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95–194 PDF 2004

S. Hrg. 108–660

THE FEDERAL GOVERNMENT’S FINANCIAL STATEMENT AND ACCOUNTABILITY OF TAXPAYER

DOLLARS AT THE DEPARTMENTS OF DEFENSE

AND HOMELAND SECURITY

HEARING

BEFORE THE

FINANCIAL MANAGEMENT, THE BUDGET, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JULY 8, 2004

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

PETER G. FITZGERALD, Illinois 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

RICHARD J. DURBIN, Illinois 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel 

AMY B. NEWHOUSE, Chief Clerk

FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE 

PETER G. FITZGERALD, Illinois, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

DANIEL K. AKAKA, Hawaii 

CARL LEVIN, Michigan 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL J. RUSSELL, Staff Director 

RICHARD J. KESSLER, Minority Staff Director 

NANCI E. LANGLEY, Minority Deputy Staff Director 

TARA E. BAIRD, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Fitzgerald ............................................................................................ 1

Senator Akaka .................................................................................................. 4

WITNESSES 

THURSDAY, JULY 8, 2004

Hon. David M. Walker, Comptroller General, U.S. Government Accountability 

Office ..................................................................................................................... 6

Linda M. Springer, Controller, Office of Federal Financial Management, U.S. 

Office of Management and Budget ..................................................................... 9

Donald V. Hammond, Fiscal Assistant Secretary, U.S. Department of the 

Treasury ................................................................................................................ 11

Lawrence J. Lanzillotta, Acting Under Secretary of Defense (Comptroller) ...... 24

Francis E. Reardon, Deputy Inspector General for Auditing, U.S. Department 

of Defense ............................................................................................................. 26

Gregory D. Kutz, Director, Financial Management and Assurance, U.S. Government Accountability Office ............................................................................. 28

Andrew B. Maner, Chief Financial Officer, U.S. Department of Homeland 

Security ................................................................................................................. 28

Clark Kent Ervin, Inspector General, U.S. Department of Homeland Security 30

McCoy Williams, Director, Financial Management and Assurance, U.S. Government Accountability Office ............................................................................. 31

ALPHABETICAL LIST OF WITNESSES

Ervin, Clark Kent: 

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 229

Hammond, Donald V.: 

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 95

Kutz, Gregory D.: 

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 195

Lanzillotta, Lawrence J.: 

Testimony .......................................................................................................... 24

Prepared statement with attachments ........................................................... 102

Maner, Andrew B.: 

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 223

Reardon, Francis E.: 

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 176

Springer, Linda M.: 

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 89

Walker, Hon. David M.: 

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 45

Williams, McCoy: 

Testimony .......................................................................................................... 31

Prepared statement .......................................................................................... 245

Page

IV

APPENDIX 

Questions and Responses submitted for the Record from: 

Mr. Walker ........................................................................................................ 260

Mr. Springer ...................................................................................................... 269

Mr. Hammond ................................................................................................... 278

Mr. Reardon ...................................................................................................... 279

Mr. Kutz ............................................................................................................ 284

Mr. Maner ......................................................................................................... 289

Mr. Ervin ........................................................................................................... 290

Mr. Williams ..................................................................................................... 297

Chart of a Memorandum for Under Secretary of Defense from Paul J. 

Granetto, CPA, Director, Defense Financial Auditing Service of an Independent Auditor’s Report on the Department of Defense Fiscal Year 2003 

Agency-Wide Principal Financial Statements ................................................... 304

Chart entitled ‘‘DOD Financial Management: Systemic Examples of Waste’’ .... 307

Chart entitled ‘‘DOD Financial Management: Operational and Security Impacts ...................................................................................................................... 308

(1)

THE FEDERAL GOVERNMENT’S FINANCIAL 

STATEMENT AND ACCOUNTABILITY OF TAXPAYER DOLLARS AT THE DEPARTMENTS OF 

DEFENSE AND HOMELAND SECURITY 

THURSDAY, JULY 8, 2004

UNITED STATES SENATE, FINANCIAL MANAGEMENT, THE BUDGET, AND

INTERNATIONAL SECURITY SUBCOMMITTEE, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC 

The Subcommittee met, pursuant to notice, at 10:32 a.m., in 

room SD–342, Dirksen Senate Office Building, Hon. Peter G. Fitzgerald, Chairman of the Subcommittee, presiding. 

Present: Senators Fitzgerald and Akaka. 

OPENING STATEMENT OF SENATOR FITZGERALD 

Senator FITZGERALD. This Subcommittee hearing will come to 

order. I would like to welcome our witnesses for being here today. 

Today, the Subcommittee is conducting a hearing on the Financial Report of the United States and the accompanying audit of the 

report conducted by what used to be known as the General Accounting Office, but which as of yesterday has officially been renamed the Government Accountability Office. But it still has the 

same acronym, GAO. We congratulate the GAO on their official 

name change. 

The hearing also will focus on the financial management of two 

departments: The Department of Defense, which was one of three 

Federal agencies to receive a disclaimer in fiscal year 2003, and the 

Department of Homeland Security, which the GAO listed on its 

high-risk list, citing a number of major management challenges 

and program risks. 

This administration and the Federal agencies are making significant strides to improve their financial management. In testimony 

before the House earlier this year, Comptroller General Walker indicated that agencies made laudable progress in expediting the 

preparation of their annual financial statements. Mr. Walker noted 

that eight agencies submitted their fiscal year 2003 financial statements in November, less than 2 months after the close of the fiscal 

year. 

In her House testimony, Ms. Springer indicated that the administration’s goal of shortening the time for agencies to prepare audited financial statements from 5 months to 45 days after the end 

2

1The chart referred to appears in the Appendix on page 304. 

of the fiscal year was achieved by a third of the major agencies a 

year in advance of the new deadline. 

Yet billions of American tax dollars are wasted by fiscal mismanagement, fraud, and abuse. A review by the Congressional Research Service of selected estimates of Federal Government savings 

indicates that more than $55 billion could be lost each year from 

improper payments paid by the Federal Government, the lack of 

adequate financial and inventory controls at the Department of Defense, and waste in other government agencies. This staggering 

amount is greater than the gross national product of over 80 countries around the world. 

This is not a trickle of coins. It is a deluge of dollars that is costing our government its fiscal integrity. Instead of disappearing into 

the abyss of government balance statements, this money should be 

equipping our troops in the war on terror, or securing our homeland from attacks, or being used for any other number of very worthy causes, or returned to the taxpayers, for that matter. 

For the seventh year in a row, the GAO was unable to audit the 

Federal Government’s fiscal year 2003 consolidated financial statement for three primary reasons. First, serious financial management problems continue to exist at the Department of Defense. Second, the Federal Government is unable to account for billions of 

dollars of transactions between Federal Government entities. And 

third, the Federal Government’s process for preparing the consolidated financial statements is ineffective. 

The government’s consolidated financial statement fails to ac- count for a $24.5 billion shift in net position. The amount of this 

so-called plug in their financial statements is up from a plug of $17 

billion in fiscal year 2002. Imagine they just come up with a number, and plug in $24.5 billion to make the balance sheet match. In 

the private sector, a company with a big plug in its financial statements probably couldn’t get any credit from a bank, nor would the 

Securities and Exchange Commission ever allow such a company to 

sell its shares to the public. Yet we apparently tolerate this kind 

of plug, amounting to billions and billions of dollars every year, 

with our own Federal Government. 

In fiscal year 2003, 20 of the 23 Federal departments covered by 

the Chief Financial Officers Act received an unqualified or clean 

audit opinion on their financial statements. The Department of Defense, the Small Business Administration, and NASA each received 

disclaimers. A disclaimer is given when an agency’s financial 

records are so unreliable that an audit simply cannot be conducted, 

and for that disclaimer of the DOD, we have put up a chart showing the inability to conduct an audit at the DOD because the books 

and records are in such disarray that heads or tails cannot be 

made of those statements.1

I commend Secretary of Defense Donald Rumsfeld for placing financial management reform on his list of top ten priorities at DOD. 

In fact, I remember talking to him on the day he was sworn in. He 

is from my home State, and I thought, if anybody is tailor made 

to bang heads together and get this problem fixed, it is Secretary 

Rumsfeld. I know of no one tougher or more qualified for that task. 

3

1The chart referred to appears in the Appendix on page 307. 

2The chart referred to appears in the Appendix on page 308. 

I shudder to think that if Secretary Rumsfeld is having a hard time 

getting it done, how are we ever going to get this done? It is such 

a monumental, daunting challenge. 

It is daunting because the Department has over 2,200 financial 

management systems, many of which are redundant or are not integrated, and this has led the GAO to list DOD’s financial management and business system modernization on its high-risk list every 

year since 1995. 

Today, we will hear from the GAO about specific examples of 

wasteful programs that are linked to DOD’s financial management, 

and we have a second chart that should give you an idea of what 

these programs are. For example, the chart at the end of the dais—

and there are two of them, one so that the audience can see over 

there and one so that Senators can see over here—the chart highlights some of these examples.1

Failed business systems—apparently, DOD spent $179 million on 

two financial accounting systems, and then decided that they didn’t 

work and just terminated the projects with no resultant benefit to 

the taxpayers or the government. One-hundred-and-fifteen million 

dollars on thousands of unused airline tickets valued at up to 

$9,800 each. One-hundred-million dollars for the failure to collect 

unpaid Federal taxes from DOD contractors. Many people with contracts or companies with contracts from the DOD were continuing 

to get payments on their contracts even though they weren’t paying 

taxes they owed to the Federal Government. And $34 million annually required to reconcile contract payments. DOD does not have an 

integrated system, apparently, to reconcile contract payments with 

contracts. Therefore, it is a labor-intensive process to issue contracts and record then in the payment system. 

In all, those examples total over $400 million alone. 

In addition to lost dollars, inadequate financial and inventory 

management also undermines DOD’s operations and the security of 

our troops, and for that, we have another chart at the end of the 

dais. This chart reflects the GAO’s findings of pay problems in the 

Army Guard that impact morale and retention; the inability to locate more than 250,000 defective chemical and biological safety 

suits; improper granting of security clearances; and the public sale 

of sensitive biotech equipment.2

And now, beneath that sheet, we have on display an actual 

chem-bio suit from the defective lot that the GAO found DOD had 

distributed to combat soldiers, possibly to soldiers in Iraq, as well 

as local law enforcement agencies. When the suits were found to 

be defective, DOD could not recall all of them due to insufficient 

inventory controls. Additionally, the next generation of this chembio suit was available for purchase on e–Bay for $3 when, at the 

same time, DOD was purchasing the same suit for more than $200. 

Not only is this wasteful spending, but this error places our soldiers and local law enforcement officials at risk. 

During the hearing by our full Committee in May of last year, 

I asked Homeland Security Secretary Tom Ridge about his plans 

to ensure sound financial management of his new Department and 

4

he assured the Subcommittee that this was a top priority. Since 

then, DHS has made significant progress in integrating its 22 component agencies and implementing its budget of $33 billion. We 

must, however, work to ensure that Homeland Security does not 

evolve into another DOD, where audit disclaimers are the norm 

and inventory controls are lacking. 

Unfortunately, the first warning flags are waving on the homeland security front. The Washington Post reported last November 

that State and local governments had used Federal homeland security dollars to fill perceived budget holes, including procurement of 

janitorial services, rather than to fund critical homeland security 

needs. 

The Department of Homeland Security is the only cabinet department not yet subject to CFO Act requirements, but is required 

under the Accountability of Tax Dollars Act to prepare and have 

audited financial statements. Last year, Senator Akaka and I introduced S. 1567, legislation that would apply the CFO Act to the Department of Homeland Security. The Senate passed this legislation 

and the House is expected to pass its version in the near future. 

We look forward to hearing from our witnesses on their views regarding the importance of applying the CFO Act to DHS. 

Publicly traded companies are held to the highest level of scrutiny and financial accountability in order to ensure that accurate 

financial information is presented to shareholders. The Federal 

Government should be held to the same level of accountability and 

provide accurate financial information to its shareholders, the 

American taxpayers. 

This is not an idle exercise in arcane accounting procedure. 

Every dollar lost to waste, fraud, or abuse or mismanagement is a 

dollar that could have been used to fight terrorism at home and 

abroad. Inefficiency makes us all less safe. 

Before we hear from our first panel, I would like to recognize the 

Subcommittee’s Ranking Member, Senator Akaka, for an opening 

statement. Senator Akaka. 

OPENING STATEMENT OF SENATOR AKAKA 

Senator AKAKA. Thank you very much, Mr. Chairman. I appreciate you holding today’s hearing to review the recent Federal financial audits of the Departments of Defense and Homeland Security. I also want to thank our distinguished witnesses for their testimony and for the efforts they are making in this regard. Mr. 

Chairman, I want to tell you that I admire you for moving into this 

area and I want you to know I am on your side. 

Just a little over 3 months ago, the Armed Services Readiness 

Subcommittee held a similar hearing. As that panel’s Ranking 

Member, I had the opportunity to discuss with Comptroller General 

Walker the shortcomings in the financial management systems at 

DOD. The General Accounting Office issued its fiscal year 2003 

audit of the government’s consolidated financial statement in February. Although noting progress with Federal financial management activities, GAO has also found continuing ‘‘significant material weaknesses or deficiencies,’’ in the government’s consolidated 

statement for the seventh consecutive year. Among the three top 

5

factors contributing to these deficiencies are the serious financial 

management problems in DOD. 

Mr. Chairman, it is disturbing that little has changed at DOD. 

Since 1995, the Department’s financial management has been on 

GAO’s high-risk list and has failed to develop an enterprise architecture blueprint for its business systems even though DOD said 

the blueprint would be in place by March 2003. 

To address these fundamental problems, the National Defense 

Authorization Act of 2003 required DOD to develop and implement 

a new financial management architecture and transition plan by 

early 2004. To date, DOD does not have a blueprint. I am hopeful 

that today’s hearing will help the Department of Homeland Security avoid the financial management problems and resistance to 

change that plagues the Department of Defense. 

Mr. Chairman, you and I have worked together to increase the 

transparency, timeliness, relevancy, and usefulness of financial information in the mutual funds industry to protect investors. In a 

similar fashion, we understand that until the agencies get their financial houses in order, the government cannot manage effectively. 

Congress and the American taxpayers have the right to know 

how much Federal agencies spend on providing essential services, 

how an agency has spent its appropriated funds, and whether there 

are unspent monies left in the pipeline. 

Capturing accounting data is the easy part. What is hard is how 

to integrate financial data with management systems that are 

flexible enough to adapt to changing goals and priorities. You and 

I share the belief that our focus should be not only on what has 

gone wrong, but on how we can move forward in a constructive way 

to address the underlying problems. 

In fiscal year 2003, the authorization for both the Departments of Defense and Homeland Security totaled $487 billion, or 22 percent of the Federal budget. Given that fighting terrorism and the 

war in Iraq will continue to dominate other budget priorities, we 

must fully understand why DOD and DHS are encountering difficulties in reconciling their annual statements. Failing to do so 

will limit our ability to make sound budgeting decisions in the future. Moreover, without improving financial management systems, 

there will be further incidents such as when the Bureau of Immigration and Customs Enforcement at DHS imposed a hiring freeze 

because its financial management system indicated current and 

projected spending would exceed its budget. 

We are faced with enormous financial challenges which demand 

timely and accurate financial data in order to instill accountability 

and ensure Federal programs are executed in the most effective 

manner. 

The establishment of DHS was the largest government reorganization since the late 1940’s. I commend DHS for meeting the 

challenges of starting a new Department. However, the consolidation of the legacy agencies into one Department has resulted in a 

non-integrated financial management system which puts the entire 

Department at risk. 

I support putting DHS under the Chief Financial Officers Act, 

which is why you and I introduced legislation last year to do that. 

Widening the scope of DHS’s financial regulations would improve 

6

1The prepared statement of Mr. Walker appears in the Appendix on page 45. 

the agency’s ability to manage effectively and efficiently the inherited financial activities of its legacy agencies and those unique to 

its new organization. 

This is what we are looking at at this hearing. I want to thank 

our witnesses and look forward to their testimonies. I know you all 

will be helpful to us. And I want to thank you, Mr. Chairman, 

again for this hearing and for what you are doing. 

Senator FITZGERALD. Senator Akaka, thank you very much. 

I would now like to introduce our first panel of witnesses. Our 

first witness on this panel is the Hon. David M. Walker, Comptroller General of the United States. Mr. Walker began his 15-year 

term as the Nation’s Chief Accountability Officer and was appointed in 1998 as head of the U.S. General Accounting Office, now 

referred to as the Government Accountability Office. Through his 

role as Comptroller General, Mr. Walker oversees the GAO’s work 

to improve the performance and accountability of the Federal Government, including measures to improve the efficient use of taxpayer dollars. 

Our second witness is the Hon. Linda M. Springer, Controller of 

the Office of Federal Financial Management at the Office of Management and Budget, the OMB. Ms. Springer was confirmed in this 

position on March 31, 2003, after having joined OMB in September 

of 2002. In her role as Controller, Ms. Springer provides governmentwide leadership for strengthening the financial management 

of the Executive Branch, including the Improved Financial Performance Initiative of the President’s Management Agenda. 

Our third witness is Donald V. Hammond, Fiscal Assistant Secretary at the Department of the Treasury. Mr. Hammond has 

served in this capacity since September 27, 1998, after serving as 

the Deputy Fiscal Assistant Secretary since July 1996. In his current position, Mr. Hammond is responsible for management of the 

government’s cash flow and the operation of governmentwide financial accounting and reporting systems, including the consolidated 

financial statements of the United States. 

Again, I would like to thank you all for being here today, and 

recognize, please, that your prepared statements will be submitted 

in the Subcommittee’s official record of this hearing, and please feel 

free to summarize your remarks off the top of your head if you feel 

able to do that. If you could try and keep your remarks to 5 minutes, we would appreciate it. 

Comptroller General Walker, thank you. 

TESTIMONY OF HON. DAVID M. WALKER,1 COMPTROLLER 

GENERAL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WALKER. Thank you, Mr. Chairman and Senator Akaka. It 

is a pleasure to be back before you. I would like to thank both of 

you at the outset for your support of the Human Capital Reform 

Act of 2004 for GAO, which was signed by the President yesterday. 

It is really going to help us and I appreciate your support. 

I also would like to thank you for holding this oversight hearing. 

Candidly, there is not enough oversight being done in a number of 

areas. There is not enough attention being placed on the imporVerDate 0ct 09 2002 09:55 Nov 09, 2004 Jkt 095194 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\95194.TXT SAFFAIRS PsN: PHOGAN
7

tance of sound Federal financial management practices, and I want 

to commend you and thank both of you for taking time out of your 

very busy schedules to conduct this hearing and be here today. 

As you mentioned, Mr. Chairman, as in the six previous years, 

or otherwise for the seventh year in a row, certain material weaknesses in internal control and selected accounting and reporting 

practices resulted in conditions that did not allow the GAO to express an opinion on the consolidated financial statements of the 

U.S. Government. We did perform a number of audit procedures, 

and fairly extensive audit procedures, in conjunction with the auditors of various departments and agencies, but certain impediments 

were there that have been there for a number of years that prohibited us from being able to express an opinion. 

While the Federal Government has not yet been able to prepare 

auditable financial statements, the requirement imposed by the 

CFO Act and others Acts for there to be annual audits has yielded 

important results to date. We have seen continuous improvement 

and significant progress with regard to the number of agencies that 

have been able to achieve clean opinions on their financial statements, but more importantly, we have seen a continuous improvement among most Federal agencies in their ability to generate 

timely, accurate, and useful financial information to make informed 

decisions on a day-to-day basis. 

In that regard, in fiscal 2003, as was the case in fiscal 2002, 20 

of the 23 CFO Act agencies were able to obtain an unqualified 

opinion on their financial statements. That is up from six agencies 

in 1996. However, only 3 of those 20 agencies met the more substantive definition of success in financial management that has 

been agreed to by the Director of OMB, the Secretary of the Treasury, and myself as Comptroller General of the United States, 

namely that not only do you have a clean opinion on your financial 

statements, but you have no material control weaknesses, no major 

compliance problems, and systems that provide for timely, accurate, and useful information to make sound management decisions 

on a day-to-day basis. Only the Energy Department, the National 

Science Foundation, and the Social Security Administration met 

that more substantive test, and I would like to congratulate and acknowledge the efforts of all three of those agencies. 

As you mention, Mr. Chairman, there are three major impediments to the ability of the GAO to express an opinion on the consolidated financial statements of the U.S. Government. First and 

foremost, serious financial management problems at the Department of Defense, which is the largest agency in the Federal Government. 

Second, the Federal Government’s inability to fully account for 

and reconcile transactions between various Federal Government 

entities. And third, the Federal Government’s process for preparing 

the consolidated financial statements, which can result in the plug 

that you referred to. 

The fact of the matter is, significant progress is being made on 

No. 2 and No. 3. Some progress is being made on No. 1. But that 

is the big challenge and we are not going to be in a position to express an opinion on consolidated financial statements until the 

8

DOD issue is dealt with, and that is by far the most complex challenge that remains before us. 

Mr. Chairman, irrespective of where we stand on financial management with regard to current and past activity engaged by the 

Federal Government with taxpayer money, I think it is also important that we start looking from a more strategic perspective. There 

is a problem with regard to how the Federal Government currently 

keeps score, both for accounting and reporting standpoint and also 

from a budgetary perspective. The simple fact of the matter is, if 

you look at the consolidated financial statements of the U.S. Government as of September 30, 2003—and this chart shows various 

related numbers. There are a lot of numbers up here, so I will try 

to hit the bottom line. 

It will show you that since the beginning of the Republic in 1789, we have run up about $7 trillion—that is a ‘‘T’’ as in trillion, 12 

zeros—in total debt, debt held by the public as well as debt held 

by the ‘‘trust funds,’’ like Social Security and Medicare. And yet 

what it doesn’t show adequately is that we have a number of significant commitments and contingencies that we have already 

made that are not shown as liabilities for various reasons but yet 

are very real, for example, the difference between the projected cost 

in discounted present value dollar terms of Social Security and 

Medicare and the amount of payroll taxes and other premiums that 

we expect to receive. 

If you look at how much money we would have to have today invested at Treasury rates to deliver on the promises that have already been made, it is really not $7 trillion, it is more like $42 trillion. That is over three-and-a-half times the entire economy, about 

18 times the current Federal budget, over $140,000 for every man, 

woman, and child in the United States. 

Senator FITZGERALD. Isn’t it $32 trillion? 

Mr. WALKER. Forty-two trillion plus. 

Senator FITZGERALD. Forty-two? 

Mr. WALKER. That includes the $7 trillion. And of that $42 trillion, roughly $27 to $28 trillion is Medicare, and of that, roughly 

$8 trillion is the new prescription drug benefit. 

So the bottom line is, we have a number of commitments and 

contingencies that already exist that we are going to have to come 

to grips with, and the way that we look at things from a budgetary 

standpoint is problematic because 10-year horizons are simply not 

adequate given the demographic challenges that we face. This 

chart represents the result of the most recent long-range budget 

simulation by GAO, which shows that we face large and growing 

structural deficits due to a number of factors, including known demographic trends and rising health care costs. 

And in the final analysis, Mr. Chairman, the Congress is going 

to have to review and reform basic entitlement programs, look at 

the base of discretionary and other spending, and look at tax policy 

in order to close this gap. But that is going to take a concerted effort by a variety of parties over a number of years. 

So in summary, Mr. Chairman, progress clearly has been made, 

in large part due to the acts that Congress took in the 1990’s to 

legislative important management reforms, not just in the financial 

management area but other areas, to bring good management pracVerDate 0ct 09 2002 09:55 Nov 09, 2004 Jkt 095194 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\95194.TXT SAFFAIRS PsN: PHOGAN
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1The prepared statement of Ms. Springer appears in the Appendix on page 89. 

tices, if you will, to the Federal Government. Progress has been 

made. It is continuing to be made. The big challenge is the Department of Defense. We are committed to doing our part to try to help, 

not only deal with financial management challenges, but also the 

imbalances that lie before us, and I look forward to working with 

you, Senator Akaka, and others to address these challenges. 

Thank you, Mr. Chairman. 

Senator FITZGERALD. Thank you, Mr. Walker. Ms. Springer. 

TESTIMONY OF LINDA M. SPRINGER,1 CONTROLLER, OFFICE 

OF FEDERAL FINANCIAL MANAGEMENT, U.S. OFFICE OF 

MANAGEMENT AND BUDGET 

Ms. SPRINGER. Thank you, Mr. Chairman and Senator Akaka. I 

am happy to be here today with you to discuss our Financial Report of the U.S. Government for Fiscal Year 2003 and other related 

financial management issues. I look forward to sharing with you 

some of the significant progress made by Federal agencies during 

the past year that underlies that report and positions it for the future. 

Financial management extends beyond receiving an unqualified 

audit opinion. Integrity and reliability, the things to which a clean 

audit attests, should be a given. First class financial management 

requires the integration of the financial impact of an agency’s activities into the operational, execution, and senior management decisionmaking at an agency, just like it does in the private sector. 

It is accompanied by accountability standard setting, performance 

tracking, and other analyses. These are among the characteristics 

we should seek in the Federal Government, every bit as much as 

we do in the private sector. 

Only a few short years ago, such a standard was not prevalent 

in the Federal Government. Through the President’s Management 

Agenda, the Office of Management and Budget has set what many 

view to be very aggressive goals to achieving respectability in the 

government’s financial management practices. It is not surprising 

that this results-focused approach, while acknowledged to be a 

positive influence, has forced significant and challenging process 

modifications at many agencies. The degree of transformation reflects just how far we have had to go to catch up to accepted practices of well-run financial management organizations in the private 

sector. 

So the question is, are these efforts that we describe paying off? 

Well, the answer is an indisputable yes. Where it took agencies 5 

months to prepare audited financial reports in the past, it now 

takes 45 days for many and only 21⁄2 months for most. Agencies are 

building on momentum from our fiscal year 2003 reporting acceleration successes to achieve the mandatory November 15 reporting 

date for fiscal year 2004. Interim financial reports were unheard of 

before 2002 and they are now being completed by 21 days after the 

close of each calendar quarter. 

It is often said that these achievements are only achieved by—

or these accomplishments are only achieved by heroic efforts, and 

hard work is always a factor, but these results are really a tribute 

10

to detailed planning, to effective management, and excellent execution. 

While the acceleration targets are critical, they are not our ultimate objective. Rather, the discipline and improved control needed 

to accelerate financial reporting is only the foundation for ensuring 

the availability of useful financial information. The incorporation of 

timely and accurate financial information into management decisionmaking and operational assessment continues to be our main 

goal. 

Progress toward this goal during fiscal 2003 was shown by the 

addition of two agencies, the Social Security Administration and 

Environmental Protection Agency, that achieved green status 

under the financial initiative of the President’s Management Agenda. These agencies were later joined by the Department of Education in the first quarter of 2004. Today, not only do the managers 

in these agencies have timely and accurate information, but they 

are using it for their program assessment and for their planning. 

I wanted to say here that if you have accurate and timely financial information, and you really need to have both, you are able to 

do those things. If you have accurate information but it is too late 

to use it, then it is worthless. If it is on time but it is inaccurate, 

you had better not be using it. So you really need to have both accurate and timely information. We believe that meeting timely reporting standards and getting clean audits is evidence that the 

agencies will have that information for their management and their 

decisionmaking. 

The mandatory financial reporting date of November 15 will require much work from the agencies this year. However, this accelerated deadline is an attainable goal, shown by the large number 

of major agencies, over 75 percent, that were able to report their 

financial statements by the end of December last year. So they 

have made significant progress. They have a little bit further to go. 

In those cases, strong agency senior leadership, careful planning, 

innovative thinking, and focused efforts were all necessary elements for success. 

This fiscal year, we are meeting regularly with each CFO of the 

agencies as well as their IGs to review plans for hitting their November deadlines. Clearly, some agencies have more challenges 

and obstacles than others, but all agencies are expected to take 

necessary steps to meet the accelerated date. 

Some of the best practices that agencies are implementing include disciplined processes and audit schedules, aggressive tracking 

and issue resolution in risk areas, reengineering of their financial 

reporting processes and their audit processes, early and frequent 

communication with their auditors from that opening conference on 

day one at the beginning of the year right on through, and focused 

financial management priorities. 

So we will continue to work and we meet with the high risk 

agencies on a monthly basis from now right up through November 

15. 

There are some emerging issues that I would like to share with 

the Subcommittee briefly. Internal control—the internal control environment of any entity is an area of focus both for management 

and for the auditor, and the agencies of the Federal Government 

11

1The prepared statement of Mr. Hammond appears in the Appendix on page 95. 

are no exception. There are several existing laws that govern agencies in assessing and representing the quality of their internal control. However, not all agencies are able to provide the positive assurance that goes with those requirements. But all continue to 

make progress in eliminating barriers to compliance. Many of these 

are longstanding system issues that will take a period of years to 

require full remediation. 

However, what you should know is that both OMB and the CFO 

Council and the Inspectors General are working together today to 

review the internal control challenges and what the best way is to 

close the gap between where we stand today and a Sarbanes-Oxley 

type of management control environment. 

The other issue I would like to bring to your attention in the 

emerging category is related to unfunded liabilities and social insurance scrutiny. As mentioned by Comptroller General Walker, 

this is an area of high concern and FASAB, the Federal Accounting 

Standards Advisory Board, has taken some steps already to increase audit scrutiny and the prominence of the social insurance 

statements within the Government’s Consolidated Financial Report. So in the future, you will see that in a more prominent position in the statement. It will become one of the basic statements 

and it will receive full audit scrutiny. So that is a step toward having information that is certified in a way that we can make the 

right policy decisions about funding. 

So our outlook for the future, to summarize, is that we have seen 

many achievements in the past year, but there remains a long way 

to go. We will continue to set and achieve higher standards of performance dealing with issues like asset management, elimination of 

improper payments, and many other areas that we believe to be 

fertile ground. It is our opinion that the Federal Government 

should be held to as high, if not a higher, standard than financial 

management in the private sector, and I was happy to hear you, 

Mr. Chairman, say the same thing. 

American citizens don’t have the option of taking their investment elsewhere. They have to pay their taxes. So we owe them the 

highest level of scrutiny and management of the taxpayer dollars 

that they have entrusted with us. We believe it is incumbent on 

every financial professional in the government to execute their duty 

according to those standards of excellence, and that is what we are 

striving to do. We have made some progress and we are going to 

continue on that path. Thank you. 

Senator FITZGERALD. Ms. Springer, thank you very much. Mr. 

Hammond. 

TESTIMONY OF DONALD V. HAMMOND,1 FISCAL ASSISTANT 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Mr. HAMMOND. Mr. Chairman, it is my pleasure today to represent the Treasury Department to discuss the status of the Federal Government’s financial reporting, and in particular the Financial Report of the U.S. Government. We have come a long way in 

the 7 years that we have prepared this report, but we face some 

significant challenges, and as such, the financial report is indeed 

12

a work in progress. My written testimony today explains more fully 

the challenges we face. 

The Committee’s interest today, however, is very important because this is an area, as the Comptroller General has pointed out, 

that needs continuing scrutiny. The Treasury Department has a 

longstanding responsibility and commitment to report accurate and 

useful information about the Nation’s finances. Our objective in 

preparing the consolidated financial statements is to provide the 

Congress and the public with a reliable, consistent, timely, and 

useful report about the costs of the government’s operations, the 

sources used to fund them, and the implications of its financial 

commitments. 

I am pleased that last year, we were able to release the report 

a month earlier than in prior years. That accomplishment is due 

in large measure to the progress that the agencies have made in 

accelerating their financial reporting. For the 2004 statements, as 

you have already heard, OMB has requested that the agencies prepare statements by November 15 and the governmentwide statements will be issued by December 15, based on those agencies’ submissions. This more timely preparation of the Consolidated Report 

means that the financial information will be available prior to the 

release of the President’s budget and providing actual data on an 

accrual basis for reference in those discussions. 

The financial report is an important addition to Federal financial 

reporting. It provides an across-the-board look at the Federal Government, computed in accordance with accrual accounting standards established by independent Generally Accepted Accounting 

Principles, or GAAP. The report goes beyond simple reporting of results, as it displays the effects of all significant assets, liabilities, 

stewardship responsibilities, and other commitments and responsibilities. The considerable financial implications of the government’s social insurance programs—Social Security and Medicare in 

particular—are reported in the stewardship accounting. 

The report is subject to audit by the GAO, and although the report has improved over the years as we have strived to make it 

more useful, the GAO has been unable to render an opinion on the 

financial statements. For the 2003 report, as has been noted today, 

GAO cited three principal reasons for the disclaimer. As the next 

panel will no doubt discuss, the DOD has displayed a strong commitment to correct its extensive financial management problems 

through a comprehensive financial management modernization program. Therefore, I will focus my remarks on the two other material 

weaknesses. 

We have a number of initiatives underway to resolve the material weaknesses and to improve the government’s management and 

accountability. The Financial Management Service, Treasury’s bureau responsible for governmentwide accounting operations, is 

making real progress. We have been focusing on the problem of 

intergovernmental activity and balances and are devoting much attention to help agencies fully reconcile these areas through the development of a new analytical tool and increased reporting frequency. I am optimistic that the reporting for the quarter ended 

June 30 will show significant further improvement. 

13

However, I must note, there is not a single centralized system solution to the problem of intergovernmental balances. Each agency’s 

management must make it a priority to improve the agency’s data 

quality, reconcile amounts with their trading partners, and adhere 

to the standard business rules issued by OMB for processing intergovernmental transactions. This is basic to accurate and consistent 

financial reporting. 

With regard to the report preparation weakness, we are addressing each of the three aspects. For the unexplained transactions 

that affect the change in net position and that require us to use 

a reconciling entry, or plug, in the financial statements, we believe 

the larger problem has its roots in the intergovernmental balances, 

but we are also employing other analytical techniques because we 

believe that there may be some activity related to custodial revenues reported by the agencies. 

As a result, we are taking those various components apart and 

hoping to be able to understand more fully the causes of that issue 

as we understand the intergovernmental balances, as well as how 

certain custodial revenue may be reported. 

As to the need to directly link agencies’ audited financial statements with the data used for compiling the governmentwide reports, FMS is completing the implementation of a new closing 

package system. This new system will provide a clear audit trail 

that will facilitate the audit of the financial report and demonstrate that it is consistent with the underlying information in 

agencies’ audited financial statements. We are also addressing the 

process to ensure that the notes or disclosures in our report are in 

compliance with GAAP. 

In summary, I look forward to meeting the new due dates this 

year, but I recognize the difficulties involved. We are dealing with 

a new central reporting process and are working with agencies 

whose financial reporting is not yet where it needs to be to meet 

these dates. That being said, I visualize the day when we have 

fully achieved more timely reporting and can obtain the full value 

of financial reporting by having reports that are truly useful. Usefulness is the final element of effective financial reporting. Financial reports should provide relevant financial and performance information that not only supports management decisionmaking, but 

also informs the public. Herein lies the greatest challenge and potentially the greatest benefit from our financial reporting. 

We have come a long way. Our upcoming challenges are significant, but manageable, and I am confident that we will continue to 

see real progress. Thank you, Mr. Chairman, and that concludes 

my remarks. 

Senator FITZGERALD. Thank you. I want to start with a question 

that takes a little bit of heat off of the Executive Branch of Government. Mr. Walker, right now, there are no audits of the Legislative 

or Judicial Branches of Government, are there? 

Mr. WALKER. Well, there are audits of many Legislative Branch 

entities. For example, GAO has an audit. Several of the other Legislative Branch agencies also have audits. 

Senator FITZGERALD. Does the Senate or the House have an 

audit? 

14

Mr. WALKER. It is my understanding that the House does have 

an audit. The Senate does not have an audit. However, the Senate 

is trying to take steps right now to explore the possibility of voluntarily doing an audit, even though they are not required to by law. 

Senator FITZGERALD. How about the court system? 

Mr. WALKER. No. They are not required, and I think the Administrative Conference of the Courts is obviously the entity that is the 

most logical one to take a look at, if Congress decides to pursue 

such a requirement. 

Senator FITZGERALD. Since nobody is auditing that co-equal 

branch of government called the Judicial Branch, it is just not 

being audited? 

Mr. WALKER. That is my understanding, Mr. Chairman. 

Senator FITZGERALD. And the Senate and the House, the House 

is maybe auditing itself? Do you get to review those audits or comment on those? 

Mr. WALKER. They are not material to the consolidated financial 

statements. I mean, we have the ability to do it. We do not perform 

that audit ourself, and for a variety of reasons, I don’t think it 

would be appropriate for us to do that. 

Senator FITZGERALD. Maybe because we control you. [Laughter.] 

Mr. WALKER. It would be challenging to audit individual offices 

of Senators and Members of Congress. Let us just say that would 

be something we would prefer not to have to do directly ourselves. 

Senator FITZGERALD. I understand. Let me ask you this about 

the consolidated financial statements of the U.S. Government. Do 

you put figures in there representing the Legislative and Judicial 

Branches of Government? 

Mr. WALKER. That is correct. We do, Mr. Chairman. 

Senator FITZGERALD. And where do you get those figures? 

Mr. WALKER. We get them based on information that they report. 

I mean, many entities will report information, but that information 

may not be audited. 

Senator FITZGERALD. OK. 

Mr. WALKER. And Don may want to comment, since he is responsible for the consolidated financial statements. 

Mr. HAMMOND. What we use is primarily the budgetary information for those three entities, combined with the audited financial 

reports for the components of the Legislative Branch that do prepare statements, such as the General Accounting Office, or, I am 

sorry, the Government Accountability Office—it will take me a little while to get used to that one—as well as the Library of Congress. 

The Administrative Office of the U.S. Courts for the Judicial 

Branch is a particular challenge, because even there, the extent of 

the budgetary information is even more limited than what we receive from the Legislative Branch. We don’t believe that those are 

particularly material balances. That being said, we would like the 

report to be complete and we would also like to be able to establish 

the significance of those amounts. 

Senator FITZGERALD. At future hearings, perhaps, this Subcommittee, I hope, will take up that issue. 

15

Are you putting accrual figures in this consolidated report for unfunded liabilities? Is it appropriate to say that this report is prepared in conformity with accrual accounting? 

Mr. WALKER. It is based upon accrual concepts, and I think it is 

important to note that substantial progress has been made over the 

last several years to enhance the transparency and also the accountability associated with some big numbers, for example, Social 

Security and Medicare commitments. I am pleased to say that several years ago, the Federal Accounting Standards Advisory Board 

created a separate statement that included discounted present 

value numbers for these programs for the first time. They subsequently made it a primary financial statement, or basic financial 

statement, and it is now going to be subject to audit. So that is tremendous progress, if you will, and it is using accrual concepts, 

which I think is important. 

Senator FITZGERALD. And are you looking at the assumptions 

used in coming up with those accrual numbers and checking them 

to make sure that they are reasonable? 

Mr. WALKER. We look at the methodology that is employed, 

whether or not that methodology is generally accepted. We look at 

the reasonableness of the assumptions. And as you know, Mr. 

Chairman, in the case of Social Security, Social Security Administration is audited, I believe, by PriceWaterhouseCoopers, and in 

the case of CMS, which is responsible for Medicare, I believe they 

are also audited by PriceWaterhouseCoopers. 

Senator FITZGERALD. That is where those unfunded liabilities 

are—it is PriceWaterhouseCoopers for the Social Security unfunded 

liability. Are they coming up with that number? 

Mr. WALKER. They are working with the actuaries for the Social 

Security Administration as well as the actuaries for the Center for 

Medicare and Medicaid Services. 

Senator FITZGERALD. OK. 

Mr. WALKER. They need to satisfy themselves, and we obviously 

have to satisfy ourselves to the extent that we are going to be in 

a position to express an opinion. But as I mentioned before, unless 

and until the Department of Defense gets its act together, and they 

are working hard to try to do that, we are not going to be in a position to express an opinion on the consolidated financial statements. 

Senator FITZGERALD. OK, and I will get to the Department of Defense in a moment, but in your consolidated financial statement, I 

think there is some point at which you discuss the explicit debt per 

American, our national debt per American, and I think it is some 

$7,000. But then when you factor in the unfunded liabilities, the 

debt per American citizen is really closer to $100,000. 

Mr. WALKER. Well, it depends on how you look at it, Mr. Chairman. Using the most up-to-date numbers, if you look at the per 

capita burden, if you will, and that is what I would call it, a burden, per American based upon the total debt, which is around $7 

trillion as of this point in time, that is about $24,000 for every 

man, woman, and child in the United States. If you add on top of 

that not just the results of historical activity but also what the difference is between how much we have promised and the revenues 

that we have dedicated to meet those promises for things like Social Security and Medicare and you calculate the gap today, the 

16

burden goes from about $24,000 per person to over $140,000 per 

person. 

Senator FITZGERALD. Over $140,000? 

Mr. WALKER. That is correct. 

Senator FITZGERALD. OK. And you are not talking per family, 

you are talking per person? 

Mr. WALKER. Including the newest newborn. 

Senator FITZGERALD. So that is a big number. Now, with respect 

to the DOD, what are we going to do about the DOD? This is apparently just a humongous problem that we are having a hard time 

getting our arms around. I remember Secretary Rumsfeld when he 

first inquired about this issue when he first took over, even before 

he was sworn in. I think he had talked to the accounting people 

at DOD, and they had told him that their accounting system was 

designed not really to do financial accounting, but it was more designed so that they could tell Members of Congress what projects 

they were doing in each of their districts. It was a whole mess, and 

the whole system needs to be revamped. 

Ms. Springer, in your judgment, are we making progress there, 

and how long will it take? This has been going on a very long time 

now, since the requirement of audited financials was put in place. 

Was that 1995? 

Ms. SPRINGER. Ninety-six. 

Senator FITZGERALD. Ninety-six. So we are talking 8 years or so. 

We still can’t get it right. When do you think we will be able to 

get it right at DOD? 

Ms. SPRINGER. I don’t know what the date is, and I would be interested in what your next panel tells you the date is, and I hope 

you ask them that same question——

Senator FITZGERALD. They are going to be asked, yes. 

Ms. SPRINGER. But what I believe is going on there at DOD and 

where I think they should head next is the following. There is a 

huge effort, their overall business modernization program that I 

am sure they will tell you more about. But what doesn’t get much 

publicity is some of the smaller issues and efforts that deal with 

specific line items, for example, on their balance sheet. 

One area—88 percent of their liabilities, I believe, or somewhere 

in that range—deals with post-retirement benefit liabilities. They 

have gotten, I think, roughly half of that to the point where it 

would get a clean opinion, if it were subject to an audit today. That 

kind of thing doesn’t make the headlines, post-retirement benefit liabilities and the opinion on that. But they are working through 

various line items on their balance sheet at the same time that 

they are doing this huge, mammoth, overall reengineering process. 

We believe that filling the under secretary position, CFO position, comptroller position at the Department of Defense is critical 

for that effort to get back on track, in my view, and continue to 

make progress. 

Senator FITZGERALD. That position is vacant now? 

Ms. SPRINGER. There is a nominee that has not been confirmed, 

and we believe there is a leadership issue. They can have all the 

project managers in the world on this project——

Senator FITZGERALD. How long have they had that situation? 

17

Ms. SPRINGER. Since Dr. Zakheim left, I think, roughly in the 

spring. And I don’t know what the prospects are, but I believe that 

when you have a leadership void, if you will, or an empty slot in 

a very key position, and Dr. Zakheim gave very significant motivation and leadership there, forcefulness, I think that the project suffers, frankly. 

Senator FITZGERALD. So right now, they are without a general in 

their war on cleaning up their accounting mess. 

Ms. SPRINGER. You can ask them if they feel that way——

Senator FITZGERALD. OK. 

Ms. SPRINGER [continuing]. But I believe that it has an impact. 

Senator FITZGERALD. OK. 

Ms. SPRINGER. I also believe that the Department needs to take 

a step back and carve out some pieces of that effort, maybe certain 

components or certain projects or certain issues to work at in a 

more concentrated way with their auditor and their Inspector General to try and make progress on those smaller pieces. It is a huge 

mountain to move and I think that is why it is difficult to show 

progress. I think it would be helpful to pick certain components 

where you can maybe get some hits. 

Senator FITZGERALD. Does OMB lean on the DOD in this area? 

Ms. SPRINGER. I am working right now with other parts of OMB, 

the ‘‘B’’ side of the house, if you will, to come up with some recommendations and we plan to meet with DOD shortly. This would 

be news to your second panel that we are starting to think this 

way. 

Senator FITZGERALD. OK. 

Ms. SPRINGER. It is not to take any emphasis off their existing 

project, but we believe that maybe some sub-segments of that 

might be helpful to address. 

Senator FITZGERALD. Now, Mr. Walker, if DOD were at least able 

to get a qualified opinion, would that enable you to do a consolidated financial statement that would be auditable? 

Mr. WALKER. Depending upon the nature of the qualification. If 

they could get to a qualified opinion and we could get comfortable 

as to the basis for that qualified opinion, that could put us in a position to issue a qualified opinion on the financial statements as a 

whole. I doubt very seriously that if they have got a qualified opinion that we would get to the point of being able to issue an unqualified opinion on the overall financial statements. 

I would say, if I can, Mr. Chairman, I think this is very important, since DOD is really the biggest challenge that we face, several 

comments for your consideration and Senator Akaka’s. I think it is 

going to take several things to get them to where they need to be. 

First, they have to have commitment from the top and it has got 

to be a priority——

Senator FITZGERALD. Do you think that commitment is there at 

the Secretary’s level? 

Mr. WALKER. Yes. I do believe it is there and I want to note that 

for the record. I do believe the Secretary is committed. I do believe 

that the key players who are in place are committed. There are, 

however, some critically vacant positions right now. For example, 

the Under Secretary and Comptroller position is vacant. Without 

18

the person who is on the point, responsible and accountable, you 

are not going to make much progress, quite frankly. 

Second, I think they are going to need some additional resources. 

They are going to need some new talent within DOD. They are also 

going to need some contractor assistance to be able to get this done. 

They also need to complete a plan for how they are going to get 

from where they are today——

Senator FITZGERALD. Couldn’t they have just contracted out this 

whole thing to fix this? 

Mr. WALKER. Well, in theory, you could, but there are a number 

of major challenges there. There are independence issues. There 

are so many of the major firms that have done work in the Department of Defense in the financial management area that they may 

not be deemed to be independent under Generally Accepted Government Auditing Standards, and we are working in a constructive 

way with the Inspector General, who is assuming responsibility for 

this audit and who will have significant contractor assistance, to 

help sort through those issues. 

There is no way that the IG can do it by themselves, and quite 

frankly, it would be difficult for any one firm to do it by themselves 

because the DOD is one of the largest and most complex entities 

on the face of the earth, if you looked at it as a separate enterprise 

by itself. But they have to have a plan, and on that plan to recognize that they are going to go from no opinion to a qualified opinion 

to an unqualified opinion. In that regard, they should do it in a matrix fashion. By that I mean, recognize that they need to look at 

various entities or units, and try to get clean opinions on certain 

units, and then they need to look horizontally on functional activities and line items, as was mentioned, to try to get them to where 

they need to be. 

Senator FITZGERALD. Would you be able to suggest what parts of 

DOD are particular problems in this regard, or do you have an 

idea? 

Mr. WALKER. Well, frankly, their problems are pervasive. They 

have problems from the standpoint of the asset side. They have 

problems from the standpoint of the liability side. Controller 

Springer just noted the fact that they are making progress with regard to post-employment obligations. That is a huge number on the 

balance sheet. But we need to make some progress on the asset 

side. 

Two other things real quickly, Mr. Chairman, and that is they 

have to have the resources. Congress is working to provide those 

resources, but they have got to have the plan to effectively use 

those resources to make sure there is not waste and that they get 

real results. They need to modify their performance management 

systems to link the ratings of the key people with the results that 

we are trying to achieve. 

And lastly, there needs to be ongoing and effective oversight. 

Frankly, this, until recently, has not been a priority for the Department but it is now. As you know, DOD has 9 of GAO’s 25 high risk 

areas. 

And the last thing I want to mention on this, I believe very 

strongly if we are going to solve the basic management problems 

at DOD, we need a Chief Management Officer at DOD who is a 

19

level two official, who is a pro, who has a proven track record for 

success, a term appointment, a performance contract, who will take 

a more strategic integrated and innovative approach not just to financial management but to the enterprise architecture, the logistics systems and things of that nature. The absence of having a pro 

who has got a proven track record, who is going to be there long 

enough to get it done, at the right level, has been a huge impediment and I question whether we are going to be successful without 

it. 

Senator FITZGERALD. And maybe we need to pay that person an 

extraordinary amount—I am thinking, why is somebody who is 

qualified to do that actually going to want to come in and take over 

that headache? 

Mr. WALKER. I actually believe that there are persons who would 

do it for their country because it would be a huge challenge. And 

it may be somebody, for example, that retired early out of the private sector, hopefully with some prior public sector experience, who 

has made money and wants to do something for their country. 

The problem is that without that person who is responsible and 

accountable, who has got a proven track record, who is going to be 

there long enough and is at the right level to get the job done, I 

question whether we are ultimately going to effectively address not 

just this area, but frankly, a whole range of high risk areas within 

DOD. 

Senator FITZGERALD. Thank you. Senator Akaka. 

Senator AKAKA. Thank you, Mr. Chairman. 

Mr. Walker, as always, I have enjoyed working with you and 

talking with you. 

Over the years, you have made an impressive case for financial 

transparency and accountability in the Federal Government and 

you have just given us some idea as to what needs to be considered 

to begin this kind of change which should start from the top level. 

Unless we do that, then we can’t begin to make changes. 

You have long stated that the key to breaking down parochial interests and stovepipe approaches would be establishing mechanisms to reward organizations and individuals for behaviors that 

comply with DOD-wide and Congressional goals. Unfortunately, we 

continue to see a lack of progress in this area. 

Let me follow up on Senator Fitzgerald’s question. Has the Department set up the necessary mechanisms to reward organizations 

and individuals for working toward overall financial management 

goals in a coordinated manner, and if not, what can we do to move 

DOD in that direction? 

Mr. WALKER. Well, Senator, first, they have taken some steps, 

but they need to take many more. As you know, DOD achieved enactment of the National Security Personnel System Reform Act, 

which will give DOD the ability to modernize and design new 

human capital policies and performance management systems in 

ways that they have not been able to in the past. 

I think it is important that we recognize that this is a challenge 

not only at the senior executive level, not just for the political appointees, but also for the career civil servants and that key changes 

need to be cascaded down through all levels of the organization. We 

need to define what we are trying to achieve, what are the measVerDate 0ct 09 2002 09:55 Nov 09, 2004 Jkt 095194 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 C:\DOCS\95194.TXT SAFFAIRS PsN: PHOGAN
20

ures of success, what are the key milestones, and then to be able 

to link institutional, unit, and individual performance measurement reward systems with those desired outcomes and key milestones. 

If you do that, it will have a powerful impact. But in order to be 

able to do it, you also have to have not only the plan and the infrastructure in place, you have got to have the leader who is going to 

be there long enough to get the job done. And from a practical 

standpoint, historically, there is frequent turnover in key leadership positions and this is a multi-year task, there is no doubt about 

it. 

Senator AKAKA. Ms. Springer, let me follow up on my question 

to Mr. Walker. Since linking goals and performance measures are 

key components of the President’s Management Agenda, would you 

please comment on Mr. Walker’s response and discuss how OMB 

is working with the DOD on this problem. 

Ms. SPRINGER. From a general standpoint of linking performance 

and results to budget, for example, we have, as you know, our 

PART process at OMB that now is working through—has been generally accepted, I think, by all of the agencies to align our budget 

requests and the strategies of the agencies to performance of programs so that the demonstration of results has really become the 

ultimate test in whether or not taxpayer dollars should be reinvested in programs. Are they succeeding? Are they getting the benefits that were expected and promised? 

To the extent that we are talking about human capital issues, 

which I think was your specific question, I believe that also comes 

within that scope of the PART and also is a part of the President’s 

initiative with respect to human capital, one of the five initiatives 

under his management agenda. But there is an overall support by 

the administration for results-based compensation. The Human 

Capital Performance Fund, I think, was an initiative of the administration, certainly in that area, and we remain committed to that. 

Senator AKAKA. Mr. Walker. 

Mr. WALKER. As you probably know, the Office of Personnel 

Management has the lead on human capital issues under the President’s Management Agenda. In that regard, they just hired one of 

our senior executives to try to help work with DOD on some of 

these issues and we at GAO are trying to work in a constructive 

fashion with Navy Secretary England, who Secretary Rumsfeld has 

designated as a point person on the NSPS design and implementation, to try to share knowledge and best practices in a constructive 

way without compromising our independence. 

Senator AKAKA. Thank you, Mr. Walker. Mr. Hammond, I would 

like to thank you for your attention to improving the financial reporting of Federal agencies. I am also interested in the governmentwide Accounting Modernization Project, which is, I understand, now underway. I understand that GWA enables agencies to 

process certain transfers and transactions without having to complete burdensome paperwork. 

My question to you is, since GAO has identified intra-agency 

transfers as one of three impediments to consolidated financial 

statements, what safeguards are built into GWA to ensure that the 

convenience of this project does not compromise the security of fiVerDate 0ct 09 2002 09:55 Nov 09, 2004 Jkt 095194 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\95194.TXT SAFFAIRS PsN: PHOGAN
21

nancial information and become a mechanism for waste, fraud, and 

abuse? 

Mr. HAMMOND. The GWA project is really an exciting opportunity to totally change the way we are going to do budgetary accounting. It is the capability and the long-term vision to build a 

web-based system so that agency financial information from the 

budgetary operations will flow automatically into the central accounting systems. It is the primary way of solving a number of the 

issues that today we are trying to clean up after the fact as they 

deal with budget authority, budget transfers, and that level of 

intergovernmental activity. 

What it is going to do is, and certainly the phases that have been 

implemented already have effectively done, is allow an agency to 

enter a transaction once, not only complete the transaction but 

carry out the accounting related to that transaction at the same 

time, thereby posting the balance consistent with the transaction 

itself, eliminating the need for clean-up activity after the fact, removing the potential for mispostings or misclassification after the 

fact as someone is trying to do the accounting subsequent to the 

transaction. 

It really will, once fully enforced, provide us with an opportunity 

to get rid of amazing numbers of reconciliation activities across the 

agencies. It is, though, however, that level of fundamental change 

that is going to take some time, because the agencies, in fact, have 

to be prepared to provide the feeder data into the system at the 

same time. 

As for the security of the system, we have built it around a fairly 

robust Internet IP platform. Because these are not actual financial 

transactions in the traditional sense—there is not money leaving 

the government—the level of security is consistent with the risk involved. This doesn’t trigger spending. This is reporting on moving 

budget authority from pocket A to pocket B, for example, with regard to transfer activity. 

Senator AKAKA. Mr. Walker, as you know, the Department of 

Homeland Security is not subject to the Chief Financial Officers 

Act and, therefore, is not required to implement and to maintain 

financial management systems that comply with the governmentwide standards. Also, its Chief Financial Officer is not confirmed 

by the Senate. As an original cosponsor of the 1990 CFO Act, I believe this law continues to offer a firm foundation on which agencies should build their financial management practices. 

My question to you is, what impact do you believe the exemption 

from the CFO Act has had on the financial situation at DHS? 

Mr. WALKER. Well, as you know, while they are not covered by 

the CFO Act, they are covered by certain other acts which require 

them to have audited financial statements. 

I think to a great extent, this is a philosophical issue. The Department of Homeland Security is one of the largest Department 

in the Federal Government. It is on our high-risk list as it relates 

to the integration and transformation of that Department. It has 

significant responsibilities that are of importance to all Americans, 

and it has a tremendous amount of financial resources. From an 

intellectual standpoint, it is hard to see why the Department of 

Homeland Security would not be covered under the CFO Act. 

22

With regard to the confirmation issue, if I might add, Senator 

Akaka, GAO and I myself as Comptroller General have testified, 

are there certain agencies that I believe could benefit from this 

chief management official—chief operating officer, whatever you 

want to refer to the title—and I think to the extent that position 

is in place, Congress needs to consider whether and to what extent 

the positions that would support to this chief management official 

should be Senate confirmed. 

I think it is very important that there be statutory qualification 

requirements for these persons and that they be presidential appointees, but I think that if we can get the right type of person at 

the level two level, as the chief management official with a term 

appointment and a performance contract, with a proven track 

record, you might want to reconsider which positions below that 

level should have Senate confirmation. That doesn’t mean they 

wouldn’t have visibility. That doesn’t mean they wouldn’t be presidential appointments. That doesn’t mean they wouldn’t have statutory qualification requirements. Those things, I think, are important. But you have a lot of work to do on confirmations and I think 

you should always be looking at how many positions should be confirmed versus not. 

Senator AKAKA. Thank you for your response. 

Senator FITZGERALD. Would Ms. Springer have a response on 

that——

Senator AKAKA. Yes. 

Senator FITZGERALD [continuing]. What she thinks about applying the CFO Act to DHS? It is the only cabinet agency that doesn’t 

have that requirement. 

Senator AKAKA. I certainly would like to hear from Ms. Springer. 

Ms. SPRINGER. Thank you, Mr. Chairman. I share some of Mr. 

Walker’s comments from the standpoint that I believe that DHS 

has acted and carried out its duties very much as it would if it 

were a CFO Act agency. I don’t think you would see much difference in the sense that they have embraced the audit requirement. They didn’t seek the waiver that they could have under the 

Accountability for Tax Dollars Act. And they have worked very diligently to do all the things that a CFO Act agency would do. So in 

our minds, there is no distinction. 

I would like to comment in particular on the confirmation aspect, 

the requirement. Certainly, the administration has put forward a 

model at DHS for management, the management structure, and it 

is a little different than what was envisioned under the CFO Act. 

The thing that I think concerns me, though, particularly about putting DHS under the CFO Act would be that the CFO would be required to go through that confirmation process, which has cost the 

administration, just this administration, somewhere in the neighborhood of 5 to 6 years of lost time of nominees in that waiting position where they have been—this is after the—in addition to, I 

should say, all of the clearance that the White House Personnel Office does. 

So from the time when that person is first identified, all of the 

White House clearance, FBI checks and all of that, and then the 

Senate confirmation process, just from that point has been about 

6 years of lost time. With CFOs that have already served, even just 

23

as recently as within this administration moving to other departments, in one case, 6 months for that one individual that already 

had a track record, who was already confirmed by this Senate. 

So it becomes very frustrating for me to try and get them to 

make these management improvements that we are all interested 

in when they are in that holding pattern. So that is the thing that 

I have the strongest reservation about personally. But to answer 

your question, I think that the agency has acted in every respect 

as it would if it were under the CFO Act. 

Senator AKAKA. Mr. Walker. 

Mr. WALKER. If I can, Senator, and I have never said this before, 

I am just thinking out loud here, if the Congress were to move in 

selected departments and agencies, such as DOD, DHS, to the 

model that I talked about, where you have a level two, that means 

deputy secretary level or principal under secretary level, a person 

focused on management issues which are inherently good government, and nonpartisan issues, with a proven track record, statutory 

qualification requirements, performance contract, term appointment, if you did that, I think you should consider whether or not 

the CFO, the CIO, and some of these other positions should be Senate confirmation. But there may be another way to make sure that 

you are getting qualified people. 

For example, there could be a notification requirement and a period of time before the appointment would take effect such that if 

there was concern in the Senate or elsewhere with regard to 

whether or not the person met the statutory qualification requirements, those concerns could be expressed. I think we need to look 

for ways that, for the good government positions, they can be filled 

by qualified people at an appropriate level in a timely manner with 

Congress having appropriate input, but yet not having undue 

delays. Just a thought. 

Senator AKAKA. Thank you. Thank you for giving me all the time 

I need, Mr. Chairman. I thank our witnesses so much for their responses. For me, it has been helpful. Thank you. 

Senator FITZGERALD. You have been a terrific panel, and I want 

to thank you very much for your time. 

I just want to say on the CFO Act for the Department of Homeland Security, I think the current administration, at the OMB, you 

guys are doing a great job and I love your performance management requirements. I have talked to Clay Johnson extensively 

about OMB doing a great job. My concern, though, is about future 

administrations that may not have the same financial accountability concerns that this administration has demonstrated. So I 

think that is something we need to consider, whether we want to 

allow Homeland Security out there to just be exempt from an act 

that other cabinet departments have to follow. 

But you are certainly right about the Senate confirmation process. We are hearing the other branch of government’s feelings on 

that issue. 

But thank you all. You have been terrific witnesses and we 

thank you. We will try and keep up our oversight in this area. 

Keep up the good work. Thank you all very much. 

I would invite the second panel to please come up. Now I would 

like to introduce the witnesses on the second panel. 

24

Our first witness on this panel is Lawrence J. Lanzillotta. Mr. 

Lanzillotta is the Acting Under Secretary of Defense (Comptroller) 

at the DOD. We were just wondering what sort of person would undertake that kind of a job. Mr. Lanzillotta is responsible for the initiation of reforms within the Office of the Department of Defense 

Comptroller. 

Our second witness is Francis E. Reardon, Deputy Inspector 

General for Auditing at the Department of Defense. Mr. Reardon 

has served as Deputy Inspector General since 2003, after serving 

since 1992 as Auditor General of the Army. In his current position, 

he is responsible for all financial and performance audits of the 

DOD, defense agencies, and joint commands. 

Third on this panel is Gregory D. Kutz, Director of Financial 

Management and Assurance at the Government Accountability Office. In his role as Director, Mr. Kutz is responsible for financial 

management issues relating to the Departments of Defense and 

State, as well as NASA and the Agency for International Development. 

Our fourth witness on this panel is Andrew B. Maner, the Chief 

Financial Officer for the Department of Homeland Security. Mr. 

Maner has served in this capacity since January of this year, when 

he was appointed by President Bush. In his role as CFO, Mr. 

Maner is responsible for department-wide financial management, 

including all budget, finance and accounting, and strategic planning and evaluation systems. You spent the past 8 years in Illinois 

before you came out here, is that correct? 

Mr. MANER. Indeed. 

Senator FITZGERALD. Well, welcome. Our next witness is the 

Hon. Clark Kent Ervin, Inspector General for the Department of 

Homeland Security. Mr. Ervin began his service at the Department 

in January 2003 as Acting Inspector General and has subsequently 

served as Inspector General since December 2003. In this position, 

Mr. Ervin is responsible for independent and objective audits, inspections, and investigations of the Department’s operations, including its efforts to consolidate legacy components. 

Our sixth and final witness is McCoy Williams, Director of Financial Management and Assurance at the Government Accountability Office. In this position, he is responsible for the GAO’s financial management work at eight CFO Act agencies, as well as 

the Department of Homeland Security. He is also responsible for 

GAO’s work regarding governmentwide improper payments, internal control standards, and single audit reviews. 

Again, I would like to thank all of you for being here today. In 

the interest of time, I would ask that you not read your prepared 

statements. Those will all be submitted and made part of the permanent record of this hearing. I would ask that you limit your 

opening remarks to no more than 5 minutes. If you can be briefer 

than that, we would welcome it because this is a very large panel, 

with six witnesses. 

With that, we will begin with Mr. Lanzillotta. You may begin. 

Thank you. 

25

1The prepared statement of Mr. Lanzillotta with attachments appears in the Appendix on 

page 102. 

TESTIMONY OF LAWRENCE J. LANZILLOTTA,1 ACTING UNDER 

SECRETARY OF DEFENSE (CONPTROLLER) 

Mr. LANZILLOTTA. Thank you, Mr. Chairman and Members of the 

Committee. I want to thank you for this opportunity to discuss the 

Department of Defense business management. This will be one of 

my last hearings before leaving the Department and so I want to 

give you my observations from three-plus years of working on DOD 

management challenges. 

My message today is the Department has undertaken an unprecedented comprehensive and visionary transformation to achieve 

this aim. We are making progress to correct weaknesses and control business system investment. Strong and consistent Congressional support of this transformation is vital to sustaining our 

progress. 

To transform DOD’s management, the Department must succeed 

with three interdependent pillars of its strategy: Overhaul and integration of DOD business processes and systems throughout the 

Department’s Business Management Modernization Program; refine and advance financial management improvement plans of the 

military services and defense agencies to enable them to produce 

auditable financial statements, resulting in a clean, auditable opinion; and audit items on the financial statements as they become 

ready for audit by developing the capability to do so. This transformation not only will be dramatically improved, DOD’s business 

and financial management, but it will also enable DOD leaders to 

make resource decisions based on the best management information available. And it will enable the Department to meet the Chief 

Financial Officers Act and other legal requirements, including satisfactory statements. 

Briefly, over the last 3 years, we have been able to establish a 

comprehensive inventory of business management systems. We 

began to build a blueprint or architecture to guide our transformation efforts. We designed an incremental strategy to achieve 

our transformational goals. We developed a governance process to 

provide strategic direction and oversee our transformation of business processes and systems. We have organized all major DOD 

business activities into six areas or domains and designated an 

Under Secretary of Defense as a domain owner to oversee each 

business area. We established a portfolio management process, an 

industry standard for managing IT systems. We established the 

DOD Audit Committee to provide concerted senior leadership focus 

and produce an auditable financial statement resulting in clean 

opinions. We developed individual reporting entity improvement 

plans that show planned improvements and milestones. And we 

implemented additional discipline to our quarterly reporting process, accelerating our preparation of financial reports and elevated 

our commitment to quality. 

It is important to note that domain owners are responsible for 

overseeing the transformation of business activities managed by 

the military services and other DOD components. This governance 

plan has already demonstrated that it can work. We are continuing 

26

1The prepared statement of Mr. Reardon appears in the Appendix on page 176. 

to strengthen and expand it. Some observers do not believe we are 

moving fast enough, yet acknowledging that DOD is one of the 

world’s largest and most complex organization, with a huge business transformational challenge. 

The Department of Defense is in the business transformation for 

the long term. It will take years to fix our systematic problems, 

which evolved over several decades. 

The last observation I would like to make, we set out on a course 

of transformation, outlining this course with domains and our governance process to control our IT investment and the direction for 

the Department. I would ask that the Congress not change our direction. Both bills of the National Defense Authorization bill significantly cut the funding for this effort and dramatically change 

the direction of this effort. Changing course right now would delay 

an untold number of years in our effort to correct this problem. 

In closing, I urge you and other Congressional leaders to continue to support the Department of Defense in its efforts to transform DOD’s business management. Congress and the Department 

must continue to partner in this unprecedented undertaking. Our 

business transformation progress is consistent with U.S. industry 

standards and it is all the more remarkable that our accomplishments have occurred while we are fighting the global war on terrorism, advancing bold initiatives to transform America’s military 

capability. 

This is a critical time for us to ensure that DOD’s management 

and business systems become just as superlative as the military 

forces they support. We, in the Department of Defense, appreciate 

and continue to need the Congressional support to achieve this 

vital priority. Thank you, Mr. Chairman. 

Senator FITZGERALD. Thank you. Mr. Reardon. 

TESTIMONY OF FRANCIS E. REARDON,1 DEPUTY INSPECTOR 

GENERAL FOR AUDITING, U.S. DEPARTMENT OF DEFENSE 

Mr. REARDON. Mr. Chairman and Members of the Committee, 

the Department of Defense Inspector General, Hon. Joseph 

Schmitz, regrets that he is unable to attend this hearing. 

In addition, I would like to thank you for the opportunity to discuss first the status and progress in achieving an unqualified audit 

opinion for the Department of Defense, and second, other areas of 

financial management within the Department. 

The Department’s financial statements are the most extensive, 

complex, and diverse in the government. The Department faces financial management problems that are longstanding, pervasive, 

and deeply rooted. These problems have impeded the Department’s 

ability to provide reliable, timely, and useful financial and managerial data to support operating, budgeting, and policy decisions. 

To address these issues, the Department has undertaken the ambitious task of overhauling its financial management systems and 

business processes, and we are encouraged by the many current 

initiatives led by the Office of the Under Secretary of Defense/

Comptroller and senior financial managers within the DOD components to correct longstanding problems. Given these initiatives, we 

27

believe there is a chance of the Department of Defense reaching the 

goal of a favorable audit opinion for fiscal year 2007. However, 

what is most encouraging is the effort being expended to correct 

the Department’s problems. 

In order to adequately support the Department’s goals of a clean 

fiscal year 2007 audit opinion, we in the Office of the Inspector 

General are putting in place plans and actions to increase our financial auditing capability during the next 3 years. Our efforts are 

directly related to the Department of Defense plan to assert that 

its financial data is reliable and ready for audit between now and 

2007. During this time period, there could be more than 100 assertions on financial statements, systems, or line items. As those assertions occur, we must be ready to audit as required by the CFO 

Act. 

We also strongly support Section 1008 of the fiscal year 2002 National Defense Authorization Act, which directs us to perform only 

minimal audit procedures required by auditing standards until 

management asserts that the financial statements are reliable. 

We are, therefore, working with the Department to ensure that 

we do not expend taxpayer dollars for extensive audit work until 

we believe that favorable opinions are probable. However, if the 

funding for our planned build-up and contracting efforts is delayed 

until the Department asserts that all DOD-wide financial statements are reliable and ready for audit, it will be impossible to complete the necessary audit work in a timely manner, thus further 

delaying a favorable audit opinion on the U.S. Government Annual 

Financial Report. 

The Department has readily acknowledged that many of its financial management and feeder systems do not produce adequate 

data to support various material amounts on the financial statements. The Department of Defense established the Business Management Modernization Plan to transform and modernize the Department’s business and financial processes and systems to optimize efficiency and effectiveness. We are monitoring progress in 

achieving the plan’s goals and have made recommendations for improvements in the business enterprise architecture as part of the 

overall modernization plan. However, our efforts on the Business 

Management Modernization Plan have been primarily limited to 

coordination with the Government Accountability Office, which is 

doing extensive work in this area, as evidenced by their recent reports being discussed during this hearing. 

The weaknesses that affect the auditability of the financial statement also impact other DOD programs and operations and contribute to waste, mismanagement, and inefficient use of DOD resources. For example, we testified before the Senate Committee on 

Governmental Affairs on April 28, 2004, and reported that purchase cards accounted for 25 percent of the purchase actions made 

in the Department in fiscal year 2003. We presented the results of 

three recent OIG–DOD audit reports that identified management 

control problems with the use of purchase cards. 

Subsequent to that hearing, our office issued an additional report 

on purchase cards which discussed further internal control weaknesses. We are working with both the Purchase and Travel Card 

Program Management Offices to improve these programs by reducVerDate 0ct 09 2002 09:55 Nov 09, 2004 Jkt 095194 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 C:\DOCS\95194.TXT SAFFAIRS PsN: PHOGAN
28

1The prepared statement of Mr. Kutz appears in the Appendix on page 195. 

ing financial risk to the government and offering recommendations 

to improve the Federal Managers Financial Integrity Act Controls. 

Thank you for considering the views of the Office of the Inspector 

General. We have provided additional details on our efforts in the 

written testimony provided to you for this hearing and I would be 

happy to address further questions as we go along. This concludes 

my testimony. 

Senator FITZGERALD. Thank you, Mr. Reardon. Mr. Kutz. 

TESTIMONY OF GREGORY D. KUTZ,1 DIRECTOR, FINANCIAL 

MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. KUTZ. Mr. Chairman, thank you for the opportunity to discuss financial management at the Department of Defense. 

The following two examples show the importance of successful financial management and business reform at DOD. First, 94 percent of mobilized Army National Guard soldiers that we investigated had pay problems. These problems distracted these special 

forces and military police from their missions, imposed financial 

hardships on their families, and has had a negative impact on retention. Our soldiers deserve better. 

Second, DOD was unable to effectively recall 250,000 defective 

chemical and biological protective suits from its inventory. As a result, many Congressional Members were concerned that our forces 

in Iraq were issued these defective suits. Thousands of these defective suits were sold to the public on the Internet, including 379 

that we purchased in an undercover operation, and you showed one 

of those 379 in your opening statement. It is the exhibit to my left. 

And thousands of these suits were improperly issued, as you mentioned, to local law enforcement officials. 

DOD’s stovepiped, duplicative systems contribute to these and 

many other problems and will cost taxpayers $19 billion in 2004. 

That is $52 million a day. Attempts to modernize DOD’s business 

systems routinely cost more than planned, miss their schedules by 

years, and deliver only marginal improvements or are terminated 

with no benefits at all. 

DOD’s superior warfighting capabilities were clearly demonstrated in Iraq and Afghanistan. However, that excellence is 

often achieved despite the enormous problems with DOD’s business 

systems and processes. 

DOD’s senior leadership is committed to transform the Department’s business operations and financial management. With waste 

and inefficiency costing $20 billion or more a year, the success of 

their efforts is critical. 

Mr. Chairman, this ends my statement. I would be happy to answer your questions. 

Senator FITZGERALD. Thank you very much, Mr. Kutz. Mr. 

Maner. 

29

2The prepared statement of Mr. Maner appears in the Appendix on page 223. 

TESTIMONY OF ANDREW B. MANER,2 CHIEF FINANCIAL 

OFFICER, U.S. DEPARTMENT OF HOMELAND SECURITY 

Mr. MANER. Thank you, Mr. Chairman, for the opportunity to be 

here and discuss progress that DHS has made in the area of financial management and thank you for your personal support that you 

have provided DHS since our creation. 

All of us at the Department are proud of the progress we have 

made since the Department’s inception in March 2003 while dealing with the enormous challenges involved in starting up the third 

largest department in the Federal Government. With Secretary 

Ridge’s support, we have made tremendous headway in unifying 

and strengthening the Department’s financial management, accounting, budgeting, strategic planning, and performance measurement process and systems. We have vastly streamlined the number 

of financial management service providers. We have consolidated 

bank card programs. 

Two months after our creation, we subjected ourselves to the rigors of a consolidated financial statement audit and obtained a 

qualified opinion on our September 30 balance sheet. We submitted 

our first strategic plan and continue to perfect our investment review process. We completed and will soon submit our first future 

years’ Homeland Security program, known as the FYHSP. We have 

made great strides in building an integrated financial system for 

the Department and have begun developing department-wide 

standard operating procedures for financial management. 

With these accomplishments under our belt, we continue to forge 

ahead towards our goal of making DHS the model of 21st Century 

financial management excellence. 

Progress in our endeavor to further define and consolidate these 

functions within the Department is made every day. We continue 

to look at the most efficient and effective way to deliver financial 

management services to the Department long-term. We continue to 

utilize best practice capabilities within the Department and work 

diligently on the weaknesses that exist. 

Essential to consolidated management functions is an integrated 

department-wide resource management system. E-Merge2 is the 

Department’s initiative that will consolidate and integrate our 

budget, accounting, cost management, acquisition, grants, and 

asset management functions. As e-Merge2 is implemented over the 

next few years, not only will it enable consolidation of these functions, but it will greatly enhance our visibility, oversight, and accountability of component operations and financial management. 

Financial management excellence also requires accountability, 

oversight, and significant attention to developing a strong internal 

control environment, which I remain committed to. For example, in 

order to correct the material weaknesses identified in our 2003 

audit, corrective action plans have been developed by each organization and I hold monthly meetings with these organizations to ensure progress is being made on these weaknesses. We are also addressing other important issues, such as elimination of improper 

payments and ensuring that the funds made available to State and 

30

1The prepared statement of Mr. Ervin appears in the Appendix on page 229. 

local governments and other non-Federal recipients are awarded in 

a timely and proper manner. 

In closing, I would like to thank the Subcommittee again for the 

opportunity to be here. DHS has accomplished much under challenging circumstances and I am confident we will realize even 

greater progress in the coming years. Thank you, Mr. Chairman. 

Senator FITZGERALD. Thank you, Mr. Maner. Mr. Ervin. 

TESTIMONY OF CLARK KENT ERVIN,1 INSPECTOR GENERAL, 

U.S. DEPARTMENT OF HOMELAND SECURITY 

Mr. ERVIN. Thank you, Mr. Chairman. As you noted, I have submitted a longer statement for the record, and in the interest of 

time, I will truncate my oral remarks, as well. 

The Office of Inspector General engaged KPMG to complete an 

audit of DHS’s financial statements as of September 30, 2003, and 

for the 7 months then ended as required by the Accountability of 

Tax Dollars of 2002. KPMG gave a qualified opinion on the consolidated balance sheet and the statement of custodial activity, meaning that except for three areas, these statements were presented 

fairly and free of material misstatements. 

The three areas were, one, a lack of documentation related to the 

Coast Guard’s property, plant, and equipment, valued at $2.9 billion; two, KPMG’s inability to observe a sufficient number of the 

physical counts of operating materials and supplies at the Coast 

Guard, or otherwise to verify $497 million of such assets; and 

three, the lack of sufficient actuarial documentation provided prior 

to the completion of KPMG’s audit procedures to support retirement benefits recorded at $3.3 billion at the Secret Service and 

post-employment benefits reported at $201 million at the Coast 

Guard. 

This was not unexpected in a first-year audit. The Coast Guard’s 

financial statements had never been audited at the level of detail 

required at DHS, where the Coast Guard became a larger bureau 

relative to its parent Department. Since the audit, the Secret Service has obtained an actuarial report on its retirement benefits liability and believes it has recorded the correct amount. And likewise, the Coast Guard has done the same with regard to the postemployment benefits liability issue. 

KPMG was unable to provide an opinion on the other statements, which we collectively call the cost activity statements, and 

I will be happy to explain the reasons if there are questions about 

that. 

Let me turn now to just a word about the audit challenges for 

2004. As you know, the reporting deadline has been accelerated to 

November 15, 21⁄2 months earlier than last year’s deadline. Meeting that date will be a considerable challenge for DHS. 

As well, one of the greatest challenges that the Department has 

faced this year is the realignment of back office functions at the 

ICE Bureau, Immigration and Customs Enforce, Customs and Border Protection Bureau, and the Citizenship and Immigration Services Bureau that took place at the start of fiscal year 2004. Nine 

months into the fiscal year, many agreements regarding intra-buVerDate 0ct 09 2002 09:55 Nov 09, 2004 Jkt 095194 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\DOCS\95194.TXT SAFFAIRS PsN: PHOGAN
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1The prepared statement of Mr. Williams appears in the Appendix on page 245. 

reau services that are being provided between and among the bureaus are not in place, leaving many accounting issues open. The 

CFO has recently reported progress in this area, and we are 

pleased to hear that, but time is short to clear up any accounting 

issues that remain this year. 

Because the performance and accountability report was issued in 

February, DHS has had little time to take corrective action on the 

material weaknesses and reportable conditions, about which I can 

speak in greater detail later, reported last year before they entered 

into this year’s audit cycle. To the extent that these weaknesses remain, they, too, will continue to make the preparation of the financial statements and the auditing of them more difficult. 

That concludes my short statement, and again, I will be happy 

to answer questions. Thank you very much. 

Senator FITZGERALD. Thank you, Mr. Ervin. Mr. Williams. 

TESTIMONY OF McCOY WILLIAMS,1 DIRECTOR, FINANCIAL 

MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WILLIAMS. Thank you, Mr. Chairman. I am pleased to be 

here today to discuss financial management challenges facing the 

Department of Homeland Security. 

First, DHS faces the challenge of obtaining an unqualified financial statement audit opinion and fixing the previously identified internal control weaknesses it inherited from its component agencies. 

As of September 30, 2003, DHS had 14 reportable conditions, seven 

of which are material weaknesses. 

Like other Federal agencies, DHS has a stewardship obligation 

to prevent fraud, waste, and abuse, to use taxpayers’ dollars appropriately, and to ensure financial accountability. DHS management 

must establish effective internal controls to safeguard assets, protect revenue, and make authorized payments. Improper payments, 

which are a governmentwide problem, occur for many reasons, but 

the root cause can typically be traced to a breakdown in internal 

control. 

While DHS was not required to report improper payments for 

2003, several of its inherited control weaknesses suggest risk of improper payments and loss of revenue. As it addresses inherited control weaknesses and integrates its business management functions, 

DHS should pay close attention to implementing strong internal 

controls. 

Mr. Chairman, another significant challenge for DHS is developing a financial management architecture with integrated systems 

and business processes. According to DHS officials, the Department 

is in the early stages of acquiring a financial enterprise solution to 

consolidate and integrate its financial accounting and reporting 

systems. Similar projects have proven challenging and costly for 

other Federal agencies. For example, efforts at NASA failed to 

meet the needs of users and key stakeholders. To avoid similar 

problems, DHS must ensure commitment and extensive involvement from top management and users in the financial system development and integration. 

32

Mr. Chairman, DHS is the only cabinet-level department in the 

Federal Government today that is not subject to the CFO Act. With 

a fiscal year 2004 budget of nearly $40 billion and more than 

180,000 employees, the Department does not have a presidentiallyappointed CFO subject to Senate confirmation and is not required 

to comply with FFMIA. DHS should not be the only cabinet-level 

department not covered by what is the cornerstone for pursuing 

and achieving the requisite financial management systems and capabilities in the Federal Government. We believe enactment of S. 

1567 will increase the likelihood that financial management challenges at DHS will be overcome. 

In closing, Mr. Chairman, I want to emphasize that the American people have increasingly demanded accountability from government and the private sector. We know that many of the larger 

agencies transferred to DHS have a history of poor financial management systems and significant internal control weaknesses, providing further evidence that DHS should be subject to the CFO Act 

and thus FFMIA. 

Mr. Chairman, this concludes my statement. I would be happy 

to answer any questions that you may have. 

Senator FITZGERALD. Thank you. I want to hone in on this issue 

about DHS not being subject to the CFO Act. We do have a CFO, 

Mr. Maner, who is here today, but he is not presidentially appointed. He is not confirmed by the Senate. As a practical matter, 

other than Mr. Maner is not confirmed by the Senate and appointed by the President technically, what are the other things specifically—you mentioned that the Department is not subject to the 

FFMIA. What requirements do we impose on other departments 

that aren’t being imposed on the Department of Homeland Security? Maybe Mr. Williams would like to go into that. 

Mr. WILLIAMS. Well, within the requirements of FFMIA, that 

would be a report that would talk about the various systems, 

whether they are in compliance with JFMIP requirements. I think 

the bottom line is that you hit on a key point on the first panel, 

and that is that while this administration has demonstrated strong 

support for the intent of the legislation, the issue—when this particular act was passed, I was involved in working with this Subcommittee’s counterpart on the House side, and the concern then 

and the concern that you raised this morning that still exists is 

that you want to make sure that you have a structure in place that 

will make sure that whether it is this administration or the next 

administration or ten administrations from now, that you have individuals in this position that are qualified to carry out the various 

financial management functions, that you have policies or laws in 

place that will make sure that agencies are striving to have systems that can produce information in a timely manner, because it 

is not just a matter of producing the information once a year in 

which you get a clean opinion and then the next day you have got 

to start back over again. You want to have that information 

throughout the year. 

So I think these requirements for having good systems in place, 

making sure that the individual in the position is qualified and 

that the structure is in place, not just for one administration but 

for any administration that is in office. 

33

Senator FITZGERALD. Mr. Maner, I don’t know that it is your role 

to comment on whether your Department should be subject to the 

CFO Act. Do you have any thoughts you want to offer? 

Mr. MANER. Well, just two quick thoughts, just for the record, 

just to make sure that it is stated correctly. I am presidentially appointed and not Senate confirmed, just so we are all on the same 

page there. 

Senator FITZGERALD. OK. 

Mr. MANER. Again, my thoughts are that the Homeland Security 

Act set up DHS less than 2 years ago. My broad thought is that 

the structure that was put in place in the Homeland Security Act 

should be given a chance to work. 

In terms of the CFO Act and FFMIA, certainly those, and for everyone in the government, those are beacons of how to manage. 

And so we certainly use those to manage. One example of that is 

as we——

Senator FITZGERALD. Even though they don’t apply to you? 

Mr. MANER. That is right. One example of that is as we went out 

for our——

Senator FITZGERALD. But wouldn’t you agree that we have no assurance that some successor of yours in a future administration 

would voluntarily decide to comply with those acts? 

Mr. MANER. Yes. It would be hard to dispute that. 

Senator FITZGERALD. OK. 

Mr. MANER. But one point I would want to make is in the spirit 

of FFMIA, for example, when we go out, or when we went out with 

our e-Merge2 solicitation, in that RFP was the requirement that 

the provider be compliant with those standards. So we have tried 

to integrate it as best we can. And also, other parts of the CFO Act, 

slightly less known, such as being a member of the OMB CFO 

Council, those things we are doing today, so I would leave it at 

that. 

Senator FITZGERALD. OK. Now, I mentioned in my opening remarks that several news reports, particularly in the Washington 

Post, have criticized homeland security spending by State and local 

governments, citing the use of Federal homeland security funds to 

plug perceived budget holes or to fund purchases that do not appear critical to homeland security needs. I think there was one 

news report that cited spending on janitorial services by some local 

unit of government. 

While such reports may be due in part to the lack of Federal 

guidelines or restrictions on the use of Federal funds, they raise 

concerns regarding the Department’s efforts to ensure that taxpayer dollars are being spent wisely. Mr. Maner, how are you 

working with State and local officials to ensure the proper use of 

Homeland Security funds? 

Mr. MANER. I will talk for a second a bit about structure and 

then a bit about systems, because I think they are both important. 

One of the items that the Department has done is to consolidate 

this year. Secretary Ridge has consolidated all the grants management functions, or the policy for grants management, in one office 

in Homeland Security. That is taking effect this next fiscal year. 

So part of it is to get all of the grants in one location, which I think 

will prove to be effective. 

34

The second is to create a systems environment that allows for information visibility, allows for perfect visibility into the grants 

management process and such. And one of the things that I have 

found very important and am very committed to is including grants 

management in our e-Merge2 project so that we are, as part of our 

financial system rollout, including grants management, because at 

the end of the day, I do believe very strongly that having visibility, 

a wide swath of visibility to all the money that is put out to State 

and locals——

Senator FITZGERALD. Do you know how much money we are talking about that is issued in grants? Would you know roughly? 

Mr. MANER. I know that in, really in the last three grant cycles, 

we have put out about $8 billion, but if you don’t mind, I will get 

back to you with specifics for the record.

INFORMATION PROVIDED FOR THE RECORD 

In FY 2003, the Department awarded $8.0 billion in non-disaster grants and $5.9 

billion in disaster grants.

Senator FITZGERALD. OK. Mr. Ervin. 

Mr. ERVIN. Yes. If I could just add something on that, Mr. Chairman, a couple of things. First of all, the Washington Post article 

that you are referring to, we ourselves were asked about that by 

Congressman Sensenbrenner and it turns out that particular article was based on a Justice Department grant as opposed to a Department of Homeland Security one. 

Having said that, certainly this kind of thing could be happening 

in the Department of Homeland Security, and that being so, we are 

going to start auditing the expenditure of these first responder 

funds. We will be doing that later this year. As you may know, we 

have issued a report already about the flow of funds from the Department to State and local governments and first responders, and 

actually that was a good news story for the Department. But we 

haven’t, as I said, begun to look at exactly how those funds were 

being spent at the State and local and first responder level. We will 

do that. 

If I could talk more generally just for a second about grants. As 

Mr. Maner says, the Department is to be applauded for moving toward consolidating the grant process in the Department, and also 

e-Merge2 will include, we are told, a grants component, and that 

is to be applauded, as well. 

There are certain structural issues, as well, that are important 

here, and that is true for the Office of CFO and for the Office of 

the Chief Information Officer, as well, and that is with regard to 

the Chief Procurement Officer. Right now, there are only seven 

procurement shops that came into the Department of Homeland 

Security to date. Fifteen other components of the Department are 

still being serviced by entities outside the Department, and you can 

see the problem there in terms of consistency and control. 

Further, with regard to the seven procurement shops that are in 

the Department of Homeland Security, the Chief Procurement Officer does not have operational control over those shops and cannot 

impose consistency among those shops. So there are certain structural issues that must be attended to. 

35

Senator FITZGERALD. Does the Government Purchasing Act—the 

traditional government procurement laws apply to all those procurements? 

Mr. ERVIN. I believe, so, yes. That is right. 

Senator FITZGERALD. OK. Once a grant leaves Homeland Security and goes to a unit of local government, does your office have 

the ability to go audit that unit of local government to see how it 

is spending the money? I hope all local governments are concerned 

that somebody may come in and audit how they use this money. 

Mr. ERVIN. Yes, sir, the answer is yes, and we do that. For example, since the Department has been operational, March 1, 2003, we 

audited 121 FEMA disaster grants to State and local communities 

and questioned $68 million in costs. One of the things that we 

found during the course of those audits were recurring problems, 

and this is another issue. More attention on the Department’s part 

to working with State and local governments to make sure that 

these recurring problems don’t occur is called for. 

For example, with regard to the $68 million, we frequently found 

that the State and local governments did not, as they are required 

to do, seek FEMA’s written permission to either continue the 

project past the expiration of the time allotted for it or to continue 

to run up costs after the ceiling had been reached. And then at the 

conclusion, FEMA would give a retroactive waiver or permission for 

that having been done. Obviously, that conduces to waste, fraud, 

and abuse. So there needs to be attention paid on FEMA’s part and 

the part of other components to making sure that the terms of 

these grants are complied with, and when they are not, there need 

to be consequences to the State and local awardees or sub-grantees. 

Senator FITZGERALD. Mr. Lanzillotta, you mentioned that bills 

moving through Congress may cut funding for the effort that includes the accountability or the accounting at the DOD. Could you 

elaborate on that? What bills are you referring to? 

Mr. LANZILLOTTA. I am referring to, Mr. Chairman, the House 

and Senate version of the authorization bill that is in conference 

right now. Each bill took reductions to each part of our strategy, 

to the IG, to our audit ability. 

Senator FITZGERALD. How about the actual DOD appropriations 

bill that passed the Senate? 

Mr. LANZILLOTTA. Both of those bills also took reductions. 

Senator FITZGERALD. How big were the reductions? 

Mr. LANZILLOTTA. Ranging from $45 million to $150 million. 

Senator FITZGERALD. Out of how much total is spent——

Mr. LANZILLOTTA. Against these three programs where they took 

the reduction, of about $500 million. 

Senator FITZGERALD. So that is an enormous percentage if you 

are looking at the $140 million reduction. 

Mr. LANZILLOTTA. Correct. 

Senator FITZGERALD. OK. That is something I am glad you—if 

your office could work with my staff on that, it might not be too 

late to write a letter to Senator Warner or somebody on that conference committee to talk about the importance of continuing the 

efforts to improve the financial accounting in DOD. 

Mr. LANZILLOTTA. We would be happy to, Mr. Chairman. 

36

Senator FITZGERALD. I hope the Armed Services Committee is 

aware of the importance of this issue and it is not just the Governmental Affairs Committee. 

Mr. LANZILLOTTA. They are my next stop right after this hearing. 

Senator FITZGERALD. OK. I am glad you are making your views 

known. 

Mr. Reardon, you believe that by fiscal year 2007, there is a 

chance that DOD could be in a position to merit a qualified opinion, but only a chance, I guess you said. I know Mr. Lanzillotta 

mentioned that he is leaving, is that correct? You are leaving the 

DOD? 

Mr. LANZILLOTTA. Yes, Mr. Chairman. This will be, hopefully, my 

last hearing. [Laughter.] 

Senator FITZGERALD. This will be your last hearing? Oh, gosh. 

[Laughter.] 

And it has probably been a very difficult and frustrating job. I 

kind of wondered out loud why anybody would want to take up this 

task. It is like Hercules trying to clean up the Agean stables. That 

is what it sounds like to me. It is kind of a thankless task. 

We are now missing a—we don’t have a Comptroller position 

filled. That is pending for appointment right now. How much do 

you think, Mr. Reardon, we are being held back by turnover in personnel and just the lack of appeal that positions such as Mr. 

Lanzillotta has in trying to clean up this mess at DOD? How big 

of a factor is that? 

Mr. REARDON. Obviously, it is a factor and leadership does chart 

the way. I don’t know how to put a percentage on it, but with turnover, there is the factor of lost leadership and direction. 

But what I have seen in the Department in the year that I have 

been there is that there are a number of career civil servants that 

are working these issues, working the committees, working the various sort of audit committees that we attend, as well as the Comptroller’s shop. People like Joanne Boutelle and Terry McKay are 

trying to work with each of the components of each of the services 

to get improvements done. 

And when I said ‘‘chance,’’ I mean, it is a limited chance to get 

a qualified opinion. But every year we see coming up, based on the 

progress that has been made, improvements. 

Ms. Springer talked about focusing on certain segments. We see 

for fiscal year 2005 that the fund balance at Treasury may, in fact, 

be able to have us do audit work on it and attest to whether it is 

reliable or not. The Air Force is working on its statement of budgetary resources, again, with the idea that in 2005, that they will 

assert that they are ready. The Corps of Engineers is doing the 

same sort of thing. 

So I think there is some delay, some halting, going back and 

forth, but what I do see underneath it is a number of people working to try in the different departments to at least show improvement, and we are seeing improvement with the systems, some of 

the legacy systems, and we are seeing improvement in the processes and stuff. I think that is important, and having an overall 

leader there for a sustained period of time is good. Dr. Zakheim 

was there just 3 years and made some good progress. I just think 

it helps. 

37

Senator FITZGERALD. Mr. Lanzillotta. 

Mr. LANZILLOTTA. Mr. Chairman, if you don’t mind, could I make 

an observation from my 3 years of working on this? 

Senator FITZGERALD. Yes. 

Mr. LANZILLOTTA. For the Department to continue to make 

progress, I would like to emphasize Mr. Reardon’s comment, it is 

a culture that has to be created for change. And once this culture 

is created, the political leadership that comes and goes is important, and I don’t want to belittle that. But if the change in the culture is there, then progress will be continually made and it won’t 

be based on one individual, because if we base any of this on one 

individual, whether it was Dr. Zakheim, myself, or the future 

Comptroller, this initiative will fail. 

I think that some of the examples that Mr. Reardon talked about 

from the career side is a change in culture as to where we are making progress on how this should go. I would like to make a plea 

that part of this culture change is Congressional. We need the Congressional support, and since I am leaving, we need the Congressional pressure to continue this program. We need chairmen like 

yourself to call us up here and make us accountable for how this 

works, because that is part of the change in the culture. We have 

that. 

When I first started this 3 years ago, 3-plus year ago, I would 

try to come over here, because I did work on the Senate staff side, 

and try to brief as to what we were doing, and that worked for a 

while because some of my friends would take briefings. Now, nobody takes briefings. I need to go to the Defense committees. I 

know the Government Reform Committee. I need to be able to get 

Congressional support because that all adds to it. 

And it is the culture, because once the Department changes its 

culture, which I believe they have, but if we can maintain that, you 

see the things that the Department has done in Iraq and Desert 

Storm and Afghanistan. I mean, we can make remarkable progress. 

Two-thousand-seven is achievable, aggressive, heroic to get there. 

It is achievable as long as we can maintain the momentum. 

Senator FITZGERALD. When you say the culture needs to change 

there, are you talking about the rank-and-file civilian employees? 

Career employees who, when a political appointee who may be in 

charge of their work comes in, they look at this person and say, 

well, we have always done things this way, and we are used to 

doing it this way. They are resistant to the change, and they look 

at their politically-appointed superiors as only here temporarily 

and we are just going to continue doing things the way we have 

always been doing them, or——

Mr. LANZILLOTTA. It has to start—they know—I don’t say that 

they do this—that a political appointee stays about 18 months, 

maybe 2 years, and they know that the political leadership 

changes. They know that as the leadership changes, sometimes 

they change direction. They know that you could wait out political 

leadership. But what is more important, not that they will because 

I think some of the examples that Mr. Reardon talked about, these 

are all advances that were made by the career force. 

And what has got to change and what has changed is when we 

have 4,000 business systems of some type, which is a remarkable 

38

number, we have 42 or 43—I forget the number now exactly—travel systems that do exactly the same thing. That started with the 

culture that everybody stovepiped. Everybody was worried about 

their problem. Everybody said, this is how I am going to fix my 

problem, by getting this system to do this for me. Nobody worried 

as to how that fit into the overall financial systems, the inventory 

systems, the asset visibility systems. Nobody worried about the 

end-to-end process. 

What we have done in the Department is at the lowest levels at 

every staff agency, we have decided to build the architecture, and 

the architecture to outline and map out what our activities and 

processes are. Now, there were two values to that. The first value 

is we needed to find out how many systems we had and we needed 

to put down on a piece of paper on how we do business, and we 

needed everybody to see it. So when we say we need to design an 

end-to-end system, it wasn’t up to Larry Lanzillotta to decide what 

that end-to-end system was. It was in the architecture that it went 

from this point to this point as to what that end-to-end system was. 

The reason why some of our systems have failed in the past is 

the same reason why they fail in private industry. They haven’t 

mapped it out, they haven’t done the planning, and they don’t 

know what it affects. They don’t know where the interfaces are, so 

when they put their new system on, it doesn’t work, or a system 

that was depending on it all of a sudden doesn’t work. 

We are changing that culture now. We have outlined our business systems. We have divided up our business areas. We put our 

business systems underneath these business areas. We have made 

people responsible for looking at investment in these business systems, approving investment in these business systems, and more 

importantly, when we field the new system, instead of just fielding 

a new system as to what systems get turned off to make it work. 

So back to the example of the defense travel, the defense travel 

system has had a checkered past. The one thing that defense travel 

did, it reengineered the business process. It checked with all the 

interfaces to the financial systems and it goes from the traveler all 

the way through his trip, through the financial statements, all the 

way up and back down to pay him his check. It is untouched by 

human hands. 

The examples you had, or the IG or Mr. Kutz talked about the 

JSLIST suits, it all goes back to the same problem. It is asset visibility, and the asset visibility, you don’t get until you do an endto-end process which shows the interfaces between these systems, 

and that is the course we are on. 

Now, it is kind of like, in my fleeting moments here in the Department, I am just imploring the Congress to stay the course. I 

just feel in my heart of hearts that we are at the point where we 

are going to make great progress, and it has been slow. It has been 

slow and it has been tedious. When we went out and mapped out 

for the architecture, there are 180,000 statutory or regulatory requirements that had to be considered, 180,000. In the finance and 

accounting systems alone, I had 5,000 statutory or regulatory rules 

that had to be verified and checked or challenged. At the end of the 

day, we are going to come back to the Congress with a package of, 

‘‘these rules don’t make sense.’’

39

1The list of active CMRs submitted for the record appears in the Appendix on page 105. 

Senator FITZGERALD. You are still working on that, aren’t you? 

I think I have asked the Secretary to give us a list. I know he cited 

some 750 reports, or maybe it was less than that, for example, that 

DOD had to submit every year to Congress. Many of these were obsolete reports, and you just have people complying with these ancient laws of Congress forever and ever producing reports that nobody is even reading. That was just one example that the Secretary 

gave us. 

Mr. LANZILLOTTA. We can provide you, Mr. Chairman, a binder. 

Last time we took this effort, we put in a six-inch binder a onepage description of every report that the Department was required 

to do. I need to update that because that binder is about 2 years 

old, and every year we add about 500, 600 reports to it.1

Senator FITZGERALD. OK. Well, please give that list to us and we 

will see what we can do before I leave Congress. I didn’t tell you, 

I am retiring in January, too. But there will be others like Senator 

Akaka here to keep supporting the DOD in changing their accounting system. 

Mr. Kutz, I want to get to you. You talked about the suits and 

you mentioned, I think, a figure of $19 billion a year lost through 

waste, mismanagement, and you said that came out to $55 million 

a day. 

Mr. KUTZ. The $19 billion is the amount they spent on business 

systems annually, including modernization and legacy systems. 

Senator FITZGERALD. On business systems alone? 

Mr. KUTZ. That would be on logistics, on finance systems, acquisition systems. It would be the business side, excluding intelligence-related and weapons systems. The total Department budget 

may be $30 billion or a little bit more. That would be maintaining 

and operating the current, what Mr. Lanzillotta testified yesterday 

and just mentioned, the current inventory of about 4,000-plus business systems. So that is the cost of having the stovepiped, non-integrated systems that don’t work. 

Senator FITZGERALD. Unbelievable. 

Mr. KUTZ. So it is an enormous amount of money, and that is one of the places where when I mentioned the $20 billion or more that 

could be saved through improvements in accounting——

Senator FITZGERALD. Are they all custom-made business systems, 

too? 

Mr. KUTZ. Some are, some aren’t. I mean, they have evolved over 

time. There was no plan that Mr. Lanzillotta is talking about now 

that they are trying to develop so there is an architecture. They 

were developed in stovepipes because each service had their own 

money. They decided they wanted to do their own type of system. 

And now you have hundreds of logistics systems, dozens of travel 

systems, hundreds of personnel systems, etc. 

I want to go back to the culture issue, because——

Senator FITZGERALD. Who is responsible for cleaning that up, for 

example, the business system? Mr. Lanzillotta, is there somebody 

in the DOD who is responsible for getting common business systems, where we are not spending $19 billion a year, $55 million a 

day, just on maintaining the existing business systems? 

40

Mr. LANZILLOTTA. Mr. Chairman, to go back to one of your earlier comments about the CFO Act, yes. I am. And we have done 

several things to do away with that. I disagree with Greg as to 

what that number is, but it doesn’t do away with the point that 

Greg is trying to make, that we have a lot of money in these 

stovepiped systems. 

The two examples that you have here that you mentioned earlier 

in your statement about the two failed systems, we had to play the 

cards of where we were at. When we came in 3 years ago and said, 

this is what we are going to do. We are going to develop a common 

architecture. We were going to see where everything fit. We were 

going to know our interfaces and what we needed to do the endto-end process. 

We stopped or slowed investment into legacy, what we call legacy 

systems, and the systems that you mentioned, the reason we killed 

them is that they weren’t ever going to meet our needs. They were 

COD systems, in some cases, that we had so many bolt-ons that 

they didn’t work right and they were never going to be financially 

compliant or give us the type of information or do the end-to-end 

process that we wanted to have. 

Business systems in the private sector fail because the ERPs fail. 

In fact, a majority of ERPs fail in the private sector and they fail 

because they haven’t done the proper planning. What we have done 

with these systems, we had another example—I will give you two 

examples. These are two failed systems. They didn’t work. We 

didn’t have our requirements right. When we came in and we started building our architecture, we looked at these systems and we 

said they were never going to fit in and it was better to terminate 

these systems now than try to go through the life-cycle cost of 

these systems and go 10 years from now and say they don’t work. 

I have a problem with my pay systems. My pay systems, military 

pay systems are written in a language called COBALT, and when 

I was in college, that is a language that I studied. I can’t find a 

COBALT programmer right now. They are very hard to find. I 

haven’t been able to make a change to this program since 1997. I 

maintain 500 people to hand-jam pay changes into my military pay 

systems since 1997. That is all they do. 

We went to PeopleSoft—that is part of Deimer’s—and I said, I 

have a problem. I can’t continue to do this. My military pay systems are going to fail. If I don’t do something now, I run the risk 

of not being able to make a payroll, and that would be disastrous. 

Can you help me? And I got, umm, get out of the way. Let me get 

the next vendor in here. They said, I think we can help you if you 

work with us. 

I wouldn’t let the people change one business practice that 

wasn’t already in that system, and in 6 months, it ran the Army 

payroll in 2 hours. When I compared it to my current payroll system that takes me a week to run the military payroll—I believe it 

is a week, I will have to correct that for the record if it is wrong—

the PeopleSoft system for compatible pay was more accurate in 

every case. 

So I was able to buy it. We already had the license. I didn’t have 

to buy it. I was able to use an existing license for COD software, 

change our business practices to match the leading industry busiVerDate 0ct 09 2002 09:55 Nov 09, 2004 Jkt 095194 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 C:\DOCS\95194.TXT SAFFAIRS PsN: PHOGAN
41

ness practices in the software. I had to work with PeopleSoft to get 

the tax package in it, because it wasn’t ready to go. And in 6 

months, I was able to do a proof of concept and run the military 

payroll in 2 hours more correctly than I can do it right now. 

I will pay for this system after I fully field it in 18 months. But 

that is the type of progress we can make if we stay the course. 

Senator FITZGERALD. So you are making progress in discrete 

areas like that. What about like on inventory control, which was 

the problem that gave rise to the defective suits not being recallable? 

Mr. KUTZ. We issued a report yesterday on a system that Defense Logistics Agency developed, and again, it was a stovepiped 

solution. It was represented at hearings over the last several years 

before the National Security Subcommittee on the House side that 

this BSM systems project would fix the JSLIST suit problem. So 

if we had defective suits again, we would be able to recall them, 

or if there was an emergency and suits needed to be identified to 

be shipped to a certain part of the world, that they would be able 

to be done. 

That system is being implemented. It is going to cost probably $1 billion or more and it doesn’t fix that problem. It is a stovepiped 

solution. It will fix issues within DLA, but it does not provide the 

end-to-end visibility of the JSLIST suits from the time that they 

are shipped from a DLA warehouse to the Army, Navy, or whoever 

else gets them so that, again, if you wanted to find them, you 

couldn’t. You would have to do a data call. So that is an example 

of today, a system that is being developed right now that isn’t 

going to solve corporate problems. 

I think, when Mr. Lanzillotta was talking about the culture, they 

are in the infancy stages of dealing with the culture. They are 

going right now from uncontrolled proliferation of business systems 

to trying to develop some semblance of control and management 

oversight over the enormous amount of money being spent on these 

business systems and I think they are at the very early stages of 

getting control of this and making it work the right way. 

Senator FITZGERALD. Mr. Kutz, what should Congress be doing 

about it? 

Mr. KUTZ. Well, I think one of the reasons, if you go back to Mr. 

Lanzillotta talking about the budget cut, and I can only speculate 

here, but the armed services put in a provision last year that said 

all systems that have obligations over $1 million should go through 

a certain procedure and be approved by the Comptroller before the 

obligation is made. I have testified several times now that we identified $863 million 

of systems that were obligated that did not go through that process. I think, quite honestly, they are a bit disturbed that they 

passed a law and the Defense Department did not follow it. And 

that gets back to the culture, because some of the people that have 

even called us have said they don’t even know what the business 

enterprise architecture is, and these are people working at the 

Chief Information Officers of some of the services. They may be 

being clever in saying that, but it may also be true that they don’t 

know what it is. But whatever the point is, there is probably billions of dollars of these systems that are still being invested in that 

42

aren’t necessarily corporate solutions or consistent with the plan 

that Mr. Lanzillotta is talking about for the architecture for the 

Department. 

Senator FITZGERALD. Is DOD just too big to ever get our arms 

around it? 

Mr. KUTZ. No, I don’t think so, and again, Mr. Walker talked 

about something like the Chief Management Official that we believe is an important aspect of this. And again, I would agree that 

person alone cannot solve the problem, but that is going to be 

someone who is a high-caliber person coming in to lead an effort. 

It is a monumental challenge, but the level of complexity is so 

much more difficult than anything you would see in the Federal 

Government or private sector. If it was easy, it would have been 

done decades alone. 

Senator FITZGERALD. Mr. Lanzillotta. 

Mr. LANZILLOTTA. Mr. Chairman, I agree with Mr. Kutz. I sometimes disagree with the way he would implement it, different recommendations. He is correct when we were legislated to certify 

every system over $1 million. 

Legislative change alone doesn’t always make it possible for us 

to get our arms around it. We had to develop databases. We had 

to develop an inventory. We had to develop, to know what those 

million-dollar systems are. We are in the process of doing that. 

We went out to industry, brought in a leading practice or portfolio management, but one of the culture changes that had to occur 

is we had to teach our domains. We had to teach the people what 

portfolio management was. We had to go through. We had to bring 

in people and say, this is how you do portfolio management. We 

had to run everybody through on concepts on how to develop portfolio management. And this year when they deliver the POMS, the 

future year’s program in the budgets in August, we are set for everybody to go through and certify their systems. 

Now, one thing that we found out when we developed these systems, and we are in the process of developing a database, in the 

finance and accounting arena, I only have about—how many systems is it, I think about, like, 20 systems that account for about 

85 percent of my dollars. 

The first time, it is going to be ugly. We are going to go through 

and we are going to look at this, but each year we are going to get 

better at doing this. I don’t believe we are at the infancy stage—

I would say maybe the adolescent stage of doing this—but we have 

some maturing to go and I don’t want to miss Mr. Kutz’s point. We 

still have some maturing to go on how we do this. 

But that is why I say, a legislative provision that says you are 

going to certify 4,000 systems and review 4,000 systems right now, 

we are trying. But I told the writers of that legislation, fine, do 

that. We need you to do that. We need you to give us the power 

to do that. But you also understand that the first year, we are not 

going to be able to get it done. There isn’t enough staffing in the 

world, enough IT people in the world that I could get to make this 

work. 

Mr. KUTZ. But one of the points I would make with that is that 

Mr. Lanzillotta and the Comptroller sent out a policy memo that 

said you are supposed to submit these systems to the Comptroller, 

43

and the fact of the matter is, people did not submit them. So there 

was a policy and a memo in place that directed the services and 

everyone with the systems to do it. They just didn’t follow it. So 

it wasn’t like the guidance wasn’t out there and people didn’t know. 

And it is a separate issue, is if those systems had all come in for 

approval, whether they had the infrastructure to actually review 

them all in a substantive way, but they didn’t even come in. 

Senator FITZGERALD. OK. We are getting close to one o’clock and 

we are going to have to terminate this hearing. It has been a wonderful hearing. I have one final question. I know, Mr. Kutz, your 

office did a lot of research into the situation with the unused plane 

tickets, for example, at DOD. I have a somewhat related question. 

I bumped into someone who owns a charter private jet service, 

and he told me one of his biggest customers was the Department 

of Defense and he was under the impression—he asked me how he 

could get in and fly Senators around. I told him, well, Senators fly 

commercial. And he said, ‘‘They do?’’ He said, ‘‘The officers at the 

Pentagon, they take private jets.’’ And I said, well, like where? And 

he said, ‘‘Well, between Washington and St. Louis and other big cities.’’

Is it true that officers fly private jets and charter private jets at 

enormous expense to the taxpayers instead of flying commercially? 

Mr. KUTZ. We have not investigated that issue before. 

Senator FITZGERALD. Mr. Lanzillotta. 

Mr. LANZILLOTTA. Mr. Chairman, I am going to have to say you 

have got me. I know we own aircraft that we use for certain levels 

of officers. They are usually four-star officers, combat and commanders, service chiefs, to fly. We own those aircraft, and those 

aircraft, we own them because of security needs, because of communications gear that has to go in there, and normal aircraft 

would not make that work. We also have certain VIP aircraft and 

we use the VIP for several VIPs and different types of VIPs to 

make trips. This is true. I was unaware that we chartered. I will 

have to go back and investigate——

Senator FITZGERALD. Would you look into that and let me know? 

I would be interested. Maybe it is that a jet wasn’t available, a 

military jet wasn’t available for generals, and then they chartered 

one. I would be interested, and I hope you are able to get that information. I would appreciate that. 

Mr. LANZILLOTTA. Mr. Chairman, for troop movements, we charter aircraft all the time. 

Senator FITZGERALD. Oh, I understand that. This guy rents private jets for corporate executives, typically, and said some of his 

best business was with the DOD and that kind of shocked me. I 

just wanted to check into that. 

All of you, thank you very much. You have been terrific witnesses. I appreciate your time. 

Mr. Lanzillotta, thank you for your service to the government. I 

know it is a thankless job. I certainly would never want to undertake cleaning up all of those systems over at the Pentagon, and so 

thank you for your service. I thank all of you for your service to 

the public. Thank you. 

44

The record will remain open for additional statements until the 

close of business next Wednesday, July 14. We appreciate your 

being here. 

This hearing is adjourned. 

[Whereupon, at 1:01 p.m., the Subcommittee was adjourned.] 

(45)

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