DOD FINANCIAL 

MANAGEMENT

Effect of Continuing 

Weaknesses on 

Management and 

Operations and Status of 

Key Challenges

Statement of Asif A. Khan, Director, 

Financial Management and Assurance

Testimony 

Before the Committee on Homeland 

Security and Governmental Affairs, 

U.S. Senate

For Release on Delivery 

Expected at 10:30 a.m. ET

Tuesday, May 13, 2014

GAO-14-576T

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-576T, a testimony 

before the Committee on Homeland Security 

and Governmental Affairs, U.S. Senate

May 13, 2014

DOD FINANCIAL MANAGEMENT

Effect of Continuing Weaknesses on Management 

and Operations and Status of Key Challenges

Why GAO Did This Study

Given the federal government’s 

continuing fiscal challenges, it is more 

important than ever that the Congress, 

the administration, and federal 

managers have reliable, useful, and 

timely financial and performance 

information to help ensure fiscal 

responsibility and demonstrate 

accountability, particularly for the 

federal government’s largest 

department, the Department of 

Defense. GAO has previously reported 

that serious and continuing 

deficiencies in DOD’s financial 

management make up one of three 

major impediments to achieving an 

opinion on the U.S. government’s 

consolidated financial statements. 

GAO’s statement focuses on (1) the 

effect of continuing financial 

management challenges on DOD 

management and operations and 

(2) DOD’s efforts to improve financial 

management and its remaining 

challenges. GAO’s statement is 

primarily based on previously issued 

reports, including GAO’s updates on 

DOD high-risk areas and its audit 

reports on DOD’s financial 

management, inventory management 

and asset visibility, weapon system 

costs, business transformation, and 

business system modernization.

What GAO Recommends

GAO has previously made numerous 

recommendations for improving 

financial systems and business 

systems that provide financial 

information as well as related 

processes and internal controls. DOD 

has generally agreed with GAO’s 

recommendations and is taking actions 

to address many of them.

What GAO Found

Long-standing weaknesses in the Department of Defense’s (DOD) financial 

management adversely affect the economy, efficiency, and effectiveness of its

operations. The successful transformation of DOD’s financial management 

processes and operations will allow DOD to routinely generate timely, complete, 

and reliable financial and other information for day-to-day decision making, 

including the information needed to effectively (1) manage its assets, (2) assess 

program performance and make budget decisions, (3) make cost-effective 

operational choices, and (4) provide accountability over the use of public funds. 

Examples of the operational impact of DOD’s financial management weaknesses 

include

• the inability to properly account for and report DOD’s total assets—about 33

percent of the federal government’s reported total assets—including 

inventory ($254 billion) and property, plant, and equipment ($1.3 trillion);

• the inability to accurately estimate the extent of its improper payments 

because of a flawed estimating methodology, which also limits corrective 

actions;

• inconsistent and sometimes unreliable reports to the Congress on estimated 

weapon system operating and support costs, limiting visibility needed for 

effective oversight of these costs; and

• continuing reports of Antideficiency Act violations—75 such violations 

reported from fiscal year 2007 through fiscal year 2012, totaling nearly 

$1.1 billion—which emphasize DOD’s inability to ensure that obligations and 

expenditures are properly recorded and do not exceed statutory levels of 

control.

DOD has numerous efforts under way to address its long-standing financial 

management weaknesses. The Congress has played a major role in many of the 

corrective actions by mandating them in various fiscal year National Defense 

Authorization Acts. However, improving the department’s financial management 

operations and thereby providing DOD management and the Congress more 

accurate and reliable information on the results of its business operations will not 

be an easy task. Key challenges remain, such as identifying and mitigating risks 

to achieving the goals of DOD’s Financial Improvement and Audit Readiness 

(FIAR) effort and successfully implementing the FIAR Guidance at the DOD 

component level, modernizing DOD’s business information systems, and 

improving the financial management workforce. 

DOD is monitoring its component agencies’ progress toward audit readiness. 

However, as dates for validating audit readiness approach, DOD has 

emphasized asserting audit readiness by a certain date instead of making sure 

that effective processes, systems, and controls are in place, without which it 

cannot ensure that its components have improved financial management 

information for day-to-day decision making. While time frames are important to 

measuring progress, DOD should not lose sight of the ultimate goal of 

implementing lasting financial management reform to ensure that it can routinely 

generate reliable financial management and other information critical to decision 

making and effective operations.

View GAO-14-576T. For more information, 

contact Asif A. Khan at (202) 512-9869 or 

khana@gao.gov.
Page 1 GAO-14-576T 

Chairman Carper, Ranking Member Coburn, and Members of the 

Committee:

Thank you for the opportunity to be here today to discuss continuing 

Department of Defense (DOD) financial management challenges and the 

implications for its management and operations and audit readiness. 

Having sound financial management practices and reliable, timely 

financial information is important to ensure accountability over DOD’s 

extensive resources in order to efficiently and economically manage the 

department’s assets, budgets, mission, and operations. Accomplishing 

this goal is a significant challenge given the worldwide scope of DOD’s 

mission and operations; the diversity, size, and culture of the 

organization; and its reported trillions of dollars of assets and liabilities 

and its hundreds of billions of dollars in annual appropriations.

Given the federal government’s continuing fiscal challenges, it is more 

important than ever that the Congress, the administration, and federal 

managers have reliable, useful, and timely financial and performance 

information to help ensure fiscal responsibility and demonstrate 

accountability, particularly for the federal government’s largest 

department. Serious, continuing deficiencies in DOD’s financial 

management have precluded it from producing financial statements that 

can be audited, and these deficiencies constitute one of three major 

impediments to achieving an opinion on the U.S. government’s 

consolidated financial statements. Our report on the U.S. government’s 

fiscal year 2013 financial statements highlighted significant DOD 

weaknesses that contributed to our disclaimer of opinion.1

• The inability to determine that DOD’s total assets were properly 

reported. For fiscal year 2013, DOD accounted for about 33 percent of 

the federal government’s reported total assets, including inventory 

($254 billion) and property, plant, and equipment ($1.3 trillion).

They include 

the following:

• Unreliable reported estimates of environmental cleanup and disposal 

liabilities ($58.4 billion) and retiree health care liabilities ($1.1 trillion).

• Ineffective financial management processes and controls.

 1

GAO, Financial Audit: U.S. Government’s Fiscal Years 2013 and 2012 Consolidated 

Financial Statements, GAO-14-319R (Washington, D.C.: Feb. 27, 2014).
Page 2 GAO-14-576T 

• Financial management systems that do not comply with the Federal 

Financial Management Improvement Act of 1996 (FFMIA).2

In addition to the impact on the auditability of the U.S. government’s 

consolidated financial statements, these problems impede DOD’s ability 

to produce timely and accurate financial management information to 

assist in day-to-day decision making and also significantly impair efforts 

to improve the economy, efficiency, and accountability of the 

department’s operations. Key areas of concern relate to ineffective asset 

control and accountability, which affect DOD’s visibility over weapon 

systems and inventory;3

To encourage progress, the National Defense Authorization Act (NDAA) 

for Fiscal Year 2010 mandated that DOD develop and maintain the FIAR 

Plan to, among other things, describe the specific financial management 

improvement actions to be taken and costs associated with ensuring that 

its department-wide financial statements are validated as audit ready by 

September 30, 2017.

unreliable budget information, which affects 

DOD’s ability to effectively measure performance, reduce costs, and 

maintain adequate control of its funds (funds control); and ineffective 

business systems and processes, which impair DOD’s ability to achieve 

accountability and transparency over its operations and accurately report 

on the results of operations. DOD is addressing these issues through its 

Financial Improvement and Audit Readiness (FIAR) Plan, which is DOD’s 

strategic plan and management tool for guiding, monitoring, and reporting 

on the department’s financial management improvement efforts.

4

 2

Pub. L. No. 104-208, div. A, title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996). DOD’s

financial management systems are required by FFMIA to comply substantially with federal 

financial management systems requirements, applicable federal accounting standards, 

and the U.S. Standard General Ledger at the transaction level. 

In October 2011, the Secretary of Defense directed 

the department to accelerate audit readiness efforts for key elements of 

3

DOD describes asset visibility as the ability to provide timely and accurate information on 

the location, quantity, condition, movement, and status of items in its inventory, including 

assets in transit. 

4

Pub. L. No. 111-84, § 1003(a),123 Stat. 2190, 2439-40 (Oct. 28, 2009). As defined in 

DOD’s FIAR Guidance, validation of audit readiness occurs when the DOD Comptroller 

examines a DOD component’s documentation supporting its assertion of audit readiness 

and concurs with the assertion. This takes place after the DOD Comptroller or 

independent auditor first reviews the documentation and agrees that it supports audit 

readiness. A component asserts audit readiness when it believes that its documentation 

and internal controls are sufficient to support a financial statement audit that will result in 

an audit opinion. 
Page 3 GAO-14-576T 

its financial statements. Subsequently, the NDAA for Fiscal Year 2013 

added that the FIAR Plan must also describe the steps to be taken, with 

associated costs, to ensure that the department’s Statement of Budgetary 

Resources (SBR) is validated as audit ready no later than September 30, 

2014.5

My statement today focuses on two topics:

• the effect of continuing financial management weaknesses on DOD 

management and operations and

• DOD’s actions to improve its financial management and achieve audit 

readiness, and its remaining challenges.

My statement is primarily based on previously issued reports, including 

our reporting on DOD high-risk areas and our audit reports on DOD’s 

financial management, inventory management controls and asset 

visibility, weapon system costs, business transformation, business system 

modernization, improper payments, military payroll, and audit risk. A list of 

related products is included at the end of this statement. This statement 

also is based on our ongoing analyses of the Army’s SBR audit readiness 

efforts and the Defense Finance and Accounting Service’s (DFAS) audit

readiness efforts for DOD payments to contractors, or “contract pay.” We 

expect to report the final results from this work in June 2014. For our 

analyses, we reviewed Army and DFAS documentation, such as 

departmental guidance and Army and DFAS action plans and statuses, 

and met with component officials to discuss the basis and timing of their 

audit readiness assertions. We discussed the preliminary results of our 

work with cognizant DOD officials.

The work on which this statement is based was conducted in accordance 

with generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on 

our audit objectives. Additional information on our scope and 

 5

Pub. L. No. 112-239, § 1005(a), 126 Stat. 1623, 1904 (Jan. 2, 2013). The SBR provides 

information about budgetary resources made available to an agency as well as the status 

of those resources at a specific point in time. 
Page 4 GAO-14-576T 

methodology is available in the previously issued products cited in this 

statement.

In the face of continuing reports of financial management weaknesses 

across the federal government, including wasteful spending, poor 

management, and losses totaling billions of dollars, the Chief Financial 

Officers (CFO) Act of 1990 was signed into law.6

• establishing a leadership structure;

The act focuses on

• improving systems of accounting, financial management, and internal 

control; and

• enabling effective management and oversight through the production 

of complete, reliable, timely, and consistent financial information.

With the foundation of the CFO Act and the Government Management 

Reform Act of 1994 (GMRA), with its goal “to provide a more effective, 

efficient and responsive government,”7 along with other federal agency 

management reform legislation, such as the Government Performance 

and Results Act of 19938

• Strengthening internal control. Accountability is part of the 

organizational culture that goes well beyond receiving an unmodified 

or “clean” audit opinion on agency financial statements; the underlying 

premise is that agencies must become more results oriented and 

focused on internal control. Thousands of internal control problems 

have been identified and corrected in executive branch agencies over 

the past two decades. A disciplined and structured approach to 

assessing and dealing with internal controls over the critical flow of 

funds through the entire agency provides a mechanism that over time 

mitigates potential damaging breakdowns in financial integrity and 

mismanagement of funds. Such breakdowns can affect the ability of 

(GPRA) and FFMIA, a framework was put in 

place to improve stewardship, accountability, and transparency in the 

executive branch. Major goals of the reform legislation have included the 

following:

 6

Pub. L. No. 101-576 (Nov. 15, 1990). 

7

Pub. L. No. 103-356 (Oct. 13, 1994). 

8

Pub. L. No. 103-62 (Aug. 3, 1993). 

Background
Page 5 GAO-14-576T 

the agency or entity to carry out its mission and can severely damage 

public confidence.

• Accurate accounting and financial reporting. The CFO Act and 

FFMIA provide for financial management systems that support reliable 

financial reporting on the results of operations on a day-to-day basis. 

This functionality, in turn, supports management decision making on 

budgets, programs, and overall mission performance and goals. 

Accurate accounting and financial reporting are also a major element 

of any effort to achieve auditable financial statements.

• Improving performance information. A key goal of much of the 

federal management reform legislation enacted over the past 25 

years, such as the CFO Act and GPRA, is the ability to have reliable 

information to measure performance against mission goals. Federal 

agencies have made progress in the preparation of annual 

performance and accountability reports (PAR).9 By linking financial 

and performance information, the PARs provide important information 

about the return on the taxpayers’ investment in agency programs and 

operations.

• Enhancing transparency. Achieving clean audit opinions evidencing 

sound financial management practices is an overall outcome of 

effective implementation of these reforms. For example, the 

achievement of a clean audit opinion on the first-ever annual financial 

statements for the Troubled Asset Relief Program (TARP) was a 

significant accomplishment.10

Many of the problems that preceded passage of the CFO Act also led us 

to issue our first high-risk list in 1990, designating certain DOD and other 

federal programs as high risk because of their vulnerability to fraud, 

waste, abuse, and mismanagement.

This provided important accountability 

and transparency to the public regarding TARP activities.

11

 9

A PAR describes an agency’s performance measures, results, and accountability 

processes for the fiscal year. This information enables the President, the Congress, and 

the American people to assess the agency’s accomplishments each fiscal year. 

DOD areas designated as high risk 

10TARP is a federal program established by the Secretary of the Treasury under authority 

provided by the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, div. 

A (Oct. 3, 2008), and intended to restore liquidity and stability to the financial system of 

the United States via the purchase of assets from financial institutions.

11See GAO, High-Risk Series: An Overview, GAO/HR-95-1 (Washington, D.C.: Feb. 1, 

1995) and High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: February 2013). 
Page 6 GAO-14-576T 

in 1990 included Supply Chain Management and Weapon System 

Acquisition, followed by Contract Management in 1992, Financial 

Management and Business Systems Modernization in 1995, Support 

Infrastructure Management in 1997, and Business Transformation in 

2005.12

As we reported in our latest high-risk update, DOD is one of the few 

federal entities that cannot accurately account for its spending or assets 

and it is the only federal agency that has yet to receive an opinion on at 

least one of its department-wide financial statements. Without accurate, 

timely, and useful financial information, DOD is severely hampered in 

making sound decisions affecting its operations. Further, to the extent 

that current budget constraints and fiscal pressures continue, the 

reliability of DOD’s financial information and ability to maintain effective 

accountability for its resources will be increasingly important to the federal 

government’s ability to make sound resource allocation decisions. 

Effective financial management is also fundamental to achieving DOD’s 

broader business transformation goals in the areas of asset management, 

acquisition and contract management, and business systems 

modernization.

As we have previously reported, long-standing weaknesses in DOD’s 

financial management adversely affect the economy, efficiency, and 

effectiveness of the department’s operations.13

 12The DOD Personnel Security Clearance Program was added to GAO’s high-risk list in 

2005, but it was subsequently removed in 2011.

DOD’s pervasive financial 

and related business management and system deficiencies continue to 

adversely affect its ability to control costs; ensure basic accountability; 

anticipate future costs and claims on the budget; measure performance; 

maintain funds control; prevent and detect fraud, waste, and abuse; and 

address pressing management issues. As we have previously 

recommended, the successful transformation of DOD’s financial 

management processes and operations is necessary for DOD to routinely 

generate timely, complete, and reliable financial and other information for 

13GAO, DOD Financial Management: Ongoing Challenges in Implementing the Financial 

Improvement and Audit Readiness Plan, GAO-11-932T (Washington, D.C.: Sept. 15, 

2011), and DOD Financial Management: Numerous Challenges Must Be Addressed to 

Improve Reliability of Financial Information, GAO-11-835T (Washington, D.C.: July 27, 

2011). 

Effect of Continuing 

Financial 

Management 

Weaknesses on DOD 

Management and 

Operations
Page 7 GAO-14-576T 

day-to-day decision making, including the information needed to 

effectively (1) manage its assets, (2) assess program performance and 

make budget decisions, (3) make cost-effective operational choices, and 

(4) provide accountability over the use of public funds.

Since 1990,14 we have identified DOD supply chain management as a 

high-risk area in part because of ineffective and inefficient inventory 

management practices and procedures, weaknesses in accurately 

forecasting demand for spare parts, and challenges in achieving 

widespread implementation of key technologies aimed at improving asset 

visibility.15

With respect to inventory management, in November 2010, as required 

by the Congress, DOD issued its Comprehensive Inventory Management 

Improvement Plan, which is aimed at reducing excess inventory by 

improving inventory management practices. We reported in 2012 and 

2013 that DOD had made progress in reducing its excess inventory and 

These factors have contributed to the accumulation of billions 

of dollars in spare parts that are excess to current needs, wasting 

valuable resources. DOD has made moderate progress in addressing its 

supply chain management weaknesses, but several long-standing 

problems have not yet been resolved. To provide high-level strategic 

direction, DOD issued its Logistics Strategic Plan in July 2010, which 

among other things, established a goal to improve supply chain 

processes, including inventory management practices and asset visibility.

 14GAO, High Risk: Letter to Congressional Committees Identifying GAO’s Original High 

Risk Areas, (Jan.23, 1990) and GAO-13-283. 

15GAO, Defense Logistics: Army Should Track Financial Benefits Realized from its 

Logistics Modernization Program, GAO-14-51 (Washington, D.C.: Nov. 13, 2013); 

Defense Logistics: A Completed Comprehensive Strategy is Needed to Guide DOD’s InTransit Visibility Efforts, GAO-13-201 (Washington, D.C.: Feb. 28, 2013); Defense 

Logistics: DOD Has Taken Actions to Improve Some Segments of the Materiel Distribution 

System, GAO-12-883R (Washington, D.C.: Aug. 3, 2012); Defense Inventory: Actions 

Underway to Implement Improvement Plan, but Steps Needed to Enhance Efforts, 

GAO-12-493 (Washington, D.C.: May 3, 2012); Defense Logistics: Improvements Needed 

to Enhance DOD’s Management Approach and Implementation of Item Unique 

Identification Technology, GAO-12-482 (Washington, D.C.: May 3, 2012); Defense 

Logistics: DOD Needs to Take Additional Actions to Address Challenges in Supply Chain 

Management, GAO-11-569 (Washington, D.C.: July 28, 2011); and DOD’s 2010 

Comprehensive Inventory Management Improvement Plan Addressed Statutory 

Requirements, But Faces Implementation Challenges, GAO-11-240R (Washington, D.C.:

Jan. 7, 2011). 

Asset Management
Page 8 GAO-14-576T 

implementing its Comprehensive Inventory Management Improvement 

Plan.16

• Data from the end of fiscal year 2009 showed that of the about $94.5 

billion in on-hand inventory, 9.4 percent, or about $8.8 billion, was 

excess. DOD’s most recent fiscal year-end data from September 

2013, showed that of the about $98.9 billion in on-hand inventory, 7.3 

percent was considered excess.

DOD established overarching goals in the plan to reduce the 

enterprise-wide percentages of on-order excess inventory, those items 

already purchased that may be excess due to subsequent changes in 

requirements, and on-hand excess inventory, those items categorized for 

potential reuse or disposal. Since DOD was exceeding its initial goals for 

reducing excess inventory, we recommended that DOD’s efforts would 

benefit from establishing more challenging, but achievable, goals for 

reducing excess inventory and that the department periodically reexamine 

and update its goals. DOD agreed with our recommendations and revised 

its on-hand excess inventory goal from 10 percent of the total value of 

inventory to 8 percent in fiscal year 2016. However, DOD did not make 

any changes to its on-order excess inventory goals and maintained that 

its current goals of 6 percent of the total value of on-order inventory in 

2014 and 4 percent in 2016 were sufficient. Our work determined that 

DOD has made progress in reducing on-hand and on order excess 

inventory. For example:

• Data from the end of fiscal year 2009 through 2013 showed that the 

department had reduced its percentage of on-order excess inventory 

from $13.6 billion to about $10.2 billion, from 9.5 to 7.9 percent, with 

$812 million considered as excess.

With respect to asset visibility, we found that DOD needs to take 

additional actions to improve asset visibility, to include completing and 

implementing its strategy for coordinating improvement efforts across the 

department for asset tracking and in-transit visibility.17

 16GAO, Defense Inventory: Actions Underway to Implement Improvement Plan, but Steps 

Needed to Enhance Efforts, 

In February 2013, 

we reported that DOD had taken steps to improve in-transit visibility of its 

assets through efforts developed by several of the defense components, 

but no one DOD organization was fully aware of all such efforts across 

GAO-12-493 (Washington, D.C.: May 2012), and 

GAO-13-283. 

17GAO-13-283. 
Page 9 GAO-14-576T 

the department, because they are not centrally tracked.18

In 2012, we reviewed DOD’s efforts to incorporate Item Unique 

Identification (IUID) technology into supply chain management and found 

a number of implementation challenges.

In 2012, DOD 

began developing a strategy for asset visibility and in-transit visibility; 

however, as of February 2013 this strategy did not include all key 

elements of a comprehensive strategic plan. We recommended that the 

department finalize its strategy and in doing so ensure complete, 

accurate, and consistent information for all in-transit visibility efforts is 

captured, tracked, and shared, and the strategy contains all of the key 

elements of a comprehensive strategic plan, including resources and 

investments and key external factors. DOD agreed with our 

recommendation and revised and finalized its asset visibility strategy. We 

are currently reviewing the new strategy and the department’s efforts to 

improve asset visibility.

19

 18GAO, Defense Logistics: A Completed Comprehensive Strategy is Needed to Guide 

DOD’s In-Transit Visibility Efforts, 

IUID technology allows DOD to 

label an item and assign a unique number to the item, could improve the 

accountability of property and equipment, and could enable DOD to track 

equipment as it moves between its components. Challenges we identified 

include incomplete information on the number of items that need to be 

marked with IUID labels, difficulties in collecting information on IUID 

implementation costs, and the lack of an overarching schedule for the 

integration of IUID into DOD’s information technology systems. DOD is 

revising its supply chain management policy and guidance to better 

include IUID use, but has not fully defined requirements for using these 

data, nor developed complete, integrated master schedules for integrating 

IUID department-wide and within components’ systems. We 

recommended that DOD complete its implementation and management 

framework for IUID by incorporating key elements of a comprehensive 

management approach, such as a complete analysis of the return on 

investment, quantitatively-defined goals, and metrics for measuring 

progress. DOD generally agreed with our recommendations and is taking 

action to address them. We are continuing to monitor DOD’s progress in 

GAO-13-201 (Washington, D.C.: Feb. 28, 2013).

19GAO, Defense Logistics: Improvements Needed to Enhance DOD’s Management 

Approach and Implementation of Item Unique Identification Technology, GAO-12-482 

(Washington, D.C.: May 3, 2012).
Page 10 GAO-14-576T 

implementing a comprehensive management approach for using IUID 

technology.

Effective asset management controls are essential for asset 

accountability and safeguarding and financial reporting on asset values. 

DOD primarily relies on various logistical systems to carry out both its 

stewardship and financial reporting responsibilities for an estimated $1.5 

trillion in physical assets, ranging from enormous inventories of 

ammunition, stockpile materials, and other military items to multimilliondollar weapon systems. These systems are the primary source of 

information for maintaining visibility over assets to meet military objectives 

and readiness goals and for financial reporting. However, our prior reports 

and DOD Inspector General (IG) reports have shown that these systems 

have serious weaknesses that in addition to hampering financial 

reporting, impair DOD’s ability to (1) maintain central visibility over its 

assets; (2) safeguard assets from physical deterioration, theft, or loss; 

and (3) prevent the purchase of assets already on hand. Collectively, 

these weaknesses can seriously diminish the efficiency and economy of 

the military services’ support operations.

For example, we have continued to monitor the implementation of the 

Army’s Logistics Modernization Program (LMP) system, which supports 

both inventory management and financial reporting.20 In November 2013, 

we reported that the Army’s LMP, which replaced two aging Army 

systems, is supporting the Army’s industrial operations.21

 20LMP is intended to provide a solution that streamlines the maintenance, repair, and 

overhaul; planning; finance; acquisition; and supply of weapon systems, spare parts,

services, and material for the Army’s working capital fund (which funds repairs and spare 

parts at cost plus a user fee) to Army commands. LMP is intended to enable worldwide, 

real-time, total asset visibility of inventory, including contractor-managed inventories. It 

also is intended to provide an anticipatory logistics planning tool that should result in 

reduced stock levels.

However, the 

current system—LMP Increment 1—does not support certain critical 

requirements, such as automatically tracking repair and manufacturing 

operations on the shop floor of depots and arsenals. In addition, 

according to Army officials, the current system will not enable the Army to 

generate auditable financial statements by 2018, the statutory deadline 

for this goal. The Army is in the process of developing LMP Increment 2 

to, among other things, address some of the identified weaknesses and 

21GAO-14-51.
Page 11 GAO-14-576T 

expects to complete fielding by September 2016. To determine whether 

the Army is achieving its estimated financial benefits in LMP, we 

recommended that the Army develop and implement a process to track 

the extent of financial benefits realized from the use of LMP during the 

remaining course of its life cycle. The Army agreed with our 

recommendation and stated that it would develop a process to track the 

extent of financial benefits recognized within LMP. We are continuing to 

monitor the Army’s actions.

Reliable performance and budget information are essential to ensure that 

DOD has effectively budgeted for its needs so that operations can 

proceed smoothly to meet mission readiness demands. Accurate and 

timely performance and budget information also is critical to effective 

oversight and decision making on DOD’s numerous reform initiatives.

The following examples illustrate some of the serious weaknesses we 

have identified in our past work on DOD’s performance management and 

budget information.

• In our February 2014 report on the audit of the U.S. government’s 

consolidated financial statements, we discussed as a material 

weakness,22 DOD’s inability to estimate with assurance key 

components of its environmental and disposal liabilities.23

 22A material weakness is a deficiency, or combination of deficiencies, in internal control 

such that there is a reasonable possibility that a material misstatement of the entity’s 

financial statements will not be prevented, or detected and corrected, on a timely basis. A 

deficiency in internal control exists when the design or operation of a control does not 

allow management or employees, in the normal course of performing their assigned 

functions, to prevent, or detect and correct, misstatements on a timely basis. 

Deficiencies 

in internal control supporting the process for estimating environmental 

and disposal liabilities could result in improperly stated liabilities as 

well as adversely affect the ability to determine priorities for cleanup 

and disposal activities and to appropriately consider future budgetary 

resources needed to carry out these activities. In addition, DOD could 

not support a significant amount of its estimated military 

postretirement health benefits liabilities for federal employee and 

veteran benefits. These unsupported amounts related to the cost of 

direct health care provided by DOD-managed military treatment 

23GAO-14-319R.

Program Performance and 

Budgeting
Page 12 GAO-14-576T 

facilities. Problems in accounting for liabilities affect the determination 

of the full cost of the federal governments operations and the extent of 

its liabilities. DOD is addressing these issues through its 

implementation of its FIAR Plan.

• In June 2013, we reported24 that problems with the accuracy of 

outstanding work orders at fiscal year-end for the Army’s Industrial 

Operations activities resulted in inaccurate budget estimates.25 To the 

extent that Industrial Operations does not complete work at year-end, 

the work and related funding are carried over into the next fiscal year. 

Carryover is the reported dollar value of work that has been ordered 

and funded by customers but not completed by Industrial Operations 

at the end of the fiscal year. We found that the Army did not 

adequately evaluate program needs and performance management 

constraints or the budgetary impact of the implementation of its LMP 

when budgeting for its Industrial Operations. As a result, unreliable 

information on the scope of work and the lack of available parts 

affected mission readiness. Further, the overstated Industrial 

Operations carryover amounts resulted in unreliable estimates of 

Operations and Maintenance funding levels. For example, the 

Industrial Fund carryover amounts more than doubled from fiscal 

years 2006 through 2012, exceeding budget estimates by more than 

$1.1 billion each year. We made three recommendations aimed at 

implementing the Army’s planned corrective actions to (1) establish a 

timetable for implementing new policy guidance, (2) improve the 

budgeting for new orders, and (3) establish procedures for evaluating 

work orders received to ensure that resources are available to 

perform the work. DOD agreed with our recommendations and has 

actions planned or under way to address them.

• The Office of Management and Budget (OMB) requires26

 24GAO, Army Industrial Operations: Budgeting and Management of Carryover Could Be 

Improved, 

that federal 

agency budget submissions reflect anticipated reductions in improper 

GAO-13-499 (Washington, D.C.: June 27, 2013).

25The Army operates 13 Industrial Operations activities that provide depot maintenance 

and ordnance services. 

26 Office of Management and Budget, Preparation, Submission, and Execution of the 

Budget, OMB Circular No. A-11, § 31.8 (July 26, 2013). 
Page 13 GAO-14-576T 

payments27 in their PARs or agency financial reports (AFR)28 pursuant 

to legal requirements for the estimation of improper payments.29 For 

years, DOD has reported over $1 billion annually in improper 

payments. Improper payments degrade the integrity of government 

programs, compromise citizens’ trust in government, and drain 

resources away from the missions and goals of the government. As 

we reported in May 2013, although DOD has reported billions of 

dollars in improper payments, it does not know the extent of its 

improper payments because of flaws in its estimating methodology.30

 27The term improper payment means any payment that should not have been made or 

that was made in an incorrect amount (including overpayments and underpayments), and 

includes payments to an ineligible recipient, any payment for an ineligible good or service, 

any duplicate payment, any payment for a good or service not received (except for such 

payments where authorized by law), and any payment that does not account for credit for 

applicable discounts. According to guidance from OMB, agencies should also report as 

improper payments any payments for which insufficient or no documentation is found. 

We found that DOD’s improper payment estimates reported in its 

fiscal year 2011 AFR were neither reliable nor statistically valid 

because of long-standing and pervasive financial management 

weaknesses and significant deficiencies in the department’s 

procedures to estimate improper payments. The flawed methodology 

for estimating improper payments also limits the effectiveness of 

DOD’s corrective actions. We recommended that DOD take steps to 

(1) improve improper payment estimating procedures, such as 

developing valid sampling methodologies and error projections; (2) 

identify programs susceptible to improper payments and perform a 

risk assessments; (3) develop and implement corrective action plans 

in accordance with best practices; (4) implement recovery audits; and 

(5) ensure the accuracy and completeness of improper payment and 

28DOD’s AFRs provide an overview of the department’s financial information and 

performance goals and objectives. Additional information, such as the department’s 

reporting on improper payments, is in Addendum A to its AFR. 

29Federal agencies are required to estimate and report annually on their improper 

payments under the Improper Payments Information Act of 2002, Pub. L. No. 107-300 

(Nov. 26, 2002), as amended by Improper Payments Elimination and Recovery Act of 

2010, Pub. L. No. 111-204 (July 22, 2010), and Improper Payments Elimination and 

Recovery Improvement Act of 2012, Pub. L. No. 112-248 (Jan. 10, 2013), and codified as 

amended at 31 U.S.C. § 3321 note. 

30GAO, DOD Financial Management: Significant Improvements Needed in Efforts to 

Address Improper Payment Requirements, GAO-13-227 (Washington, D.C.: May 13, 

2013). 
Page 14 GAO-14-576T 

recovery audit reporting. DOD agreed with our recommendations and 

cited planned actions to address them.

Reliable information on the cost of operations is critical to provide 

accountability for and to efficiently and economically manage DOD’s vast 

resources. Reliable cost information is essential for making important 

decisions, such as reallocating resources to fighting forces and 

considering whether to continue, modify, or discontinue programs and 

activities. However, DOD’s legacy financial management systems were 

not designed to capture the full cost of its activities and programs, and 

DOD’s enterprise resource planning (ERP) systems31 continue to 

experience schedule slippages and cost overruns and are not estimated 

to be fully implemented until the end of fiscal year 2016 or later.32

As our prior work has found, to effectively, efficiently, and economically

manage DOD’s programs, its managers need reliable cost information for 

(1) evaluating programs (for example, measuring actual results of 

management’s actions against expected savings or determining the effect 

of long-term liabilities created by current programs); (2) making costeffective choices, such as whether to outsource specific activities and 

how to improve efficiency through technology choices; and (3) controlling 

costs for its weapon systems and business activities funded through 

working capital funds. The lack of reliable, cost-based information has 

hampered DOD in each of these areas, as described in the following 

examples.

• In a February 2014 report on our audit of the U.S. government’s 

consolidated financial statements, we reported that DOD was 

responsible for the majority of the federal government’s inventories 

and property, plant, and equipment and that DOD did not maintain 

adequate systems or have sufficient records to provide reliable 

information on these assets. Further, deficiencies in internal control 

over such assets could affect the federal government’s ability to fully 

 31An ERP system is an automated system using commercial off-the-shelf software 

consisting of multiple, integrated functional modules that perform a variety of businessrelated tasks, such as general ledger accounting, payroll, and supply chain management. 

32GAO, DOD Financial Management: Reported Status of Department of Defense’s 

Enterprise Resource Planning Systems, GAO-12-565R (Washington, D.C.: Mar. 30, 

2012).

Cost-effective Choices
Page 15 GAO-14-576T 

know the assets it owns, including their location and condition, and its 

ability to (1) safeguard assets from physical deterioration, theft, or 

loss; (2) account for acquisitions and disposals of such assets and 

reliably report asset balances; (3) ensure that the assets are available 

for use when needed; (4) prevent unnecessary storage and 

maintenance costs or purchase of assets already on hand; and (5) 

determine the full costs of programs that use these assets.33 DOD is 

addressing these issues through implementation of its FIAR Plan.

• With the nation facing fiscal challenges and the potential for tighter 

defense budgets, the Congress and DOD have placed more attention 

on controlling the billions of dollars spent annually on weapon system 

operating and support costs, including costs for repair parts, 

maintenance, and personnel, which account for 70 percent of the total 

costs of a weapon system over its life cycle. The Selected Acquisition 

Report (SAR) is DOD’s key recurring status report on the cost, 

schedule, and performance of major defense acquisition programs 

and is intended to provide authoritative information for congressional 

oversight of these programs. Oversight of operating and support costs 

is important because many of the key decisions affecting these life 

cycle costs are made during the acquisition process. In February 

2012, we reported that DOD’s reports to the Congress on estimated 

weapon system operating and support costs are often inconsistent 

and sometimes unreliable, limiting visibility needed for effective 

oversight of these costs.34 To enhance the visibility of weapon system 

costs during acquisition, we recommended that DOD improve its 

guidance to program offices on cost reporting and also to improve its 

process for reviewing these costs prior to final submission of the SAR 

to the Congress. DOD concurred with our recommendations and 

noted actions it was taking to address them. We are continuing to 

monitor DOD’s progress in addressing our recommendations.

• In December 2012, DOD canceled the Air Force’s Expeditionary 

Combat Support System after having spent more than a billion dollars 

and missing multiple milestones, including failure to achieve 

deployment within 5 years of obligating funds. The system was to 

 33GAO-14-319R.

34GAO, Defense Logistics: Improvements Needed to Enhance Oversight of Estimated 

Long-term Costs for Operating and Supporting Major Weapon Systems, GAO-12-340 

(Washington, D.C.: Feb. 2, 2012). 
Page 16 GAO-14-576T 

provide the Air Force with a single, integrated logistics system that 

was to control and account for about $36 billion of inventory. We 

issued several reports on this system and found that among other 

things, the program was not fully following best practices for 

developing reliable schedules and cost estimates.35 We also reported 

that independent Air Force technical evaluations identified operational 

deficiencies that impaired the system’s efficiency and effectiveness in 

accounting for business transactions and reporting reliable financial 

information. 

• Accurate and complete cost information also is key to making 

effective and economical investment decisions. We reported that onetime implementation costs for Base Realignment and Closure (BRAC) 

2005 grew from $21 billion originally estimated by the BRAC 

Commission in 2005 to about $35.1 billion, or by 67 percent, through 

fiscal year 2011, primarily because of higher-than-anticipated military 

construction costs.36 Military construction costs for the BRAC 2005 

round increased from $13.2 billion based on original estimates by the 

BRAC Commission to $24.5 billion, an 86 percent increase, through 

fiscal year 2011, while over the same period, general inflation 

increased by 13.7 percent. In certain cases, DOD did not include 

some significant military construction requirements that were needed 

to implement the recommendations as envisioned, resulting in the 

identification of additional requirements and related cost increases 

after the recommendations were approved by the BRAC Commission. 

Consequently, the increase of $11.3 billion in military construction 

 35GAO, Information Technology: OMB and Agencies Need to More Effectively Implement 

Major Initiatives to Save Billions of Dollars, GAO-13-796T (Washington, D.C.: July 25, 

2013); Major Automated Information Systems: Selected Defense Programs Need to 

Implement Key Acquisition Practices, GAO-13-311 (Washington, D.C.: Mar. 28, 2013); 

DOD Financial Management: Challenges in Attaining Audit Readiness and Improving 

Business Processes and Systems, GAO-12-642T (Washington, D.C.: Apr. 18, 2012); 

DOD Financial Management: Implementation Weaknesses in Army and Air Force 

Business Systems Could Jeopardize DOD’s Auditability Goals, GAO-12-134 (Washington, 

D.C.: Feb. 28, 2012); and DOD Business Transformation: Improved Management 

Oversight of Business System Modernization Efforts Needed, GAO-11-53 (Washington, 

D.C.: Oct. 7, 2010).

36GAO, Military Bases: Opportunities Exist to Improve Future Base Realignment and 

Closure Rounds, GAO-13-149 (Washington, D.C.: Mar. 7, 2013), and Military Base 

Realignments and Closures: Updated Costs and Savings Estimates from BRAC 2005, 

GAO-12-709R (Washington, D.C.: June 29, 2012). 
Page 17 GAO-14-576T 

costs drove about 80 percent of the total cost increases of $14.1 

billion for BRAC 2005. Further, because some additional requirements 

were driven by events after the BRAC Commission’s approval, the 

Congress had limited visibility into the potential costs of the original 

recommendations. Another reason we identified for the growth in 

implementation costs over DOD’s initial BRAC estimates was that 

DOD had difficulties accurately anticipating information technology 

requirements for many recommendations, leading to significantly 

understated information technology costs for some BRAC 

recommendations—particularly those that involved missions with 

considerable reliance on such capabilities. We made 10 

recommendations for improving the BRAC process. DOD concurred 

with 3 of our recommendations, partially concurred with 2, and did not 

concur with 5 of them. In disagreeing with certain recommendations, 

DOD expressed concern that our recommendations precluded 

optimizing military value and stated that the current process was 

sufficient to address our concerns. We continue to believe that 

although DOD’s BRAC process was fundamentally sound, our 

recommendations did not preclude opportunities for improvements or 

the potential for cost savings.

We recently reported that our analysis of 333 reports related to DOD 

funds control issued in fiscal years 2007 through 2013 identified over 

1,000 funds control weaknesses related to (1) training, supervision, and 

management oversight; (2) proper authorization, recording, 

documentation, and reporting of transactions; and (3) business system 

compliance with federal laws and accounting standards.37

 37GAO, DOD Financial Management: Actions Under Way Need to Be Successfully 

Completed to Address Long-standing Funds Control Weaknesses, 

We found that 

these weaknesses led DOD to make program and operational decisions 

based on unreliable data and impaired DOD’s ability to improve its 

financial management. Specifically, fundamental weaknesses in funds 

control significantly impaired DOD’s ability to (1) properly use resources, 

(2) produce reliable financial reports on the results of operations, and (3) 

meet its audit readiness goals as discussed in the following examples.

GAO-14-94 

(Washington, D.C.: Apr. 29, 2014). 

Accountability over Use of 

Public Funds
Page 18 GAO-14-576T 

• Continuing reports of violations of the Antideficiency Act (ADA) and

other fiscal laws, such as the Purpose Statute,38 underscore DOD’s 

inability to assure that obligations and expenditures are properly 

recorded and do not exceed statutory levels of control.39 The ADA 

requires, among other things, that no officer or employee of DOD 

incur obligations or make expenditures in excess of the amounts 

made available by appropriation, by apportionment, or by further 

subdivision according to the agency’s funds control regulations. 

According to copies of ADA violation reports we reviewed, DOD 

reported 75 ADA violations from fiscal year 2007 through fiscal year 

2012, totaling nearly $1.1 billion. We received reports of 2 additional 

ADA violations in 2013 totaling $148.6 million. However, we 

determined that the number of violations and dollar amounts reported 

may not be complete because of weaknesses in DOD’s funds control 

and monitoring processes that may not have allowed all violations to 

be identified or reported. For example, DOD IG reports issued in fiscal 

years 2007 through 2012 identified $5.5 billion in potential ADA 

violations that required further investigation to determine whether an 

ADA violation had, in fact, occurred, or if adjustments could be made 

to avoid a violation. Further, while DOD’s Financial Management 

Regulation (FMR)40 limits the time from identification to reporting of 

ADA violations to 15 months,41

 3831 U.S.C. 1301(a) (appropriations shall be applied only to the objects for which the 

appropriations were made, except as otherwise provided by law). 

our analysis identified several 

examples of time spans for investigations of potential ADA violations 

taking several additional months to several years before 

determinations of actual violations were reported. For example, as of 

September 30, 2013, three of the DOD IG-reported potential violations 

totaling $713.1 million could not be fully corrected and, consequently, 

resulted in $108.8 million in actual, reported ADA violations. To the 

3931 U.S.C. §§ 1341-42, 1349-52, 1511-19. DOD categorizes violations of various fiscal 

laws and violations of the ADA collectively as ADA violations. For example, DOD has 

reported violations of the Purpose Statute as ADA violations. In some cases, reports of 

ADA violations included both ADA and other fiscal law violations.

40DOD FMR, vol. 14, ch. 1, “Administrative Control of Funds” (January 2009). DOD’s FMR 

is issued under the authority of DOD Instruction 7000.14, Department of Defense 

Financial Management Policy and Procedures (rev. Sept. 17, 2008). The DOD FMR 

directs statutory and regulatory financial management requirements, systems, and 

functions for all appropriated and nonappropriated working capital, revolving, and trust 

fund activities

41DOD, FMR, vol. 14, ch. 7, “Antideficiency Act Report,” § 070102 (November 2010). 
Page 19 GAO-14-576T 

extent that ADA violations are not identified, corrected, and reported, 

DOD management decisions are being made based on incomplete 

and unreliable data.

• DOD has stated that its major financial decisions are based on 

budgetary data (e.g., the status of funds received, obligated, and 

expended). We have found that the department’s ability to improve its 

budgetary accounting has historically been hindered by its reliance on 

fundamentally flawed financial management systems and processes 

and transaction control weaknesses. In its November 2013 AFR,42

For example, we found that DOD continues to make billions of dollars 

of unsupported, forced adjustments, or “plugs,” to reconcile its Fund 

Balance with Treasury (FBWT).

DOD self-reported 16 material weaknesses in financial reporting, 

noting that it has no assurance of the effectiveness of the related 

controls. These weaknesses affect reporting on budgetary 

transactions and balances, including budget authority, fund balance, 

outlays, and categories of transactions, such as civilian pay, military 

pay, and contract payments. As a result, we have concluded that 

DOD’s reports on budget execution and reports on the results of 

operations that could have a material effect on budget, spending, and 

other management decisions are unreliable.

43

 42Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer, United 

States Department of Defense, Agency Financial Report, for Fiscal Year 2013.

In the federal government, an 

agency’s FBWT accounts are similar in concept to corporate bank 

accounts. The difference is that instead of a cash balance, FBWT 

represents unexpended budget authority in appropriation accounts. 

Similar to bank accounts, the funds in DOD’s appropriation accounts 

must be reduced or increased as the department spends money or 

receives collections that it is authorized to retain for its own use. For 

fiscal year 2012, DOD agencies reported making $9.2 billion in 

unsupported reconciling adjustments to agree their fund balances with 

the Department of the Treasury’s (Treasury) records. DOD’s 

unsupported reconciling adjustments to agree its fund balances to 

Treasury records grew to $9.6 billion in fiscal year 2013. We 

recommended that the Navy develop and implement standard 

43GAO, DOD Financial Management: Ongoing Challenges with Reconciling Navy and 

Marine Corps Fund Balance With Treasury, GAO-12-132 (Washington, D.C.: Dec. 20, 

2011).
Page 20 GAO-14-576T 

operating procedures for performing FBWT reconciliations with 

Treasury records and that it provide training on the new procedures to 

personnel performing FBWT reconciliations. The Navy has actions 

under way to address our recommendations.

• Further, we have reported that over the years, DOD has recorded 

billions of dollars of disbursement and collection transactions in 

suspense accounts because the proper appropriation accounts could 

not be identified and charged, generally because of coding errors.44

While DOD has actions under way to address its department-wide funds 

control weaknesses, several are not expected to be completed until 2017. 

Until fully resolved, these weaknesses will continue to adversely affect 

DOD’s ability to achieve its goals for financial accountability, including the 

ability to produce consistent, reliable, and sustainable financial 

information for day-to-day decision making. Sustained leadership 

commitment will be critical to achieving success. In commenting on our 

most recent report released this week, DOD stated that while our report 

recommended no new actions based on the numerous actions that DOD 

already has under way, the department’s commitment to building a 

stronger business environment via its people, processes, and systems 

remains paramount.

Accordingly, Treasury does not accept DOD reporting of suspense 

transactions, and suspense transactions are not included in DOD 

component FBWT reconciliations. We have concluded that it is 

important that DOD accurately and promptly charge transactions to 

appropriation accounts since these accounts provide the department 

with legal authority to incur and pay obligations for goods and 

services. We recommended that the Navy perform periodic testing of 

systems for reporting transactions to Treasury and prioritize and 

address identified deficiencies. The Navy agreed with our 

recommendations and has actions under way to address them. We 

are monitoring the Navy’s progress.

45

 44GAO-12-132.

45GAO-14-94.
Page 21 GAO-14-576T 

Collectively, DOD’s major financial management reform efforts are being 

managed under the FIAR effort as well as several other interdependent 

efforts, such as DOD’s Civilian Workforce Plan and business systems 

modernization.46 With the FIAR Plan’s emphasis on audit readiness, it is 

important to note that financial statement audits are not just about 

validating the amounts and activity reported on the statements. They also 

provide a framework for assessing and improving internal controls and 

compliance with laws and regulations; developing effective, integrated 

financial management systems directed at providing reliable, useful, and 

timely information for decision making; demonstrating stewardship and 

accountability over federal programs and resources; and enabling a 

greater focus on managing the costs of government. Improving the 

department’s financial management operations and thereby providing 

DOD management and the Congress more accurate and reliable 

information on the results of its business operations continues to be a 

difficult task. Below are some of the key challenges we have identified in 

prior work that DOD must address to improve its financial management 

and mitigate the operational effects mentioned previously as well as 

enable DOD to produce auditable financial statements

In 2005, the Under Secretary of Defense Comptroller/CFO (DOD 

Comptroller) established the FIAR Directorate, consisting of the FIAR 

Director and his staff, to develop, manage, and implement a strategic 

approach for addressing financial management deficiencies, achieving 

audit readiness, and integrating those efforts with other initiatives. In 

accordance with the NDAA for Fiscal Year 2010, DOD provides reports to 

relevant congressional committees on the status of DOD’s 

implementation of the FIAR Plan twice a year—no later than May 15 and 

November 15.47

 46DOD’s Civilian Workforce Plan encompasses a department-wide effort to ensure that 

each of DOD’s 24 mission areas, including financial management, has the right mix of 

civilian and military personnel with the right skills and qualifications to effectively perform 

required mission duties.

In August 2009, the DOD Comptroller sought to focus 

FIAR efforts by giving priority to improving processes and controls that 

support the financial information most often used to manage the 

department. Accordingly, the DOD Comptroller revised the FIAR Plan

strategy to focus on two priorities—budgetary information and asset 

47Pub. L. No.111-84, §1003(b). 

DOD’s Actions to 

Improve Financial 

Management and 

Achieve Audit 

Readiness, and 

Remaining 

Challenges

FIAR Plan Implementation
Page 22 GAO-14-576T 

accountability. The first priority was to strengthen processes, controls, 

and systems that produce DOD’s budgetary information. The second 

priority was to improve the accuracy and reliability of management 

information pertaining to the department’s mission-critical assets, 

including military equipment, real property, and general equipment. In 

May 2010, the DOD Comptroller first issued the FIAR Guidance, which 

provided the standard methodology for the components to implement the 

FIAR Plan. According to DOD, the components’ successful 

implementation of this methodology is essential to the department’s ability 

to achieve full financial statement auditability.

In October 2011, the Secretary of Defense directed the department to 

achieve audit readiness for its SBR for general fund accounts by the end 

of fiscal year 2014,48 and the NDAA for Fiscal Year 2012 required that the 

next FIAR Plan update include a plan to support this goal.49 Further, the 

NDAA for Fiscal Year 2013 made the 2014 target for SBR auditability an 

ongoing component of the FIAR Plan by amending the NDAA for Fiscal 

Year 2010 such that it now explicitly refers to describing the actions and 

costs associated with validating as audit ready both DOD’s SBR by the 

end of fiscal year 2014 and DOD’s complete set of financial statements 

by the end of fiscal year 2017.50

In response to component difficulties in preparing for a full SBR audit, the 

November 2012 FIAR Plan Status Report and the March 2013 FIAR 

Guidance included a revision to narrow the scope of initial audits to only 

current-year budget activity and expenditures on a Schedule of Budgetary 

Activity. Under this approach, beginning in fiscal year 2015, reporting 

entities are to undergo an examination of their Schedules of Budgetary 

Activity reflecting the amount of SBR balances and associated activity 

related only to funding approved on or after October 1, 2014. As a result, 

the Schedules of Budgetary Activity will exclude unobligated and 

unexpended amounts carried over from prior years’ funding as well as 

information on the status and use of such funding in subsequent years 

 48An agency’s general fund accounts are those accounts in the U.S. Treasury that hold all 

federal money not allocated by law to any other fund account. 

49Pub. L. No. 112-81, div. A, § 1003 (Dec. 31, 2011).

50Most recently, the NDAA for Fiscal Year 2014, Pub. L. No. 113-66, § 1003 (Dec. 26, 

2013), mandates that a full audit of DOD’s financial statements occur for fiscal year 2018, 

and that it be completed by March 31, 2019.
Page 23 GAO-14-576T 

(e.g., obligations incurred and outlays). These amounts will remain 

unaudited. Over the ensuing years, as the unaudited portion of SBR 

balances and activity related to this funding decline, the audited portion is 

expected to increase. However, the NDAA for Fiscal Year 2010, as 

amended by the NDAA for Fiscal Year 2013, requires that the FIAR Plan 

describe specific actions to be taken and the costs associated with 

ensuring that DOD’s SBR is validated as ready for audit by not later than 

September 30, 2014. We have reported that because the audit of the 

Schedule of Budgetary Activity is an incremental step building toward an 

audit-ready SBR, the FIAR Plan does not presently comply with this 

requirement.51

The FIAR Guidance sets out a mandatory set of five standardized phases 

for achieving audit readiness that DOD components are required to apply 

to each assessable unit.

Furthermore, all material amounts reported on the SBR will 

need to be auditable in order to achieve the mandated goal of full 

financial statement audit readiness by September 30, 2017. It is not clear 

how this can be accomplished if activity related to funding provided prior 

to October 1, 2014, remains unaudited.

52 In the first two phases, Discovery and 

Corrective Action, the components identify, assess, and correct or 

mitigate deficiencies in the processes and controls of the assessable 

units related to preparing auditable financial statements, line items, or 

transactions and the activities that feed into them. In the 

Assertion/Evaluation phase, the component asserts audit readiness53

 51

and 

the FIAR Directorate reviews and gives the component feedback on its 

state of audit readiness. In the Validation phase, the FIAR Directorate 

reviews the component’s examination report and documentation 

supporting successful remediation of deficiencies, and determines the 

reporting entity’s audit readiness state. In the Audit phase, an 

independent auditor or the DOD Office of Inspector General (OIG), 

performs an audit of the financial statements or specified elements and 

issues an opinion on whether they are fairly presented in accordance with 

GAO-14-94.

52DOD defines an assessable unit as any part of the financial statements, such as a line 

item or a class of assets, a class of transactions, or a process or a system, that helps 

produce the financial statements. 

53A management assertion, according to the November 2013 FIAR Guidance, is a written 

declaration that the subject matter (assessable unit) is audit ready in conformity with the 

internal control and supporting documentation criteria based upon the FIAR methodology. 
Page 24 GAO-14-576T 

generally accepted accounting principles. We found that while DOD has 

made progress toward financial audit readiness, according to DOD’s 

November 2013 FIAR Plan Status Report, milestone dates for the Navy 

have slipped and SBR milestone dates for the Army and defense 

agencies have been compressed, making it questionable whether 

corrective actions for these DOD components will be completed by 

September 2014 for all assessable units.54

In addition, our recent reports have identified several major challenges to 

DOD’s ability to successfully implement the FIAR Plan and meet its audit 

readiness goals. The following discussion summarizes these challenges.

Further, the Air Force has 

revised its milestone dates for achieving SBR audit readiness to the third 

quarter of fiscal year 2015. With a reported $187.8 billion in fiscal year 

2013 General Fund budgetary resources, the Air Force is material to 

DOD’s SBR, and if the Air Force cannot meet DOD’s September 2014 

SBR audit readiness goal, DOD will not be able to meet its goal. This in 

turn raises substantial concerns about DOD’s ability to undergo an audit 

on a full set of financial statements for fiscal year 2018.

Process for identifying and mitigating risks to the FIAR effort. In 

August 2013, we reported that DOD’s FIAR effort would benefit from a 

risk management strategy to help program managers and stakeholders 

make decisions about assessing risk, allocating resources, and taking 

actions under conditions of uncertainty.55

 54

In January 2012, DOD identified 

six department-wide risks to the FIAR Plan’s implementation: (1) lack of 

DOD-wide commitment, (2) insufficient accountability, (3) poorly defined 

scope and requirements, (4) unqualified or inexperienced personnel, (5) 

insufficient funding, and (6) information systems control weaknesses. 

DOD officials stated that risks are discussed on an ongoing basis during 

various FIAR oversight committee meetings; however, the risks DOD 

initially identified were not comprehensive, and DOD provided no 

evidence of efforts to identify additional risks. Further, we found little 

evidence that DOD analyzed risks it identified to assess their magnitude 

or that DOD developed adequate plans for mitigating the risks. DOD’s risk 

mitigation plans, published in its FIAR Plan Status Reports, consisted of 

brief, high-level summaries that did not include critical management 

information, such as specific and detailed plans for implementation, 

GAO-14-94.

55GAO-13-123. 
Page 25 GAO-14-576T 

assignment of responsibility, milestones, or resource needs. In addition, 

information about DOD’s mitigation efforts was not sufficient for DOD to 

monitor the extent of progress in mitigating identified risks. We concluded 

that without effective risk management at the department-wide level to 

help ensure the success of the FIAR Plan implementation, DOD is at 

increased risk of not achieving its audit readiness goals. We 

recommended that the department design and implement departmentlevel policies and detailed procedures for FIAR Plan risk management 

that incorporate the five guiding principles for effective risk management. 

DOD acknowledged that it does not have a risk management program 

that is specifically related to its FIAR effort and cited planned actions that 

if effectively and efficiently implemented, would address some aspects of 

the five guiding principles of risk management that are the basis for our 

recommendations. We are continuing to monitor DOD’s actions on our 

recommendation.

Component implementation of the FIAR Guidance. The FIAR 

Guidance provides a methodology for DOD components to use in 

developing and implementing their Financial Improvement Plans (FIP).56

The guidance details the roles and responsibilities of the DOD 

components, and prescribes a standard, systematic process for 

assessing processes, controls, and systems. DOD’s ability to achieve 

department-wide audit readiness greatly depends on its military 

components’ ability to effectively develop and implement FIPs in 

compliance with the FIAR Guidance. However, we have reported on 

concerns with the department’s efforts to implement this methodology. 

For example, our review of the Navy’s civilian pay and Air Force’s military 

equipment audit readiness efforts identified significant deficiencies in the 

components’ execution of the FIAR Guidance, resulting in insufficient 

testing and unsupported conclusions.57

 56A FIP is a framework for planning and tracking the steps and supporting documentation 

necessary to achieve auditability within the FIAR methodology. 

We recommended that DOD take 

various actions to improve the development, implementation, 

documentation, and oversight of DOD’s financial management 

improvement efforts. DOD generally concurred with recommendations 

and noted actions being taken to implement them. We are continuing to 

monitor Navy and Air Force audit readiness actions.

57GAO-11-851.
Page 26 GAO-14-576T 

In reviews of other DOD components, we also found internal control 

weaknesses in DOD’s procedures for maintaining accountability for 

billions of dollars in funds and other resources. For example, the Army 

and DFAS could not readily identify the full population of payroll accounts 

associated with the Army’s $46 billion active duty military payroll because 

of deficiencies in existing procedures and nonintegrated personnel and 

payroll systems.58

Preliminary results from our ongoing work to assess the Army’s progress 

in implementing its FIP for budget execution to help guide its SBR 

readiness efforts indicate that the Army did not fully complete certain 

tasks in accordance with the FIAR Guidance to ensure that its FIP 

adequately considered the scope of efforts required for audit readiness. 

For example, the Army did not consider the risks associated with 

excluding prior year balances and current year activity associated with 

legacy systems and did not adequately identify significant SBR activity 

attributable to service-provider business processes and systems or obtain 

sufficient information to assess their audit readiness. These activities may 

continue to represent material portions of future SBRs, which if not 

auditable, will likely affect the Army’s ability to achieve audit readiness 

goals as planned. Our review of the Army’s monthly tests to assess the 

effectiveness of selected budget execution controls show that the Army 

identified extensive deficiencies, such as a lack of appropriate reviews or 

approvals, and had an average failure rate of 56 percent for control tests 

from June 2012 through May 2013, the period covered by our review. 

Further, the Army’s corrective actions were not linked to specific 

corrective action plans to address the causes of identified deficiencies. 

The deficiencies and gaps we have identified in our preliminary findings 

throughout various phases of the Army’s SBR audit readiness efforts 

demonstrate a focus on meeting scheduled milestone dates and asserting 

audit readiness instead of completing actions to resolve extensive control 

deficiencies.

We recommended that the Army identify documents 

needed to support military payroll transactions affecting the pay of 

millions of active duty Army military personnel and that it develop and 

implement procedures for maintaining those documents. As a first step, 

the Army has developed a matrix of supporting documents for its military 

pay. However, the Army has not yet completed action to populate a 

central repository with these records.

 58GAO-12-406.
Page 27 GAO-14-576T 

Further, the military services rely heavily on DOD’s internal service 

providers to perform a variety of accounting, personnel, logistics, and 

system operations. For example, DFAS performs accounting and 

disbursement functions for the military services and defense agencies. 

The FIAR Guidance requires the service providers to have their control 

activities and supporting documentation examined by the DOD IG or an 

independent auditor in accordance with Statement on Standards for 

Attestation Engagements (SSAE) No.16 so that components have a basis 

for relying on the service provider’s data for their financial statement 

audits.59 In August 2013, we reported that DOD did not have an effective 

process for identifying audit-readiness risks, including risks associated 

with its reliance on service providers for much of its components’ financial 

data, and it needed better department-wide documentation retention 

policies.60

DOD has identified contract pay as a key element of its SBR. DFAS, the 

service provider responsible for disbursing nearly $200 billion annually in 

the department’s contract pay, has asserted that its processes, systems, 

and controls over contract pay are suitably designed and operating 

effectively to undergo an audit. Preliminary results from our ongoing 

assessment of DFAS’s implementation of its FIP for contract pay audit 

readiness indicate that DFAS has numerous deficiencies that have not 

yet been remediated. For example, DFAS did not adequately perform 

certain planning activities, such as assessing dollar activity and risk 

We identified two DOD component agencies—the Navy and 

the Defense Logistics Agency (DLA)—that had established practices 

consistent with risk management guiding principles. Because effective 

service-provider controls are critical to ensuring improvements in DOD 

funds control, we recommended that DOD consider and incorporate, as 

appropriate, Navy and DLA practices in department-level policies and 

procedures. DOD agreed with our recommendation and is taking actions 

to address it.

 59In accordance with SSAE No. 16, Reporting on Controls at a Service Organization, the 

auditors of each of these external service organizations issued reports concerning the 

design and operating effectiveness of the service organizations’ internal control over the 

processing of user transactions. Services provided by an external service organization are 

considered to be part of a user entity’s information system relevant to the user entity’s 

financial reporting if the services affect classes of transactions that are significant to the 

user entity’s financial statements as well as the financial reporting process used to 

prepare the financial statements.

60GAO, DOD Financial Management: Ineffective Risk Management Could Impair Progress 

toward Audit-Ready Financial Statements, GAO-13-123 (Washington, D.C.: Aug. 2, 2013). 
Page 28 GAO-14-576T 

factors of its processes, systems, and controls, which resulted in the 

exclusion of three key processes from the FIP, such as the reconciliation 

of its contract pay data to components’ general ledgers. As a result, 

DFAS did not obtain sufficient assurance that the contract disbursements 

it processed were accurately recorded and maintained in the components’

general ledgers and that the status of DOD’s contract obligations was upto-date. Although DFAS has asserted audit readiness for contract pay, 

until it corrects the weaknesses we identified, its ability to process, record, 

and maintain accurate and reliable contract pay transaction data is 

questionable. Therefore, our preliminary results indicate that DFAS does 

not have assurance that its FIP will satisfy the needs of DOD components 

or provide the expected benefits to department-wide efforts to assert audit 

readiness for contract pay as a key element of the SBR.

In May 2014, we reported that DOD continued efforts to improve its 

business enterprise architecture (BEA)—a modernization blueprint—and 

transition plan and modernize its business systems and processes, 

consistent with key statutory provisions.61

Further, DOD has identified several, multifunctional ERP systems as 

critical to its financial management improvement efforts. In a 2012 report 

on four of these ERPs, we found deficiencies in areas such as data 

quality, data conversion, system interfaces, and training that affect their 

However, we found that even 

though DOD has spent more than 10 years and at least $379 million on 

the architecture, DOD has not yet demonstrated that the BEA has 

produced business value for the department. For example, while DOD 

has established a tool that can assist in identifying potential duplication 

and overlap among business systems, the department has not 

demonstrated that it has used this information to reduce duplication and 

overlap. Accordingly, we recommended that the department develop 

guidance requiring military departments and other defense organizations 

to use existing BEA content to more proactively identify potential 

duplication and overlap. DOD agreed with our recommendation. 

Collectively, the limitations described in our May 2014 report put the 

billions of dollars spent annually on approximately 2,100 business system 

investments that support DOD functions at risk.

 61GAO, Defense Business Systems: Further Refinements Needed to Guide the 

Investment Management Process, GAO-14-486 (Washington, D.C.: May 12, 2014). The 

relevant legal requirements are codified, as amended, at 10 U.S.C. § 2222. 

Modern Business 

Information Systems
Page 29 GAO-14-576T 

capability to perform essential business functions.62 DFAS personnel also 

reported difficulty in using the systems to perform day-to-day activities. 

We recommended that DOD ensure that (1) any future system 

deficiencies identified through independent assessments are resolved or 

mitigated prior to further deployment of the systems, (2) timelines are 

established and monitored for those issues identified by DFAS that are 

affecting their efficient and effective use, and (3) training on actual job 

processes are provided in a manner that allows users to understand how 

the new processes support their job responsibilities and the work they are 

expected to perform.63

If these business systems do not provide the intended capabilities on 

schedule, DOD’s goal of establishing effective financial management 

operations and becoming audit ready could be jeopardized. We recently 

reported that the Air Force did not meet best practices in developing a 

schedule for the Defense Enterprise Accounting and Management 

System (DEAMS) program.

DOD partially concurred with our first 

recommendation, stating that based on the nature of an identified system 

deficiency, it will determine whether to defer system implementation until 

it is corrected. DOD agreed with our recommendations to establish and 

monitor timelines and provide training on user roles and responsibilities. 

We are continuing to monitor DOD’s actions.

64 We believe that this raises questions about 

the credibility of the deadline for acquiring and implementing DEAMS to 

provide needed functionality for financial improvement and audit 

readiness. We recommended that the Air Force update the cost estimate 

as necessary after implementing our prior recommendation to adopt 

scheduling best practices. DOD concurred with our recommendation.

A key principle for effective workforce planning is that an agency needs to 

define the critical skills and competencies that it will require in the future 

to meet its strategic program goals. Once an agency has identified critical 

skills and competencies, it can develop strategies to address gaps in the 

number of personnel, needed skills and competencies, and deployment of 

the workforce.

 62GAO-12-134.

63GAO-12-134.

64GAO, DOD Business System Modernization: Air Force Business System Schedule and 

Cost Estimates, GAO-14-152 (Washington, D.C.: Feb. 7, 2014).

Competent Financial 

Management Workforce
Page 30 GAO-14-576T 

In April 2014, we reported65 that DOD is addressing financial 

management workforce competencies and training through 

complementary efforts by (1) the Office of the Under Secretary of 

Defense for Personnel and Readiness (Personnel and Readiness) to 

develop a strategic civilian workforce plan that includes financial 

management,66 pursuant to requirements in the NDAA for Fiscal Year 

2010, as amended,67 and (2) the DOD Comptroller to develop and 

implement a Financial Management Certification Program, pursuant to 

requirements in the NDAA for Fiscal Year 2012.68 Financial management 

personnel are expected to possess the competencies that are relevant to 

and needed for their assigned positions. These competencies include 

fundamentals of accounting, accounting analysis, budget execution, 

financial reporting, and audit planning and management, among others. 

Personnel and Readiness is currently working on a competency 

assessment tool that will be used by the department, including the 

financial management functional community. The tool is to capture 

information related to competencies, such as proficiency level, 

importance, and criticality, and to identify any gaps in support of the 

Comptroller’s Financial Management Certification Program. Phased 

implementation of the program began in June 2013, and the current 

target date for full implementation is the end of fiscal year 2014. The 

certification program is to be mandatory for DOD’s approximately 54,000 

civilian and military financial management personnel and may take up to 

2 years to complete, depending on the extent to which an individual’s 

prior course work and level of experience to meet the new certification 

requirements. In April 14, 2014, the Deputy CFO stated that the newly 

implemented Financial Management Certification Program has already 

enrolled 22,300 financial managers and certified over 30.69

 65 GAO-14-94.

66The details of DOD’s financial management workforce assessment are contained in the 

Fiscal Year 2010 Department of Defense Strategic Workforce Plan, app. B-15, Financial 

Management. 

67See Pub. L. No. 111-84, § 1108(a)(1), (Oct. 28, 2009), codified as amended at 10 

U.S.C. § 115b. 

68Pub. L. No. 112-81, div. A, § 1051, (Dec. 31, 2011), codified at 10 U.S.C. § 1599d.

69GAO-14-94.
Page 31 GAO-14-576T 

Without a competent workforce and effective implementation of financial 

management processes, systems, and controls, DOD and its components 

are at risk that DOD’s other financial management reform activities will 

not be successful, resulting in incomplete and unreliable data for decision 

making. To the extent that these challenges are not addressed, DOD 

financial management will continue to be at high risk for waste, fraud, 

abuse, and mismanagement.

In conclusion, while DOD has several financial management improvement 

efforts under way and is monitoring progress against milestones, as the 

dates for validating audit readiness approach, DOD has emphasized 

asserting audit readiness by a certain date over making sure that effective 

processes, systems, and controls are in place to ensure that its 

components have improved financial management information for day-today decision making. However, several significant factors—including 

DOD component milestone slippages in meeting audit readiness dates; 

continuing, uncorrected DOD-wide financial management weaknesses; 

and inadequate risk management efforts—make it increasingly unlikely 

that DOD’s SBR will be audit ready by September 2014. While 

establishing and working toward milestones are important to measure 

progress, DOD should not lose sight of the ultimate goal of implementing 

lasting financial management reform to ensure that it has the systems, 

processes, and personnel to routinely generate reliable financial 

management and other information critical to decision making and 

effective operations for achieving its missions. Overcoming DOD’s longstanding financial management challenges will require strong 

commitment and top leadership support.

Chairman Carper, Ranking Member Coburn, and Members of the 

Committee, this completes my prepared statement. I would be pleased to 

respond to any questions that you may have at this time.

If you or your staff have any questions about this testimony, please 

contact me at (202) 512-9869 or khana@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this testimony. GAO staff members who made key 

contributions to this testimony include Gayle L. Fischer (Assistant 

Director), Gregory Marchand (Assistant General Counsel), Arkelga 

Braxton, Michael Bingham, Francine DelVecchio, Jason Kirwan, Susan 

Mata, Sheila D. M. Miller, Roger Stoltz, and Heather Rasmussen.

GAO Contacts and 

Staff 

Acknowledgments
Related GAO Products

Page 32 GAO-14-576T 

Defense Business Systems: Further Refinements Needed to Guide the 

Investment Management Process. GAO-14-486. Washington, D.C.: May 

12, 2014.

DOD Financial Management: Actions Under Way Need to Be 

Successfully Completed to Address Long-standing Funds Control 

Weaknesses. GAO-14-94. Washington, D.C.: April 29, 2014.

Defense Logistics: Army Should Track Financial Benefits Realized from 

its Logistics Modernization Program. GAO-14-51. Washington, D.C.: 

November 13, 2013.

DOD Financial Management: Ineffective Risk Management Could Impair 

Progress toward Audit-Ready Financial Statements. GAO-13-123. 

Washington, D.C.: August 2, 2013.

Information Technology: OMB and Agencies Need to More Effectively 

Implement Major Initiatives to Save Billions of Dollars. GAO-13-796T. 

Washington, D.C.: July 25, 2013.

Army Industrial Operations: Budgeting and Management of Carryover 

Could Be Improved. GAO-13-499. Washington, D.C.: June 27, 2013.

DOD Financial Management: Significant Improvements Needed in Efforts 

to Address Improper Payment Requirements. GAO-13-227. Washington, 

D.C.: May 13, 2013.

Major Automated Information Systems: Selected Defense Programs 

Need to Implement Key Acquisition Practices. GAO-13-311. Washington, 

D.C.: March 28, 2013.

Military Bases: Opportunities Exist to Improve Future Base Realignment 

and Closure Rounds. GAO-13-149. Washington, D.C.: March 7, 2013.

Defense Logistics: A Completed Comprehensive Strategy is Needed to 

Guide DOD’s In-Transit Visibility Efforts. GAO-13-201. Washington, D.C.: 

February 28, 2013.

High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 

2013.

Related GAO Products
Related GAO Products

Page 33 GAO-14-576T 

Defense Logistics: DOD Has Taken Actions to Improve Some Segments 

of the Materiel Distribution System. GAO-12-883R. Washington, D.C.: 

August 3, 2012.

Military Base Realignments and Closures: Updated Costs and Savings 

Estimates from BRAC 2005. GAO-12-709R. Washington, D.C.: June 29, 

2012.

Defense Inventory: Actions Underway to Implement Improvement Plan, 

but Steps Needed to Enhance Efforts. GAO-12-493. Washington, D.C.: 

May 3, 2012.

Defense Logistics: Improvements Needed to Enhance DOD’s 

Management and Approach and Implementation of Item Unique 

Identification Technology. GAO-12-482. Washington, D.C.: May 3, 2012.

(197136)
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