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84–603 PDF 2003

THE DEPARTMENT OF DEFENSE: WHAT IS BEING

DONE TO RESOLVE LONGSTANDING FINANCIAL

MANAGEMENT PROBLEMS?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,

FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MARCH 20, 2002

Serial No. 107–157

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

STEPHEN HORN, California, Chairman

RON LEWIS, Kentucky

DAN MILLER, Florida

DOUG OSE, California

ADAM H. PUTNAM, Florida

JANICE D. SCHAKOWSKY, Illinois

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

EARL PIERCE, Professional Staff Member

JUSTIN PAULHAMUS, Clerk

DAVID MCMILLEN, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 20, 2002 ............................................................................ 1

Statement of:

Jonas, Tina W., Deputy Under Secretary for Defense, Financial Management, Department of Defense, accompanied by Thomas R. Bloom, Director, Defense Finance and Accounting Service, Department of Defense; and De W. Ritchie, Jr., Acting Deputy Chief Financial Officer,

Department of Defense ................................................................................. 22

Kutz, Gregory D., Director, Financial Management and Assurance, U.S.

General Accounting Office, accompanied by Randolph C. Hite, Director,

Information Technology Systems, U.S. General Accounting Office; and

David R. Warren, Director, Defense Capabilities and Management, U.S.

General Accounting Office ............................................................................ 3

Lieberman, Robert J., Deputy Inspector General, Department of Defense . 36

Letters, statements, etc., submitted for the record by:

Jonas, Tina W., Deputy Under Secretary for Defense, Financial Management, Department of Defense:

Information concerning schedule and program plans ............................ 54

Prepared statement of ............................................................................... 26

Kutz, Gregory D., Director, Financial Management and Assurance, U.S.

General Accounting Office, prepared statement of .................................... 5

Lieberman, Robert J., Deputy Inspector General, Department of Defense,

prepared statement of ................................................................................... 38

Schakowsky, Hon. Janice D., a Representative in Congress from the

State of Illinois, prepared statement of ...................................................... 49

(1)

THE DEPARTMENT OF DEFENSE: WHAT IS

BEING DONE TO RESOLVE LONGSTANDING

FINANCIAL MANAGEMENT PROBLEMS?

WEDNESDAY, MARCH 20, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL

MANAGEMENT AND INTERGOVERNMENTAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 1 p.m., in room

2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn and Schakowsky.

Staff present: J. Russell George, staff director and chief counsel;

Bonnie Heald, deputy staff director; Rosa Harris, professional

staffmember and GAO detailee; Earl Pierce, professional staff

member; Justin Paulhamus, clerk; David McMillen, minority professional staff member; and Jean Gosa, minority assistant clerk.

Mr. HORN. I think everybody is here. We have Mr. Kutz, Mr.

Hite, Mr. Warren, Ms. Jonas, Mr. Bloom, Mr. Ritchie, and Mr.

Lieberman. OK. If you don’t mind, we’ll have you rise and raise

your right hand.

[Witnesses sworn.]

Mr. HORN. The clerk will note that they’ve all affirmed.

We will start with my opening statement, but we will have to recess in a little while because two more votes have popped-up on the

floor.

A quorum being present, this hearing of the Subcommittee on

Government Efficiency, Financial Management and Intergovernmental Relations will come to order.

We are here today to continue our examination of the progress

executive branch departments and agencies in the Federal Government are making toward providing timely and useful information.

Encouragingly, an increasing number of agencies were able to

produce clean, auditable financial statements and made marked

improvements in their financial management systems. However,

this progress was often achieved through difficult and costly efforts.

Despite that progress, the failures of the few agencies continue to

tarnish the overall record of the executive branch.

The Department of Defense still cannot adequately account for

the billions of tax dollars it spends. For example, the Department

has issued more than 230,000 purchase cards to employees who use

the card to buy $1.8 billion worth of goods and services last year,

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yet a recent General Accounting Office audit of only 300 accounts

found numerous cases in which the Government-guaranteed credit

card had been inappropriately or fraudulently used.

For the sixth consecutive year, the Department’s Inspector General has been unable to render an opinion on the reliability of the

Department’s financial statements. For fiscal year 2001, to Office

of Inspector General limited its internal control review to examining the status of the corrective actions relating to material weaknesses that had been reported in prior audits.

In addition, for fiscal year 2001 the Inspector General did not

test for compliance with the Federal Financial Management Improvement act of 1996, but relied on the Department’s acknowledgement that many of its systems do not comply with the act.

For the last 5 years, the Department of Defense received the unacceptable grade of ‘‘F’’ on the subcommittee’s financial management report card, which is one of the primary reasons the Federal

Government is unable to prepare auditable financial statements.

The Department of Defense’s financial management and feeder systems simply cannot provide adequate evidence to support various

material amounts on the financial statements.

The Department of Defense relies on non-integrated systems that

are prone to errors. The GAO—the General Accounting Office—has

reported that the Department of Defense’s financial management

systems reform will take years to complete.

For fiscal year 2001, alone, the Department of Defense reported

total information technology investments of almost $23 billion. Despite the billions invested in modernizing its financial management

systems, the Department does not have a plan in place to guide

and direct these investments.

In today’s hearings we will focus on what the Department of Defense is going to do to resolve these longstanding issues. I welcome

today’s witnesses and look forward to working with you to ensure

financial accountability throughout the Federal Government.

I might add that Secretary Rumsfeld made it very clear yesterday that he won’t tolerate what has happened in terms of the purchase cards and that he intends to do something about it. I’m glad

that Secretary Jonas is here too.

We will now start with—well, I’m going to check to see if I need

to go vote. Yes, we have about 6 minutes, so have a rest.

[Recess.]

Mr. HORN. The Nation has been saved. We stopped a motion that

allowed us to be out and not still work. Sorry for going over there

and holding you all up, but we will now start with Gregory Kutz,

the Director of Financial Management and Assurance, U.S. General Accounting Office.

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STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL

MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY RANDOLPH C. HITE, DIRECTOR, INFORMATION TECHNOLOGY SYSTEMS, U.S. GENERAL

ACCOUNTING OFFICE; AND DAVID R. WARREN, DIRECTOR,

DEFENSE CAPABILITIES AND MANAGEMENT, U.S. GENERAL

ACCOUNTING OFFICE

Mr. KUTZ. Mr. Chairman, it is a pleasure to be here to discuss

financial management at the Department of Defense. The recent

successes of our forces in Afghanistan has again demonstrated that

our military forces are second to none; however, the same level of

excellence is not evident in many of DOD’s processes, including financial management.

DOD’s financial management problems date back decades, and

previous attempts at reform have largely proven unsuccessful.

Problems with DOD financial management go far beyond its accounting and finance systems and processes. DOD’s network of

business systems was not designed, but rather has evolved into an

overly complex and error-prone operation, with little standardization across the Department, multiple systems performing the same

tasks, the same data stored in multiple systems, and significant

manual data entry. Some of the systems in operation today date

back to 1950’s and 1960’s technology.

Past reform efforts have not succeeded, despite good intentions,

and the conditions that led to those reform initiatives remain largely unchanged. As a result, the DOD has fundamentally flawed financial management systems and a weak overall internal control

environment.

My testimony has two parts: first, the root causes of DOD’s inability to effectively reform its business operations, and, second,

the keys to successful reform.

First, we believe the underlying causes of the chronic financial

and business reform challenges include: lack of sustained top-level

leadership and accountability; cultural resistance to change, including service parochialism; lack of results-oriented goals and performance measures; and inadequate incentives for seeking change.

Let me briefly touch on two of these—the challenges relating to

leadership and culture.

In our Executive Guide on World-Class Financial Management,

the leading organizations we surveyed, including General Electric,

Boeing, and Pfizer, identified leadership as the most important factor in making cultural change and establishing effective financial

management. DOD’s past experience has suggested that top management has not had a proactive, consistent, and continuing role in

leading financial management reform.

Sustaining top management commitment to performance goals is

a particular challenge for DOD. In the past, the Department’s top

political appointees’ average tenure of 1.7 years has served to

hinder long-term reform efforts.

Cultural resistance to change and military service parochialism

have also played a significant role in impeding previous reform efforts. I testified before this subcommittee last week on the culture

at a Navy unit in San Diego that dismissed the need for internal

controls and allowed abusive usage of Government purchase cards.

4

All parts of DOD will need to put aside their parochial interests

and focus on Department-wide approaches to financial management reform.

My second point relates to the key elements necessary for successful reform. My written statement discusses seven elements necessary for reform. I will touch on two of those seven now.

First, the financial management challenges must be addressed as

part of a comprehensive, integrated, DOD-wide business process reform and improvement strategy cannot be developed in a vacuum.

Financial management is a cross-cutting issue that affects all of

an organization’s business processes. Currently, DOD has six of the

twenty-two agency-specific high-risk areas in the Federal Government, including systems modernization and inventory management. In addition, our two Government-wide high-risk areas,

human capital strategy and computer security, are also relevant to

DOD. These inter-related management challenges must be addressed using an integrated, enterprise-wide approach.

Second, establishing and implementing an enterprise-wide financial management architecture will be essential for the Department

to effectively manage its modernization effort. The Clinger-Cohen

Act requires agencies to develop, implement, and maintain an integrated systems architecture. Such an architecture can help ensure

that the Department invests only in integrated, enterprise-wide

business system solutions. Building systems without an architecture is like building a house without a blueprint.

And the stakes are high. For fiscal year 2001, DOD reported total information technology investment of about $23 billion. Without an architecture, DOD risks spending billions of dollars that will

only result in perpetuating the existing complex, stovepipe, and

high-maintenance systems environment.

In summary, we support Secretary Rumsfeld’s vision for transforming the Department’s full range of business processes. The

benefits of business reform are substantial. The Secretary estimated that DOD could save 5 percent of its budget, which would

be $15 to $18 billion annually, through successful business reform.

Today the momentum exists for reform, but the real question remains: Will this momentum continue to exist tomorrow, next year,

and throughout the years to make the necessary cultural, systems,

human capital, and other key changes necessary a reality.

For our part, we will continue to work constructively with the

Department and the Congress on these reform issues.

Mr. Chairman, this concludes my testimony. I have Randy Hite

and Dave Warren with me to answer questions.

Mr. HORN. We thank you very much.

[The prepared statement of Mr. Kutz follows:]

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Mr. HORN. We now have Tina W. Jonas, Deputy Under Secretary

for Defense, Financial Management, Department of Defense. When

we were voting recently, I met with Mr. Lewis and said you were

going to turn the Department around, and he said, ‘‘Absolutely.’’

Ms. JONAS. We are trying mightily.

STATEMENTS OF TINA W. JONAS, DEPUTY UNDER SECRETARY

FOR DEFENSE, FINANCIAL MANAGEMENT, DEPARTMENT OF

DEFENSE, ACCOMPANIED BY THOMAS R. BLOOM, DIRECTOR,

DEFENSE FINANCE AND ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE; AND DE W. RITCHIE, JR., ACTING DEPUTY CHIEF FINANCIAL OFFICER, DEPARTMENT OF DEFENSE

Ms. JONAS. Thank you, Mr. Chairman and members of the committee. I am pleased to be here to give you an update on the Department’s financial management reform program. I wish to reaffirm the commitment to financial management reform that we

made to you last year. Our goal for financial management reform

is profound and far-reaching. We intend to provide the Department’s decisionmakers with financial data that is reliable, relevant,

and timely so that they, in turn, can carefully and efficiently manage and account for taxpayer funds.

You cannot change anything unless you get your arms around

the problem, and we are beginning to get our arms around the extent of our problem. We are taking five basic steps to achieve successful financial reform. We are rebuilding our financial management infrastructure to include renovating our information systems

and business processes. We are improving the quality of the processes we use to prepare financial statements, and we are developing and using performance measures to target areas for improvement. We are also ensuring that components safeguard their assets

from fraud, waste, and abuse, and we are developing procedures to

build and maintain a highly motivated professional financial work

force.

Our first step is building a robust financial management infrastructure. Our program targets two primary causes of the Department’s extensive problems. These are the uncontrolled proliferation

of antiquated and stand-alone financial management systems and

the inefficient business processes that they support.

It is important to note that our financial systems were developed

to support the budget appropriations process, but, unfortunately,

they do not generate the type of financial information necessary for

the Department’s decisionmakers and they do not incorporate

standard accounting principles as required by law. We intend to fix

this.

The proliferation of systems can be seen in the inventory diagram here. There’s a board over there, and it’s on the screen, Mr.

Chairman, that represents over 673 financial and what they call

‘‘feeder systems’’—in other words, systems that produce data that

is relevant or necessary for financial reporting.

The slide or the chart, aside from it, is the chart that GAO used

last year when I came to see you. They thought that spider chart—

I call that the spider chart—was a problem. The work we have

been doing has identified and validated that mess. There are 1,500

different what they call ‘‘interfaces.’’ So, I think very explicitly and

23

graphically that shows you the extent of the Department’s problem.

I was informed by my team this morning that we have discovered

another 200 systems.

So many of the things that we are dealing with, all the problems

in reporting—the inability to get financial statements on time—

stem from that mess, and it is going to be a very difficult task to

try to clean-it-up, but we are going to get to that.

We are modernizing our business processes so that we can

produce financial information. We are eliminating as many systems

as possible and integrating standards and standardizing those that

remain. We are creating an enterprise architecture that will serve

as a plan of action linking systems and business processes in a

comprehensive and integrated fashion.

These processes are now isolated from each other across functional areas. The functional areas, as I mentioned earlier, these include healthcare, inventory, and other areas.

Our enterprise architecture will also outline Department-wide financial management standards and prescribe stringent internal

controls.

We expect to complete this architecture by March 2003, and we

will be looking toward six pilot sites and prototyping the system by

2004.

Just as a note here, we will be briefing the Deputy Secretary tomorrow and the service Secretaries on the status of our plan, so

the Secretary gets routine briefs on where we are. Essentially,

what I am describing for you, Mr. Chairman, is the approach that

Greg has just discussed with you on an enterprise architecture—

that is, creating a blueprint that will guide our financial investments in the future and will hopefully get us to a point where

we’re not spending so much money on inefficient processes.

In addition to developing a robust financial infrastructure, we

are addressing many of the Department’s most intractable financial

problems, including those that prevent the Department from receiving a clean audit opinion. For example, we are working to

change the way the Department accounts for ships, tanks, aircraft,

and other military equipment, and we want to give our managers

and the public a clear view of the full cost associated with these

items.

We are developing more accurate methods to estimate our environmental liabilities so that we know what it costs to clean them

up.

We are improving our ability to estimate retiree healthcare costs.

Our enhanced healthcare program will help us to budget for future

healthcare costs more accurately. Our goal is to improve the quality of healthcare for our retirees.

We are also balancing our checkbook with the U.S. Treasury, so

knowing exactly how much money we have in our Treasury accounts helps to ensure that we spend only the funds appropriated

to us by Congress.

And, fifth, we have made considerable progress in documenting

adjustments to our books, thus improving audit trails.

Another area, Secretary Rumsfeld has stated—known to state

that if we cannot measure it, we cannot manage it. We have begun

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to use performance measures to target areas for improvement, and

our data shows that we are making progress.

For instance, we are doing a better job of paying our bills on

time. From April 2001, to October 2001, we reduced the backlog of

commercial payments by 41 percent. This improves our business

relationships and reduces wasteful interest payments. For example,

when I came in I realized—I started to ask for performance data,

and they suggested that we were spending $40 million a year on

interest payments. That’s something that is just untenable, so

we’re using performance measures to understand. We brought that

down, I think, by at least $12 million over the past year.

We are also trying to do a better job of accurately recording payments so that we know the status of our funds. We decreased our

payment recording errors by 44 percent between January, 2001,

and October 2001. We have also reduced our travel card payment

delinquencies by 34 percent between January, 2001, and December,

2001, for cards held by individuals, and during the same period of

time we reduced delinquencies related to cards held by DOD organizations by 86 percent.

We are trying to demonstrate to the Congress and to others that

we want to measure our progress and understand where we are,

particularly in the travel card area. This is very critical, and Dr.

Zakheim—I get monthly briefings on where we are, and we’re trying to drive the numbers to an acceptable level.

We are also aggressively collecting money that contractors owe us, overpayments. We have identified over $53 million worth of

overpayments, and we have collected as much as $31 million so far,

and we continue to seek to get the rest of the returns on that, on

those overpayments.

Concurrent with our review of policies and procedures we are

making enforcement of internal controls a top priority, and we are

looking very closely at our overall internal controls program, with

a specific focus on credit cards.

Mr. Chairman, since I was here last week and we discussed this

a little bit, the Secretary has put together a task force. That task

force has met on a routine basis, and Tom is part of that task force.

He may have the actual hours committed to that. But we are looking exactly at what has been done, what has not been done, what

administrative remedies we have, what we must do for proper control. Don Zakheim has personally spoken to the acting IG, and

we’re going to invite Justice on the task force, so we hope to have

some solid answers for this. I guarantee you the Secretary is personally involved in this.

You asked me last week whether or not the service Secretaries

have been discussed—this has been discussed with the service Secretaries. I guarantee you it has. So hopefully we will make some

progress in those areas.

I covered—Monday the Secretary had asked Dr. Zakheim to meet

with the senior leadership and he did so, and I just mentioned the

task force that we are involved with.

So, Mr. Chairman, we are also, just as a final note—and I don’t

want to give it short shrift, but we’re also—we had a human capital work group. The financial work force is critical. I think Greg

has talked about this many times, David Walker has talked about

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it. We’re serious about improving the financial management work

force and the credentials of that work force, and we may be seeking

legislation on some particular matters associated with that.

Thank you, Mr. Chairman. I appreciate the opportunity to testify.

[The prepared statement of Ms. Jonas follows:]

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Mr. HORN. Well, that’s a good report, and we’re glad to hear

about what is happening. I look forward to the conclusions and

summaries of the task forces that cut across the services, because

if we don’t do it down there it will never get done at the top, and

it should be standard at the top. I think you are there to do it and

we will work with you.

Now, Mr. Bloom and Mr. Ritchie, I assume are here for questions, or do they have something?

Mr. BLOOM. Yes, for questions.

Mr. HORN. OK. So our last presenter is Robert J. Lieberman,

Deputy Inspector General, Department of Defense.

STATEMENT OF ROBERT J. LIEBERMAN, DEPUTY INSPECTOR

GENERAL, DEPARTMENT OF DEFENSE

Mr. LIEBERMAN. Thank you, Mr. Chairman.

My written statement addresses the results of our audits of the

Department of Defense year-end financial statements for fiscal year

2001. It also summarizes the most significant of our many audit reports on financial management issues over the past year. Two of

those reports, in March 2001, and January 2002, discuss the crucial efforts to modernize the vast array of information systems that

generate financial data and to achieve compliance with new accounting standards. For several years we have reported and testified that these system development and modernization projects are

high-risk because of historically fragmented management and the

poor DOD track record for information technology system acquisition and control.

Since 1999, we have been advocating the application of the successful Year 2000 conversion management techniques to the task

of revamping these systems. We’ve also stressed that the primary

focus needs to be on generating useful financial information, not

just clean audit opinions.

I am pleased to report today that the Department’s new approach is very much along the lines that we have been suggesting.

Therefore, we are very supportive of this effort, beginning with the

major and difficult initiative to develop a comprehensive financial

system architecture.

I would be remiss, though, not to warn that there are undeniable

risks. Specifically, development of the architecture could take

longer than anticipated, the end product might leave numerous

issues that are hard to resolve, the cost to implement the architecture might be prohibitively expensive, or the DOD might lack the

discipline over time to make system program managers conform to

the architecture.

Nevertheless, the Department has taken a major step forward by

accepting the premise that the financial management improvement

effort needs to be treated as a program in its own right, with all

the management controls that a very large Government program

should have. Those include a master plan, well-defined management accountability, full visibility in the budget, regular performance reporting, and robust audit coverage. We believe that the

DOD is making a good faith effort to create a strong management

structure for this effort.

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We look forward to assisting with timely and useful audit advice,

just as we did during the Year 2000 conversion.

Likewise, we welcome the emphasis in the President’s management initiatives on controlling erroneous payments. As the Department of Defense pursues the goal of greatly improved financial reporting, we must also keep focused on the need for better controls

in many facets of its day-to-day finance operations and closely related purchasing activities such as the use of Government credit

cards.

As mentioned in my written statements, there have been 382 audits of the purchase card program and 31 audits of the travel card

program. More reports on them, as well as the aviation card program, are in the pipeline. In fact, we plan to issue a major IG report with numerous recommendations for improvement to the purchase card program later this month.

Moreover, numerous criminal investigations involving credit card

misuse are in progress, as well as proactive investigative research

efforts intended to identify abuses of credit card privileges. The Defense Criminal Investigative Service, which is part of the Office of

the Inspector General, currently has 17 open cases involving misuse of Government credit cards. Cooperation from senior DOD

managers on this subject has been exemplary, and we welcome the

latest initiatives.

Everyone agrees that much more need to be done to improve

local level management controls. I will close by noting that, despite

unacceptably weak controls at some DOD activities, particularly in

the Navy, it is wrong to assume that there is little peril for individuals who abuse their Government credit card privileges. Recent

criminal convictions illustrate that abusers of Government credit

cards actually take considerable risk. To underscore that point, my

written statement includes a list of examples of recently closed

cases on felony frauds involving the misuse of DOD credit cards.

Again, thank you for soliciting our views in this matter. That

concludes my summary.

[The prepared statement of Mr. Lieberman follows:]

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Mr. HORN. Well, thank you very much. I appreciate the onepager of examples of Defense Criminal Investigative Service cases

on credit card fraud. How many of those had some sort of sanction?

Were any of them let off by either the U.S. Attorney or the particular judge, or what?

Mr. LIEBERMAN. On that particular list, every single example is

a conviction and a sentence. Some of the sentences are not particularly heavy, but that is the way the criminal justice system works,

and, of course, the Department of Defense has nothing to say about

the sentencing.

Mr. HORN. I see some of the others actually had imprisonment.

Mr. LIEBERMAN. Yes, sir.

Mr. HORN. Yes.

Mr. LIEBERMAN. And for white collar offenses like that, in all

these cases first-time white collar offenders, some of those are considered heavy sentences in those parts of the country.

Mr. HORN. I now yield to the ranking member, Ms. Schakowsky,

for her statement.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. Here we go again,

and I’m glad that we are. We are here today because once again

the Department of Defense has failed to produce a set of books that

could be audited. Unfortunately, this isn’t news. It actually should

be news. I wish there were more attention to this fact. Even though

the Defense Department is responsible for half the total discretionary spending of the Federal Government, over $300 billion,

they don’t have enough respect for the American public to keep a

clean set of books.

This is Enron accounting ten times worse. I find this particularly

disturbing because the men and women who put their lives on the

line for this country are not the ones responsible for these failures.

It’s the military bureaucrats at the Pentagon and around the country who keep the books.

If they’re failing the American public in this way, I wonder in

what other ways they are failing those men and women who are

putting their lives on the line.

In 1995, the GAO put the Defense Department financial management on the high-risk list. One of the issues raised then by the

GAO was the failure of the Department to protect its assets from

fraud, waste, and abuse. Last week, we saw just how vulnerable

the Department is to fraud in the area of purchase cards, which

has been discussed already. Millions of dollars in personal items,

trips, and even plastic surgery were charged to Government-issued

credit cards. The financial mismanagement continues at the Pentagon.

Seven years ago the GAO reported that the Defense Department

was unable to reliably report on the cost of its operations—7 years

ago. Today that remains a problem. Seven years ago the GAO reported that the Defense Department was not properly reporting billions of dollars of future liabilities associated with environmental

liabilities. Today, that remains a problem. Seven years ago the

GAO reported the Defense Department was unable to protect its

assets from fraud, waste, and abuse, and today that remains a

problem.

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Twelve years ago the GAO reported that the Defense Department’s inventory management was a high-risk for failure, and

today that remains a problem. Twelve years ago the GAO reported

that the weapons system acquisition was a high-risk for failure.

Today that remains a problem.

The list goes on and on, and we’ve heard lots of talk and we have

not seen any progress.

As I pointed out last week, the problems, in my view, is not systems or training or organization, and Mr. Kutz mentioned that

today. The word I am looking for is the culture at the Department

of Defense.

The mission of the Department is critical to our safety and welfare; unfortunately, the bureaucracy has taken the importance of

that mission and turned it into impudence.

These failures to account for the cost of programs to properly

identify environmental costs, protect against fraud, are not just the

dry, arcane stuff of accounting, these are examples of how the Department abuses the public trust, wastes billions of dollars, and in

the process asks for more.

Today we will hear again—we are hearing again how the Department is going to correct these problems, and I have to say that,

frankly, I see no reason to believe those responses at this moment.

Last July we were told that the credit card issue would be addressed; instead, it was business as usual, fraud, waste, and abuse.

And why should we not expect the same today? That’s really the

nature of the questions that I want to be asking. Why should we

have any confidence in this?

I think that these questions ought to be the central part of the debate when we look at the $48 billion increase, the $400 billion

Defense budget that is being asked for. Why should we expect that

these problems won’t be there next year and next year and next

year?

Thank you, Mr. Chairman.

[The prepared statement of Hon. Janice D. Schakowsky follows:]

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51

Mr. HORN. If you’d like to use the 10-minutes now for questions,

I’ll yield 10 minutes to you.

Ms. SCHAKOWSKY. Thank you.

Mr. Lieberman, in a recent report your office criticized the De- partment. I can’t get past this number—$1.2 trillion in Department-level accounting entries which were unsupported because of

documentation problems or improper because the entries were illogical or did not follow generally accepted accounting principles.

How can this happen?

Mr. LIEBERMAN. The number you’re referring to was in our report last year on year-end financial statements for fiscal year 2000.

The direct answer to your question is that, because those systems

outlined on those two different charts they are incapable of generating accurate reports, the Department has to go through a convoluted series of procedures, work-arounds that are both inefficient

and just simply don’t work in terms of leaving an inadequate audit

trail.

Ms. SCHAKOWSKY. This is so obvious, though.

Mr. LIEBERMAN. Yes.

Ms. SCHAKOWSKY. It is so obvious to everyone. Were you waiting

for this subcommittee to act or to raise questions? I mean, anybody

could look at that and say that. So why wasn’t something done earlier, and why has it still not happened, even when repeatedly that

has been pointed out by you and others?

Mr. LIEBERMAN. Yes, ma’am. That was pointed out when the

Chief Financial Officers Act was passed. I remember hearings with

this committee when it was called ‘‘Government Operations,’’ and

we were saying back then the Department will have to completely

revamp its information systems in order to do this, and that is a

monumental effort, requiring a lot of intensive management attention, which, frankly, I don’t think the problem got throughout the

decade of the 1990’s.

Ms. SCHAKOWSKY. And why is that?

Mr. LIEBERMAN. A combination of the Department having other

priorities and the Congress having very on-again/off-again interest

from year to year on how much progress was being made.

Ms. SCHAKOWSKY. Accumulating over time to $1.2 trillion in such

transactions that we just can’t adequately account for or sensibly,

logically account for.

Mr. LIEBERMAN. When we first started doing these year-end financial statement audits, we did not try to quantify the value of

the unsupported transactions. We only actually tried to do that

starting 2 or 3 years ago. So I don’t know what the number was

when DOD first started, but it would have been astronomical, because what that number tells you is the systems are incapable of

doing the kind of job that a corporation’s systems can do when they

put together an auditable financial statement.

Ms. SCHAKOWSKY. But it is not as if these systems and processes

are beyond our grasp. It is not that we didn’t know there was a

problem. It is not that we didn’t know that the problem was of astronomical proportion. It’s just there was no will to do that.

Mr. LIEBERMAN. I won’t argue with your statement, ma’am, because I have said many of the same things.

Ms. SCHAKOWSKY. Yes.

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Mr. LIEBERMAN. I think, in addition to a lack of will, it has been

a matter of organization. The way the Department is organized, all

those different systems belong to many different organizations

within the Department. There is nobody at the Assistant Secretary

level who owns all of them. And getting the different parties involved to focus on the particular challenge of improving financial

management reporting has proven to be very, very difficult because

those other managers had their own priorities and there wasn’t

strong enough central leadership.

The problem here is no tougher than the Year 2000 problem that

I alluded to earlier. I know Chairman Horn probably remembers

well that he had hearings when we all sat here and said, ‘‘Gee, the

Department just discovered another few hundred systems.’’ We

were still doing that well into the fall of 1999. But there was very

strong and sustained central management interest, and everybody

in the Department ended up marching in the same direction. It

took 2 years of many a critical audit report and many a nasty

meeting, but then Deputy Secretary Hamry kept pounding on people to get over the finish line and they did, and it was a successful

conclusion to an enormous management challenge.

This one hasn’t had quite the sex appeal that one did. What is

going on and how much is being spent has always been somewhat

of an unknown. There was never one place you could go to to say,

‘‘How much are we spending on this this year?’’ The numbers simply didn’t exist, incredibly, when you think about it, because we’re

talking a multi-billion-dollar government program. But there was

not a program structure with someone in charge, a clear roadmap,

as Ms. Jonas is talking about. You’ve got to have a roadmap of

where you want to go and then set milestones and expect people

to report where they are against those milestones. Over the years

we never had any of that. We always had just a vague notion that

we were moving forward.

And a lot of money was spent during the 1990’s. It’s not that

there hasn’t been a lot of activity. Unfortunately, it has not been

efficiently focused.

Ms. SCHAKOWSKY. I think there is actually a lot of—you put it

‘‘sex appeal’’ to this issue. If the American people really—if this

message really got out, even just the credit card aspect, which I

think is a small part of it, I think that there would be a lot of interest. People would be very upset if we were successful in really—

I think the Department has been lucky, actually, that this is not

widely known among the American people, who would feel very betrayed, I think, if that got out.

Let me ask you this. Our colleague, Representative Kucinich, has

proposed the following language be added to our budget views: ‘‘Except for funds to be used directly for homeland security, the subcommittee opposes any increase in the Department of Defense

budget unless the Department passes a test of an independent

audit.’’

I’d like to get your reaction to this proposal, and overall why—

and, Ms. Jonas, feel free to answer this—why we shouldn’t take

some sort of direct action instead of just these hopeful kind of hearings.

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Ms. JONAS. Well, and I appreciate that because the spirit of the

Congressman’s legislation I personally would agree with. The problems I was describing earlier and the practicality—when I first got

into this job, I asked some very fundamental questions. We have

known that systems, in general, have been a problem, but it has

never been clearly defined to the point where you could start to resolve the problem, so one of the basic questions I asked was:

What’s the extent of the problem? Nobody could tell me. I asked

how much we were spending on these systems. Nobody could tell

me.

So for several months we have had a good task force of people,

which is now part of the structure of the Comptroller’s Office, investigating, looking at this very carefully. This diagram is not just

a posterboard. That represents a huge amount of data. It tells us

every little linkage that we have, and we needed to have that in

order to fix it.

We must get to a point where the systems will routinely provide

the type of information that the Congress deserves. It absolutely

deserves it. I think everybody at this table would agree with the

sentiments expressed here, your sentiments that it is inexcusable.

So we must get to that.

I think we have—I don’t have it with me, but we do have our

schedule and our program plan laid out. I’d like to submit that for

the record, if that’s all right, so that you can see what progress we

expect to make and, you know, how we are measuring yourselves,

if that’s all right.

Mr. HORN. Without objection, that will be in the record.

[The information referred to follows:]

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55

Mr. HORN. The clerk should get copies here.

Ms. SCHAKOWSKY. OK. The Secretary is adamant and we are

very hopeful with his leadership we can get this raised to the level.

I’ve known John Hamry for years, and John tried very mightily

and did a great job on the 2002—the 2000 problem. We need that

kind of sustained leadership. That is why we’ve set up an executive

committee to deal with this and a steering group at my level to

work through these issues. It is the only way to get the problem

solved.

So we have got a lot of work to do. It is huge. But your basic

question, we should be able to comply with that law and we intend

to try to get there as soon as we possibly can.

Mr. HORN. Let me pursue some of these issues. When the National Security Act brought in not only the CIA but the National

Security Council and certainly the Department of Defense under

the Truman administration, implemented in part by the Eisenhower administration, and Secretary Forrestal as we all know, had

difficulties, and he probably just didn’t know what he was in for.

He had been a very able Secretary of the Navy, but once you got

into the complexity and the services are fighting with each other,

and his successor, as I remember Louis Johnson, decided that,

‘‘Well, I’ll just give them each one-third of the budget.’’ That’s what

it was, and so it was submitted to Congress in that way.

Now, when we got into the systems bit, the computer systems

versus the accounting system, obviously computers used for the accounting system, but the first Secretary should have said, ‘‘Folks,

we’re going to have one accounting system and we’re going to have

it for the services and we’re going to have it for the overall Department of Defense.’’ Nobody did that.

I’m curious, Mr. Lieberman—you could probably write a great

memoir on this, and that is, when Mel Laird was Secretary of Defense and David Packard of Hewlitt Packard, he was a brilliant

student at Stanford in the early 1930’s, and he came back here and

he was one tough hombre in terms of being Deputy Secretary. Now,

he also wanted to turn that place around, and I’m just curious,

were you there when he was there?

Mr. LIEBERMAN. Yes, I was. I was afraid for a minute you were

going to ask me if I was there when Forrestal was there. I don’t

go back quite that far.

Mr. HORN. And I wasn’t going to ask you about General Grant,

either. [Laughter.]

General Grant was for a Department of Education. We’ve now

got one. It took about a century, but things are going good.

So tell me about—did David Packard, who was an industrialist

and knows what it is to have a very tough-minded central group

and getting the things done, so I’d be curious what he did or didn’t

do.

Mr. LIEBERMAN. As I recall, his primary focus was on weapons

system acquisition.

Mr. HORN. Yes.

Mr. LIEBERMAN. Trying to make sure that the different systems

being bought by the different services didn’t duplicate each other,

and hammering out a lot of very difficult budget issues. In his day,

the Defense Department budget was not growing and there was

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great difficulty in modernizing the forces. So I don’t remember him

being an active player in financial management, frankly. The first

time I remember a concerted effort to try to get a handle on this

financial management system problem was really in the ill-fated

corporate information management initiative, which was launched

under Secretary Cheney’s deputy, Don Atwood, and it just did not

have the support within the Department at the time and sort of

petered out by the mid 1990’s.

Mr. HORN. Well, I got into the Y2K bit, and Mr. Hamre, as you

suggest, really threw his heart into it and tried to get things done.

And, as I remember, it started with 149 accounting systems, and

when I said that, the next hearing a couple of hundred more, just

as you found, were there, and they kept coming out. Nobody could

ever get their handle on that. Of course, as Secretary Forrestal

said, as I noted, they should have had one and his successor should

have stuck with one unless there was something wrong with it and

make sure that it is integrated and related with all the services.

So that’s one of your problems that you face, Madam Secretary,

and we’ve got to get the type of things that executives need before

them if they are going to know what the options are.

What else is needed over there? Heaven knows we give them a

lot of money.

Ms. JONAS. Well, I really think the sustained support of the Congress. We recognize, you know, this is a culture problem, and to the

extent that we can have the support of the Congress—OMB has

been very good. You know, they have a watchful eye over us, as

does the GAO and the IG, but we need to demonstrate to the culture that this is unacceptable, and changing culture is a very difficult job. I mean, we cannot, you know—a system—this isn’t all

just a system issue. Systems are a really good part of that, but we

also have to do—Tom Bloom has been here. He is changing his culture, DFAS, quite a bit, retraining people, making sure that people

understand that certain mistakes are unacceptable. He did a great

job on cleaning-up the canceled accounts issue. At one time there

were 162 of those accounts that were illegal. He worked on that

problem and has completely cleaned-it-up, and I’ll let him give you

the stats on it. But it is the sustained attention of management

and letting the people know that it’s not acceptable.

Mr. HORN. Mr. Bloom, want to comment on that?

Mr. BLOOM. It’s clearly a cultural issue, as Ms. Jonas mentioned.

It is also a human capital issue. We’re working those issues hard.

We need to get the right folks with the right training in the jobs

as we’re changing the culture, as well as getting a handle on the

systems, and we need to take these issues as seriously as we have.

Ms. Jonas mentioned the canceled account issue that we talked

about last July—which, by the way, was one of the worst days of

my career to have to come up here and look you all in the face and

say, ‘‘Look, we screwed up. We need to fix this.’’ But we took that

and we changed the systems. We got the training for the people.

We’ve worked very hard on the culture.

I can’t tell you that we’ll never have another one. I’d like to think

that we’ll never have another one. But we have worked so hard to

change the culture and the systems and the human capital. That’s

the kind of effort overall that needs to be done.

57

Mr. HORN. I’d be curious about the Office of Personnel Management and how helpful they are to a department, and what’s the

kind of flexibility that you have to get that capital, human capital?

Are you able to do it within the Department of Defense, or do you

have to beg at the OPM?

I was in the Eisenhower administration, and our person in administration who should have been working for the Department

never worked for him. He simply said, ‘‘Gee, I’ve got to do something with the U.S. Civil Service Commission.’’ That was just bunk,

frankly, but they were so regulatory that they weren’t—they didn’t

have any vision of human capital. And we puttered along with that

until OPM was created, and I think the ballots are still out on

OPM, and they ought to be where they can.

Looking at the various issues that you have faced and to get

them down at your level as an agency and not an all-executive

branch, then they ought to be letting everyone. I did that in a rather complicated system in California, and the personnel people just

went after us. You couldn’t believe it. And it’s because they don’t

have a broad vision. But, by George, the trustees did. And it took

me 5 years to do it, but the fact is we had a flexible scale so that

we could get the people that we needed and we could go between

10,000 and 110,000 and have contracts every 6 months to see what

are you going to accomplish.

Mr. KUTZ. Mr. Chairman, it’s interesting right now. The environment we’re in with human capital in the financial area is actually

quite good. We’ve seen that, you know, with the dotcom bomb and

the people that are available out there looking for a stable job,

challenging work, the kind of work that we do at GAO, for example, is quite appealing to people. We’ve had pretty good success the

last year in the financial management area. In the past it was very

difficult to compete with the Pricewaterhouses and the other firms

out there, but now even they don’t look so attractive with what’s

happening with Arthur Andersen. So we’ve found that the environment right now is quite good, actually, to hire good financial management people from either the dotcom companies or right off of

campuses, so this is a unique opportunity to fill the ranks with

some good young people for succession planning and for, you know,

places like GAO and DOD for the future leaders of the financial organizations.

Mr. HORN. I think when you’re out in the States, and all 50 of

them, that if you have a chance you ought to be talking to students

that are in business school, public administration school, and

undergrads as well as grad students and all that if we are going

to recruit people, because it is a terrific opportunity.

Mr. BLOOM. Mr. Chairman, over this last year we’ve really seized

on that opportunity with the economy, and every one of my executives now, as part of their performance plan, is to visit a college

and university, get to know the professors, get to know the kids,

get to know the graduate students and recruit. We look at this as

a unique opportunity.

In the Department of Defense, particularly in financial management, we had a 10-year hiatus essentially on hiring. It is tough to

find a 29-year-old in financial management in the Department of

58

Defense. We just hadn’t been hiring them. And we have a unique

opportunity now, and at DFAS we are really grasping.

Mr. HORN. Well, I’m delighted to hear that.

Mr. LIEBERMAN. Mr. Chairman, could I add something on that?

Mr. HORN. Yes. Let me just get one point here on this. With all

that fine work, it might help if you sent Members of Congress that

want to be on campuses, want to say good things about the Department of Defense, and so forth, I’d love to have a kit which I can

have some decent figures and know what’s happening now. The

services have always been very good about educating their people,

and master’s and Ph.D’s and all the rest of them.

Go ahead on that, Mr. Lieberman.

Mr. LIEBERMAN. I can’t tell you how much we appreciate your interest in this question. The entire Civil Service faces a crisis right

now because it is an aging work force. In the Office of the IG, we

are in the process of hiring a lot of young people, and I’m pleased

to be able to tell you we’ve had excellent luck over the last few

years. I have some of our junior auditors sitting here in the back

row——

Mr. HORN. They’re smiling.

Mr. LIEBERMAN [continuing]. Thinking they were going to sit in

the shadows.

Mr. HORN. They’re smiling and saying, ‘‘We need a raise,’’ right?

Mr. LIEBERMAN. They are smiling. And they’re excellent, and

we’re very pleased that we’ve had good luck recruiting. Even

though we are not competitive salary-wise head-up with private industry in a lot of cases, we can offer intrinsically interesting work

and good working conditions, and I think anything that can be

done to spread that word by public officials would really be for the

best.

Mr. HORN. See, that’s the kind of thing, when Members of Congress, Senate and House, have a weekly column in many places,

and that’s one way to get it out to all the little towns in America,

as well as the big towns in America.

Well, let me pursue a few questions right now. Let me ask, Mr.

Kutz, the Department of Defense received approximately $100 million in fiscal year 2002 and has requested $96 million for fiscal

year 2003 to transform its financial management operations. Over

the years, the Department has undertaken various efforts to

streamline operations within the Department. The success rate,

however, has been less than admirable.

In your opinion, what does the Department of Defense need to

do to ensure that the current effort does not continue wasting significant resources on marginal improvements, at best? Have you

separated out, as a critic, the degree to which certain things should

be done and certain things are being done?

Mr. KUTZ. I guess I would go back to the several items that were

mentioned earlier, the sustained leadership issue and the cultural

transformations needed to get this done.

The systems that you see up there I think are a symptom of the

lack of sustained leadership and of a culture that allows or encourages even everybody to kind of do their own thing, to build their

own system, even if someone else has a system that could do the

59

same thing. That’s how you get something like the computer chip

and the spider chart over there as to developing systems.

So I really believe that the leadership and the culture—we laid

out in our written statement the seven key elements to reform, but

it seems to me that the culture is going to be the most difficult one

for the leadership here to really address and to get people to

change the way they’re doing things.

I mean, if you look over time, people probably are hoping they

can wait this group out and maybe this phase will pass and they

can wait until the next group comes in, and that’s the reality of

what not only DOD faces but other agencies face that have difficulty having sustained leadership over time.

Mr. HORN. With Mr. Kutz, I’m going to have the ranking person

here, Ms. Schakowsky, for 10 minutes on going through and seeing

some of these things just like I have.

Ms. SCHAKOWSKY. Mr. Kutz, at every hearing we’re told that the

solutions to these problems lie, when they get solved, 5 to 10 years

down the road, but as we’ve seen from the purchase card fiasco,

what happens is the deck chairs get rearranged so fast that it is

hard to hold anybody really accountable 6 months later, so I’m

wondering how we address that, and if you believe, you really believe, that it is possible to solve these problems, and if you want

to make any predictions about that, given the current promises, the

current personnel, etc.

Mr. KUTZ. Right. I mean, we’re not in a position to predict at this

point. I think we would need to see several years of looking over

the long-term, this being, if you did it the right way, a five, ten,

possibly longer year type of solution until there are specific markers set out there that we can see being achieved year by year.

If you have another hearing next year and you see that they

have met their goal of having the enterprise architecture done, developed, and in place and are moving on to step two, then I think

you can start to say, ‘‘OK, we’re seeing some progress here.’’ But

until you really see the long-term plan and have markers every

year that they need to meet and they can come up and testify before this subcommittee and others saying either we did or didn’t

meet these markers, that’s how you can start projecting.

If you get 2 to 3 years into a seven-to 10-year planning, you see

that you are making progress, then you can start to have some confidence that maybe this is going to take 7 years.

Ms. SCHAKOWSKY. And what happens if the marker isn’t met,

you know, because that’s what happens all the time.

Mr. KUTZ. Exactly. I mean, right now there are no consequences,

necessarily, and that’s why I think Secretary Rumsfeld has said

that there are going to be personal consequences for people who are

responsible, someone that you can point to and say, ‘‘You are the

person who is actually responsible.’’ I think Ms. Jonas will probably

elaborate on that, but that is I think what is the new culture

they’re trying to establish there, that someone actually is held accountable if they don’t meet that marker.

Ms. SCHAKOWSKY. And so that person gets fired and then there’s

a new person and then we have a hearing, and that person says,

‘‘Well, I just got here and I have all these new ideas and now here

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is what we’re going to do.’’ That’s what I’m talking about. We rearrange the deck chairs and we never get to the end of it.

Ms. Jonas, did you want to comment?

Ms. JONAS. I can really appreciate your comments, but I will tell

you, from my own standpoint, Secretary Rumsfeld really is the

kind of Secretary who drags people in and says, ‘‘What have you

done for me lately? What has this system done for me lately? Have

you met your markers?’’ That type of leadership, you know, is filtering down. It’s gradual.

If he decided to leave tomorrow, would the culture continue? I

don’t know. But we need to continue to show that we are accountable, that we intend on meeting deadlines, even simple things like

meeting deadlines from memos.

You know, the Department is used to just delaying everything

because there is no cost in their mind to delaying everything.

There’s a huge cost to delaying things. You know, you said in your

discussion during my testimony that 10 years have gone by, what’s

happened since the enactment of the law. Well, nobody sees that

there is a problem that we’ve delayed.

Some of the systems there represented we discovered were cost- ing us $3 to $4 billion. Nobody had made them visible. You know,

there’s so much that needs to be done to bring this into the light,

let everybody see what is being spent, and make people accountable, meet deadlines, meet milestones.

One of the reasons we went with a program management technique, which is something that is used in the acquisition side of the

house, is because there is routine and regular senior-level review

at milestones. Those systems were never developed with the acquisition discipline in mind, so nobody has ever seen that they’re

being really developed. It is an undisciplined process.

Ms. SCHAKOWSKY. Yes, it is an undisciplined process, that’s for

sure, but it is not as if we didn’t know, in many instances, that a

billion here, a billion there was being—it was either unaccounted

for or slipping through the cracks. So it’s not just shedding light.

A lot of light has been shed over the years.

Let me ask Mr. Lieberman a question. Maybe you’ve said this in

other ways. If you agree with the Department’s new financial management plans, and then if your office has been given appropriate

responsibilities in these plans, and, if not, if you think that your

office should have additional responsibilities.

Mr. LIEBERMAN. Yes, I do very much support the plan. We had

been calling for the exact same things that are in the plan now for

some time, and there had been movement in those directions, but

nothing put into place as concrete as what is going on now, so we

are very pleased with that.

Part of the scheme here, once the architecture is put together

and systems managers know exactly what it is they’re supposed to

do, is that then we can begin auditing each one of these system development efforts to provide independent verification that they actually are making progress and doing what they are supposed to

be doing, rather than going off on a tangent and creating kind of

mushy result that has occurred in prior years.

So we expect that to be a heavy audit requirement for us. It is

challenging in terms of resources and priorities because people

61

want us to do a lot of other things, too, but we’re going to step up

to that as best we can and put very high priority on it.

The Department also, I think, is very receptive to audit support

in other areas like credit cards. We’re going to be issuing a report

next week on the purchase card program that has lots of recommendations for changes in procedures in the program, and I expect either total concurrence with that or something close to it.

Ms. SCHAKOWSKY. I wanted to ask you, I think there is another

side to the whole purchase card issue than that has been suggested, and that is the whole issue of vendor fraud, where there

is—anybody want to comment on that?

Mr. KUTZ. I certainly can. That is an issue that we see. If you

have an environment—again, a weak control environment where

people are not reviewing the monthly credit card bill, you are vulnerable to vendors peppering your account with inappropriate

charges, and we have several investigations that we are going to

followup on out in San Diego, based on the work we did for the

hearing last week, that we’re going to look into that issue. But yes,

the Department is vulnerable to vendors hitting their accounts for

inappropriate charges or work that wasn’t done, and if nobody is

looking at the bill the Government is going to pay the bill and not

receive the services.

Ms. SCHAKOWSKY. I just can’t emphasize enough how absolutely

unacceptable this would be to ordinary Americans who—you know,

Ms. Jonas, you talk about balancing a checkbook as if that would

be such a fabulous achievement for the Department, which it would

be, but families in this country do it every single month, and it is

unthinkable that they would proceed year to year to year without

doing that, and I think there is this basic assumption that we are

doing that here.

So these really modest goals I think, common-sense goals that

are regularly being violated is just—I’m speechless. Thank you.

Mr. HORN. I’ve never seen a Member of Congress speechless.

[Laughter.]

But on a Wednesday afternoon—don’t forget, we’re not going to

be around tomorrow.

Anyhow, let’s get back a little bit to Secretary Jonas. Is there

anything else you have to say to what Mr. Kutz has said in terms

of getting a comprehensive, integrated strategy for reengineering

all of the Department’s business processes? What actions have you

taken or do you plan to take to ensure a comprehensive, integrated

approach to reform? And obviously that’s part of the culture and

the toughest job is the culture, and the only way you change that

is you stay around there and you don’t run down the halls and say,

‘‘How did I ever get into this? I’m going back to Congress.’’

If you’re in there and they know you’re in there for 5 years, it

will change.

Ms. JONAS. I appreciate your comments, Mr. Chairman. I will tell

you I have been working about 14-hour days at least 6 days a week

on this job, so——

Mr. HORN. We’re used to it up here.

Ms. JONAS [continuing]. I do wonder sometimes what did I get

myself into.

Mr. HORN. We’re used to it up here.

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Ms. JONAS. Just one comment to the point on vendor issues. We

are developing, as I mentioned in my testimony, and have available

to us some very detailed performance metrics that we’re using, and

I alluded to the overpayments, which is a sore issue, and using

DCAA and Defense Audit Agency and DFAS together, working very

aggressively to look at some of these contracts to identify overpayments—in other words, what are we owed, and let’s get it back, at

a minimum, so that we’re not asking Congress for additional appropriations if we don’t need it. So let’s get the money back from the

contractors that is owed us. Let’s be out there, be aggressive.

I will be showing the SEC, which is the Senior Executive Committee that the Secretary has, our metrics, so they’ll see. Their sustained leadership there will help.

I agree with much of what has been said here. I agree, Ms.

Schakowsky, with your statement it is incredible. What I have

found out since I have been over there has been truly incredible.

We just have to stick with it. It is a hard job. It’s going to get harder. We just must stay with it so that we can demonstrate good

stewardship.

The one good thing about working for Secretary Rumsfeld is we

know that we have his support.

Mr. HORN. The Secretary of Defense has stated it will take 8

years or more to complete the planned financial management reform at the Department. Do you agree with that time table?

Ms. JONAS. It will take quite a while. What we do anticipate is

by 2004 being able to prototype this system, and we would probably pick—I don’t want to be too forward-leaning—when we finish

our architecture, that will tell us very specifically what we should

do and how we should proceed. As Greg alluded to, it is the equivalent of a blueprint for building a house. But I would say within various functional areas, perhaps healthcare—I mean, healthcare is

costing us $20 billion in the Department. That is a key area. It is

one that the Secretary is intensely interested in. We could get more

efficient in that area. We may prototype the system in that area.

But we don’t know for sure. It will take several years, however.

Mr. HORN. Yes, because otherwise it will be 2009 and none of

you will be around. There will be a new administration, since there

is a term limit for Presidents at 8 years. A lot of the bureaucrats

say, ‘‘Well, this crowd will go, just like the last crowd,’’ and so

forth, so that’s the cynical that you have to really cut right through

to it.

In your testimony you stated the Department of Defense has created an enterprise architecture that is expected to be complete in

March, 2003, and you’re saying you’d like to at least get it at 2004.

Anything else on that point?

Ms. JONAS. Just to clarify. The blueprint will be accomplished

within a year. We would be prototyping in 2004, so that’s a—

there’s a distinction there.

Mr. HORN. OK. What specifically controls does the Department

have in place to eliminate overpayments to contractors? We passed

a law on that, so what’s happening?

Ms. JONAS. I think, as I alluded to, one of the things that Dr.

Zakheim did—and, Tom, you may want to pipe in here—was to get

the Defense Contract Audit Agency engaged in reviewing some of

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these outstanding contracts and, you know, get aggressive on that

matter, and DFAS is cooperating with them—Tom, you might want

to address this—but really move out aggressively on these overpayments.

Some of our—you know, these systems are very difficult to reconcile. That causes problems in the contract process. Contractors

are anxious to get paid. We don’t want to pay interest. But at the

same time we have to be just as aggressive in getting what is owed

to us as they are about getting the money that is owed to them.

Mr. BLOOM. And there is work being done on the back end, as

Ms. Jonas mentioned, but we are also doing a fair amount of work

on the front end to make sure we don’t make the screw-ups to

begin with, and we’ve—I’ve got a cell of folks dedicated to this.

They’re actually out in California. They work with a system that

we’ve developed called ‘‘Predator,’’ where we can—before we make

payments we take certain edit areas, certain edit functions, and we

have been able to capture an awful lot of potential duplicate payments.

Most of the time we make a duplicate payment it is just because

of a mistake. Either a contractor has billed us twice and we haven’t

caught that, or, you know, maybe we copied an invoice twice, and

Predator has gone a long way. We still have a ways to go, but Predator has gone a long way to eliminate a lot of those duplicate payments.

Mr. HORN. Now, one of the places we used to have—and I

haven’t heard much about now—and I’d just be curious—Columbus, Ohio, the facility there. On the Y2K bit we found that $1 million went off to one, and he said, ‘‘Hey, I didn’t have anything. Oh,

well, must be right,’’ so the person put it in the bank, lived off the

interest, and then sent it back. So I don’t think that’s apocryphal.

But what has happened in that place—and it is clear that they

were using GS–1s, for heaven’s sake, which I thought went out

with the first World War, so they didn’t have the people there that

could make judgments. So what is happening?

Mr. BLOOM. Columbus actually has been a success story in the

last year. We’ve changed leadership totally. I think you had the opportunity last July to meet JoAnn Boutelle, and JoAnn has done

some great things there, along with three or four other new members of the team, and she has changed the attitude, she has

changed the culture. She does not tolerate mistakes. She is hard

but fair, and she is working on getting the people trained.

Again, I go back to the training. Ms. Boutelle is a big proponent

of——

Mr. HORN. Spell it out for us so she gets due credit in this hearing.

Mr. BLOOM. I believe it is B-O-U-T-E-L-L-E. And that’s JoAnn.

Mr. HORN. OK. Well, there ought to be awards for people like

that.

Mr. BLOOM. We try to take as good care of her as we can, sir.

Mr. HORN. OK. So do we have another question or so on Mr.

Lieberman, I think? Go ahead.

Ms. SCHAKOWSKY. Has anybody put a dollar figure to waste,

fraud, and abuse? We talked about a billion on purchase cards. Has

there ever been a total on that amount?

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Mr. LIEBERMAN. No. Well, we can tell you things like how much

money has been recovered from investigations, but if your question

is how much waste, fraud, and abuse is going on, we don’t know.

Ms. SCHAKOWSKY. Well, we estimated on the purchase cards in

terms of—oh, I see what you’re saying, because that is what has

been discovered and recovered.

Mr. LIEBERMAN. Right. And even the excellent GAO work at

those two Navy sites is fine in its own right, but there are many

different parts of the Department, so it remains to be seen just how

widespread the problem is.

Mr. KUTZ. Well, as Mr. Lieberman said, you can quantify what

you know, but with fraud the issue is there’s a lot of fraud that we

don’t know about. Again, it gets back to the control environment

at DOD. The weaker the control environment, the more fraud

that’s likely taking place that nobody ever catches. A lot of the investigative cases that do get prosecuted, as Mr. Lieberman said,

some are caught through the system and some are just caught because someone talks, but there are as many or more that never get

caught, so fraud is always something that’s very, very difficult to

quantify.

Ms. SCHAKOWSKY. So in that context, though, then how does

someone self-confidently propose a $48 billion increase in a budget

where we know about billions of dollars of fraud that has occurred—fraud, waste, and abuse that has occurred? I just think the

Department is on such weak footing to ask for such a large increase. How do you? What do you say? If the American people say,

‘‘Wait a minute. Look at all this. Look at this mess, this spider

web.’’ What’s the answer to that? Anybody?

Ms. JONAS. I think one of the traditional means the Department

has used to understand what its request should be—I’m a former

budgeteer—has been what we spent in the prior years, and I know

that doesn’t tell you what things actually cost, it tells you what

you’ve spent. And the difference between the systems that we’re

proposing to create that give true accountability, give cost accounting, give the Secretary an understanding how efficient we are, they

don’t exist. They’re based on appropriations laws and appropriation

accounting, which basically tells you by quarter how much you’ve

obligated and——

Ms. SCHAKOWSKY. I understand that, but when we’re asking for

an increase that, in and of itself, is larger than the total defense

budget of any other nation on the globe, then it seems to me that,

given the context in which this money is used, that it’s a pretty

hard case to make, I think.

Mr. HORN. Any comments on that?

[No response.]

Mr. HORN. If not, this will be the last couple of questions, although I’d like each of you to tell us something that we were too

dumb to ask you. We always give you an out.

In your testimony, Mr. Lieberman, you stated that the fiscal year

2002 National Defense Authorization Act directs the Inspector General to perform only the minimum audit procedures required by auditing standards for year-end financial statements that management acknowledges that they are unreliable. The act also directs

65

you to redirect resources freed up by that limitation to more useful

audits.

So the question is: What changes have you made to redirect your

audit resources from auditing statement balances to identifying

needed improvements in the Department’s systems and internal

controls?

Mr. LIEBERMAN. We had already cut back a lot of our transaction

testing on related year-end financial statements in anticipation of

that legislation, so we’re not talking about a massive shift in resources here.

In addition to that legislation, the Intelligence Committees gave

us extra financial statement audit work to do vis-a-vis the Defense

Intelligence Agencies, so some of those resources are going sideways into that area.

But what that legislation helps us avoid doing is wasting any

audit resources telling everybody what they already know—that

these statements are unauditable. The thinking was if management admits the statements are unauditable, there’s no point in

the auditors having to prove that’s so. We thoroughly support that

direction, which will help us focus our resources toward looking at

how these systems are doing rather than just fooling around belaboring the obvious in terms of the problems with the existing

statements.

Mr. HORN. You heard about the Secretary of Defense that certain

things will take 8 or more years. Do you agree with that time table,

and does that mean we should not expect to see an opinion on the

Department’s financial statements until 2009, although Secretary

Jonas has said there’s a performance point along the way?

Mr. LIEBERMAN. Well, that entirely depends on how sweeping a

change the new architecture mandates, and then how much money

the Department and the Congress are going to be willing to spend

each year to implement that architecture. So I don’t know whether

we’re talking about a plan that is going to end up being logically

phased over 2 years, 5 years, 8 years. Any of those things are possible, depending on how many resources you throw at the problem.

All I can say is that history tells us that it’s very dangerous to

make an optimistic estimate on this, because systems development

projects inevitably take quite a bit longer than anybody forecasts

upfront.

Mr. HORN. Now, do any of you have anything else you’d like to

get on the record?

Mr. KUTZ. Mr. Chairman, I would say one thing. In the past the

Department had really focused its goals on getting a clean opinion

on the financial statements, and they’ve really kind of gone away

from that as the goal, because that’s a misleading goal. I mean, you

can get a clean opinion and not have good information to manage

on a day-to-day basis. They are really—their goal is more now to

have good financial management information to manage the organization.

As happens in the private sector, the goal is not a clean opinion.

The goal is to have real-time data on a day-to-day basis to make

decisions. That clean opinion falls out from that. It just happens.

It isn’t something that each year Johnson and Johnson and Exxon

and Mobil are saying, ‘‘What kind of opinion are we going to get?’’

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It’s, ‘‘We close the books in a day or two, we get the report to the

shareholders, and we’re done.’’ So I think that they’ve focused more

on the longer-term and actually real change rather than trying to

take this mass computer chip and the spider chart and trying to

gin-up financial statements from it.

DOD is so large that there is no way, I don’t think, to go through

the heroic measures that would be necessary and it would be a

waste of taxpayer money to do so, so, I mean, I would give them

credit that they have got their priorities straight and they’ve really

scaled back on that and they’re trying to make longer-term, lasting

changes.

Mr. HORN. Any other points anybody wants to make?

Ms. JONAS. Just to quantify what Greg has said, Mr. Chairman,

we spent—in 2001 the Department spent about $52 million to prepare and audit our financial statements, and, based on new legislation that we got from the Congress last year and pursuant to what

Bob was talking about, this year we will be able to save $24 million

because we don’t have to go through the machinations. We really

are interested in getting at the root cause of the problem and not

trying to act as if we can come up with a clean audit that would

be respectable. We really want to get at the problem, get the good,

timely information to our decisionmakers so that they can become

efficient and we can—as Greg said, you know, clean statements are

just a product—an important product, but are not years worth of

and millions of dollars worth of work.

Mr. HORN. Well, thank you. All of you have contributed quite a

bit to our further understanding of what is the major Department

within the executive branch.

I now want to thank those that prepared this hearing: J. Russell

George, staff director and chief counsel; Bonnie Heald is deputy

staff director; Rosa Harris to my left and your right is professional

staff on detail from the General Accounting Office; Earl Pierce, professional staff; our faithful clerk, Justin Paulhamus; and the minority, Mr. Dave McMillen, professional staff; Jean Gosa, minority

clerk; and the court reporter, Joan Trumps.

We now thank you all, and we have to go to vote.

[Whereupon, at 2:43 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

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