GAO

United States General Accounting Office

Testimony 

Before the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate

For Release on Delivery

Expected at

2 p.m.

Wednesday,

April 14, 1999 

DOD FINANCIAL 

MANAGEMENT

More Reliable Information 

Key to Assuring 

Accountability and 

Managing Defense 

Operations More 

Efficiently

Statement of Gene L. Dodaro

Assistant Comptroller General

Accounting and Information Management Division

GAO/T-AIMD/NSIAD-99-145

Page 1 GAO/T-AIMD/NSIAD-99-145

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss the steps needed to improve 

financial management at the Department of Defense (DOD). Having 

reliable, timely financial information is important to ensure accountability 

over DOD’s extensive assets and resources in order to efficiently and 

economically manage the department. Accomplishing this goal is a 

tremendous challenge given the worldwide scope of DOD’s mission and 

operations; the diversity, size, and culture of the organization; its estimated 

trillion dollars of assets and liabilities; and its hundreds of billions of 

dollars in annual appropriations.

DOD has created and maintains the world’s most powerful fighting force 

and its effectiveness in protecting the safety and security of our nation and 

national interests is unparalleled. Yet, without more reliable financial and 

other management information, DOD cannot ensure adequate 

accountability to the President, the Congress, and the American public. In 

addition, decisionmakers and managers are deprived of valuable tools to 

control costs and address pressing management issues that drain resources 

that could be better used to increase readiness and meet other priorities, 

such as weapon system modernization.

Central to achieving accountability are effective financial management 

operations. However, pervasive weaknesses in DOD’s financial 

management operations led us in 1995 to designate DOD financial 

management as a high-risk area vulnerable to waste, fraud, abuse and 

mismanagement--a situation that continues today.1

 Also, taken together, 

the material weaknesses in DOD’s financial operations represent the single 

largest challenge to getting an unqualified opinion on the U.S. government’s 

financial statements.

While in the past we have questioned the department’s commitment to 

fixing these long- standing problems, DOD has started to devote additional 

resources to correct its financial management weaknesses. The 

atmosphere of “business as usual” at DOD has changed to one of marked 

effort at real reform. DOD is working on short-term actions to improve 

financial reporting and to help support the President’s goal to obtain an 

1

High-Risk Series: An Overview (GAO/HR-95-1, February 1995), High-Risk Series: Defense Financial 

Management (GAO/HR-97-3, February 1997), and Major Management Challenges and Program Risks: A 

Governmentwide Perspective (GAO/OCG-99-1, January 1999).
Page 2 GAO/T-AIMD/NSIAD-99-145

unqualified opinion on the federal government’s financial statements. In 

addition, DOD has recently submitted to the Congress its Biennial 

Financial Manageme’t Improvement Plan. This plan presents, for the first 

time, the department’s strategies, including a concept of operations for 

modernizing its financial management activities. The plan, which DOD has 

now committed to updating annually, is an ambitious undertaking that 

encompasses over 900 pages and represents an important step toward longterm improvements.

These initiatives are all very important steps in the right direction, but it is 

essential to keep in mind the magnitude of DOD’s financial management 

problems. These problems are pervasive and entrenched in an extremely 

large decentralized organization. It will take considerable effort, time, and 

sustained top management attention to turn reform efforts into day-to-day 

management reality.

My comments today will focus on

• the impact of financial management weaknesses on DOD’s ability to 

efficiently and economically carry out its operations;

• efforts DOD has initiated, and additional actions that are necessary, to 

improve financial management systems and controls in the short term; 

and

• enhancements needed in updating DOD’s Financial Management 

Improvement Plan--its long-term blueprint for financial management 

reform.

Impact of Financial 

Management 

Weaknesses on the 

Economy and 

Efficiency of DOD 

Operations

Recent audits of the fiscal year 1998 financial statements for DOD and the 

individual military services, performed by the DOD Inspector General (IG) 

and the service audit agencies, and our report on the U.S. government's 

financial statements have highlighted many critical DOD financial 

management problems.2 These problems not only hamper the 

department’s ability to produce timely and accurate financial management 

information, but also significantly impair efforts to improve the economy 

and efficiency of its operations. Key areas of concern relate to ineffective 

asset control and accountability, which affects DOD’s visibility over 

weapons systems and inventory, and unreliable cost and budget 

2

See appendix I for a complete list of DOD’s 1998 financial statement audit reports.
Page 3 GAO/T-AIMD/NSIAD-99-145

information, which affects DOD’s ability to effectively measure 

performance, reduce costs, and maintain adequate funds control.

Control and Accountability 

for Assets Impaired

DOD primarily relies on various logistical systems to carry out its 

important stewardship responsibility over an estimated $1 trillion in 

physical assets, ranging from multimillion dollar weapon systems to 

enormous inventories of ammunition, stockpile materials, and other 

military items. These systems are the primary source of information for

(1) maintaining visibility over assets to meet military objectives and 

readiness goals and (2) financial reporting. However, these systems have 

material weaknesses that, in addition to hampering financial reporting, 

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

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

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

Overall, these weaknesses can seriously diminish the efficiency and 

economy of the military services’ support operations. For example, DOD’s 

lessons learned studies from Operation Desert Storm highlighted combat 

support problems associated with tracking the status and location of 

personnel and supplies.

In response to this problem, the department initiated programs or renewed 

its emphasis on implementing existing measures that would improve asset 

visibility and tracking. For example, the Global Combat Support System 

(GCSS), led by the Defense Information Systems Agency, was established 

in September 1995 to reengineer processes and procedures and provide a 

technological base, including a common environment and shared 

infrastructure needed to rapidly deploy support to the warfighter. In 

addition, DOD renewed its Total Asset Visibility (TAV) initiative to provide 

department-level access to timely, accurate information on the status, 

location, and movement of units, personnel, equipment and supplies--

including weapon systems, secondary inventory,3

 and ammunition.

The effectiveness of these programs in achieving their common objectives 

of supporting the warfighter will depend on the accuracy and timeliness of 

information provided by the underlying systems. This includes the 

equipment and inventory data provided by numerous logistic systems such 

3

Secondary inventory includes spare parts, clothing, and medical supplies to support DOD operating 

forces worldwide.
Page 4 GAO/T-AIMD/NSIAD-99-145

as the Defense Logistics Agency’s (DLA) Distribution Standard System and 

the Army’s Continuing Balance System (CBS-X). As discussed in the 

following sections, information in these logistic systems on DOD’s weapon 

systems and inventories does not meet accuracy objectives and unless 

substantive improvements in producing reliable, timely data are made, it 

will be difficult for efforts such as GCSS and TAV to achieve their 

objectives.

Weapon Systems Accountability While necessary to effectively implement the department's overall 

objective to maintain visibility over all deployable DOD weapon systems, 

many of the military services’ logistics systems used to track and support 

weapon systems and support equipment were unable to be relied on to 

accurately provide information to support DOD’s asset visibility and 

reporting.

Audits of this information in fiscal year 1997 included specific tests to 

validate the data in the logistics systems reporting military equipment. 

Because of the sensitive nature of the equipment items selected for 

existence testing, auditors’ fiscal year 1997 financial audit tests were 

designed to either “pass” or “fail” the accuracy of logistical system 

information. For a number of critical systems tested, it was agreed”with the 

military leaders who used those systems that a system would “pass” only 

where all assets selected from the system were found. For other systems, 

which generally carry information on less critical assets, it was agreed that 

up to two errors could be identified with the system still receiving a passing 

grade.

Auditors tested recorded information for 11 categories of Navy military 

equipment. Fiscal year 1997 testing of critical Navy logistics systems 

showed that the Navy’s systems failed for 3 of 11 categories of military 

equipment tested. Specifically, auditors determined that the Navy systems 

relied on for visibility or accountability over active boats, service craft, and 

uninstalled engines failed because the data were either incomplete or 

included assets that no longer existed. For example, tests of these mission 

critical systems found the following:

• Of 45 boats selected for examination, 2 were included in the Combatant 

Craft and Boat Support System even though they had been disposed of 

or sold.

• Of 79 inactive service craft reported in the Naval Vessel Register (NVR) 

and tested by auditors, 6 could not be located. Fifteen other service craft 

had been sold or disposed of but were still included in the NVR as 
Page 5 GAO/T-AIMD/NSIAD-99-145

inactive, indicating their availability to meet rapid mobilization 

requirements.

• Of 105 uninstalled engines sampled, 10 valued at up to $4 million could 

not be found.

Because of the severity of these problems, a working group was 

established in 1998 to address the issue. The Navy, however, has not yet 

implemented any significant corrective actions to address deficiencies that 

continue to impede the Navy’s accountability over these weapon systems. 

Since these problems remained unaddressed, Navy auditors did not repeat 

these tests for the 1998 audit.

For 1997, Air Force logistic systems tested, including those supporting 

aircraft, missiles and uninstalled engines, passed auditors’ tests and 

auditors made recommendations to correct the minimal number of 

inaccuracies found during the tests. However, as part of the fiscal year 1998 

financial statement audit work, auditors were unable to verify the reported 

data on 8,387 uninstalled engines, with an estimated value in excess of

$8 billion. This occurred because the Comprehensive Engine Management 

System (CEMS) which is used to report data on these assets, could not 

separately identify additions and deletions of engines during the fiscal 

year--a basic control for ensuring accountability over assets.

Audit tests in 1997, using the pass-fail approach previously discussed, 

found that the Army property books maintained by the local units were 

generally accurate for major equipment items held by those units. However, 

the CBS-X, which is intended to provide Army leadership with worldwide 

visibility over the Army’s reportable equipment items, has significant 

accuracy problems. For example, we have reported4 that CBS-X was 

inaccurate because it (1) does not effectively capture data on equipment 

transactions from all Army units, (2) reflects software errors, and 

(3) contains transaction posting errors. In addition, like the Air Force’s 

CEMS, CBS-X does not provide accountability and control over Army 

assets by tracking additions and deletions to asset quantities on hand.

Recognizing that CBS-X could not provide effective visibility over 

equipment maintained by Army units, the Army used a data call to 

complete its financial reporting for fiscal year 1998 of this equipment and to 

4

Army Logistics Systems: Opportunities to Improve the Accuracy of the Army’s Major Equipment Item 

System (GAO/AIMD-98-17, January 23, 1998).
Page 6 GAO/T-AIMD/NSIAD-99-145

correct inaccuracies in CBS-X. The Army Audit Agency reported that this 

data call and other procedures identified 1,837 items, which included 10 

Army reconnaissance aircraft, 81 Tow missile launchers, and 174 Javelin 

command-launch units that were not reported to CBS-X. Because these 

results were based on only 78 percent of the units reporting as of 

October 28, 1998, the Army continued to follow up with units that had not 

reported and, by mid-December, 90 percent of the units had reported. For 

example, as a result of these additional units reporting, the Army identified 

another 43 reconnaissance aircraft that were not reported in CBS-X.

Inventory Accountability 

Weaknesses

Audit work has shown that inventory5 accountability data are inaccurate 

and include omissions. Further, DOD has large quantities of inventory 

beyond its requirements that may contribute to its inability to maintain 

accurate inventory quantity information. Incomplete and inaccurate data 

will hamper the department’s ability to meet and sustain the goals of TAV 

and other DOD-wide asset visibility initiatives, as well as adversely impact 

DOD's financial reports. In addition, inaccurate and omitted data increase 

the risk that responsible inventory item management may request funds to 

obtain additional, unnecessary inventories of items that are on hand but 

not reported. Finally, DOD is incurring unnecessary holding costs.

DOD's 1999 Annual Report to the President and the Congress incorporated 

the TAV initiative goals, including a target of 90-percent visibility of DOD 

materiel assets by 2000. TAV’s longer term target is 100 percent visibility by 

2004. The overall objective of TAV is to use the information to improve 

DOD's logistics practices, including sharing assets within component 

commands and/or among components. DOD cannot attain its overall TAV 

objective without both complete and accurate data.

With regard to incomplete inventory data, financial statement audits have 

found that the department generally excludes information in several 

inventory accountability systems from financial reports, including reports 

provided to the Congress on inventory levels, and from overall visibility 

systems. For example, Navy omissions, which primarily relate to spare and 

repair parts, included an estimated (1) over $9 billion in items warehoused 

on board ships, (2) over $3 billion of inventory items held by engineering 

5

DOD inventory includes ammunition (such as machine gun cartridges, rocket motors, and grenades), 

consumables (such as clothing, bolts, and medical supplies), repairable items (such as navigational 

computers, landing gear, and hydraulic pumps), and stockpile materials (such as industrial diamonds, 

rubber, and tungsten).
Page 7 GAO/T-AIMD/NSIAD-99-145

and ordnance activities, and (3) $650 million of items at redistribution 

centers. In addition, about $19 billion of government owned material held 

by contractors is omitted from inventory reports provided to the Congress.

With regard to accurate inventory data, financial audits have repeatedly 

found large differences between on hand and recorded inventory 

quantities. For example, in 1996 the DOD IG reported an overall 24-percent 

error rate at DOD’s primary storage locations. In 1997, Navy auditors 

reported a 23-percent error rate for the 13 major storage locations they 

visited. Finally, in 1998, for the 14 depots we visited holding 82 percent of 

depot inventory, the reported depot accuracy rates were below DLA’s 

targeted 95-percent accuracy mark, with only 2 depots reporting inventory 

record accuracy rates above 90 percent. Further, our preliminary 

observations over the physical inventory count procedures and the 

accuracy of those rates show that improvements are needed to strengthen 

controls over inventory. We will soon be providing DOD with specific 

recommendations on how it can improve these inventory controls.

The sheer size and volume of DOD’s on-hand inventories also impede the 

department’s efforts to accumulate and report accurate inventory data. We 

reported in our high-risk reports on defense inventory management that the 

department needs to avoid burdening its supply system with large 

unneeded inventories.6 In our soon to be released report, we stated7 that 

about 60 percent of on-hand items, or an estimated $39.4 billion of DOD’s 

secondary inventory, exceeded DOD’s requirements. The DOD IG has also 

recently reported that about $3 billion of DLA’s reported $9.8 billion of 

consumable inventory was inactive and of uncertain future utility. DOD 

acknowledges the need to reduce its inventories and has established goals 

to reduce supply inventory by $12 billion by 2000.

Finally, inaccurate or incomplete data can result in unnecessary purchases. 

In addition, unneeded inventory incurs holding costs. For example, in 

February 1997, we reported that DOD had ordered $11.3 million in items 

such as hydraulic pump valves and circuit card assemblies that were

6Major Management Challenges and Program Risks: Department of Defense (GAO/OCG-99-4, January 

1999).

7

Defense Inventory: Status of Inventory and Purchases and Their Relationship to Current Needs (GAO/

NSIAD-99-60, April 16, 1999).
Page 8 GAO/T-AIMD/NSIAD-99-145

already in excess supply.8 In addition, we estimated9 that the services could 

save about $382 million annually in inventory holding costs by eliminating 

at nonmajor locations inventory that is not needed to meet current 

requirements.

Reliable Cost Information 

Not Available

Reliable information on the cost of operations and the use of budgetary 

resources is critical to provide accountability for, and to efficiently and 

economically manage, DOD’s vast resources. Both cost and budgetary 

information are essential for making important decisions, such as 

reallocating resources to our fighting forces and considering whether to 

continue, modify, or discontinue programs and activities. However, DOD’s 

financial management systems are not designed to capture the full cost of 

its activities and programs. Also, as the next section discusses further, 

certain information on DOD’s budget resources is unreliabe

To effectively, efficiently, and economically manage DOD’s programs, its 

managers need reliable cost information for (1) evaluating programs (for 

example, measuring actual results of management’s actions against 

expected savings or determining the effect of long-term liabilities created 

by current programs), (2) making economic choices, such as whether to 

outsource specific activities and how to improve efficiency through 

technology choices, (3) controlling costs for its weapon systems and 

business activities funded through working capital funds, and 

(4) measuring performance. The lack of reliable, cost-based information 

hampers DOD in each of these areas, as discussed below.

Evaluating Programs Accurate cost information is needed to evaluate the results of 

management’s decisions, including determining whether anticipated 

savings have been achieved. In this regard, we recently reported10 that 

DOD relied on budget estimates and projections to determine its estimated 

savings from base closure activities. We concluded that because of data 

and record weaknesses, DOD’s estimates should only be viewed as 

8

Defense Logistics Much of the Inventory Exceeds Current Needs (GAO/NSIAD-97-71, February 28, 

1997).

9Defense Inventory: Spare and Repair Parts Costs Can be Reduced (GAO/NSIAD-97-47, January 17, 

1997).

10Military Bases: Review of DOD’s 1998 Report on Base Realignment and Closure (GAO/NSIAD-99-17, 

November 13, 1998).
Page 9 GAO/T-AIMD/NSIAD-99-145

providing a rough approximation of costs and savings rather than a precise 

accounting.

In addition, long-term liabilities that affect program costs must be 

accurately measured and considered in evaluating the status of programs. 

Without adequate cost data to help determine liabilities, DOD may be overor understating the future resources that will be required to meet its 

commitments. For example, inadequate cost data inhibit DOD’s ability to 

accurately estimate the projected costs of providing health care benefits to 

future military retirees and their beneficiaries. Currently, for financial 

reporting, DOD estimates its liability using unaudited budget information, 

which does not include the full cost of the program. For example, the costs 

of the treatment facilities and some personnel costs such as pension 

benefits may not be fully captured. As a result, the liability could be 

substantially different from the reported balance.

Further, DOD’s lack of reported cost data on the disposal of weapon 

systems, including for example, aircraft, missiles, ships, and submarines, 

was a significant factor contributing to our conclusion that the liability for 

such costs on the federal government's financial statements was 

understated.11 The liability for this disposal activity is a part of the overall 

life cycle cost of these weapon systems and can contribute to the ongoing 

dialogue on funding comparable weapon systems.

Making Economic Choices DOD’s decisions on whether to outsource specific functions are 

undermined without supporting cost data. Yet DOD, as well as other 

government agencies, has historically been unable to provide actual data 

on the costs associated with functions to be considered for outsourcing, 

particularly with respect to overhead rates. Consequently, to ease concerns 

about unfair competition, OMB selected a single overhead rate (12 percent) 

for DOD and other federal agencies to use in A-76 competitions.

11Financial Management: Factors to Consider in Estimating Environmental Liabilities for Removing 

Hazardous Materials in Nuclear Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997), Financial 

Management: DOD's Liability for Aircraft Disposal Can Be Estimated (GAO/AIMD-98-9, November 20, 

1997), Financial Management: DOD's Liabilities for the Disposal of Conventional Ammunition Can Be 

Estimated (GAO/AIMD-98-32, December 19, 1997), and Financial Management: DOD's Liabilities for 

Missile Disposal Can Be Estimated (GAO/AIMD-98-50R, January 7, 1998).
Page 10 GAO/T-AIMD/NSIAD-99-145

We recommended12 that DOD develop overhead rates that better reflect 

actual overhead costs, which would promote fairer competition between 

the government and private sector. Further, DOD is unable to capture 

complete and reliable data on the capital costs associated with its 

operations, which adversely affects its ability to develop cost information 

to compare with the private sector. Specifically, billions of dollars of 

existing DOD plant, property, and equipment assets have been expensed 

and, as a result, the costs associated with their acquisition and use may not 

be adequately considered.

Further, inadequate cost information diminishes DOD’s ability to manage 

military health treatment in areas such as allocating resources, deciding 

whether to provide services internally or by outsourcing, setting third-party 

billing rates, and benchmarking its health delivery system with those of 

other providers. Specifically, the preliminary results of our review of key 

DOD data for estimating these costs identified inconsistent data collection 

and reporting and incomplete accounting for all relevant expenses and 

revenues.

Finally, the Clinger-Cohen Act mandates performance-based and resultsoriented information for all major information technology (IT) 

investments. As we have reported,13 lack of cost information prevents DOD 

from properly compiling the total cost of its IT investments, as required by 

the Clinger-Cohen Act. This impedes DOD in meeting the act’s requirement 

to establish goals for improving efficiency through effective use of 

information technology and benchmarking agency process performance 

against comparable processes in terms of cost, benefits, and risk.

Controlling Costs Two of the most prominent areas where DOD has stated a need for more 

accurate data to control costs are in its weapon systems activities and its 

working capital fund operations. Specifically, DOD acknowledges that the 

lack of a cost accounting system is the single largest impediment to 

controlling and managing weapon systems costs, including costs of 

acquiring, managing, and disposing of weapon systems. Without accurate 

information on the life-cycle costs of weapon systems, neither DOD 

officials nor Congress can make fully informed decisions about which 

12Defense Outsourcing: Better Data Needed to Support Overhead Rates for A-76 Studies (GAO/NSIAD98-62, February 27, 1998).

13Defense Information Management: Continuing Implementation Challenges Highlight the Need for 

Improvement (GAO/T-AIMD-99-93, February 25, 1999).
Page 11 GAO/T-AIMD/NSIAD-99-145

weapons, or how many, to buy. DOD is developing, by 2000, a system 

intended to provide management with improved insight into total costs 

and the information necessary to make more informed decisions.

DOD also has long-standing problems accumulating and reporting the full 

costs associated with working capital fund operations which provide goods 

and services in support of the military services--its primary customers. The 

foundation for achieving the goals of these business-type funds is accurate 

cost data, which is critical for them to operate efficiently.

DOD working capital funds charge their customers prices for the support 

operations provided so that they can recover the full cost of the goods and 

services provided, including administrative and overhead costs. Every 

dollar that the military services spend inefficiently on DOD working capital 

fund purchases results in fewer resources available for other defense 

spending priorities. Simply stated, working capital fund overcharges could 

result in the military services using more Operations and Maintenance 

appropriations in the current year than anticipated; undercharges could 

result in unanticipated future pricing increases and funding requests.

In recent financial audits of DOD working capital funds, auditors found 

large adjustments to the value of inventory balances. For example, the Air 

Force and the Army working capital funds had gains and losses of 

$21 billion and approximately $3.1 billion, respectively, resulting from 

physical inventory and accounting adjustments. Such large inventory gains 

and losses, which often were not investigated, are likely to have a 

significant impact on the funds' costs of operations and the prices charged 

to the funds' customers for goods and services provided.

Finally, DOD working capital funds set sales prices based on projected 

operating costs and cash flows. In recent years, there have been large 

fluctuations in prices charged. For example, the Navy surcharge increased 

from 14 percent in 1996 to 27 percent in 1997 and to 57 percent in 1998, 

impacting the sales price to customers. For example, an item with an 

acquisition cost to the working capital fund of $100 in 1996 would have 

been sold for $114 in 1996, $127 in 1997, and $157 in 1998. Fluctuations of 

this type make it difficult for the funds' customers to budget the future 

costs of repairables and other goods and services, leading to funding 

shortfalls that could affect operations and readiness.

Measuring Performance DOD is unable to develop reliable, cost-based performance indicators and 

measures across virtually the entire spectrum of its operations. As part of 
Page 12 GAO/T-AIMD/NSIAD-99-145

its Results Act Performance Plan for fiscal year 2000, DOD has developed 

43 unclassified performance measures and indicators to measure a wide 

range of activities--from force levels to asset visibility, but these measures 

and indicators contain few efficiency measures based on cost.14 Most 

programs have some form of associated cost consequences that can be 

directly or indirectly measured and should be considered in assessing 

program achievement.

Reliable Budgetary Data 

Essential

In addition to accurate cost data, reliable budget information is essential to 

ensure that spending of appropriated funds complies with the amount, 

purpose, and time frame designated by the Congress. To help ensure that 

this occurs, DOD has implemented systems and controls it relies on to 

(1) record obligations when it orders goods and services and (2) liquidate 

the obligations by disbursing funds when goods and services are received. 

Effective obligation and disbursement practices are essential to ensure that 

DOD's spending does not exceed appropriated amounts and other spending 

limits imposed by the Congress.

As part of the DOD fiscal year 1998 financial statement audit, auditors 

found several areas, however, in which the systems and controls over the 

department's use of its budgetary resources were ineffective. These control 

weaknesses have left DOD in a situation where it does not know the true 

amount of funds that are available to obligate and spend in each 

appropriation account. This situation occurs because obligated balances 

are not always correct, reconciliations between DOD and Treasury records 

are not being adequately performed, and certain disbursements are not 

being recorded promptly in DOD’s accounting records. Either 

overspending or cancellation of funding authority (not dispersing funds 

during the period they were made available for spending by Congress 

results in cancellation of the authority) can result.

Some Recorded Obligations Are 

Incorrect

Auditors found that recorded obligations included amounts that were no 

longer correct or were unsupported. Specifically, at the Air Force--the only 

DOD component performing a full financial audit of its obligated balances--

an estimated $4.3 billion of a $34 billion balance in obligations for its 

general funds were found to be incorrect or unsupported. Further, review 

of unliquidated Navy contract obligations showed that approximately 17 

14Results Act: DOD's Annual Performance Plan for Fiscal Year 1999 (GAO/NSIAD-98-188R, June 5, 

1998).
Page 13 GAO/T-AIMD/NSIAD-99-145

percent of the amounts tested ($101 million of $592 million) were no longer 

correct. Army auditors also found evidence of unsupported obligations but 

were unable to quantify the extent of the problem.

Reconciliations Not Adequately 

Performed

DOD’s records on its available funds should be reconciled to Treasury 

records just as an individual reconciles his or her checkbook to a bank 

statement. However, comparison of the two records resulted in unresolved 

differences amounting to $9.6 billion. These unresolved differences could 

significantly affect the status of budget authority available to be obligated 

and expended.

Further, DOD’s records show an estimated $823 million held in suspense 

accounts at the end of fiscal year 1998 that have not been properly reported 

to Treasury and are not reflected in the differences noted above. Until these 

transactions are posted to the proper appropriation account, the 

department will have little assurance that the collections and adjustments 

recorded in these accounts are proper DOD transactions and that its 

disbursements do not exceed appropriated amounts. Moreover, this 

reported amount represents netting of collections and adjustments against 

disbursements, thus understating the magnitude of the problem. For 

example, as part of our fiscal year 1997 financial audit, we found that while 

the Navy had a net balance of $464 million in suspense accounts recorded 

in its records, the individual transactions, collections as well as 

disbursements, totaled about $5.9 billion.

Disbursements Not Properly 

Recorded

The concerns the auditors raised with respect to the reliability of the 

department's budget information are further exacerbated by the 

department's problem disbursements--disbursements that are not properly 

matched to specific obligations recorded in the department’s records. DOD 

reported these problems at $17.3 billion as of September 30, 1998. To the 

extent that these disbursements cannot be matched to existing recorded 

obligations, DOD would be required to record an obligation. This obligation 

could create an Antideficiency Act violation if the department’s available 

unobligated balance was insufficient to cover the amount of the obligation.

Overspending/Cancellation of 

Funds Can Occur

Recent audit reports have described the consequences of the department's 

inability to keep track of its obligations and expenditures. Specifically, 

auditors found several instances in which the department may have spent 

more than authorized amounts. For example, the Air Force’s Depot 

Maintenance Activity--a component of one of the department's working 

capital funds--may have incurred obligations of $1.1 billion in excess of 
Page 14 GAO/T-AIMD/NSIAD-99-145

available budgetary resources as of September 30, 1998. In addition, as we 

previously reported,15 according to Navy records, as of September 30, 1997, 

obligations in 29 canceled and expired appropriations may have exceeded 

available budget authority by a total of $290 million.

The problems affected the reliability of both obligation and disbursement 

data. As a result, the Congress cannot be assured that DOD did not 

overexpend its budget authority or spend more for specific programs for 

which the Congress established spending limits. Conversely, these fund 

control weaknesses also result in the department’s inability to properly 

identify and manage remaining budget authority, so that funds the Congress 

intended for specific DOD programs may be unused and eventually 

canceled. For example, at the end of fiscal year 1998, the department had 

$4.3 billion in expired budget authority that was allowed to cancel.

Short-Term Financial 

Management 

Improvement Efforts 

Essential

Fully resolving many of DOD’s financial management deficiencies will 

require long-term actions and technology improvements, as discussed in 

the next section. In the interim, however, DOD must work to improve its 

existing financial management systems through short-term corrective 

actions. These efforts focus on improving the credibility of DOD’s financial 

information to improve the reliability of year-end financial statements for 

DOD and the government as a whole--and on making efforts to strengthen 

the integrity and controls over existing underlying financial and logistical 

systems.

On May 26, 1998, the President directed the head of each agency designated 

by OMB to identify corrective actions to resolve financial reporting 

deficiencies and to make quarterly progress reports to OMB. The 

administration’s goal is to have individual agencies, as well as the 

government as a whole, complete audits and gain unqualified opinions on 

their financial statements. In response, the DOD Comptroller has been 

developing and implementing short-term steps in collaboration with DOD’s 

functional and audit communities, OMB, and the GAO. Several of the 

actions included in DOD’s short-term plan, along with additional short-term 

actions necessary to provide a solid foundation for the department’s 

financial management improvement efforts, are highlighted below. These 

include actions that are needed to (1) ensure feeder system data accuracy, 

15Financial Management: Problems in Accounting for Navy Transactions Impair Fund Control and 

Financial Reporting (GAO/AIMD-99-19, January 19, 1999).
Page 15 GAO/T-AIMD/NSIAD-99-145

(2) implement accounting policy guidance, (3) instill fundamental controls, 

and (4) train financial management personnel.

Ensuring Accuracy of 

Feeder System Data

About 80 percent of the data now relied on for financial management 

comes from department program operating systems such as logistics, 

acquisition and personnel. For example, the department relies on data from 

its personnel systems to provide data to its payroll systems. Effective 

controls to ensure that only valid and accurate transactions are initially 

entered into the department’s feeder systems on a timely basis is critical to 

obtaining reliable data through the department's existing system structure. 

It also is necessary to achieve an effective transition to the department's 

envisioned future integrated system structure. 

The department has acknowledged, and audit reports have confirmed, that 

the data produced by many of these feeder systems are not yet reliable. 

Specifically, auditors have identified problems in the accuracy of the 

department’s feeder systems data relied on to provide information ranging 

from plant, property, and equipment to the cost of military retiree health 

benefits to weapon and inventory systems.

To help eliminate inaccurate payments in the department's military payroll 

system, DOD has reported that an interface between its military personnel 

systems and its military payroll system is scheduled for completion in 2000. 

As part of their fiscal year 1998 financial audit, Army auditors continued to 

report major mismatches between military personnel and payroll data, a 

condition that was previously identified in 1993. The planned interface 

should reduce some problems identified with inappropriate payments to 

military personnel; however, it will only do so to the extent that data on 

personnel actions are entered to the interfaced personnel system 

accurately and in a timely manner. Until this interface is operational, the 

Army intends to compare and reconcile military payroll and personnel data 

monthly.

DOD also has short-term plans calling for a number of actions by high-level 

functional and financial personnel intended to improve the accuracy of 

DOD's inventory, property, plant, and equipment, and military retiree health 

benefit feeder system data.

Inventory Accountability Data The DOD Comptroller and Under Secretary of Defense for Acquisition and 

Technology are responsible for a set of actions intended to improve the 

accuracy of data in its inventory accountability systems. Specifically, they 
Page 16 GAO/T-AIMD/NSIAD-99-145

plan to require inventory holders to evaluate how inventory transactions 

(e.g., receipts and issues) are processed, determine the sources and causes 

of processing errors, and develop a remedial plan for correcting those 

errors. In addition, they intend to improve the department’s inventory 

sampling and physical count procedures to provide more accurate and 

meaningful rates for measuring the accuracy of inventory records.

Plant, Property, and Equipment 

Data

The DOD Comptroller and Under Secretary of Defense for Acquisition and 

Technology are responsible for actions directed at developing more 

credible valuation data for the department’s plant, property, and equipment 

by obtaining contractor support for testing the validity of cost data 

currently in accountability systems. If the current systems’ cost data are 

found to be unsupportable, the contractor will develop a methodology for 

approximating historical cost and the required accumulated depreciation 

for those assets.

Military Retiree Health Benefit 

Data

The Under Secretary of Defense for Personnel and Readiness is responsible 

for providing more reliable data for estimating the future cost of military 

retiree health benefits. DOD has developed a high-level data quality task 

force to ensure that financial, labor utilization, and workload data in its 

primary health care cost system are reconcilable to data in respective 

source documents and support systems.

Implementing Accounting 

Policy Guidance

The department also has plans to implement new or revised federal 

accounting policies in several areas. For instance, we have reported that 

DOD is not following federal accounting standards for accounting for 

environmental and disposal liabilities associated with certain major 

weapons systems such as aircraft, missiles, ships, and submarines. To 

provide better information on these liabilities, DOD is developing policies 

and procedures to estimate (1) the expected restoration costs for 

contaminated site and hazardous waste removal and (2) the disposal costs 

for ammunition, chemical weapons, excess and obsolete structures, and 

major weapons systems. Also, to better account for inventory, DOD is 

improving procedures related to inventory gains and losses, determining 

the value of depot-level repairable inventory, and estimating the cost of 

beginning inventory balances.

Instilling Fundamental 

Control

DOD has long-standing control deficiencies, including serious computer 

security weaknesses. DOD’s plans call for ensuring that existing 
Page 17 GAO/T-AIMD/NSIAD-99-145

rudimentary accounting and control policies and procedures are followed, 

through such means as reconciliations of its Fund Balance With Treasury 

accounts and its inventory asset accounts. We have made a number of 

recommendations to DOD to instill greater discipline by adhering to 

fundamental controls. For example, we recently recommended that the 

department better ensure that existing vendor payment controls are 

followed, including limiting the number of personnel with access to pay 

systems. DOD has begun a departmentwide initiative to review access to 

such systems to identify individuals with unneeded access.

Training Financial 

Management Personnel

One of the key issues facing DOD is the need to ensure that its financial 

management staff has the knowledge and skills required to carry out 

complex financial management operations. Our work16 has shown that 

state governments and private sector organizations place a strong 

emphasis on training as a means of upgrading financial workforce 

knowledge of accounting and financial management requirements. In 

contrast, the results of a survey we conducted of key DOD financial 

managers showed that over half of those surveyed had received no 

financial management training during 1995 and 1996.

DOD leadership has acknowledged that it needs to improve the capabilities 

of its financial managers, and DFAS is developing a program intended to 

identify the kinds of skills and developmental activities needed to improve 

the competencies of its financial personnel. We have recommended that 

DOD modify its planned program to better ensure that financial 

management personnel throughout the department receive the necessary 

training, including establishing minimum training requirements 

emphasizing technical accounting and related financial management 

courses. This recommended approach is similar in scope to the program 

recently put in place to improve the skills of the department's acquisition 

workforce.

16Financial Management: Profile of Financial Personnel in Large Private Sector Corporations and State 

Governments (GAO/AIMD-98-34, January 2, 1988).
Page 18 GAO/T-AIMD/NSIAD-99-145

Updates to Long-Term 

Improvement Plan 

Need to Incorporate 

Additional Elements

Completing short-term actions can improve DOD’s financial information 

and ultimately even result in auditable financial statements. However, an 

unqualified audit opinion, while certainly important, is not an end in itself. 

For some agencies, the preparation of financial statements requires 

considerable reliance on ad hoc programming and analysis of data 

produced by inadequate systems that are not integrated or reconciled, and 

often requires significant audit adjustments. Efforts to obtain reliable yearend data that are not backed up by fundamental improvements in 

underlying financial management systems and operations to support 

ongoing program management and accountability will not achieve the 

intended results of the Chief Financial Officers Act--reliable financial 

management information to support day-to-day decision-making over the 

long term. Thus, it is essential that DOD also undertake and complete longterm efforts to improve financial management systems and processes.

The National Defense Authorization Act for Fiscal Year 1998 (Public Law 

105-85) required the Secretary of Defense to biennially submit to the 

Congress a strategic plan for the improvement of financial management 

within DOD. The plans are to address all aspects of financial management 

within DOD, including the finance systems, accounting systems, and data 

feeder systems that support its financial functions, including the 

department's concept of operations for financial management. Section 912 

of the Strom Thurmond National Defense Authorization Act for Fiscal Year 

1999 (Public Law 105-261) required GAO to analyze DOD’s Biennial Plan 

and discuss the extent to which it is a workable plan for addressing DOD’s 

financial management problems.

DOD submitted its first Biennial Plan to the Congress on October 26, 1998. 

The department has committed to update the plan annually rather than 

biennially as required by law. This first plan presents DOD’s concept of 

operations, the current environment, and the transition plan intended to 

describe the goals of the department for achieving the target financial 

management environment and to identify the strategies and corrective 

actions necessary to move through the transition. It also provides 

information on the specific financial management improvement initiatives 

intended to implement the transition plan.
Page 19 GAO/T-AIMD/NSIAD-99-145

We have analyzed DOD’s first plan and, in January 1999, reported17 the 

results of our analysis to the Senate and House Armed Services 

Committees. As we said in our report, DOD’s plan represents a great deal of 

effort and provides a first-ever vision of the department’s future financial 

management environment. In developing this overall concept of its 

envisioned financial management environment, DOD has taken an 

important first step in improving its financial management operations. The 

department's plan also represents a significant landmark because it 

includes, for the first time, a discussion of the importance of the 

programmatic functions of personnel, acquisition, property management, 

and inventory management to the department’s ability to support 

consistent, accurate information flows to all information users. In addition, 

DOD’s plan includes an extensive array of initiatives intended to move the 

department from its current state to its envisioned financial management 

environment.

If effectively implemented, the initiatives discussed should result in 

improving DOD’s financial management operations. However, 

modifications to the plan are needed if DOD is to achieve the full range of 

reforms needed. To accomplish this, the department's planned update 

should include

• a revised concept of operations to reflect, at a high level, the full range 

of the department's financial management operations, including its key 

asset accountability and budget formulation responsibilities;

• specific plans on shared servicing and outsourcing strategies;

• clarification in the transition plan of the role of each of the described 

initiatives in bridging the gap between the current environment and the 

envisioned future concept of operations and the steps the department 

will take to ensure that it will build reliability into the data provided by 

its feeder systems; and

• concepts established in the Clinger-Cohen Act for effectively 

implementing the technology initiatives contained in the plan.

Revised Concept of 

Operations

While the plan's discussion of how DOD’s financial management operations 

will work in the future--its concept of operations--is a good start, it is not 

complete. It does not address how (1) it will support budget formulation 

17Financial Management: Analysis of DOD's First Biennial Financial Management Improvement Plan

(GAO/AIMD-99-44, January 29, 1999).
Page 20 GAO/T-AIMD/NSIAD-99-145

and (2) its financial management operations will effectively support not 

only financial reporting but also asset accountability and control. DOD 

stated that it intentionally excluded budget formulation from its concept of 

operations because it is performed as part of the department's Planning, 

Programming, and Budgeting System (PPBS). However, budget 

formulation is one of the central processes involved in any agency's 

financial management operations and must be included in the department's 

concept of operations to develop a fully integrated financial management 

system that ensures that budgets consider financial implications and that 

policy decisions are based on sound financial information.

To effectively support accountability and control, DOD’s systems need to 

share information. However, the flow of information among functional 

areas, such as how acquisition will share information with property 

management, is not clear in DOD’s plan. The figure below is a simplified 

example of how a financial management system for asset acquisition 

shares information to help achieve greater control and accountability.

Figure 1: Example of How Systems Integration Helps Achieve Greater Control

As shown in this figure, contract data are entered initially by acquisition 

personnel when an asset is ordered. This information would be available to 

accounting personnel to record the obligation and to property management 

to recognize that an asset is to be delivered. Upon asset receipt, property 

management personnel enter the asset in property management records. 
Page 21 GAO/T-AIMD/NSIAD-99-145

Those records are available for accounting personnel for payment 

purposes, for acquisition personnel to monitor contract delivery, and for 

property management personnel to monitor program results and the use of 

budgetary resources. Greater asset control and accountability is achieved 

because data associated with assets acquired are available to accounting, 

property management, and acquisition personnel.

Shared Servicing and 

Outsourcing Strategies

Many leading organizations have reduced the cost of, and increased the 

control over, day-to-day accounting activities by processing routine 

accounting functions at a reduced number of locations, known as shared 

service centers. These shared service centers provide common services 

such as accounts payable, fixed asset, and payroll processing to operating 

locations and business units. In this regard, the National Defense 

Authorization Act for fiscal year 1998 required the department to address in 

its first biennial Financial Management Improvement Plan the feasibility of 

reorganizing DFAS along functional lines.

Preliminary results from a study we are completing on financial 

management best practices indicate that many leading organizations we 

identified, including the six we visited, used a shared services strategy. 

While several different organizational structures were used to apply the 

concept, many followed three stages in implementing this strategy. The 

first stage is consolidation and includes changing the organizational 

structure and gaining control over the current business processes. The 

second stage is standardization and entails changing the current business 

processes and adopting a common technology platform. The final stage is 

reengineering and includes leveraging technology through the use of 

electronic commerce, data warehousing, and document imaging.

To date, DFAS has consolidated the activities of 332 installation finance and 

accounting offices at its headquarters, 5 centers, and 19 operating locations 

and intends to further consolidate locations. The plan states that DFAS 

processes are most efficiently performed at a minimal number of locations. 

As the number of systems is reduced, the number of separate operating 

locations necessary to operate the systems is also reduced. However, the 

plan did not provide additional information on the number or nature of the 

required locations. We will continue to examine this area.

The fiscal year 1998 authorization act also required that the plan address 

the feasibility of outsourcing DOD’s accounting operations. While DOD’s 

plan identified certain functional areas, such as commissaries and retired 
Page 22 GAO/T-AIMD/NSIAD-99-145

annuitant pay, for outsourcing studies under A-76, the plan needs to more 

clearly articulate a competitive outsourcing strategy. For example, our 

October 1997 report18 on the results of our survey of selected private 

sector and nonfederal public organizations’ use of outsourcing identified 

several factors associated with successful outsourcing.

One of the key factors was establishing a competitive outsourcing policy 

that specifies what process and criteria the organization will follow in 

making competitive outsourcing decisions to achieve its overall goals. This 

policy at DFAS might include (1) an outsourcing structure by which the 

functional areas to be considered for outsourcing are identified and 

(2) criteria to be used in determining whether or not to outsource a specific 

function, such as personnel losses, decreased costs, or economic impact to 

the community. In addition, a schedule with specific time frames for 

competitively bidding DFAS functions and deciding whether or not to 

outsource them might be added later. Finally, after an organization decides 

to outsource, it is key that effective oversight controls be in place to ensure 

that vendors carry out their responsibilities. Establishing a competitive 

outsourcing policy that includes these elements as well as adequate 

oversight controls is fundamental to achieving the projected cost savings, 

process cycle time reductions, and other related financial management 

improvement goals established by the department.

Clarification of Transition 

Plan

In addition, the transition plan, while an ambitious statement of DOD’s 

planned improvement efforts, has two important limitations: (1) links are 

not provided between the envisioned future operations and the over 200 

planned improvement initiatives to determine whether the proposed 

transition will result in the target financial management environment and 

(2) actions to ensure feeder systems' data integrity are not addressed--an 

acknowledged major deficiency in the current environment. Without 

identifying specific actions that will ensure ongoing feeder system data 

integrity, it is unclear whether the department will be able to effectively 

carry out not only its financial reporting, but also its other financial 

management responsibilities.

18Financial Management: Outsourcing of Finance and Accounting Functions (GAO/AIMD/NSIAD-98-43, 

October 17, 1997).
Page 23 GAO/T-AIMD/NSIAD-99-145

Concepts of Clinger-Cohen Effective implementation of the modernized systems outlined in the 

Biennial Plan will require following well defined practices for managing 

investments in information technology--practices that have been lacking in 

DOD and other agencies across government. Several recent management 

reforms have introduced requirements emphasizing the need for federal 

agencies to significantly improve their management processes, including 

how they select and manage IT resources. For instance, the Clinger-Cohen 

Act requires agencies to have processes and information in place to help 

ensure that IT projects are being implemented at acceptable costs, within 

reasonable and expected time frames and are contributing to tangible, 

observable improvements in mission performance. We recently testified19

before the House Committee on Armed Services’ Subcommittee on Military 

Readiness about a number of serious management challenges DOD faces 

regarding technology-driven processes and business systems. Specifically, 

we highlighted DOD’s lack of effective fundamental management and 

oversight controls for (1) assessing the costs and risks of proposed 

information technology projects, (2) ensuring that projects follow 

departmentwide technical and data standards, (3) measuring performance, 

and (4) discontinuing projects shown to be technically flawed or not cost 

effective. DOD has efforts underway to implement required reforms but a 

great deal more effort is needed. Unless DOD successfully implements 

these broader information technology reforms, it will be limited in its 

ability to achieve the financial management system goals outlined in its 

Biennial Plan.

While there is a need to address these problems over the long term, we 

recognize that in the short term the department still must focus on the Year 

2000 computing challenge. However, DOD has a unique opportunity to 

capitalize on the valuable lessons it has learned in its Year 2000 effort and 

apply them to its overall management of financial management and 

information technology. Doing so can enable the department to acquire and 

deploy high performing, cost-effective systems and to avoid repeating 

costly mistakes. Examples include the following:

• Without the continuing, active involvement of top-level managers, major 

management reform efforts cannot succeed.

19Defense Information Management: Continuing Implementation Challenges Highlight the Need for 

Improvement (GAO/T-AIMD-99-93, February 25, 1999).
Page 24 GAO/T-AIMD/NSIAD-99-145

• Maintaining a reliable, up-to-date system inventory is fundamental to 

well-managed financial management and information technology 

programs.

• DOD has spent 3 years identifying system interfaces and implementing 

controls at the system level that should help prevent future data 

exchange problems in its systems and resolve conflicts between 

interface partners.

• Once the Year 2000 effort is completed, DOD can use the operational 

and functional evaluations to further identify and retire duplicative or 

unproductive systems.

The Secretary of Defense has expressed the department's commitment to 

financial management reform. He recently announced that he was 

expanding his Defense Reform Initiatives to include financial management. 

Achieving real reform will entail the involvement and dedication of top 

management. Working through the Defense Management Council or a 

similar structure of the department's high-ranking leadership, such as that 

used to address the Year 2000 computing crisis, is a key factor in achieving 

major change within the organization.

In closing, Mr. Chairman, sustained congressional attention on DOD’s 

efforts to reform its long- standing financial management weaknesses, 

provided in hearings such as this one, will also be critical to ensuring that 

DOD is able to provide accountability to the taxpayers and to meet its 

operational goals as efficiently and effectively as possible.

Mr. Chairman, this concludes my statement, I will be glad to answer any 

questions you or other Members may have at this time.
Page 25 GAO/T-AIMD/NSIAD-99-145
Page 26 GAO/T-AIMD/NSIAD-99-145

DOD Fiscal Year 1998 Financial Statement 

Audit Reports

Department of Defense Agency-wide Financial Statements (March 1, 1999, 

DOD IG 99-097)

Army General Fund Financial Statements (February 18, 1999, AA 99-158)

Army Working Capital Fund Financial Statements (February 19, 1999, AA 

99-160)

Army Corps of Engineers, Civil Works Financial Statements (February 8, 

1999, AA 99-157)

Air Force General Fund Financial Statements (March 1, 1999, AFAA Project 

98053002)

Air Force Working Capital Fund Financial Statements (March 1, 1999, 

AFAA Project 98068013)

Navy General Fund Financial Statements (February 10, 1999, NAS 024-99)

Navy Working Capital Fund Financial Statements (February 22, 1999, NAS 

027-99)

Defense Logistics Agency Working Capital Fund Financial Statements 

(March 1, 1999, DOD IG 99-089)

Defense Finance and Accounting Service Working Capital Fund Financial 

Statements (March 1, 1999, DOD IG 99-090)

Military Retirement Trust Fund Financial Statements (March 5, 1999, DOD 

IG 99-104)

(918954) Letr

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