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i 

68–167 2011

[H.A.S.C. No. 112–59] 

DOD’S PLANS FOR FINANCIAL 

MANAGEMENT IMPROVEMENT AND 

ACHIEVING AUDIT READINESS 

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 

JULY 28, 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, July 28, 2011, DOD’s Plans for Financial Management Improvement and Achieving Audit Readiness ................................................................ 1 

APPENDIX: 

Thursday, July 28, 2011 .......................................................................................... 25 

THURSDAY, JULY 28, 2011 

DOD’S PLANS FOR FINANCIAL MANAGEMENT IMPROVEMENT AND 

ACHIEVING AUDIT READINESS 

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 

Hale, Hon. Robert F., Under Secretary of Defense (Comptroller), U.S. Department of Defense .................................................................................................... 3 

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

McGrath, Hon. Elizabeth A., Deputy Chief Management Officer, U.S. Department of Defense .................................................................................................... 6 

APPENDIX 

PREPARED STATEMENTS: 

Conaway, Hon. K. Michael .............................................................................. 29 

Hale, Hon. Robert F., joint with Hon. Elizabeth A. McGrath ...................... 32 

Khan, Asif A. ..................................................................................................... 43 

DOCUMENTS SUBMITTED FOR THE RECORD: 

Organizational Plan of the Panel on Defense Financial Management and 

Auditability Reform ...................................................................................... 69 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

Mr. Rigell .......................................................................................................... 73 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

Mr. Palazzo ....................................................................................................... 79 

(1) 

DOD’S PLANS FOR FINANCIAL MANAGEMENT 

IMPROVEMENT AND ACHIEVING AUDIT READINESS 

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

AUDITABILITY REFORM, Washington, DC, Thursday, July 28, 2011. 

The panel met, pursuant to call, at 8:00 a.m. in room 2118, 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. Welcome to the inaugural hearing for the Armed 

Services Committee’s Panel on Defense Financial Management and 

Auditability Reform. 

The panel met to organize on July 13th and had our first informal briefing last week. We have adopted an organizational plan, 

including a detailed work plan, to assist us in examining the 

progress the Department of Defense has made in improving financial management and achieving audit readiness and identifying the 

challenges that remain. 

Without objection, I would like to enter the organizational plan 

into the record for today’s hearing. 

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

page 69.] 

Mr. CONAWAY. But more important are the details of our oversight agenda. Chairman McKeon and Ranking Member Smith have 

charged this body with making recommendations and providing 

continuity of leadership on this issue. 

Therefore, I would like to take a moment to introduce each of the 

panel members and thank them for their commitment to join Rob 

and me as we continue to work on the previous Defense Acquisition 

Panel. 

In addition to my partner, Rob Andrews of New Jersey, the following members will serve on the panel: Scott Rigell from Virginia; 

Joe Courtney from Connecticut; Steven Palazzo of Mississippi; Tim 

Ryan of Ohio; Todd Young of Indiana. 

They will be embarrassed that they weren’t here to hear their 

names read and bragged on, and all that kind of stuff. The first 

question on the panel’s work plan addresses whether DOD’s [the 

Department of Defense’s] current financial improvement and audit 

readiness strategy, methodology and timeliness are appropriate. 
2 

I feel this is the appropriate starting point as DOD has initiated 

numerous efforts over the years to address its financial management weaknesses and achieve audit readiness with little or no success. 

In fact, for over 20 years now, GAO [Government Accountability 

Office] and DOD auditors have continued to report significant 

weaknesses in DOD’s ability to provide timely, reliable and useful 

information for decisionmaking and reporting. 

In these difficult fiscal times it is absolutely crucial that DOD 

has reliable information to manage its resources. Having reliable 

information is essential, is especially critical, as DOD attempts to 

implement the $178 billion in cuts and efficiencies proposed by the 

former Secretary of Defense, not to mention how important it is for 

DOD, it will be, if DOD is forced to look for further significant cuts 

in the near future. 

The Department of Defense also needs to provide assurance to 

the American taxpayer that they are not wasting resources. However, because of DOD’s poor internal controls, the financial management area has been on GAO’s list of high-risk programs that 

are vulnerable to waste, fraud and abuse since 1995. 

The Defense Authorization Act of 2010 requires that DOD’s financial statements be ready for audit by no later than September 

30, 2017. 

Today we will hear about DOD’s strategy and methodology to get 

the Department of Defense to audit readiness by 2017 and the 

challenges that the Department faces to achieving that goal. We do 

not expect to discuss all the challenges DOD is facing in great detail in this hearing, but it is a good starting point to understanding 

what the Department is up against in its financial improvement efforts. 

I expect the panel to hold future hearings that will cover in much 

more detail the challenges that the Department is facing in their 

efforts to resolve the issues. 

I would like thank our witnesses in advance for their testimony 

and agreeing to be here at such an early hour. Our witnesses today 

are the Honorable Robert Hale, Under Secretary of defense, comptroller; the Honorable Elizabeth McGrath, deputy chief management officer, Department of Defense; Mr. Asif Khan, the director 

of financial management and assurance at GAO. 

I would now like to turn to Rob Andrews for any remarks he 

would like to make. 

Rob. 

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

STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE 

FROM NEW JERSEY, RANKING MEMBER, PANEL ON 

DEFENSE FINANCIAL MANAGEMENT AND AUDITABILITY 

REFORM 

Mr. ANDREWS. Well, good morning to my colleagues. 

Good morning, ladies and gentleman. We thank you for your attendance at this early hour. 

I want to thank Chairman Conaway for his leadership on this 

panel. It has been a pleasure to work with him the last couple of 
3 

years, to roll up our sleeves, and I am very much looking forward 

to continuing that effort. 

And I also wanted to take a minute and introduce Congressman 

Jim Cooper, who is a member of our full committee, who is the 

ranking member on the Oversight Committee, who I commend for 

having the zeal to be here at this hour to participate in this. 

You can’t make good decisions without good information. And 

when it comes to the complexity of the Department of Defense, you 

can’t have good information without financial statements. And we 

don’t have them. 

Now, most people hear that and think that is the result of some 

sinister conspiracy to hide money or this or that. That is simply not 

true. What is true is that the Department of Defense is probably 

the most complex organization in the world. It is actually multiple 

organizations under the same organizational rubric. 

It does just about everything, and it is organized just about everywhere, so—and it is this sui generis organization. You know, the 

way you value a hotel or a shopping mall is not the way you would 

value Andrews Air Force Base, a very well-named installation here 

in the country. 

[Laughter.] 

So I want to dispel from the outset the notion that the reason 

we don’t have these statements is some military-industrial conspiracy to hide things from the public. That is not true. 

What is true are two other things. One is that it is a complex 

task to figure out how to get from where we are today to where 

we need to be, which are good, auditable financial statements. 

But the second is it is doable. And I think you are going to hear 

from this panel today that these are folks involved in getting it 

done. And the briefing we had last week shows that there has been 

a sincere, concerted, focused effort from Secretary Hale and his 

team. 

And we are anxious to try to be a resource in making that happen so that the members of Congress and the public can make 

well-informed decisions about future expenditures in this Department. 

So I look forward to hearing what the witnesses have to say, and 

I am glad to join you this morning. 

Mr. CONAWAY. Well, thank you. With that, I will turn the microphones over to the panel, whoever wants to start, however you 

want to do it. 

So, Bob. 

STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY 

OF DEFENSE (COMPTROLLER), U.S. DEPARTMENT OF 

DEFENSE 

Secretary HALE. Well, good morning, Congressman Conaway, 

Congressman Andrews, members of the panel. Thank you for the 

opportunity to testify this morning on financial management improvements at the Department of Defense. 

Secretary Leon Panetta, our new Secretary of Defense, shares 

your interest and mine in improving financial management at DOD 

and has asked that I provide him a comprehensive review of our 
4 

efforts in the near future. And I look forward to getting his personal guidance on this topic. 

To bring you up to date on our progress, the Department’s Deputy Chief Management Officer, Ms. Beth McGrath, and I have prepared a joint statement, which we have submitted for the record. 

We will jointly summarize that statement. We are going to do tagteam. I will start out. Beth will join midway on some of the I.T. 

[Information Technology] system issues, and I will finish up. 

I believe that defense financial managers have three broad goals. 

They need to help the Department acquire the resources necessary 

to meet national security objectives. It is the key goal, the budget 

goal, if you will. 

Second, they need to ensure that once those resources are enacted, they are spent in a manner that is legal, effective and efficient. And that goal probably encompasses many that we will talk 

about today. 

And, third, they need to champion a strong financial management workforce, because if we don’t do that, we won’t be able to 

accomplish the other goals. 

The first thing I would like to note is as we work to meet national security objectives, DOD financial management has its 

strengths. Mainly we are effective, in my view, in meeting the 

needs of our warfighters—the financial management needs—financial needs of our warfighters. And that is the key goal, maybe the 

most important one for me. 

We also have a dedicated workforce of more than 60,000 financial 

management professionals, and through personal experience I can 

tell you they bring a culture of stewardship to their jobs. They 

worry about whether or not this money is spent effectively. 

We also have effective financial processes in some key areas. As 

a result, violations of key financial laws are few in the Department 

of Defense. Timely and accurate payments are the rule, and interest associated with late payments is quite low. 

Financial managers have also made some progress on the areas 

that I know of, and an area that I know is of particular interest, 

I should say, to this panel, namely the financial improvement and 

audit readiness area. 

I am sorry, I am getting ahead of myself. There are some other 

things that we do that I wanted to cover before I get to the FIAR 

[Financial Improvement and Audit Readiness] plan. 

We are working to try to improve financial information. That is 

key. Partly in response to congressional direction, we are working 

to improve information on the number and costs of contractors employed by DOD. 

We are also working to further improve training for financial 

managers by implementing a course-based certification program 

similar to the one available to or now in place for acquisition managers. 

Financial managers have partnered with the deputy chief management officers to ensure implementation of proposed efficiencies. 

Last year DOD proposed efficiencies in streamlining totaling $178 

billion in fiscal year 2012 to 2016. 

We recently completed an internal review of plans for achieving 

those efficiencies, and I am pleased to report that the Services and 
5 

agencies, I believe, are developing credible plans and processes to 

meet these demanding goals. They are clearly taking this effort seriously. 

We have also made progress improving financial information and 

achieving audit readiness. That is a topic I know that is of particular interest to this panel. It is of particular interest to me. 

We have already achieved and are maintaining auditable statements in some key entities—the Army Corps of Engineers, a number of our defense agencies and several of our large trust funds. 

But it is also clear that the greatest audit challenges lie ahead, especially the need to move the military services toward auditability. 

In addition, there are enterprise-wide weaknesses in DOD financial management which require an enterprise-wide response. To 

pass an audit, an organization has got to have systems and processes that record financial results of business events in a consistent 

and reliable manner. 

Our processes and systems don’t always meet that standard. 

Many of the systems are old. They don’t record information in the 

level of detail that is required for an audit. Our processes are 

sometimes variable across commands, even across bases. 

These issues are especially challenging in the Department of Defense, because DOD’s enormous size and geographical dispersion 

mean we just can’t rely on manual solutions or workarounds, as 

many other agencies have been able to do. 

To deal with these enterprise challenges and to improve financial 

information and achieve audit readiness, we revised our approach 

that we have taken—and obviously it hasn’t worked—over the past 

17 years since the Government Management and Reform Act. 

Since August 2009, our emphasis has been on improving the 

quality of our data and moving toward audit readiness with the information that we use to manage the Department every day—specifically, budgetary information, because we manage the Department based on budgets, and the accounts and location of our assets, which is key to our warfighters. Auditors call it existence and 

completeness. 

We have also put in place a cost-effective approach for dealing 

with other information required for full auditability. Less than 2 

years have passed since we launched this new approach. I can say 

without hesitation or reservation, financial auditability is now 

readily acknowledged as a high priority in the Department, and 

that was not true in some previous terms that I have served in the 

Department. And we have made noteworthy changes. 

We have a clear governance process. There is somebody in charge 

here. It is the Chief Management Officer, the Deputy Secretary for 

the Department of Defense, supported on a day-to-day basis by the 

Chief Financial Officer—me—and also the Deputy Chief Management Officer and an analogous organization at the service level, the 

CMOs [chief management officers], the under secretaries in that 

case in charge, aided by their assistant secretaries for financial 

management and also the deputy chief management officers. 

We have established long-term and, more importantly, shortterm goals, which are actively managed by our governance process. 

We need to have goals that we can check are happening over the 

next couple of years, not just 2017. 
6 

We ensured that each military department has programmed adequate resources to support this refocused strategy, and they have 

done that over the full Future Years Defense Plan [FYDP], so out 

5 years. 

We now require that senior executive performance appraisals for 

both financial and nonfinancial personnel include financial audit 

goals where they are relevant. So we are trying to get this outside 

the comptroller community. 

We are assembling teams within each military department that 

will be tasked with improving financial controls. I have told you, 

they are too variable and sometimes they don’t meet our audit 

standards. We have got to fix them. The systems will help, but they 

alone are not this full solution. 

We are in the process of establishing a course-based certification 

program for defense financial managers that I hope will provide a 

framework and, among other things, ensure that we provide training to our people on accounting and audit issues. 

And we have maintained a close working relationship with our 

oversight bodies, including the Government Accountability Office 

and the Department’s Inspector General. I have personally briefed 

Gene Dodaro, the Comptroller General, on this plan, also Gordon 

Heddell, the DOD IG [Inspector General]. 

In addition, we have focused on improvements in business systems, and I would like now to ask my colleague, Beth McGrath, to 

discuss our system efforts. 

STATEMENT OF HON. ELIZABETH A. MCGRATH, DEPUTY 

CHIEF MANAGEMENT OFFICER, U.S. DEPARTMENT OF 

DEFENSE 

Ms. MCGRATH. Good morning. I do appreciate the opportunity to 

discuss financial management improvements at the Department of 

Defense. 

As the Deputy Chief Management Officer, I am responsible for 

instituting a framework that clearly defines business goals, develops meaningful performance measures and aligns activities 

through established and repeatable processes. 

The purpose of DOD’s overarching management agenda is to establish an effective, agile, innovative business environment that is 

fiscally responsible. 

This business environment includes many IT solutions, which are 

essential enablers of a broader set of innovative business operations, rather than an end only unto themselves. While I acknowledge past challenges, there are number of things that we are doing, 

putting together these programs to ensure that they are on the 

right path. 

To ensure that the future programs are structured for success, 

we are deliberately tying acquisition decisions on our major programs with business outcomes, such as financial auditability. 

We are ensuring a program’s complete proper business process 

reengineering to make certain we are not automating inefficient 

processes and that the Department is prepared for the new system 

and the process prior to implementation. 

By analyzing business investment from a cross-functional perspective, Mr. Hale noted that we are ensuring that the financial 
7 

auditability goals are part of other than financial managers’ performance appraisals. It is because of their significant contribution 

to our ability to achieve audit readiness. That takes everyone. 

Every functional area must participate. 

We are adopting a concept of end-to-end processes and standard 

development methodologies into the business enterprise architecture, together this will enable a more holistic way of thinking into 

the management of our business operations and ensure we have a 

shared understanding of our architecture so that we can achieve 

the interoperability that we are discussing. 

We are implementing a new acquisition process for our defense 

business systems that are tailored to meet the requirements of the 

business area. Guidance for this process, called the business capabilities life cycle, has been released and is being used today. 

Our goal is to deliver a streamlined 21st century systems environment consisting of I.T. capabilities that work together to support efficient, effective business operations. 

I would like to note that GAO’s removal of the DOD personnel 

security clearance program from its high-risk list is a significant 

first in the Department. And it owes its success to our commitment 

to this results-oriented, end-to-end approach that I just described. 

In closing, we are committed to improving management and acquisition of I.T. systems, as it contributes to the overall business 

operations, again, to include financial auditability. These issues receive significant management attention and are a key part of our 

overarching strategy to build a better business environment, business processes and systems that create results our men and women 

in uniform need. 

I look forward to continuing our work with this panel as we 

strive together to a greater efficiency and effectiveness and to create an agile business space enabled by modern, interoperable I.T. 

solutions. I look forward to your questions. 

Secretary HALE. Okay. So we have made a lot of process improvements in business systems, governance, funding. But I want 

to do more than that. We need to actually start doing some audits 

and validations. It will focus us on the real problems. 

And so we have begun doing that. We have launched an audit 

of the Marine Corps’ statement of budgetary resources. If successful, this would be the first time any military service has actually 

completed an audit of a financial statement. And we are learning 

a great deal. 

We have brought an independent public accountant in—and they 

do this for a living, so they know what the problems are. We have 

learned so much from that audit already. 

In May, we began a DOD-wide examination and validation of our 

funds control and distribution process. It is known in audit terms 

as appropriations received. Again, an independent public accounting firm is doing that for us. I expect this validation will yield positive results next month. 

Periodic validation of our funds control process is very important 

to me. It also should be important to you, because it will reassure 

you that we are issuing and controlling our funds in ways that ensure we comply with the laws that you enact. 
8 

In June, we began a validation by a public accounting firm of the 

Army’s new General Fund Enterprise Business System, its enterprise research planning system, GFEBS, at those bases where 

GFEBS has been installed and is mature. 

This is also very important, because it will identify areas that 

must be improved—and there are going to be some, I am sure— 

to be sure that we are using that system in a manner that is 

auditable. I am not so worried about the system. I am worried 

about all the feeders and the processes that are associated with it. 

And I don’t want to get these systems deployed throughout the 

Department of Defense and find out, or have somebody find out 3 

or 4 years from now, that they are not auditable. So we will cycle 

through the other Services with that same approach as we can. 

In July, we tasked the public accounting firm to validate the Air 

Force’s processes and controls to reconcile their accounts with 

Treasury, essentially our checkbook with Treasury. It is called 

funds balance with Treasury. And, again, another key step, and I 

am cautiously optimistic we will get positive results there. 

And by the end of this calendar year, we expect to begin several 

other validation efforts, including accounts and locations of large 

portions of our military equipment. 

In short, I would tell you there is still a lot to do. I have focused 

on the positive side, but I am not naive. We have got a long way 

to go. There are still enterprise-wide weaknesses that we have not 

resolved. We need to institute a culture of financial controls in the 

Department, consistent ones that don’t yet exist. 

But we are committed to improving financial information and 

audit readiness in the Department of Defense, and I believe we 

have made significant progress. Our goal is to achieve fully 

auditable statements by 2017. 

That concludes our opening statement, and after Mr. Khan finishes, we welcome your questions. 

[The joint prepared statement of Secretary Hale and Ms. 

McGrath can be found in the Appendix on page 32.] 

Mr. CONAWAY. Mr. Khan. 

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

Mr. KHAN. Thank you. 

Good morning, Mr. Chairman, Ranking Member Andrews and 

members of the panel. It is a pleasure to be here today to discuss 

DOD financial management improvement efforts and how it is 

going to achieve auditability. 

At the outset, I really want to thank this panel for inviting us 

here. We believe that focused attention, such as these panels, is the 

key to corrective actions within the Department of Defense. 

In my testimony today, I am going to be providing GAO’s perspective on the status of DOD’s financial management weaknesses 

and the efforts to resolve them. 

In addition to that, I will also touch upon some of the challenges, 

which DOD continues to face in improving its financial management operations. My testimony is based on our prior work within 

the Department of Defense. 
9 

Regarding the status, for more than a decade, DOD has dominated GAO’s list of federal programs and operations at high risk, 

due to their susceptibility to fraud, waste, abuse and mismanagement. 

In the last 20 years, as a result of significant management weaknesses, none of the DOD military departments—Army, Navy or the 

Air Force—have been able to prepare auditable financial statements. 

DOD’s past strategies for improving its financial management 

have generally been ineffective. But recent initiatives and what we 

have heard this morning are encouraging and show promise. 

Specifically, recent changes to the DOD plan for financial improvement and audit readiness, the FIAR plan, if implemented effectively, could result in improved financial management and 

progress toward auditability. The Army, Navy, Air Force and the 

Defense Logistics Agency have key roles in implementing the plan. 

However, DOD does face many challenges in overcoming its longstanding financial management weaknesses. I am going to briefly 

highlight six of these major challenges. 

The first one, one of the toughest challenges in implementing the 

FIAR plan is sustaining committed leadership. The DOD comptroller has expressed commitment to the FIAR goals and has established a focused approach to achieving the FIAR long-term goals 

that is intended to help the DOD achieve near-term successes as 

well. 

To succeed in the long-term efforts to improve, financial management needs to be cross-functional. DOD agencies and offices that 

perform business functions—for example, weapon system acquisition, and supply chain management—have to work together, as financial management function is dependent on the information received from these two functions and, vice versa, these two functions 

also need financial management information in order to perform 

their functions effectively. 

However, within every administration and, of course, between 

administrations there are changes in leadership. It is paramount 

that the FIAR plan and other current initiatives be institutionalized throughout the Department at all working levels. 

The second one is a competent financial management workforce, 

with the right knowledge and skills, is needed to implement the 

FIAR plan. Effective financial management requires a knowledgeable, skilled workforce that includes individuals who are trained 

and well-versed in government accounting practices and information technology. 

Analyzing skills needed and then building and retaining an appropriately skilled workforce are needed for DOD to succeed in its 

transformation effort. 

The third one is the accountability and effective oversight of the 

improvement efforts. DOD has established bodies responsible for 

governance and oversight of the FIAR plan implementation. It will 

be critical for senior leadership in each of the DOD components to 

ensure that oversight of the financial improvement projects and efforts is effective, and that responsible officials are held accountable 

for the progress. 
10 

Fourth, a well-defined enterprise architecture. For DOD, a key 

element of modern financial management and business operations 

is the use of integrated information systems with a capability of 

supporting a vast and complex business operation. 

A well-defined enterprise architecture will be needed as DOD 

blueprints for modernizing its business systems. However, DOD 

has yet to address previously identified issues associated both with 

the architecture and investment management. 

The fifth one, which is linked to the prior points I have made, 

is enterprise resource planning, or ERP systems. These are expected to form the core of the business information systems and the 

DOD components. Their effective implementation is effective to improving DOD financial management and related business operations, and will be key to becoming auditable. 

However, the components have largely been unable to implement 

ERPs that deliver the needed capability on schedule and within 

budget. Effective business system modernization across DOD is key 

to achieving hundreds and millions of dollars in annual savings. 

Finally, weaknesses in DOD’s internal controls over financial 

management are a pervasive and primary factor in DOD’s inability 

to become auditable. DOD needs a practical approach to prioritize 

these internal control weaknesses and to correct them within a reasonable period of time. 

In closing, I am encouraged by the recent efforts shown and the 

commitment by DOD leadership, however the Department’s ability 

to address these six weaknesses, or the six major challenges, that 

I have highlighted today will be a major factor in reaching 

auditability. 

Mr. Chairman, these are my remarks for the morning. I will be 

happy to answer any questions that you have. Thank you. 

[The prepared statement of Mr. Khan can be found in the Appendix on page 43.] 

Mr. CONAWAY. All right, Mr. Khan. 

Thank you, panelists. 

Without objection, I think everybody will go on the 5-minute 

clock so that we get a lot of the way through. So I will start us. 

Bob, yesterday you talked to the Senate about the most recent 

analysis on the FIAR, that you had made 5 of the 25—— 

Secretary HALE. You had a spy there, sir. 

Mr. CONAWAY. We pay attention, or try to. Five of those shortterm goals and you have now extended 20 of those. Were there consequences to the folks who did the 5 versus the folks who did not 

get the 20? Is your accountability system in place yet to hold managers accountable for that? Has it been implemented? 

Secretary HALE. You know I think we are still getting the point 

there, and certainly nobody was fired and shouldn’t have been in 

that regard. Many of those were interim goals. As I have told you 

we have met a number of them. We are going to meet within this 

fiscal year the key goals that concern me—the appropriations received, funds balanced with treasury, the GFEBS, and continue 

with the Marine Corps audit. 

We did miss some of the interim goals and, frankly, it was probably because we didn’t plan them well, so I think at this point I 
11 

don’t feel disciplinary action is appropriate. I think encouragement 

is what is appropriate. We are making progress. 

I was taken aback by the numbers, but I believe she was right, 

Mr. Chairman. Senator Udall had made that comment yesterday. 

We did miss a number of the interim goals, but I think we have 

hit the key goals, at least within the fiscal year. 

And we have got to pick up the pace. I understand that. I am 

hoping for a learning curve here, both in terms of our ability to 

plan what we can carry out, but also our ability to know how to 

do it. 

Mr. CONAWAY. Let me pivot over to Ms. McGrath, then. The senior executive staff—what is the S for, the SES, Senior Executive—— 

Ms. MCGRATH. Service. 

Mr. CONAWAY [continuing]. Service now has performance measures built into their evaluation process. Have you been at it long 

enough to have gone through a cycle yet where you put the SES 

folks through a specific analysis of what their performance goal 

was versus what they did? 

Ms. MCGRATH. Sir, we certainly did that during last performance 

year’s cycle at the, lets say, at the OSD [Office of the Secretary of 

Defense] level. They were proliferated across the OSD, and they 

were established for the military departments going into this year’s 

cycle. And we are just at the tail end of this performance year. 

Mr. CONAWAY. Can you talk to us about what did and didn’t happen to folks who either had a satisfactory performance against the 

goal they were assigned or did not have satisfactory performance? 

Any actions taken at this stage? 

Ms. MCGRATH. So, certainly, the overall performance. The Department has embedded financial audit goals into its overarching—— 

Mr. CONAWAY. Right, but try to get down to the individual level, 

because—— 

Ms. MCGRATH [continuing]. Performance—— 

Mr. CONAWAY. Has anybody actually been—yet—held accountable for not getting something done they were supposed to get 

done? 

Ms. MCGRATH. So, I would say yes. The Department’s overall 

performance against all of our goals, it would contribute to their— 

I will call it their bonus calculation. So those have been in place, 

and what we have done in the existing year is proliferated them 

outside the financial space. So the short answer is yes, they have. 

They have been in place. 

Mr. CONAWAY. Given that it is inappropriate to share individual 

names in here because of the privacy issues, I do think it is going 

to be helpful to those on the panel to see where—at least some statistics that folks who didn’t meet their goals were not as well—they 

did not get compensated for not making those goals, and folks who 

did make those goals are, in fact, compensated. So that would be 

one of the things that we look at. 

I want to talk briefly in my time remaining on legacy systems. 

The folks on this side of the table are trying to figure out ways to 

kind of watch what goes on. The folks on your side of the table will 

know abundantly more about what is going on than we will. One 
12 

of the measures that I am going to try to focus on and look at is 

continued legacy systems. 

We asked some folks in the Army yesterday once they got the 

GFEBS done across all 211 sites, having legacy systems would go 

away. There are about 150-something sites now, so there would be 

a ways to go. But at some point, we need to do a meaningful job 

in the number of legacy systems being maintained. 

So is that a good tracking metric, Bob, or not? 

Secretary HALE. I think it is. I am going to ask Beth to add to 

that, because it is more in her lane. But I believe it is. You will 

need to be patient, and GFEBS made a decision not to try to bring 

all the old data, past data, into the system. That greatly speeds up 

our ability to deploy this. 

It also means that for a period of time we are going to have to 

operate the old systems so that we can keep track of the legacy 

data, if you will. So it will be a number of years before they go 

away. 

The other Services have chosen a different approach. That is to 

bring the old data into the system. That means a huge job of data 

cleanup, which just slows the implementation. 

I am not sure which one is right, you know. I will go with their 

judgments, but yes we do need to get rid of legacy systems there. 

Ms. MCGRATH. But I would add that we currently published an 

enterprise transition plan that identifies our target solutions like 

the Army’s accounting solutions, GFEBS solution that we have 

talked about a couple of times. 

In the enterprise transition plan, it identifies sunset dates for the 

legacy systems associated with the implementation of GFEBS. And 

so we do identify those with dates, and we monitor those as well— 

again, tied to auditability but also reducing and rationalizing our 

overall I.T. footprint. 

Mr. CONAWAY. Thank you. Rob, for 5 minutes. 

Mr. ANDREWS. Well thank you for the testimony. It appears that 

there has been some substantial progress in the Marine Corps 

area, Secretary, which you referred to. What are the lessons 

learned from that? What has led to the relative better progress in 

that area? I am sure it is a smaller organization. That has a lot 

to with it. But what has led to the better progress there? And what 

have we learned that still need to be done there? 

Secretary HALE. Well, I think the reason, and you know, frankly, 

the Department of Navy in general is ahead. All of the other Services are working to catch up. The inter-service rivalry is a very 

powerful tool in the Department. 

Mr. ANDREWS. We have heard this. 

Secretary HALE. And I will work this whenever I can. I learned 

that as the Air Force F.M. [Financial Manager]. And the Navy has 

been investing steadily over the past 5, 7 years. That is why they 

are ahead. And the Marine Corps in particular has strong commitments, so—— 

Mr. ANDREWS. Investing in personnel training, software? 

Secretary HALE. Both dollars, I think, and personnel, both—and 

across the board, not just the Marine Corps, although the Marine 

Corps is particularly focused. But we have learned a great deal. I 

mean, we learned, first, that we don’t know what we don’t know. 
13 

We don’t really fully understand in the Department of Defense 

what you have to do to pass an audit for military service, because 

we have never done it. And you can’t learn to swim on the beach. 

It is hard to talk to other agencies that tend to be different from 

us, so as the Marine Corps jumped in to try to swim, they found 

out they had a number of problems. 

Some of them were system related, although they have got a 

pretty decent and fairly integrated system. The real problem is 

with business processes. We are just doing some things which are 

effective in terms of meeting war fighter needs, but aren’t 

auditable. 

For example, we do bulk obligations of military pay. The auditors 

want it done in a much more detailed fashion. Sometimes we 

weren’t doing basic and blocking and tackling appropriately. 

For example, we weren’t taking people off access lists of financial 

systems when they left the base. They were busy. They didn’t get 

to it. The auditors looked and said, ‘‘Hey, there are people here 

that shouldn’t have access.’’ So we have got to correct those kinds 

of business processes. 

Mr. ANDREWS. Does the Department of the Navy have more people relative to the size of the organization working on this problem, 

or do they have the same number of people doing it more effectively? 

Secretary HALE. I think they have in the past. Now I am less 

sure, because the other Services have definitely bulked up here, 

and in terms of funding, they are right up. I have kind of used the 

Navy as a benchmark, as I have looked at the other Services, figuring they are making progress, probably need similar resources. 

And the other Services are coming up to that level. 

Mr. ANDREWS. Mr. Khan, one of the things that you have mentioned in your testimony is major weapons system maintenance 

and operating and support costs. Do you have any suggestions as 

to how we might require estimates of those operating support costs 

be billed into the up front statement of the weapons system? 

In other words, one of the problems that has plagued us for a 

long time is we buy a weapons system and it winds up costing an 

awful lot more than we thought it was going to—in part, because 

of the requirement creep, in part because of other problems, but I 

think also in part, because we understate the operating and support cost. 

What suggestions do you have that we might require bidders to 

build into their costs so that we can more accurately anticipate 

what is coming? 

Mr. KHAN. I mean, certainly this issue starts with process, really, that start in acquisition. 

I am sorry, can you hear me now. I am sorry. 

It does start in the acquisition process and what Ms. McGrath 

mentioned that DOD is implementing, an end-to-end process so 

that when you have a procurement, when you raise a purchase 

order, you begin to collect all the data which is necessary for accumulating the actual cost which is going to be spent on that particular product itself. 

So, I mean, in our work, we have seen that. That is slow to happen in acquisition to link that up with capturing the cost informa-
14 

tion, which can be meaningfully built into, if you will, a profile, 

whether its weapon systems or even in the large system acquisitions. 

I think that will go a long way towards having more of a discipline so that you can true up the estimates with what the actual 

costs are. 

Mr. ANDREWS. Your agency did a compelling study that said we 

were $297 billion in cost overruns in seven major weapons systems, 

I believe it was. Could you just guess what percentage of that $297 

was misunderstanding of support and maintenance costs? 

Mr. KHAN. That would be a tough guess. I am sorry. 

Mr. ANDREWS. If you would supplement the record later, I would 

be curious. 

Mr. KHAN. Okay. 

Secretary HALE. I believe I would let GAO supplement it, though. 

That was looking at—those were the selected acquisition reports, 

and they were looking at the procurement on the investment costs 

associated with the weapons. I don’t believe that any of that was 

associated with that. 

Mr. ANDREWS. I think you are right. I think I would modify my 

question to say, could you make an interesting projection as to 

what follow-on costs behind the $297 are going to come because of 

this problem. That is a better way to frame it. It may be worse, 

but—— 

Secretary HALE. May I add a brief point—may I add a brief point 

to that? 

Mr. ANDREWS. Sure. 

Secretary HALE. A major issue in the Department has been, as 

long as I have been associated with DOD, we tend to be overly optimistic about projections of operating and support costs, and we 

don’t make decisions based on them. And you have to make that 

decision very early in the life of a weapons system to have any 

meaningful effect. 

In some cases we are paying for game-changing capabilities. I 

think stealth capability has been extremely costly, because every 

time you exercise with a weapon and it hits a rock or a bird, you 

have got to recode it. If you have to do maintenance, you have to 

recode it. It is very expensive. 

On the other hand, it has been a war fighter game change. So 

I wouldn’t always say higher operating costs are a bad idea. You 

have to judge them against what you get. 

Mr. CONAWAY. Thanks, Rob. 

Scott, for 5 minutes. 

Mr. RIGELL. Thank you Mr. Chairman. 

I certainly thank our panel for getting up early. 

Mr. Chairman, I commend you for starting on time. I think in 

my 6 months here, this is the first and only meeting that has actually started on time. I am impressed by that. 

I also want to thank the Ranking Member Andrews. I think the 

tone that has been set here is the tone that we need set. I think 

it is actually, if I can go as far as to say, it is beyond bipartisan. 

It is just American, you know, us trying to get our hands around 

this and work together. 
15 

And I think that we are here today talking about the challenges 

faced in the accounting of DOD is of no surprise, given the rapid 

increase in funding and the mission that was given to DOD after 

9/11. 

Mr. Hale, I wanted to ask you, given the complexity of DOD, it 

seems like this of all endeavors we would have to slow down and 

be very thoughtful and very strategic about how you get your arms 

around this challenge here. 

And have you identified global challenges, those barriers that inhibit our ability to produce audited statements and on a global 

scale, but identified maybe a smaller sector that we could go after 

and see if we could get real success in a smaller sector? 

I know the government likes to have these acronyms and things 

like a center of excellence and then ramp it up and move across. 

Now, I don’t know if that is a profound statement at all. You may 

have done that. Maybe that is reflected in the success that you 

have had in the Marine Corps. But if you could comment on that, 

it would be helpful to me. 

Secretary HALE. First off, we have been pretty good at slowing 

down over the years. I am not working to do that. I would like to 

speed up. 

There are two broad problems that we have had in the challenges we face. I would say one is better systems. Especially the 

Army and Air Force feel that their current systems simply cannot 

support auditability. Now I will give you just one example to try 

to make that more concrete. 

These systems don’t keep track of data at the invoice level. And 

so when an auditor wants to check our payment, they want to see 

an invoice. They want to see a contract that backs up that invoice. 

They want to see a receiving report. Right now what we have to 

do if we are going to audit that is manually go out and get those 

documents. 

And when you are doing samples of thousands, you can’t do it 

in a timely fashion. The new systems keep track of this data so you 

literally can hit a button, if it is working right, and you will have 

the data available. So especially the Army and Air Force feel they 

must have a new system. So that is one global problem. 

The other ones are business processes or financial controls which 

are too variable and in some cases not strong enough to support 

audits. I mean, I would say they are reasonable. I know where we 

are spending the money in budget terms, and I would argue with 

those who say differently. But they aren’t good enough to support 

audits. 

So we are going to have to improve them. We are working on 

teams to try to identify those and get our commands to start making changes now at the same time they are doing the systems. I 

don’t want to do this—I don’t want to do it—I want to do it concurrently, not sequentially. 

Finally in terms of your—you have hit exactly what we are trying to do. We are trying to do this in a phased manner. The Marine 

Corps is a good first step, and these validations are also looking at 

pieces of this. And so we will learn, and I hope build up some successes, as well as areas where we need to improve. 
16 

Mr. RIGELL. I appreciate the answer. Maybe the second part of 

the question is still a bit unclear to me. 

Have we identified a smaller sector, maybe a division, a branch 

to say this is the one that we are really going to do very, very well, 

and then we are going to scale this up—lessons learned, best practices. And has that been done? Or is it more you are trying to get 

your arms around the whole thing? 

Secretary HALE. No, I think we have done exactly what you are 

saying. First, we picked budgetary information as our major focus. 

And the reason we did that is because it is most used to manage. 

Then within that, the Marine Corps is our smallest service. It is 

also the least complex, because the Navy handles a lot of its procurements. And so it is a good starting point, and we are learning 

a great deal. 

But I don’t want to just focus on the Marine Corps and have the 

Air Force—— 

Mr. RIGELL. That is okay. I think I—— 

Secretary HALE [continuing]. And the Army sit over there and do 

nothing. 

Mr. RIGELL [continuing]. A lot of Marines on the panel. That is 

okay. 

Secretary HALE. We are counting on the Marine Corps for a financial beachhead and to hold it, too. 

I want the other Services to be active. We can’t audit their whole 

statement yet. We are not close enough to do that. So that is why 

we picked these validations. We are picking pieces that are key— 

the Air Force for funds balance with Treasury, the Army to look 

at its systems—— 

Mr. RIGELL. I am not—— 

Secretary HALE. We have a phased approach—we call them 

waves—— 

Mr. RIGELL. Okay. 

Secretary HALE [continuing]. That attempts to do this. 

Mr. RIGELL. Thank you. 

In my remaining 15 seconds, could you provide the committee— 

we may have this; I don’t believe we do, though—could you provide 

the committee with the observations and recommendations from 

the outside auditors? And I am not talking about reams of papers, 

but if you could condense that, summarize it. 

What are the outside auditors, to the extend that that can be 

summarized in, you know, four or five pages, and specifically if 

there were any legislative—and this may be going to the end of the 

book, the last page of the book, but are there any legislative suggestions that they may have made? 

Thank you, Mr. Chairman. 

Thank you, Mr. Hale. 

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

page 73.] 

Mr. CONAWAY. All right thanks. 

Tim, 5 minutes. 

Mr. RYAN. Thank you, Mr. Chairman. 

I am reading here through the GAO report, and one of the issues 

that they brought up here is the limited ability to identify, aggre-
17 

gate and use financial management information for managing and 

controlling operating and support costs. 

What are you specifically doing to try to get that more information? And how much of that—I would imagine a good deal of it— 

you will be interfacing with contractors to try to get that information? 

Secretary HALE. Yes. Certainly, in some cases we will use contractor support, although the overall process has to be led by government employees. 

First, I would say that for budgetary information, I mean, when 

you make an appropriation to us, we can track whether or not we 

meet that appropriation. The appropriations received that I spoke 

of is the process we use at the start to distribute the money in a 

manner consistent with the laws the Congress enacts. 

And then we do have ability to track that. And I can go 

through—you heard it when I was giving the briefing a week ago; 

if you want I will go through it again—but there is some external 

corroboration of that. We have about 3,000 auditors watching every 

program and financial move. 

Generally, our violations of the Anti-Deficiency Act, which essentially says you weren’t doing what the law told you, are quite low— 

very much lower, I might add, than nondefense agencies taken as 

a whole. So I have reasonable confidence in the data, that we know 

where we are spending the data as you tell us. 

What gets hard is when you want to start getting cost data, 

which is very important. When you want to figure out what the 

JSF, Joint Strike Fighter, costs to operate, that requires special 

studies. Our systems just can’t do that. 

We can do the studies, but they take time, and so we need to improve there. And overall, we do need audits to verify that the information is correct. Now, I am pretty sure it is in the right spots and, 

therefore, I have reasonable confidence in the data we are using to 

make decisions. But I fully accept that we need audits to verify 

that point. 

Mr. RYAN. So, well, I am not an accountant, so I am trying to—— 

Secretary HALE. Neither am I. 

Mr. RYAN [continuing]. Wrap my brain around this. You are not 

getting enough good information. Is that fair? Is that what the 

GAO is saying here? 

Secretary HALE. Certainly—— 

Mr. RYAN. So what are you doing to get more information to 

eventually figure this out? 

Secretary HALE. I would say its in some cases we don’t have good 

information, and overall we don’t have audits to verify the quality 

of that information. There are some good points, like I said. I think 

our budgetary information—when you appropriate something in 

Army weapons and track combat vehicles and tell us to spend it 

a certain way, we can track that. 

Mr. RYAN. But what it says here—and maybe GAO would like to 

chip in here—I mean, what your report here is saying is that this 

is a repair costs, maintenance, contract services. It seems—feel free 

to chime in, too—you know, it seems like those are pretty standard 

requests to know, okay, on the Joint Strike Fighter what are the 

repair costs? What are the maintenance costs? 
18 

And I am having trouble figuring out what the issue is here. 

Mr. KHAN. Let me just—oh, I am sorry. Turned that off. 

Let me just build on my response to Mr. Andrews’ question. The 

issue is cost here. I mean, DOD does have very good estimates, 

which they have developed themselves. But they have to be trued 

up with the actual cost information. 

And that is where acquisition process comes into it, because they 

are the primary people dealing with the contractors. So it has to 

be set up front the expectation with the contractors that they need 

specific cost information to be broken down in a certain way, which 

DOD systems and DOD processes can take into their systems to be 

able to develop that and match that with the estimates. 

Mr. RYAN. Okay. So are we doing that with the contractors now? 

Ms. MCGRATH. So part of the today’s environment, as Mr. Hale 

has articulated, the systems weren’t designed to do cost accounting. 

And I am not an accountant either. But as Mr. Hale also articulates, we know where the money goes. It is the actual costs of 

doing, you know, repairs and those kinds of things. 

Mr. RYAN. Right. 

Ms. MCGRATH. And so the enterprise resource planning systems, 

many of those systems that we have been talking about, the target 

solutions are being designed such that we can capture that cost information, have the actual data that says that we can do forecasting for maintenance and sustainment of those systems, so that 

we are actually using real data to establish both our inventory 

needs and our forecasting. 

So it is a long way of saying that we are through the development of the business center enterprise architecture. We are developing standard financial information standards along with logistics 

based standards to ensure at the end of the day that we can aggregate the data, have the cost information so that, you know, that we 

can have those estimates that GAO has articulated that we don’t 

currently have today. 

Mr. RYAN. Okay. I am out of time. 

Thank you, Mr. Chairman. 

Secretary HALE. If I can take one more shot, because I don’t feel 

I have been helpful. 

Let me take the JSF as an example. If you want its operating 

costs, you are going to have to look at our personnel information, 

you are going to have to look at our day-to-day operation and maintenance information, you have to look at spare parts. 

Those all are in separate appropriations. If you wanted that now, 

you could not punch a button and get it. You would have to get a 

team of experienced analysts to go in, look at the budgetary data 

in those categories, in some cases estimate what portion were attributable to the JSF and come up with that data. 

When you are done with that study, I think you would have reasonable information to make a decision, but it is slow, and we don’t 

have an audit that verifies that all of the information is correct. 

So it is a nuanced answer. Yes, I can get something that would 

help the commander make a decision, but it will take a long time, 

and it will require specialized expertise, contractors and others. 

And, again, there is no audit to verify its capability. 
19 

I hope that is helpful. It is not a black-or-white answer. It is not 

that we don’t have any information. It is just not as readily available, and sometimes it is not as high quality as I would like. 

Mr. CONAWAY. It is still a good rationale for continuing pushing 

on this issue to get this done at the end of the day. 

Secretary HALE. Yes, but, you know, to be honest, even if we got 

an audit, it wouldn’t solve—— 

Mr. CONAWAY. No, no, no, but you can have systems in place, 

and you would sustain the audits and do those kinds of analysis 

quicker—— 

Secretary HALE. You will have—— 

Mr. CONAWAY [continuing]. More nimble 

Secretary HALE [continuing]. Somewhat quicker, yes. 

Mr. CONAWAY. And so, Todd Young for 5 minutes. 

Mr. YOUNG. Thank you, Mr. Chairman. 

Thank you to all our panelists. I do appreciate you being here 

early this morning. 

Mr. Khan, I appreciated your six pillars, if you will, of change 

that, as you see, must occur in order to really begin to tackle this 

challenge in a serious way. 

I would further reduce those into a few different buckets, if you 

give me liberty. One would be processes, another would be systems, 

and then, finally, we have people. And you have put people first in 

terms of your comments. I don’t know if these were order of priority, but it strikes me they were. 

Certainly, if we are going to have any sort of lasting change here, 

we are going to have to have sustaining, committed leadership. We 

are going to have to institutionalize whatever plans we develop 

here, and we also need people with the appropriate skill sets to be 

able to add some value to this overall process. 

And so I would ask you or anyone here on the panel, what we 

have done first to try and—from the beginning, I think we need to 

be thinking about institutionalizing whatever plans are put in 

place here. So what have we done to ensure that we are going to 

have sustaining, committed leadership across administrations, with 

respect to the FIAR plan? 

And then, secondarily, what is being done with respect to assessing the skills needed within DOD in order to make sense of this 

and to then build that skilled workforce? 

Secretary HALE. Perhaps the biggest concern of mine is sustained 

commitment to this over time. That really depends on—and we 

have got it right now. I care about this. I learned it in my Air Force 

F.M. days. I cared about it then. I care about it now. 

But, frankly, the people that sit in my chair have generally 

been—I like to use the phrase ‘‘budget junkies.’’ There is a heavy 

focus on budget. And I consider myself a budget junkie. I am working constantly, watching what you are doing right now to the budgets. I am very concerned. 

So it is important that we have somebody that is my successor 

or somebody at senior levels who knows something and cares about 

the audits. I won’t be able to do anything about that. I would urge 

you to do what you can to ensure that. And it will, obviously, be 

very important that the deputy secretary and the secretary care 
20 

about it as well. Sustained leadership over a couple of administrations will be required to make this happen. 

Let me turn to the workforce. I think, generally, there are about 

68,000 people in the defense financial management workforce, 

roughly 58,000 government civilians, and about 10,000 of these in 

the so-called G.S. [grade scale] 500 series, and about 10,000 military personnel. I think, generally, they are well trained. But we 

haven’t been as systematic about that as I would like. 

We are starting to do that in two respects: one, completing a 

competency review—figuring out what they ought to know. I think 

we generally knew that, but we have to be more specific. 

And, second, we have asked for legislative authority, and you 

have given it to us, as has the Senate, so I hope we will come out 

of conference, to impose a course-based certification program for defense financial managers, analogous to the Defense Acquisition 

Workforce Improvement Act legislation for acquisition, which 

would allow a framework. 

And we would require certain courses for certain jobs. And 

auditability and accounting would be one of them. So I believe that 

it is, generally, a well-trained workforce, based on my experience 

with it, especially at the senior levels. But I think a more systematic approach would be appropriate. 

You are scowling at me. Did I answer your question? 

Mr. YOUNG. Thank you. You did, and, actually when sustained, 

committed leadership was said, I wasn’t necessarily thinking about 

just the top people in the organization. 

And perhaps that is what you meant, Mr. Khan, but I thought 

institutionally, things might be implemented so that we didn’t have 

a—it didn’t require each administration to appoint enlightened people. Maybe we could do things that would ensure that they stayed 

focused on this problem. 

Mr. KHAN. Right, Mr. Young, I mean, that is why I emphasized 

the human capital of the well-trained workforce. I think that is 

going to go a long way towards helping institutionalizing some of 

the topics we are talking about today. 

This is to drive transformation. This is change management process. And without having a well-trained workforce in a very complex 

environment, that is going to be a huge challenge. 

I think Congress recognized that. There was a requirement in 

National Defense Authorization Act of 2006 for DOD to perform a 

skill set analysis, if you will, and then do a gap analysis of what 

the to-be requirements are for the skill sets and where they were 

currently and what the plan was to transition. 

So that is going to be key. I mean, it is a complex environment, 

and then financial management itself is a technically complex area. 

So you are dealing with several different moving parts here, so the 

process and systems issue has received attention, but human capital is equally important. And without that the elements aren’t 

going to come together. 

Secretary HALE. But I don’t think this will succeed unless the 

secretary, deputy and comptroller and both OSD and the Services 

care about it and make a high priority of it. It won’t happen. 

Ms. MCGRATH. Can I also add, though, that we are, from an institutional perspective, baking it into the summary justification of 
21 

the budget. So there are performance measures that are identified 

as part of the budget submission. They are part of the overall 

GPRA Modernization Act [Government Performance and Results 

Modernization Act of 2010]. So these are top priorities. It is part 

of the strategic management plan. 

We are utilizing the business enterprise architecture to tie directly to achieving the financial auditability outcome, leveraging 

the investment review board process, so when systems do come in 

for development and modernization, there is that connectivity. 

And so from an institutional perspective, we are using all of the 

levers that are there. That notwithstanding, I don’t disagree with 

Mr. Hale’s point about the leadership, top-down driven requirement must happen. 

Mr. YOUNG. Great. Thank you. 

Mr. CONAWAY. Thank you. 

To Joe for 5 minutes. 

Mr. COURTNEY. Thanks, Mr. Chairman. 

Secretary Gates, when he has been before the full committee, has 

said over and over again that the Department is getting eaten alive 

by health care costs. Mr. Khan, in your report, you mentioned a 

problem that GAO identified with TRICARE [DOD health care program] in terms of misclassification. 

And I was wondering, first of all, is that just a sort of anecdotal, 

you know, sui generis incident? Or is that something that you think 

is a broader based problem? 

The second question is—and this is just showing my lack of 

knowledge—is TRICARE done service by service, or is this a program that is administered by the Pentagon in one place? 

And given the fact that that is sort of a hot spot in terms of the 

Pentagon’s budget, I mean, is there efforts that are being, you 

know, focused, in terms of this area, because, again, it is something 

the Secretary said repeatedly to our committee. 

So, Mr. Khan, maybe you can just talk about the report that you 

submitted. 

Mr. KHAN. Yes. I mean, that was an accounting misclassification 

of information. I mean, that is one instance that we have highlighted. There are several other instances where—I mean, this goes 

down to the basic fundamentals of bookkeeping, coding of information to make sure that it has correct classification. 

These are building blocks of financial reports. If the information 

is not being accumulated and aggregated at the correct level under 

the correct classifications, the information is going to be 

mischaracterized in the financial statements, so you will end up 

with certain types of information to be understated and other types 

of information to be overstated. 

So this really points towards the importance of having that discipline so that when you pull together the financial statements that 

you have reasonable assurance that the information that you have 

in front of you is accurate. 

This comes to all the decisionmaking process. If you are making 

important decisions, if you want to reduce certain activity, where 

you want to increase activity, or where you can have any cuts, this 

type of information is going to be very useful. 
22 

Secretary HALE. TRICARE is managed centrally in the Department. The Services, obviously, participate, but it is managed centrally. 

And, yes, it is a major problem, and we have made two broad 

proposals: One, to achieve some efficiencies in the TRICARE management agency. And they are working right now to implement 

those. Can we do it with fewer contractors, fewer people to reduce 

the overhead? 

The other one is to make some changes in the benefits, particularly to working age retirees. 

And we have both in the military health care area. We have 

made a set of proposals, and I very much appreciate the fact that 

the House supported those proposals in almost all cases. And, generally, the Senate Armed Services Committee has, too, so I would 

hope that we will get authority, for example, for modest increases 

in the enrollment fee for working-age retirees in TRICARE and 

some changes in pharmacy co-pays. 

These are tough votes. I recognize that. But some of this is getting out of hand, and we need to begin to make some modest 

changes in those benefits. So I appreciate your support. 

Mr. COURTNEY. Well, again, I understand that certainly one way 

to save money in the system is to, obviously, shift some costs to the 

beneficiaries. And, again, that debate has already taken place. 

I guess the question is, though, that, you know, what I think we 

would appreciate is having some confidence in knowing that the 

program is being administered as efficiently as possible, and the 

GAO criticism seems to suggest that there are problems there. 

And I guess that is sort of, you know, is the Pentagon making 

efforts to really try and make sure before they come to Congress, 

asking the beneficiaries to pay more, that, you know, you feel good 

about whether or not the management is up to speed? 

Secretary HALE. We have made a whole series of efforts, prior to 

proposing those beneficiary increases, to look for ways to hold down 

the growth in cost. 

For example, we were able to use the Veterans pricing scheme 

for pharmaceuticals, which saved us—I want to say—half a billion 

a year. I may correct that for the record, but it was substantial savings. 

We have looked at a variety of management improvements to deliver the care more carefully. The miscategorization—I need to look 

more carefully at the GAO report. I don’t know enough details to 

give the answer. 

But I can tell you that before we asked for those benefit increases, even though I think they are increases in enrollment fees, 

even though I think they are fully justified, we tried to do everything we could to try to make the system more efficient. 

Can we do more? Yes. There is an ongoing review right now of 

TRICARE and the rest of the military health system, looking for 

additional efficiencies. And I would hope that coming out of that 

would be some further recommendations next year to the Congress. 

Mr. CONAWAY. Thanks, Joe. 

Rob, you okay? 

Mr. ANDREWS. Yes. 

Mr. CONAWAY. All right. 
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Well, then, Bob, Beth, Asif, thank you for coming. I guess, just 

in concluding here, Bob, and Beth are spectacular professionals. 

You say all the right things. And to someone who just came walking in and sat down, you would think that you guys almost have 

it done, because, you know, you are really good at telling us all 

these things. 

As this panel progresses, diving deeper into the weeds, so to 

speak, I want that sense of urgency somehow to be seen other 

places, or a sense of urgency seen other places. You know Bob, you 

told us last week that, you know, nobody gets up thinking about 

September 30th, 2017, and that you have got to make interim 

progress, incremental progress to make this happen and a 5 for 25 

on that first round on the FIAR plan. 

What I don’t want to see happen, though, is to set the bar so low 

on those goes that you go 25/25, because you didn’t push yourselves 

far enough to make that happen. So there is a balance in there. 

You put it too far out there, and you get discouraged because you 

don’t get there. You put it too low, and you waste time as well. 

So this panel is going to be committed to trying to figure out how 

Congress can put that institutional continuity or sustainability of 

focus in place so that over these next 6 years that we get this done. 

You and your predecessors are going to be, you know, integral 

parts to that. So thank you for coming this morning at 8 o’clock. 

Rob, you got any closing remarks? 

Mr. ANDREWS. Well, I just want to associate myself with the 

Chairman’s remarks here. We see tangible progress, and we want 

to work with you to make that happen, but, frankly, the reason 

this panel exists is to guarantee that progress. 

We are hopeful we have a kindred spirit in Secretary Panetta. 

We know we have kindred spirits on your team, but we want to 

do more than spirit. We want the body as well. And the panel is 

on a bipartisan basis committed to that kind of oversight. I appreciate the opportunity to speak this morning. 

Mr. CONAWAY. All right. 

Thank you all very much. 

The hearing is adjourned. 

[Whereupon, at 9:03 a.m., the panel was adjourned.] 

A P P E N D I X 

JULY 28, 2011 

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DOCUMENTS SUBMITTED FOR THE RECORD 

JULY 28, 2011 

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WITNESS RESPONSES TO QUESTIONS ASKED DURING 

THE HEARING 

JULY 28, 2011 

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RESPONSE TO QUESTION SUBMITTED BY MR. RIGELL 

Secretary HALE. While the outside auditors have provided feedback on the audits, 

they have not made any legislative suggestions. The auditors’ detailed observations 

and recommendations from the financial statement audit of the U.S. Marine Corps 

(USMC) General Fund Statement of Budgetary Resources (SBR) follow. 

The audit has yielded significant improvements in key business processes and internal controls. The Fiscal Year (FY) 2010 audit employed a two-track approach to 

assessing the validity and fair presentation of General Fund SBR in accordance 

with accounting principles generally accepted in the U.S. (GAAP). Audit work 

streams were segmented into two distinct categories: 1) Financial Transaction 

Supportability; and 2) Information Systems Reliability. 

Financial Transaction Supportability—Audit requirements are aimed at supporting the balances reported on the financial statement by performing examination 

procedures that tie the accounting transaction to its corresponding supporting documentation. These are termed ‘‘substantive procedures’’ and assume little, if any, reliance on internal controls. 

The auditors approached testing across three key components of the financial 

statement: 1) Beginning Balances; 2) Current-Year Operations; and 3) Ending Balances and Compilation. The most difficult and challenging component of a first-year 

audit is assessing the reliability of a Beginning Balance, which represents all 

brought forward balances for every appropriation that is not in cancelled status in 

the year of audit. That is, appropriations that are active for making obligation adjustments and/or disbursement for requirements established in a prior period and 

remain active. The USMC financial statement audit did not significantly progress 

beyond Beginning Balance testing in FY 2010 because of the following significant 

auditor observations and findings: 

1. Inappropriate Accrual. The auditors uncovered inappropriate accruals that 

lacked support at the time of recognition and entry into the core accounting 

system. This matter was corrected by the USMC prior to the end of the FY 

2010 SBR audit. 

2. Lack of Management Evidence to Substantiate Obligation Estimates. On occasion, the USMC initiates a ‘‘bulk’’ transaction or one that is based on an 

estimate or calculation for future requirements. The auditors determined 

that these estimates were not being monitored or adjusted as necessary. As 

a result of this audit finding, the USMC has taken steps to implement improved estimation models and monitoring controls. 

3. Inappropriate Recognition of Contract Financing Payments as Advances. 

The auditors confirmed the equal general ledger treatment of advances 

(pre-payments) and contract financing payment. This represents an accounting classification error for a specific subset of assets. Although the 

USMC has corrected its core accounting system logic in order to properly 

record and report contract financing payments, the impact of this issue to 

the balances reflected on the financial statement was minimal. Prior to the 

SBR audit, the USMC was in compliance with the Department of Defense 

Financial Management Regulation (DoDFMR) when processing the recognition of contract financing payments. However, as a result of this audit, 

there are efforts underway within the Office of the Under Secretary of Defense (Comptroller) to update and clarify the DoDFMR. 

4. Timely Recording and Review. The auditors identified a number of documents during testing that contained abnormal balances. These balances 

were a combination of negative obligations, latent undelivered orders balances, documents containing no recorded expenses, and stale obligations. A 

more robust quarterly and year-end review is needed in order to maintain 

normal balances on the documents in the core accounting system. This includes stronger management oversight and review of monthly reporting. 

The USMC has strengthened the tri-annual review process that is required 

throughout the DoD. 
74 

5. Trial Balance Compilation. The compilation and reconciliation of the detailed transactions to the financial statements is the first and most important requirement of any audit. The USMC was able, although with some 

difficulty and delay, to reconcile the detailed financial transactions to the 

unadjusted trail balance that the auditors use to sample and test the balances of the SBR. In order to sustain these improvements, the USMC implemented a series of reports that are generated monthly to facilitate faster 

and more accurate data exchange to the auditors. Additionally, the USMC 

worked closely with the Defense Finance and Accounting Service (DFAS) 

and the Business Transformation Agency to create a complete general ledger reconciliation of the unadjusted trial balance to the adjusted trial balance. This was an achievement never accomplished prior to the audit that 

spurred improved financial reporting and reconciliation support that will 

yield tangible audit benefits all financial statement reporting entities within the DoD. 

6. Shared Appropriations. Shared appropriations are appropriations identified 

and authorized through the Department of the Navy (DON) annual budget 

process that are shared by the Navy and the USMC. The auditors uncovered the inappropriate use of a general ledger account that does not reflect 

an allotment from the DON. For the FY 2011 General Fund SBR audit, the 

USMC implemented general ledger corrections to effect a reclassification 

across the impacted general ledger accounts to support the appropriate recording and reporting of a shared appropriation. There is no net effect to 

the presentation of the financial statement and the balances reported. These 

corrections are currently under evaluation. 

Information Systems Reliability—The audit requirements focus on leveraging the 

Government Accountability Office Federal Information System Controls Audit Manual in the auditor’s approach for testing financial systems and mixed-use systems 

controls. The controls tested consisted of select internal controls that depend on information systems processing and included general controls and application controls. 

The FY 2010 audit focused on three systems: 1) the Marine Corps Total Force 

System (MCTFS); 2) the Standard Accounting Budgeting and Reporting System 

(SABRS); and 3) the Defense Departmental Reporting System (DDRS). Of the three 

systems, only one system, MCTFS, is owned by the USMC. MCTFS supports integrated personnel and pay transactions for both the active and reserve components 

of the USMC as well as retired Marines. SABRS, which is owned by DFAS, is the 

core accounting systems used by the USMC for all General Funds appropriations. 

DDRS is used by the USMC to produce DoD financial statements, interim financial 

statements and budgetary reports. For FY 2011, the auditors added the Defense 

Cash Accountability System (DCAS) to their information systems audit scope. Along 

with DDRS, audit assessment of DCAS represents significant value for the DoD as 

this is a key financial recording and reporting system that is utilized across the enterprise. 

The FY 2010 audit of the USMC SBR identified 56 information systems (IS) audit 

findings for the 3 systems. Examples of the auditor’s observations and findings, as 

categorized by application control, include: 

1. Security Management. These controls provide reasonable assurance that security management is effective. The auditors identified instances where application level logging and monitoring was not performed and formal policy 

and procedures for the monitoring performed by third party providers had 

not been documented. By not actively monitoring application level activity 

nor third party providers adherence to service level agreements or other performance metrics, management cannot ensure they are receiving the agreed 

upon services at agreed upon metrics. There is also the risk that the third 

party provider does not properly communicate any security vulnerability to 

management in a timely manner. This could impact the SBR if unauthorized, fraudulent, or erroneous application activity is not detected, logged, 

and investigated by the third-party information technology (IT) security organization. 

2. Access Controls. These controls provide reasonable assurance that access to 

computer resources (data, equipment, and facilities) is reasonable and restricted to authorized individuals. The audit revealed that periodic management review of user access was not performed. Without periodic reviews and 

recertification of users, inappropriate access to significant financial data 

may be undetected. Additionally, there is risk of lingering access for employees who have been reassigned, terminated, or retired. 
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3. Configuration Management. These controls provide reasonable assurance 

that changes to information system resources are authorized and systems 

are configured and operated securely and as intended. The audit revealed 

little evidence of periodic review of changes that were migrated into production. Without a periodic review of changes that are migrated to production, 

there is an increased risk that an unauthorized, erroneous, or harmful code 

could be introduced the production environment and negatively impact the 

SBR financial statement reporting systems and related processes. 

4. Segregation of Duties. These controls provide reasonable assurance that incompatible duties are effectively segregated. The auditors uncovered instances where administrators were granted a functional role for their administrator accounts without an approved waiver from management. By not 

effectively restricting access to applications based on job function and adhering to segregation of duties principles, the risks for fraud and inappropriate 

transactions are increased. 

5. Contingency Planning. These controls provide reasonable assurance that 

contingency planning: 1) protects information resources and minimizes the 

risk of unplanned interruptions; and 2) provides for recovery of critical operations should interruptions occur. The contingency plan was not approved 

or tested, and did not include a business impact analysis. By not having a 

tested contingency plan and business impact analysis, there is an increased 

risk that the USMC will not be able to restore a system quickly and effectively after a service disruption. 

6. Business Process. These controls are the automated and/or manual controls 

applied to business transaction flows. They relate to the completeness, accuracy, validity and confidentiality of transactions and data during application 

processing. They typically cover the structure, policies, and procedures that 

operate at a detailed business process level and operate over individual 

transactions or activities across business processes. The auditors found that 

a data management strategy and design (i.e., how data is organized into 

structures to facilitate retrieval while minimizing redundancy) was not formally documented. Additionally, there was no formal procedure that documented how data was managed and monitored. A data management strategy and design is a critical factor in helping to assure the quality of data 

as well as its interrelationship with other data elements. Without a data 

management strategy and design there is a risk of poor quality data that 

may lead to a failure of system controls, process inefficiencies, and inaccurate management reporting. 

7. Interface Controls. These consist of those controls over the: 1) timely, accurate, and complete processing of information between applications and other 

feeder and receiving systems on an on-going basis; and 2) complete and accurate migration of clean data during conversion. Documentation that identified, listed, and provided an explanation for interface data processing files 

was not readily available for the auditors. Without properly listing, identifying, and providing an explanation for all the edit conditions contained in 

the input process program, there is no evidence that the edit checks are appropriately configured for data processing. 

8. Data Management System Controls. Enforce user authentication/authorization, availability of system privileges, data access privileges, application 

processing hosted within the data management systems, and segregation of 

duties. The audit testing found that multiple users shared one administrative account and password to access the Collection Server and could invoke 

privileged level access. Allowing the use of a shared account decreases the 

ability for management to establish accountability for user actions. Additionally, the use of a guest account with administrative privileges compounds the potential effect by having a generic account that could potentially be used to modify system settings or data without the action being 

tied to an individual. 

The audit helped to identify areas of both financial and IS risk in the USMC. The 

USMC audit team has worked with the auditors to understand the issues and risks 

and has taken firm action to remediate the known findings. The corrective actions 

resulting from the findings and issues identified in the FY 2010 audit are currently 

being reevaluated by the auditors during the FY 2011 audit. At this time the FY 

2011 audit is not complete. The USMC is confident that its action to address these 

audit issues and findings in FY 2011 will be sustained and ultimately validated by 

an audit opinion. Additionally, the USMC will continue to strengthen its manage-
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ment controls and improve its IT security posture in response to any future audit 

findings. [See page 16.] 
QUESTIONS SUBMITTED BY MEMBERS POST HEARING 

JULY 28, 2011 

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QUESTIONS SUBMITTED BY MR. PALAZZO 

Mr. PALAZZO. On Page 7, under the heading ‘‘Where We Are Today,’’ you stated 

that you are ‘‘assembling teams within each Military Department that will be 

tasked with improving financial controls.’’ I applaud your efforts to assemble these 

important teams within the Services. Can you please elaborate, for the Panel, the 

makeup of these teams with respect to their accounting background? How many of 

them are working on this task daily, etc? 

Secretary HALE and Ms. MCGRATH. Congressman Palazzo let me start by thanking you for your comment in support of our plan to assemble teams to improve financial controls. Our plan calls for each Military Department to devote at least 15 

people from its audit agency to assist the Department to improve its internal controls. Auditors have the experience needed to assist business and financial process 

owners with designing sound internal controls and then assisting with their effective implementation. As for the accounting background of the teams, the employment requirements for auditors include at least 24 hours of accounting or auditing 

course work and many of the auditors have years of financial audit experience. 

Mr. PALAZZO. On Page 5 of your submitted statement, you mention that the ‘‘Deputy Secretary has made clear that one of his highest management priorities is improving the acquisition, development, and fielding of IT systems.’’ While I can appreciate the attention and urgency given to acquiring, developing, and getting IT systems into the field, could DOD utilize systems they already have, instead of going 

through rounds of acquisitions to purchase something we could find in a desk 

drawer? 

Secretary HALE and Ms. MCGRATH. The Department is committed to taking a balanced approach to transitioning from its legacy systems environment to its target 

systems environment. This balanced approach includes both the acquisition of new 

systems and the modernization or retirement of existing systems. In many cases, 

utilization of existing systems to meet current capability needs is not possible, however, due to outdated programming languages, non-compliance with statute such as 

the Federal Financial Management Improvement Act (FFMIA), stovepiped business 

processes, or a variety of other reasons. In those cases, it is critical that the Department efficiently and effectively acquire new business systems that help to integrate 

our business operations and deliver interoperable data. 

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