59

ments to audit. And they haven’t been required to. We're not trying
to assert that they have.

The Army has shown that they can produce auditable state-
ments. So they have done their No. 1 grade. Gene talks about them
being at a No. 2; that is, there are some audit exceptions. They
don’t have a clean opinion. So they are between a one and a three
at this point. That’s why he used the grade C.

The Navy hasn’t taken the first test yet. They haven’t gone for
that merit badge yet. And maybe they could produce it tomorrow;
we don’t know, but they haven’t done that yet. So we can’t give
them a grade in that regard.

Mr. Horn. So the Air Force, I take it, is No. 2? Under the GAO
grading system, where does that rank them?

Mr. DESEVE. It’s actually the OMB grading system.

Mr. Doparo. That’s right. Yes.

Mr. DESEVE. It’s a No. 2.

Mr. Doparo. Yes, I think Ed’s right. We’re in that position.

Mr. Horn. You’re moving off letters and into numbers. OK. So,
in other words, a C-plus in your university equals a one. What’s
an A get in your university?

Mr. DESEVE. That’s the unqualified opinion.

Mr. Doparo. That's right.

Mr. DESEVE. And, of course, there are gradations. I think of one
agency where there are three components. Two of the components
have unqualified opinions, as components. The third could have an
unqualified opinion, but for really a problem in legislation, where
the law is written in such a way that it’s very difficult to verify the
spending that goes on in the agency, it’s a tough problem that
they’ve got to solve. They are probably at a 2-plus, where another
agency who has produced financial statements but has a whole
slew of problems would be at a 2-minus.

I think the Air Force and the Army are both right in the middle,
striving to see who gets to be first. We're really waiting to see.
Gene and I are waiting to see that.

Mr. Doparo. Right.

Mr. DESEVE. I will buy dinner for four financial managers of the
first service, at the restaurant of their choice, in Washington, DC.

Mr. Horn. He’s under oath, folks. Make sure he comes through.

Well, I’m going to yield to somebody who knows about gradin;
systems from the 1960’s, the distinguished representative, and
ranking minority member, from New York.

Mr. DESEvE. When she was in high school; that’s right.

Mrs. MALONEY. Thank you, Mr. Chairman.

In your testimony, you said that to solve the payment and ac-
counting problems is going to depend greatly on DOD and GAO co-
operation. The Assistant Comptroller General noted and identified
several, problems, and you outlined five in your testimony, on pages

and 3.

Mr. DESEVE. Right.

Mrs. MALONEY. So I would like to ask you, what has DOD done
to solve the No. 1 problem you talk about, accounting for billions
of dollars in annual disbursements? And have they cooperated with
you? Have they worked with you, as you said was necessary, in
your testimony?


123

training in the Department of Defense, or is this strictly a Depart-
ment of Defense function?

Ms. HILL. On that one I don’t have much personal knowledge. I
do know that DOD is trying to do some things. They have some-
thing they are calling the Defense Business Management Univer-
sity that they are in the process of setting up. That hasn’t been
sited yet, but they are developing a curriculum. But, honestly, I
don’t know that I have enough knowledge to really answer that, as
to whether OPM has been heavily involved in that or not.

Mr. Horn. Well, ask your staff when you go back.

Ms. HILL. We can find out and get back to you.

Mr. Horn. We will file that and put it in the record at this point.

What would you suggest to improve the reliability of the finan-
cial information that is produced at these DFAS centers, especially
the Columbus, OH, one?

Ms. HILL. Well, first of all, the systems have to get into place to
produce not only accurate information but it has to be standardized
information. I think, certainly, automation, as we’ve talked about
and you’ve heard testimony about, would be very important, but,
you know, that raises some other questions. And, again, I’m not a
DOD expert yet, I’ve only been there a few months, but from what
I understand there is a big move in the department to automate
and to improve what they call the Corporate Information Manage-
ment Initiative.

But that’s not handled by the part of DOD that runs the finance
system; that’s handled by another component. So that raises ques-
tions of how much interface should they have. Second, I think that
initiative is focusing on information, DOD-wide, by function. So
that’s how they are focusing on developing systems for information.

On the other hand, if you look at how we're developing the ac-
counting systems, they are doing, at least in this migratory system,
the initial cut, they are doing it by service-unique systems. The
method that they are using is different, so that may create some
problems.

So I think automation has great potential in this area, but it
needs to be coordinated with what the department is doing, as a
whole.

Mr. Horn. With these smaller systems that still exist, and they
are in all the services, is anybody watching to see what kinds of
purchases they are making, to upgrade that system when it ought
to be folded into a more consolidated system? Or are we just spend-
ing millions of dollars still to keep this sort of rat trap moving?

Ms. HILL. You're talking about the accounting systems?

Mr. Horn. The accounting systems, and the technology to back
it up, and the software, and all that. I can just see, nobody gets
the message sometimes.

Ms. HILL. Well, I can tell you one concern we've got about some
of these systems is, you know, as we're developing them, we’re in
a rush to get the systems in, but are we making sure that these
systems have the right controls in them, controls against fraud,
and vulnerabilities of that nature?

And some of that is being lost—maybe not lost, but at least it’s
not being emphasized as much, and our reports have shown that,
because the push is to be able to come up here and tell the Con-


25

I get monthly reports from Rich on those accounts which are still
frozen. So we're not doing that.

We have also imposed requirements, at the same time, on requir-
ing a match to the obligation record, at the same time, and estab-
lishing a new obligation, if you can’t match it within a 180-day pe-
riod. So the answer is no, the Treasury will not continue to honor
a check if it’s against an account that’s “in the red,” because our
disbursing systems don’t allow us even to disburse them.

ir. HORN. We can ask the Inspector General, which I will ask,
although she might not have been there at that time, did they ever
pick up any of this situation? That is what I do hope the Inspector
General will get into, because it seems to me some of this could
have been caught by accurate audit ahead of time by the Inspector
General and others.

Mr. Hamre. Sir, may I just say, though, I think you will find a
very consistent record on the part of the Inspector General and the
General Accounting Office, pointing out these problems over years.
But please do ask them. I think that they were highlighting it, and
we just weren’t attentive enough to it.

Mr. Horn. Yes, well, at that point, I think they should have
nailed you—your predecessors—on that.

Now, according to you and Mr. Rau—this is again the Washing-
ton Post—a number of cases are under investigation for possible
violations of the Antideficiency Act, a law that governs how con-
gressionally appropriated money must be spent. When I was in the

‘isenhower administration, we did take that act very seriously.
And I’m just curious about the cases that might have been viola-
tions. What’s happened; what’s the status of those?

Mr. Hamre. Sir, there are, right now, probably a little over 50
pending cases of pending Antideficiency investigations. Some of
them go back a long time. This is an area where the department
has—we’ve tried to focus during the last 2 years. I think we've
made a concerted effort to get on top of the Antideficiency inves-
tigation cases. We take it very seriously.

I find it probably the most fearful lever that we have is to give
people what we call 1517 legal liability; that is, handing
Antideficiency limits to fund holders. They pay close attention to
that. We do have violations. Sometimes they are small and very
unintended. A person buys a computer with O&M dollars, and they
were not supposed to use O&M dollars, little things. And then
we've had some larger and more serious cases. I think, right now,
we have about 50 of them pending.

Mr. Horn. I notice here that—this sort of tickled me, because
having run a State university, I went through the same problem,
which was how the old boys did know how to balance the books.
Somehow they moved money around, and they always seemed to be
balanced. And I note that this paragraph that you noted, “The
services allowed such money mingling to go on partly because of
the complexity of the yearly congressional appropriations process.
‘People want to find an easier way to get the job done,’ he said.
‘They are trying to get some flexibility in a very cumbersome sys-
tem.’” And I can certainly agree with you on that.

And then it came, “You're frustrated by it, but in the past they
just waited until people retired. It was the old boy network cover-


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, Jr., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, Illinois
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jx., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida JOHN M. SPRATT, JR., South Carolina
WILLIAM H. ZELIFF, Jz, New Hampshire © LOUISE McINTOSH SLAUGHTER, New
JOHN M. MCHUGH, New York York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida GARY A. CONDIT, California
PETER BLUTS, Massachusetts COLLIN C. PETERSON, Minnesota
THOMAS M. DAVIS, Virginia KAREN L. THURMAN, Florida
DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York
JON D. FOX, Pennsylvania THOMAS M. BARRETT, Wisconsin
RANDY TATE, Washington GENE TAYLOR, Mississippi
DICK CHRYSLER, Michigan BARBARA-ROSE COLLINS, Michigan
GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of
MARK E. SOUDER, Indiana Columbia
WILLIAM J. MARTINI, New Jersey JAMES P. MORAN, Virginia
JOE SCARBOROUGH, Florida GENE GREEN, Texas
JOHN B. SHADEGG, Arizona CARRIE P. MEEK, Florida
MICHAEL PATRICK FLANAGAN, Illinois | CHAKA FATTAH, Pennsylvania
CHARLES F. BASS, New Hampshire BILL K. BREWSTER, Oklahoma
STEVEN C. LATOURETTE, Ohio TIM HOLDEN, Pennsylvania
MARSHALL “MARK” SANFORD, South

Carolina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, Jk., Maryland (Independent)

James L. CLARKE, Staff Director
Kevin Sano, General Counsel
JupitH McCoy, Chief Clerk
Bup Myers, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman
MICHAEL PATRICK FLANAGAN, Illinois CAROLYN B. MALONEY, New York

PETER BLUTE, Massachusetts MAJOR R. OWENS, New York
THOMAS M. DAVIS, Virginia JOHN M. SPRATT, JR., South Carolina
JON D. FOX, Pennsylvania PAUL E. KANJORSKI, Pennsylvania
RANDY TATE, Washington COLLIN C. PETERSON, Minnesota
JOE SCARBOROUGH, Florida TIM HOLDEN, Pennsylvania

CHARLES F. BASS, New Hampshire

Ex OFFICIO

WILLIAM F. CLINGER, Jr. Pennsylvania CARDISS COLLINS, Mlinois
J. RUSSELL GEORGE, Staff Director
ANNA G. MILLER, Professional Staff Member
ANDREW G. RICHARDSON, Clerk
CHERRI BRANSON, Minority Professional Staff

aD


119

The Army Materiel Command's prior year requirements were not
always funded from the correct appropriations, and the balances
in its financial records could not always be relied on for making
financial decisions.

© Progress payments to contractors and liquidations of
previous payments were not necessarily recorded against the
correct appropriations; as a result, appropriation balances were
distorted, potential violations of the Antideficiency Act could
have occurred, and overpayments to contractors were not recouped
in a timely manner. About $1.1 billion in unliquidated progress
payments was recorded in January 1994 for Army contracts funded
with expired appropriations. The balance was partially
attributable to deficiencies in the recording and liquidation of
progress payments, rather than to outstanding progress payments
that were valid but not liquidated.

© Contingent liabilities of at least $29.7 million existed
in programs funded in the expired procurement appropriations for
Aircraft; Missiles; Weapons and Tracked Combat Vehicles; and
Other Procurement items. Those liabilities were not adequately
reflected in accounting records and could result in funding
deficiencies and a potential violation of the Antideficiency Act
in the Aircraft appropriation.

© Army had about $3.9 billion in unliquidated obligations
charged to expired appropriations; however, the Army and the
Defense Finance and Accounting Service were not effectively
validating unliquidated obligation balances in expired
appropriations.

Management generally agreed with the audit recommendations for
corrective actions. Similar, but more extensive, problems had

been noted previously in audits of Navy and Air Force expired
accounts.


68

Since fiscal year 1991, the Army has prepared agency-wide au-
dited financial statements as a pilot under the Chief Financial Offi-
cers Act. As the committee is well aware, each year our auditors
have been unable to express an opinion on the reliability of our
statements. Looking back over 4 years of reporting experience, the
greatest lesson we have learned is that the CFO Act is not just
about financial statements and audits. They are the means to an
end, and that end is the integration of functional and financial
management, not only in systems and data, but in all aspects of
day-to-day operations.

The Army has derived another major benefit from our experience
as a CFO pilot, and that is our recognition of the differences be-
tween systemic and management problems, between problems
which require DOD-wide efforts and will take years to resolve, and
those for which we in the Army can and must take responsibility.

That recognition led to our forming strong partnerships with
functional proponents throughout the Army to resolve internal
problems. And I believe we have been very aggressive in finding
new and improved ways of doing business with the tools and re-
sources that are available to us today.

One of the most immediate outcomes of our early CFO audits
was a restructuring of our management control process, an area in
which the committee has expressed interest. In our first audit, the
General Accounting Office found that the Army had a good man-
agement control framework, but commanders and managers in the
field often simply were not using it. Our own assessment confirmed
the GAO’s findings and pointed out a number of specific problems.

Our new process, which became effective 1 October 1994, reduces
workload and promotes ownership and accountability, by limiting
required evaluations to key management controls, by giving com-
manders and managers greater flexibility in conducting evalua-
tions, and by raising the level of responsibility for certifying eval-
uations.

The final thrust of our management control approach is edu-
cation. We are incorporating the management control message into
the full range of Army training and education programs, from ori-
entations for new brigadier generals and senior executive service
members, to courses for new managers and first-line supervisors,
and a wide range of soldier schools.

As I noted earlier, the Army financial management community
has formed strong partnerships with functional proponents, not
only to improve our systems interface capabilities, but in a variety
of reengineering efforts. Among our success stories is the Army
Joint Reconciliation Program, which combines the financial skills of
accounting and budget personnel with the expertise of acquisition
specialists, logisticians, auditors, and legal staff to analyze problem
disbursements.

During last fiscal year, joint reconciliation reduced unmatched
disbursements by 51 percent, reduced negative unliquidated obliga-
tions by 70 percent, and reduced contingent liabilities associated
with canceling year appropriations by 96 percent. We also imple-
mented a new program to streamline and expedite the administra-
tive and legal review process for open Antideficiency Act violation


79

cost estimates grew to the point that both systems were canceled. Shortly there-
after, under the Corporate Information Management Initiative (CIM), DOD decided
to pursue standard systems across the entire Department of Defense and a morato-
rium was placed on the development or modernization of Service-unique systems
pending the selection of standard systems. As a result, we are living with technology
and systems from the 70s and 80s that are ill-suited to the demands of the current
environment.

When DFAS was established in January 1991, the DON had 50 systems officially
inventoried for its general funds and 34 Systems for its DBOF operations. In addi-
tion to these inventoried systems, the DON had over 20 supporting systems. These
accounting and reporting systems use several different general ledgers, but none
used the new government standard general ledger. These systems are predomi-
nantly “transaction driven” for a number of financial categories such as payables,
but they are deficient in other areas such as plant, property, and equipment.

a. General Funds. For Navy general funds, we have selected the existing Standard
Accounting and Reporting System (STARS) as our interim migratory system. In its
final configuration, the system will have departmental (STARS-DR), headquarters
(STARS-HQ), and field (STARS-FL) accounting modules.

STARS-HQ is resident at all major acquisition commands. STARS-FL is now de-
ployed at 93 percent of the Navy’s shore locations and deployment will be completed

yy the end of 1996. We also hope to have built the interfaces nece: for our oper-
ating force compenents to use STARS-FL by October 1996. The STARS-HQ and
STARS-FL modules have an on-line bill paying module called STARS-ONE PAY,
which includes the capability to “prevalidate” invoices (i.e., to locate a matching obli-
gation record before making the payment). The changes necessary to bring existing
software of the STARS-HQ and STARS-FL modules into compliance with govern-
ment-wide accounting standards are scheduled to be completed early in 1997.

Development of STARS-DA is scheduled to be completed by April 1996. We also
are upgrading the DON Centralized Expenditure Reporting System (CERPS), which
will improve accuracy, reduce processing costs, and shorten cycle time for reporting
of expenditures. The redesign is planned to be completed by the summer of 1999.
These activities will provide the Navy a fully compliant set of general fund account-

ing systems

ibit 1 shows the plan for consolidation of Navy general fund accounting sys-
tems. As it shows, we have reduced from 50 systems in FY92 to 38 today and expect
to have only two systems (STARS and CERPS) by FY98.

General Fund
‘System Consolidation Strategy Summary

Fiscal Fiscal ‘Fiscal Fiscal_— Fiscal «Fiscal = Fiscal’ ‘Fiscal

‘ystems Consolidated ..
Systems Remaining ..

sso 5 1 6 3 1S 8 0
50 45 ag 38 ra) 10 2 2

Marine Corps general funds accounting is done primarily in the Standard Ac-
counting, Budgeting, and Reporting system (SABRS) and the Headquarters Account-
ing System (HAS). SABRS has been Selected as the Marine Corps’ interim migratory
system. When upgraded and fully deployed in August of 1997, SABRS will subsume
the functions of HAS and replace six other legacy systems.

b. DBOF Systems. Selection of DBOF accounting systems has been under the pur-
view of the DBOF Corporate Board. The Board initially decided on a strategy of
standardization on the best system in each business area in each Service before
moving to one or a very few systems DBOF-wide. This strategy was thought to be
more feasible than moving directly to one or a very few systems due to the signifi-
cant differences that existed in business practices among the Services. For the rea-
sons described below, this has taken longer than initially expected,

As candidates for these “interim migration” systems were evaluated, most were
found to require major functional upgrades to meet minimum requirements. In addi-
tion, many of the systems with the best functional scores used very old technology
requiring us to consider technical as well as functional upgrades. In two Navy busi-
ness areas, the candidates were so poor that the Board directed a subsequent inves-
tigation of ‘the suitability of commercial-off-the-shelf (COTS) systems, many of which
have been designed to meet government-wide accounting standards.

ss toward standard systems has been further complicated by the time re-
quired to determine the cost of deployment. The cost can differ at each site depend-



15

leaders, meets statutory requirements, minimizes inefficiency and fraud, and pro-
vides superlative customer service.

PROBLEM AND CAUSES

Since its formation in 1947, the Department of Defense has had a decentralized
mode of operations. Reflecting that reality, the three military departments and the
major defense agencies have, until recent reforms began, always managed their own
budget, finance, and accounting systems. They developed their own processes and
business practices, geared to their particular mission and with little need to achieve
compatibility with other DoD operations. As defense missions became more com-
plicated and DoD organizations were required to interact more with each other,
their incompatibility and lack of standardization took a toll. Rather than redesign:
ing its organization or standardizing its multitude of systems, ‘the Department de-
veloped increasingly complex business practices to link the systems.

Illustrative of this situation, it traditionally has taken about a hundred paper
transactions among as many as a dozen DoD organizations to make a progress pay-
ment toward the acquisition of a complex weapon system. Moreover, after the pay-
ment has been made, the final accounting for that payment typically has required
considerable time and effort to complete—resulting in the accumulation of problem
disbursements.

Such complexity left DoD financial systems prone to error or to demands that
could not be met with the systems, personnel, or time available. No matter how
good the people operating the systems, problems were almost inevitable. Moreover,
there was an inherent inefficiency to having scores of incompatible organizations
performing virtually identical functions. There was only one pay schedule for mili-
tary people and one for DoD civilians; yet DoD had dozens of different pay systems.

REFORM INITIATIVES AND PROGRESS TO DATE

Highlighted below are the major Department of Defense initiatives for financial
management reform:

DFAS and the Consolidation of Financial Management Operations

Since its activation in January 1991, the Defense Finance and Accounting Service
(DFAS) has been the Department's pivotal agent for financial management reform.
Through FY 1995 DFAS has achieved budget savings of $314 million.

DoD"s financial management systems are of two types: (1) finance systems for
processing payments to DoD personneV/organizations and to private contractors; and
'2) accounting systems, for accumulating and recording operating and capital ex-
penses—as well as appropriations, revenues, and other receipts. Before DFAS was
established, the Department had some 250 finance and accounting systems.

Before consolidation began, the Department's many financial management sys-
tems operated from over 300 field activities or sites. DFAS is now streamlining
these down to five DFAS Centers and 21 Operating Locations. As of October 1995,
over 100 financial management activities had been closed. Another 94 will be shut
down in FY 1996, and all remaining closures will be completed by FY 1999. This
consolidation of operations, along with the consolidation of systems detailed below,
will: eliminate redundancy and unnecessary management layers, facilitate standard-
ization, improve and speed up operations and service to customers, increase
workforce productivity, facilitate expanded use of innovative technology, and en-
hance the financial management support of DoD decision makers.

Tn its financial management reform, the Department is reaching beyond its orga-
nizational confines to find the best way of doing business. For example, DFAS has
initiated DoD-private sector cost comparisons in the functional areas of logistics and
administrative support of its facilities, debt and claims management, and vendor
py, in support of the Defense Commissary Agency. The objective is to determine
ow best to provide the most cost effective financial management services. For some
functions, that may mean contracting out to the private sector. For example, in two
business areas— printing publications and base operations for the Navy—DoD plans
to switch to commercial off-the-shelf accounting systems.

Consolidation of Finance Systems

As reform is carried out, finance and accounting operations have to continue to
operate. People must be paid, and accounts kept current. Because of this and other
considerations, the consolidation of financial management systems generally is
being carried out in stages. The first step is to designate certain of the existing fi-
nancial management systems as “migratory” systems, into which all existing sys-
tems can be consolidated without serious difficulty. In preparing these designated
systems for their expanded role, the Department adapts the best features of existing



74

key to success. My written statement provides more details on
these and talks about several others, as well.

The first area is the way the Department of the Navy is orga-
nized for financial management. When I speak about the Depart-
ment of the Navy, I am including the Marine Corps, because that
comes under my purview, as well. From the very beginning, our
Secretary, John Dalton, made responsible stewardship a major
theme of his tenure. It’s 1 of his top 10 priorities for the next 2
years. And he specifically charged me, when I came on board, with
trying to get our financial house in order.

There are several organizational steps we’ve taken to do that.
Right off, we selected a career professional to be my principal dep-
uty. What is remarkable about that is that the other two military
departments have had a career professional to provide that con-
tinuity of leadership and experience for a long time, and the Navy
had not done that. It had relied on military officers who tended to
rotate through fairly frequently. So we felt it was important to get
professionalism and continuity at the top.

We also established an Office of Financial Operations to pull to-
gether people from several locations who had bits and pieces of this
problem and make sure that we had one person who was respon-
sible for getting that. It reports directly to me and my principal
deputy. They have initiated a Department of the Navy-wide effort
to reengineer all of our financial management business processes,
from beginning with the budget preparation right down through ac-
count closing.

We have also taken steps to more closely involve our acquisition
community. As previous speakers have noted, a lot of our problems
arise during the execution of procurement contracts, and it’s impor-
tant that they be more closely involved in the financial manage-
ment process.

And, finally, we are beginning to take steps to produce our gen-
eral funds financial statements. I want to elaborate a little bit on
this one, because this is a very important point, and we do, as peo-
ple have pointed out, have a very long way to go in this regard.

When I came on board 19 months ago, the department and the
Defense Finance and Accounting Service were putting a lot of en-
ergy into financial reports for our Defense business operations
functions. We have been preparing CFO statements for that part
of our business for I guess 3 years now. And, in fact, of our $70-
billion budget, $22 billion flows through that part. So we’re not a
complete stranger to the CFO Act requirements for financial state-
ments.

We have actually made quite a bit of progress here, and I think
I gave your staffs a copy of a report from the Naval Audit Service
that does formal audits on these statements every year about what
progress we have made. We were not, however, putting similar ef-
forts into financial statements for general funds. We weren't a pilot
project, and we had not really gotten started in that regard.

Based on the experience we had in trying to correct current fi-
nancial statements for DBOF, it was apparent to us that it would
be a very significant effort to try and correct the accuracy of cur-
rent statements. So we have put our highest priority in trying to


32

going to start using this system,” er whatever. Gr see you think
of a mid-year use of the systern, to wari up, or what’s your pl

Mr. KEEVEY. Well, we are doing some interim, if you will,
provements and interim iterations of financial statements, <
retera. I think the best way to have a systern in place that wi
produce statements at the end that meet criteria would be at tire
beginning of a fiscal year.

Mr. Horn. Right.

Mr. KEEvey, But I think tnere’s another aspect that you r
which I think is sort of independent of financial statement
tation, and that is fraud kinds of things.

Mr. Horn. Right.

Mr. KeEvey. Under whatever systera we're riew working
rnean, we strive to have systems improved to prevent fraud. Por &
ample, when sornebody submits an invoice, we do a lot of checkir:
against other criteria to make sure that this hasn’t been a dupil
cate payment, or that somebody is not puiting an invoice through
that hasn’t been approved for payrnent, et cetera. So we ean do
that now, and we strive to do that now, even though the basic ac.
counting systems that are used to produce financial statements
may not be up to snuff.

Having said that, we still have situations where someone will puc
through an inappropriate invoice or we make a duplicate payment.
But I would hasten to say that I think that might happen even if
we had a perfect system.

Mr. Horn. Well, I take it, you and your subordinates have jooke
at the normal checks one has, where at least two people need ‘i
do something.

Mr. KEEVEY. That’s correct.

Mr. Horn. So you've got a conspiracy at that point, if something
is going awry.

Mr. KEEVEY. Yes.

Mr. Horn. You've got that worked out at this point, I take it.

Mr. KEEvey. I think pretty well. That’s not to say that I can si
here and tell you that there is no fraud that ever occurs throug!
an accounting system; that is not true. Even if we had the best of
systems, somebody is going to figure out a way to get through. But
our chore is to try to prevent that as much as possible.

In addition to that, we started a new fraud detecticn protecti
We call it “Project Mongoose,” where we're irying to develop a
ries of data base matches, so that, presumably, if we don’t catc
somebody through on the preaudit, by matching accounting sys-
tems on various other systems, we can catch fraud after the fact.

We have, for example, bumped up a lot of our payroll systems
against our retirement and annuitant systems to make sure people
aren’t on both systems, et cetera. And we’re developing some tem
plates to try to go in and see what are the aberrations in there that
would lead us to suspect that somebody is making some attemp:
at abuse and fraud, and we hope to do some correction of that after
the fact. That’s in addition to the normal preaudit within an ac
counting system.

Mr. Horn. Right. Now, what about the training of the staff o
you consolidate, and what about the need, if any, for a newer type



103

© develop and provide accounting guidance, ensure
distribution to all users, and follow up to ensure consistent

implementation;

© improve accounting for property, plant and equipment;

© develop and improve documentation on critical accounting

processes to assist personnel in preparing financial information.

Also, we believe that by focusing on the control environment and
procedures as part of the internal control structure, management.
can address many of the problems identified, and should not await
implementation of major new systems to do so. It is our
understanding that the DoD Chief Financial officer agrees with

that advice.

We intend to provide similar summary reports on both the
general fund and DBOF areas annually. We feel that the
comprehensive listing of audit results in such reports will be

helpful in "scoring" progress.

EINANCE AND ACCOUNTING OPERATIONS

It has often been said, but bears periodic repeating, that
perhaps the greatest value of the requirement for audited
financial statements in the Government sector lies in the

discipline that it imposes on Government financial managers.


39

nancial management problems, and these problems span virtually
all major aspects of their accounting operations. It is essential that
they successfully tackle this issue. The department cannot cur-
rently provide adequate accountability over the public’s huge in-
vestment in our national defense. This not only, as pointed out
today, undermines their credibility, but it is also taking money and
draining resources away from military readiness.

DOD is going to be severely challenged to make these needed im-
provements, however. As a result of this long history of neglect,
their financial management structure, their systems, their proc-
esses, the work force need a major overhaul. Moreover, the mag-
nitude of the problems go beyond accounting boundaries. Basic
business practices, in areas such as procurement and inventory
management, need to be revamped, as well.

As you have heard this morning, both the Secretary and Dr.
Hamre are very candid and they are openly recognizing the seri-
ousness of the problem. They’ve got many actions underway to fix
some of the problems in the areas of unmatched disbursements,
contractor overpayments, consolidating financial operations and
systems, and reengineering their business practices.

We think these are all good steps, and they are in the right di-
rection, and we’re supportive of the thrust of those actions. How-
ever, there are concerns that we have in three areas, which we are
in the process of more closely examining. The first involves re-
vamping their accounting systems. Much of their improvement
strategy hinges on redesigning the accounting systems, but their
track record in producing good systems is not good, and many
planned improvements are years away.

Issues we plan to explore include the schedule for developing sys-
tems without first reaching agreements on standard data elements
and accounting requirements, the planned phased approach to de-
veloping a DOD-wide accounting system, and the need to address
the limited software development capabilities within the Defense
Finance and Accounting Service to provide quality systems on time
and within budget.

Another critical area is upgrading the quality of DOD’s financial
management work force. This area has suffered greatly from the
historic low priority given accounting in the department. Adequate
training and skill development have been stifled.

Much of DOD’s performance problems lie in carrying out existing
procedures. Financial audits have consistently pointed this out. We
are encouraged, however, by recent DOD actions to address this
issue, but we plan to further work to identify additional opportuni-
ties for improvement. We also believe that a complete assessment
of DOD's gaps in needed skills is essential to achieve meaningful
results.

The final key barrier to improvement lies in the DOD structure
itself. Within the financial management area there needs to be
greater clarity between the Defense Finance and Accounting Serv-
ice responsibilities and those of the military service departments.
There are efforts being made to clarify this, but it’s been a problem
since DFAS was established in 1991, and we think that needs to

fixed.


64

We should be able to computerize that and have that information
ready so that we can manage our contracts better and see where—
answer really the five questions that you outlined that were the
five major problems in the system. I don’t see why we can’t do that.

Mr. Doparo. We don’t disagree.

Mrs. MALONEY. You don’t disagree.

Mr. DESEVE. I am going to disagree with Gene. Gene and I don’t
normally disagree. OK. The real question is the capacity of any or-
ganization to undertake change and how long it takes. The idea of
a single integrated financial management system is one that—and
I will send you a copy of OMB Circular A-127, which beautifully
espouses how to design and develop such a system. I will give you
a copy of the financial framework document that explains how to
get to it, and a copy of the core document which shows what it
looks like. And there are agencies out there who are doing it now
and doing it very well.

The question is, in an organization where accounting is, frankly,
not, as it would be in a bank, mission-critical, I’m not suggesting
that it doesn’t play a very important role in the Defense Depart-
ment, but the criticality of it is less than it would be, for example,
in a banking institution.

To put the pace of change that you suggest, 1 or 2 years, into
the creation of a centralized system where no tradition—and you
go back to the Key West agreement, and so on, in the Defense De-
partment—no tradition of agreement exists—read the roles and
missions report that now Deputy Secretary White prepared last
May—-still issues about fighting force capabilities and trying to in-
tegrate those. To create that single system I think would be ter-
ribly disruptive to the Defense Department in the near term.

I didn’t want to have on the record that lack of concern. I wanted
to register my concern about the pace of change in that cir-
cumstance.

Mrs. MALONEY. OK. What I was talking about is not critical de-
fense measures or the fighting forces; I’m talking about an account-
ing system. Now, I certainly defer to the generals and admirals on
the strategies of where our fighting forces should be and how they
are trained. I’m just saying the accounting system of paying the
Personnel and paying for the uniforms, I mean, it ain’t that big a

eal.

I mean, we have computer systems. We have standard practices.
And I’m not talking about interfering with the defense of the coun-
try; ’'m just saying we should have good accounting principles. And
maybe it takes 5 years to do it, but we should start going down a
plan that makes sense. From what I’m hearing from your testi-
mony, we now have 250 different prototypes out there, and now
they are talking about consolidating, in the very least, into three
different prototypes. We're not talking about the strategies on the
beaches or the plains; we’re talking about an accounting system.

Mr. DESEvE. Yes, we are. Mrs. Maloney, we are talking about
those strategies. One of the critiques that GAO presents of the ac-
counting system in the Defense Department is that it is incapable
of managing its inventory, that during Desert Storm, because the
accounting system couldn’t tell them how many things they had in
a warehouse, they had to go out and buy new things.


35

ward, all this, over the next 3 years, where do you think we are
now? Are we at a 3, or a 4, or a 5, or a 1; 1 being the worst of
the scale? Where would you say we are?

Mr. KEEVEY. I would say we’re at a 3.

Mr. Horn. You're at a 3.

Mr. KEEvEy. And I answer it in the context of, a true balance
sheet audit requires a lot of sophistication with regard to inventory
and fixed assets, which we are a long way off from correcting. I
think we have a much stronger chance, in the next couple years,
to correct other aspects of what is integral to a balance sheet, other
than fixed assets and inventory—accounts receivable, accounts pay-
able, fund balances, things of that nature, that I think we will
make giant steps toward correcting; again, with a lot of help from
improvements to our accounting systems.

Mr. Horn. How do you feel about it, Mr. Tucker?

Mr. TuckER. I would agree with that. I think—I hope that we
are pretty realistic now, both the GAO and the IG and ourselves.
We know this is a difficult road, but it’s one that we’re committed
to. We will reach the end of this journey in time. We're still at a
3, I would certainly agree.

Mr. Horn. Do you have any further questions?

Mrs. MALONEY. I do have further questions, and I’m going to sub-
mit them in writing so that we can get on to the other panels, so
that we can hear them. But I do want to just mention one question
that I related in my opening statement, and it concerns the Prompt
Payment Act, which requires DOD to pay interest on valid invoices
that are paid late. Many people have talked about this; however,
the GAO found that, during a 6-month period in fiscal year 1993,
78 percent of checks processed in the main Defense Finance and
Accounting Service represented overpayments—overpayments by
the government.

So not only are we having problems just giving an accounting of
where the dollars are; we are having a problem with overpayment.
The GAO also found the department does not have an adequate
system to recover overpayments. And I would like to ask you some
questions on that. What specific initiatives have you put in place
in management to improve overpayments? What are your proce-

ures?

Mr. KEEVEY. We talked a little bit about that when you were out.
The problem, in 1993, I think was an order of magnitude of about
$800 million, mostly because we have a lot of contracts that are
unreconciled. We have an accounts payable system where data is
entered into it separately than it’s entered into our accounting sys-
tem. And when we come to make payments, the systems are not
in synch, and therefore it leads to contract overpayments.

Mrs. MALONEY. What are you doing to correct that, to put them
in synch?

Mr. KEEVEY. What Dr. Hamre indicated, we’re spending a lot of
time getting the contracts reconciled so that the accounts payable
system and the accounting systems are in synch. We're spending
a lot of extra time in supervisory review of individual payments
over a certain dollar amount, that there is extraordinary review, if
you will, before a payment is made due to a contract.


67

million into it last year, as I remember; is that about right, in
terms of the accounting system and upgrading?

1 Mr. Doparo. Yes. They have plans, I think, to spend $200 mil-
on.

Mr. Horn. But they haven’t done that yet?

Mr. Doparo. They have spent some money. I’m not sure.

Mr. Horn. We will ask the following panel.

Well, we thank you for your time and appreciate your coming
back here. It’s always good to hear from you. And I’m fascinated
as to where you're going to order that dinner; is it McDonald’s?

Mr. DESEVE. No, no. We will let the first department decide.

Mr. Horn. We want to give incentives to assistant secretaries.

Mr. DESEVE. The only stipulation is, it has to be while I’m still
the Controller at OMB.

4 Mr. Horn. I think there’s going to be a fast resignation if they
lo it.

Mr. DESEVE. No, sir. No, sir.

Mr. Horn. OK. Panel three: Assistant Secretary of the Army, As-
sistant Secretary of the Navy, Assistant Secretary of the Air Force.
We won’t line you up by one, two, or three, we will just do it as
we have it in the schedule.

OK. If you would raise your right hands.

[Witnesses sworn.]

Mr. Horn. All three witnesses affirmed.

Now, you know the procedure. In terms of written statements,
we will file those. We would like you to summarize in 5 minutes,
if possible. I know often, after I’ve said that in other hearings, peo-
ple continue to read from page 1. But I will tell you, we read it;
the staff reads it. We all look at your written statement, but we
just like to have you talking from the heart, looking at us and tell-
ing us what the problem is and what are we going to do about it.
So don’t worry about sticking to the script. And that way we often
hear things that make us pay attention.

So, Secretary McCoy, if you will begin.

STATEMENT OF HELEN T. McCOY, ASSISTANT SECRETARY OF
THE ARMY, FINANCIAL MANAGEMENT AND COMPTROLLER;
DEBORAH P. CHRISTIE, ASSISTANT SECRETARY OF THE
NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER; AND
ROBERT F. HALE, ASSISTANT SECRETARY OF THE AIR
FORCE, FINANCIAL MANAGEMENT AND COMPTROLLER

Ms. McCoy. Thank you, Mr. Chairman, Mrs. Maloney.

I appreciate your invitation to present my views on financial
management in the Department of the Army and our progress in
implementing the Chief Financial Officers Act. As you know, I do
have é written statement, and I thank you for entering it into the
record.

The subject of this hearing is “Department of Defense Financial
Management Problems.” My colleagues and I certainly agree that
there are many problems. However, there is also a great deal of
good news, and I welcome the opportunity to share with this com-
mittee some of the notable improvements we have made in Army
financial management and stewardship.


104

By and large, the same types of system problems and internal
control weaknesses that hamper preparation of annual financial
statements also impair the efficiency of day to day operations.
Therefore the Chief Financial Officers Act led directly to
increased attention being given to problems in DoD funds control,
payroll and vendor payments. The consolidation of DoD finance
and accounting activities into the Defense Finance and Accounting
Service also brought the full extent of formerly dispersed and

poorly understood problems into much sharper focus.

In addition to the inability to produce auditable financial
statements, the Department’s antiquated systems and business
practices have led to considerable vulnerability to fraud,
computer tampering, Antideficiency Act violations, and erroneous
payments to both contractors and DoD personnel. Several of our
numerous recent audit reports addressing those types of problems

are summarized in Attachment 2.

NEW INITIATIVES

Turning the DoD financial management situation around is one of
our top priorities, as manifested by the planned commitment of
about 700 combined DoDIG, Army, Navy and Air Force auditor
workyears annually to the finance and accounting area, mostly to
perform financial statement audits, by FY 1996. Details are at
Attachment 3. This is the largest continuing commitment of DoD

internal audit resources to a single management area ever.


126

government well-run. Maybe we should try to set up a meeting
with the General Contracting Association on this and see how we
can try to work that out.

Mr. Horn. You go right ahead and do that. I want to hear a re-
port on it.

Mrs. MALoney. OK. I will. I will. One of the things that you
mentioned was the data problem, that the data comes to you in
forms that aren’t standardized and oftentimes it’s not even accu-
rate.

Ms. HI. Right.

Mrs. MALONEY. If, by some chance, your staff returns from the
furlough, and when my staff gets back from the furlough, I would
like to meet with you, possibly, on proposed standardized data ele-
ments that would make this clear to understand.

Ms. HILL. We would be glad to do that, because that has been
a finding in many, many, many of our audit reports, that the data
was just not standardized.

Mrs. MALONEY. Now, one of the things that really annoys me,
Mr. Chairman—and then I am going to be quiet—is that this is ob-
viously a huge problem, which common sense tells you is not that
difficult to solve. Now, if the contractors, in writing their contracts,
can’t make them clear enough so that the bill payers can figure out
what’s going on, or the contractor who is receiving the contract
can’t understand, I mean, something is very, very wrong.

Just common sense tells you that this can be corrected. And I
think everybody has a stake in seeing it corrected, not only govern-
ment, but I think the private contractors, and certainly the audi-
tors. What has been outlined before us is a disaster, an absolute
disaster that I don’t have any confidence is going to be corrected,
myself, quite frankly. And I don’t see any reason why it can’t be
corrected.

That’s all I have to say.

Mr. Horn. If the ge entlelady would yield.

Mrs. MALONEY. Absolutely.

Mr. Horn. I’m just curious on the process. As I recall, a lot of
these contracts are based on RFPs, where those have been designed
by the services involved to get a certain type of procurement. Now,
some of them might be from General Services and standard across
all agencies, but it seems to me, as the gentlewoman from New
York suggests, this is a manageable problem, if you bring together
the acquisition people that are either writing that contract or ap-
proving the contract.

I don’t look to a poor contractor that is busy getting widgets out,
and they are quality widgets, to solve all the technical problems of
what the Pentagon needs to know, to know, one, did they get what
they ordered; and No. 2, what did they pay for it, and when did
they pay for it? It seems to me those elements are what the finan-
cial people are looking for.

I must say, I worry when I read some of the commentary
on the Columbus Center, of how you’ve got to hunt through rooms
filled with files to find the element. And we're expecting GS—3s to
do it. Can’t this be computerized and put into the system?

Ms. HILL. That’s why, as we’ve said, it’s very important that not
just the finance part of DOD is aware of this.


45

and its efforts to address deep-rooted organizational impediments to meaningful
change.

DOD'S FINANCIAL MANAGEMENT SYSTEMS ARE NOT YET CAPABLE OF PROVIDING
ACCURATE DATA

Accounting and financial systems are the backbone of any agency’s financial man-
agement processes and operations. The CFO Act requires that agencies develop inte-
grated systems—meaning budget and accounting systems—that provide reliable,
timely, and consistent information necessary to conduct agency operations and
produce reliable information on the cost and performance of those operations. DOD’s
financial systems are neither integrated nor do they provide reliable information.

DOD operates over 250 financial management systems that are largely incompat-
ible. Only 8 percent of those systems are integrated, and only 9 percent have been
designated as DOD-wide systems. Further, only three systems comply with the
Comptroller General’s accounting principles and standards.15

This situation causes real problems within the agency, as shown in the following
examples.

. The problem of properly matching billions of dollars in disbursements is exac-
erbated by poor system performance. DOD has not yet fully implemented an
automated process for validating invoices prior to disbursement. In order to
comply with a legislative mandate to validate all disbursements over $5 million,
the Department had to process most of the transactions manually. Nonstandard
systems have also prevented DOD from implementing a new prevalidation
threshold of $1 million at its largest contract-paying facility.

* Poor cost accounting systems limit the effectiveness of DBOF, which was es-
tablished, in part, to help the Department run on a more businesslike basis, Ac-
curate cost data are needed to properly analyze trends, make comparisons, and
evaluate the performance of DBOF business activities. Many DOD business ac-
tivities are inefficient, and accurate financial information is needed to help pin-
point where cost reductions are needed. However, DOD is experiencing difficulty
obtaining such data because the cost accounting systems are fragmented, costly
to maintain, and do not provide the cost information necessary for managers to
better control costs. The DOD Inspector General has cited system deficiencies
as one of the major obstacles to the preparation of statements that fairly
present DBOF’s financial position.’

Further, our analyses of DBOF's budgeting and financial reports have shown
that they differ by billions of dollars for net operating results. DBOF’s fiscal
year 1993 budgeting and financial reports differed by $5.9 billion, whereas the
fiscal year 1994 reports differed by $4.4 billion.17 Credible cost data on operat-
ing results are essential because they are needed in setting the prices DBOF
will charge its customers which, in turn, provide the basis for establishing cus-
tomers’ budget requests.

A key element of Secretary's Perry’s reform blueprint was the consolidation of fi-
nancial management systems. Such action is expected to help eliminate duplication,
enhance system performance, and save money. The Department is implementing
this strategy by developing a standard financial accounting system for each service
and by consolidating the current 80 DBOF systems into 17 standard systems.

However, we are concerned about the pace of needed systems improvements. The
projected time frames for completion of these system development efforts are several
years away. According to a recent DOD IG report,!® DFAS management has said
long-term corrective actions, including the development of new accounting systems,
will not be completed until September 1998. According to the DOD IG, until that
date, general fund financial statements will remain unauditable. The report goes on
to state that the DOD IG will not be able to render audit opinions on any of the
military services’ general fund operations until March 2000 at the earliest.

Historically, DOD has encountered difficulty in putting effective financial manage-
ment systems into place. For example, in response to the first GAO audit of the Air

pie Pederal Financial Management Status Report & Five-Year Plan (Office of Management and
udget, Jul ).

16Major Accounting Deficiencies in the Defense Business Operations Fund in FY 1994 (Report
No, 95-294, August 18, 1995). .

17 Defense Business Operations Fund: Improved Pricing Practices and Financial Reports Are
Needed to Set Accurate Prices (GAO/AIMD-94-132, June 22, 1994).

18 Major Deficiencies Preventing Auditors From Rendering Audit Opinions on DOD General
Fund Financial Statements (Report No. 95-301, August 29, 1995)


87

Air Force NULOs
(in Millions)

30-Jun-94 30-Jun-95 30-Sep-98
sen $669 $613

$2,500 se

This excellent progress reflects much hard work on the part of DFAS Denver as
well as extensive cooperation and work on the part of Air Force Materiel Command
and Air Force Headquarters personnel.

While we are making significant progress on NULOs, we must continue to work
on other categories of problem disbursements including Unmatched Disbursements
(UMD)? and In-Transit transactions? We must also support efforts to improve the
systems that contribute to these problems.

Reducing the number of open antideficiency cases. Antideficiency cases involve the
potential overobligation of appropriated funds, In recent years the Air Force has had
too many antideficiency cases. As recently as March of 1994, we had 80 open cases.
As the graph shows, we have reduced the open cases to 28 and are working hard
to achieve further reductions.

Open Antideficinecy Act Cases

T-Ap96 Oct-94 31-Oct-95,
80 64 2B

Open Cases ........

Moreover, some of our antideficiency cases were not being reviewed quickly
enough. A year ago, for example, we had 43 open antideficiency cases in which the
investigation began before January 1994. We have now reduced the number of badly
overdue cases to 8 and hope soon to resolve all of these vintage cases. This progress
reflects hard work by my own staff at headquarters as well as efforts at our major
commands, Particularly the Air Force Material Command.

We are also reducing the number of new antideficiency cases that are being
opened. As recently as fiscal year 1993, we opened 55 new antideficiency cases. That
number fell to 23 ‘cases in fiscal year 1994 and to 18 cases in fiscal year 1995. So
far in fiscal year 1996, we have had no new cases.

Our efforts to minimize antideficiency violations also include stepped up training.
We are offering training courses at several of our financial centers, particular!
those that are heavily involved in procurement actions. We are also working witl
USD(C) to develop a training course for those assigned to investigate antideficiency
violations.

Improving FMFIA compliance. The Chairman's letter asked about efforts to im-
prove internal controls. We have an initiative underway to focus and improve our
compliance with FMFIA. This responds to direction from the Secretary of the Air
Force to have Air Force commanders “take a personal interest in overseeing the re-
quirements of the Federal Managers’ Financial Integrity Act.”

The Air Force Auditor General has taken the lead in this important project. We
want to insure that our efforts at compliance involve not only identifying weak-
nesses but also taking actions to correct them.

In the fiscal year 1994 version of the DoD FMFIA Report to the President, Sec-
retary Perry outlined six major internal control weaknesses that adversely impact
DoD operations. These systemic weaknesses encompassed the areas of financial data
maintenance; financial records maintenance for inventory and property; total asset
visibility, acquisition reform; information systems security; environmental defi-
ciencies; and the third party collection program. The Air Force is working to elim
nate the weaknesses identified in each category. In conjunction with functional rep-
resentatives responsible for managing each of the major categories of weaknesses,
we are cataloging each known internal control weakness, determining actions un-
derway to correct the weakness, assessing progress to date, and identifying further
improvements required to resolve the weakness,

it, we also realize that we cannot do everything at once. Therefore, at the meet-
ing of our Financial Improvement Policy Council last January, we agreed to con-

2A UMD is a financial disbursement received by an accountable station that does not match
an obligation at the detail level.

3 An in-transit disbursement is a financial disbursement that has been sent to an accountable
station for matching, but not yet received.


Now you may ask (as cid GAO) how do you know the problem
isn't worse? Indeed, tne Zigures above represent just what tne
contractors have returned. How much more haven't they returned?

There could well be nore that ve don't know about. By law
it ig a criminal penalty for contractors to hold onto money when
they <now they have oeen cvecpaid. And every contract is audited
before it is closed and :hat :s usually when we catch
overpayments that have cccurred.

I am not making excuses for poor behavior. ‘e have to get
becter. The problem already nas oeen reduced by 65 percent in
the past two years and we will continue to work on it until we
get it totally corrected, Sut please remember we still nave a
99.7 percent success ra:

Let me conclude by saying hat there have been countless
cails for “holding someore accountable" for this mess. 1 ask you
to hold me accountable. The bulk of our problems are the product
of innocent mistakes inside a very complex system where
typographical errors produce thousands of mismatched records that
require subsequent researen. Some 46,000 people work in this
area (the average grade :s a GS-7) and they are working hard
overcoming the limitations of che overly complicated system we
have given them. We are fundamentally overhauling our business
practices in this area--cutting by 90 percent the number of
offices, cutting by over 80 percent the number of finance
systems, cutting by half the number of people in the field, and
so forth. Hold me responsible for progress. We are making
progress, and I hope to earn your confidence.

Please let me know if 2 can provide additional information
or insights into this important area.

SingpePly,
/
.-——
Jonn| J. Hamre

ec: Honorable John P. Murtha’
Ranking Democrat


THE DEPARTMENT OF DEFENSE’S FINANCIAL
MANAGEMENT PROBLEMS

TUESDAY, NOVEMBER 14, 1995

U.S. House OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room
2154, Rayburn House Office Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.

Present: Representatives Horn, Scarborough, and Maloney.

Staff present: J. Russell George, staff director; Anna Gowans Mil-
ler, professional staff member; Andrew G. Richardson, clerk; Cherri
Branson, minority professional staff; and Jean Gosa, minority staff
assistant.

Mr. Horn. A quorum being present, the Subcommittee on Gov-
ernment Management, Information, and Technology will come to
order.

This afternoon we will examine financial management practices
at the Department of Defense. Recent articles in the national press
and other hearings on Capitol Hill have highlighted serious short-
comings in the Defense Department’s financial management sys-
tems. These are not recent; they go back 40, 45 years to the found-
ing of the department and its expansion.

The systems are antiquated. They do not communicate with each
other. They make it difficult for the staff of the Department of De-
fense to accurately complete their work. The systems are not de-
signed to produce the kind of financial information that financial
audits require, let alone sufficient financial information for man-
agement of that vast department.

However, instead of making changes, the Department of Defense
has claimed that changes could, ironically, given what is occurring
today, require a system-wide shutdown and would be too expensive
to implement. Yet they continue to operate with systems that can-
not even accommodate double-entry bookkeeping, which every mom
and pop store in America can manage.

Well, such stories demand change. For example, last May 14, the
Washington Post reported that, in the past 10 years, the Depart-
ment of Defense had spent $15 billion that it could not account for.
The General Accounting Office reported, as of August 31, the true
figure was nearly double that amount. The Post cited overpay-
ments to contractors including one problem that took years to re-
solve.

@


42

bursements had remained unresolved for at least 180 days. As we discuss later
in this statement, DOD is taking steps to begin to address this issue.

Also, we recently reported that DOD could not rely on its own financial data
to detect errors in payments made to contractors. For example, in one case, a
$7.5 million overpayment was outstanding for 8 years and might not have been
recovered if the contractor had not notified DOD of the overpayment. When
such overpayments were identified, DOD did not always properly try to recover
those overpayments, costing the government millions of dollars in additional in-
terest.4
+ Not identifying and disclosing future Government costs. Financial audits have
reported that DOD has not properly reported billions of dollars in potential fu-
ture liabilities. Most of these future costs are associated with outstanding legal
obligations, or with environmental cleanup costs at military installations, in-
cluding bases that have been or will be closed.

This problem was found in both the Army's and Air Force's financial state-

ments. For example, a fiscal year 1994 Army Audit Agency report disclosed that
the Army did not properly report an estimated $21 billion in potential future
costs the government may incur for the cost of environmental cleanup.5 The Air
Force Audit Agency’s fiscal year 1994 financial audit of the Air Force also iden-
tified almost $28 billion of previously undisclosed contingent liabilities for items
such as contract appeals and civil law and litigation claims.¢
* Breakdowns in the Department’s ability to protect its assets from fraud,
waste, and abuse. CFO Act audits have highlighted continuing problems in
overseeing DOD's multi-billion dollar investment in government furnished prop-
erty and equipment in the hands of contractors, real property, and inventory
and equipment. For example, our report? on Army real property disclosed in-
stances in which real property maintenance requirements for some installations
were understated, while other installations’ requirements were overstated. In
March 1995, the Army Audit Agency continued to report ® on breakdowns in the
process to ensure the accuracy of accounting for the Army’s reported $30 billion
investment in real property. The same report indicated that the Army did not
have accurate records for its reported $8.5 billion investment in government fur-
nished property in the hands of contractors. As a result, relying on contractors’
reporting of government furnished property in their possession, the Army in-
creased its accounting records by $5.6 billion for fiscal year 1994.
* Continuing Problems in reliably reporting on the cost of its operations. Reli-
able cost information is necessary for the Congress to make sound budget deci-
sions and is a key to achieving the Department's goal of reducing the cost of
its operations. However, financial audits have demonstrated DOD's inability to
accurately record and report costs. For example, we reported that the life cycle
support costs reported to decisionmakers in DOD and the Congress for modifica-
tions to the Blackhawk and Chinook helicopters were understated by at least
$3.6 billion.®

Reliable cost information is also vital for DBOF to operate as intended on a
break-even basis. However, the amount of DBOF’s net operating results for fis-
cal year 1994 differed by an estimated $4.4 billion between its financial and
budgetary reports. As a result, it was unclear if DBOF operated at a gain or
a loss, or whether it “broke even.”

Beginning in fiscal year 1996, the Navy's general fund operations, for the first
time, will be subject to audit under the expansion of the CFO Act requirements en-
acted by GMRA. We reviewed the Navy's fiscal year 1994 financial reports as a
measure of the Navy's current ability to prepare reliable financial statements. In
our soon-to-be-issued report, we conclude that, to an even greater extent than the

other military serviees, the Navy is plagued by troublesome financial management
deficiencies involving billions of dollars.

4DoD Procurement: Millions in Contract Payment Errors Not Detected and Resolved Promptly
(GAO/NSIAD-96-8, October 6, 1995).

SAudit of the Army's Principal Statements, Fiscal Years 1994 and 1993, Audit Opinion (HQ
95-451, March 23, 1995).
1, weview of Contingent Liabilities, FY 1994 Air Force Financial Statements (94053037, May

, 195).

7 Financial Management: Army Real Property Accounting and Reporting Weaknesses Impede
Management Decision-making (GAO/AIMD-94-9, November 2, 1993).

® Audit of the Army's Principal Financial Statements, Fiscal Years 1994 and 1993, Audit Opin-
ion (HQ 95~451, March 23, 1995).

®Financial Management: Reliability of Weapon System Cost Reports Is Highly Questionable
(GAO/AIMD-94- 10, October 28, 1993),


73

CONSOLIDATION OF ARMY FINANCE AND ACCOUNTING SUPPORT

We have worked diligently with the Defense Finance and Accounting Service,
their operating locations, installation Commanders, and supporting Defense Ac-
counting Offices to review detailed procedures associated with consolidation and
transfer of financial operations and services to designated DFAS operating locations
(OPLOGs). To date, the process has proceeded well. Working together, we are ensur-
ing that adequate management controls are in place at the losing and gaining activi-
ties.

THE ARMY COMMITMENT

I am proud of the Army’s demonstrated commitment to the letter, and the spirit,
of the Chief Financial Officers Act. Even more important, “CFO” is becoming our
way of doing business in the Army, and the impact of our efforts is expanding be-
yond the forums of internal federal management. Earlier this year, we were deeply
gratified when The Comptroller General testified before the Senate Subcommittee
on Defense, Committee on Appropriations, that “. . . Army’s proactive approach to
implementing the COO Act has been noteworthy .. . its top leadership made
strong, visible, commitments to addressing the Act’s objectives. This momentum con-
tinues today. The Army's advice is now sought by other DoD components seeking
to upgrade their financial reporting capabilities.” I can assure you that commitment
remains stronger than ever.

The Army is equally committed to implementation of the Government Perform-
ance and Results Act, and to the framework it offers for the meaningful integration
of financial and program performance information. We have been incorporating
readiness-related program performance measures into our annual financial state-
ments since FY 1993, and we continue working to identify and report more mean-
ingful and objective measures, We are especially committed to ensuring that we
focus these initial efforts on core Army missions in support of readiness and sustain-
ability.

"To that end, we have implemented a new performance assessment process within
Department of the Army headquarters. The Quarterly Army Performance Review
provides both a mechanism ‘and a forum for assessing Army mission accomplish-
ment. It provides the Secretary of the Army and senior Army leaders a corporate
view of performance and the status of major Army programs, systems, projects, and
issues of special interest to Army leaders, the Department of Defense, or Congress.

CONCLUSION

I would like to assure the members of this Committee that I have intentionally
presented a “good news” story today, but that does not mean that I do not take very
seriously the many continuing problems in Defense and Army financial manage-
ment. Rather, it is the very seriousness with which we face those problems that I
find the most encouraging: ‘As a direct result of our experiences as a CFO Act pilot,
we have recognized that sound financial management and stewardship transcend
any individual organization, functional area, or system. Within the Army, we are
breaking down the traditional stovepipe barriers between functional and financial
mangers, and working together to fix our problems and to improve every aspect of
our stewardship. I believe our efforts to make “CFO” our way of doing business have
paid great dividends already, and I have cited a number of success stories today.
Mr. Chairman, you have my assurance, and that of Secretary West, that we will
continue to demonstrate our commitment to implement both the letter and the spirit
of the law, and to improve Army stewardship of the resources entrusted to us.

Mr. Horn. Thank you very much, Madam Secretary.

Secretary Christie.

Ms. CHRISTIE. Mr. Chairman, Mrs. Maloney, as earlier witnesses
have pointed out, there are some very serious problems in virtually
every aspect of financial management in the Department of the
Navy and the parts of the Defense Finance and Accounting Service
that support us. So I welcome this opportunity today to tell you
what we are doing to try and solve these serious problems and
when our efforts might bear fruit.

As you requested, I will just try to hit, in this presentation, the
highlights of the four areas that I consider perhaps to be absolutely


82

area of reform involves systems, and let me take a shot at why this
is so hard and will take time. We've got about 80 accounting sys-
tems. We need to get them down, Mrs. Maloney, but I would share
Debbie’s feeling that if we try to go to one for the whole DOD,
we've got to crawl before we walk, in my view. We need to reduce
the number, but I think that we probably have to take the interim
step of fixing some in each service.

T’ve got 80 of those. I’ve got more than 100 of what I call feeder
systems. They are part of acquisition, logistics, personnel systems,
but they feed financial data in. In every one of those cases, we've
got to go and modify the—first figure out what they are, and I
haven’t even identified them all on the feeder side—then go and
get a contractor to modify the computer code to put in what’s called
a transaction-driven general ledger, which is required for auditable
statements.

And, also, we are required to get rid of these accounting errors
that we have. The term meant nothing to me 18 months ago, so
I will take just a moment and say what it is. Essentially, right
now, what we've got is a system, if you put data in system A, even
though system B depends on it, we often have to manually reenter
the data, because they are not tied together. That creates errors.
It creates separate sets of books that we then have to reconcile,
and that’s where you get some of these large errors.

We need to have a transaction-driven system so, when you enter
data in system A, it automatically updates system B where that’s
appropriate. That’s not easy to do. It’s networking computer sys-
tems and revising what is often an antiquated code, and it’s why
it’s going to take time and a fair amount of money.

e have a plan to do that. DFAS has got the lead in a number
of the areas, but the Air Force is actively assisting them where we
can. Their success is our success. In some of the cases, particularly
these feeder systems, it will be our responsibility, and we are prob-
ably least far along with regard to those feeder systems. We are
really trying to bite off a piece of that apple, and identified some,
in our case, the plant, property and equipment ones, that we can
come up with a plan to fix them and seek the resources.

All of that is going to take time. We’re several years away, at
least, I think, from having that done. In the meantime, there are
some short-term efforts that we need to undertake. We have been
actively working with DFAS to reduce these problem disburse-
ments and have had some notable success, particularly in the nega-
tive unliquidated obligations category; they are down more than 70
percent in the last 15 months. We've got to work more on the un-
matched disbursements and especially the in-transit category.

We also had way too many open Antideficiency violations, and
I’ve got to tell you the Air Force, in my view, wasn’t consistent in
discipline on those. Eighteen months ago, we had 80 open
Antideficiency cases; we’re down to 28. We had 43 cases where the
investigation started at least 2 years ago; we got that down to 8.

It needs to go lower, but I think we’ve made substantial progress.
And working with our lawyers, both the military and civilian side,
I think we are getting more consistent discipline. There have been
a number of letters of reprimand and admonishments in connection
with those Antideficiency violations.


THE DEPARTMENT OF DEFENSE’S FINANCIAL
MANAGEMENT PROBLEMS

HEARING

BEFORE THE
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

NOVEMBER 14, 1995

Printed for the use of the Committee on Government Reform and Oversight

a

U.S, GOVERNMENT PRINTING OFFICE
36-562 CC WASHINGTON : 1997

went Printing Office
les Office. Washington. DC 20402

Z


108

During the next few years, it will be important to focus on
the detailed audit findings on internal control weaknesses to
ascertain if progress is being made. We now have a good baseline
in terms of what problems exist in most major DoD organizations
and funds. The extent of internal control problems in the Navy
general fund and those Defense Agencies that are not financed
through the DBOF is not yet fully known, because they were not
initially covered under the Chief Financial Officers Act. This
year we are working on those areas, Thus far it appears that the
types of problems being encountered are similar to those already
found elsewhere in the Department. The full cataloging of the
internal control weaknesses will be essentially complete as we
report out on the ongoing audit work and the financial statements
prepared for FY 1996. This is not to say that most of the needed
DoD corrective actions have to be slowed up or deferred until

those previously unaudited areas are covered.

Among the positive developments since the Deputy Inspector
General testified on this subject before this Subcommittee last

year are the following:

© Task forces have been formed to revamp the DoD travel and
transportation management processes. Those efforts could have
tremendous positive impact, since 730,000 travel vouchers and
340,000 transportation bills are processed monthly using

obsolete, cumbersome and labor intensive procedures. We are

1




109

participating actively on those task forces and doing related

audits.

0. The Department is also pressing forward with task forces
on computer security, debt avoidance, computer matching (Project
Mongoose) and Electronic Commerce/Electronic Data Interchange
(EC/EDI). The OIG is supporting each of those efforts too.
There are great opportunities for streamlining DoD operations by
adopting commercial business practices, using credit cards for
the millions of small purchases made annually throughout the
Department. Innovations like that would serve both to reduce
procurement lead times and cut DoD administrative burden,

including finance and accounting paperwork.

© The Under Secretary of Defense (Comptroller) issued
excellent guidance in a number of crucial areas, including
standards for Antideficiency Act violation investigations,
Defense Business Operations Fund procedures, prevalidation of
obligations before disbursements are made and handling problem

disbursements that cannot be reconciled.

© We are beginning to see progress in both systems and site
consolidation, as well as data element standardization. We are
currently auditing the development strategy and design efforts
for certain key systems, including the Defense Civilian Payroll

System, Defense Joint Military Pay System and Corps of Engineers

12


30

general accounting systems—we haven’t had a problem since—
jointly shared with the comptroller and the mayor.

And I don’t see why we couldn’t do this now, a general account-
ing system, jointly shared with all the important areas of our na-
tional defense.

Tve got to go vote. I do appreciate your efforts to correct this, and
I do appreciate the strong work of our military leaders. We have
the strongest country on earth, and, really, the first purpose of gov-
ernment is to protect its citizens. My father, my grandfather, my
brother, they all served in the military, and I’m proud of the mili-
tary.

But I think what you are telling us today is a disgrace to the
American fighting men and women who have given their lives, put
their lives on the line to defend this country, and we can’t, in
Washington, or Ohio, or wherever it is, do general accounting and
keep the books straight. And you've given a bad name to the mili-
tary.

Te got to go vote. I’m sorry, but I’m rather upset by this.

[Recess.]

Mr. Horn. Thank you very much for bearing with us while we
had two votes on the floor of the House. I think we want to prove
we are essential and not go away today. So here we are, and thank
you all for coming.

Now, I missed what you might have told Mrs. Maloney, and I’m
not sure quite where we are here on this panel. What I’m inter-
ested in, let me just go through a few questions that might help
get to this, because I am very concerned about whether you will be
able to have a balance sheet in fiscal year 1997.

Are you optimistic that you can make sufficient corrections in the
Department of Defense, in terms of processes and all the rest of it,
perhaps go through improved training of people in the various dis-
bursement centers; as you said, simplification of contracts, in some
way, so they can easily check it off? I don’t see how, frankly, they
do it, if they are Grade 3s, unless they have had extensive training.
So that worries me.

How about it, Mr. Keevey?

Mr. KEEVEY. I think there’s a distinction between those kinds of
problems in payment and matching records, et cetera, vis-a-vis pre-
senting certified financial statements at a certain point in time.
They require, that is, the latter, preparing certified financial state-
ments, a lot better improvements to our accounting systems. We
have a plan to do that. I think that plan will not be completed by
fiscal 1997. I hope to be able to say by fiscal 1997, by a lot of other
hard work and effort, we will present much better financial state-
ments than we are now doing.

But I think the ultimate answer can only be, when we have bet-
ter underlying systems. The systems were not developed, from day
one, to produce financial statements under what we would call gen-
erally accepted accounting principles. They were basically devel-
oped to handle appropriation accounting.

The concept of generally accepted accounting principles was for-
eign to the Federal Government until fiscal 1990, under the CFO
Act. Therefore, the underlying systems that keep track of that were
just not designed that way. They pale in comparison to what is nec-


89

major problem that you have discovered? Let’s start with you, Ms.
McCoy. And did it surprise you?

Ms. McCoy. No, and I think we’ve talked about it quite a bit
here today, and it’s our systems or our lack of systems to do the
job that we now find we have to do. All of our systems were devel-
oped, some as far back as the 1970’s, some maybe in the 1980's,
and we also moved along a path where we had financial systems
and we had functional systems, and never did the two talk to each
other.

We are just beginning to try to get the functional side—and I
think we’ve made a lot of progress—to understand that financial
information should be a byproduct of their systems. We haven’t got-
ten there yet, but that, in my view, is the biggest problem that we
have faced.

Mr. Horn. How about you, Secretary Christie?

Ms. CuRISTIE. Similarly, I think—maybe two challenges. One is
this—I have a slogan this year: “Financial management, it’s not
just for comptrollers anymore.”

We've really got to be sure that everyone in the logistics and per-
sonnel and acquisition communities understands that they have a
role to play here, and they have not, to date, had that awareness.
So we have a real consciousness raising effort here. It’s not an un-
willingness. I have found, when we have gone to people and said,
“Look, there is this problem,” they have really been quite willing
to help. So it’s partly an education problem on our part.

The second one is people. All of us are being pressure to
downsize. All of my comptroller shops throughout the Navy have
been pushed to downsize in recent years. So we really have to find
ways to be as efficient as we possibly can in our processes and to
automate as much of it as we can, so that people can do all of the
things that they need to do to be responsible financial managers.
And I think that’s probably the second biggest challenge here.

Mr. Horn. OK. Thank you.

Mr. Hale.

Mr. HALE. Well, you asked about surprise. I will confess, most of
my career I’ve spent around Defense, but it’s almost all been with
the budget, mostly with Congress, actually. I was amazed at how
many problems we have with our accounting systems, and they are
antiquated, and they don’t work very well, as you see from the re-
sults.

In terms of challenges, I think Debbie and Helen have said them
pretty well. We're trying to do this while we’re downsizing. We
don’t have a lot of resources to throw at it. They are large in num-
ber, often controlled by other parts of the services. All of that
means we have to get them all on our side, and it takes time.
They’ve got their own priorities. Meanwhile, of course, we need to
manage a budget that is pretty dynamic of itself these days. So this
effort can’t consume all of our time. It’s probably a good deal less
than half of my personal time. The budget and other aspects of fi-
nancial management consume a lot of it.

So there are lots of challenges, but I do feel good about the
progress we’re making. We're in the right direction, and we're
going at a reasonable pace.

Mr. Horn. Thank you.


84

We also created an organization designed to provide better coordination of the re-
form effort among senior Air Force leaders. At the Secretary's direction, last year
I set up the Financial Improvement Policy Council (FIPC), which I chair, to inform
senior Air Force leaders about developing initiatives and issues and insure full co-
ordination of financial improvement efforts. The FIPC also provides a forum for in-
forming the Defense Finance and Accounting Service (DFAS) of our initiatives. The
FIPC has met several times to discuss such issues as changes in systems for the
defense business operations fund (DBOF), which affects other functional areas such
as logistics. We have also used the FIPC to coordinate our efforts to improve our
implementation of the Federal Managers Fiscal Integrity Act (FMFIA).

‘he Air Force also participates actively in groups set up by the Office of the Sec-
retary of Defense (OSD) to coordinate reform efforts. I am a member and regularly
attend meetings of the DBOF Corporate Board as well as the Financial Manage-
ment Steering Committee. I also support the Secretary of the Air Force in her re-
sponsibilities as a member of the Senior Financial Management Oversight Council.
This group, chaired by the Deputy Secretary of Defense, provides visibility for finan-
cial reform efforts at the highest levels of the Department of Defense.

In addition to making changes within the Air Force, we have gone outside to seek
ideas and assistance. Shortly after assuming my current position, I met with Mr.
Bowsher, the Comptroller General, to discuss issues and approaches to financial
management improvement. At his suggestion, we reached out to the corporate com-
munity by seeking ideas from the Financial Executives Institute (FEI). The advice

rovided by FEI's Committee on Government Liaison, and particularly by Mr. Ted
Sheridan who heads this committee, is proving most helpful in improving our CFO
Report. We have also tapped the expertise of Electronic Data Systems (EDS) and
Coopers and Lybrand for analysis in the areas of systems certification and perform-
ance indicators.

It is important to note that the Air Force is not undertaking financial reform in
isolation. Our reform effort depends on interrelated and cooperative efforts by sev-
eral organizations within DoD. In his capacity as DoD's Chief Financial Officer, Dr.
Hamre, the Under Secretary of Defense, Comptroller (USD(C)), provides overall
guidance and leadership for financial reform, His efforts have been invaluable. Dr.

lamre has been a leader in keeping financial reform at the forefront of DoD’s agen-
da and in insuring that difficult reforms are actually accomplished. We also depend
heavily on the services of the Defense Finance and Accounting Service (DFAS).
DFAS not only provides all our accounting services; it is also responsible for making
many of the improvements in our financial systems.

IMPROVING FINANCIAL SYSTEMS

Improving our financial systems is key to financial management reform. We need
better systems in order to provide the information necessary to execute Air Force
programs properly and to provide proper oversight and reporting of financial activi-
ties. Perhaps even more important to this hearing, flaws in our current systems are
also the key reason why we do not have auditable financial statements and so can-
not now comply with the CFO Act.

‘Air Force financial systems fall into two basic categories: those systems that
record, process, and report financial data and those that primarily serve other func-
tional ‘activities—such as logistics, civil engineering, and personnel—but also pro-
vide financial information. Most of the systems in both categories have flaws that
prevent compliance with today’s accounting standards. Most lack a double-entry
general ledger accounting system, which precludes meeting current accounting
standards. Most of the systems are also not “transaction-driven” Transaction-driven
systems insure that, where appropriate, data entered into one system automatically
updates other systems. If systems are not transaction driven, information en’
into one system does not automatically update other systems. Thus, much of the
data related to accounting and finance must be reentered, and this leads to errors
that show up in our financial statements.

Because of the size and complexities of these systems, and the substantial cost
to change or replace them, it will be years before we can accomplish all the improve-
ments necessary to produce fully auditable statements. Nevertheless, we are making
a start. The nature of our approach varies according to the type of system, as does
the organization that is in charge. For some types of systems, the Air Force will
take the lead in improving systems. For most systems, DFAS is primarily respon-
sible for system improvements, with the Air Force playing an active role in support.

Defense Business Operations Fund (DBOF) systems. DFAS has taken the lead in
evaluating systems for use in the DBOF. Based on that evaluation, the DBOF Cor-


12

they weren't properly matched up against the underlying account-
ing record.

May I use an analogy, because this is a very complicated thing,
to explain how this works. Let’s pretend that I am a rich uncle, and
I have 10 nephews and nieces. And because I have all the money
and my brothers and sisters don’t have any money, I offer to send
them all to college, and I’m going to pay all their bills. But I’m no
dummy, and I say, well, before I do that, I’m going to sit down with
each of those kids and work out, in advance, a budget.

And my nephew John, he’s a bright kid; he wants to go to Prince-
ton. I worked out, here’s his tuition, and here’s however much for
room and board, for all these different things, and I’ve worked that
out with him, and then I give him a stack of blank checks. And I
do that with each of my 10 nieces and nephews.

That’s really how we do it in the Department of Defense. All of
the program managers, we work out in advance what they are
going to spend on something, and then we give them blank checks.
They start spending money, and then we match up those checks,
when they come in, back from the bank, with what did we agree
in advance with their budget.

Now, let’s say that I got a tuition check back from Princeton, and
my agreement with my nephew John was that he was going to
spend $13,000, and it came in $13,500. That $500 is a negative un-
liquidated obligation, a NULO. It isn’t a bad payment; but it’s one
that differs from our underlying accounting record, and we have to
go back and research it and find out was it right or not right. And
we had about $10 billion of those, accumulated over a period of
about 10 years, that we had to resolve.

Mr. Horn. $10 million or $10 billion?

Mr. TUCKER. $10 billion, sir, big numbers.

Mr. Horn. I heard $10 million.

Mr. TUCKER. I’m sorry. I’m just trying to confuse you. No, I
apologize. In this case it was about $10 billion, and we were off.
And we had to resolve each one of those.

Now, let’s say that my niece Mary Ann, I worked this out as well
with her. And all of a sudden a check comes in from the Red Horse
Saloon, and I said, “Well, wait a minute. I never worked out a deal
with my niece, with her little budget, that she could spend any
money at the Red Horse Saloon. What’s going on here?” OK. It
wasn’t in my accounting records at all.

That’s an unmatched disbursement. It’s a check that was writ-
ten. Now, I find out after the fact that she could buy a used eco-
nomics textbook from a guy who was a bartender. She went there
on Saturday night; he wanted cash; she wrote a check, and she got
her book. Now, it might be a perfectly legitimate expenditure, but
we have to research it after the fact. Now, we had about $14 billion
worth of those in that category.

We have been working these off. Then we had a large number
of what are called “in transits,” which had not yet formally been
posted into the accounting record. Altogether, these various ac-
counts, we had $51 billion, as of June 1993. During the last 2
years, the department has made a lot of progress, and we've got the
number down, as of September, to $20.5 billion. So it’s gone down


54

PROGRESS IN PRODUCING AUDITABLE FINANCIAL STATEMENTS

As noted above, the production of auditable financial statements is a key indicator
of the health of an agency’s financial management.

‘The Army and Air Force have made significant progress in their efforts to produce
auditable fnancial statements, The Navy will be required to produce a service: wide
financial statement for the first time for FY 1996.

As highlighted in the audit of the Army's 1994 consolidated financial statements,
significant progress has been made in many areas, including:

« improving the process and controls related to the preparation of the financial
statements.

* implementing record retention policies which ensure the existence of appro-
priate audit trails.

* developing interfaces between Army personnel and payroll systems and en-
suring reconciliation of military payroll amounts.

The Army Auditor General pointed out that although the Army is working ener-
getically to solve its financial management problems, the Army’s financial managers
concentrate most of their attention on fund control and ensuring that they obligate
all available funds. As a result, even with the limited capabilities of the existing
accounting systems, the Army suffers from a lack of meaningful cost information.

‘The Air Force Audit Agency, in its report on the Air Force’s 1994 consolidated fi-
nancial statements, recognized progress made by the Air Force in a number of
areas, including:

* coordinating system development efforts with the DFAS, particularly in areas
where the two organizations’ systems will need to interface.

* developing a plan to preclude unmatched disbursements and eliminate exist-
ing mismatches.

« improving controls cover the obligations process and reducing obligation dis-
crepancies between the Air Force and DFAS

SUMMARY

The Department of Defense has been candid in admitting its challenges in the fi-
nancial management area. They have identified the need for aggressive action on
a continuing basis to implement the changes that the Department contemplates.

OMB stands ready to provide assistance in evaluating strategic direction and ac-
complishing specific milestones. In the Report of the Commission on Roles and Mis-
sions of the Armed Forces, dated May 24, 1995, two recommendations were made
which should be noted here. The first:

* “The Department's decision-making information support framework—the Fu-
ture Years Defense Plan—is too ‘input’ oriented. We recommend a mission/out-
put-oriented information framework to better enable the assessment of forces
and capabilities to perform missions derived from the National Security Strat-
egy. The new framework would include improved metrics for measuring and
tracking performance.”

Improvements to Defense financial information process will increase the efficiency
and integrity of the “decision-making information support framework” mentioned
above. The progress toward mission-oriented budgeting will help maximize the use
of ever more scarce resources, and so must be pursued. For these reasons, coupled
with continued stakeholder assurance that, as stated in the Roles and Missions Re-
port states, “America has the best and most capable military forces in the world.”,
the improvements in integrity of financial management systems cannot be an issue.
Good financial management will provide Congress and the general public valuable
information about what they are getting for what they are spending.

The second recommendation from the Report is consistent with GAO's rec-
ommendation regarding a board of experts:

» “We recommend establishing a board of directors for each defense agency and
major field activity. These boards should include customer representatives and
be supported by expert consultants to promote adoption of innovative manage-
ment practices, Their purview should extend beyond financial accounting mat-
ters to address the full range of customer needs.”

While I agree with the Roles and Missions Commission on the need for such a
Board in the financial management area, the focus should be on delivering activities
and services which are geared toward meeting the needs of the customer. The meld-
ing of financial information and customer service, regardless of the vehicle, is good
financial management. OMB would look forward to supporting this effort.

Mr. Horn. Well, we have a few to ask. No. 1, going back at least
40 years, as I remember, the U.S. Government Organization Man-


96

I can tell you that, at least in three of those, and some of them
are still ongoing—several of them we had to refer back for addi-
tional information, because we didn’t have enough information,
which is another data problem—but in three of them we found
that, in fact, there was no Antideficiency violation. What had hap-
pened was, the information was wrong; the data was wrong. The
data in the accounting records was not even accurate.

So whereas it appeared there was a deficiency, when you really
went back and went to all the different entities involved, which
takes a lot of work and a lot of time, you found out the data wasn’t
accurate. So it was another data problem. So they really need to
emphasize standardizing the data and also making sure that it’s
accurate. And that goes to systems and to people.

Second, and you’ve heard this many times today, and I won't
overplay this, the systems problem. We agree completely that they
need to emphasize and speed up, to the degree they can, the move
to consolidate the systems. I think the department ultimately
wants to get to the point of a single system, and this gets to the
issue of whether we need to have service systems or one DOD-wide
system. I think our people believe we need to have one DOD-wide
system, but we are certainly a long way off. But that needs to be
worked on.

Third, when you develop those systems, at the same time, the de-
partment needs to develop good processes and be aware of what the
processes they are going to be using are, because if you don’t do
that in conjunction with developing the systems, you’re not going
to have any assurance that, when you ultimately get the systems,
they are going to be able to perform under the processes you've set
out. So that needs to be coordinated.

Fourth, the people problem. This is a twofold problem: One, we
agree with GAO. They need enhanced training efforts. People need
to be advised, and I think the department is trying to do that. But,
again, they need to strengthen their efforts to improve training;
and second, not only training, but to give their people very clear
guidance and direction, and consistent guidance and direction on
what they should do.

Fifth, and this is something I think Secretary Christie alluded to,
this is not an issue that can just be handled by the Comptroller,
Mr. Hamre, and the people in the finance area. Part of the prob-
lem, the big problem with the information and the data, much of
that information is generated outside the finance and accounting
area. It comes from other components within the department, and
until those components really emphasize the same problems and
the sheed to address this, we’re not going to have a system that
works.

So I think all of those are important. We've tried to focus on
those. I can tell you that we’re spending, I think, 700 audit work
years just looking at finance and accounting issues, which I’m told
is the largest commitment of audit resources in DOD ever, on a
single issue. So we're trying to prioritize it.

T also would say that we have ongoing at least maybe four or five
projects that relate to this area. We’re not finished; we’re still in
the draft stage. But some of them have to do with some of the is-
sues GAO had talked about, as far as looking at the systems they


75

figure out what systemic changes we need to make them right in
the long run, and getting those underway.

We're not as far along as we would like. We in DFAS have a plan
of action which I will have to admit we are somewhat behind on,
but we do have working groups in each major area of information,
educating people about the requirement, identifying sources of
data, and making sure that there are clear lines of responsibility.

Just as soon as we in DFAS have completed CFO statements for
DBOF for this year, which should be sometime in December or
early January, we're going to start doing a prototype CFO state-
ment for our general ds. It will be a learning experience for us.
It will help us identify weaknesses in data and other corrective ac-
tions that we may need to take that we haven’t started already.

A second key area is the consolidation and standardization of ac-
counting operations. We are served by two centers: DFAS Cleve-
land and Kansas City. They have already stood up the five operat-
ing locations into which our accounting is going to be consolidated.
And by the end of this fiscal year we will have more than two-
thirds of former Navy and Marine Corps accounting sites already
consolidated, and the full consolidation should be completed by the
end of fiscal year 1997.

This is really important, because DFAS has found that most peo-
ple don’t want to move with their jobs. You have to hire new peo-
ple; you have to train them. So this is one of those circumstances
where things do sometimes get worse before they get better. We
are seeing now, in some of the new centers that have been stood
up, an improvement there, and I’m really convinced this is the
right thing to do in the long run. So we're looking forward to get-
ting this part of that problem behind us.

Another important piece is the consolidation of our accounting
systems. If I can run down some quick data here, when DFAS was
established, we had 50 general fund accounting systems. We're
down to 38 now, which is the good news, and by the end of fiscal
year 1998, we’re going to be down to two: one for the Navy; one
for the Marine Corps. Will we get to one eventually? We might very
well. I really subscribe to what OMB said, that it’s going to be a
great leap forward to get ourselves down to two.

We did some looking at what it would cost to upgrade some of
these very old systems, and the moneys ranged from maybe a few
million dollars to as much as $10 million or $20 million per system.
Clearly, it would not have been economically sound to modify 50
different systems at that price. So I think we’re doing the right
thing, which is to get down to one or two and make them work
properly. There’s a similar situation in our DBOF accounting. We
started with 34 systems; today we’re down to 29. And we think,
eventually, we will get down to 8, or possibly even 6.

The final area is to make sure we have good data in those sys-
tems. DFAS provides the data on disbursements, but we are still
responsible for obligations, reimbursable transactions, inventory,
Plant, property and equipment, contingent liabilities, lots and lots
of things.

Many of these sources of data are in other communities; they are
not directly from financial management. Fortunately, those other
communities are also modernizing and upgrading their systems.


36

Mrs. MALONEY. Over the $5 million, but what percentage are
under the $5 million in your payments? J would think it’s huge.

Mr. KEEVEY. Well, that’s a little bit different than a contract
overpayment. Now you’ve wandered into the problems related to
unmatched disbursements and NULOs.

Mrs. MALONEY. You said you had more oversight for the large:
payments; isn’t that what you said? I thought that’s what you said

Mr. KEEvey. OK. I just want to make sure we’re switching ovi
of contract. We now pay, under the Columbus environment, if you
will, where we pay our major weapons systems contracts, any pay-
ment that’s over $5 million we match to the underlying accounting
system, which we heretofore did not do. For all the other account:
ing systems, we match for every payment over $1 million.

Mrs. MALONEY. Not today, but could you get us in writing wha:
the numbers are? I would like to know, in contract dollars, how
much is spent under the $5 million extra oversight level and unde:
the $1 million extra oversight level. I just know that, in Federai
contracting of the $200 billion that the Federal Government com-
tracts annually, the large percentage of it is under $1 million. ?
was just wondering if, in the military, it’s the same.

Mr. Krevey. Well, we pay $90 billion a year on contract pay.
ments. And we can give you some stratification of payments that
are individually submitted as an invoice over $5 million and those
that are under $5 million. We can get that.

Mrs. MALONEY. What could Congress do to help you achieve thi

Mr. Horn. Let me just say, that answer will be put in the record
at this point, without objection.

Mr. KEEVEY. Yes, sir. OK.

Mrs. MALONEY. What could we do to assist you in resolving thes¢
problems? Do you need more money allocated to do this, or wha
do we need to do to help you solve these problems?

Mr. KEEveEy. I don’t think more money at the moment is the
problem. I think it’s attention to the problem.

Mrs. MALONEY. So you have the resources to get the job done?

Mr. KEEvEY. Yes. I mean, there has to be a continual series of
these resources year after year. J mean, this is a multiyear plan
that has to be undertaken to solve these problems. They won’t be
overcome overnight. A lot of the more glaring errors have been re
duced and mitigated significantly. If we were sitting here 3 years
ago, we would be talking about $50 billion of unmatched disburse-
ments. We're talking about 60 percent less than that now and a
plan laid out where we are, on a daily basis, minimizing that po-
tential to increase because of the matching that we’re doing that
heretofore was not done.

What we need to do is persist on to make those continual im-
provements and improve the accounting systems, which is the long-
range solution.

Mrs. MALONEY. How long do you think it will take you before you
are able to match your overpayments with the actual amount that
is owed? Is it a year, 2 years; how long?

Mr. KEEVEY. [ think, until we have the accounting systems cor-
rected, which will probably not be until at least fiscal 1998, will we
have accounting systems that can produce financial statements. In
the shorter term, what we’re trying to do is develop some interim



$8

compiled in DOD's accounting svstems and financial ceports. However, these func-
tional managers operate outside the DOD CFO's sphere of influence. Consequently,
garnering the support and active involvement of these organizations will be another
major challenge that the DOD CFO must address. Because overcoming these organi-
zational impediments are a key to any fundamental improvements in DOD's finan-
cial management, we are also planning additional work to examine whether addi-
tional actions will be needed to help the DOD CFO achieve the goals of more effec-
tive and efficient integration.

Reforming DOD's financial management operations is one of the formidable chal-
lenges facing the government today. Secretary Perry's blueprint lays out an overall
plan to help meet this challenge. DOD must now translate the plan into concrete
actions that will move the Department forward and result in measurable progress.
Tt is essential that DOD have a world-class financial operation in order to make
sound resource allocation decisions and safeguard the American public's huge in-
vestment in defense.

As outlined in our May 1995 testimony, we continue to believe that DOD should
consider establishing an independent, outside board of experts to provide counsel,
oversight, and perspective to DOD's reform efforts. Such experts could provide valu-
able advice and expertise in all three of the challenging areas we have outlined
today: systems development, personnel needs assessment, and organizational struc-
ture. We plan to continue working closely with the Department in its efforts to meet
the goals of the CFO Act.

Mr. Chairman, this concludes my testimony. I will be happy to answer questions
that you or Members of the Subcommittee may have.

Mr. Horn. Right. Now we will call on Mr. DeSeve.

Mr. DESEVE. Thank you very much, Mr. Chairman.

I would like to summarize the statement that [ h: submitted
for the record. Often, in a systein of government built on checks
and balances, disagreements are perpetuated to promote a particu-
lar objective or point of view. The objective of improved financial
management in the Defense Department is not the subject of such
disagreements.

The testimony you have heard so far today, and will hear later,
all points to the need for commonly arrived-at solutions. An impor-
tant byproduct of the Chief Financial Officers Act and its successor,
the Government Management Reform Act, is the establishment of
a clear and common goal for success, an auditable financial state-
ment, with an unqualified opinion from the auditor.

This goal, in itself, represents a capstone to the process of achiev-
ing it. In this case, the process may be more important than the
product. Why? To produce an auditable financial statement, trans-
actions must be properly executed and recorded. The systems used
to receive the data, classify it, transmit it, and report it must be
complete and efficient. The process by which cash and contracts are
handled must meet high standards of integrity

These and many other requirements are inherent in the concept
of auditability and producing an unqualified opinion. Time and
time again, throughout the government, the audit process has un-
covered weaknesses and prompted solutions. In a recent survey
conducted by Coopers & Lybrand, on behalf of the Association of
Government Accountants, all 26 of the Inspector Generals’ offices
responding to the survey indicated that they believed that internal
controls had improved as a result of CFO Act implementation, in-
cluding auditing of financial statements.

As Assistant Comptroller General Gene Dodars has noted, recent
audits in the Defense Department have identified serious problems
in accounting for billions of dollars in annual disbursements: the
need to report, fully, future liabilities; properly accounting for prop-



117

eS
Missile Programs," June 19, 1995

io

Progress payments were allocated accurately for the Patriot
missile production contract, but were not always allocated
accurately for the M1A2 research, development, test and
evaluation contract. Specifically, 60 of 69 progress payments
contained 98 erroneous charges. Of the 60, 39 progress payments
contained foreign military sales requirements of $49.5 million
that were paid with DoD appropriations; 10 payments contained DoD
requirements of $4.9 million that were paid with foreign military
sales funds; and 49 payments contained $82 million of joint
requirements that were not correctly allocated to either
customer. The following conditions caused the misallocations:

© Although the contractor billed by contract line item
number, the paying offices disregarded this information, which
resulted in erroneous charges to some DoD and foreign military
sales funds.

o The U.S. Army Tank-automotive and Armaments Command did
not provide adequate guidance to allow paying offices to
accurately allocate the charges for work billed to contract line
item numbers that were funded by DoD and foreign military sales.

The U.S. Treasury incurred unnecessary interest from the
time the erroneous charges were made until the time the charges
should have been made. Foreign military sales customers may also
have incurred interest because of premature charges.

Misallocation of progress payments or other disbursements within
multiple line contracts is a very widespread problem. A report
was issued on this particular contract because of questions
raised regarding cash flow requirements for the foreign military
sales customers. On a prospective basis, the DoD acquisition
community has recognized the need to write contracts in a way
that will better facilitate clear payment instructions ani
billings. .

The Defense Finance and Accounting Service agreed to issue
guidance for making payments on the basis of contract line item
numbers or account classification reference numbers when the
contractor’s request for payment cites these numbers, and when
payment on that basis meets the terms of the contract.

The Army Tank-automotive and Armaments Command issued payment
instructions to the paying office and will continue to provide
appropriate payment instructions to the Defense Finance and
Accounting Service.


53

continue during the preparation of the President's Budget regarding the strategy
and the resources needed to implement it.

‘An important part of Undersecretary Hamre's Blueprint for Reform is the stand-
ardization of data, definitions and concepts. As noted in Deputy CFO Tucker's testi-
mony,

“Until recent consolidation efforts began, DOD finance and accounting
systems managed some 100,000 data elements. Detailed data modeling has
indicated that DOD financial operations eventually could be conducted with
fewer than 800 carefully designed standard data elements. As of June 1995,
we have adopted 540 standard financial management data elements. Addi-
tional elements are likely to be added in the future.”

DOD is moving towards meeting the requirements of OMB Circular 4-127, rec-
ognizing that consistently recording financial events is key to producing reliable fi-
nancial information. Data standardization is a significant step towards improving
the consistency of data entered in a system. These elements will serve as the basis
to all accounting and financial systems. Efforts are underway to implement the
Standard General Ledger (SGL) across the department as new systems are imple-
mented or old systems are upgraded. Currently only 24% of the systems have the
SGL place. DOD also is moving towards source data entry to support consistent re-
cording of financial events. This means that information on a financial event is en-
tered at a single source and is provided to other systems without reentry by elec-
tronic means.

To consolidate its financial operations, Defense established the Defense Financiai
and Automation Service (DFAS) organization in 1991. Under the DFAS approach,
the number of financial centers is expected to be reduced from over 300 to 26 by
1998. Although Defense will recognize savings from operating fewer financial cen-
ters, the optimum benefits of streamlinin; ‘inancial operations will not be recog-
nized until financial processes and the architecture of systems which support them
bre restructured to eliminate redundant and out-dated practices. This requires con-
tinuing a buy-in by top management down through the staff levels and must cross
functional boundaries into areas such as procurement and logistics.

OMB has expressed some concern with DOD's interim standard system approach.
This approach has focused upon selecting the best of the systems supporting each
of the functional areas. Unfortunately, the best systems may be inadequate to meet
financial management needs and may require significant and costly upgrades. OMB
has recommended in the past that DOD look outside of its current financial man-
agement structure for system solutions. Possible alternatives include Commercial
Off-The-Shelf Software (COTS), out-sourcing, cross-servicing, and adoption of sys-
tems from other agencies.

Although most_of the publicity has focused on system problems, DOD has had
some successes. Defense has reduced the number of civilian payroll systems from
18 in 1991 to 14 and expects to further reduce this number to one by FY 1997. DOD
civilian payroll systems are successfully servicing other agencies, including the Ex-
ecutive Office of the President (EXOP). DOD has successfully implemented the in-
terim systems for retiree/annuitant, debt management, and contract payments and
has migration plans for implementing the interim target system for most of the
other functional areas. The number of DOD accounting systems has declined from
270 in 1993 to 249 in 1995.

Defense still has long-term financial problems which must be dealt with. The cur-
rent target systems are interim systems. The Department is still a long way from
achieving integrated financial management systems as required by OMB policy.
Plans for some functional areas need additional time for implementation. These in-
clude major areas, such as DBOF support and general appropriation accounting.
The planned systems reduction for these areas is shown below:

Iga 1995 1998
General Fund a este ee

Business Fund . . ~ se a 80
Total sononesnesen 7 a 170 163 59

Much work remains before Defense systems meet the current financial manage-
ment system requirements outlined in OMB Circular 4-127. For example, the De-
partment reports that only 35% of its systems meet reporting requirements, and
36% comply with departmental data standards.


49

erty and equipment to guard against waste and fraud; accurate
cost information that is not always available to support decision-
making; and inventories, which must be integrated with other fi-
nancial and operating systems to minimize duplication and waste.

Let me just digress for a second. Those five things are the hur-
dles that must be overcome in order to for the specifications, first,
to have a statement that is auditable at all, and then, finally, ulti-
mately to get the Holy Grail of the clean opinion. Those are the five
to keep your eyes on as you go forward.

Now, what has OMB been doing to help the Department of De-
fense? First, I would like to talk about Mrs. Maloney’s earlier ques-
tion, and that is the question of accounting standards. Trying to do
accounting without accounting standards is like free verse; that is,
trying to play tennis without a net. You can’t do it.

But let’s put a couple of things in context so that Mrs. Maloney’s

uestion can get a better answer. No. 1, until 1994, when the

‘MRA was passed, 1 year ago, the Defense Department was not
required by this Congress to comply with what we call generally
accepted accounting principles throughout government; that is,
State and local government as well as in commercial activities. So
it was a year ago that—I’m not making an apology; I just want to
give, you a context—it was a year ago when the standards were put
in place.

Standards for the Federal Government do not currently exist.
What has OMB been doing? Since 1990, along with GAO and
Treasury, we've been developing those standards. They are almost
finished. I’m told by the people who are working on them, that in
the spring of the year, all of the standards will be in place. Many
of them are in place now; for example, entity and display. You have
to decide what buckets or what categories to put things in. And the
Defense Department has complied very nicely. They have organized
their own financial statements to be in exact accordance with en-
tity and display.

Cost accounting principles are now available to us. We’re waiting
on revenue principles. But some very thorny questions lie in the
weeds. What do you do about liabilities in Defense for environment
clean-up? How do you count those on the balance sheet? What does
that future liability look like? It’s a problem that DOD shares with
others. So there are problems within the inherent nature of govern-
ment accounting.

And we will be happy, Mrs. Maloney, to spend some time, if you
would like it, to go over some of the FASAB standards and the
challenges that the Defense Department has facing them.

However, all of that said—we’re not trying to apologize for the
department—there’s a bigger problem. Let’s go to New York City
for the moment. The last time I looked, New York City was about
a $25-billion-a-year operation. By any standard, it’s as big as a
Federal department. The Defense Department is about 10 times as
big as New York City. It’s about $250 billion a year, but still a
magnitude that you can contemplate. It’s spread all over the Na-
tion and has different requirements, but still something you can
think about.

What forced New York City, as you correctly said, to begin pro-
ducing audited financial statements that could have a clean opinion


78

chain. From the beginning, Secretary of the Navy Dalton has made responsible
stewardship a major theme of his tenure, and he charged me ‘with getting our fiscal
house in order. It rapidly became apparent to the PDASN and me that our staff was
not well organized to manage all the change that was taking place. The staff ele-
ment with primary responsibility for oversight of financial operations was much too
small for the task at hand; responsibility for related functions was fragmented; and
there was some duplication of effort. Thus we established an Office of Financial Op-
erations within our staff, consolidating and modestly expanding staffs that were re-
sponsible for pieces of the problem. This new organization is responsible for finan-
cial management policy and procedures; Departmental level funds control; CFO and
other external reports; development, in coordination with DFAS, of a family of sys-
tems to meet DFAS and DON requirements; and oversight of the Department’s in-
ternal management control program.

One of the PDASN’s highest priorities has been leading a DON-wide effort to re-
engineer financial management procedures from budget preparation through ac-
count closing. Increased requirements and pressure to downsize make it imperative
that we have the most efficient organization possible. Individuals from headquarters
to the field are involved in the effort. They are looking both at quick fixes (such as
eliminating exhibits no longer required or sharing best practices among organiza-
tions) and at those that will take longer because they require more fundamental
process changes and investment in the system improvements that facilitate them.

Another necessary step is to ensure that people throughout the organization un-
derstand policies and procedures and what is expected of them. To this end, we have
begun a thorough review and consolidation of policies and procedures. Publication
of a single DOD Financial Management Regulation is enabling us to cancel many
DON directives, instructions, and letters. Where it is necessary for us to supplement
DOD regulations, we plan a single document. Our intent is to develop a handbook
for financial managers that will spell out clearly what actions are expected of them
throughout the life of an appropriation.

We also have taken steps to more closely involve the acquisition community in
solving financial management problems. Many of these problems arise during the
execution of acquisition programs. Necessary steps include ensuring that acquisition
managers understand financial management requirements, better communication
between the two communities about funding requirements and availabilities, and
electronic interfaces for timely and accurate transmissions of data. Actions are un-
derway in each area.

Finally, as I noted earlier, the DON and DFAS are preparing to produce general
fund financial statements. This involves (1) identifying what data are required and
where it is maintained, (2) educating those involved about the requirement, and (3)
enhancing interim migratory accounting systems. After we have completed CFO fi-
nancial statements for DON DBOF operations for FY95, we plan to prepare proto-
type CFO statements for DON general funds. This will help us identify weaknesses
in data and reporting processes so that we can make corrections (or, at least, initi-
ate corrective action) before we have to prepare statements for FY96.

2. DFAS Consolidation. The DFAS Clevel land and Kansas City centers provide fi-
nance and accounting services to the Navy and Marine Corps respectively. All five
operating. locations (OPLOCs) subordinate to Cleveland have been established. Each
of these OPLOCs formerly was a major Navy accounting activity. Of the remaining
former Navy accounting sites (now DFAS accounting offices), the work of 25 percent
has been consolidated into these OPLOCs already, and, by the end of FY96, about
75 percent of consolidations will be completed. ‘All the Marine Corps accounting
functions will be consolidated into the Kansas City Center. To date the work of
about 30 Percent of former Marine Corps accounting sites has been moved, and, by
the end of FY96, about 70 percent of consolidations will be completed.

DFAS has found that most individuals do not follow their jobs to the OPLOCs as
these eographie consolidations occur. Thus this consolidation is resulting in a con-
siderable loss of expertise. This loss is particularly a problem with the older ac-
counting systems, which frequently use old technology and are not well documented.
The bright side to this picture is that consolidation of the Nays general fund ac-
counting activities will be largely completed by the end of FY96. In combination
with the deployment and enhancement of standard general funds accounting sys-
tems, which I will describe next, this means that we should turn the corner soon
and begin to see a marked improvement in products.

3. Systems Modernization. The center piece of our efforts is the standardization
and upgrading of accounting systems.

During the 1980s, the Navy attempted to develop two standard accounting sys-
tems: one for general funds and one for revolving funds. As is all too often the case
with major automated information systems, these programs fell behind schedule and



88

centrate our initial efforts in the critical areas of inventory management, automated
data processing (ADP) security, and internal controls within our recently established
financial services offices.

In the inventory management area, the Air Force Audit Agency is working in con-
cert with our senior logistics official. The Agency has completed an in-depth com-
pilation of those internal control weaknesses associated with inventory management
that have been identified in audit reports, inspections, and internal management re-
views. The auditors and the logistics community then documented improvements
completed or underway to resolve the weaknesses and finally outlined future actions
still needed. Senior logistics officials are actively working to achieve the changes
needed in each area.

In a process similar to the inventory review, Air Force Audit Agency auditors
worked with senior ADP officials to identify and catalog weaknesses in computer se-
curity identified in audits, inspections, and internal management reviews. The effort
identified eight categories of weaknesses in system development and system oper-
ations that require both Air Force and DoD attention. This effort also outlined ex-
tensive actions currently underway and pointed out further actions required.

Finally, to address financial management controls at Air Force installations after
DFAS consolidation efforts were completed, we participated in a joint working con-
ference with DFAS to outline controls and rocedures needed at DFAS operating lo-
cations and Air Force financial services offices. We asked Air Force auditors to par-
ticipate in this effort. Now that we have implemented the new procedures, we have
asked the Air Force Audit Agency to review internal controls in actual practice at
our offices to ensure they are adequate. Specifically, the review will address cash
verification procedures, emergency payment, certification of funds, vendor payment,
and guidance provided to the financial services offices.

Streamlining financial management efforts. At the same time we are carrying out
major initiatives to improve financial management, we are also involved in efforts
to streamline the financial management process. One of the most prominent of these
streamlining efforts is the consolidation of all base-level defense accounting offices,
which are now run by DFAS, into centralized operating locations (known as
“OPLOCS”), So far 17 Air Force bases have transferred their accounting operations
to the new OPLOCS; another 20 bases are scheduled to consolidate to OPLOCS
through the second half of FY 1996.

We are experiencing some “growing pains” as the OPLOCS are being set up.
Many of the personnel at the OPLOCS are inexperienced, and communications prob-
lems have sometimes occurred. As a result, there have been adverse effects on serv-
ice. For example, vendor payments have sometimes been late, resulting in com-
plaints from vendors and sharp increases in interest payments and lost discounts.

DFAS has instituted a number of changes aimed at solving the problems. Among
these changes are increases in temporary hires, changes in procedures, and more
efforts to clean up the data bases at facilities that are about to be consolidated to
an operating location. The Air Force also needs to be sure that it adheres closely
to standard accounting procedures in order to assist in this consolidation.

We are working closely with DFAS and monitoring this transition carefully. Both
DFAS and the Air Force remain confident that we will complete the consolidation
successfully.

SUMMARY

I believe that the Air Force, with strong leadership from USD(C) and important
help from DFAS, has made significant progress in financial management reform
over the last year and a half. We now have a group on my staff responsible for fi-
nancial reform efforts, a plan for system improvements, and active efforts to im:
prove the CFO Report. We have significantly reduced problem disbursements and
antideficiency violations, and we are working to improve FMFIA compliance.

While I am pleased that we have made progress, I also realize that we have a
Jong way to go—esperially in our efforts to improve our systems, It is said that a
journey of a thousand miles begins with a single step. We are well beyond the first
step, but the finish line for financial management reform is still far off in the dis-
tance. With the support of this Subcommittee and the Congress, we will complete
the journey just as quickly as we can.

Mr. Horn. Thank you very much.

Let me ask each of you the same question: As you have tried to
consolidate, to get new systems involved, and generally looked at
the problem areas that we are here discussing, what has been your


43

We found that the Navy's financial reports were of little value in assessing its op-
erations or the execution of its stewardship responsibilities. We identified substan-
tial misstatements in almost all of the Navy’s major accounts and $225 billion in
errors in the Navy's fiscal year 1994 financial reports, For example’ our findings in-
cluded the following.
* As of August 31, 1995, the Navy's problem disbursements had grown to $18.6
billion and accounted for 67 percent of DOD’s total problem disbursements.
« DOD has reported to the Congress and the President that from October 1992
through July 1995, the Navy had 15 violations of the Antideficiency Act totaling
about $87 million.
* Navy and DOD managers did not have sufficiently reliable information to
know whether, in fiscal year 1994, Navy's DBOF activities operated at a gain
or a loss, or whether they broke even as intended, Of the $80 billion in revenue
for fiscal year 1994, the Navy's DBOF activities accounted for $23 billion. Fur-
ther, since the inception of DBOF in fiscal year 1992, the DOD Inspector Gen-
eral has not been able to render a favorable audit opinion on DBOF’s financial
statements.!0
+ Navy managers did not consider all excess inventory in their budgetary and
procurement decision-making. For example, not all of Navy's excess inventories
of about $400 million accumulated from the overhaul and decommissioning of
ships and submarines were considered in developing its fiscal year 1996 budget
request. As a result, we reported that the Navy's fiscal year 1996 budget re-
quest could be reduced by $38 million, "1

We found the Navy's financial reporting problems could be attributed in part to
the long-standing failure to instill discipline in its financial operations and follow
basic procedures, For example, rudimentary controls, such as ensuring the conduct
of periodic physical inventories, reconciling related accounts and records, document-
ing adjustments, and reviewing abnormal account balances, were not routinely car-
ried out.

We also found flaws in Navy and DOD controls relied on to secure their vast auto-
mated data processing operations. For example, we identified weaknesses in re-
stricting access to sensitive data and in ensuring continuity of computer operations
in the event of a catastrophe or other emergency. Such deficiencies increase DOD's
exposure to security breaches that could result in the loss of assets or leaks of sen-
sitive information, such as payroll data.

The Navy, along with DOD, has not taken full advantage of the 5 years since the
CFO Act’s passage, or the lessons learned from the experiences of the other services
in preparing financial statements. They must now ‘play catch up” and earnestly
counteract these serious problems through measures that will lead to successfully
preparing reliable financial statements on the Navy's operations within the next
year. Our planned reporting on our Navy work will detail recommendations to the

ecretaries of Defense and the Navy to help correct the problems we identified.

DOD’S PROGRESS IN MEETING THE CFO ACT OBJECTIVES

In laying out his “Blueprint” for reforming the Department’s financial manage-
ment operations in February 1995, Secretary Perry took a first step towards resolv-
ing the Department's Jong standing problems. The following five areas were key ele-
ments of that blueprint: (1) consolidate finance and accounting operations, (2) con-
solidate finance and accounting systems, (3) establish pre-validation for disburse-
ments, (4) reengineer DOD business practices, and (5) strengthen internal controls.
DOD has cited the Defense Finance and Accounting Service’s (DFAS) “Business
Plan” as the mechanism on which it will rely to implement the blueprint.
1 A summary of DOD's improvement initiatives in the blueprint’s five key areas fol-
lows,
* Consolidate Finance and Accounting Operations. In May 1994, DOD an-
nounced plans to consolidate over 300 defense accounting offices in’5 large ex-
isting finance centers!? and 20 new sites called operating locations during the
next 5 to 7 years. The plan, which is expected to reduce DOD finance and ac-
counting personnel from 46,000 to 23,000, is aimed at streamlining DOD's fi-
nancial operations and setting the stage for future process enhancements.

1©Major Accounting Deficiencies in the Defense Business Operations Fund in FY 1994 (Report
No. 95-294, August 18, 1995). .

111996 DOD Budget: Potential Reduction to Operations and Maintenance Program (GAO/
NSIAD-95-200BR, September 26, 1995).

12DOD’s five large centers are located in Columbus, Ohio; Cleveland, Ohio; Denver, Colorado;
Indianapolis, Indiana; and Kansas City, Missouri.


113

Examples of Audit Reports Issued since
July 1, 1994 on DoD Financial Management

AUTOMATED SYSTEMS
Re) = “Corrective ste ire
Security Def iciencies," June 995

Management requested followup audits to track DoD progress in
improving the security of automated financial systems.

The Financial Systems Activities in Pensacola, Florida, and
Denver, Colorado, had begun actions in response to previous audit
findings on computer security and had improved controls over
access to critical computer systems, software changes, and
quality assurance procedures; however, seven of the eight
recommendations to the Defense Finance and Accounting Service in
previous audit reports were not yet fully implemented. The
corrective actions were continuing.

The Defense Finance and Accounting Service and the Defense
Information Systems Agency concurred with all of the findings and
recommendations. Report No. 95-263 (below) addressed similar
followup issues at other sites.

Report No. 95-263, "Controls Over Operating System and Security
Software, and Other General Controls for Computer Systems

e 2 Syste
June 29, 1995

Previous audit reports showed that opportunities existed for
improving computer security at the Defense Finance and Accounting
Service, the Defense Information Systems Agency and the Defense
Logistics Agency. Controls over sensitive features of the
operating systems needed improvements. As a result, application
programs and data such as pay records could be added, modified or
deleted without detection.

The followup audit indicated the Defense Finance and Accounting
Service, the Defense Information Systems Agency and the Defense
Logistics Agency have made commendable efforts to implement prior
recommendations. However, additional corrective actions were
required in some areas. Verification was performed on 87 of 123
prior recommendations. Of the 87 prior recommendations, adequate
corrective actions were taken on 67 recommendations (77 percent)
and additional corrective action was required on 20 (23 percent).

(Attachment 2)


122

hear about it, one thing that now has happened on that they have
started, in the acquisition area, as opposed to the finance people,
the contracting officers are now being required, when they put out
these contracts, to include identifying information that matches
these acquisition numbers to specific lines or sublines of contracts.

So, ideally, if that’s complied with and it works, when the finance
people get that, they will have the information there to match up
these disbursements. Part of the problem now is, they don’t have
the information. No matter how long they spend on it, they don’t
have the accurate data in front of them. So those kinds of things
they need to continue to do.

Mr. Horn. What can your office do? Now that you've had your
series of audits, do you plan to do this on a yearly basis, or what
else can the Inspector General do to stir the pot and keep people
moving?

Ms. HILL. Well, obviously, we’re going to continue to audit the fi-
nancial statements that we are required to under the CFO Act, and
work with GAO on the governmentwide effort on financial state-
ments. That’s something we will do, we are required to do by stat-
ute; we have assigned people to do that.

In addition, and in some ways I wish this hearing had been a
couple months down the road, because I think we are working and
we're going to continue to work on some issues as to is what we’re
doing now the best way to do this. And that goes back, Mr. Hamre
alluded to it, and I mentioned it, the ongoing work we have on this
whole process of getting new systems. Are we doing it the right
way?

So I think our job is not only to keep looking at the financial
statements, but part of our oversight mission is to see, are the
ways we're addressing this problem in the department the best
ways and most efficient ways? And we need to continue to look at
that and pressure them, you know, to do things the best way, and
maybe to raise with them alternatives.

I mean, I’ve raised some very kind of, you know, non-DOD ques-
tions to people. I get very frustrated, as Congresswoman Maloney
has been, and I’ve said to people, “Well, you know, if you can’t
match up this disbursement to the right contract, because you don’t
have the information to identify which account this is supposed to
be out of, well, just don’t pay it.”

But the response is—and then you get into these hard choices on
policy here—you know, DOD doesn’t sit in a vacuum. DOD not only
affects the services and the military members; it affects huge parts
of the economy, as far as contractors. I mean, are we to the point
where we want to solve unmatched disbursements immediately so
badly that we’re going to not pay major defense contractors, be-
cause we don’t have enough information to prevalidate those pay-
ments.

So, I mean, those are the kinds of choices that they get down to.
And I think people probably need to start thinking about that, how
far do we want to push them in either direction?

Mr. Horn. Getting back to training a minute, have you seen any
evidence that the Office of Personnel Management, in the Execu-
tive Office of the President, is being helpful on improvement of


127

Mr. Horn. Right. The contract part.

Ms. HILL. You have to have acquisition, logistics, all these other
parts of the department have to be feeding into this process and
working with us to get the system to where it works.

Mr. Horn. What concerns me is what we've seen_at the FAA,
we've seen it in a number of other agencies, and the Pentagon has
been notorious for it, in their history, going back probably to Jeffer-
son, is that we will have some huge, massive system develop be-
cause we've got unique needs. Their needs of purchasing aren’t any
more unique than the most complex electronic company in Amer-
ica. And it seems to me we're already doing this in the private sec-
tor, another reason to fet their people to give some advice on how
you do the job, if we fail to have that competency here.

It isn’t a matter of our people are dumb; it’s just sometimes the
private sector has a little more freedom than government agencies
do to go out and get the latest technology, the latest software.

Ms. Hitt. I do know, certainly, on the audit side of it, not on the
operations part, but on our audit side, with the service audit agen-
cies and the IG’s Office, we are increasing our contacts with the
private sector and looking at their best practices in auditing, and
that kind of thing, and seeing where we can use that in govern-
ment. So there is certainly room for some exchange of ideas there,

think.

Mr. Horn. Well, good. Hopefully, that will also be encouraged by
the Inspector General, you and your colleagues, across the govern-
ment.

I want to thank you all for your patience today. We did have two
votes. We thought we had a third coming up at 5 o’clock, but they
must have sent all the floor staff home, or something.

So with that, I’m going to thank the people that put this hearing
together.

For the majority, Russell George, staff director; Anna Miller, who
is to my immediate left, the professional staff member specifically
assigned to this. And I want to thank, in particular, since it’s his
almost last day working with us, and he comes from the Pentagon,
Tony Polzak, legislative fellow, with the Department of the Army,
who has been an invaluable addition to our staff, because he
worked for nothing, for the last 9 months or so. And Andrew Rich-
ardson, our chief clerk; and the minority staff, Cherri Branson. And
then our official reporter, Barbara Smith.

We thank you all for helping. With that, we thank you, and ad-
journ this session.

{Whereupon, at 5:35 p.m., the subcommittee adjourned.]

ie)


CONTENTS

Hearing held on November 15, 1995 .
Statement of:

Dodaro, Gene L., Assistant Comptroller General, Accounting and Infor-
mation Division, U.S. General Accounting Office; and G. Edward
DeSeve, Controller, Officer of Federal Financial Management, Office
of Management and Budget

Hamre, John J., Comptroller, Department of Defense, accompanied by
Alvin Tucker, Deputy Chief Financial Officer; Richard Keevey, Director,
Defense Finance and Accounting Service .....

Hill, Eleanor J., Inspector General, Department of Defense .

McCoy, Helen ‘T., Assistant Secretary of the Army, Financial Manage-
ment and Comptroller; Deborah Christie, Assistant Secret of
the Navy, Financial Management and Comptroller; and Robert F. Hale,
Assistant Secretary of the Air Force, Financial Management and Com;
troller ...

Letters, statements, etc., submitted for the record by:

Christie, Deborah P., Assistant Secretary of the Navy, prepared state-
ment of

DeSeve,
Office of Management and Budget, prepared statement of

Dodaro, Gene L., Assistant Comptroller General, Accounting
mation Management Division, Prepared statement of

Hale, Robert F., Assistant Secretary of the Air Force, (Fi
ment and Comptroller), prepared statement of ..

Hill, Eleanor J., Inspector General, Department. o}
statement of

Horn, Hon. Stephen, a Representative in Congress from the State of
California, letter dated May 22, 1995 ..

Maloney, Hon. Carolyn B., a Representative in Congress from the State
of New York, prepared statement of ..

MeCoy, Helen, Assistant Secretary of the Army, prepared statement

rrcker, “Alvin, Deputy Chief Financial Officer, Department of Defense,
prepared statement of .

jefense, prepared

ay

Page
1

38

Ro

67

76
51
40
83


106

© Consulting with the Private Sector Council, an advisory
group of representatives from public accounting firms, and
adapting private sector practices in our overall audit approach,
with principal focus on meaningful "corporate level" audit
opinions. We will also study the merits of contracting for
financial statement audits, although it appears there would be
considerable problems in outsourcing as long as most systems

remain fundamentally not in condition to audit.

© Agreeing with the Office of Management and Budget and
Chief Financial officer, DoD, on a logical and meaningful
reporting structure for financial statements, starting with the
statements for FY 1996. While many dozen DoD components will
work with DFAS to prepare financial statements and their
individual component internal control systems will be audited,

the principal reporting entities will be as follows:

Department of Defense Consolidating Statements (DoD IG
Opinion)

Army General Fund (Army Audit Agency Opinion)

Navy General Fund (Naval Audit Service opinion)

Air Force General Fund (Air Force Audit Agency opinion)
Defense Business Operations Fund (DoD IG Opinion)

DoD Military Retirement Trust Fund (DoD IG Opinion)

National Defense Stockpile Transaction Fund (DoD IG Opinion)


66

maybe we wouldn’t have a situation where we don’t know where
our dollars are.

But, in any event, I look forward to reading all the reports that
you talked about, the strategic plan for implementing a centralized
system that you said that you had and the steps that you felt you
needed to go forward. I sincerely would like to read it. I understand
we're going to be here over the weekend. It sounds like good week-
end reading material. So if you get it to my office, I’d love to read
it.

Thank you.

Mr. DESEvE. Sure will.

Mr. Horn. Earlier, I asked the other panel about the resistance
that would be found in reorganizations. To what degree have either
one of you or your staff members asked some of the people in these
various accounting centers, where change is going to be made by
consolidation of systems, as to what their concerns are, what their
fears are?

Having gone through computerization, modernization, techno-
logical change in an institution I once ran, I am well aware that
people have legitimate worries, rumors are rife, about, will I have
a job at the end of this wonderful consolidated system? And they
aren’t really thinking about the mission of the Department of De-
fense or the mission of the university; they are thinking about
them, which is normal human behavior.

Now, to what extent have those feelings been assuaged, in your
judgment, as people that look in on the scene and try to see what’s
going on? What do you think?

Mr. Doparo. Mr. Chairman, I think that’s a very good question.

Mr. Horn. Have I got a very good answer coming?

Mr. Doparo. Well, we have not done any systematic collection of
opinions. Definitely, the consolidation of the accounting functions is
creating change in the work force, as was pointed out. Many of the
people who were in some of the closed facilities, for example, when
the DFAS moved its Navy facilities to Cleveland from Arlington,
did not go along there. So it is creating some challenges for them
to hire up the people. There are some concerns, obviously, in some
of those areas that we’ve come across with people.

As we pointed out in our testimony, training, upgrading the skill
level of the work force is a critical issue. So I think that whole
issue is one that needs to be managed very carefully. Managing
change is difficult.

Mr. Horn. Well, that’s right. And if it’s handled right, people are
enthusiastic about it. And if people can be retrained for other jobs
somewhere, they wouldn’t worry that much about what’s going to
happen. But let’s face it, you and I know, in any human organiza-
tion, change is the major inhibitor to making what you think is a
rational organization. Since few organizations have rationality at
the end of the pipeline, maybe it’s too much for us all to expect.

But accounting is one of the ones where you know whether they
did it or they didn’t do it. And we would welcome any suggestions
you have as to what Congress ought to be doing. That’s why I’ve
asked about the hardware and the software. But it seems to me
they have probably got the funds over there, that if they want to
solve the problem, they can focus on it. Now, they put about $200


52

consider preparing separate stand-alone financial statements for its sub-organiza-
tions that conduct very visible or critical activities with a high level of public inter-
est. Using this criteria, DOD indicated that starting with FY1996, it will prepare
separate stand-alone financial statements for the individual military services and
the Defense Business Operations Fund (DBOF).

GMRA extended DOD's audit coverage from its revolving funds, trust funds, sub-
stantial commercial functions, and organization-wide pilots (Army and Air Force) to
the entire Department. The new requirements of GMRA aiso include the need to
produce a departmentwide statement by March 1, 1997 and to transmit information
for the government-wide statement by March 31, 1998. These new requirements
gaye rise to a major program of assistance by GAO, Treasury, and OMB.

As I noted earlier, the new standard for success—the audited financial statement
with a clean opinion—gives all of us a common goal. To assist DOD and others in
meeting this goal, Gene Dodaro, Fiscal Assistant Secretary of the Treasury Gerry
Murphy and I, along with our staffs, visited the Inspectors General and Chief Fi-
nancial Officers in each agency.

Our purpose was:

+ To offer assistance in meeting challenges unique to a department or agency.
For example, one agency has never reconciled one of its funds. The question of
the practicality of attempting to find and reconcile very old records was dis-
cussed and is being examined by the agency and the central agencies to find
a practical solution that addresses the problem in a comprehensive manner.

* To create interagency task forces to deal with common problems. The Defense
Department is not the only agency that has difficulty accurately recording its
environmental liabilities. A task force has been formed to deal with this issue
in a consistent manner throughout the government that will give DOD assur-
ance that its own efforts will satisfy accounting and audit requirements.

© To inform the agencies of the importance of statutory deadlines and to indi-
cate that no waivers would be given by OMB, The process of granting waivers
has been interpreted by some as a reason to postpone action toward compliance.
This has caused unnecessary delays.

The central agencies will continue to work with DOD through FASAB; indi
ually as part of the audit or policy setting process; in the task forces to assure that
its unique needs are considered; and to help in finding practical solutions to prob-
lems.

THE ROLE OF FINANCIAL SYSTEMS.

Throughout the Federal government, the creation of reliable integrated financial
management systems is the number one financial management priority. This is re
flected in two recent publications. The first is the 1995 Federal Financial Status Re-

ort and Five-Year Plan, which was transmitted by OMB Director Alice Rivlin to

‘ongress in July. For the first time, the five year plan reflected the jointly stated
priorities of the statutory Chief Financial Officers (CFO) Council and OMB.

In making financial systems its highest priority, the CFO Council said,

“Improving financial management systems is the CFO Council’s number
one priority, in part because good financial systems are required to support
so many other areas, For example, financial statements and performance
reporting depend on financial management systems to provide accurate,
useful data. ilarly, electronic commerce depends on changes to business
processes supported by financial management systems.”

The second publication was the previously referred to Association of Government
Accountants/Coopers and Lybrand report. 35.4% of the financial mangers respond-
ing to the survey stated that lack of integrated financial management systems was
the greatest barrier to implementation of the CFOs Act. This was by far the greatest
barrier cited and twice as important as the next category.

The Defense Department has acknowledged this priority in its 1994 Chief Finan-
cial Officer Financial Management Five-Year Plan. In his letter of transmittal,
Comptroller and Under Secretary John Hamre states,

“We acknowledge the need to accelerate the pace of improvements in de-
partmental operations and systems, and as a result, are undertaking ag-
gressive actions to comply with the Chief Financial Officers Act.”

The pace of change in financial systems technology will require a continual re-
evaluation by the Department of its strategy. OMB has reviewed the Department's
current systems strategy as part of its annual systems briefings. Discussions will



101

The audits of the Army and Air Force general fund FY 1994
financial statements disclosed 81 specific deficiencies in the
overall areas of systems, asset reporting, disbursements and

collections, and contingent liabilities.

The most fundamental problem is that accounting systems
supporting Army and Air Force general funds do not compile and
report reliable and auditable information. Those systems can not
produce an audit trail of information from occurrence of a
transaction through recognition in the accounting records at.
various levels and ultimately to the general fund financial
statements. Because of the accounting systems’ inadequacies,
auditors could not obtain sufficient evidence or apply other
auditing procedures to satisfy themselves as to the fairness of
the financial statements. Until the Defense Finance and
Accounting Service (DFAS) implements accounting systems with
integrated, double-entry, transaction-driven general ledgers to
compile and report information, auditors will be impeded in
determining whether valid transactions are properly recorded,
processed, and summarized. This presents a significant scope
limitation to the auditors and will likely continue to cause us
to disclaim opinions on the general fund financial statements for
the next several years. Also, this almost certainly includes the
Navy general fund statements, which will be prepared and audited
for the first time for FY 1996. ‘The Navy has recognized the
problems that it faces and cancelled plans to formulate general

fund statements for FY 1995.


26

ing up for people.” I take it we’re now beyond the old boy network,
that we’ve got to actually see if the money is there before it’s used
to balance?

Mr. Hamre. Yes, sir. And since I’m the senior old boy, I’ve got
to make sure we don’t do it that way.

Mr. Horn. OK. And then—well, some of these I can save for your
deputy there.

Mr. Hamre. Yes, of course.

Mr. Horn. But let’s see. Yes, here on this part of the Post story,
which I wasn’t clear on, “Charles Coffee, Director of the Columbus
Center, said the problem took so long to solve because some of the
contract records were missing. Not asking for the overpayment to
be returned ‘was a bad decision,’ he said.” Now, I take it that Co-
lumbus situation has been straightened out?

Mr. Hamre. It’s getting better. We’re not out of the woods yet in
Columbus. May I explain what happened? We had, prior to 1990,
the department had 10 locations around the country that made
contract payments. Performance was, I think I would be charitable
to say, uneven. In some cases, it was downright poor. And, again,
attribute to Don Atwood, to Sean O’Keefe, my predecessor, to John
Sheikopf and others, for having made the hard choice, we have to
bring them together.

We probably weren’t as careful in consolidating our contract pay-
ment operations back then as we should have been. And so we
moved them all to Columbus, OH, and, in some cases, lots of
records were lost or missing. They may not have been there origi-
nally. As I said, some of the operations were fairly flawed.

So we have been spending the last 4 years, frankly, trying to rec-
oncile contracts where the original documentation is gone. That’s
been a painful thing. We actually hired a private accounting firm
to help us do that. We should have most of the contract reconcili-
ation—the outstanding contracts that need reconciliation done by
the end of March of next year.

That is a major factor in why we overpaid, because if the under-
lying record wasn’t correct, and you didn’t have invoices and pay-
ments against invoices recorded, you could run the chance of over-

ying. And we did overpay. Back in 1993, we overpaid by about
By million, that’s $750 million in an office that (pays about $35
million an hour. So the percentage is small, but, in our business,
small percents add up to big numbers.

Mr. Horw. Are we giving a bonus to people in terms of how many
checks they turn out per hour, and this kind of thing? Is there any
incentive that’s being given that really is meaning you go too fast;
you don’t have time to check; the idea is, just get it out of there?
It seems to me that can be counterproductive, and I was just curi-
ous what the Columbus Center system is.

Mr. KEEVEY. No, we don’t.

Mr. Horn. The other is, the level of education to understand the
contracts against which you're checking.

Mr. KEEVEY. That’s a problem. That’s correct.

Mr. Horn. And that bothered me, if you’ve got GS~3s. Is that
correct?

Mr. KEEVEY. These are very, very detailed, complicated con-
tracts. Some of them literally take up half of a floor of a room. And


22

mented by various Components. DoD is taking action to standardize procedures for
the treatment of financial information and is standardizing the Chief Financial Offi-
cers Act financial statements and footnotes. The standardizing of CFO statements
for FY 1995 reports is being driven by the Department's preparation for the DoD-
Wide consolidated financial statement that will be prepared and audit opinion ren-
dered starting in FY 1996.

DoD is committed to providing audited financial statements by March 1st each
year. To achieve this requirement DOD’s Components, auditors, and accountants
are working together anc raking the CFO reports better each year. We will con-
tinue to focus our efforts for implementation of compliant accounting systems and
the development and use of better business process procedures and guidance.

UNQUALIFIED OPINIONS ON FINANCIAL STATEMENTS

We have a long way to go to obtain unqualified opinions on all DoD CFO reports,
but we are taking aggressive action to reach that goal. At DoD we are committed
to improving the financial reports that reflect our responsibility and accountability
for the resources entrusted to us to carry out the Department's mission.

DoD continues to improve the CFO accounting policy and procedures used to col-
lect and present fairly entity financial information DFAS and the DoD Components
are correcting policy and procedure shortcomings identified in audit recommenda-

tions.

Although a disclaimer opinion has been given for most DoD CFO reports, DoD has
received Favorable opinions on some of the DoD appropriation trust fund CFO re-
ports. i.e, Voluntary Incentive Trust Fund, National Becurity Education Trust Fund,
and the DoD Military Retirement Trust Fund.

The Department will continue to improve the quality of CFO reports so when
transaction driven general ledger accounting systems are implemented we can ob-
tain favorable audit opinions. The DFAS will continue to work to improve the qual-
ity of financial information presented in the CFO annual reports, DFAS and our
customers are taking action to improve the accuracy of asset valuation for real prop-
erty, personal property, inventories, and equipment. Improvement in the disclosure
of contingent liabilities is another area we are working to improve.

DoD is working with the Federal Accounting Standards Advisory Board to estab-
lish and_implement accounting standards to address the diverse, and sometimes
unique’ Federal Government requirements.

Auditors have noted the progress DoD has made in some policy and procedures
areas over the past few years. Improved presentation of financial statement data,
footnote disclosures, reconciling pay and personnel records to increase accuracy of
payroll data, DoD efforts to address the DoD-wide problem of mismatched disburse-
ments.

DoD strongly supports financial management reform. We intend to provide accu-
rate and useful information to the Congress. The Department has identified our fi-
nancial problem areas and is working hard to correct those deficiencies.

CONSOLIDATION OF ACCOUNTING SYSTEMS.

The Defense Finance and Accounting Service (DFAS) is streamlining its oper-
ations by consolidating over 300 offices into no more than 5 Centers and 21 Operat-
ing Locations (OPLOCs). The process began in Fiscal Year (FY) 1991 with the cre-
ation of DFAS which resulted in the capitalization of six large Military Service and
Defense Agency finance centers. In an effort to achieve efficiencies and early sav-
ings, one of the six centers was disestablished in FY 1992, with its functions trans-
ferred to the other Centers. During. FY 1993, over 300 field finance and accounting
activities were transferred to DFAS from the Military Departments and Defense
Agencies. In FY 1994, the Deputy Secretary of Defense selected the five DFAS cen-
ters and 21 new Operating Locations as the consolidation sites. By the end of FY
1995, 14 of the 21 new operating locations had been opened and one-third (110) of
the field activities had been closed, with their functions transferred to one of the
consolidation sites. Eighty more field activities have been announced for consolida-
tion during FY 1996, and the remainder will be closed by FY 1999. When consolida-
tion is completed, savings of over $120 million per year is expected.

In the financial systems area, DFAS has made significant progress toward the
consolidation and standardization of finance systems and operations. We have se-
lected and modified major military pay, retired and annuitant pay, civilian pay, debt
management, contract payment, and transportation payment finance systems to
meet Department-wide Fequirements and are implementing them as migratory sys-
tems for use throughout DoD. In 1991, 82 finance systems were in use in these
areas, we are now down to 42 and by 1998, DFAS will have reduced the number


105

Because my office is expected to downsize by about 33 percent
from FY 1994 to FY 2001, this means that DoDIG audit resources
for the acquisition, logistics, construction, military health
care, foreign military sales, communications and environmental
areas could be reduced by nearly one half. To cope with the

realities of downsizing and to ensure the best possible audit
coverage in the finance and accounting area, we have taken a

number of initiatives, some of which include:

© Establishing a more formal DoD audit management structure
with well documented processes to ensure good coordination

between the DoDIG, Army, Navy and Air Force financial audits.

o Taking a leading role on the Government-wide Audited
Financial Statement Task Force, which is a joint effort by the
Office of Management and Budget, Treasury, General Accounting
Office, IG community and Chief Financial Officer community to

plan for implementing the Government Management Reform Act.

© Establishing resident DoDIG audit offices at four of the

five DFAS Centers.

© Developing a risk assessment plan to focus audit
assessments of automated system controls and reliability on the
most critical DoD systems, with emphasis on new, standard

systems.


34

Mr. Horn. Who gets the interest in the interim?

Mr. KEEVEY. We lose that interest.

Mr. Horn. You lose it.

Mr. KEEVEY. Yes, sir.

Mr. Horn. And the person that got the overpayment can keep it.

Mr. KEEVEY. That’s correct.

Mr. Horn. You're more liberal than the IRS.

Mr. KEEVEY. They are required, that is, the contractor, to pay us
back, but they may not always be aware themselves.

Mr. Horn. Well, let me ask you, as we move toward that object
of 1997, late 1996, 1997, as we move toward that, of getting a bal-
ance sheet, your testimony stated that you’re making progress.
You've just reaffirmed that you’re making progress. And I guess
Tm interested in how we’re measuring that progress. We've had a
whole series of hearings here on benchmarks and how do you es-
tablish them in relation to goals of a particular organization.

Do you feel that you’re getting unqualified, clean audit opinions
at this point? How much of your operation could you say you would
get a clean opinion in?

Mr. KEEVEY. Hardly any.

Mr. TucKER. A few of the trust funds, sir, military retirement
trust funds.

Mr. Horn. The trust funds you have got them?

Mr. TUCKER. Some of the other smaller trust funds that are
mostly securities of some sort that are held from the Treasury, we
have clean opinions on.

Mr. Horn. As I'm looking down here, the Navy is still substan-
tial; no audits performed, I take it, on some of these.

Mr. KEEVEY. No, they haven’t undergone an audit yet.

Mr. Horn. Yes, since they aren’t a pilot, presumably.

Mr. KEEVEY. Say again, sir?

F Mr. Horn. They are not a pilot program, as is the Army and Air
orce.

Mr. KEEVEY. Yes. The GAO has done a report on the financial
statement of the Navy, but that was not a statement that was set
up for a pilot audit. We will be going into that for the 1996 state-
ment.

Mr. Horn. Mr. Tucker, as I understand, you stated in your testi-
mony that DOD has received favorable opinions on some of the
DOD appropriation trust fund CFO reports; namely, the Voluntary
Incentive Trust Fund, the National Security Education Trust Fund,
and the DOD Military Retirement Trust Fund. In which years did
any of those funds really get favorable opinions?

Mr. Tucker. I think in all but 1 year they got favorable opinions.
They are mainly Treasury securities with a few operating expenses
associated with them.

Mr. Horn. As I look at this thing, I think only one of them did;
is that correct? Fiscal year 1994 did. The second got a qualified,
and the third was not audited. I’m going to put in the record at
the point the reporting on fiscal years 1991, 1993, and 1992, DOD
financial statements.

I guess what I would just like to know from both of you, in your
respective areas, and then we will close this out, if you had a scale
of 1 to 10, with 10 being clean audits, the balance sheet can go for-


115

Therefore, additional allotment payments may have been sent to
other than the appropriate donation recipient. In addition,
$22,280 was sent to central receipt and accounting points that
were not authorized to participate in the Campaign.

© ‘The Centers did not send detailed supporting statements
to the central receipt and accounting points as required by
Office of Personnel Management and Department of the Treasury
regulations. Without supporting statements, the central receipt
and accounting points could not identify the number of employees,
by Government agency, who contributed to the campaign, and could
not verify payments received.

© There were material management control weaknesses in
processing pledge cards and maintaining the tables of address
codes for the central receipt and accounting points in the
military payroll systems.

The Defense Finance and Accounting Service is implementing
procedural and system changes to strengthen controls over
entering and maintaining the address codes of the central receipt
and accounting points in the Defense Joint Military Pay System.
One standard address table for central receipt and accounting
points will be maintained in the military payroll system for all
Services using the system. Also, the Defense Finance and
Accounting Service will develop a standard report to accompany
Combined Federal Campaign payments to the central receipt and
accounting points.

Repo} 5a “Proce:
Fi ive Se “ 1994

Excessive debts were incurred at separation of active duty
personnel because of inaccurate and incomplete calculations of
pay. The Air Force was doing an excellent job in personnel
separations; however, at Army, Navy and Marine Corps activities
17 to 34 percent of separated personnel had outstanding debts.
Post-separation debt collection is inefficient and costly, making
preventative action imperative. The auditors estimated that
about half of the debts were readily avoidable without impairing
the separation process.

Management generally concurred with most findings and
recommendations and subsequently established a Debt Management
Task Force to aggressively pursue reduction in individual
indebtedness. The Inspector General, DoD, plans to issue an
audit report on the DFAS debt collection program by early
December 1995.


58

Mr. Horn. Well, really, GAO gave up on doing financial audits,
didn’t it, on even a spot-check basis?

Mr. Doparo. Well, basically, from the time we turned over the
accounting systems to the agencies and examining each individual
voucher, where we used to have about 14,000 people doing that, we
did not do a lot of financial auditing until the 1980’s. And then we
started with the General Services Administration, the Veterans De-
partment. All the agencies that were under the pilot program in
the CFO Act, GAO started with these agencies.

So I would say we’ve been under a regular basis now of doing fi-
nancial audits of selected departments and agencies for the better
part of the last decade.

Mr. Horn. How would you rank the various military services’
progress in complying with the CFO Act?

Mr. Doparo. My views on that are, the Department of the Army,
I think, has shown a good commitment. I think they are making
some steady progress, as noted by the Army audit and the DODIG
in their last audit report this year. We did the audits of the Army
for the first two fiscal years, under the act, and now have turned
them over to the DODIG and the Army Audit Agency. I think the
Army, they have had top-level commitment, and I would have to
give them the highest marks of the services.

Mr. Horn. OK. Are they at the B, B-plus, or A-minus level?

Mr. Doparo. Giving grades are always difficult.

Mr. Horn. Giving them is easier than taking them.

Mr. Doparo. I would say they are at the C, C-plus level, and im-
proving. I think the real test will be which military service gets a
clean audit opinion. Also, to DOD's credit, they have identified and,
under the act, they will not only have a DOD-wide financial state-
ment and audit opinion, but they are going to have audits done of
individual components of DOD. So the Army, Navy, Air Force will
all have individual audit opinions.

I think the Navy probably has the longest way to go. They were
not under the pilot program. I think they need to give some re-
newed emphasis to their operations.

Mr. Horn. What is your grade for their operations?

Mr. Doparo. It’s lower than the Army’s.

Mr. DESEvE. Mr. Chairman, I think there’s an absolute stand-
ard.

Mr. Horn, How much lower?

Mr. DeSeve. I think there’s an absolute standard we can apply.

or, Horn. Can they go to a community college to make up, or
what?

Mr. DESEVE. I think there’s a standard that we can apply that’s
a very simple standard. One, can the department prepare financial
statements which do not have a disclaimer of opinion; that is, they
are auditable? Let’s call that grade one.

Mr. Horn. OK.

Mr. DESEvE. At the moment, the Navy has not done that. We
won't know until 1996 whether they are capable of doing it and
subjecting themselves to the outside test. They may have done it
internally, and you should certainly ask them that, but we haven’t
worked with those yet. They are still working on their first merit
badge, No. 1, that is producing statements, subjecting the state-


112

FY 1994 CFO Audit Opinions

Audit
Title Organization Opinion

Voluntary Separation Incentive Trust Fund OIG, DoD Unqualified
Financial Statements for FY 1994
National Security Education Trust Fund OIG, DoD Qualified
Financial Statements for FY 1994
Statement of Financial Position for the OIG, DoD Disclaimer
Commissary Surcharge Collections Fund,
as of September 30, 1994
Defense Business Operations Fund OIG, DoD Disclaimer
Consolidated Statement of Financial
Position for FY 1994
Army's Principal Financial Statements Army Disclaimer
for Fiscal Years 1994 and 1993,
Fiscal Year 1994 Principal Financial Navy Qualified
Statements of the Navy General Gift Fund
FY 1994 Principal Financial Navy Qualified
Statements of the Office of Naval
Records and History Fund
Opinion on FY 1994 Air Force Air Force Disclaimer

Consolidated Financial Statements

(Attachment 1)


76

This will be a great help to us in both complying with data require-
ments and having an automated way to feed those data to the ac-
counting systems.

But systems alone don’t do the job. You have to rely on individ-
uals, as people have noted, and you have to rely on your manage-
ment control. We do have lots of audit reports which suggest that
there are management control problems, generally that people
aren't complying with the procedures that are there, not that the
procedures themselves, if followed, wouldn’t be sufficient.

My impression here is that people really do want to do a good
job. As John Hamre said, this is not a case of evil people who are
trying to pull something over. It’s a case of people who want to do
a good Seb, working under very difficult conditions. Frequently,
these are very labor-intensive processes, and people have staffing
restrictions which make it hard for them to comply when there’s
a labor-intensive process.

Modern systems will help, but I think we need other ways of
measuring and following up and doing that sort of thing. So an-
other thing my Office of Financial Operations is going to be doing
is trying to find out and sort of look at our whole management con-
trol process and see how we need to change it to make it more re-
sponsive.

Well, these problems didn’t happen overnight, and they are not
going to get solved quickly, but we hope we Fave corrective action
in each of the areas that has been identified for solution. We will
need your support for investments. This will take investment dol-
lars both in software and hardware, and we appreciate your under-
standing for how long it’s going to take.

Thank you.

[The prepared statement of Ms. Christie follows:]

PREPARED STATEMENT OF DEBORAH P. CHRISTIE, ASSISTANT SECRETARY OF THE.
Navy

Mr. Chairman and Members of the Committee:

The last five years have seen a “sea state change” in the financial management
environment throughout the Department of Defense (DOD) and the Department of
the Navy (DON).

Legislative: The Chief Financial Officers’ (CFO) Act of 1990 and the Government
Management Reform Act (GMRA) of 1994 require comprehensive action to improve
federal financial management and placed new reporting requirements on all federal
agencies. Earlier, the Defense Authorization Act of 1990 also required a significant

ange in the way DOD managed funds and programs.

Organizational: Within DOD, responsibility for most disbursing and accounting
operations has been assigned’ to the Defense Finance and Accounting Service
(DFAS), which was established in January 1991. DFAS was given the mission of
physically consolidating most of DOD's disbursing and accounting operations, stand-
ardizing policies and business Pinetices. and developing and deploying standard fi-
nancial systems. In doing so, DFAS is e: ted to significantly reduce the cost of
operations and the numbers of people involved.

_ Management Priority: Finally, the Department of Defense has placed new empha-
sis on following sound financial management practices, including a significant effort
to eliminate errors in our accounting systems that have accumulated over decades.

Serious problems exist in many facets of DON financial management. As | hope
to show, the DON and DFAS now have responsive improvement plans well under
way. The DON is improving its prpanization for financial management. DFAS is
well along in the consolidation of financial management services. The centerpiece
of our joint efforts is the selection, upgrading, and deployment of compliant financial
systems. The final essential ingredient is the provision of accurate data through
modern feeder systems and a system of internal controls to ensure their proper use.
Unfortunately, we have not yet reached a point where Congress and the public can


28

Mr. Hamre. I think it’s asserted; I don’t think it’s documented.
Tl be glad to go through that.

Mrs. MALONEY. That they allege. That they allege.

Mr. Hamre. OK. That’s very different.

Mrs. MALONEY. Is far greater than any that has been mentioned
in these other programs. So the No. 1 recommendation was, why
aren’t you putting together the payments and accounting for bil-
lions of dollars in the annual disbursements? Why don’t you put
them together? When you get the bill, you pay the bill?

Mr. Hamre. I thought I explained we did do that.

Mrs. MALONEY. You are doing it?

Mr. Hamre. Yeah. I thought I explained that.

Mr. Horn. You are doing it?

Mr. Hamre. Yes. We cannot make a payment until we have a re-
ceiving report.

Mrs. MALONEY. When did you start doing that?

Mr. Hamre. We’ve been doing that all the time.

Mrs. MALONEY. Well, earlier, in one of the reports, they said that
there was $17 billion.

Mr. HaMRE. They weren’t matched to the accounting record. Do
you remember my analogy when I got in the bill?

Mrs. MALONEY. OK. They recommended that you match it to the
accounting record.

Mr. Hamre. Yes, and we do agree with that totally.

Mrs. MALONEY. You agree with that?

Mr. Hamre. Oh, absolutely.

Mrs. MALONEY. And they recommended that in 1990, and why
hasn't that been implemented?

Mr. Hamre. Well, I didn’t get there until 1993.

Mrs. MALONEY. By all accounts, everyone says you’re doing an
excellent job. I’m just saying, why aren’t we doing that now?

Mr. Hamre. Well, I think we're doing it now where we can. On
the prematch to the accounting record, we’re doing it at the $5-mil-
lion disbursement right now. We would like to drop that as soon
as we can. Now, for small vendor payment, it’s being done in some
of the systems already; for example, STARS which is an accounting
system used by the Navy. At the vendor payment level of installa-
tion, there is a prematch basis for that already. I think the CAP
system in the Army is, as well.

But in the aggregate, we had so many problems.

Mrs. MALONEY. If it is being done, then how did we “lose $17 bil-
lion” that’s not matched?

Mr. Hamre. I don’t think we lost it. I think what it was is the
disbursement.

Mrs. MALONEY. Well, how come we can’t account for it?

Mr. Hamre. We can account for it, but, unfortunately, we’ve got
a pile of canceled checks and not a clear record back to the account-
ing station. And we’ve been researching those. We resolve about a
billion dollars a month; we clear it up.

Mrs. MALONEY. But from now on you're going to have it all to-
gether, into the accounting system, so that we'll have a clear
record?

Mr. Hamre. Ma’am, lots of things are going on simultaneously.
We had, as I said, back in 1990, there were 300 places in the coun-


94

Mr. Horn. OK. So if you have some, let us know. We would be
glad to help.

Well, we get down to the final panel, the very patient Inspector
General of Defense, with two of her deputies, so please come for-
ward.

Ms. HILL. It’s just me.

Mr. Horn. Have they gone?

Ms. HILL. They have been furloughed.

Mr. Horn. Oh, they have been furloughed. OK. You're telling me
the Inspector General's Office is nonessential in the judgment of
the Department of Defense?

Ms. HILL. Not completely, no.

Mr. Horn. OK.

[Witness sworn.]

Mr. Horn. The Inspector General has affirmed.

You know the ground rules. We put your statement in, and then
we would love to have you summarize it.

STATEMENT OF ELEANOR J, HILL, INSPECTOR GENERAL,
DEPARTMENT OF DEFENSE

Ms. HILL. Thank you, Mr. Chairman.

I am very pleased to be here. As you alluded to, I had planned
on bringing with me our two, I should say, in-house experts on
DOD financial management, Mr. Lieberman, who is the Assistant
Inspector General for Auditing, and Mr. Rau, the Assistant Inspec-
tor General for Policy and Oversight. However, they were both fur-
loughed, in accordance with the government shutdown plans ear-
lier today.

So I will try my best to give you our assessment of the situation
at the Department of Defense, with the caveat that I am not, by
trade, an accountant. I am, instead, a prosecutor and an investiga-
tor, formerly. But I have talked at length to our auditors, and they
have spent a great deal of time on this issue.

I do want to put the statement in the record and just touch on
a few points that I’ve listened to as you’ve asked questions of the
other witnesses.

First of all, I absolutely share your frustration at the state of fi-
nancial management in the Department. I have been at the De-
partment about 9 months now, and I have to admit that one of the
first things that I started to notice a pattern on, when I started re-
viewing the audit reports that were coming across my desk back
in the spring, after I got there, was that there was a very consist-
ent pattern in our reports of finding significant, not just minor
problems, but significant problems in the finance and accounting
systems at DOD.

I was frankly, at least at first, horrified to see that we were issu-
ing disclaimers and unable to provide opinions on financial state-
ments that we were required to audit under the Chief Financial Of-
ficers Act. Having been there now 9 months, I can tell you I’m be-
coming a little more accustomed to it, but I’m still not very happy
about it; I’m still very frustrated by it, as I know, Mr. Hamre and
the other witnesses are, and as you are, certainly.


Mr. Horn. OK. Proceed.

STATEMENT OF JOHN J. HAMRE, COMPTROLLER, DEPART-
MENT OF DEFENSE, ACCOMPANIED BY ALVIN TUCKER, DEP-
UTY CHIEF FINANCIAL OFFICER; AND RICHARD KEEVEY, DI-
RECTOR, DEFENSE FINANCE AND ACCOUNTING SERVICE

Mr. Hamre. Mr. Chairman, thank you very much. You are gra-
cious to invite. I might say, as I look around this room, you have
98 percent of all of the financial management talent in the Depart-
ment of Defense and in the General Accounting Office that focuses
on it. So it’s a testament, I think, to the importance that we give
to you and to this committee that we want to deal with these seri-
ous issues. And I personally appreciate very much your courtesy in
inviting me and then also ynekuding in the record important docu-
ments that I think fill out that record.

I have asked to join me today, Mr. Tucker, who was originally
going to be our witness, and he has a prepared statement, and I
know we would like to add that to the record. And I would also like
to introduce Mr. Richard Keevey, who is the Director of the De-
fense Finance and Accounting Service. I frequently say DFAS is
more than a four-letter word, although that’s usually what I only
hear are four-letter words about it. And if there are any questions
about DFAS, we would be delighted to answer them. I know he
would be glad to.

Sir, I got to the department a little over 2 years ago, and I re-
member a very important hearing that I attended that Senator
John Glenn had on your counterpart committee in the Senate on
problems in financial management. And I must say I never really
focused on it during the 11 years that I worked in the Congress,
focused on Defense issues. I never worried about how we did fi-
nance and accounting for the Department of Defense. And I was
startled at some of the things I heard.

My immediate reaction, as I think most Americans’ are, is how
they could be such a bunch of bums? You know, why would they
be so stupid to do things that way? Why would people be so wicked
to let these problems get out of control? And as I got over to the
office, and my first reaction was just to crash a lot of heads, and
we're going to certainly straighten this out, and I found out it was
a much bigger, more complicated problem. It would be an easy an-
swer if it was just slothful people or wicked people wanting to do
bad things.

That isn’t the case at all. Indeed, I found a department that was
working very hard, trying to overcome the systemic problems that
existed. So I set about saying, what are really the deeper, underly-
ing causes of this problem? How did we get into this fix? Because
the examples that Mrs. Maloney read, they are a little out of con-
text with the truth, but nonetheless it is true, we had, when I got
to the department—we didn’t even aggregate it at the time—over
$50 billion of problem disbursements. How did we get into this fix?

So let me go through a bit of that as context for what follows.
I think the first thing I’ve got to say is, we’re dealing with a de-
partment and 200 years of business practices which are not ade-
quate for today’s form of business. I tell the analogy—I’ve given
this to Secretary Perry—that when I got a review of our programs,


77

see the results of our efforts in terms of accurate and auditable financial state-
ments, and we still are dependent on many error-prone processes and systems.
Therefore, I welcome this opportunity to apprise you of the status of actions being
undertaken by the DON and DFAS ‘and our forecast of when their results shoul
be visible to you.

PRIORITIES

Making these changes requires an investment of resources—both people and
funds—by the DON and DFAS. As we try to make progress in all areas simulta-
neously, both organizations have had to set clear priorities for the use of their lim-
ited resources.

First priority for financial managers throughout the DON must be execution of
the ongoing program, This is essential to the day-to-day operations and readiness
of our forces and to thetr long-term recapitalization. Most DON Comptroller organi-
zations were staffed for this function alone. Recent changes in law and policy have
made this a more demanding task and require staffs to acquire new knowledge and
skills.

Second priority is correction of errors in our accounting system. We must do this
both to ensure that our funds are being spent appropriately and to avoid encumber-
ing the funds needed to execute the ongoing program. We are meeting this challenge
primarily with extra effort (overtime) from existing staffs and contractor support.

Third priority is making the systemic changes necessary to comply with govern-
ment-wide financial management standards and reporting requirements. This re-
quires changes in policies, procedures, and systems in the DON and in DFAS. It
also requires a long-term investment in the tools required by DON and DFAS activi-
ties to do their jobs correctly and efficiently. This work is being done primarily by
my immediate staff and DFAS.

‘ourth priority has been reviewing and correcting the financial reports that are
being generated from existing systems. This has been accorded a lower priority be-
cause—unlike priorities two and three, which make a permanent improvement with
recurring effects—it provides primarily a one-time improvement.

When I came on board 19 months ago, the DON and DFAS were putting signifi-
cant energies into improving reports for the DON’s Defense Business Operating
Fund (DBOF) operations. As a result of significant effort by the Naval Audit Service
(NAS), DON comptroller staffs, and DFAS, CFO financial statements for the DON’s
DBOF operations have improved each year since we began to prepare them in FY92.
T have provided your staff an analysis by the NAS of our progress. These efforts not
only helped us identify the systemic problems we had to eliminate but also improved
the accuracy of the reports themselves. As I alluded to above, significant further im-
provement in those reports is unlikely, however, until the underlying problems are
eliminated.

Similar efforts were not being put into financial statements for general funds, al-
though the Departments of the Army and Air Force have been actively involved in
this as part of the CFO pilot project. As the General Accounting Office (GAO) has
reported, significant errors have existed in financial statements prepared for
general funds in the past—specifically the SF 220 reports required by the Depart-
ment of the Treasury. These errors stem both from errors in the data (such as plant,
property, and equipment) provided to DFAS by the DON, from the inability of cur”
rent accounting systems to provide information required by CFO Act financial re-
Potts, and from errors in accounting data. Based on our experience with correcting

BOF financial statements, a considerable effort would be needed to improve the
accuracy of current general funds statements, Within available manpower, such an
effort could only come at the expense of efforts to improve the situation in the long
term, In March of last year, my staff and our DRAS Centers initiated efforts to pre-
pare to produce the CFO financial statements for our general funds that will be re-
quired by the GMRA for FY96 and beyond. Thus we have accorded priority to curing

e disease, not treating the symptoms.

STEPS FOR IMPROVEMENT

Of the many activities that will improve DON financial operations, there are four
that I consider to be key: organizing the DON for the task, consolidating finance
and accounting services in DFAS, standardizing and upgrading accounting systems,
and improving feeder systems and the quality of the data they contain.

1. DON Organization for Financial Management. Shortly before I came on board
the DON had changed the position of Principal Deputy Assistant Secretary of the
Navy (PDASN) for Financial Management from a military to a career position to
ensure continuity of leadership expertise at the top of the financial management


83

We're also working with DFAS to try to improve the quality of
the CFO reports. DFAS has been very helpful to us in instituting
monthly reconciliations and training programs to try to correct
some of these errors in the reports. We are trying to do a better
job of including performance measures, because that is a key as-
pect, if these are ever to be useful.

Frankly, I think I could put a 1-800 number right now in the
Air Force CFO reports and say, I’ll give you 50 bucks if you call
it, and it wouldn’t cost me a dime. They are not used right now in
the services. We need to find ways, and we’ve been experimenting
with our work and with our wing commanders and are continuing
an effort to make them more useful. We manage by budgets, not
by CFO reports, at the moment.

I have highlighted a few key initiatives. I think they are moving
us toward this goal of full compliance, eventually, with the CFO
Act and GMRA. Eventually, they will also improve the data avail-
able to our field commanders, and that is at least as important to
me. I think the initiatives are important, and they certainly will
continue to receive my attention, but, as both my colleagues have
said, we’re a long way off. If a journey of a thousand miles begins
with a single step, we’re beyond the first step, but the finish line
is still quite distant.

So with your help and perhaps your prodding, we will complete
that journey as soon as we can. And that’s all I have to say. I will
be glad to answer any questions.

(The prepared statement of Mr. Hale follows:]

PREPARED STATEMENT OF ROBERT F. HALE, ASSISTANT SECRETARY OF THE AIR
FORCE, (FINANCIAL MANAGEMENT AND COMPTROLLER)

Mr. Chairman and Members of the Committee:

Iam pleased to have this opportunity to testify regarding the status of Air Force
financial management and our efforts to comply with the Chief Financial Officers
(CFO) Act and the Government Management Reform Act (GMRA). I place a high
priority on improving financial management in the Air Force, and the Secretary of
the Air Force fully supports my commitment. Indeed, in a letter written last year
the Secretary stated that: “I am firmly committed to the goal of reforming financial
management systems in the Air Force.”

‘There are several reasons why the Air Foree must place a high priority on reform
of its financial management systems. We need financial management reform to pro-
vide better information, both to our field commanders and senior leaders. As this
Subcommittee knows well, we also need financial reform to comply with the CFO
‘Act and GMRA. Finally, we need to improve our financial management processes
in order to correct flawed practices such as disbursing funds from accounts that do
not have available obligational authority or paying contractors that have not billed
us. These financial “horror stories” erode the public’s confidence in us as good stew-
ards of their resources.

We have underway a number of initiatives designed to improve our financial man-
agement and move toward full compliance with the CFO Act and GMRA. In this
statement I will describe the efforts we have undertaken, document our progress to
date, and indicate further actions we plan to take. The Chairman's letter requesting
my testimony raised a number of specific questions, and I will answer them in the
context of this discussion of our reform agenda.

ORGANIZING FOR REFORM

One of the first things we did within the Air Force was to organize for financial
reform. That organization effort began with my own staff. We established a small
group of people to oversee our financial management reform efforts, designating
them the Financial Systems and Reporting Directorate (SAF/FMPS). Many other or-
ganizations within the Air Force are involved in reform efforts, but now we have
a single focal point at our headquarters.


UNCER SECRETARY OF DEFE!
100 CEFENSE PENTAGON
IASHINGTEN CC 70301-1100

ay 22

Honorable C. 4. 3il: oung
Chairman, Subcommittee on Nat:
Committee on Appropr:ations
House of Represencac:ves
Washington, DC 20513

nai Security

Dear Mr. Chairman:

on May 14, 1995, the Hasnington Post printed a startling
article about the condition of our finance and accounting
operations in the Department of Defense. I feel it is necessary
to write you about this article because it implies that the
Department's finance and accounting systems are so flawed and
error prone that you can’t trust the budget we have submitted to
you. That is flatly not the case, as = explain below.

Let me say at the outset that we do have serious problems in
our finance and accounting operations. Secretary Perry has given
me very specific direction to get our house in order, and as I
hope this letter will show, we are making good progress. No one
is hiding our problems and I am very willing to review them in
any detail you desire. But it is essential that these problems
be placed in a proper context. I feel that the Post article
failed to do that. Since you undoubtedly will hear €rom your
constituents about the problems, I must take this means to
provide you that context.

First, our accounting problems can be separated from the
makeup and quality of the annual Defense budget. While we have
serious accounting problems, our budget is based on best
estimates of future needs and expected costs. Further, it is
sed on the obligation of funds, over which there is strict
oversight. Those obligations reflect the avard of contracts for
goods and services. There has been very little dispute about the
accounting for obligations, i.e., for what is on contract.
Likewise, we have in place an elaborate system to determine
whether goods or services have been delivered. Rather, our
problems have concerned the matching of expenditures to
obligations, which are an important part of accounting, but a
less relevant factor in the development of budgets or the
Measurement of budget execution.

When I arrived, I learned that the Department had serious
problems in matching obligations and disbursements. These were
not the makings of ay predecessor. These problems, in varying
degrees go back 50 years to the founding of the Department.

6



il

CONCLUSION

In summary, Mr. Chairman, we are putting top priority on
auditing DoD finance and accounting operations, and we will
continue to emphasize this area even in the face of significant
downsizing of the DoD audit community. We also will continue
making every effort to keep this Subcommittee informed of our

efforts.

This concludes my statement and we would be happy to answer

any questions.

14


81

My overall impression is that people want to do the right thing but frequently are

hampered by labor intensive processes. The systems described above certainly will

facilitate compliance, but there undoubtedly are other steps we can take. Therefore,

T have tasked my Office of Financial Operations to initiate a business process Te.

engineering effort on the entire DON internal management control process.
CONCLUSION,

In my confirmation hearing, I was asked what I thought reasonably could be ac-
complished in the three years then remaining in this Presidential term. I responded
that I would be satisfied if we had developed a plan for improvement and begun
to implement it. I still believe this is a realistic assessment of the situation.

The DON and DFAS now have improvement plans well under way in every major
area of financial management. For its part, the DON is improving its organization
for financial management. DFAS is well along in the consolidation of financial man-
agement services for the DON. The centerpiece of our joint efforts is the selection,
upgrading, and deployment of compliant financial systems, where we are further
along than I had hoped. The final essential ingredient is the provision of accurate
data through modern feeder systems and a system of internal controls to ensure
their proper use. Here, a number of process and system improvements are underway
that will facilitate the provision of timely and accurate information. The result of
these efforts will be sound financial information for internal decision-making and
external reporting.

We need your support for the improvements we must make, and appreciate your
understanding of the time it will take to complete them.

Mr. Horn. Assistant Secretary Hale.

Mr. HALE. Mr. Chairman, Mrs. Maloney, I appreciate the chance
to testify also.

I am, like all of my colleagues, firmly committed to improving fi-
nancial management in the Air Force. You asked me to speak from
the heart, so will One of the major reasons I want to do that is,
I'm very concerned about the crisis of confidence in the Federal
Government and its employees.

You can see it in public opinion polls, which show that fewer
than one in eight Americans have a great deal of confidence in
their government. And I can see it in my own family. I have two
teenage sons, and I have a great deal of difficulty persuading Scott
and Michael that we are reasonable stewards of the public’s money,
even though I view that as one of my major jobs.

I don’t expect that this one thing will solve that problem, by any

means. It’s a lot larger than financial management, for sure, but
I think it’s a contribution I can make, and so I’m firmly committed
to trying.
So what am I doing? A lot of the same things you’ve heard about.
I will hit a few of the highlights. We, in the Air Force, didn’t have,
in my view, an organization that provided a focal point for financial
management reform. I have created a small group on my staff to
do that. I brought along two of them today, kept them off furlough,
for a short period at least, so they could be here, because, in my
mind, their contributions are very important.

We have established a senior oversight group. We call it the Fi-
nancial Improvement Policy Council. It’s trying to do some of what.
Helen is already doing in the Army, get senior Air Force leaders
aware of what we’re doing, because we need their participation.
And we have sought outside advice, affiliated ourselves with the Fi-
nancial Executive Institute, which is a group of CFOs from private
corporations, and I’ve found their advice already very helpful.

So much for organizational issues. Let me talk a bit about the
substance of reform efforts in the Air Force. In my view, the key


107

Corps of Engineers, Civil Works (Army Audit Agency Opinion)

Defense Security Assistance Agency (DoD IG Opinion)

MEASURING PROGRESS

Mr. Chairman, we recognize the frustration that
understandably occurs when Government agencies continually assert
that it will take several years to fix fundamental management
problems. At the present time, the DoD faces such criticism on
many fronts. The Secretary of Defense acknowledges that drastic
improvement is needed not only in finance and accounting, but
also in the equally huge, complex, controversial and troubled
procurement and logistics sectors. It is important to keep in
mind that the Department has been engaged for about five years in
fundamentally reengineering its management processes and the
thousands of automated or manual systems that support those
processes. In every area, this is a long term challenge and
readily usable and meaningful metrics for measuring progress can
be hard to develop. Certainly the annual audit opinions on year
end financial statements are one indicator. For the next few
years, however, it is unlikely that there will be a dramatic
turnaround from mostly disclaimers to clean opinions. In fact,
we have candidly reported that we do not foresee such a
turnaround happening until the statements for F¥ 1999, at the

earliest.

10


92

tion has to be written clearly and understandably, and all of those
things. So it’s more than just the financial operations. Again, we
are a byproduct of what everybody else does, if you will.

In direct response to a finance service, I’m not sure that that
would be the answer, quite frankly. We have recognized a need for
additional training, if you will, and we have undertaken some ef-
forts to provide that training. Granted, all of the downsizing, the
consolidations have had an impact on our work force, but I don’t
think that, once we get to that end state in terms of automation,
that we will need the number of people that we even have today.
But, again, we have to get there.

But I really don’t believe that a finance service, if you will, in the
sense that you're thinking of it, if I’m not mistaken, would nec-
essarily help us today. We know the problems. It’s a matter of get-
ting the time, of getting the dollars, and, in some cases, getting
agreement, quite frankly, on what the solutions are.

Mr. Horn. Well, that’s, I think, well said. I was sort of surprised
when you didn’t mention the people problems at the head of the list
of problems, when I asked the first question, because, I think, usu-
ally, when we run into one of these situations, it might be people
problems in getting there, but it’s also, for sure, people problems
getting out of where you are and trying to go somewhere else.

Ms. McCoy. Yes. And our joint reconciliation effort is a prime ex-
ample of that. It’s very labor-intensive, but we have been willing
to put forth the effort, and the people have been willing to do the
work. What we’re promising them is, hopefully, one day soon, you
won't have to do this manually.

Mr. Horn. Yes. But we need to have some future, and some
maybe alternative jobs, and maybe ways to get, say, from account-
ing into purchasing, or whatever it is.

is. McCoy. Yes.

Mr. Horn. I would love to see a little more cross-fertilization.
We've mentioned it to a number of people in the Pentagon about
the senior executive service. It seems to me we ought to have peo-
ple moving around a little more and get them out of the Pentagon
into other departments, and get them out of other departments into
the Pentagon. I mean, if you’re a general manager; you're a general
manager. There are certain skills there. And people in the execu-
tive service who have a lot of talent ought to have an opportunity
to pursue those on an upward mobility basis.

ecretary Christie, some thoughts on this?

Ms. CHRISTIE. Yes. Of course, in a way, with the creation of
DFAS, we did start a centralized activity, but as long as the money
flows to the service secretaries and they have the responsibility for
managing the obligation of those funds and making these financial
statements, we’re going to need some people who are our own.

And, of course, in the Navy, we have financial transactions going
on on ships at sea, so we have, inevitably, a certain component of
the financial community that will have to be specific to the serv-
ices. Other people have the same problem when they are in a de-
ployed situation.

I'm sorry John Hamre is not here, because he has been very in-
terested and very concerned about the career development. We had
a whole offsite for a day where we all got together and talked about


Mr. DES
thing done
morrow. I think Kick fied that moving fi
6 $20 rnillion ia w sbursement is certainly a good step.
Consolidating their accounting centers into fewer locations is 2
good step. They still need to train their people.

Mrs. MALONEY. But they still have 250 locations; right?

Mr. DESEVE. I would rather have them answer that. I don’t knew:
what the current number is.

Mrs. MALONEY. Is that correct, 250 locations?

Mr. Doparo. I believe that’s accurate, but I’m not sure. They ave
consolidating every year. I think the biggest step that they ha
de is starting now to prevalidate on those large payments of $
rillion or more, as they mentioned. That is having a positive effect
Now, they have to do most of that inanually, but it has also pointed
out where they have some problems. Most of the problems that
they have in matching that revolve around having to revisit either
contract modifications or additional obligational authority.

So I think they have started in the right direction in putting in
place a requirement that they always had, really, but didn’t follow,
which was matching the payment to the obligation before payment
was made. So they are starting to institutionalize that. There are
two other areas that they really need to move on. One is to stream.
line the contract procurement process, and they are trying to de
that now. And I think that’s central to doing this.

Mr. Horn. Now, in the testimony earlier, in the first panel, they
said that it would take them 1 year to come up with a simplified
form for their contract, a one-pager. Now, I don’t understand why
it takes 1 year. I would like to ask Hon. Ed DeSeve if he would
submit to the committee.

Mr, DESEVE. DeSeve.

Mr. Horn. DeSeve. Excuse me. Mr. DeSeve, it you would submit
to the committee a suggested, streamlined, one-page contract man-
agement form. Not that it’s the be-all or end-all, just your ideas
Not that you spend a lot of time on it, just one afternoon, when
you finish work, just put down your ideas, you know.

Mr. DESEVE. We don’t finish work at OMB till late in the
evening, Mrs. Maloney.

Mr. Horn. I just don’t understand why it takes a year to come
up with a simplified form. I really believe that, if | spent some time
on it, I could come up with a simplified form in a week, or at least
a work sheet from which we could try to consult with other people
and make better.

Mr. DESEVE. I’ll be happy to do that. I would like to work with
my colleague, Dr. Steven Kellman, who has been actively involved
in this area with DOD, from the OMB Office of Federal Procure-
ment Policy.

Mrs. MALONEY. I know. He’s done a fantastic job. In fact, we
worked with him on a procurement bill that had measures to help
the personnel and upgrade the personnel, and to streamline it and
make it more cost-effective.

So you mentioned they need to streamline the contracting. What
was the second point?



56

The problem—and your question of where we went wrong-
that, No. 1, the Treasury Department has for years accepted
ports from agencies that are known to be inaccurate. We have
put in place the independent financial audit mechanism to re!
agencies to answer questions and subject their accounting pr:
to some degree of scrutiny.

In my opinion, that was the major flaw: no one was checking ‘<
see whether or not the standards that were being promulgated, cx
that the agencies had themselves, were indeed followed. In fa
big finding out of almost all the financial audits done in the
Act now, basically say the agencies are net following their ex
procedures. They are not doing basic reconciliations with Treasi
They are not reviewing accounts. They are making adjustmen
their accounting records without adequate documentation. They
not conducting physical inventories.

I would like to make it clear, and hope we don’t get sidetrack:
{ think the policies and procedures are important, but they are
place. We're talking about the basic problems of compliance
discipline in executing those operations.

Mr. Horn. Well, it’s very well stated, but if you have the polic
and procedures, I guess I don’t understand why the old Bureau of
the Budget, and now OMB, has not cracked down on those depa.
ments that weren't following the procedures issued by a unit «:
Executive Office of the President.

I mean, I’m reminded of what President Truman said when Gen-
eral Eisenhower was about to become President. He said, “He's
going to give an order to somebody around here, and he will think
it’s carried out, because he’s been in the Army, and he will find,
6 months later, nobody has done anything.”

Well, it sounds like, 40 years later, nobody has done anyth:
until the 1990 Act, the 1994 Act. And all I can say is, 1
before the Second World War, GAO used to do audits
And we've gone through that before.

Mr. Doparo. That’s right.

Mr. Horn. Now you're off in the glorious program analysis, all
of which I favor, but maybe Sam Rayburn was right when he didn’t
want you to do it, and it didn’t happen while he was alive. And
maybe we need somebody that gets into the basic auditing.
is that what we’re thinking of in terms of these finan
ments?

Mr. Doparo. Yes.

Mr. DESEVE. Yes.

Mr. Horn. And we will turn it over to private auditors?

Mr. Doparo. No.

Mr. DESEVE. No.

Mr. Horn. You see, the Congress had never been audited since
1789. The Speaker said, “We’re going to have an audit. We want
to see what’s going on around here.” It cost a few million. On the
other hand, everything was looked over. We all, in our offices,
every Member, have a stack that high of the audit.

Mr. Doparo. Well, the structure that is in place now with the
CFO Act relies on the Inspectors General to either do the eudits
or to arrange to have the audits done for the 24 largest depart-
ments and agencies, and requires GAO to be the auditor for the



18

transportation pay systems. Besides data matches, Mongoose uses face-to-face inter-
views to verify retiree/annuitant claims.

Past incidences of fraud generally were made possible by deficiencies in our finan-
cial management systems and inadequate internal controls. Therefore fraud inves-
tigations have been used to identify and change practices that permitted the wrong-

loing.
Management Incentives

A fundamental aim of DoD reform is to more effectively use financial controls to
support desirable management incentives. For example, a key goal of the DBOF ini-
tiative has been to guide management decisions toward genuine cost consciousness,
by prescribing that all relevant data be included in the costs affecting those deci-
sions.

To encourage greater cost effectiveness, the Department is devising ways to track
budget expenditures relative to their associated outcomes, as required by the Chief
Financial Officers Act and the Government Performance and Results Act.

AupIT SCHEDULE

Mr. Chairman, the Under Secretary of Defense (Comptroller/Chief Financial Ofi-
cer and the Inspector General, DoD, have consulted and we are in agreement with
their audit strategy to perform audits which comply with Office of Management and
Budget requirements in support of the Government Management Reform and Chief
Financial icers Acts.

L understand that the Inspector General has been invited to testify and will pro-
vide much more detail concerning that office's anticipated audit coverage. I will only
reiterate that our respective offices have discussed those plans and we are in agree-
ment with their plans and projections.

CORRECTIVE ACTION PLANS

‘The overarching problem preventing a qualified or unqualified opinion on the De-
artment’s financial statements is that the accounting systems which support the
financial statements do not have an integrated general ledger or produce account-

oriented transaction files. Lacking a complete general ledger, the reported value for

fixed assets in the financial statements is derived from systems designed to manage
or physically account for those items. These management systems do not often inter-
face with the accounting systems and too often do not contain complete or reliable
financial information. Moreover, the accounting systems often do not generate trans-
action files supporting the assets accounts past the budgetary phase of the acquisi-
tion process. The Department has several initiatives directed at improving the inter-
nal control and accounting procedural deficiencies identified in the audit of its FY
1998 and FY 1994 financial statements. Some of the more significant deficiencies
include:
© The use of a variety of non-integrated data bases. These separate data bases
reclude the easy or reliable integration or interfacing of information from other
non-financial) functional areas—such as personnel, acquisition and logistics—
with the Department's finance and accounting systems.
Current finance and accounting systems often are not sufficiently flexible to
respond rapidly to changing customer bases, legislative changes, contingency
operations, management initiatives, requirements from other’ government
central agencies, or other changes.
Finance and accounting systems often do not include automated indicators
that measure, or are linked to, costs, performance measurements, or other out-
put measurements.
Finance and accounting systems lack a single standard transaction driven
general ledger—an essential ingredient for sound reliable financial reports.
In addition to the above, inadequate internal controls and undocumented audit
trails have contributed to unreliable financial data and exacerbated significant pro-
tural and systemic deficiencies. Weaknesses include the Department's difficulties
with:
* verifying and reconciling cash,
‘ consistently valuing and reconciling physical inventories to financial account
alances
* accurately reporting the value of property, plant and equipment, and
. reporting amounts in a consistent and timely manner.

This is due largely, but not entirely, to long standing systems problems. The con-

tinuing system problems remain a serious challenge to the Department—and real-

istically will require a number of years to correct. However, these audits also have


47

The DOD IG’s report on its summary of the major deficiencies that prevented the
development of reliable DBOF financial statements identified personnel as a major
problem.2? For example, it highlighted inadequate training and shortages of support
personnel as factors impeding effective DBOF transaction processing.

In May 1995, we testified 2? that ensuring that DOD has the appropriate number
of staff with the requisite skills is a key to turning Secretary Perry’s blueprint into
substantive improvements. Unfortunately, DOD has not made enough progress in
addressing these fundamental personnel issues. DOD needs to comprehensively as-
sess the personnel levels, skills, and experience necessary to effectively carry out
DOD’s financial operations.

However, we are encouraged by the DOD CFO’s recognition of the importance of
professional development for the Department's financial management workforce. In
August 1995, the DOD CFO established a Financial Management Community Exec-
utive Committee. The committee is chaired by the DOD CFO, and its members in-
clude the Director of DFAS and representatives from the military services’ assistant
secretaries for financial management. One of the committee’s planned initiatives is
to address the specific competency requirements for the Department's financial per-
sonnel, If successfully carried out, such initiatives may help strengthen the profes-
sional skills of DOD's financial management workforce.

Because of its importance to the overall success of DOD’s reform efforts, we plan
to take a closer look at DOD's financial management workforce needs. Specifically,
we will be looking at whether additional actions may be needed in (1) ensuring that
DOD has the appropriate number of staff with the requisite skills required to suc-
cessfully reform DOD's financial operations, (2) determining the appropriate train-
ing and experience requirements, and (3) developing and implementing plans to ad-
dress future financial management needs.

BUILD AN EFFECTIVE FINANCIAL MANAGEMENT ORGANIZATION STRUCTURE WITH CLEAR
ACCOUNTABILITY

One of the key objectives of the CFO Act is to establish a CFO in each agency
with the authority to oversee all financial management activities. While DOD has
established a Chief Financial Officer, we are concerned that DOD's CFO faces major
long-standing organizational barriers that will be extremely difficult to overeome in
making needed improvements. In presenting his blueprint for reforming DOD's fi-
nancial management, Secretary Perry accurately stated that “DOD's manifold finan-
cial management failures reflect an antiquated bureaucratic organizational struc-
ture coping unsuccessfully with the complexities of modern government and busi-
ness.”

For example, since the creation of DFAS in 1991, DOD has had conti prob-
lems in clarifying the relationship between DFAS and its customers—principally the
military services. DFAS was created to serve as DOD's “Accounting Service,” with
its Director reporting to DOD's CFO. However, DOD faces significant organizational
challenges, and accountability concerns remain. In our December 1993 report on the
Army's financial operations, we pointed out that the effectiveness of the Army’s fi-
nancial management was impaired as a result of the lack of clearly delineated roles
and responsibilities between DFAS and the military services. Most recently, in our
review of the Navy, we found that DOD still had not yet clearly defined or strictly
enforced accountability between the Navy and DFAS for the Navy's financial man-
agement and reporting operations, or for meeting the CFO Act's requirements,

‘The DOD CFO has issued a draft of a section of its financial management regula-
tions setting out detailed proposed roles and responsibilities among the various
DOD organizations involved in financial management. If effectively implemented,
including establishing individual accountability, the draft policy may help address
many of the failures to follow basic control procedures that we found. We have re-
cently recommended that this draft document, issued for comment in February
1995, be finalized as soon as possible, and that’a follow-up effort be established to
ensure its effective implementation.

In addition, the responsibility for many of the actions that will be needed to bring
about any major improvements in DOD's financial management resides with DOD’s
functional area managers, such as DOD’s procurement, personnel, and logistics
functions. The systems and procedures that are directed by these DOD functional
managers currently are relied on to provide substantial portions of the data that is

22 Major Accounting Deficiencies in the Defense Business Operations Fund in FY 1994 (Report
No. 95-294, August 18, 1995),

29Financial Management: Challenges Confronting DOD's Reform Initiatives (GAO/T-AIMD-
95-146, May 23, 1995).


51

Gene has identified, but think that we all have to move forward
and recognize where we need to go.

Systems are something we’ve talked a lot about today, and I will
be happy to answer any questions on those. OMB is making sure,
where we can, that adequate standards exist and that resources
are available.

I would be happy to answer any questions that you have.

[The prepared statement of Mr. DeSeve follows:]

PREPARED STATEMENT OF G. EDWARD DESEVE, CONTROLLER, OFFICE OF FEDERAL
FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

INTRODUCTION: THE UNIFIED CHALLENGE

Often in a system of government built on checks and balances, disagreements are
perpetuated to promote a particular objective or point of view.

1e objective of improved financial management in the Defense Department is not
the subject of such disagreements. The testimony you have heard so far today and
will hear later all points to the need for commonly arrived at solutions.

An important by-product of the Chief Financial Officers (CFOs) Act and its succes-
sor the Government Management Reform Act (GMRA) is the establishment of a
clear and common goal for success: an auditable financial statement with an un-
qualified opinion from the auditor. This goal in itself represents a capstone to the
Process of achieving it. In this case the process may be more important than the

juct.

Why? To produce an auditable financial statement, transactions must be properly
executed and recorded; the systems used to receive the data, classify it, transmit
and report it must be complete and efficient; the process by which cash and con-
tracts are handled must meet high standards of integrity.

These and many other requirements are inherent in the concept of auditability
and producing an “inqualified opinion. Time and time again throughout the govern-
ment, the audit process has uncovered weaknesses and prompted solutions.

Ina recent survey conducted by Coopers and Lybrand ‘on behalf of the Association
of Government Accountants, all 26 of the Inspectors General offices responding to
the survey indicated that they believed that internal controls had improved as a re-
sult of CFOs Act implementation.

As Assistant Comptroller General Gene Dodaro has noted, recent audits in the
Defense Department have identified the following:

* Serious problems in accounting for billions of dollars in annual disbursement.
Disbursements must be matched to prevent fraudulent or erroneous payments
and to assure that appropriations are not exceeded.

* The need to report future liabilities fully and clearly.

« Properly accounting for real property and equipment to guard against fraud
and waste.

* Accurate cost information is not always available to support decision making.
« Inventories must be integrated with other financial and operating systems to
minimize duplication and waste.

Given these audit concerns, it is incumbent on all of us to assist the Department
in finding solutions not just in identifying the problems. None of us can be consid-

to have completed our tasks until the financial management of the Department
meets the standard of integrity established by producing an audited financial state-
ment that can assure Congress and the general public that the Department is on
the path to an unqualified opinion. This is the unified challenge that we face.

THE OMB ROLE IN ASSISTING DOD

Just as GAO’s role is primarily that of auditor, OMB’s role is primarily that of
policy setter. Together with Treasury, who receives and records information govern-
ment wide, OMB and GAO have been providing various forms of assistance to DOD.

The recognition that the CFO Act would require Federal accounting standards led
to the Memorandum of Understanding among OMB, GAO, and Treasury that estab-
lished the Federal Accounting Standards Advisory Board (FASAB).

DOD has been an active participant in FASAB and its needs and views have
shaped the Board’s deliberations. DOD took cognizance of the Board’s standard,
“Entity and Display” and applied its erteria in identifying components that would
prepare separate stand-alone financial statements in addition to the agency-wide
statements required by GMRA. Entity and Display suggests that an agency should


80

ing on the number of interfaces that must be established with feeder systems and
the suitability of the hardware suite at the site. Site-by-site surveys have been nec-
essary.

Finally, it is essential that plans for accounting systems be coordinated with plans
for the systems with which they must interface in the acquisition, logistics, and per-
sonnel communities. Each of these communities also are modernizing their systems,
and we must ensure that we retain electronic interfaces (or establish them where
they do not now exist).

On the bright side, however, taking the time to study the problem thoroughly had
led us to conclude that we can use the same system in several business areas. Thus
where the initial Board decision would have resulted in ten systems in DON DBOF
business areas, we now believe as few as six may be adequate to meet our needs.

Exhibit 2 shows the plan for consolidation of DON DBOF accounting systems. As
it shows, we have reduced from 34 in FY92 to 29 today, and we eventually will have
at most eight systems (possibly only six). Although preliminary estimates are that
deployment will not be completed until 1999, we are working with DFAS to inves-
tigate ways to accelerate deployment.

Defense Business Operations Fund
‘System Consolidation Strategy Summary

Fiscal Fiscal Fiscal ‘Fiscal’ = ‘Fiscal ‘Fiscal’~=— ‘Fiscal’ ‘Fiscal Fiscal,

Year Year’ = Year Year, Year Year, Year’ Year Year

1992 1993 1994 1995, 1996 1997 1998 1999 2000
Systems Consolidated 2 sos fl 1 30 0 6 6 9 oO
Systems Remaining ee MB BT a 8

4, Feeder Systems and Data. Financial statements can only be as good as the data
in our accounting systems. Thus deployment of compliant systems alone is only part
of the solution. ile DFAS is the source of most data on disbursements, the DON
is responsible for the entry of obligation data; still makes some payments; generates
the data on most reimbursable transactions and receivables; and is responsible for
maintaining and providing data on inventory, on plant, property, and equipment,
and on contingent liabilities in areas such as contracts and environmental cleanup.
Fortunately, a number of actions already are underway that will improve the accu-
ray of data that originates within the DON and permit us to transmit it electroni-
cally to

© acquisition community is developing a DOD Standard Procurement System
(SPS). SPS will include contract writing and modification and contract management
functions. It will draw from a data base into which we also can electronically link
financial management systems. This will permit data to be entered only once and
used by both the acquisition and financial management communities, eliminating
many of the sources of error in current systems. We plan to begin deployment of
SPS at DON activities in FY98.

DFAS has selected the Defense Property Accounting System (DPAS) to be the
DOD standard for maintaining plant, property, and equipment (PPE) records. The
Navy is now conducting a pilot test of DPAS at the Fleet Industrial Supply Center
in Norfolk. In as many cases as possible we will attempt to deploy DPAS along with
new accounting systems to minimize the number of interfaces that must be built
to non-standard PPE systems. We also will insist on a cleanup of existing PPE data
as DPAS is deployed at individual sites.

One of the changes the DON and DFAS are making to reduce the incidence of
problem disbursements is implementing prevalidation for reimbursable orders with

BOF activities. We have developed the software necessary for DBOF sites to access
STARS records to “prevalidate” an order before billing it. This capability has been
successfully implemented at six Naval Aviation Depots, the Naval Air Warfare Cen-
ter Aircraft Division, and the Naval Research Laboratory. Deployment should be
completed at the remaining 24 DBOF sites by June of 1996,

e Navy is developing a Navy Single Integrated Personnel System (NSIPS) for
field-level data entry and query for personnel data for all active, reserve, and retired
personnel. This system will provide the interface with the DOD standard military
pay system to implement the principle that personnel events should drive pay.

systems by themselves do not ensure accurate data, however. For that we must
rely on individuals and our system of internal management controls. Numerous in-
ternal and external audits have identified control deficiencies, but these usually re-
sult from a failure to follow established procedures not from a lack of them. We need
to understand why this is happening and what we can do to improve the situation.



13

from $50 billion to $20 billion, and we still have a way to go, obvi-
ously.

Now, during this time, we've also put some policies in place that
say, “You've got 180 days to work this out. And if you can't find
the obligation during a 180-day period worth of research, you've got
to now post an obligation against it.” So we're trying to close that
loop between our accounting systems and our finance systems.
We've got a long way to go, but we are making progress as a de-
partment.

Now, how close are we to complying with the Chief Financial Of-
ficers Act, with auditable finance statements? That’s a question
that you need to ask the Assistant Secretary for Financial Manage-
ment for the services that are here, and you have all of the chief
principal leaders for the services here today.

It’s an uneven picture, and we’re a long way away, but we are
making progress. Will we have certified statements without dis-
claimers tomorrow? Heck no. We’re a way away from that, but we
are making progress. We need to do better, and I would suggest
that you direct that question to the assistant secretaries that are
coming in the next panel. We’re making some progress, sir.

Sir, let me end with that. And I would like to answer your ques-
tions. I’ve got two people who are much more expert in details than
I, who might be able to answer things that you have specifically.
And some of the charges that were made previously, for example,
in the Post article, the facts weren’t wrong; the context was totally
off. So I would like to clarify that. Maybe my letter will do that,
that was put in the record. I would be glad to answer any ques-
tions, sir.

[The prepared statement of Mr. Tucker follows:]

PREPARED STATEMENT OF ALVIN TUCKER, DEPUTY CHIEF FINANCIAL OFFICER,
DEPARTMENT OF DEFENSE

Mr. Chairman and members of the Committee.

Thank you for the opportunity to discuss with you financial management in the
Department of Defense (DoD) and the Department's efforts to implement the Gov-
ernment Management Act. I would like to address those issues you expressed inter-
est in when inviting the Department to testify before this subcommittee.

ELIMINATING PROBLEM DISBURSEMENTS

First, I would like to discuss the issue of problem disbursements within the De-
partment of Defense. Problem disbursements in DoD financial operations occur
when an expenditure is not reconciled with official accounting records. On May 5,
1995, and June 30, 1995, Dr. Hamre, the Under Secretary Of Defense (Comptroller)
and Chief Financia! Officer advised Congressman Clinger of the actions the Depart:
ment had recently taken and those the Department would take to resolve problem
disbursements. I would like to speak specifically to two areas, Unmatched Disburse-
ments and Contractor Overpayments.

Unmatched Disbursements. The Department of Defense aggressively is pursuing
the matching of its old disbursements to proper obligations. In order to be success:
in these efforts, the Department must be able to correct its records when an error
is found. Thus, if a disbursement initially is charged to the incorrect obligation or
appropriation, the Department must be able to correct that error and charge the
proper obligation or appropriation. Such corrections are not difficult when only cur-
rent or expired appropriations are involved. However, a substantial portion of the
Department’s obligations that have not yet been matched to the proper obligation
involve appropriations that have been canceled. Thus, it is imperative that, for dis-
bursements made before the cancellation of an appropriation, the Department be
able to make corrections involving appropriations that have been canceled.


55

ual used to note that the Bureau of the Budget, the predecessor of
OMB, had some responsibility with regard to standards, in conjunc-
tion with the General Accounting Office, in terms of what depart-
ments and independent agencies did in their accounting processes.

What went wrong, when, in the sense, did this happen when we
moved from the Department of War and the Department of the
Navy into the national military establishment, in 1947, and then
the Department of Defense in 1949? Where did this thing get off
the track?

Mr. DESEvE. Let me go back and separate the question into two
parts. One is the question of standards.

Mr. Horn. Right.

Mr. DESEVE. The standards issued by GAO, the standards issued
by OMB, compliant with law, because the first thing, in any audit,
you look for is compliance with laws and regulations, took the laws
for appropriation accounting, as the Congress passed them, related
to the appropriation account and the ability to calculate the obliga-
tions and the outlays, and so on, and said, “Here’s how you do
that.” Congress never asked, until last year, for a full accrual set,
if you will, of accounting, certainly on an agency and consolidated

asis.

That’s what we’re doing now. That’s the process that we’re going
through in producing the standards with PASAB, under the joint
memorandum of understanding. And we will followup, at OMB,
with what we call Form and Content, telling them how to put their
financial statements together, and finally the audit bulletins that
we put out. GAO has a similar process, as well.

So we're really trying to respond to the way Congress has asked
that accounting be done. And we couldn't applaud more the stand-
ards set out in GMRA. We think they are terrific—and the CFO
Act—we think they are terrific.

Mr. Horn. I would have thought, though, when you had some
standards developed—granted, they might not result in the full
balance sheet, but if you did it right from the beginning, in terms
of processes, I would think it would have been a much easier con-
version, given the rise of the tremendous number of expenditures
of Defense.

As I remember, in 1949, Louie Johnson had a $3-billion budget,
just before the Korean War, $1 billion for each service, which is,
you know, the thoughtful thinking of the Secretary of Defense at
that time.

Mr. Doparo. Mr. Chairman, just to give our historical perspec-
tive here a bit, really a lot of the foundation for some of what we’re
talking about today was laid in 1950, in the Budgeting and Ac-
counting Act. And following that process, GAO did promulgate
some accounting standards and principles for the Federal Govern-
ment. The problem was, they weren’t viewed as a consensus set of
standards, although a lot of agencies did put them into their own
policies and procedures, and many agencies now do have some ac-
counting principles and standards that they follow.

We are now talking about coming up with a set of accounting
principles and standards that people can agree upon, that are rel-
evant to decisionmakers, and really move us into a new age of Fed-
eral reporting that is much more timely and will meet user needs.


2

A company in Van Nuys, CA, wrote to the Defense Finance and
Accounting Center in Columbus, OH, asking for $3.4 million which
it was due pursuant to a Navy contract. “Oh, no, the center officials
told the Navy contractor. We actually owe you $11.1 million under
the contract, and here is your check.”

That was 1992. It took until last month for the center to remedy
this gross error, to request that the overpayment be returned. If a
corner store operated that way, it would soon be out of business.
I hope we hear some better news than stories like this, this after-
noon. With shrinking budgets, strong financial management is
needed more than ever to make sure every dollar works to main-
tain the effectiveness of our Nation’s armed forces.

Today’s session will focus on steps the Department of Defense is
taking to strengthen its management control. Specifically, we will
examine the department’s compliance thus far with two laws de-
signed to restore fiscal accountability: the Chief Financial Officers
or CFO Act of 1990 and the Government Management Reform Act
of 1994, The second law, GMRA, which is the Government Manage-
ment Reform Act, I believe, requires the Department of Defense
and other executive branch agencies to produce auditable financial
statements beginning with fiscal year 1997.

Recent reports by the General Accounting Office and Office of
Management and Budget identified problems and recommended
changes to the Defense Department’s financial management sys-
tems. In this hearing, we intend to review the DOD’s progress in
implementing those recommendations.

ur witnesses today come from the Office of the Secretary of De-
fense, the military services, the General Accounting Office, and the
Office of Management and Budget. Dr. John Hamre, the Depart-
ment of Defense Under Secretary/Comptroller/Chief Financial Offi-
cer, will set the stage for us on panel one. And I am conscious of
the time; Dr. Hamre is going to have to leave here about 20 of or
15 minutes of 2 to make other commitments.

Then he will be followed by his principal deputy in the financial
management area. Then Gene Dodaro of the General Accounting
Office and Ed DeSeve of OMB will summarize their agencies’ re-
ports on Defense’s problems. Next, the Army, Navy, and Air Force
Assistant Secretaries for Financial Management, and the DOD
Comptroller will update us on their services’ recovery plans. We
will conclude with an overall assessment by the Department of De-
fense Inspector General, Eleanor Hill.

Ladies and gentleman, we thank you all for joining us. We do
have a tradition on this committee that we swear in all witnesses.
And we also have the rule that if there is a written statement—
and I know some of you have it; some of you don’t—by prearrange-
ment, that statement is inserted in the record after we introduce
you. We would like you to summarize in 5 minutes the written
statement, and then we will have more time for questions.

So if you will all stand and raise your right hands.

[Witnesses sworn.]

Mr. Horn. Note to the clerk that all three witnesses affirmed.

Dr. Hamre, we welcome you here today. We realize this is not
your problem over the years. On the other hand, you’re going to be
the one who is going to solve the problem.


72

DOD ACQUISITION AND FINANCIAL MANAGEMENT REVIEW TEAM

Army acquisition and financial management personnel have been working with
the Office of the Under Secretary of Defense for Acquisition and Technology, the Of-
fice of the Under Secretary of Defense (Comptroller), the Defense Finance and Ac-
counting Service, the Defense Information Systems Agency, and the Navy and Air
Force to eliminate problem disbursements. The DoD Acquisition and Financial Man-
agement Review Team recommended a total of 48 mid- and long-term improvements
to eliminate problem disbursements and to implement approved policy changes, sys-
tem updates, and electronic interfaces to support this effort. Electronic data inter-
change (EDI) is the single most important application that will lead to success in
this overall effort. The electronic transfer of information from contract writing sys-
tems to contract payment systems is a critical component of the long-term solution
to problem disbursements.

SUPPLY REQUISITION AND ACCOUNTING

Working with the Deputy Chief of Staff for Logistics, we are conducting a busi-
ness process review of the existing logistics and financial processes to requisition
and account for supplies. By the end of this month, we will identify a best business
process, and we will revise and standardize our policies and procedures. This will
include the interface of the logistic communities supply system with the finance and
accounting system.

MILITARY PAY AND PERSONNEL SYSTEMS

In a joint effort with the Assistant Secretary of the Army for Manpower and Re-
serve Affairs and the Soldier Support Institute, a personnel finance business process
reengineering team is reviewing military personnel and pay, with the goal of inte-
grating the pay and personnel systems, Final recommendations are scheduled for
January 1996, In the interim, systems changes to place a total of 93 pay related
events into the Army military personnel system are scheduled for completion over
the next 24 months. These changes will provide for an interface between the person-
nel and pay systems.

UNIT COMMANDERS FINANCE REPORT

Through our joint efforts with the Deputy Chief of Staff for Personnel, on August
10, 1995, we implemented a mandatory requirement for unit commanders to review
the monthly Finance Report and return a certified copy to finance (within 5-10
days), certifying the accountability and status of all soldiers in the unit. This action
will assist commanders and the finance and personnel communities to identify any
“ghost” accounts and correct soldiers’ entitlements and allowances in a timely man-
ner.

INITIATIVE TO REDUCE OUT OF SERVICE DEBT

Today, one out of four soldiers separates from active duty owing the Army—as
a result of such things as overpayment of pay, allowances, leave, bonuses, transpor-
tation costs, or travel advances, or for liability for lost or damaged government prop-
erty. In too many instances, we out-process a soldier and pay a final settlement be-
fore all relevant data is available. The debt is more difficult to collect after the sol-
dier separates and, in many cases, the cost to collect the debt may exceed the
amount to be recovered. To compensate for this late data collection, a new separa-
tion checklist and procedures have been developed that focus on debt avoidance by
requiring a more rigorous, standardized installation clearance process. Soldiers proc-
essing a completed checklist will receive 100 percent of all monies due at separation.
Soldiers processing an incomplete checklist will receive 65 pereent of final pay,
pending verification of outstanding debts. Army wide testing of this new separation
checklist policy and procedures began on November 1, 1995.

ANTI-DEFICIENCY ACT VIOLATION CASES

We have implemented a program to reduce the number of open Anti-Deficiency
Act (ADA) violation cases. This included communicating the importance of expedited
processing of ADA cases by Major Commands, increasing emphasis on attending fis-
cal law courses, and coordinating with the Office of the Army General Counsel to
streamline the administrative and legal review process and expedite final approval.
Our efforts have resulted in reducing the number of open Army ADA violation cases
from 33 to 5—an 85 percent reduction.


27

many of the people who are making payments against these con-
tracts are account clerks or very junior level accountants.

Mr. Horn. Does that make sense?

Mr. KEEVEY. That is a problem. What we're doing is try to work
with the contract acquisition community to try to simplify the con-
tracts, specifically as it has to do with the finance components of
it. For example, a simple thing as to consolidate and put in one
place of the contract, or some kind of cover sheet, the critical finan-
cial data that an account clerk needs to look against. That is not
the practice at the moment; that has not been the practice in the
past and, frankly, needs to be corrected.

Mr. Horn. Well, are you on the way to correcting that? When
will it be corrected? It seems to me that’s a major problem.

Mr. KEEVEY. Yes. I think, in all honesty, the correction to that
aspect that I just spoke to, that is, simplifying the contracts, has
not been fleshed out in the correct detail with the acquisition and
contract yet. I would say we’re at least a year away before that
would be completed. In the meantime, what we need to do and
what we're working on is to develop technology which we had that
we would check, before we make a payment above a certain
amount, with the underlying accounting system, before we make
the payment out the door.

This begs the question as to the competency of the clerk, but at
least—we didn’t do this in the past; we will do this in the future—
that is, check the accounting record before we make the payment
out, a sort of basic check that one would think that one would nor-
mally do, but had not been the practice.

Mr. Horn. I yield to the ranking minority member the remainder
of the time. I’m going to go vote and then be able to come back and
preside.

Mrs. MALONEY [presiding]. I’m going to have to leave in 5 min-
utes to go vote, too.

Since 1990, GAO has made over 350 recommendations to resolve
DOD’s financial crisis? How many of these 350 recommendations
have been implemented?

Mr. HAMRE. Maybe you can give me the list of the 350. I'll be
glad to give you a response for the record, Mrs. Maloney. I don’t
know.

Mrs. MALONEY. No. 1, they recommended to you in 1990 that
there were serious problems in accounting for billions of dollars in
annual disbursements. And they stated that without the proper
matching, the fact that they were in separate offices and not
matched up at one point or at one time, electronically or any other
way, they stated that there were a lot of areas for fraudulent or
erroneous payments. They certified, through audits and others, the
CFO audit, that DOD had paid billions of dollars without even
being able to determine exactly what was purchased.

I just have to say that, in this Congress, every other day there’s
a speech on the floor attacking welfare fraud, Medicaid fraud, Med-
icare fraud. But the amount of fraud that’s documented in this
GAO report.

Mr. Hamre. I don’t think it’s documented. I think it’s asserted.

Mrs. MALONEY. Well, the CFO audit that they cite.


70,

will continue to be unable to express an opinion. We have been working with the
DoD Comptroller, the Defense Finance and Accounting Service, and the other Mili-
tary Departments for some time to bring about the necessary comprehensive re-
forms of our financial management systems and processes. We believe a great deal
of progress has been made, but it will take years to achieve the streamlined and
reliable systems that are our goal.

Although the state of our accounting systems is the single greatest factor cited
in the wait opinions, other negative findings proved to be within the Army’s ability
to resolve. Audits of the first Army financial statements, and the associated hear-
ings and media reports, were often—and in some cases, justifiably—harsh in their
criticism of the Army as a steward of public resources. The Army responded by get-
ting back to the basics, by bringing together key financial and program management
personnel to resolve problems one by one. We have been and continue to be involved
in a number of disciplined efforts to improve our management practices, ensure fis-
cal responsibility, and promote sound stewardship—actions that will not end, even
when we do have integrated functional and financial management systems.

We are now preparing our financial report for Fiscal Year 1995—our last year as
a pilot before full implementation of CFO reporting under the Government Manage.
ment Reform Act of 1994, Looking back over the four years of reporting experi-
ence—and to the future, as we prepare to support consolidated DoD financial report-
ing—we in the Army have learned that the CFO Act is not just about preparing
financial statements, or even audits. The statements and audits are the means to
an end—and that end is the integration of financial and functional information, not
only in systems and data, but in all aspects of our day-to-day management.

Without doubt, the single greatest benefit the Army has derived from its experi-
ence as a CFO Act pilot is our recognition and acknowledgment of the differences
between systemic and management problems—between problems which require
DoD-wide efforts and will take years to resolve, and those which we in the Army
can, and must, take immediate responsibility for. We have formed strong partner-
ships with functional proponents throughout the Army to resolve internal problems
with how we safeguard and account for the assets entrusted to us. I believe we have
been very a ssive in our efforts to find new and improved ways of doing business
with the tools and resources that are available to us today.

MANAGEMENT CONTROLS

One of the most immediate outcomes of our first audits under the CFO Act audit
was the restructuring of our management control process. The GAO auditors found
that, although the Army had a ood management control policy and program frame-
work, commanders and managers in the field often simply were not using it. In re-
sponse, we initiated a self-assessment of our management control policy and proc-
ess, including feedback sessions with Army managers and an independent assess-
ment by a private accounting firm. This self-assessment confirmed the GAO’s find-
ings and pointed out several specific problems with the process—too much cen-
tralization, too little flexibility for commanders and managers, and little sense of
“ownership.” The checklists that were used to evaluate controls were excessive in
number and length, confusing in format and style, and filled with minor procedural
requirements.

ased on this self-assessment, we developed a restructured management control
process that became effective on October 1, 1994. The new process reduces workload
and promotes ownership and accountability by limiting required evaluations to key
management controls, by providing maximum flexibility to commanders and man-
agers in conducting evaluations, and by raising the level of responsibility for certify-
ing evaluations. Our new process encourages the use of existing review mecha-
nisms—as does the new Office of Management and Budget (OMB) Circular A~123
(“Management Accountability and Control,” June 21, 1995)—thereby eliminating re-
dundant efforts and embedding management control evaluations in routine manage-
ment processes.

I believe our revised approach to management controls and compliance with the
Federal Managers’ Financial Integrity Act is the strongest in DoD. It is based on
the fundamental philosophy that all commanders and managers have inherent re-

sibility for management controls—for ensuring that operations are effective and
that resources are protected and used appropriately. Our process supports fulfilling
that responsibility by providing a process for conducting detailed evaluations of key
management controls and for reporting material weaknesses in management con-
trols.

To provide effective oversight of this process, the Army Audit Agency routinely as-
sesses the effectiveness of management controls in the course of every audit and ex-



63

Part of the problem is reaching agreement within DOD on what
the system should be, No. 1, and that has been a bit of a difficult
area. Right now they are trying to go to one system for each serv-
ice.

Mrs. MALONEY. Why should they have a different system for each
service? That’s just going to make it more difficult to compare pro-
ductivity, cost-effectiveness, and protect taxpayers’ dollars for the
uses they are expected to be spent on.

Mr. Doparo. Well, we’ve got some questions about the strategy
that DOD is pursuing. And I don’t want to pretend that I’m defend-
ing DOD strategy to make their financial systems improvements.
I’m just pointing out what they are planning to do. We’re planning
to look at their strategy in more detail and also look at their capa-
bility to develop software, which we’ve got some concerns about, as
well.

One is, what system do you want to put in place? And No. 2,
what capacity do you have to deliver that? We have questions
about both, and we're looking at those issues.

Mrs. MALONEY. Could you and Mr. DeSeve’s department, OMB,
possibly come up with a proposed system that might take care of
the Air Force, the Army, and the Navy? After all, we’re not talking
about what they are doing to defend the country; we’re talking
about how they procure and handle their books, their accounting.
I don’t see one reason why they have to have different accounting
systems, and I don’t understand why they need 250.

In fact, the chairman and I, earlier, we did have one bill attached
to the reconciliation bill that I think was a fine bill to save tax-
payers money, and that was to improve the collections. We worked
very closely with OMB and with Treasury, and with really all the
departments in government, to centralize collections with ways to
bring the money into the government. Everybody said you couldn’t
do it. We devised a system, and we did it.

What I would like to respectfully request, because I’m very inter-
ested in this, because I personally feel that the cuts that we’re hav-
ing in certain areas—I won’t go into them, but education and oth-
ers—that if we managed our other systems better, then we would
have more dollars for police officers and teachers and other things
we need. And certainly we shouldn’t be wasting taxpayers dollars
through mismanagement.

I think we could probably save a lot of money if we moved into
the computer age in the accounting systems of the Department of
Defense. Computer systems can contain a lot of information, to go
back to Mr. DeSeve’s example of New York City being a $25-billion
budget. It’s really a $31-billion budget. But computer systems, once

ou have a standard, it doesn’t matter whether it’s $25 billion or
250 billion, if you’re putting it into a computer system that can
manage it.

Maybe what we should have been doing, Mr. Chairman, instead
of spending $8 billion on weapons systems that even the Pentagon
says they don't want, and the Joint Chiefs of Staff said they didn’t
want, and the President doesn’t want, maybe investing in a cen-
tralized computer system that is jointly managed by the three serv-
ices, so that you know who is being paid for what, for how much,
and whether there is an overpayment.


20

and procedures, the selection of non-DBOF (i.e. appropriated fund) accounting sys-
tems, the need for a standard budget and accounting code architecture, travel re-
engineering, and the implementation of a Defense Property Accountability System.

sfense Business Operations Fund Corporate Board. The Board monitors imple-
mentation and operation of the Fund, including policies, rates, cash flow analysis
and criteria for inclusion of business areas in the Fund. To assist it in its task, the
Board has established separate subcommittees to address areas such as cost reduc-
tions, policies and performance. Each of these subcommittees are specifically tasked
to bring to the Corporate Board proposed solutions to specific problems, or to pro-
vide recommendations for improvement.

The Department also is making advancements in remedying inadequate account-
ing support for the Defense Business Operations Fund. The Department has identi-
fied system requirements for supporting the Defense Business Operations Fund, and
determined which existing systems best support those requirements. This will allow
DoD to migrate to fewer Defense Business Operations Fund systems, and reduce re-
lated systems costs.

Reduction, Clarification and Reissuance of Policies. Numerous nonstandard finan-
cial management policies had been promulgated in the past within the Department.
This condition existed because, in part at least, when the Office of the USD (Comp-
troller) issued Policy jidance, that guidance was not always widely disseminated
by the various DoD Components, Instead, the DoD Components frequently inter-
preted the guidance and published internal implementing procedures. ‘Too often, the

‘omponents’ interpretation and implementing procedures resulted in the inconsist-
ent application of DoD policy. In Eesponse to this situation, the Department has
commenced an effort to issue the “DoD Financial Management Regulation” for use
on a DoD wide basis. The regulation, which includes both policies and implementing
procedures, promulgates guidance involving the Department’s appropriated funds,
its Defense Business Operations Fund, as well as its other funds, and replaces a
myriad of existing USD (Comptroller) policy guidance, clarifies existing guidance
where appropriate, and includes additional guidance as needed. In conjunction with
the resolution of Component unique system issues, separate financial management
policy and procedural issuances of the DoD Components are being eliminated and
incorporated into the Regulation as appropriate. This effort is eliminating some
70,000 pages of sometimes conflicting guidance and providing the Department with
a sound basis for achieving standard policies and procedures.

STATUS OF UPGRADING FINANCIAL SYSTEMS

DFAS, in coordination with the Defense Logistics Agency (DLA) are developing
systems to replace the current contract administration and payment entitlement
system for Contract Administrated Service (CAS) contracts. The current system, the
Mechanization of Contract Administration Services (MOCAS), is to be replaced by
a new system. The finance module that will be deployed will be called the Defense
Procurement Payment System (DPPS) and will handle the entitlement functions for
the CAS and vendor type payments. In addition, DFAS and DLA are collaborating
in the establishment of a single, shared data base which will serve as a repository
for procurement and financial related data. This data will be used to perform the
acquisition, contract admii ion and finance and accounting missions more effi-
ciently and accurately. The initial module of this data base is to be deployed in

In the area of General Accounting, DFAS Centers and their components have
identified interim migratory systems. As these systems become operational, DFAS
will be able to improve markedly its accountability and reporting capabilities, and
save resources by using fewer systems and consolidating its accounting operations.
These interim migratory systems will incorporate a standard general ledger, stand-
ard budget and accounting classification , key accounting requirements, Federal
Managers’ Financial Integrity Act requirements, audit report recommendations and
comply with the CFO Act. We will also ensure that our upgraded systems interface
and support systems-such as those for logistics, procurement, and contracting. The
DFAS has instituted a Strategic Business Plan concept containing detailed Tactical
Plans of Actions and Milestones for each system to adequately address and access
progress toward our goal.

ABILITY TO PRODUCE AUDITABLE STATEMENTS.

‘The GAO and DoDIG have been auditing DoD financial systems and reports for
decades, so we believe there is no question that DoD financial data is auditable. His-
torieally the finaneial information was used to report on budget execution as well
as for budget justification use; and DoD has produced the necessary reports year


37

technology that will limit that problem; that is, of making overpay-
ments and of making unmatched disbursements and NULOs. I
would say that that problem is being addressed every day.

Mrs. MALONEY. Why can’t we move to general standard account-
ing practices?

Mr. KEEVEY. You alluded to that earlier.

Mrs. MALONEY. Yes.

Mr. KEEVEY. State and local governments, for many years, pre-
pared financial statements under generally accepted accounting
principles. The Federal Government never had that criteria or in-
terest. Not until the CFO Act was passed was there a requirement
to prepare financial statements. The Federal Government budget
structure, particularly the Department of Defense, was based upon
systems that only worried about appropriation accounting, obliga-
tion accounting, not developed to prepare financial statements to
meet generally accepted accounting principles.

What we have underway now is a program to produce financial
statements that meet generally accepted accounting principles. The
systems were simply not designed to accomplish that. And I think
that’s probably true in most Federal agencies.

Mrs. MALONEY. OK. But your systems comply with the Comptrol-
ler General’s accounting principles. My basic question is, you're
telling me that States and cities comply with it, but the Federal
Government never has.

Mr. KEEVEY. That’s correct. There was never a requirement to do
so until the CFO Act.

Mrs. MALONEY. OK. I understand completely that you have not
been required to do so. Due to mismanagement—I call this mis-
management, overpayments, missing or unaccounted money, this is
mismanagement. My question to you is maybe we should require
general accounting principles.

Mr. KEEVEY. We do.

Mrs. MALONEY. Not the same standard general accounting prin-
ciples that are the accepted ones for the private sector, for New
York City, and New York State. You’re operating under different
accounting principles.

Mr. TUCKER. When the CFO Act was passed, it was recognized
that—and I think it was put into the GMRA—it was recognized
that the Federal Government needed somewhat different account-
ing standards. I sit on the Federal Accounting Standards Advisory
Board. We are developing standards for the government, account-
ing standards for the government, that are being approved by
OMB, GAO, and the Treasury.

We will have somewhat different standards for the Federal Gov-
ernment than the general accounting standards that apply to busi-
ness, for instance. And there are different standards also that
apply to State and local government. So we need our own stand-
ards.

Mrs. MALONEY. OK. I would like to request in writing why your
standards have to be different. The GAO reports that there are
only three financial management systems that comply with the
Comptroller General’s accounting principles and standards. If these
are merely generally accepted accounting principles, why can’t
every service comply immediately.


57

financial statements. We are working very closely
x General community, and with OMB and Treas-
prepare the statements. Treasury has the primary re-
And we're working with the IGs to get the audits done.

So you will have regular audits now, beginning with fiscal year
1996, for all 24 agencies, and you will have audit opinions. So it
won't be just the pilot agencies that were first selected under the
1990 Act. And then, beginning in 1997, you will have a govern-
mentwide set of financial statements which GAO will audit.

So we are continuing to do our audit responsibilities. We’re au-
diting IRS, for example, for the fourth straight year now. We're
g to start the first audit ever of the Bureau of the Public Debt,
‘reasury’s Financial, Management Service. And I think a lot of
these audits that we’re going to do of the central accounting oper-
ations of the government will get at some of the issues about why
these reports have been accepted from the agencies that have been
inaccurate.

Mr. Horn. Now, will the Department of Defense be prepared to
meet that test?

Mr. Doparo. They plan to prepare financial statements for 1996.

Mr. Horn. It will be prepared, but it isn’t going to meet your
test; right?

Mr. Doparo. Right. Eleanor Hill is coming up next. She will be
the person primarily auditing DOD’s set of financial statements.
And they are predicting that, because of all the problems we've
talked about today with Defense, that it will probably be more to-
ward the year 2000 before the department gets a financial audit
opinion. And she can point out those problems to you.

A lot of the problems revolve around the systems areas that
we've talked about and not complying with some of the existing
procedures. The work force issues that 1 pointed out, all these is-
sues really need to be addressed.

Mr. Horn. To your knowledge, has any member of the financial
management group, anywhere in the Federal Government, ever
been sanctioned, reprimanded, or anything else, for violating the
Antideficiency Act?

Mr. Doparo. Yes. As a matter of fact, this forthcoming report we
have on the Departrnent of the Navy, indicates.

Mr. Horn. Going to name names and take numbers?

Mr. Doparo. Well, they have identified the people, and there
were disciplinary actions taken against the individuals where they
cluded that there were violations put in place. The act, as you
nt out, has nowhere near been enforced as much as it probably
could have been. And now, through the financial auditing that’s
done, more things are coming to light than there were before. But
the issues are being better surfaced now, and I think there’s a lot
of attention.

i think the other thing, in addition to the CFO Act, that’s driving
a lot of this attention now is the serious budgetary problems that
we have in the agencies, which we did not have in the 1960’s and
1970’s. As the government agencies grew, we added more pro-
grams, and we had a lot of resources, so nobody really paid a lot
of attention to how we were using existing resources. That’s now
changing, and I think much for the better.



23

of finance system to 20. The major systems are: The Defense Joint Military Pay Sys-
tem; Marine Corps Total Force System; Defense Retiree and Annuitant Pay System;
Defense Civilian Pay System’ Defense Business Management System; Defense Debt
Management System; Mechanization of Contract Administration Services System;
and the Defense Transportation Payment System.

In the Defense Business Operations Fund (DBOF) area, DFAS developed a two
phase migratory strategy which was approved by the DBOF Corporate Board in
February 1994. The strategy provides an interim phase that consolidates DBOF ac-
counting systems along component and/or business area lines, converts key legacy
systems into interim migratory systems, maintains current operations during the
transition period and achieves compliance with the accounting and reporting objec-
tives of the Federal Managers Financial Improvement Act (FMFIA) and Chief Fi-
nancial Officers (CFO) Act. The interim phase accommodates existing unique capa-
bilities of current component operations and structures. The approach permits a
more aggressive simultaneous migrations and consolidations of systems by select
DFAS Centers, while maintaining existing management information system require-
ments. The second phase of the system migration strategy is the transition from the
interim to the ultimate migratory systems.

We are in the final phase of completing cost or economic analyses of the rec-
ommended interim migratory systems. Concurrent with the completion of the analy-
ses, we are developing Strategic Business and Tactical Plans that detail the en-
hancement and deployment initiatives for each system. Actions to improve and de-
ploy the systems are being authorized on the recommended systems based on the
approval of the cost or economic analysis. Because of the need to complete the anal-
ysis before investing in the system, most enhancement and deployment actions are
just beginning. Additionally, we are in the process of procuring Commercial-Off-The-
Shelf (COTS) software to support two DBOF business areas. Both procurements are
scheduled to be awarded in FY 1996.

We believe the strategy we are following is the best solution for DBOF. We are
executing the strategy aggressively but relooking at our plans when appropriate to
ensure the job is done right.

In the General Funds area, DoD is committed to, and has undertaken, a major
effort toward consolidating and improving accounting systems. In 1991, there were
91 major general accounting systems. Many of these systems were obsolete, unreli-
able and were not integrated with other DoD financial and non-financial systems.
DFAS identified interim migratory systems along component lines. These interim
migratory systems will enable DFAS to eliminate 14 general accounting systems by
the end of 1995 and an additional 24 systems by the end of 1998, as shown below:

General Accounting Systems

FUNCTION 1991 19951998
Installation tevel 49 39 23
Departmental ........ 2m 16 a
Security Assistance ....... _ 7 oan senate son nese 8 8 8
Non-Appropriated Funds noe “ oe 7 10 10 10
Trust Funds se 4 4 4

TOTAL ssnsonnnenncnnn 2 7 88

Selected investments in migratory systems will be made to incorporate the U.S.
Government Standard General ledger, Standard Budget and Accounting Classifica
tion Code, and other limited improvements to redress deficiencies in the systems.
DFAS will also ensure that the upgraded systems interface and link to support sys-
tems such as logistics procurement, and contracting. This strategy requires enhance-
ments to fewer systems which saves DoD resources. Fewer systems also supports
DFAS's long-term plans for consolidation of accounting functions.

A further reduction in the number of accounting systems below the projected 53
general accounting systems will depend on the number of legacy systems and the
type of systems being reduced. Some legacy systems can be easily consolidated into
an interim migratory system. Whereas some legacy systems support, to a great de-
gree, systems such as logistics, procurement, and contracting. The conversion of
these mixed systems is more problematic.


90

Mrs. Maloney.

Mrs. MALONEY. Thank you, Mr. Chairman.

I want like to ask each of you to submit in writing, because the
day is getting long, if you were to automate your systems and were
able to modernize them—I asked some of the previous panels this,
and they said there was no more money needed. But what I’m
hearing from you, you need to automate it and upgrade it, and cer-
tainly bring it into the computer age.

Could you submit to the record, I mean, just a dream list of the
tools that you feel that you need to get the job done, and even in
personnel, the people that you need to help you pull this together.
Maybe we need Congress to send some type of directive. If we can
send a directive that you are to spend $8 billion more on defense
weapons that the Defense Department says you don’t need, maybe
we can also send a directive that a certain amount of money is to
be spent in your departments so that you can track where these
dollars are going and the overpayments, and everything, and bring
it into a system.

I would like to see it personally. I would just like to read it and
see what you think you need to do. And technology is changing so
quickly. I just know, in my own office, we had a computer system,
and now they are telling me it’s antiquated, you know. There are
all these new types of systems.

I would like to ask Secretary Hale, you mentioned that there
were 80 different types of accounting systems now in the Air Force
and that you were trying to consolidate them down a little bit. I
would like to ask you if you could find time, at some point in the
next couple of weeks, to come by and just talk to me about them.

Mr. HALE. I would be glad to.

Mrs. MALONEY. I don’t want to belabor the point now, but to me
it just doesn’t make sense that we need so many different account-
ing systems, but maybe I need to learn more about it.

Are there some systems that you could possibly integrate into
one? For example, in the GAO report, they mentioned that some
had gone to standard accounting practices, I believe it was in pay-
roll, three. So I assume it’s the three in your different departments.

Mr. HALE. No.

Mrs. MALONEY. It’s not?

Mr. HALE. No. The finance area is a real success story where we
are heading to single systems. It’s DFAS that’s doing it, but I think
that is a real success story, and they are coming close to being
auditable. That’s a real plus, and we ought to give credit where
credit is due. I think they’ve done a good job.

Mrs. MALONEY. I was really very impressed with Secretary
McCoy’s testimony and the really successes that you’ve had in
Army. What I just would like for anyone to respond to is, why can’t
Army’s experiences under the CFO pilot be duplicated and applied
to the other services? I just open that out.

Ms. CHRISTIE. I think they can. We are, in some ways, emulating
the Army model, both with our career professionals and an Office
of Financial Operations. And I’m looking very hard at the way they
have organized the different communities. We started late, and so
we have some catching up to do here.


44

We see DOD’s plans to consolidate and reduce personnel as a necessary step
toward a more effective and efficient finance and accounting service. However,
as discussed in our September 1995 report, we have concerns with DOD's
planned consolidation efforts.!? For example, DOD decided to open 20 new oper-
ating locations without first determining what finance and accounting functions
they would perform or if 20 was the right number to support its operations. In
response to the report, DOD has committed to reevaluate the number of loca-
tions and personnel required to perform finance and accounting functions by
November 30, 1995. Further, starting December 15, 1995, and annually there-
after, DOD has agreed to reassess its site-selection decisions and report its find-
ings to the Secretary of Defense.

+ Consolidate Finance and Accounting Systems. DOD has acknowledged that
its financial management systems are antiquated and cannot be relied upon to
provide DOD management and the Congress with accurate and reliable finan-
cial information for use in decision-making. To date, a number of standard sys-
tems have been selected, including those used for civilian pay, military retiree
and annuitant pay, military pay, transportation payments, debt management,
and contractor payments. The implementation of these standard systems is ex-
pected to reduce DOD's cost of operating redundant systems. To illustrate, 3
years ago, DOD had 18 separate military payroll systems; today, there are 11.
By 1996, DOD hopes to reduce the number of systems to two or three. While
DOD has made progress in reducing the number of payment systems, as dis-
cussed later, we have concerns with the overall strategy and timing of DOD’s
other systems improvement efforts.

* DOD Disbursements. DOD recognizes that it has a serious problem of not
being able to properly match disbursements with obligations. In attempting to
correct this problem, DOD is taking steps to implement the legislative mandate
limiting the funds that may be disbursed before the proposed payments are
prematched to the obligation data in the official accounting systems. This initia-
tive should help ensure that the (1) disbursements are properly matched to the
corresponding obligations and (2) obligations and disbursements data are re-
corded accurately in the accounting records. As discussed later, DOD has not
yet been able to fully implement this initiative.

* Reengineer Business Practices. DOD has recognized that its financial man-
agement structure consists of many organizations with each having their own
processes. These often duplicative processes have produced business practices
that were complex, slow, and error-prone. For example, we have reported that
DOD's administrative travel processes were extremely complicated.'* DOD has
recognized that it could save hundreds of millions of dollars yearly by re-
engineering its travel processes and has such efforts under way.

As discussed in our May 1995 testimony, the potential for savings in other

areas may be even greater. While DOD's mission is unique, many of its support
functions, such as payroll/personnel, are similar to those carried out in the pri-
vate sector and could be modeled on industry best practices. DOD is now plan:
ning to evaluate the potential for reengineering a number of these areas.
« Strengthen Internal Controls. Strong internal controls are critical to effec-
tively controlling and accounting for the estimated $1 trillion in DOD assets
worldwide. Secretary Perry has directed that senior managers Play a more ac-
tive role in identifying, reporting, and correcting poor controls. We endorse the
thrust of DOD's efforts in this area. In the past, we were critical of DOD’s fail-
ure to acknowledge its fundamental! internal control deficiencies in its Federal
Managers’ Financial Integrity Act reporting. However, more recently, we have
been encouraged by DOD's more complete and realistic reporting on its internal
control weaknesses.

We support DOD’s reform initiatives and recognize the difficult challenge it faces
in ealizing financial management improvements. However, as we testified in May
1995, DOD could take added steps to help increase the likelihood of turning Sec-
retary Perry's blueprint into substantive improvements. We suggested that DOD (1)
assess the number and skill level of its financial management workforce and (2) es-
tablish an outside board of experts to provide counsel, oversight, and perspective to
reform efforts. As discussed in the following sections, we also are planning to closely
examine DOD's overall strategy and timing of planned systems improvement efforts

*9DoD Infrastructure: DOD's Planned Finance and Accounting Structure Is Not Well Justified
(GAO/NSIAD-95-127, September 18, 1995)

\4Travel Process Reengineering: DOD Faces Challenges in Using Industry Practices to Reduce
Costs (GAO/AIMD/NSIAD-95-90, March 2, 1995).


85

porate Board has selected the systems that will be improved for most functional
areas, DFAS is now actively working to begin improvements on the chosen systems.

The Air Force has fully supported these DFAS efforts and will continue to do so.
Financial management personnel at Air Force headquarters and field-level activi-
ties, along with personnel from other functional areas, actively participated in the
functional evaluation of the DBOF candidate systems. Candidates were evaluated
for DBOF Wholesale and Retail Supply, Depot Maintenance, and Transportation
business areas. Likewise, Air Force software design activities participated in the
technical evaluation of the existing systems. The Air Force Cost Analysis Agency
further supported this effort with detailed cost estimates for systems implementa-
tion. We have also used the FIPC organization discussed above to keep senior Air
Force leaders informed of DFAS efforts to improve these systems.

is now developing plans to improve the systems that have been chosen.
pras has indicated that it hopes to complete the revisions to all DBOF systems
y a

General funds accounting systems. General funds accounting systems include
most of the accounting systems outside of the DBOF business areas. These systems
provide information to Air Force entities ranging from headquarters to all our bases.

in 1991, DFAS assumed systems management responsibility for general funds ac-

counting systems. As a first step toward improving the data available from these
systems and meeting audit standards, the Denver Center of DFAS has completed
the conceptual design for an interim system called (GL/FC). GL/FC will be a modu-
lar system that provides double entry, general ledger accounting capability that ig
transaction driven. It will also provide the capability for on-line verification of fund
availability. DFAS Denver is now beginning the design work for GL/FC.

‘The Air Force actively supports the GLIEC effort. Air Force personnel are working
regularly with personnel at DFAS Denver to insure that GL/FC meets our customer
needs and to assist in the design effort in any way that we can. We are also making
our field personnel aware of the development efforts so that, when the time comes
to field a new system, the fielding can be done quickly. To that end, we recently
invited the Director of DFAS Denver to discuss this system at our worldwide finan-
cial management conference.

Feeder financial systems. Feeder systems are systems in other functional areas—
such as logistics, civil engineering, or personnel—that provide financial data to our
accounting and finance systems. ‘These feeder systems must be improved before we
can achieve auditable financial statements.

‘The first step is to identify the feeder systems. An ongoing survey effort, financed
jointly by DFAS Denver and the Air Force, is investigating all Air Force functional

stems that interface with our finance and accounting systems. This effort is well
along and should be complete by the end of January 1996. We expect that this sur-
vey will identify more than 100 of these feeder systems. In most cases, the Air Force
will be responsible for making necessary changes to these systems to comply with
accounting and FMFIA standards.

Because of the number of systems that are involved, we have decided to focus first
on Property, Plant, Equipment (PPE) and Inventory systems. In addition to failing
to meet financial standards, these systems have frequently been cited in audits as
failing to meet FMFIA standards for reliable inventory control. We are working now
with DFAS to get better and more complete certification criteria. Next, with input
from the system managers and Air Force auditors, we will build a complete cat
of the known system deficiencies in these PPE systems, Interim survey results wi
be briefed to the FIPC later this month as a means of informing senior leaders in
the functional areas that own these feeder systems of our plans and to coordinate
any required actions.

e have also begun working with a contractor to structure a master plan for im-
proving the plant, property, and equipment systems. Our goal is to have a plan and
cost estimates by next spring. We can then seek necessary funding to begin the im-
provements and develop a detailed schedule.

Financial systems within procurement systems. DoD procurement systems also
feed financial data to our accounting and finance systems. Efforts to improve these
procurement systems deserve special mention because procurement systems defi-
ciencies contribute to serious financial management problems, such as payments
that are sometimes made to contractors who have not billed us.

OSD is taking the lead in developing a new Standard Procurement System (SPS)
that will be designed to solve these problems. SPS will include a financial module.
The Air Force is currently examining the costs and benefits associated with SPS to
insure that it will meet our needs. ;

We also continue to work with OSD and DFAS to make interim improvements in
the financial portions of our procurement systems. In early 1995, for example, we


62

I think that that standard that you have set is very important and
very key there.

Mr. Doparo. I think one of the other things, Mrs. Maloney, if I
might add, would be another good test is to have the Congress, par-
ticularly the appropriations committees, have more regular over-
sight using the financial audit reports and asking questions, in
terms of determining that. We have had some interest on the Sen-
ate side. The Senate subcommittee focused on the Defense issue,
and they plan to have regular hearings.

But I think the more committees, particularly those that have
control over resource decisions that can get involved, in addition to
this committee, or working in conjunction with this subcommittee,
I think that will help apply some additional pressure for quicker
change.

Mrs. MALONEY. I agree. In your GAO report, you said that there
are only three financial management systems that comply with the
Comptroller General’s accounting principles and standards. What
are the three financial systems that comply now?

Mr. Doparo. Those primarily are civilian pay systems. I can sub-
mit for the record the three specific systems, but most of them are
involved with the pay systems.

Mrs. MALONEY. Civilian pay systems. OK. Why can’t every—if
we're able to get these to comply with general accounting systems,
why can't every service comply immediately or comply within a
year?

Mr. Doparo. Part of the problem I think they have at Defense
is the vast number of systems that they have.

Mrs. MALONEY. You mean the codes?

Mr. Doparo. Well, no—the codes are a problem—the sheer num-
ber of systems. They have 250 different systems, by their count,
that they have, accounting systems. Each one is different. Many of
them are old. Many of them do not contain the elements of a stand-
ard general ledger requirement that has been put in place.

Mrs. MALONEY. It sounds to me that, if you have 250 different
systems, you don’t want people to know what you're doing. I mean,
if you wanted to figure a system that made it so difficult that you
couldn’t audit, that you couldn’t get a hold on what was happen-
ing—I mean, that is an absolute program for disaster.

Why couldn’t we—now, I keep asking this question because—it
may sound like a simple question, but I haven’t gotten an appro-
priate answer. Why couldn’t we just merely say to all 250 systems,
“Guess what, we’re changing your system. We're going to general
accounting systems. All of you have to comply within a year or two,
and let’s go. And here’s the standard, and let’s change it”? Why
couldn’t we do that?

Mr. Doparo. I think the department is trying to get there, but
it’s taking them a while in order to move in that direction. I mean,
there’s no question you could move, and that’s the direction they
need to move into. I think they better than I can explain the com-
plexities of trying to get there. You have a lot of different systems
set up for different purposes. They clearly need to have more
standardization, smaller systems. They have done it in the payroll
area first. They are trying to move in the other direction.


86

asked DFAS to delay the transfer of Air Force payment files from an Air Force sys-
tem to an the interim system. We did so to preclude serious deterioration in finan-
cial management and contract execution control and to allay major contractor dis-
satisfaction with the payment process. During the moratorium, the required systems
modifications were accomplished and problems were averted.
In sum, we are undertaking efforts to improve a wide variety of our financial
management systems and feeder systems. I believe we are making important
s. I recognize, however, that we have a long way to go and that we need to
continue to look for ways to speed up the process.

IMPROVING ACCOUNTING AND REPORTING

System improvements are the key to achieving fundamental improvements in fi-
nancial management. While those improvements are being made, we are taking
other steps to realize near-term improvements. These efforts to improve our ac-
counting and reporting fall into several categories.

Improving the CFO Report. Our CFO reports will not be fully auditable until our
financial systems are improved, but in the meantime we can enhance the utility of
the CFO reports by improving our use of performance measures. We are working
with other Air Force functional communities to identify existing performance meas-
ures that would enhance the supplemental financial information section in the CFO
report as well as the overview section of the report. We are reviewing measures that
are presently a part of our budget submission. In addition, we are looking for ways
to utilize the performance measures chosen for the Government Performance and
Results Act (GPRA), including those developed for the DoD-level GPRA report and
those being developed at our GPRA pilot Projects at wing level. To supplement
this effort, we are working with Coopers and Lybrand to identify new performance
measures based on their experience with the measures used in the private sector
and other government agencies. We expect their efforts will identify additional new
factors that can be incorporated into ‘the fiscal year 1995 CFO statements and an-
ticipate that additional factors can be developed and incorporated into the fiscal
year 1996 statements.

We are also supporting the Denver Center of DFAS in efforts to improve the qual-
ity of data in Air Force CFO reports. Better accounting systems will be required to
minimize data errors, but DFAS Denver is pursuing other steps as well. These steps
include emphasizing monthly reconciliations, continuing manual reviews, and train-
ing personnel to reduce errors in the data. We are also working with the private
sector through the Financial Executives Institute to improve our CFO reporting in
the important area of contingent liabilities.

In addition, we have begun experiments to make the financial information in the
CFO report more useful and meaningful to both field commanders and financial
managers. If managers made more use of the report, data quality would improve.
Greater use of CFO data would also :mprove our efforts to integrate financial plan-

ing and accountability into day-to-day operations.

‘e began our efforts to increase the utility of the CFO report by asking, several
wing commanders at our Air Combat Command whether portions of the CFO Report
could be made useful to them on a day-to-day basis. Personnel from the Air Force
Auditor General as well as DFAS were involved in this project. After examining sev-
eral approaches, we concluded that wing commanders feel they are already gettin,
the information’ they need to manage and do not currently want additional C

ata.

We are now pursuing alternative approaches to making the CFO reports more
useful. We are considering changes in the format of the headquarters-level report
that would make it more meaningful to our managers. Our logistics community
expressed interest in reviewing our CFO data to assess the day-to-day operations
of DBOF activities.

Reducing problem disbursements. Problem disbursements include categories such
as negative unliquidated obligations (NULOs), in which DoD is essentially writing
checks on accounts that are in the red. Such actions are of concern because they
erode public confidence in us as good stewards of public funds.

The USD Comptroller has taken the lead in pushing for reductions in problem
disbursements, and his efforts are bearing fruit within the Air Force. We have made
great progress in reducing negative unlic ited obligations (NULOs).1 As the
sraph shows, NULOs have been reduced by more than 70% during the past 15
months.

3)

1A NULO is a financial disbursement that appears to exceed the related obligation.


121

Mr. Horn. Well, thank you. That’s a very thorough and emphatic
statement.

Let me ask you, in reviewing the reports of your auditors and
maybe in just wandering around the building and talking to people,
on the training side, what’s your view of how the Inspector Gen-
eral’s Office can help, in terms of sitting down with some of the key
people that are responsible for that vast accounting network, using
all these different systems? Do you think training is a problem
here? I mean, do you detect that a lot of them have problems with
recruitment, with the stability of the work force? Is it constant re-
training that is needed? What’s your sense of it.

Ms. HILL. I think there are a couple issues that my auditors tell
me, and they, again, have done much more hands-on work on this
than I have. First, certainly when they audited the DBOF, the De-
fense Business Operations Fund, the financial statement on that,
one of the issues they raised there was the training of the individ-
uals, and more emphasis on finance, accounting, and that sort of
thing.

The other issue they have raised to me is that the downsizing
that we are going through has had an impact. Obviously, as you
downsize, you get less people to do the same amount of work, un-
less you eliminate some of that work and change what you're doing
or the way you're doing it. The other aspect to the downsizing is
that there have been a lot of senior people leaving. And that’s a
loss, not only of people, but of experience. And that’s something
that’s hard to make up. So they have seen some evidence that
that’s had an impact and that that is a problem.

Our people, I know, have a lot of contact with all of the finance
systems. They do a lot of work inside some of the financial centers.
We have worked very closely with John Hamre’s people. I know
John from years ago when I worked in the Senate, and his people,
before I came into the department, were working very closely with
Derek Vander Schaaf, my deputy, and our staff. So, I mean, there’s
been a lot of back-and-forth interplay.

But, yes, we think training is a problem, a serious problem.

Mr. Horn. What else can the Defense Department do, right now,
to get focused in on where we're headed, given the fact that there’s
a whole ream of testimony here that we’re not going to make it by
fiscal 1997, which everybody else is, presumably, going to make it?
And we might even be at the end of the year, 7-year balanced
budget, listening to things. 2002 no one has mentioned, but maybe
that’s where we will end up

Ms. HILL. I think the bottom line and unfortunate truth is, there
is really no quick fix to this. I don’t see it. Our people don’t see it.
So it’s not something that, no matter what they did today or tomor-
row, you’re probably not going to see an immediate turnaround.

We do think that the issues that I raised, those five points, are
ones that they need to really emphasize and hit on continually. I
think, also, the last one about getting the rest of the department
in synch with this, they need to do that. We’re seeing some evi-
dence that’s happening.

I mean, one positive thing that’s happened on this unmatched
disbursements issue, which is, you know, a terrible issue and it
concerned a lot of people, and to the public, certainly, when they


124

gress that we've got these systems in place. So people are rushing
to try and do that, and they may, in the rush, not be doing it as
thoroughly as we would like to. Now, the cost, there may be some
of that that’s sacrificed, too, in the rush to get a system in place
and to meet the deadlines under the act on financial statements,
which are going to turn on having those systems in place.

Mr. Horn. Very good.

Secretary Christie, you are welcome. You are still under oath.

Ms. CHRISTIE. I don’t want to butt in, but we did one thing right.
We did put a moratorium, when we decided to create DFAS and
standardized systems, we put a moratorium on modernization of
systems until we had selected which ones were going to be stand-
ard, because we did want to avoid exactly what you were answer-
ing, that spending tens of millions of dollars on 50 different sys-
tems.

Mr. Horw. Is that true of just the Navy or all services?

Ms. CHRISTIE. No, that’s DOD-wide.

Mr. Horn. So that’s DOD-wide.

Mr. Horn. That’s DOD-wide, yes.

Mr. Horn. That’s helpful.

Ms. HILL. I mean, I think what they are doing is picking out se-
lect systems that already existed, so we're really not bringing in
new systems; we're taking existing systems and trying to improve
them. Of course, that also raises a question, again, as an outsider,
maybe we should have considered outside systems, I don’t know,
but that’s where they are moving from.

Mr. Horw. I would think, and I guess since some of the Secretar-
ies are still here, I would ask to what degree have we looked to pri-
vate industry that has gone through this on, say, the merger of dif-
ferent companies, where you’ve got to integrate the controllership
role and the financial management? To what extent has the De-
partment of Defense gone out and asked advice?

Now, I heard earlier today, from Dr. Hamre, on the board of ex-
perts, and this kind of thing. But have we done it now? Because
that isn’t hard to get. There are some brilliant chief financial offi-
cers around the country, in various corporations. And as they have
had mergers and acquisitions, they have faced exactly the problem
that the Department of Defense is facing. So I was just curious,
anybody tapping that brainpower? It’s free; they won’t charge you.
They are glad to get to know you.

Secretary Hale.

Mr. HALE. Well, I think, at least to a limited extent, in the Air
Force, we have sought outside guidance. Now, we haven’t really es-
tablished a full board of overseers. I do have the sense, Mr. Chair-
man, that we’re going to have to jump into traffic on some of these,
take a chance. We probably won't be perfect, but I fear that, if we
sit around and look for the perfect solution or try to go immediately
to one system, we will never get there, at least in our lifetimes.

I’m already concerned about how long it will take, even with
these interim approaches. So I’m convinced that we ought to go for-
ward with the interim approaches, get rid of as many old systems
as we can, but it won't be just one when we're done, and try to fix
them, lest my son be sitting here someday telling you that, “Gee,


31

essary to handle inventory, fixed assets, which is a lot of the prob-
lems highlighted by the General Accounting Office, which we fall
far short of. I think that will be the biggest stumbling block to cor-
recting the balance sheet presentation.

But I think we are making and can make improvements related
to the kinds of things that you talked about earlier: unmatched dis-
bursements, negative unliquidated obligations. I think we have re-
duced them a lot. We have some short-term actions in line to re-
duce it even more: the idea of prevalidating before we make pay-
ment; the development of shared data bases so that, for example,
when one enters contract data into the contract system, it is also
entered into the accounting system at the same time. That is not
now the practice, and that’s why we have so much of these dis-
connects.

So I think we have a plan. I don’t think we’re going to get there
where somebody will walk in the door and say, “Yup, we'll give you
a check mark that, yes, you have financial statements that are cer-
tifiable,” but we’re not oblivious to the problem.

Mr. Horn. We all remember the old line whenever you use com-
puters: “Garbage in; garbage out.” And, obviously, the first ques-
tion here is to get a system that makes sense, whether that’s just
common accounting practice or whatever. How far along are you on
getting the system that makes some sense? Have we closed all the
loopholes and everything else in that system?

Mr. KEEVEY. Well, we have multiple systems at the moment; too
many systems.

Mr. Horn. Right.

Mr. KEEVEY. Our strategy is to get rid of a lot of them and to
beef up the ones that we choose to be the ones that will service us
for the next few years. For example, in the Navy environment—I
don’t know exactly how many—they may have 50 or 40-some. Our
strategy is to get down to one or two, so that we don’t have these
mismatches and convoluted details, on the ship different than
what’s on shore, et cetera.

So we're putting money and improvements on one of the systems
within the Navy environment, to build that up so it is capable,
much more capable than is now being done, to handle detailed, bet-
ter accounting records. And we're following that same practice in
the Army and in the Marine Corps and the Air Force. We’re mak-
ing better progress in some areas than in other areas.

Mr. Horn. As you try to consolidate and eliminate some, is it
possible that we're going to get to a year where we're just going to
say, “Hey, there’s no way we can dump this data into this new sys-
tem and try to make some sense out of it,” and just start, from that
fiscal year, to do it right? What’s your thinking on that?

Mr. KEEVEY. Well, I think that’s what it will be. Once we get the
system, it will be good for that year on. And I don’t know whether
we will be able, for example, from a strict accounting point of view,
begin with the correct balances in all aspects of the balance sheet,
if that was your point.

Mr. Horn. Yes. I guess my concern is what do we do about fraud
and abuse under the condition that, when we finally get consolida-
tion, we will say, “OK. October 1, when the fiscal year begins, we’re


contract and (2) the :nvoice is accompanied by an independent
report from a government receiving activity indicating that we
received the goods and services, this cross disbursing process
resulted in a situation where checks were written for valid bills
without checking first :hat there vas a clear path back to the
accounting record in one of those 250 accounting systems. The
result was a business oractice {and a culture) of “pay now,
account for it lacer.

That has to stop. 2a Marca cf last year, I issued
directives suspending ail cayments from accounts "in the red."
Since that time, we have held up over 20,000 payments to over
1,500 contractors. Today, we are still holding up 367 payments
totaling $19.2 million. We lowered the problem through the
research efforts of the past year. Also at that time, I issued
new guidelines for matcning unmatcned disbursements and "negative
unliquidated obligat:cns." That policy change has had a huge
effect in reducing the >roblem.

‘The ultimate solution is to preclude payment until we have a
clear match with the accounting record. We will start doing that
in culy, We will starz slow, Zirst with payments over $5
million, dropping to all payments over $1 million on October 1.
Eventually we will drop that to zero. Because we process 2.5
million invoices a monzz, we can't insist on prevalidation
immediately or we wou-d freeze up all paymencs overnight.

The second serious allegation made in the Post article was
that we were willy nilly paying contractors more than we owed
them, and that often ve didn't even know about it. That too is
wrong. Here are the facts.

Contr: werpayment;
($ in Millions)

FY 1993 792

FY 1994 294

FY 1995 (projected) 270

‘As you can see, back in FY 1993, we did pay contractors $792
million more than we snould have, but we
overpayments. Since that time, we have devoted considerable
effort to correcting these problems and have reduced the FY 1995
overpayment to $137 million through March 1995. The projected
FY 1995 level is roughly a 65 percent reduction, and again, I am
vety proud of that.

This too must be put in context, We made thi overpayments:
at the Columbus DFAS Center which pays some $90 billion annually.
We disburse $35 million an hour at the Columbus Center. Thi
means, we overpay contractors about .3 of 1 percent, or in other
words, they get it right 99.7 percent of the time. I don't
excuse our mistakes, and we are working to correct them. But I
have to ask that you puc this in perspective.



46

Force in 1990,!° DOD stated that its Corporate Information Management (CIM) ini-
tiative would be partly or wholly responsive to 17 of the 26 recommendations that
were made. Unfortunately, we have reported that the overall objectives of CIM,
which in part, was aimed at improving the standardization, quality, and consistency
of data from DOD's multiple automated information systems, have not been
achieved.20 Because the needed systems improvements are still not in place, the ac-
curacy and reliability of the data provided by the systems today remain question-
able.

‘As part of our ongoing efforts to evaluate DOD's financial operations, we will be
more closely examining DOD's current systems strategy. For instance, is the DOD
strategy of reducing the number of accounting systems within each service—the in-
terim migration approach—appropriate? Will DOD’s planned investment of $200
million to enhance existing systems produce auditable financial statements that
comply with applicable accounting standards and reporting requirements? Will the
interim systems as designed be truly integrated?

We will also be evaluating DOD's underlying capability to successfully develop
software and manage its contractors. Standard software engineering processes are
critical to developing and enhancing systems in a timely and cost-effective manner.
However, based on a DFAS self-assessment, we believe that it currently lacks the
software engineering capability to provide assurance that systems enhancements
can be effectively carried out, although it has begun improvement efforts.

We recently started an assessment of the software process improvement efforts of
the Financial Systems Organization—the information technology arm of DFAS—and
plan to develop detailed recommendations to assist in these efforts. We also plan
to evaluate the software engineering capability of other DOD organizations provid-
ing software support to DFAS. For our evaluations, we are using the Capability Ma-
turity Model developed by the Software Engineering Institute (located at Carnegie
Mellon University). The model is used by DOD and the private sector to assess an
organization's software engineering capability.

in addition, DOD needs to pursue short-term actions to improve the quality and
reliability of the data in its current systems, such as (1) following and enforcinj
rent accounting policies and procedures, (2) reviewing and analyzing its monthly r
ports to identify inaccuracies, and (3) taking action to correct the problems ident
fied. These actions are not new or revolutionary, but rather fundamental internal
control procedures. The Director of DFAS has recognized the need to reinforce these
key procedures and issued a September 1, 1995, directive that called for all DFAS
locations to place increased emphasis on adhering to established internal controls.

ESTABLISH SKILLED FINANCIAL MANAGEMENT WORKFORCE,

Another key responsibility that the CFO Act assigned to agency CFOs is directing
and upgrading the agency’s financial management personnel, including enhancing
their professional training. Well-qualified personnel with the knowledge and skills
required to carry out existing systems operation and accounting procedures will be
essential if DOD is to make marked strides toward improving its financial oper-
ations,

While we have not yet done any comprehensive assessment of the Department’s
financial personnel, récurring audit findings have highlighted problems relating to
DOD personnel adhering to basic control requirements. For example, these audits
have consistently found that DOD personnel did not carry out required supervisory
reviews or reconciliations, nor did they properly document adjustments to financial
records. In addition, both our financial audits and those of the DOD Inspector Gen-
eral have raised questions about the adequacy of DOD's financial management per-
sonnel, as shown in the following examples.

* Our 1993 review of the y’s financial operations disclosed that of its 84

top managers responsible for overseeing the work of over 1,500 personnel at its

central accounting location, only 7 had any professional certifications.??

+ Our recent review of the Navy's financial operations disclosed that 31 percent

of the positions at its central accounting facility were vacant. In addition, 30
percent of its mid- and senior-level positions were filled with personnel in a job
series that requires no accounting education.

19Financial Audit: Air Force Does Not Effectively Account for Billions of Dollars of Resources
(GAO/AFMD-90-23, February 23, 1990).

22 Defense Management Initiatives: Limited Progress in Implementing Management Improve-
ment Initiatives (GAO/T-AIMD-94-105, April 14, 1995).

21Financial Management: Strong Leadership Needed to Improve Army's Financial Account-
ability (GAO/AIMD-94-12, December 22, 1993).


indeed, had it not been or Secretary Cheney's pathbreaking
Gecision to combine the var:ous finance and accounting offices
around the Department into a consolidated Defense Finance and
Accounting Service, our problems would be dramatically worse, and
we-would not be in’a position to attack these problems now.

in the fall of 1993, Secretary Perry (then as Deputy
Secretary) directed us zo cut our problems in half within a year.
in the process, ve learzed the problems were even bigger than we
thougnt. The foliowing chart summarizes the status and progress
we have made. (GAO cricicized us for understating the problem
earlier this year, so i am using the most all-encompassing
definition called for by GAO in these comparisons.) The thre
measures are disbursements not matched to any obligation,
disoursements that exceed obligations (negative unliquidated
coligations), and disoursements that are in process now.

(Dollars in Billions)
$134 2

Category of Disbursemencs

Unmatched Disbursements 23.0 ad 13.3
legative Unliquidated Cbiigations a8 7.3 3.3
in-Transit Disbursements 6.9 126 226
Total 48.7 35.3 28.8

As you can see, over a 21-month period we have reduced the
total problem from $48.7 billion down to $28.8 billion. That is
a 41 percent reduction, and I am very proud of that. We have had
thousands of people working very hard to make progress. In some
areas the progress has been nothing short of stunning. The Aray
has reduced its problem disbursements by nearly 60 percent during
this period. This is an incredible achievement, made possible
only by exceptional efforts. Unfortunately, ve still are left
with a large number of problem disbursements which we must
resolve.

I should point out, however, that these problem disbur:
ments occurred during the past 10 years during which we disbursed
over $2.5 trillion. ‘This means our problem disbursements total
approximately 1 percent of total disbursements, and during the
past 21 months we solved nearly $20 billion of these problem
disbursements and correctly matched our cancelled checks with
their proper accounting records. I hope ve will cut this in half
during the next year.

So why are we making errors in the first place? In brief,
we have flawed business practices that have built up over the
past 40 years. When the Department was created, every
organization developed its own accounting systems. When the DFAS
was created, there were over 250 major accounting systems in
operation. Some 30 years ago, the Department adopted a system
where any one of the 300 plus finance offices can write a check
on behalf of anyone else in the Department (cross disbursing).
Although, we never write checks unless (1) there is a valid



40

Additionally, as pointed out today, solutions to a lot of these
problems lies in DOD's business practices that result in payment
and accounting problems, and we believe there needs to be a lot of
cooperation within DOD in order to address these problems.

We plan to continue working with DOD to help find solutions to
these problems. We believe their efforts, however, would be en-
hanced by the introduction of a first-rate group of outside experts.
We made this recommendation last spring. These would be experi-
enced chief executive officers, CFOs, information technology ex-
perts that have a proven track record in large-scale improvement
efforts in the private sector. People have done this and accom-
plished this.

We believe DOD has extraordinary problems that require seeking
some extraordinary solutions. An outside group of people could
bring some creativity and perhaps more timely solutions to their
problems.

In closing, let me underscore the value of the CFO Act in making
needed improvements in DOD. CFO implementation has been abso-
lutely critical to the progress that we’ve made to date, and the act’s
goals provide a valuable way to measure DOD’s progress. Contin-
ued oversight by this subcommittee is very important to effectively
ensure that the act is implemented in DOD.

I will be glad to answer questions later.

(The prepared statement of Mr. Dodaro follows:]

PREPARED STATEMENT OF GENE L. DODARO, ASSISTANT COMPTROLLER GENERAL,
ACCOUNTING AND INFORMATION MANAGEMENT DIVISION

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the Department of Defense's (DOD)
efforts to implement the Chief Financial Officers (CFO) Act. This act has been in-
strumental in helping the Department understand the depth and magnitude of its
financial management problems and start on a course towards corrective measures.
Today, as you asked, we will highlight the results of financial audits since the pas-
sage of the CFO Act’and provide our perspective on the major challenges facing the
Department in meeting the act’s objectives.

Achieving the reforms required by the CFO Act is essential because DOD needs
accurate financial information and appropriate internal controls to effectively man-
age the Department's vast resources—over $1 trillion in assets, 3 million military
and civilian personnel, and a budget of over $250 billion for fiscal year 1995. Unfor-
tunately, the Department does not yet have adequate financial management proc-
esses in’place to produce the information it needs to support its decision-making
process. No military service or other major DOD component has been able to with-
stand the scrutiny of an independent financial statement audit.

As discussed in our high-risk series,! this failure has serious implications. Good
financial management runs deeper than the ability to develop accurate financial
records. It is being able to provide managers with clear visibility and control over
inventories, being able to accurately project material needs, and being able to effec-
tively balance scarce resources with critical needs. In short, effective financial man-
agement is essential to ensuring that DOD’s resources are productively employed in
meeting our nation’s defense objectives.

The Department has recognized the seriousness of its financial management prob-
lems and the need to take action. Secretary Perry and Under Secretary Hamre, who
serves as DOD's CFO, have been candid in their assessments of the status of cur-
rent processes and practices. The Department's financial reform goals—presented in
its February 1995 “Blueprint"—offer a good perspective of the corrective actions
which must be taken. This approach represents an important first step in commit-
ting DOD to real action. However, very serious management challenges face the De-
partment as it moves to make the blueprint a reality.

1 High Risk Series: An Overview (GAO/HR-95-1, February 1995)


WORKYEARS

120

CFO AUDIT WORKYEARS}

800
7004 690 700
600} 581 S01
225 225
500- 167 156
“
3004
2004 {160}
100+ U) Wy Li)
174 141 141
° FY 94 FY 95 FY 96 FY 97

ZZ Air Force SJ Navy [=] Army

[El DoD IG

Attachment 3



19

shown that some actions, short of substantive system changes, can be taken to im-
Prove operations. Ongoing initiatives to redress current system deficiencies are:

Senior Financial Management Oversight Council. This Council, chaired by the
Deputy Secretary of Defense, meets on a regular basis to address existing and
emerging financial management weaknesses and deficiencies, to approve plans for
proactive solutions to financial management weaknesses and deficiencies, to assign
responsibility for correcting financial management problems, and to monitor
progress in reforming the Department's financial management. The Council includes
the Secretaries of the Military Departments, the Vice Chairman of the Joint Chiefs
of Staff, the Under Secretary of Defense (Acquisition and Technology), the USD
(Comptroller)/Chief Financial Officer (Executive Secretary), the DoD General Coun-
sel, the Assistant Secretary of Defense (Command, Control, Communications and In-
telligence) and the Director of the Defense Performance Review. The Inspector Gen-
eral, in order to avoid a conflict of interest, is not_a member of the Council but
serves as an observer, and at the request of the Chair, provides support to the
Council, The Director, DFAS also attends the Council meetings. In short, the Coun-
cil provides the necessary framework and clout to focus attention on problem areas

ind exert pressure to. things happen.

Improvement of the Federal Managers’ Financial Integrity Act Process. A recent
initiative by the Secretary of Defense places an even greater emphasis on sound in-
ternal controls and the correction of control weaknesses. Office of the Secretary of
Defense (OSD) senior managers have been tasked to play a more active role in the
identification, reporting and correction of internal control weaknesses. Previously,
these responsibilities were primarily those of the various individual DoD Compo-
nents and many senior OSD managers played little or no active role in this process.
However, new roles and responsibilities require senior OSD managers, in addition
to the DoD Components, to identify major systemic and other weakness and internal
control problems within the functional area under their purview when such weak-
nesses or problems have not been reported by a Military Department or other DoD
Component, This responsibility encompasses both those weakness or problems that
may be unique to one DoD Component, as well as those that may be common to,
or affect, all or multiple Components. Once such weaknesses or problems are identi:
fied, OSD managers also are responsible for requesting, and ensuring, that the af-
fected DoD Component(s) take responsibility for reporting the weakness or problem
in the DoD Annual Statement of Assurance and taking appropriate actions to elimi-
hate the weakness or correct the problem. For those issues that impact, more than
one Component, applicable OSD functional managers are responsible for working
with the affected DoD organizations to provide a single reporting of the systemic
weakness or problem, and overseeing a joint effort to address and resolve it.

Establishment of an Acquisition Financial Management Panel. A senior level
panel, the Acquisition and Financial Management Panel, was established to identify
and develop a course of action to correct systemic problems that cause problem dis-
bursements. The panel is co-chaired by the USD (Comptroller) and the Principal
Deputy Under Secretary of Defense for Acquisition and, Technology. ‘The panel also
includes the Under Secretaries of the Army, Navy and Air Force, as well as the Di-
rector, DFAS and the Director of the Defense Contract Management Command. The
purpose of the panel is to design, and oversee, a long-term solution to the problem
of unmatched disbursements and the lack of interconnectivity between finance and
acquisition systems.

jecause this issue is co critical, a working group was formed by the panel to pro-
vide short-term improvement recommendations aimed at resolving the causes of un-
matched disbursements. The working group prepared a report that identifies a
strategy for implementing needed systemic improvements. One focus is on expanded
use of standardized Electronic Data Interchange transaction formats to transmit
contract data between systems. This will greatly reduce manual data entry, improve
timeliness and ensure consistency between the contract administration, payment
and accounting systems. Another focus is on improving the payment computation
and validation processes. Work has begun already on a number of the high priority
actions needed to resolve existing deficiencies.

Financial Management Steering Committee. This Committee oversees the develop-
ment of functional requirements, facilitates implementation of produet and policy
recommendations, and addresses other issues involving financial management sys-
tems and practices outside the Defense Business Operations Fund. The Committee
is chaired by the USD(C)/CFO and includes the Assistant Secretaries for Financial
Management and Comptroller in the Military Departments, Comptroller of the De-
fense Logistics Agency, and a senior official from the Office of the Assistant Sec-
retary of Defense (Command, Control, Communications, and Intelligence). This
Committee has focused on such issues as compliance with internal controls, policies


4

With the concurrence of the Department's Inspector General and the Office of
General Counsel, Dr. Hamre approved policies and procedures for making correc-
tions to DoD’s canceled appropriations. These policies and procedures are consistent
with the provisions of the closing accounts legislation. While they permit corrections
in canceled appropriations to transactions that occurred before an appropriation was.
canceled, they do not permit new disbursements to be made from canceled appro-
priations. Consistent with the closing accounts legislation, disbursements after the
cancellation of an appropriation must be charged to an appropriation current at the
time of the disbursement.

To prevent future cases of unmatched disbursements, the Department is working
toward requiring that every disbursement be matched to an obligation before actual
payment is made. We can't fix the problem just by correcting the mistakes after
they have been made. Instead, we have to go back to basic principles and not make
the mistake in the first place. We now require the validation of proposed payments
with the corresponding obligation data in official accounting systems prior to mak-
ing payments. Since July 1995, DoD has required such validations for all payments
over $5 million. Beginning October 1, 1995, that threshold dropped to include all

ayments over $1 million for all DoD activities with the exception of payments made
by the DFAS Columbus Center. We expect to begin lowering the dollar threshold
at the Columbus Center in later in FY 1996. Since the implementation of this policy,
DFAS has successfully prevalidated over 1,100 invoices at a gross value of $7.4 bil-
lion. As of November 5, only eight invoices are being held until we have found a
satisfactory match to the accounting records.

Because systems are not in place to automatically prevalidate payments, much of
the work must still be done manually. While the significant number of manual
transactions will continue to hinder the Department's progress until automated sys-
tems are in place, the Department remains confident that the aggressive automa-
tion program underway will reduce the likelihood of unmatched disbursements.

Contractor Overpayments. Overpayments to DoD contractors constitute another
area that is receiving intense management attention. In addition to the pre-valida-
tion process I have described, DFAS'’s Columbus Center has instituted a number of
measures and internal controls to minimize the volume of overpayments occurring
at this paying office. For example, the Center’s Internal Review Office now conducts
post payments reviews of all payments in excess of $1 million to readily identify any
potential overpayments. This ensures that requisite receivables can be established
along with the issuance of demand letters. In addition, each of the Payment entitle-
ment operating divisions are continuously reviewing a sample of all $1 million pay-
ments before the disbursement is made.

In late August, the Columbus Center sent letters to the contract community
served by this center requesting that they return expeditiously, all overpayments
that they discover. In addition, this letter served to advise the contracting commu-
nity that the Defense contract Audit Agency will be adding a step to its review of
contractor billing systems to evaluate the adequacy of contractors’ controls for iden-
tifying and notifying the Government of any overpayments.

e have also instituted a new procedure to expedite the delivery of demand let-
ters to the contractors once the contracts have been reconciled. In addition, we have
sent letters to the top 550 contractors requesting that they immediately return any
identified overpayments. These actions will enable us to identify and collect over-
payments to contractors more expeditiously.

‘On the system side, the Columbus Center is also in the process of developing pro-

ming changes to the entitlement system that will prevent payments if the dis-
ursements made on a contract exceed available obligations.

FINANCIAL MANAGEMENT REFORM.

In the early 1990's Department of Defense leaders initiated several important fi-
nancial management improvements. When the Clinton Administration took office in
1993, the new DoD leadership directed a review of these initiatives and made major
adjustments to increase their likelihood of success. More importantly, the leaders
also concluded that the Department's financial management failures were more fun-
damental and entrenched than previously recognized. They therefore undertook a
comprehensive diagnosis of financial management problems and causes, then
launched new policies and far-reaching reforms to set things right. As a result the
Department is now embarked upon the most comprehensive reform of financial
management systems and practices in its history.

Planned reforms aim to streamline and redesign DoD financial processes and or-
ganizations, in order to make them optimally effective and to cut costs. Reforms also
seek to ensure that the Department's financial management fulfills the needs of its


3

Mr. HaAMRE. Sir, thank you very much, Mr. Chairman. No, you're
actually right; it is my problem.

Mr. Horn. Excuse me a minute. Our distinguished ranking mi-
nority member has an opening statement. I should have asked.

Mrs. MALONEY. Thank you very much, Mr. Chairman.

This is certainly a very important hearing. In our national dis-
cussion of Federal spending, the role of proper accounting, record-
keeping, and other “nuts and bolts” aspects of financial manage-
ment are often overlooked. They were overlooked dramatically, in
this case, with the Department of Defense.

I would just like to ask that my opening statement be made part
of the record. It mirrors many of the things that you said. It out-
lines the two laws that Congress passed and the steps that the De-
partment of Defense is taking to adhere to them, some of which are
impressive. On the other hand, the reading the material—and I
congratulate you on calling this hearing—and also press reports, in
the Washington Post, “Defense Department, billions go astray,
often without a trace,” really curled my hair, reading about this.

I just want to note that I find it almost believable that the report
listed in 1994, the annual report of Congress, the report listed ac-
counting problems totaling billions of dollars, including $19 billion
in unmatched disbursements; in other words, checks written but
not matched to specific equipment and services.

At the very least, I would like to know from this hearing why—
I mean, you know, the most simple business manager in a small
business, when you get an invoice, you match it to the bill before
you pay it. I was reading in some of the reports that sometimes the
offices are separated. You are paying bills in offices that are sepa-
rate from where you are receiving the invoices. That seems to me
like standard eighth grade intelligence to figure out that you match
these two.

And I don’t understand why the Department of Defense hasn’t
done this, when I must note for the record that, when we are facing
these severe cutbacks in government, in every single area—the
only area that grew was $8 billion to the Defense Department, $8
billion, more than what the Defense Department wanted. But I feel
that you should have had, at the very least, an accounting of the
one budget that has increased in this Congress, not been cut.

I want to mention also, they noted $7 billion in negative, unliqui-
dated obligations, money spent for goods and services which ex-
ceeded the amount appropriated by Congress for a particular
project. In particular, the GAO found that, during a 6-month period
in 1993, $305 million of the $751 million, or about 78 percent of
checks processed in the main Defense Finance and Accounting
Service, represented overpayments by the government. So I cer-
tainly would like to hear what your overpayment procedures are
and why we are having such a huge amount spent in overpay-
ments.

In any event, I look forward to what you have to say. And last,
I would like to know why you are not following general accounting
principles. I think that that would simplify it for the audits; it
would simplify it for Congress; and it would certainly keep a better
track of the citizen taxpayer dollars. You know, to have $19 billion


110

Financial Management System, We will report our findings to DoD

and the Congress later this year.

© In reaction to previous DoDIG audit findings, the Defense
Federal Acquisition Regulation Supplement was amended in July
1995 to require contracting officers to ensure that future
contracts clearly identify the accounting classification
reference numbers which apply to each contract line or subline
item. In addition, contract modifications which obligate or
deobligate funds shall identify the related accounting changes
for each contract line or subline to enable appropriate payment.
Those changes and other requirements related to contract form are
intended to provide clear billing instructions to the disbursing
offices. When fully implemented, the new rule will improve
financial control over future DoD contracts with multiple lines
and different funding sources, provide for progress payments that
more accurately reflect actual performance of work, and make
prevalidation of disbursements easier. It is a very positive
sign that the DoD acquisition community finally is actively
engaged in helping to address the longstanding problems with
vendor payments, many of which originate with confusing contract
structure and wording or a lack of good instructions to the

paying offices.

13


69

cases. This led to our reducing the number of open cases by 85 per-
cent.

One of our most critical partnerships is with the logistics commu-
nity, and we are working together to improve the processes to req-
uisition and account for supplies. We will identify a best business
process by the end of this month and revise and standardize our
policies and procedures, as necessary, to include an interface be-
tween key supply and accounting systems.

In a joint effort with the Assistant Secretary of the Army for
Manpower and Reserve Affairs, a business process reengineering
team is working to integrate the military pay and personnel sys-
tems. Final recommendations are scheduled for January 1996. In
the interim, we have initiated systems changes to place a total of
93 pay-related events into the military personnel system over the
next 24 months.

On August 10, we implemented a new mandatory requirement
for unit commanders to certify the status of all soldiers in their
units on the monthly finance report. This will enable us to identify
any ghost accounts and to correct soldiers’ entitlements and allow-
ances. On November 1, we began testing a new checklist and sepa-
ration Procedure for soldiers leaving the Army. Today, one out of
four soldiers separates owing money, usually as a result of an over-
payment or for lost or damaged property.

I am proud of achievements such as these and of the Army’s
demonstrated commitment to the letter and the spirit of the Chief
Financial Officers Act. I have intentionally presented a good news
story here today, but that does not mean that I do not take very
seriously the many continuing problems in Army financial manage-
ment. Rather, it is the very seriousness with which we face our
problems that I find most encouraging.

Thank you.

[The prepared statement of Ms. McCoy follows:]

PREPARED STATEMENT OF HELEN T. MCCoy, ASSISTANT SECRETARY OF THE ARMY

Mr. Chairman, I appreciate your invitation to appear today to present my views
on financial management in the Department of the Army and our progress in imple-
menting the Chief Financial Officers (CFO) Act,

Your invitation noted the subject of this hearing as “Department of Defense finan-
cial management problems.” My colleagues and I certainly agree with you that there
are many problems. However, there is also a great deal of good news, and I welcome
the opportunity to share with this committee some of the notable improvements we
have made in Army financial management and stewardship.

THE ARMY AS A CFO ACT PILOT

Since Fiscal Year (FY) 1991, the Army has prepared agency-wide audited finan-
cial statements as a pilot under the Chief Financial Officers (CFO) Act. As the com-
mittee is well aware, our auditors—the General Accounting Office for the FY 1991
and FY 1992 reports, and the US Army Audit Agency for FY 1993 and FY 1994—
have been unable to express an opinion on the reliability of our financial state-
ments, The overarching problem. preventing a qualified or unqualified opinion is
that the accounting systems which support the statements do not have an inte-
grated general ledger or produce account-oriented transaction files. Without a com-
plete general ledger, we must use systems that were designed to manage and phys-
ically account for Army assets to derive the value of those assets. The management
systems do not interface with our accounting systems, nor do they meet require-
ments for generating reliable, auditable financial information.

While the audit opinions for FY 1992, FY 1993, and FY 1994 each noted signifi-
cant progress from the previous year’s reporting, until our systems can produce the
information necessary to test the reliability of financial statement data, our auditors


24

CLOSING

DoD's Financial management reform actions constitute an ambitious agenda and
your continued support of the Department of Defense's efforts to eliminate its finan-
‘cial management deficiencies is essential and very much appreciated. We are very
proud of the pace of our progress so far and expect to continue on as expeditiously
as possible.

Mr. Horn. The letter is in the record, as will be the Post articles,
and I’m going to ask some questions about these.

Mr. Hamre. Yes, sir.

Mr. Horn. So my first one is on the second page of your letter,
just to double check the obvious. You say, “during the past 21
months, we solved $20 billion of these problem disbursements, cor-
rectly matched our canceled checks with their proper accounting
records.” Now, does that include the purchase order of the delivery
item in question, matching that again?

Mr. Hamre. Yes, sir. As I mentioned, there are two checks that
are going on: There is first the matching to the delivery of the good
or service, and that’s required before we write the check in the first
place. You have to have a receiving report from a government offi-
cial, either at the destination or at the factory, before we can write
the check. That we already had.

What we didn’t have was a clear match against the accounting
records, a second step, a step that you want to do. I mean, it’s a
basic internal control feature. We didn’t do that in the past, and
we're going to have to move to that. We're going to do that increas-
ingly, through a series of prevalidation requirements that Congress
has imposed on us, which we think are a good idea.

Mr. Horn. You mentioned you’re thinking of maybe contracting
out some of these functions.

Mr. HAMRE. Yes, sir.

Mr. Horn. Should there be an outside random sample audit
taken of various parts of DOD? What’s your thinking on that, in
terms of how you're going to go about getting yourself into a regu-
lar annual audit and financial statement?

Mr. Hamre. Sir, I think I would—first of all, I have an auditor,
and that’s the Inspector General. So I feel I have audit oversight,
an independent organization responding to the Congress, independ-
ent from the executive branch. Ask Eleanor Hill that question. I
personally feel I’ve got more than enough audit oversight between
that and the General Accounting Office. Let me say, we are work-
ing closely with both, trying to get at these problems.

Mr. Horn. In the Washington Post story on this situation, dated
May 14, 1995, this paragraph appeared. And I realize you don’t
represent the Treasury, but I would like your reaction to it. “The
U.S. Treasury has always paid the bills, even when there was no
money in a given project’s account, because it assumes any error
was unintentional and someday would be corrected, said Pentagon
officials and Inspector General investigators.”

Is that basically still the Treasury policy with the Pentagon?

Mr. HAMRE. Sir, we have changed our policy. Prior to April 1,
1994, we had a practice where we would write checks even on ac-
counts that were in the red. We changed that. So we froze pay-
ments on accounts where there was no balance, as of April 1, 1994.


10

I reported about my predecessor back 200 years ago, who was John
Warren, who was the second officer ever appointed by the Con-
tinental Congress. He was the paymaster general.

And after 6 months in the job, he wrote back to the Continental
Congress and said, “I can’t do my job,” said, “There are 13 separate
payroll systems. The uniforms aren’t uniform. I mean, nothing is
common.” I reported to Dr. Perry, “We've made great progress. In
210 years, we have only added 5 more payroll systems, even
though we've added 37 more states to the union.”

When I got there, we had 18 payroll systems for civilians only.
We had 18 military payroll systems. That reflects, frankly, a very
important underlying reality. The Department of Defense, even
though it was created 50 years ago, really constitutes a thin veneer
over the business practices that built up, in some cases, over 200
years. And we designed a system where individual organizations
developed their own finance and accounting operations, all of which
were designed to report vertically to the boss; none of which were
designed to interoperate with other organs in the government.

So we confront a department that has, today, over 230 account-
ing systems. Back 5 years ago, we had over 66 finance systems.
And we are gradually going through the process of scoping this
down, reducing the number, as a fallout to the consolidation that
was started by the Department 5 years ago. If there is a hero, in
my mind, it is Don Atwood, who was the Deputy Secretary of De-
fense, God rest his soul, he died a year ago.

Don Atwood was the Deputy Secretary of Defense under Dick
Cheney. He came from industry. He was a senior executive in Gen-
eral Motors, and he said, “I can’t believe we’re doing business like
this in the Department of Defense.” And it was Don Atwood who
created the Defense Finance and Accounting Service and said,
“We've got to start bringing these things together. We've got to re-
duce the number of accounting systems and disbursing systems.
We've got to introduce modern accounting methods.”

He started us on the path. If it weren’t for his efforts, we would
be nowhere right now, and thank goodness he got us going.

Now, what have we done in the last 5 years? And I’ve got to say,
it’s hard to appreciate the scope of the problems. I’m clearly goin;
well over my allotted time, if I may. Sir, first let me share wit]
you the magnitude of the department and what it does. Every
month we process 10 million payroll checks. Every month we proc-
ess 2.5 million invoices. We process about 700,000 travel vouchers
a month. We process 5,000 death notices a month. It’s a gigantic
operation.

It is also an operation that is spread to hither and yon. Four
years ago, when DFAS was created, there were over 300 accounting
stations and 300 disbursing stations. Any one of these disbursing
stations could write a check on somebody else’s account. It doesn’t
make a lot of sense, but that was the business practice at the time,
5 years ago. We are gradually going through very profound
changes.

This last year alone, we closed nearly 80 accounting stations. We
are consolidating so that we will only have 26 locations in the fu-
ture that will do finance and accounting. We have consolidated our
payroll systems. For example, we had four separate retiree and an-


29

try that would write checks on other people’s accounts, I mean, and
not check in advance, and that was a problem. We are shrinking.

Mrs. MALONEY. Even if they were writing checks—first of all, I
would start right ahead that you don’t write checks unless you
check, and have the accounting principles, and put it into the cen-
tralized accounting system.

Mr. Hamre. And we absolutely agree with you.

Mrs. MaLoney. I think that that’s a minor requirement. Even if
you're at 300 different stations, or even 1,000 different stations,
you, at the very least, can accomplish that, it seems to me.

Mr. Hamre. As I said, when you talk about that number of loca-
iions and our volume of transactions, 2.5 million invoices a month.

Mrs. MALONEY. All you have to do is tell them, “You don’t pay
it until you match it with your invoice, until it’s put into the
central recordkeeping accounting.”

Mr. Hamre. OK. Again, we match it with the invoice, but if I
were to hold up—if a payment is made in an Air Force accounting
station on a Navy account, it takes about 180 days to clear the ac-
counting record. Now, you're telling me I’ve got to say to a contrac-
tor, “I’m not going to pay you for 180 days, until I get the electrons
worked out and I get it validated against the underlying accounting
record.” I mean, the Prompt Payment Act says we pay in 30 days
or start paying interest penalty payments.

So, as long as we have a receiving report that says we received
the goods and services, we pay that bill. Now, that’s not the ideal.
In the long run, we want the system you have described very
much.

Mrs. MALONEY. Now, earlier you said that they match only for
expenditures over $1 million?

Mr. Hamre. Over $5 million.

Mrs. MALONEY. Over $5 million.

Mr. Hamre. This is at the Columbus Contract Payment Center.

Mrs. MALONEY. OK. What about the volume of transactions
under $5 million. There are a huge number; right?

Mr. Hamre. Oh, absolutely. Yes, absolutely.

Mrs. MALONEY. Well, I could go through, there are 350: not iden-
tifying and disclosing future government cost; not having an inven-
tory of equipment. These are basic recommendations. No. 4, inabil-
ty to accurately record and report costs. Just for the record, I
would like to request that you respond to the 350 recommendations
in writing, exactly what you have done.

Mr. Hamre. Sure.

Mrs. MALONEY. So that we can start looking at it. And one thing
that I would like in writing, because I just don’t understand why
it's not being done, is why we don’t follow general accounting prin-
ciples. And I’m going to tell you a brief story.

I'm a New York City resident. We had a financial crisis in 1977.
We went bankrupt. The mayor had one set of books; the comptrol-
jer had another; the city council had another. It was a complete
mess. They said they couldn’t be part of one central accounting sys-
tem; it was too complicated.

Well, the Federal Government said to us, “We're not going to bail
you out unless you change your accounting systems, you go to gen-
eral accounting systems.” And guess what, overnight they went to


98

Ms. Eleanor J. Hill
Inspector General

Department of Defense
Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss financial
management in the Department of Defense. I am accompanied today
by Mr. Robert J. Lieberman, the Assistant Inspector General for
Auditing and Mr. Russell A. Rau, the Assistant Inspector General
for Policy and Oversight. The principal focus of my remarks will
be an overall assessment of the Department’s ability to improve
its finance and accounting operations and to comply with the
Chief Financial Officers Act and the Government Management Reform
Act. We would also like to share with the Committee what
measures have been taken to make financial management reform a
top DoD audit priority and to devise more efficient and effective

audit approaches in this critical area.

In preparing for this hearing, Mr. Chairman, my staff
brought an interesting historical note to my attention. It seens
that, in 1779, the Continental Congress purchased thousands of
preprinted pro forma ledger pages for use by Army commissary
officers. The intent was to create an audit trail to facilitate
Congressional oversight. Quartermaster Jacob Greene balked,
complaining that his purchasers could not be expected to itemize
expenditures or provide delivery certifications from suppliers.
The Quartermaster claimed the paperwork required by the Treasury

Board was unreasonable. He further stated that the Quartermaster


91

Mr. HALE. The same thing here. I mean, we are basically copying
a lot of what they have done with the CFO report. But let me ask
Helen to comment on something, and I think I know the answer.
The Army has the same fundamental system problems. They are
also getting, I believe—correct me if I’m wrong—disclaimers on
their statements, because they don’t have transaction-driven gen-
eral ledgers, the same system problems we all have. Fair?

Ms. McCoy. Yes, that’s a fair assessment.

Mr. HALE. Not to take away at all from what they have done.

Ms. McCoy. And we did start earlier. After our first CFO audit,
the Army formed what was called a senior level steering group. It
was a group of all the three-stars and senior SESers in the head-
quarters, from all the functional areas, because, quite frankly, it
was an eye-opener for us. We brought in a group from the private
sector, the Private Sector Council, and got advice from them over
a 2-year period. So we have been at this a little longer than they
have, and it’s paying off, finally.

Mrs. MALONEY. Well, thank you very much. I would be interested
in hearing from you what you think you need to get the job done.

Mr. Horn. Let me just ask one closing question that interests
me, with procurement, and I wonder if it applied to accounting. It
seems to me you have a lot of similar recruitment problems, pay
problems, upward mobility problems in some of these areas, where
you’re handling very important things, but it tends to become rou-
tinized. And there’s a question as to how much creativity one really
feels they are getting out of that.

Should we be thinking of a unified financial service in the De-
partment of Defense? Now, I realize you represent the three service
departments that still, despite unification pleas, go at each other
almost as much as they go at the enemy, and maybe not just on
the football field. And I understand all that. But the question
would be, in terms of some basic support services, that was put
very well, if you don’t pay the troops on time, you’ve got a morale
problem. George Washington wrote a number of letters to Congress
about that very problem, the Continental Congress.

So do we need a financial service where we truly recognize the
talent that it takes to run one of these systems, and where we have
people that can make those contractual judgments, and we're not
paying them at a very low grade for what is a very responsible job?
Granted, it’s automated, but judgment is still called for.

I will start with Secretary McCoy.

Ms. McCoy. A couple of comments. First of all, the comment
about there being very low grades and decisions having to be made.
In my dream list or dream world, if you would, I would like to take
that decisionmaker away from the low-graded individual and make
it automated.

Mr. Horn. Do you want to elaborate on that? I think I know
what you mean, but I just want it to be very, very clear.

Ms. McCoy. Well, I think, in today’s environment, with the tech-
nology that is available to us, you can have rule-based systems, you
have artificial intelligence, there are so many tools available that
the individual, particularly in that kind of operation, doesn’t nec-
essarily have to make decisions. Of course, it depends on contracts
being written clearly. If it has to do with a requisition, the requisi-


ll

nuitant systems, and we have reduced them now so that there is
a single system being operated, I think, quite effectively, in two lo-
cations: one for annuitants, and one for retirees. We are consolidat-
ing our payroll systems. We are down now from 18 civilian payrolls
systems; I think we only have 6 now, and we will be out of those
by the end of next year.

So we are making profound changes across the board. We have
made less progress, frankly, in the area of accounting. Now why is
this? If I might address a question that Mrs. Maloney raised, which
is, why are we not using modern accounting methods? It’s a good
question. Virtually all of the systems that we have set up in the
Department of Defense are designed to answer one of two ques-
tions: If you have to go to war, can you do it, and where are there
problems? That’s question No. 1. And question No. 2 is, did you
spend the money the way Congress gave it to you, and did you fol-
low their guidelines?

That second question dominates our world in finance and ac-
counting. And during the 1940's, and the 1950's, and the 1960’s,
and the 1970’s, and the 1980’s, we did all of that through the fi-
nance systems in the department; that is, disbursing systems that
spent money. And our entire system revolved around accountability
by keeping track of how we spent the dollars, recorded in the fi-
nance systems, not in our accounting systems. And we never had
a closed circuit between our disbursing systems and our accounting
systems.

We need to change that. This is, frankly, at the core of the re-
form that got started with passage of the Chief Financial Officers
Act. We are on the way to doing that, but we are a long way away
from getting that done. We have made some progress, not bad
progress, but some progress in the area of consolidating our general
accounting systems. We have made less progress in the area of our
industrial fund accounting systems. And there it’s because most of
them are integrated into the business management systems that
exist for those organizations, such as our depots and supply sys-
tems.

We have a plan to fix that. It’s a long-term plan that’s going to
take us years, and it’s going to take a lot of money. And there is
some controversy about that. One of the questions you will want
to ask later in this hearing, of Eleanor Hill, is, do we need to go
the route that we’re currently going on? We may not need to, and
there is some discussion inside the department about that.

Another question is, how much of this should we do inside the

‘overnment? Maybe we should contract out for some of it, to leap-

g this step and not necessarily improve our systems and then try
to operate them as a government. Maybe we ought to contract it
out. These are all issues that are on the table and things that we
ought to explore.

Now, what can we promise you? What have we done so far, and
what can we promise you? As I said, when I got to the office and
when Rich Keevey came to the job, we had approximately $50 bil-
lion of problem disbursements. May I say, these weren't checks
written where we had no idea what we spent them on. We don't
write the check until we have a receiving report that said we _re-
ceived the goods and services, and then we write the check. But


97

are using, the migratory system of approach to change the account-
ing systems. We are now looking at whether we think that’s the
best way to do it, if there are other ways to do it. We have some
concerns, but, again, that work is ongoing and hopefully will be fin-
ished very soon.
I will be glad to try and answer any questions you may have.
[The prepared statement of Ms. Hil fllows:|


102

DEFENSE BUSINESS OPERATIONS FUND

The Defense Business Operations Fund (DBOF) is the primary
vehicle for financing DoD support activities such as supply,
maintenance, transportation, finance, and information processing.
We have reported 120 specific DBOF financial management
deficiencies such as poor audit trails, unsupported and
unverified transactions, and lack of guidance. These
deficiencies prevented the timely development, reliable
presentation, and effective use of the financial statements. The
scope of the problem is evident from the fact that auditors
recommended $53.6 billion in adjustments to the DBOF FY 1994
financial statements and supporting accounting records. The
systems and internal controls for preparing DBOF financial
statements are clearly not in place and it appears that several
years of sustained effort will be needed to turn the situation
around. We recommend, however, that DoD should put priority on

the following measures:

o implement the DoD Standard General Ledger in all interim

migratory, migratory, and new accounting systems;

o improve documentation and audit trails;

© implement reasonableness and analytical edit checks for

internal control;


118

FINANCIAL REPORTING

101 + 95=' " i eS. 21
Rendering Audit Opinions on DoD General Fund Financial
Statements," August 29, 1995

Four major deficiencies prevent DoD from preparing auditable
general fund financial statements. These deficiencies include a
lack of modern systems designed to produce financial statements,
inaccurately or improperly valued assets, inaccurately accounted
for disbursements and collections, and undisclosed contingent
liabilities. Numerous corrective actions, some long-term, are
planned and ongoing to address these deficiencies.

Management agreed that the DoD lacks an integrated, double entry,
transaction driven general ledger system; does not have adequate
interfaces between financial and non-financial systems; and does
not adequately record and reconcile "Fund Balance With Treasury”
general ledger accounts to amounts reported by the Treasury. ‘The
Department will follow pending Federal Accounting Standards
Advisory Board guidance on defining and reporting contingent
liabilities.

Report No. 95-294, "Major Accounting Deficiencies in the Defense
Business Operations Fund in FY 1994," August 18, 1995.

Major DBOF accounting and financial management deficiencies,
resulting in $53.6 billion in auditor-recommended adjustments,
prevented the timely development, reliable presentation, and
effective use of the DBOF’s financial statements. These
deficiencies were grouped into the following major categories:
accounting systems’ characteristics; policy guidance; Property,
Plant, and Equipment; inventory classification and classification
ef accounts; and personnel. Corrective actions totaling $19.9
billion affecting the identified deficiencies had been
implementéd. The overall inability to produce financial
statements has been caused by numerous unlinked financial
accounting and nonfinancial systems that are unable to compile
and report financial information. These systems were designed
without consideration of accounting principles such as accrual-
based accounting, or the DoD Standard General Ledger.

Management generally concurred, stating that, on balance, the
report fairly presents conditions that existed within DBOF during
the period of the audit.


65

The logistics system, the inventory system are integrally tied to-
gether. And to make changes in those systems, ultimately—the ci-
vilian pay system, the military pay system are accounting systems.
If the troops aren’t paid properly, the troops won’t function well. To
change systems rapidly runs the risk of the inability to meet the
mission of the department. That’s my point about mission critical-
ity.

So I’m simply saying that the pace of change and the vision that
we all have for a single integrated financial management system
is one we have to be very careful of in implementation. We would
like to see the Defense Department move faster. We continually en-
courage. I just offered a dinner for four to the first service that gets
an unqualified opinion. It’s going to cost me several hundred dol-
lars, probably. They eat a lot in the services, I’m told. I don’t know;
T’ve never had dinner with them.

My point is that we’ve got to be careful of the pace of change.
We've got to push them to move faster.

Mrs. MALONEY. I understand your point, and I’m not talking
about extraordinary circumstances as in time of war. I can cer-
tainly understand that we have to move quickly, do whatever we
have to do to win. But the GAO report did not talk about Desert
Storm. What the GAO report talked about was day-to-day manage-
ment and the fact that certain policies, even when you're not in
war—thank God we haven’t been in war for many years—that the
management steps are not there.

What concerns me, what I’m hearing from the testimony, is that
I’m hearing a reluctance in the Department of Defense to move for-
ward. I mean, you told me yourself they want three different sys-
tems, at least, for the three different military establishments. That
didn’t make any sense to me. When you're buying paper clips;
you're buying paper clips. Why do you have a different system for
the Navy than you have for the Army?

Mr. DESEVE. Why does General Electric have a different system,
within GE, for GE Credit Corp. and the Large Steam Turbine Gen-
erator Division? Because in organizing their business, they have
made strategic decisions about how their business will function.
That's the reason.

Mrs. MALONEY. OK. My point is, there are certain functions
within the Army, Navy, and Air Force that are the same, paying
their personnel. So I think that that should be the same. Now, if
you have a Star Wars system that’s got to be billed differently than
any other system, possibly, but I would like to see that in writing.
IT mean, you know, procurement is procurement. Paying bills is pay-
ing bills.

Whether they have a turbo system in GE or paying their person-
nel, they have general accounting principles that they are following
with that, and I can assure you they are not doing overpayments.
And I can assure you that they know where their dollars are going.
And maybe we should try to do the same thing with the govern-
ment.

You were saying it’s not critical. Maybe it should be critical that
we have better management of our taxpayers dollars, and we
should have the same attitude toward tax dollars as we have for
other things. Maybe we wouldn’t be overspending our budgets or


71

plicitly addresses management control deficiencies in its reports. In addition, the
‘Agency conducts an annual audit of the management control process itself, resulting
in an independent assessment from the Auditor General to the Secretary of the
Army. Finally, our Senior Level Steering Group—a crossfunctional, general officer-
level oversight council—conducts a final “corporate” review of the Secretary's annual
Statement of Assurance before it is submitted for his approval and signature.

The most critical element in making the management control process work is
leadership. The Army’s senior leadership has consistently stressed the importance
of effective management controls and sound stewardship of public resources. The
Secretary of the y, the Under Secretary, and the Chief of Staff have issued a
series of letters to our field commanders and the headquarters staff requiring their
active involvement in the management control process and stressing effective con-
trols as a means to successful mission accomplishment. Field commanders and head-
quarters principals, in turn, have issued their own directives emphasizing the im-
portance of management controls.

The final thrust of our management control approach is education. We have im-
plemented an Army-wide education and training effort to ensure personnel through-
out the Army understand the Army’s process and their role in it. We have developed
training materials, such as briefing packages and a videotape, to provide Army com-
mands and activities with an in-house training capability. We developed a handbook
for all management control administrators, and initiated an annual Army Manage-
ment Control Conference. Our staff provides management control instruction in In-
troductory, Intermediate and Senior Auditor courses.

Our efforts to incorporate the management control message into the curriculum
of Army schools cover a wide range of educational programs. At present, this in-
struction is included in: orientations for new Brigadier Generals and Senior Execu-
tive Service members; the Command and General Staff Officers Course; the Arm;
War College; the Garrison Commanders’ Course; the Army Management Staff Ci
lege; a variety of senior financial management training programs, and correspond-
ence courses for new managers and first-line supervisors. In addition, we are work-
ing to incorporate management control instruction in a wide range of soldier schools,
to include the Officer and Warrant Officer Basic and Advanced courses, the Ad-
vanced Non-Commissioned Officer and First Sergeant courses, and the Combined
Arms and Services Staff School. Finally, in a joint effort with the US Department
of Agriculture (USDA) Graduate School, we developed a one-day management con-
trol course for managers. This course was made available Army-wide beginning in
March 1995, and is conducted on-site by the USDA Graduate School on a reimburs-
able basis.

PARTNERSHIPS AND PROGRESS

As 1 noted earlier, the Army financial management community has formed strong
and lasting partnerships with functional proponents in the Army and throughout
the Department of Defense, We are working together to improve not only our sys-
tems interface capabilities, but in a variety of business process reengineering efforts.

THE ARMY JOINT RECONCILIATION PROGRAM

Among our greatest success stories is the Army Joint Reconciliation Program,
which combines the financial skills of accounting and budget personnel with the ex-
pettise of acquisition specialists, logisticians, auditors, and legal staffs in creatin;
orizontal teams to analyze problem disbursements—payments that do not mate
the obligations on the books. These are of major concern within the Defense Depart-
ment because if they are not resolved in a timely manner, current year dollars must
be used to pay bills from previous years. During FY 1995, joint reconciliation:
¢ Reduced “absolute value” unmatched disbursements (UMDs—payments for
which there are no matching corresponding obligations on the books) from $750
million on June 30, 1994, to $368 million on September 30, 1995—a reduction
of 51 percent.
* Reduced “absolute value” negative unliquidated obligations (NULOs—pay-
ments that exceed the obligation amounts reserved) from $500 million on June
30, 1994 to $148 million on September 30, 1995—a reduction of 70 percent.
« Reduced contingent liabilities associated with the canceling year appropri:
tions from $539 million on October 1, 1994 to $23 million on September 30,
1995—a reduction of 96 percent.

Our Major Commands report that their experience with the Joint Reconciliation
Program has led to improvements in their execution of current year obligation au-
thority. Most important, it has precluded current year funds being diverted from es-
sential expenditures in support of military readiness.



16

systems, corrects reasonably correctable deficiencies, improves processing and re-
porting capabilities as much as possible, and seeks cost savings,

The next step then is to develop optimum follow-on systems, drawing on lessons
from the migratory ones and taking full advantage of the latest technology. The fu-
ture transition to these optimum systems will be at a pace determined by the money
and technologies available for such a transition, and other circumstances.

The consolidation of DoD finance systems is well underway, with the implementa-
tion of six migratory finance proceeding rapidly:

* By 1997, the Defense Civilian Payroll System (DCPS) will be fully implemented,
replacing 27 payroll systems. The DCPS will handle the pay of all DoD civilians,
now numbering about 830,000. As of September 1995, about half of the DoD civilian
work force was under DCPS, and 222 payroll offices had been eliminated.

* By 1999, the Defense Joint Military Pay System (DJMS) will be fully imple-
mented, consolidating the original 22 systems down to 2: DJMS for the Army, Navy,
and Air Force; and the Marine Corps Total Force System for that service. The
DJMS will support the 2.5 million people on active duty and in the Reserve Compo-
nents.

* The Defense Transportation Payment System (DTPS) is being implemented to
consolidate and standardize all DoD transportation payments. It currently processes
payments for the shipment of some household goods and freight. In FY 1996, DFAS
will improve the DTPS's use of electronic data exchange and other aspects of it.
DTPS improvements are expected to save about $21 million per year.

* The Defense Retiree and Annuitant System was fully implemented in FY 1995
and is now managing over 2 million accounts. When DFAS was created, retirees and
annuitants were being paid from four sites, using 8 systems handling fewer than
2500 accounts per employee. We now have one system operating at just 2 sites. The
DRAS enables us to handle 3400 accounts per employee, operate with 247 fewer
workers, and save over $10 million annually.

« The Defense Debt Management System became operational in 1993. It standard-
izes the collection of debts from military and civilian personnel not on active DFAS
payroll systems, as well as delinquent contractor payments. It replaced 5 distinct
systems operated by DoD components.

Consolidation of Accounting Systems

The Department continues to work hard to eliminate as many as 100 accounting
systems. At least as important also are our ongoing improvements to the remainin,
systems—to make them more compliant with the Chief Financial Officers Act ant
capable of providing accurate, timely, and auditable financial statements.

in the general accounting area, migratory systems have been selected along the
lines of the three military departments. We have already gone from 91 general fund
accounting systems in 1991 to 77 in 1995. We anticipate a further reduction to 53
systems by 1998. Again, these migratory systems are continuously being improved
to make them more accurate, timely, and compliant with the CFO Act. We also are
working to improve greatly the link between accounting systems and the non-finan-
cial systems that handle logistics, procurement, and contracting.

In the functional area of business operations, the Defense Business Operation
Fund (DBOF) Corporate Board has approved 18 migratory accounting systems, to
handle the consolidation of the current 77 systems. We expect these DBOF migra-
tory systems to be operational beginning in February 1998.

Reengineering Business Practices

A critical component of DoD’s financial management reform is the reengineering
of its business practices, i.e, the procedures by which it functions. The goal is to
make DoD business practices simpler, more efficient, and less prone to error. The
Department recognizes that even the very best finance or accounting system cannot
compensate for inherent flaws in the processes that they service. Reengineering is
being achieved by the revision of existing policies and procedures and the increased
standardization, consolidation, and compatibility of existing systems.

In advancing the consolidation of DoD financial operations, DFAS is achieving a
significant reengineering of the associated business practices. The organizational
structure of DFAS's five centers and 21 Operating Locations is designed to facilitate
standardization and streamlining, improve accountability, reduce data incompati-
bility, and improve customer service. Substantial reengineering also was achieved
in the development of the new payroll/payment systems.

Electronic commerce/electronic data interchange (EC/EDT) technology is a major
tool in DoD’s reengineering effort to promote the paperless exchange of financial in-
formation, thereby saving time and money. DFAS is spearheading the widespread
adoption of EC/EDI for DoD financial operations. For example, EDI is currently


99

Department could not be run like the “plain business of the
common storekeeper." Simply put, here we are 216 years later in
the computer age and we still cannot supply Congress with an

acceptable accounting of expenditures.

INANCT, NG

The Chief Financial officers Act of 1990 required
preparation and audit of financial statements of revolving funds,
trust funds and commercial-like functions throughout the Federal
government. Additionally, the Departments of the Army and Air
Force were designated under the Act as pilot programs, requiring
preparation and audit of financial statements for the general
funds of those Services. The Government Management Reform Act of
1994 expands the requirement for providing audited financial

statements to all DoD funds for FY 1996.

As you know, the Department of Defense is massive in size,
encompassing a wide array of organizational entities and
activities. Unfortunately, the Department’s current process for
preparing financial statements necessarily involves gathering
data from hundreds of accounting and non-accounting systems that
are not integrated, not compatible, and not designed for
financial statement purposes. In some cases, the systems are not
even automated, but are based on manual record keeping. The
Department will be able to achieve sound financial reporting

practices only after the number of multiple automated systems are


21

after year. However, the systems were not developed over the decades to produce
financial statements patterned after the private sector annual reporting require-
ments.

Essentially the over 250 legacy systems developed over the past 30 plus years
were designed to respond to Executive and Legislative Branch requirements and to
direct DoD's management focus toward budget execution reporting. DoD Compo-
nents independently developed their own version of systems to meet financial re-
porting needs. The requirement to produce private sector type financial statements,
using the existing budget execution reporting orientated systems, is easier said than
done. To achieve the financial statement requirements means DoD must make radi-
cal changes to financial management systems. We strongly support the direction
and benefits to be gained, but want to be up-front on how difficult this change will
be. The changes impact our policy, procedures, systems, training, and our DoD per-
sonnel and managers.

Nevertheless DoD continues to work hard to improve the quality of financial
statements each year and to disclose more useful information in the CFO annual
reports. While we are focusing our efforts to implement compliant accounting sys-
tems we are working in parallel to resolve audit recommendations in policy and prc
cedures areas. Our objective is to improve the policy and procedures so when compli-
ant accounting systems are implemented we will be able to obtain favorable audit
opinions.

To improve the quality and auditability of CFO financial statements, DoD must
continue to focus on the business transactions that create the millions of accounting
entries each month that must be classified, posted, and accumulated up from instal-
lation level customer accounting records to departmental level accounting systems.
‘The standardizing of accounting policy and regulations across DoD, the re-engineer-
ing of business practices, the use of Electronic Commerce/Electronic Data Interface
(EC/EDI), implementing standard financial statements and footnotes, and work to-
ward a standard Budget Accounting Classification Code will improve the efficiency
and quality of financial management support, reports, and auditability of trans-
actions.

Re-engineering DoD business practices is critical to DoD’s financial reform. Busi-
ness practices need to be more efficient because of the huge volume of accounting
transactions performed to support our world-wide customers. DFAS’s focus on the
use of Electronic Commerce/Electronic Data Interface is a piece of the improvement
effort to bring the efficiency of current technology to bear on the contract payment,
disbursing and accounting processes.

The accuracy of the Department's reported asset account balances is a continuing
audit finding. DoD is working to improve the procurement, logistics, and property
functional reporting used in the Departments financial statements.

DoD continues to make progress in the quality of CFO reports as improvements
in procedures, clarification and expansion of guidance, and the knowledge and expe-
rience of auditors, accountants, and customers has grown.

CONTINUING IMPLEMENTATION OF THE CFO ACT

DoD is expanding the scope of CFO reports and beginning with the FY 1996 CFO
reports, DoD) will be reporting on 100%¢ of the Department's entities and appropria-
tions/funds. A total of nine DoD CFO annual reports will be published and audit
opinions rendered.

For Fiscal Year 1996 DoD’s Navy CFO report will cover 100% of the Navy General
Funds. DFAS and Navy have established a joint team to plan and prepare the FY
1996 Navy General Funds CFO report. The detailed Plan of Action and Milestones
(POA&M) for this requirement is being carried out to produce financial statements
that comply with OMB/DoD Form and Content guidance and provide Navy Man-
agers useful financial information, DFAS and Navy are learning from the earlier ef-
forts of the Army and Air Force who have been reporting on 100% of their funds
for the past few years,

In FY 1996 DoD will also include financial information covering 100% of the De-
fense Agencies/Defense-Wide General Funds In the past CFO reports were prepared
only for some of the Defense Agencies/Defense-Wide trust and revolving accounts.

‘DoD will also prepare, starting in FY 1996, a DoD-Wide CFO report consolidating
ali DoD funds. This CFO report will include Army, Navy, Air Force, the Defense
Business Operations Fund, the DoD Military Retirement Trust Fund, the National
Defense Stockpile Transaction Fund, the U.S. Army Corps of Engineers, the Defense
Security Assistance Agency, and Other Defense Organizations.

Before financial reforms began in 1990 the DoD problems seemed intractable. The
Department’s financial management troubles reflect the divergent procedures imple-


50

on them was the Federal Government, but it was also the credit
markets. The credit markets said, “We’re not going to lend you any
more money.”

Before the Federal Government was asked, Chemical Bank was
asked, and others were asked, to lend money to New York. And
they said to New York, as every other State and locality, “We’re not
going to give you any money unless you've got, according to gen-
erally accepted accounting principles, a clean financial statement.
Sorry. No statement; no money.” So there was a market test.

The Federal Government, as a whole, has never had a market
test. We use the full faith and credit of the Federal Government
to borrow. We've never had, for the Federal Government, and were
never required to until this Congress passed, last year, GMRA, to
have an audited governmentwide financial statement. So the stand-
ard simply wasn’t there. We simply never asked the Defense De-
partment.

A good friend of mine, Morgan Kinghorn, who was the CFO at
IRS, was asked the same question. Why are these IRS financial
statements so terrible? And Morgan said, “Well, they were never
designed to be audited.” Well, that gave rise to a great humorous
column by Dave Barry, the humorist, who talked about not paying
his taxes this year because his tax return was never designed to
be audited.

We can only appreciate the magnitude of the task, No. 1; the fact
that it’s never been asked to be done before, No. 2; and No. 3, the
absence of market pressure. I don’t want to sound like a market
theorist in any way, but that lack of pressure focuses the attention
more diffusely in the Defense Department than it does in New
York, which needs to borrow in the credit markets on their under-
lying financial statement. So we would like to spend some time
talking about that.

I don’t want to go into a lot more detail other than to say that
Gene, Gerry Murphy, and I have visited each of the departments
covered by the CFO Act, recently. And we asked them questions
about their auditability: can they produce an income statement;
can they produce a balance sheet; do they have underlying systems
that, with or without manual intervention, can produce those docu-
ments. We then said, what unique problems do you have? We found
one agency where, over at least 17 years, they had never reconciled
one of their major funds.

Now, the question is, do you start back in year one and take
every shoe box, every cardboard file box out, in every office in that
agency—and this is not the Defense Department—and reconcile
each of those documents? Or do you try to do some testing and find
some practical ways to find that opening balance, and then go for-
ward from there? We’re discussing and debating that question now.

What do you do with property, valuation of property? The State
Department has a very difficult time valuing the Embassy in
Tokyo. It sits on several acres of ground in the middle of downtown
Tokyo. So there are a lot of audit issues that go beyond simply
dealing with waste, fraud, and abuse. And I don’t mean to be—how
shall I say it—I don’t mean to be obfuscating on the issue in the
Defense Department. I associate myself with the Big Five that


95

Let me just tell you, briefly, a few points, and then I will try to
answer any questions you may have. First of all, where are we, in
terms of our assessment of what is happening right now?

First of all, the sad truth is that the DOD audit community,
which really consists of not only our office, the Inspector General’s
Office, but also, as I think you know, each of the services has an
auditor general, and they have significant audit resources. To-
gether with the Army, Air Force, and Navy auditing communities,
we are charged with conducting many of the CFO audits. The sad
truth is, together we have been unable to give opinions on the larg-
est DOD funds that are required to be audited under the Chief Fi-
nancial Officers Act.

The second piece of bad news, if you would, is that we have been
very candid and consistent on our opinion that, given current cir-
cumstances, and given what is now going on, the efforts that are
now being made, but being realistic about it, we have estimated to
GAO and the other agencies involved in the ongoing financial state-
ment effort that we do not think that that situation is really going
to change considerably until, at the earliest, 1999 or the year 2000,
which is beyond the 1997 date in the statute.

The next point, I would say, and our statement reflects it, there
has been some movement in the department in a positive direction,
which you’ve heard at length about today. I don’t need to go into
that in great detail. It’s in the statement. We have seen some good
efforts. We think there are a lot of people working very hard on
this in the department, but, unfortunately, given the situation and
given also what they have inherited, I think it’s fair to say they do
have a long way to go.

Overall, when we look at our reports, and my conversations with
our auditors and people who have done this for years and years
and years, I think, really, we think the needs, the most critical
needs, really break down, I would say, into about five areas, some
of which have been touched on; all of which, I think, at one point
or another have been at least alluded to today.

First of all, and I think we probably might even put this at the
top of the list, is the problem with the data. Yes, there is a problem
with systems, which is second on our list. But before you even get
to coordinating the systems, what our audits are consistently find-
ing is that the data going into those systems is, No. 1, not stand-
ardized.

In other words, you have different definitions. You are comparing
apples and oranges between different systems, and you cannot eas-
ily make the transition into one system, when different services
and different parts of the department are defining things different
ways. So it’s not standardized data.

No. 2, we are finding, in many, many instances, the data is not
accurate. One example, Mr. Hamre, back in 1994, when he first
looked at the unmatched disbursements issue and started issuing
directives on that, which we worked with him on some of those di-
rectives and tried to give him our best advice on how to do that
or address that problem, he asked us to look at some Antideficiency
issues, situations where he thought, based on the evidence, it ap-
peared there might be violations.


33

of technology, software, and so forth? Where are we on figuring
that one out?

Mr. KEEvey. That’s been a challenge too. For example, when we
reduced these 300 accounting offices out there down to the 21. Last
year we did about 50 of them, or 60, 1 forget which. When we
closed down accounting offices and moved them into the new cen-
ters, a lot of the people didn’t go with the work, so we had to hire
up new people. We had a lot of training that needed to be accom-
plished. We have a program laid down to do that.

By the same token, we found that to be a problem, because we
didn’t have staff up sufficiently at first, so we ran into some dif-
ficulties in the short run. But I think we’re strengthened by our
first experience under the consolidation aspects, and we will in-
crease training as we open up these new centers.

We have other problems related to training, just general account-
ing expertise. Especially in this downsizing of the government, we
have to be careful that, when we rehire or maintain certain staff,
we get the correct expertise in these areas to do that. So I think
we're conscious of the problem. We've experienced some difficulties
in our consolidation because of the drawdown of staff and the mov-
ing around of locations, but I think we're up to that task.

Mr. Horn. Were there any other centers besides the Columbus
Genter that had the difficulties in overpayments and this kind of
thing?

Mr. KEEveY. That’s the major center, because Columbus is the
eenter that pays our major contracts, our weapons systems. They
pay about $90 billion out of the one system there, and that, there-
fore, is the center that you would most likely find these huge num-
bers.

Mr. Horn. So when you compare centers, there isn’t anything
proportionately wrong?

Mr. KEEVEY. No.

Mr. Horn. The proportions are about the same, in terms of over-
payments, with other centers?

Mr. KEEvey. They are very, very small. In fact, the overpayment
issue that is talked about in the various reports that reviewed
DOD center on the Columbus Center and center on weapon system
payment contracts, where we have made overpayments principally
because of what Dr. Hamre alluded to, contracts that are not rec-
onciled. We have a contract writing system out there. Data is not
entered into that system the same way it’s entered into the ac-
counts payable system or the accounting system, and therefore
there are disconnects which lead to some overpayments.

I should point out that we have made a lot of improvements, I
think, reduced the contract overpayments which was identified at
about $800 million in fiscal 1993. The year of the close, we had con-
tract overpayments of about $250 million. So we’re reducing the
amount—still not acceptable—but I think making progress.

And in most instances—I should say “most,” because I don’t
know with certitude—we get the payments back. It’s not like we
have paid the money out and will not get it back. We will correct
that, either by investigation during the time that we we're doing
it or when a contract closes out. Most of the time this is money
ahead of what it should be.


17

used to process invoices in the Standard Automated Material Management System.
In addition, we are implementing EDI for payment notification to vendors and the
direct input of data into accounting systems.

During 1995, DFAS reengineered all processes by which the Department
garnishes the pay of employees for child support, alimony, commercial debt, and di-
visions of retired pay. The new processes will be implemented in FY 1996. In FY
1997 and 1998, DFAS will introduce and integrate EDI, imaging, and artificial intel-
ligence technologies into the processes. These changes are expected to increase dre
matically the efficiency of DoD garnishment operations, plus reduce their cost sig-
nificantly.

Travel Reengineering

Another important reengineering effort is simplifying the process for temporary
duty (TDY) travel by DoD civilian and military personnel. The goal is to eliminate
many of the steps now required to initiate travel, process a voucher, and receive
payment. A new paperless system will meet the needs of travelers, support mission
requirements, and save as much as $100 million annually. The Department will rely
on the private sector for all services except the obligation and approval of funds,
final accounting, and random audit.

Features of the reengineered TDY system include:

Simple policies, and entitlements, focused on mission requirements and re-
spectful of the integrity of travelers and commanders.

© Single trip document to serve as travel order, voucher, and itinerary record.
* Maximum use of government travel credit cards, to eliminate cash advances.
* One-stop shopping for travel arrangements.

« Simplified accounting to enable supervisors to track their travel budgets.

» Random and exception-based audits, vice 100 percent audits.

Standardization of Data

The standardization of financial management data throughout the Department is
crucial to reform. It facilitates the consolidation of financial management systems,
enables the sharing of data and greater compatibility between financial manage-
ment and non-financial management systems, and supports the reengineering of
business practices.

Until recent consolidation efforts began, DoD finance and accounting systems
managed some 100,000 data elements, Detailed data modeling has indicated that
DoD financial operations eventually could be conducted with fewer than 800 care-
fally designed standard data elements. As of June 1995, we have adopted 540 stand-
ard financial management data elements. Additional elements are likely to be added
in the future.

Also supporting reform is an ambitious effort to standardize and share acquisition
data. This will greatly improve the interactions between DoD procurement systems
and the financial management systems that process and account for payments for
procurement.

To foster standardization beyond just data, the Department is consolidating finan-
cial policy and procedures into a single 15-volume DoD Financial Management Reg-
ulation. This will replace a myriad of existing regulations and will clarify and ex-
pand upon many financial management procedures.

Eliminating Problem Disbursements

Although I have previously discussed the importance of financial management re-
form in eliminating Problem Disbursements within the Department of Defense, I
would like to reemphasize an important point—the Department was faced with a
choice—should we spend large sums of money and devote a substantial amount of
work-years researching these old files, or should we devote our limited resources
and personnel to fixing the underlying problems with our finance and accounting
systems? The Department has decided it isn’t worth going back to try to reconstruct
all of the old records that are incomplete and in some cases no longer exist, instead,
we plan to focus on getting the more recent records straight and fix the underlying
causes of the problem.

Computer Security and Fraud Detection

In June 1994 the Department established Operation Mongoose to detect fraud and
reduce the vulnerability of its computer networks to intrusion. The program is joint-
ly sponsored by the USD (Comptroller), USD (Personnel and Readiness), and the
DoD Inspector General. Data matches from multiple sources are used to identify po-
tentially fraudulent payments to individuals or contractors. Payments can be mon-
itored and validated from the civilian, military, retired and annuitant, vendor, and



61

Mr. Doparo. Right. The second one was really automating their
systems to have a lot of this done automatically. Given the volume
of transactions that they have, that’s the only way they are really
going to get at this issue.

There are two dimensions on the streamlining, just to clarify: one
is getting the simplified document that Mr. Keevey talked about for
their payment process now; second, is changing the payment proc-
ess itself and getting to more standardized and less complex ac-
counting codes. Some of the accounting codes they have could be
40, 50 digits, if not more. So, given the number of contracts.

Mrs. MALONEY. Mr. Dodaro, then could I request that for the
committee you submit—take their remaining accounting codes—
how many do they have now?

_ Mr. Doparo. Well, they've got different codes for different serv-
ices.

Mrs. MALONEY. But they have a total of about how many, about
8,000, or how many do they have?

Mr. Doparo. I’d have to go back and check, in terms of the num-
bers of codes. But I was just talking about one payment.

Mrs. MALONEY. I’d like to know how many codes they have now.
And if GAO could make some recommendations of simplifying
those codes and folding them into workable codes, maybe that
would be helpful for us to look at, and maybe it would be helpful
to them. But I can understand, if you have so many codes, ways
that you feel that you could compress them and make them more
manageable I think would be very helpful.

Mr. Doparo. One thing they are working on, too, which we think
is very important, is to have a standard set of budgetary and ac-
counting codes for the Department of Defense, which they do not
now currently have.

Mrs. MALONEY. OK. Standardized?

Mr. Doparo. A standard set of budget and accounting code clas-
sifications, and they are working on that now.

rs. NEY. Could you submit sort of a draft of what you
think it should be, from GAO?

Mr. Doparo. We would be happy to look into that.

Mrs. MALONEY. Thank you very much.

Mr. Horn. All those exhibits will go at the relevant place in the
record.

Mrs. MALONEY. OK. Now, I’d like to go back to your testimony
when you said one of the reasons that New York City was able to
solve their problem and move quickly, within 1 year, to general ac-
counting codes, was that they not only had the Federal Govern-
ment demanding it but they had a market test, that they had to
do it. Why can’t we just have a market test on DOD, that they
have to do it, and move to these standard procedures?

Mr. DESEVE. I think what you've done, in passing GMRA and the
CFO Act, is to put that market test in place for the first time.

Mrs. MALONEY. So you think that that’s sufficient?

Mr. DESEVE. I think it is, because I think it has now raised the
cognizance within the department. If you read, for example, the
roles and missions report, it’s clear there that moving in that direc-
tion is very important to the department, to reduce the cost of what
they do, and also to improve the integrity of what they are doing.


114

Although significant improvements had been made, some additional
improvements were required in security software and environmental
controls. Because of these weaknesses, knowledgeable users could
gain unauthorized system access to manipulate or destroy records.

The Defense Finance and Accounting Service and its Financial
Systems Activity Denver generally concurred.

1 = tion _o:

Report No, 95-046, “Data Input Controls for Mechanization of
Contract Administration Services System," November 30, 1994

Controls over automated data input for the Mechanization Contract
Administration Services (MOCAS) system at the DFAS Columbus
Center to pay contractors were not adequate. Specifically, MOCAS
accepted invalid data in 57 of the 484 automated input fields
tested. Edit tables available from the Military Departments
which could significantly improve the accuracy of MOCAS were not
being used. As a result, the risk of negative unliquidated
obligations, unmatched disbursements, and incorrect or duplicated
payments was very high. At the time of our review in April 1994,
there were 2,779 contracts with negative balances of $1.07
billion.

Management concurred with the finding and issued guidance to
improve internal operating procedures. However, despite the
hiring of additional personnel, contracts with negative balances
actually increased. As of June 1995, the DFAS Columbus Center
reported 2,857 contracts with negative balances totaling

$1.5 billion. The June 1995 numbers include contracts for
additional paying activities and a change in procedures for
reporting cancellation of yearend funds.

PAYROLL
Report No. 95-244, "Processing and Distribution of Combined
Federal Campaign Payroll Deductions for Military Personnel,"

June 21,199!

The audit was conducted at the request of the Office of Personnel
Management. Payroll deductions for the Combined Federal Campaign
were not always processed and distributed as requested by Service
members. Specifically:

© Three Defense Finance and Accounting Service Centers
distributed at least $582,428 in allotment payments to Combined
Federal Campaigns in which Service members did not participate.
Our results were based on problems reported to the Defense
Finance and Accounting Service Centers in FY 1994 and a
judgmental review of a limited number of pledge cards at three
Payroll offices and three central receipt and accounting points.


116

”AYMENT:

Rey + 95-234, "Dey t fense Complial Wi. de:
Reporting Requirements," June 14, 199

Compliance by the DoD with Internal Revenue Service Form 1099
reporting requirements was poor. Ten of the 11 DoD paying
offices reviewed, including the DFAS Columbus Center, were not
obtaining the needed information, maintaining accurate records,
or reporting payments for services obtained from noncorporate
contractors and medical service corporations to the Internal
Revenue Service. Failure to provide Form 1099 hampers IRS
efforts to combat tax evasion.

Management concurred, stating that the Department proposes to
achieve compliance via vendor registration for electronic
contracting in DoD and expects to complete the process within
two years.

t No. 95~ ” ts - Defer ountint
Office, Air Force District of Washingt nai I «
June 12, 1995

The Defense Accounting Office (DAO) Pentagon made incorrect or
improper payments, improperly certified vouchers, did not update
the accounting system, and did not maintain acceptable supporting
documents for obligations, accruals and disbursements. As a
result, duplicate and erroneous payments of at least $629,000
were made during FY 1993 and the first two quarters of FY 1994;
vouchers valued at $335,000 were not certified properly;
transactions were not recorded in a timely manner; and
obligation, accrual, and disbursement transactions totaling

$102 million of the $107.9 million reviewed lacked supporting
documentation. The inaccurate accounting system could not be
relied on to make resource allocation decisions because of the
potential for overobligation of funds.

The DAO Pentagon did not react to exception reports that
identified accounting errors and failed to ensure the integrity
ef accounting information.

Certifying fund availability was not consistently performed. As
a result, it was unclear who was the official responsible for
certifying expenditure of funds.

Management agreed to improve accounting procedures, recoup
duplicate payments, maintain adequate supporting documentation
for accounting transactions and do more to implement the DoD
Internal Management Control Program.


4

lost, to have tremendous overpayments in a 6-month period of
time—anyway.
{The prepared statement of Hon. Carolyn B. Maloney follows:]

PREPARED STATEMENT OF HON. CAROLYN B, MALONEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK

Mr. Chairman, this is an important hearing. In our national discussion of Federal
spending, the role of proper accounting, record keeping and other “nuts and bolts”
aspects of financial management are often overlooked. However, I question whether
this is an “essential” hearing. The Federal government shut down last night at mid-
night, and only essential Federal government employees are working and collecting
a paycheck today. In my district alone, thousands of Federal workers have been
idled and my staff has been reduced by over half. It seems to me that all of our
time would be better spent in trying to resolve the current budget impasse, rather
than spending four hours on an oversight hearing.

But since I won't win that argument, let me address the issues at hand. The De-
artment of Defense receives half of all Federal money not spent on entitlements.
[ts fiscal 1995 budget is $260 billion. It sends out an average of $35 million an hour

in checks for military and civilian employees from its main financing office. Approxi-
mately $380 billion flows from the military to the private sector each year.

Within the Defense Department different organizations use different and often in-
consistent operating and accounting approaches to do similar tasks. Additionally,
the acquisition and accounting practices are not based on computerized or central-
ized files. Essentially, the system is based on tracking transactions through a manu-
ally produced paper maze involving contracts, invoices, payment orders and can-
celled checks. Each manual step in this out-dated process increases the chance of
error within any given transaction.

The Department of Defense has embarked on a massive effort to implement
standardized accounting practices and resolve the questions which arose as a result
of previous accounting practices. The Department has undertaken a major con:
dation of payroll and contracting offices; initiated over 100 investigations into indi-
vidual managers or agencies for violations of the Anti-deficiency Act; frozen 23
major accounts and stopped payment on invoices of over 1000 contractors with ques-
tionable practices; and prohibited payments over $5 million unless supported by
valid contract and accounting records.

Despite its current efforts, the Department of Defense has a long way to go. Com-
pliance with the Chief Financial Officers Act, and the requirements of the Govern-
ment Management Reform Act and Government Performance and Results Act will
increase the pressure to establish a standardized accounting and financial manage-
ment system with stringent financial controls.

Thank you Mr. Chairman.

Mr. Horn. The gentlewoman’s statement will be put in the
record as if read.

At this point, since you will probably offer it anyhow, I want in
the record the letter the Under Secretary wrote to the Hon. C.W.
Bill Young, chairman of the Subcommittee on National Security of
the House Committee on Appropriations, which is a very full letter
on this situation.

And Dr. Hamre accepts responsibility for it, even though, as I
said earlier, this goes back probably before he was born. You look
sort of young to me. Everybody looks pretty young to me.

[The letter referred to follows:]



93

career development issues, and now have a formal committee set
up to look at these kinds of problems. How do I get a trained ac-
countant, for example, in the future, when all the junior level ac-
counting positions are in DFAS, if I need a managerial level
trained accountant, at some point, to replace the people who are in
those jobs now?

So we are concerned about this problem, and I agree with you,
T’ve been thinking about some more deliberate career rotation be-
tween the business and financial management community and ac-
quisition, for example, in the comptroller community, to try and
foster better communications and better understanding of the re-
quirements.

Mr. Horn. Are the personnel offices you all have to clear through
receptive to doing something, or do personnel people do what some-
times I think personnel people do?

Ms. CHRISTIE. I haven’t detected any problems in that regard.

Mr. Horn. Have you had any problems in the Army?

Ms. McCoy. No. I believe they would be receptive. They, too, are
looking for ways to help their customers.

Mr. Horn. Good for them. Progress has been made in 25 years.

Secretary Hale.

Mr. HALE. I think, on the accounting side, I would agree with
what has been said. I think we’re all concerned about growing
those people. Let me be real clear, though, and I think this would
be true for my colleagues, as well, I have about 11,000 people in
the Air Force who are preparing, defending, and executing our
budgets at the bases, at the major commands, and a few of them
here at headquarters.

I think those people, by and large, are quite well trained. We
have an extensive program of entry level training, of mid-career
training. We run a training school, a joint training school, profes-
sional military comptrollers school at Maxwell Air Force Base.
There are a variety of courses other than those three basic ones
that these people go to. I’m very impressed by their capability in
the Air Force and the ones I've met in the other services, as well.

So I think, on the financial management side, we've been focus-
ing on the accounting side, and I understand that’s the focus of the
hearing, but recognize we have an important job to take the money
you appropriate and be sure—one, we've got to tell you what we
want it for and defend it; two, then we’ve got to be sure it’s prop-
erly executed. I think we do that fairly well. And the systems we
have were designed, as you've heard, to keep track of that, and I
think they worked fairly well for that purpose.

So that’s the reason why I would say this is not—the systems
problems aren’t, fundamentally, creating fraud and waste, because
we are keeping track of the money that you appropriate. What we
aren’t doing a good job at is functioning like a business and looking
at our past accounting data and relating that to performance.
There we’ve got a long way to go. But on the financial management
side, I think the ‘Air Force people are very well trained.

Mr. Horn. Well, any other problems you think we ought to know
to educate us, that we were too stupid to ask you? Speaking only
for myself. The ranking minority member is never stupid.

Mr. HALE. I think you’ve asked very good questions.


38

See, I don’t understand. I understand that you have a different
system. My question is, why do you have to have a different sys-
tem? Why can’t you move simply to the accounting system that is
accepted and used and understand so easily by accountants and
auditors? When you read the audit report, they said they had a
hard time trying to figure out what was going on. They still don’t
even know, because your recordkeeping apparatus is unique.

My question is, why does it have to be unique? I can understand
that if you have security expenditures for defense that you don’t
want anyone to know about; it’s under intelligence; it’s off in a dif-
ferent category. But the whole procurement of the Department of
Defense, a lot of which are just everyday supplies, why those can-
not be brought into the same system that three management sys-
tems already have.

I don’t want to belabor the point, but I would like to ask that
you get back to the chairman and myself with that in writing, why
you can’t follow it. I think it’s a simple question, and I’m getting
answers that aren’t answering my questions. So maybe if I ask to
get it in writing and you have time to think about it and tell me
the unique situations that you may face, so that we can look at it
and try to figure out why this problem is taking place. We cannot
afford to waste billions or mismanage billions of dcllars.

Mr. Horn. Do you have some further questions?

Mrs. MALONEY. Thank you. I have many more, but I will put
them in writing, because the chairman has several other panels.

Mr. Horn. Let me just ask one last question. Do you feel, in ei-
ther of your respective areas, that you have strong resistance to
this change from some parts of the Department of Defense, some
of the services?

Mr. TUCKER. Well, I have to say that I think Dr. Hamre has been
a very, very strong supporter. He has brought along with him not
only the Secretary of Defense, who strongly supports our initiative,
but he has brought along his colleagues in the various functional
areas, acquisition and technology, RED, procurement. The prob-
lems are difficult, but he has brought the people to the table who
can help us solve them.

Mr. Horn. Very good. Any comment on that, Mr. Keevey?

Mr. KEEVEY. No. I agree.

Mr. Horn. Thank you both for coming. Your written testimony
will be put in the record. That’s automatic with all witnesses.

Panel two, the members from the General Accounting Office.

(Witnesses sworn.]

Mr. Horn. Both witness affirmed.

I take it, Mr. Dodaro, you will begin, as befits the Assistant
Comptroller General. So welcome.

STATEMENT OF GENE L. DODARO, ASSISTANT COMPTROLLER
GENERAL, ACCOUNTING AND INFORMATION DIVISION, U.S.
GENERAL ACCOUNTING OFFICE; AND G. EDWARD DeSEVE,
CONTROLLER, OFFICER OF FEDERAL FINANCIAL MANAG!
MENT, OFFICE OF MANAGEMENT AND BUDGET

Mr. Doparo. Good afternoon, Mr. Chairman, Mrs. Maloney.
I_am pleased to be here today to discuss financial management
at DOD. As you heard today, the department has some serious fi-



125

you know, it will be 5 years before we have systems that will give
you auditable statements.”

Mr. Horn. That will be the hearing in 2025 that we plan al-
ready.

I yield to the ranking member from New York, and New York
City, on this committee.

Mrs. MALONEY. Thank you very much.

Secretary Hill, I would like to ask you, you mentioned the prob-
lem with the prompt payment bill, that you have to pay within 30
days or interest starts accruing. Why couldn’t we just, as we passed
that bill, modify it and change that prompt payment bill, and say
that you pay 30 days after you have verified that the bill is accu-
rate; therefore, giving your personnel time to check the contract
amount with the bill? Wouldn’t that work?

Ms. HILL. Certainly, the Congress created that act and is free to
change it. That would certainly give the department more time to
do the verification process. I can foresee that you would have prob-
ably many contractors complaining that they weren’t getting paid,
which is the other side of this that I alluded to before. When I have
raised this on occasion, “Well, just don’t pay this stuff,” the re-
sponse is, “No. 1, we’re going to have to pay interest under Prompt
Payment, and, No. 2, you’re going to have a lot of businesses, from
the small businesses to the major contractors very upset because
they may not get paid.”

Mrs. MALONEY. Well, as the chairman mentioned, having sort of
a joint public-private cooperation, you could notify the contractor
you're having difficulty verifying their bill. I’m sure they will send
a volunteer in immediately, you know, to try to help you figure out
how to get the paperwork right and to verify it.

Mr. Horn. But the problem comes with the government side, on
acquisition, when they wrote that contract, so the finance side can
understand it. And when it gets down to push and shove, there are
more contractors in our districts than there are finance officers and
acquisition officers.

Ms. HILL. Probably true.

Mr. Horn. So I don’t think that law is going to be changed. In
fact, I get so irritated. We have a State law, also, in California. I
get so irritated when I see some poor, struggling Hispanic contrac-
tor, who hasn’t been paid in 6 months, it just sets me off. Because
these people are working their hearts out, 18 hours a day, and
they’ve got a cash-flow problem on paying their employees, and the
check doesn’t come from the Highway Department, or whatever.

Ms. HILL. I raised this. I had a similar discussion. My question
was, “Well, is the problem that we don’t get the information from
the contractor, or are we not getting the right information from our
acquisition people?” And I was told it’s probably a little bit of both.
So you’ve got a mix there.

Mrs. MALONEY. Well, I’m sure that they would work overtime to
get you the proper information quickly.

Ms. HILL. You certainly would be giving them an incentive,
whether it was either government or a contractor. We need to find
some incentives.

Mrs. MALONEY. And I think that they have a stake in having our
government well-run. They have an absolute stake in having our


100

drastically reduced and the systems are redesigned and
modernized. The fewer systems and the less manual intervention
to produce accounting data, the more accurate and timely the data

should become.

The financial statement data for the vast majority of DoD
funds remain essentially not in condition for audit. In
accounting terms, the current situation can best be described as
a general lack of effective internal management controls.
Consequently, we and the Service audit organizations were unable
to give audit opinions on the financial statements for the
largest DoD funds covered by CFO Act requirements for FY 1994.
Those funds included the Army and Air Force general funds
(combined assets of $612.9 billion reported); and the Defense
Business Operations Fund (DBOF) ($102.6 billion in assets
reported). A complete listing of the audit opinions issued or

disclaimed is at Attachment 1 to this statement.

GENERAL FUNDS

In August 1995, we provided two special summary reports to
DoD management, the Office of Management and Budget, and the
Congress discussing the major deficiencies that prevented the
auditors from rendering opinions on the Army and Air Force

general funds and the Defense Business Operations Fund.


41

Given the serious and pervasive nature of DOD’s financial management problems,
and the need for more immediate progress, the Department needs to consider addi-
tional steps to fix its long-standing weaknesses. As we testified in May 1995, DOD
needs io take several immediate actions to turn Secretary Perry's blueprint into
substantive improvements, including (1) assessing the number and skill level ofits
financial management workforce and (2) establishing an outside board of experts to
provide counsel, oversight, and perspective to reform efforts. In addition, we have
questions about whether DOD's systems improvement strategy will produce the
Reeded improvements in a timely manner and whether enough actions are planned
to address the Department's deep-rooted organizational impediments to attaining
meaningful change.

We are in the process of more closely examining these issues and DOD's other
specific improvement strategies as requested by the Chairman of the Subcommittee
on Defense, Senate Committee on Appropriations. We plan to provide our assess-
ment and recommendations next spring. In the interim, we will continue to work
with DOD in providing our views on ways to build upon its improvement efforts.

The following sections summarize the serious financial problems facing the De-
partment, the actions it plans to take, and the difficult issues that it must address
to overcome its problems.

CFO ACT AUDITS HAVE BROUGHT GREATER CLARITY TO DOD’S FINANCIAL MANAGEMENT
PROBLEMS

The CFO Act requirements have served as an important catalyst for focusing at-
tention on the financial problems facing the Department.

The regular preparation of financial statements and independent audit opinions,
in particular, are bringing greater clarity to the scope and depth of DOD's financial
management problems and needed solutions. These annual public report cards also
are, enerating increased pressure on DOD management to fix its long-standing
problems.

GAO performed the initial financial audit of the Army general fund operations
under the CFO Act pilot program, as well as an early assessment of the Air Force’s
ability to meet the act's requirements. Also, we will soon release the results of our
review of the Navy's financial reporting. Throughout our audit work, we developed
and maintained a close working relationship with the DOD Inspector General (IG)
and the milit services’ audit agencies. They have assumed responsibility for the
audits of the Air Force and Army general funds over the past few years and have
had responsibility for audits of the Department's $80 billion Defense Business Oper-
ations Fund (DBOF) operations since 1992. I want to commend the DOD audit com-
munity for its continuing strong support of the CFO Act. We are particularly en-
couraged that the DOD Inspector General and the military services’ audit organiza-
tions Fecently pledged substantial resources to meet the expanded requirement for
an audit of DOD's fiscal year 1996 consolidated financial statements resulting from
passage of the Government Management Reform Act of 1994 (GMRA).

Since 1990, we and the DOD auditors have made over 350 recommendations to
help resolve the financial management weaknesses identified throughout the De-
partment. These audits have consistently identified fundamental deficiencies in the

epartment’s financial operations. A brief recap of the recurring issues identified by
these audits follows.

* Serious problems in accounting for billions of dollars in annual disburse-
ments. Without the proper matching of disbursements with obligations there is
substantial risk that (1) fraudulent or erroneous payments may be made with-
out being detected and (2) cumulative amounts of disbursements may exceed
appro} riated amounts and other legal limits. CFO Act audits have shown that
DOD has paid billions of dollars without being able to determine exactly what
was purchased. Also, financial audits of the Air Force and Army have shown
that existing controls could not be relied on to ensure that DOD did not spend
more than it was authorized—a basic fund control responsibility. Similar prob-
lems were disclosed in our recent review of the Navy.

As of August 1995, DOD reported that its problem disbursements totaled
about $28 billion. Of this amount, $16 billion, or 58 percent, of the problem dis-

? Financial Management: Challenges Confronting DOD's Reform Initiatives (GAO/T-AIMD-
95-146, May 23, 1995).

Financial Audit: Air Force Does Not Effectively Account for Billions of Dollars of Resources
(GAO/AFMD-90-23, February 23, 1990); Financial Management: Strong Leadership Needed to
Improve Army's Financial Accountability (GAO/AIMD-94-12, December 22, 1993); and Maj

leficiencies eventing Auditors From Rendering Audit Opinions on DOD’s General Fund Fi-
nancial Statements (DOD Inspector General Report No. 95-301, August 29, 1995).