink,] (Washington, D.C.: February 

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

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

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

[8] 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. 

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

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

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

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

[13] [hyperlink,]. 

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

[15] The eight interrelated high-risk areas that represent the 
greatest challenge to DOD 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. 

[16] [hyperlink,]. 

[17] [hyperlink,]. 

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

[19] [hyperlink,]. 

[20] [hyperlink,]. 

[21] [hyperlink,]. 

[22] [hyperlink,]. 

[23] [hyperlink,]. 

[24] [hyperlink,]. 

[25] [hyperlink,]. 

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

[27] [hyperlink,].