Testimony

Before the Subcommittee on Government Efficiency,

Financial Management and Intergovernmental

Relations, Committee on Government Reform, House

of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at

10 a.m.

Tuesday,

May 8, 2001

DOD FINANCIAL

MANAGEMENT

Integrated Approach,

Accountability, and

Incentives Are Keys to

Effective Reform

Statement of Gregory D. Kutz

Director, Financial Management and Assurance

GAO-01-681T
Page 1 GAO-01-681T

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss the status of financial

management at the Department of Defense (DOD). Mr. Chairman, I want

to commend you for holding this hearing today. As our nation moves into

the 21st century, the 107th Congress and the new administration face an

array of challenges and opportunities to enhance the performance and

assure the accountability of the federal government for the benefit of all

Americans. For DOD, changing security threats, increased globalization,

and rapid technological advances are prompting fundamental changes in

the environment in which it operates. These trends are placing a premium

on increasing strategic planning, using integrated approaches, enhancing

results-orientation, and ensuring accountability.

With DOD spending currently representing about 16 percent of the federal

budget—down from about 50 percent in 1962, it is increasingly important

that it get the most from every Defense dollar spent. Each Defense dollar

that is spent inefficiently is a dollar that is unavailable to meet other

departmental priorities, such as weapon system modernization and

readiness, or to meet other governmentwide needs. Over the past few

years, DOD has made incremental improvements in financial management.

However, the results of the department’s fiscal year 2000 financial audit

are one indicator of the continuing serious and pervasive weaknesses in its

financial management systems, operations, and internal controls that have

impeded the development of useful, reliable, and timely financial

information for day-to-day management and decision-making.

The department’s financial management problems are closely tied to its

other seven major management challenges—strategic planning, human

capital, information technology, acquisition, contract management,

support infrastructure, and logistics. An estimated 80 percent of the data

needed for sound financial management comes from the department’s

other business operations, such as acquisitions and logistics. As discussed

in our January 2001 reports1

 addressing the major performance and

accountability challenges and high-risk areas facing DOD, while our

military forces are second to none, this same level of excellence is not

evident in many of the business processes that are critical to achieving the

department’s mission in a reasonably economical, efficient, and effective

 1

Major Management Challenges and Program Risks: Department of Defense (GAO-01-244,

January 2001) and High-Risk Series (GAO-01-263, January 2001).
Page 2 GAO-01-681T

manner. These eight key interrelated areas represent the department’s

greatest challenge to developing world-class business operations to

support its forces.

Today, I will focus on (1) an overview of the long-standing financial

management weaknesses facing DOD—as highlighted by the recent results

of the fiscal year 2000 financial audit, (2) the underlying causes of DOD’s

financial management challenges, and (3) key actions necessary to correct

DOD’s financial management problems as part of a fundamental business

process reform.

We have been reporting on the department’s financial management as an

area of high risk since 1995.2 As discussed in our recent report on the

results of our review of the fiscal year 2000 Financial Report of the U.S.

Government,3

 DOD’s financial management deficiencies, taken together,

continue to represent the single largest obstacle to achieving an

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

statements. To date, none of the military services or major DOD

components have passed the test of an independent financial audit

because of pervasive weaknesses in financial management systems,

operations, and controls.

These weaknesses not only hamper the department’s ability to produce

timely and accurate financial management information, but also make the

cost of carrying out missions unnecessarily high. Ineffective asset

accountability and the lack of effective internal controls continue to

adversely affect visibility over its estimated $1 trillion investment in

weapon systems and inventories. Such information is key to meeting

military objectives and readiness goals. Further, unreliable cost and

budget information related to nearly a reported $1 trillion of liabilities and

about $347 billion of net costs negatively affects DOD’s ability to

effectively measure performance, reduce costs, and maintain adequate

funds control. As the results of the department’s fiscal year 2000 financial

 2

GAO has designated government operations and programs as “high risk” because of either

their greater vulnerabilities to waste, abuse, and mismanagement or major challenges

associated with their economy, efficiency, or effectiveness.

3

U.S. Government Financial Statements: FY 2000 Reporting Underscores the Need to

Accelerate Federal Financial Management Reform (GAO-01-570T, March 30, 2001).

Long-standing

Financial

Management

Weaknesses Continue
Page 3 GAO-01-681T

audit and other recent auditors’ reports demonstrate, DOD continues to

confront serious weaknesses in the following areas.

Budget execution accounting. The department was unable to reconcile

an estimated $3.5 billion difference between its available fund balances

according to its records and Treasury’s at the end of fiscal year 2000—

similar in concept to individuals reconciling their checkbooks with their

bank statements. In addition, the department made frequent adjustments

of recorded payments between appropriation accounts, including

adjustments to cancelled appropriation accounts4

 of at least $2.7 billion

during fiscal year 2000. In addition, a number of obligations were incorrect

or unsupported. For example, auditors found that $517 million of the $891

million in recorded Air Force fiscal year 2000 obligations tested were not

supported. Further, the department could not fully and accurately account

for an estimated $1.8 billion of transactions that were held in suspense

accounts5 at the end of fiscal year 2000.

The net effect of DOD’s problems in this area is that it does not know with

certainty the amount of funding it has available. Until the department can

effectively reconcile its available fund balances and Treasury’s, ensure that

payments are posted to the correct appropriation accounts, and post

amounts held in suspense accounts to the proper appropriation accounts,

the department will have little assurance that reported appropriation

balances are correct. Such information is essential for DOD and the

Congress to determine if funds are available that could be used to reduce

current funding requirements or that could be reprogrammed or

transferred to meet other critical program needs.

Environmental and disposal liabilities. The amounts of environmental

and disposal liabilities the department has reported over the last few years

has varied by tens of billions of dollars—from $34 billion in fiscal year

1998, up to $80 billion in fiscal year 1999, and down to $63 billion in fiscal

year 2000. However, these reported amounts potentially excluded billions

of dollars of future liabilities associated with DOD’s non-nuclear weapons;

conventional munitions; training ranges; and other property, plant and

 4

Agencies are required to account for obligated and unobligated balances of their

appropriations for 5 years after the expiration of their period of availability. At the end of 5

years, appropriation balances, both obligated and unobligated, are cancelled.

5

A suspense account is a temporary holding account for problem transactions—for

example, those rejected because of system edit controls.
Page 4 GAO-01-681T

equipment—such as landfills. For example, we recently reported6 that

while DOD reported a fiscal year 2000 liability of $14 billion associated

with its environmental cleanup of training ranges, other DOD estimates

show that this liability could exceed $100 billion. Obtaining reliable

estimates of the department’s environmental liability is an important

factor for DOD managers and oversight officials to consider with respect

to the likely timing of related funding requests and DOD’s ability to carry

out its environmental cleanup and disposal responsibilities.

Asset accountability. DOD has continued to experience problems in

properly accounting for and reporting on its weapon systems and support

equipment. Material weaknesses continue in the central systems DOD

relies on to maintain visibility over assets critical to meeting military

objectives and readiness goals. For example, in fiscal year 1999, auditors

found that Army’s central visibility system excluded information on 56

airplanes, 32 tanks, and 36 Javelin command-launch units. Auditors’ fiscal

year 2000 financial audit testing showed that previously identified

problems in the systems and processes that DOD relied on to account for

and control its large investment in weapon systems had not yet been

corrected.

In addition, DOD’s inability to account for and control its huge investment

in inventories has been an area of major concern for many years.7

 For

example, auditors’ fiscal year 2000 reviews revealed that (1) Army did not

perform required physical counts for wholesale munitions with an

estimated value of $14 billion and (2) central accountability and visibility

records at four Army test facilities excluded data on about 62,000 missiles,

rockets, and other ammunition items that were on hand. In addition,

physical counts at the Defense Logistics Agency’s 20 distribution depots

showed that none of the depots achieved the department’s goal of 95

percent inventory record accuracy—with error rates ranging from 6 to 26

percent.

As a result of continuing problems in this area, the department continues

to spend more than necessary to procure inventory and at the same time,

experience equipment readiness problems because of the lack of key

spare parts. For example, we reported that because of long-standing

 6

Environmental Liabilities: DOD Training Range Cleanup Cost Estimates Are Likely

Understated (GAO-01-479, April 11, 2001).

7

GAO-01-263.
Page 5 GAO-01-681T

weaknesses in controls over shipments, the department’s inventories are

at high risk for undetected loss and theft. At the same time, and for a

number of years, insufficient spare parts have been recognized as a major

contributor to aircraft performing at lower mission capable rates than

expected. Our recent reporting8

 disclosed that inaccurate, inconsistent,

and missing pricing data for weapon system spare parts undermined

military units’ ability to buy needed spare parts.

Net cost information unreliable. A continuing inability to capture and

report the full cost of its programs represents one of the most significant

impediments facing the department. DOD does not yet have the systems

and processes in place to capture the required cost information from the

hundreds of millions of transactions it processes each year. Consequently,

while DOD reported $347 billion in total net costs for its fiscal year 2000

operations, it was unable to support this amount.

The lack of reliable, cost-based information hampers DOD across nearly

all its programs and operations. For example, recent reporting highlights

the adverse impact the lack of such information has had on the

department’s studies conducted under Office of Management and Budget

(OMB) Circular A-76 and its performance measurement and cost reduction

efforts. For example, in December 2000, we reported9

 that our review of

DOD functions that were studied over the past 5 years for potential

outsourcing under OMB Circular A-76 showed that while DOD reported

that savings had occurred as a result of these studies, we could not

determine the precise amounts of any such savings because the

department lacks actual cost data.

Lacking complete and accurate overall life-cycle cost information for

weapon systems impairs DOD and congressional decisionmakers’ ability

to make fully informed judgments on funding comparable weapon

systems. DOD has acknowledged that the lack of a cost accounting system

is the single largest impediment to controlling and managing weapon

 8

Defense Acquisitions: Prices of Marine Corps Spare Parts Have Increased (NSIAD-00-123,

July 31, 2000), Defense Acquisitions: Price Trends for Defense Logistics Agency’s Weapon

System Parts (GAO-01-22, November 3, 2000), and Navy Aviation Spare Parts Billing

Transaction Issues (GAO-01-178R, January 11, 2001).

9

DOD Competitive Sourcing: Results of A-76 Studies Over the Past 5 Years (GAO-01-20,

December 7, 2000).
Page 6 GAO-01-681T

system costs, including the cost of acquiring, managing, and disposing of

weapon systems.

In addition, the measures used in the department’s reporting under the

Government Performance and Results Act (GPRA) often did not address

the cost-based efficiency aspect of performance, making it difficult for

DOD to fully assess the efficiency of its performance. For example, we

reported10 that while DOD’s performance plan for 2001 included 45

unclassified metrics, few metrics contained efficiency measures based on

costs.

Financial management systems. DOD lacks integrated, transactiondriven, double entry accounting systems that are necessary to properly

control assets and control costs. DOD has acknowledged that, overall, its

reported network of 167 critical financial management systems does not

comply with the Federal Financial Management Improvement Act’s federal

financial management systems requirements.

DOD’s transaction processing, using a large network of systems relied on

to carry out its financial management operations, is overly complex and

error-prone. Each of the military services continue to operate many standalone, nonstandard financial processes and systems. As a result, millions

of transactions must be manually keyed and rekeyed into the vast number

of systems involved in any given DOD business process. To further

complicate processing, transactions must be recorded using a coding

structure that, as illustrated in the following figure, can exceed 50 digits.

 10Observations on the Department of Defense’s Fiscal Year 1999 Performance Report and

Fiscal Year 2001 Performance Plan (GAO/NSIAD-00-188R, June 30, 2000).
Page 7 GAO-01-681T

Figure 1: Example of DOD’s Accounting Coding

Source: DOD.

DOD uses such coding—which according to DOD can exceed 75 digits—to

accumulate appropriation, budget, and management information for

contract payments. In addition, such accounting coding often differs—in

terms of type, quantity, and format of data required—by military service

and fund type.

As a result, financial accountability is lacking and financial management

information available for day-to-day decision-making is poor. Weak

systems and controls leave the department vulnerable to fraud and

improper payments. For example, DOD continues to overpay contractors.

Although the full extent of overpayments is not known, the department

has an annual budget for purchases involving contractors of over $130

billion. In October 2000, we reported11 that of the $3.6 billion DOD

reported in its fiscal year 1999 financial statements as uncollected debt

related to a variety of contract payment problems, at least $225 million

represented improper payments, including duplicate payments,

overpayments, and payments for goods not received. Without effective

controls over this important area, DOD will continue to risk erroneously

 11Financial Management: Billions in Improper Payments Continue to Require Attention

(GAO-01-44, October 27, 2000).

Appropriation

Command

Budget Activity

Weapons System

Suballotment

Appropriation

Accounting Station

Transaction Type

Project Directive

Line Item and Suffix

for Management

Oversight

(e.g., engine

accessory)

ACRN

Service

Beginning

Fiscal 

Year

Ending

Fiscal

Year

Office of

Management

and Budget

Cost Code

Participating

Manager

Requiring

Financial

Manager

Receiving Activity

Project Unit

(e.g., engine)

Contractor

Support

Cost Code

AA 17 9395 1506 4 1 AV 031 BZ 276 0 068342 2B 000000 01030 MAS 0020
Page 8 GAO-01-681T

paying contractors millions of dollars and incur additional, unnecessary

costs to collect amounts owed from contractors.

DOD has initiated a number of departmentwide reform initiatives to

improve its financial operations as well as other key business support

processes. These initiatives have produced some incremental

improvements, but have not resulted in the fundamental reform necessary

to resolve these long-standing management challenges.

The underlying causes for the department’s inability to resolve its longstanding financial management problems, as well as the other areas of its

operations most vulnerable to waste, fraud, abuse, and mismanagement

were first identified in our May 1997 testimony.12 These conditions remain

largely unchanged today. Specifically, we believe the underlying reasons

for the department’s inability to put fundamental reforms of its business

operations in place are

• a lack of top-level leadership and management accountability for

correcting problems;

• cultural resistance to change, including service parochialism and

stovepiped operations;

• a lack of results-oriented goals and performance measures and

monitoring; and

• inadequate incentives for seeking change.

Lack of leadership and accountability. DOD has not routinely

established accountability for performance to specific organizations or

individuals that have sufficient authority to accomplish desired goals. For

example, under the CFO Act, it is the responsibility of agency CFOs to

establish the mission and vision for the agency’s future financial

management. However, at DOD, the Comptroller—who is by statute the

department’s CFO—has direct responsibility for only an estimated 20

percent of the data relied on to carry out the department’s financial

management operations. The department has learned through its efforts to

meet the Year 2000 computing challenge that to be successful, major

improvement initiatives must have the direct, active support and

involvement of the Secretary and Deputy Secretary of Defense. Such top-

 12DOD High-Risk Areas: Eliminating Underlying Causes Will Avoid Billions of Dollars in

Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997).

Underlying Causes of

Financial and Related

Business Process

Reform Challenges
Page 9 GAO-01-681T

level support helps guarantee that daily activities throughout the

department remain focused on achieving shared, agency-wide outcomes.

DOD experience has suggested that top management has not had a

proactive, consistent, and continuing role in building capacity, integrating

daily operations for achieving performance goals, and in creating

incentives. Sustaining top management commitment to performance goals

is a particular challenge for DOD. In the past, a turnover rate among the

department’s top political appointees of 1.7 years hindered long-term

planning and follow-through.

Cultural resistance and parochialism. Cultural resistance to change

and service parochialism have also played a significant role in impeding

DOD management reforms. DOD has acknowledged that it confronts

decades-old problems deeply grounded in the bureaucratic history and

operating practices of a complex, multifaceted organization, and that

many of these practices were developed piecemeal and evolved to

accommodate different organizations, each with its own policies and

procedures.

For example, as discussed in our July 2000 report,13 the department has

encountered resistance to developing departmentwide solutions under the

Secretary’s broad-based Defense Reform Initiative (DRI).14 The department

established a Defense Management Council—including high-level

representatives from each of the military services—which was intended to

serve as the “board of directors” to help break down organizational

stovepipes and overcome cultural resistance to changes called for under

DRI. However, we found that the council’s effectiveness was impaired

because members were not able to put their individual military services’ or

DOD agencies’ interests aside to focus on departmentwide approaches to

long-standing problems.

We have also seen an inability to put aside parochial views and cultural

resistance to change impeding reforms in the department’s weapon system

acquisition and inventory management areas. For example, as we recently

 13Defense Management: Actions Needed to Sustain Reform Initiatives and Achieve Greater

Results (GAO/NSIAD-00-72, July 25, 2000).

14Announced by the Secretary of Defense in 1997, DRI represents a set of actions aimed at

reforming the department’s major business processes and support operations.
Page 10 GAO-01-681T

reported,15 while the individual military services conduct considerable

analyses justifying major acquisitions, these analyses can be narrowly

focused and do not consider joint acquisitions with the other services. In

the inventory management area, DOD’s culture has supported buying and

storing multiple layers of inventory rather than managing with just the

amount of stock needed.

Unclear goals and performance measures. Further, DOD’s reform

efforts have been handicapped by the lack of clear, hierarchically linked

goals and performance measures. As a result, DOD managers lack

straightforward road maps showing how their work contributes to

attaining DOD’s strategic goals, and they risk operating autonomously

rather than collectively. In some cases, DOD had not yet developed

appropriate strategic goals, and in other cases, its strategic goals and

objectives were not linked to those of the military services and defense

agencies.

As part of our assessment of DOD’s Fiscal Year 1999 Performance Report,

we reported16 that it did not include goals or measures for addressing its

contracting challenge, and it was not clear whether the department had

achieved identified key program outcomes. The department’s 1999

performance report did not provide any information on whether DOD is

achieving any reduction in the important area of erroneous payments to

contractors nor did it provide any cost-based measures for whether the

department had achieved its desired outcome of putting in place a more

efficient and cost-effective infrastructure and associated operating

procedures.

Many of the department’s business processes in operation today are mired

in old, inefficient processes and systems, many of which are based on

1950s and 1960s technology. The department faces a formidable challenge

in responding to technological advances that are changing traditional

approaches to business management as it moves to modernize its systems.

For fiscal year 2000, DOD reported total information technology

investments of over $21 billion supporting a wide range of military

operations as well as its business functions, including an estimated

$7.6 billion in major information system projects. While DOD plans to

 15Major Management Challenges and Program Risks: Department of Defense (GAO-01-244,

January 2001).

16GAO/NSIAD-00-188R, June 30, 2000.
Page 11 GAO-01-681T

invest billions of dollars in modernizing its financial management and

other business support systems, it does not yet have an overall blueprint—

or enterprise architecture—in place to guide and direct these investments.

Lack of incentives for change. The final underlying cause of the

department’s inability to carry out needed fundamental reform is the lack

of incentives for making more than incremental change to existing

“business as usual” processes, systems, and structures. Traditionally, DOD

has focused on justifying its need for more funding rather than on the

outcomes its programs produced. DOD generally measures its

performance by the amount of money spent, people employed, or number

of tasks completed. Incentives for DOD decisionmakers to implement

changed behavior have been minimal or nonexistent.

This underlying problem has perhaps been most evident in the

department’s acquisition area. In DOD’s culture, the success of a

manager’s career has depended more on moving programs and operations

through the DOD process rather than on achieving better program

outcomes. The fact that a given program may have cost more than

estimated, took longer to complete, and did not generate results or

perform as promised is secondary to fielding a new program. To effect real

change, actions are needed to (1) break down parochialism and reward

behaviors that meet DOD-wide and congressional goals, (2) develop

incentives that motivate decisionmakers to initiate and implement efforts

that are consistent with better program outcomes, and (3) facilitate a

congressional focus on results-oriented management, particularly with

respect to resource allocation decisions.

The new Secretary of Defense has stated that he intends to include

financial management reform among his top priorities. The Secretary faces

a monumental task in putting in place such a fundamental reform. The size

and complexity of DOD’s operations are unparalleled. DOD is not only

responsible for an estimated $1 trillion in assets and liabilities, but also for

supporting personnel on an estimated 500 bases in 137 countries and

territories throughout the world. It has also estimated that it makes

$24 billion in monthly disbursements, and that in a given fiscal year, the

department may have as many as 500 or more active appropriations. Given

the unparalleled nature of DOD’s operations, combined with its deeply

entrenched financial management weaknesses, it will not be possible to

fully resolve these problems overnight. Changing how DOD carries out its

financial management operations is going to be tough work.

Keys to Fundamental

DOD Business

Process Reform
Page 12 GAO-01-681T

Going forward, various approaches could be used to address the

underlying causes of DOD’s financial management challenges. But,

consistent with our previous testimony before your subcommittee, as well

as the results of our survey of world-class financial management

organizations and other recent reviews, 17 there are several elements that

will be key to any successful approach to reform

• address the department’s financial management challenges as part of a

comprehensive, integrated, DOD-wide business process reform;

• provide for active leadership by the Secretary of Defense and resource

control to implement needed financial management reforms;

• establish clear lines of responsibility, authority, and accountability for

such reform tied to the Secretary;

• incorporate results-oriented performance measures tied to financial

management reforms;

• provide appropriate incentives or consequences for action or inaction;

• establish an enterprisewide architecture to guide and direct financial

management modernization investments; and

• ensure effective oversight and monitoring.

Integrated business process reform strategy. As we have reported in

the past,18 establishing the right goal is essential for success. Central to

effectively addressing DOD’s financial management problems will be the

recognition that they cannot be addressed in an isolated or piecemeal

fashion separate from the other major management challenges and highrisk areas facing the department.19 Successfully reengineering the

department’s processes supporting its business operations will be critical

if DOD is to effectively address deep-rooted organizational emphasis on

maintaining “business as usual” across the department.

Financial management is a crosscutting issue that affects virtually all of

DOD’s business processes. For example, improving its financial

 17Department of Defense: Progress in Financial Management Reform

(GAO/T-AIMD/NSIAD-00-163, May 9, 2001) and Executive Guide: Creating Value Through

World-class Financial Management (GAO/AIMD-00-134, April 2000).

18GAO/T-AIMD/NSIAD-00-163.

19As discussed previously, the eight interrelated areas that represent the greatest challenge

to DOD developing world-class business operations supporting its forces are: strategic

planning, human capital, financial management, information technology, acquisition,

contract management, support infrastructure, and logistics.
Page 13 GAO-01-681T

management operations so that they can produce useful, reliable, and

timely cost information will be essential if the department is to effectively

measure its progress toward achieving many key outcomes and goals

across virtually the entire spectrum of DOD’s business operations. At the

same time, the department’s financial management problems—and, most

importantly, the keys to their resolution—are deeply rooted in and

dependent upon developing solutions to a wide variety of management

problems across DOD’s various organizations and business functions. The

department has reported that an estimated 80 percent of the data needed

for sound financial management comes from the department’s other

business operations, such as its acquisition and logistics communities.

DOD’s vast array of costly, non-integrated, duplicate, inefficient financial

management systems is reflective of the lack of an enterprise wide,

integrated approach to addressing its management challenges. DOD has

acknowledged that one of the reasons for the lack of clarity in its reporting

under the GPRA was that most of the program outcomes the department is

striving to achieve are interrelated.

Active leadership and resource control. The department’s successful

Year 2000 effort illustrated and our survey of leading financial

management organizations20 captured the importance of strong leadership

from top management. As we have stated many times before, strong,

sustained executive leadership is critical to changing a deeply rooted

corporate culture—such as the existing “business as usual” culture at

DOD—and successfully implementing financial management reform. The

personal, active involvement of the Deputy Secretary of Defense played an

important role in building entity wide support for the department’s Year

2000 initiatives. Given the long-standing and deeply entrenched nature of

the department’s financial management problems combined with the

numerous competing DOD organizations, each operating with varying and

often parochial views and incentives, such visible, sustained top-level

leadership will be critical.

Clear lines of responsibility and accountability. Establishing clear

lines of responsibility, decision-making authority, and resource control for

actions across the department tied to the Secretary will also be a key to

reform. As we reported21 with respect to the department’s implementation

 20Executive Guide: Creating Value Through World-class Financial Management

(GAO/AIMD-00-134, Apr. 2000).

21GAO/NSIAD-00-72.
Page 14 GAO-01-681T

of its DRI, such an accountability structure should emanate from the

highest levels and include the secretaries of each of the military services

as well as heads of the department’s various business areas.

Results-oriented performance. As discussed in our report on DOD’s

major performance and accountability challenges, 22 establishing a resultsorientation will be another key element of any approach to reform. Such

an orientation should draw upon results that could be achieved through

commercial best practices, including outsourcing and shared servicing

concepts. Personnel throughout the department must share the common

goal of establishing financial management operations that not only

produce financial statements that can withstand the test of an audit but,

more importantly, also routinely generate useful, reliable, and timely

financial information for day-to-day management purposes.

In addition, we have previously testified23 that DOD’s financial

management improvement efforts should be measured against an overall

goal of effectively supporting DOD’s basic business processes, including

appropriately considering related business process system

interrelationships, rather than determining system-by-system compliance.

Such a results-oriented focus is also consistent with an important lesson

learned from the department’s Year 2000 experience. DOD’s initial Year

2000 focus was geared toward ensuring compliance on a system-by-system

basis and did not appropriately consider the interrelationship of systems

and business areas across the department. It was not until the department

shifted to a core mission and function review approach that it was able to

achieve the desired result—greatly reducing its Year 2000 risk.

Incentives and consequences. Another key to breaking down parochial

interests and stovepiped approaches that have plagued previous reform

efforts will be establishing mechanisms to reward organizations and

individuals for behaviors that comply with DOD-wide and congressional

goals. Such mechanisms should provide appropriate incentives and

penalties to motivate decisionmakers to initiate and implement efforts that

result in fundamentally reformed financial management operations.

Enterprise architecture. Establishing an enterprise wide financial

management architecture will be essential for the department to

 22GAO-01-244.

23GAO/T-AIMD/NSIAD-00-163.
Page 15 GAO-01-681T

effectively manage its large, complex system modernization effort now

underway. As we testified last year,24 the Clinger-Cohen Act requires

agencies to develop and maintain an integrated system architecture. Such

an architecture can help ensure that the department invests only in

integrated, enterprise wide business system solutions, and conversely, will

help move resources away from non-value added legacy business systems

and nonintegrated business system development efforts. In addition,

without an architecture, DOD runs the serious risk that its system efforts

will result in perpetuating the existing system environment that suffers

from systems duplication, limited interoperability, and unnecessarily

costly operations and maintenance. In a soon to be issued report, we point

out that DOD lacks a financial management enterprise architecture to

guide and constrain the billions of dollars it plans to spend to modernize

its financial management operations and systems.

Monitoring and oversight. Ensuring effective monitoring and oversight

of progress will also be a key to bringing about effective implementation

of the department’s financial management and related business process

reform. We have previously testified25 that periodic reporting of status

information to OMB, the Congress, and the audit community was another

key lesson learned from the department’s successful effort to address its

Year 2000 challenge. Finally, this Subcommittee’s annual oversight

hearings, as well the active interest and involvement of other cognizant

Defense committees, will continue to be key to effectively achieving and

sustaining DOD’s financial management and related business process

reform milestones and goals.

In closing, while DOD has made incremental improvement, it has a long

way to go to address its long-standing, serious financial management

weaknesses as part of a comprehensive, integrated reform of the

department’s business support operations. Such an overhaul must include

not only DOD’s financial management and other management challenges,

but also its high-risk areas of information technology and human capital

management. Personnel throughout the department must share the

common goal of reforming the department’s business support structure.

 24GAO/T-AIMD/NSIAD-00-163.

25GAO-01-244.
Page 16 GAO-01-681T

The transition to modern performance management and, along with it, to

strategic human capital and information technology management, will

require a cultural transformation throughout the department that will take

time. DOD will need to be more partnerial, results oriented, integrated,

and externally focused in the future. Without reengineering, DOD will have

little chance of radically improving its existing cumbersome and

bureaucratic processes. Such a fundamental reform will require sustained

commitment from the highest levels of DOD leadership and changes

throughout all levels of the department as well as vigorous congressional

oversight. We stand ready to help the Congress and the administration put

in place world-class business operations in support of our forces by

providing professional, objective, and constructive assistance.

Mr. Chairman, this concludes my statement. I will be happy to respond to

any questions you or other members of the Subcommittee may have.

(192012)