GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

United States Government Accountability Office

Washington, DC 20548 

September 20, 2004 

The Honorable Norm Coleman 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member 

Permanent Subcommittee on Investigations 

Committee on Governmental Affairs 

United States Senate 

The Honorable John Ensign 

Chairman 

The Honorable Daniel K. Akaka 

Ranking Minority Member 

Subcommittee on Readiness and Management Support 

Committee on Armed Services 

United States Senate 

Subject: Financial Management: Further Actions Are Needed to Establish 

Framework to Guide Audit Opinion and Business Management Improvement 

Efforts at DOD 

As the Comptroller General recently testified and as discussed in our latest financial 

audit report,1

 the Department of Defense’s (DOD) financial management deficiencies, 

taken together, continue to represent the single largest obstacle to achieving an 

unqualified opinion on the U.S. government’s consolidated financial statements. For 

example, to date, none of the military services has passed the test of an independent 

financial audit because of pervasive weaknesses in internal control, processes, and 

fundamentally flawed business systems. 

Problems with the department’s financial management operations go far beyond its 

accounting and finance processes and systems. The department continues to rely on 

a reported 4,000 or more fundamentally flawed finance, logistics, personnel, 

acquisition, and other management information systems to gather the data needed to 

 

1

 GAO, Fiscal Year 2003 U.S. Government Financial Statements: Sustained Improvement in Federal 

Financial Management Is Crucial to Addressing Our Nation’s Future Fiscal Challenges, GAO-04-

477T (Washington, D.C.: Mar. 3, 2004). 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 2 

support day-to-day management decision making and reporting. These systems were 

not designed to be, but rather evolved into the overly complex and error-prone 

operation—vulnerable to fraud, waste, and abuse—that exists today. Further, 

inefficiencies in DOD’s current business operations, such as (1) little standardization 

across DOD components, (2) multiple systems performing the same tasks, (3) the 

same data stored in multiple systems, (4) manual entry of the same data into multiple 

systems, and (5) a large number of data transactions, combine to exacerbate 

problems with data integrity. 

On November 6, 2003, the DOD Principal Deputy Under Secretary (Comptroller) 

testified before your Subcommittee that the department had a plan to achieve its goal 

of an unqualified (clean) audit opinion on its fiscal year 2007 financial statements. In 

August and September 2003, the DOD Comptroller directed the military services and 

other DOD components to prepare and submit, by October 31, 2003, comprehensive 

midrange financial improvement plans for addressing material financial statement 

line item deficiencies and supporting the department’s fiscal year 2007 unqualified 

audit opinion goal. Further, applicable DOD directives and business rules emphasized 

the importance of linking the component’s midrange financial improvement plans to 

the department’s Business Management Modernization Program (BMMP), the 

departmentwide initiative responsible for overseeing the development and 

implementation of DOD’s business enterprise architecture.2

 

Concerned about whether DOD’s plan to obtain a clean audit opinion by fiscal year 

2007 was a prudent use of taxpayer money, in November 2003 you requested that we 

review DOD’s plan to determine whether it was consistent with DOD’s long-term 

business enterprise architecture goals and would result in sustainable progress 

toward addressing financial management deficiencies in key business process areas, 

such as logistics and finance and accounting. In December 2003, we contacted DOD 

Comptroller staff to make initial inquiries regarding the department’s plan for 

achieving an unqualified audit opinion on its fiscal year 2007 consolidated financial 

statements. At that time, DOD Comptroller staff informed us that they had not yet 

received or reviewed all the individual component plans that would constitute the 

departmental plan. 

As a result, and as agreed to with your staff in December 2003, we delayed our review 

until after February 2004 to provide the DOD Comptroller more time to receive and 

review the component plans. However, following our initial fieldwork in April 2004, 

we determined that it would not be feasible to perform a detailed review of the major 

component plans that constitute the DOD plan, due to their current and continuing 

state of development. Instead, we agreed with your staff, that we would answer the 

following key questions. 

 

2

 In May 2003, the DOD Comptroller changed the architecture name from the financial management 

enterprise architecture to the business enterprise architecture to reflect the transformation of 

departmentwide business operations and supporting systems, including accounting and finance, 

budget formulation, acquisition, inventory management, logistics, personnel, and property 

management systems. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 3 

(1) Does DOD have a comprehensive, integrated plan for obtaining an unqualified 

audit opinion on the department’s fiscal year 2007 consolidated financial 

statements? 

(2) Has the DOD Comptroller established effective processes and procedures for 

monitoring the implementation of the plan(s) to increase the likelihood of 

sustainable progress and to ensure that component auditability assertions are 

supported? 

(3) Has DOD established a clear link between DOD component improvement 

efforts and the department’s BMMP? 

Further, as agreed, we will continue reviewing DOD’s efforts to address its financial 

management deficiencies as part of our continuing DOD business enterprise 

architecture work and oversight of DOD’s consolidated financial statement audit. We 

will provide periodic briefings to you or your staff as DOD’s improvement plans are 

further refined and implemented over the next few years. 

We performed our work from March 2004 through July 2004 in accordance with 

generally accepted government auditing standards. Details of our scope and 

methodology are included in enclosure I. 

Results in Brief

DOD’s goal to obtain an unqualified audit opinion on its fiscal year 2007 consolidated 

financial statements is not yet supported by a comprehensive and integrated plan. 

Although most of the DOD components, including the Army, Navy, and Air Force, 

have submitted improvement plans to the DOD Comptroller, DOD has not yet 

developed an integrated departmental strategy, key milestones, accountability 

mechanisms, or departmental cost estimates for achieving its fiscal year 2007 audit 

opinion goal. Further, there is little evidence of a direct linkage between component 

midrange financial improvement plans and the department’s BMMP. Importantly, the 

department’s fiscal year 2007 unqualified audit opinion goal was set without direct 

input from all major DOD components. Involving and gaining a commitment from key 

DOD stakeholders will be critical to meeting any calendar year audit goal. 

Nevertheless, most of the DOD officials we interviewed, including component 

officials, said they believed that the department would achieve significant interim 

improvements in its business operations as a result of working toward a stated goal 

and that a goal date was needed. However, given the magnitude of DOD’s challenges 

and its current lack of a comprehensive and integrated departmental plan with 

results-oriented performance measures and complete and reliable cost estimates, and 

a corresponding infrastructure to effectively oversee and monitor component efforts, 

we do not believe that DOD will be in position to achieve an unqualified audit opinion 

by fiscal year 2007. 

Our review of key individual component plans revealed that the plans varied in levels 

of detail, completeness, and scope, such that it will be difficult for DOD Comptroller 

staff to use its departmental database of component plans to oversee and monitor 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 4 

component efforts. In this regard, we found that the component plans did not 

consistently identify how staff, processes, or business systems would be changed to 

implement corrective actions. Such changes are key elements in assessing the 

adequacy of a component’s plan and in monitoring progress and sustainability. In 

fact, after performing a high-level review, DOD Comptroller staff returned most of the 

component plans initially submitted due to format and content deficiencies. 

Furthermore, DOD Comptroller staff indicated that once the department has its 

infrastructure (including a database, staffing, processes, and procedures) in place to 

improve its oversight and monitoring capability, additional plans would likely be 

returned to the components for clarification. 

DOD also does not yet have effective oversight and accountability mechanisms in 

place to ensure that the plans are implemented and corrective actions are 

sustainable. The database the department is currently using is not integrated 

electronically with subordinate component plans. Rather, the department currently 

relies upon DOD components to resubmit their plans when revisions are made so the 

departmental database can be updated. Because component plans are continually 

changing, the information contained in the departmental database will only be as 

current as the latest version of component plans received and input into the database. 

In addition, we found that the milestone dates identified in the component plans were 

based on assertion dates prescribed by the DOD Comptroller and not on actual 

estimates of effort required. Furthermore, task dependencies were not clearly 

identified, including critical corrective action tasks that would need to be completed 

in order for the fiscal year 2007 audit opinion to be achieved. As a result, DOD’s 

current database is not an efficient or effective oversight and monitoring tool. DOD is 

in the process of developing and refining its infrastructure to better integrate 

component improvement efforts with those of BMMP. The DOD Comptroller’s office 

recently contracted with a consulting firm to expand the department’s capability to 

(1) analyze and compare component plans, (2) oversee and monitor component 

efforts—including the establishment of a reporting process and metrics for 

measuring performance, and (3) coordinate with BMMP. In addition, the DOD 

Comptroller issued business rules to guide DOD components through the various 

processes and procedures the department has established. The business rules are 

intended to minimize the likelihood that DOD components would request audits of 

financial line items or statements before they have made sufficient progress toward 

ensuring that their reported financial information is auditable. If implemented as 

planned, this control mechanism should help ensure that audit resources are not 

wasted. 

To date, DOD has not established a clear link between DOD component improvement 

efforts and BMMP—the department’s long-term improvement initiative. According to 

DOD officials, DOD components plan to rely primarily upon manual work-arounds 

and modifications to existing legacy business systems rather than on new business 

system deployments to support DOD’s fiscal year 2007 audit opinion effort. However, 

we found that the component plans we reviewed did not consistently identify 

whether a proposed corrective action included a manual work-around or business 

system modification or deployment. In addition, as we have previously reported,3

 the 

 

3

 GAO, DOD Business Systems Modernization: Billions Continue to Be Invested with Inadequate 

Management Oversight and Accountability, GAO-04-615 (Washington, D.C.: May 28, 2004). 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 5 

department currently lacks a mechanism to effectively identify, monitor, and oversee 

business system investments, including modifications, occurring within the 

department. Because of this lack of visibility over how DOD components plan to 

advance their financial management functionality, the DOD Comptroller and BMMP 

may not have sufficient information to assess the feasibility of a work-around or to 

review and approve all modifications to existing legacy business systems to ensure 

that they are sound investments, optimize mission performance and accountability, 

and are consistent with applicable requirements and key architectural elements in 

DOD’s business enterprise architecture. 

At this stage, an unqualified fiscal year 2007 audit opinion remains simply a goal for 

which there is not yet a clearly defined, well-documented, and realistic plan to 

achieve. However, by involving its components in developing and implementing 

solutions to long-standing deficiencies in their business operations, DOD has taken a 

critical step toward obtaining the commitment and buy-in needed to successfully 

improve the timeliness, accuracy, and reliability of its business management 

information. DOD Comptroller staff acknowledged that their goal is ambitious, but 

believe that they are in the process of laying a framework to facilitate movement 

towards sustainable financial management improvements and eventually obtaining an 

unqualified audit opinion. The DOD Comptroller has several initiatives planned or 

under way to (1) refine the departmental database and component plans, (2) improve 

the department’s ability to effectively oversee and monitor component efforts, (3) 

ensure the completeness of the department’s business enterprise architecture, and 

(4) establish clearer links between component midrange efforts and BMMP. 

This report includes four recommendations to the Under Secretary of Defense 

(Comptroller) to (1) develop and implement an integrated department-level plan, 

including a brief executive level summary, in order to tie currently disparate 

improvement efforts at the component and departmental levels together with 

accountable personnel, milestones, and required resources; (2) develop and 

implement an effective oversight and monitoring infrastructure, including staffing, 

processes, procedures, and performance metrics, to provide assurance that actions 

taken by DOD components to address deficiencies are sustainable, cost-effective, and 

result in timely, accurate, and reliable information for business management; (3) 

direct DOD components to develop and implement plans that include sufficient 

corrective action information, such as changes affecting people, process, and 

business systems, and are electronically linked to DOD’s database tool, with 

appropriate results-oriented performance measures, to facilitate efficient and 

effective oversight and monitoring; and (4) direct BMMP to review the plans to 

identify system investments occurring at the DOD component level. 

In its written comments on a draft of this report, DOD agreed with our 

recommendations and outlined its actions to address the deficiencies noted in our 

report. 

Background 

Essential to achieving an opinion on the consolidated financial statements is 

resolution of the serious financial management problems at DOD, which we have 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 6 

designated as a high-risk area since 1995.4 Based largely on DOD’s assertion that its 

financial information was not auditable, the DOD Inspector General (IG) again 

disclaimed an audit opinion on DOD’s financial statements for fiscal year 2003 as it 

had for the previous 7 fiscal years. Pursuant to the requirements in section 1008 of 

the National Defense Authorization Act for Fiscal Year 2002 (the Act),5

 DOD has 

asserted for each of the past 3 years that the department was not able to provide 

adequate evidence supporting material amounts in its financial statements. 

Specifically, DOD stated that it was unable to comply with applicable financial 

reporting requirements for (1) property, plant, and equipment; (2) inventory and 

operating materials and supplies; (3) environmental liabilities; (4) intragovernmental 

eliminations and related accounting entries; (5) disbursement activity; and (6) cost 

accounting by responsibility segment. Although DOD reported that the reliability of 

its military retirement health care liability data had improved for fiscal year 2003, the 

cost of direct health care provided by DOD-managed military treatment facilities—a 

significant amount of DOD’s total recorded health care liability—was based on 

estimates for which adequate support was not available. 

As previously stated, to date, none of the military services has passed the test of an 

independent financial audit. This failure is due primarily to pervasive weaknesses in 

DOD’s business management systems, operations, and internal control, including an 

inability to compile financial statements that comply with generally accepted 

accounting principles. Recent audits and investigations by GAO and DOD auditors 

continue to confirm the existence of pervasive weaknesses in DOD’s financial 

management and related business processes and systems. These problems have (1) 

resulted in a lack of reliable information needed to make sound decisions and report 

on the status of DOD activities, including accountability over its assets, through 

financial and other reports to Congress and DOD decision makers; (2) hindered its 

operational efficiency; (3) adversely affected mission performance; and (4) left the 

department vulnerable to fraud, waste, and abuse. 

In prior years, DOD expended significant resources and made billions of dollars of 

financial account adjustments to derive its financial statements. However, such 

statements were determined to be unauditable. In this regard, section 1008 of the Act 

has offered the department some relief from the cost and time associated with 

preparing and auditing its financial statements. By acknowledging that its financial 

statements were unauditable because underlying information was unreliable, DOD is 

in a position to redirect its resources from preparing and auditing financial 

statements to improving the department’s financial management systems and 

policies, procedures, and controls.6

 Over the past 13 years, DOD leaders have 

attempted to address financial management problems in various ways but have 

largely been unsuccessful despite good intentions and significant effort. 

 

4

 GAO, High-Risk Series: An Overview, GAO/HR-95-1 (Washington, D.C.: February 1995), and HighRisk Series: An Update, GAO-03-119 (Washington, D.C.: January 2003). 5

 National Defense Authorization Act for Fiscal Year 2002, Pub. L. No. 107-107, §1008, 115 Stat. 1012, 

1204 (Dec. 28, 2001). 

6

Specifically, section 1008 requires that DOD assess its auditability each year and report the results to 

the DOD IG and others. If DOD asserts that its financial information is not auditable, DOD and the 

DOD IG are required to limit the work performed to prepare and audit the financial statements. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 7 

Under the leadership of DOD’s previous Comptroller, the department began earnestly 

addressing a number of its financial management problems as part of its business 

transformation effort. One broad-based initiative that is vital to the department’s 

efforts to transform DOD business operations is BMMP, which the department 

established in July 2001. The purpose of BMMP is to oversee the development and 

implementation of the departmentwide business enterprise architecture, a supporting 

transition plan, and related efforts. BMMP is then to ensure that DOD business 

system investments are consistent with the architecture.7

 A well-defined and properly 

implemented business enterprise architecture can provide assurance that the 

department invests in integrated enterprisewide business solutions and, conversely, 

can help move resources away from nonintegrated business system development 

efforts. 

Recognizing that it would take several years to transform the department’s current 

business process and systems environment, in August and September 2003 DOD’s 

Comptroller directed the military departments, defense agencies, and other major 

DOD fund holders to prepare comprehensive and cost-effective midrange financial 

improvement plans. According to DOD officials, the financial improvement plans of 

the military services and defense agencies are intended to identify planned 

improvements, milestones, and costs required for DOD to achieve its goal of an 

unqualified audit opinion for fiscal year 2007. 

Further, DOD anticipated reprogramming additional funds from each of the 

components to the DOD IG to fund the cost of required financial line item and 

statement assessments and audits following assertions by DOD components that the 

amounts reported are reliable. 

DOD Does Not Yet Have a Comprehensive, Integrated Plan for Achieving Its 

Fiscal Year 2007 Audit Opinion Goal 

The plan currently under development by DOD was not intended to be an executivelevel document that integrates the department’s various improvement initiatives into 

a single strategic plan with clear objectives, results-oriented performance measures, 

and resource requirements. Rather, the department’s plan, when completed, will 

consist of a database of information obtained from 52 individual component 

midrange plans, including the military services, the Army Corps of Engineers (the 

Corps), defense agencies, and other major fund holders. At the time of our review, 

component plans varied in length (from 4 pages to about 150 pages), and focused on 

the use of work-arounds and modifications to legacy business systems to obtain an 

unqualified audit opinion by fiscal year 2007. In addition, the department’s database 

plan lacked appropriate scope (including clear links to other departmentwide 

improvement initiatives), results-oriented performance measures, and cost 

information for Congress and senior DOD management to guide both project 

execution and control over departmentwide business management improvement 

initiatives. 

 

7

 In December 2002, Congress directed DOD to develop and implement a financial management 

enterprise architecture and repealed an earlier requirement that DOD produce a comprehensive 

biennial financial management improvement plan. Bob Stump National Defense Authorization Act for 

Fiscal Year 2003, Pub. L. No. 107-314, §1004, 116 Stat. 2458, 2629 (Dec. 2, 2002). 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 8 

The department has said it intends to rely upon the collective efforts of the DOD 

components, as shown in their discrete plans, to address its financial management 

deficiencies and achieve its fiscal year 2007 audit opinion goal. According to DOD 

directives and instructions pertaining to the plans, each component plan must 

identify by financial statement and financial statement line item (1) all major known 

deficiencies; (2) corrective actions for eliminating each deficiency; (3) required 

resources (people and dollars); (4) estimated completion date (although the 

completion date can be no later than the component assertion date established in the 

DOD Comptroller’s August and September 2003 directives); (5) responsible 

office/person; (6) links, if any, to BMMP; and (7) dates when improved financial line 

items or statements will be ready for external assessment and audit (although the 

external assessment and audit dates provided cannot be any later than the dates 

established in the DOD Comptroller’s August and September 2003 directives). 

DOD is currently in the process of populating and updating its departmental database 

plan, as new and revised component plans are received. Within the database, DOD 

has grouped components into the following four tiers to facilitate planned oversight 

and monitoring of component improvement efforts. 

• Tier 1: Entities, such as the military services and the Corps, that are directed 

by the Office of Management and Budget to prepare audited financial 

statements and the Medicare Eligible Retiree Health Care Fund. 

• Tier 2: Intelligence agencies. 

• Tier 3: Entities, such as the Defense Logistics Agency (DLA), directed by DOD 

to prepare stand-alone statements. 

• Tier 4: All other DOD agencies, entities, and funds. Although Tier 4 entities 

are not required to prepare financial statements, they are required to prepare 

improvement plans to ensure information provided for the DOD consolidated 

financial statements is auditable. 

DOD components that have already obtained unqualified audit opinions on their 

financial statements, such as the Defense Finance and Accounting Service (DFAS)8

and the Military Retirement Fund, were not required to submit financial improvement 

plans. 

As illustrated in table 1, as of July 14, 2004, DOD had received initial plan submissions 

from 36 of the 52 components required to submit plans, including all 11 of its tier 1 

components, and was awaiting submissions from the remaining 16 components. As of 

July 14, 2004, DOD had requested revisions to 26 of the 36 plans initially submitted 

because the plans were either not in the required format or lacked sufficient detail for 

inclusion in DOD’s database. While table 1 reflects that the DOD has received 21 

revised plans, the department currently lacks the infrastructure to perform a 

thorough review of the plans. Accordingly, DOD Comptroller staff acknowledged that 

additional component plans, including those that were revised and resubmitted, 

 

8

 DFAS’s financial statements and corresponding unqualified audit opinion pertain only to the 

administrative functions of DFAS itself and, consequently, do not provide any assurance as to the 

reliability of the accounting processes and systems DFAS uses to provide services to other DOD 

components, including the military services. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 9 

would likely be rejected for content deficiencies when the department’s consultant 

begins to review the plans. 

Table 1: Status of DOD Component Financial Improvement Plans as of July 14, 2004 

Component Requested 

Initial 

submission

pending

Initial 

submission

received

Initial 

submission 

rejected 

Revision 

submission

received

Total 52 16 36 26 21

Source: GAO analysis of DOD data. 

Our review of eight component plans (consisting of the Corps, DLA, and the general 

and working capital funds of the Departments of the Army, Navy, and Air Force) 

revealed that none of these plans were comprehensive in nature. The plans did not 

consistently address DOD instructions to fully describe why each identified 

deficiency affected the auditability of a line item or statement and how the deficiency 

would be addressed. For instance, we found that the plans did not clearly or 

consistently include descriptive elements— such as people (human capital), 

processes, and systems—that are key to clearly understanding 

• the nature of the deficiency and how it occurred; 

• how the deficiency affects the timeliness, accuracy, and reliability of financial 

management information; and 

• how the deficiency will be addressed, including whether the corrective action 

relies upon manual work-arounds or will require automated business system 

changes. This distinction is key to assessing the sustainability of planned 

corrective actions and identifying and monitoring business system 

investments that are outside the DOD Comptroller’s direct line of 

responsibility. 

The following are some examples of the deficiencies we observed in the component 

plans we reviewed. 

• Some components submitted “plans to develop plans.” For instance, we found 

that DLA’s and the Corps’ plans referred extensively to the development and 

implementation of subordinate improvement plans or to agreements between 

DLA and the Corps and others regarding corrective actions intended to 

address reported deficiencies pertaining to several key line items. For 

example, DLA referred to future development of a plan of action to address 

deficiencies in key financial statement line items, including accounts 

receivable, other assets, inventory, and general property, plant, and 

equipment. Similarly, the Corps’ plan refers to memorandums of agreement 

with the audit community as a key element of its corrective action process, 

but does not provide any specifics regarding those agreements, particularly 

what actions, if any, the Corps has agreed to take to address the deficiencies. 

• All the plans we reviewed used numerous vague terms such as “ensure,” 

“provide,” “establish,” and “determine” in their corrective action descriptions. 

What the plans uniformly lacked were clear descriptions of intended 

corrective actions, including how the component would address the deficiency 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 10 

through changes to people, processes, and business systems. For instance, see 

the following: 

 The Army’s consolidated general and working capital fund plans 

identified a deficiency related to the auditability of its fund 

balance with Treasury (FBWT) line item that read “lack of longterm solutions to improve the accountability and reporting of 

FBWT.” The corresponding corrective actions to address this 

deficiency included “establish a long term solution to improve 

the accountability and reporting of FBWT.” 

 The Navy’s general and working capital fund plans stated that 

“physical inventory procedures are not being performed on a 

consistent and periodic basis.” Corresponding corrective actions 

were limited to enforcing the current policy and conducting 

physical inventories in accordance with existing policy. Navy did 

not provide any corresponding detail on who was accountable, 

how it intended to ensure compliance, or timelines for making 

this happen. 

 The Air Force’s general and working capital fund plans stated 

that Air Force “ensure that capital lease liabilities are accurately 

valued and reported” and “establish a baseline for capital leases.” 

Air Force did not provide any additional detail on how it 

intended to implement or sustain these corrective actions or 

measure progress. 

• Other than providing training to staff to address a specific deficiency 

pertaining to training, none of the component plans reviewed included actions 

to address human capital issues, such as size of staff (including whether 

contract support would be used), staff turnover, specific skill mixes, and staff 

performance. In April 2002, DOD published a departmentwide strategic plan 

for its civilian employees that sets forth its vision to “design, develop, and 

implement human resources policies, strategies, systems, and tools to ensure a 

mission-ready civilian workforce that is motivated to excel.” Without 

correcting human capital deficiencies, sustainability of corrective actions, 

particularly those that depend on extensive manual work-arounds, is 

questionable. 

• Although most of the component plans implied that business process and 

system changes would be needed, they provided little or no information on 

what specific changes were planned. Without clear descriptions of planned 

business process changes, the DOD Comptroller lacks information to assess 

the feasibility, cost-effectiveness, and sustainability of the corrective actions. 

Further, in May 2004, we reported9

 that DOD lacked an effective and 

transparent process for overseeing and monitoring system investments. 

Clearer descriptions of component system changes needed to implement 

corrective actions could aid the department in its efforts to identify future 

 

9

 GAO-04-615. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 11 

business system investments and improve oversight and monitoring of these 

activities. 

Further, our review of the plans revealed that the milestone dates—critical for 

measuring progress—identified in component plans were generally based on the 

component assertion and audit opinion dates established by the DOD Comptroller in 

August and September 2003. Further, the plans did not identify task dependencies— 

key to identifying tasks that must be finished on schedule if the project is to be 

completed as planned. For example, the only dates provided in the Navy’s general 

and working capital fund plans for addressing Navy’s deficiencies were the assertion 

and audit opinion dates established by the DOD Comptroller for the applicable Navy 

line item or financial statement. As a result, the milestone dates provided in the plans 

do not generally depict actual estimates of the time required to address each 

deficiency, nor do they identify critical tasks that must be completed on time in order 

to achieve the department’s audit opinion goal. The lack of valid results-oriented 

performance measures undermines the department’s ability to effectively monitor 

and measure progress and hold individuals accountable. 

In addition, DOD has not yet calculated the cost of its effort to obtain a fiscal year 

2007 unqualified audit opinion. Although it requested and received some cost 

information from DOD components, DOD has not accumulated this cost information 

in its database or used it to assess the cost-effectiveness or feasibility of its fiscal year 

2007 unqualified audit opinion goal or component plans (including the use of manual 

workarounds and the need for contractors and additional DOD human capital). 

Without assessing the cost of component efforts, DOD has little or no assurance that 

its resources are being utilized in the most cost-effective manner. 

As illustrated by previous examples, DOD does not yet have a comprehensive, 

integrated strategic plan with results-oriented performance measures and cost 

information for addressing its financial management deficiencies by fiscal year 2007. 

Developing and implementing a plan to overcome the deficiencies in financial and 

related business operations of one of the largest and most complex organizations in 

the world by fiscal year 2007 represents a huge management challenge. Tasking DOD 

components to take an active role in identifying and addressing known deficiencies 

systematically is an important step toward obtaining buy-in and establishing 

responsibility and accountability for corrective actions. However, DOD must 

recognize that its deficiencies cannot be addressed in an insolated, stovepiped, or 

piecemeal fashion separate from the other high-risk areas it faces—previous reform 

efforts have tried this approach and failed.10

 

In the past, we have reported that DOD’s financial management problems are the 

result of long-standing deficiencies related to three factors: its systems, processes, 

and people. To successfully address the department’s deficiencies, it is important that 

the components’ plans, as incorporated in DOD’s database, clearly address all three 

factors and incorporate cost and valid results-oriented performance measures aimed 

 

10 The nine interrelated high-risk areas that represent the greatest challenge to DOD developing worldclass business operations supporting its forces are financial management, human capital, information 

security, systems modernization, weapon system acquisition, contract management, infrastructure 

management, real property, and inventory management. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 12 

at achieving timely, accurate, and reliable information for business management 

rather than solely an audit opinion. 

DOD’s Infrastructure for Effectively Overseeing and Monitoring 

Improvement Efforts Is Not Yet Developed 

DOD has not yet developed the ability to effectively oversee and monitor component 

efforts to address financial management deficiencies. The department’s capacity, 

including available resources, processes, and controls, for overseeing and monitoring 

the development and implementation of individual component plans is also evolving. 

As of July 14, 2004, the DOD Comptroller had assigned five staff on a part-time basis 

to review 52 component plans and oversee and monitor component improvement 

efforts. However, the department’s ability to effectively oversee and monitor 

component efforts is reduced because of the lack of sufficient information pertaining 

to deficiencies and corrective actions in the component plans, valid results-oriented 

performance measures, and resource requirements. Further, the lack of electronic 

integration between the component plans and the department’s database diminishes 

the utility of the department’s database as an efficient and effective oversight and 

monitoring tool. As currently designed, DOD components must resubmit their entire 

plan if a revision is made so that DOD Comptroller staff can update the departmental 

database. Because component plans and the status of corrective actions are 

continually changing, such an onerous process means that DOD’s departmental 

database will probably never reflect the current status of component plans and 

corrective actions. 

In July 2004, DOD contracted with a consulting firm to improve component plans and 

its own oversight and monitoring efforts. The contractor is tasked with analyzing 

DOD component plans to determine if milestones are sufficient and executable and 

adequately support attainment of an unqualified opinion on the department’s fiscal 

year 2007 consolidated financial statements. Moreover, the contractor is required to 

(1) refine, design, and maintain DOD’s database plan, which consists of individual 

component plans; (2) recommend metrics for use in tracking implementation of 

component plans; and (3) prepare various reports to aid the DOD Comptroller in 

monitoring component progress. Further, the contractor is tasked to provide liaison 

support between component plans and the department’s business enterprise 

architecture effort. Given that the contractor only began assisting DOD in late July 

2004, it is unknown at this point what impact the contractor will have on improving 

DOD’s oversight and monitoring abilities. 

On June 23, 2004, DOD issued business rules11 to implement section 1008 of the Act 

and guide its components along the path toward obtaining a clean audit opinion. 

Simply stated, the business rules describe the oversight process the DOD Comptroller 

has established to ensure that the corrective actions, as described in component 

plans, are implemented and validated in order to minimize the department’s risk of 

unsupported claims that reported financial information is auditable. Further, DOD 

officials indicated that the new business rules recognize that management, not the 

auditor, is responsible for documenting business processes, systems, and internal 

 

11 Business rules are statements of fact, policy, law, regulation, or a combination of these that drive 

business activities. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

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control, and for collecting and maintaining transaction data. As of July 22, 2004, no 

DOD component required to submit an improvement plan has asserted that its 

reported financial information is auditable and that it has completed the process 

required by the new business rules as described below. However, DOD Comptroller 

staff advised us that they expect to receive several financial line item packages by the 

end of fiscal year 2004, primarily from Air Force, that support component claims that 

their financial information is auditable. 

Under DOD’s business rules, the department’s process for preparing, implementing, 

and monitoring component actions toward achieving the department’s fiscal year 

2007 audit opinion goal will consist of three management phases: (1) discovery and 

correction, (2) validation, and (3) assertion. Following the assertion phase, the DOD 

IG will either assess the auditability of a financial line item or statement or subject it 

to audit. 

Discovery and correction phase. During the discovery and correction phase, DOD 

components are expected to identify deficiencies and prepare and implement 

improvement plans with measurable outcomes and milestone dates for overcoming 

their deficiencies. Most DOD components are currently in this phase of the process. 

Our review of component plans revealed that the plans focused primarily on 

addressing previously reported deficiencies and provided little or no indication that 

the components were attempting to identify additional deficiencies. It is important to 

note that the discovery of additional deficiencies will likely require additional time 

and resources and may adversely affect the ability of DOD components to achieve 

their milestones. Further, we found that the milestone dates identified in most of the 

plans reviewed were generally based on the targeted end dates assigned by the DOD 

Comptroller rather than on actual estimates of the time required to implement and 

validate a corrective action. Therefore, the department’s ability to identify critical 

tasks or actions that must be completed on time if the department is to achieve its 

unqualified audit opinion for fiscal year 2007 is diminished. 

Validation phase. Once a DOD component has implemented corrective actions to 

resolve identified deficiencies it is required to validate that the deficiencies in its 

financial line item or statement were effectively addressed. According to DOD 

Comptroller staff, a contractor, a military service audit organization, or the 

component itself can validate the corrective actions. Our review of selected 

component plans and interviews with component representatives responsible for 

developing the plans revealed that planned approaches for validating corrective 

actions varied. Some components, such as DLA, plan to hire contractors to assist in 

developing and applying procedures for ensuring that corrective actions effectively 

address deficiencies identified in the discovery and correction phase. Other 

components, such as the Corps and the Air Force, stated that at least some of the 

business process and other improvements currently being made or recently 

completed should not require validation under the new business rules since many of 

these actions originated from agreements reached with the auditors to address 

previously identified deficiencies. 

Assertion phase. Once efforts to address financial statement line item or statement 

deficiencies are complete, DOD components are required to submit an assertion 

package to the DOD Comptroller for review and approval to obtain an assessment or 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 14 

audit. Each assertion package should contain (1) a management letter asserting the 

audit readiness of the validated financial line item or statement, (2) a summary of the 

validation work performed and an explanation of corrective actions taken, (3) 

validation reports, and (4) a complete assertion package checklist attesting to the 

availability of process, procedural, system, and transaction data pertaining to the 

financial line item or statement. To further aid in ensuring sufficient evidential 

material is available to support financial information, on October 20, 2003, the DOD 

Comptroller issued a directive that all activities retain monthly accounting reports, 

accompanying system backups that contain supporting transactions, and related 

documentation for 1 year after appropriations cancel. 

DOD Comptroller and DFAS staff, as well as a DOD IG advisor, will review each 

assertion package to determine whether the corrective actions taken by the 

component provide sufficient support for a recommendation that an assessment or 

audit be performed on the financial line item or statement. DOD is utilizing a 

complicated matrix approach (by component, financial statement, and financial line 

item) to identify and address its financial management deficiencies. As a result, DOD 

Comptroller staff and contractors involved in overseeing and monitoring component 

plans need to possess a sufficient understanding of pertinent accounting and auditing 

standards and component deficiencies to ensure that the corrective actions will 

actually accomplish their objective and result in improved financial management 

information. After a component has received approval to obtain an assessment or 

audit, the DOD IG, in coordination with the component, will either perform or 

contract for the assessment or audit. 

While full compliance with DOD’s new business rules will increase the level of 

supporting documentation required to assert that a financial line item or statement is 

auditable, successful application of DOD’s new rules offers significant benefits. For 

example, 

• resource requirements for preparing for and conducting an audit would not be 

wasted; 

• audit efficiency would increase due to improved documentation of business 

processes, controls, systems, and transactional data; and 

• the documentation submitted by DOD components to support assertions that 

their financial information is auditable could be used by components and 

BMMP to increase DOD’s understanding of existing business processes and 

systems in order to transition to more efficient ones in the future. 

DOD’s business rules clearly reflect management’s intent that the department avoid 

using its resources to prepare and audit unreliable financial information. Further, 

implementation of business rules to guide components through the process of 

ensuring that sufficient evidence exists to support assertions that their financial 

information is auditable is a significant step toward clearly communicating 

expectations. However, it is critical that DOD establish an adequate infrastructure to 

effectively and efficiently oversee and monitor component improvement efforts and 

ensure compliance with its business rules. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 15 

Clear Links between Midrange and Long-term Efforts to Address 

Deficiencies in DOD’s Business Operations Are Not Yet Established 

The department has not yet integrated its component efforts to obtain a fiscal year 

2007 unqualified audit opinion with the long-term improvement efforts of BMMP. 

Although both DOD components and BMMP were directed by the DOD Comptroller 

to support the department’s fiscal year 2007 audit opinion goal, the focus of their 

efforts appears to be quite different. According to DOD officials, the department will 

rely primarily on business process changes, including manual work-arounds and 

modifications to component legacy business systems, to achieve DOD’s fiscal year 

2007 audit opinion goal. In contrast, BMMP’s efforts, particularly those of its 

functional business process areas (commonly referred to as domains) are long-term 

and therefore directed toward sustaining the unqualified opinion rather than 

producing auditable financial statements for fiscal year 2007. However, DOD 

Comptroller staff told us that they were working closely with the Finance, 

Accounting, and Financial Management (Finance and Accounting) domain to develop 

an approach that will establish a clearer link between the two improvement efforts. 

At the time of our review, BMMP had only limited involvement in reviewing DOD 

component improvement plans. Our interviews with representatives from three of the 

nine BMMP domains—Installations and Environment, Logistics, and Finance and 

Accounting—revealed that only the Finance and Accounting domain had performed 

more than a cursory review of component plans. According to the Finance and 

Accounting domain representative, the domain’s objective in reviewing the 

component plans, which the representative acknowledged contained insufficient 

detail regarding deficiencies and corrective actions planned, was to identify (1) 

processes or process changes that were not considered in DOD’s business enterprise 

architecture and incorporate them in the architecture and (2) manual work-arounds 

that could potentially be automated in the future. Although all BMMP officials we 

interviewed, including domain representatives, expected to review and approve all 

modifications to legacy systems that would result from component improvement 

efforts, they were adamant in stating that the DOD Comptroller, rather than BMMP, 

was responsible for assessing the completeness, feasibility, and cost-effectiveness of 

corrective actions identified in component improvement plans. However, as we 

previously reported,12 the department does not have efficient and effective processes 

and controls in place to identify business system investments, including 

modifications to legacy business systems that are occurring within the department. 

Further, component plans, which should identify planned system investments, 

including modifications to legacy systems, often lacked sufficient details needed to 

readily determine that modifications to legacy business systems are planned. Better 

integration of component midrange improvement efforts is needed to not only 

identify omissions in the department’s business enterprise architecture, but also to 

aid the department in managing and controlling business system investments 

occurring throughout the department. As we recently reported,13 if the department is 

unable to more efficiently and effectively manage its business system investments, it 

will continue to invest billions of dollars in systems that fail to markedly improve its 

 

12 GAO-04-615. 

13 GAO-04-615. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 16 

financial management information and do not comply with its business enterprise 

architecture. 

The component plans that we reviewed did not consistently provide information to 

identify or highlight business systems as a key element of a planned corrective action. 

However, Army’s midrange improvement plan indicated that it expects to implement 

two systems as part of its improvement effort in support of the fiscal year 2007 goal: 

• the Global Combat Support System in fiscal year 2006, to address deficiencies 

in recording and reporting operating materials and supplies for the general 

fund financial statement; and 

• the Defense Medical Logistics Standard Support System in fiscal year 2005, to 

address compliance deficiencies currently existing in the Army Medical 

Department Property Accounting System. 

Accordingly, given BMMP’s role in sustaining an unqualified audit opinion, it would 

be reasonable to expect—though not clearly stated in the Army’s plan—that BMMP 

would be involved in ensuring that these new systems complied with the 

department’s business enterprise architecture, including the new financial reporting 

business rules that are expected to be in effect prior to fiscal year 2007. The new 

financial reporting business rules, which are intended to standardize financial 

information processing in the department, include 

• pro forma accounting entries to standardize how transactions are recorded in 

the department; 

• identification of applicable U.S. Government Standard General Ledger

accounts; and 

• a standard fiscal financial information structure that would require all 

organizations to capture the same type of information in their systems (such 

as contractor or invoice number, appropriation number, and fiscal year) to 

facilitate transaction recording within and between organizations. 

While the development and implementation of financial reporting business rules is an 

important step in DOD efforts to begin applying its business enterprise architecture, 

the impact of these rules on current business systems will be negligible. To address 

financial reporting deficiencies in DOD’s current systems until a long-term solution 

can be implemented, BMMP plans to utilize software commonly referred to as 

“middleware” to extract data from DOD’s current inventory of over 4,000 systems and 

put that data in the proper format in accordance with the established business rules 

and regulations. Middleware may be used successfully to extract, format, and report 

data from legacy systems. However, the availability, completeness, and reliability of 

the financial data extracted by the middleware from the legacy systems for financial 

reporting will depend upon the efficiency and effectiveness of component efforts to 

identify and address deficiencies. 

Conclusions 

Given the magnitude of DOD’s challenges and its current lack of a comprehensive 

and integrated departmental plan with results-oriented performance measures and 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 17 

complete and reliable cost estimates, and a corresponding infrastructure to 

effectively oversee and monitor component efforts, we believe it is highly unlikely 

that DOD will be in a position to achieve an unqualified audit opinion by fiscal year 

2007. Further, while we support the intent of both DOD’s midrange and long-term 

efforts to improve the department’s financial management, DOD has not yet clearly 

linked these efforts. The department needs a comprehensive, integrated plan with 

result-oriented performance measures to guide project execution and to control 

departmentwide business management improvement efforts. In our experience, 

efforts aimed primarily at obtaining a financial statement opinion seldom are a 

prudent use of taxpayer resources nor do they result in marked improvements in the 

timeliness, accuracy, and reliability of business management information. To the 

extent that DOD’s efforts to obtain an unqualified audit opinion by fiscal year 2007 

result in lasting improvements in DOD’s business operations, they are worth 

pursuing. However, focusing improvement efforts on implementing manual 

workarounds and patching legacy business systems in order to obtain information 

primarily for financial reporting purposes may inadvertently divert limited resources 

away from ongoing efforts to develop and implement long-term solutions and 

improve data for managing DOD’s business operations. The department should be 

able to achieve an unqualified audit opinion on its financial statements as ongoing 

efforts to transform DOD business operations mature and the department is able to 

more effectively and efficiently support both the warfighter and DOD decision 

makers. 

Recommendations for Executive Action 

To expand DOD’s ability to effectively oversee and monitor component and 

departmental financial improvement initiatives intended to improve the timeliness, 

accuracy, and reliability of business management information for DOD decision 

makers and financial reporting, we recommend that the Under Secretary of Defense 

(Comptroller) take the following four actions: 

• Develop an integrated departmental plan, including a brief executive summary, 

which ties currently disparate improvements at the component and 

departmental levels together with accountable personnel, milestones, and 

required resources. 

• Establish an infrastructure, including staff, processes, procedures, and 

performance metrics, to facilitate efficient and effective oversight and 

monitoring of the development and execution of component improvement 

plans to ensure that corrective actions are sustainable and will result in timely, 

accurate, and reliable business management information. 

• Direct DOD components to include in their plans sufficient corrective action 

information, such as changes affecting people, process, and business systems, 

and to link their plans electronically to a DOD database, with appropriate 

results-oriented performance measures, to facilitate oversight and monitoring. 

• Direct BMMP, including its domains, to use component plans as an aid in 

identifying system investments occurring at the DOD component level. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 18 

Agency Comments and Our Evaluation 

In its written comments, DOD concurred with our recommendations and identified 

actions to address identified deficiencies. Specifically, DOD’s response outlined 

recent actions taken, others that are underway, and further planned actions with 

respect to our recommendations. If effectively implemented, these actions should 

substantially improve DOD’s management and oversight of its financial management 

initiatives. DOD’s comments are reprinted in enclosure II. 

 ------------------------------------------------------- 

We are sending copies of this report to interested congressional committees. We are 

also sending copies to the Secretary of Defense and the Under Secretary of Defense 

(Comptroller). Copies will be made available to others upon request. In addition, this 

report will also be available at no charge on GAO’s home page at http://www.gao.gov. 

Please contact me at (202) 512-9095 or by e-mail at kutzg@gao.gov or Evelyn Logue, 

Assistant Director, at (202) 512-3881 or by e-mail at loguee@gao.gov if you or your 

staffs have any questions concerning this report. Major contributors to this report 

were Shawn Ahmed, Molly Boyle, Cherry Clipper, and Carolyn Voltz. 

Gregory D. Kutz 

Director, Financial Management and Assurance 

Enclosures - 2 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

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Enclosure I 

Scope and Methodology 

We obtained and reviewed individual component plans for the general and working 

capital funds of the Defense Logistics Agency (DLA) and the Departments of the 

Army, the Navy, and the Air Force. We also reviewed the component plan for the 

Army Corps of Engineers (Corps). We did not verify the reliability of the information 

provided in the plans beyond information obtained during interviews with component 

representatives responsible for developing the plans. As agreed with our requesters, 

given the continuing evolution of the Department of Defense’s (DOD) improvement 

efforts and corresponding processes and procedures, we limited our work to 

determining whether 

• DOD had a comprehensive, integrated plan for obtaining an unqualified 

opinion on its fiscal year 2007 consolidated financial statements, 

• the DOD Comptroller had established effective processes and procedures for 

monitoring the implementation of the plan(s) to increase the likelihood of 

sustainable progress and to ensure that component auditability assertions are 

supported, and 

• DOD had established a clear link between DOD component improvement 

efforts and the department’s Business Management Modernization Program 

(BMMP). 

To assess the plans, we compared them to the various criteria identified in DOD 

Comptroller directives, instructions, and business rules issued to the components to 

guide their plan development activities and guide them through DOD’s process for 

achieving an unqualified audit opinion. In addition, we interviewed appropriate Army, 

Navy, Air Force, DLA, and Corps officials responsible for preparing component 

midrange financial improvement plans to increase our understanding of the status of 

component plans and corresponding efforts to address audit impediments and 

coordination with BMMP and links to DOD’s business enterprise architecture. 

We also interviewed pertinent staff of the Under Secretary of Defense (Comptroller), 

in Washington, D.C., responsible for (1) the development of DOD’s database plan; (2) 

review of individual component plans; (3) development of DOD directives, 

instructions, and business rules; and (4) development and implementation of 

processes and procedures for overseeing and monitoring component efforts. In 

addition, we reviewed extracts from the DOD database to gain an understanding of 

how it stored information and what information it contained. We also reviewed the 

DOD Comptroller’s financial improvement initiative tracking schedule, as of July 14, 

2004, to identify staff assigned to oversee and monitor component plans and the 

status of component plans. Furthermore, we reviewed the financial improvement 

initiative business rules issued by the department to obtain an understanding of the 

processes, procedures, and requirements, including documentation requirements, 

DOD had established to minimize the likelihood of an unsupported auditability 

assertion. In addition, we reviewed a copy of the contract DOD issued to obtain 

oversight and monitoring support. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

Page 20 

To assess whether clear links exist between component improvement efforts and 

those of BMMP to refine and implement a business enterprise architecture to guide 

DOD’s business transformation effort, including overseeing and controlling business 

system investments, we reviewed component plans to determine the extent to which 

business system investments and related coordination activities with BMMP were 

identified. In addition, we interviewed DOD component and Comptroller staff to 

discuss coordination of component midrange improvement efforts and BMMP. 

Further, we interviewed BMMP staff—including business process area 

representatives of the Logistics; Installations and Environment; and Finance, 

Accounting, and Financial Management domains (functional business process 

areas)—to assess the extent of their involvement in reviewing component plans and 

coordination with DOD components in support of DOD’s fiscal year 2007 audit 

opinion goal. 

We briefed DOD Comptroller officials on the details of our audit, including findings 

and their implications. On August 9, 2004, we requested comments on a draft of this 

report. We received comments on September 9, 2004, and have summarized those 

comments in the “Agency Comments and Our Evaluation” section of this report. 

DOD’s comments are reprinted in enclosure II. We conducted our audit work from 

March 2004 through July 2004 in accordance with generally accepted government 

auditing standards. 
GAO-04-910R DOD Fiscal Year 2007 Audit Opinion 

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Enclosure II 

Comments from the Department of Defense
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