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i 

70–784 2011

[H.A.S.C. No. 112–68] 

DOD’S EFFORTS TO IMPROVE 

PAYMENT AND FUNDS CONTROL 

HEARING 

BEFORE THE

PANEL ON DEFENSE FINANCIAL MANAGEMENT 

AND AUDITABILITY REFORM 

OF THE

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

SEPTEMBER 22, 2011 
(II) 

PANEL ON DEFENSE FINANCIAL MANAGEMENT 

AND AUDITABILITY REFORM 

K. MICHAEL CONAWAY, Texas, Chairman 

SCOTT RIGELL, Virginia 

STEVEN PALAZZO, Mississippi 

TODD YOUNG, Indiana 

ROBERT ANDREWS, New Jersey 

JOE COURTNEY, Connecticut 

TIM RYAN, Ohio 

PAUL FODERARO, Professional Staff Member 

WILLIAM JOHNSON, Professional Staff Member 

LAUREN HAUHN, Research Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2011 

Page 

HEARING: 

Thursday, September 22, 2011, DOD’s Efforts To Improve Payment and 

Funds Control ....................................................................................................... 1 

APPENDIX: 

Thursday, September 22, 2011 ............................................................................... 23 

THURSDAY, SEPTEMBER 22, 2011 

DOD’S EFFORTS TO IMPROVE PAYMENT AND FUNDS CONTROL 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

Andrews, Hon. Robert, a Representative from New Jersey, Ranking Member, 

Panel on Defense Financial Management and Auditability Reform ................ 2 

Conaway, Hon. K. Michael, a Representative from Texas, Chairman, Panel 

on Defense Financial Management and Auditability Reform .......................... 1 

WITNESSES 

Blair, Daniel, Deputy Inspector General for Auditing, U.S. Department of 

Defense .................................................................................................................. 6 

Easton, Mark, Deputy Chief Financial Officer, U.S. Department of Defense .... 3 

Khan, Asif A., Director, Financial Management and Assurance, U.S. Government Accountability Office .................................................................................. 8 

APPENDIX 

PREPARED STATEMENTS: 

Blair, Daniel ...................................................................................................... 40 

Conaway, Hon. K. Michael .............................................................................. 27 

Easton, Mark .................................................................................................... 29 

Khan, Asif A. ..................................................................................................... 61 

DOCUMENTS SUBMITTED FOR THE RECORD: 

[There were no Documents submitted.] 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

Mr. Andrews ..................................................................................................... 97 

Mr. Conaway ..................................................................................................... 97 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

[There were no Questions submitted post hearing.] 

(1) 

DOD’S EFFORTS TO IMPROVE PAYMENT AND FUNDS 

CONTROL 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, PANEL ON DEFENSE FINANCIAL MANAGEMENT AND

AUDITABILITY REFORM, Washington, DC, Thursday, September 22, 2011. 

The panel met, pursuant to call, at 8:01 a.m. in room 2212, Rayburn House Office Building, Hon. K. Michael Conaway (chairman 

of the panel) presiding. 

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE FROM TEXAS, CHAIRMAN, PANEL ON DEFENSE FINANCIAL MANAGEMENT AND AUDITABILITY REFORM 

Mr. CONAWAY. Call the meeting to order. Welcome to today’s 

hearing on DOD’s [Department of Defense] efforts to improve payment and funds control. Previous hearings have covered DOD’s efforts to improve financial management, achieve audit readiness. 

Improving financial management controls is critical to safeguarding taxpayer dollars and preventing waste, fraud, and abuse. 

Today we will examine the Department’s efforts to address improper payments, Antideficiency Act violations, and other types of 

disbursements that increase the risk of fraudulent or erroneous 

payments and impact the ability to report reliable information on 

our financial statements. 

Billions of taxpayer dollars are wasted each year when the Federal Government makes payments in incorrect amounts to the 

wrong entities and to entities that are not eligible to receive those 

payments. In fiscal year 2010, the Federal agencies reported an estimated $125 billion in improper payments, of which a billion was 

reported by Department of Defense. Under any other circumstance, 

a billion would be considered a staggering amount. Yet both the 

DOD Office of Inspector General and GAO [Government Accountability Office] have reported that DOD may not be reporting or capturing the full extent of its improper payments. 

Properly identifying and reporting the amount of the improper 

payments is a critical step on the way to developing actions needed 

to prevent and recover these payments. The Antideficiency Act prohibits executive agencies from incurring obligations or making expenditures that exceed their appropriations. That is one of the 

major laws—major ways in which Congress exercises its constitutional control of the purse. 

In September 2008, GAO reported that as a result of continuing 

financial management weaknesses, including difficulties in ensur-
2 

ing the proper authorization, processing and recording of payments, 

DOD’s ability to timely and reliably determine the amounts of 

funds that it has available to spend is impaired, and the Department remains at risk of overobligating and overspending its appropriations in violations of the Antideficiency Act. In fact, according 

to DOD—sorry, GAO, DOD reported 64 ADA [Antideficiency Act] 

violations from fiscal year 2007 through mid-September 2011, totaling about $927 million. 

DOD has taken actions to improve its financial management system, yet as illustrated by the examples—certain examples, there is 

still much work to be done. With budget deficits in the trillions, the 

Government can ill afford to not properly account for all of our taxpayer resources because of poor management controls. 

I want to thank our witnesses in advance for their testimony. We 

have today Mark Easton, Deputy Chief Financial Officer for the 

Department of Defense; we have got Daniel Blair, Deputy Inspector 

General for auditing, Department of Defense; and Asif Khan, Director of Financial Management and Assurance from GAO. 

Now I will turn to Rob Andrews for any comments he wants to 

make. 

[The prepared statement of Mr. Conaway can be found in the Appendix on page 27.] 

STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE 

FROM NEW JERSEY, RANKING MEMBER, PANEL ON DEFENSE FINANCIAL MANAGEMENT AND AUDITABILITY REFORM 

Mr. ANDREWS. Chairman, good morning. I would like to thank 

you and our colleagues for assembling a really first-rate panel. 

We have heard from all three of these gentlemen in various 

iterations over the last couple years, and I look forward to this 

morning’s testimony. 

I think the chairman set the context exactly right for this discussion. If you exclude the OCO [Overseas Contingency Operations] 

accounts, the overseas accounts in Iraq and Afghanistan, and you 

look at real dollar defense budgets, the defense budget is 40 percent higher than it was in 2001 in real dollars. We have essentially 

the same end strength, the same number of ships, the same number of airplanes, which sort of begs the question, where is this 

money, and what have we gotten for it? 

Now, I don’t think there is a preordained right answer to what 

the level should be. Actually, the best answer I have ever heard 

was given by then-Marine Commandant General Krulak a few 

years ago before the committee when someone asked him what he 

would do with the last dollar he had to spend. And he said, I would 

spend it on, after he or she has completed their mission successfully, bringing my last Marine home safely. Pretty good answer, I 

thought. 

So, with that spirit in mind, in looking at this 40 percent real 

growth over time, we have a lot of important decisions to make. We 

can’t make good decisions without accurate data. And we can’t 

have accurate data without auditable financial statements. 

The chairman talked about the alarming level of inappropriate 

payments. When I say ‘‘inappropriate,’’ I don’t mean necessarily 
3 

criminal or nefarious, but, you know, paying too much for the right 

thing or paying something for the wrong thing. And so I think we 

have assembled—I know we have assembled—three individuals 

that have great expertise in addressing this problem and pointing 

us in the right direction. 

And Mr. Chairman, I am looking forward to hearing what they 

have to say and then engaging with our colleagues in some good 

questions to further edify the effort. 

So, good morning, and I look forward to hearing what you have 

to say. 

Mr. CONAWAY. Thanks, Rob. 

One quick anecdote. I was on a trip last week out in the hither 

lands at a DOD facility. We finished the tour, and a couple of the 

guys who were leading the tour were walking, the three of us were 

walking off, and they were having a brief conversation. And I 

wasn’t paying much attention, but the phrase ‘‘ERP’’ [Enterprise 

Resource Planning] came into their conversation. This is between 

those two. So I kind of stepped into it. 

I said, what are you guys talking about? And they were talking 

about they were going to, over the next 3 or 4 weeks, they were 

going to have to put in an extensive amount of work to get converted to whatever the ERP thing they were working on. 

I said, well, what do you think about that? They were very complimentary. They had no reason to know why I had a keen interest 

in it. They said, you know, it is going to be better on the other side. 

It will help us work our work better. 

So, Mark, pass on to the rest of the squad, it is filtering all the 

way down to buy-in by folks who are actually having to, at the 

point end of that sword, to have to put it together. So I was very 

encouraged by their comments that they were sold out to the advantages of getting it done in their particular deal. 

So, with that, Mark, you want to start us this morning? 

STATEMENT OF MARK EASTON, DEPUTY CHIEF FINANCIAL 

OFFICER, U.S. DEPARTMENT OF DEFENSE 

Mr. EASTON. Thank you, sir. 

Chairman Conaway, Ranking Member Andrews, members of the 

panel, thank you for your continued interest in DOD financial management and for providing me an opportunity to relate it to issues 

like improper payments, problem disbursements, and 

Antideficiency Act violations. 

I submitted a more detailed statement for the record, but in the 

interest of time, I will summarize briefly so that we will have as 

much time as possible for questions. 

As the deputy chief financial officer, my responsibilities at DOD 

involve financial policies, systems compliance, and internal controls, among a lot of other things. I have dealt with these kinds of 

things in various capacities in the field, both in uniform and as a 

civil servant and in the field particularly. So I appreciate your comments relative to getting the word out. 

I am proud to be part of a financial management workforce that 

is supporting the warfighter around the world. But I am also mindful of our stewardship responsibility and the fact that DOD finan-
4 

cial management has remained on the GAO high-risk list since 

1995. 

My experience tells me that a reasonable level of controls do 

exist within DOD, especially in the local control of assets and expenditure of funds. But my current position also provides me with 

a broader perspective that must acknowledge enterprise-wide 

weaknesses that negatively impact our financial management capabilities and demand an enterprise-wide response. The lack of 

auditable financial statements are clearly a symptom of those 

weaknesses. 

As we have talked to you many times in this forum, DOD has 

a challenging business environment, a combination of size, complexity, and geographical dispersion. How well we manage within 

that environment depends on how well the people, processes, and 

systems that have to deal with that interact and work together. 

People are really the key, particularly now. We have a dedicated 

and experienced workforce, and we rely heavily on those traits of 

dedication and technical expertise. We depend on them not only to 

support today’s mission, which has been expanding over the last 10 

years particularly, and to deal with today’s problems, but also to 

be able to acquire new skills and to lead change throughout the enterprise. 

Another key business element is processes. And this is an area 

that I think you are going to hear a lot of issues across the board. 

But the one thing that we do agree on is the need for increased 

and improved internal controls, more standard processes. That is 

the key to being able to produce higher quality financial information for both reporting and decisionmaking. 

And the third factor, Mr. Chairman, is the one you mentioned 

about ERPs. Clearly, our size and complexity demands that we 

have automated, integrated systems. It is key to particularly being 

able for us to support auditability and sustain those changes. The 

bottom line is that a stronger business environment is really the 

key. It will reduce the likelihood of improper payments and problem disbursements that we have experienced and minimize the risk 

of ADA violations. 

I would assert that we manage these three risk factors well, despite current weaknesses, but we have to do much, much better. 

Let me highlight each of these areas very briefly. 

First, improper payments. The Defense Finance and Accounting 

Service—and you heard from Martha Smith last week—handles 

about 90 percent of all our payments. We use post-base statistical 

sampling on five of the six major programs that we have. And we 

plan to expand—and this is an area of contention—but we plan to 

expand that to our commercial payment area, post-payment statistical sampling, in addition to being able to act on issues that we 

receive in terms of notifications from vendors to be able to recapture those—capture those resources. 

We use the processes to be able to identify root causes and act 

on those causes. As you mentioned, the Government-wide error 

rate with the $120 billion that are reported of improper payments, 

you know, we represent roughly half of that as a percentage, and 

about $1 billion. The elements that we are emphasizing through 
5 

auditability, and this is the linkage that I will keep am coming 

back to, strong internal controls will further reinforce this program. 

Turning to problem disbursements, and to try to use a plain 

English analogy, we have thousands of people writing checks and 

thousands of individual accounts. One digit or one problem on any 

one of those transactions oftentimes doesn’t prevent that payment 

from being disbursed, but it does prevent it from being able to return and being posted to your checking account. We put problem 

disbursement—essentially, that is what a problem disbursement 

is—we put problem disbursements into three categories: unmatched, which is a case that we have an obligation, and that disbursement cannot find its way back to that obligation, so we have 

an unmatched condition. The second is something we call a negative unliquidated obligation, which means it did find that original 

obligation, but the dollar value exceeded that. And then the third, 

you might refer to it as float in your own checking account, where 

you have written checks, we call that in-transits. Once those intransits reach a particular age, they essentially fall into the categories of problem disbursements. 

Across the board, we have made significant progress. For example, in 1999, overage problem disbursements since then have been 

reduced by 82 percent; negative unliquidated obligations have been 

reduced by 97 percent. 

Antideficiency Act violations are another matter. They can occur 

for a number of reasons: a violation of purpose, time, or amount. 

We first strive to prevent the occurrences. And as you heard Secretary Hale say, the only right goal for Antideficiency Act violations is zero. But when they do occur, we need to track them, track 

the ongoing investigation, and make sure that we reach a conclusion and report promptly. Each ADA case is unique, but there are 

recurring themes. And frequently, they reveal a need to increase 

the level of training and awareness, because it is a very, very complex business environment. 

Over the past 4 years, a total of 123 cases were identified 

through audits or through self-reporting, and we would like do 

more through self-reporting, having management assume that responsibility; 48 cases were investigated and found to be actual violations and were reported; 37 cases were investigated and found to 

be no violations; and 38 are currently under investigation as potential violations. It is important to note that it is not—once we begin 

an investigation, we may reach the conclusion that it is not a violation in the course of the investigation. We have been able to minimize, and the number of Antideficiency Act violations have been 

relatively stable despite a very, very porous business environment. 

Our current emphasis on internal controls as part of our audit 

readiness program should contribute to timelier investigation—excuse me, timelier identification, that is really the key, and more efficient investigation of those cases. Secretary Hale has placed significant emphasis on ensuring that we are reporting in a more 

timely manner. We inherited approximately—we have reduced the 

number of overage cases—these are cases that are too old, past the 

1 year time frame to investigate and report—we have reduced that 

number by 60 percent. 
6 

In summary, please be assured that my colleagues and I are fully 

committed to fulfilling our stewardship responsibility to the taxpayer. We recognize the benefits of a stronger and better controlled 

business environment. One that supports auditable financial statements will increase public confidence in our reporting and will reduce the incidents of improper payments and problem disbursements. Most importantly, they will provide better information for 

us to get more out of the program. 

We are building a business environment, those people, processes, 

and systems, that will attack the causes, not just the symptoms. 

And finally, we are maintaining a strong working relationship with 

key stakeholders, to include my colleagues on the panel today, 

GAO and DOD IG [DOD Office of Inspector General]. Their feedback, while sometimes painful, is important to our overall efforts 

to strengthen financial management. 

Mr. Chairman, this concludes my statement, and I sincerely appreciate the time that you and your distinguished panel have invested to better understand our challenges and support our efforts 

to address them. 

[The prepared statement of Mr. Easton can be found in the Appendix on page 29.] 

Mr. CONAWAY. Thanks, Mark. Daniel. 

STATEMENT OF DANIEL BLAIR, DEPUTY INSPECTOR GENERAL 

FOR AUDITING, U.S. DEPARTMENT OF DEFENSE 

Mr. BLAIR. Chairman Conaway, Ranking Member Andrews, and 

distinguished members of the panel, good morning, and thank you 

for the opportunity to appear here before you on behalf of the DOD 

IG to talk about improper payments, Antideficiency Act violations, 

and other problem disbursements. 

In the current economic environment, it is important for DOD to 

know that every payment that it makes goes to the right person 

for the right amount and at the right time. Over the past few 

years, the Department has worked hard to address its financial 

management challenges and has recognized some of the impediments that need to be resolved. However, more progress needs to 

be made in order to be good stewards of the taxpayers’ money. 

Since fiscal year 2007, DOD IG has issued 27 audit reports addressing improper payments. These payments are often the result 

of unreliable data and poor internal controls, and they create an 

environment where fraud and waste are more likely. 

In fiscal year 2010, the Department reported nearly $1 billion of 

estimated improper payments. However, we found the Department’s process did not review more than half of the fiscal year 2010 

gross outlays and therefore question the reliability of this estimate. 

Without strong internal controls, the Department is at risk of 

making improper payments. For example, our audit of a contract 

supporting Broad Area Maritime Surveillance found that DOD personnel did not validate that a contractor was entitled to receive 

over $329 million because none of the invoices were reviewed. We 

also found that the Navy paid this contractor $206,000 for questionable travel expenses, such as a golf outing and air shows in 

Paris and Singapore. 
7 

We have concerns about the large number of potential 

Antideficiency Act, or ADA, violations that are averted because we 

identify them during the course of our audit, and the Department 

takes appropriate corrective actions to remedy these situations. 

Since 2005, we have issued 49 reports that have identified over 900 

potential ADA violations, valued at over $2.3 billion, which the Department needed to investigate and resolve. 

We found that the Department often sends money to other Federal agencies to fulfill contracting needs. And this money may be 

used beyond the time and purpose limitations of the appropriation. 

A joint audit that we did with the State Department IG recently 

on the Afghan National Police Training efforts identified almost 

$75 million in potential ADA violations. Using Defense Department 

funds, the State Department re-obligated funds outside the scope 

of the reimbursable agreement and moved expired funds to cover 

new requirements. 

Fund Balance with Treasury reconciliations are a basic control to 

ensure that all disbursements are properly accounted for, and they 

help to identify problem disbursements. As you know, generally 

Fund Balance with Treasury is similar to a checking account that 

needs to be reconciled on a regular basis. However, the Department 

oftentimes struggles to consistently reconcile these accounts, which 

last year totaled over $521 billion. 

Currently, 54 other defense organizations share a commingled 

Fund Balance with Treasury account and must rely primarily on 

balances in the Cash Management Report when reconciling to the 

U.S. Treasury. However, we recently found that the cumulative 

balances on the Cash Management Report were over $9 billion different than amounts reported by the U.S. Treasury and included 

$1.45 billion in unmatched transactions. 

During fiscal year 2010, the Marine Corps’ financial statement 

audit of its Budgetary Resources, Statement of Budgetary Resources, the Marine Corps was unable to support its Fund Balance 

with Treasury reconciliations. However, starting in June of this 

year, the Marine Corps has been able to provide detailed transaction files supporting its reconciliation process. So there is an obvious note of improvement that has taken place since the last 

year’s audit. 

Before closing, I also want to briefly mention three key challenges that must be addressed before the Department’s financial 

statements become auditable by the 2017 deadline. These three 

areas are improving data reliability, improving internal controls, 

and effectively implementing new systems. These challenges must 

be resolved before this ambitious plan can become a reality. 

We frequently identify financial data that is incomplete and inaccurate. And as a result, DOD decisionmakers and other leaders 

cannot rely on this data to make sound business decisions. The Department also faces pervasive internal control weaknesses that 

hamper its financial management efforts. While DOD’s new systems are a key component of its auditability strategy, unless the 

Department first improves the quality of the data and reengineers 

its processes, many of the intended benefits of these systems will 

not be realized. 
8 

In closing, sound financial management is critical to providing effective stewardship over billions of dollars the Defense Department 

receives annually. While I recognize that there is significant effort 

that the DOD leadership is putting in at this point to resolve financial management problems, frankly, much more remains to be 

done. Senior leadership in the Department and other stakeholders, 

including Congress, need reliable financial information on a daily 

basis to ensure that every dollar supports the warfighter and improves military readiness. 

This concludes my statement, and I would be happy to answer 

any questions that you may have. 

[The prepared statement of Mr. Blair can be found in the Appendix on page 40.] 

Mr. CONAWAY. Thank you, Daniel. 

Asif. 

STATEMENT OF ASIF A. KHAN, DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. KHAN. Mr. Chairman, Ranking Member Andrews, and members of the panel, good morning. 

It is my pleasure to be here today to provide our perspectives on 

the status of Department of Defense funds control and payment 

controls. 

As a steward of public resources, DOD is responsible and accountable for using public funds for the purposes and within the 

timeframes and amounts prescribed by law, making payments to 

the right parties in the correct amount, identifying and recouping 

any improper payments, and accurately recording and reporting on 

its transactions on the use of public funds. 

I would like to thank the panel for holding this important hearing. Having assurance that these basic controls and processes are 

working correctly is a fundamental prerequisite for overall financial reliability and reporting. In my testimony today, I will discuss 

the weaknesses in DOD’s funds control and payment controls and 

their impact on the reliability of DOD financial information. I will 

also discuss the Department’s efforts to estimate its improper payments. My statement today is based primarily on our prior work. 

In addition, it includes relevant information from reports issued by 

the DOD Inspector General. 

First, regarding funds control, for years GAO has reported pervasive weaknesses in DOD’s controls over its funds and the reliability 

of its financial reporting. For example, in 2008, like you had mentioned, Mr. Conaway, we had reported that DOD’s complex and inefficient payment processes, unintegrated business systems, and 

weak internal controls impaired its ability to maintain proper 

funds controls, putting DOD at risk of overobligating or overspending its appropriations. These conditions have hindered its 

ability to ensure that transactions are accurately recorded, sufficiently supported, properly executed, and effectively monitored. In 

other words, at any given time, DOD does not have sufficient reliable information available to provide assurance that its obligations 

and disbursements are within budget and legal limits. 
9 

Funds control weaknesses place DOD at risk of violating the 

Antideficiency Act, enacted to prevent agencies from incurring obligations or making expenditures in excess or in advance of appropriations. The ADA requires DOD to report on its ADA violations. 

For the 5-year time period from fiscal year 2007 through September 15, 2011, DOD reported 64 ADA violations, with a total dollar amount of just over $927 million. However, DOD’s reporting of 

ADA violations may not be complete as a result of other pervasive 

internal control weaknesses. 

In addition, DOD has a category of disbursement it refers to as 

problem disbursements. They include disbursements paid that have 

not been matched to their related obligation records as a result of 

breakdowns in both fund control and payment controls. DOD has 

been reporting hundreds and millions of dollars in unmatched disbursements over 120 days old in recent fiscal years. 

Problem disbursements increase the risk of making fraudulent or 

erroneous payments without detection. In addition, problem disbursements impair the reliability of DOD financial statements and 

DOD’s ability to control its disbursements, a key aspect of funds 

control. 

These and other weaknesses over financial reporting have prevented the military services, and DOD overall, from preparing a reliable Statement of Budgetary Resources, the SBR, since they were 

first required in 1998. For instance, like Mr. Blair mentioned, the 

Marine Corps received a disclaimer of opinion on its fiscal year 

2010 SBR due to serious control weaknesses. Also, funds control 

and other weaknesses are currently hindering Navy’s audit readiness related to its Funds Balance with Treasury. Controls over 

Fund Balance with Treasury are similar to reconciling a checkbook 

with a bank statement and a key step in preparing the SBR. 

Finally, regarding improper payments, DOD reported for fiscal year 2010 that it made an estimated $1 billion in improper payments. However, these estimates do not include amounts from its 

commercial payment programs, which account for approximately 

one-third of the value of DOD payments. Our prior work and reports issued by the DOD IG have highlighted the Department’s 

longstanding and significant problems with estimating and preventing improper payments. 

Specific weaknesses in DOD’s payment controls include inadequate payment processing, inadequate support documentation for 

expenditures, financial systems deficiencies, and also weak contract 

audit and payment controls. We have also reported on weaknesses 

in DOD processes for assessing the risk of improper payments and 

in reporting estimated amounts of improper payments. 

In closing, Mr. Chairman, DOD continues to face difficult challenges. If DOD is to achieve its stated goal of audit readiness for 

its consolidated financial statement by the end of fiscal year 2017, 

it is critical for the Department to closely monitor its progress. It 

is also critically important for DOD to focus on the basics, such as 

correctly recording obligations, performing key reconciliations, and 

making accurate payments. 

Mr. Chairman, Ranking Member Andrews, and members of this 

panel, this concludes my prepared statement. I would be happy to 

answer any questions that you may have at this time. Thank you. 
10 

[The prepared statement of Mr. Khan can be found in the Appendix on page 61.] 

Mr. CONAWAY. All right. 

Thank you, gentlemen. 

We are going to reverse order on our side. 

Todd for 5 minutes. 

Mr. YOUNG. Thank you, Mr. Chairman. 

Thank you to all of our witnesses for your service and appearance here this morning. I wanted to direct my line of inquiry to 

ERP implementation, something all of you touched on at various 

levels of detail. 

DOD we know is investing billions of dollars in modernizing 

these business systems. And there have been some challenges, understandably at some level in terms of implementing these systems 

in a timely fashion and within budget. It was Mr. Blair, I believe, 

in his testimony, who said that DOD has been unable to meet key 

milestones for 4 of the 11 ERP systems in the Department. 

So I am curious what impact you project that any continued slippages will have in terms of the Department’s efforts to improve its 

funds control and payment processes, firstly. And then, secondarily, 

what, if anything, is being done and can be done to mitigate those 

slippages in your interface with the vendors or internally? 

Mr. BLAIR. One of the things that is important to note is how 

critical the ERP systems are to the Department’s fund balance— 

or not just fund balance, but to auditability of all of its statement. 

And as you noted, some of them have slipped. And I think that because it is such an integral part of the auditability efforts, this slippage is of serious concern. It could have a profound impact upon 

whether or not the Department is able to meet its auditability goal. 

What we have done at the IG is to increase the number of audits 

that we are doing of these systems, because what we are starting 

to see is that there are some consistent themes in LMP [Logistics 

Modernization Program], for example, or GFEBS [General Fund 

Enterprise Business System], where some of the same problems 

exist in those systems, where they are not compliant with the 

standard general ledger, for example. And we are making recommendations to the Department to fix these, but also to look at 

how they are implementing other ERPs so they can take the lessons learned from one and apply it to all, as appropriate. 

Mr. YOUNG. Thank you. 

Mr. Easton. 

Mr. EASTON. We appreciate the question. I think that with I 

would say most the of the ERPs—we have still got a couple of 

ERPs from Air Force coming along—but most of the ERPs we are 

beginning to more effectively apply lessons learned. And I would 

look for some of the slippages in schedule to be mitigated, if only 

for the fact that we are very close to the end of the program in 

many regards. We are directly linking those things to audit readiness. 

I would venture to say that some of our previous experience and 

some of the cause is the fact that we had the acquisition program 

delivering a system without the business community fully engaged 

and being able to link the kinds of things that we talked about. So 

I think that we have done a much better job of being able to say, 
11 

you know, these are the problems that we are trying to solve relative to problem disbursements. 

Having said that, we are putting these ERPs into an environment that is sort of flawed. And so the interfaces that exist now, 

hopefully many of them will go away, we will begin to improve that 

process as well. So bottom line is that we are getting better, but 

it is a critical enabler. 

Mr. YOUNG. You share that assessment, Mr. Khan? 

Mr. KHAN. Mr. Young, I just want to mention two things as far 

as the ERP slippage is concerned. The impact is going to be more 

cost, obviously, because there are cost overruns. And it is going to 

require more money in terms of using legacy systems. And the impact of using legacy systems on a go-forward basis is going to be 

on improper payments and ADA violations, because the underlying 

cause is weak controls. If we continue forward with the legacy systems, it is going to perpetuate the weak controls, causing more improper payments or continuing to have them and also ADA violations as the status quo. 

Mr. YOUNG. So to take that to the next level, you say if we continue on with the legacy systems, it would require additional appropriations by Congress, additional investments to move past 

some of those systems, right? Otherwise we can experience additional data exchange challenges and corrupt data and what not, 

right? So we are just going to have to weigh that trade-off. 

Mr. KHAN. I mean, that is a correct consequence that you have 

laid out. 

Mr. YOUNG. Okay. 

Mr. KHAN. It is going to cost more to maintain the legacy systems, certainly, and operate them. And at the same time, additional money is going to be spent on developing the ERPs. 

Mr. YOUNG. Thank you all. 

I yield back. 

Mr. CONAWAY. Thanks, Todd. 

Rob, 5 minutes, or Joe. 

Mr. ANDREWS. Recognize Mr. Courtney. 

Mr. CONAWAY. In spite of rewarding bad behavior, we will go 

with Joe Courtney. 

Mr. COURTNEY. Thank you, Mr. Chairman. 

Over the weekend, I was at an Indian event, the Mohegan Indian 

event, where they gave me a new name. It was Two Iron Fish instead of Two Subs, which Mr. Conaway would appreciate that. Mr. 

Blair, your testimony you talked about the 27 audits that have 

taken place since 2007. What triggers those? Is that just sort of 

random, or is it whistleblower complaints, or is it a regular process? I mean, what—maybe you could just help me with that. 

Mr. BLAIR. Our audits start from a wide variety of sources. Some 

of them are whistleblowers. Some are as a result of our annual 

planning efforts. Some of them are as of a result of outreach to the 

Department, and we ask them, what are your areas of concern? So 

we put that all together; we do our annual audit plan. And so that 

is how we come up with the wide variety of the audits that we do. 

Mr. COURTNEY. So if we fast-forward to 2017 and we get to a 

place where it is auditable systems, what does that mean for your 
12 

office? Does that allow you to be less random in terms of trying to 

find where the problems are? 

Mr. BLAIR. There is no doubt that when we get to the 2017 date 

that we are going to have to approach this with a large number of 

our resources. And it will reduce the number of audits that we can 

do in other areas. I do have a fairly large number of staff who are 

financial statement auditors. And they will be the ones that will be 

leading the 2017 effort. But it will impact some of the other work 

that we have been able to do. But what I am hoping is that as we 

go forward over the next several years, there will be more and 

more corrections that will be made, less audits are needed in those 

other areas, so that we will be able focus those resources appropriately on this effort. 

Mr. COURTNEY. So when you, on page three of your testimony, 

talked about we found the Department’s review process included 

less than half of fiscal 2010’s first quarter gross outlays, I mean, 

help me. I read that as saying that basically we don’t know about 

where the other half is in terms of accuracy as far as payments. 

And will that change once we get to 2017, assuming, you know, we 

hit that date? 

Mr. BLAIR. Mr. Easton and I were talking about that before we 

started this morning. And one of the things that we agree on is the 

need to expand the methodology that they are using to identify improper payments and to go into those other gross outlays in subsequent years that they didn’t look at in fiscal year 2010. And the 

more you look, the more you are going to find. The more you find, 

the more corrections that can be made to prevent that going forward. So I think that is the ultimate goal. 

Mr. COURTNEY. Go ahead, Mr. Easton. 

Mr. EASTON. Can I follow up? On that particular issue, I guess 

going back to your broad question in 2017, I would like to see an 

environment where management assumes responsibility for those 

internal controls. I would like to be able to go to Dan and say, you 

know, you are going to have to put your resources in a financial 

audit. That will mean because we have recognized and acknowledged and implemented controls so that you don’t have to make 

these specific kind of things. On that particular issue of improper 

payments, and this was an issue that, quite frankly, we did not 

agree with the segment of outlays that was in the testimony were 

intergovernmental outlays, essentially, and some in the intelligence 

community that were not included, and we did not plan to include 

those. And so there was a difference of opinion there. There is 

much that we agree on, and that particular area that we did not 

agree. 

But an audit will allow us to be able to combine the internal control perspective, the coverage perspective, so that we don’t have 

these disagreements in the future. 

Mr. COURTNEY. Thank you. 

I yield back, Mr. Chairman. 

Mr. CONAWAY. Thank you. 

Scott. 

Mr. RIGELL. Thank you, Mr. Chairman. 

I appreciate the panel coming in this morning. Having been in 

the business for about 25 years, I have certainly been embarrassed 
13 

from time to time to learn that our business had overpaid a vendor 

twice. And I will even confess that in our campaign, in the blur of 

life, we also paid twice there on occasion. So when you look at the 

magnitude of the Department of Defense, it is not at all surprising 

that this is a challenge. 

Having said that, the testimony this morning, and particularly, 

Mr. Blair, for some reason, I just focused in on what you both said 

and what you have written in your testimony. There is a part of 

me that gets extremely frustrated as a fellow American to hear 

this. And the business side of me says, hey, what a great opportunity to make things better. There is no shortage of places to look. 

I share your view that we have severely, in some cases, understated the amount of overpayment. And at some point, if you could, 

I don’t want to spend too much time on this, but if you could help 

us quantify that, what your view is; what, you know, if it is not 

a billion in the DOD, what is it? It is certainly higher. 

One thing that seems to be absent in the reports that we are 

hearing this morning is tying in accountability. This is going to be 

a common theme that I am going to bring pretty much each and 

every session. When we read about these overpayments—and I am 

not looking for a scapegoat. I am not looking to just fire someone 

to fire someone, but there does seem to be a lack of accountability 

of the personnel. And we need to say, is it that the process has not 

been clearly communicated? Have we not trained our people well? 

Or, if we have done all of that and we just have some people who 

are not performing well, have we held them accountable? 

There is a sense, and you know this just as a fellow American 

here, that our Government is not holding people accountable. We 

want to promote the people who are doing well, reward them, have 

more of an entrepreneurial approach in Government and also work 

with and, if necessary, fire someone who is not performing well. 

So, Mr. Blair, if you could comment, please, on, what are the barriers to better performance? Is it the resources that we are not 

funding our auditors enough? Because it seems to me you would 

get a good marginal return on allocating more money to this, certainly with the numbers that I have seen. And then please comment on the accountability part, both for our personnel and for the 

vendors who—some who deliberately are stealing from the American taxpayer. 

Mr. BLAIR. With regard to resources, I mean, I think that certainly the DOD IG has sufficient resources to fulfill the audit mission that we have. There is no lack of opportunities for us to audit. 

Because we always end up at the end of every year with more audits than we have staff for, so we have to roll some options forward 

and do them in subsequent years. 

I think the Department is dedicating a lot of resources to improving financial management. And I think it is important to note that. 

To make real sustainable progress in financial management, I 

think more resources may have to be dedicated to that in the future. And that is a question that the senior leadership in the Department are going to have to wrestle with; how much can they afford to put in this area versus other areas? 

As with regard to accountability, I agree with some of the statements that you have made. It is very difficult to hold people ac-
14 

countable in the Federal Government. We oftentimes find that 

when we get in and do our audits and we zero in on the office or 

the person that was responsible, we have found that they left. They 

have retired. They have gone to another job. But what we are doing 

is making a more concerted effort, starting in this fiscal year, in 

our audit reports to include recommendations that the Department 

review the actions of specific individuals and take appropriate action, as necessary, to hold people accountable. 

Mr. RIGELL. Thank you, Mr. Blair. 

And so you said we have the resources, but it is because maybe 

the person has moved on. And I think we should work together to 

help identify maybe the systemic challenges, the whole process. 

And one thing that is somewhat unique to the military is, you 

know, every time I meet a senior officer, for example, I say, well, 

how long are you going to be here in Hampton Roads? Well, 2 

years, 2 years. And I have known that every time—you know, let’s 

say you hire somebody to fix the Department, the first thing they 

say is, well, boy, what I inherited was really, really, but I will fix 

it for you. And then they move on. 

So I wonder if we should consider for these positions keeping 

them in the job 6 years and 8 years, and to build a base to where 

they could be held accountable in the most positive sense of the 

word. 

And I would like to circle back around—we will do this off line, 

my time is running out here—but I would really like to know the 

names of some of these companies who have just had these egregious examples of overcharging. Because if you really circle back 

around, every dollar that is spent for a golf outing in Paris and 

France and Singapore, I am sure there is a young lance corporal 

in Helmand Province that could use a little more support. So we 

need to go after these guys and hold them accountable. And if they 

steal from us, put them in jail. And conversely, the people who are 

doing a good job, we promote them. And I just want to build more 

of that culture in our Government. 

I yield back. Thank you, Mr. Chairman. 

Mr. CONAWAY. Thanks, Scott. 

Rob. 

Mr. ANDREWS. Thank all the witnesses. 

Mr. Khan, I want to get into your description of the violation in 

June 2010 involving the Army’s overobligation of fiscal year 2008 

MPA [Military Personnel, Army] Army appropriation, which Mr. 

Conaway and I and others have written a letter about to try to get 

some more information. Now, I know that we don’t have the facts 

yet on this, so I am not asking you to draw a conclusion. But I am 

asking you to generate some hypotheses as to how this might happen based upon your experience. My understanding is what happens here is that it is discovered, you eventually discover that 

there is a $200 million transfer by the DOD from the Working Capital Fund to the Army MPA fund. Is that what happens? 

Mr. KHAN. That is correct. 

Mr. ANDREWS. And then you say, well, gee, why did this transfer 

happen? Essentially, the answer is, well, because we overobligated 

the MPA fund by $200 million. Right? Is something wrong with 

that? Is that what happens? 
15 

Mr. EASTON. That is in process. I think that there was using 

their transfer authority to transfer money. At the time, I think the 

Army’s perspective was that they knew that they needed that 

money. They had not already overobligated. That is their perspective, but that is under investigation right now. 

Mr. ANDREWS. Okay. So it is not established that they overobligated the $200 million? 

Mr. EASTON. It is being investigated right now. 

Mr. ANDREWS. Let me just say this. Assuming that it were, that 

it was the case, and it may not be, but assuming it was the case, 

what hypotheses could you generate, Mr. Khan, as to why that 

happened? 

Mr. KHAN. I think it has been established that it was overobligated. 

Mr. ANDREWS. Whether it has or hasn’t, if it were true—— 

Mr. KHAN. Right. 

Mr. ANDREWS [continuing]. Typically, what might the reasons be 

that something like that would happen? 

Mr. KHAN. I mean, pure and simple, there was a lack of communication between the Army budget office and the program office. 

The Army budget office was using estimates or what is known as 

bulk obligations on a different set of projections than what was actually taking place in the field. 

This is going back to 2008, when there was an uptick in recruitment, fuel costs were going up. However, the budget estimates that 

the Army budget office was using was still using old numbers. So, 

consequently, there was a mismatch—— 

Mr. ANDREWS. So they are assuming that they can hire people 

and move them around in vehicles at a cost that is actually too low. 

Mr. KHAN. That is correct. 

Mr. ANDREWS. So they hire too many people and they drive too 

many miles, and they overexpend the account by $200 million. 

Mr. KHAN. And it was specifically related to permanent change 

of stations, PCS [permanent change of station] moves, where they 

are moving people around the country. And there was an uptick in 

that also. 

Mr. ANDREWS. Now, this is not a rhetorical question, but how 

does that happen? I mean, and I think it goes to Mr. Rigell’s question that somebody was figuring this out assuming, you know, $2 

gasoline instead of $4 gasoline. Who did that, and how did it happen? Do we know? 

Mr. KHAN. It is a flaw in the estimation process. And really underlying that is a lack of connection, lack of a good process which 

connects where the estimates are being created and where the actual expenses are taking place. 

Mr. ANDREWS. But in plain English, doesn’t somebody say, gee, 

you estimated someone is going to drive—fill their tank with 20 

gallons last week, and you estimated it was going to cost $40, and 

it cost $80. I mean, doesn’t somebody somewhere along the way figure that out and say, I wonder if all these projections are therefore 

flawed? How can you make $200 million worth of that mistake? 

Anybody want to take a whack at that one? That is a rhetorical 

question. 
16 

Mr. EASTON. There is no good answer to that. I think someone 

should have known. Those accounts, number one, I think are basically viewed as an entitlement. In other words, we are supporting 

the mission. We are managing them centrally, and we are executing them decentrally without good connectivity. We have had 

MILPERS [Military Personnel], ADAs across the board—— 

Mr. ANDREWS. No one is questioning that when someone has a 

permanent change of station, that their family should be moved. It 

is an entitlement, absolutely. But that is not the issue. The issue 

is whomever is calculating the cost of the moving van, the other 

stuff that is going on, is wildly out of whack here. And I think it 

goes to the earlier question about accountability. I would ask that, 

consistent with the privacy obligations of the Department, with the 

chairman’s consent, that you give us a blow-by-blow of what investigation took place, who was held accountable for that decision, and 

what happened to them, again consistent with your Privacy Act obligations. I think we would like to know that, just kind of see what 

happened here. 

I yield back on that. 

[The information referred to can be found in the Appendix on 

page 97.] 

Mr. KHAN. Mr. Andrews, I just wanted to add one point that in 

DOD there are a lot of estimates. And estimates are not a bad 

thing as long as they are trued up. It is not a perfect system. It 

is like Chairman Conaway had mentioned; it is a large and complex organization with antiquated systems. So estimating—— 

Mr. ANDREWS. Let me ask just one quick follow-up, if I could, 

and I should know this answer. The $200 million is off a base of 

how large an account? How large is that account? 

Mr. KHAN. It is around $43 million—I am sorry, $43 billion. 

Mr. ANDREWS. Okay. So $4 billion is 10 percent of the account, 

and $400,000 is 1—$400 million is 1 percent of the account. So this 

is one half of 1 percent? That is a small number, but that is a pretty big number, one half of 1 percent. That is more than a rounding 

error. It is outside the standard deviation, I would think, for an account that size. 

Mr. KHAN. It is material. 

Mr. ANDREWS. Yeah, it is material. It is one half of 1 percent, 

but on a $43 billion account, that is pretty serious money. So I 

think we would like that kind of report, again consistent with your 

Privacy Act obligations. 

Mr. CONAWAY. Thanks, Rob. 

And we will reward bad behavior on our side. 

Steven. 

Mr. PALAZZO. Thank you, Mr. Chairman. 

I appreciate you all coming out this morning. I think you all 

know this is an extremely difficult job, and an important issue that 

we are going to—it is pretty difficult to implement, but it is not impossible. 

So we are here to keep putting the pressure on everybody to 

make sure it becomes a reality. I had some stock questions, but my 

colleagues brought up some points, so I am going to kind of deviate 

from them. I will submit those for the record or something. 
17 

When we are talking about ERP, I have never met an ERP that 

actually was on time, within budget, and to the owner’s satisfaction. Can you kind of tell me, have you all had any success stories 

where we have had an IT [information technology] integration that 

actually worked? And who actually comes up with these timelines? 

I am sure it is probably a joint between the person, the consultant 

selling the service and this product and the owner that is wanting 

to purchase it. But why does it always seem that that is where our 

time slippage comes from? Is it just unrealistic expectations? Or is 

it just one of those things that you can just never grasp, and this 

is going to become a reality for all ERP implementations? 

We will start with Mr. Easton. 

Mr. EASTON. I think it is a combination of things. I think that 

we have typically unrealistic schedule estimates, overestimates 

when it comes to savings associated with those. We don’t spend 

enough time up front in terms of really thinking through the 

changes in the business that we need to make prior to implementing. And so, as a result, I think that—and at the same time, 

we have a tendency not to want to stop. In other words, once we 

are going on the wrong direction, we should stop. 

The one example that I would say has been in general more successful has been the DLA [Defense Logistics Agency] enterprise 

business system, in which case they did have to make several 

starts and stops, and they incremented on small scales. And I think 

in general that tended to be more successful. But your track record 

that you point out, I think, both within the Government as well as 

private sector, is accurate. 

Mr. BLAIR. I would have to agree with much of what Mr. Easton 

said. The Department is the one who sets the milestone dates. And 

those dates are often driven by a lot of external factors. The 2017 

date I think is putting a lot of pressure on the interim milestone 

dates, especially as it relates to the ERPs. 

As we go through and audit the ERPs and we identify problems, 

we oftentimes make recommendations that the Department not 

further implement the system until the problems are addressed. To 

this point, I have not seen where the Department has weighed in 

on the side of caution. Rather, they more frequently push forward 

with implementation, with the idea that they are going to fix it 

later. And I am not aware of any success stories, as you asked earlier, about ERPs being done on time and within, you know, cost or 

schedule. I think this is a very consistent challenge that the Department has to address. 

Mr. KHAN. Sir, like you pointed out, ERPs are a challenge to implement, even in a commercial environment. ERP software is very 

sensitive. It is very complicated. So it has to be done right. 

There are three observations that we have, GAO has, as far as 

ERP implementations within the DOD environment. The first one 

is requirements. It is critical that the upfront, like Mr. Easton had 

mentioned, the upfront user requirements are correctly identified 

so that additional work, slippages, do not come about in terms of 

modifying the software once you begin to implement that. So that 

is critical. 

The other one is, like I had mentioned before, that there are several legacy systems within DOD. They have got data which has to 
18 

be fed into the ERPs. Data conversion is a challenge. It is unwieldy. I mean, it has to be done somehow, but that is also a cause 

of slippages. 

And the third one, which is linked to the antiquated systems, the 

legacy systems, is the interface, how the older systems, some of 

them, they can’t be pulled away, like MOCAS [Mechanization of 

Contract Administration Services], at least in the near term. They 

have to interface with the ERPs. And that can really complicate 

matters. 

Mr. PALAZZO. Kind of running out of time. Real quick, if there 

is a repeat offender, someone that is constantly overcharging the 

Government, what mechanism do we have in place, one—and real 

quick, and whoever is the resident expert can pick this—to actually 

seek reimbursement? And also, how do we debar Federal contractors from doing business with the Federal Government? That is a 

loaded question. 

Mr. EASTON. This is a little bit beyond my area of expertise, but 

I think that that was what I was going to say. There are legal procedures that we can take relative to debarment. We can serve to 

be able to recover those and offset those costs to be able to get that 

money back, because frequently we are doing business multiple 

times with the same people. But we aggressively go after those 

folks and then use the contract administration folks to be able to 

take the legal action as appropriate. I defer. 

Mr. PALAZZO. I am out of time, but thank you. I appreciate it. 

Mr. CONAWAY. Thanks, Steven. 

The Department reported in 2010 improper payments of about $1.069 billion. Half of that, though, was in personnel or military 

pay. Walk us through—there are certain areas, I guess, like commercial pay, which is not represented on that list of five, you would 

expect problems with. But you would think you would get the pay 

right. What is in that $500 million number? 

Mr. EASTON. In general, I think that we do get the pay right the 

vast majority of the times. You know, many of those improper payments are in fact underpayments. You know, we get situations, 

particularly—there are two situations I would point out. In other 

words, we will report payments based on information that we don’t 

have. Members have not provided us information, say if they get 

married, that they are entitled to basic housing allowance or a particular thing. If we don’t have that information, there is a lag, in 

other words, until we get that information. So when we actually 

are able to catch up we pay that. 

Mr. CONAWAY. Would that be considered an improper payment? 

Mr. EASTON. Yes. 

Mr. CONAWAY. Even though you are not—okay. 

Mr. EASTON. Absolutely. And that is that we did not pay that on 

time. So we keep track of those things. 

The other thing, from a military personnel perspective, sort of 

Reserve leave in terms of when reservists go on and off of Active 

Duty and their leave has to catch up. And that is recorded as an 

improper payment. 

Mr. CONAWAY. Okay. 

Mr. EASTON. We pay I would say 97 percent, you know, on time. 

But still, and Mr. Andrews raised a question, these are big dollars 
19 

that are reflected. But it is an ongoing relationship. We recover 

money quickly, and we catch up quickly if we underpay. 

Mr. CONAWAY. I guess I would put those in two different categories. If a member hasn’t reported something to you and you 

have got a back pay for something, I wouldn’t put that in the improper payment category because you didn’t know. Anyway, we can 

talk about that one. 

Looking at the problem disbursements, I got a chart from April 

2011 which shows for unmatched disbursements a total of $111 

million, almost ununderstandable descriptor called negative unliquidated obligations. I have no clue what it means, but it is 10 million bucks. Zero for the Air Force by the way. 

So, congratulations, Air Force, whoever is out there. 

And anyway, and then aged in-transit float. When you say 

‘‘aged,’’ what is the date on that aging? 

Mr. EASTON. Over 60 days. 

Mr. CONAWAY. Over 60 days. Why is the Army so much bigger 

in their unmatched disbursements than everybody else? 

Mr. EASTON. A primary driver right now is the implementation 

of their ERP GFEBS, the General Funds Enterprise Business System that they are implementing. That is driving a significant number of unmatched disbursements. And these are disbursements 

that are recorded. And if the Army were here, they would say that 

in some cases, they would disagree with the reporting number. We 

are in the process of trying to sort that out. That has been a longstanding, as I look back on the reports that have been made on improper payments, you know, it gets into some of the cataloguing 

issues as the driver. 

Mr. CONAWAY. So how often do you pull that report? 

Mr. EASTON. Every month. 

Mr. CONAWAY. Every month? 

Mr. EASTON. Every month. 

Mr. CONAWAY. So, at some point, you would expect the Army to 

catch up and that number to drop when they get the GFEBS. 

Mr. EASTON. Absolutely. And we put that in the FIAR [Financial 

Improvement and Audit Readiness] plan, because we want people 

to be tracking those. We want people to understand why we are 

making these changes, and not just systems changes but control 

changes towards auditability that should begin to reflect in those 

statistics. 

Mr. CONAWAY. All right. 

Mark, in your statement—let me see here—you are talking about 

Funds Balance with Treasury. You said that they are not recorded 

or were improperly recorded either at Treasury or in our general 

ledger. How would they get improperly recorded at Treasury? 

Mr. EASTON. They would be—they should be recorded correctly 

at Treasury. 

Mr. CONAWAY. Right. 

Mr. EASTON. In other words, by the time that disbursement, you 

know, oftentimes does not get back and reconciled into the particular chart of accounts where the transaction was initiated. That 

is really the key. In other words, oftentimes the transactions will 

in fact be recorded at Treasury, but at an appropriation level, but 
20 

what we need do is record it into the individual account and chart 

of accounts. 

Mr. CONAWAY. Help me understand. I guess I had assumed that 

Treasury was just your bank, and the bank didn’t really care. As 

long as you had money in there, they would clear the transactions 

in and out. Is there a recording that goes on at Treasury within 

an appropriation category, or why is it that you are reconciling over 

there? 

Mr. EASTON. In other words, we are reconciling; we are reconciling with Treasury. And Treasury has the transaction recorded in 

a vast majority of times. So I may have misspoke on that particular 

issue. 

Mr. CONAWAY. That is fine. What happens at year end? We are 

on a cash basis, and we have got all these transactions out there 

that we are not sure about. How does that get reflected in the financial statements that we will soon be seeing November 15ish? 

Mr. EASTON. The transactions are reflected and in some cases in 

an undistributed category. And so I think in the financial statements, and I can get back to you with specifics, they would offset 

receivables and payables. And I think that my fellow—I think that 

that would be how they would be recorded, but they would be disclosed. 

[The information referred to can be found in the Appendix on 

page 97.] 

Mr. CONAWAY. Okay. 

Mr. EASTON. Those quantities would be disclosed in the footnotes. 

Mr. CONAWAY. All right. 

We will go a second round. 

Rob, you have any questions? 

Mr. ANDREWS. I really don’t have a second round question, but 

just want to comment that—well, I guess I would ask each panelist 

to comment on this, that if you had to identify the greatest impediment toward zeroing out these improper payments, if we could only 

do one thing, what is the thing that you would have us do to zero 

out the improper payments? 

What do you think, Mr. Easton? 

Mr. EASTON. I think the internal control emphasis is really what 

we need. I mean, systems clearly creates a lot of the problems. And 

the issue of accountability that you raised, I think the environment 

makes it very, very difficult to specifically hold people accountable. 

But we need to do a better job of that as well. But internal controls 

and making sure that we get the people to focus on those controls. 

Mr. ANDREWS. Mr. Blair, what do you think? 

Mr. BLAIR. I agree with some of what Mr. Easton said, but I 

want to add a little more specificity to it. I think the internal controls are key. And there are some specific things that I think need 

to be done. More importantly, you need to do an in-depth analysis 

of all of the disbursements so you have a better idea of where your 

payments are going. But there has to be controls over all of the 

payments. Some of the things that I cited in my testimony, the examples, those are examples where there is oftentimes an inadequate or absent review process over the payments that are made, 

those contract invoices that are paid. And that is a specific control. 
21 

Mr. ANDREWS. Specifically referring to the commercial payment 

problem? 

Mr. BLAIR. Yes, sir. 

Mr. ANDREWS. Okay. 

Mr. Khan, what do you think? 

Mr. KHAN. I just want to say that two important elements, like 

I have mentioned in my oral statement, funds control and payments control. They have to be strengthened if you have to reach 

auditability. 

And another point I just want to bring out that both funds control and payments control originate in nonfinancial areas. Typically, they originate in procurement. So it is critical in terms of, sir, 

accountability. I mean, responsibility has to be taken by other functions. It all ends up in financial management, where it has to be 

corrected. But procurement has to have the training to be able 

to—— 

Mr. ANDREWS. We don’t want to create a shoot-the-messenger 

problem. 

Mr. KHAN. Exactly. 

Mr. ANDREWS. The financial people are actually doing their job 

reporting the problem. We want to get to the source of why the 

problem was created in the first place. I do understand that. Thank 

you very much. 

Mr. CONAWAY. There was a bit of a disagreement between—on 

the commercial pay category for estimating improper payments. 

Mr. Kahn, your team had a vision or view that was different 

than what the Department of Defense had. Did you all reconcile 

that? Are you comfortable now that those are being estimated, improper payments, that you used the right methodology? 

Mr. KHAN. Yes. I mean, the commercial pay was not picked up 

for 2010. And based on what the comptroller, Mr. Hale, has recently said, commercial pays are going to be picked up for estimating improper pays. 

Mr. EASTON. We are going to continue. The difference of opinion—and at the time—and there was a GAO report in 2008 or 

2009, I believe. We were complying with the OMB [Office of Management and Budget] guidance at the time. Subsequent legislation 

up here made it very, very clear that we want you to do statistical 

sampling to be able to support those estimates. But I want to make 

sure that we are clear that there is a significant amount of prepayment checks that we do. In fact, we emphasize—this is why I wanted to emphasize the people aspect. I mean, we put a lot of people 

and a lot of eyes on it. But admittedly, much like everything, it is 

a team sport. And so it goes to the contracting officer, contract administration, contract audit. There is a lot of aspects to be able to 

do that. But that is the key issue, and I think we resolved it. 

Mr. CONAWAY. Good. 

Just one quick—Mark, you had mentioned that—the internal 

control would be owned by you in 2017. I would posit that the internal control is owned by management today. 

Mr. EASTON. Absolutely. 

Mr. CONAWAY. I wanted to make sure I understood that. 

Mr. EASTON. I meant—I guess the key issue that I would have— 

and we have this discussion with my colleagues all the time. Too 
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often—and this gets into the people and the culture—you know, we 

have relied on the auditors to come in and tell us what the issues 

are. Sort of detective controls. You know, back in 1982, even going 

back to 1950 if I look at the GAO report, clearly management has 

to assume responsibility. So what I would want—and we had a recent case where we were talking about the improper payments, 

high dollar value that were reported, management should have 

done a more aggressive job, saying this is what—this is why we 

feel the way we feel, as opposed to waiting for the auditors to come 

in. It is a change in mindset and it is something that goes along— 

that management responsibility that is associated with the audit is 

something that we have got to change. 

Mr. CONAWAY. Thank you. 

Gentlemen, thank you for coming this morning. I want to thank 

our panel members as well. Anything—all right. 

Mark, Daniel, Asif, any final comments? 

All right. Thank you, boys. 

We are adjourned. 

[Whereupon, at 9:01 a.m., the subcommittee was adjourned.] 
A P P E N D I X 

SEPTEMBER 22, 2011 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

SEPTEMBER 22, 2011 

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WITNESS RESPONSES TO QUESTIONS ASKED DURING 

THE HEARING 

SEPTEMBER 22, 2011 

(97) 

RESPONSE TO QUESTION SUBMITTED BY MR. CONAWAY 

Mr. EASTON. In general, these transactions (often referred to as undistributed disbursements and collections) reflect outlays that have not been recorded in the lower 

level field accounting systems, but have been recorded against the Agency-compiled 

Department of Defense (DoD), Office of Management and Budget (OMB), and Department of the Treasury (Treasury) financial reports. These transactions have been 

recorded on a cash basis by Treasury, either through a disbursement or a collection. 

If the correct accrual has been established, the dollar value of these transactions 

is ‘‘offset’’ against these payables (for disbursements) or receivables (for collections). 

There are two categories of undistributed transactions: supported and unsupported. 

Some additional detail is provided in the paragraphs below. 

Supported undistributed disbursements or collections typically represent transactions that will properly post, however with a lag in time. Supported undistributed 

disbursements are offset against accounts payable and undistributed collections are 

offset against accounts receivable. Adjusting entries are made at the Departmental 

level using Treasury United States Standard General Ledger accounts. 

Unsupported undistributed balances represent balances that Treasury has reported, but DoD does not have support to accurately identify the outlays. Current 

DoD guidance is to record the unsupported undistributed disbursements as disbursements in transit, which offsets the nonfederal accounts payable. Unsupported 

undistributed collections are recorded in nonfederal other liabilities. Effective with 

the first quarter of Fiscal Year (FY) 2012, the unsupported undistributed disbursements will be recorded against accounts payable, and unsupported undistributed 

collections will be recorded against accounts receivable. New reporting attributes 

have been approved that will allow these balances to be identified within the trial 

balance. 

OMB Circular A–136, ‘‘Financial Reporting Requirements,’’ does not address or require any disclosures, including the amount, for undistributed disbursements or collections recorded in the financial statements and footnotes. As such, DoD does not 

disclose the balances in the financial statement footnotes. However, DoD includes 

in Note 1, ‘‘Significant Accounting Policies,’’ a disclosure discussing the treatment 

for undistributed disbursement and collection. This disclosure has been included in 

the DoD financial statements since FY 2004. [See page 20.] 

RESPONSE TO QUESTION SUBMITTED BY MR. ANDREWS 

Mr. EASTON. Because the final, formal investigation is not yet complete, accountability and discipline is yet to be determined. The information below provides additional detail. 

A preliminary Antideficiency Act (ADA) investigation report was initiated on November 19, 2009, following the Government Accountability Office (GAO) Decision B– 

318724, ‘‘Department of the Army—The Fiscal Year 2008 Military Personnel, Army 

Appropriation and the Antideficiency Act,’’ dated June 22, 2010. The preliminary investigation resulted in a potential ADA violation of $200 million, and the Army initiated a formal ADA investigation in March of 2010. The Army completed the formal 

ADA investigation in January 2011, and during the next six months maintained a 

dialogue with the Department of Defense Office of the General Counsel. During this 

period the case was further refined to ensure that all relevant information had been 

included; this has been particularly critical in supporting assignment of individual 

responsibility/accountability. We anticipate an advanced decision in the near term. 

A final legal decision (referred to as an ‘‘advance’’ decision) is required prior to completing the ADA report and administering discipline. Once the responsible individual(s) has been named, and discipline imposed, the report will be finalized and 

reported to Congress, in accordance with OMB Circular A–11. Due to this requirement, and to ensure legal right to due process, the disciplinary phase of the ADA 

process may further delay formal submission. We estimate the final completion date 

to be December 2011. This formal report will establish individuals responsible and 

the discipline administered. 
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In its decision of June 22, 2010, the GAO concluded the Army violated the 

Antideficiency Act in the Fiscal Year 2008 Military Personnel, Army appropriation 

because total obligations exceeded funds available within the appropriation. This 

was caused because, as stated in GAO’s decision, ‘‘Army Budget’s accounting 

records, for a period of time, reflected estimated obligations instead of actual obligations until it was too late to control the incurrence of obligations in violation of the 

Antideficiency Act.’’ The Army’s investigation finds that Army program managers 

within the Deputy Chief of Staff (DCS G–1) did not record actual obligations in a 

timely manner, and instead used estimates as the basis for recording obligations. 

The Army Budget Office and DCS G–1 personnel routinely reconciled obligation estimates to actual disbursements, adjusting obligation estimates as necessary, and 

worked with Defense Finance and Accounting Service personnel to ensure the most 

accurate actual information was used to update recorded estimates. A violation occurred because total disbursements exceeded estimated obligations and funds available within the subdivision provided to DCS G–1. [See page 16.] 

Æ