Testimony 

Before the Subcommittee on Terrorism, 

Unconventional Threats and Capabilities, 

Committee on Armed Services, U.S. House 

of Representatives

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 1:30 p.m. EST 

Wednesday, March 31, 2004 DEPARTMENT OF 

DEFENSE 

Further Actions Needed to 

Establish and Implement a 

Framework for Successful 

Business Transformation 

Statement of Gregory D. Kutz 

Director, Financial Management and Assurance 

Randolph C. Hite 

Director, Information Technology Architecture and Systems 

GAO-04-626T 
www.gao.gov/cgi-bin/getrpt?GAO-04-626T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory Kutz at 

(202) 512-9095 or (kutzg@gao.gov) or 

Randolph Hite, (202) 512-3439 

Highlights of GAO-04-626T, a testimony 

before the Subcommittee on Terrorism, 

Unconventional Threats and Capabilities, 

Committee on Armed Services, U.S. 

House of Representatives 

March 31, 2004

DEPARTMENT OF DEFENSE 

Further Actions Needed to Establish and 

Implement a Framework for Successful 

Business Transformation 

DOD’s senior civilian and military leaders are committed to transforming the 

department and improving its business operations and have taken positive 

steps to begin this effort. However, overhauling the financial management 

and related business operations of one of the largest and most complex 

organizations in the world represents a huge management challenge. Six 

DOD program areas are on GAO’s “high risk” list, and the department shares 

responsibility for three other governmentwide high-risk areas. DOD’s 

substantial financial and business management weaknesses adversely affect 

not only its ability to produce auditable financial information, but also to 

provide timely, reliable information for management and Congress to use in 

making informed decisions. Further, the lack of adequate transparency and 

appropriate accountability across all of DOD’s major business areas results 

in billions of dollars in annual wasted resources in a time of increasing fiscal 

constraint. 

Impact of Weaknesses in Human Capital Management, Internal Control, and Systems 

Business area 

affected Problem identified 

Military pay Ninety-four percent of mobilized Army National Guard soldiers GAO 

investigated had pay problems. These problems distracted soldiers from their 

missions, imposed financial hardships on their families, and had a negative 

impact on retention. 

Logistics Asset visibility and other logistical support problems hampered mission 

readiness during Operation Iraqi Freedom, including cannibalization of vehicles 

for parts and duplication of requisitions. 

Travel Seventy-two percent of the over 68,000 premium class airline tickets DOD 

purchased for fiscal years 2001 and 2002 were not properly authorized and 73 

percent were not properly justified. 

Property New JSLIST chem-bio suits sold on the Internet for $3 while at the same time 

DOD was buying them for over $200. Further, thousands of defective suits, 

declared excess by DOD, were improperly issued to local law enforcement 

agencies—which are likely to be first responders in case of a terrorist attack. 

Contract 

payments 

Some DOD contractors were abusing the federal tax system, with little or no 

consequence. As of September 2003, DOD had collected only $687,000 of 

unpaid federal taxes through a mandated levy program. GAO estimated that at 

least $100 million could be collected annually through effective implementation 

of the levy on DOD contract payments. 

Source: GAO. 

Four underlying causes impede reform: (1) lack of sustained leadership, 

(2) cultural resistance to change, (3) lack of meaningful metrics and ongoing 

monitoring, and (4) inadequate incentives and accountability mechanisms. 

To address these issues, GAO reiterates the keys to successful business 

transformation and offers two suggestions for legislative action. First GAO 

suggests that a senior management position be established to spearhead 

DOD-wide business transformation efforts. Second, GAO proposes that the 

leaders of DOD’s functional areas, referred to as departmentwide domains, 

receive and control the funding for system investments, as opposed to the 

military services. Domain leaders would be responsible for managing 

business system and process reform efforts within their business areas and 

would be accountable to the new senior management official for ensuring 

their efforts comply with DOD’s business enterprise architecture. 

GAO has issued several reports 

pertaining to the Department of 

Defense’s (DOD) architecture and 

systems modernization efforts 

which revealed that many of the 

underlying conditions that 

contributed to the failure of prior 

DOD efforts to improve its 

business systems remain 

fundamentally unchanged. The 

Subcommittee asked GAO to 

provide its perspectives on (1) the 

impact long-standing financial and 

related business weaknesses 

continue to have on DOD, (2) the 

underlying causes of DOD business 

transformation challenges, and 

(3) DOD business transformation 

efforts. In addition, GAO reiterates 

the key elements to successful 

reform: (1) an integrated business 

transformation strategy, 

(2) sustained leadership and 

resource control, (3) clear lines of 

responsibility and accountability, 

(4) results-oriented performance, 

(5) appropriate incentives and 

consequences, (6) an enterprise 

architecture to guide reform 

efforts, and (7) effective 

monitoring and oversight. GAO 

also offers two suggestions for 

legislative consideration that are 

intended to improve the likelihood 

of meaningful, broad-based 

financial management and related 

business reform at DOD. 
Page 1 GAO-04-626T 

Mr. Chairman and Members of the Subcommittee: 

It is a pleasure to be here to discuss key aspects of business 

transformation efforts at the Department of Defense (DOD). At the outset, 

we would like to thank the Subcommittee for having this hearing and 

acknowledge the important role hearings such as this one serve. The 

involvement of this Subcommittee is critical to ultimately assuring public 

confidence in DOD as a steward that is accountable for its finances. DOD’s 

substantial long-standing business management systems and related 

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

operations, and have resulted in a lack of adequate transparency and 

appropriate accountability across all major business areas. As a result, 

DOD does not have timely, reliable information for management to use in 

making informed decisions. Further, as our reports continue to show, 

these problems result in significant fraud, waste, and abuse and hinder 

DOD’s attempts to develop world-class operations and activities to 

support its forces. Of the 25 areas on GAO’s governmentwide “high risk” 

list, 6 are DOD program areas, and the department shares responsibility 

for 3 other high-risk areas that are governmentwide in scope.1

 The 

problems we continue to identify relate to human capital challenges, 

ineffective internal control and processes, and duplicative and stovepiped 

business systems. The seriousness of DOD’s business management 

weaknesses underscores the importance of no longer condoning “status 

quo” business operations at DOD. 

Over the last 3 years, DOD has taken action to begin addressing a number 

of these challenges as part of its business transformation effort. Business 

transformation has been a priority of Secretary Rumsfeld. For example, 

DOD has been granted additional human capital flexibilities and is in the 

process of developing a new personnel management system for its civilian 

employees. In addition, through its Business Management Modernization 

Program (BMMP), DOD is continuing its efforts to develop and implement 

a business enterprise architecture and establish effective management and 

control over its business system modernization investments. To date, 

however, the underlying operational conditions remain fundamentally 

 1

 U.S. General Accounting Office, High-Risk Series: An Update, GAO-03-119 (Washington, 

D.C.: January 2003). The nine interrelated high-risk areas that represent the greatest 

challenge to DOD’s development of world-class business operations to support its forces 

are: contract management, financial management, human capital management, information 

security, support infrastructure management, inventory management, real property, 

systems modernization, and weapon systems acquisition. 
Page 2 GAO-04-626T 

unchanged and tangible evidence of improvements in DOD business 

operations remains limited to specific business process areas, such as 

DOD’s purchase card program, where improvements have generally 

resulted from increased management focus and better internal control 

rather than from major modifications to automated systems. It is 

important to note that some of the key elements we highlight in this 

testimony as necessary for successful business transformation were 

critical to the success of several of the interim initiatives that we will 

discuss today. 

Because DOD is one of the largest and most complex organizations in the 

world, overhauling its business operations represents a huge management 

challenge. In fiscal year 2003, DOD reported that its operations involved 

over $1 trillion in assets, nearly $1.6 trillion in liabilities, approximately 

3.3 million military and civilian personnel, and disbursements of over 

$416 billion. Moreover, execution of DOD operations spans a wide range 

of defense organizations, including the military services and their 

respective major commands and functional activities, numerous large 

defense agencies and field activities, and various combatant and joint 

operational commands that are responsible for military operations for 

specific geographic regions or theaters of operations. To execute these 

military operations, the department performs an assortment of interrelated 

and interdependent business process areas, including logistics 

management, procurement, healthcare management, and financial 

management. Secretary Rumsfeld has estimated that successful 

improvements to DOD’s business operations could save the department 5 

percent of its budget a year. Using DOD’s reported fiscal year 2004 budget 

authority amounts, this percentage would equate to approximately $22 

billion a year in savings. 

Over the last 3 years, we have made a series of recommendations to DOD 

and suggestions for legislative changes that provide a framework for 

effectively addressing the challenges DOD faces in transforming its 

financial management and related business operations and systems and 
Page 3 GAO-04-626T 

offered several key elements necessary for reform to succeed.2 This 

framework recognizes the complexity of the challenge and the long-term 

nature of overcoming it. Moreover, it recognizes the underlying causes of 

the challenge, such as lack of sustained leadership, cultural resistance to 

change, parochialism, and stovepiped operations, that impeded the 

success of previous administrations in addressing DOD’s problems that 

continue today. DOD has agreed with our recommendations and launched 

efforts intended to implement them, but progress has been slow. If DOD is 

unable to address these underlying causes that have resulted in the failure 

of previous broad-based reform efforts, improvements will remain 

marginal, confined to narrowly defined business process areas and 

incremental improvements in human capital policies, business processes, 

internal control systems, and information technologies. 

Today, we will provide our perspectives on (1) the impact that longstanding financial management and related business process weaknesses 

continue to have on DOD, (2) underlying causes that have impeded the 

success of prior efforts, (3) keys to successful reform, and (4) DOD’s 

business transformation efforts. In addition, we will offer two suggestions 

for legislative consideration, which we believe will provide the sustained 

top-level leadership and accountability necessary for the business 

transformation effort to succeed. Our statement is based on previous GAO 

reports as well as on our review of the work of other DOD auditors and 

recent DOD reports and studies. 

 2

 U.S. General Accounting Office, DOD Financial Management: Integrated Approach, 

Accountability, Transparency, and Incentives Are Keys to Effective Reform, GAO-02-497T

(Washington, D.C.: Mar. 6, 2002), Information Technology: Architecture Needed to Guide 

Modernization of DOD’s Financial Operations, GAO-01-525 (Washington, D.C.: May 17, 

2001), DOD Business Systems Modernization: Improvements to Enterprise Architecture 

Development and Implementation Efforts Needed, GAO-03-458 (Washington, D.C.: Feb. 28, 

2003), DOD Business Systems Modernization: Continued Investment in Key Accounting 

Systems Needs to be Justified, GAO-03-465 (Washington, D.C.: March 28, 2003), DOD 

Business Systems Modernization: Long-standing Management and Oversight 

Weaknesses Continue to Put Investments at Risk, GAO-03-553T (Washington, D.C.: Mar.

31, 2003), Business Systems Modernization: Summary of GAO’s Assessment of the 

Department of Defense’s Initial Business Enterprise Architecture, GAO-03-877R

(Washington, D.C.: July 7, 2003), and DOD Business Systems Modernization: Important 

Progress Made to Develop Business Enterprise Architecture, but Much Work Remains, 

GAO-03-1018 (Washington, D.C.: Sept. 19, 2003). 
Page 4 GAO-04-626T 

For several years we have reported that DOD faces a range of financial 

management and related business process challenges that are complex, 

long-standing, pervasive, and deeply rooted in virtually all business 

operations throughout the department. As the Comptroller General 

recently testified and as discussed in our latest financial audit report,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 has passed the test of an independent financial audit 

because of pervasive weaknesses in internal control and processes and 

fundamentally flawed business systems. 

In identifying improved financial performance as one of its five 

governmentwide initiatives, the President’s Management Agenda 

recognized that obtaining a clean (unqualified) financial audit opinion is a 

basic prescription for any well-managed organization. At the same time, it 

recognized that without sound internal control and accurate and timely 

financial and performance information, it is not possible to accomplish the 

President’s agenda and secure the best performance and highest measure 

of accountability for the American people. The Joint Financial 

Management Improvement Program (JFMIP)4

 principals have defined 

certain measures, in addition to receiving an unqualified financial 

statement audit opinion, for achieving financial management success. 

These additional measures include (1) being able to routinely provide 

timely, accurate, and useful financial and performance information, 

(2) having no material internal control weaknesses or material 

noncompliance with laws and regulations, and (3) meeting the 

requirements of the Federal Financial Management Improvement Act of 

 3

 U.S. General Accounting Office, Fiscal Year 2003 U.S. Government Financial 

Statements: Sustained Improvement in Federal Financial Management Is Crucial to 

Addressing Our Nation’s Future Fiscal Challenges, GAO-04-477T (Washington, D.C.: Mar. 

3, 2004) and our report contained in the U.S. Department of the Treasury, Financial Report 

of the United States Government (Washington, D.C.: Feb. 27, 2004). 

4

 JFMIP is a joint undertaking of the Office of Management and Budget, GAO, the 

Department of Treasury, and the Office of Personnel Management, working in cooperation 

with each other and with operating agencies to improve financial management practices 

throughout the government. 

Impact of Financial 

Management and 

Related Business 

Process Weaknesses 
Page 5 GAO-04-626T 

1996 (FFMIA).5 Unfortunately, DOD does not meet any of these conditions. 

For example, for fiscal year 2003, the DOD Inspector General (DOD IG) 

issued a disclaimer of opinion on DOD’s financial statements, citing 11 

material weaknesses in internal control and noncompliance with FFMIA 

requirements. 

Recent audits and investigations by GAO and DOD auditors continue to 

confirm the existence of pervasive weaknesses in DOD’s financial 

management and related business processes and systems. These problems 

have (1) resulted in a lack of reliable information needed to make sound 

decisions and report on the status of DOD activities, including 

accountability of assets, through financial and other reports to Congress 

and DOD decision makers, (2) hindered its operational efficiency, 

(3) adversely affected mission performance, and (4) left the department 

vulnerable to fraud, waste, and abuse, as the following examples illustrate.

• Four hundred and fifty of the 481 mobilized Army National Guard soldiers 

from six GAO case study Special Forces and Military Police units6

 had at 

least one pay problem associated with their mobilization. DOD’s inability 

to provide timely and accurate payments to these soldiers, many of whom 

risked their lives in recent Iraq or Afghanistan missions, distracted them 

from their missions, imposed financial hardships on the soldiers and their 

families, and has had a negative impact on retention. (GAO-04-89, Nov. 13, 

2003) 

• DOD incurred substantial logistical support problems as a result of weak 

distribution and accountability processes and controls over supplies and 

equipment shipments in support of Operation Iraqi Freedom activities, 

similar to those encountered during the prior gulf war. These weaknesses 

resulted in (1) supply shortages, (2) backlogs of materials delivered in 

theater but not delivered to the requesting activity, (3) a discrepancy of 

 5

 FFMIA, Pub. L. No. 104-208, Div. A., title VIII, 110 Stat. 3009-389—3009-393, Sept. 30, 1996, 

requires the 23 major departments and agencies covered by the Chief Financial Officers Act 

of 1990, Pub. L. No. 101-576, 104 Stat. 2838, Nov. 15, 1990 (as amended), to implement and 

maintain financial management systems that comply substantially with (1) federal financial 

management systems requirements, (2) applicable federal accounting standards, and (3) 

U.S. Standard General Ledger (SGL) at the transaction level. 

6

 The six case study units reviewed include the Colorado B Company, Virginia B Company, 

West Virginia C Company, Mississippi 114th Military Police Company, California 49th 

Military Police Headquarters and Headquarters Detachment, and the Maryland 200th 

Military Police Company. In addition, our limited review of pay experiences of soldiers in 

the Colorado Army Guard’s 220th Military Police Company, who recently returned from 

Iraq, indicated that some of the same types of pay problems that we found in our case 

studies had also affected them. 
Page 6 GAO-04-626T 

$1.2 billion between the amount of materiel shipped and that 

acknowledged by the activity as received, (4) cannibalization of vehicles, 

and (5) duplicate supply requisitions. (GAO-04-305R, Dec. 18, 2003) 

• Inadequate asset visibility and accountability resulted in DOD selling new 

Joint Service Lightweight Integrated Suit Technology (JSLIST)—the 

current chemical and biological protective garment used by our military 

forces—on the internet for $3 each (coat and trousers) while at the same 

time buying them for over $200 each. DOD has acknowledged that these 

garments should have been restricted to DOD use only and therefore 

should not have been available to the public. (GAO-02-873T, June 25, 2002) 

• Inadequate asset accountability also resulted in DOD’s inability to locate 

and remove over 250,000 defective Battle Dress Overgarments (BDOs)—

the predecessor of JSLIST—from its inventory. Subsequently, we found 

that DOD had sold many of these defective suits to the public, including 

379 that we purchased in an undercover operation. In addition, DOD may 

have issued over 4,700 of the defective BDO suits to local law enforcement 

agencies. Although local law enforcement agencies are most likely to be 

the first responders to a terrorist attack, DOD failed to inform these 

agencies that using these BDO suits could result in death or serious injury. 

(GAO-04-15NI, Nov. 19, 2003) 

• Tens of millions of dollars are not being collected each year by military 

treatment facilities from third-party insurers because key information 

required to effectively bill and collect from third-party insurers is often not 

properly collected, recorded, or used by the military treatment facilities. 

(GAO-04-322R, Feb. 20, 2004) 

• Our analysis of data on more than 50,000 maintenance work orders 

opened during the deployments of six battle groups indicated that about 

29,000 orders (58 percent) could not be completed because the needed 

repair parts were not available on board ship. This condition was a result 

of inaccurate ship configuration records and incomplete, outdated, or 

erroneous historical parts demand data. Such problems not only have a 

detrimental impact on mission readiness, they may also increase 

operational costs due to delays in repairing equipment and holding 

unneeded spare parts inventory. (GAO-03-887, Aug. 29, 2003) 

• DOD sold excess biological laboratory equipment, including a biological 

safety cabinet, a bacteriological incubator, a centrifuge, and other items 

that could be used to produce biological warfare agents. Using a fictitious 

company and fictitious individual identities, we were able to purchase a 

large number of new and usable equipment items over the Internet from 

DOD. Although the production of biological warfare agents requires a high 

degree of expertise, the ease with which these items were obtained 

through public sales increases the risk that terrorists could obtain and use 

them to produce biological agents that could be used against the United 

States. (GAO-04-81TNI, Oct. 7, 2003) 
Page 7 GAO-04-626T 

• Based on statistical sampling, we estimated that 72 percent of the over 

68,000 premium class airline tickets DOD purchased for fiscal years 2001 

and 2002 was not properly authorized and that 73 percent was not 

properly justified. During fiscal years 2001 and 2002, DOD spent almost 

$124 million on premium class tickets that included at least one leg in 

premium class—usually business class. Because each premium class 

ticket cost the government up to thousands of dollars more than a coach 

class ticket, unauthorized premium class travel resulted in millions of 

dollars of unnecessary costs being incurred annually. (GAO-04-229T, Nov. 

6, 2003) 

• Some DOD contractors have been abusing the federal tax system with 

little or no consequence, and DOD is not collecting as much in unpaid 

taxes as it could. Under the Debt Collection Improvement Act of 1996, 

DOD is responsible—working with the Treasury Department—for 

offsetting payments made to contractors to collect funds owed, such as 

unpaid federal taxes. However, we found that DOD had collected only 

$687,000 of unpaid taxes as of September 2003. We estimated that at least 

$100 million could be collected annually from DOD contractors through 

effective implementation of levy and debt collection programs. (GAO-04-

95, Feb. 12, 2004) 

• Our review of fiscal year 2002 data revealed that about $1 of every $4 in 

contract payment transactions in DOD’s Mechanization of Contract 

Administration Services (MOCAS) system was for adjustments to 

previously recorded payments—$49 billion of adjustments out of $198 

billion in disbursement, collection, and adjustment transactions. 

According to DOD, the cost of researching and making adjustments to 

accounting records was about $34 million in fiscal year 2002, primarily to 

pay hundreds of DOD and contractor staff. (GAO-03-727, Aug. 8, 2003) 

• DOD’s information technology (IT) budget submission to Congress for 

fiscal year 2004 contained material inconsistencies, inaccuracies, or 

omissions that limited its reliability. For example, we identified 

discrepancies totaling about $1.6 billion between two primary parts of the 

submission—the IT budget summary report and the detailed Capital 

Investments Reports on each IT initiative. These problems were largely 

attributable to insufficient management attention and limitations in 

departmental policies and procedures, such as guidance in DOD’s 

Financial Management Regulation, and to shortcomings in systems that 

support budget-related activities. (GAO-04-115, Dec. 19, 2003) 

• Since the mid 1980s, we have reported that DOD uses overly optimistic 

planning assumptions to estimate its annual budget request. These same 

assumptions are reflected in its Future Years Defense Program, which 

reports projected spending for the current budget year and at least 4 

succeeding years. In addition, in February 2004 the Congressional Budget 

Office projected that DOD’s demand for resources could grow to about 
Page 8 GAO-04-626T 

$490 billion in fiscal year 2009. DOD’s own estimate for that same year was 

only $439 billion.7

 As a result of DOD’s continuing use of optimistic 

assumptions, DOD has too many programs for the available dollars, which 

often leads to program instability, costly program stretch-outs, and 

program termination. Over the past few years, the mismatch between 

programs and budgets has continued, particularly in the area of weapons 

systems acquisition. For example, in January 2003, we reported that the 

estimated costs of developing eight major weapons systems had increased 

from about $47 billion in fiscal year 1998 to about $72 billion by fiscal year 

2003.8

 (GAO-03-98, January 2003) 

These examples clearly demonstrate not only the severity of DOD’s 

current problems, but also the importance of business systems 

modernization as a critical element in the department’s transformation 

efforts to improve the economy, efficiency, and effectiveness of it’s 

operations, and to provide for transparency and accountability to 

Congress and American taxpayers. 

Since May 1997,9

 we have highlighted in various testimonies and reports 

what we believe are the underlying causes of the department’s inability to 

resolve its long-standing financial management and related business 

management weaknesses and fundamentally reform its business 

operations. We found that one or more of these causes were contributing 

factors to the financial management and related business process 

weaknesses we just described. Over the years, the department has 

undertaken many initiatives intended to transform its business operations 

departmentwide and improve the reliability of information for decision 

making and reporting but has not had much success because it has not 

addressed the following four underlying causes: 

 7

 Congressional Budget Office, The Long-Term Implications of Current Defense Plans: 

Detailed Update for Fiscal Year 2004 (www.cbo.gov, February 2004). Figures from this 

report are in constant fiscal year 2004 dollars. 

8

 U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of Defense, GAO-03-98 (Washington, D.C.: January 2003). Figures from this 

report are in constant fiscal year 2003 dollars. 

9

U.S. General Accounting Office, DOD High-Risk Areas: Eliminating Underlying Causes 

Will Avoid Billions of Dollars in Waste, GAO/T-NSIAD/AIMD-97-143 (Washington, D.C.: 

May 1, 1997). 

Underlying Causes of 

Financial and Related 

Business Process 

Transformation 

Challenges 
Page 9 GAO-04-626T 

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

correcting problems; 

• deeply embedded cultural resistance to change, including military service 

parochialism and stovepiped operations; 

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

monitoring; and 

• inadequate incentives and accountability mechanisms relating to business 

transformation efforts. 

If not properly addressed, these root causes will likely result in the failure 

of current DOD initiatives. 

DOD has not routinely assigned accountability for performance to specific 

organizations or individuals who have sufficient authority to accomplish 

desired goals. For example, under the Chief Financial Officers Act of 

1990,10 it is the responsibility of the agency Chief Financial Officer (CFO) 

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

management and to direct, manage, and provide oversight of financial 

management operations. 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 other 80 percent comes from DOD’s 

other business operations and is under the control and authority of other 

DOD officials. 

In addition, DOD’s past experience has suggested that top management 

has not had a proactive, consistent, and continuing role in integrating daily 

operations for achieving business transformation related performance 

goals. It is imperative that major improvement initiatives have the direct, 

active support and involvement of the Secretary and Deputy Secretary of 

Defense to ensure that daily activities throughout the department remain 

focused on achieving shared, agencywide outcomes and success. While 

the current DOD leadership, such as the Secretary, Deputy Secretary, and 

Comptroller, have certainly demonstrated their commitment to reforming 

the department, the magnitude and nature of day-to-day demands placed 

on these leaders following the events of September 11, 2001, clearly affect 

the level of oversight and involvement in business transformation efforts 

 10 Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 Stat. 2842, Nov. 15, 1990 

(codified, as amended in scattered sections of title 31, United States Code). 

Lack of Sustained 

Leadership and Adequate 

Accountability 
Page 10 GAO-04-626T 

that these leaders can sustain. Given the importance of DOD’s business 

transformation effort, it is imperative that it receive the sustained 

leadership needed to improve the economy, efficiency, and effectiveness 

of DOD’s business operations. Based on our surveys of best practices of 

world-class organizations,11 strong executive CFO and Chief Information 

Officer (CIO) leadership and centralized control over systems investments 

are essential to (1) making financial management an entitywide priority, 

(2) providing meaningful information to decision makers, (3) building a 

team of people that delivers results, and (4) effectively leveraging 

technology to achieve stated goals and objectives. 

Cultural resistance to change, military service parochialism, and 

stovepiped operations have all contributed significantly to the failure of 

previous attempts to implement broad-based management reforms at 

DOD. The department has acknowledged that it confronts decades-old 

problems deeply grounded in the bureaucratic history and operating 

practices of a complex, multifaceted organization. Recent audits reveal 

that DOD has made only small inroads in addressing these challenges. For 

example, the Bob Stump National Defense Authorization Act for Fiscal 

Year 200312 requires the DOD Comptroller to determine that each financial 

system improvement meets the specific conditions called for in the act 

before DOD obligates funds in amounts exceeding $1 million. However, 

we found that most system improvement efforts involving obligations over 

$1 million were not reviewed by the DOD Comptroller for the purpose of 

making that determination and that DOD continued to lack a mechanism 

for proactively identifying system improvement initiatives. We asked for, 

but DOD did not provide, comprehensive data for obligations in excess of 

$1 million for business system modernization. Based on a comparison of 

the limited information available for fiscal years 2003 and 2004, we 

identified $479 million in reported obligations by the military services that 

were not submitted to the DOD Comptroller for review. 

 11 U.S. General Accounting Office, Executive Guide: Creating Value Through World-class 

Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April 2000) and U.S. 

General Accounting Office, Executive Guide: Maximizing the Success of Chief 

Information Officers: Learning From Leading Organizations, GAO-01-376G

(Washington, D.C.: February 2001). 

12 Bob Stump National Defense Authorization Act for Fiscal Year 2003, Pub. L. No. 107-314, 

§ 1004 (d), 116 Stat. 2458, 2629, Dec. 2, 2002. 

Cultural Resistance and 

Parochialism 
Page 11 GAO-04-626T 

In addition, in September 2003,13 we reported that DOD continued to use a 

stovepiped approach to develop and fund its business system investments. 

Specifically, we found that DOD components receive and control funding 

for business systems investments without being subject to the scrutiny of 

the DOD Comptroller. DOD’s ability to address its current “business-asusual” approach to business system investments is further hampered by its 

lack of (1) a complete inventory of business systems (a condition we first 

highlighted in 1998), (2) a standard definition of what constitutes a 

business system, (3) a well-defined enterprise architecture, and (4) an 

effective approach for the control and accountability over business system 

investments. Until DOD develops and implements an effective strategy for 

overcoming resistance, parochialism, and stovepiped operations, its 

transformation efforts will not be successful. 

A key element of any major program is its ability to establish clearly 

defined goals and performance measures to monitor and report its 

progress to management. However, DOD has not yet established 

measurable, results-oriented goals to evaluate BMMP’s cost, schedule and 

performance outcomes and results, or explicitly defined performance 

measures to evaluate the architecture quality, content, and utility of 

subsequent major updates to its initial business enterprise architecture 

(BEA). For example, in our September 2003 report,14 we stated that DOD 

had not defined specific plans outlining how it intends to extend and 

evolve the initial BEA to include the missing scope and details that we 

identified. Instead, DOD’s primary BEA goal was to complete as much of 

the architecture as it could within a set period of time. According to DOD, 

it intends to refine the initial BEA through at least six different major 

updates of its architecture between February 2004 and the second quarter 

of 2005. However, it remains unclear what these major updates will 

individually or collectively provide and how they contribute to achieving 

DOD’s goals. 

 13 U.S. General Accounting Office, DOD Business Systems Modernization: Important 

Progress Made to Develop Business Enterprise Architecture, but Much Work Remains, 

GAO-03-1018 (Washington, D.C.: Sept. 19, 2003). 

14 GAO-03-1018.

Lack of Results-Oriented 

Goals and Performance 

Measures 
Page 12 GAO-04-626T 

In its March 15, 2004, progress report to defense congressional committees 

on the status of BMMP’s business transformation efforts, DOD reported 

that it plans to establish an initial approved program baseline to evaluate 

the cost, schedule, and performance of the BMMP. Given that DOD has 

reported disbursements of $111 million since development efforts began in 

fiscal year 2002, it is critical that it establish meaningful, tangible, and 

measurable program goals and objectives—short-term and long-term. 

Until DOD develops and implements clearly defined results-oriented goals 

for the overall program, including the architecture content of each major 

update of its architecture, the department will continue to lack a clear 

measure of the BMMP’s progress in transforming the department’s 

business operations and in providing the Congress reasonable assurance 

that funds are being directed towards resolving the department’s longstanding business operational problems. 

The final underlying cause of the department’s long-standing inability to 

carry out needed fundamental reform has been the lack of incentives for 

making more than incremental change to existing “business-as-usual” 

operations, systems, and organizational structures. Traditionally, DOD has 

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

outcomes its programs have produced. DOD has historically measured its 

performance by resource components such as the amount of money spent, 

people employed, or number of tasks completed. Incentives for its 

decision makers to implement changed behavior have been minimal or 

nonexistent. 

The lack of incentive to change is evident in the business systems 

modernization area. Despite DOD’s acknowledgement that many of its 

systems are error prone, duplicative, and stovepiped, DOD continues to 

allow its component organizations to make their own investments 

independently of one another and implement different system solutions to 

solve the same business problems. These stovepiped decision-making 

processes have contributed to the department’s current complex, errorprone environment. The DOD Comptroller recently testified that DOD’s 

actual systems inventory could be twice as many as the number of systems 

the department currently recognizes as its systems inventory. In March 

2003, we reported that ineffective program management and oversight, as 

well as a lack of accountability, resulted in DOD continuing to invest 

DOD recognizes that it 

needs to define 

measurable goals and 

performance measures 

Lack of Incentives for 

Change 
Page 13 GAO-04-626T 

hundreds of millions of dollars in system modernization efforts without 

any assurance that the projects will produce operational improvements 

commensurate with the amount invested.15

For example, the estimated cost of one of the business system investment 

projects that we reviewed increased by as much as $274 million, while its 

schedule slipped by almost 4 years. After spending $126 million, DOD 

terminated that project in December 2002, citing poor performance and 

increasing costs. GAO and the DOD IG have identified numerous business 

system modernization efforts that are not economically justified on the 

basis of cost, benefits and risk; take years longer than planned; and fall 

short of delivering planned or needed capabilities. Despite this track 

record, DOD continues to increase spending on business systems while at 

the same time it lacks the effective management and oversight needed to 

achieve real results. Without appropriate incentives to improve their 

project management, ongoing oversight, and adequate accountability 

mechanisms, DOD components will continue to develop duplicative and 

nonintegrated systems that are inconsistent with the Secretary’s vision for 

reform. 

To effect real change, actions are needed to (1) break down parochialism 

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

that motivate decision makers to initiate and implement efforts that are 

consistent with better program outcomes, including saying “no” or pulling 

the plug early on a system or program that is failing, and (3) facilitate a 

congressional focus on results-oriented management, particularly with 

respect to resource allocation decisions. 

As we have previously reported,16 and the success of the more narrowly 

defined DOD initiatives we will discuss later illustrate, the following key 

elements collectively will enable the department to effectively address the 

underlying causes of its inability to resolve its long-standing financial and 

business management problems. These elements are 

• addressing the department’s financial management and related business 

operational challenges as part of a comprehensive, integrated, DOD-wide 

strategic plan for business reform; 

 15 GAO-03-465. 

16 GAO-02-497T. 

Keys to Successful 

Reform 
Page 14 GAO-04-626T 

• providing for sustained and committed leadership by top management, 

including but not limited to the Secretary of Defense; 

• establishing resource control over business systems investments; 

• establishing clear lines of responsibility, authority, and accountability; 

• incorporating results-oriented performance measures and monitoring 

progress tied to key financial and business transformation objectives; 

• providing appropriate incentives or consequences for action or inaction; 

• establishing an enterprise architecture to guide and direct business 

systems modernization investments; and 

• ensuring effective oversight and monitoring. 

These elements, which should not be viewed as independent actions but 

rather as a set of interrelated and interdependent actions, are reflected in 

the recommendations we have made to DOD and are consistent with those 

actions discussed in the department’s April 2001 financial management 

transformation report.17 The degree to which DOD incorporates them into 

its current reform efforts—both long and short term—will be a deciding 

factor in whether these efforts are successful. Thus far, the department’s 

progress in implementing our recommendations has been slow. 

Over the years, we have given DOD credit for beginning numerous 

initiatives intended to improve its business operations. Unfortunately, 

most of these initiatives failed to achieve their intended objective in part, 

we believe, because they failed to incorporate key elements that in our 

experience are critical to successful reform. Today, we would like to 

discuss one very important broad-based initiative, the BMMP, DOD 

currently has underway that, if properly developed and implemented, will 

result in significant improvements in DOD’s business operations. Within 

the next few months we intend to issue a report on the status of DOD’s 

efforts to refine and implement its enterprise architecture and the results 

of our review of two on going DOD system initiatives. In addition to the 

BMMP, DOD has undertaken several interim initiatives in recent years that 

have resulted in tangible, although limited, improvements. We believe that 

these tangible improvements were possible because DOD has accepted 

our recommendations and incorporated many of the key elements critical 

for reform. Furthermore, we would like to offer two suggestions for 

legislative consideration that we believe could significantly increase the 

likelihood of a successful business transformation effort at DOD. 

 17 Department of Defense, Transforming Department of Defense Financial Management: 

A Strategy for Change (Washington, D.C.: Apr. 13, 2001). 

DOD Business 

Transformation 

Efforts 
Page 15 GAO-04-626T 

The BMMP, which the department established in July 2001 following our 

recommendation that DOD develop and implement an enterprise 

architecture, is vital to the department’s efforts to transform its business 

operations.18 The purpose of the BMMP is to oversee development and 

implementation of a departmentwide BEA, transition plan, and related 

efforts to ensure that DOD business system investments are consistent 

with the architecture. A well-defined and properly implemented BEA can 

provide assurance that the department invests in integrated 

enterprisewide business solutions and, conversely, can help move 

resources away from nonintegrated business system development efforts. 

As we reported in July 2003,19 DOD had developed an initial version of its 

departmentwide architecture for modernizing its current financial and 

business operations and systems and had expended tremendous effort and 

resources in doing so. However, substantial work remains before the 

architecture will be sufficiently detailed and the means for implementing it 

will be adequately established to begin to have a tangible impact on 

improving DOD’s overall business operations. We cannot overemphasize 

the degree of difficulty DOD faces in developing and implementing a welldefined architecture to provide the foundation that will guide its overall 

business transformation effort. 

On the positive side, during its initial efforts to develop the architecture, 

the department established some of the architecture management 

capabilities advocated by best practices and federal guidance,20 such as 

establishing a program office, designating a chief architect, and using an 

architecture development methodology and automated tool. Further, 

DOD’s initial version of its business enterprise architecture provided a 

foundation on which to build and ultimately produce a well-defined 

business enterprise architecture. For example, in September 2003,21 we 

reported that the “To Be” descriptions address, to at least some degree, 

how DOD intends to operate in the future, what information will be 

 18 GAO-01-525. 

19 GAO-03-877R. 

20 U.S. General Accounting Office, Information Technology: A Framework for Assessing 

and Improving Enterprise Architecture Management (Version 1.1), GAO-03-584G

(Washington, D.C.: April 2003). 

21 GAO-03-1018. 

Business Management 

Modernization Program 
Page 16 GAO-04-626T 

needed to support these future operations, and what technology standards 

should govern the design of future systems. 

While some progress has been made, DOD has not yet taken important 

steps that are critical to its ability to successfully use the enterprise 

architecture to drive reform throughout the department’s overall business 

operations. For example, DOD has not yet defined and implemented the 

following. 

• Detailed plans to extend and evolve its initial architecture to include the 

missing scope and detail required by the Bob Stump National Defense 

Authorization Act for Fiscal Year 2003 and other relevant architectural 

requirements. Specifically, (1) the initial version of the BEA excluded 

some relevant external requirements, such as requirements for recording 

revenue, and lacked or provided little descriptive content pertaining to its 

“As Is” and “To Be” environments and (2) DOD had not yet developed the 

transition plan needed to provide a temporal road map for moving from 

the “As Is” to the “To Be” environment. 

• An effective approach to select and control business system investments22

for obligations exceeding $1 million. As we previously stated, and it bears 

repeating here, DOD components currently receive direct funding for their 

business systems and continue to make their own parochial decisions 

regarding those investments without having received the scrutiny of the 

DOD Comptroller as required by the Bob Stump National Defense 

Authorization Act for Fiscal Year of 2003. Later, we will offer a suggestion 

for improving the management and oversight of the billions of dollars DOD 

invests annually in business systems. 

DOD invests billions of dollars annually to operate, maintain, and 

modernize its business systems. For fiscal year 2004, the department 

requested approximately $28 billion in IT funding to support a wide range 

of military operations as well as DOD business systems operations, of 

which approximately $18.8 billion23—$5.8 billion for business systems and 

$13 billion for business systems infrastructure—relates to the operation, 

 22 Business systems include financial and nonfinancial systems, such as civilian personnel, 

finance, health, logistics, military personnel, procurement, and transportation, with the 

common element being the generation or use of financial data to support DOD’s business 

operations. 

23The remaining $9 billion is for National Security Systems. These systems are intelligence 

systems, cryptologic activities related to national security, military command and control 

systems, and equipment that is an integral part of a weapon or weapons system or is 

critical to the direct fulfillment of military or intelligence mission. 
Page 17 GAO-04-626T 

maintenance, and modernization of the department’s reported thousands 

of business systems. The $18.8 billion is spread across the military services 

and defense agencies, with each receiving its own funding for IT 

investments. 

However, as we reported,24 DOD lacked an efficient and effective process 

for managing, developing, and implementing its business systems. These 

long-standing problems continue despite the significant investments in 

business systems by DOD components each year. For example, in March 

2003 we reported that DOD’s oversight of four DFAS projects we reviewed 

had been ineffective.25 Investment management responsibility for the four 

projects rested with the Defense Finance and Accounting Service (DFAS), 

the DOD Comptroller, and the DOD CIO. In discharging this responsibility, 

each had allowed project investments to continue year after year, even 

through the projects had been marked by cost increases, schedule 

slippages, and capability changes. As a result DOD had invested 

approximately $316 million in four DFAS system modernization projects 

without demonstrating that this substantial investment would markedly 

improve DOD financial management information for decision making and 

financial reporting purposes. 

Specifically, we found that four DFAS projects reviewed lacked an 

approved economic analysis that reflected the fact that expected project 

costs had increased, while in some cases the benefits had decreased. For 

instance as we previously stated, the estimated cost of one project— 

referred to as the Defense Procurement Payment System (DPPS)— had 

increased by as much as $274 million, while its schedule slipped by almost 

4 years. Such project analyses provide the requisite justification for 

decision makers to use in determining whether to invest additional 

resources in anticipation of receiving commensurate benefits and mission 

value. For each of the four projects we reviewed we found that DOD 

oversight entities—DFAS, the DOD Comptroller, and the DOD CIO—did 

not question the impact of the cost increases and schedule delays, and 

allowed the projects to proceed in the absence of the requisite analytical 

justification. Furthermore, in one case, they allowed a project estimated to 

cost $270 million, referred to as the DFAS Corporate Database/DFAS 

Corporate Warehouse (DCD/DCW), to proceed without an economic 

 24 GAO-03-465 and GAO-03-553T. 

25 GAO-03-465. 
Page 18 GAO-04-626T 

analysis. In another case, they allowed DPPS to continue despite known 

concerns about the validity of the project’s economic analysis. 

DOD subsequently terminated two—DPPS and the Defense Standard 

Disbursing System (DSDS)—of the four DFAS system modernization 

projects reviewed. As we previous mentioned, DPPS was terminated due 

to poor program performance and increasing costs after 7 years of effort 

and an investment of over $126 million. DFAS terminated DSDS after 

approximately 7 years of effort and an investment of about $53 million, 

noting that a valid business case for continuing the effort could not be 

made. These two terminated projects were planned to provide DOD the 

capability to address some of DOD’s long-standing contract and vendor 

payment problems. 

In addition to project management issues that continue to result in 

systems that do not perform as expected and cost more than planned, we 

found that DOD continues to lack a complete and reliable inventory of its 

current systems. In September 2003, we reported that DOD had created a 

repository of information about its existing systems inventory of 

approximately 2,300 business systems (up from 1,731 in October 2002) as 

part of its ongoing business systems modernization program, and 

consistent with our past recommendation.26 Due to its lack of visibility 

over systems departmentwide, DOD had to rely upon data calls to obtain 

its information. Unfortunately, due to its lack of an effective methodology 

and process for identifying business systems, including a clear definition 

of what constitutes a business system, DOD continues to lack assurance 

that its systems inventory is reliable and complete. In fact, the DOD 

Comptroller testified last week before the Senate Armed Services 

Subcommittee on Readiness and Management Support that the size of 

DOD’s actual systems inventory could be twice the size currently reported. 

This lack of visibility over current business systems in use throughout the 

department hinders DOD’s ability to identify and eliminate duplicate and 

nonintegrated systems and transition to its planned systems environment 

in an efficient and effective manner. 

Of the 2,274 business systems recorded in DOD’s systems inventory 

repository, the department reportedly has 665 systems to support human 

resource management, 565 systems to support logistical functions, 542 

 26 U.S. General Accounting Office, Financial Management: DOD Improvement Plan Needs 

Strategic Focus, GAO-01-764 (Washington, D.C.: Aug. 17, 2001). 
Page 19 GAO-04-626T 

systems to perform finance and accounting functions, and 210 systems to 

support strategic planning and budget formulation. Table 1, which 

presents the composition of DOD business systems by functional area, 

reveals the numerous and redundant systems operating in the department 

today. 

Table 1: Reported DOD Business Systems by Domain and Functional Area 

Domain 

Air 

Force Army

Navy/ 

Marine Corps DFAS Other Total

Acquisition 27 31 61 3 21 143

Accounting and finance 43 88 195 165 51 542

Human resource 

management 71 387 86 33 88 665

Installations and 

environment 12 98 9 1 8 128

Logistics 180 191 104 11 79 565

Strategic planning and 

budgeting 23 63 98 15 11 210

Enterprise information 

environment 1 5 2 3 10 21

Total 357 863 555 231 268 2,274

Source: GAO analysis of BMMP data. 

As we have previously reported,27 these numerous systems have evolved 

into the overly complex and error-prone operation that exists today, 

including (1) little standardization across DOD components, (2) multiple 

systems performing the same tasks, (3) the same data stored in multiple 

systems, (4) manual data entry into multiple systems, and (5) a large 

number of data translations and interfaces that combine to exacerbate 

problems with data integrity. The department has recognized the 

uncontrolled proliferation of systems and the need to eliminate as many 

systems as possible and integrate and standardize those that remain. In 

fact, the two terminated DFAS projects were intended to reduce the 

number of systems or eliminate a portion of different systems that perform 

the same function. For example, DPPS was intended to consolidate eight 

 27 U.S. General Accounting Office, DOD Financial Management: Important Steps 

Underway But Reform Will Require a Long-term Commitment, GAO-02-784T

(Washington, D.C.: June 4, 2002). 
Page 20 GAO-04-626T 

contract and vendor pay systems and DSDS was intended to eliminate four 

different disbursing systems. 

Until DOD completes its efforts to refine and implement its enterprise 

architecture and transition plan, and develop and implement an effective 

approach for selecting and controlling business system investments, DOD 

will continue to lack (1) a comprehensive and integrated strategy to guide 

its business process and system changes, and (2) results-oriented 

measures to monitor and measure progress, including whether system 

development and modernization investment projects adequately 

incorporate leading practices used by the private sector and federal 

requirements and achieve performance and efficiency commensurate with 

the cost. These elements are critical to the success of DOD’s BMMP. 

Developing and implementing a BEA for an organization as large and 

complex as DOD is a formidable challenge, but it is critical to effecting the 

change required to achieve the Secretary’s vision of relevant, reliable, and 

timely financial and other management information to support the 

department’s vast operations. As mandated, we plan to continue to report 

on DOD’s progress in developing the next version of its architecture, 

developing its transition plan, validating its “As Is” systems inventory, and 

controlling its system investments. 

Since DOD’s overall business process transformation is a long-term effort, 

in the interim it is important for the department to focus on improvements 

that can be made using, or requiring only minor changes to, existing 

automated systems and processes. As demonstrated by the examples we 

will highlight in this testimony, leadership, real incentives, accountability, 

and oversight and monitoring—key elements to successful reform—have 

brought about improvements in some DOD operations, such as more 

timely commercial payments, reduced payment recording errors, and 

significant reductions in individually billed travel card delinquency rates. 

To help achieve the department’s goal of improved financial information, 

the DOD Comptroller has developed a Financial Management Balanced 

Scorecard that is intended to align the financial community’s strategy, 

goals, objectives, and related performance measures with the 

departmentwide risk management framework established as part of DOD’s 

Quadrennial Defense Review, and with the President’s Management 

Agenda. To effectively implement the balanced scorecard, the Comptroller 

is planning to cascade the performance measures down to the military 

services and defense agency financial communities, along with certain 

Interim Initiatives 
Page 21 GAO-04-626T 

specific reporting requirements. DOD has also developed a Web site where 

implementation information and monthly indicator updates will be made 

available for the financial communities’ review. At the departmentwide 

level, certain financial metrics will be selected, consolidated, and reported 

to the top levels of DOD management for evaluation and comparison. 

These “dashboard” metrics are intended to provide key decision makers, 

including Congress, with critical performance information at a glance, in a 

consistent and easily understandable format. 

DFAS has been reporting the metrics cited below for several years, which, 

under the leadership of DFAS’ Director and DOD’s Comptroller, have 

reported improvements, including the following. 

• From April 2001 to January 2004, DOD reduced its commercial pay 

backlogs (payment delinquencies) by 55 percent. 

• From March 2001 to December 2003, DOD reduced its payment recording 

errors by 33 percent. 

• The delinquency rate for individually billed travel cards dropped from 18.4 

percent in January 2001 to 10.7 percent in January 2004. 

Using DFAS’ metrics, management can quickly see when and where 

problems are arising and can focus additional attention on those areas. 

While these metrics show significant improvements from 2001 to today, 

statistics for the last few months show that progress has slowed or even 

taken a few steps backward for payment recording errors and commercial 

pay backlogs. Our report last year on DOD’s metrics program28 included a 

caution that, without modern integrated systems and the streamlined 

processes they engender, reported progress may not be sustainable if 

workload is increased. 

Since we reported problems with DOD’s purchase card program, DOD and 

the military services have taken actions to address all of our 109 

recommendations. In addition, we found that DOD and the military 

services took action to improve the purchase card program consistent 

with the requirements of the Bob Stump National Defense Authorization 

Act for Fiscal Year 2003 and the DOD Appropriations Act for Fiscal Year 

 28 U.S. General Accounting Office, Financial Management: DOD’s Metrics Program 

Provides Focus for Improving Performance, GAO-03-457 (Washington, D.C.: Mar. 28, 

2003). 
Page 22 GAO-04-626T 

2003.29 Specifically, we found that DOD and the military services had done 

the following. 

• Substantially reduced the number of purchase cards issued. According to 

GSA records, DOD had reduced the total number of purchase cards from 

about 239,000 in March 2001 to about 134,609 in January 2004. These 

reductions have the potential to significantly improve the management of 

this program. 

• Issued policy guidance to field activities to (1) perform periodic reviews of 

all purchase card accounts to reestablish a continuing bona fide need for 

each card account, (2) cancel accounts that were no longer needed, and 

(3) devise additional controls over infrequently used accounts to protect 

the government from potential cardholder or outside fraudulent use. 

• Issued disciplinary guidelines, separately, for civilian and military 

employees who engage in improper, fraudulent, abusive, or negligent use 

of a government charge card. 

In addition, to monitor the purchase card program, the DOD IG and the 

Navy have prototyped and are now expanding a data-mining capability to 

screen for and identify high-risk transactions (such as potentially 

fraudulent, improper, and abusive use of purchase cards) for subsequent 

investigation. On June 27, 2003, the DOD IG issued a report30summarizing 

the results of an in-depth review of purchase card transactions made by 

1,357 purchase cardholders. The report identified 182 cardholders who 

potentially used their purchase cards inappropriately or fraudulently. 

We believe that consistent oversight played a major role in bringing about 

these improvements in DOD’s purchase and travel card programs. During 

2001, 2002, and 2003, seven separate congressional hearings were held on 

the Army and Navy purchase and individually billed travel card programs. 

Numerous legislative initiatives aimed at improving DOD’s management 

and oversight of these programs also had a positive impact. 

Another important initiative underway at the department pertains to 

financial reporting. Under the leadership of DOD Comptroller, the 

department is working to instill discipline into its financial reporting 

 29 The Department of Defense Appropriations Act for Fiscal Year 2003, Pub. L. No. 107-248, 

§ 8149, 116 Stat. 1519, 1572, Oct. 23, 2002. 

30 Department of Defense, Office of the Inspector General, Summary Report on Joint 

Review of Selected DOD Purchase Card Transactions, D2003-109 (Washington, D.C.: June 

27, 2003). 
Page 23 GAO-04-626T 

processes to improve the reliability of the department’s financial data. 

Resolution of serious financial management and related business 

management weaknesses is essential to achieving any opinion on the DOD 

consolidated financial statements. Pursuant to the requirements in section 

1008 of the National Defense Authorization Act for Fiscal Year 2002,31 DOD 

has reported for the past 3 years on the reliability of the department’s 

financial statements, concluding that the department is not able to provide 

adequate evidence supporting material amounts in its financial statements. 

Specifically, DOD stated that it was unable to comply with applicable 

financial reporting requirements for (1) property, plant, and equipment, 

(2) inventory and operating materials and supplies, (3) environmental 

liabilities, (4) intragovernmental eliminations and related accounting 

entries, (5) disbursement activity, and (6) cost accounting by 

responsibility segment. Although DOD represented that the military 

retirement health care liability data had improved for fiscal year 2003, the 

cost of direct health care provided by DOD-managed military treatment 

facilities was a significant amount of DOD’s total recorded health care 

liability and was based on estimates for which adequate support was not 

available. DOD has indicated that by acknowledging its inability to 

produce reliable financial statements, as required by the act, the 

department saves approximately $23 million a year through reduction in 

the level of resources needed to prepare and audit financial statements. 

However, DOD has set the goal of obtaining a favorable opinion on its 

fiscal year 2007 departmentwide financial statements. To this end, DOD 

components and agencies have been tasked with addressing material line 

item deficiencies in conjunction with the BMMP. This is an ambitious goal 

and we have been requested by Congress to review the feasibility and cost 

effectiveness of DOD’s plans for obtaining such an opinion within the 

stated time frame. 

To instill discipline in its financial reporting process, the DOD Comptroller 

requires DOD’s major components to prepare quarterly financial 

statements along with extensive footnotes that explain any improper 

balances or significant variances from previous year quarterly statements. 

All of the statements and footnotes are analyzed by Comptroller office 

staff and reviewed by the Comptroller. In addition, the midyear and end-ofyear financial statements must be briefed to the DOD Comptroller by the 

military service Assistant Secretary for Financial Management or the head 

 31 National Defense Authorization Act for Fiscal Year 2003, Pub. L. No. 107-107, §1008, 115 

Stat. 1012, 1204, Dec. 28, 2001. 
Page 24 GAO-04-626T 

of the defense agency. We have observed several of these briefings and 

have noted that the practice of preparing and explaining interim financial 

statements has led to the discovery and correction of numerous recording 

and reporting errors. 

If DOD continues to provide for active leadership, along with appropriate 

incentives and accountability mechanisms, improvements will continue to 

occur in its programs and initiatives. 

We would like to offer two suggestions for legislative consideration that 

we believe could contribute significantly to the department’s ability to not 

only address the impediments to DOD success but also to incorporate 

needed key elements to successful reform. These suggestions would 

include the creation of a chief management official and the centralization 

of responsibility and authority for business system investment decisions 

with the domain32 leaders responsible for the department’s various 

business areas, such as logistics and human resource management. 

Previous failed attempts to improve DOD’s business operations illustrate 

the need for sustained involvement of DOD leadership in helping to assure 

that the DOD’s financial and overall business process transformation 

efforts remain a priority. While the Secretary and other key DOD leaders 

have certainly demonstrated their commitment to the current business 

transformation efforts, the long-term nature of these efforts requires the 

development of an executive position capable of providing strong and 

sustained executive leadership over a number of years and various 

administrations. The day-to-day demands placed on the Secretary, the 

Deputy Secretary, and others make it difficult for these leaders to maintain 

the oversight, focus, and momentum needed to resolve the weaknesses in 

DOD’s overall business operations. This is particularly evident given the 

demands that the Iraq and Afghanistan postwar reconstruction activities 

and the continuing war on terrorism have placed on current leaders. 

Likewise, the breadth and complexity of the problems preclude the Under 

Secretaries, such as the DOD Comptroller, from asserting the necessary 

authority over selected players and business areas. 

 32DOD has one Enterprise Information Environment Mission, and six departmental 

domains including (1) acquisition/ procurement, (2) finance, accounting, and financial 

management, (3) human resource management, (4) logistics, (5) strategic planning and 

budgeting, and 6) installations and environment. 

Suggestions for Legislative 

Consideration 

Chief Management Official 
Page 25 GAO-04-626T 

While sound strategic planning is the foundation upon which to build, 

sustained leadership is needed to maintain the continuity needed for 

success. One way to ensure sustained leadership over DOD’s business 

transformation efforts would be to create a full-time executive level II 

position for a chief management official who would serve as the Principal 

Under Secretary of Defense for Management.33 This position would 

provide the sustained attention essential for addressing key stewardship 

responsibilities such as strategic planning, performance and financial 

management, and business systems modernization in an integrated 

manner, while also facilitating the overall business transformation 

operations within DOD. This position could be filled by an individual, 

appointed by the President and confirmed by the Senate, for a set term of 

7 years with the potential for reappointment. Such an individual should 

have a proven track record as a business process change agent in large, 

complex, and diverse organizations—experience necessary to spearhead 

business process transformation across the department, and potentially 

administrations, and serve as an integrator for the needed business 

transformation efforts. In addition, this individual would enter into an 

annual performance agreement with the Secretary that sets forth 

measurable individual goals linked to overall organizational goals in 

connection with the department’s overall business transformation efforts. 

Measurable progress towards achieving agreed upon goals would be a 

basis for determining the level of compensation earned, including any 

related bonus. In addition, this individual’s achievements and 

compensation would be reported to Congress each year. 

We have made numerous recommendations to DOD intended to improve 

the management oversight and control of its business systems 

investments. However, as previously mentioned, progress in achieving this 

control has been slow and, as a result, DOD has little or no assurance that 

current business systems investments are being spent in an economically 

efficient and effective manner. DOD’s current systems funding process has 

contributed to the evolution of an overly complex and error-prone 

information technology environment containing duplicative, 

nonintegrated, and stovepiped systems. Given that DOD plans to spend 

approximately $19 billion on business systems and related infrastructure 

 33 On September 9, 2002, GAO convened a roundtable of executive branch leaders and 

management experts to discuss the Chief Operating Officer concept. For more information 

see U.S. General Accounting Office, Highlights of a GAO Roundtable: The Chief Operating 

Officer Concept: A Potential Strategy to Address Federal Governance Challenges, 

GAO-03-192SP (Washington, D.C.: Oct. 4, 2002). 

Central Control Over System 

Investments 
Page 26 GAO-04-626T 

for fiscal year 2004—including an estimated $5 billion in modernization 

money—it is critical that actions be taken to gain more effective control 

over such business systems funding. 

The second suggestion we have for legislative action to address this issue, 

consistent with our open recommendations to DOD, is to establish specific 

management oversight, accountability, and control of funding with the 

“owners” of the various functional areas or domains. This legislation 

would define the scope of the various business areas (e.g., acquisition, 

logistics, finance and accounting) and establish functional responsibility 

for management of the portfolio of business systems in that area with the 

relevant Under Secretary of Defense for the six departmental domains and 

the CIO for the Enterprise Information Environment Mission (information 

technology infrastructure). For example, planning, development, 

acquisition, and oversight of DOD’s portfolio of logistics business systems 

would be vested in the Under Secretary of Defense for Acquisition, 

Technology, and Logistics. 

We believe it is critical that funds for DOD business systems be 

appropriated to the domain owners in order to provide for accountability, 

transparency, and the ability to prevent the continued parochial approach 

to systems investment that exists today. The domains would establish a 

hierarchy of investment review boards with DOD-wide representation, 

including the military services and Defense agencies. These boards would 

be responsible for reviewing and approving investments to develop, 

operate, maintain, and modernize business systems for the domain 

portfolio, including ensuring that investments were consistent with DOD’s 

BEA. All domain owners would be responsible for coordinating their 

business systems investments with the chief management official who 

would chair the Defense Business Systems Modernization Executive 

Committee and provide a cross-domain perspective. Domain leaders 

would also be required to report to Congress through the chief 

management official and the Secretary of Defense on applicable business 

systems that are not compliant with review requirements and to include a 

summary justification for noncompliance. 

As seen again in Iraq, the excellence of our military forces is unparalleled. 

However, that excellence is often achieved in the face of enormous 

challenges in DOD’s financial management and other business areas, 

which have serious and far-reaching implications related to the 

department’s operations and critical national defense mission. Our recent 

work has shown that DOD’s long-standing financial management and 

Conclusion 
Page 27 GAO-04-626T 

business problems have resulted in fundamental operational problems, 

such as failure to properly pay mobilized Army Guard soldiers and the 

inability to provide adequate accountability and control over supplies and 

equipment shipments in support of Operation Iraqi Freedom. Further, the 

lack of adequate transparency and appropriate accountability across all 

business areas has resulted in certain fraud, waste, and abuse and hinders 

DOD’s attempts to develop world-class operations and activities to 

support its forces. As our nation continues to be challenged with growing 

budget deficits and increasing pressure to reduce spending levels, every 

dollar that DOD can save through improved economy and efficiency of its 

operations is important. 

DOD’s senior leaders have demonstrated a commitment to transforming 

the department and improving its business operations and have taken 

positive steps to begin this effort. We believe that implementation of our 

open recommendations and our suggested legislative initiatives would 

greatly improve the likelihood of meaningful, broad-based reform at DOD. 

The continued involvement and monitoring by congressional committees 

will also be critical to ensure that DOD’s initial transformation actions are 

sustained and extended and that the department achieves its goal of 

securing the best performance and highest measure of accountability for 

the American people. We commend the Subcommittee for holding this 

hearing and we encourage you to use this vehicle, on at least an annual 

basis, as a catalyst for long overdue business transformation at DOD. 

Mr. Chairman, this concludes our statement. We would be pleased to 

answer any questions you or other members of the Subcommittee may 

have at this time. 

For further information about this testimony, please contact Gregory D. 

Kutz at (202) 512-9095 or kutzg@gao.gov, Randolph Hite at (202) 512-3439 

or hiter@gao.gov, or Evelyn Logue at 202-512-3881. Other key contributors 

to this testimony include Bea Alff, Meg Best, Molly Boyle, Art Brouk, 

Cherry Clipper, Mary Ellen Chervenic, Francine Delvecchio, Abe Dymond, 

Eric Essig, Gayle Fischer, Geoff Frank, John Kelly, Patricia Lentini, 

Elizabeth Mead, Mai Nguyen, Greg Pugnetti, Cary Russell, John Ryan, 

Darby Smith, Carolyn Voltz, Marilyn Wasleski, and Jenniffer Wilson. 

Contacts and 

Acknowledgments 

(192127) 
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