```
                                                                 
DOD Financial Management: Important Steps Underway But Reform	 
Will Require a Long-term Commitment (04-JUN-02, GAO-02-784T).	 
                                                                 
The Department of Defense (DOD) faces complex financial and	 
related management problems that are long-standing and deeply	 
rooted in DOD's business operations and management culture. Over 
the past 12 years, the department has initiated several 	 
broad-based departmentwide reform efforts--the Defense Reform	 
Initiative, the Defense Business Operations Fund, and the	 
Corporate Information Management initiative--to fundamentally	 
reform its financial operations and other key business areas.	 
These efforts have proven to be unsuccessful. The conditions that
led to these previous attempts at reform remain largely 	 
unchanged. GAO identified several key elements fundamental to DOD
financial management reform. These include (1) addressing the	 
department's financial management challenges as part of a	 
comprehensive, integrated, DOD-wide business reform; (2)	 
providing for sustained leadership and resource control to	 
implement needed reforms; (3) establishing clear lines of	 
responsibility, authority, and accountability for such reform;	 
(4) incorporating results-oriented performance measures and	 
monitoring tied to the reforms; (5) providing appropriate	 
incentives or consequences for action or inaction; (6)		 
establishing and implementing an enterprise architecture to guide
and direct financial management and modernization investments,	 
and (7) ensuring effective oversight and monitoring.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-784T					        
    ACCNO:   A03480						        
  TITLE:     DOD Financial Management: Important Steps Underway But   
Reform Will Require a Long-term Commitment			 
     DATE:   06/04/2002 
  SUBJECT:   Defense budgets					 
	     Defense economic analysis				 
	     Financial management				 
	     General management reviews 			 
	     Defense Business Operations Fund			 
	     Defense Joint Accounting System			 
	     DFAS Mechanization of Contract			 
	     Administration Services System			 
                                                                 
	     DOD Corporate Information Management		 
	     Initiative 					 
                                                                 
	     DOD Defense Reform Initiative			 
	     DOD Standard Procurement System			 

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GAO-02-784T
     
A

Test i mony Before the Subcommittee on National Security, Veterans Affairs,
and International Relations, Committee on Government Reform, House of
Representatives

For Release on Delivery Expected at 10: 00 a. m. DOD FINANCIAL Tuesday, June
4, 2002 MANAGEMENT

Important Steps Underway But Reform Will Require a Long- term Commitment

Statement of Gregory D. Kutz Director, Financial Management and Assurance

Randolph C. Hite Director, Information Technology Architecture and Systems
Issues

David R. Warren Director, Defense Capabilities and Management

GAO- 02- 784T

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity
to discuss financial management at the Department of Defense (DOD). Today,
DOD faces financial and related management problems that are pervasive,
complex, long- standing, and deeply rooted in virtually all business
operations throughout the department. DOD?s financial management
deficiencies, taken together, represent the single largest obstacle to
achieving an unqualified opinion on the U. S. government?s consolidated
financial statements. To date, none of the military services or major DOD
components has passed the test of an independent financial audit because of
weaknesses in financial management systems, operations, and controls.

Overhauling DOD?s financial management represents a major challenge that
goes far beyond financial accounting to the very fiber of the department?s
range of business operations and management culture. Previous
administrations have tried to address these problems in various

ways but have been unsuccessful. In this regard, on September 10, 2001,
Secretary of Defense Rumsfeld announced a broad initiative intended to
?transform the way the department works and what it works on? which he
estimated could save 5 percent of DOD?s budget- or about $15 billion to $18
billion annually. Secretary Rumsfeld recognized that transformation would be
difficult and expected the needed changes would take 8 or more years to
complete. Our experience with other federal agency business

transformation efforts supports the Secretary?s position. The President has
made financial management and the use of technology integral to his fiscal
year 2002 Management Agenda for making the federal government more focused
on citizens and results. The President?s

Management Agenda notes, ?Without accurate and timely information, it is not
possible to accomplish the President?s agenda to secure the best performance
and highest measure of accountability for the American people.?

With the events of September 11, and the federal government?s short- and
long- term budget challenges, it is more important than ever that DOD
effectively transform its business operations to ensure that it gets the
most from every dollar spent. The department must be able to effectively
carry out its stewardship responsibilities for the funding it receives and
for the vast amount of equipment and inventories used in support of military
operations. Even before the events of September 11, increased globalization,
changing security threats, and rapid technological advances

were prompting fundamental changes in the environment in which DOD operates.
These trends place a premium on increasing strategic planning, enhancing
results orientation, ensuring effective accountability, maintaining
transparency, and using integrated approaches. Of the 22

areas on GAO?s governmentwide ?high- risk? list, 6 are DOD program areas,
and DOD shares responsibility for 2 other high- risk areas that are
government wide in scope. 1 Central to effectively addressing DOD?s
financial management problems will be the understanding that these eight
areas are interrelated and cannot be addressed in an isolated, stovepiped,
or piecemeal fashion.

The excellence of our military forces is unparalleled. This same level of
excellence is not yet evident in the department?s financial management and
other related business areas. This is particularly problematic because
effective financial and related management operations are critical to
achieving the department?s mission in a reasonably economical, efficient,

and effective manner and to providing reliable, timely financial information
on a routine basis to support management decision making at all levels
throughout DOD. Transforming DOD?s business operations would free up
resources that could be used to enhance readiness, improve the quality of
life for our troops and their families, and reduce the gap between ?wants?
and available funding in connection with major weapon systems.

Today, we will provide our perspectives on the (1) department?s longstanding
inability to effectively reform its financial management and other business
systems and processes and (2) keys to successfully carrying out the
Secretary?s business process transformation. Last summer, the Comptroller
General shared a business transformation paper with Secretary Rumsfeld and
Comptroller Zakheim. This paper provided an

overview of our views on the challenges facing the department, the keys to 1
U. S. General Accounting Office, High- Risk Series: An Update, GAO- 01- 263
(Washington, D. C.: Jan. 2001).

effective reform, and detailed one option for addressing these challenges.
Our testimony today highlights the keys to success included in that paper.
Long- standing

History is a good teacher. To solve the problems of today, it is important
to Financial Management

avoid repeating past mistakes. Over the past 12 years, the department has
initiated several broad- based departmentwide reform efforts intended to
Problems and Attempts fundamentally reform its financial operations as well
as other key business

at Reform areas, including the Defense Reform Initiative, the Defense
Business

Operations Fund, and the Corporate Information Management initiative. These
efforts, which are highlighted below, have proven to be unsuccessful despite
good intentions and significant effort. The conditions that led to these
previous attempts at reform remain largely unchanged today. Defense Reform
Initiative (DRI). In announcing the DRI program in

November 1997, the then Secretary of Defense stated that his goal was ?to
ignite a revolution in business affairs.? DRI represented a set of proposed
actions aimed at improving the effectiveness and efficiency of DOD?s
business operations, particularly in areas that had been long- standing

problems- including financial management. In July 2000, we reported 2 that
while DRI got off to a good start and made progress in implementing many of
the component initiatives, it did not meet expected time frames and goals,
and the extent to which savings from these initiatives would be realized was
yet to be determined. We noted that a number of barriers had kept the
department from meeting its specific time frames and goals. The most notable
barrier was institutional resistance to change in an organization as large
and complex as DOD, particularly in such areas as acquisition, financial
management, and logistics, which transcend most of the department?s
functional organizations and have been long- standing management concerns.
We also pointed out that DOD did not have a clear road map to ensure that
the interrelationships between its major reform initiatives were understood
and addressed and that it was investing in its highest priority
requirements. We are currently examining the extent to which DRI efforts
begun under the previous administration are continuing. Defense Business
Operations Fund. In October 1991, DOD established a new entity, the Defense
Business Operations Fund by consolidating nine

2 U. S. General Accounting Office, Defense Management: Actions Needed to
Sustain Reform Initiatives and Achieve Greater Results, GAO/ NSIAD- 00- 72
(Washington, D. C.: July 25, 2000).

existing industrial and stock funds and five other activities operated
throughout DOD. Through this consolidation, the fund was intended to bring
greater visibility and management to the overall cost of carrying out
certain critical DOD business operations. However, from its inception, we
reported that the fund did not have the policies, procedures, and financial
systems to operate in a businesslike manner. In 1996, DOD announced the
fund?s elimination. In its place, DOD established four working capital
funds. DOD estimated that for fiscal year 2003 these funds would account for
and control about $75 billion. These new working capital funds inherited
their predecessor?s operational and financial reporting problems. Our
reviews of these funds have found that they still are not in a position to
provide accurate and timely information on the results of operations. As a
result, working capital fund customers cannot be assured that the prices
they are charged for goods and services represent actual costs.

Corporate Information Management (CIM). The CIM initiative began in 1989 and
was expected to save billions of dollars by streamlining operations and
implementing standard information systems to support common business
operations. CIM was expected to reform all of DOD?s functional areas-
including finance, procurement, material management, and human resources-
through consolidating, standardizing, and

integrating information systems. DOD also expected CIM to replace
approximately 2, 000 duplicative systems. Over the years, we made numerous
recommendations to improve CIM?s management to help

preclude the wasteful use and mismanagement of billion of dollars. However,
these recommendations were generally not addressed. Instead, DOD spent
billions of dollars with little sound analytical justification. Rather than
relying on a rigorous decision- making process for information technology
investments- as used in leading private and public

organizations we studied, DOD made systems decisions without (1)
appropriately analyzing cost, benefits, and technical risks; (2)
establishing realistic project schedules; or (3) considering how business

process improvements could affect information technology investments. For
one effort alone, DOD spent about $700 million trying to develop and
implement a single system for the material management business area-

but this effort proved unsuccessful. We reported in 1997 3 that the benefits
of CIM had yet to be widely achieved after 8 years of effort and spending
about $20 billion. The CIM initiative was eventually abandoned. 3 U. S.
General Accounting Office, High- Risk Series: Information Management and

Technology, GAO/ HR- 97- 9 (Washington, D. C.: Feb. 1997).

DOD?s long- standing financial management difficulties have adversely
affected the department?s ability to control costs, ensure basic
accountability, anticipate future costs and claims on the budget (such as
for health care, weapon systems, and environmental liabilities), measure
performance, maintain funds control, prevent fraud, and address pressing
management issues.

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

 In March of this year, we testified 4 on the continuing problems with
internal controls over approximately $64 million in fiscal year 2001
purchase card transactions involving two Navy activities. Consistent with
our testimony 5 last July on fiscal year 2000 purchase card transactions at
these locations, our follow- up review demonstrated that continuing control
problems contributed to fraudulent, improper, and abusive purchases and
theft and misuse of government property. We are

currently auditing purchase and travel card usage across the department.

 In July 2001, we reported 6 that DOD did not have adequate systems,
controls, and managerial attention to ensure that the $2.7 billion of
adjustments affecting closed appropriation accounts made during fiscal year
2000 were legal and otherwise proper. Our review of $2.2 billion of

these adjustments found about $615 million (28 percent) of the adjustments
should not have been made, including about $146 million that violated
specific provisions of appropriations law and were thus illegal. For
example, the stated purpose of one adjustment was to charge a $79 million
payment made in February 1999 to a fiscal year 1992 research and development
appropriation account to correct previous payment recording errors. However,
the fiscal year 1992 research and

4 U. S. General Accounting Office, Purchase Cards: Continued Control
Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO- 02- 504T
(Washington, D. C.: Mar. 13, 2002). 5 U. S. General Accounting Office,
Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to Fraud
and Abuse, GAO- 01- 995T (Washington, D. C.: July 30, 2001).

6 U. S. General Accounting Office, Canceled DOD Appropriations: $615 Million
of Illegal or Otherwise Improper Adjustments, GAO- 01- 994T (Washington, D.
C.: July 26, 2001).

development appropriation account closed at the end of fiscal year 1998- 4
months before the $79 million payment was made. Therefore, the adjustment
had the same effect as using canceled funds from a closed appropriation
account to make the February 1999 expenditure, which is prohibited by the
1990 law. As of April 2002, DOD had reversed

140 of the 162 transactions and provided additional contract documentation
for the remaining 22 transactions. However, DOD has yet to complete the
reconciliation for the contracts associated with these adjustments and make
the correcting entries. DOD has indicated that it will be later this year
before the correct entries are made.

 In June 2001, we reported 7 that DOD?s financial systems could not
adequately track and report on whether the $1.1 billion in earmarked funds
that the Congress provided to DOD for spare parts and associated logistical
support were actually used for their intended purpose. The vast majority of
the funds- 92 percent- were transferred to the military services operation
and maintenance accounts. Once the funds were transferred into the operation
and maintenance accounts, the department could not separately track the use
of the funds. As a result, DOD lost its ability to assure the Congress that
the funds it received for spare parts purchases were used for, and only for,
that purpose. Problems with the department?s financial management operations
go far

beyond its accounting and finance systems and processes. The department
continues to rely on a far- flung, complex network of finance, logistics,
personnel, acquisition, and other management information systems- 80 percent
of which are not under the control of the DOD Comptroller- to gather the
financial data needed to support the day- to- day management

decision making. This network was not designed to be, but rather has evolved
into, the overly complex and error- prone operation that exists today,
including (1) little standardization across DOD components, (2) multiple
systems performing the same tasks, (3) the same data stored in multiple
systems, (4) manual data entry into multiple systems, and (5) a

large number of data translations and interfaces that combine to exacerbate
problems with data integrity. Many of the department?s business operations
are mired in old, inefficient

processes and legacy systems, some of which go back to the 1950s and 7 U. S.
General Accounting Office, Defense Inventory: Information on the Use of
Spare Parts Funding Is Lacking, GAO- 01- 472 (Washington, D. C.: June 11,
2001).

1960s. For example, the department still relies on the Mechanization of
Contract Administration Services (MOCAS) system- which dates back to 1968-
to process a substantial portion of the contract payment

transactions for all DOD organizations. In fiscal year 2001, MOCAS processed
an estimated $78 billion in contract payments. Past efforts to replace MOCAS
have failed and the current effort has been delayed. As a result, for the
foreseeable future, DOD will continue to be saddled with MOCAS.

In the 1970s, we issued numerous reports detailing serious problems with the
department?s financial management operations. Between 1975 and 1981, we
issued more than 75 reports documenting serious problems with DOD?s cost,
property, fund control, and payroll accounting systems. In the 1980s, we
found that despite the billions of dollars invested in individual systems,
these efforts, too, fell far short of the mark, with extensive

schedule delays and cost overruns. For example, our 1989 report 8 on eight
major DOD system development efforts- including two major accounting
systems- under way at that time, showed that system development cost
estimates doubled, two of the eight efforts were abandoned, and the
remaining six efforts experienced delays of 3 to 7 years.

Two recent specific system endeavors that have fallen short of their
intended goals are the Standard Procurement System and the Defense Joint
Accounting System. Both of these efforts were aimed at improving the
department?s financial management and related business operations.

8 U. S. General Accounting Office, Automated Information Systems: Schedule
Delays and Cost Overruns Plague DOD Systems, GAO/ IMTEC- 89- 36 (Washington,
D. C.: May 10, 1989).

Standard Procurement System (SPS). In November 1994, DOD began the SPS
program to acquire and deploy a single automated system to perform all
contract management- related functions within DOD?s procurement process for
all DOD organizations and activities. The laudable goal of SPS was to
replace 76 existing procurement systems with a single departmental system.
DOD estimated that SPS had a life- cycle cost of approximately $3 billion
over a 10- year period. According to DOD, SPS was to support about 43,000
users at over 1,000 sites worldwide and was to interface with key financial
management functions such as payment

processing. Additionally, SPS was intended to replace the contract
administration functions currently performed by MOCAS. Our July 2001 report
9 and February 2002 testimony 10 before this Subcommittee identified
weaknesses in the department?s management of its investment in SPS.
Specifically:

 The department had not economically justified its investment in the
program because its latest (January 2000) analysis of costs and benefits was
not credible. Further, this analysis showed that the system, as defined, was
not a cost- beneficial investment.

 The department was not accumulating actual program costs and therefore,
did not know the total amount spent on the program to date, yet life- cycle
cost projections had grown from about $3 billion to $3.7

billion.  Although the department committed to fully implementing the
system

by March 31, 2000, this target date had slipped by over 3 � years to
September 30, 2003, and program officials have recently stated that this
date will also not be met.

We recommended that the Secretary of Defense make additional investments in
SPS conditional upon first demonstrating that the existing version of SPS is
producing benefits that exceed costs and that future investment decisions,
including those regarding operations and

9 U. S. General Accounting Office, DOD Systems Modernization: Continued
Investment in the Standard Procurement System Has Not Been Justified, GAO-
01- 682 (Washington, D. C.: July 31, 2001). 10 U. S. General Accounting
Office, DOD?s Standard Procurement System: Continued Investment Has Yet to
Be Justified, GAO- 02- 392T (Washington, D. C.: Feb. 7, 2002).

maintenance beyond fiscal year 2001, be based on complete and reliable
economic justifications.

Defense Joint Accounting System (DJAS). In 1997, DOD selected DJAS 11 to be
one of three general fund accounting systems. 12 As originally envisioned,
DJAS would perform the accounting for the Army and the Air Force as well as
the DOD transportation and security assistance areas. Subsequently, in
February 1998, Defense Finance and Accounting Service (DFAS) decided that
the Air Force could withdraw from using DJAS. DFAS made the decision because
either the Air Force processes or the DJAS processes would need significant
reengineering to allow for the development of a joint accounting system. As
a result, the Air Force was

allowed to start development of its own general fund accounting system-
General Fund and Finance System- which resulted in the development of a
fourth general fund accounting system.

In June 2000, the DOD Inspector General reported 13 that DFAS was developing
DJAS at an estimated life- cycle cost of about $700 million without
demonstrating that the program was the most cost- effective alternative for
providing a portion of DOD?s general fund accounting. More specifically, the
report stated that DFAS had not developed a complete or fully supportable
feasibility study, analysis of alternatives, economic analysis, acquisition
program baseline, or performance measures, and had not reengineered business
processes. According to data provided by DFAS,

for fiscal years 1997- 2000 approximately $120 million was spent on the
development and implementation of DJAS. However, today DJAS is only being
operated at two locations- Ft. Benning, Georgia, and the Missile Defense
Agency. According to a DFAS official, DJAS is considered to be fully
deployed- which means it is operating at all intended locations.

Significant resources- in terms of dollars, time, and people- have been
invested in these two efforts, without demonstrated improvement in DOD?s 11
The original name of the system was the Corps of Engineers Financial
Management System (CEFMS). After it was determined that CEFMS could be
modified to satisfy Army customers and had the potential for supporting the
Defense Working Capital Funds, DFAS selected CEFMS to meet the DJAS
requirements.

12 The other two general fund systems were the Standard Accounting and
Reporting System and the Standard Accounting and Budgetary Reporting System.
13 Department of Defense Office of the Inspector General, Acquisition of the
Defense Joint

Accounting System, Report No. D- 2000- 151 (Arlington, VA.: June 16, 2000).

business operations. It is essential that DOD ensure that its investment in
systems modernization results in more effective and efficient business
operations, since every dollar spent on ill- fated efforts such as SPS and
DJAS is one less dollar available for other defense spending priorities.

Underlying Causes of As part of our constructive engagement approach with
DOD, the

Financial and Related Comptroller General met with Secretary Rumsfeld last
summer to provide

our perspectives on the underlying causes of the problems that have Business
Process

impeded past reform efforts at the department and to discuss options for
Reform Challenges

addressing these challenges. There are four underlying causes:  a lack of
sustained top- level leadership and management accountability

for correcting problems;  deeply embedded cultural resistance to change,
including military

service parochialism and stovepiped operations;  a lack of results-
oriented goals and performance measures and monitoring; and  inadequate
incentives for seeking change.

Lack of Sustained Historically, DOD has not routinely assigned
accountability for

Leadership and performance to specific organizations or individuals who have
sufficient

Accountability authority to accomplish desired goals. For example, under the
CFO Act, it

is the responsibility of agency CFOs to establish the mission and vision for
the agency?s future financial management. However, at DOD, the Comptroller-
who is by statute the department?s CFO- has direct responsibility for only
an estimated 20 percent of the data relied on to carry out the department?s
financial management operations.

 The department has learned through its efforts to meet the Year 2000
computing challenge that to be successful, major improvement initiatives
must have the direct, active support and involvement of the Secretary and
Deputy Secretary of Defense. In the Year 2000 case, the then Deputy
Secretary of Defense was personally and substantially

involved and played a major role in the department?s success. Such toplevel
support and attention helps ensure that daily activities throughout the
department remain focused on achieving shared, agencywide outcomes. A
central finding from our report on our survey of best practices of world-
class financial management organizations- Boeing; Chase Manhattan Bank;
General Electric; Pfizer; Hewlett- Packard; Owens Corning; and the states of
Massachusetts, Texas, and Virginia-

was that clear, strong executive leadership was essential to (1) making
financial management an entitywide priority, (2) redefining the role of
finance, (3) providing meaningful information to decision makers, and (4)
building a team of people that delivers results. 14 DOD?s past experience
has suggested that top management has not had a

proactive, consistent, and continuing role in building capacity, integrating
daily operations for achieving performance goals, and creating incentives.
Sustaining top management commitment to performance goals is a

particular challenge for DOD. In the past, the average 1.7- year tenure of
the department?s top political appointees has served to hinder long- term
planning and follow- through. Cultural Resistance and

Cultural resistance to change and military service parochialism have also
Parochialism

played a significant role in impeding previous attempts to implement broad-
based management reforms at DOD. The department has acknowledged that it
confronts decades- old problems deeply grounded in the bureaucratic history
and operating practices of a complex, multifaceted organization, and that
many of these practices were developed piecemeal and evolved to accommodate
different organizations, each with its own

policies and procedures. 14 U. S. General Accounting Office, Executive
Guide: Creating Value Through World- class Financial Management, GAO/ AIMD-
00- 134 (Washington, D. C.: Apr. 2000).

For example, as discussed in our July 2000 report, 15 the department
encountered resistance to developing departmentwide solutions under the then
Secretary?s broad- based DRI. In 1997, the department established a Defense
Management Council- including high- level representatives from each of the
military services and other senior executives in the Office of the Secretary
of Defense- which was intended to serve as the ?board of directors? to help
break down organizational stovepipes and overcome cultural resistance to
change called for under DRI. However, we found that the council?s
effectiveness was impaired because members were not able to put their
individual military services? or DOD agencies? interests aside to

focus on departmentwide approaches to long- standing problems. Cultural
resistance to change has impeded reforms not only in financial management,
but also in other business areas, such as weapon system acquisition and
inventory management. For example, as we reported 16 last year, while the
individual military services conduct considerable analyses justifying major
acquisitions, these analyses can be narrowly focused and do not consider
joint acquisitions with the other services. In the inventory

management area, DOD?s culture has supported buying and storing multiple
layers of inventory rather than managing with just the amount of stock
needed.

Unclear Goals and DOD?s past reform efforts have been handicapped by the
lack of clear, Performance Measures

linked goals and performance measures. As a result, DOD managers lack
straightforward road maps showing how their work contributes to attaining
the department?s strategic goals, and they risk operating autonomously
rather than collectively. In some cases, DOD had not yet developed
appropriate strategic goals, and in other cases, its strategic goals and
objectives were not linked to those of the military services and defense

agencies. As part of our assessment of DOD?s Fiscal Year 2000 Financial
Management Improvement Plan, we reported 17 that, for the most part, the 15
GAO/ NSIAD- 00- 72. 16 U. S. General Accounting Office, Major Management
Challenges and Program Risks: Department of Defense, GAO- 01- 244
(Washington D. C.: Jan. 2001).

17 U. S. General Accounting Office, Financial Management: DOD Improvement
Plan Needs Strategic Focus, GAO- 01- 764 (Washington D. C.: Aug. 17, 2001).

plan represented the military services? and defense components? stovepiped
approaches to reforming financial management and did not clearly articulate
how these various efforts would collectively result in an integrated DOD-
wide approach to financial management improvement. In addition, we reported
that the department?s plan did not include performance measures that could
be used to assess DOD?s progress in resolving its financial management
problems. DOD officials have informed us that they are now working to revise
the department?s approach to this plan so that future years? updates will
reflect a more strategic, departmentwide vision and provide a more effective
tool for financial management reform.

As it moves to modernize its systems, the department faces a formidable
challenge in responding to technological advances that are changing
traditional approaches to business management. For fiscal year 2003, DOD?s
information technology budgetary request of approximately $26

billion will support a wide range of military operations as well as DOD
business functions. As we have reported, 18 while DOD plans to invest
billions of dollars in modernizing its financial management and other
business support systems, it does not yet have an overall blueprint- or
enterprise architecture- in place to guide and direct these investments. As
we recently testified, 19 our review of practices at leading organizations
showed they were able to make sure their business systems addressed
corporate- rather than individual business unit- objectives by using
enterprise architectures to guide and constrain investments. Consistent with
our recommendation, DOD is now working to develop a financial

management enterprise architecture, which is a very positive development.
Lack of Incentives for

The final underlying cause of the department?s long- standing inability to
Change

carry out needed fundamental reform has been the lack of incentives for
making more than incremental change to existing ?business- as- usual?
processes, systems, and structures. Traditionally, DOD has focused on
justifying its need for more funding rather than on the outcomes its
programs have produced. DOD generally measures its performance by the

18 U. S. General Accounting Office, Information Technology: Architecture
Needed to Guide Modernization of DOD?s Financial Operations, GAO- 01- 525
(Washington, D. C.: May 17, 2001).

19 U. S. General Accounting Office, Defense Acquisitions: DOD Faces
Challenges in Implementing Best Practices, GAO- 02- 469T (Washington, D. C.:
Feb. 27, 2002).

amount of money spent, people employed, or number of tasks completed.
Incentives for its decision makers to implement changed behavior have been
minimal or nonexistent. Secretary Rumsfeld perhaps said it best in
announcing his planned transformation at DOD: ?There will be real

consequences from, and real resistance to, fundamental change.? This lack of
incentive has perhaps been most evident in the department?s acquisition
area. In DOD?s culture, the success of a manager?s career has depended more
on moving programs and operations through the DOD process than on achieving
better program outcomes. The fact that a given program may have cost more
than estimated, taken longer to complete, and not generated results or
performed as promised was secondary to fielding a

new program. To effect real change, actions are needed to (1) break down
parochialism and reward behaviors that meet DOD- wide and congressional
goals; (2) develop incentives that motivate decision makers to initiate and
implement efforts that are consistent with better program outcomes,
including saying ?no? or pulling the plug on a system or program that is
failing; and (3) facilitate a congressional focus on results- oriented

management, particularly with respect to resource- allocation decisions.
Independent Recognizing the need for improved financial data to effectively
manage the Assessment Calls for

department?s vast operations, Secretary Rumsfeld commissioned an independent
study to recommend a strategy for financial management the Reform of DOD?s

improvements. The report 20 recognized that the department would have to
Financial Operations

undergo ?a radical financial management transformation? and that it would
take more than a decade to achieve. The report also noted that DOD?s current
financial, accounting, and feeder systems do not provide relevant, reliable,
and timely information. Further, the report pointed out that the ?support of
management decision- making? is generally not an objective of the
financially based information currently developed or planned for future

development. Additionally, the report stated that although the department
had numerous system projects underway, they were narrowly focused, lacked
senior management leadership, and were not part of an integrated DOD- wide
strategy. The report also noted that the systemic problems discussed were
not strictly financial management problems and could not

be solved by DOD?s financial community. Rather, the solution would 20
Department of Defense, Transforming Department of Defense Financial
Management: A Strategy for Change (Washington, D. C.: Apr. 13, 2001).

require the ?concerted effort and cooperation of cross- functional
communities throughout the department.?

The report recommended an integrated approach to transform the department?s
financial operations. The report noted that its proposed framework would
take advantage of certain ongoing improvement actions within the department
and provide specific direction for a more coordinated, managed, and results-
oriented approach. The proposed course of action for transforming the
department?s financial management centered around six broad elements: (1)
leadership, (2) incentives, (3) accountability, (4) organizational
alignment, (5) changes in certain rules, and (6) changes in enterprise
practices.

The report referred to its approach as a ?twin- track? course of action. The
first track employs a DOD- wide management approach to developing standard
integrated systems; obtaining relevant, reliable, and timely financial data;
and providing incentives for the department to utilize financial data in an
efficient and effective way. This track will require a longer time frame and
will include establishing a centralized oversight

process under the DOD Comptroller for incrementally implementing the
recommended structural changes and developing standard, integrated financial
systems.

The second track focuses on targeting, selecting, and overseeing
implementation of a limited number of intraservice/ cross- service projects
for major cost savings or other high- value benefits under a process led by
the DOD Comptroller and assisting the Secretary of Defense in establishing
and managing a set of metrics. Prime tools of such improvements would
include activity- based costing and benchmarking/ best practices analysis to
identify cost- saving opportunities.

A July 19, 2001, departmental memorandum from Secretary Rumsfeld confirmed
that the department needs to develop and implement an architecture for
achieving integrated financial and accounting systems in order to generate
relevant, reliable, and timely information on a routine basis. Secretary
Rumsfeld further reiterated the need for a fundamental transformation of DOD
in his ?top- down? Quadrennial Defense Review. Specifically, his September
30, 2001, Quadrennial Defense Review Report concluded that the department
must transform its outdated support

structure, including decades- old financial systems that are not well
interconnected. The report summed up the challenge well in stating: ?While
America?s businesses have streamlined and adopted new business

models to react to fast- moving changes in markets and technologies, the
Defense Department has lagged behind without an overarching strategy to
improve its business practices.?

Keys to Fundamental Our experience has shown there are several key elements
that collectively DOD Financial

would enable the department to effectively address the underlying causes of
its inability to resolve its long- standing financial management problems.
Management Reform For the most part these elements are consistent with those
discussed in the department?s April 2001 financial management transformation
report. These elements, which we believe are key to any successful approach
to financial management reform, include

 addressing the department?s financial management challenges as part of a
comprehensive, integrated, DOD- wide business reform;

 providing for sustained leadership by the Secretary of Defense and
resource control to implement needed financial management reforms; 
establishing clear lines of responsibility, authority, and accountability

for such reform tied to the Secretary;  incorporating results- oriented
performance measures and monitoring

tied to financial management reforms;  providing appropriate incentives or
consequences for action or inaction;  establishing and implementing an
enterprise architecture to guide and

direct financial management modernization investments; and  ensuring
effective oversight and monitoring. Actions on many of the key areas central
to successfully achieving desired financial management and related business
transformation goals- particularly those that rely on longer term systems
improvements- will take a number of years to fully implement. Secretary
Rumsfeld has estimated that his envisioned transformation may take 8 or more
years to

complete. Our research and experience with other federal agencies have shown
that this is not an unrealistic estimate. Additionally, these keys should
not be viewed as independent actions, but rather, a set of interrelated and
interdependent actions that are collectively critical to transforming DOD?s
business operations.

Consequently, both long- term actions focused on the Secretary?s envisioned
business transformation and short- term actions focused on improvements
within existing systems and processes will be critical going forward.
Shortterm actions in particular will be critical if the department is to
achieve the greatest possible accountability over existing resources and
more reliable data for day- to- day decision making while longer term
systems and business process reengineering efforts are under way. Beginning
with the Secretary?s recognition of a need for a fundamental transformation
of the department?s business operations and building on some of the work
begun under past administrations, DOD has taken a number of positive steps
in

many of these key areas, but these steps are only a beginning. Challenges
remain in each of these key areas that are formidable. Integrated Business
Reform

As we previously reported, 21 establishing the right goal is essential for
Strategy

success. Central to effectively addressing DOD?s financial management
problems will be the recognition that they cannot be addressed in an
isolated, stovepiped, or piecemeal fashion separate from the other high-
risk

areas facing the department. 22 Further, successfully reforming the
department?s operations- which consist of people, business processes, and
technology- will be critical if DOD is to effectively address the deeprooted
organizational emphasis on maintaining business- as- usual across the
department.

21 U. S. General Accounting Office, Department of Defense: Progress in
Financial Management Reform, GAO/ T- AIMD/ NSIAD- 00- 163 (Washington, D.
C.: May 9, 2000). 22 The eight interrelated high- risk areas that represent
the greatest challenge to DOD?s developing world- class business operations
supporting its forces are: contract management, financial management, human
capital, information security, infrastructure management, inventory
management, systems modernization, and weapon system acquisition.

Financial management is a crosscutting issue that affects virtually all of
DOD?s business areas. For example, improving its financial management
operations so that they can produce timely, reliable, and useful cost
information is essential to effectively measure its progress toward
achieving many key outcomes and goals across virtually the entire spectrum
of DOD?s business operations. At the same time, the department?s financial
management problems- and, most importantly, the keys to their resolution-
are deeply rooted in and dependent upon developing solutions to a wide
variety of management problems across DOD?s various organizations and
business areas. For example, we have reported 23 that many of DOD?s
financial management shortcomings were

attributable in part to human capital issues. The department does not yet
have a strategy in place for improving its financial management human
capital. This is especially critical in connection with DOD?s civilian
workforce, since DOD has generally done a much better job in conjunction
with human capital planning for its military personnel. In addition, DOD?s
civilian personnel face a variety of size, shape, skills, and
successionplanning

challenges that need to be addressed. As we mentioned earlier, and it bears
repetition, the department has reported that an estimated 80 percent of the
data needed for sound financial management comes from its other business
operations, such as its acquisition and logistics communities. DOD?s vast
array of costly, nonintegrated, duplicative, and inefficient financial
management systems is reflective of its lack of an integrated approach to
addressing management challenges. DOD has acknowledged that one of the
reasons for the lack of clarity in its reporting under the Government
Performance and Results Act has been that most of the program outcomes the
department is striving to achieve are interrelated, while its management
systems are not integrated.

As we discussed previously, the Secretary of Defense has made the
fundamental transformation of business practices throughout the department a
top priority. In this context, the Secretary established a number of top-
level committees, councils, and boards, including the Senior Executive
Committee, Business Initiative Council, and Defense Business Practices
Implementation Board. The Senior Executive Committee was established to help
guide efforts across the department to improve its business practices. This
committee- chaired by the Secretary of Defense,

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

and with membership to include the Deputy Secretary, the military service
secretaries, and the Under Secretary of Defense for Acquisition, Technology
and Logistics- was established to function as the ?board of directors? for
the department. The Business Initiative Council- comprising the military
service secretaries and headed by the Under Secretary of Defense for
Acquisition, Technology and Logistics- was established to encourage the
military services to explore new moneysaving business practices to help
offset funding requirements for transformation and other initiatives. Our
research of successful public and private sector organizations shows

that such entities, comprised of enterprisewide executive leadership,
provide valuable guidance and direction when pursuing integrated solutions
to corporate problems. Inclusion of the department?s top leadership should
help to break down the cultural barriers to change and result in an
integrated DOD approach for business reform. Sustained Leadership and

The department?s successful Year 2000 effort illustrated, and our survey of
Resource Control

leading financial management organizations 24 captured, the importance of
strong leadership from top management. As we have stated many times before,
strong, sustained executive leadership is critical to changing a deeply
rooted corporate culture- such as the existing ?business- as- usual? culture
at DOD- and to successfully implementing financial management reform. In the
case of the Year 2000 challenge the personal, active involvement of the
Deputy Secretary of Defense played a key role in building entitywide support
and focus. Given the long- standing and deeply entrenched nature of the
department?s financial management problems- combined with the numerous
competing DOD organizations, each operating with varying, often parochial
views and incentives- such visible,

sustained top- level leadership will be critical. In discussing their April
2001 report to the Secretary of Defense on transforming financial
management, 25 the authors stated that, ?unlike previous failed attempts to
improve DOD?s financial practices, there is a

24 U. S. General Accounting Office, Executive Guide: Creating Value Through
World- class Financial Management, GAO/ AIMD- 00- 134 (Washington, D. C.:
Apr. 2000). 25 Department of Defense, Transforming Department of Defense
Financial Management: A Strategy for Change (Washington, D. C.: Apr. 13,
2001).

new push by DOD leadership to make this issue a priority.? Strong, sustained
executive leadership- over a number of years and administrations- will be
key to changing a deeply rooted culture. In addition, given that significant
investments in information systems and related processes have historically
occurred in a largely decentralized

manner throughout the department, additional actions will likely be required
to implement centralized information technology investment control.

In our May 2001 report 26 we recommended that DOD take action to provide
senior departmental commitment and leadership through establishment of a
enterprisewide steering committee sponsored by the Secretary, that could
guide development of a transformation blueprint and provide for centralized
control over investments to ensure funding is provided for only those
proposed investments in systems and business reforms that are consistent
with the blueprint. Absent such a control, DOD runs the serious risk that
the fiscal year 2003 information technology budgetary request of
approximately $26 billion and future years? requests will not result in
marked improvement in DOD?s business operations. Without such an approach,
DOD runs the risk of spending billions of dollars on systems modernization,
which continues to perpetuate the existing systems environment that suffers
from duplication of systems, limited interoperability, and unnecessarily
costly operations and maintenance and

will preclude DOD from achieving the Secretary?s vision of improved
financial information on the results of departmental operations.
Additionally, as previously discussed, the tenure of the department?s top
political appointees has generally been short in duration and as a result it
is

sometimes difficult to maintain the focus and momentum that is needed to
resolve the management challenges facing DOD. The resolution of the array of
interrelated business system management challenges previously discussed is
likely to require a number of years and therefore span several
administrations. The Comptroller General has proposed in congressional
testimony that one option to consider to address the continuity issue would
be the establishment of the position of chief operating officer. This

position could be filled by an individual appointed for a set term of 5 to 7
years with the potential for reappointment. Such an individual should have a
proven track record as a business process change agent for large, diverse 26
U. S. General Accounting Office, Information Technology: Architecture Needed
to Guide

Modernization of DOD?s Financial Operations, GAO- 01- 525 (Washington, D.
C.: May 2001).

organizations and would spearhead business process transformation across the
department. Clear Lines of Last summer, when the Comptroller General met
with Secretary Rumsfeld, Responsibility and

he stressed the importance of establishing clear lines of responsibility,
Accountability decision- making authority, and resource control for actions
across the department tied to the Secretary as a key to reform. As we
previously reported, 27 such an accountability structure should emanate from
the highest levels and include the secretary of each of the military
services as well as heads of the department?s various major business areas.
The Secretary of Defense has taken action to vest responsibility and

accountability for financial management modernization with the DOD
Comptroller. In October 2001, the DOD Comptroller, as previously mentioned,
established the Financial Management Modernization Executive 28 and Steering
Committees as the governing bodies that oversee the activities related to
this modernization effort and also established a supporting working group to
provide day- to- day guidance and direction in these efforts. DOD reports
that the executive and steering committees met for the first time in January
2002. At the request of the Subcommittee on Readiness and Management
Support, Senate Committee on Armed Services, we are initiating a review of
the department?s efforts to develop and implement an enterprise
architecture. As part of the effort, we will be assessing the department?s
efforts to align current investments in financial systems with the proposed
architecture.

It is clear to us that the DOD Comptroller has the full support of the
Secretary and that the Secretary is committed to making meaningful change.
The key is to translate this support into a funding control mechanism that
ensures DOD?s components information technology

investments are aligned with the department?s strategic blueprint.
Addressing issues such as centralization of authority for information
systems investments and continuity of leadership is critical to successful
business transformation. To make this work, it is important that the DOD
Comptroller have sufficient authority to oversee the investment decisions

27 GAO/ NSIAD- 00- 72. 28 The structure and responsibilities of the
Executive Committee as outlined in the October 2001 memorandum are
consistent with the provisions of Section 1009 of Public Law 107- 107.

in order to bring about the full, effective participation of the military
services and business process owners across the department.

Results- oriented As discussed in our January 2001 report on DOD?s major
performance and

Performance accountability challenges, 29 establishing a results orientation
is another key

element of any approach to reform. Such an orientation should draw upon
results that could be achieved through commercial best practices, including
outsourcing and shared servicing concepts. Personnel throughout the
department must share the common goal of establishing financial management
operations that not only produce financial statements that can withstand the
test of an audit but more importantly, routinely generate useful, reliable,
and timely financial information for dayto- day management purposes.

In addition, we have previously testified 30 that DOD?s financial management
improvement efforts should be measured against an overall goal of
effectively supporting DOD?s basic business processes, including

appropriately considering related business process system
interrelationships, rather than determining system- by- system compliance.
Such a results- oriented focus is also consistent with an important lesson
learned from the department?s Year 2000 experience. DOD?s initial Year 2000
focus was geared toward ensuring compliance on a system- by- system basis
and did not appropriately consider the interrelationships of systems

and business areas across the department. It was not until the department,
under the direction of the then Deputy Secretary, shifted to a core mission
and function review approach that it was able to achieve the desired result
of greatly reducing its Year 2000 risk.

Since the Secretary has established an overall business process
transformation goal that will require a number of years to achieve, going
forward it is especially critical for managers throughout the department to
focus on specific metrics that, over time, collectively will translate to
achieving this overall goal. It is important for the department to refocus
its annual accountability reporting on this overall goal of fundamentally
transforming the department?s financial management systems and related

29 GAO- 01- 244. 30 GAO/ T- AIMD/ NSIAD- 00- 163.

business processes to include appropriate interim annual measures for
tracking progress toward this goal.

In the short term, it is important to focus on actions that can be taken
using existing systems and processes. It is critical to establish interim
measures to both track performance against the department?s overall
transformation goals and facilitate near- term successes using existing
systems and processes. The department has established an initial set of
metrics intended to evaluate financial performance, and it reports that it
has seen improvements. For example, with respect to closed appropriation

accounts, DOD reported during the first 6 months of fiscal year 2002 a
reduction in the dollar value of adjustments to closed appropriation
accounts of about 80 percent from the same 6- month period in fiscal year

2001. Other existing metrics concern cash and funds management, contract and
vendor payments, and disbursement accounting. We are initiating a review of
DOD?s short- term financial management performance metrics and will provide
the Subcommittee the results of our review. DOD also reported that it is
working to develop these metrics into higher- level measures more
appropriate for senior management. We agree with the department?s efforts to
expand the use of appropriate metrics to guide its financial management
reform efforts.

Incentives and Another key to breaking down the parochial interests and
stovepiped Consequences

approaches that have plagued previous reform efforts is establishing
mechanisms to reward organizations and individuals for behaviors that comply
with DOD- wide and congressional goals. Such mechanisms should

be geared to providing appropriate incentives and penalties to motivate
decision makers to initiate and implement efforts that result in
fundamentally reformed financial management and other business support

operations. In addition, such incentives and consequences are essential if
DOD is to break down the parochial interests that have plagued previous
reform efforts. Incentives driving traditional ways of doing business, for
example, must be changed, and cultural resistance to new approaches must be
overcome. Simply put, DOD must convince people throughout the department
that they must change from business- as- usual systems and practices or they
are likely to face serious consequences, organizationally and personally.

Enterprise Architecture Enterprise architecture development, implementation,
and maintenance are a basic tenet of effective information technology
management. Used in concert with other information technology management
controls, an

architecture can increase the chances for optimal mission performance. We
have found that attempting to modernize operations and systems without an
architecture leads to operational and systems duplication, lack of
integration, and unnecessary expense. Our best practices research of
successful public and private sector organizations has similarly identified
enterprise architectures as essential to effective business and technology

transformation. 31 Establishing and implementing a financial management
enterprise architecture is essential for the department to effectively
manage its modernization effort. The Clinger- Cohen Act requires major
departments and agencies to develop, implement, and maintain an integrated
architecture. As we previously reported, 32 such an architecture can help
ensure that the department invests only in integrated, business system
solutions and, conversely, will help move resources away from non-
valueadded legacy business systems and nonintegrated business system
development efforts. Without an enterprise architecture to guide and
constrain information technology investments, DOD runs the serious risk

that its system efforts will perpetuate the existing system environment that
suffers from systems duplication, limited interoperability, and
unnecessarily costly operations and maintenance. In our May 2001 report, 33
we pointed out that DOD lacks a financial

management enterprise architecture to guide and constrain the billions of
dollars it plans to spend to modernize its financial management operations
and systems. According, we recommended that the department develop and
implement an architecture in accordance with DOD?s policies and guidance and
that senior management be involved in the investment decision- making
process.

31 U. S. General Accounting Office, Executive Guide: Improving Mission
Performance through Strategic Information Management and Technology, GAO/
AIMD- 94- 115 (Washington, D. C.: May 1994). 32 GAO/ T- AIMD/ NSIAD- 00-
163.

33 GAO- 01- 525.

DOD has awarded a contract for the development of a DOD- wide financial
management enterprise architecture to ?achieve the Secretary?s vision of
relevant, reliable and timely financial information needed to support
informed decision- making.? In fiscal year 2002, DOD received approximately
$98 million and has requested another $96 million for fiscal year 2003 for
this effort. Consistent with the recommendations contained in our January
1999 34 and May 2001 reports, DOD has begun an extensive effort to document
the department?s current ?as- is? financial management architecture by
identifying systems currently relied upon to carry out financial management
operations throughout the department. To date, the department has identified
over 1,100 systems that are involved in the processing of financial
information. In developing the ?as- is? environment

DOD has recognized that financial management is broader than just accounting
and finance systems. Rather, it includes the department?s budget
formulation, acquisition, inventory management, logistics,

personnel, and property management systems. In developing and implementing
its enterprise architecture, DOD needs to ensure that the multitude of
systems efforts currently underway are designed as an integral part of the
architecture. As discussed in our May 2001 report, 35 the Army and the
Defense Logistics Agency (DLA) are investing in financial management
solutions that are estimated to cost about $700 million and $900 million,
respectively. Further, the Naval Audit Service has reported that the Navy
has efforts underway which are estimated to cost about $2.5 billion. 36
These programs- commercial enterprise resource planning (ERP) products- are
intended to implement different commercially available products for
automating and reengineering various operations within the organization. 37
Among the functions that these ERP programs address is financial management.
However, since DOD has yet to develop and implement its architecture,

34 U. S. General Accounting Office, Financial Management: Analysis of DOD?s
First Biennial Financial Management Improvement Plan, GAO/ AIMD- 99- 44
(Washington, D. C.: Jan. 29, 1999).

35 GAO- 01- 525. 36 Naval Audit Service, Department of the Navy
Implementation of Enterprise Resource Planning Solutions, N2002- 0024
(Washington, D. C.: Jan. 25, 2002).

37 ERP products consist of multiple, integrated functional modules that do
different tasks, such as track payroll, keep a standard general ledger,
manage supply chains, and organize customer data.

there is no assurance that these separate efforts will result in systems
that are compatible with the DOD designated architecture. For example, the
Naval Audit Service reported that there are interoperability problems with
the four Navy ERP efforts and the entire program lacks appropriate
management oversight. The effort to develop a financial management
architecture will be further

complicated as the department strives to develop multiple architectures
across its various business areas and organizational components. For
example, in June 2001, we recommended 38 that the DLA develop an
architecture to guide and constrain its Business Systems Modernization
acquisition. Additionally, we recommended that the department develop a DOD-
wide logistics management architecture that would promote interoperability
and avoid duplication among the logistics modernization efforts now under
way in DOD component organizations, such as DLA and the military services.

As previously discussed, control and accountability over investments are
critical. DOD can ill- afford another CIM, which invested billion of dollars
but did not result in systems that were capable of providing DOD management
and the Congress with more accurate, timely, and reliable information of the
results of the department?s vast operations. To better control DOD?s
investments we recommended in our May 2001 report, 39 that until the
architecture is developed investments should be limited to (1) deployment of
systems that have already been fully tested and involve no additional
development or acquisition cost, (2) stay- in- business

maintenance needed to keep existing systems operational, (3) management
controls needed to effectively invest in modernized systems, and (4) new
systems or existing system changes that are congressionally directed or are
relatively small, cost effective, and low risk and can be delivered in a
relatively short time frame.

38 U. S. General Accounting Office, Information Technology: DLA Should
Strengthen Business Systems Modernization Architecture and Investment
Activities, GAO- 01- 631 (Washington, D. C.: June 29, 2001). 39 GAO- 01-
525.

Monitoring and Oversight Ensuring effective monitoring and oversight of
progress will also be key to bringing about effective implementation of the
department?s financial

management and related business process reform. We have previously testified
40 that periodic reporting of status information to department top
management, the Office of Management and Budget (OMB), the Congress, and the
audit community is another key lesson learned from the department?s
successful effort to address its Year 2000 challenge. Previous submissions
of the department?s Financial Management

Improvement Plan have simply been compilations of data call information on
the stovepiped approaches to financial management improvements received from
the various DOD components. It is our understanding that DOD plans to change
its approach and anchor the plan in the enterprise architecture. If the
department?s future plans are upgraded to provide a departmentwide strategic
view of the financial management challenges facing the department, along
with planned corrective actions, these plans can serve as an effective tool
not only to help guide and direct the department?s financial management
reform efforts, but also to help maintain oversight of the department?s
financial management operations. Going forward, this Subcommittee?s
oversight hearings, as well as the

active interest and involvement of the defense appropriations and
authorization committees, will continue to be key to effectively achieving
and sustaining DOD?s financial management and related business process
reform milestones and goals. In conclusion, we support Secretary Rumsfeld?s
vision for transforming the

department?s financial and business related operations. The continued
leadership and support of the Secretary and other DOD top executives will be
essential to successfully change the DOD culture that has over time
perpetuated the status quo and been resistant to a transformation of the

magnitude envisioned by the Secretary. Comptroller Zakheim, as the
Secretary?s leader for financial management modernization, will need to have
the authority to make the difficult investment decisions involving the
billions of dollars being spent on systems across the department. DOD
business operations- people, processes, and technology- will have to be
reengineered and stovepiped and internally focused approaches will have

to be put aside. The past has taught us that well- intentioned initiatives
will 40 GAO- 01- 244.

only succeed if they are transparent and the incentives and accountability
mechanisms are in place. The events of September 11 and other funding and
asset accountability

issues associated with the war on terrorism, at least in the short term, may
dilute the focused attention and sustained action that are necessary to
fully realize the Secretary?s transformation goal, which is understandable
given

the circumstances. At the same time, the demand for increased defense
spending, when combined with the government?s long- range fiscal challenges,
means that solutions to DOD?s business systems problems are even more
important. As the Secretary has noted, billions of dollars of resources
could be freed up for national defense priorities by eliminating waste and
inefficiencies in DOD?s existing business processes. Only time will tell if
the Secretary?s current transformation efforts will come to fruition. Others
have attempted well- intentioned reform efforts in the past. Today, the
momentum exists for reform. But, the real question remains, will this
momentum continue to exist next month, next year, and

throughout the years to make the necessary cultural, systems, human capital,
and other key changes a reality? For our part, we will continue to work
constructively with the department and the Congress in this important area.

Mr. Chairman, this concludes my statement. We would be pleased to answer any
questions you or other members of the Subcommittee may have at this time.

Contacts and For further information about this testimony, please contact
Gregory D. Acknowledgments

Kutz at (202) 512- 9095 or kutzg@ gao. gov, Randolph C. Hite at (202) 512-
3439 or hiter@ gao. gov, or David R. Warren at (202) 512- 8412 or warrend@
gao. gov. Other key contributors to this testimony include Geoffrey Frank,
Paul Francis, Cynthia Jackson, John Ryan, Darby Smith, and Jenniffer Wilson.
(192061)

GAO United States General Accounting Office

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