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S. HRG. 112–297 

FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF DEFENSE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON READINESS AND MANAGEMENT 

SUPPORT 

OF THE

COMMITTEE ON ARMED SERVICES 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 27, 2011 

Printed for the use of the Committee on Armed Services 

( 

Available via the World Wide Web: http://www.fdsys.gov/ 

COMMITTEE ON ARMED SERVICES 

CARL LEVIN, Michigan, Chairman 

JOSEPH I. LIEBERMAN, Connecticut 

JACK REED, Rhode Island 

DANIEL K. AKAKA, Hawaii 

E. BENJAMIN NELSON, Nebraska 

JIM WEBB, Virginia 

CLAIRE MCCASKILL, Missouri 

MARK UDALL, Colorado 

KAY R. HAGAN, North Carolina 

MARK BEGICH, Alaska 

JOE MANCHIN III, West Virginia 

JEANNE SHAHEEN, New Hampshire 

KIRSTEN E. GILLIBRAND, New York 

RICHARD BLUMENTHAL, Connecticut 

JOHN MCCAIN, Arizona 

JAMES M. INHOFE, Oklahoma 

JEFF SESSIONS, Alabama 

SAXBY CHAMBLISS, Georgia 

ROGER F. WICKER, Mississippi 

SCOTT P. BROWN, Massachusetts 

ROB PORTMAN, Ohio 

KELLY AYOTTE, New Hampshire 

SUSAN M. COLLINS, Maine 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

DAVID VITTER, Louisiana 

RICHARD D. DEBOBES, Staff Director 

DAVID M. MORRISS, Minority Staff Director 

SUBCOMMITTEE ON READINESS AND MANAGEMENT SUPPORT

CLAIRE MCCASKILL, Missouri, Chairman 

DANIEL K. AKAKA, Hawaii 

E. BENJAMIN NELSON, Nebraska 

JIM WEBB, Virginia 

MARK UDALL, Colorado 

MARK BEGICH, Alaska 

JOE MANCHIN III, West Virginia 

JEANNE SHAHEEN, New Hampshire 

KELLY AYOTTE, New Hampshire 

JAMES M. INHOFE, Oklahoma 

SAXBY CHAMBLISS, Georgia 

ROB PORTMAN, Ohio 

SUSAN M. COLLINS, Maine 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

(II) 

C O N T E N T S 

CHRONOLOGICAL LIST OF WITNESSES 

FINANCIAL MANAGEMENT AND BUSINESS TRANSFORMATION AT THE DEPARTMENT OF

DEFENSE

JULY 27, 2011

Page 

Hale, Hon. Robert F., Under Secretary of Defense, Comptroller; Accompanied 

by Hon. Elizabeth A. McGrath, Deputy Chief Management Officer, Department of Defense .................................................................................................... 20 

Matiella, Hon. Mary Sally, Assistant Secretary of the Army, Financial Management and Comptroller .................................................................................... 26 

Commons, Hon. Gladys J., Assistant Secretary of the Navy, Financial Management and Comptroller .................................................................................... 30 

Morin, Hon. Jamie M., Assistant Secretary of the Air Force, Financial Management and Comptroller .................................................................................... 32 

Khan, Asif A., Director, Financial Management and Assurance, Government 

Accountability Office ............................................................................................ 36 

Annex: The Analysis of Alternatives for the Global Combat Support SystemArmy ...................................................................................................................... 102 

(III) 

(1) 

FINANCIAL MANAGEMENT AND BUSINESS 

TRANSFORMATION AT THE DEPARTMENT 

OF DEFENSE 

WEDNESDAY, JULY 27, 2011 

U.S. SENATE,

SUBCOMMITTEE ON READINESS AND

MANAGEMENT SUPPORT, 

COMMITTEE ON ARMED SERVICES, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 2:09 p.m., in room 

SR–232A, Russell Senate Office Building, Senator Claire McCaskill 

(chairman of the subcommittee) presiding. 

Committee members present: Senators McCaskill, Begich, 

Manchin, Portman, Ayotte, and Cornyn. 

Committee staff members present: Leah C. Brewer, nominations 

and hearings clerk; and Jennifer L. Stoker, security clerk. 

Majority staff member present: Peter K. Levine, general counsel. 

Minority staff members present: Pablo E. Carrillo, minority investigative counsel; and Lucian L. Niemeyer, professional staff 

member. 

Staff assistants present: Brian F. Sebold and Breon N. Wells. 

Committee members’ assistants present: Tressa Guenov, assistant to Senator McCaskill; Lindsay Kavanaugh, assistant to Senator 

Begich; Joanne McLaughlin, assistant to Senator Manchin; Brent 

Bombach, assistant to Senator Portman; Brad Bowman, assistant 

to Senator Ayotte; and Dave Hanke, assistant to Senator Cornyn. 

OPENING STATEMENT OF SENATOR CLAIRE MCCASKILL, 

CHAIRMAN 

Senator MCCASKILL. Thank you, everyone, for joining us today 

for this hearing. 

The Readiness and Management Support Subcommittee meets 

today to address the issues of financial management and business 

transformation at the Department of Defense (DOD). We are 

pleased to be joined by the Honorable Robert Hale, DOD Comptroller; the Honorable Elizabeth A. McGrath, the DOD Deputy 

Chief Management Officer (CMO); the Comptrollers of the three 

Military Departments; and Mr. Asif A. Khan, Director of Financial 

Management and Assurance at the Government Accountability Office (GAO). 

Welcome to all of you, and thank you for your participation in 

this very important hearing. 

2 

GAO first designated DOD financial management as high risk in 

1995, as a result of pervasive financial and related business management systems and control deficiencies. These deficiencies, GAO 

reported, have adversely affected DOD’s ability to control costs, ensure basic accountability, anticipate future costs and claims on the 

budget, measure performance, maintain funds control, prevent and 

detect fraud, waste, and abuse, address pressing management 

issues, and in some ways maybe the most important of all, the ability to prepare auditable financial statements. 

Over the last decade, this committee has initiated a series of legislative provisions designed to address these problems as recommended by GAO. Unfortunately, we continue to hear reports 

that soldiers in the field have received the wrong paychecks, that 

DOD cannot account for expenditures of billions of dollars in Iraq 

and Afghanistan, and that DOD cannot reliably determine the 

number of contractors it employs. 

Before leaving office earlier this month, Secretary Gates likened 

his efforts to find efficiencies and reduce waste in DOD to something akin to an Easter egg hunt. He stated, ‘‘My staff and I 

learned that it was nearly impossible to get accurate information 

and answers to questions such as ‘How much money do you spend?’ 

and ‘How many people do you have?’ ’’ 

The underlying problem is that DOD financial management systems are riddled with decades-old problems that are difficult to reverse. As GAO recently explained, the DOD systems environment 

that supports its business functions is overly complex and error 

prone and is characterized by: one, little standardization across 

DOD; two, multiple systems performing the same tasks; three, the 

same data stored in multiple systems; and four, the need for data 

to be entered manually into multiple systems. 

According to DOD’s systems inventory, this environment—now 

this is hard to believe—is composed of 2,258 business systems and 

includes 335 financial management, 709 human resource management, 645 logistics, 243 real property installation, and 281 weapon 

acquisition management systems. 

DOD is endeavoring to address these problems by fielding a series of enterprise resource planning (ERP) programs. I hate acronyms, but it is very hard to function on the Senate Armed Services 

Committee without getting close and personal with acronyms. 

So for everyone, and the public particularly, you should know 

that ERP is basically shorthand for ‘‘We are trying to get our arms 

around it.’’ Which are intended to provide timely, reliable, accurate, 

and useful information for management decisions. 

Unfortunately, these programs have not lived up to expectations. 

The Financial Improvement and Audit Readiness (FIAR) plan itself 

indicates that all three Military Departments have already missed 

deadlines on the implementation of their ERP systems. Last year, 

GAO reported that six of DOD’s nine largest ERP programs had experienced schedule delays ranging from 2 to 12 years and incurred 

cost increases ranging from $530 million to $2.4 billion, in significant part because of DOD’s failure to follow good management 

practices. 

Similarly, the DOD Inspector General (IG) reported last month 

that the Army’s General Fund Enterprise Business System 

3 

(GFEBS), or its ERP system, is at high risk of incurring additional 

schedule delays, exceeding planned cost, and not meeting program 

objectives as a result of inadequate planning and integration efforts. 

Even if the GFEBS is deployed in a timely manner, the IG reported, it may not meet the Army’s financial management objectives. In particular, the IG reported that the Army has not adequately planned for data conversion from existing systems to the 

GFEBS, failing completely to address the conversion of historical 

transaction data and the conversion of data from 49 non-Army systems. 

According to the IG, these flaws mean that even if the Army 

fully deploys GFEBS in a timely manner, the Army will not be able 

to achieve its objective of auditable financial statements. I am 

deeply concerned that the shortcomings documented by the IG in 

the Army’s GFEBS program are symptomatic of problems with the 

other ERP systems and that these problems will undermine DOD’s 

efforts to address its financial management issues and achieve an 

auditable financial statement by 2017. 

Sound financial systems and good data are critical to our efforts 

to provide efficient management, save money, and ensure accountability at DOD. We simply have to do better. 

At this time, I would like also to insert a useful document into 

the record. Thanks to Senator Coburn’s efforts, this document was 

prepared by the Congressional Research Service to chronicle the 

timeline of DOD’s efforts since 1990 to achieve an unqualified 

audit. 

It is a document that I recommend to everyone for their perusal. 

I think it is an excellent history for the public to know about. So 

I want it to be added to the record at this time, followed by my 

prepared statement. 

[The information referred to follows:] 

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PREPARED STATEMENT BY SENATOR CLAIRE MCCASKILL

The Readiness and Management Support Subcommittee meets today to address 

the issues of financial management and business transformation at the Department 

of Defense (DOD). We are pleased to be joined by the Hon. Robert F. Hale, the DOD 

Comptroller; the Hon. Elizabeth A. McGrath, the DOD Deputy Chief Management 

Officer; the Comptrollers of the three Military Departments; and Asif A. Khan, Director of Financial Management and Assurance at the Government Accountability 


727rms20.eps
17 

Office (GAO). Welcome to all of you, and thank you for your participation in this 

important hearing. 

The Government Accountability Office first designated DOD financial management as a ‘‘high risk’’ area in 1995, as a result of ‘‘pervasive financial and related 

business management systems and control deficiencies.’’ These deficiencies, GAO reported, have adversely affected the Department’s ability to control costs; ensure 

basic accountability; anticipate future costs and claims on the budget; measure performance; maintain funds control; prevent and detect fraud, waste, and abuse; address pressing management issues; and prepare auditable financial statements. 

Over the last decade, this committee has initiated a series of legislative provisions 

designed to address these problems, as recommended by GAO. Unfortunately, we 

continue to hear reports that soldiers in the field have received the wrong paychecks; that the Department cannot account for expenditures of billions of dollars 

in Iraq and Afghanistan; and that DOD cannot reliably determine the number of 

contractors it employs. Before leaving office earlier this month, Secretary Gates likened his efforts to find efficiencies and reduce waste in the Department to ‘‘something akin an Easter egg hunt.’’ He stated: ‘‘My staff and I learned that it was nearly impossible to get accurate information and answers to questions such as ’How 

much money do you spend?’ and ‘How many people do you have?’’ 

The underlying problem is that DOD’s financial management systems are riddled 

with decades-old problems that are difficult to reverse. As GAO recently explained: 

‘‘[T]he DOD systems environment that supports [its] business functions 

is overly complex and error prone, and is characterized by: (1) little standardization across the department, (2) multiple systems performing the same 

tasks, (3) the same data stored in multiple systems, and (4) the need for 

data to be entered manually into multiple systems. . . . According to the department’s systems inventory, this environment is composed of 2,258 business systems and includes 335 financial management, 709 human resource 

management, 645 logistics, 243 real property and installation, and 281 

weapon acquisition management systems.’’ 

The Department is endeavoring to address these problems by information for 

management decisions. Unfortunately, these programs have not lived up to expectations. The FIAR plan itself indicates that all three Military Departments have already missed deadlines on the implementation of their enterprise resource planning 

(ERP) systems. Last year, GAO reported that six of DOD’s nine largest ERPs had 

experienced schedule delays ranging from 2 to 12 years and incurred cost increases 

ranging from $530 million to $2.4 billion—in significant part because of the Department’s failure to follow good management practices. 

Similarly, the DOD Inspector General (IG) reported last month that the Army’s 

General Fund Enterprise Business System (GFEBS) program is at ‘‘high risk of incurring additional schedule delays, exceeding planned costs, and not meeting program objectives’’ as a result of inadequate planning and integration efforts. Even if 

GFEBS is deployed in a timely manner, the IG reported, it may not meet the Army’s 

financial management objectives. In particular, the IG reported that the Army has 

not adequately planned for data conversion from existing systems to GFEBS, failing 

completely to address the conversion of historical transaction data and the conversion of data from 49 non-Army systems. According to the IG, these flaws mean that 

even if the Army fully deploys GFEBS in a timely manner, the Army will not be 

able to achieve its objective of auditable financial statements. 

I am deeply concerned that the shortcomings documented by the IG in the Army’s 

GFEBS program are symptomatic of problems with other ERP systems and that 

these problems will undermine the Department’s efforts to address its financial 

management issues and achieve an auditable financial statement by 2017. 

Sound financial systems and good data are critical to our efforts to provide efficient management, save money, and ensure accountability at the Department of Defense. We simply have to do better. 

Senator MCCASKILL. I will now turn the microphone over to Senator Ayotte if she would like to make an opening statement. 

STATEMENT OF SENATOR KELLY AYOTTE 

Senator AYOTTE. Thank you very much, Madam Chairman. 

I want to welcome our witnesses and thank them for appearing 

today. 

I understand that this is the first hearing the Senate Armed 

Services Committee has held on defense financial management and 

18 

business transformation in several years. So I want to thank the 

chairman for scheduling this meeting. 

This hearing goes to the heart of the fiscal crisis that faces our 

Nation. As Admiral Mullen has said, the greatest threat to our national security is our national debt. We need to work to address 

that fiscal crisis, and obviously, with what we are looking at on a 

national level, DOD needs to be included in that process. 

We have to closely scrutinize every single Federal agency, including DOD, to identify and eliminate wasteful or duplicative programs. However, as we reduce defense spending, we must ensure 

that those reductions do not undercut our warfighters or endanger 

our readiness for future contingencies. 

To distinguish between necessary defense budget cuts and cuts 

that would harm our troops and damage readiness, we must have 

reliable financial data and effective business processes and systems 

in place. Unfortunately, DOD is one of the few agencies in the entire Federal Government that cannot pass an independent audit of 

its finances. I am skeptical whether DOD will even be ready for an 

audit by 2017, as required by the law. 

DOD’s inability to be audited could limit its ability to successfully implement management controls and efficiency initiatives, 

achieve savings, and redirect increasingly scarce defense dollars to 

the higher priorities. 

Shortly before Secretary Gates left office, he publicly expressed 

frustration that his efforts to find efficiencies and reduce wastes 

were ‘‘something akin to an Easter egg hunt.’’ He explained: ‘‘My 

staff and I learned that it was nearly impossible to get accurate information and answers, such as ‘How much money do you spend?’ 

and ‘How many people do you have?’ ’’ 

In light of the fiscal crisis we are confronting and the many proposals to cut defense spending, these are questions that we must 

be able to answer. I am encouraged that Secretary of Defense Leon 

Panetta has said that making DOD auditable is a top priority and 

that he will look into actually accelerating the current timetable for 

achieving this important goal. 

But it is important to remember that the auditable financial 

statement is not really the desired objective. It is a means to a 

more important end. DOD must be auditable and we must have reliable financial data so that we can be responsible stewards of the 

taxpayers’ dollars and so that we can ensure that every dollar supports our warfighters and improves our military readiness. 

Let there be no doubt, careful investment in financial management can save money. The Defense Information Systems Agency 

(DISA), for example, has returned $10 for every $1 spent on financial improvement. The Marine Corps has achieved $3 for every $1 

invested in improved financial management. 

Senator Tom Coburn estimates, as the chairman has mentioned 

and, of course, introduced the document that CRS produced, and I 

want to commend her for doing that. It is a very important document. Senator Tom Coburn estimates that DOD could realize at 

least $25 billion in savings each year for the next 10 years through 

improved financial management. 

In preparing for this hearing, staff polled several experts inside 

and outside of Government regarding the most significant strucVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
19 

tural impediments to improving financial management and business processes and systems at DOD. There seems to be a consensus 

regarding the leading impediments to improving financial management, and that is some of these impediments include unclear lines 

of authority, a workforce not sufficiently trained in key components 

of financial management, as well as potentially ineffective accountability and oversight. 

There are also potential problems related to enterprise architecture and investment controls as well as, the chairman has mentioned, with the implementation of the ERP systems. Here are 

some important questions I hope to address at this hearing. 

Do those leading DOD’s financial improvement efforts have the 

authority needed to influence the Service Secretaries and military 

chiefs, as well as other political appointees within DOD, to ensure 

that what is required to succeed actually gets done? 

How well are current oversight mechanisms within DOD functioning? 

Is DOD’s financial management workforce sufficiently trained 

and certified in accounting, well-versed in Government accounting 

practices and standards, and experienced in relevant information 

technology? 

Is DOD’s FIAR plan on a path to succeed? 

I am troubled by cases where we are spending billions of dollars 

on ERPs that accomplish little more than lining the pockets of contractors who are hired to integrate them into DOD. In a few highprofile cases, new systems have come online at considerable expense to the taxpayers, but the relevant entities are still unable to 

pass an audit. Every dollar must be spent deliberately and carefully to achieve the desired objective. 

Thank you, again, Madam Chairman, for calling this important 

hearing. I look forward to hearing from the witnesses, and I look 

forward to working together to improve financial management at 

DOD. Improved financial management will help us make the tough 

decisions we need to make, eliminate waste, and support our 

warfighters. 

I want to thank all of you for being here today. 

Senator MCCASKILL. Since this topic is rather dry, and typically, 

we don’t have hordes of Senators show up, I want to particularly 

comment on both Senator Cornyn and Senator Begich being here. 

I had not planned on giving anyone else an opportunity to make 

an opening statement, but I am so proud of you for showing up—— 

[Laughter.] 

I want to give both of you an opportunity, if you would like, to 

make a few comments on the record. 

Senator Cornyn. 

Senator CORNYN. Madam Chairman, thank you for having this 

very important hearing. 

I am called away to the Judiciary Committee to introduce a 

Texan who is being nominated for a judicial office. So I am going 

to be leaving now, and I will come back. 

I have some questions for the witnesses, but no opening statement. 

Thank you for the opportunity. 

Senator MCCASKILL. Thank you, Senator. 

20 

Senator Begich. 

Senator BEGICH. I am glad we could surprise you, Madam Chair. 

That is always good. [Laughter.] 

But I really don’t have any opening statement. I am anxious for 

the testimony. You have a great lineup, as I saw when I decided 

to be able to make it over here for at least an hour, I think, I can 

be here for. 

Senator MCCASKILL. Great. 

Senator BEGICH. So I look forward to it. 

Thank you. 

Senator MCCASKILL. Thank you, Senator. 

We will start with Secretary Hale. 

STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY 

OF DEFENSE, COMPTROLLER; ACCOMPANIED BY HON. ELIZABETH A. MCGRATH, DEPUTY CHIEF MANAGEMENT OFFICER, DEPARTMENT OF DEFENSE 

Mr. HALE. Good afternoon, Madam Chairman, Senator Ayotte, 

and Senator Begich. 

Thank you for the opportunity to discuss financial management 

at DOD. Secretary Panetta, as you have said, our new Secretary 

of Defense, my new boss, shares your interest in financial management, shares my interest in financial management improvements, 

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

efforts. I look forward to his personal guidance. 

To bring you up-to-date on our progress and also our continued 

challenges, DOD’s Deputy Chief Financial Management Officer 

(DCMO), Ms. McGrath, and I have prepared a joint statement. I 

am going to summarize it briefly for the both of us, and then we 

will turn to the service financial management (FM) executives. 

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

know that is not popular, but I believe it is true. 

For one thing, I think it is effective in getting the financial resources that we need to our warfighters, and I view that as my primary job. We do have a dedicated workforce, I think a reasonably 

well-trained one—let us talk more about that later—more than 

60,000 financial management professionals who bring a culture of 

stewardship, certainly my experience for 7 years in the Air Force, 

a culture of stewardship to their jobs. 

We have effective processes in some key areas. As a result, violations of key financial laws are few. Much better, I might add, than 

in the non-defense agencies. Timely and accurate payments are the 

rule. Again, much better than in the non-defense agencies, and interest associated with late payments is low. 

We have also made progress on an issue that is of concern to 

me—I have been working on it for several decades as a professional—and I know to you, improving financial information and 

moving toward audit readiness. We have auditable financial statements in a couple of large organizations, particularly in the Army 

Corps of Engineers, several of the large defense agencies, and several of our large trust funds. 

But it is also clear that our greatest audit challenges lie ahead, 

especially the need to move the Military Services to auditability. 

21 

We really have been picking around the edges of this problem, to 

some extent. We have to turn to them because they are the key 

issue. In addition, there are enterprise-wide weaknesses in DOD financial management, without question, and they require an enterprise-wide response. 

To pass an audit, an organization needs systems and processes 

that record financial results of business events in a consistent and 

reliable manner. Our current business environment does not always meet that standard. Many of our systems are old, and they 

weren’t designed to handle information that supports audit standards. 

The issue is even more challenging because of DOD’s enormous 

size and geographical dispersion, which makes a manual solution 

of these problems almost impossible. Some of the smaller independent agencies have been able to do that. We simply can’t. 

To deal with these enterprise challenges and to improve financial 

information and achieve audit readiness, we have revised the approach that DOD has used in the past. It wasn’t working, I think 

we can all agree. 

Since August 2009, our emphasis has been improving the quality 

of data and moving toward audit readiness for the information that 

we use every day to manage DOD. Specifically, budgetary information and existence and completeness of assets. Knowing where our 

assets are and how many we have. 

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

with the other information that is needed to move toward full 

auditability. Less than 2 years have passed since we launched this 

new approach. I call it the focused approach. I can tell you that financial auditability is now readily acknowledged as a high priority 

in DOD. I think it will be even a higher priority under my new 

boss. 

We have made some noteworthy changes, I think, that are moving us in the right direction. We have a clear governance process 

headed by our DOD CMO, Deputy Secretary, and supported at the 

Office of the Secretary of Defense (OSD) level by me, the Chief Financial Officer (CFO), and the DCMO, and by the Service FMs and 

the Service DCMOs. 

We have established long-term and, particularly importantly, 

short-term goals which are actively managed by our governance 

bodies. We have ensured that each Military Department has programmed adequate resources to support this focused strategy over 

the entire Future Years Defense Plan. 

We now require, and I think this is important, that senior executive performance appraisals for both financial and nonfinancial personnel include financial and audit goals where that is relevant to 

them. We are assembling teams within each Military Department 

that will be tasked with improving financial controls because we 

need to do that if we are going to be successful. 

We are establishing a course-based certification program for our 

defense financial managers that will give us a framework like they 

have in the acquisition workforce so that we can require certain 

courses of our personnel and ensure, for example, that they have 

training in accounting and auditing. We have maintained a close 

working relationship with our oversight bodies, including GAO and 

22 

the DOD IG. I have personally briefed Gene Dodaro, the Comptroller General, and Gordon Heddell, the DOD IG. 

In addition, we have focused our improvement on improvements 

in business systems, and I know you are particularly interested in 

these. Our goal is a streamlined systems environment made up of 

information technology (IT) capabilities that work together to support effective and efficient processes and operations. 

Ms. McGrath, the DCMO, has the lead for OSD. The Services 

and agencies are managing overall implementation. We are focusing our system efforts in three areas—improvements in acquiring 

and implementing IT systems, including those, implementing those 

ERPs, that word you don’t like, Madam Chairman; reducing required data exchanges and system-to-system interfaces while increasing standardization; and use of business enterprise architecture, which provides data standards, business rules, performance 

metrics, and standard system configurations. 

In addition to procedural changes, though, we are actually doing 

something. We are actually moving and taking tangible steps toward auditability of the service statements that big boys use in the 

audit world. We have launched an audit of the Marine Corps statement of budgetary resources. If successful, this would be the first 

time that any military Service has completed an audit of a financial statement. 

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

funds control and distribution process, known in audit terms as appropriations received. This is being done by an independent public 

accounting firm. I expect that this validation will yield a positive 

opinion in August, and periodic validations of our appropriations 

received will demonstrate to Congress and to me that we are controlling our funds carefully and in ways that ensure we comply 

with the laws that you enact. 

In June, we began a validation by a public accounting organization of the Army’s organization and bases that have implemented 

their ERP, the GFEBS. This will identify any areas that must be 

improved to ensure that we are using the system in a manner that 

is auditable. I don’t want to get these things deployed throughout 

DOD and find out that we aren’t going to achieve our goal. 

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

Force’s processes and controls to reconcile their accounts with 

Treasury, essentially their checkbook with Treasury. It is called 

Funds Balance with Treasury. 

By the end of the calendar year, we expect to begin several other 

validation efforts, including the accounts and locations of large portions of our military equipment. In short, there is a lot still to do. 

I make no bones about it. We have a long way to go, but I think 

we are making progress. 

I believe we do have a plan. We are committed to improving financial information and achieving audit readiness in DOD. Our 

goal is to achieve auditable financial statements by 2017. 

Madam Chairman, this concludes my opening statement. I believe we will turn to the Service FMs now, and then we will be glad 

to answer your questions. 

[The joint prepared statement of Mr. Hale and Ms. McGrath follows:] 

23 

JOINT PREPARED STATEMENT BY HON. ROBERT F. HALE AND

HON. ELIZABETH A. MCGRATH

Chairman McCaskill, Senator Ayotte, members of the subcommittee, thank you 

for the opportunity to testify today concerning financial management at the Department of Defense (DOD) and our ongoing efforts to improve financial operations. We 

should note that this is an area of interest to our new Secretary of Defense. Secretary Panetta has asked us to join with other Department leaders to review our 

plans for financial improvement and report back to him with any suggested improvements. 

From our perspective, there are two principal reasons for striving to make DOD 

as efficient and effective a manager as possible. The first is to ensure that America’s 

service men and women have the resources they need to carry out their mission. 

The second reason is to satisfy our duty as stewards of the resources entrusted to 

us by the taxpayers. 

As Members of the U.S. Senate, you have a great interest in both purposes. Moreover, your oversight and interest in this subject is a great help to us as we go forward. 

BACKGROUND AND CONTEXT

As we pursue these dual goals, we rely on the support of a dedicated professional 

work force of approximately 60,000 financial management personnel, who provide 

our warfighters with the resources and financial services they need to meet national 

security objectives in every area of the world, including Afghanistan and Iraq. We 

know that you appreciate their efforts as much as we do. 

Today, the Department has effective financial processes in many key areas. As a 

result, our violations of the key financial laws are quite low, timely and accurate 

payments are produced in a very high percentage of cases, while interest payments 

have been dramatically reduced. 

In fact, there has been significant progress toward improving financial information and audit readiness in several entities. For example, the Army Corps of Engineers has fully auditable financial statements and is maintaining them. Several Defense Agencies maintain auditable statements including the Defense Finance and 

Accounting Service and the Defense Contract Audit Agency. Several large trust 

funds managed by DOD are also auditable. 

At the same time, it is clear that the most daunting challenges remain ahead, 

particularly the challenge of moving the Military Services toward auditability. Moreover, we know that there are enterprise-wide weaknesses in DOD financial management, and they demand an enterprise-wide business response. The lack of auditable 

financial statements for DOD as a whole reflects those weaknesses. 

The challenge is more daunting because of DOD’s enormous size and geographical 

dispersion. For example, we obligate an average of $2 billion to $3 billion every business day and handle hundreds of thousands of payment transactions. These financial transactions take place in thousands of locations worldwide, including war 

zones. Given our size and mission requirements, we are not able to deploy the vast 

numbers of accountants that would be required to fully meet audit standards. 

To pass an audit, an organization is required to have a business environment— 

including systems and processes—that record the financial results of business 

events (such as contract signing) in a consistent and reliable manner. Our current 

business environment does not always meet that standard. Many of our systems are 

old and handle or exchange information in ways that do not readily support current 

audit standards. They were designed decades ago to meet budgetary rather than 

proprietary accounting standards. They tend to be non-standard and sometimes do 

not include strong financial controls. In these cases, the consistent application of internal controls becomes critical. Many of the legacy systems also do not record data 

at the transaction level, a capability essential to audit success. 

AN ENTERPRISE-WIDE RESPONSE

To address these enterprise-wide issues, we have put in place a strong governance 

model. As the Department’s Chief Management Officer (CMO), the Deputy Secretary is responsible for Department-wide business operations and management 

issues. He is supported in this by the Deputy Chief Management Officer (DCMO). 

The Under Secretary of Defense (Comptroller) (USD(C)) and Chief Financial Officer is responsible for financial management policy and operations for the Department. He has the lead in efforts to improve financial information and audit readiness. But the Comptroller organization cannot improve financial management on its 

own. The Department will achieve its financial management goals only through an 

24 

active partnership involving both the Comptroller and the DCMO. We must also 

have help from those in acquisition, logistics, and other business areas, as well as 

the business communities that reside in the Military Departments. 

To inject this holistic, integrated way of thinking into the existing fabric of defense management, the DCMO has established a framework for organizing our Business Enterprise Architecture (BEO), business processes, and systems environment 

into essential end-to-end business processes, such as Budget-to-Report, Order-toCash, and Procure-to-Pay. This enterprise-wide approach is building the future business processes and systems environment of DOD, with audit readiness and management information in mind. 

IMPROVING THE QUALITY OF THE INFORMATION WE USE EVERY DAY

To deal with these enterprise challenges—and to improve financial information 

and achieve audit readiness—we revised our approach from those pursued by DOD 

in the past. 

Our strategy revision was shaped by senior leaders in the Comptroller and DCMO 

organizations and in the Military Departments and Defense agencies. We also solicited input from the Office of Management and Budget, the Government Accountability Office (GAO), and congressional staff. 

In August 2009, we issued a memorandum outlining the new approach, which emphasizes improvements in the quality, accuracy, and reliability of the financial and 

asset information that we use every day to manage the Department. This approach 

leads to our current concentration on areas that are most important to defense managers while holding down costs in a period of budgetary constraints. Specifically, we 

are working on two types of information—budgetary information and existence and 

completeness of assets. 

Budgetary information is critical to leadership at all levels, as people make operational and resource allocation decisions. Our new approach on improving budgetary 

information will lead to audit readiness for our Statements of Budgetary Resources 

(SBR). 

We are also focusing on the accuracy in the numbers and locations of our mission 

critical assets. The financial audit elements of ‘‘existence and completeness’’ translate directly into knowing ‘‘what we have’’ and ‘‘where it is,’’ so we can use the 

equipment in combat and ensure that our acquisition organization is buying only 

what DOD needs. 

We have not ignored other efforts necessary to achieve fully auditable statements. 

This spring we completed a business case analysis that was required by key stakeholders and included as a provision in the National Defense Authorization Act 

(NDAA) for Fiscal Year 2011. This analysis provides a roadmap to a cost-effective 

way for achieving auditability for financial statements beyond the SBR. 

The NDAA for Fiscal Year 2010 and subsequent acts accommodated our new approach to financial improvement and audit readiness. We appreciate the support of 

Congress and remain committed to have fully auditable statements by 2017. 

SYSTEM IMPROVEMENTS ARE CRITICAL TO SUCCESS

To achieve and sustain auditable financial statements, even using this new approach, we must improve our financial systems. 

To accomplish this, we must orient the DOD around end-to-end business processes 

that support audit goals, implement Enterprise Resource Planning (ERP) systems, 

leverage those investments to the maximum extent practicable, modernize legacy 

systems when necessary and supported by a business case, and also aggressively 

sunset legacy systems that are obsolete, redundant, or not aligned with our business 

objectives. Our goal is to deliver a streamlined, 21st-century systems environment 

comprised of IT capabilities that work seamlessly together to support effective and 

efficient business processes and operations. The DCMO and the Military Department CMOs play an integral role in the governance processes overseeing the implementation of these systems and the processes they enable. 

We are focusing on three key areas: 

First, we have taken steps to improve our current approach to acquiring and implementing IT systems, particularly in the business domain. Important revisions to 

the Department’s standard acquisition process will be included in an update to the 

DOD Instruction 5000.2, ‘‘Operation of the Defense Acquisition System,’’ for IT systems. These revisions will include an improved acquisition model for our defense 

business systems, called the Business Capability Lifecycle, which is in use today for 

a growing number of programs and is an essential pilot effort for our broader IT 

reform effort. The Deputy Secretary has made clear that one of his highest manageVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
25 

ment priorities is improving the acquisition, development, and fielding of IT systems. 

Further, in addition to improving acquisition policy, the Department is working 

to improve specific acquisition outcomes of its business Major Automated Information System programs through more rigorous acquisition oversight and investment 

review. The Department is more closely tying business outcomes to acquisition milestones and specifically requiring that individual programs, such as Army’s General 

Fund Enterprise Business System (GFEBS) and Navy ERP, define the role that 

they play in their organizations’ auditability efforts and end-to-end processes. For 

example, in the last GFEBS Acquisition Decision Memorandum, signed June 24, 

2011, we explicitly required that GFEBS: 

• Obtain the USD(C) and DOD DCMO approval of the end-to-end process 

and system portions of the Army plan to achieve audit readiness by September 2017 as defined in Financial Improvement and Audit Readiness 

(FIAR) Guidance. Specifically, the Army plan must address the GFEBS role 

in achieving audit readiness in the work products defined in phases 1 and 

3 of the FIAR Guidance Methodology. 

• Obtain USD(C) concurrence that the end-to-end business systems and 

processes within Army control support auditable financial statements 

where GFEBS has been implemented and integrated. The USD(C) will rely 

on the opinion of an independent public accounting firm expressed in an examination of the Army audit readiness assertion of a GFEBS entity currently planned for December 31, 2012 and will allow for remaining minor 

system and process enhancements scheduled for completion within 12 

months. 

Second, we are defining a target systems architecture that is modeled on the 

premise of end-to-end business processes and uses the capability inherent in our 

ERP systems to the maximum extent practicable. This will minimize the number 

of required data exchanges and system-to-system interfaces, thus reducing the potential for error. It will also increase the degree of process standardization and cut 

down on unnecessary software development. 

Third, we will continue to guide our system investments using the BEA, which 

defines the necessary data standards, business rules, performance metrics, and 

standard system configurations that will allow our systems to be interoperable. 

This, along with our Enterprise Transition Plan, will ensure that when data is exchanged between systems, it happens securely and maintains the integrity of the 

data. 

Improved systems alone, however, will not eliminate our weaknesses or guarantee 

auditable statements. Achieving auditability requires that we apply a consistent 

level of process controls that cross organizations and functional areas. Business and 

financial information that is passed from system to system must also be subject to 

a control environment to ensure that only authorized personnel are using the system and that these systems protect the data quality and maintain a compliant audit 

trail within the end-to-end business process. This process must be controlled at the 

transaction level, from the source to the general ledger postings, accurate trial balances, and reliable period closeouts. Only by completing these steps can we prepare 

financial statements that an auditor can cost-effectively review and verify. Many 

elements of our current business environment must be changed to allow us to meet 

financial audit standards. In the midst of two wars and numerous military operations, implementation of our new approach will continue to be a major challenge. 

WHERE WE ARE TODAY

Less than 2 years have passed since we took stock of our previous efforts and decided on new priorities designed to bring the various functional communities together to work toward the common goal of financial auditability. Financial 

auditability is now accepted as a high priority for the Department. To move forward 

with our new, focused approach, we have made many changes: 

• We established a clear governance process with the Department’s CMO 

in the lead and the USD(C) and DCMO playing key roles. 

• We established clear but flexible guidance, so the components can prepare to assert audit readiness by developing detailed plans for their discovery and remediation efforts. 

• We have engaged the Department’s CMO (the Deputy Secretary), as well 

as the Military Department CMOs (Under Secretaries) and the Service Vice 

Chiefs, in a personal commitment to support our goals. 

• We have ensured that each Military Department has programmed adequate resources to move forward with this strategy. 

26 

• We established a clear and meaningful linkage between major business 

system investments and the goals of financial auditability. 

• We are requiring Senior Executive performance appraisals to include financial audit goals among their criteria, including functional business areas 

that generate business events with financial impact. This key initiative will 

help establish audit requirements in business areas outside comptroller. 

• We have begun efforts to establish a course-based certification program 

for defense financial managers that will permit us to emphasize education 

in key areas including auditability. 

• We are assembling teams within each Military Department that will be 

tasked with improving financial controls. 

• We have maintained a close working relationship with key stakeholders 

and oversight bodies, including GAO and the Department’s Inspector General. 

While we have made or are making many process changes, we also recognize that 

we must demonstrate specific progress to reassure ourselves, and Congress, that we 

are actually moving toward auditable financial statements. To that end, we 

launched an audit of the Marine Corps’ Statement of Budgetary Resources. If successful, this would be the first time that any Military Service has completed an 

audit of a financial statement. We have already learned a great deal from this effort, and we believe that it will lead to a positive audit opinion. 

We are also undertaking a number of other efforts to validate and demonstrate 

progress. In May of this year we began a DOD-wide examination and validation of 

our funds control and distribution process (known in audit terms as ‘‘appropriations 

received’’) by a public accounting firm. Periodic validation of appropriations received 

will demonstrate to Congress that we are controlling our funds carefully and in 

ways that ensure we comply with the laws you enact. In June we began a public 

accounting firm validation of the Army’s organizations and bases that have implemented the GFEBS business environment, a key effort to ensure that this new system is being used in a manner that is auditable. In July we began a public accounting firm validation of the Air Force’s processes and controls to reconcile their accounts with Treasury. This ‘‘checkbook reconciliation’’ is a key building block to 

auditable financial statements. By the end of this calendar year we expect to begin 

several other validation efforts including validations of the counts and locations of 

large portions of our military equipment. 

CONCLUSION

In sum, we recognize the challenges associated with improving financial information and achieving audit readiness at DOD. To meet that challenge, we have developed a workable and promising partnership between the CFO and DCMO communities that will help with implementation. We have also implemented a new, focused 

approach that includes near-term goals, in addition to the long-term goal of achieving auditable statements by 2017. 

As we mentioned at the outset of this statement, we are also currently reviewing 

plans for financial management improvement at the request of Secretary Panetta. 

We will report back to him and solicit his guidance about future initiatives. 

We would conclude by emphasizing that we are personally committed to this effort 

as part of our overall commitment to providing the financial resources and business 

operations necessary to meet our national security objectives. 

Senator MCCASKILL. Thank you very much, Secretary Hale. 

Secretary—is it Matiella? 

Ms. MATIELLA. Matiella. 

Senator MCCASKILL. Secretary Matiella. 

STATEMENT OF HON. MARY SALLY MATIELLA, ASSISTANT 

SECRETARY OF THE ARMY, FINANCIAL MANAGEMENT AND 

COMPTROLLER 

Ms. MATIELLA. Thank you. 

Madam Chairman, Senator Ayotte, members of the subcommittee, thank you for the opportunity to testify today regarding 

financial management in the U.S. Army and our commitment to 

achieving auditable financial statements. 

27 

Secretary McHugh, Chief of Staff Dempsey, Secretary Westphal, 

our CMO, and all of our senior leaders recognize the value and the 

importance of achieving the mandate of the National Defense Authorization Act (NDAA) for Fiscal Year 2010, which requires the 

Army to be audit-ready by September 30, 2017. 

The Army employs hard-working soldiers and civilian personnel 

across all functional areas, who are dedicated to achieving audit 

readiness goals. These professionals are transforming our financial 

and business systems to improve financial management, to provide 

timely, accurate, and relevant information for decisionmakers, and 

to reassure the American taxpayers and Congress that the Army 

is a trustworthy steward of public funds. 

I am confident that we will be audit ready by September 30, 

2017, because we have a sound and resourced financial improvement plan, which conforms to DOD’s FIAR criteria. We have a solid 

ERP strategy guiding our business systems development and deployment, and we have effective governance and oversight ensuring 

accountability. 

Our financial improvement plan is fully resourced, contains detailed corrective actions and milestones, incorporates lessons 

learned from the Army Corps of Engineers audit and the Marine 

Corps audit, and identifies the organizations responsible for corrective actions. Further, the plan requires significant evaluation and 

testing to ensure internal controls vital to the audit readiness and 

ensures that the internal controls are in place and operating effectively. 

To ensure that we are audit ready by September 30, 2017, our 

improvement plan calls for four audit examinations each year from 

fiscal year 2011 to fiscal year 2014. These examinations culminate 

with an assertion of audit readiness of the Army’s statement of 

budgetary resources in fiscal year 2015. 

These four audit examinations ensure that our financial management practices and corrective actions pass audit scrutiny. To ensure audit readiness is sustained, governance and oversight are 

being provided by the auditors’ senior leaders. 

Additionally, management personnel across all business functions are being held accountable for achieving audit readiness milestones. This accountability is included in their fiscal year 2012 performance plans. 

In summary, execution of our financial improvement plan and 

our ERP strategy, combined with our senior-level governance and 

oversight, enable the Army to be audit-ready by September 30, 

2017. 

I am personally committed to meeting our national security objectives and mandates of the law requiring auditability. I will continue to collaborate with the members of this committee, your 

counterparts in the House of Representatives, the GAO, Comptroller Hale, and DCMO McGrath to ensure the continued improvement of the Army’s business environment. 

I look forward to your questions. 

[The prepared statement of Ms. Matiella follows:] 

28 

PREPARED STATEMENT BY DR. MARY SALLY MATIELLA

Madam Chairman, Senator Ayotte, and members of the subcommittee, thank you 

for an opportunity to testify today regarding financial management in the U.S. 

Army, my assessment of Army’s progress toward achieving auditable financial statements, the implementation of Army enterprise resource planning systems, and our 

ongoing efforts to improve financial management operations. 

I share Mr. Hale’s belief regarding the importance of audit readiness. With Secretary McHugh’s support, the Army intends to achieve the milestones required by 

section 1003 of the National Defense Authorization Act (NDAA) for Fiscal Year 

2010: that is, be audit ready not later than September 30, 2017. The emphasis on 

audit readiness underscores the transformation in financial management across the 

Army enterprise. The Army employs extremely hard working individuals across all 

functional areas, both military and civilian, committed to supporting the soldiers 

executing their mission and defending our country. However, the improvements we 

are implementing will require our dedicated soldiers and civilians to execute their 

business differently. Our financial and business systems, processes, controls and 

training are all keyed to improved financial management and will result in timely, 

accurate, and relevant information for decisionmakers. 

Our enterprise resource planning systems are in various stages of deployment and 

include a new transaction-driven, compliant general ledger for our general fund, a 

compliant general ledger for our working capital fund, a tactical supply system and 

an integrated pay and personnel system. As these systems are being implemented, 

legacy systems are being drawn down. Our financial managers and business process 

owners will employ compliant systems operating with associated internal controls 

as a part of new business processes, which creates a sustainable business environment when coupled with the ongoing training. 

We are following the Department’s Financial Improvement and Audit Readiness 

(FIAR) guidance by executing a detailed, fully resourced Financial Improvement 

Plan (FIP) which provides detailed corrective actions, associated milestone schedule, 

and identifies organizations responsible for corrective actions. Our FIP tracks multiple elements including implementation and stabilization of the Army’s Enterprise 

Resource Planning (ERP) systems, testing of internal controls and implementation 

of corrective actions where controls are not operating effectively, and the execution 

of multiple audit examinations conducted by Independent Public Accountants (IPAs) 

to ensure corrective actions will withstand audit scrutiny. Additionally, our FIP incorporates lessons learned from the Army Corps of Engineers’ successful audit, and 

the current audit activity with the U.S. Marine Corps. To ensure we remain on 

track, all Army senior executives will be held accountable in their fiscal year 2012 

performance plans for meeting specific audit readiness milestone requirements. 

Our major mid-term goals are to assert audit readiness on the General Fund 

Statement of Budgetary Resources at the end of fiscal year 2015 and to verify the 

existence and completeness of mission critical assets by the third quarter of fiscal 

year 2015. These mid-term milestones support requirements established by Comptroller Hale and the NDAA for Fiscal Year 2010 to focus audit readiness activities 

on improving the information most useful to the department’s managers such as 

budgetary information reflected in the Statement of Budgetary Resources and the 

existence and completeness of mission critical assets. 

To ensure we achieve these mid-term milestones, we have established several interim milestones in our FIP. For example the Army asserted audit readiness for all 

general fund appropriations received, covering about $232 billion fiscal year 2010 

appropriations. The Army’s entire appropriations received is under audit examination by an IPA. The audit will determine if the Army has the appropriate controls 

and documentation to properly record and report appropriations received and distributed throughout all Army commands. Appropriations received represents a significant interim milestone covering a substantial reporting element on the Army’s 

financial statements. 

Another example of our interim milestones is a second audit examination currently in process by an IPA of multiple business activities conducted at Army Headquarters and several field sites operating the Army’s financial management ERP 

system, the General Fund Enterprise Business System (GFEBS). This is the first 

of four interim audit examinations planned between now and fiscal year 2015 to ensure our management controls, business processes and documentation, as established in the objective ERP environment supported by GFEBS, are capable of meeting the rigors of a financial statement audit. Collectively, the appropriations received audit, and the interim audit examinations of the ERP environment will enable us to achieve our mid-term objective to assert audit readiness of the Army’s 

29 

Statement of Budgetary Resources by fiscal year 2015, and to assert audit readiness 

of all financial statements by September 30, 2107. 

In addition to audit examinations conducted by IPAs, we are also mapping all our 

end-to-end business processes, identifying key controls within each business process, 

and executing discovery and evaluation activities to ensure controls are properly established and operating effectively. Our discovery and evaluation efforts are led by 

my audit readiness staff with support provided by the Army Audit Agency and the 

Army’s Internal Review and Audit Compliance network. Our discovery and evaluation efforts comply with the Department’s FIAR criteria, and requirements established by Office of Management and Budget Circular A–123 Appendix A. The discovery and evaluation efforts enable us to ensure all business activity within the 

Army is conducted in a compliant manner, and to isolate non conforming activity 

for corrective actions. Follow-up audit by the Army Audit Agency and reviews by 

our Internal Review and Audit Compliance personnel ensure corrective actions are 

properly implemented. 

This strategy enables us to make adjustments to our approach by the early detection and correction of control and process deficiencies. We have several interim milestones that will provide us with appropriate information on our progress for meeting 

both the 2015 and 2017 goals. In fact, we have already started to achieve some important milestones that will pave the way for full financial statement audit readiness by September 30, 2017. Army will engage the Department of Defense (DOD) 

Inspector General in fiscal year 2014 to conduct an audit of the existence and completeness of mission critical assets, which includes nearly 700,000 general equipment, military equipment, and real property end items, as well as several million 

missiles and ammunition assets. We have already completed an existence and completeness assertion of 97 percent of our aviation assets, which accounts for 17 percent of the Army’s military equipment line items, and have expanded our audit 

readiness work to cover all mission critical assets across the Army. 

The Army FIP focuses on correcting internal control weaknesses throughout the 

Army’s business processes and business systems. The plan includes corrective actions, milestones and performance measures, and links the replacement of nonstandard, non-compliant business information systems with implementation of the 

Army’s Enterprise Resource Planning systems. Establishing and maintaining an 

auditable organization requires executing standardized business processes and systems, as well as complying with Federal accounting standards and the DOD business enterprise architecture. By linking the FIP with the Army’s Enterprise Resource Planning Strategy, we are able to ensure business system development and 

modernization is synchronized with audit readiness requirements. 

Since the Army’s Enterprise Resource Planning systems are vital to achieving and 

sustaining audit readiness, we are conducting internal assessments of our business 

systems using the Government Accountability Office (GAO) Financial Information 

Systems Control Audit Manual (FISCAM). Our business system assessment is informed by the Single Army Financial Enterprise architecture which provides all 

business system components and processes. The FISCAM provides the standards 

against which an IPA will conduct a financial statement audit. 

As an interim milestone, we plan to complete and document our internal assessment of the GFEBS against FISCAM standards by December 2011, and conduct an 

audit examination by an IPA in fiscal year 2012. The results our fiscal year 2011 

internal assessment and the fiscal year 2012 follow-up systems audit will provide 

assurance that the GFEBS is able to fully support the Army’s audit readiness goals, 

well in advance of our fiscal year 2015 Statement of Budgetary Resources assertion. 

In the fall of 2011, we will begin similar FISCAM preparation work, using our Single Army Financial Enterprise Architecture as a guide, to ensure all business systems supporting the financial enterprise, including the Army’s Enterprise Resource 

Planning systems are able to support the Army’s audit readiness goals. 

Since February 2010, we have experienced successes and achieved milestones 

never accomplished previously. For example, GFEBS has been fielded to over 34,000 

users worldwide and is substantially compliant with the Federal Financial Managers’ Integrity Act. We have made several assertions in the past 9 months and 

have IPAs currently conducting two audits. In addition, three of our four Enterprise 

Resource Planning systems are in deployment providing the Army for the first time 

a standard, transaction driven general ledger recording and reporting capability enabling auditors to track balances from the financial statements to the detailed 

transactions supporting these balances. Much of this success can be attributed to 

the 2 years of consistent Army and DOD leader engagement, the Department’s focus 

and sound audit readiness guidance, and the support provided by Congress. 

I am encouraged by preliminary results of the GAO’s current audit of the Department’s financial improvement efforts. Results indicate the Department has a solid 

30 

methodology as established by criteria of the FIAR framework. We are implementing the FIAR methodology in our FIP by taking a controls-based audit readiness approach focused on establishing and sustaining audit readiness by identifying 

risks, mapping them to the key control objectives established by the GAO Financial 

Audit Manual and FIAR Guidance, and implementing effective controls throughout 

the business environment. In addition, we are automating as many controls as possible within the Enterprise Resource Planning systems to minimize manual controls 

and reduce risks that exist within business processes. 

Our strategy is focused on building the internal structure to sustain audit readiness and realize the benefits of an improved and controlled business environment. 

This corporate knowledge begins with top-down leadership engagement and accountability. The Army recognizes that audit readiness requires engagement throughout 

the organization and the Army is the first Service to take the bold step holding all 

Senior Executive Service personnel—not just those in the financial management 

community—accountable for achieving audit readiness milestones. On May 26, 2011, 

I established assessment criteria against which all Army Senior Executive personnel 

will be held accountable in fiscal year 2012 performance plans for achieving audit 

readiness milestones. 

I am confident we are executing a sound plan that will achieve the NDAA 2010 

mandate. I do, however, recognize we have many hard challenges ahead and areas 

for improvement. The feedback we are receiving from our discovery and evaluation 

efforts, IPA Audit Examinations, and lessons from U.S. Army Corps of Engineers 

and U.S. Marine Corps audits are all helpful to forming and shaping our audit readiness efforts. We will continue to leverage these resources as we move forward in 

the execution of our FIP. 

In summary, I recognize the challenges associated with improving financial information and achieving audit readiness within Army. However, we are making great 

progress because of the commitment from senior Army leaders and business process 

owners. I am personally committed to this effort to meet our national security objectives and the mandates of the law. I look forward to working with the members of 

this committee, your counterparts in the House of Representatives, GAO, and Comptroller Hale to ensure the continued improvement of the Army’s business environment. 

Senator MCCASKILL. Thank you. 

Secretary Commons. 

STATEMENT OF HON. GLADYS J. COMMONS, ASSISTANT SECRETARY OF THE NAVY, FINANCIAL MANAGEMENT AND 

COMPTROLLER 

Ms. COMMONS. Madam Chairman, Senator Ayotte, Senator 

Begich, thank you for the opportunity to discuss the Navy’s efforts 

to achieve financial audit readiness. 

The Navy is fully committed to achieving financial auditability, 

and our senior leaders have provided the resources to do so. We are 

moving forward. 

As Secretary Hale noted, the Marine Corps is in the second year 

of audit of the statement of budgetary resources. We hope to have 

positive results from that audit by the end of the year. 

As also noted, the Navy is currently undergoing examination by 

a private firm of our appropriations received process, and we 

should have those results in August. 

The DOD IG is currently examining the completeness and existence of high-value military equipment—that is, our ships, ballistic 

missiles, and satellites—to be followed by an examination of the existence and completeness of our aircraft and ordnance inventory. 

We have learned many lessons from the Marine Corps audit, and 

we have incorporated those lessons into our overall Navy financial 

improvement plan. We are also sharing these lessons with the 

other Services. They include from the very complex of ensuring the 

31 

accuracy of our beginning balances to the simple—maintenance of 

our supporting documentation and separation of duties. 

We are working with our service providers to ensure we all understand what must be done and who is responsible. We have 

reached across our own aisles to assign responsibility to our business process owners, such as our human resource organizations 

and our acquisition organizations. Beginning in October, every senior executive responsible for executing our business processes will 

have an audit readiness objective in his or her performance plan. 

We are also engaging our general and flag officers through the 

Vice Chief of Naval Operations and the Assistant Commandant of 

the Marine Corps. In August, we will begin training our new general and flag officers specifically on their responsibility as they relate to auditability. 

Achieving auditability is challenging, and there is much work to 

be done. We are committed to this effort and we are making 

progress. 

Thank you for your interest and support of our efforts. I will be 

pleased to answer any questions you might have later. 

[The prepared statement of Ms. Commons follows:] 

PREPARED STATEMENT BY HON. GLADYS J. COMMONS

Chairman McCaskill, Senator Ayotte, members of the subcommittee, thank you 

for the opportunity to discuss the Department of the Navy’s efforts to achieve financial audit readiness. Achieving financial auditability is one of my highest priorities 

and I am personally committed to this objective. The top leaders in the Department, 

Secretary Mabus, Under Secretary Work, as well as the Chief of Naval Operations, 

Admiral Roughead, and General Amos, the Commandant of the Marine Corps, are 

all also committed to our drive to auditability. 

Indeed, the Department has demonstrated through performance that we are aggressively moving forward. The Marine Corps is in its second year of audit on its 

Statement of Budgetary Resources. Our goal is to attain an opinion later this year 

from the Department of Defense (DOD) Inspector General and the private firm conducting the engagement. This effort has been a significant first-time challenge for 

us, but the marines have risen admirably to the test, as they always do. This audit 

has been invaluable because of the lessons we’ve learned. We have incorporated 

those lessons into our larger Department of the Navy financial improvement plan 

and are sharing them with the other Military Departments. 

The Department of the Navy is currently undergoing an examination by an outside auditor of its Appropriation Received process; and the DOD Inspector General 

is conducting an examination on the existence and Completeness of high-value military equipment, including ships, ballistic missiles, and satellites. We also believe 

that we are ready for an examination of the existence and completeness of our aircraft and ordnance. 

In addition to supporting these ongoing audits, we continue to identify the improvements to business processes and systems needed to support an audit of the entire Department’s Statement of Budgetary Resources. We know we must comply 

comprehensively with accounting and auditing standards, just as all financial entities, public or private, are required to do; however, our systems and processes are 

not yet designed to do so. Internal controls in most areas must be strengthened. Our 

audit readiness team has refined its detailed plan for audit readiness, based on the 

extensive lessons we’ve learned from our Marine Corps audit and from our initial 

assessments of the auditability of our business processes. 

One current focus is bolstering our collaboration with our service providers, particularly the Defense Finance and Accounting Service (DFAS). We know that we 

must develop several essential capabilities before we can undergo an audit, including reconciling our cash balance with Treasury and tracing transactions from their 

orgination through the financial statements. Extensive cooperation with DFAS will 

be required for success in these areas. We have their commitment. 

In addition to changing business processes, we need to improve controls in supporting business systems. Navy’s Enterprise Resource Planning (ERP) system will 

make a significant contribution to our auditability efforts. Navy ERP will enhance 

32 

these efforts because it establishes a stronger, embedded internal control framework 

and helps standardize business processes for a sustainably auditable environment. 

Implementation of Navy ERP continues space and according to schedule. 

As a final point, I’d like to reiterate our leadership’s commitment to audit readiness. We continue to widen the circle of accountability. Beginning next fiscal year, 

every senior executive responsible for executing our business processes will have an 

audit readiness objective in his or her performance plan. These frontline leaders will 

help the Department transform its business processes and orient its business culture toward auditability. In addition, we continue to have the commitment of our 

leadership to resource these efforts adequately now and into the future. 

I’ll be pleased to answer any of your questions at the appropriate time. 

Senator MCCASKILL. Thank you very much. 

Secretary Morin. 

STATEMENT OF HON. JAMIE M. MORIN, ASSISTANT SECRETARY OF THE AIR FORCE, FINANCIAL MANAGEMENT AND 

COMPTROLLER 

Mr. MORIN. Thank you very much, Madam Chair, Ranking Member. 

It is a pleasure, as always, to have a chance to come before this 

committee and the subcommittee. It is a committee I had a lot of 

chances to work with when I spent 6 years on the staff in the Senate. 

If I may, I would like to just summarize the written testimony 

that I prepared for the committee and have the statement entered 

in the record. 

When I came before the Senate Armed Services Committee 2 

years ago as a nominee, I accepted a charge from Senator McCain 

that for the Air Force, business-as-usual would not be acceptable 

when it came to the audit readiness effort. That is a charge I have 

taken to heart and I think the Air Force has stepped forward aggressively on over the last couple of years. Air Force leadership 

simply will not and cannot accept doing business as usual if we expect to get to audit readiness by the statutory deadline in 2017. 

As I promised at that confirmation hearing, I have been a very 

strong advocate for Under Secretary Hale’s effort to really focus our 

FIAR plan on the information that matters to managers. I said at 

the time and I agree now that that is a good idea because it builds 

a positive feedback loop, where the people charged with leading 

and running DOD on a day-to-day basis see the practical results 

of the FIAR effort. 

They get the better information they need to manage better, and 

therefore, they are more likely to seek to invest more in getting us 

to that statutory timeline. It gives the leaders the information they 

need in order to maximize the value we get out of each taxpayer 

dollar. 

I think this new focus really has delivered in terms of creating 

stronger managerial incentives, and it has raised the profile of 

audit readiness across the Air Force. Senator Ayotte’s point about 

auditability as a means to an end of good stewardship is, I think, 

right on target, and that mindset is really taking hold across the 

Air Force. 

Like my colleagues, I am pleased to report that the Air Force has 

made some very good and important progress on some of our key 

interim deliverables over the last year or 2. Some of the wins include our assertions of audit readiness on appropriations received 

33 

and distributed; our Funds Balance with Treasury reconciliation 

process, which Mr. Hale mentioned. 

That is a critical challenge, and sort of balancing our checkbook 

with Treasury, it is over a million transactions a month. We are 

matching up 99.99 percent of them, which is an essential enabler 

for our broader audit readiness effort. 

The existence and completeness of our entire military equipment 

portfolio. We are also moving onto a range of operating materials 

and supplies, things like our cruise missiles and aerial targets and 

several other items there. 

The progress that has been made is a direct result of the exceptional commitment from our CMO, Under Secretary Conaton, and 

the Air Force senior leadership. They have increased the resources 

to this—applied to this effort every year, and they have applied the 

right level of management attention to focus the team on the 

progress. 

Just 2 months ago, Under Secretary Conaton and the Vice Chief 

of Staff for the Air Force, General Breedlove, wrote to all of our 

major commands underscoring, first, the overall importance of the 

FIAR and how it plays into Air Force efficiency efforts; but also 

charging each of those commands with creating the right incentives 

in the performance plans of their senior leaders to focus the organization not just at a headquarters level, but down to the field on the 

financial improvement effort. 

But while we have made great progress on some of these interim 

deliverables, we do still have a long way to go to meet the 2017 

deadline. Our ability to achieve audit readiness depends in part on 

our ability to field our ERPs. These systems are replacing Vietnamera bookkeeping systems that are not compliant with any of the 

key requirements that are needed to get to audit readiness. 

While ERPs are not a panacea and the fielding of them has not 

been without challenges, there is no alternative to modernizing Air 

Force financial management systems. Whether it is ERP or something else, we have to modernize those systems if we are going to 

get to audit readiness. 

In fielding our ERPs, we have benefited greatly in the Air Force 

from being a little bit behind the other Services. We have had an 

opportunity to observe their deployments, observe their fielding, 

and learned quite a few lessons. 

So, for example, we have had a heavy focus on data cleanup and 

data integrity efforts and migrating the historical data over. We 

continue to push forward, consistent with guidance from the Office 

of Management and Budget (OMB) and others, to focus on fielding 

discrete increments and smaller pieces of these ERPs in order to 

improve accountability, avoid big bang approaches. 

Successful deployment of these systems, though, will depend on 

execution and our ability to work these systems through an acquisition and fielding timeline that is—will strain the system. If we 

do DOD acquisition business as usual, we will not be able to successfully field these systems. 

It is for those reasons that I do see moderate risk in the Air 

Force’s ability to meet that fielding timeline. As a result, we are 

working to hedge against that risk and explore interim solutions 

that would help us achieve auditability in a more patchwork way 

34 

if the systems do not deliver on the schedule that is currently 

there. 

Again, this is a belt-and-suspenders approach in many cases. But 

having observed the DOD acquisition of IT systems over quite a 

few years, while we have a schedule in front of us that I have reasonable confidence in, I know that the historical record of achievement of planned schedules on IT acquisitions is not good, and I feel 

a need to hedge against that. 

But I do want to be very clear. We have a comprehensive plan 

toward our business systems modernization and toward our business process improvement that is carefully crafted to get us toward 

an audit-ready environment by 2017. We are pressing forward with 

a very strong leadership commitment to achieving that deadline. 

With that, I am ready for the committee’s questions and the testimony of the other witnesses. 

[The prepared statement of Mr. Morin follows:] 

PREPARED STATEMENT HON. JAMIE M. MORIN

Thank you for the opportunity to brief the subcommittee on your Air Force’s efforts and progress towards financial improvement and audit readiness. We recognize 

that auditable financials will be useful tools helping the Air Force produce the maximum combat capability from each taxpayer dollar invested. The Air Force is implementing the Department of Defense (DOD) Financial Improvement and Audit Readiness (FIAR) guidance through a detailed Financial Improvement Plan (FIP) which 

includes discovery of problem areas, a set of milestones and interim deliverable, and 

assignment of corrective actions to accountable parties. 

Air Force leadership is engaged and committed to our audit readiness efforts. This 

engagement extends to the highest levels—for instance, both uniformed and civilian. 

In May, the Under Secretary of the Air Force, Ms. Conaton, and the Air Force Vice 

Chief of Staff, General Breedlove wrote to the leadership of all our Air Force Major 

Commands emphasizing the importance of audit readiness. 

A key focus in Air Force audit readiness efforts is individual accountability. Toward that end, the Air Force has led the way requiring senior executives to include 

audit readiness objectives in their annual performance plans. These goals must be 

concrete, measurable and individually tailored to ensure accountability. Members of 

my team, the Air Force Deputy Chief Management Officer and a small number of 

other key leaders already have these goals in their performance plans. We continue 

to expand this effort to include executives in acquisition, logistics, and personnel. 

Currently, the end date on Air Force’s audit readiness schedule comes later than 

those of the other Services. This is due in part to our reliance on our Enterprise 

Resource Planning (ERP) systems as part of the solution to several key audit readiness challenges. Over the last 2 years, we have aimed to accelerate our progress by 

seeking additional funding in our fiscal year 2012 budget request and evaluating 

legacy systems for audit. Additionally, Air Force leadership placed heavy emphasis 

on identifying opportunities for interim progress, such as accelerating asserting Existence and Completeness for Medical Equipment and Munitions. Air Force financial 

managers and other responsible officials are engaging with the Office of the Secretary of Defense (OSD) and the other Services to ensure we benefit from the lessons learned by other organizations in their own audit readiness efforts. 

As a result of strong leadership commitment and the changes we have made in 

the last year, we have made significant progress in Under Secretary Hale’s 

prioritized audit readiness areas—Budgetary Information and Mission Critical Assets. 

In September 2010, the Air Force asserted audit readiness on Appropriations received and distributed to our major commands. This assertion covers $165 billion 

or 94 percent of new budget authority. This assertion provides taxpayers the confidence we have control of appropriations received. In April 2011, KPMG, an Independent Public Accounting firm, was hired to express an opinion on our assertion 

and we expect completion of this engagement in late August 2011. 

In December 2010, we asserted audit readiness for our Fund Balance with Treasury (FBwT) Reconciliation. This is analogous to balancing the Air Force checkbook, 

albeit one with approximately 1.1 million transactions per month. Since April 2010, 

we have consistently exceeded the OSD goal of reconciling 98 percent and in June 

35 

2011, we reconciled 99.99 percent of the dollar value. Our unmatched disbursements 

declined from $1.3 billion to $800 thousand since implementing our FBwT reconciliation tool and process. 

We also asserted audit readiness for the existence and completeness of Military 

Equipment in December 2010. This includes satellites, aircraft, remotely piloted vehicles, aircraft pods, and intercontinental ballistic missiles. With a Net Book Value 

of $103 billion, Military Equipment represents approximately one third of our total 

assets. Finally, we asserted audit readiness on the existence and completeness of 

our cruise missiles, aerial targets, and drones in June 2011. Testing will likely reveal a few areas for further cleanup, but this is a major accomplishment. 

Standard business rules and data structures defined in comprehensive business 

architecture are critical to establishing an audit ready environment. The Air Force 

Chief Management Officer (CMO) is responsible for ensuring comprehensive business enterprise architecture is adopted across the enterprise. The CMO’s office exercises oversight of the functional communities’ adoption of this architecture through 

biweekly meetings with representatives from all communities. This enterprise senior 

working group also reviews systems investments exceeding $1 million ensuring appropriate consideration has been given to business process reengineering as an alternative to system investments. 

The Air Force is committed to continuous progress toward audit readiness. For 

several years, we have deferred enhancements to our legacy systems while we developed more robust IT Solutions, including Enterprise Resource Planning Systems 

(ERPs) such as Defense Enterprise Accounting Management System (DEAMS), Expeditionary Combat Support System (ECSS), Air Force Integrated Personnel and 

Pay System (AF–IPPS), and NexGen IT for our real estate and facilities. These 

ERPs were designed to replace numerous subsidiary systems, reduce the number of 

interfaces and eliminate redundant data entry, while providing an environment for 

end-to-end business processes. These systems serve as the foundation for our audit 

readiness which means that delays in deploying these ERPs will impact our ability 

to successfully complete an audit. We coordinated our FIAR plan to achieve audit 

readiness with the deployment of these ERPs. 

For example, DEAMS will serve as the General Ledger for our General Fund 

while ECSS serves as the General Ledger for our Working Capital Fund and the 

Accountable Property System of Record for our Military Equipment, Operating Materials and Supplies, and Inventory. AF–IPPS integrates our military personnel and 

pay processes; recording and managing an annual payroll in excess of $33 billion. 

NexGen IT is our target Accountable Property System of Record for Real Property 

handling $32 billion or 10 percent of total assets. DEAMS and ECSS have already 

deployed initial capabilities and are operating at Scott and Hanscom AFB respectively. We are close to completing the requirements definition process for AF–IPPS, 

including the ‘‘clean-audit’’ standards—and will release an RFP to industry in the 

next 8 weeks for bids on a technical solution. NexGen IT is our target Accountable 

Property System of Record for Real Property handling $32 billion or 10 percent of 

total assets. 

These systems clearly will have a material impact on our statements and any 

delays in their deployment will impact our audit readiness goals. We are working 

with OSD and the Office of Management and Budget to mitigate these risks and 

are exploring opportunities to accelerate the acquisition process using a new approach—the Business Capability Lifecycle model rather than the lengthier process 

outlined in DOD Instruction 5000. 

Successfully implementing a more tailored approached to acquisition that works 

in the fast moving IT environment is key to achieving our audit schedule. I am also 

concerned about the cost and capabilities of the ERPs and am looking at alternatives for deploying several smaller discrete software releases, regularly competed 

to incentivize contractors assisting us. We have also encountered integration challenges with the ERPs within our current information technology architecture. While 

we have taken major steps to get the Air Force ERP systems on track, and I’ve seen 

real progress with DEAMS in its initial deployment, there is very little flex in the 

implementation schedule. Therefore, I see a moderate risk in the Air Force’s overall 

audit readiness schedule. To hedge against the risks either our acquisition process 

or our systems infrastructure will fall short, I have directed an exploration of interim solutions to achieve auditability by the 2017 deadline. 

During fiscal year 2012 we have several important milestones to achieve. We will 

do an early assessment of DEAMS and ECSS to validate they are configured with 

the appropriate controls and data to support an audit. I fully expect to find some 

issues through this review which we will correct as we work towards full deployment, but that is a normal part of the process addressing system weaknesses. Another important fiscal year 2012 milestone is our audit assertion of the Space Based 

36 

Infrared System program. Because a program does not typically create stand alone 

financial statements that are audited, we are working with DFAS to establish the 

parameters of the audit, but anticipate it covering at least 90 percent of the SIBRS 

Procurement and R&D expenditures between fiscal year 2008 and fiscal year 2010. 

Our team had been working to assert existence and completeness for aircraft spare 

engines and missile motors in June 2011. However, we did not feel that the testing 

results were sufficient to support audit readiness and are withholding the assertions 

while additional corrective actions are implemented. We believe that the corrective 

actions will allow us to submit both assertions during the first quarter of fiscal year 

2012 and begin an audit by the third quarter of fiscal year 2012. 

The slippage in the assertion on space engines and missile motors underlines the 

importance of incremental progress and setting stretch goals. We do not expect a 

perfect batting average the first time through and if we built a process to deliver 

perfection the first time, it would not be timely. We develop the FIP and schedule 

primarily at Headquarters based on the best available information, but there are 

always unknowns due to the Air Force’s decentralized operating structure. Our people conduct business at 191 bases across the world organized in 11 major commands. Many processes have evolved differently across our organization, meaning 

that implementing the required corrective actions sometimes takes longer than expected. 

As we work to achieve the 2017 deadline, Air Force leadership is setting numerous stretch goals and setting ambitious goals means occasionally missing them. On 

the other hand, we have also been able to accelerate some assertions based on better 

than expected results. We are also striving to strike the right balance between applying resources to robust planning and testing of progress versus hands-on fixing 

of weaknesses. Both are important. In keeping with best practices, we will rely on 

the DOD Inspector General or hire an independent public accounting firm to opine 

on each of our assertions. It is important to note that there are three or more 

phases of testing enroute to a clean audit—internal Air Force review prior to assertion, external review of the assertion itself, and then the actual audit of Air Force 

financials. 

Thank you for the committee’s interest and focus on this important effort. The 

continued involvement of Congress, OSD, and the Government Accountability Office 

as well as the very strong commitment of today’s Air Force leadership is crucial to 

ensuring continued progress towards an unqualified audit opinion no later than 

2017. 

Senator MCCASKILL. Thank you, Secretary Morin. 

Mr. Khan. 

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

Mr. KHAN. Thank you. 

Madam Chairman and members of the subcommittee, good afternoon. It is a pleasure to be here today to discuss the status of DOD 

financial management improvement and business transformation 

efforts. 

At the outset, I would like to thank the subcommittee for holding 

this hearing and acknowledge the importance of focused attention 

on the corrective actions needed to meet difficult challenges. 

In my testimony today I will provide GAO’s perspective on the 

status of DOD financial management weaknesses and its efforts to 

resolve them. In addition, I will also address the challenges DOD 

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

Regarding the status, like, Madam Chairman, you had mentioned, more than a decade DOD has dominated GAO’s list of Federal programs and operations at high risk due to their susceptibility to fraud, waste, abuse, and mismanagement. In the last 20 

years, as a result of significant financial management weaknesses, 

none of the DOD components—including the Army, Navy, or the 

37 

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

DOD’s past strategies for improving financial management have 

generally been ineffective. But recent initiatives are encouraging, 

specifically recent changes, as Mr. Hale laid out, to the DOD’s plan 

for FIAR plan, if implemented effectively, could result in improved 

financial management and progress toward our auditability. The 

Army, Navy, Air Force, and the Defense Logistics Agency have key 

roles in implementing this plan. 

DOD faces many challenges in overcoming its longstanding management weaknesses. I am going to highlight six of these challenges, which very much resonate what you have mentioned in 

your opening statements. 

First, one of the toughest challenges in implementing the FIAR 

plan is sustaining committed leadership. The DOD Comptroller has 

expressed commitment to the FIAR plan, and he has established a 

focused approach to achieve FIAR’s long-term goals. This is intended to help DOD achieve near-term successes as well. 

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

perform business functions—for example, weapon system acquisitions and supply chain management—are highly dependent on financial management. 

However, within every administration and, of course, between 

administrations, there are changes in senior leadership. Therefore, 

it is paramount that the FIAR plan and other current initiatives 

be institutionalized throughout DOD at all levels. 

Second, a competent financial management workforce with the 

right knowledge and skills is needed to implement the FIAR plan. 

Effective financial management requires a knowledgeable and 

skilled workforce that includes individuals who are trained as well 

and well-versed in Government accounting practices and experienced information technology. Analyzing skill needs and then 

building and retaining an appropriately skilled workforce are needed to succeed in DOD’s transformation efforts. 

The third challenge is to assure accountability and effective oversight to the improvement efforts. DOD has established bodies responsible for governance and oversight of the FIAR plan implementation. It will be critical for senior leadership at each DOD component to ensure that oversight of financial management improvement projects is effective and that responsible officials are held accountable for progress. 

Fourth, a well-defined business architecture is the fourth challenge. For DOD, a key element of modernizing financial management and business operations is the use of integrated information 

systems with the capability of supporting the vast and complex 

business operations that DOD has. 

A well-defined enterprise architecture will be needed as DOD’s 

blueprint for modernizing its business systems. However, DOD has 

yet to address previously identified issues associated with both architecture and investment management. 

The fifth challenge, like we have mentioned, is the ERP systems. 

They are expected to form the core of business information systems 

and DOD components. Their effective implementation is essential 

38 

1DOD excludes from its business systems those designated as national security systems under 

section 2222(j) of title 10, U.S.C. National security 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 missions. 

to improving DOD financial management and related business operations, and they will be key to becoming auditable. 

However, the components have largely been unable to implement 

ERPs that deliver the needed capabilities and on schedule and 

within budget. Effective business system modernization across 

DOD is a key to achieving hundreds and millions of dollars in annual savings. 

Finally, weaknesses in DOD internal control over financial management are pervasive and primary factor in DOD’s ability to become auditable. DOD needs a practical approach to prioritizing actions to correct these weaknesses. 

In closing, I am encouraged by the recent efforts and commitments the DOD leaders have shown towards improving DOD’s financial management. However, DOD’s ability to address these six 

major challenges that I have highlighted today will be critical to 

improving its financial management operations and achieving 

auditability. 

These challenges are significant. They deal with the very basic 

building blocks of sound financial management. However, it is absolutely critical at the same time that DOD continues with its current efforts, commitments, and momentum going forward. 

Madam Chairman, this concludes my remarks. I will be happy 

to answer questions you may have. 

Thank you. 

[The prepared statement of Mr. Khan follows:] 

PREPARED STATEMENT BY ASIF A. KHAN

Chairwoman McCaskill, Ranking Member Ayotte, and members of the subcommittee: 

It is a pleasure to be here today to discuss the status of the Department of Defense’s (DOD) efforts to improve its financial management operations and achieve 

audit readiness. At the outset, I would like to thank the Subcommittee for holding 

this hearing and to acknowledge the important role of such hearings in the oversight of DOD’s financial management efforts. 

DOD is one of the largest and most complex organizations in the world. For fiscal 

year 2012, the budget requested for the department was approximately $671 billion—$553 billion in discretionary budget authority and $118 billion to support overseas contingency operations. The fiscal year 2012 budget request also noted that 

DOD employed over 3 million military and civilian personnel—including Active and 

Reserve servicemembers. DOD operations span a wide range of defense organizations, including the Military Departments and their respective major commands and 

functional activities, 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 operation. To execute its operations, the 

department performs interrelated and interdependent business functions, including 

financial management, logistics management, health care management, and procurement. To support its business functions, DOD has reported that it relies on over 

2,200 business systems,1 including accounting, acquisition, logistics, and personnel 

systems. 

The department’s sheer size and complexity contribute to the many challenges 

DOD faces in resolving its pervasive, complex, and longstanding financial management and related business operations and systems problems. Numerous initiatives 

and efforts have been undertaken by DOD and its components to improve the department’s financial management operations and to arrive at a point where the reliability of its financial statements and related financial management information 

39 

2DOD’s auditors have reported material financial management weaknesses in the following 

areas: (1) Financial Management Systems, (2) Fund Balance with Treasury, (3) Accounts Receivable, (4) Inventory, (5) Operating Materials and Supplies, (6) General Property, Plant, and 

Equipment, (7) Government-Furnished Material and Contractor-Acquired Material, (8) Accounts 

Payable, (9) Environmental Liabilities, (10) Statement of Net Cost, (11) Intragovernmental 

Eliminations, (12) Other Accounting Entries, and (13) Reconciliation of Net Cost of Operations 

to Budget. 3 An ERP system uses commercial off-the-shelf software consisting of multiple, integrated 

functional modules that perform a variety of business related tasks such as general ledger accounting, payroll, and supply chain management. 4GAO, Financial Management: Achieving Financial Statement Auditability in the Department 

of Defense, GAO–09–373 (Washington, DC: May 6, 2009). 5GAO, DOD Business Transformation: Improved Management and Oversight of Business 

Modernization Efforts Needed, GAO–11–53 (Washington, DC: Oct. 7, 2010); Defense Logistics: 

Actions Needed to Improve Implementation of the Army Logistics Modernization Program, 

GAO–10–461 (Washington, DC: Apr. 30, 2010), DOD Business Transformation: Air Force’s Current Approach Increases Risk That Asset Visibility Goals and Transformation Priorities Will Not 

Be Achieved, GAO–08–866 (Washington, DC: Aug. 8, 2008), DOD Business Systems Modernization: Important Management Controls Being Implemented on Major Navy Program, but Improvements Needed in Key Areas, GAO–08–896 (Washington, DC: Sept. 8, 2008), and DOD 

Business Transformation: Lack of an Integrated Strategy Puts the Army’s Asset Visibility System Investments at Risk, GAO–07–860 (Washington, DC: July 27, 2007). 6DOD bears responsibility, in whole or in part, for 14 of the 30 Federal programs or activities 

that GAO has identified as being at high risk of waste, fraud, abuse, and mismanagement. The 

eight specific DOD high-risk areas are: (1) approach to business transformation, (2) business 

systems modernization, (3) contract management, (4) financial management, (5) supply chain 

management, (6) support infrastructure management, and (7) weapon systems acquisition. The 

seven governmentwide high-risk areas that include DOD are: (1) disability programs, (2) interagency contracting, (3) information systems and critical infrastructure, (4) information sharing 

for homeland security, (5) human capital, (6) real property, and (7) ensuring the effective protection of technologies critical to U.S. national security Interests. 7Support infrastructure includes categories such as installations, central logistics, the defense 

health program, and central training. 

would be sufficient to pass an audit with favorable (clean) audit opinions. To date, 

DOD has not achieved effective financial management capabilities or financial statement auditability.2

Today, I will discuss the status of DOD’s financial management weaknesses, its 

efforts to resolve those weaknesses, and the challenges DOD continues to face in its 

efforts to improve its financial management operations. In addition, I will outline 

the status of the department’s efforts to implement its Enterprise Resource Planning (ERP) systems,3 which represent a critical element of the department’s Financial Improvement and Audit Readiness (FIAR) strategy. My statement today is 

based on our prior work related to the department’s FIAR plan 4 and ERP implementation efforts.5 Our work was conducted in accordance with generally accepted 

government auditing standards and our previously published reports contain additional details on the scope and methodology for those reviews. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence 

to provide a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 

BACKGROUND

The department is facing near- and long-term internal fiscal pressures as it attempts to balance competing demands to support ongoing operations, rebuild readiness following extended military operations, and manage increasing personnel and 

health care costs as well as significant cost growth in its weapon systems programs. 

For more than a decade, DOD has dominated GAO’s list of Federal programs and 

operations at high risk of being vulnerable to fraud, waste, abuse.6 In fact, all of 

the DOD programs on GAO’s High-Risk List relate to business operations, including 

systems and processes related to management of contracts, finances, supply chain, 

and support infrastructure,7 as well as weapon systems acquisition. Longstanding 

and pervasive weaknesses in DOD’s financial management and related business 

processes and systems have: (1) resulted in a lack of reliable information needed to 

make sound decisions and report on the financial status and cost of DOD activities 

to Congress and DOD decisionmakers; (2) adversely impacted its operational efficiency and mission performance in areas of major weapons system support and logistics; and (3) left the department vulnerable to fraud, waste, and abuse. 

Because of the complexity and long-term nature of DOD’s transformation efforts, 

GAO has reported the need for a chief management officer (CMO) position and a 

comprehensive, enterprisewide business transformation plan. In May 2007, DOD 

40 

8Sec. 31 U.S.C. § 3515(a),(c); PMB Bulletin No. 07–04, Audit Requirements For Federal Agencies Statements, Appendix B (Sept. 2004). 

designated the Deputy Secretary of Defense as the CMO. In addition, the National 

Defense Authorization Acts for Fiscal Years 2008 and 2009 contained provisions 

that codified the CMO and Deputy CMO (DCMO) positions, required DOD to develop a strategic management plan, and required the Secretaries of the Military Departments to designate their under secretaries as CMOs and to develop business 

transformation plans. 

Overview of DOD’s Accounting and Finance Activities 

DOD financial managers are responsible for the functions of budgeting, financing, 

accounting for transactions and events, and reporting of financial and budgetary information. To maintain accountability over the use of public funds, DOD must carry 

out financial management functions such as recording, tracking, and reporting its 

budgeted spending, actual spending, and the value of its assets and liabilities. DOD 

relies on a complex network of organizations and personnel to execute these functions. Also, its financial managers must work closely with other departmental personnel to ensure that transactions and events with financial consequences, such as 

awarding and administering contracts, managing military and civilian personnel, 

and authorizing employee travel, are properly monitored, controlled, and reported, 

in part, to ensure that DOD does not violate spending limitations established in legislation or other legal provisions regarding the use of funds. 

Before fiscal year 1991, the Military Services and Defense agencies independently 

managed their finance and accounting operations. According to DOD, these decentralized operations were highly inefficient and failed to produce reliable information. 

On November 26, 1990, DOD created the Defense Finance and Accounting Service 

(DFAS) as its accounting agency to consolidate, standardize, and integrate finance 

and accounting requirements, functions, procedures, operations, and systems. The 

Military Services and defense agencies pay for finance and accounting services provided by DFAS using their operations and maintenance appropriations. The Military 

Services continue to perform certain finance and accounting activities at each military installation. These activities vary by Military Service depending on what the 

Services wanted to maintain in-house and the number of personnel they were willing to transfer to DFAS. As DOD’s accounting agency, DFAS records these transactions in the accounting records, prepares thousands of reports used by managers 

throughout DOD and by Congress, and prepares DOD-wide and service-specific financial statements. The Military Services play a vital role in that they authorize 

the expenditure of funds and are the source of most of the financial information that 

allows DFAS to make payroll and contractor payments. The Military Services also 

have responsibility over all DOD assets and the related information needed by 

DFAS to prepare annual financial statements required under the Chief Financial 

Officers Act.8

DOD accounting personnel are responsible for accounting for funds received 

through congressional appropriations, the sale of goods and services by working capital fund businesses, revenue generated through nonappropriated fund activities, 

and the sales of military systems and equipment to foreign governments or international organizations. DOD’s finance activities generally involve paying the salaries of its employees, paying retirees and annuitants, reimbursing its employees for 

travel-related expenses, paying contractors and vendors for goods and services, and 

collecting debts owed to DOD. DOD defines its accounting activities to include accumulating and recording operating and capital expenses as well as appropriations, 

revenues, and other receipts. According to DOD’s fiscal year 2012 budget request, 

in fiscal year 2010 DFAS 

• processed approximately 198 million payment-related transactions and 

disbursed over $578 billion; 

• accounted for 1,129 Active DOD appropriation accounts; and 

• processed more that 11 million commercial invoices. 

PERVASIVE FINANCIAL MANAGEMENT PROBLEMS CONTINUE TO AFFECT THE EFFICIENCY

AND EFFECTIVENESS OF DOD OPERATIONS

DOD financial management was designated as a high-risk area by GAO in 1995. 

Pervasive deficiencies in financial management processes, systems, and controls, 

and the resulting lack of data reliability, continue to impair management’s ability 

to assess the resources needed for DOD operations; track and control costs; ensure 

basic accountability; anticipate future costs; measure performance; maintain funds 

control; and reduce the risk of loss from fraud, waste, and abuse. 

41 

9GAO, Financial Audit: Air Force Does Not Effectively Account for Billions of Dollars of Resources, GAO/AFMD 90–23 (Washington, DC: Feb. 23, 1990). 10GAO, Department of Defense: Additional Actions Needed to Improve Financial Management 

of Military Equipment, GAO–10–695 (Washington, DC July 26, 2010). 11GAO, Defense Management: DOD Needs Better Information and Guidance to More Effectively Manage and Reduce Operating and Support Costs of Major Weapon Systems, GAO–10– 

717 (Washington, DC: July 20, 2010). 12GAO reviewed the following seven major aviation systems: the Navy’s F/A–18E/F; the Air 

Force’s F–22A, B–1B, and F–15E; and the Army’s AH–64D, CH–47D, and UH–60L. 13GAO, Department of the Army—The fiscal year 2008 Military Personnel, Army Appropriation and the Antideficiency Act, B–318724 (Washington, DC: June 22, 2010). 14GAO, Defense Health: Management Weaknesses at Defense Centers of Excellence for Psychological Health and Traumatic Brain Injury Require Attention, GAO–11–219 (Washington, 

DC: Feb. 28, 2011). 

Other business operations, including the high-risk areas of contract management, 

supply chain management, support infrastructure management, and weapon systems acquisition are directly impacted by the problems in financial management. 

We have reported that continuing weaknesses in these business operations result 

in billions of dollars of wasted resources, reduced efficiency, ineffective performance, 

and inadequate accountability. Examples of the pervasive weaknesses in the department’s business operations are highlighted below. 

• DOD invests billions of dollars to acquire weapon systems, but it lacks 

the financial management processes and capabilities it needs to track and 

report on the cost of weapon systems in a reliable manner. We reported on 

this issue over 20 years ago,9 but the problems continue to persist. In July 

2010, we reported 10 that although DOD and the Military Departments 

have efforts underway to begin addressing these financial management 

weaknesses, problems continue to exist and remediation and improvement 

efforts would require the support of other business areas beyond the financial community before they could be fully addressed. 

• DOD also requests billions of dollars each year to maintain its weapon 

systems, but it has limited ability to identify, aggregate, and use financial 

management information for managing and controlling operating and support costs. Operating and support costs can account for a significant portion 

of a weapon system’s total life-cycle costs, including costs for repair parts, 

maintenance, and contract services. In July 2010, we reported 11 that the 

department lacked key information needed to manage and reduce operating 

and support costs for most of the weapon systems we reviewed 12—including 

cost estimates and historical data on actual operating and support costs. 

For acquiring and maintaining weapon systems, the lack of complete and 

reliable financial information hampers DOD officials in analyzing the rate 

of cost growth, identifying cost drivers, and developing plans for managing 

and controlling these costs. Without timely, reliable, and useful financial information on cost, DOD management lacks information needed to accurately report on acquisition costs, allocate resources to programs, or evaluate program performance. 

• In June 2010, we reported 13 that the Army Budget Office lacked an adequate funds control process to provide it with ongoing assurance that obligations and expenditures do not exceed funds available in the Military Personnel-Army (MPA) appropriation. We found that an obligation of $200 million in excess of available funds in the Army’s military personnel account 

violated the Antideficiency Act. The overobligation likely stemmed, in part, 

from lack of communication between Army Budget and program managers 

so that Army Budget’s accounting records reflected estimates instead of actual amounts until it was too late to control the incurrence of excessive obligations in violation of the act. Thus, at any given time in the fiscal year, 

Army Budget did not know the actual obligation and expenditure levels of 

the account. Army Budget explained that it relies on estimated obligations—despite the availability of actual data from program managers—because of inadequate financial management systems. The lack of adequate 

process and system controls to maintain effective funds control impacted 

the Army’s ability to prevent, identify, correct, and report potential violations of the Antideficiency Act. 

• In our February 2011 report 14 on the Defense Centers of Excellence 

(DCOE), we found that DOD’s TRICARE Management Activity (TMA) had 

misclassified $102.7 million of the nearly $112 million in DCOE advisory 

and assistance contract obligations. The proper classification and recording 

42 

15GAO, Financial Management: Achieving Financial Statement Auditability in the Department of Defense, GAO–09–373 (Washington, DC: May 6, 2009). 

of costs are basic financial management functions that and are also key in 

analyzing areas for potential future savings. 

Without adequate financial management processes, systems, and controls, DOD 

components are at risk of reporting inaccurate, inconsistent, and unreliable data for 

financial reporting and management decisionmaking and potentially exceeding authorized spending limits. The lack of effective internal controls hinders management’s ability to have reasonable assurance that their allocated resources are used 

effectively, properly, and in compliance with budget and appropriations law. 

DOD’S PAST STRATEGIES FOR IMPROVING FINANCIAL MANAGEMENT WERE INEFFECTIVE

BUT RECENT INITIATIVES ARE ENCOURAGING

Over the years, DOD has initiated several broadbased reform efforts to address 

its longstanding financial management weaknesses. However, as we have reported, 

those efforts did not achieve their intended purpose of improving the department’s 

financial management operations. In 2005, the DOD Comptroller established the 

DOD FIAR Directorate to develop, manage, and implement a strategic approach for 

addressing the department’s financial management weaknesses and for achieving 

auditability, and to integrate those efforts with other improvement activities, such 

as the department’s business system modernization efforts. In May 2009,15 we identified several concerns with the adequacy of the FIAR plan as a strategic and management tool to resolve DOD’s financial management difficulties and thereby position the department to be able to produce auditable financial statements. 

Overall, since the issuance of the first FIAR plan in December 2005, improvement 

efforts have not resulted in the fundamental transformation of operations necessary 

to resolve the department’s longstanding financial management deficiencies. However, DOD has made significant improvements to the FIAR plan that, if implemented effectively, could result in significant improvement in DOD’s financial management and progress toward auditability, but progress in taking corrective actions 

and resolving deficiencies remains slow. While none of the Military Services has obtained an unqualified (clean) audit opinion, some DOD organizations, such as the 

Army Corps of Engineers, DFAS, the Defense Contract Audit Agency, and the DOD 

Inspector General, have achieved this goal. Moreover, some DOD components that 

have not yet received clean audit opinions are beginning to reap the benefits of 

strengthened controls and processes gained through ongoing efforts to improve their 

financial management operations and reporting capabilities. Lessons learned from 

the Marine Corps’ Statement of Budgetary Resources audit can provide a roadmap 

to help other components better stage their audit readiness efforts by strengthening 

their financial management processes to increase data reliability as they develop action plans to become audit ready. 

In August 2009, the DOD Comptroller sought to further focus efforts of the department and components, in order to achieve certain short- and long-term results, 

by giving priority to improving processes and controls that support the financial information most often used to manage the department. Accordingly, DOD revised its 

FIAR strategy and methodology to focus on the DOD Comptroller’s two priorities— 

budgetary information and asset accountability. The first priority is to strengthen 

processes, controls, and systems that produce DOD’s budgetary information and the 

department’s Statements of Budgetary Resources. The second priority is to improve 

the accuracy and reliability of management information pertaining to the department’s mission-critical assets, including military equipment, real property, and general equipment, and validating improvement through existence and completeness 

testing. The DOD Comptroller directed the DOD components participating in the 

FIAR plan—the departments of the Army, Navy, Air Force and Defense Logistics 

Agency—to use a standard process and aggressively modify their activities to support and emphasize achievement of the priorities. 

GAO supports DOD’s current approach of focusing and prioritizing efforts in order 

to achieve incremental progress in addressing weaknesses and making progress toward audit readiness. Budgetary and asset information is widely used by DOD managers at all levels, so its reliability is vital to daily operations and management. 

DOD needs to provide accountability over the existence and completeness of its assets. Problems with asset accountability can further complicate critical functions, 

such as planning for the current troop withdrawals. 

In May 2010, DOD introduced a new phased approach that divides progress toward achieving financial statement auditability into five waves (or phases) of concerted improvement activities (see appendix I). According to DOD, the components’ 

43 

16GAO–09–373. 

implementation of the methodology described in the 2010 FIAR plan is essential to 

the success of the department’s efforts to ultimately achieve full financial statement 

auditability. To assist the components in their efforts, the FIAR guidance, issued 

along with the revised plan, details the implementation of the methodology with an 

emphasis on internal controls and supporting documentation that recognizes both 

the challenge of resolving the many internal control weaknesses and the fundamental importance of establishing effective and efficient financial management. The 

FIAR Guidance provides the process for the components to follow, through their individual financial improvement plans (FIP), in assessing processes, controls, and 

systems; identifying and correcting weaknesses; assessing, validating, and sustaining corrective actions; and achieving full auditability. The guidance directs the 

components to identify responsible organizations and personnel and resource requirements for improvement work. In developing their plans, components use a 

standard template that comprises data fields aligned to the methodology. The consistent application of a standard methodology for assessing the components’ current 

financial management capabilities can help establish valid baselines against which 

to measure, sustain, and report progress. 

NUMEROUS CHALLENGES MUST BE ADDRESSED IN ORDER FOR DOD TO SUCCESSFULLY

REFORM FINANCIAL MANAGEMENT

Improving the department’s financial management operations and thereby providing DOD management and Congress more accurate and reliable information on 

the results of its business operations will not be an easy task. It is critical that the 

current initiatives being led by the DOD Deputy Chief Management Officer and the 

DOD Comptroller be continued and provided with sufficient resources and ongoing 

monitoring in the future. Absent continued momentum and necessary future investments, the current initiatives may falter, similar to previous efforts. Below are some 

of the key challenges that the department must address in order for the financial 

management operations of the department to improve to the point where DOD may 

be able to produce auditable financial statements. 

Committed and sustained leadership. The FIAR plan is in its 6th year and continues to evolve based on lessons learned, corrective actions, and policy changes that 

refine and build on the plan. The DOD Comptroller has expressed commitment to 

the FIAR goals, and established a focused approach that is intended to help DOD 

achieve successes in the near term. But the financial transformation needed at 

DOD, and its removal from GAO’s high-risk list, is a long-term endeavor. Improving 

financial management will need to be a cross-functional endeavor. It requires the 

involvement of DOD operations performing other business functions that interact 

with financial management—including those in the high-risk areas of contract management, supply chain management, support infrastructure management, and weapon systems acquisition. As acknowledged by DOD officials, sustained and active involvement of the department’s Chief Management Officer, the Deputy Chief Management Officer, the Military Departments’ Chief Management Officers, the DOD 

Comptroller, and other senior leaders is critical. Within every administration, there 

are changes at the senior leadership; therefore, it is paramount that the current initiative be institutionalized throughout the department—at all working levels—in 

order for success to be achieved. 

Effective plan to correct internal control weaknesses. In May 2009, we reported 16

that the FIAR plan did not establish a baseline of the department’s state of internal 

control and financial management weaknesses as its starting point. Such a baseline 

could be used to assess and plan for the necessary improvements and remediation 

to be used to measure incremental progress toward achieving estimated milestones 

for each DOD component and the department. DOD currently has efforts underway 

to address known internal control weaknesses through three interrelated programs: 

(1) Internal Controls over Financial Reporting (ICOFR) program, (2) ERP implementation, and (3) FIAR plan. However, the effectiveness of these three interrelated efforts at establishing a baseline remains to be seen. Furthermore, DOD has yet to 

identify the specific control actions that need to be taken in Waves 4 and 5 of the 

FIAR plan, which deal with asset accountability and other financial reporting matters. Because of the department’s complexity and magnitude, developing and implementing a comprehensive plan that identifies DOD’s internal control weaknesses 

will not be an easy task. But it is a task that is critical to resolving the longstanding 

weaknesses and will require consistent management oversight and monitoring for 

it to be successful. 

44 

17Pub. L. No. 109–163, div. A, § 1122, 119 Stat. 3136, 3452 (Jan. 6, 2006). The National Defense Authorization Act for Fiscal Year 2010 made this strategic plan into a permanent annual 

requirement. Pub. L. No. 111–84, div. A, § 1108, 123 Stat. 2190, 2488 (Oct. 28, 2009), codified 

at 10 U.S.C. § 115b. 18GAO, DOD Civilian Personnel: Competency Gap Analysis and Other Actions Needed to Enhance DOD’s Strategic Workforce Plans, GAO–11–827T (Washington, DC: July 14, 2011). 19GAO–09–373. 

Competent financial management workforce. Effective financial management in 

DOD will require a knowledgeable and skilled workforce that includes individuals 

who are trained and certified in accounting, well versed in government accounting 

practices and standards, and experienced in information technology. Hiring and retaining such a skilled workforce is a challenge DOD must meet to succeed in its 

transformation to efficient, effective, and accountable business operations. The National Defense Authorization Act for Fiscal Year 2006 17 directed DOD to develop 

a strategic plan to shape and improve the department’s civilian workforce. The plan 

was to, among other things; include assessments of: (1) existing critical skills and 

competencies in DOD’s civilian workforce, (2) future critical skills and competencies 

needed over the next decade, and (3) any gaps in the existing or future critical skills 

and competencies identified. In addition, DOD was to submit a plan of action for 

developing and reshaping the civilian employee workforce to address any identified 

gaps, as well as specific recruiting and retention goals and strategies on how to 

train, compensate, and motivate civilian employees. In developing the plan, the department identified financial management as one of its enterprisewide mission-critical occupations. 

In July 2011, we reported 18 that DOD’s 2009 overall civilian workforce plan had 

addressed some legislative requirements, including assessing the critical skills of its 

existing civilian workforce. Although some aspects of the legislative requirements 

were addressed, DOD still has significant work to do. For example, while the plan 

included gap analyses related to the number of personnel needed for some of the 

mission-critical occupations, the department had only discussed competency gap 

analyses for three mission-critical occupations—language, logistics management, 

and information technology management. A competency gap for financial management was not included in the department’s analysis. Until DOD analyzes personnel 

needs and gaps in the financial management area, it will not be in a position to 

develop an effective financial management recruitment, retention, and investment 

strategy to successfully address its financial management challenges. 

Accountability and effective oversight. The department established a governance 

structure for the FIAR plan, which includes review bodies for governance and oversight. The governance structure is intended to provide the vision and oversight necessary to align financial Improvement and audit readiness efforts across the department. To monitor progress and hold individuals accountable for progress, DOD managers and oversight bodies need reliable, valid, meaningful metrics to measure performance and the results of corrective actions. In May 2009, we reported 19 that the 

FIAR plan did not have clear results-oriented metrics. To its credit, DOD has taken 

action to begin defining results-oriented FIAR metrics it intends to use to provide 

visibility of component-level progress in assessment; and testing and remediation activities, including progress in identifying and addressing supporting documentation 

issues. 

We have not yet had an opportunity to assess implementation of these metrics— 

including the components’ control over the accuracy of supporting data—or their 

usefulness in monitoring and redirecting actions. 

Ensuring effective monitoring and oversight of progress—especially by the leadership in the components—will be key to bringing about effective implementation, 

through the components’ Financial Information Plans, of the department’s financial 

management and related business process reform. If the department’s future FIAR 

plan updates provide a comprehensive strategy for completing Waves 4 and 5, the 

plan can serve as an effective tool to help guide and direct the department’s financial management reform efforts. 

Effective oversight holds individuals accountable for carrying out their responsibilities. DOD has introduced incentives such as including FIAR goals in Senior Executive Service Performance Plans, increased reprogramming thresholds granted to 

components that receive a positive audit opinion on their Statement of Budgetary 

Resources, audit costs funded by the Office of the Secretary of Defense after a successful audit, and publicizing and rewarding components for successful audits. The 

challenge now is to evaluate and validate these and other incentives to determine 

their effectiveness and whether the right mix of incentives has been established. 

45 

20 A federated architecture consists of a family of coherent but distinct member architectures 

in which subsidiary architectures conform to an overarching corporate architectural view and 

rule set. 21GAO–10–461; DOD Business Systems Modernization: Navy Implementing a Number of Key 

Management Controls on Enterprise Resource Planning System, but Improvements Still Needed, GAO–09–841 (Washington, DC: Sept. 15, 2009); GAO–08–896; GAO–08–866; DOD Business 

Systems Modernization: Key Marine Corps System Acquisition Needs to Be Better Justified, Defined, and Managed, GAO–08–822 (Washington, DC: July 28, 2008); GAO–07–860. 22GAO, DOD Business Transformation: Improved Management and Oversight of Business 

Modernization Efforts Needed, GAO–11–53 (Washington, DC Oct. 7, 2010). 

Well-defined enterprise architecture. For decades, DOD has been challenged in 

modernizing its timeworn business systems. Since 1995, we have designated DOD’s 

business systems modernization program as high risk. Between 2001 and 2005, we 

reported that the modernization program had spent hundreds of millions of dollars 

on an enterprise architecture and investment management structures that had limited value. Accordingly, we made explicit architecture and investment managementrelated recommendations. Congress included provisions in the Ronald W. Reagan 

National Defense Authorization Act for Fiscal Year 2005 that were consistent with 

our recommendations. In response, DOD continues to take steps to comply with the 

act’s provisions and to satisfy relevant system modernization management guidance. 

Collectively, these steps address best practices in implementing the statutory provisions concerning the business enterprise architecture and review of systems costing 

in excess of $1 million. However, longstanding challenges that we previously identified remain to be addressed. Specifically, while DOD continues to release updates 

to its corporate enterprise architecture, the architecture has yet to be federated 20

through development of aligned subordinate architectures for each of the Military 

Departments. In this regard, each of the Military Departments has made progress 

in managing its respective architecture program, but there are still limitations in 

the scope and completeness, as well as the maturity of the Military Departments’ 

architecture programs. For example, while each department has established or is in 

the process of establishing an executive committee with responsibility and accountability for the enterprise architecture, none has fully developed an enterprise architecture methodology or a well-defined business enterprise architecture and transition plan to guide and constrain business transformation initiatives. In addition, 

while DOD continues to establish investment management processes, the DOD enterprise and the Military Departments’ approaches to business systems investment 

management still lack the defined policies and procedures to be considered effective 

investment selection, control, and evaluation mechanisms. Until DOD fully implements these longstanding institutional modernization management controls its business systems modernization will likely remain a high-risk program. 

Successful implementation of the ERPs. The department has invested billions of 

dollars and will invest billions more to implement the ERPs. DOD officials have said 

that successful implementation of ERPs is key to transforming the department’s 

business operations, including financial management, and in improving the department’s capability to provide DOD management and Congress with accurate and reliable information on the results of DOD’s operations. DOD has stated that the ERPs 

will replace over 500 legacy systems. The successful implementation of the ERPs is 

not only critical for addressing longstanding weaknesses in financial management, 

but equally important for helping to resolve weaknesses in other high-risk areas 

such as business transformation, business system modernization, and supply chain 

management. 

Over the years we have reported 21 that the department has not effectively employed acquisition management controls to help ensure the ERPs deliver the promised capabilities on time and within budget. Delays in the successful implementation of ERPs have extended the use of existing duplicative, stovepiped systems, and 

continued funding of the existing legacy systems longer than anticipated. Additionally, the continued implementation problems can erode savings that were estimated 

to accrue to DOD as a result of modernizing its business systems and thereby reduce funds that could be used for other DOD priorities. 

To help improve the department’s management oversight of its ERPs, we have 

recommended 22 that DOD define success for ERP implementation in the context of 

business operations and in a way that is measurable. Accepted practices in system 

development include testing the system in terms of the organization’s mission and 

operations—whether the system performs as envisioned at expected levels of cost 

and risk when implemented within the organization’s business operations. Developing and using specific performance measures to evaluate a system effort should 

help management understand whether the expected benefits are being realized. 

Without performance measures to evaluate how well these systems are accomVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
46 

23GAO, Department of Defense: Further Actions Needed to Institutionalize Key Business Systems Modernization Management Control, GAO–11–684 (Washington, DC: June 29, 2011). 24GAO, Business Systems Modernization: DOD Needs to Fully Define Policies and Procedures 

for Institutionally Managing Investments, GAO–07–538 (Washington, DC: May 11, 2007); Business Systems Modernization: Air Force Needs to Fully Define Policies and Procedures for Institutionally Managing Investments, GAO–08–52 (Washington D.C.: Oct. 31, 2007); Business Systems Modernization: Department of the Navy Needs to Establish Management Structure and 

Fully Define Policies and Procedures for Institutionally Managing Investments, GAO–08–53 

(Washington, DC: Oct. 31, 2007). 25GAO, Opportunities to Reduce Potential Duplication in Government Programs, Save Tax 

Dollars, and Enhance Revenue, GAO–11–318SP (Washington, DC: Mar. 1, 2011). 

plishing their desired goals, DOD decisionmakers including program managers, do 

not have all the information they need to evaluate their investments to determine 

whether the individual programs are helping DOD achieve business transformation 

and thereby improve upon its primary mission of supporting the warfighter. 

Another key element in DOD efforts to modernize its business systems is investment management policies and procedures. We reported in June 2011 23 that DOD’s 

oversight process does not provide sufficient visibility into the Military Department’s investment management activities, including its reviews of systems that are 

in operations and maintenance made and smaller investments. As discussed in our 

information technology investment management framework and previous reports on 

DOD’s investment management of its business systems,24 adequately documenting 

both policies and associated procedures that govern how an organization manages 

its information technology projects and investment portfolios is important because 

doing so provides the basis for rigor, discipline, and repeatability in how investments are selected and controlled across the entire organization. Until DOD fully 

defines missing policies and procedures, it is unlikely that the department’s over 

2,200 business systems will be managed in a consistent, repeatable, and effective 

manner that, among other things, maximizes mission performance while minimizing 

or eliminating system overlap and duplication. To this point, there is evidence showing that DOD is not managing its systems in this manner. For example, DOD reported that of its 79 major business and other IT investments, about a third are 

encountering cost, schedule, and performance shortfalls requiring immediate and 

sustained management attention. In addition, we have previously reported 25 that 

DOD’s business system environment has been characterized by: (1) little standardization; (2) multiple systems performing the same tasks; (3) the same data stored 

in multiple systems; and (4) manual data entry into multiple systems. Because DOD 

spends billions of dollars annually on its business systems and related IT infrastructure, the potential for identifying and avoiding the costs associated with duplicative 

functionality across its business system investments is significant. 

CLOSING COMMENTS

In closing, I am encouraged by the recent efforts and commitment DOD’s leaders 

have shown toward improving the department’s financial management. Progress we 

have seen includes recently issued guidance to aid DOD components in their efforts 

to address their financial management weaknesses and achieve audit readiness; 

standardized component financial improvement plans to facilitate oversight and 

monitoring; and the sharing of lessons learned. In addition, the DCMO and the 

DOD Comptroller have shown commitment and leadership in moving DOD’s financial management improvement efforts forward. 

The revised FIAR strategy is still in the early stages of implementation, and DOD 

has a long way and many longstanding challenges to overcome, particularly with regard to sustained commitment, leadership, and oversight, before the department 

and its military components are fully auditable, and DOD financial management is 

no longer considered high risk. However, the department is heading in the right direction and making progress. Some of the most difficult challenges ahead lie in the 

effective implementation of the department’s strategy by the Army, Navy, Air Force, 

and DLA, including successful implementation of ERP systems and integration of 

financial management improvement efforts with other DOD initiatives. 

GAO will continue to monitor the progress of and provide feedback on the status 

of DOD’s financial management improvement efforts. We currently have work in 

progress to assess implementation of the department’s FIAR strategy and efforts toward auditability. 

As a final point, I want to emphasize the value of sustained congressional interest 

in the department’s financial management improvement efforts, as demonstrated by 

this Subcommittee’s leadership. 

47 

Chairwoman McCaskill and Ranking Member Ayotte, this concludes my prepared 

statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have at this time. 

For further information regarding this testimony, please contact Asif A. Khan, 

(202) 512–9095 or khana@gao.gov. Key contributors to this testimony include J. 

Christopher Martin, Senior-Level Technologist; F. Abe Dymond, assistant Director; 

Gayle Fischer, assistant Director; Greg Pugnetti, assistant Director; Darby Smith, 

assistant Director; Beatrice Alff; Steve Donahue; Keith McDaniel; Maxine Hattery; 

Hal Santarelli; and Sandy Silzer. 

APPENDIX I: FIAR PLAN WAVES

The first three waves focus on achieving the DOD Comptroller’s interim budgetary and asset accountability priorities, while the remaining two waves are intended to complete actions needed to achieve full financial statement auditability. 

However, the department has not yet fully defined its strategy for completing waves 

4 and 5. Each wave focuses on assessing and strengthening internal controls and 

business systems related to the stage of auditability addressed in the wave. 

Wave 1—Appropriations Received Audit focuses on the appropriations receipt and 

distribution process, including funding appropriated by Congress for the current fiscal year and related apportionment/reapportionment activity by the OMB, as well 

as allotment and sub-allotment activity within the department. 

Wave 2—Statement of Budgetary Resources Audit focuses on supporting the 

budget-related data (e.g., status of funds received, obligated, and expended) used for 

management decision making and reporting, including the Statement of Budgetary 

Resources. In addition to fund balance with Treasury reporting and reconciliation, 

other significant end-to-end business processes in this wave include procure-to-pay, 

hire-to-retire, order-to-cash, and budget-to-report. 

Wave 3—Mission Critical Assets Existence and Completeness Audit focuses on ensuring that all assets (including military equipment, general equipment, real property, inventory, and operating materials and supplies) that are recorded in the department’s accountable property systems of record exist; all of the reporting entities’ 

assets are recorded in those systems of record; reporting entities have the right 

(ownership) to report these assets; and the assets are consistently categorized, summarized, and reported. 

Wave 4—Full Audit Except for Legacy Asset Valuation includes the valuation assertion over new asset acquisitions and validation of management’s assertion regarding new asset acquisitions, and it depends on remediation of the existence and 

completeness assertions in Wave 3. Also, proper contract structure for cost accumulation and cost accounting data must be in place prior to completion of the valuation 

assertion for new acquisitions. It involves the budgetary transactions covered by the 

Statement of Budgetary Resources effort in Wave 2, including accounts receivable, 

revenue, accounts payable, expenses, environmental liabilities, and other liabilities. 

Wave 5—Full Financial Statement Audit focuses efforts on assessing and 

strengthening, as necessary, internal controls, processes, and business systems involved in supporting the valuations reported for legacy assets once efforts to ensure 

control over the valuation of new assets acquired and the existence and completeness of all mission assets are deemed effective on a go-forward basis. Given the lack 

of documentation to support the values of the department’s legacy assets, Federal 

accounting standards allow for the use of alternative methods to provide reasonable 

estimates for the cost of these assets. 

In the context of this phased approach, DOD’s dual focus on budgetary and asset 

information offers the potential to obtain preliminary assessments regarding the effectiveness of current processes and controls and identify potential issues that may 

adversely impact subsequent waves. 

Senator MCCASKILL. Thank you, Mr. Khan, and thank you for all 

of your work in this area. 

We will begin questions now. Let me start with using an example, because the challenge of this hearing is to make this product 

consumable to the public and to my fellow Senators in a way that 

allows us to keep attention and pressure on this issue. 

I think one of the reasons that DOD has failed at this for so long 

is because it never received the kind of attention and emphasis 

that it should have through the years, particularly as it relates to 

sun-setting legacy systems and interfacing between the various 

48 

functions of the military. The military, I think, is famous for its silo 

capability, and no place has the silo been more prevalent than in 

the management of financial information within DOD. 

But there are real consequences to the failures that have continued to plague DOD in terms of financial management. It caught 

my eye that there was a report just issued a few days ago, and this 

is from the IG of DOD. The cost of war data for Marine Corps contingency operations were not reliable. What this report said is that the data—out of $4.3 billion in Marine Corps transactions, the IG found that 86 transactions valued 

at $1.82 billion were not properly supported. In addition, almost 

$1.5 billion in transactions were reported in the wrong operation 

or cost category. As a result, data provided to Members of Congress 

and other decisionmakers did not reflect how funds were really actually spent. 

Now, it is astonishing to me that we would have almost half of 

the transactions in a contingency operation not properly supported 

and that we would have $1.5 billion in those transactions in the 

wrong cost or operations category. 

I want to give you a chance, Secretary Commons, to respond to 

the report. I know that management has been asked to provide 

completion date for the recommendations on this audit by August 

22. I would ask you that this committee would also like to receive 

the completion date for the recommendations that have been made 

in this audit. 

But I want to give you a chance to respond to this recent report 

that Congress is not getting accurate information about how we are 

spending our money in Iraq and Afghanistan when it comes to Marine Corps operations. 

Ms. COMMONS. Madam Chairman, I believe for that report, it 

was a matter of establishing a cost code to report those costs, and 

we had not promulgated that information to all of our field activities. So some of them did, in fact, record it in the wrong category. 

We are in the process of correcting that and putting out policy 

so that they will know exactly how to report the costs in the proper 

category. We will work with that. We will be happy to give you the 

information about the completion date and the precise actions that 

we will take to make sure that that does not happen in the future. 

Senator MCCASKILL. It is very troubling that we are not getting 

cost codes to people in the field. The taxpayers of this country have 

spent an enormous amount of money on these contingency operations. I don’t need to go through the record as to how many different ways we have figured out that we weren’t keeping good 

track of the money in contingency operations. 

So we will look forward to responses on this and, most importantly, look forward to a signal from the IG that they are more 

comfortable that we are keeping track of contingency operations 

spending. 

Let me now briefly go to the Global Combat Support System 

(GCSS)-Army and GCSS-Marine Corps systems. One of the elements of the FIAR plan, which is the FIAR plan that people have 

referred to, is the existence and completeness of critical assets. 

In a report that is scheduled to be issued tomorrow, GAO says 

that DOD’s business systems make it difficult to obtain timely and 

49 

accurate information on the assets that are present in theater and 

operations, and DOD lacks a comprehensive plan for addressing 

the problem. 

They go on to say ongoing efforts to modernize or replace DOD 

business information systems, including systems supporting supply 

chain management, are intended to improve data quality. However, 

we have found that data quality problems persist, and these systems are not designed to routinely share data across organizational 

boundaries, such as among Military Departments. 

So this is the situation we have. We have the Army and the Marine Corps sharing equipment in theater. Anybody disagree with 

that—that they are sharing equipment in theater, the Army and 

the Marine Corps? 

Okay. They both are designing systems to track real-time equipment in theater, equipment that they are sharing. Now, $3.9 billion 

we are planning to pay for this system for the Army, almost $4 billion for a system to track equipment for the Army. We are paying 

another $934 million, or another $1 billion, to develop and field the 

same kind of system for the Marine Corps to track the same equipment. 

Now, here is the punch line. They don’t speak to each other. 

Now, how does this happen? How do we end up buying $5 billion 

worth of systems to track the same equipment that don’t talk to 

each other? That is for, obviously, the Army and the Navy, but also 

I would love to hear from Ms. McGrath or Secretary Hale on this 

question also. 

Ms. MCGRATH. I am happy to start. 

The two systems, although they sound very similar in the capabilities they deliver for the respective organizations, are embedded 

into very different, I will say, business processes that they execute 

their both supply and maintenance infrastructures. 

So, although they sound very much the same, they do operate 

within two very different infrastructures and processes, and they 

are not one-for-one used by the same people. So, although, as I 

mentioned, they sound very similar, there is a lot more detail behind the execution of those systems and those capabilities that 

those systems enable. 

Senator MCCASKILL. They couldn’t use the same system? 

Ms. MCGRATH. That said, I do believe that because the Marine 

Corps has fielded, GCSS-Marine Corps—they are certainly further 

ahead in their implementation than the Army is to date—that the 

Army did, as part of their analysis of alternatives (AoA), it is my 

understanding, take a look at the GCSS-Marine Corps capability as 

part of their AoA prior to making the decision to go with a different 

application to deliver their capability. 

Senator MCCASKILL. I would like to find out who that person was 

that made that decision, that looked at the Marine Corps. I would 

like the analysis as to why the Marine Corps system was not adequate and why we had to spend another $4 billion. 

That is a significant price tag, and it is—there better be damned 

good reasons as to why the Marine Corps system was inadequate, 

if it was so inadequate that you had to spend another $4 billion to 

get the job done. 

50 

So, I would appreciate knowing who the decisionmakers were on 

that item. I would like to have a written analysis of why the Marine Corps system was inadequate and why it remains inadequate 

today. 

In light of our current fiscal climate, why they cannot suck it up 

and use the same system the Marine Corps is using to track equipment since it has been fielded. 

Ms. MCGRATH. Yes, ma’am. There is an AoA that is required to 

be done on every one of those business systems. So, for us to provide to you, we could do that in the very near-term. 

[The AoA for the Global Combat Support System Army, follows:] 

[See annex printed at the end of this hearing]. 

Senator MCCASKILL. Okay, great. Thank you very much. 

Senator Ayotte. 

Senator AYOTTE. Thank you, Madam Chairman. 

I wanted to follow up on the IG’s report. I know that you are 

going to report back to this committee, but I think what that report 

showed is that the reconstruction money, defense dollars, are particularly susceptible to waste, fraud, and mismanagement, in conjunction with the Overseas Contingency Operations (OCO) funding. 

What is it that—I know we are going to get a report back. But 

Secretary Hale, what is it that you see, having reviewed that report, that needs to be done to DOD to improve that process, the 

financial management of the OCO funding? 

Also, I guess in conjunction with that, the other piece of that report, which I am deeply interested in, had to do, of course, with the 

money that was going to our enemy because we were contracting 

in some instances with those that were collaborating with our 

enemy. Senator Brown and I have a bill that is incorporated in the 

NDAA. 

But I think also recently when we asked General Dempsey in his 

confirmation hearing about this topic, he pointed out that there 

was a need for more contracting officers, better-trained contracting 

officers. 

So I throw all of that at you and would ask you to say, when you 

reviewed that report, what was the impression you had in terms 

of what we need to do differently? I would like to have Mr. Khan 

also comment on that. 

Mr. HALE. Let me focus on the corruption issues in Afghanistan. 

There are major problems, Senator Ayotte. I think you know that. 

We have established a task force to try to reduce it where we can. 

We are dealing with a culture that is just different than ours. 

But I believe they are having some success. They have started 

vetting contractors and subcontractors to try to weed out those that 

have bad records. They are trying to work with Afghan officials, 

the ones that we can work with well, to minimize corruption. 

We have gotten most of the cash off the battlefield. We pay for 

hardly anything in U.S. cash now in Afghanistan. It is almost all 

electronic funds transfer. Where we can, we pay in afghanis, which 

are a lot harder to export to outside the country. 

So I think there is some progress. But it is an uphill fight, and 

we are dealing with just a very different culture than the one we 

51 

have. So the best answer I can give you, it is going to be an ongoing issue, I think, as long as we are involved in Afghanistan. 

Senator AYOTTE. Can you also follow up to the issue that the 

chairman raised in terms of the misallocation of funds in terms of 

the OCO funding? 

Mr. HALE. I am going to defer that one to Ms. Commons. I, 

frankly, have not reviewed that particular report. I think she answered it. I will look at it, but I have not. 

Senator AYOTTE. I know that you had answered to it, but I 

thought maybe you might have some insight on that as well. 

Mr. HALE. I would underscore what she said. We need to fix it, 

and I think what I heard Gladys say was we need to get the right 

codes out there. 

I don’t know that we violated the Anti-Deficiency Act or anything 

like that. But we need to get it in the right category so we are supporting and providing the information that we all need. Not just 

you, I need it, and we all need it. So we need to fix it. 

Senator AYOTTE. I also wanted to ask you about the milestones 

that have been completed since you submitted your last report on 

DOD’s FIAR plan in November 2010. According to your most recent 

report, which you submitted in May, DOD accomplished only 1 

milestone and 11 were pushed out to future dates. 

So, as I understand the math, 1 for 12. Your report also identifies another set of milestones called the interim goals for initial 

FIAR opportunities—excuse me, priorities—and the results here 

aren’t much better, with four milestones being met and nine 

pushed out to later dates. 

So if we put that all together, we are basically 4 for 13 on these 

interim goals, and DOD has been citing those as things that it has 

been focusing on. But if we look at it as 5 for 25, shouldn’t we be 

concerned about this? What does it suggest in terms of DOD’s ability to meet the 2017 deadlines? 

If Mr. Khan can also comment on this, I would appreciate it. 

Mr. HALE. I haven’t counted them in the fashion you have, but 

I will accept your math. I like to look at the ones we have actually 

started, and I think they are so important. We haven’t done any 

in the past in terms of validations. We haven’t had any goals, nor 

have we done any to speak of. 

We actually have an audit of a Military Service underway. First 

time that has ever happened in DOD. I won’t go through them all 

again, but we have a number of the validations. 

I don’t want to waste the money by pushing if we are not ready, 

but I hear your point that we need to pick up the pace in terms 

of meeting these deadlines. I share your concern. 

Again, I haven’t counted them quite that way, but I will accept 

your math and accept the challenge that we need to pick up the 

pace. 

Senator AYOTTE. Is there anything more that we can be doing as 

Congress to help this process move forward? Because, obviously, 

you are working toward it. Are there obstacles that we have put 

in place, or can we better give you the tools that you are missing 

right now? 

Mr. HALE. I rarely ask for hearings, but I think some steady 

pressure, hopefully moderate pressure, is a good idea. It focuses us, 

52 

just as I had a boss early in my career who said to me when I became confirmed, ‘‘Yours is the power to call meetings.’’ 

That sounded very bureaucratic, but I learned that he was right 

because it focused attention. Well, yours is the power to call hearings, and it also focuses attention. 

There are some things you can do. One in particular. We haven’t 

talked about it, but we have proposed a course-based certification 

program for defense financial managers, similar to the one in acquisition. It will establish a framework we don’t have now. It will 

allow us to require courses. 

We want it to be mandatory with appropriate waivers. That will 

require legislation. It is in the House bill. I believe it is in the Senate Armed Services Committee (SASC) bill. I think the SASC language is very good, and I hope that it survives in conference. So 

I would appreciate your help there. 

I will say one more thing you can do, and I know you can’t do 

this personally. Don’t put us on another Continuing Resolution for 

6 months. I can’t tell you how much time that drained from financial managers. It is very difficult to manage, and it also was devastating, I think, to our contracting workforce. 

So if there is any way we can avoid that, I would hope you would 

try. 

Senator AYOTTE. Secretary Hale, I have to tell you, this is music 

to my ears because I am the newest appointment to the Senate 

Budget Committee, and I am anxious for us to actually get down 

to the hard work of putting together a budget. I couldn’t agree 

more that this short-term funding is not the best way to fund a 

government, nor is it the best to deal with the fiscal crisis that we 

face. 

Mr. HALE. A debt ceiling agreement would help, too. 

Senator AYOTTE. Well, there you go. [Laughter.] 

I don’t know if Mr. Khan had any comments? My time is up. But 

if you had any comments? 

Mr. KHAN. Just to add to what Mr. Hale said, I think there have 

been slippages in milestones. The more important ones to view and 

to keep track of are the slippages in the ERP milestones. 

2017 is going to be upon us very soon, sooner than we expect. 

Without the implementation or effective implementation of those 

ERPs within the Services, it will be a challenge reaching the 2017 

milestone to be audit ready. 

Thank you. 

Senator AYOTTE. Thank you. 

Senator MCCASKILL. Thank you. 

I do want to say for the record that the irony is not lost on at 

least the subcommittee chairman that it does take some nerve for 

us to call a hearing calling you to task for your lack of fiscal management in light of what we are busy trying to get done here in 

the halls of Congress this week. 

Clearly, this could be in the category of, ‘‘Hello, pot, this is kettle.’’ [Laughter.] 

So I do get that part. 

Senator Begich, questions? 

Senator BEGICH. Thank you very much, Madam Chair. 

53 

Let me, if I can, and whoever can answer this, and then I may 

have some additional follow-up to it. 

First, we know the Corps of Engineers—and maybe this is for 

Secretary McGrath and Secretary Hale. I am not sure which one. 

But the Corps of Engineers and Defense Contract Audit Agency 

have auditable financial statements. I heard you mentioned a little 

bit, but I want to follow through on this. They are able to be audited. What are we learning from that? 

I guess, just so you know, I am just a little frustrated. I know 

a lot of you folks are new to the process here. But I am frustrated 

that we are not—it is one of the largest units, and we can’t audit 

ourselves. So I won’t go through that lecture. 

But how does the Corps do it? What are you doing to replicate 

or improve on that? Why is it going to take you 6 years? 

Mr. HALE. The Corps is a lot smaller. I don’t take away from 

their accomplishment one bit. It took them about 8 years, I might 

add, to get there. But they are a lot smaller, and that makes it 

easier. 

We have learned, I think, from what they have done and are trying to copy their successes. Even more importantly, we are finally, 

as I have said, auditing the financial statement, one of them, of a 

Service, the Marine Corps statement of budgetary resources. We 

are learning a great deal from that. 

It is discouraging in some ways because I think we have learned 

that our business processes are simply not standard, sufficiently 

standard to accommodate an audit, and I believe that is going to 

be true throughout all of the Military Services. 

To start to fix that, I have asked the Services to assemble teams, 

probably from their audit agencies, that should go out to the commands and get a report on financial processes and make an assessment for us about what we have to do to improve them so that they 

are auditable. I hope that we can get that started soon. We are 

working internally to move ahead. 

So that is an important lesson learned. The other reason it takes 

so long are the systems. We simply have to have them. I think it 

is particularly true in the Army and the Air Force. Their systems 

are sufficiently old that they just aren’t going to support what an 

audit requires. 

They take time to implement and money, and both are in short 

supply, particularly the money. I am not making excuses. I know 

it sounds like whining. I would like to go faster, too. 

Senator BEGICH. No, let me walk through this. Are you going to 

do within each one of those kind of—and it sounds like you are, to 

some extent—but instead of waiting for the whole thing to be developed, are you going to do subaudits? 

Mr. HALE. Yes. 

Senator BEGICH. I know when I was on my local assembly, I was 

chair of the Budget and Audit Committee for, I think, 2 or 3 years. 

We were given a presentation to change the system and do the 

whole thing. 

They were going to do the whole thing all at once, which was 

going to be a disaster. You could see it coming. We forced them into 

kind of these micro elements so we could actually refine it as it 

moved along. Is that the game plan? 

54 

Mr. HALE. Yes. That is the game plan and a focused strategy. So 

let us focus on the information we most use to manage, which 

makes sense, let us start with the stuff that we actually need, 

which would include the budget, because we manage the place 

based on budgets, and also knowing where our assets are and how 

many we have because that is critical to warfighters. 

So we focused first on that. We will take pieces within that as 

well. These validations that I spoke of are essentially mini audits. 

Pick a section they think we are ready to go. We will hire an independent public accountant or, in some cases, the IG, and ask him 

to go in and give us advice. 

We are already finding that we are learning a lot from those because they can tell us, ‘‘Hey, you are doing okay here, but you are 

not doing okay there. You have to change.’’ 

Senator BEGICH. Let me ask you in regards to assets. I am trying 

to follow up on what the chairwoman was getting to. That is so the 

Army versus the Air Force versus the Marine Corps, is their management of their assets systems different, or will be different? I am 

seeing a head shake ‘‘yes’’ here. So it wasn’t your words, but I saw 

a head over here—— 

Mr. HALE. I would say they have different processes. 

Senator BEGICH. That is not what I am asking. I am not sure— 

an asset is an asset, okay? As a former mayor, I had a police department, a fire station. We had the same system. They had different missions. They had sub-missions. Then I had public works, 

libraries. Everyone had a different mission, but the asset management was the same. 

So, as a mayor, if I wanted to know, at any given point, what 

my capacity is in an emergency, what kind of equipment was available department-wide, city-wide, I could do that. 

Ms. MCGRATH. So their total asset visibility is what you are talking about, and the GCSS capabilities that we have discussed, both 

the Army and the Marine Corps, are their respective contributors, 

if you will, to that total asset picture. 

There is another, I will call it a command-and-control system 

that has a responsibility to bring that asset visibility from the respective components into that common operating picture. Today, 

my understanding is that we don’t have that total asset visibility 

in the aggregate because we don’t have defined, I will call them 

standards across DOD. 

Senator BEGICH. That is your goal? 

Ms. MCGRATH. Yes, absolutely. Moving toward not only the 

standards within the logistics space for asset visibility, but total 

asset visibility, period, irrespective of commodity, be it a ship or a 

plane or a piece part. 

That is tied to the overarching logistics, I will call it road map, 

so that they have that common operating picture, both on the field 

and in the business space. 

Senator BEGICH. Let me ask you another question in regards to 

the layers. As you guys are doing your work, and not to be disrespectful, but like us, we come and go. It is the layers deeper 

down. 

What is going to change in that culture after how many years of 

no audits, forever? So how are you going to change that? 

55 

I know you are going to say you are going to do training. You 

are going to do this and do that. But the reality is some of those 

people will have to go. That is just the way it is. Because I know 

this—you cannot retrain 100 percent of the people to change the 

way they have been doing business for the last umpteen years. 

One, are you going to do that? Do you have the systems to do 

it and a process that is going to be immediate, not just, well, we 

have to kind of move them over here and move them over there to 

survive? 

Because if you don’t do that, it doesn’t matter what system you 

have. Because the people—and this is my simplistic way of saying 

it—at the front desk, putting the data in, wherever they may be 

stretched across the globe, wherever our assets are—if they are not 

trained or understand the new culture, you are going to still have 

problems down the road. 

So to me, it is going to be those layers deeper down. What are 

you going to do to dramatically change that culture? Are you going 

to be able to do and have the wherewithal to say to them we are 

not doing business that way. If you don’t like working here, then 

get the hell out because we have to change the way we do business. 

Who wants to take that one? 

Ms. MCGRATH. Again, I will start. The change management challenge, I think, is the largest challenge. There are many challenges—— 

Senator BEGICH. The change—the culture? 

Ms. MCGRATH. The culture, right. The change management challenge, articulating both the business value and the need to change 

so that people understand what their contribution is to the overall 

business outcome you are trying to achieve. Here we are talking 

about financial auditability. 

Some of the things that have been discussed in terms of taking 

a cross-functional look at achieving auditability we are putting in 

place largely due to a lot of the tools that Congress has provided 

us in the NDAA legislation, ensuring that we have done appropriate business process reengineering. So the front desk individual 

can’t do things the way they are accustomed to doing. They must 

change. 

Senator BEGICH. So my question is, if you can’t get them to 

change, do you have the mechanisms to get rid of them? That is 

the ultimate question because the human element is what starts 

the train moving. 

Ms. MCGRATH. I think, through the systems implementations 

and the drive to the business outcomes driven by not only the top 

leadership but layers down is what is required to make those 

changes happen. I think that all of the tools we are putting in 

place, institutionalizing where we can, wherever we can, will help 

enable that sustained practice. 

Senator BEGICH. Simple question—I am going to end here. Do 

you have the capacity to get rid of people who are not—it is human 

nature in any organization change that you are going to have a 

percentage that will not adapt. That will want to keep their job, 

but will not adapt. 

That is the ultimate question, because if you don’t get that information flowing on the front end, I guarantee you, whatever you see 

56 

on the top, it is going to be a problem. That is my only question— 

yes or no? 

It is a pretty—you should say yes to this. I am trying to help you. 

Ms. MCGRATH. Well, no, no—— 

Mr. HALE. Yes, but this is not a strength of the Federal Government. It is very difficult to terminate employees. But, yes, the process exists. It is just it is cumbersome, and it tends to take a long 

time. 

Senator BEGICH. But you understand the problem? 

Ms. MCGRATH. Absolutely, and I think that driving a change 

management through efficiencies and effectiveness at the organization will enable those people to I want to say get out of the way, 

whether—— 

Senator BEGICH. Think about their future? 

Ms. MCGRATH. Think about their future—much better words. 

Senator BEGICH. Okay. I will leave it at that. 

Thank you, Madam Chair. 

Senator MCCASKILL. Senator Cornyn? 

Senator CORNYN. Thank you, Madam Chairman. 

Thank you all for coming today. 

I am here because I am concerned about our national security. 

During tight budgetary times, I know DOD is going to have to be 

doing more with less. I intend to make it one of my responsibilities 

to make sure it is adequate to the task and the challenges we face. 

But as someone who believes that national security is the number one responsibility of the Federal Government, I simply can’t explain to my constituents some of the anecdotes that we have heard 

with regard to financial mismanagement. I appreciate what you 

said, Secretary Hale, that a little firm pressure is a good thing, and 

I just wanted to show up and let you know I am going to be contributing to that. [Laughter.] 

That pressure is going to get firmer and firmer and firmer, using 

every tool that I have, whatever that may be. 

But when I read an interview in 2008 that the Comptroller at 

the DISA gave to Federal News Radio where he acknowledged both 

the problems with the financial management discipline that you 

talked about, as Senator Ayotte identified, the 10-to-1 savings, $10 

basically saved for every dollar invested in financial management 

system improvement. 

But they actually, in this radio interview, said that they found 

$400 million at DISA. This is for an agency that has 16,000 personnel. So, if you multiply that across all the personnel, assuming 

you could do that, it is shocking, to say the least. 

I was delighted to hear Secretary Panetta testify, both informally 

and at his hearing, that he intended to make this a priority. I appreciate all the work that each of you are doing to make it a reality. But it strikes me along the lines that Senator Begich mentioned, that what is critical is to have goals, resources, and accountability. 

I know the chairwoman well enough and Senator Ayotte and the 

rest of us enough to know that we intend to provide you with not 

only the goals, but the resources and also the accountability that 

is going to be necessary for your success and our collective success. 

57 

Secretary Hale, in 2006, you headed up a task force to look into 

the possibility of creating a CMO for the Secretary of Defense. In 

your report, your task force recommended creating a position with 

responsibility and authority to be the CMO/Chief Operating Officer 

for DOD, a principal under the Secretary of Defense for management and CMO. 

There continues to be difficulty with not having senior-level managers armed with appropriate budgetary and organizational authority needed to direct Under Secretaries and Service Secretaries 

responsible for the day-to-day management of DOD’s financial improvement and business transformation efforts across all the functions within DOD. 

Why isn’t the approach that you recommended when you headed 

up the task force needed today? 

Mr. HALE. I think DOD chose another route, which is to vest that 

authority in the Deputy Secretary. They wanted one Secretary, and 

I understand that. 

They did create a DCMO. She is sitting to my left. I think it has 

been very valuable to DOD. It has given somebody who has the experience, the time to focus on the systems. 

They used to fall as a collateral duty to the Comptroller, in many 

respects, and it wasn’t happening because the budget was so overwhelming in terms of time. It has given somebody who has the experience and the time the opportunity to focus on performance 

management and other things that Beth does. 

So I believe it has worked out well. They did choose a different 

route, and I accept that. We were an advisory group when I issued 

that report. I wasn’t, I think, the lead, but I was on the team. But 

I think it is working reasonably well. 

I am pleased with the DCMOs—and not just, I might add, at 

OSD. Let me add something maybe, Madam Chairman. We had a 

hearing on efficiencies. We just finished a review with each of the 

Services and the defense agencies. 

I confess I was skeptical going in about how well we were doing 

with the plans for those—that is $178 billion in fiscal year 2012 to 

fiscal year 2016. I am much more encouraged. The Services are 

clearly taking this very seriously. They all have management structures. Generally, they have plans for the fiscal year 2012 and fiscal 

year 2013, or where they can’t meet them, and there are cases, 

they are looking actively to substitute other efficiencies. 

So I believe I teamed with Beth, the DCMO, in that effort, and 

I think she was very helpful, and her office. So I am feeling better 

about the $178 billion, and I know that we are going to have to 

look for more and that we will need to continue that oversight. 

So I just wanted you to know that we are working the issue, and 

wherever Secretary Gates is, I want to tell him, too. 

Senator CORNYN. Ms. McGrath, since you are the DCMO, how do 

you feel about the recommendations of Secretary Hale’s task force 

and the alternative direction DOD has taken? Do you feel that you 

have the resources you need not only to do your job, but to hold 

other people in DOD accountable? 

Mr. HALE. Can I just clarify one thing? I wasn’t the Secretary at 

the time. That was an advisory group. I just want to make sure 

58 

that I didn’t make the recommendation as the Secretary. I was on 

the Defense Business Board. 

Senator CORNYN. If I misspoke, I apologize. I knew you headed 

up the task force, or at least that is in my notes here. 

But Ms. McGrath? 

Ms. MCGRATH. I feel that the DCMO has the authority through 

the CMO, or the Deputy Secretary of Defense, where I am going 

to say all of this conversation comes together to execute both the 

priorities, some of the oversight that Mr. Hale talked about in 

terms of efficiencies, both the follow-through and execution, and 

the identification of new ones. 

I work very closely with the Under Secretaries of the Military 

Departments, as the CMOs of the Military Departments. Again, 

they are looking from a corporate perspective how do things integrate. So, I actually do think it is an effective structure and that 

DOD has capitalized on the opportunity and is using it effectively. 

Senator CORNYN. Mr. Khan, do you agree or disagree? 

Mr. KHAN. The positions have been established, and people have 

filled those offices. We are waiting for how these particular offices 

are going to result in specific actions. 

One of the positives that maybe I can point out, and that is the 

example we are looking for, was the recent removal of the DOD 

personnel security from DOD high risk. That is a positive. We are 

looking for the same type of intensity, same type of commitment 

and leadership for the removal of the other high-risk areas. 

So we are much more focused on results. There have been plans. 

There have been governance boards. The role of the CMO or the 

CMO organization at the Military Departments is to drive the 

transformation. 

As far as from what we can see, it is a start, but we want to see 

the results. The results would be how it impacts, how the role, responsibilities, and action impact some of the other longstanding 

and pervasive weaknesses. We would like to see some more action 

on the other high-risk areas—financial management being one 

area. 

Senator CORNYN. Thank you. My time is up. 

Senator MCCASKILL. Thank you, Senator. 

Senator Manchin. 

Senator MANCHIN. Thank you, Madam Chairman. 

I am so sorry that I was running late. I had another meeting to 

be at, but I wanted to fill in a few things. 

First of all, the concern, I think, that Senator Ayotte talked 

about is what we have is with what is happening and what we are 

hearing about happening as far as the corruption, outright thievery 

that goes on over in Afghanistan and Pakistan and every place else 

that we seem to be doing business over there. It is hard for me to understand how $10 million can go missing in cash. The report, I think, is $10 million a day, up to about $10 

million a day. Did you touch on this, Kelly? 

Senator AYOTTE. I didn’t touch on the numbers, but, yes, talked 

about it. 

Senator MANCHIN. But $10 million, that is $3.6 billion a year. 

This has been going on for I don’t know how long. I have been over 

there a few times. So we see a lot of concerns we had. But I can 

59 

follow up with another question that might be something more on 

your line, if that is not in your line on the money. 

Mr. HALE. It is in my line. Anything to do with money. I am not 

familiar with the specific numbers. I will say what I said earlier. 

There is a problem in Afghanistan. It is a different culture. We 

are doing our best to push for less corruption. We have established 

a task force under the command now of General Allen. It has done 

a number of specific things—vetting of contractors and subcontractors to try to be sure that we are dealing with people that are reliable, working with the officials where we can work with them to 

try to minimize this problem. 

We don’t use American cash anymore in Afghanistan. Almost all 

of it is electronic funds transfer. We are trying wherever we can 

to pay local vendors in afghanis. It is a lot harder to export those 

to other nations. 

All of these are good things, and we need to continue, and we 

need to push this hard. I think we probably won’t fully solve the 

cultural issues. We will do our best. 

Senator MANCHIN. No, I know that. I can give you a few examples. 

I have a constituent who is in the military and working with the 

Afghanistan Ministry of Interior, Public Affairs. He tells me that 

250 to 1,000 vehicles that we purchased through U.S. tax dollars 

are missing. That is a lot of vehicles that go just missing. 

I was a former Governor, and all of us have had former positions 

we were responsible for offices. I was responsible for the State 

budget and how we procured. It all starts with how you purchase. 

If you don’t have a good purchasing system, you are not going to 

have good auditing because you can’t follow it. 

We revamped our whole purchasing, and we had to have a purchase order. It had to be one that was of need. The purchase order 

followed into a purchasing agreement. The purchasing agreement 

followed into basically a complete auditing system that had to show 

how we disposed of it also. 

I don’t know why it is so complicated, and why you—has it just 

morphed into something so large that it is just unmanageable for 

you all? 

Mr. HALE. I think we are just dealing with different attitudes 

than we do in the United States toward accountability. 

Senator MANCHIN. I am not even saying over there. I am just 

saying how we do our business. 

Mr. HALE. Oh, here. 

Senator MANCHIN. Yes, I mean—— 

Mr. HALE. I am not dealing with 250,000 vehicles missing in the 

United States. I need to know about that. 

Senator MANCHIN. Well, I am—— 

Mr. HALE. Is that here? Is that what you are saying? 

Senator MANCHIN. I am just asking when was the last time we 

had a really good audit for the entire DOD? 

Mr. HALE. Well, we have never had a successful one. 

Senator MANCHIN. That is what I thought. 

Mr. HALE. A financial audit. I hear your point. But I do believe 

that—I mean, I am not aware of—— 

60 

Senator MANCHIN. I am brand new. I am the new kid on the 

block here. I can’t—it is just inconceivable for me how DOD, being 

one of our largest, and you can see the amount of money we put 

into it. We were told yesterday that we spend more money on defense than all the other nations combined. 

I don’t know if that is accurate or not, but it might be right close. 

Mr. HALE. Might be. 

Senator MANCHIN. How we don’t have a handle on this thing. 

Mr. HALE. Let me come at that differently. I believe we do have 

reasonable financial controls—and I know this probably won’t be a 

popular statement—in DOD on the budgetary—on the money you 

give us. I think we aren’t over there spending your $671 billion 

that you gave us any way we want. 

I say that for two reasons. One, we have 60,000 people who do 

have a culture of stewardship. I have a lot of personal familiarity 

with them, and I know they do. 

But we also have external auditors. We have about 3,000 auditors in DOD watching our every program and financial move. It is 

really a notch in their belt to find that we violate the law or the 

rules. That should be. That is their job. 

Over the last 5 years, if you look at violations of the major Federal law governing financial management, the Anti-Deficiency Act 

(ADA), 20 cents out of every $1,000—20 cents out of $1,000—actually resulted in an ADA violation. That is 20 cents too much. My 

goal is zero, and it is the only right goal. But it is 200th of 1 percent. 

I don’t think it suggests a system that has no reasonable controls. I think we do. We have problems. We need to pass an audit. 

But we do, I believe, have reasonable controls. 

I might add that the amount of ADA violations are significantly 

less than in the non-defense agencies, taken as a whole. 

Senator MANCHIN. Let me just say this, that you know that with 

the financial challenges we are having right now, and we have our 

problems, too. So none of us are immune from those problems. But 

you know there are going to be some adjustments as far as the 

budget—and your budget and everybody’s. I think you—— 

Mr. HALE. Say it is not so, Senator. 

Senator MANCHIN. You see that coming. To what extent everyone 

believes—everyone believes since you all really don’t have an accurate audit, then whatever we have to cut, we could cut there, and 

it could probably be made up in the waste or fraud or abuse. 

What do you believe truly is feasible through fraud, waste, and 

abuse right now before you start cutting into what we call the 

quick of the matter? 

Mr. HALE. I can’t give you a number. I think that fraud that goes 

on—— 

Senator MANCHIN. We are going to cut—let us say we can cut 

$400 billion. 

Mr. HALE. I certainly don’t think you can get anywhere near that 

from fraud, and waste is in the eye of the beholder. 

Senator MANCHIN. I am saying over a 10-year period. I have 

heard anywhere from $400 billion to maybe $800 billion over 10 

years. That is $40 billion to $80 billion a year. 

61 

Mr. HALE. I don’t think you can get anywhere near $400 billion 

with fraud, waste, and abuse by any reasonable definition. 

Senator MANCHIN. Over a 10-year period? 

Mr. HALE. Over a 10-year period. We will have to make changes 

in our strategy in order to accommodate those kinds of cuts. We 

will also look for efficiencies of the sort that we identified and that 

we are now monitoring, $178 billion over 5 years in that case. But 

it is not going to do it by itself. 

We will have to cut back numbers of troops. We will have to 

delay investments, and we will have to look at that in a strategic 

context. 

Senator MANCHIN. Then what you are saying, out of a $700 billion a year budget, you don’t believe that there is 5 to 7 percent 

of waste or fraud or abuse in that? 

Mr. HALE. I certainly don’t think there is 5 to 7 percent of fraud. 

Waste is always in the eye of the beholder. There are some who 

feel some of our programs are wasteful, even though—— 

Senator MANCHIN. I agree. 

Mr. HALE.—we believe they contribute to national security. That 

is a debate we need to have. But, no, I absolutely don’t think that 

we are sitting there with $400 billion over 10 years of fraud. I don’t 

know of any evidence. 

If that were true, how come those 3,000 auditors are only finding 

20 cents out of every $1,000 that violates the ADA? Because it is 

a violation—it would be. Fraud is almost certainly going to be a 

violation. 

Senator MANCHIN. So you are basically thinking it might be more 

policy, deciding on what we think we need and what we don’t need? 

Mr. HALE. Absolutely. We are looking at it carefully, and we will 

be responsive. But it is not going to be—it will be fewer troops and 

less investments. 

Senator MCCASKILL. I know you can’t put a number on it. I think 

that sometimes that waste part is in the eye of the beholder. I 

would say that two systems tracking assets that can’t speak to 

each other, even if one has much more capability than the other, 

a $5 billion price tag on IT that is tracking assets is a huge number in any private sector enterprise, even as big as DOD. 

But let me ask about accountability. Who is the single official 

within DOD who is responsible for the FIAR plan? 

Mr. HALE. It would be the Secretary of Defense. But he has basically delegated that to the CMO, the Deputy Secretary. 

But in an organization our size and with the scope of the responsibility, I think you are looking at the rascals who have the dayto-day responsibility—the CFO and the DCMO at the OSD level; 

the Service FMs and the Service DCFOs—DCMOs, I should say, at 

the Service level. 

Senator MCCASKILL. Who has the primary responsibility on all 

the feeder systems? 

Mr. HALE. That would be the Service—you want to take a shot 

at that? 

Ms. MCGRATH. So the systems that really, I am going to say, it 

depends where they are in their respective life cycle in terms of 

who has the day-to-day operational control and then investment decisions. 

62 

Through the investment review board process, we have been able 

to obtain greater visibility in terms of development and modernization, and so that we do have an oversight process required by statute, where we are reviewing the development, any modernization 

to the legacy environment, so we have a better understanding on 

how those investments fit into the broader picture. 

The proposed legislation—the revision to the section 2222 actually provides—we very much support. It provides greater visibility 

into total investment for those systems. So it is not just development modernization. It is the total investment. 

So that we can, from in particular a perspective have a better 

view of all of the investments to then drive both IT rationalization, 

any changes that are made, any changes over $1 million to that 

business environment so that we can better drive elimination of duplication from a legacy to an ERP, the future, to look at duplication 

of existing systems across DOD. 

So we very much support the draft legislation that has been proposed. 

Senator MCCASKILL. The reason I ask about the feeder systems 

is I review all this. As I look at the plans and I look at the ERPs, 

I am always on the watch for that moment in this—I know we 

have some issues about all the things that are going to happen all 

at once in some years and some of the Services in 2015 and 2016. 

I am realistic about whether there is going to be a pushback on the 

2017 number. 

But what I am really worried about is we are going to get to the 

end of this process, and they are going to say, ‘‘Well, there is the 

feeder system problem.’’ That no one is going to say, ‘‘Well, that 

really wasn’t my problem. That feeder system wasn’t my problem.’’ 

I want to make sure that, right now, we know who to hold accountable on the feeder system problem. Mr. Khan, could you 

speak to that issue as to from where you sit can you make any observations about who you think is the logical person to have responsibility over all these feeder systems that are going to ultimately either provide or not provide the ability for us to get to an 

auditable system? 

Mr. KHAN. Feeder system is a huge problem because of the data 

which comes in from the feeder systems has to be fed eventually 

into the ERPs. So the data conversion would be an issue. 

I think that is critical that when investment decisions are made 

for giving additional funding to a particular system or a program, 

that it has to be looked at very carefully as to how they are going 

to be linked with their transformation within DOD itself. 

One of the elements of transformation which is linked with the 

business—or the enterprise architecture is how it is going to address the legacy systems and the feeder systems. So that is the 

point in time when the investment decisions are being made that 

those hard questions have to be asked. 

Senator MCCASKILL. Right. 

Mr. HALE. Can I address that? 

Senator MCCASKILL. Yes. 

Mr. HALE. I think we—I am very worried about that, too. I don’t 

want to get all these systems deployed at great cost and in considVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
63 

erable time find out we are not using them in the right way or the 

feeders. 

So what we have done is asked each Service—and the Army has 

started, and I will ask Ms. Matiella if she will comment on that— 

with these validations. We have taken—is it three bases you are 

starting with? 

Ms. MATIELLA. Yes. 

Mr. HALE. We are actually asking an independent public accountant to go out, look at GFEBS, which is their ERP. 

Senator MCCASKILL. Right. 

Mr. HALE. Say, ‘‘Are we using it in a way to include the feeder 

systems that is auditable?’’ I suspect we are going to have problems 

and that we will have to fix them, but at least we are finding out 

now. 

So do you want to add to that? 

Ms. MATIELLA. Yes. As the auditors go onto a specific installation, they look at GFEBS and the integrity of the data and the 

processes in GFEBS. Of course, what that includes is the data that 

came in. 

So, as they come up with their recommendations and their findings, it will include that data that came in from other feeder systems. So, we will be alerted to the fact that it may be that it is 

an HR feeder system or logistic feeder system that may be creating 

a data integrity problem within GFEBS. 

Of course, I am in charge of, to a large extent, making sure that 

the end-to-end processes will end up in auditability. For example, 

I am the process owner for procure-to-pay. So I have to make sure 

that whatever goes through a procurement system, in fact, does result in good, auditable data in the end. 

So, we are in the Army looking at end-to-end processes to make 

sure that whatever goes into the accounting system, into GFEBS, 

is auditable at that transaction level, does have supporting documentation. 

I work with the other Assistant Secretaries very, very closely to 

make sure that they are working their systems to make sure that 

in the end, the Army is successful in auditability. So we are looking 

at things end-to-end. 

Senator MCCASKILL. Okay, good. 

Mr. HALE. We will do it with the Navy. I hope this year to start 

one with the Navy ERP in the context of a major defense acquisition program. As the Air Force’s system matures, we will do the 

same thing there. 

Senator MCCASKILL. Okay, good. I just want to make sure that 

we are prepared. Obviously, you are concerned about it, Secretary 

Hale, for the right reasons. 

It could be all of this effort and all of this money is only as good 

as the data feed-in. 

Mr. HALE. I might add, the processes that we use and the training of the people, it is all a package. 

Senator MCCASKILL. It is all included. Yes. 

Mr. MORIN. Madam Chairman? 

Senator MCCASKILL. Yes? 

Mr. MORIN. Thank you, ma’am. 

64 

I wanted to highlight just one thing that I think is important in 

the context of our overall business systems modernization. It is 

that these new systems are much more intolerant of bad data. 

So, whereas the legacy systems have tolerated feeder systems 

that have bad data, and it has skated sometimes below the radar 

screen, with our implementation of DEAMS at Scott Air Force 

Base, we found instances where feeder systems are providing bad 

information in large quantities because the business processes in 

those nonfinancial systems were bad. 

But the system highlighted that for us directly. It told us thousands of transactions were not meeting standards, which instantly 

brought the level of management attention in order to fix the problem. So there is an advantage to these new systems in that we 

catch those problems. 

Senator MCCASKILL. Yes, that is good. That is great. Thank you 

for that. 

Senate Ayotte. 

Senator AYOTTE. Thank you. 

Ms. McGrath, I just wanted to ask you about something that had 

happened. One of the Business Transformation Agency’s (BTA), 

largest initiatives is the Defense Agencies Initiative (DAI), an ERP 

system for the defense agencies. BTA, in fact, was the first agency 

to implement DAI for itself and, from what we understand, was a 

small-scale effort but one that was very successful in terms of following the best practices that we are talking about today. 

Now we have heard that as BTA is being shut down and about 

half of that agency or so is being folded into your office, that you 

are going to stop using DAI for your new business in fiscal year 

2012 and force the BTA folks that you are inheriting to go back to 

the old, antiquated system supplied out of DOD. 

Is that what is happening? If so, why would we want to go backwards when we have this new system that we have piloted? 

Ms. MCGRATH. BTA was the first user, if you will, of the DAI, 

which is the financial—ERP solution for the defense agencies. 

There are other agencies who are also using the DAI solution today 

and has a complete implementation schedule. 

The OSD team, if you will, uses a legacy system called WAAS 

today. Instead of having, I am going to say, my office on a standalone system as part of the overall OSD footprint, we are not moving toward implementation for just my office, but rather moving toward implementation with the rest of OSD when we move on to 

DAI. We are scheduled to implement DAI as part of OSD. 

It is just I would not have my own office do it, whereas my budget is rolled up into the overall OSD budget. So, I would be the 

anomaly, if you will, and not standard with the rest of OSD. So I 

guess my overall message is we are moving to DAI. We are not 

doing it today because I am a component of the broader OSD budget, but we are certainly aligned and on track to do that. 

Senator AYOTTE. As the DCMO, you are leading the transformation of business operations across DOD. What problems, if 

any, have you had in convincing folks in DOD to get on board and 

to start using the new system that has already been up and running for a few years and is completely ready for them to use? Are 

you having problems convincing DOD to use the new system? 

65 

Ms. MCGRATH. I am sorry. Is your question specific to utilization 

of DAI? 

Senator AYOTTE. Yes. 

Ms. MCGRATH. So there is no problem convincing DOD, if you 

will. The Washington Headquarters Services actually executes the 

budget for OSD. We are on the implementation schedule for DAI. 

It is just more of a timing issue than a convincing them to do 

that. So there is no, I will say, challenge in terms of the business 

benefit for the solution. We will align to the rest of the implementation, just like I would have otherwise before the—— 

Senator AYOTTE. But if you have folks that have already used 

this system successfully, why are you farther down on the list rather than farther up on the list? 

Ms. MCGRATH. BTA—my office is an OSD element today. Before 

any of the functions from BTA moved into my office, I today am 

part of OSD. So, my budget today is done as part of the broader 

OSD budget. 

BTA, as a defense agency, used an ERP-based solution to do 

their financials. So, with the disestablishment of the defense agency, all of their systems, which they use to executive the operations 

of their defense agency, aren’t needed to run that. Again, I am a 

member of the OSD element. 

OSD is on a path to move to DAI. We are moving there. I am 

just part of the implementation for OSD. So, I don’t view it as a 

challenge in terms of the business value. It is just a—it is a timing—— 

Senator AYOTTE. So when would—— 

Mr. HALE. Would I help if I made it clear, her office was never 

on DAI. It was the agency that was on it. She will move to it, along 

with all our offices, I hope, fairly soon. I can’t remember when it 

is scheduled. 

Senator AYOTTE. Right. So what is the timing then? 

Ms. MCGRATH. I don’t have it, I am sorry, off the top of my head. 

I know it is not the beginning of fiscal year 2012. I believe it is fiscal year 2013, but I would like to come back and tell you what the 

very specific date is. 

Senator AYOTTE. I would appreciate that. 

[The information referred to follows:] 

The current implementation schedule for Defense Agencies Initiative (DAI), for 

fiscal years 2012 through 2016, continues to include 25 Defense Agencies. The Office 

of the Deputy Chief Management Officer is part of the Office of the Secretary of 

Defense (OSD), which is currently supported by Washington Headquarters Service 

(WHS). WHS is scheduled to begin implementation of DAI in fiscal year 2015 and 

become operational in early fiscal year 2016. It did not make sense for DOD to significantly alter the implementation schedule for DAI because of a small number of 

Business Transformation Agency employees moving into OSD. 

Senator AYOTTE. I just wanted to ask Mr. Khan. Overall, we are 

going to have to make some tough choices around here, no matter 

what the deficit plan that goes forward. It is going to cause us to 

have to make some difficult choices across every agency. 

How sufficient is the quality of our financial data to ensure that 

we are not making cuts that undercut our warfighters or endanger 

readiness? Can you help us, just in terms of where we are on the 

financial management end of when we need to make these difficult 

decisions, how reliable is the information we are going to receive? 

66 

Mr. KHAN. Thank you for that question. 

That question really goes to the heart of the importance of a financial statement audit, which really trues up the internal controls 

and the infrastructure which provides reliable financial information. 

So the challenge in answering your question is that without having adequate internal controls, adequate processes, it is difficult to 

say how reliable the information that we are making decisions on. 

In part, it also touches upon some of the other questions you had 

earlier on about information coming from other areas, which feed 

into DOD, about the internal controls, about how that information 

is processed, how that information is reported. 

So just want to link that to the importance of the improvement 

in financial management infrastructure itself. The proof of that is 

going to be successfully passing an audit, which will give management comfort that the information that they are using for decisionmaking is reliable. 

It has reasonableness of having gone through internal controls. 

It has the rigor of an audit. Even though you may not be using the 

financial statements for making decisions, but the information that 

goes into them, which is much more detailed, that is reasonable, 

reliable. 

Mr. HALE. May I add to that? Oh, go ahead. 

Senator AYOTTE. Sure. No, I thank you for that answer. Go 

ahead, Mr. Secretary. 

Mr. HALE. You have heard me say, and I believe it is true, we 

have reasonable controls. We are not over there spending this 

money wherever we want. If we were doing that, you would get 

wholesale ADA violations. It is just not happening. 

So I will use the colorful language of my former boss, Secretary 

Gates. Maybe it was an Easter egg hunt to get the information. 

But I guess he found the eggs because he made the decision—and 

I am not trying to be silly. 

In the end, I think we got him enough so that he felt comfortable 

making those decisions in a way that wouldn’t damage the troops. 

He would never do that. 

So it is not pretty. We need better financial systems. We need 

audits. But we are not over there just randomly spending this 

money. We are spending it the way you tell us. 

I think we can establish that. In August, we will establish it for 

our funds distribution process through an independent auditor. I 

will go back to my ADA violations to say, overall, I believe we have 

reasonable controls. 

Senator AYOTTE. One of, I think, the overall fears we have is that 

we are in a position, if you are looking to 2017 and the best scenario of being audit ready, we just don’t want to be in a position 

here where we are getting—instead of taking the rotten eggs, we 

are taking the chocolate eggs, so to speak. 

So, that is where we want to make sure that we are making 

some good decisions. So, I appreciate your commenting on that, and 

that kind of goes to the whole—— 

Mr. HALE. We share your concerns. We are heading towards 

some difficult times. We need to work with you and with less than 

67 

perfect information, unquestionably. But I believe we can make the 

right decisions. 

Senator AYOTTE. Thank you. 

Senator MCCASKILL. Senator Portman. 

I will let the witnesses know that we are planning on having a 

vote at 4 p.m. So I am sure we will be able to wrap this up by 

about 10 minutes after the hour. 

Senator Portman. 

Senator PORTMAN. Thank you, Madam Chair. We have to stop 

having these meetings together like this. 

Senator MCCASKILL. I know. 

Senator PORTMAN. My chair on every committee. 

Senator MCCASKILL. It is because you are a wonk, too. 

Senator PORTMAN. Yes. [Laughter.] 

First of all, thank you all for being here. I appreciated the comments from my colleague from New Hampshire, and your answers 

to her. 

I am sure that you have heard this today already, but we think 

what you do is incredibly important. As some of you know, I offered 

an amendment, which was later accepted, to ensure that you all 

continue to have the stature that comes with being a confirmed position. 

Now that you are all in position, you probably think that is okay. 

Maybe if you have to go through it again, you would disagree with 

that. But, seriously, we really believed, as a Congress, that it was 

important to hold you all up and to empower you so that in dealing 

with other confirmed appointees, you had the ability to ensure that 

financial management and the critical roles you play were given 

adequate consideration. 

With that comes a lot of responsibility, and we expect you to utilize that full power that we were trying to empower you with. 

When I was the OMB director, I met regularly with the CFOs in 

the hopes of doing just that, empowering people, letting them know 

that, at least in my role as OMB director, I viewed what you do 

in the agencies as incredibly important. 

I think what Senator Ayotte said is true. We are going to be 

under enormous budget pressure here. So, it is more important 

than ever. We want the money to go to our troops, and we want 

it to be as efficiently and effectively spent as possible. 

That is going to be your job in a tight budget environment, where 

there will be tremendous pressures on the budgets of every one of 

the Services. So, with that in mind, let me ask a couple of questions about accountability and specifically as it relates to the audits. 

I think Senator McCaskill and, I am told, Senator Cornyn also 

raised this accountability issue earlier today. But Secretary Hale, 

I saw in your prepared remarks, you talked about the audit process, and you said, ‘‘The department will achieve its financial management goals only through the active partnership involving both 

the Comptroller’’—you—‘‘and the DCMO. We also have to have 

help from those in acquisitions, logistics, other business areas as 

well as business communities that reside in the department.’’ 

68 

You said you have ‘‘engaged the department’s CMO as well as 

Military Department CMOs and the Service Vice Chiefs in a personal commitment to support the goals.’’ 

I am just, to be honest with you, a little concerned about some 

of these terms. Active partnership? Help, engage, personal commitment? It doesn’t sound like a mission with a whole lot of accountability and responsibility. 

I thought that the whole point of having the CMO or at least an 

identifiable leader, a single leader, who puts his or her weight behind this problem and can hold people accountable, was the intent 

of Congress. 

I know Secretary Panetta has said this is a priority of his. But 

again, from your comments, I get the sense it is going to take more 

than just prioritization to make audits happen. 

Can you speak a little to the accountability issue and how we ensure that, at the very highest level, there is a commitment to this 

and that someone is held accountable? 

Mr. HALE. I think there is clear accountability. It starts with the 

Secretary of Defense. But his focus is, he has so many things to do. 

I think the CMO, who will be the Deputy Secretary of Defense, Bill 

Lynn for the moment, is the primary accountable official. 

I meet weekly with him. I have discussed this issue a number 

of times. We have had several formal meetings. But we have to get 

this out farther than OSD. So, there has to be a process. So we 

have set up one. 

Beth McGrath and I chair a governance board, meets quarterly, 

has the Service FMs there. So we get down to that level. Also has 

many of the defense agency leaders. It has senior representatives 

from acquisition, technology and logistics, and from personnel. Increasingly, where we are going with that FIAR governance board, 

as we call it, is kind of stoplight charts of how we are doing on our 

various milestones. 

Then there is a monthly meeting at a level down with my Deputy 

CFO and the financial operations personnel in the Services so that 

we get it a level down. This is a big organization. No one person— 

Bill Lynn can’t manage this day-to-day. He just doesn’t have time. 

I don’t have enough time. I can’t devote all my time to it. 

Senator PORTMAN. I can’t believe he has—— 

Mr. HALE. But he is responsible for it, and he understands that. 

Senator PORTMAN. Yes. You think there is an understanding of 

that and the accountability thing, how you talked about the, in a 

sense, I guess, performance measures that you are using? Then you 

have some green, yellow, and red lights, since you said stoplights, 

attached to those. Do you feel like that is something that, at the 

highest level, there is a commitment to? Is there an alignment that 

people understand at Mr. Lynn’s level? 

Mr. HALE. Yes. Maybe Beth wants to add to this. We have 

monthly meetings of the Defense Business Systems Management 

Group (DBSMG) and we review all the major priorities. This is one 

of the top nine business priorities in DOD. There are stoplight 

charts. 

Is it perfect? No. Could we do better? I am sure we could. But 

there is a commitment to this. I spent 7 years as the Air Force FM. 

69 

It is a whole lot different. There was no commitment, frankly, at 

that point, no strong senior commitment. 

It is going to get more senior because, obviously, Secretary Panetta cares about this. I mentioned these testimonies to him, and 

he is just busy with a lot of other things. But I am scheduled to 

see him next week, and I will give him an overview of where we 

are and get his personal guidance. 

Senator PORTMAN. Tell him that the former OMB directors are 

all relying on him. 

Mr. HALE. Okay. [Laughter.] 

Senator PORTMAN. I am a former OMB director, too. 

Mr. HALE. His heart is in the right place, and I am looking forward to his help. Even if it is—just his support will be very important, and just his stating that it is important will be very important. 

Senator PORTMAN. Given your background, do you feel there are 

enough green and yellow lights on your charts to indicate that you 

are going to meet your 2017 date? 

Mr. HALE. I am cautiously optimistic, but I know we have to pick 

up the pace. You look at the timing, there is a lot toward the end 

of that. We are going to have to find ways to move that back in 

order to meet it. 

I am more optimistic that we will meet these requirements for 

the high-priority information. I know you weren’t here, but we have 

a plan that focuses on the information we most use to manage, and 

we are focusing heavily on that. It is budgetary information because we manage the Government, and certainly DOD, by budgets. 

Also, our accounts and availability of assets because they are so 

critical to the warfighter. I am more confident that we will meet 

it there because we are focusing heavily on it. But we have an approach for full auditability, and as I say, I will choose my words 

carefully, I am cautiously optimistic. 

Senator PORTMAN. Thank you all very much. 

One quick final question and just a nodding of heads or shaking 

of heads. How much time do you spend ensuring financial standards—the CFO role—as opposed to just getting through the budget 

process and preparing the budget? Do you all feel like you have 

enough time to spend on the broader CFO role? 

Ms. MATIELLA. Absolutely. We focus a lot on auditability, as well 

as the budget. Basically, it is a long, long day, but both things are 

important. We have to focus on both things, the budget side and 

the accounting side. 

So, I believe, not only does it have my attention as a senior leader, but it has the attention of the CMO and the Secretary of the 

Army and all the senior leadership. Definitely accountability is 

there and ownership is there at many, many levels. 

Senator PORTMAN. Good to hear. 

Ms. Commons. 

Ms. COMMONS. I spend a considerable amount of my time focused 

on the auditability effort. By and large, the budget process is one 

that has worked very well for us, and I can spend a little less time 

focused on it. So I do spend a lot more time focused on auditability. 

As Secretary Hale said, I was also here in 1995 working as the 

Principal Deputy, and certainly, there was no real senior leaderVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
70 

ship focus on these issues. The senior leaders are really focused on 

this issue now. They have given us the resources that we need to 

make progress here. 

Even the business owners are now aligned with us and focused 

on improving our business processes. I believe that is the key to 

sustainability for this effort. We are focused on actually look at our 

business processes end-to-end, standardizing those processes and 

making the changes that we need in order to sustain this even 

when I leave as the Assistant Secretary. 

I believe that is the only way that we will become auditable and 

keep that auditability forever. 

Mr. MORIN. Sir, I would also agree. The three priorities that I 

am working pretty much every day are rebalancing the Air Force 

budget to get the maximum combat capability out of each taxpayers’ dollar, the FIAR effort and the broader transformation of 

our financial operations to have actionable accurate information 

and quality service to the airmen who depend on it, and then the 

reinvigoration of our cost-estimating capability so that we make the 

right decisions on our acquisition programs with the best possible 

information as we make those long-term investment commitments. 

Senator PORTMAN. Thank you. 

Mr. Khan, you are welcome to—I am over my time here. So the 

chair is being very generous. 

Mr. KHAN. Maybe I can just comment on the commitment of the 

leadership. We have been impressed by the current team. Like I 

mentioned in my opening statement, I think the leadership is an 

important element to have a plan in there to be able to sustain it 

and to be able to work together across the different functions. 

Thank you. 

Senator MCCASKILL. Thank you, Mr. Portman. 

I just have two other areas I want to discuss and one of them 

we may not have time to get time for and take for the record. But 

the first is interfacing. 

We have—one of the problems is that we can’t take commercial 

off-the-shelf systems because everybody wants to hold onto the legacy systems, and then we have to like adjust them and customize 

them to try to do interfaces. It is expensive. It is very, very expensive. 

GAO has looked at the data on the planned interfaces in the 

ERP systems. I am a little surprised at how many interfaces are 

planned. It is a huge number in every branch. 

The winner goes to the Air Force, and so I am going to focus this 

question for you and ask you to get back with an answer. You all 

are planning on having an interface with your system, the Expeditionary Combat Support System (ECSS), 157 interfaces in Phase 1, 

growing to 673 interfaces. 

Now I don’t know how you get to 673 interfaces. I can’t figure 

out why you would need to get to 673 interfaces. So I would like 

you to look into that and get back to us with an explanation and 

maybe a plan to reduce the number of interfaces. Because the more 

interfaces you have, the more unwieldy it is in terms of getting systems that work efficiently and effectively that don’t cost $5 billion 

to develop. 

71 

Mr. MORIN. Yes, ma’am. We will get back to you with details on 

the interfaces that are involved. 

[The information referred to follows:] 

As the Expeditionary Combat Support System (ECSS) design has matured, we 

have determined there are 141 currently planned interfaces established for Increment 1. For Increments 2–4 we have identified 423 currently planned interfaces, for 

a total of 564 interfaces; this is an update to the 830 as reported in the October 

2010 GAO Report. This number was revised during our May 2011 Government Accountability Office audit. ECSS Increment 1 is projected to interface with over 30 

discrete systems, and each transmission of data to and from the ECSS application 

is counted as an interface. For example, ECSS interfaces with the Defense Communications Security Material System, a supply chain system that requires 5 separate 

interfaces. Therefore, the 30+ systems that ECSS interacts with are what creates 

the 141 data exchanges or interfaces with ECSS Increment 1. The refinement of the 

number of interfaces is a normal part of Enterprise Resource Planning design and 

development activities. The Air Force will continue to eliminate or consolidate interfaces as data needs are challenged and/or duplication is uncovered. 

Mr. MORIN. I will say at a top level, and recognizing that ECSS 

is a system to run essentially the entire logistics enterprise of the 

Air Force. So it is a very broad all-encompassing system. 

But there is always a tradeoff in developing these ERPs between 

do you make it truly the entire enterprise, thereby doing away with 

lots of the interfaces, but accepting much more development risk in 

building a more complicated system to address different business 

processes? Or do you constrain the size of that system, accept the 

need to build interfaces to legacy systems, and all of the data interface problems that you have alluded to earlier? 

There is no one good answer there. But the process that we have 

in DOD for looking at these systems and challenging those sorts of 

assumptions that Ms. McGrath and Mr. Hale are very intimately 

involved on, forces discussion on exactly those design decisions. 

Senator MCCASKILL. We need some kind of clarification. I think 

all of you have 40, 50, 100 planned, but nobody has anywhere near 

657 planned. So we need to understand why there is this wide disparity and why there are so many. Because it is trouble. It is trouble to have that many interfaces. It is not going to happen. 

Now, finally, asset valuation. In the grand scheme of public accounting and Government accounting and yellow book standards, 

asset valuation has obviously been controversial and difficult in 

terms of auditing and determining what asset valuation is. I was 

there for the wars over asset valuation in terms of infrastructure 

in State government. 

So I know that, Mr. Hale, you have said that the asset valuation, 

you are asking the Federal Accounting Standards Advisory Board 

(FASAB) to change the Federal accounting standards to prevent 

the expensing of military acquisition costs. 

I am curious what OMB and GAO, if they agree with this approach. I would particularly like your input, Mr. Khan, about what 

GAO thinks about the approach that DOD is recommending, saying 

it is too expensive to get at some of the legacy aspects in terms of 

valuation. We would just like briefly your input on that. 

Mr. HALE. Yes, briefly. We will ask—we haven’t yet—but we will 

ask the FASAB for military equipment, to allow us to expense it. 

For other assets, we will pursue our waiver phased approach. 

We are going to wait until we get the statement of budgetary resources because it feeds the information once it is auditable. That 

72 

will help. We need the ERPs, especially the logistics ones, to do 

this. 

Finally, we plan to do it only prospectively. That is, we won’t go 

back and try to figure out every building we ever built. We will 

start with the ones that—which means that we will get qualifications on our opinions for a while. But I think it is a more effective 

use of the taxpayers’ money. 

Bottom line is we don’t use it much to manage. It is of low value, 

very low value, and very different than a private company where 

asset valuation allows them to depreciate, and they can use it to 

offset taxes. I don’t pay any taxes. They need the book values, especially if they were going to sell it. I am not going to plan to sell 

the Pentagon. 

It is just not information we use. So we need a cost-effective way, 

and we think we found it. I did brief Mr. Dodaro on this, and I believe he was generally supportive. I am not going to sign him up 

to saying he would agree to everything. But I believe he was generally supportive. 

Senator MCCASKILL. Is OMB okay with it? 

Mr. HALE. Say again? 

Senator MCCASKILL. OMB okay with it? 

Mr. HALE. Yes. We believe they are comfortable. I don’t have 

anything signed, and we will have to go through a formal coordination process when we get to FASAB. But yes, we have briefed 

Danny Werfel, and I believe he is generally supportive. 

Senator MCCASKILL. Mr. Khan, do you want to let Mr. Dodaro 

speak for GAO here, since his name has been brought up? I don’t 

want to put you in an awkward position where you state one thing, 

and maybe Gene disagrees. 

Mr. KHAN. No, I don’t. I wouldn’t do that, speak for Mr. Dodaro. 

But essentially, in our discussions with Mr. Hale’s office and 

OSD, certainly we agreed with the current approach of continuing 

with the existence and completeness of the mission-critical asset. 

We feel that is going to provide important information. 

At the same time, we feel that maybe going to FASAB may be 

premature. Going down the existence and completeness approach 

may provide more information in the next few years, which may 

impact what sort of standards you may really need to have to address. Primarily, this is the issue of military equipment, accounting 

for that, because that is largest part of the assets which has different viewpoints of how that may be accounted for. 

The other point is that having the standards changed in the near 

future is not really going to impact the auditability. Because before 

going through existence and completeness, valuation is going to be 

a stage after that. 

Mr. HALE. We accept to wait a year or 2. 

Senator MCCASKILL. Right. I understand. 

Mr. HALE. We are going to focus on the higher-priority stuff at 

the moment, as we are doing. 

Senator MCCASKILL. I understand that. The vote has been called. 

So we will close the hearing here. I will say that I will look forward 

to an opinion, even if it is qualified. I would be thrilled with a 

qualified opinion. 

73 

Mr. HALE. So, if we get a qualified opinion, we are going to have 

a party. Will you come? [Laughter.] 

Senator MCCASKILL. I think you can assume it will be a qualified. I don’t think that any of us are expecting a clean audit the 

first time around. 

Mr. HALE. But how about the party, Madam Chair? [Laughter.] 

Senator MCCASKILL. I am just looking forward to an audit. 

Thank you all for this hearing, and we will continue to follow up 

and provide the pressure we think is necessary. 

Thank you. We are adjourned. 

[Questions for the record with answers supplied follow:] 

QUESTIONS SUBMITTED BY SENATOR KELLY AYOTTE

DEFENSE AUDIT READINESS

1. Senator AYOTTE. Secretary Hale and Ms. McGrath, today, what are the most 

significant impediments to making the Department of Defense (DOD) auditable by 

the 2017 statutory deadline? 

Secretary HALE and Ms. MCGRATH. DOD’s legacy financial processes and systems 

were established many years ago and were designed to ensure budgetary accountability—not meet the proprietary or commercial accounting standards called for in 

the Chief Financial Officer (CFO) Act, which are necessary to achieve auditability. 

To meet these standards, there is a substantial amount of work to be done. Some 

of the most significant impediments include: 

• DOD business and financial management systems are not fully integrated and do not always collect data at the necessary transaction level. 

• Reliable end-to-end processes and internal controls have not fully been 

defined to support financial reporting. 

• DOD lacks sufficient operational and financial personnel experienced in 

financial audits. 

• DOD’s traditionally stove-piped culture is primarily focused on mission 

outcomes and does not yet place a sufficiently high value on capturing and 

using financial and cost information. 

• Significant cultural change is necessary to achieve success. 

2. Senator AYOTTE. Secretary Hale and Ms. McGrath, exactly what aspects of 

those impediments remain unaddressed in DOD’s current financial improvement 

and business transformation plans, if any remain unaddressed? 

Secretary HALE. All of these impediments—systems, processes, workforce, and culture—are addressed through the Financial Improvement and Audit Readiness 

(FIAR) Plan, as well as the Department’s Strategic Management Plan (SMP), Enterprise Transition Plan (ETP), and supporting component business and financial management plans. 

Ms. MCGRATH. All of these impediments—systems, processes, workforce, and culture—are collectively addressed through the FIAR plan, the Department’s SMP, 

ETP, Business Enterprise Architecture (BEA) and supporting component business 

and financial management plans. Culture is also being addressed through many additional avenues, such as communications, training, and accountability. 

3. Senator AYOTTE. Secretary Hale and Ms. McGrath, what, if anything, can Congress do to help DOD overcome these unaddressed obstacles, to ensure that it meets 

the 2017 statutory deadline? 

Secretary HALE. Continued attention and oversight from Congress encourages 

more attention and participation from the non-financial management community to 

sustain the current focus. Additionally, providing a timely appropriations bill without the use of multiple continuing resolutions will help leaders devote more time 

to audit readiness. 

Ms. MCGRATH. Continued attention and oversight from Congress is beneficial and 

encourages more attention and participation from the entire DOD management community in sustaining the current focus on auditability. 

74 

ENTERPRISE RESOURCE PLANNING SYSTEMS

4. Senator AYOTTE. Secretary Hale and Ms. McGrath, over the last 5 years, how 

much per year and in total has DOD been applying towards the development, procurement, and deployment of Enterprise Resource Planning (ERP) systems? 

Secretary HALE and Ms. MCGRATH. In order to provide the committee with the 

most relevant number, we have taken a look at the available information for all 

prior year funding for the ERPs listed in the GAO’s October 2010 report on DOD 

Business Transformation, GAO–11–53. These ERPs are the Army’s General Funds 

Enterprise Business System (GFEBS), Global Combat Support System-Army (GCSSArmy), Logistics Modernization Program (LMP), and Integrated Personnel and Pay 

System-Army (IPPS–A), Navy’s ERP, Global Combat Support system-Marine Corps 

(GCSS–MC), and Future Personnel and Pay Systems (FPPS), the Air Force’s Defense Enterprise Accounting and Management System (DEAMS), Expeditionary 

Combat Support System (ECSS), and Integrated Personnel and Pay System-Air 

Force (IPPS–AF), and DOD’s Defense Agencies Initiative (DAI). DOD has applied 

approximately $7.2 billion towards the design, development, procurement, test and 

evaluation, and deployment of these systems since their inception. 

5. Senator AYOTTE. Secretary Hale and Ms. McGrath, please provide the same information over the current Future Years Defense Plan. 

Secretary HALE and Ms. MCGRATH. Based on available information, DOD plans 

to apply approximately $6.2 billion towards the design, development, procurement, 

test and evaluation, and deployment of the systems identified in question #4 over 

fiscal years 2012 to 2016. 

6. Senator AYOTTE. Secretary Hale and Ms. McGrath, DOD has made it clear that 

modernizing its business systems is central to its approach to getting auditable. But, 

even when its new systems have begun to come on-line, those entities are still not 

able to pass an audit. Why is that, and what does that mean for the future of audit 

readiness? 

Secretary HALE and Ms. MCGRATH. Modernizing DOD’s business systems is a key 

aspect of our overall effort to achieve auditability. However, improved systems alone 

will not eliminate our weaknesses or guarantee auditable statements. Achieving 

auditability requires that we apply consistent levels of process controls that cross 

organizations and functional areas. Many elements of our current business environment must be changed to allow us to meet financial audit standards, including improving the data quality of our feeder systems. So, while DOD is taking pro-active 

steps to more closely tie individual ERP programs with auditability outcomes, we 

are also focused on delivering audit ready processes and controls that will remain 

outside the ERP systems. 

7. Senator AYOTTE. Secretary Hale and Ms. McGrath, the Defense Logistics Agency’s (DLA) ERP system has been at full operational capability (FOC) for several 

years and has been proclaimed as a major success, but DLA is still projecting many 

years until audit readiness. In fact, it looks like they’ll be last in getting to audit 

readiness, way out in 2017. That’s more than a decade after the system reached 

FOC. How is that possible? 

Secretary HALE and Ms. MCGRATH. DLA has made great strides toward full implementation of their ERP, Enterprise Business System (EBS). To date, the EBS 

has been implemented for the non-fuels supply business line, with great success. 

However, EBS has not been fully implemented for the full range of business lines 

and processes needed for DLA to be audit ready. Of particular note, the DLA audit 

readiness efforts are impacted by two EBS programs that are extending the capabilities and scope of EBS, EBS-Energy Convergence, and EBS-eProcurement. 

Additionally, full implementation of EBS is not enough to ensure that DLA is 

audit ready. Further corrective actions are necessary to ensure that the process and 

control environments around the systems (including at service providers) are compliant and sufficient to withstand a financial statement audit. DLA must also develop 

more complete documentation to achieve audit readiness. The DLA audit readiness 

plan has always included these elements when projecting full audit readiness. 

8. Senator AYOTTE. Secretary Hale and Ms. McGrath, how can DOD cite the implementation of this ERP as a success given this reality? 

Secretary HALE and Ms. MCGRATH. DOD considers the implementation of EBS a 

success because it has dramatically improved processes and controls in the non-fuels 

supply business. Auditability for the entire DLA likely will be achieved, as described 

75 

in the previous answer, when further process and control improvements are made 

and additional ERP functionality is fully implemented. 

9. Senator AYOTTE. Secretary Hale and Ms. McGrath, what does this mean to all 

the strategies in the FIAR plan that says these new systems are so essential to 

audit readiness; but, here, your best one has already been up-and-running for years 

and audit readiness is still many more years away? 

Secretary HALE and Ms. MCGRATH. As explained in the answer to question #7, 

the DLA ERP has been implemented for the supply business line but not for the 

full range of business lines and processes needed for the entity to be audit ready. 

The DLA audit readiness plan has always included these material elements of the 

business when projecting full audit readiness. We continue to work with all DOD 

components to improve all material parts of their business operations to achieve 

audit readiness as soon as possible and within the goals established in legislation. 

10. Senator AYOTTE. Secretary Hale and Ms. McGrath, exactly what evidence do 

you have that any of the new systems that are being implemented and integrated 

with legacy systems will in fact yield an auditable result? 

Secretary HALE. Each of the system acquisition programs has included the requirements of the Federal Financial Management Improvement Act (FFMIA) in the 

system requirements. Testing of these requirements are part of the system acceptance process. These tests give us confidence that the software is largely audit ready. 

Additionally, DOD is more closely tying business and financial management outcomes with specific acquisition milestone decisions, which provides us additional 

confidence that at each step of the acquisition process, we are ensuring that they 

will yield the results that we desire. 

However, the new systems cannot achieve audit readiness on their own. They 

must be well-integrated with many other systems to create a well-controlled endto-end business process. Many elements of the larger business environment, including processes and controls, must also be changed to allow us to meet financial audit 

standards. 

Ms. MCGRATH. Each of the system acquisition programs has included the requirements of the FFMIA in the system requirements. Testing of these requirements are 

part of the system acceptance process. Additionally, my office has begun an independent assessment of every ERP and business system that needs to be compliant 

with SFIS and USSGL. These reviews look at the underlying system’s SFIS configuration, its USSGL posting logic, its ability to interface using SFIS, and its financial 

reporting capability. These tests give us confidence that the software is largely audit 

ready. Additionally, DOD is more closely tying business and financial management 

outcomes with specific acquisition milestone decisions, which provides us additional 

confidence that at each step of the acquisition process, we are ensuring that they 

will yield the results that we desire. 

However, the new systems cannot achieve audit readiness on their own. They 

must be well-integrated with many other systems to create a well-controlled endto-end business process. Many elements of the larger business environment, including processes and controls, must also be changed to allow us to meet financial audit 

standards. 

11. Senator AYOTTE. Secretary Hale and Ms. McGrath, have you tested any of 

these systems from the perspective of a financial audit? If yes, exactly what have 

you learned? Please be specific. 

Secretary HALE and Ms. MCGRATH. The FFMIA testing we described in the answer to question #10 covers many of the requirements of a financial statement 

audit. While we have learned a few lessons from this testing, it is the ongoing testing of the end-to-end processes that include the ERPs where we will learn valuable 

lessons. Right now, an Independent Public Accounting (IPA) firm is examining the 

Army’s target business environment with a report expected by late November. We 

have a similar evaluation planned to begin for the Navy target environment in the 

first quarter of fiscal year 2012. 

12. Senator AYOTTE. Secretary Hale and Ms. McGrath, we are concerned that 

DOD is spending billions of dollars on new state-of-the-art systems but in the end 

these systems will not be able to provide it with the compliant processes and adequate controls needed to achieve an audit opinion. I understand DOD has a BEA 

that is suppose to include the business rules for end-to-end processes to include 

standard data elements and controls. So, why is DOD still implementing ERPs that 

are not auditable? 

76 

Secretary HALE. BEA provides a foundation of requirements for implementation 

of sound business practices. Improved systems alone will not eliminate our weaknesses or guarantee auditable statements. Achieving auditability requires that we 

apply a consistent level of process controls that cross organizations and functional 

areas. Many elements of our current business environment must be changed to 

allow us to meet financial audit standards. We have every reason to believe that 

the ERPs themselves are auditable and as described in the answer to question #11 

we have engagements with accounting firms to evaluate the state of audit readiness 

in Army and Navy entities using the ERPs as core parts of their business environment. 

Ms. MCGRATH. The BEA provides a foundation of requirements for implementation of sound business practices. Compliance to the BEA includes the ability of reporting entities to implement necessary internal controls. business rules and standard data elements, and the successful implementation of systems to support these 

internal controls. However. many of the ERP programs that the Military Departments are currently implementing were initiated prior to the development and refinement of the BEA, so in some cases we are forced to make incremental improvement to the systems to bring them in line with the standards that are included in 

the BEA. To increase the validation of key enterprise data standards/requirement, 

DOD is conducting independent assessments of each ERP and business system that 

needs to be compliant with SFIS and USSGL and is taking remedial action where 

deficiencies are identified. 

13. Senator AYOTTE. Secretary Hale and Ms. McGrath, why is DOD buying ERPs 

without deliverables for ensuring these systems can pass an audit? 

Secretary HALE and Ms. MCGRATH. The implementation of ERPs is a central part 

of our business systems modernization strategy because the design principles within 

an ERP directly enable key elements of auditability. Among those principles, ERPs 

are designed to handle transactions end-to-end, enforce process and execution standardization among implementing organizations, manage consolidated business data 

in a single repository that allows centralized access control, and facilitate the flow 

of information both within an organization and with outside stakeholders. These design principles within an ERP directly enable these capabilities essential to 

auditability: 

• Traceability of all transactions from source to statement 

• The ability to recreate a transaction 

• Documented, repeatable processes and procedures 

• Demonstrable compliance with laws, regulations, and standards 

• A control environment that is sufficient to reduce risk to an acceptable 

level 

Additionally, we are ensuring that all of our ERP programs are accountable for 

delivering systems compliant with the standards necessary to achieve an audit such 

as the Standard Financial Information Structure (SFIS) and others captured in the 

BEA. We are validating this compliance through onsite audits. As part of each 

audit, we look at the underlying system’s SFIS configuration, its USSGL posting 

logic, its ability to interface using SFIS, and its financial reporting capability. DOD 

is also tying business outcomes to acquisition milestones and specifically requiring, 

in Acquisition Decision Memoranda, that individual programs, such as Army’s 

GFEBS and Navy ERP, define the role that they play in their organizations’ 

auditability efforts and end-to-end processes. However, improved systems will not 

eliminate all of our weaknesses nor guarantee auditable statements alone. Achieving auditability requires that we apply a consistent level of process controls across 

organizations and functional areas. DOD’s senior leadership understands this and 

is committed to achieving our audit goal. 

14. Senator AYOTTE. Secretary Hale and Ms. McGrath, what, if anything, is DOD 

doing to ensure all new systems and ERPs are compliant with the BEA and that 

the BEA is compliant with accounting and auditing standards? 

Secretary HALE and Ms. MCGRATH. DOD is doing many things to improve the 

content and quality of the BEA and the BEA compliance process. Currently, the 

BEA captures and maps all applicable laws, regulations, and policies to a framework of 15 end-to-end processes. Our existing policies require all business systems 

and services to document their solution compliance to the business architecture via 

a self-assertion process. In order to validate the self-assertion for compliance with 

the SFIS and USSGL, we are conducting an independent assessment for every system involved. This assessment ensures compliance with the standards and adoption 

and enforcement of the business rules, elements, and usage. For an ERP, this 

77 

equates to approximately 250 business rules that will be evaluated. In addition to 

checking for compliance, DOD initiated a plan to improve the usability of the BEA 

by adopting open semantic standards that allow for machine readable 

discoverability of applicable rules and standards. This change will ensure systems 

and processes are aware of all applicable standards in addition to providing a substantially improved compliance process. 

15. Senator AYOTTE. Secretary Hale and Ms. McGrath, what improvements, if 

any, can be made in this area? 

Secretary HALE and Ms. MCGRATH. DOD continues to take steps to ensure all 

new systems are compliant with the BEA and that the BEA sufficiently documents 

all appropriate accounting and auditing standards. First, DOD is evolving and improving the underlying technology and methodology of the BEA and the business 

solution architectures. The next version of the BEA will be based upon non-proprietary, open-standards that provide the ability to validate compliance in an automated machine readable fashion. DOD has also directed business system and business solution architectures to adopt these same languages and symbols. This standards-based approach will allow the solutions to leverage the BEA directly and the 

enterprise to directly access solution architectures. As a result of this evolution and 

common language, DOD will be able to more effectively guide for investments within 

a portfolio and ascertain impacts of business process and rule changes on systems 

and data. 

Second, we are taking steps to rationalize our current portfolio of investments. 

Within the procure-to-pay end-to-end process, we have identified and categorized 

legacy, interim, and target systems by function, activity, and cost. We have also documented transition dates, overlapping capability, and termination dates of these 

systems. This information is available to the Investment Review Board (IRB) to provide transparency and enable rationalization of systems and services. 

Third, we plan to increase independent BEA compliance assessments leveraging 

lessons learned during the SFIS validation and those learned by the Real Property 

and Infrastructure Lifecycle Management IRB, which is a leader in validating compliance. Independent assessments in addition to self-assessments will provide a 

much higher-level assurance that systems and organizations are complying with the 

BEA. 

16. Senator AYOTTE. Secretary Hale and Ms. McGrath, one of the big obstacles 

to DOD’s ability to become auditable by 2017 relates to its feeder systems—in particular, the fact that the data that supports their use is many times configured differently from how they should be for them to communicate effectively with the core 

ERP systems. This frustrates DOD’s ability to get reliable information into the overall system (they have to be inputted manually and that creates errors) and to reengineer its business processes in a way that allows the ERPs to work as intended— 

to facilitate auditability. Do you recognize that concern? If so, how is DOD addressing it? 

Secretary HALE and Ms. MCGRATH. Yes, we recognize the concern. Interoperability between core ERPs and associated systems challenges DOD’s ability to reach 

its auditability and efficiency goals. DOD has adopted a framework of 15 end-to-end 

processes that facilitates the ability to document and describe the processes and the 

data required by DOD to conduct business. As DOD improves its ability to describe 

the data and processes using machine-readable open standards, we expose obstacles 

and address them as part of our continuing efforts to rational IT investments. We 

are also using the end-to-end framework to identify business process reengineering 

(BPR) opportunities within a portfolio versus an individual system. For example, 

DOD recently initiated a project to provide a common service for contract clause validation within the enterprise vice multiple individual system solutions. 

17. Senator AYOTTE. Secretary Hale and Ms. McGrath, what improvements, if 

any, can be made in this area? 

Secretary HALE and Ms. MCGRATH. DOD has adopted a framework of 15 end-toend processes that facilitates the ability to document and describe the processes and 

the data required to conduct our business. As DOD improves its ability to describe 

the data and processes using machine readable open standards, we expose obstacles 

and address them as part of our continuing efforts to rational IT investments. This 

will help to improve data quality across our end-to-end processes, regardless what 

system it resides in. We are also using the end-to-end framework to identify BPR 

opportunities within a portfolio versus an individual system. For example, DOD recently initiated a project to provide a common service for contract clause validation 

within the enterprise vice creation of multiple individual system solutions. 

78 

DEFENSE FINANCE AND ACCOUNTING SERVICE

18. Senator AYOTTE. Secretary Hale and Ms. McGrath, the Treasury performs financial transactions on behalf of other Federal agencies. With the adoption of the 

new ERP systems, it seems that these brand-new systems could communicate directly with the Treasury and bypass the Defense Finance and Accounting Service 

(DFAS). We understand that an Army system is undergoing a pilot to look into the 

viability of this approach. We are interested in the idea that we can reduce the 

DFAS footprint and direct any savings realized into both increased capability for our 

military and, possibly, debt reduction. In your view, to what extent can the Treasury 

perform at least some of the financial functions that DFAS is now performing? 

Secretary HALE and Ms. MCGRATH. The Army is using the GFEBS to pilot/test 

the feasibility of making payments directly from the Treasury to the payee, replacing many of the payment processes and systems currently employed by DFAS today. 

However, it is too early to estimate potential savings that could result from the pilot 

and what DFAS functions could be replaced by GFEBS in conjunction with Treasury 

disbursing. As part of DOD’s audit readiness efforts, we will continue to evaluate 

this effort and determine whether it can potentially replace some DFAS processes 

and systems. 

19. Senator AYOTTE. Secretary Hale and Ms. McGrath, are you aware of any business case that supports having the ERPs communicate directly with the Treasury 

for financial transactions, bypassing DFAS? If so, please explain. If not, do you intend to conduct that business case analysis? If so, when? 

Secretary HALE and Ms. MCGRATH. As explained in the answer to question #18, 

the Army is using the GFEBS to pilot/test the feasibility of making payments directly from the Treasury to the payee, replacing many of the payment processes and 

systems currently employed by DFAS today. There is a planned 6-month evaluation 

period at the conclusion of the pilot. This will include a full Cost-Benefit Analysis 

and Business Case. These will be used to determine if the Army should go forward 

with implementing the Treasury disbursing capability Army-wide. 

20. Senator AYOTTE. Secretary Hale and Ms. McGrath, is leadership at DOD waiting for the result of the pilot effort with the Army financial ERP GFEBS before approving it? 

Secretary HALE and Ms. MCGRATH. DOD has approved the current GFEBS baseline for full deployment and, as explained in the answers to questions #18 and #19, 

has approved the Army to use GFEBS to pilot/test the feasibility of making payments directly from the Treasury to the payee. There is a planned 6-month evaluation period at the conclusion of the pilot. The results of this evaluation will be used 

to determine whether these additional capabilities should be integrated in the current GFEBS baseline and deployed throughout the Army. The results of the pilot 

will be shared DOD-wide. 

21. Senator AYOTTE. Secretary Hale and Ms. McGrath, why would an extensive 

pilot be needed for a brand-new ERP system? 

Secretary HALE and Ms. MCGRATH. The complex nature of the business operation 

involves multiple processes with linked outcomes. A change in a particular process 

often affects related process, data flows, and systems. There are business process 

differences between how DOD currently conducts disbursement as compared to the 

Treasury and a phased approach is prudent to ensure there are no unintended consequences on reconciliation and reporting. We feel it is necessary to assess the impacts in a microenvironment before prematurely rolling out an enterprise solution. 

22. Senator AYOTTE. Secretary Hale and Ms. McGrath, other agencies have ERPs 

that communicate directly with the Treasury. Could your analysis leverage those experiences to possibly field this solution more quickly? 

Secretary HALE and Ms. MCGRATH. DOD has consulted with other agencies on 

their experiences and has benefited from their lessons-learned. Among other examples, the Army has held extensive discussions with Customs and Border Protection 

(CBP) about the business processes and the efficiencies that agency gained by disbursing directly through Treasury. The Army is leveraging CBP’s experience while 

implementing the Army’s ERP. In addition, DOD has been represented in ERP 

users groups sponsored by the Office of Management and Budget’s (OMB) CFO 

Council, providing other opportunities to leverage non-defense agency experience. 

79 

23. Senator AYOTTE. Secretary Hale and Ms. McGrath, please provide a rough 

order of magnitude of how much could be saved—in terms of dollars and personnel—by this approach vis-a-vis DFAS? 

Secretary HALE and Ms. MCGRATH. That information is not yet available. The extent of potential savings is part of what the Army’s pilot/test is trying to assess. For 

the Treasury disbursing capability, it is the Army’s belief that by eliminating and 

streamlining processes and systems, the Army will generate cost savings within 

DOD and also enhance the likelihood of achieving audit readiness. However, specific 

figures are still being determined. 

24. Senator AYOTTE. Secretary Hale and Ms. McGrath, the Navy ERP is nearly 

fully deployed. Is it transacting financial payments direct to the Treasury? If not, 

why not? 

Secretary HALE and Ms. MCGRATH. No, the Navy ERP system is not transacting 

payments to the Treasury. Depending on the results of the ongoing pilot/test, Navy 

ERP may move in that direction. 

FINANCIAL IMPROVEMENT AND AUDIT READINESS PLAN

25. Senator AYOTTE. Secretary Hale, I have reviewed what you have described as 

Interim Goals for fiscal year 2011 and fiscal year 2012 in your FIAR plans. With 

the exception of one goal for fiscal year 2011 (‘‘Achieve audit opinion on USMC’’) 

and one goal for fiscal year 2012 (‘‘fully deploy GFEBS’’), all the others are, in fact, 

not goals. They are a list of tasks to ‘‘begin’’ or for DOD to ‘‘assert’’, which only begins the audit process. As of today, what is the status of your goals for fiscal year 

2011 and fiscal year 2012; as of today, will they be met? If so, please specify when. 

Secretary HALE. DOD has set aggressive stretch goals in order to push the organization to meet the goal of audit readiness by September 2017. Since publication of 

the May FIAR plan Status Report, we have completed six of the eight fiscal year 

2011 goals depicted in Figure 7 of the May 2011 FIAR plan Status Report. An independent accounting firm issued a clean opinion on the audit readiness examination 

of the Army, Navy, and Air Force appropriations received assertions. The IG has 

begun an examination of the Navy military equipment and accounting firms have 

begun the examinations of Army entities using GFEBS and Air Force Funds Balance with Treasury reconciliation. 

We will not meet all interim goals and our performance in fiscal year 2012 remains to be seen. I have reason to be confident that we can continue to build on 

the momentum we have developed in fiscal year 2011. 

26. Senator AYOTTE. Secretary Hale, why are your goals listed as beginnings or 

assertions instead of when these tasks will be complete? 

Secretary HALE. We have developed a methodology for audit readiness that addresses many lessons from our earlier efforts. The recent GAO audit (http:// 

www.gao.gov/Products/GAO–11–851) reviewed our methodology and reports that 

‘‘DOD’s FIAR Guidance provides a reasonable and systematic process that DOD 

components can follow in their efforts to achieve audit readiness. It establishes clear 

priorities for the components and a road map for reaching auditability.’’ 

One key part of the process is for the DOD IG and my office to review assertions 

of audit readiness before beginning a more detailed examination. As also reported 

in the GAO audit, this review is not a rubber-stamp process and has more often 

than not determined the component must perform additional work before beginning 

the external validation. So we consider the beginning of the external validation to 

be a significant milestone. While not all examinations will result in a clean opinion 

we feel that the components are more likely than not audit ready when the examination begins. 

27. Senator AYOTTE. Secretary Hale, please provide me with a list of when the 

fiscal year 2011 and fiscal year 2012 tasks are expected to be complete—and not 

merely begun. 

Secretary HALE. We plan to complete validations of audit readiness assertions 

within 6 months. Several of these early efforts were delayed while we established 

a contract vehicle for the work. Since publication of the May FIAR plan Status Report, we have completed validations related to three of the fiscal year 2011 goals 

in Figure 7 of the report, the independent validation of the Army, Navy, and Air 

Force appropriations received assertions. Three of the other four ‘‘begin validation’’ 

goals have also been met and all four validations will be complete in fiscal year 

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2012. The latest status on all fiscal year 2011 and fiscal year 2012 goals will be reported in the November 2011 FIAR plan Status Report. 

28. Senator AYOTTE. Secretary Hale, wave 1 of your strategy for financial readiness is for there to be an audit of ‘‘Appropriations Received’’. Isn’t that basically just 

making sure that the congressional appropriations got into the right accounts? 

Secretary HALE. Yes, this first phase of our effort is to prove that DOD accurately 

accounts for and distributes funds provided by Congress into the right accounts in 

accordance with law. While funds receipt and distribution is a simple process relative to some other DOD processes such as weapon system acquisition, it is an important step for two reasons. First, we want to have independent validation that we 

receive and distribute funding in accordance with the law to provide Congress confidence. We also want to get our components more experience with the rigors of 

audit and this was a good early exercise of their ability to meet audit documentation 

requirements. 

29. Senator AYOTTE. Secretary Hale, this sounds simple; why is it that none of 

the Services—the Departments of the Army, Navy, or Air Force—can do that simple 

task yet? 

Secretary HALE. We always had confidence that the Services could pass this test 

and in August, an IPA firm completed its examination and issued unqualified 

(‘‘clean’’) opinions to the Army, Navy, and Air Force on their Appropriations Received audit readiness assertion. These clean opinions validate that the Military Departments have reliable and auditable processes, controls, and systems in place to 

record the annual appropriations from Congress. 

30. Senator AYOTTE. Secretary Hale, why shouldn’t Congress be alarmed that the 

simple task of depositing the right money into the right accounts before even spending it cannot now be verified by independent auditors? 

Secretary HALE. Congress should be confident that we use appropriations in accordance with the law and we now have it verified by an IPA firm. In August, an 

IPA firm completed its examination and issued unqualified (‘‘clean’’) opinions to the 

Army, Navy, and Air Force on their Appropriations Received audit readiness assertion. These clean opinions validate that the Military Departments have reliable and 

auditable processes, controls, and systems in place to record the annual appropriations from Congress. 

31. Senator AYOTTE. Secretary Hale, exactly how is that objective necessary for 

achieving full audit readiness? 

Secretary HALE. Accurate and timely recording of appropriations and other related budget activity is critical as it is the focus of the first third of the Statement 

of Budgetary Resources (SBR). If the resources received are not recorded accurately 

then all remaining sections of the SBR will be inaccurate. 

32. Senator AYOTTE. Secretary Hale, according to the most recent FIAR plan, this 

was supposed to have been completed in fiscal year 2010 for the Navy and fiscal 

year 2011 for the Army and the Air Force. But, they have all been moved to fiscal 

year 2012. Please explain why. 

Secretary HALE. In the May 2011 FIAR plan Status Report, we reported the validations of Army, Navy, and Air Force Appropriations Received audit readiness assertions would be complete in the fourth quarter of fiscal year 2011 and, in fact, 

they were completed. In August, an IPA firm completed its examination and issued 

unqualified (‘‘clean’’) opinions to the Army, Navy, and Air Force on their Appropriations Received audit readiness assertion. These clean opinions validate that the 

Military Departments have reliable and auditable processes, controls, and systems 

in place to record the annual appropriations from Congress. 

There was a delay to the Navy milestone while we contracted with IPA firms to 

do this work at the best value to the Government. 

33. Senator AYOTTE. Secretary Hale, I am concerned that DOD has too much of 

a budget focus and not enough of a focus on what they are spending the $700 billion 

Congress has given them. We know DOD spends enormous resources putting together a budget and justifying the need. We know the management focus is on 

spending all of the funds we approve for fear of not getting to keep the same level 

of funding going forward. Now, for the approach to getting to an unqualified audit 

opinion, DOD is focusing on the SBR—once again a budget focus. Why is DOD not 

focusing on the balance sheet so we can improve the quality of data captured on 

what we are buying? It would seem wiser to be focused on the end-to-end business 

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transactions that encompass both the budgetary and proprietary general ledger account postings. 

Secretary HALE. DOD’s major financial decisions are based upon budgetary data 

(e.g., status of funds received, obligated, and expended). Therefore, the first priority 

focuses on process improvements, controls, and systems associated with budgetary 

information. This effort involves ensuring improved quality of information in order 

to better inform decisions—not just to ensure the funds are spent. Fiscal pressure 

and good stewardship demand this. The budget is key to public sector accounting. 

Proving positive control over each business event in the end-to-end process provides 

the framework for the rest of the statements. With modern, capable systems, business events are posted to both proprietary and budgetary ledgers. Our revised strategy to focus on budgetary information and asset counts/locations has resulted in 

more participation from the non-financial business communities. They are active in 

our efforts to improve controls over asset management as well as ensuring that obligations are recorded and adjusted when needed. This approach has also been validated by GAO and advisory bodies. 

34. Senator AYOTTE. Secretary Hale, doesn’t managing to the budget, as the SBR 

does, focus the FIAR effort mostly on funding in and funding obligated and expended, where Congress wants DOD to focus additionally on what it is buying so 

it can analyze its buying decisions and the costs of programs, as Secretary Gates 

complained about? 

Secretary HALE. By focusing first on budgetary data, we will improve processes, 

controls, and systems we use to manage DOD budgets, appropriations, funds availability, and expenditure information—which are critical to effectively managing operations and acquisitions. The type of cost or managerial accounting you refer to in 

your question is dependent on a basis of accurate financial accounting. We are focused on building that solid foundation while also looking to improve cost accounting. 

35. Senator AYOTTE. Secretary Hale, are you focusing on the SBR because you 

lack the people who understand the proprietary side of the accounting processes and 

systems? 

Secretary HALE. We have some of the finest people in Government. They are experienced, trained, and dedicated. We have an extensive training program to ensure 

our financial managers know the proper rules and processes. However, they generally do not have financial audit experience. That is changing. We have hired people from the outside, employed contractors, and developed an audit readiness training program. My certification plan that is included in the House and Senate 

versions of the NDAA of 2012 will institute the skills we need moving forward. 

36. Senator AYOTTE. Secretary Hale, it seems you are more comfortable with the 

budget processes. Does DOD have enough individuals with experience auditing complex financial statements? 

Secretary HALE. Our people are experienced, well-trained, and dedicated; but they 

generally do not have financial audit experience. We are working to add this experience through actual audits and examinations, interaction with experienced auditors 

helping our audit readiness efforts, training, and through hiring. 

37. Senator AYOTTE. Secretary Hale, I understand that you are sponsoring an accreditation program before Congress to increase the number of government employees holding a CPA certification. I applaud this initiative, but how concerned are you 

that even under the initiative, the workforce within DOD will not be trained quickly 

or sufficiently enough to achieve a first-time audit opinion by 2017? 

Secretary HALE. The 2017 goal is ambitious from a variety of perspectives but we 

are committed to this date. I hope you will continue to encourage and support this 

workforce initiative and others which will help us to not only achieve but also sustain auditability in the future. Our intended business environment, as well as external pressure to do more with fewer resources, will demand that our workforce has 

the right skills. Increased requirements for credentials will be part of this emerging 

program. 

38. Senator AYOTTE. Secretary Hale, how critical is this as a limiting factor? 

Secretary HALE. Our people’s experience is a critical factor but no single factor 

will result in success. We believe we have a strategy and approach that addresses 

all factors sufficiently. Inclusion of FIAR goals as a requirement in performance 

plans and organization strategic plans will also help motivate our people to get the 

skills they need to succeed and be rewarded. 

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OVERSIGHT OF BUSINESS SYSTEMS MODERNIZATION

39. Senator AYOTTE. Ms. McGrath, you are the vice chair of the Defense Business 

Systems Management Committee (DBSMC), which has been in existence for more 

than 5 years now. The statute that authorized the DBSMC requires oversight of enterprise architecture and business system modernization efforts across DOD. These 

ERP systems appear to be at the heart of those modernization efforts, both for audit 

readiness and other important reasons. Exactly what kind of oversight has the 

DBSMC provided over these ERP programs? 

Ms. MCGRATH. The DBSMC has provided consistent oversight over DOD’s ERP 

investments. In addition to responsibility for reviewing and approving the ERP programs’ funds certification requests, the DBSMC has played an active role in defining DOD’s overall strategy with regard to these programs, authorizing and reviewing the results of pilot efforts, such as the Procure-to-Pay pilot, to investigate ways 

to make better use of the capability inherent in the ERP software packages, and 

holding component leaders responsible and accountable for the performance of their 

programs. 

40. Senator AYOTTE. Ms. McGrath, how often, and specifically how, do you personally verify that the Services are building ERPs in a way that is compatible for the 

Office of the Secretary of Defense (OSD) and other users to undertake cross-Service 

search for financial, human resources, or supply information? 

Ms. MCGRATH. I am personally involved in ensuring that the Services are building ERPs in a way that is compatible for OSD and other users to undertake crossService search for financial, human resources, or supply information in a number 

of ways. As Vice Chair of the DBSMC, a key member of our IRBs, and Milestone 

Decision Authority of many of the Service ERPs, I ensure that they are being built 

in compliance with the BEA, which contains the data and process standards that 

provide for information interoperability. Additionally, my office, through our ERP 

laboratory, provides the Services with standard configurations of the major ERP 

software packages that facilitate Service-specific implementation of the BEA standards. Finally, my office is leading efforts to further improve the BEA and develop 

innovative technology approaches for business intelligence and analytics. 

41. Senator AYOTTE. Ms. McGrath, please provide me with a description of which 

ERPs the DBSMC reviewed in detail and the dates when the DBSMC conducted 

those detailed reviews. 

Ms. MCGRATH. Since the DBSMC was established in 2005, in addition to considering certification requests for DOD’s ERP systems, it specifically reviewed DOD’s 

overarching ERP strategy, Procure-to-Pay End-to-End process pilot efforts, and its 

individual ERP investments many times. With regard to the individual ERP programs, the DBSMC’s reviews included the Defense Integrated Military Human Resources System (DIMHRS), Defense Agencies Initiative (DAI), Navy Enterprise Resource Planning System (Navy ERP), the Air Force’s Defense Enterprise Accounting 

and Management System (DEAMS) and ECSS, the Army’s GFEBS, GCSS-Army, 

and LMP, and the DLA’s Enterprise Business System (EBS). These reviews took 

place on the following dates: 

April 29, 2005; 

June 5, 2005; 

July 27, 2005; 

August 31, 2005; 

September 28, 2005; 

October 25, 2005; 

December 1, 2005; 

December 21, 2005; 

January 25, 2006; 

March 23, 2006; 

April 13, 2006; 

May 19, 2006; 

July 26, 2006; 

August 23, 2006; 

September 22, 2006; 

November 30, 2006; 

December 21, 2006; 

January 31, 2007; 

February 22, 2007; 

March 29, 2007; 

May 22, 2007; 

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June 25, 2007; 

July 23, 2007; 

August 17, 2007; 

September 26, 2007; 

October 26, 2007; 

November 27, 2007; 

December 21, 2007; 

February 1, 2008; 

February 28, 2008; 

April 3, 2008; 

April 29, 2008; 

July 24, 2008; 

August 21, 2008; 

September 24, 2008; 

October 30, 2008; 

December 5, 2008; 

January 14, 2009; 

February 24, 2009; 

March 30, 2009; 

April 30, 2009; 

July 21, 2009; 

February 2, 2010; 

March 2, 2010; 

June 1, 2010; and 

November 10, 2010. 

42. Senator AYOTTE. Ms. McGrath, with this information, please briefly describe 

the matter reviewed in a level of detail for me to understand the nature of these 

detailed reviews. 

Ms. MCGRATH. The reviews listed in the answer to question #41 vary greatly, but 

can be grouped into a number of general categories. First, the DBSMC has received 

a number of broad program overviews, particularly in the months following the creation of the DBSMC in 2005, to introduce the DBSMC members to a particular program. Second, the DBSMC has received program updates throughout programs’ acquisition lifecycles to stay informed about progress and share lessons learned across 

DOD. These updates generally would be composed of broad looks at cost, schedule, 

performance, and risk factors. Third, the DBSMC has conducted in-depth reviews 

on particular programs or individual issues associated with particular programs. 

The subjects of these in-depth reviews vary, but include issues such as interfaces, 

data conversion, implementation/roll-out, change management, et cetera. Fourth, 

the DBSMC has received decision briefs on ERP programs or strategies that present 

potential courses of action for the group’s consideration and decision. Finally, the 

DBSMC has received a number of follow-up briefings to answer members’ questions 

from a previous meeting or present the status of actions assigned at previous meetings. 

43. Senator AYOTTE. Ms. McGrath, most of the business systems DOD has bought 

are over-budget and have gone long past scheduled delivery. The Government Accountability Office (GAO) puts those numbers in the billions of dollars on the budget 

side, and most of these programs have had to go through the so-called ‘‘Critical 

Change Process (CCP)’’ with reports to Congress because they breached on execution 

targets. Exactly what specific changes has the DBSMC prescribed for each of these 

over-budget programs to get them under control? 

Ms. MCGRATH. The senior official, typically the component acquisition executive, 

within the acquisition chain of command is responsible for certifying programs in 

accordance with CCP described in 10 U.S.C., Chapter 144a, not the DBSMC. As 

part of the CCP the senior DOD official responsible for the program provides written certification (with supporting explanation) that: 

• the automated information system to be acquired is essential to the national security or to the efficient management of DOD; 

• there is no alternative to the system which will provide equal or greater 

capability at less cost; 

• the new estimates of the cost, schedule, and performance with respect to 

the program and system or information technology investment, as applicable, have been determined with the concurrence of the Director of Cost Assessment and Program Evaluation (CAPE), to be reasonable; and 

• the management structure of the program is adequate to manage and 

control program costs. 

84 

Based on the findings of various programs’ CCP, the senior official or the Milestone Decision Authority, in consultation with DBSMC members, has directly implemented corrective actions to address the root causes of the breaches. For example, 

programs have been directed to: 

• restructure into smaller increments focused on discrete capability delivery aligned to the user needs; 

• put in place additional performance measures to track high risk areas 

identified by the critical change team, such as interfaces, data conversion, 

defect reports, et cetera; 

• restructure the program’s contracts to limit the Government’s cost exposure; 

• limit obligation authority tied to short-term program milestones vice 

multi-year funding authority; and 

• limit fielding of releases of an increment to do additional testing or demonstrate operational stability of a release prior to full deployment. 

44. Senator AYOTTE. Ms. McGrath, most of the CCP submissions to Congress basically come to the conclusion that the status quo is appropriate and that, despite the 

fact of being over budget and beyond schedule, we should just keep going and going 

under the original plans. What specific programmatic changes can you point to that 

the DBSMC has imposed on any of these programs in response to this poor track 

record? 

Ms. MCGRATH. The senior official, typically the component acquisition executive, 

within the acquisition chain of command is responsible for certifying programs in 

accordance with CCP described in 10 U.S.C., Chapter 144a, not the DBSMC. As 

part of the CCP the senior DOD official responsible for the program provides written certification (with supporting explanation) that: 

• the automated information system to be acquired is essential to the national security or to the efficient management of DOD; 

• there is no alternative to the system which will provide equal or greater 

capability at less cost; 

• the new estimates of the cost, schedule, and performance with respect to 

the program and system or information technology investment, as applicable have been determined with the concurrence of the Director of CAPE, to 

be reasonable; and 

• the management structure of the program is adequate to manage and 

control program costs. 

Based on the findings of various programs’ CCP, the senior official or the Milestone Decision Authority, in consultation with DBSMC members, has directly implemented corrective actions to address the root causes of the breaches. For example, 

programs have been directed to: 

• restructure into smaller increments focused on discrete capability delivery aligned to the user needs; 

• put in place additional performance measures to track high risk areas 

identified by the critical change team, such as interfaces, data conversion, 

defect reports, et cetera; 

• restructure the program’s contracts to limit the Government’s cost exposure; 

• limit obligation authority tied to short-term program milestones vice 

multi-year funding authority; and 

• limit fielding of releases of an increment to do additional testing or demonstrate operational stability of a release prior to full deployment. 

45. Senator AYOTTE. Ms. McGrath, how often has audit readiness been discussed 

at DBSMC meetings? 

Ms. MCGRATH. DOD’s FIAR efforts have been specifically briefed at the DBSMC 

six times and have also been discussed as part of the DBSMC’s quarterly performance reviews. 

46. Senator AYOTTE. Ms. McGrath, what specific actions have resulted from those 

discussions where people were directed to do something differently? 

Ms. MCGRATH. Examples of direction from the DBSMC as a result of briefings on 

DOD’s FIAR efforts include revisions of financial management goals in DOD’s SMP, 

further development of the Standard Financial Information Structure (SFIS) standards and additional dialogue between the Under Secretary of Defense (Comptroller), 

and the CMO of the Air Force to ensure that Air Force audit efforts were properly 

resourced and aligned with DOD’s direction. 

85 

47. Senator AYOTTE. Ms. McGrath, the DBSMC has the responsibility to oversee 

DOD’s compliance with the BEA, but GAO has raised concerns about the thoroughness of the reviews that are performed by the IRBs to ensure that compliance is 

actually occurring. I’m specifically interested in what you call the SFIS, which has 

been in the architecture for several years and is essential for achieving audit readiness. I believe the DOD IG had written a report a couple of years ago that was very 

critical of one of the Army ERP programs for not really being compliant with this 

requirement, even though they had successfully gone through the review process. 

What steps does the review process under the direction of the DBSMC take to absolutely ensure that these new systems are compliant with this standard financial 

structure? 

Ms. MCGRATH. Since the DOD IG report concerning the Army ERP programs, my 

office has begun an independent assessment of every ERP and business system that 

needs to be compliant with SFIS and USSGL. These reviews look at the underlying 

system’s SFIS configuration, its USSGL posting logic, its ability to interface using 

SFIS, and its financial reporting capability. For each element in SFIS, there are 

implementable business rules that address syntax, usage, and relationships. To be 

compliant with SFIS, a system must be compliant with the SFIS business rules. 

Each business rule is evaluated against the system’s configuration. For an ERP, approximately 250 business rules will be evaluated. To date, we have performed 12 

validations and expect to complete the remaining 38 validations by December 2012. 

Additionally, since the DOD IG report concerning the Army ERP programs, the 

DOD IG has begun to review all ERPs for the SFIS requirements and my staff 

meets regularly with DOD IG to provide recommendations and exchange information concerning SFIS validation. Prior to this, the SFIS assessment process was a 

self-assertion process. 

48. Senator AYOTTE. Ms. McGrath, where those reviews have actually been conducted, what did they find? 

Ms. MCGRATH. As discussed in the answer to question #47, to date, DOD has conducted 12 independent assessments of SFIS compliance and expects to complete the 

remaining 38 assessments by December 2012. For the systems assessed to date, preliminary results indicate that overall average SFIS compliance is approximately 78 

percent. General reasons for non-compliance include: 

• Out-of-date reporting chart of accounts 

• Out-of-date posting chart of accounts 

• Improper posting logic 

• System interfaces not yet updated for SFIS compliance 

• Poorly maintained data sets 

• Improper derivation logic 

• External configuration guidance that conflicts with and/or is not documented in the BEA 

• Financial business processes highly dependent on non-SFIS or legacy 

data 

We continue to work closely with DOD IG, the Program Offices, and Office of the 

Under Secretary of Defense (Comptroller) to correct deficiencies that have been 

identified. 

49. Senator AYOTTE. Ms. McGrath, what examples can you offer where you have 

actually validated this compliance, as opposed to, say, just taking someone’s word 

for it through unchecked self-assertions? 

Ms. MCGRATH. As discussed in the answers to questions #47 and #48, my office 

has begun an independent assessment of every ERP and business system that is required to be compliant with SFIS and USSGL. These reviews look at the underlying 

system’s SFIS configuration, its USSGL posting logic, its ability to interface using 

SFIS, and its financial reporting capability. To date, we have performed 12 validations and expect to complete the remaining 38 validations by December 2012. Additionally, since the DOD IG report concerning the Army ERP programs, the DOD IG 

has begun to review all ERPs for the SFIS requirements and my staff meets regularly with DOD IG to provide recommendations and exchange information concerning SFIS validation. 

DEFENSE AGENCIES INITIATIVE CASE STUDY

50. Senator AYOTTE. Ms. McGrath, one of the Business Transformation Agency’s 

(BTA) largest initiatives is the DAI, an ERP system for defense agencies. BTA, in 

fact, was the first agency to implement DAI for itself, and from what we underVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6621 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
86 

stand, was a small-scale effort but one that was very successful in terms of following 

the best practices you advocate. Now, we hear that as BTA is being shut down, and 

about half the agency or so is being folded into your office, that you’re going to stop 

using DAI for your new business in fiscal year 2012 and force the BTA folks that 

you’re inheriting to go back to the old, antiquated system supplied out of DOD. Why 

would you want to go backwards when you have this new system already up and 

running? 

Ms. MCGRATH. I do not intend to move backwards with DAI deployment plans. 

The current implementation schedule for DAI, for fiscal years 2012 through 2016, 

continues to include 25 Defense Agencies. 

The Office of the Deputy CMO is part of OSD, which is currently supported by 

Washington Headquarters Service (WHS). WHS is scheduled to implement DAI in 

fiscal year 2016. It did not make sense for DOD to significantly alter the implementation schedule for DAI because of a small number of BTA employees moving into 

OSD. 

51. Senator AYOTTE. Ms. McGrath, isn’t DOD operation targeted to migrate to 

DAI in the future? 

Ms. MCGRATH. Yes, the activity that supports day-to-day operations for OSD, 

WHS is scheduled to begin implementation of DAI in fiscal year 2015 and become 

operational in early fiscal year 2016. 

52. Senator AYOTTE. Ms. McGrath, why does it not just accelerate DAI’s deployment, instead of forcing you to regress to their old system that appears to be exactly 

the kind of system you are trying to move away from? 

Ms. MCGRATH. Acceleration of the schedule would be extremely challenging and 

provide increased risk to the established workload. The DAI implementation schedule includes the deployment of multiple sites over the next few years and program 

resources have been allocated to meet this schedule. Additionally, the specific sites 

are currently preparing for implementation, which includes data cleansing efforts, 

training, and BPR. Further, in addition to the increased risk, additional resources 

would be required to accelerate. 

53. Senator AYOTTE. Ms. McGrath, how is jettisoning DAI today consistent with 

the practices and direction you’ve otherwise advocated for DOD in terms of improving its business systems and processes? 

Ms. MCGRATH. The program has not been jettisoned. The current implementation 

schedule for DAI, for fiscal years 2012 through 2016, continues to include 25 Defense Agencies. 

54. Senator AYOTTE. Ms. McGrath, in your best, independent, professional judgment, should this system continue to be used? 

Ms. MCGRATH. Yes, the program should continue. DAI is pivotal for DOD Agencies in terms of meeting the requirements of Federal statutes requiring auditable 

financials and producing clean audits, and in complying with DOD architectural 

standards driven by the Deputy Chief Management Officer (DCMO). 

55. Senator AYOTTE. Ms. McGrath, what, if anything, does this episode relating 

to DOD’s decision to move away from DAI imply about your office’s ability to fulfill 

its charter? 

Ms. MCGRATH. DOD is not moving away from DAI. My office will continue to play 

a significant role in DOD’s DAI implementation and will move to DAI itself with 

the rest of OSD in early fiscal year 2016. I do not believe that this reflects on my 

office’s ability to fulfill its charter. 

56. Senator AYOTTE. Ms. McGrath, regardless of what happened with DAI or why 

it was done, to what extent does not having funds control of the multiple different 

service business system programs hamper your ability to get the Services to follow 

your business transformation guidance or directives? 

Ms. MCGRATH. I am currently able to influence funds control of DOD’s diverse 

portfolio of business systems as Vice Chair of the DBSMC, as a member of the IRBs, 

and as Milestone Decision Authority for many of our business Major Automated Information System (MAIS) programs. However, the proposed changes to 10 U.S.C. 

Section 2222, expanding and centralizing the oversight function of the IRBs, under 

consideration by the Congressional Defense Committees in the National Defense Authorization Act (NDAA) for Fiscal Year 2012 would be a welcome expansion of the 

existing statute, as it would enable greater transparency of business investments. 

87 

DISESTABLISHMENT OF THE BUSINESS TRANSFORMATION AGENCY

57. Senator AYOTTE. Ms. McGrath, Secretary Gates directed that the BTA be disestablished in his announcement last August. What impact, if any, will that decision 

have on your ability to continue to drive business transformation across DOD? 

Ms. MCGRATH. I do not see a long-term impact on my ability to drive business 

transformation across DOD. When BTA was established in 2006, it was entrusted 

with the mission of reforming and modernizing DOD’s business practices. That mission remains valid. However, with the establishment of the position of DCMO as 

an Under Secretary of Defense-level official in OSD, fairly substantial overlap was 

created. It was determined that the benefit provided by the BTA could be more effectively realized through the disestablishment of the BTA and the incorporation of 

its core functions into the office of the DCMO and the incorporation of its direct program management responsibilities for specific enterprise Defense Business Systems 

(DBS) into the DLA. This consolidation will enable more agile management of 

DOD’s business transformation functions and enhance our ability to carry out our 

mission. 

58. Senator AYOTTE. Ms. McGrath, it seems that transformation kinds of programs require highly skilled people to lead those efforts. I, however, understand 

that more than a third of the BTA staff has left DOD since the Secretary’s announcement last year, including most of the top leadership. Why should I not conclude that this will negatively impact on your ability to be successful? 

Ms. MCGRATH. My office continues to be equipped with the people and hiring authorities necessary to effectively execute its mission. First, while we lost several key 

personnel during the disestablishment of the BTA and the incorporation of its core 

functions into the office of the DCMO and the incorporation of its direct program 

management responsibilities for specific enterprise DBS into the DLA, we also retained many key personnel, including those with expertise in ERP system implementations, architecture development, and process improvement, among other critical skills. We are moving quickly to hire new staff to replace those that left. Additionally, I plan on continuing to utilize the Highly Qualified Expert (HQE) hiring 

authority, which BTA used quite effectively, to hire individuals outside of the Federal Government who are leading authorities in technical disciplines and other 

areas of expertise needed by the Government to satisfy emerging and non-permanent requirements. I embrace the HQE model and intend to supplement my seasoned government staff with these HQEs. 

EXPEDITIONARY COMBAT SUPPORT SYSTEMS

59. Senator AYOTTE. Ms. McGrath and Secretary Morin, one of the most expensive 

ERP systems in DOD is the Air Force’s ECSS. While this ERP, which is actually 

a commercial-off-the-shelf system, is primarily seen as a logistics system, our understanding is that it is also very much a financial system, in particular for the Air 

Force’s Working Capital Fund (WCF). 

Since having begun in 2004, to date this program has spent approximately $800 

million and has yet to really deliver any meaningful capabilities. And it won’t be 

fully deployed until 2016—just a year before the 2017 deadline by which DOD must 

be audit-ready. To me, this sounds like a train wreck waiting to happen. On what 

factual basis do you have confidence that this program will get fully implemented 

or provide required capability as intended? 

Ms. MCGRATH. I share your concerns regarding ECSS. In February 2011, the 

Milestone Decision Authority, the Under Secretary of Defense for Acquisition, Technology, and Logistics directed the program to create time and condition-based success criteria that if not met, would be used to evaluate future options for ECSS. The 

Milestone Decision Authority allowed the program to proceed with increment one, 

Pilot C (material management) because that effort was already on contract with the 

system integrator as a fixed-price effort. 

By September 2011, it was evident that the program was not able to meet the 

stated success criteria. Therefore the Milestone Decision Authority directed the program to conclude pilot C and stop work on pilot D (mobile supply chain management) which limits the Government’s customer liability. In addition, the Milestone 

Decision Authority created an assessment team to identify possible way-ahead options for the program. The assessment team concluded their analysis and made a 

recommendation to the Milestone Decision Authority in late 2011. The Milestone 

Decision Authority is in the process of evaluating the information. 

Secretary MORIN. The Air Force has already fielded some limited system capability through ECSS Pilot A (Vehicle and Tools Management) and Pilot B (EquipVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6621 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
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ment Management) at Hanscom AFB. In addition, the Air Force reviews ECSS’ key 

metrics on a weekly basis to assess the progress of software code development, data 

cleansing, interface test readiness, test case execution, and deficiency reports. This 

review provides leadership with actionable information on the health of Pilot C (Materiel Management) and Pilot D (Mobile Supply Chain) activities. The ECSS program is both a critical and complex enterprise. Although its performance has been 

inconsistent, ECSS is only one tool the Air Force plans to use to create auditable 

financial statements. The combination of enhancements to legacy systems and fielding of ERP systems helps reduce the risks of achieving the 2017 deadline. 

60. Senator AYOTTE. Ms. McGrath, what specific oversight, if any, has you office 

exercised over this program? 

Ms. MCGRATH. My office has direct involvement with the oversight of this program. In February 2011, in concert with the Under Secretary of Defense, Acquisition, Technology and Logistics, we created an Overarching Integrated Product Team 

(OIPT) lead for MAIS DBS. The DBS OIPT is chaired by one of my senior division 

directors who reports directly to me and the Milestone Decision Authority. The DBS 

OIPT lead is well-versed in DOD’s business processes as well as the defense acquisition process. 

61. Senator AYOTTE. Ms. McGrath, on the basis of that oversight, what are your 

concerns about this ERP? 

Ms. MCGRATH. My concerns with ECSS center around the ability of the program 

office to meet the criteria established in February 2011 (reference my response to 

question #59). As such, I worked with the Milestone Decision Authority to place the 

following conditions on the program as part of the critical change certification per 

10 U.S.C. Chapter 144a: 

• Document and lock requirement for ECSS Increment I, Pilot C and D. 

Pilot C was designed to provide operational and tactical logistics capability 

at the base level. Pilot D was designed to provide capability that would enable Air Force personnel to operate in a disconnected environment; i.e., 

away from a base. The intent of this action was to prevent ‘‘requirements 

churn’’. 

• Define the success criteria the Air Force will use to assess the health of 

the program as well as alternative strategies to provide the necessary ECSS 

capabilities if the program is unable to meet the defined success criteria. 

The intent of this condition was to define and enforce a performance based 

‘‘trigger’’ that the Air Force could be used to evaluate success of the program. 

• Adopt program status metrics defined by the Milestone Decision Authority to measure the health of the program. The intent of this condition was 

to establish a set of transparent measures that all program stakeholders 

could use to monitor the health of the program. 

62. Senator AYOTTE. Ms. McGrath, has your office explored, or does it intend to 

explore, any alternatives to ECSS? 

Ms. MCGRATH. Yes, my office is actively exploring options for ECSS. In fact, functional and ERP experts from my staff are directly involved in the assessment team 

referenced in response to question #59. Further, the DBS OIPT referenced in response to question #60 has a direct role in the assessment process. 

63. Senator AYOTTE. Ms. McGrath, at some point, don’t you need to just shut 

down out-of-control programs like this? Should that happen here? 

Ms. MCGRATH. Yes, we should shut down out-of-control programs. In this case, 

however, I believe it was not appropriate to shutdown ECSS because Increment 

One, Pilot C (base level logistics support) was already on contract with the system 

integrator as a fixed price effort. Increment One, Pilot D on the other hand (disconnected logistics support) was not under contract on a fixed-priced basis. In September, when it was evident that the program was not able to meet established success criteria (see question #61), the Milestone Decision Authority directed the program to stop work on Increment One, Pilot D, effectively limiting the Government’s 

liability and shutting down future development work. In addition, the Milestone Decision Authority created an assessment team to identify possible way-ahead options 

for the program. The assessment team made a recommendation in late 2011 that 

we are in the process of evaluating. 

64. Senator AYOTTE. Secretary Morin, has the Air Force explored, or does it intend 

to explore, an alternative to ECSS? 

89 

1GAO, DOD Financial Management: Numerous Challenges Must Be Addressed to Improve 

Reliability of Financial Information, GAO–11–835T (Washington, DC: July 27, 2011). 2GAO, DOD: Further Actions Needed to Institutionalize Key Business System Modernization 

Management Controls, GAO–11–684 (Washington, DC: June 29, 2011). 3 A federated architecture consists of a family of coherent but distinct member architectures, 

in which subsidiary architectures conform to an overarching corporate architectural view and 

rule set. 

Secretary MORIN. Yes, the Air Force has and will continue to investigate alternatives to the ECSS program. In February 2011, the Air Force submitted the ECSS 

Critical Change report through OSD/AT&L to Congress. The report included analysis of several delivery alternatives and different ECSS program structures. In addition, the Air Force actively monitors the health of ECSS using pilot programs, capturing metrics, and collectively assessing ECSS alternatives. The metrics reviews 

and alternative development efforts are ongoing. 

ENTERPRISE ARCHITECTURE AND INVESTMENT CONTROLS 1

65. Senator AYOTTE. Ms. McGrath and Mr. Khan, as Congress, the OMB, and the 

Federal Chief Information Officers Council (CIOC) have recognized, effectively using 

a well-defined enterprise architecture is vital to organizational transformation and 

systems modernization. A corporate approach to investment controls management is 

a similarly important characteristic of successful public and private organizations. 

DOD continues to release updates to its corporate enterprise architecture. But, how 

successfully has this architecture been federated through the development of aligned 

subordinate architectures for each of the Military Departments? 

Ms. MCGRATH. BEA is the thin enterprise architecture layer that articulates the 

corporate vision, strategic direction, and principles for the target capabilities and 

processes in support of the DOD Strategic Management Plan goals. It is aligned to 

and decomposed by the Military Departments into segment architectures. Individual 

program and system investments and their architectures are first aligned with and 

assessed against the Military Departments’ architectural segments and then assessed against the enterprise direction contained in the BEA for capital planning 

and investment control. While important progress has been made, as recognized by 

the GAO, architecture federation between BEA and the Military Department architectures remains a challenge. 

Mr. KHAN. As we reported in June 2011,2 adopting a federated 3 approach continues to be a challenge with much remaining to be accomplished at the component 

level. While DOD continues to release updates to its corporate enterprise architecture, the architecture has yet to be federated through development of aligned subordinate architectures for each of the Military Departments. Each of the Military Departments has made progress in managing its respective architecture program, but 

there are still limitations in the scope and completeness, and the maturity of the 

Military Departments’ architecture programs. For example, while each department 

has established or is in the process of establishing an executive committee with responsibility and accountability for the enterprise architecture, none has fully developed an enterprise architecture methodology or a well-defined BEA and transition 

plan to guide and constrain business transformation initiatives. 

In addition, while DOD continues to establish investment management processes, 

the DOD enterprise and the Military Departments’ approaches to business systems 

investment management still lack the defined policies and procedures needed for effective investment selection, control, and evaluation. Until DOD fully implements 

these institutional modernization management controls required by law and addressed in GAO recommendations, its business systems modernization will likely remain a high-risk program. 

66. Senator AYOTTE. Ms. McGrath and Mr. Khan, how does DOD intend to improve in this area? 

Ms. MCGRATH. DOD is focused on improving architecture federation in two main 

areas. First, we have shifted the BEA from being organized functionally to being 

organized based on end-to-end (E2E) business processes. Second, we are mandating 

the use of international standards for building architectures. Our use of standards 

such as the Web Ontotology Language (OWL) and Business Process Modeling Notation (BPMN) provides the same opportunity for universal understanding that 

HyperText Markup Language (HTML) provides for users browsing pages on the 

internet. Both areas will facilitate the alignment and integration of DOD’s efforts. 

• DOD has identified 15 E2E business processes that represent a set of mature industry and Government leading practices for horizontal integration 

90 

4GAO–11–684. 

5See for example, GAO, DOD Business Systems Modernization: Recent Slowdown in Institutionalizing Key Management Controls Needs to Be Addressed, GAO–09–586 (Washington, DC: 

May 18, 2009); DOD Business Systems Modernization: Military Departments Need to Strengthen Management of Enterprise Architecture Programs, GAO–08–519 (Washington DC: May 12, 

2008); DOD Business Systems Modernization: Progress in Establishing Corporate Management 

Controls Needs to Be Replicated Within Military Departments, GAO–08–705 (Washington, DC: 

May 15, 2008); Business Systems Modernization: Department of the Navy Needs to Establish 

Management Structure and Fully Define Policies and Procedures for Institutionally Managing 

Investments, GAO–08–53 (Washington, DC: Oct. 31, 2007); Business Systems Modernization: 

Air Force Needs to Fully Define Policies and Procedures for Institutionally Managing Investments, GAO–08–52 (Washington, DC: Oct. 31, 2007); DOD Business Systems Modernization: 

Progress Continues to Be Made in Establishing Corporate Management Controls, but Further 

Steps Are Needed, GAO–07–733 (Washington, DC: May 14, 2007); Business Systems Modernization: DOD Continues to Improve Institutional Approach, but Further Steps Needed, GAO–06– 

658 (Washington, DC: May 15, 2006); and DOD Business Systems Modernization: Important 

Progress Made in Establishing Foundational Architecture Products and Investment Management Practices, but Much Work Remains, GAO–06–219 (Washington, DC: Nov. 23, 2005). 

across the organization. DOD’s Strategic Management Plan (fiscal years 

2012–2013) in its goal #6 focuses DOD’s efforts to reengineer/use E2E business processes to reduce transaction times, drive down costs, and improve 

service. For fiscal year 2012, DOD is focusing first on mapping the Procureto-Pay and Hire-to-Retire processes while continuing to enhance other E2E 

processes. 

• The E2Es are represented as Business Process Models (BPMs) and are 

both horizontally integrated and vertically integrated where they connect. 

The DCMO issued an executive memorandum requiring that the BEA adopt 

international standards for visualizing the BPMs and for the identifying 

and documenting the data required to support the models. BEA version 

10.0 will be based opon these standards. As the Military Departments adopt 

these standards, it will support better alignment and federation to the 

BEA. 

Mr. KHAN. As we reported in June 2011,4 a well-defined federated architecture 

and accompanying transition plans for the business mission area, along with welldefined investment management policies and procedures across all levels of DOD, 

are critical to effectively addressing DOD’s business systems modernization highrisk area. DOD has continued to take steps in defining and implementing key institutional modernization management controls, but challenges that we identified in 

prior years 5 still need to be addressed. Our previous recommendations to DOD have 

been aimed at accomplishing these and other important activities related to its business systems modernization. To DOD’s credit, it has agreed with these recommendations and said it is committed to implementing them. 

NAVY SYSTEMS AUDIT READINESS

67. Senator AYOTTE. Ms. McGrath and Secretary Commons, the Marine Corps has 

been trying to become fully auditable for quite some time, putting a lot of effort into 

this. Yet, it seems like every year the FIAR plan indicates slippage, and that the 

Navy won’t ever get to the goal. What, in your view, are the primary obstacles to 

progress? 

Ms. MCGRATH. The current legacy environment has several material internal control deficiencies such as lack of proper supporting documentation, non-standard systems, non-standard data, and non-standard processes. DOD needs to move to a business environment that enforces internal controls and begins to replace non-standard 

business operations and systems. A disparate system environment is one of the key 

challenges in achieving auditability. As stated in the DOD 2010 Agency Wide Financial Report, material weaknesses fall into two major categories: (1) Noncompliant 

Systems. Most legacy systems do not comply with the wide range of systems requirements, and do not provide assurance that core financial systems and related 

information is traceable to source transactional information. Smaller organizations 

have successfully applied compensating controls, as demonstrated by favorable audit 

opinions, but these are not as practical in larger organizations, such as the military 

departments. (2) Legacy Financial Processes. Many financial processes, such as accounts receivable and accounts payable, do not comply with Generally Accepted Accounting Principles (GAAP) because they are dependent on the noncompliant legacy 

systems currently used to compile financial information for DOD financial statements. Leveraging ERP investments to their fullest potential will increase referenVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6621 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
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tial integrity, reduce the number of interfaces, and significantly reduce these material weaknesses. 

Secretary COMMONS. The major challenges the Navy faces pursuing auditability 

are in two general areas. First, the Navy’s business-financial environment has 

evolved over time without synchronization to financial audit standards. Business 

processes have been tailored by users for their own optimization; financial accounting implications of these designs were of a lesser concern. End-to-end business processes span multiple functional areas, with stakeholders both in and outside of the 

Navy; coordinating these multiple stakeholders to embrace changes needed for audit 

readiness is a large task. Moreover, legacy accounting systems have been designed 

primarily to perform funds/budgetary accounting, not proprietary/financial accounting. 

Our second challenge is data management. Source documentation to support a financial audit may not be available in all instances, as systems and processes have 

not been designed to support audit readiness. Building an audit response infrastructure, which can assemble and transfer massive amounts of transactional data in a 

short timeframe, is a complex challenge. 

68. Senator AYOTTE. Ms. McGrath and Secretary Commons, the Navy has its core 

accounting system, and then all these feeder systems, some of which are Marine 

Corps systems, DFAS systems, DOD systems, et cetera. From what you’ve learned, 

how does all this integration to these other systems impact the Navy’s ability to become ready for an audit? 

Ms. MCGRATH. Integration between core accounting systems and legacy feeder 

systems is a challenge as the key to becoming auditable rests with developing compliant, integrated systems aligned to our stated audit objectives. If we cannot completely integrate our financial and financial feeder systems we will implement and 

document manual work-arounds in order to become ready for an audit. 

Secretary COMMONS. As the number of systems and systems owners increase, the 

complexity of the challenge increases commensurately. However, audit readiness in 

this complicated business-financial environment is feasible. Auditability is dependent on strengthening the control environment of our end-to-end business processes. 

In that vein, standardization of our business process and associated systems are key 

elements of these end-to-end processes. 

As a milestone in audit readiness, comprehensive surveys must be conducted on 

relevant business systems to ensure that their general (access and security) controls 

and their application (business execution, including interfaces) controls are designed 

and operating effectively. The Navy will continue to conduct surveys on its major 

business-financial systems and correct any deficiencies indicated by these assessments; an assessment of Navy ERP’s control environment using financial audit 

standards is currently underway. 

The Navy is also highly dependent on multiple outside service providers (primarily other Defense agencies) which manage and maintain business systems producing data flowing to the Navy financial statements. These service providers must 

bolster the control environments of their contributing business systems by assessing 

their general and application controls and strengthening them where necessary. The 

Navy is partnering with OSD, other components, and with external service providers to ensure that joint collaboration leads to success. 

69. Senator AYOTTE. Ms. McGrath and Secretary Commons, what, if anything, is 

your office doing to either make these other systems compliant to support an audit 

or to replace them? 

Ms. MCGRATH. I have made a concerted effort as part of the systems acquisition 

process to ensure that business systems progress toward DOD audit goals while also 

delivering capability to the users. To that end, I fully support the DOD Comptroller’s effort, which was integrated with a recent acquisition decision, to rely upon the 

opinion of an IPA firm, to be expressed in an examination of the Navy audit readiness assertion of a Navy ERP entity, currently planned for September 30, 2012. 

This approach will allow for identification of system and process enhancements 

scheduled for completion within 12 months. 

Secretary COMMONS. The control environment of all relevant business systems 

must be assessed for adequacy, and changes must be made to strengthen the controls when necessary to support audit readiness. Enforced standardization of our 

business processes is the underlying foundation. The Navy will conduct these surveys on the major business-financial systems managed and maintained by the Navy. 

We are partnering with OSD, other components, and with external service providers 

to ensure success in this area. 

92 

70. Senator AYOTTE. Ms. McGrath, please provide a list of those systems, especially the ones that are required to be used by OSD across DOD, that represent the 

most significant stumbling blocks to audit readiness and explain exactly what the 

plan is to overcome this problem for each of these systems. 

Ms. MCGRATH. Some of the most critical enterprise systems to achieving audit 

readiness are the Defense Departmental Reporting System and the Defense Cash 

Accountability System, which are part of the Business Enterprise Information Services (BEIS) family of systems, as well as the Automated Disbursing System (ADS) 

and the Deployable Disbursing System (DDS), which are part of the Standard Disbursing Initiative (SDI). The BEIS family of systems provides timely, accurate, and 

reliable business information from across DOD to support auditable financial statements and provides specific functionality such as a DOD-wide system for Treasury 

reporting. SDI addresses current disbursing challenges by consolidating existing 

functionality to meet DFAS customer needs for enterprise ADS and tactical DDS 

disbursing. These enterprise systems are primarily developed and maintained by 

DOD core service providers such as the DFAS and DLA and must efficiently work 

with each of the Military Department’s financial systems and processes. To ensure 

that this happens, the DCMO and Under Secretary of Defense (Comptroller), 

through the FIAR governance structure, are facilitating collaboration between the 

service providers and Military Departments to make sure that the necessary 

changes are made on both sides to create an effective target environment. 

Additionally, each Military Department has a number of legacy systems in place 

that must be replaced through the implementation of modern ERP systems to 

achieve audit readiness. These ERPs come with greater capabilities and higher level 

controls than the systems they’re replacing. These plans are included in the DOD’s 

FIAR plan. 

71. Senator AYOTTE. Secretary Commons, I understand that when the Navy’s primary ERP system is fully deployed it will only cover just over half of all obligation 

authority in the Navy. The rest will be covered by legacy financial systems. How 

will the Navy maintain a clean audit opinion if it achieves one? 

Secretary COMMONS. The control environments of Navy ERP and other businessfinancial systems must be assessed and strengthened to ensure that they meet the 

standards for financial auditability. Enforced standardization of our business processes is the underlying foundation. The Navy will make necessary changes to its legacy and Navy ERP financial systems to strengthen its key internal and systems controls as required. We will also partner with outside service providers to ensure they 

do the same to their systems which support us. To ensure sustained effectiveness, 

key controls will be continually monitored and periodically tested as an essential 

component of the system owner’s internal controls program. 

72. Senator AYOTTE. Secretary Commons, is it the Navy’s plan to employ a timeconsuming, expensive manual effort each year to maintain a clean audit opinion 

with the legacy financial systems? 

Secretary COMMONS. It is not our intent to employ a time consuming, expensive 

manual effort each year to maintain a clean audit opinion with our legacy financial 

systems. The Navy plans to implement Navy ERP through the present schedule, 

which encompasses six large acquisition commands. The Navy will continue to assess the costs and benefits of expanding the number of organizations using Navy 

ERP; part of the cost-benefit equation will be the costs and returns of audit readiness. 

The Navy will make necessary changes to its legacy and Navy ERP financial systems to strengthen its key internal and systems controls as required, with the objective of automating as many manual processes as possible. We will also partner with 

outside service providers to ensure they do the same to their systems which support 

us. To ensure sustained effectiveness, key controls will be continually monitored and 

periodically tested as an essential component of the system owner’s internal controls 

program. 

LEADERSHIP AND ACCOUNTABILITY

73. Senator AYOTTE. Mr. Khan, my sense is that there is no day-to-day commitment among leadership at DOD to achieve auditability. And, DOD’s oversight of the 

components’ efforts to become auditable seems to rely mostly on self-reporting. Do 

you agree? 

Mr. KHAN. The DOD Comptroller has expressed commitment to the FIAR goals, 

and has established a focused approach that is intended to help DOD achieve sucVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6621 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
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6GAO–11–835T. 

cesses in the near-term. But the financial transformation needed at DOD, and its 

removal from GAO’s high-risk list, is a long-term effort. Improving financial management will need to be a cross-functional endeavor; which requires improvement 

in some of DOD’s other business operations such as those in the high-risk areas of 

contract management, supply chain management, support infrastructure management, and weapon systems acquisition. As acknowledged by DOD officials, sustained 

and active involvement of DOD’s CMO, the DCMO, the DOD Comptroller, the Military Departments’ CMOs, and other senior leaders is critical for the successful implementation of the FIAR plan. Absent continued momentum, the current initiative 

may falter, as have previous efforts. 

Ensuring effective monitoring and oversight of progress—especially by the leadership in the components—will be key to bringing about effective implementation 

through the components’ Financial Improvement Plans (FIP). Effective oversight 

also holds individuals accountable for carrying out their responsibilities. In this regard, DOD has introduced incentives such as including FIAR goals in Senior Executive Service Performance Plans. 

74. Senator AYOTTE. Mr. Khan, how, in your view, can top leadership at DOD better drive throughout DOD an effort as large as achieving the first unqualified audit 

opinion of DOD’s consolidated financial statements? 

Mr. KHAN. DOD’s past strategies for improving its financial management were ineffective, but recent initiatives are encouraging. In 2005, DOD issued its FIAR plan 

for improving financial management and reporting. In 2009, the DOD Comptroller 

directed that FIAR efforts focus on financial information in two priority areas: budgetary information and asset accountability. The FIAR plan also has a new phased 

approach that comprises five waves of concerted improvement activities. The first 

three waves focus on the two priority areas and the last two waves on working toward full financial statement auditability. The FIAR plan is being implemented 

largely through the DOD components, including the Army, the Navy, and the Air 

Force Military Departments and the DLA, through the development and implementation of their respective FIPs—lending increased importance to the commitment of 

component leadership. The component’s FIPs are intended to both guide and document financial improvement efforts. 

As discussed in our testimony,6 improving DOD’s financial management operations and thereby providing DOD management and Congress more accurate and 

reliable information on the results of its business operations will not be an easy 

task. Numerous challenges must be addressed in order for DOD to successfully reform financial management. Some of the key challenges that DOD must address in 

order for the financial management operations of DOD to improve to the point 

where DOD may be able to produce auditable financial statements are: 

• Committed and sustained leadership. Improving financial management 

will need to be a cross-functional endeavor. The successful resolution of the 

weaknesses in financial management depends on improvements in some of 

DOD’s other business operations such as contract management, supply 

chain management, and weapon systems acquisition. As acknowledged by 

DOD officials, sustained and active involvement of DOD’s CMO, the DCMO, 

the Military Departments’ CMOs, the DOD Comptroller, and other senior 

leaders is critical. 

• Effective plan to correct internal control weaknesses. Because of DOD’s 

complexity and magnitude, developing and implementing a comprehensive 

plan that identifies DOD’s internal control weaknesses will not be an easy 

task. But it is a task that is critical to resolving the longstanding weaknesses and will require consistent management oversight and monitoring, 

at all levels including each and every component of DOD, for it to be successful. Such a baseline could be used to assess and plan for the necessary 

improvements and remediation to be used to measure incremental progress 

toward achieving estimated milestones for each DOD component and DOD. 

• Accountability and effective oversight. Ensuring effective monitoring and 

oversight of progress—especially by the leadership in the components—will 

be key to bringing about effective implementation of the FIAR plan through 

the components’ FIPs. If DOD’s future FIAR plan updates provide a comprehensive strategy for completing Waves 4 and 5, the FIAR plan can serve 

as an effective tool to help guide and direct DOD’s financial management 

reform efforts. 

94 

75. Senator AYOTTE. Mr. Khan, what value do you see in either separating the 

CMO position from the position of Deputy Secretary of Defense or putting the responsibility for achieving an unqualified audit opinion of DOD’s consolidated fiscal 

year 2017 financial statements under the joint leadership of the CMO and the CFO? 

Mr. KHAN. Because of the complexity and long-term nature of DOD’s business 

transformation efforts, GAO has recommended the need for a separate CMO position with significant authority, experience, and a sufficient term to provide focused 

and sustained leadership. In May 2007, the Secretary of Defense designated the 

Deputy Secretary of Defense as DOD’s CMO. The NDAA for Fiscal Year 2008 codified the CMO position, created a DCMO position, directed that CMO duties be assigned to the Under Secretary of each Military Department, and required DOD to 

develop a SMP for business operations. 

DOD has taken various steps to implement the CMO and DCMO positions, and 

to develop a strategic plan. For example, in 2008, DOD issued its first SMP. DOD 

has also issued directives that outlined broad CMO and DCMO responsibilities, established a DCMO office, and named an Assistant DCMO. In July 2009, and again 

in December 2010, DOD updated its SMP. As of March 2010, all of the Military Departments had CMOs in place, and in July 2010, the DCMO was confirmed in her 

position. In addition, DOD has established various governance entities, such as the 

DBSMC, which is intended to serve as the primary forum for addressing overall 

business transformation, and the End-to-End Process Governance Board, whose role 

is to advise the DBSMC on opportunities to enhance the management and execution 

of end-to-end business processes across DOD. While GAO recognizes that DOD has 

taken some positive steps, our work indicates that additional opportunities exist for 

the CMO, assisted by the DCMO, to provide the leadership needed to ensure that 

actions to implement reforms are completed and to achieve the goals reflected in the 

SMP, including those in areas we have identified as high-risk, such as financial 

management. Moreover, opportunities also exist for the CMO and DCMO to take on 

a greater leadership role in implementing ongoing DOD-wide efforts to achieve more 

efficiencies in its operations and to ensure results in individual business areas. Finally, DOD needs to take additional actions to further develop a business transformation plan that contains measurable goals and funding priorities and that is 

supported by a strategic planning process that includes mechanisms to fully align 

plans and budgets and to measure progress against goals. It remains to be seen 

whether the current arrangement, rather than establishing the CMO as a separate 

position, will enable DOD to provide the long-term sustained leadership needed to 

address significant challenges in its business operations. 

The CMO has various responsibilities, including to develop and maintain a DODwide strategic plan for business reform; establish performance goals and measures 

for improving and evaluating overall economy, efficiency, and effectiveness; and 

monitor and measure the progress of DOD. The DOD Comptroller/CFO is focused 

on the financial management aspects of DOD, which includes preparing auditable 

financial statements. Based upon our discussions with the office of DOD’s Comptroller/CFO and statements made by DOD’s DCMO and DOD Comptroller/CFO, at 

the hearing, they are working in a collaborative manner to address DOD’s business 

transformation issues and auditability. Both individuals are part of the FIAR Governance Board which is responsible for reviewing the DOD components’ progress in 

achieving auditability. Further, both offices participate in the review of the various 

DOD components’ efforts to modernize their business systems, which DOD has acknowledged as critical for achieving audit readiness by fiscal year 2017. Issuing 

auditable financial statements is a key responsibility of the DOD Comptroller, but 

the CMO and DCMO will be instrumental in supporting the Comptroller’s efforts 

to improve the reliability of financial information generated by business functions 

for which other DOD leaders are responsible. 

76. Senator AYOTTE. Mr. Khan, from a management or leadership perspective, 

what, if anything, can be done to better ensure commitment and support across 

functional areas to improve financial management at DOD? 

Mr. KHAN. The DOD Comptroller has expressed commitment to the FIAR goals, 

and established a focused approach that is intended to help DOD achieve successes 

in the near-term. But the financial transformation needed at DOD, and its removal 

from GAO’s high-risk list, is a long-term endeavor. Improving financial management 

will need to be a cross-functional endeavor. The successful resolution of the weaknesses in financial management depends on improvements in some of DOD’s other 

business operations such as contract management, supply chain management, and 

weapon systems acquisition. As acknowledged by DOD officials, sustained and active involvement of DOD’s CMO, the DCMO, the Military Departments’ CMOs, the 

DOD Comptroller, and other senior leaders is critical. Furthermore, it is paramount 

95 

7GAO, Financial Management: Achieving Financial Statement Auditability in the Department 

of Defense, GAO–09–373 (Washington, DC: May 6, 2009). 8GAO–11–835T. 

that DOD’s ongoing efforts to improve financial management through the FIAR plan 

and the components’ FIPs must be institutionalized—at all working levels—in order 

for success to be achieved. 

77. Senator AYOTTE. Mr. Khan, there can be no doubt that effective accountability 

and oversight are vital to effectively implementing DOD’s financial management 

and related business process reform. The FIAR plan has established a set of review 

bodies for governance and oversight of the Plan’s implementation. But, what more, 

if anything, can be done to ensure effective monitoring and oversight of progress— 

especially by the leadership in the components? 

Mr. KHAN. DOD established a governance structure for the FIAR plan that includes review bodies for governance and oversight. The governance structure is intended to provide the vision and oversight necessary to align FIAR efforts across 

DOD. To monitor progress and hold individuals accountable for progress, DOD managers and oversight bodies need reliable, valid, meaningful metrics to measure performance and the results of corrective actions. 

In May 2009, we reported 7 that the FIAR plan did not have clear results-oriented 

metrics. To its credit, DOD has taken action to begin defining results-oriented FIAR 

metrics for use in providing visibility of component-level progress in assessment, 

and in testing and remediation activities, including progress in identifying and addressing supporting documentation issues. We have not yet had an opportunity to 

assess implementation of these metrics—including the components’ control over the 

accuracy of supporting data—or their usefulness in monitoring and redirecting actions. 

The success of the FIAR plan is dependent upon the ability of the components to 

develop and implement their respective FIPs. The components’ plans are intended 

to guide and document financial improvement efforts. In this regard, component 

senior leadership, such as the CMO, needs to be actively involved in the oversight 

and monitoring of their component’s efforts to help ensure that corrective actions 

are being taken to resolve the longstanding financial management weaknesses that 

limit DOD’s ability to produce accurate and reliable information on the results of 

operations. Further, while DOD has established a governance structure to oversee 

and monitor the components’ efforts, the various governance bodies must be active 

participants in order for the components’ FIPs to be effective in resolving DOD’s 

longstanding financial management weaknesses. 

78. Senator AYOTTE. Mr. Khan, to help drive the cultural change through DOD 

that is necessary for these important initiatives to succeed, we have to demonstrate 

that there is a cost for an inferior FIAR plan or ERP transition plan. Otherwise, 

I believe very little will change. In your view, what should those consequences be? 

Mr. KHAN. As discussed in our testimony,8 ensuring effective monitoring and oversight of progress—especially by the components’ leadership—will be key to bringing 

about effective implementation, through the components’ FIPs. If DOD’s future 

FIAR plan updates provide a comprehensive strategy for completing Waves 4 and 

5, the plan can serve as an effective tool to help guide and direct DOD’s financial 

management reform efforts. 

Effective oversight holds individuals accountable for carrying out their responsibilities. DOD has introduced incentives such as including FIAR goals in Senior Executive Service Performance Plans, increased reprogramming thresholds granted to 

components that receive a positive audit opinion on their SBRs, audit costs funded 

by OSD after a successful audit, and publicizing and rewarding components for successful audits. The challenge now is to evaluate and validate these and other incentives to determine their effectiveness and whether the right mix of incentives has 

been established. 

79. Senator AYOTTE. Mr. Khan, can any type of budgetary consequence, for example, be useful? 

Mr. KHAN. The FIAR plan has established various milestones to mark when specific actions are to be completed as DOD continues to work on its two priority 

areas—budgetary information and asset accountability. The FIAR plan has also 

identified specific timeframes for when DOD’s various ERP efforts are going to be 

implemented. DOD has stated that these system efforts are critical to achieving 

auditability. Congressional hearings on the ability of DOD to achieve these milestones would be one way to encourage the development of quantitative measures on 

96 

9GAO–11–835T. 

10 5 U.S.C. § 9903. 11 5 U.S.C. §§ 3371–3376. 12Pub. L. No. 109–163, div. A, § 1122, 119 Stat. 3136, 3452 (Jan. 6, 2006). The NDAA for Fiscal Year 2010 made this strategic plan into an annual requirement. Pub. L. No. 111–84, div. 

A, § 1108, 123 Stat. 2190, 2488 (Oct. 28, 2009), codified at 10 U.S.C. § 115b. 

the progress being made to achieve auditability. These hearings could also be used 

by Congress to assess whether continued funding of certain efforts is worthwhile. 

As noted in our testimony,9 effective oversight holds individuals accountable for 

carrying out their responsibilities. DOD has introduced incentives such as including 

FIAR goals in Senior Executive Service Performance Plans, increased reprogramming thresholds granted to components that receive a positive audit opinion on their 

SBRs, funding of audit costs by the OSD after a successful audit, and publicizing 

and rewarding components for successful audits. To determine their effectiveness 

and whether the right mix of incentives has been established, DOD needs to evaluate and validate these and other incentives, including the possibility of other organization-based incentives such as incentives or disincentives to DOD components 

based on results. 

SKILLED WORKFORCE

80. Senator AYOTTE. Mr. Khan, there can be no doubt that effective financial management in the Federal Government today requires a knowledgeable and skilled 

workforce that includes individuals who are trained and certified in accounting, 

well-versed in government accounting practices and standards, and experienced in 

information technology. While the authority to hire HQEs was put in place for DOD 

to go find private sector experts who have experiences with ERP business systems 

and mergers and acquisitions, my sense is that DOD has, instead, been using that 

unique authority to hire the same types of civilians who should be brought under 

the regular general service/senior executive service schedule. Do you agree? 

Mr. KHAN. While DOD’s fiscal year 2009 Strategic Civilian Human Capital Plan 

mentions some use of the HQEs,10 we have not assessed how DOD has implemented 

this authority. Specifically regarding the plan, DOD noted that authorities for the 

Intergovernmental Personnel Act11 and HQEs are used as an avenue to fill some 

positions with highly technical requirements, but neither authority can be used to 

fill continuing positions. This results in a high turnover rate and lack of stability 

for work that is continuing. It also states that, in areas of emerging science, medical 

technologies, and information technology, DOD has supplemented its Federal workforce with both HQEs and contractor personnel. According to the 2009 plan, since 

September 11, 2001, and the beginning of the Overseas Contingency Operations, 

contractors and HQEs have commonly been used to fill gaps in expertise in the Federal DOD workforce. However, it further stated that the HQE authority had some 

stringent guidelines and could not be used to address all gaps. While we note that 

the 2009 plan discussed DOD’s use of such authorities for some of its functional 

communities, to date, we have not assessed the extent to which or how this authority has been used by DOD, particularly in the area of financial management. 

81. Senator AYOTTE. Mr. Khan, what more, if anything, can be done to ensure 

that DOD hires and retains the skilled workforce needed for it to successfully transform its business operations to become efficient, effective, and accountable? 

Mr. KHAN. Effective financial management in DOD will require a knowledgeable 

and skilled workforce that includes individuals who are trained and certified in accounting, well-versed in government accounting practices and standards, and experienced in information technology. Hiring and retaining such a skilled workforce is 

a challenge DOD must meet to succeed in its transformation to efficient, effective, 

and accountable business operations. The NDAA for Fiscal Year 2006 12 directed 

DOD to develop a strategic plan to shape and improve DOD’s civilian workforce. The 

plan was to, among other things, include assessments of: (1) existing critical skills 

and competencies in DOD’s civilian workforce; (2) future critical skills and competencies needed over the next decade; and (3) any gaps in the existing or future 

critical skills and competencies identified. In addition, DOD was to submit a plan 

for developing and reshaping the civilian employee workforce to address any identified gaps. The plan was to include specific recruiting and retention goals and strategies on how to train, compensate, and motivate civilian employees. In developing the 

plan, DOD identified financial management as one of its enterprise-wide missioncritical occupations. 

97 

13GAO, DOD Civilian Personnel: Competency Gap Analysis and Other Actions Needed to Enhance DOD’s Strategic Workforce Plans, GAO–11–827T (Washington, DC: July 14, 2011). 

In July 2011, we reported 13 that DOD’s 2009 overall civilian workforce plan had 

addressed some legislative requirements, including assessing the critical skills of its 

existing civilian workforce. Although some aspects of the legislative requirements 

were addressed, DOD still has significant work to do. For example, while the plan 

included gap analyses related to the number of personnel needed for some of the 

mission-critical occupations, DOD had only discussed competency gap analyses for 

three mission-critical occupations—language, logistics management, and information 

technology management. A competency gap for financial management was not included in DOD’s analysis. Until DOD analyzes personnel needs and gaps in the financial management area, it will not be in a position to develop an effective financial management recruitment, retention, and investment strategy to successfully address its financial management challenges. 

STATEMENT OF BUDGETARY RESOURCES

82. Senator AYOTTE. Secretary Morin, exactly how is the Air Force planning to 

get an audit of its SBR 2 years after the Army is planning to and 4 years after the 

Navy? 

Secretary MORIN. The Air Force schedule for auditing its SBR is within the timeframe established in the 2010 NDAA. The first step in the process is to evaluate 

the current state of processes and systems and determine the necessary corrective 

actions. The constraining factors on the Air Force schedule are primarily related to 

financial systems modernization. We have accelerated aspects of our audit readiness 

efforts, such as budget authority, and continue to look for other opportunities to 

reach audit readiness sooner. We are proceeding in a methodical fashion to reduce 

the risk of not meeting the 2017 deadline. 

83. Senator AYOTTE. Secretary Morin, what has the Air Force learned from the 

Marine Corps’ success and how have those lessons been incorporated? 

Secretary MORIN. The Air Force reviewed the Management Letter from the Marine Corps’ audit. We looked at each finding and evaluated its relevance to the Air 

Force. Of the 71 findings, our initial review determined that 68 items could possibly 

impact the Air Force. As we evaluate systems and processes, we continue to keep 

the findings from the Marine Corps’ audit efforts in mind, ensuring our review is 

as complete as possible. 

84. Senator AYOTTE. Secretary Morin, at this point, what’s the most significant 

impediment to the Air Force’s ability to get its SBR audit ready? 

Secretary MORIN. Perhaps the greatest challenge is the state of the legacy systems. While many of our systems allow the Air Force to efficiently manage its operations, they do this at the expense of transparency. We are unable to pull the detailed transactions from many systems that are necessary to support the summary 

level balances. In order to rectify these shortcomings, the Air Force is relying on 

a systems modernization effort that includes replacement of legacy systems with 

ERP systems, as well as cost-effective system enhancements and process improvements to provide the necessary detail in certain legacy systems. For example, we 

recently implemented a standard document numbering policy in our legacy accounting system that will allow us to perform a detailed reconciliation on our Budget Authority. We are continuing to look at legacy system enhancements as we develop our 

ERP systems. 

ARMY’S ENTERPRISE RESOURCE PLANNING SYSTEMS

85. Senator AYOTTE. Secretary Matiella, DOD’s FIAR plan has a strong emphasis 

on the implementation of GFEBS, as the cornerstone of your audit readiness strategy. But GFEBS, which covers the General Fund of the Army, represents only part 

of the Army. It doesn’t include any of the Army’s Working Capital Fund, which is 

measured in tens of billions of dollars annually. I understand that most of that activity is going to occur in another system called the LMP, which is managed out 

of Army Materiel Command. The DOD Inspector General (IG) has, however, been 

particularly critical of LMP for its compliance regarding financial management controls. What is your role in overseeing LMP and ensuring that it meets the same financial standards and requirements as GFEBS? 

98 

Secretary MATIELLA. I am responsible for ensuring LMP financial functionality 

meets audit standards and requirements. My staff oversees Army Materiel Command actions to ensure LMP meets financial compliance standards and that the 

problems identified in the DOD IG audit are addressed. This oversight has achieved 

positive results. We have updated LMP’s general ledger to include the missing accounts identified by the audit. We have identified requirements for compliance with 

DOD’s Standard Financial Information Structure (SFIS), and are on track to add 

these requirements to LMP’s baseline in fiscal year 2012. We have included LMP 

and working capital fund requirements in our FIP to ensure management controls, 

business process, and systems for both meet audit readiness requirements. We will 

continue to work with the auditors to identify problems and initiate corrective actions to ensure LMP is audit ready by fiscal year 2017. 

86. Senator AYOTTE. Secretary Matiella, LMP has already been deployed to parts 

of the Army for a few years now. Have any auditors examined that system and provided any feedback on its ability to support a financial audit? 

Secretary MATIELLA. My office is working closely with Army Audit Agency to ensure LMP complies with the financial systems requirements of the FFMIA of 1996. 

The audit agency examined LMP in 2007, and reported the system substantially 

complied with the 757 applicable FFMIA requirements. Now that LMP is fully deployed, we have engaged the audit agency to perform a follow-on FFMIA compliance 

audit that will test 1,298 requirements. The requirements growth is attributable to 

functionality added to the LMP baseline since 2007, and the growth in DOD’s compliance criteria. Additionally, we have included LMP and working capital fund requirements in our FIP to ensure management controls, business process, and systems for both meet audit readiness requirements. 

87. Senator AYOTTE. Secretary Matiella, I understand that the Army is buying 

two logistics ERPs—the LMP system and the GFEBS–Army. Why? 

Secretary MATIELLA. The LMP system is the logistics and financial management 

system for the Army Working Capital Fund, which is a separate legal entity from 

the Army General Fund. The Working Capital Fund conducts business that is very 

different from the General Fund. The LMP system provides logistics and inventory 

support for the Army’s depots, arsenals, and wholesale supply facilities. LMP will 

serve as the general ledger for the Army’s Working Capital Fund. The GFEBS supports the Army’s General Fund business and financial reporting requirements. 

88. Senator AYOTTE. Secretary Matiella, why is the Army buying one logistics 

ERP for ground logistics and the Marine Corps is buying a completely separate one, 

made by a different company, so that the two systems will be unable to work together? 

Secretary MATIELLA. GCSS-MC and GCSS-Army will be interoperable just as 

Army and Marine Corps systems interoperate today—they will be perfectly capable 

of passing transactions back and forth to one another. However, it is important to 

realize that less than 1 percent of the transactions occurring within Army logistics 

systems involve the Marine Corps. Most of the Army’s logistics transactions (tens 

of thousands daily) are within Army Enterprise Systems, or with the DLA, all of 

which run the same commercial software, SAP. It is far more important that the 

Army and DLA work together than it is to optimize Army systems with the Marine 

Corps. Also, GCSS–A and GFEBS use the same SAP software and share a common 

financial design, including a standard general ledger configuration, to ensure 

auditability and financial interoperability between the two systems. An initial review estimates moving Army to GCSS-MC would increase life cycle costs substantially and would place the Army’s ability to be auditable by fiscal year 2017 at significant risk. 

89. Senator AYOTTE. Secretary Matiella, what is the cost per transaction and cost 

per user of the legacy systems versus the ERP systems? 

Secretary MATIELLA. Prior to initiating an ERP development effort, an economic 

analysis is performed to justify investment in the ERP. Each economic analysis is 

subject to multiple reviews, and is ultimately approved by DOD’s CAPE organization. The economic analysis documents the cost and justifies the economic benefit 

of the ERP development. The ERP systems have many different types of transactions that are more complex than those in the legacy environment, making a cost 

per transaction comparison very difficult. For example, the ERP systems track cost, 

asset values, and expenses at the transaction level. This capability is not present 

in the legacy environment. Unlike the legacy systems, the ERP systems provide integrated general ledger capabilities, updating the general ledger instantly at the 

99 

14DOD’s auditors have reported material financial management weaknesses in the following 

areas: (1) Financial Management Systems, (2) Fund Balance with Treasury, (3) Accounts Receivable, (4) Inventory, (5) Operating Materials and Supplies, (6) General Property, Plant, and 

Equipment, (7) Government-Furnished Material and Contractor-Acquired Material, (8) Accounts 

Payable, (9) Environmental Liabilities, (10) Statement of Net Cost, (11) Intragovernmental 

Eliminations, (12) Other Accounting Entries, and (13) Reconciliation of Net Cost of Operations 

to Budget. 15GAO–11–835T. 16GAO–09–373. 

transaction level. Many general ledger updates in the legacy environment are done 

at a summary level, a practice that will not pass audit scrutiny. Although transactional complexity is greater in the ERP environment, this complexity is necessary 

to achieve DOD’s audit readiness goals, and to provide transparent cost and financial information for use by managers and review by auditors. 

QUESTIONS SUBMITTED BY SENATOR JOHN MCCAIN

DEFENSE FINANCIAL MANAGEMENT METRICS

90. Senator MCCAIN. Secretary Hale and Mr. Khan, during the Readiness and 

Management Support Subcommittee of the Senate Armed Service Committee hearing, Secretary Hale said that DOD is doing well on financial management, citing 

the relatively low levels of Anti-Deficiency Act (ADA) violations at DOD as compared with other Federal agencies. Specifically, you mentioned that only 20 cents 

of every $1,000 appropriated to DOD were in violation of the ADA—much lower 

than other agencies. You also stated that DOD pays its bills on time and avoids interest payments—another indicia of sound financial management. If these are the 

only important indicia of sound financial management, why, in your view, has DOD 

remained on GAO’s High-Risk List for its financial management since 1995? 

Secretary HALE. I continue to strongly feel that we have ‘‘islands’’ of excellence, 

and elements of our process tied to our stewardship culture—ADAs and timely payments are two. While these are important indicators of sound financial management, they are certainly not the only ones. Broadly, a financial audit opinion is the 

most comprehensive and important indicator and it is something that DOD has not 

yet achieved. Being able to achieve auditability would ensure that we had eliminated the kind of systemic weakness that have kept us on the GAO High-Risk List 

to date. Therefore, we will continue to focus on these two indicators, while also focusing on the broader objective of achieving auditability. 

Mr. KHAN. These are two indicators that are important, but provide information 

about narrow aspects of DOD financial management. Furthermore, the 13 material 

weaknesses in financial management reported by the DOD auditors,14 and the lack 

of audit assurance and reliability surrounding DOD’s financial information, call into 

question the completeness and accuracy of these two measures. 

Also, discussed in our testimony,15 numerous challenges must be addressed in 

order for DOD to successfully reform its financial management operations. One of 

those challenges is the development and implementation of an effective plan to correct internal control weaknesses. Internal control comprises the plans, methods, and 

procedures that serve as the first line of defense in safeguarding assets and preventing fraud. In May 2009, we reported 16 that the FIAR plan had not established 

a baseline of DOD’s state of internal control and financial management weaknesses. 

Such a baseline is used to plan for and assess improvements and remediation. DOD 

currently has efforts underway to address known internal control weaknesses 

through three integrated programs: (1) Internal Controls over Financial Reporting 

(ICOFR) program; (2) ERP implementation; and (3) the FIAR plan. However, the 

effectiveness of these three integrated efforts in establishing a baseline remains to 

be seen. 

Furthermore, the success of the Military Services’ ability to achieve audit readiness of their SBR should help provide broader measures of DOD’s financial management effectiveness. The DOD Comptroller has indicated that one of the highest priorities in improving financial management is the improvement of the budgetary information and processes underlying the SBR. A successful SBR audit is an important tool in providing accountability and discipline over the budgetary resources provided by Congress. 

91. Senator MCCAIN. Mr. Khan, what metrics does GAO use to make this determination for high risk, both generally and with respect to DOD’s financial management? 

100 

17GAO, Determining Performance and Accountability Challenges and High Risks, GAO–01– 

159SP (Washington, DC: November 2000). 

Mr. KHAN. GAO maintains a program to focus attention on government operations 

that it identifies as high risk due to their greater vulnerabilities to fraud, waste, 

abuse, and mismanagement. An individual performance and accountability challenge merits a GAO high-risk designation when it involves a program or mission 

area having national significance or a management function that is key to performance and accountability. We then determine whether the risk stems from an inherent risk, which may arise when the nature of a program creates susceptibility to 

fraud, waste, and abuse, or a systemic problem, which may arise when programmatic, management support, or financial systems, policies, and procedures established by an agency are ineffective. 

We also consider qualitative and quantitative factors. Qualitative factors include 

whether the risk is seriously detrimental to the Nation in areas that include, for 

example, health or safety or national defense. We also consider potential results of 

the risk, such as significantly reduced effectiveness and efficiency; injury or loss of 

life; unreliable decisionmaking data; reduced confidence in government; misuse of 

sensitive information; or program failure. In addition to qualitative factors, we consider the exposure to loss in monetary or other quantitative terms. A minimum of 

$1 billion must be at risk in areas such as: 

• the value of major assets; • revenue sources (e.g., taxes due) not being realized; • improper payments; and • contingencies or potential liabilities (e.g., environmental cleanup). 

Before assigning a high-risk designation, we determine and assess the effectiveness of an agency’s planned and ongoing corrective actions to address a material 

weakness. This assessment considers whether the agency has demonstrated commitment to resolving the problem, progress in addressing the problem, appropriate corrective action planning, and solutions that will be substantially completed near-term 

and will resolve the root cause of the problem. These criteria and other elements 

of the assessment of programs for designation as high risk, and for removal from 

the list, are discussed further in GAO’s Determining Performance and Accountability Challenges and High Risks.17

With regard to the designation of DOD’s financial management as high risk, the 

area meets the criteria as a program and a mission area of national significance and 

as a management function that is key to performance and accountability. Longstanding and pervasive weaknesses in DOD’s financial management and related 

business processes and systems have: (1) resulted in a lack of reliable information 

needed to make sound decisions and report on the financial status and cost of DOD 

activities to Congress and DOD decisionmakers; (2) adversely impact its operational 

efficiency and mission performance in areas of major weapons systems support and 

logistics; and (3) left DOD vulnerable to fraud, waste, and abuse. 

The financial transformation needed at DOD, and its removal from GAO’s highrisk list, will be a long-term effort. Improving financial management needs to be a 

cross-functional endeavor. The successful resolution of the weaknesses in financial 

management depends on improvements in some of DOD’s other business operations 

such as contract management, supply chain management, and weapons systems acquisition. As acknowledged by DOD officials, sustained and active involvement of 

DOD’s CMO, the DCMO, the Military Departments’ CMOs, the DOD Comptroller, 

and other senior leaders is critical. 

GENERAL FUND ENTERPRISE BUSINESS SYSTEMS

92. Senator MCCAIN. Ms. McGrath, during the Readiness and Management Support Subcommittee of the Senate Armed Services Committee hearing, Mr. Hale 

mentioned several times that the Army’s GFEBS was undergoing an audit check. 

He also said, ‘‘I don’t want to get all these ERP systems deployed at great cost and 

in considerable time find out we’re not using them in the right way.’’ With this in 

mind, why did you approve GFEBS full deployment last month before this audit was 

completed and before evaluating the results of that audit? 

Ms. MCGRATH. In June 2011, I approved a Full Deployment Decision (FDD) for 

GFEBS because the program met the criteria established in the Acquisition Program Baseline and had successfully completed an Independent Operational Test and 

Evaluation. I recognize the importance of the financial audit to DOD however and 

as part of the FDD, I levied specific audit related criteria that the Army must meet 

before declaring GFEBS fully deployed. 

101 

ARMY VS. MARINE CORPS ENTERPRISE RESOURCES PLANNING SYSTEMS

93. Senator MCCAIN. Ms. McGrath, you stated that the reason the Army and Marine Corps have two very different, but similar sounding, ERP systems for logistics 

was that they were: ‘‘embedded into very different I’ll say business processes that 

they execute their both supply and maintenance infrastructures. So although they 

sound very much the same, they do operate within two very different infrastructures and processes and they are not one-for-one used by the same people. And so, 

although, as I mentioned, they sound very similar, there’s a lot more detail behind 

the execution of those systems and those capabilities that those systems enable.’’ 

Why do the Army and Marine Corps, both ground military forces with similar equipment and doctrine, have very different processes? 

Ms. MCGRATH. The way the systems are employed is tactically different. For example, the Marine Corps system requires servers to be placed on ships and taken 

ashore when operations require traversing long distances inland. This distributed 

architecture is needed because the Marine Corps does not have the robust satellitebased networking capability that the Army has in every battalion throughout its 

force structure. 

94. Senator MCCAIN. Ms. McGrath, did they not go through BPR under the direction of your office before the adoption and installation of their billion dollar ERPs? 

Ms. MCGRATH. Most of the large ERP investments predate the decision to create 

the DCMO as well as the NDAA provision that requires the DCMO or Military Department CMO to make BPR determinations. However, the DCMO is involved with 

the Army’s ongoing ERP Strategy review, which is continuously seeking to improve 

its business processes leveraging its ERP implementations. 

95. Senator MCCAIN. Ms. McGrath, will the Army and Marine Corps continue to 

maintain very different business processes for logistics, maintenance, and supply 

functions? If so, why? 

Ms. MCGRATH. Yes, I believe the Army and Marine Corps will continue to maintain different business processes for logistics, maintenance, and supply functions. 

GCSS-Army and GCSS-Marine Corps have very different mission and system requirements, even though they do perform some similar core logistics functions. The 

primary differences are scale of operations, interoperability with other Service-component systems, and financial reporting processes. However, the two systems will 

interoperate to the degree necessary to conduct joint operations. 

96. Senator MCCAIN. Ms. McGrath, what plan, if any, is there to subject those 

processes to BPR? 

Ms. MCGRATH. I will look for opportunities where it makes sense to drive common 

business processes across DOD. For example, I am establishing an enterprise architecture to determine the feasibility of leveraging the Military Services’ processes in 

our end-to-end business cycles. The Services’ business systems will then be compared to the established process to focus project execution and enable trade-offs 

across a portfolio to reduce redundancy and effectively align resources to deliver valued mission capabilities. The business processes between the Army and Marine 

Corps are more different than alike and to adopt a standard set of processes prematurely would drastically affect each organization’s ability to organize, train, 

equip, and operate in support of the combatant commanders. 

97. Senator MCCAIN. Ms. McGrath, there may be a case for the Navy and Air 

Force having different logistics needs as ships and planes are very different. But, 

how are the Marine Corps and Army so different that they need separate, wholly 

incompatible billion-dollar ERP systems that are supposed to be modeled after commercial best practices? 

Ms. MCGRATH. The primary differences are related to complexity and scope. The 

GCSS-Army system supports a customer base much greater than the GCSS-Marine 

Corps system (four times more people and equipment) and provides much greater 

functionality resident in the system. GCSS-Army Increment I provides the tactical 

warfighter with supply, maintenance, ammunition, property accountability, integrated materiel management center, management functionality, and support to tactical financial processes. GCSS-Marine Corps Increment 1 provides Combat Service 

Support functionality: Supply, Maintenance, Task Organization, and Request Tracking in a shared data environment in support of deployed operations. 

Additionally, there are numerous situations where the Army and the Marine 

Corps have been working together to improve systems interoperability. For example, 

in Iraq and Afghanistan the legacy Standard Army Retail Supply System and MaVerDate Aug 31 2005 10:53 Mar 14, 2012 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6621 Y:\BORAWSKI\DOCS\72524.TXT JUNE PsN: JUNEB
102 

rine Corps Supported Activities Supply System interoperate today. Legacy operations over the last 12 months have resulted in over 6,000 orders with a 92 percent 

fill rate out of over 19.6 million overall supply transactions. 

Further, the interaction between the Army and Marine Corps in the greater logistics area is a relatively small (less than .03 percent of Army transactions in the past 

6 months), whereas the interaction within the Army and with the DLA makes up 

the vast majority of the workload. As a result, the emphasis has been to improve 

the interoperability between the Army and DLA. 

98. Senator MCCAIN. Ms. McGrath, please provide the Analysis of Alternatives 

(AoA) that the Army used in determining to not implement the Marine Corps’ ERP 

solution. 

Ms. MCGRATH. The AoA for the GCSS-Army is attached. 

[See annex printed at the end of this hearing]. 

99. Senator MCCAIN. Ms. McGrath, when will OSD adopt the DAI to manage its 

business processes? 

Ms. MCGRATH. The activity that supports OSD, WHS, is scheduled to begin implementation of DAI in fiscal year 2015 and complete implementation in early fiscal 

year 2016. 

100. Senator MCCAIN. Ms. McGrath, shouldn’t OSD lead the way with ERP implementation? 

Ms. MCGRATH. OSD is currently supported by WHS. WHS is scheduled to begin 

implementation of DAI in fiscal year 2015 and complete implementation in early fiscal year 2016. Acceleration of the schedule to accommodate a small number of employees moving from the BTA into OSD would be extremely challenging and provide 

increased risk to the established workload. The DAI implementation schedule includes the deployment of multiple sites over the next few years and program resources have been allocated to meet this schedule. Additionally, the specific sites are 

currently preparing for implementation, which includes data cleansing efforts, training, and BPR. Further, in addition to the increased risk, additional resources would 

be required to accelerate. I intend to leverage lessons learned within the defense 

agencies when deploying DAI across OSD. 

101. Senator MCCAIN. Ms. McGrath, how can the CMO convince the Military 

Services and other agencies through change management to adopt ERPs and turn 

off legacy systems while they continue to use their legacy system? 

Ms. MCGRATH. Each of the Services is committed to the implementation of ERPs 

in order to modernize their business system environments and drive toward audit 

readiness. However, turning off legacy systems remains a challenge. That said, 

there has been recent progress in sunsetting legacy systems. For example, the fielding of Navy ERP has enabled the retirement of 27 systems to date, with 69 more 

planned by 2016. Additionally, DOD is using the tools provided by Congress in 10 

U.S.C. section 2222, such as the IRBs, the BEA, and the ETP, to ensure that legacy 

systems are being turned off as new capability comes online. However, section 2222, 

as written, focuses exclusively on development and modernization (i.e., new systems), and not legacy systems in sustainment. The changes to section 2222 under 

consideration by the Congressional Defense Committees in the NDAA for Fiscal 

Year 2012 could provide DOD with a more effective tool to drive the retirement of 

DOD legacy systems. 

ANNEX 

[The Analysis of Alternatives for the Global Combat Support System-Army, follows:] 

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[Whereupon, at 4:09 p.m., the subcommittee adjourned.] 

Æ