U.S. GOVERNMENT PRINTING OFFICE

62–467 CC WASHINGTON : 2000

OVERSIGHT OF THE FINANCIAL MANAGEMENT

PRACTICES AT THE DEPARTMENT OF DEFENSE

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

MAY 4, 1999

Serial No. 106–80

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

BONNIE HEALD, Director of Communications/Professional Staff Member

MASON ALINGER, Clerk

FAITH WEISS, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on May 4, 1999 ................................................................................. 1

Statement of:

Mancuso, Donald, Acting Inspector General, Department of Defense, accompanied by Robert Lieberman, Assistant Inspector General for Audit,

Department of Defense; Gene Dodaro, Assistant Comptroller General

for Accounting and Information Management, General Accounting Office, accompanied by Lisa Jacobson, Director of Defense Audits, Accounting and Information Management Division; and William Lynn,

Under Secretary of Defense, Chief Financial Officer, Department of

Defense, accompanied by Nelson Toye, Deputy Chief Financial Officer,

Department of Defense ................................................................................. 8

Letters, statements, et cetera, submitted for the record by:

Dodaro, Gene, Assistant Comptroller General for Accounting and Information Management, General Accounting Office, prepared statement

of ..................................................................................................................... 43

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Lynn, William, Under Secretary of Defense, Chief Financial Officer, Department of Defense, prepared statement of .............................................. 76

Mancuso, Donald, Acting Inspector General, Department of Defense, prepared statement of ........................................................................................ 12

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 5

(1)

OVERSIGHT OF THE FINANCIAL MANAGEMENT PRACTICES AT THE DEPARTMENT OF

DEFENSE

TUESDAY, MAY 4, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2247, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Biggert, Ose, and Turner.

Staff present: J. Russell George, staff director and chief counsel;

Bonnie Heald, director of communications, professional staff member, Mason Alinger, clerk; Richard Lukas, intern; Faith Weiss, minority counsel; and Earley Green, minority staff assistant.

Mr. HORN. We’re here today to discuss the status of the efforts

at the Department of Defense to correct long-standing financial

management problems. Again, in fiscal year 1998, auditors were

unable to express an opinion on the financial statements of the Department of Defense or any of its services. Pervasive, crosscutting

problems continue to plague the Department.

These weaknesses in financial management result in wasted resources and undermine the Department of Defense’s ability to man- age its annual budget, which exceeds $250 billion. In addition,

these problems cause inefficiencies and ineffectiveness in the Department’s management and oversight of approximately $1 trillion

in assets, assets such as weapon systems, aircraft, vessels and related inventory and supplies.

In our March 31 hearing on the second annual governmentwide

audit, the Comptroller General, when asked which Federal agency

had the most significant financial management weaknesses, quickly responded ‘‘DOD, the Department of Defense.’’ This subcommittee has held numerous hearings exploring a wide

array of issues facing the Department of Defense. We take seriously the need to resolve these financial management problems, as

I’m sure the Department of Defense does.

We will explore these issues in greater detail today. We want to

know what the Department of Defense is doing to resolve these deficiencies, both in the short term and in the long term. We need

to be sure that we have a commitment of the top executives in the

Department to resolve these issues.

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These problems are severe. We cannot allow them to persist, and

I’m looking forward to the testimony.

We have a very fine panel this morning. If we would have it on

the front of my binder, it would help. We’re going to have essentially one panel.

The opening witness will be the Acting Inspector General of Defense, who will be followed by the Assistant Comptroller General,

the Under Secretary of Defense, and the Chief Financial Officer.

The routine in this subcommittee as part of the full committee

is to swear in all witnesses. When we call on you, that statement

is automatically put in the record in full. What I would like to do

this morning is give you a great liberality to an oral statement;

roughly 10 minutes for each principal witness; then, we would like

to spend the rest of the time on dialog and questioning between

both sides.

[The prepared statement of Hon. Stephen Horn follows:]

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Mr. HORN. Mr. Turner has joined us. And, Mr. Turner, you’re

free as ranking member to make an opening statement. You’re just

in time.

Mr. TURNER. Well, since I’m a little late, I will ask the Chair if

I can file my opening statement for the record.

[The prepared statement of Hon. Jim Turner follows:]

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Mr. HORN. We will have it filed for the record as if read. We’re

delighted to see our colleague this morning. It’s sort of a quiet day

around here, but that will change as the morning goes on.

So, if you will stand with the people that will also give answers

behind you, I want everybody sworn in at once. Just raise your

right hands.

[Witnesses sworn.]

Mr. HORN. We have seven witnesses or potential witnesses.

We will start with Mr. Donald Mancuso, the Acting Inspector

General, Department of Defense. Mr. Mancuso is accompanied by

Mr. Robert Lieberman, Assistant Inspector General for Audit, Department of Defense.

So, Mr. Mancuso, go ahead.

STATEMENTS OF DONALD MANCUSO, ACTING INSPECTOR

GENERAL, DEPARTMENT OF DEFENSE, ACCOMPANIED BY

ROBERT LIEBERMAN, ASSISTANT INSPECTOR GENERAL FOR

AUDIT, DEPARTMENT OF DEFENSE; GENE DODARO, ASSISTANT COMPTROLLER GENERAL FOR ACCOUNTING AND INFORMATION MANAGEMENT, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY LISA JACOBSON, DIRECTOR OF DEFENSE AUDITS, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION; AND WILLIAM LYNN, UNDER SECRETARY

OF DEFENSE, CHIEF FINANCIAL OFFICER, DEPARTMENT OF

DEFENSE, ACCOMPANIED BY NELSON TOYE, DEPUTY CHIEF

FINANCIAL OFFICER, DEPARTMENT OF DEFENSE

Mr. MANCUSO. Thank you. Mr. Chairman and members of the

committee, I appreciate the opportunity to be here today, to discuss

the significant challenges facing the Department of Defense in the

financial management area and the progress made since your last

hearing on these matters just over a year ago.

I would like to begin by underscoring both the critical importance

of sound financial management and the unavoidable complexity of

finance and accounting operations in an organization as large as

the Department of Defense. The Department is the largest holder

of U.S. Government physical assets, has the most employees, owns

the most automated systems, administers the most complicated

chart of accounts, and manages the most diverse mix of operating

and business functions of any government agency.

The end of the cold war and the downsizing of the Defense budget caused many profound changes in the Department. For example,

it was evident that administrative processes of all kinds, including

finance and accounting, in their current forms were neither affordable nor capable of keeping pace with rapidly changing management practices and information technology.

Likewise, individual DOD components have been allowed to develop several hundred finance and accounting automated systems,

whose interoperability among themselves and with nonfinancial

systems was generally poor.

In my office’s estimation, achieving full integration of DOD support operations, including financial management, is far from complete. It will require sustained and probably even intensified commitment by both the Congress and the Department and will certainly take several more years.

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The Department has not been able to comply with the requirements for automated financial statements levied by the Chief Financial Officers Act, the Government Management Reform Act, and

the Federal Finance Management Improvement Act. The results of

the audits of the DOD financial statements for fiscal year 1998,

when viewed solely in terms of audit opinions, were identical to the

previous poor results.

My office and the Auditors General of the Army, Navy and Air

Force issued opinion reports earlier this year. Only the Military Retirement Trust Fund received an unqualified clean audit opinion.

Disclaimers of opinion were necessary for the consolidated DOD

statements, as well as all other major fund statements.

The Department lacks systems capable of compiling financial reports that comply with Federal accounting standards and laws, nor

will those systems be in place for several more years. Much effort

is being expended, however, to compensate for inadequate systems

and to achieve improvement. It is likely that one or more of the

major fund entities below the DOD level will achieve a clean or unqualified opinion during the next 1 to 3 years and various smaller

entities are likely to do so as well.

Although such indicators of progress may be good for morale, favorable opinions on fragments of the Department’s financial reports

have limited actual importance if the consolidated statements remain fundamentally flawed. The prospect for favorable audit opinions on the consolidated DOD financial statements in the near

term are not good.

We believe that focusing on audit opinions as the primary indicator of financial management and improvement may well

incentivize some Federal managers merely to want to shop around

for favorable audit opinions on annual statements, instead of focusing on the usefulness of all financial reports and the adequacy of

management controls.

An agency could conceivably develop workaround procedures, actually bypassing its official accounting systems, that would function

well enough to achieve a favorable audit opinion on its consolidated

financial statements.

Unfortunately, failure to fix those systems and related control

weaknesses would leave program managers still unable to rely on

the various financial reports that they need to conduct day-to-day

business. Several other sources of insight into the Department’s

progress should be considered in addition to audit opinions.

First, the previously mentioned extensive audit reporting provides considerable information. Second, numerous action-plan milestones have been created in an effort begun in mid-1998 by the Office of Management and Budget, the General Accounting Office, the

DOD Chief Financial Officer and my staff to develop sound action

plans for implementing the new Federal accounting standards.

Third, progress toward making financial and nonfinancial feeder

systems compliant with applicable laws, regulations and new accounting standards is an excellent indicator of how well the system

deficiencies that are the root cause of inaccurate financial reporting

are being addressed.

We recently issued a report that assessed the Biennial Financial

Management Improvement Plan whose first version was provided

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by DOD to Congress last September as a response to a tasking in

the National Defense Authorization Act for fiscal year 1998. We

concluded that the plan’s focus on systems was very appropriate,

although much can be done to improve it as a reporting vehicle to

the Congress.

Another major step would be to develop more effective internal

DOD management mechanisms. It is useful to compare the well-focused reporting now being regularly provided to senior managers

and Congress on the Y2K compliance status of several thousand

DOD systems with the rather unfocused information available annually on the CFO compliance status of about 200 of those same

systems.

As you know, the DOD struggled at first with the year 2000 conversion, because definitions of terms like ‘‘compliant’’ and ‘‘certified’’ were unclear, but there was insufficient management control

of the overall program; and many functional managers and commanders initially remained uninvolved. So far the same kinds of

problems have hampered the financial management system improvement effort.

We look forward to helping the Department learn from the Y2K

experience and establish an approach that will allow senior managers and Congress to know exactly how well each DOD management sector is supporting the DOD system improvement goals.

Mr. Chairman, my written statement discusses several other

challenges confronting the DOD financial community in addition to

financial reporting. I would, however, like to emphasize my concern

about information assurance. As the recent hacker attack against

the NATO website and the so-called Melissa virus incident demonstrated, any automated system may be attacked or misused.

My office has been working closely with the Defense Information

Systems Agency and the Defense Finance and Accounting Service

over the past several years to address this problem. We have

issued 20 audit reports during the 1990’s on security matters related to DFAS and made over 200 recommendations.

The Defense Criminal Investigative Service, the investigative

arm of our office, recently established an information infrastructure

team. This new unit works in partnership with other law enforcement organizations and the Defense Information Systems Agency

to react immediately to system penetration incidents involving any

part of the Department. Additionally, we have a special agent assigned full-time to the FBI National Infrastructure Protection Center.

Knowing this subcommittee’s leading role in monitoring efforts to

combat the so-called millennium bug, I also want to emphasize

we’ve been auditing the DFAS Y2K conversion problem continuously since mid-1997. DFAS has been responsive to audit advice

and has made great progress in ensuring that its 41 mission-critical systems will be able to function; however, much remains to be

done.

Of those, 13 systems missed the OMB compliance goal of March

31, 1999; and DFAS still faces formidable challenges in terms of

ensuring robust end-to-end testing and formulating realistic contingency plans.

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In summary, the DOD financial management community faces

major challenges and needs the active support of senior departmental managers and the Congress. My office will continue to place

heavy emphasis on DOD finance and accounting operations. We’ll

be keeping all stakeholders, the Department, Congress, OMB, and

the public informed of our audit and investigative results. Thank

you.

Mr. HORN. Thank you. You actually have 3 minutes to go. So

thanks for the rapid summary, it was very good.

[The prepared statement of Mr. Mancuso follows:]

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Mr. HORN. We now deal with the General Accounting Office, Mr.

Gene Dodaro, the Assistant Comptroller General for Accounting

and Information Management. He is accompanied by Ms. Lisa

Jacobson, the Director of Defense Audits, same division.

Mr. Dodaro.

Mr. DODARO. Thank you, Mr. Chairman. Good morning to you,

Congressman Turner, Congressman Ose. We appreciate the opportunity to be here today to talk about the need to strengthen financial management at the Department of Defense.

A few weeks ago, I was before this committee and we were talking about the major challenges confronting the Federal Government in receiving a positive opinion on the consolidated statements

of the Federal Government. DOD represents a significant portion

of its assets and liabilities. And, indeed, over half of all discretionary spending of the Federal Government. Addressing the financial management weaknesses at the Department of Defense is an

integral part of achieving the administration’s goal of having an

unqualified or clean opinion on the financial report of the entire

Federal Government.

Equally as important, however, if not more critical, is the need

to strengthen financial management at the Department to better

demonstrate accountability over billions of taxpayer dollars and

also to provide more reliable and timely information in order to

manage the Department’s vast operations more efficiently. The Department recognizes these potential benefits, and I’m pleased to report this year that they’ve accelerated their efforts to address these

problems that have been plaguing them for a number of years.

But we also need to recognize that these problems are pervasive.

They’re serious, and they need to be corrected in a very large decentralized organization. As a result, it’s going to take time. It’s

going to take a lot of effort, and it will take dedicated top-level attention in the Department similar to, as Mr. Mancuso mentioned,

the effort being put forward on the year 2000 problem, to really

make some progress.

Now, while the challenges are great at improving financial management at DOD, so are the potential benefits. No. 1, improving financial management over at the Department of Defense would help

address known inefficiencies that are draining resources away from

readiness and other priorities, such as modernizing weapons systems.

For example, it’s widely recognized that problems in having adequate visibility over assets has led to greatly increased costs of

military operations such as Desert Storm.

It’s also well known and well documented that inventories are incomplete and not accurate at the Department and, as a result, this

is a contributing factor to hundreds of millions of dollars in uneconomical purchases and also has an impact on readiness.

Also good financial management information is really a critical

foundation to identifying and implementing other management reforms. For example, questions have been raised about the cost savings occurring from base closures because of the lack of good historical data at the Department.

Now, when we look at this, we always see that savings indeed

happen, but the timing of when the savings occur and the exact

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amount to be saved always do not come to pass because of the difficulty in making the estimates. Also when the Department compares its internal operations to those of the private sector in arriving at decisions on outsourcing options, it’s difficult to make a decision if you’re a Department manager on what’s the most economical option to pursue because there’s not good historical information

on the costs of their operations.

And it is also well recognized within the Department that the

cost accounting systems to track life-cycle costs of weapon systems

are not what they need to be, and they need to be improved. Third,

there’s a need to make sure there’s better financial management to

track the status of budget resources. There was approximately over $9 billion of differences this past

year between DOD’s records and the Department of Treasury’s

records. And you can well imagine what the significance of that

would be if you’re trying to balance your own checkbook with that

of a bank. And, indeed, not balancing results in some difficulties.

For example, during the 1998 audit, the auditors came across a deposit that the Army had made in 1991, 7 years earlier, that was

supposed to be an over $2 million deposit in the bank. Well, the

bank, because of an error, only recorded that deposit at less than

$3,500.

So until the reconciliations got started, this went undetected for

a 7-year period. Once it was discovered, the bank repaid the Federal Government the $2.1 million plus $640,000 of interest; but

during that 7-year period, the government was deprived of this

money. And as most of you know during many of those years, we

were borrowing to fund the general operations of the government.

So the need to do these reconcilations is very important.

Also, audits have discovered where sometimes budget authority

might lapse. There are budget resources that are encumbered or

obligated that may not be deobligated and used for other sources,

and in still other instances, there are some concerns whether or not

the Department has exceeded budget limits that have been set by

the Congress. So this whole area is one where better financial management would lead to sound budget integrity which is one of the

key goals of the CFO Act.

Now, the Department recognizes the importance of these problems and this past year has accelerated its effort, put more resources on it. We’re having a very constructive dialog, as Mr.

Mancuso outlined, coming up with short-term plans, as well as

highlighting some of the longer-term issues that need to be dealt

with.

Now in the short term, what needs to be done? No. 1, the data

in the existing systems the Department is using needs to be better

in terms of being cleaned up, and following control procedures that

aren’t followed. The existing systems could produce better information as the Department focuses on implementing procedures that

are in place or making some modifications to those procedures.

Second, accounting standards are in place across the Federal

Government. The Department has not yet fully implemented, then

for example, in the environmental disposal area. They need to implement those standards; they’re working on that. But those need

to be put in place and procedures followed. The Department also

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needs to balance its checkbook with the Treasury Department.

That needs to be cleaned up, because every day billions of dollars

are spent.

If these records are not cleaned up from the beginning, they’re

just going to snowball and have a cumulative effect of never being

able to be unraveled over time.

Also the Department needs to have better financial management

training for its employees. The requirements for Federal financial

management have been increased through the CFO Act and other

mandates that the Congress has legislated to achieve financial

management reform, but there needs to be commensurate training

that for the financial management work force in the Department.

We made some recommendations along those lines for minimum

training requirements. Training needs to be revamped.

One of the key goals of the CFO Act was to upgrade the qualifications of financial management personnel across the government. That needs to be done in order for these changes to come to

fruition. Also in addressing the long term, the Department had a

major step this past year in issuing its first biennial financial management improvement plan. That plan was a good start. For the

first time DOD recognized that systems, other than just the finance

and accounting systems, need to be revamped. Such as logistics

systems that are used to track inventories, and property management systems. Indeed, 80 percent of the information to prepare the

financial statements comes from outside the financial sphere, and

so they need to involve people across the Department.

This plan begins that process. They’ve also committed to update

this plan annually, which is a good step forward. And we’ve made

some recommendations, as they do that, to incorporate more requirements into that plan to make sure that they, indeed, do in the

new systems that are developed have—first of all, a smooth transition from the existing systems to their new environment in the future; that they build in requirements to have data integrity in the

new systems so you don’t just have modern updated systems but

still have the data integrity problems because they’re not following

procedures; and they really need to improve their activities to implement information technology reform, and embody the Clinger,

Cohen amendments that the Congress has levied in 1996 to develop IT investments in modular projects to have good cost investment, disciplined processes.

The Department is committed to put in place the requirements

of that legislation, but it’s yet to fully implement them. That will

be very important if the Department is ever going to have modern

management systems that will work effectively and produce all the

requirements.

In closing, let me commend this committee for its diligent oversight in this area. It’s really the series of hearings that have been

held over the past few years on DOD financial management that

have been very important to helping stimulate and encourage the

type of constructive dialog we’ve had with the Department. And we

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look forward to continuing to work with this committee and with

DOD in really making financial management reform a day-to-day

reality at the Department.

Thank you very much. I would be happy to answer questions

after all the witnesses have given their statement.

[The prepared statement of Mr. Dodaro follows:]

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Mr. HORN. Well, we thank you and the GAO for that very thorough statement.

Our last witness this morning is the Honorable William Lynn,

the Under Secretary of Defense, Chief Financial Officer of the Department of Defense. And he’s accompanied by Mr. Nelson Toye,

the Deputy Chief Financial Officer, Department of Defense.

Mr. Lynn.

Mr. LYNN. Thank you very much, Mr. Chairman. I was going to

thank you for the opportunity to be here, but since you’ve sworn

me in, I thought better of that.

Mr. HORN. Right.

Mr. LYNN. I do appreciate you putting the full statement in the

record, and I will just try and summarize it in the 10 minutes that

you’ve allotted. Let me start, you know—— Mr. HORN. You can take more time if you want.

Mr. LYNN. Let me start by stressing what both Mr. Mancuso, Mr.

Dodaro said is that the effort in financial management reform is

important. It is a priority at the highest levels of the Department,

starting with Secretary Cohen and Deputy Secretary Hamre and,

I, as the Chief Financial Officer and the implementer of their will

on this.

And I want to talk about the progress we’ve made so far and

what our plans are for further progress over the next several years.

In terms of where we are right now, what progress we’ve made

so far, the way I would describe it, we’ve laid the foundations for

a massive shift of the DOD financial management systems from a

200-year focus on an obligation-based system toward a more commercial style accrual-base system.

This is not an easy shift, particularly, with an operation the size

of the Department dwarfs any private sector enterprise that dwarfs

any other government enterprise. But we need—despite the challenge, we need to be able to do this for exactly the reasons Mr.

Dodaro cited in his testimony, which I would summarize as cost

visibility and public confidence, in terms of the accounting systems

and the finance systems where a good portion of the Nation’s tax

dollars are spent.

The foundations that we’ve laid here are three. First was the creation of DFAS by the prior administration in 1991. The Defense Finance and Accounting Service is the critical, pivotal agent for financial management reform. The creation of DFAS has allowed to

consolidate financial operations, eliminate non-Chief Financial Officer compliant finance and accounting systems, and fundamentally

reengineer our business practices to accomplish these goals.

The second major foundation is that of consolidation. Since 1991,

we’ve consolidated from 330 Defense accounting offices down to 5

centers and 20 operating locations. This is a reduction of over 90

percent. It’s been accomplished in 7 years. That’s 2 years earlier

than planned. It saved us money; but probably, more importantly,

it’s eliminated redundancy and facilitated the standardization and

improved the accuracy and time limits of all of our financial operations.

And that’s, in fact, the third element of the foundation of these

financial reforms is that consolidation. To remedy the problem we

had of too numerous and incompatible finance and accounting sysVerDate 11-MAY-2000 09:56 Mar 22, 2001 Jkt 066699 PO 00000 Frm 00077 Fmt 6633 Sfmt 6601 E:\HEARINGS\62467 pfrm09 PsN: 62467
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tems, DFAS embarked on a major streamlining effort. We started

in 1991 with 324 finance and accounting systems. We are on a path

to reduce that by 90 percent, down to 32 by 2003. We’re just over

100 right now.

The number of 100 compares favorably with most fortune—or the

top Fortune 500 companies. The number of 32 will put us in the

upper tier of those companies. And we are right now on track to

do that. But the objective is not simply to reduce the number of finance systems. The consolidation effort, rather, is meant to eliminate outdated financial management systems and replace them

with systems that provide more accurate, more timely, and more

meaningful data to decisionmakers.

It’s that data that gives you the cost visibility that gives the taxpayers the confidence that we are, indeed, good stewards of the national defense resources. With those foundations which, as I say,

we just completed the consolidation effort, in the last year and

we’re about two-thirds of the way through the effort to streamline

our finance and accounting services, we’ve been able in the last

year to turn to next steps. And those next steps have been alluded

to by the previous two witnesses.

They focus now on an area that we have not focused as heavily

on because we were not able to, but we can now focus on the

achievement of clean opinion on an auditable financial statement.

With the foundations laid by DFAS’s consolidation of the accounting stations and the financial management systems, we are able to

take the next steps of focusing on a clean audit opinion.

We’ve been working closely on the last year with our partners at

GAO and the Inspector General, who are here, as well as the Office

of Management and Budget, to develop both a short-term and a

long-term strategy. Why do we need two strategies? The fundamental fact is the long-term strategy, as Mr. Mancuso indicated, requires a complete overhaul of the Department’s management information systems. Now, that goes far behind the improvements in

the finance and accounting systems that I described just a moment

ago.

As was indicated earlier, more than 80 percent of the data that

is on a finance—on our financial statement comes from outside the

financial systems. It comes from the logistics systems. It comes

from the personnel systems, from the acquisition systems, from the

medical systems. So in order to achieve a clean financial opinion,

we need to integrate those systems into our reporting chain.

That requires upgrades of those systems so that they’re CFO

compliant and it requires improved interfaces with the financial

systems. The financial management improvement plan that we

submitted this past fall is the first step in that effort. We need to

improve on that plan, but we think that lays a cornerstone in our

effort to get a clean opinion.

While there’s no substitute, as Mr. Mancuso indicated, for the

system changes, in terms of achieving the long-term goals, those

goals will take several years, maybe more than several years. Accordingly, we’ve developed a short-term strategy to try and accelerate the achievement of a clean opinion on our financial statements.

We’ve been working with the GAO and the Inspector General

and OMB to develop this strategy. They’ve been very helpful in

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identifying the major deficiencies in our financial management reporting. And we’ve focused a series of interim methodologies on

each of those deficiencies to try and narrow the deficiency down,

such that we would at least be able to achieve a clean financial

opinion in advance of getting all the systems improvements that

are in the pipeline now.

Let me just give you one or two examples of what we’re doing.

Probably the best example is in the area of real property, real property—and personal property as well. The problem we have there is

the Department only keeps paperwork for 6 years and 6 months,

most 6 our—almost all of our real property and much of our personal property has been around much longer than that.

The paperwork for those properties, however, is no longer

around. That’s a problem for the auditors. We don’t have an audit

train that goes back to the acquisition of that property and goes

through to the current time. I think all of us agree that the auditors, as well as DOD, agree that it would not be worth the effort

to try and find the receipt for, say, West Point. It’s not a helpful

project. On the other hand, it is a useful step to know what the

value of that property is.

And so what we’ve undertaken with two CPA firms is for them

to develop a methodology for us to value our current inventory of

both real property and personal property and then to set up a system that will continually update those valuations so that they will

be usable for audit purposes. That’s an example of the kinds of interim methodology that addresses one of the principal deficiencies

that cause the Department not to be able to achieve a clean opinion

on its financial statements.

Let me just conclude by saying the Department takes full responsibility for its financial stewardship. We take that responsibility seriously. As I say, it goes straight to the top, to the Secretary. We’re

taking substantial steps in the direction of reform. As I mentioned,

we’ve already taken the steps to lay the foundation with DFAS and

the consolidation of the accounting stations, as well as the finance

and accounting systems.

We are now expanding that effort to include all of the feeder systems that involve the 80 percent of the data outside the financial

systems. And we’re working with GAO, the IG, and the OMB to develop an interim approach to try and achieve an even more accelerated goal of clean financial opinion.

But I think we always need to remember that as we go through

this effort, that this is an effort that the Department cannot stop

to achieve. Every month we have to pay our 2 million members of

the military, both active and reserve, our 700,000 civilians. We

have to pay $24 billion a month in contractor and vendor payments. None of that can stop.

So financial management for the reform for the Department of

Defense is a lot like changing the wheels on an automobile without

stopping. We’ve changed one or two of those wheels; we are not all

the way there. We will not stop, though, until we achieve our overall goals. Thank you very much, Mr. Chairman.

[The prepared statement of Mr. Lynn follows:]

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Mr. HORN. Well, we thank you. I don’t envy you your responsibilities. And I appreciate your statement.

We’re going to allow 10 minutes to each Member for questioning.

We will alternate, and the chairman’s time will go to Mr. Ose for

10 minutes and then the ranking member, Mr. Turner, and then

the vice chairwoman, Mrs. Biggert.

So, Mr. Ose, 10 minutes on questioning.

Mr. OSE. Thank you, Mr. Chairman.

My questions are primarily directed to Mr. Dodaro. I have read

your testimony. I have a couple of questions. I think they boil down

to really a concern on my part as highlighted on page 15 and 16,

regarding training of personnel, page 15 at the bottom and page 16

at the top.

There is a comment in there, ‘‘It is essential that DOD also establish a well-trained cadre of financial management personnel.

‘‘And at the risk of cherry-picking this testimony, I’m going to hop

forward a couple of paragraphs, where it also makes the comment

that over half of those surveyed had received no financial or accounting-related training during 1995 and 1996.

First of all, the DOD has a cadre—I hate that word—but a group

of accountants that it uses to establish the books. Do they come out

of the military? Do they come out of military training? Do they

come out of business school? Where do these folks aggregate to us

from?

Mr. DODARO. Yes. Most of the accounting technicians are from

the civilian work force. Part of the issue here—and really this is

an issue across the Federal Government, but it’s most acute in the

Department—is that in many cases, the accounting functions could

be best described as administrative backwater functions over the

years. This occurred until there were requirements to prepare financial statements which started in fiscal year 1996, which was

the first year these requirements were in place across the government.

So there were in place a lot of technicians or clerks, voucherprocessing people, and really there was not a great deal of attention given to training of those people over time, which was our

point to the Department. We went out and we compared the type

of training activities that occur in leading organizations in the private sector and in State governments, where they have had audited

financial statements for a number of years, and good financial

management operations, and we asked, ‘‘How much do you devote

to training?’’

And they came back and said, we devote quite a bit of effort, resources and time to do that. We believe, unless there’s minimum

training requirements established and a training curriculum put in

place for the Department, that there’s going to be continual difficulties. Part of the recurring audit problems, Congressman Ose, largely revolve around failure to follow established procedures that are

in place, not doing these monthly reconciliations that I mentioned

at Treasury Department. So training is really important.

And I understand that the Department has been reluctant to set

minimum requirements then that implies a resource commitment

to this organization of people to bring them up to the level in which

they’re been held accountable now. And that’s really important.

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Mr. LYNN. If I could jump in.

Mr. OSE. Mr. Secretary.

Mr. LYNN. I think what Mr. Dodaro said is true. In the past we

have been reluctant to set standards. In fact, we are now undertaking an effort that would set standards and certification to those

standards.

Mr. OSE. For the personnel?

Mr. LYNN. For the personnel. We set up a new school in Massachusetts with the curriculum toward this end. We’re working with

the American Society of Military Comptrollers in terms of an effort

to do that certification, to have an objective set of criteria by which

to judge people. And we agree with Mr. Dodaro that more efforts

need to be put into training. That’s actually not, I think, limited

to financial management. I think that’s government generally.

One of the things that we’ve found, in general, is that the Federal Government does not spend nearly as much on training its

people as private sector people, private sector companies do across

the board. And the Secretary is committed to improving that across

the board, and we’ve taken steps in the financial management area

in particular.

Mr. OSE. As a freshman I would hasten to add, I wish they

would have some congressional training for Members, but it’s not

just on that side of the table.

Mr. DODARO. Congressman Ose, one of the things we point out

in those paragraphs that you’re citing is that there’s a well-defined

program that has been put in place in the acquisition community

in the Department of Defense, because there has been problems

over the years and because of the billions of dollars that that organization handles, now there’s certification requirements and training programs; and we think the same level of effort needs to be

given to financial management. So I’m glad you raised that question.

Mr. OSE. I don’t know how to handle a problem unless the person

handling it is well trained. You can see how I’m flailing about up

here. I can imagine how it is out there.

I do want to note that there’s a couple of spots under the shortterm improvements notation in some of these paragraphs where accounting standards are in the process of being implemented. I specifically want to go to the citation on page 9 related to the Air

Force in differentiating between national defense assets and property plant and equipment. This indicates that we’re in the process

of implementing that. I would appreciate a status report if anyone

has information as to however along that is.

Mr. DODARO. Sure. The basic standard changed abit for fiscal

year 1998. Let me back up and explain the way that standards are

set. There’s a Federal Financial Accounting Standards Advisory

Board that has been created by the Director of OMB, the Secretary

of Treasury and the Comptroller General, and they recommend

standards to OMB and GAO and then they’re adopted and put into

effect.

One of the fundamental issues that they’ve been focusing in on

is while they use commercial accounting standards to the extent

they make sense for the Federal Government, is to really tailor the

standards to the unique requirements of the Federal Government.

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Nowhere is this more applicable than in the national defense

arena, where you really don’t always have comparable standards.

This area is very unique.

So the requirements for 1998 were to take mission assets, weapons systems, et cetera, off the balance sheet because everybody

agreed it didn’t make any sense to depreciate carriers over a period

of time. The change put them in a separate stewardship statement,

whereby there would still be accountability for quantities of those

assets, have some information on the level of investment that we’re

making as a country in weapons systems development, and there

would be responsibility for tracking additions and deletions over

time. And that standard is still under review as to exactly what

type of reporting would best be useful to the users of the financial

statements.

But the basic idea was to treat mission assets differently than

you would treat the buildings used on bases in the normal support,

real property, land and buildings and personal property, desks,

computers, et cetera, that carry out normal business functions. And

the Department is in the process now of separating that out. There

are some gray areas, obviously.

Mr. OSE. How far along is the separation?

Mr. DODARO. Let me ask Ms. Jacobson to answer that. And I’m

sure the Comptroller’s office has some information on it.

Ms. JACOBSON. They basically have just begun going through the

individual kinds of assets and trying to separate them between the

various categories, between weapons systems and other types of

property. Part of that is because the definition did change under

the standard this year, to try to clarify some ambiguous items. So

they are in the process. They are working on it, and they do have

contractors involved trying to help them do that.

Mr. OSE. If I may, one thing I always like to do is I always like

to do something small and then expand it, if it works. Are there

any departments or—that’s not the right word—subdepartments of

the DOD where your review has shown things to be properly accounted for that you have a high degree of confidence in the reports

that you submit?

Mr. DODARO. Basically, the Military Retirement Trust Fund has

received a clean audit opinion from the audits done by the Inspector General. The various services are at different stages of development. Under the original Chief Financial Officers Act that passed

in 1990, the Department of Army and the Department of Air Force

were designated pilot programs and audits were done. So they’ve

undergone audit scrutiny for a longer period of time and are moving to correct some of the weaknesses.

But by far, the service that needs the most work is the Department of Navy. And I know there are different levels of effort that’s

going to be required to bring up different parts of DOD. But the

only one so far in the major parts of DOD to get a clean opinion

is the Military Retirement Trust Fund.

Mr. OSE. Does that include the post-retirement medical—because

I saw in here there’s 200—an estimate of $223 billion in actuarial

liability.

Mr. DODARO. No, that does not include that, and that is still an

issue which we raised on the consolidated financial statements of

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the Federal Government. On the civilian side for the fiscal 1998

statements, problems were rectified by changes that OPM put in

place. But on the military side, the post-retirement health care

benefit still needs work to determine a better basis for making the

estimates, having actual claims data, documentation, et cetera.

Mr. OSE. Mr. Chairman. If I may, I would like to submit questions for followup. Just the observation that I’ve got is that—I

mean my business was very small and it was no grand enterprise,

by any means. But I always figured that if I could get one thing

under control and keep it there and move to the next thing where

it was screwed up, if it was, and correct that and keep moving

across the board, we could always get to the end at some point in

the future where we knew things were right.

That’s why I asked the question about the retirement system. If

that’s fixed, let’s not take our eye off the ball there. Let’s move to

another segment, fix that, if we can, and keep moving through. So

I thank you for the chance, and I will submit questions.

Mr. HORN. I agree with the gentleman. And the questions and

the answers from the various witnesses will be put in the record

at this point, without objection.

Now I yield 10 minutes for questioning to the ranking minority

member on the committee, Mr. Turner of Texas.

Mr. TURNER. Thank you, Mr. Chairman.

One area that I wanted to inquire a little bit into in the prepared

testimony that was submitted today related to improper contract

and vendor payments. You know, this just almost boggles the mind

to read that particular section of the report.

It says the DFAS Columbus Center received in return payments from defense contractors $4.6 billion. Between 1994 and 1998 those

return payments were due to overpayments to contractors. It’s just

beyond me to understand how that much in overpayments could be

made to contractors, and you have to try and get it back and you

wonder how much more is out there that you didn’t get back.

It would be helpful if you can explain to me how in the world

that kind of situation exists. I mean, are contracts all that complex

that we just—that they can’t even administer them properly and

everybody is having to go back and check on whether they’ve got

the right amount of money?

Mr. DODARO. Basically, there are a couple of fundamental problems. No. 1, many of these contracts are complex. They’re modified

many times over a number of years, and there are countless

amendments. And some of the files and contract files that DFAS

Columbus require—in fact, reinforced floors to hold the size of

some of these contract files.

So contract administration is complex. When contractors return

payments on their own; a lot of these cases the contractors are just

sending back voluntarily overpayments, in addition to those found

by the Defense Contract Agency. Part of the problem stems from

the fact that a large part is contract administration errors that

occur along the way, and then there are payment errors.

This problem, Congressman Turner—if you remember when we

were talking about the consolidated statements of the Federal Government, we mentioned the Medicare area where there were a lot

of improper payments made in the fee-for-service program. A lot of

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this stems from the fact that over the years the primary measure

of performance for a lot of financial management functions were

how quickly you could get the payments out, in this case, to the

DOD contractors and other cases the Medicare service providers.

So there was pretty much a pay-and-chase mentality in place

over time, as you get the money out quickly, and then you sort

through the process through a post-audit evaluation, which is why

the Defense Contract Agency has been set up. And that is not a

good way to run a business. I mean, it’s not a good internal control

to rely on the people you’re paying to voluntarily send money back

to you if they’re overpaid.

So DOD started to validate some of the material beforehand. But

part of it also stems from the fact that the contract payment process is different than the accounting process. And so the payments

are made, and then it takes a while to match up. This is where the

systems problems are really problematic, because they have no

ability to compare and reconcile the information to know that the

goods were received and also that it was a valid obligation.

So this is a fundamental area that needs reform. And you’re putting your finger on a proper issue. It’s a fundamental problem. And

it’s been in place for a while. The Department is trying to address

it, but until they reform and bring the contract community together

with the accounting community—and this is another area where

you have diffuse responsibilities within the Department—and really have a good check and balance in place on those payment systems to make sure that only proper payments go out the door, this

is going to continue to occur.

Mr. LYNN. Mr. Turner, if I might just jump in. One of the challenges we have in the Department of Defense is that any number

that involves the Department of Defense is going to be huge, which

is a two-edge sword. It means that we have to redouble our efforts

to make sure that we’re—we have the right controls in place, because so many dollars are involved.

It also means that any example that you cite is going to have a

large number associated with it. The number you’ve cited is coming

down. We’ve cut contractor overpayments in half over the last 3

years. So it’s down. Just to give you an example of what kind of

magnitude, it’s about one-tenth of 1 percent right now. But that

still gets you up into the hundreds of millions of dollars, which is

still too large. And Mr. Dodaro is exactly right. We need—and we

are taking the steps which involve electronic data transmission,

electronic commerce, that will link up the systems to avoid any of

these overpayments.

But I don’t want you to leave the impression that this is a large

portion of our dollars. It is a small portion, and it is declining.

Mr. TURNER. Well, just if my math is correct, it looks like we

have to return about $2 million a day to Defense contractors or

they have to return to us about $2 million a day. It just seems like

an awful lot of money to me.

Mr. LYNN. You’re making my point; just about any level of the

Defense Department has a lot of money.

Mr. TURNER. It seems to me that, you know, maybe it goes to the

complexity of the contract arrangements; maybe it’s inevitable that

there is going to be some confusion in it. One thing I noticed under

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the section labeled ‘‘improper contract and vendor payments,’’ in

the first paragraph you refer to the $4.6 billion that is returned

over that 5-year period by Defense contractors; and then down in

the third paragraph on page 19, we’re talking about $6.8 billion.

I’m not sure I understand the difference in those two numbers.

Mr. DODARO. The $4.6 billion is what the contractors returned on

their own voluntarily. The $6.8 billion is what the Defense Contract Agency disallowed through a post-audit function, where

they’re reviewing all the contract documents on the payments and they disallow some costs. So the $6.8 billion is what DOD identified

on its own through the contract agency and settling out a contract.

Any time a contract is closed, it’s then audited by this contract

agency. So those numbers are mutually exclusive.

Mr. TURNER. And, Mr. Secretary, the numbers you were mentioning that have improved, are those the voluntary repayments or

the amount that we’ve actually recovered through efforts of the Defense Department?

Mr. LYNN. The numbers I was referring to was the first set that

you referred to, which are in some voluntary overpayments, others

are overpayments that we find ourselves as we go back and research the payments. It’s a combination of both of those.

Mr. TURNER. So you can’t tell me what percentage of the improvement is represented by increased voluntary return from Defense contractors versus the percentage that we have recovered because of our own Department of Defense initiative?

Mr. LYNN. Oh, no, I can tell you that. Almost all of the improvement stems from improved systems and better linkages between

our disbursement activities and our accounting activities. It doesn’t

represent an increase in voluntary payments.

Mr. TURNER. Is there any way—and I guess you have to be pretty close to all of this to understand this very well—but is there any

way to know how much more we should be recovering? These are

large numbers to me, and you say it’s improved in terms of repayments from Defense contractors. But is this sort of a tip-of-the-iceberg sort of the problem, or does this represent just the way the

system works and we’re probably getting back all that we’re supposed to get back?

Mr. DODARO. It’s difficult at this point to really tell until there

are thorough audits done on a statistically valid basis to look at

total disbursements. As we point out in here, there are other problems with disbursements that are made that are not matched to

obligations for a long period of time.

And so part of the problems that the audit community have been

identifying we really have not gone in and taken like we have in

the Medicare program, as we explained to you before, a nationwide

sample of claims and come up with a number of improper payments, so that those can be tracked over time. That has not occurred yet at the Department of Defense.

And at some point in the future, when the records can be in a

little bit better shape, that needs to be done; and then you would

have the figure that you’re talking about. So you would really know

the magnitude. These are anecdotal examples at this point and not

based on a statistically valid sample of all the disbursements at the

Department.

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Mr. TURNER. What would it take to do a statistical-analysis sampling to really—I mean, is this really a big undertaking to do this?

Mr. DODARO. It would be a significant effort. But right now, it’s

not worth the resources, because there are so many fundamental

problems and the lack of documentation. In some cases, some of

these disbursements are researched for 4 and 5 and 6 years before

they’re matched with the disbursement with the obligation. So

some of the records—the fundamental recordkeeping is problematic—that’s why I mentioned getting the existing systems better in

shape and the reconciliations that need to be done. Those things

need to be done first and narrow this problem.

Because you could do a statistical sample, but in most cases what

you would find is that perhaps the documentation is not available

to make a conclusion one way or the other. So our judgment at this

point is that it wouldn’t be a prudent use of resources until we can

get some more fundamental improvements in place at the Department. But once that has occurred, through use of the proper statistical-sampling techniques, you should be able to do this.

Mr. TURNER. Thank you.

Mr. HORN. Ms. Jacobson, you had to really work on that audit.

Do you want to say some things in response to Mr. Turner’s questions?

Ms. JACOBSON. Well, I would just add to Gene’s comments that

we did do some testing of those MOCAS disbursements out of Columbus this year; and one of the things that our preliminary findings show is that about half of the total dollars in transactions are

adjustments. Some of those go back for 24 years adjusting the accounts to reflect what happened when that disbursement went out

the door. So it’s a very messy system in process right now. And it’s

going to take a lot of effort to clean up.

Mr. HORN. That was Mr. McNamara’s beat, 1965.

Mr. MANCUSO. Mr. Chairman, if I might, I would add that from

the Inspector General’s perspective, there have been any number

of occasions over the last several years where the Department has

recognized that a particular contractor or an individual may have

received what appeared to be duplicate payments or excessive payments and for whatever reason has not acknowledged that and in

some cases denies it when confronted.

Just as a matter of course, the Department relates that information to the Inspector General’s office, and we pursue those matters

as potentially being fraud against the Department. Although in

numbers, these are very few compared to the overall numbers of

instances of overpayment, we have found on occasion that people

have deliberately double-billed the Department because they suspect there may have been a weakness in the accounting system.

Or in other cases, unfortunately, there have been times when

people internal to the Department have generated payments

through the payment offices in a roundabout way, moneys that

would come back to themselves or associates, again taking advantage of the poor controls in the systems that we currently have.

So there has been a somewhat good relationship with the Department and the IG’s office in trying to ferret out these anomalies

where it is just not a simple mistake in overpayment or a mistaken

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act by a contractor in accepting an overpayment. But overall, those

have been relatively few.

Mr. HORN. In our first hearing on this, the figure was, and we

sort of looked at it with certain bemusement, the same outrage, in

a sense, that Mr. Turner has and, that is, what has the Pentagon

done with $25 billion that we can’t find? We asked Mr. Hamre at

that time, the Assistant Secretary. I think it was your job, and

yours has a new nice title to it, Under Secretary. We did another hearing, and we were told it is down from $25

billion that we can’t find to $10 billion that we can’t find. I think

that figure was used today in the testimony. Is it basically just a

problem of acquisition, contracts, and inventory that we can’t seem

to match up somewhere? Again, a lot of it was the Columbus, OH,

processing center.

We even heard there were such things as general schedule 1 still

around. I thought they went with the first world war because I actually knew a GS–1, an administrative Assistant Secretary who

worked his way up the whole hierarchy when it was GS–1 to GS– 18. Have they cleaned up that situation?

Mr. LYNN. Maybe I can help with you that one. The $25 billion and the $10 billion numbers that you were referring to is actually

not money that we can’t find. We can find the money. The issue

there is the paperwork. What you are looking at—those are what

is called the problem disbursements. The problem there is that the

paperwork is not all complete. There is some missing element.

There are a variety of explanations for it. It can be a transposed

set of numbers; it can be not being able to find the right obligation;

it can be not being able to find the right contract. There is a whole

series. Those take a long time and too long, as Mr. Dodaro indicated, to research and find. The vast majority, as Mr. Mancuso indicated, involved just lost paperwork and ultimately it is found.

But the money is not lost. It is a problem in the paperwork. The numbers that you cited going from $25 billion to $10 billion

indicate the improvement in the systems that we have put into

place. The systems are about two-thirds there. As we replace other

systems, the MOCA system in Columbus that Ms. Jacobson was referring to is on the list to be replaced over the next year or year

and a half. That will substantially help that area.

The prevalidation efforts that we are putting into place at this

point will substantially help that. We are trying to drive this down,

but it’s a very large operation. I don’t want to leave you with the

misimpression that the money is lost or cannot be found. This is

an issue of making sure that the paperwork is all up to date and

matched.

Mr. HORN. Are you saying, Mr. Lynn, that the money has found

the Defense Department, but the Defense Department hasn’t found

the money? Where is it in the pipeline?

Mr. DODARO. I am saying, for example, that——

Mr. HORN. Let’s move that team that has got the retirement

problem fixed up and move them over to the Columbus processing

center if they are still screwed up.

Mr. DODARO. One of the ways that we have gotten the $25 billion that we inherited down to $10 billion is we have had tiger teams

where we put the best people on it and drive these things down.

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You are talking about going through warehouse after warehouse of

information to try to find that right piece of paper that matches

with the payment. It takes time. We are working our way through

it.

Ultimately what you want to do, as I think that Mr. Dodaro and

Mr. Mancuso indicated, is you want to have an electronic system

so that you don’t have to do that paperwork research, that the system itself is seamless, and that those matches are made electronically. We are working that. At the same time we are trying to work

that backlog of unmatched disbursements down.

Mr. HORN. Any other comments? Mr. Lieberman has a comment.

Mr. LIEBERMAN. If I might, Mr. Chairman, make a couple of

quick comments. We analyzed the problem disbursement situation

in a report that we just issued on April 16, which the committee

now has. I think there are a few basic points to make when we talk

about contract payments.

First of all, Mr. Turner alluded to the way DOD contracts are

structured in the first place. It is true that we have bewilderingly

complex contracting which is something that the acquisition reform

effort is trying to do something about. Second, we have to keep in

mind that we are talking about tens of millions of transactions annually. It’s imperative that we fix the process on the front end so

that these payments are made right, rather than trying to audit fidelity back into the system afterwards, because there are just too

many of them being made.

It’s equally imperative that these disbursements be made by

automated systems, because DOD just can’t do tens of millions of

transactions manually and have any hope at all of complying with

the Prompt Payment Act. Therefore, we are back to systems as

being the root cause. We have lousy systems. New ones are in the

works and will be in place by, say, 2002. That’s the long-term solution.

In the meantime, the Congress has legislated an extra step in

the process which we call ‘‘prevalidation.’’ Disbursements over $1

million are not supposed to be made unless the disbursement people know that they have a valid obligation already on the books to

match against that disbursement. That’s supposed to be an extra

control.

The Department is trying to drive the prevalidation threshold

down from the $1 million figure required by Congress all the way

to a de minimus level of, say, $2,500, which would cover many

more payments. But that’s been terribly difficult because this is a

manual process. We have been unable to get below the $500,000

figure and stay there because payments slow down. Contractors

have a right to be paid if they provide services to the government.

If they are not paid, they scream to the Department and to the

Congress. This is a real dilemma over the next 3 years or so until

we have these better automated systems in place. So it’s a very

tough problem.

Last, it’s hard to judge whether DOD is making progress or not

with problem disbursements, because we don’t know what we don’t

know. The data that managers have in their systems is not particularly reliable to tell them what is going on and we have done limited auditing due to resource constraints.

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Mr. DODARO. The parallel issue that needs attention at the same

time that the Department is automating systems is to really fix

some of the weaknesses in computer controls. The Department’s

computer systems are like a lot of Federal agency computer systems. I am talking now about unclassified systems which would include some of these payments systems as well as some logistics information. They have serious computer security problems that

make them vulnerable, both to outside hackers getting into the system and as well as people within the Department or its contractors

who have too much access.

Mr. Mancuso mentioned the number of reports that they have

issued in that regard with recommendations. We have, at GAO

made recommendations, and the Department is trying to put into

place a comprehensive computer security program. But if that problem is not handled now with the existing systems, as the Department becomes more automated, that problem will become more

acute and the Department will become more vulnerable.

So both things have to go in tandem: process reforms, upgrading

the systems, and having the proper computer security controls in

place to make sure that the systems are not exploited.

Mr. HORN. Anybody else want to comment on Mr. Turner’s question? OK. Vice Chairwoman Biggert, 10 minutes questioning.

Mrs. BIGGERT. Thank you, Mr. Chairman. I think that the GAO

reported that in the Department of Defense lessons learned and

studies from operation Desert Storm, that better asset information

could have saved over $2 billion and that the weaknesses in management control assets have been longstanding.

Mr. Lynn, will the Department experience any cost deficiencies

in the current conflict in Kosovo as a result of the changes from

the lessons learned in Desert Storm?

Mr. LYNN. I wouldn’t be able to quantify that. We have improved

our systems since Desert Storm. We have better total asset visibility. So what that will mean is the units in the field are better

able to know when their munitions and other spare parts stocks

are on the way so they won’t double and triple order them. I think

that was the problem referred to.

We think we have reduced that problem, which would imply

some savings, but I wouldn’t even try to quantify it. We have not

licked that problem, though. In particular, we need better inventory systems in the logistics area, and we need a better connection

between the inventory systems and the financial accounting systems. That interface right now is not adequate, and that’s one of

the reasons that we are not able to get a clean opinion. That’s one

of the four or five major deficiencies that we are focussing on with

GAO, the IG, and OMB to try and better improve our performance

there.

Mrs. BIGGERT. I think one of the problems that we are facing

with a vote coming up is the fact that we don’t have really the inventories and what is really the supplies and inventories that we

need right now, over and above the bullet for bullet in Kosovo. So

if you say that you don’t know or have control over those assets,

then it makes our job much more difficult.

Mr. LYNN. I’m not saying that we don’t know and don’t have control over the assets. We do have control over the assets. The issue

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with regard to the vote that you are talking about, I think, is somewhat different. The kinds of things where we are proposing to replace right now are major end items like cruise missiles, JDAM

bombs, Tomahawk cruise missiles, Navy cruise missiles. All of

those, we have very exact controls. We know where all of them are.

We know how many we need. We know how many we have expended.

The issue surrounding them has to do with where we are in production. For example, the JDAM is only in its second year of production. It is becoming the munition of choice because it’s performed so well. But you obviously do not have very many if you are

only in the second year of production. The proposal that is going

to be before you this week would be to accelerate that production,

to actually double that production because of the performance.

The cruise missiles are still a different story. The air-launched

cruise missiles are actually older cruise missiles. They were nuclear. They were built during the Reagan administration. The line

was shut down then. As the nuclear forces have been coming down,

we have been converting those nuclear cruise missiles to conventional purposes. There is only so many that we can do that with.

The long-term solution, which is not that long term, production

starts next year on a new standoff attack weapon called the

JASSM. The air-launched cruise missile is just an interim weapon.

Similarly with the Tomahawk, the Navy-launched cruise missile.

The issue there is we are going into a production of a new system

in 2003. The question is how many of the older systems that are

not quite as good or quite a bit more expensive, how many of those

do you want to keep as a bridge to the new system that starts production in 2003? The proposal that you have before you would increase that number because of the expenditures in Kosovo and

Kosovo as well as Desert Fox.

Because we have shot those numbers at a higher rate than we

anticipated, we now see a need to supplement the numbers we

have between 2000 and 2003. In no case, though, here do you have

an inventory problem with any of those systems.

Mrs. BIGGERT. Mr. Dodaro, could you comment on that? Do you

think that there has been any significant change since Desert

Storm?

Mr. DODARO. I would only say that I agree with Mr. Lynn’s comment, that they haven’t got the problem licked yet with the systems, and they will need to continue to work on that to get the integration between the accounting system and the logistic systems.

Mrs. BIGGERT. OK. Mr. Mancuso, in your statement, you point

out that you believe that focusing primarily on the financial statement audit opinions may not be the best approach for the Department. We keep hearing about the clean audit, the clean audit.

Could you expand on that a little bit?

Mr. MANCUSO. Yes. I think it’s clear that despite our efforts and

despite our work with the Department, at least many of us believe

that the statement, for instance, for this year, which was a disclaimer, will probably be repeated next year, certainly on the consolidated statements and almost certainly on many of the other

supporting statements.

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We feel it necessary to keep working with the Department and

with GAO and OMB on ensuring that the feeder systems get addressed, that the underlying systems receive the resources that

they need to ensure continued progress so that eventually we can

reach clean statements.

Even within our own organization, however, I would say that

there is some debate as to how much of our resources need to be

continued toward just achieving clean statements. By that I mean

that, for instance, in the DOD IG’s office, we spend about 200 audit

work years solely on CFO work. That consists of close to half of our

audit resources.

At the same time, for instance, we have no resources at all looking on the finance side of DFAS, where we know there are problems. Yet we continue to spend our 200 audit work years. To be

fair, there is a very strong argument that could be made to say

that we will never achieve clean statements if we let up the pressure, if we tried—for instance, an elementary suggestion would be,

well, why can’t we just look at them every other year if we already

know what we are going to find next year? An argument could be

made that that would lessen the pressure on certain leadership in

the Department to achieve clean statements and to achieve the

work that needs to be done on the underlying feeder systems.

So in sum, again, I guess our perspective would be that we see

a greater good coming from resources being applied toward correcting the underlying problems and not in solely aiming toward

clean financial statements which may, in themselves, disguise

problems that still exist in the feeder systems.

Mrs. BIGGERT. Thank you.

Mr. DODARO. If I could add a couple of perspectives to that, the

underlying law, the Government Management Reform Act, really

requires annual audits to be done, financial statements to be prepared and audits to be done across the 24 departments and agencies of the Federal Government as well as the consolidated financial statements of the U.S. Government, which means that for the

first time the Federal Government is now living by the rules that

it sets through the SEC for publicly traded corporations. They have

annual audits so the stockholders have good information.

Every State and local government in this country that receives

over $100,000 in Federal assistance has to have an annual financial audit. But the executive branch of our National Government

has not had that requirement in place until recently. We have seen

other departments and agencies across the Federal Government

begin to get their fiscal house in order only through this annual

public scorecard.

We now have about half of the departments and agencies that

get unqualified or clean opinions. It takes a number of years, but

the annual requirement is paramount in our opinion, and also the

measurement of progress should not be the overall opinion, but it

should be how many deficiencies are identified in that opinion and

are the departments making progress in reducing the number and

severity of the audit deficiencies. As Mr. Lynn indicated, we are

working on a plan with the Department that will be a better measuring stick of the Department’s short-term progress.

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Mr. LYNN. If I might add, I agree entirely with Mr. Mancuso. The

audit opinion in and of itself is of limited value to the Department.

We don’t determine expansion as a commercial operation would be

on a—we don’t need a profit and loss statement for stockholders.

The value for us is the state of our underlying finance and accounting systems and public confidence in our financial stewardship.

Those are the purposes for which we would seek a clean audit opinion, which are considerably more narrow than a commercial operation.

Mr. Mancuso, I think, is exactly right. The goal needs to be to

improve our underlying systems. If we are to get a clean opinion

that doesn’t improve our underlying financial systems, that is— that’s meaningless. What we need to do is improve our overall effort in this regard, and the clean opinion should be a measure of

our progress in that. That’s its major value.

Mr. DODARO. I would agree with what Mr. Lynn is saying, but

I would say that if a department or any organization cannot get

their end-of-year financial data correct 6 months after the end of

the financial year, there is no hope to have underlying data correct

throughout the year. It’s a starting point. It’s not an end in and

of itself, but a starting point to get year-end data correct so that

at least you have annual trends that you can track over a period

of time. It is a modest beginning, but it’s a necessary one.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Mr. HORN. Thank you. Did you get enough people answering that

last question? It’s a very important question, so let me pursue it

a little bit. I will yield myself some time on this and then turn to

Mr. Turner. Are the logistic systems part of the problem, the inventory controls and the interface with the financial systems? It seems

to me that you have a product, you purchased it, it has a certain

value on it, it is located in a certain place. Tell me how that works,

Mr. Lynn, and how far along we are in getting those matchups?

Mr. LYNN. The logistics systems are indeed a problem, Mr.

Chairman. One of the problems was alluded to in your question.

You indicated they have a value. Actually, many of the logistics

systems were not designed to do financial accounting. They didn’t

include a value. They were just for accountability purposes to track

the equipment but not to track the value. In other cases, if they

track the value, they are interested in the replacement costs

whereas the auditors would be interested in the initial purchase

cost and then to depreciate that.

Oftentimes the logistic systems do not actually have the right information for us to be able to get a clean opinion. We are taking

steps and we are moving in the direction of putting—either replacing those systems or putting modules in those logistic systems that

provide that information. And we are taking steps. The first major

one was this financial management improvement plan to try to improve the interfaces between those systems and the finance and accounting systems.

Mr. HORN. Have you lined up different categories? And if so, give

me some examples. I would think you are talking about the replacement costs of cruise missiles. Pencils, who knows what you

are talking about on that one. Can you just show me a few different forms of logistic interface with financial management?

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Mr. LYNN. You are getting into more of a detailed area that I

think Mr. Toye would be better able to answer.

Mr. TOYE. Mr. Chairman, we have identified 83 critical feeder

systems. These are the systems that are most essential to provide

financial information to DOD to allow it to produce audited financial statements. We are focusing on each of those systems, identifying the information that we need from those systems, determining what the difference is between what is in there and what

the needs are, and we are modifying the systems to get the information that we need.

One of those areas, for example, would be property systems. Another area would be medical systems. There are, within each of

those categories, numerous systems that capture information. For

example, in the property area there are multiple systems that took

national defense weapons systems. There are systems that focus on

real property. There are other systems that focus on what we call

personal property which would include general equipment, vehicles,

ADP systems and software. The problem in each of those systems

is a little different. The overarching problem is the same, as indicated by Bill Lynn. Often those systems do not capture the value

information that we need to report in our financial reports.

Mr. HORN. For most Members of Congress who are not on the

Armed Services Committee or on the Defense Appropriations Subcommittee, it came as a tremendous surprise that we did not have

a very good inventory of cruise missiles. We heard of a few Tomahawks floating around and a few cruise missiles turning around. It

just seems to me that Congress would have been rather upset if

they had known what maybe the Armed Services Committee did

know but the rest of us didn’t know.

When that word spread around here a few weeks ago that we

were out of munitions, that came as a surprise to Members of Congress as a whole. Mr. Lynn.

Mr. LYNN. Let me be clear. We are not out of munitions, Mr.

Chairman. As I said, there are certain interim munitions in which

the stocks have been reduced. We have gotten proposals to restore

those stocks. There are other categories of munitions such as laserguided bombs which just came in at the very front end of Desert

Storm. A few were used then. We now have tens of thousands of

those.

It’s when you—as you shift from one munition to a more advanced munition, there is a tendency to focus on the stock of the

most advanced munition which will always be the smallest because

you just started production. The munition just behind it, we have

tens and tens of thousands. We are not running out of munitions,

Mr. Chairman.

Mr. HORN. Now you noted that you have got—was it the JASSM

missile?

Mr. DODARO. JASSM. It’s a joint-air-to-surface missile.

Mr. HORN. Because I thought of tea when you first said it, and

I also thought of a jazz man in New Orleans, and I wasn’t quite

sure what that was. Now we have gotten that straight for the reporter. Right now if somebody asked you what is your surplus in

the Pentagon budget, could you give them a number?

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Mr. LYNN. We don’t have a surplus in the Pentagon budget, Mr.

Chairman. We spend every dollar that you give us, and we try to

spend it responsibly.

Mr. HORN. How much money did you have at the end of fiscal

year 1998, that you could reprogram?

Mr. LYNN. I don’t have that number in my head. I could provide

it for the record.

Mr. HORN. Without objection, it will be provided for the record. Was it $20 billion? Was it $50 billion reprogrammable money?

Mr. LYNN. Oh, no. It would be nowhere near that. To give you

an order or magnitude, the omnibus reprogramming which is

where we pull together all of that kind of effort where we try and

take account of the things that have changed. Some things change

in which we either need more money and other things change that

we need less money. The omnibus reprogramming last year was about $1.5 billion, I

believe it was. It would be about a half of a percent of the Department’s overall budget was reprogramed. That’s both a positive and

a negative. In other words, in some cases, an acquisition program

may miss a test or something and, therefore, resources would not

be able to be spent on that program. In other cases, say in a depot,

we do more depot maintenance than we anticipated, so we would

shift resources from one area to another. But the magnitude would

be in that area.

Mr. HORN. So it would be $1 to $2 billion roughly.

Mr. LYNN. That is the normal reprogramming that the Department proposes over the course of the year. Congress actually limits

our transfer authority. The limit in the transfer authority this year

is $1.6 billion. Last year, I think it was a little bit over $2 billion.

Mr. HORN. I forgot to look at the language, but I looked at it

years ago. Generally, you get the sign off of the Chair and the

ranking member of your Appropriations and Authorizations Committee. Is that how that currently works?

Mr. LYNN. That’s correct, Mr. Chairman. All four of the oversight

committees need to approve a reprogramming and they need to approve both the source, that is where the money is coming from, and

where the money is going to.

Mr. HORN. Now, we have had Clinger-Cohen in law for about 2

years, right? I don’t know the exact date.

Mr. LYNN. I think he has been Secretary for 2 years, so a little

bit longer than that.

Mr. DODARO. It has been 3 years.

Mr. HORN. What have we learned from the use of Clinger-Cohen

in terms of liberalization of acquisition, and has that been reflected

in your financial systems, and what has been the difference between what you did and had prior to Clinger-Cohen that you have

now?

We are going to hold a hearing on seeing what agencies are taking advantage of this legislation and liberalized purchasing, and I

am just curious about any feelings in the financial management

community in relation to that acquisition law.

Mr. LYNN. I’m not sure where you are going with that, Mr.

Chairman.

Mr. HORN. I’m going for an answer, hopefully.

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Mr. LYNN. I guess I don’t have enough of a question.

Mr. HORN. Let’s try it out on GAO and the Inspector General.

Have you done anything to see how that is being administered?

Mr. DODARO. From our standpoint, we have been focussing more

on the aspects of the law to reform the information technology infrastructure, putting CIOs in place with the requisite authority,

using disciplined investment processes, and good cost-benefit analysis. There were, as you point out, some provisions to allow for piloting in the information technology arena some advanced acquisition reforms. To my knowledge, there has not been very many pilots exercised. I would have to go back and check on that.

Mr. HORN. It’s been in effect 3 years. Is there any plan by the

General Accounting Office to take a look at it and see how it is

being administered?

Mr. DODARO. Yes, there is, because it is up for reauthorization

in 2001. We are targeting for that, and we plan to move more

resouces into that as soon as we emerge from this Y2K computer

challenge.

Mr. HORN. So that would be early in 2000 you would start?

Mr. DODARO. Start taking an indepth look at all aspects of the

legislation.

Mr. HORN. How about the Inspector General’s office? Any

thoughts, since that is a major purchaser for the Federal Government?

Mr. LIEBERMAN. Mr. Chairman, first of all, we are largely in the

same boat the GAO is, that is, we are so involved in the Y2K conversion that we have had to defer a lot of potentially very important audits of DOD’s investment processes for information technology and also of our security systems.

There are many different systems involved in the financial management area. There are roughly 200 systems that are directly pertinent to preparing financial statements alone. Many of those are

development efforts and others are modification efforts.

I would say that the application of the principles of the ClingerCohen Act has been very uneven. We could probably find examples

on either end of the spectrum. Some programs would be considered

models in terms of good application of principles like modular development, good oversight, good involvement by the Chief Information Officer, et cetera. And on the other hand, I’m sure that we

could find lots of examples where the feedback is not so positive.

We need to do a lot more auditing across the spectrum of IT investments in Defense, which spends $15 billion a year buying and

modifying systems. As Mr. Mancuso’s testimony indicated, for just

this population of 200 financial management related systems, we

don’t really have the kind of management control and oversight of

the whole process that Clinger-Cohen envisions. So there is considerable extra work to do.

Mr. HORN. One of the concerns that Members of Congress will

have in various committees in both bodies will be the degree to

which Clinger-Cohen has reflected some of the purchases at least

in small business or in minority businesses, because as some of you

will remember, we had quite a battle on the floor in getting that

legislation through two chambers. It’s just one of the things that

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we will be asking about, and we might as well build it into the

study.

Ten minutes to my colleague, Mr. Turner of Texas, the ranking

member.

Mr. TURNER. I want to talk a little bit with you about the problem of overspending and budget authority. It’s mentioned on page

18 of the GAO testimony today. Just for clarification on my part,

we were talking a minute ago about reprogramming and this $1.6

billion in transfer authority. Are we talking about the same thing?

In other words, the Department has the authority to transfer this

year $1.6 billion, but is that what we are talking about that is approved, or is that a separate matter?

Mr. DODARO. It’s a separate matter.

Mr. TURNER. Explain that to me so that I will have an understanding. It might help me with the next series of questions.

Mr. LYNN. The reprogramming involves resources that were

originally appropriated by Congress for one purpose. That purpose

can no longer be accomplished so the Department returns to Congress through its four oversight committees and proposes a different purpose for that funding. That’s the process that I was discussing with Chairman Horn. The limit on that transfer authority,

which is the reprogramming, is this year $1.6 billion which is

somewhat less than it was the prior year. But it’s generally in that $2 billion neighborhood.

Mr. TURNER. Those are separate things. You can transfer $1.6

billion within your budget?

Mr. LYNN. That’s right.

Mr. TURNER. That’s not subject to any congressional approval?

Mr. LYNN. It is subject to approval by the four oversight committees, the House and Senate Armed Services Committee and the Defense subcommittees of the two Appropriations committees.

Mr. TURNER. So the reprogramming that you do has to fit within

the $1.6 billion?

Mr. LYNN. That’s correct.

Mr. TURNER. Returning then to the portion on page 18 of the

GAO testimony—and I suppose I could direct this to Mr. Mancuso

or Mr. Lieberman. I assume that I found the right audit report

here, the one that refers to the oversight of the Air Force. Is it in

this report that the GAO is referring to the $1.1 billion that were

obligations incurred in excess of available budget resources as of

September 30, 1998?

Mr. LIEBERMAN. We have issed two reports on the Air Force financial statements, one on the general funds and one in the working capital funds. They are both equally thick so I’m not sure which

one you have in hand.

Mr. TURNER. Irrespective of whether I have been looking at the

right one or not, let’s just look at the GAO testimony. It makes

mention of the fact that the Air Force audit agency reported that

the Air Force’s depot maintenance activity, which is a component

of one of the Department’s working capital funds, may have in- curred obligations of $1.1 billion in excess of available budgetary

resources as of September 30, 1998.

I guess what I would like for you to do for me is explain—it says

may have occurred, as if maybe it occurred and maybe it didn’t—

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but that would be an awful lot of excess obligations that were incurred there by the Air Force if they had no budgetary resources

to fulfill those obligations. If that’s the problem, would that be the

kind of thing that the Air Force and the DOD should have come

forward with and asked for a transfer or a reprogramming to remedy that problem?

Mr. LIEBERMAN. In a case of this type, whenever you have an apparent overobligation, or overdisbursement for that matter, whether it is a small amount or gigantic one like this, there probably will

have to be an Antideficiency Act violation investigation, because it

is a criminal offense to overspend.

This is a very structured process. The word ‘‘may’’ is used in

there on purpose because the auditors can’t normally determine definitively that there has been an overobligation or overdisbursement. We are dealing with records that are flawed. It may well be

that after the records are straightened out there is not overspending, but this has to be investigated and it will be investigated. The

Department of the Air Force will have the responsibility to conduct

an Antideficiency Act violation investigation. If a violation is determined to have occurred, the details have to be reported by the Secretary of Defense to the President and the Congress.

Mr. TURNER. If that had been discovered earlier, then it could

have been remedied by a request for reprogramming?

Mr. LIEBERMAN. Yes. They will have to find a way to cover the

deficiency either through a supplemental appropriation or using

current year budget authority. But for an amount that size, certainly they would break a reprogramming threshold and have to

come back for congressional approval.

Mr. TURNER. Give me a little bit of a description so that I can understand. What are we talking about that this $1.1 billion may

have been spent for? These are Air Force depot maintenance activities. I am a little bit at a loss as to how we could spend $1 billion

more than we have budget authority to do so without anybody noticing it or coming forward or requesting reprogramming or something. It is a lot of money, even though it does say may have.

Somebody must think they are on to something here.

Ms. JACOBSON. Mr. Turner, perhaps since I put it in the testimony I can explain what the background of this particular transaction is. The Air Force does not have a budgetary system comparable to some of the other services—this depot maintenance facility does not have a budgetary system comparable to some of the

other systems in DOD. What they were doing was using an estimate of what their—the budget authority and maintenance account

really stems from how much they believe they are going to get in

orders and from the service itself.

So the service orders goods and services from the depot to provide depot maintenance, and then the depot uses the money as

their budget authority to pay for their people and their inventories

to do the actual activity that they are there to perform. These are

supposed to be working capital—they are working capital funds.

They are supposed to be run like business operations.

Basically, they are supposed to be on a break-even basis. Money

comes from the services to pay for the activity as if it were a business activity. They can spend as much as they are going to get

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from the services. And in this case, what they were doing is estimating what they thought at the beginning of the year they were

going to get from the service, from the Air Force, and using that

as their budget authority; and, in fact, they did not get that much

activity in that depot. So they ended up obligating more than they

actually got in orders and activity from the Air Force.

Mr. TURNER. So this problem occurred at one particular depot location?

Ms. JACOBSON. I believe there were a couple of incidences in Air

Force, but I would have to go back and check the Air Force report.

Mr. HORN. Would the gentleman yield for 10 seconds. I’m curious, was this at McClellan Air Force Base?

Ms. JACOBSON. I don’t know specifically.

Mr. HORN. How many people were involved? I hear you saying

something back there but I can’t quite——

Mr. WARREN. There are five Air Force maintenance depots in the

working capital funds, so it could have been an accumulation

among those five. Two are in the process of closure——

Mr. HORN. Just let the reporter know name and title and so

forth.

Mr. WARREN. Dave Warren, Director of Defense Management

issues for GAO.

Mr. HORN. I was just curious because those were authorized, or

rather recommended by the Hoover Commission. This would be a

way that government could do business. And presumably what you

took out, as you say, Ms. Jacobson, you get other services or your

own service to pay for whatever those maintenance and repairs are.

Mr. Turner certainly raised a very pertinent question as to overoptimistic budgeting.

Ms. JACOBSON. In terms of reprogramming, generally, again,

these organizations are supposed to recover their cost through their

rates. So we would have expected that they would have to raise

rates either now or in the future to recover any overexpenditure.

Mr. HORN. It isn’t limited to the Air Force in terms of uses. It

is other services that can use it. Right?

Ms. JACOBSON. That’s correct.

Mr. HORN. Go ahead.

Mr. TURNER. Give me a feel for—we are talking about $1.1 billion in excess obligations. What is the total picture in terms of the

total expenses related to depot? We are talking about $1.1 billion

out of $5 billion or how big of a problem are we looking at here?

Ms. JACOBSON. My associate behind me is saying that it’s about

$5 billion for the depots, for the Air Force depot.

Mr. TURNER. Do we attribute this kind of problem to just total

incompetence on somebody’s part? It seems like a serious breakdown to say that $1 billion out of a roughly $5 billion operation

was overobligated. That’s a little bit of a shocking number.

I ask the size of it because we have been cautioned here a

minute ago not to be too struck by these billion dollar figures because it may be one half of 1 percent of something. Obviously that

one wasn’t. It seems to me a very serious problem. I see my time

has expired, Mr. Chairman, and I will defer back.

Mr. HORN. If you would like to finish up——

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Mr. DODARO. If I might, Mr. Chairman, to just add just one

broad point to this whole discussion is that prior to fiscal year

1998, the agencies prepared budgetary statements on how well

they complied with fund control procedures and provided that information to the Treasury Department and OMB. That information

was not audited.

Beginning with fiscal year 1998, the statement of budgetary resources, how much budget authority agencies were given and how

much had been obligated and how much remains unobligated, prior

year balances, carry overs, et cetera, is now subject to these annual

audit requirements to ensure that there is budgetary integrity in

the system; and, indeed, that agencies are complying with the limits established by the Congress.

So we are hopeful, and that’s one of the reasons why annual requirements are important, that this new requirement in place now

will lead to more attention being given to these matters during the

year by agencies to make sure that their fund control procedures

that are in place are operating effectively and do provide them the

internal control necessary to make sure that they either did not

overobligate, or have obligations that could be deobligated and used

for other purposes.

That’s when some of these investigations take place and people

go back and scrub these accounts. They find that they have obligations on the books here that they didn’t use, so they deobligate that

money to cover these overobligations and that is why there is

‘‘may’’ in many of these cases until those thorough investigations

are done. That tells us from an audit standpoint that there needs

to be more rigor in making sure that the fund control processes operate as intended.

Mr. TOYE. Mr. Turner, if I may, all violations have a negative

number, but not necessarily all negative numbers are a violation

or are the result of a violation. Let me give you some examples.

Recently in the Navy, preliminary indications were that potentially a number of Navy accounts, over 20, about 29, may have incurred a violation. DOD investigates, as the IG indicated, all of

those negative numbers. In those instances in which we have completed those investigations—I should say the Navy has completed

the investigations—on over 20 of those 29 accounts, none of those

were a violation.

Regarding the incidence of the Air Force negative numbers, DOD

will also take a look at that. However, the fact that it is a negative

number does not by itself mean that it is a violation. That’s why

the auditors tend to use the words ‘‘may have been’’ because it may

be, as indicated, an accounting error.

It may be other valid reasons that something different than a

violation or an overobligation, even though that’s what it appears

to be at first. We do followup on all of these negative numbers and

we do investigate them and we do find that a number of them are

simply not overobligations, but we cannot—and we do not—ignore

them when the negative numbers appear.

Mr. HORN. One last question and then it’s Mrs. Biggert’s turn.

I just want to get the record clear.

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When you find this series of negatives for one reason or another,

can you balance those off with other funds in the DOD and the various services where you would pick up a surplus to balance them?

Mr. TOYE. If we have a violation, then the Department needs to

correct that violation. They need to fund it. It depends upon the

level at which the violation occurs. For example, if it’s below the

appropriation level, if it’s at a particular command—let’s pick on

the Army since we haven’t talked about them yet—if it’s at an

Army Command but at the Army appropriation level, and there is

sufficient funds to fund that negative number, we can do it within

the appropriation. If it’s at the appropriation level, then we would

have to come back to the Congress. But we always report it.

Mr. HORN. Ten minutes to the gentlewoman from Illinois, Vice

Chairman Biggert.

Mrs. BIGGERT. Thank you, Mr. Chairman. I just have one question and that is to start with Mr. Dodaro. You mentioned that the

Department has underestimated the future cost of environmental

cleanup in the disposal of weapons systems, and then for

unexploded ordnance—I guess that’s how you pronounce it—from

the training ranges. How poorly has this been done? And I guess

my question is, how does that fit into the whole scheme of the financial management?

Mr. DODARO. Basically, those figures that the Department has,

it’s not how poorly the case is. They just have not made estimates

for those major classes of weapons systems disposals. We have been

undertaking discussions with them. This is in the category of accounting standards that have been adopted but need to be implemented by the Department.

Those amounts are material essentially to the consolidated financial statements of the U.S. Government along with the environmental disposal liabilities estimated by the Department of Energy

for cleanup and nuclear weapons complex. That was the one area,

looking across the government on the consolidated financial statements, that we knew was understated.

In many other areas, we didn’t know if the right number was

there. It couldn’t be substantiated with this area, because those estimates are not yet being made, that we reached that conclusion

that we did. So the Department is in the process now of adopting

that standard and then methodologies need to be developed to have

a sound basis for making those estimates.

We have provided the Department with some information based

on our research of how that could be done as a starting point, a

foundation, but they need to implement it.

Mrs. BIGGERT. Mr. Secretary.

Mr. LYNN. Mrs. Biggert, we are doing exactly what Mr. Dodaro

said. This goes back, I think, to my comments of my original testimony where I said we are making the shift from a system where

we were essentially a budgetary-based system to now we are doing

an accrual-based system.

Under a budgetary-based system, your environmental liabilities

wouldn’t be on the books until you budgeted for them. On the accrual-based system that we are moving to, you would anticipate

those liabilities and include them on the financial statement. That

is exactly the shift that we are making now.

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Mr. Dodaro is exactly right. We are in a discussion over what

standards ought to be applied with the FASAB and the other participants in that, and then we are looking at methodologies to try

and come up with an acceptable means of estimating those liabilities. I think that we are actually making some progress in that

area.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Mr. HORN. We thank you. Let me just ask a few general questions here and let everybody get into it. I have a lot of confidence

in Secretary Cohen and Deputy Secretary Hamre.

Mr. Lynn, you are the Under Secretary. What is it that you need

to solve those problems, and are you getting the support from the

Secretary and the Deputy Secretary? Could you outline for us the

strategy of how the next time we meet we will have a lot of these

things cleaned up; and, if we are going to have that situation, what

are you going to have to ask for?

Mr. LYNN. Mr. Chairman, I think that we have asked for it. It

starts at the top, as you said. We have the support of Mr. Cohen,

who came to the Department with some experience in this area.

You referenced the act. He sponsored the Clinger-Cohen Act and

his participation in your corresponding body in the Senate in which

he was a Member. Deputy Secretary Hamre, having had this job,

fully understands the problems and is committed to the solutions.

What specifically are we doing? That I tried to indicate in my

opening testimony. The biggest thing we need to do—and it was a

point Mr. Mancuso stressed—is we need to improve the systems.

We have a plan in place that is going to update all of the financial

accounting systems and neck them down to 32. That should be

complete by 2002. We are two-thirds done; we are on track to complete the rest. That will put us in a very good position with regard

to the 20 percent of the data that is on the financial statement that

comes from those systems directly. The other 80 percent that we

have taken the next step just this past fall, which is to do a financial management improvement plan.

The major comment that we got from the auditors is we need to

take further steps on the feeder systems. They are absolutely right.

That is, indeed, the next step. That is where we are going. I have

been holding meetings on a monthly basis with all of the departments which are the action agents in this regard. We have tapped,

in general, the financial manager of each department to try and

put in place a system of upgrades to the feeder systems, the logistics, the acquisition, the personnel, the medical systems, all of the

various systems that feed data into the finance and accounting. We

are taking those steps as we speak.

As I said, it involves quite a major effort involving all components in the Department. Finally, we have been meeting not quite

on a monthly basis, but with the audit agencies as well as OMB

to develop these interim strategies that I mentioned earlier.

I think the most helpful step and really the corner stone of that

effort was the auditors identifying what they the called ‘‘show stoppers.’’ What are the five or six items that are really causing us—

what are the five or six deficiencies in the financial statement that

we really need to address, valuation of real and personal property,

the connection of the inventory systems and so on.

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Mrs. Biggert just left, but the liabilities issue that she mentioned. We are attacking each one of those. We are trying to develop a strategy that will get us better data in advance of the final

effort which is the improvements in the systems.

Mr. HORN. Does the General Accounting Office have anything to

add to that outline of a strategy to solve some of these problems?

Mr. DODARO. As I indicated in my statement, both oral and written, I’m very encouraged. The Secretary had put out a memorandum, which is the first time that there is a written document

urging that this be given priority across the Department.

And everything that Mr. Lynn outlined is correct. We are engaging in short-term activities. The big question mark in my mind is

that financial management reform is a Department-wide issue. And

Mr. Lynn is a very important player there, but he needs the cooperation of both the military and the civilian leadership across the

Department.

I was also encouraged that the Secretary adopted the financial

management reform under the defense reform initiative which

means that the senior management of the agency will follow it and

track it and develop it. That to me will be the telling of the tale

as to whether or not the reforms are adequately implemented a

year from now; as to whether the financial management reform is

as vigorously pursued as the year 2000 computing challenge problem; and whether the very top people across the Department are

helping Mr. Lynn and his colleagues achieve change.

That, only time will tell. But unless that happens, a lot of these

plans will not bring about the real improvements that are needed.

But the foundation is being laid. This is a question of followthrough and execution on the plans. And Defense, like a lot of

agencies, have had many good plans that just stay on the shelf and

never get implemented. This is a case where we are watching that

very closely, and that will be the pivotal element in this whole exercise.

Mr. HORN. Mr. Mancuso, how does the Inspector General feel? Is

that strategy outlined by Mr. Lynn acceptable to the Inspector

General’s office?

Mr. MANCUSO. Yes, it is. And I would add that the Secretary, the

Deputy Secretary, and Mr. Lynn have been supportive of our efforts. In the past few years—and I know your committee has heard

this story—our budget had been planned to decrease at a dramatic

rate. We were up around 1,650 people in 1994; we’re at about 1,250

people now, and we were scheduled to decrease another 200 people

in the next 2 years.

The Department sat down in good faith and discussed this matter with us. We presented our concerns as to why we felt that we

could not do our statutory job and the job that the Department deserves and needs in handling such things as high risk areas, et

cetera, without some relief.

The Deputy Secretary and the Comptroller negotiated that relief

with us. We’re now on an even path to maintain approximately our

current level of resources, and we believe we will be able to cover

the things that absolutely need to be covered. We also have ongoing

negotiations with the Comptroller involving the number of entities

for which annual statements will be required.

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And we feel that with some possible relief in that area, we may

be able to shift some resources toward, again, more concentration

on the underlying problems. We also have, I think, a healthy relationship with the Department in that we’ve been asked to participate in well over 100 process-action teams and improvement task

forces in the Department.

So the IG has become an active player in identifying some of the

problems and seeking solutions at an early stage. And as Mr.

Dodaro said, we view as very positive the fact that the Department

is willing to consider using the Y2K methodology in addressing

some of the more serious financial management challenges that we

have.

So in sum, I would say that we are quite pleased and we believe

that we have general agreement with the Department as far as

how efforts need to be focused in addressing such important challenges as financial management.

Mr. HORN. We could stop here, but I just want to get them on

the record. Computer system security, the General Accounting Office, and the Inspector General have reported on the vulnerabilities

that exist in the Department of Defense’s computer systems. The

Inspector General, in its written testimony, stated that the defense

financial systems that processed nearly $300 billion in disbursements annually are clearly at risk.

Could you expand on that area. How much of a problem is this?

Usually, we’ve read headlines somewhere during the year that

some 18-year-old has cracked into a defense system. I mean, can

we protect most of those or where are we on that?

Mr. MANCUSO. Again, what I would say is that, as you are well

aware, 18-year-olds may attack any system. We had a case just recently where there was an attack on a DOD system and the same

individual had actually had a hacker attack on a nuclear facility

in India, so that there’s certainly no sacred systems out there.

The Department of Defense presents a very dramatic challenge

for a lot of hackers. Our financial systems are of great concern, and

the Department is rightfully not placing emphasis solely on security issues. They’re looking at whether we are protecting our resources.

The way to do that is through a strong infrastructure protection

program; and we’re working on that. We’re reasonably satisfied—

in fact we are satisfied with the efforts of the Defense Information

Systems Agency in that regard. We have individuals, trained individuals, that we have placed in DISA to help us develop the mechanisms to identify problems and to react to them. So on that one,

yes, we are satisfied with what the Department is doing. We’re reasonably assured that the right level of effort and concern is being

placed there.

And we’re hopefully optimistic, I guess, that the controls that are

in place or are being put in place right now will succeed.

Mr. HORN. Any comment from the General Accounting Office?

Mr. DODARO. From our aspect, as you know, we’ve identified

computer security across the Federal Government as a high-risk

area. Along with Y2K, back in early 1997. Those were the first two

areas we’ve ever identified governmentwide on our high risk program. The risks are increasing as we become a more interconnected

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world, if you will, the increased use of the Internet. The Internet,

as many people have said, it’s not ready for prime time from a security standpoint.

But to give you some indication, in 1995, we issued a report

where the Defense Department estimated that there were approximately 250,000 hacker attacks on the Department during that particular year and it estimated about 60 percent or so have been successful. This is a growing problem.

I agree with Mr. Mancuso that the Department has given this

elevated attention over the past few years, thanks to Deputy Secretary Hamre. I also know Mr. Lynn has been involved, as well the

Defense Information Agency. They do have an information assurance plan in place. It’s being staffed now. But, again, it’s not yet

implemented; and it needs to be implemented.

And this is another example of a Department-wide problem that

needs department-wide attention and execution. And we’re going to

continue to followup and evaluate those computer controls as part

of the annual audit. But the Department of Defense, like some

other Department’s are really an attractive target for people; and

there’s growing capacity of people developing information warfare

capabilities. And this is a very serious issue.

I was pleased to see after we designated this a high-risk area the

President came out with a decision directive, Presidential Decision

Directive 63, that talked about trying to secure critical information

infrastructures across the country, not just the Federal Government, but on electric power systems, telecommunication systems,

and transportation systems. It’s a very important issue. And I

would urge this committee to really continue to keep an eye on

that.

Mr. HORN. Mr. Lynn, do you want to add something to that? You

heard the 1995 number. What has it been in 1998, 1999 in terms

of hacker attacks?

Mr. LYNN. I’m afraid that’s outside my knowledge at this point.

I would be happy to provide it.

Mr. HORN. OK. For the record.

Mr. LYNN. For the record.

Mr. HORN. Without objection, it will be in the record.

This is really a national security thing, obviously. Is the National

Security Agency involved to help get at the hacking problem?

Mr. LYNN. Yes, they are. They are—there are a couple of agencies in the Department. Mr. Dodaro mentioned DISA, the Defense

Information Assistance Agency. We also have an information assurance team at the NSA, and they do a great deal of work both in

terms of monitoring our systems as well as looking to the future

and trying to anticipate future threats and develop hardware and

software and techniques for doing that for dealing with that.

Mr. HORN. There’s no problem within NSA’s help, no problem in

having their help?

Mr. LYNN. No, they’re a full member of the team.

Mr. HORN. Yes, OK. Because Secretary Weinberger, I think, was

the first Defense Secretary they realized they report to him; and

when they were going around him, there was little discussion with

the then commanding general. I’m glad to hear they are helping.

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Mr. DODARO. Mr. Chairman, I might add that the National Security Council has been given lead responsibility under this Presidential Decision Directive to get involved. They’re asking for plans

from each of the Federal agencies. They’re working with OMB.

We’ve made a series of recommendations to make sure that it is

coordinated and there’s adequate follow through. So, again, I’m

pleased to see that they are involved on a broad basis.

And they’re also trying, as relates to an earlier question by Congressman Ose, to develop training to make sure there are adequately trained people to be security administrators in the area.

This is another area where security is always taking a back seat

to making the system more user friendly, more easily accessed; and

security now needs to be elevated to be a competing priority.

Mr. HORN. That’s fine. Nothing else to add, Mr. Lynn, to this?

You’re happy with the security?

Mr. LYNN. Well, I don’t want to say happy or satisfied. We’re

well aware of our attractiveness as a target. With my specific responsibilities for the defense finance and accounting service, we are

taking it very seriously. We have a team down in Florida that focuses exclusively on that, as I think Mr. Mancuso’s testimony indicated. We have taken the vast majority of the IG recommendations

with regard to that. And it’s, I think, a constant effort to try and

stay ahead of the hackers and other people who would wish us ill.

Mr. HORN. OK. The General Accounting Office has testified that

in raising its capitalization threshold from $5,000 to $100,000. The

Department of Defense has effectively removed billions of dollars in

assets from accounting controls. Do you still feel strongly on that?

Mr. DODARO. Well, part of——

Mr. HORN. Can you elaborate?

Mr. DODARO. Well, that issue, the capitalization threshold issue

needs to be reexamined. Mr. Lynn and myself and our organizations have had an ongoing dialog about that, as well as with the

contractors that DOD has hired to look at the real property and

personal property area. I know Mr. Lynn is going to have them

take a look at the capitalization threshold. I’m very encouraged

that they’re reconsidering that now, and hopefully we can come to

an acceptable outcome that we can all feel is an agreeable solution

to this issue.

It’s important not only from asset control and accountability but

also in coming up with costs associated with the useful life of the

assets and spreading those costs over a period of time, so that

when cost comparisons are made between DOD activities and commercial activities where they have much lower capitalization

thresholds and their costs are spread over a period of time that

there’s a comparability and also for charging prices under DOD’s

working capital funds so that there’s adequate consideration of

what the appropriate costs would be over time, depending on the

assets.

Mr. HORN. How would you define the capitalization aspect at

$100,000? I mean, is there a definition there of what is in and what

is out in terms of capitalization or potential capitalization?

Mr. DODARO. The Department has a definition that’s fairly generic, although there are some nuances. I think the likely outcome

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will be more capitalization thresholds targeted to different types of

assets, rather than a more of a generic approach.

Mr. HORN. How are we defining this, Mr. Lynn?

Mr. LYNN. As Mr. Dodaro indicated where this is an issue that

we’re actively working, as we speak, I guess I would not agree with

your characterization. The threshold takes assets off the statement.

That is actually not true. It’s a question of timing. Assets that are

above the threshold are put on the statement and depreciated over

time. Assets that are below the threshold are also on the statement. They’re just expensed all in the year that they’re purchased.

But either way, they end up on the statement. The difference is,

as Mr. Dodaro indicated, the accounting treatment. Do you want to

treat this as a capital asset which you depreciate?

We think at this point $100,000 is the right level. We do not

want to depreciate, say, a fire hydrant. That isn’t valuable. Actually, it takes quite a bit of work to depreciate these things, and

there’s no value to us in depreciating things that low.

Having said that, we have asked, as Mr. Dodaro indicated, two

private contractors to come and, based on commercial standards, to

come in and recommend to us where our thresholds ought to be.

And we plan to evaluate those recommendations as we get them

later in the summer and work with GAO.

The other point I would make, though, is DOD’s threshold at

$100,000 actually puts it in the middle in terms of government

agencies. There are several agencies that are higher, or at

$100,000, that have received clean opinions, and GAO has approved those clean opinions. Those are agencies that are considerably smaller than that that have many fewer assets and you would

think have a lower threshold than DOD, but it’s actually equal to

or greater.

So there’s a prima facie case there that we’re at least at a reasonable level if other agencies are able to get a clean opinion at

that level.

Mr. HORN. Does the Inspector General have a dog in this hunt?

Mr. MANCUSO. I think I’m going to defer to Mr. Lieberman on

this one.

Mr. LIEBERMAN. No, we do not feel strongly about what the

threshold should be. As these gentlemen and lady know, we’re most

concerned with the Department’s ability to accurately account for

these items, no matter what the threshold ends up being. So I

think we will just stay on the sidelines and then try to enforce the

rule, whatever it turns out to be.

Mr. DODARO. As Mr. Lynn indicated, this is a governmentwide

issue, and we’re exploring it on a governmentwide basis to make

sure there’s consistency across the agencies.

Mr. HORN. You’ve got a study under way?

Mr. DODARO. Yes, we’re going to start this spring.

Mr. HORN. Has that been requested by a particular committee?

Mr. DODARO. No.

Mr. HORN. We will request it then.

Mr. DODARO. I can always count on this committee, Mr. Chairman, for requests.

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Mr. HORN. I held this partnership in assets of property last

week. We might as well see what’s being either amortized or expensed, as the case may be.

Mr. DODARO. Request accepted.

Mr. HORN. Although I have great sympathy with Mr. Lynn, why

are we fiddling around with a fire plug at $5,000?

Mr. DODARO. I don’t think that’s in my statement, Mr. Chairman. We’re not talking about fire plugs.

Mr. HORN. OK. That’s gone to the dogs, too, I think.

Are expense assets tracked as to where they are or is it what the

condition they’re in or what are we talking about when you expense something?

Mr. DODARO. Well, that’s part of the issue that we want to have

examined. It’s one thing to have an expense, but there needs to be

control from an internal control standpoint that the asset is safeguarded, it’s protected from theft and, that the Department knows

the location, the condition that they could use it properly.

So that’s one of the other reasons why, as Mr. Lieberman just articulated, beyond the capitalization level, there’s a stewardship responsibility for any use of the taxpayer money to make sure that

there’s accurate tracking of that and to be put in place. So the

asset accountability and stewardship responsibilities are throughout the use of the money and the tracking of those assets. That

needs to be dealt with.

There are problems associated with tracking, which are included

in my statement and the Department’s and the Inspector General’s

reports about inaccuracies of information of assets under $100,000

and how those are properly accounted for.

Mr. HORN. So, between the three forces here that relate to Defense in some way or the other, you think this will be worked out

on some consensus?

Mr. DODARO. That is our goal, Mr. Chairman. I must admit we’ve

had some spirited discussions on this particular issue. I think—

part of the problem is that there’s not accurate information to do

analysis in the beginning, to find out how many of the Department

assets—assuming certain threshold levels—how much of the assets

are really removed and expensed on an annual basis.

There’s also the comparability issue from an IRS standpoint. The

IRS is much more judicious about a private enterprise’s assets that

have a useful life over a year, and there are other standards that

need to be looked through. So I’m always optimistic that we’re

going to be able to work this out. I hope we can.

But if we can’t, we will have to acknowledge our differences and

outline what those are and make the judgments that we’re all paid

to make.

Mr. HORN. Any comments, Mr. Lynn?

Mr. LYNN. I certainly hope we will be able work it out. That was

the purpose of the hiring—or asking the two outside CPA firms to

make a recommendation was to try and get a common basis from

which to proceed. It is a difficult issue, though. The Federal Accounting Standards Board did look at the idea of setting a governmentwide standard and found it too complex and too difficult and

chose not to.

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Mr. HORN. Have you had that report from the accounting firms

yet?

Mr. LYNN. No, they’re just reviewing the data bases as we speak;

and as Mr. Dodaro indicated, you have to make first a judgment

about the accuracy of the data bases and what the value of below

$100,000 or below any threshold is, vis-a-vis the statement, before

you can make a recommendation. So they’re in that part of the

process right now.

Mr. HORN. I assume you’re using the Y2K mess as a way to take

a look at a lot of systems you either don’t need or you need in better hardware and software?

Mr. LYNN. Yes, we are.

Mr. HORN. This is an opportunity to throw a few overboard.

Mr. TOYE. Mr. Chairman, before we leave the capitalization

issue, I think it’s important to understand that within DOD we

make a distinction between accounting and accountability. And irrespective of what the capitalization threshold is, that does not

mean that anything below that threshold does not have accountability controls, that is, we maintain controls, we know where the

item is, and what the condition is.

All of those items that Mr. Dodaro mentioned that we should do

for those items below the capitalization threshold, we do do, so the

accounting threshold does not automatically eliminate accountability for those items that are below that threshold. And I think

that point is important also to consider.

Mr. HORN. Well, that’s certainly true on a base in terms of inventory. And it sort of mellows out, I think, at a few other levels. Has

anybody lost any ships this year or missile launchers that we can’t

find?

Mr. LYNN. No, Mr. Chairman, we have not lost any ships or any

missile launchers.

Mr. HORN. OK. That’s good to know.

On that optimistic view, we will close the hearing; and I will

thank the staff for its work. I thank the witnesses for their work.

J. Russell George is the staff director, chief counsel for the Government Management, Information, and Technology Subcommittee.

The director of communications is way in the second row from the

last wall there, Bonnie Heald, and professional staff member; and

then on my left and your right, Larry Malenich, the detailee from

the General Accounting Office. That’s why we get thoroughly into

these things. Mason Alinger in the corner over there is our faithful

clerk that makes sure that things are set up around here; and

Richard Lucas—is Richard around today? Richard isn’t. He is our

intern. Faith Weiss, counsel to the minority and Earley Green,

staff assistant. And our court reporters are Cindy Sebo and Randy

Sandefer.

So with that, we thank you all for coming over. And we adjourn

this session.

[Whereupon, at 12:20 p.m., the subcommittee was adjourned.]

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