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i 

72–934 2012

[H.A.S.C. No. 112–96] 

DEPARTMENT OF DEFENSE 

PERSPECTIVES ON FINANCIAL 

IMPROVEMENT AND AUDIT READINESS 

EFFORTS 

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD 

JANUARY 24, 2012 
(II) 

HOUSE COMMITTEE ON ARMED SERVICES 

ONE HUNDRED TWELFTH CONGRESS

HOWARD P. ‘‘BUCK’’ MCKEON, California, Chairman 

ROSCOE G. BARTLETT, Maryland 

MAC THORNBERRY, Texas 

WALTER B. JONES, North Carolina 

W. TODD AKIN, Missouri 

J. RANDY FORBES, Virginia 

JEFF MILLER, Florida 

JOE WILSON, South Carolina 

FRANK A. LOBIONDO, New Jersey 

MICHAEL TURNER, Ohio 

JOHN KLINE, Minnesota 

MIKE ROGERS, Alabama 

TRENT FRANKS, Arizona 

BILL SHUSTER, Pennsylvania 

K. MICHAEL CONAWAY, Texas 

DOUG LAMBORN, Colorado 

ROB WITTMAN, Virginia 

DUNCAN HUNTER, California 

JOHN C. FLEMING, M.D., Louisiana 

MIKE COFFMAN, Colorado 

TOM ROONEY, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

SCOTT RIGELL, Virginia 

CHRIS GIBSON, New York 

VICKY HARTZLER, Missouri 

JOE HECK, Nevada 

BOBBY SCHILLING, Illinois 

JON RUNYAN, New Jersey 

AUSTIN SCOTT, Georgia 

TIM GRIFFIN, Arkansas 

STEVEN PALAZZO, Mississippi 

ALLEN B. WEST, Florida 

MARTHA ROBY, Alabama 

MO BROOKS, Alabama 

TODD YOUNG, Indiana 

ADAM SMITH, Washington 

SILVESTRE REYES, Texas 

LORETTA SANCHEZ, California 

MIKE MCINTYRE, North Carolina 

ROBERT A. BRADY, Pennsylvania 

ROBERT ANDREWS, New Jersey 

SUSAN A. DAVIS, California 

JAMES R. LANGEVIN, Rhode Island 

RICK LARSEN, Washington 

JIM COOPER, Tennessee 

MADELEINE Z. BORDALLO, Guam 

JOE COURTNEY, Connecticut 

DAVE LOEBSACK, Iowa 

GABRIELLE GIFFORDS, Arizona 

NIKI TSONGAS, Massachusetts 

CHELLIE PINGREE, Maine 

LARRY KISSELL, North Carolina 

MARTIN HEINRICH, New Mexico 

BILL OWENS, New York 

JOHN R. GARAMENDI, California 

MARK S. CRITZ, Pennsylvania 

TIM RYAN, Ohio 

C.A. DUTCH RUPPERSBERGER, Maryland 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

COLLEEN HANABUSA, Hawaii 

KATHLEEN C. HOCHUL, New York 

ROBERT L. SIMMONS II, Staff Director 

PAUL FODERARO, Professional Staff Member 

WILLIAM JOHNSON, Professional Staff Member 

LAUREN HAUHN, Research Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2012 

Page 

HEARING: 

Tuesday, January 24, 2012, Department of Defense Perspectives on Financial 

Improvement and Audit Readiness Efforts ........................................................ 1 

APPENDIX: 

Tuesday, January 24, 2012 ..................................................................................... 23 

TUESDAY, JANUARY 24, 2012 

DEPARTMENT OF DEFENSE PERSPECTIVES ON FINANCIAL 

IMPROVEMENT AND AUDIT READINESS EFFORTS 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

McKeon, Hon. Howard P. ‘‘Buck,’’ a Representative from California, Chairman, Committee on Armed Services .................................................................. 1 

Smith, Hon. Adam, a Representative from Washington, Ranking Member, 

Committee on Armed Services ............................................................................ 2 

WITNESSES 

Hale, Hon. Robert F., Under Secretary of Defense (Comptroller), U.S. Department of Defense .................................................................................................... 3 

McGrath, Hon. Elizabeth A., Deputy Chief Management Officer, U.S. Department of Defense .................................................................................................... 4 

APPENDIX 

PREPARED STATEMENTS: 

Hale, Hon. Robert F., joint with Hon. Elizabeth A. McGrath ...................... 29 

McKeon, Hon. Howard P. ‘‘Buck’’ .................................................................... 27 

DOCUMENTS SUBMITTED FOR THE RECORD: 

[There were no Documents submitted.] 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

Mr. Bartlett ....................................................................................................... 43 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

Mr. Langevin ..................................................................................................... 47 

Mr. Schilling ..................................................................................................... 48 

(1) 

DEPARTMENT OF DEFENSE PERSPECTIVES ON FINANCIAL IMPROVEMENT AND AUDIT READINESS EFFORTS 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, Washington, DC, Tuesday, January 24, 2012. 

The committee met, pursuant to call, at 10:34 a.m. in room 2118, 

Rayburn House Office Building, Hon. Howard P. ‘‘Buck’’ McKeon 

(chairman of the committee) presiding. 

OPENING STATEMENT OF HON. HOWARD P. ‘‘BUCK’’ MCKEON, 

A REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED SERVICES 

The CHAIRMAN. I would like to welcome everyone to today’s hearing on the ‘‘Department of Defense Perspectives on Financial Improvement and Audit Readiness Efforts.’’ We just heard from Representative Mike Conaway, the chairman of our Defense Financial 

Management and Auditability Reform Panel, who briefed the committee on the panel’s findings and recommendations contained in 

the panel’s final report. 

He is our subject matter expert so I will not restate what he just 

said. Unfortunately our other subject matter expert, Rob Andrews, 

could not join us here today, but we are pleased to have our briefing be followed by today’s hearing so that the committee might also 

receive the Department’s perspectives on the report and its ongoing 

financial management reform efforts. 

I would like to thank the Department’s witnesses that are here 

today as well as those who have testified in previous panel hearings. 

The Department’s willingness to make time to testify in the 

many early morning hearings conducted by the panel is a testament to its commitment to achieving financial management reform. 

With that said, as pointed out in the panel’s report there is much 

work to be done for DOD [Department of Defense] to reach its financial improvement and audit readiness goals. But with the billions of dollars in budget cuts facing the Department and the need 

to have reliable information in order to make the tough decisions, 

DOD must take the necessary actions to overcome the challenges 

it faces. 

The committee stands ready to support DOD in this effort and 

is interested in receiving feedback on the panel’s work to assist us 

in our oversight on this very important effort. We have with us 

here today the Honorable Robert F. Hale, Under Secretary of Defense (Comptroller) of the Department and the Honorable Elizabeth 

A. McGrath, Deputy Chief Management Officer of the Department 

of Defense. Let me conclude by saying two more things. Given the 
2 

change in defense strategy recently announced by the President 

and the significant budget cuts the Department has to implement, 

starting this year, all of us are anxious to learn more about the 

specific changes contained in the fiscal year 2013 budget request. 

We will have that opportunity next month, but although we are 

joined today by Secretary Hale, I recognize that he is not at liberty 

to discuss these issues in advance of the President’s release of the 

budget. Thank you again for joining us, nevertheless. 

Lastly, following what must have been a difficult decision to resign from office, I want to wish our colleague, Representative 

Gabrielle Giffords, our very best in her recovery and make sure she 

knows that she will be missed. 

She was a leader on this committee and a tireless advocate for 

our men and women in uniform. I know our last conversation in 

December during the—what do we call that when we all—the lame 

duck session at the end of the last Congress—a nightmare, yes— 

she came up to me on the floor and requested that as early as possible, as a committee, we visit Fort Huachuca in her district, which 

was very important to her. I am sorry that we haven’t made that 

trip yet, but I think it is something that we should schedule as a 

trip to one of the bases that we have been trying to do. 

And when we do, we should invite her if she is able, to accompany us on that visit. I know leaving public service and the constituents she has worked so hard for cannot have been an easy decision. She will continue to be in our thoughts and prayers as we 

move forward on our work in this committee. 

Mr. Smith. 

[The prepared statement of Mr. McKeon can be found in the Appendix on page 27.] 

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM 

WASHINGTON, RANKING MEMBER, COMMITTEE ON ARMED 

SERVICES 

Mr. SMITH. Thank you, Mr. Chairman. I appreciate those comments, and I certainly want to echo them. Gabby will be very much 

missed from this Congress and particularly from this committee. 

She worked tirelessly, as we all know on, gosh just about every 

conceivable issue that was before us; and worked with many different members—Democrat and Republican alike—on the issues 

that were important to her district and the issues that were important to the country. I have had the opportunity to visit Fort 

Huachuca on a couple of occasions and Davis-Monthan Air Force 

Base as well and they absolutely love her out there. 

They know that she is working hard on their behalf and has 

done a fabulous job representing that district in Arizona. I think 

the encouraging thing is how much her physical condition has improved over the course of the last year. I think what she was mindful of, is that this is a, you know, a 2- to 3-year recovery period 

from this type of injury. She is going to continue to get better. But 

she needs to focus on that and focus on her health. And I think 

also the understanding was, you know, that there is a way to represent a district. It is the way she has represented it for her entire 

career, 100 percent and with just full on energy. 
3 

And if she couldn’t do that, she didn’t think it was fair to the 

people of her district to continue in that capacity. And I greatly admire that decision, even as I am very personally disappointed by 

it because we would love to have her back on this committee. But 

I think it is also important for everyone to remember what she said 

and in that announcement and has said since, this is an interruption, not an end. She wants to be back into public service in some 

capacity or another. Focused on her health right now, but as she 

said more than once, she will be back. 

And we all look forward to her continuing in public service in 

any of a number of different possible capacities; great serving with 

her. Who knows, hopefully we may have that opportunity again at 

some point, and I thank the chairman for his kind words and appreciate Gabby’s service on this committee during her time in Congress. 

I had made opening remarks earlier about the auditing process— 

don’t have anything further to say on that. I look forward to our 

witnesses’ testimony, and I thank the chairman for holding this 

hearing and for his work on this important issue. I yield back. 

The CHAIRMAN. Thank you. 

Mr. Hale. 

STATEMENT OF HON. ROBERT F. HALE, UNDER SECRETARY 

OF DEFENSE (COMPTROLLER), U.S. DEPARTMENT OF DEFENSE 

Secretary HALE. Well, thank you, Mr. Chairman and members of 

the committee. Thank you for your interest in financial management at the Department of Defense. And we especially want to 

thank Chairman Conaway and his ranking associate, Congressman 

Andrews, and the members of the Defense Financial Management 

and Auditability Reform Panel for their support. 

And let me say, everybody in the Department of Defense will 

miss Congresswoman Giffords. She was an able supporter of the 

Department, and we certainly wish her the best. 

Ms. McGrath and I submitted a statement for the record that 

contains our reaction to the panel’s recent report. 

[The joint prepared statement of Secretary Hale and Ms. 

McGrath can be found in the Appendix on page 29.] 

Secretary HALE. It also describes our overall approach to 

auditability. We will now deliver a joint oral statement that summarizes the key points. Let me start with the panel report. Most 

importantly, we find the panel’s report balanced and constructive. 

It recognizes the progress we have made in overcoming historic impediments to audit readiness, and we are pleased that the report 

endorses our financial improvement and audit readiness, or FIAR 

[Financial Improvement and Audit Readiness] strategy, which is to 

focus first on the information DOD most uses to manage the Department, especially budgetary information and the accounts and 

locations of our assets. 

The panel did identify five areas where action is still needed, and 

we would like to comment briefly on each of those. First, the panel 

concluded that we need sustained leadership. We fully agree with 

that. Today, we have the support from the Secretary himself, from 

the Deputy Secretary, and from many other key leaders in the De-
4 

partment. But while we have strong senior leader support now, we 

know this support must be sustained as leaders change. 

Our goal is to build up momentum so that this current FIAR effort will continue, and we are building that momentum by establishing a clear governance structure. We have that in place. Setting 

aside dedicated resources. We have in our future years defense 

plan money in each of the years in each of the departments, and 

money to help each of the defense agencies, and identifying short 

term and long term goals, which we have done. We also expect and 

welcome congressional oversight, which should help to sustain momentum. 

A second factor identified by the panel involves the DOD Financial Management workforce. Our professionals are capably supporting key missions around the world. I am very proud of them. 

They are in Afghanistan. They are in all the hot spots as well as 

so many other places. But the business environment is changing 

and we need to change our training to match. 

In the short term we are achieving practical training in audit 

readiness by using independent public accountants who have great 

expertise in this area. For the longer term, we are implementing 

a course-based certification program to ensure that financial managers have the skill and experience in key areas, including financial statement audits. 

We appreciate congressional support for this program in the fiscal year 2012 Authorization Act. You provide us legal authority to 

put it in place. And we are working aggressively to get the certification program started. I had a briefing on it yesterday. We expect 

to have pilots in place by the end of the calendar year. 

The third factor identified by the panel involves enterprise resource planning systems. This is a key area, and let me ask my colleague, Ms. McGrath, to address this important topic. 

STATEMENT OF HON. ELIZABETH A. MCGRATH, DEPUTY 

CHIEF MANAGEMENT OFFICER, U.S. DEPARTMENT OF DEFENSE 

Ms. MCGRATH. Mr. Chairman, other members of the committee, 

I too appreciate the opportunity to discuss the panel’s report with 

you today and echo Mr. Hale’s heartfelt thanks to Congressman 

Conaway and Mr. Andrews, for their focused attention to this important topic. 

As the panel in the report notes, effective implementation of enterprise resource planning, or ERP systems, will not enable 

auditability by itself, but it will help to achieve the modern business environment needed to meet and sustain our goal of audit 

readiness. Both the panel and GAO [Government Accountability 

Office] recognize that the Department has improved the way we acquire and implement ERPs over the past 2 years. That said, they 

also believe that we can and need to do even better. The Department agrees. 

We also agree with the panel that it is important to closely link 

our ERP efforts to audit readiness. To this end, we are employing 

a number of tools to establish and maintain the linkage. For example, we are tying business outcomes, including auditability to acquisition milestones, and requiring individual programs to define 
5 

what specific role they play in achieving those business outcomes. 

We have done this recently with both the Army and Navy’s financial systems, the General Fund Enterprise Business System and 

the Navy Enterprise Resource Planning system, and the Army’s logistic system, the Global Combat Support System. 

We also share the same view as the panel with regard to the importance of overcoming challenges in acquiring ERPs, specifically 

in requirements definition and testing. To this end, we issued 

streamlined policy for the acquisition of business I.T. [Information 

Technology] systems that emphasize rigorous analyses of capability 

gaps, summarizing them as a problem statement, focusing also on 

incremental delivery of capability in 18 to 24 months, and using a 

business case and a program charter to streamline documentation. 

Additionally, to help better define and stabilize requirements for 

our acquisition programs, we are driving better application of business process re-engineering, especially as a precursor to the acquisition of a business system or a capability. We are grateful that the 

panel’s report emphasizes one of our toughest challenges, dealings 

with the problems inherent in implementing ERPs in a legacy environment. 

The report rightly cites the difficulties associated with data conversion. Complications arise when the quality of the legacy data is 

not equal to what is required by a modern ERP system, and the 

need in some cases is to institute multiple interfaces to legacy systems. Our goal is to significantly reduce and/or eliminate as many 

interfaces as possible. 

We are working aggressively to sunset our legacy systems wherever and whenever appropriate. The Navy ERP is a great example 

of how the implementation of a ERP can lead to the retirement of 

legacy systems. The system provides an integrated business management capability that modernizes, streamlines and standardizes 

how the Navy manages people, programs, money, equipment and 

supplies. 

It has enabled inventory reduction, real-time visibility of assets, 

resources and inventory, and improved financial controls. It has approximately 66,000 users worldwide managing approximately $62 

billion. And it also has enabled the retirement of 27 legacy systems 

to date, with 69 more schedule to be retired by 2016. 

Furthermore, we appreciate Congress’ recent change to our Business Systems Investment Review Board process, specifically Section 901 of the Fiscal Year 2012 National Defense Authorization 

Act, which enables visibility of the entire business portfolio, not 

just the modernization efforts. This will greatly assist our efforts 

to rationalize the legacy environment. 

In closing, I thank the panel for its work and carefully considered recommendations. I would also like to thank the committee for 

its continued attention for both auditability and the DOD’s broader 

business operations. 

This concludes my statement. I look forward to your questions. 

[The joint prepared statement of Ms. McGrath and Secretary 

Hale can be found in the Appendix on page 29.] 

Secretary HALE. Let me pick up with a couple other points, and 

then we will get to all of your questions. 

And thank you, Beth. 
6 

Important as they are, improved financial systems by themselves 

aren’t going to get us to auditable financial statements. We also 

need improved financial reporting controls. And that is a fourth 

concern expressed by the panel. Controls are a key to audit success, 

but sometimes we find that ours are inadequate, sometimes they 

are too variable across commands, or they are not adequately documented. 

To address this problem, the services are enlisting help from 

their service audit agencies, their internal auditors. The audit 

agencies have people who are qualified to assess management controls and make sound recommendations. We also need the support 

of field commanders who can ensure that management control improvements actually occur. And we are seeking that support. 

Better internal controls should help with improper payments. 

Our improper payment rates are actually lower than most civilian 

agencies, as measured as a share of our budget, even though those 

agencies have clean opinions. But we need to do more and we are 

taking the steps to lower improper payments even further. The 

same is true for unmatched disbursements and Anti-Deficiency Act 

Violations. 

And fifth on the panel’s list, we are taking actions to institutionalize these various improvements, and to raise awareness of 

the audit efforts in nonfinancial areas. We have a strategic management plan that clearly incorporates this initiative. The Secretary’s directive on auditability issued last October certainly 

helped raise awareness. It has also created new goals for us. 

The Secretary wants us to cut in half the time that we will spend 

getting our budget statement ready, the statement of budgetary resources for general funds. Specifically, he wants that statement be 

audit-ready by 2014, and he wants us to take other steps to increase audit readiness. We are carrying out Secretary Panetta’s direction. An overview of our accelerated plan was submitted to the 

Secretary in December, and he approved it. 

We are now developing the details where needed to ensure that 

we can execute the new plan and that we have a way to hold people accountable. We will be prepared to brief your staffs in March 

on the details and will provide more comprehensive information in 

the May version of the FIAR report. 

Let me conclude by addressing our overall audit efforts. Our goal 

is to have all DOD financial statements audit-ready by 2017. 

The key to achieving our 2017 goal is building a foundation. To 

do that, we need to carry out things we are doing right now, our 

current priorities, achieve auditable budget statements, and counts, 

and locations of assets. That foundation will greatly help us as we 

work toward asset valuation, which is the other major step that we 

have to carry out by 2017. 

We also need to sustain effort in this area, and in that regard, 

there is one area where we could use your help. In the past year, 

we have had no fewer than four threats of a Government shutdown. It required enormous planning efforts. We were on a 6- 

month continuing resolution, also required a great deal of management attention. 

Now the prospect of sequester is hanging over us. This uncertainty has drained valuable time and leadership attention for many 
7 

initiatives, including our commitment to audit readiness. Congress 

could help us a great deal by returning to a more orderly budget 

process. 

Especially with regard to business processes, the Department of 

Defense is, if you will, more like an aircraft carrier than a speedboat. It doesn’t change quickly. But we are building a foundation 

for auditability and we have created considerable momentum. 

And, aircraft carriers, once again, started, also don’t stop quickly. 

And because we are building a foundation and creating momentum, 

I am reasonably confident that we can meet our goal to have all 

DOD financial statements audit-ready by 2017. 

Mr. Chairman, on the end, as I started—by expressing appreciation for the committee’s interest in this topic and appreciation for 

the panel’s suggestion and its recognition of our progress. That concludes our statement. We welcome your questions. 

The CHAIRMAN. Thank you very much for your report and for 

your testimony. 

I know you can’t go into specifics of the upcoming budget request, 

but one of the critical factors for success in meeting your financial 

management and audit reform goals will be the availability of resources. 

Do you have confidence that the fiscal year 2013 budget request 

will continue to provide resources required to meet your accelerated 

audit readiness goals? I know you just mentioned things that we 

could do to help, like returning to regular order. 

Some of our Members may be wearing buttons today, listing 

1,000 days since the Senate has passed a budget. It makes it very 

difficult to return to regular order when we pass the budget on our 

side, but are not able to get the Senate to function properly under 

regular order. So maybe it would be good if you get the opportunity 

to testify over there, you can make the same request of them. 

I know we will be striving to get our budget passed and do it 

through regular order on our side here, and hopefully we will be 

able to get that done. I know we were told that the Secretary—they 

were going to give us the budget, and they have had to move it 

back for a week. But we have been able to adjust our schedule to 

keep on schedule, to get our work done. We will try to do your request. 

I know a lot of people think that this will be a pretty much political year and will probably end up the year in another continuing 

resolution that is unfortunate. I hope that is not the case. And I 

hope we are able to return to regular order and we will be trying— 

if we could get all Congress to function the way our committee 

does, that would be a big step forward. 

Anyway, if you can think of anything that we could do that we 

are not doing in regard to specific amounts that you need to make 

sure that you have the resources you need, be happy to hear them 

if you have any specifics other than what you already mentioned 

to us. 

Secretary HALE. Mr. Chairman, I think we are going to be okay 

on resources. I will not go into specifics. It helps to have Secretary 

Panetta’s support. It probably doesn’t hurt to have the Comptroller’s support. So I think we are going to be okay in terms of the 
8 

budget resources. It is not on my worry list. Sustained leadership 

is, but that is not. So I think we are okay. 

The CHAIRMAN. Very good. Thank you. 

Mr. Smith. 

Mr. SMITH. Thank you, Mr. Chairman. First of all, I want to 

point up something you said near the end of your testimony and 

that is the, you know, four times when you were uncertain exactly 

how the money was going to be coming to you this year, the four 

threats of a Government shutdown. 

I don’t think there is a proper understanding in this body, or 

even nationally, the devastating impact that has on the ability of 

the Government, certainly DOD, having such a large budget. And 

that is the one that I am most intimately familiar with. 

I remember meeting with folks over at the Pentagon as they 

were trying to figure out what they were going to do, which programs they could continue, where they could find the money to continue them, which ones were going to have to be suspended. 

And I know out there in the private contractor world, they didn’t 

hire people. They had a program. They knew it was supposed to 

be funded, but then maybe it wasn’t going to be funded. So they 

had to ramp up. They were planning on hiring people to get ready 

to do this, but they didn’t know if it was going to happen, so they 

couldn’t hire them. 

It is devastating when this body is unable to pass the normal appropriations and authorizing bills in some sort of regular order. We 

tend to think, here in the last couple of years, that that is just 

what happens. We can’t get an agreement, so we do a C.R. [Continuing Resolution] and then maybe the C.R., you know, leads to 

a threatened shutdown and, well, that is just the way things go. 

It is horrific in terms of its impact upon the ability of the Government to do its job; and again, not just DOD. 

And while we are out there wrestling with constituents who are 

deeply dissatisfied with Government, its ability to do its job by 

whatever definition they have, understand that we are just crippling that by not being able to give all the departments some predictability about when they are going to get their money, whatever 

that amount of money is. 

So I just wanted to place an extra little exclamation point on 

that. And, you know, I know this committee, you know, we passed 

our bill in May, waited for 6 months for the Senate to pass it. So 

I will say I think this committee did its job. But collectively as Congress, we need to do our job to enable you to do this. 

And then I just have two questions. One, to just sort of frame 

this, I mean, it has been said in the press that, you know, the Pentagon doesn’t know where it is spending its money because it can’t 

audit properly. I think a lot of people don’t know what that means 

in sort of concrete terms. 

What is it that the Pentagon is unable to do, and how does that 

translate into the notion of knowing where you spend your money? 

Could you explain that a little bit in terms of just where the problem is at, the sort of what it is and what it isn’t? 

Secretary HALE. Well, I will try. First off, in—— 

Mr. SMITH. I am sorry. The microphone is sort of off to your side 

there, if you could get that over, that is great. 
9 

Secretary HALE. Better? 

Mr. SMITH. Yes. 

Secretary HALE. I will try. First off, I am fully committed to 

auditable statements for a variety of reasons, but the most important reason is we need to reassure the public and the Congress 

that we are good stewards of their funds and will never do it unless 

we can pass an audit. So I have committed a lot of effort to that. 

That said, I believe that when it comes to knowing where we 

spend our money by appropriation, the way you appropriate it to 

us, we do have accurate information. Our systems are designed to 

do that. They do it pretty well. 

And I would offer, as corroboration, the absence of problems. We 

do about 140 million accounting transactions a year in DOD. If we 

were off even by 1 percent, that would be more than a million incorrect transactions. You would see regular mispayments to contractors. And we have a few, but not many. 

You would see regular mispayments to people or improper payments to personnel are a couple tenths of a percent, and they usually go away quickly. You would see unmatched disbursements in 

a wholesale basis. We are not seeing any of that. So I am confident 

that the data is reasonably accurate, but so we need to demonstrate that through an audit, and I am fully committed to doing 

it. 

Mr. SMITH. In layman’s terms, then—and I am not an accountant—what does it mean that you can’t do an audit? 

Secretary HALE. Well, let me try that. I do that with some humility, with Mr. Conaway here as a CPA [certified public accountant], 

because I am not. But basically an auditor wants to see for every 

entry in your budget statement—let me focus on that—they want 

to see an invoice. They want to see a receiving report that said you 

got the goods. They want to see a contract that matches the price 

and the invoice. 

And we do with 140 million transactions a year. We can’t quickly 

generate all that documentation in a manner that satisfies auditors. One of the big things the Enterprise Resource Planning systems will do for us is keep that information, particularly the receiving reports and the invoices in a manner that is electronically accessible. 

Right now, you have to go out to the bases in some case. They 

prowl through your files, find that invoice, and there are thousands 

of them when they sample. We can’t do it quickly enough. We can’t 

balance—at a transaction level, with our Treasury account—the socalled funds balance with Treasury, which is required. And we 

should be able to do it. 

So we can’t reassure you, and we need to do that. But the absence of fundamental problems, it leaves me convinced that the 

basic data we are presenting to you when we show you the budget 

in a couple of weeks are accurate. 

Mr. SMITH. Okay. I had another question, but I will hold off on 

that, and yield back. Thank you. 

The CHAIRMAN. Thank you. 

Mr. Bartlett. 

Mr. BARTLETT. That is testimony to our inability to adequately 

communicate with our constituents the average constituent be-
10 

lieves that if we just didn’t have any earmarks—and now we 

don’t—that if we cut out foreign aid and if we cut out waste, fraud 

and abuse, we probably could have balanced the budget. 

I am not sure we are going to cut out foreign aid, but they would 

certainly like us to cut out waste, fraud and abuse. And they have 

the perception that unless we can audit what we are doing, there 

is little chance that we are going to be able to cut out waste, fraud 

and abuse. 

Can you, in a couple of minutes here, so we have a statement for 

the record, tell our constituents why it is so difficult for DOD to 

keep records that can be auditable? And then could you provide us 

a little one-pager that we can send to our constituents who wonder 

why half of the money in our discretionary spending cannot be audited? 

Secretary HALE. Well, Mr. Bartlett, I will offer you an answer 

but not an excuse. We need to do this. And we need to move to do 

it quickly. 

The reason is, at least partly, goes to the answer I just gave Mr. 

Smith, we don’t have systems in place right now that allow us to 

quickly get the information that an auditor requires. As I said, 

they want an invoice, they want a receiving report, they want a 

contract. With 140 million transactions a year—and maybe 10,000– 

20,000 sampled transactions by an auditor, you have to have that 

in an automated form because they want it in a couple of weeks. 

And we don’t have that right now. We also don’t have internal controls that are adequate. I will give you a couple examples to try to 

make that a little more clear. 

We went to some of our bases when the Marine Corps had its 

budgetary statement under audit, and the auditors found that we 

had not taken off people who had left the base. We had not taken 

them off access to our financial systems. They say, ‘‘Wait a minute. 

I mean, that is a fraud potential.’’ That is pretty easy blocking and 

tackling, but we have got to get it done across the Department. 

We also do something called bulk obligations of military personnel dollars. We obligate them broadly for, say, a whole command. This is efficient for us, saves us time. The auditors don’t find 

that acceptable. They want to be able to track it back to the individual and be sure, you know, Sergeant Bob Hale really is a sergeant and is getting paid properly. So we have to change our businesses practices to avoid bulk obligations, or at least have the detail that they want. 

Translating that for the American people, we will take a shot. 

But it is pretty technical stuff. It is just we got to get it done and 

we need to reassure you and the public that we are good stewards. 

And as I said before, I don’t think we will ever do that unless we 

can pass what every viable company in America has to do and pass 

an audit. 

If I have time, I will tell you a brief story. It was in 1994. I had 

taken over as the Air Force financial manager and I was trying to 

do audit then and I didn’t get too far. I was talking to my wife 

about why our statements weren’t auditable. 

And first off, she is not an accountant, so I had to try to explain 

what audit meant. And I did that. And then she stopped me and 

she said, ‘‘Well Bob, if your statements aren’t auditable, how do 
11 

you know people aren’t stealing from you?’’ Financial statement audits aren’t really designed to detect fraud. That is not what they 

are designed to do. 

But I started to explain that and I just stopped and realized we 

aren’t ever going to convince the American public we are good 

stewards until we do this. So we are trying. And I would like to 

be getting there faster, but I think we have made a fair amount 

of progress. And I will try for the one-pager. 

Mr. BARTLETT. Can you give us a little one-pager in layman’s 

language that they will understand of why it is so difficult? 

[The information referred to can be found in the Appendix on 

page 43.] 

Secretary HALE. I will try. 

Mr. BARTLETT. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Mrs. Davis. 

Mrs. DAVIS. Thank you, Mr. Chairman. 

I would just ask you to follow up really on the question that I 

asked Mr. Conaway about how you move this in a way that the 

need for auditability becomes part of the culture in a way that 

the—and he mentioned the evaluations, and that is part of the report that they put forward and how important that is to senior 

leadership and what goes down the line. 

But how do you tell people that this is really going to change? 

And I guess the other question that I have to ask myself is was 

this not in place before? What is changing? 

Secretary HALE. Well, let me go to your first question. How do 

you do it? Tone at the top really helps. Secretary Panetta’s endorsement of this has been of enormous advantage. I view it as a golden 

opportunity. I am looking how I can leverage that. And I think he 

is convinced that this is important, and that is beginning to circulate through the system. 

We need to get this from being a comptroller issue to a commander’s issue. It is the commanders that can make these changes 

that have to happen. I think that is starting to happen, but we 

haven’t gotten there yet. We are doing a meeting I hope this afternoon with the Deputy’s Management Action Group. We will have 

all the vice chiefs there. And one of the questions we are going to 

ask them is how do we do better at getting this to be a commander’s issue. 

As you heard Mr. Conaway say, we have asked that the performance plans for every member of the senior executive service who 

has any significant involvement with audit, their performance 

plans specify that this is one of the things that they have to do. 

That ties to bonuses. And so it is a step in the right direction. 

We have to do all of that and more. Why haven’t we done it before? I would just have to say that management attention has been 

variable. We haven’t sustained it. And we are big and we are fighting wars and all the reasons or excuses that you hear, but we just 

have to sustain the attention and make this happen. 

Mrs. DAVIS. Do you see a role for the personnel committee, as 

Mr. Conaway stated, to make certain that there is an acknowledg-
12 

ment, and participation by all those involved, all the stakeholders 

involved in this? 

Secretary HALE. So as I have said to Mr. Conaway, political appointees don’t usually ask for hearings. However, I think it is appropriate that there be ongoing hearings. I will let you decide 

where that will be. I won’t specify the organization. 

But I think it is appropriate to have some ongoing oversight, perhaps particularly during the change of administration. And no matter what happens in the election, there will be change in senior 

leaders. That is just inevitable. 

So I think it would be appropriate perhaps particularly during 

that period to have oversight hearings. And if you wanted to ask 

in your personnel role whether the members of the senior executive 

service at each department have this in there, I would welcome 

that. I think you will hear yes because we work carefully with the 

departments, but I think it would be a good question to ask. 

Mrs. DAVIS. Ms. McGrath, did you have anything you would like 

to add? 

Ms. MCGRATH. I would echo Mr. Hale’s comments about the— 

you know, this has to come outside of just the comptroller community. And so we have embedded every functional area into the governance process of the Financial Improvement Audit Readiness. It 

is more than just he and I at the table and the accountants. It is 

everybody. We are cascading those into the performance plans, 

holding those members accountable. 

And we are also tying, as I mentioned in my statement, the implementation of the various systems. These are logisticians now 

paying attention to audit as part of an acquisition decision. What 

business outcomes are we trying to achieve? Not only the logistics 

aspects, but also the audit piece so they are not separate. So I 

think we are taking a much more integrated approach to achieving 

collective business outcomes, as opposed to specific functional outcomes. And I think all of that has been very helpful. 

Mrs. DAVIS. Okay. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Mr. Conaway. 

Mr. CONAWAY. Thank you, Mr. Chairman. Mr. Hale and Ms. 

McGrath, on the Panetta 60-day review of the 2014 statement of 

budgetary resources acceleration, can you give us kind of where we 

are right now? We are a little more than 90 days past that deal. 

Can you give us a sense of where that is going? 

Secretary HALE. I can. First off, procedurally, we gave the Secretary 2 days before it was due a summary of the plan. He has approved it. We are now moving and well along with getting details, 

dates and who is responsible. 

Some of that will get reviewed at what I hope will be this meeting this afternoon with our Chief Management Officer, Dr. Carter. 

And Ms. McGrath and I will be there for that. But let me try to 

be helpful. And at some point we need to share more details with 

you. I understand that. Let me try to be helpful and try to tell you 

where we are kind of by department. 

The Marine Corps is in the best shape. There is a statement of 

budgetary resources actually under audit. I have got my fingers 
13 

crossed for a positive opinion. We will know by March, but we have 

learned a lot and they are clearly a lot better off. Your 8,000—400 

analogy you used in terms of hours I think is characteristic. So 

they are furthest ahead. I am not too worried about them. 

The Naval Service is in pretty good shape. They had intended to 

assert audit readiness on the statement of budgetary resources by 

2014. They just have to do it. I don’t want to understate the important of that. 

The Army will have to speed up by about a year compared to 

their previous plan. They will need to be sure their GFEBS [General Fund Enterprise Business System] system, it is their ERP, is 

in place. And they are going to have to accelerate some of their 

data-cleaning efforts. Some of the older data that they had hoped 

would just sort of go away with time by 2017 won’t by 2014. 

The Air Force faces the biggest challenge of the military departments because it was depending on the DEAMS [Defense Enterprise Accounting and Management System] system, which they had 

hoped to have there by 2017—is not going to be there in large part 

by 2014. They are going to have to look at workarounds and maybe 

higher sample sizes or other approaches for some of their existing 

systems for a year or two. I don’t mind that, so long as we have 

got a long-term plan to get off that. I don’t want to do that on a 

permanent basis. 

The defense agencies, only 3 of I think 26 defense agencies have 

clean audit opinions. We have got a big job there. They are smaller, 

so each one is not a problem. It is their number that is an issue. 

And I think they are challenging because of their number. 

We have set up a small group in my office to try to help them, 

and we have set aside some money in this forthcoming budget to 

act as seed money to help them move ahead. Ask them to assert 

readiness for what is called appropriations received, their funds 

distribution by next March and audit readiness by 2014. 

We need our service providers like DFAS [Defense Finance and 

Accounting Service] to be ready and our principal staff assistants, 

like me, to work with their defense agencies to make sure that they 

are moving ahead. So that is probably more detail than you want, 

but we are getting there in terms of this plan. 

Mr. CONAWAY. Part of Secretary Panetta’s charge was for the 

Deputy Secretary of Defense to set up a periodic review process on 

this issue so that we keep that sustained leadership emphasis on 

it. Has the Deputy had a chance to put something in place yet? 

Secretary HALE. He has. He will use this Deputy’s Management 

Action Group, which is all the under secretaries, the vice chiefs, the 

principal staff. The under secretaries from OSD [Office of the Secretary of Defense] are all represented on this group. And basically 

what Ash Carter has said to me is, you know, ‘‘Bob, tell me when 

you have something ready for me.’’ 

And so we have a meeting this afternoon that will go over the 

plan for acceleration. And also we are going to use that opportunity 

when we have all the vice chiefs there to say, ‘‘How do we get this 

out in the field? How do I get commanders involved?’’ I think they 

are starting to do that, but I would like their advice. 

And, basically, Dr. Carter has said, ‘‘Come back to me when you 

are ready for another meeting when you have something meaning-
14 

ful.’’ He didn’t want to schedule it every 2 months, and I think that 

is right. It is my job to tell him when we are ready to go. So yes, 

I think there is a process in place. 

Mr. CONAWAY. Beth, do you want to add to that? 

Ms. MCGRATH. I would just echo Mr. Hale. As was mentioned in 

our written statement, financial auditability remains a priority for 

the Department. We have cascading governance throughout the organization so that there is an appropriate level of accountability. 

And I think Mrs. Davis asked earlier what was missing or what 

is different. I think that that is a big factor. 

Mr. CONAWAY. Thank you both again for testifying. Let me make 

one comment. We probably ought to modify the ‘‘unauditable’’ 

phrase by saying it is unauditable at rational costs. You could unleash enough auditors to redo every transaction, all 140 million 

transactions, and you could get an audit. That is not rational to do 

that. 

So we may want to make sure people understand that 

unauditable means you can’t audit it at a cost to the system that 

makes sense. With those comments, I yield back. 

The CHAIRMAN. Mr. Kissell. 

Mr. KISSELL. Thank you, Mr. Chairman. 

Secretary Hale, good to see you again. I remember when we traveled together before you made a statement. I think it was something like ‘‘you are not happy until everybody else is unhappy.’’ Is 

that correct? 

Secretary HALE. Yes, that is one of the mottoes of the Comptroller. ‘‘We are not happy until you are not happy.’’ 

Mr. KISSELL. Are we making progress towards making you 

happy? 

Secretary HALE. Yes, I think so. I am not quite sure where you 

are going, but I think we have got the Department headed in the 

right direction on this and so I am pleased, but I recognize we have 

got a long way to go. And so I am also humble and I’d really like 

to underpromise and overdeliver for a change. We have been doing 

the opposite for 17 years, overpromising and underdelivering and 

we need to deliver. 

Mr. KISSELL. I do want to follow up more specifically with—you 

talked about sustained leadership as being important to all of this. 

And this may have been discussed earlier and I missed it, but what 

area are you talking about that we need that sustained leadership? 

And how do you see that is working? 

Secretary HALE. Well, it would be very helpful if—I am not predicting when Secretary Panetta will leave, but whenever he does 

if the next Secretary of Defense shared his commitment to this. It 

is critical that it also be shared by the service secretaries and 

chiefs. They have got a lot of the effort to do by the Comptroller 

and my job, by the DCMO [Deputy Chief Management Officer]. I 

mean frankly most comptrollers are budget junkies. I am too. We 

focus a lot on budgets. We have to, that is part of our job. And it 

can push out everything else because it can be so all consuming. 

You know we need for the person who follows me, whenever that 

happens, to make sure they are still committed to pushing this 

process along toward auditability. So, it is sustained leadership at 
15 

the top, as well as getting our career people involved. But we need 

that sustained leadership has got to come from the top. 

Mr. KISSELL. Thank you, sir. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Coffman. 

Mr. COFFMAN. Thank you, Mr. Chairman. 

Now, refresh me, what year again is the goal to be able to have 

auditable books for the Department of Defense? 

Secretary HALE. It is audit-ready, which means we are ready to 

actually hire an auditor, going in there by 2017 for everything; 

2014, for what I would say is the highest priority—the statement 

of budgetary resources for general funds. 

Mr. COFFMAN. Now you said this is pretty complicated in that, 

you know, all these different echelons of command were not able 

to match our invoices up with our expenditures. Is that a correct 

statement? 

Secretary HALE. Yes, I mean each one isn’t complicated, pretty 

straightforward. It is. The problem is the numbers and the nature 

of the processes that we have, that don’t make it easy. 

Mr. COFFMAN. You know, let me tell you what isn’t complicated 

and what I think—that unless the culture of the Department of Defense changes, then I think it is going to be very difficult to get 

auditable records. Here is, I think, the fundamental problem, and 

that is that commanders don’t feel the responsibility. That in different echelons of command, there are always inspections that 

come down and the commanders are held accountable. 

Even though there is the staff person may have a military occupational specialty, whether a logistician or some other field, 

where—let us say it is an infantry commander, in that instance 

they are held accountable. But in financial management, there is 

not that kind of inspection where the military commanders at the 

respective commands are held accountable. And so I think what we 

need to do is to change the culture of the Department of Defense 

to make military commanders at every echelon of command, vested 

in financial management. 

So, somewhere in professional military education there is going 

to have to be some aspect to where they have knowledge of this; 

to where they are accountable. To where if they have folks that 

aren’t keeping track, that aren’t able to pass an inspection, that 

they don’t think are going to be able to pass inspection, prior to 

that, relieving them and getting competent people in there. Until 

we change the culture in the Department of Defense and have military commanders at every echelon vested in financial management, 

I believe this problem is going to continue. 

And I would love your—both of you—I would like your response 

to that? 

Secretary HALE. I agree with you fully. We recognize, I said earlier we have got to get this out of the comptroller community and 

into the commander’s community. The Comptroller should still be 

the source of information. What I would like to see is every commander say, ‘‘All right, I have got a senior staff meeting—’’ 

Mr. COFFMAN. Absolutely. 

Secretary HALE. You know, ‘‘What is the problem here?’’ And, 

‘‘Comptroller, what have I got to do?’’ 
16 

Mr. COFFMAN. Right. 

Secretary HALE. And then it is their job to say, ‘‘Okay, you know, 

we have got to fix the internal controls,’’ which is the main thing 

they have got to do. We need to support the installation of these 

systems. And other steps that they will need to take. We are moving in the right direction. The fact that we have had several meetings now—it is not the first time that we have had a meeting with 

the vice chiefs, so I think we are moving in the right direction. I 

also don’t think we are there yet. I think if you randomly pick commanders at bases and installations, they might have heard of it because of Secretary Panetta’s statement, but I don’t yet feel that 

widely they would feel responsible. 

We have got to get there and that is one of the things I am going 

to ask this afternoon of our vice chiefs, how do I help do that? Or, 

how do you help me do that? I know they are out there talking 

about it because we are getting some feedback. Mr. Conaway had 

to leave but he has had some personal contacts at a base where the 

commander mentioned this. So, we are moving in the right direction, but we are not there yet. And I recognize that is a key thing 

that has to happen. 

Ms. MCGRATH. I would just echo Mr. Hale. On the civilian side, 

we have taken steps to put the auditability goal on the civilian 

side. We don’t have the same mechanism on the military side, although we are, I will say educating and teaching of professional 

military comptrollers. Again within the military comptroller community, the goal is to get it outside and more broadly aware and 

share the accountability across the military departments. That is 

why I said we are approaching this at every angle we possibly can 

through the systems implementation, IT rationalization. If we take 

away the legacy environment, that will enable stronger controls, 

because we will create a more integrated environment. 

I think through all of these means and mechanisms, we can help 

change the culture. But I think it will take all of them along with 

the sustained leadership that Mr. Hale and others here have mentioned. 

Mr. COFFMAN. And I can tell you, having served in both the 

Army and the Marine Corps, if the Secretary of Defense said today 

that military commanders at every level will be accountable to the 

financial management of their organizations, I think that this situation would change almost overnight where you would have military commanders all of the sudden studying to understand the financials of their organization in terms of, as was mentioned here 

today—tracking the money spent with the invoices paid. 

Ms. MCGRATH. And that is in the intent with the more detailed 

FIAR report. It starts at high level auditability goals and cascades 

down to the military departments and then has to get down to the 

command level. For the department to achieve its auditability 

goals, it has to get down to the command level. 

Mr. COFFMAN. Okay. Well, let me just say we have not taken 

that step and I will encourage the Secretary of Defense to do so. 

Mr. Chairman, I yield back. 

Mr. BARTLETT. [Presiding.] Thank you. 

Mr. Critz. 
17 

Mr. CRITZ. Thank you Mr. Chairman. Just so I understand because I have been one of those folks who have been pushing as well 

for auditable reports and in an earlier statement you said that your 

financial statements at this point are really accurate, that you felt 

very strongly about the information that is there, it is just not to 

the level to auditable. And of course my concern was that to get 

to auditable, helps you know what you have and in cases like when 

Congress doesn’t pass a budget and you have to go to a continuing 

resolution, helps in your planning. 

But from the statement you made earlier, maybe my thought was 

not as accurate as I thought it was and so I am asking, getting to 

the level of an auditable report accomplishes what? 

Secretary HALE. Well I will reiterate what I said, I think the information we are going to supply you in a couple of weeks in the 

budget is accurate and I won’t go through that answer again. But 

it is because of the absence of major problems. But you get several 

advantages from auditable state. First, it is the law. And I take 

that seriously and I know you do. Second, we will improve our 

business practices in ways that may make us better able to use resources. 

Right now out of those 140 million transactions, as some get lost 

to us; and the money does not get obligated and expires and we 

can’t make use of it. So, it will help us make better use of resources. But I would come back and we need better business practices to make sure that what I said is true, that things are accurate. But I will come back to the fundamental point. The reason we 

need to do this, is to reassure the American public, we are good 

stewards of the funds and Congress that we are good stewards of 

their funds. 

And that is valuable in and of itself. And I think the single biggest thing that we will get out of auditable statements in my view. 

Mr. CRITZ. Okay. And I look at it as a business model. And that 

is what I was trying to discern. Are we going to spend $100 million 

to save $50 million—is sort of, you know—that is where I am trying to get to—is that, you know, what are the personnel costs going 

to be to get to an auditable report? What is the time consumption 

and the—really you talk about from the Secretary on down—the 

dedication that has to be to this effort. 

So, you know I believe wholeheartedly that we need these 

auditable reports because you should be able to come to Congress 

and the American people and say where you are spending the 

money and what you spent on it. But also from a planning standpoint, I thought it would be helpful, but especially when you have 

a C.R., where now you are starting to juggle things. And maybe I 

misinterpreted that. And I am happy to hear that you are very accurate. 

Secretary HALE. I think we could manage if we had to, without 

it. We are managing and we did do it for 6 months. It had problems 

quite apart from our lack of knowledge of where the dollars were. 

But that doesn’t take away, in my view, from the importance of 

getting this done—— 

Mr. CRITZ. Right. 

Secretary HALE [continuing]. In order again, to reassure the public. 
18 

Ms. MCGRATH. But if I could add, I think it affords you the opportunity in a more real-time manner to have the information. You 

have heard a lot about the processes and the internal controls. 

Those are things that we work through to get to the accuracy of 

the data. With a more sound controlled business environment, you 

actually then have an integrated capability to, in a more real-time 

fashion, get at the information that you are seeking. And so I do 

think that there is the real-time aspect that may or may not have 

a dollar value but affords the opportunity for that planning that 

you are talking about. 

Mr. CRITZ. Good. Good. 

From a personnel standpoint, what is the plan to either ramp up, 

redefine, or re-educate people so that we are getting to this point? 

And I heard you tell the chairman that you have the finances you 

need to implement this plan. So, could you just go through what 

is going to be happening at the civilian side? What might be happening on the uniform side to make this happen? 

Secretary HALE. Well, in the financial community, I think we 

need a course-based certification program analogous to the Defense 

Acquisition Workforce Improvement Act. What it allows us to do— 

we have got a lot of training, but what we don’t have is a framework that allows senior leaders to say, ‘‘Okay; on a certain job you 

need to have three or four courses and one of them on audit readiness.’’ And that is not the only area where we need a better framework, but that framework will allow us to require that training. 

You gave us the legal authority to impose that framework and 

we are moving to do that. In that process, audit readiness is a high 

priority for us. We are going to develop a short-course base—or an 

online course—that indicates the importance of audit readiness. 

And at more senior levels, will require more accounting knowledge 

so that people understand better the accounting system and what 

has to be done to be audit-ready. 

So I think we are moving in the right direction in the financial 

community, both the military and civilian. This will apply equally 

to military and civilian. In the nonfinancial communities, they generally probably have the expertise. We need their attention and we 

are trying to get that. And it may be that we want to provide 

maybe one of these online courses for an hour on why audit is important. I think I need to think about whether that would be a 

good idea. And perhaps provide that to people who would be most 

involved. 

So, training is an important part of this, and I think we are moving in the right direction. 

Mr. BARTLETT. Thank you. 

Mr. West. 

Mr. WEST. Thank you, Mr. Chairman and Mr. Ranking Member, 

and thanks for the panel members being here. I want to dovetail 

off what Mr. Coffman kind of asked because it does cause me some 

concern. I spent a couple of days in the military myself and I understand at the lowest level if you have, you know, fiscal responsibility it should translate up to the highest levels. You know, at the 

age of 27, I had an artillery battery that was multimillion dollars. 

I am not a CPA, I am not an accountant. But we had systems in 
19 

place—monthly 10 percent inventories; weekly, monthly and quarterly budget reconciliations. 

So at the end of 20 months, the command—I will never forget this, it was $9.35 budget—hose for a hemi truck. And that was the 

only thing that was missing. And you know, I thought I would have 

to write a check for that. But the commander kind of laughed that 

off. But even as a battalion X.O. [executive officer], you know, I 

continued on to, you know, supervise commanders and make sure 

we had that reconciliation process as a battalion commander as 

well. Listening to what Mr. Coffman was talking about, you know, 

that was part of your evaluation as a commander on the greensuiter side. 

And that went all the way up to division commanders, as well 

as corps commanders. Are we not enforcing a system of property 

management, fiscal responsibility, for our commanders? Because in 

my day as a young captain, you could get relieved if you are, you 

know, not fiscally responsible. So, is that still in place in the military, or has something changed where they are not doing regular 

inventories, reconciliations? That was part of the monthly USR 

[Unit Status Report] report that went up to division commanders. 

Secretary HALE. I believe those are still in place, Mr. West, and 

I don’t want to leave you with the impression that there is widespread fiscal irresponsibility in the Department of Defense. But financial statements audits require certain kinds of information be 

quickly available. As I mentioned, we have got 140 million transactions a year. For each one of those, I need an invoice; I need a 

contract; I need a receiving report. We can’t produce that information that quickly. 

And I agree with your suggestion and Mr. Coffman that changing 

that has to be part of the commander responsibility. We are going 

to have to add that to the list of things. But I think we are still 

out there checking for the stuff that we own. 

I will say on property accountability, one of the problems we 

have seen, because that is one of the high priority areas, counts 

and locations of our assets, I think we know what we have got generally. We don’t always get it into the system of record. And so the 

auditor goes out there and they look at our system, I mean they 

have got an excel spreadsheet over there and they know what 

they’ve got. But they look at the system of record and it is not 

there. And so we have got to get commanders to say, hey, you 

know, cuff records are okay, but you have got to get it into the system of record. 

Mr. WEST. Could we institute, like I talked about, the weekly 

reconciliations or the 10-percent inventories? Is there some kind of 

means that we can come up with a 5- to 10-percent monthly reconciliation process so at least we can look and say, you know, ‘‘I 

am going to look at this percent of your invoices. Not everything 

within a month, but this percent,’’ so at least we get this sense of 

urgency and a sense of recordkeeping and accountability? Because 

for me, I knew that if the boss above me asked that question and 

I did not have that signed off 10-percent inventory reconciliation, 

that is my job and I am gone. 

Can we input something like that or in place something like 

that? 
20 

Secretary HALE. Yes. You don’t wait until the end of the year. 

When you are doing this successfully, you are checking as you go 

along. 

Mr. WEST. Yes. 

Secretary HALE. A quarterly basis, perhaps. And if you are actually under audit, then the auditors are pulling a statistical sample 

and they are going out to the bases and saying, ‘‘Okay; show me 

that information on a, perhaps, quarterly basis.’’ So as we get to 

the audit, yes, we will do just that. 

Ms. MCGRATH. Sir, if I could add to echo Mr. Hale, though, those 

things are still certainly required within the Department. From an 

auditability perspective, we are looking at ensuring that we have 

established this referential integrity so you know what the, if you 

will, the paper trail is with strong internal controls and documented processes. Those are the areas that I think do need the 

commander’s attention so that we document those processes—not 

that it is not being done. It perhaps could be documented more deliberately so that an auditor could see exactly what processes and 

internal controls we had in place. 

Mr. WEST. Okay, well I tell you if you get a chance to go over 

to talk to General Gordon Sullivan, who used to be the Chief of 

Staff of the Army, that was my division commander, First Infantry 

Division, and he would embarrass you at the monthly USR if he 

looked at the numbers of your expenditures and you could not tell 

the story of what you were doing, as far as within your brigade, 

with the money you are spending. So, he can probably give you 

some good lessons learned. 

Thank you very much, I yield back, Mr. Chair. 

Mr. BARTLETT. Thank you. 

Ms. Hanabusa. 

Ms. HANABUSA. Thank you, Mr. Chair. 

And thank you both for being here. 

In reading the panel’s report, and I believe Ms. McGrath has 

mentioned this term about three times in listening to her testimony, I would like an explanation of the concept of legacy systems? 

Ms. MCGRATH. Concept of legacy systems? 

Ms. HANABUSA. And it is throughout the report, as you know—— 

Ms. MCGRATH. Yes. 

Ms. HANABUSA [continuing]. Justification for the ERPs because 

we replace so many legacy systems. So what are these legacy systems that we are replacing? 

Ms. MCGRATH. There are thousands of legacy systems within the 

Department of Defense that perform numerous functions. They 

were not designed to be an integrated suite of capabilities. Many 

times there were local decisions made that enable local capability. 

And a commander had a need-to continue the example, if the commander had a need to perform a business function, he or she had 

the ability to, you know, procure a solution, an I.T. solution, to help 

solve a local problem. 

The enterprise resource planning capabilities are integrated in 

an off-the-shelf integrated suite of capabilities, so it has financial 

and logistics and personnel modules within the box, if you will so 

that you can take a more integrated, holistic approach to your business environment. Most of the military departments in some way, 
21 

shape or form are procuring or pursuing an ERP for their future 

state business environment. In order to successfully do that, you 

must also retire and eliminate the legacy environment. 

And there are many challenges associated with that. One is the 

change of management that we have talked about, taking people off 

the old and onto the new. Another big factor is the data. How are 

you going to move the data from the past to the present? And what 

is the best strategy to do that? Because also with the legacy environment, it allows you great flexibility to define the data as you 

needed to define it very locally. It did not take a corporate perspective. 

And so there is a lot of, say, opportunities and implementation 

of the ERPs. But really to successfully implement those, you must 

also rationalize the legacy I.T. environment. 

Ms. HANABUSA. And am I correct in saying that the legacy systems are probably one of your greatest barriers in terms of doing 

the audits? 

Ms. MCGRATH. Yes. 

Ms. HANABUSA. Now, like for example, Mr. Hale talked about the 

DEAMS system within the Air Force and there is a statement in 

here, and I don’t know if you agree with it or not, but this is from 

the panel’s report that they believe that the DEAMS system will 

support $335 million in annual savings after it has been fully deployed by providing real-time visibility into costs and allowing 

timely reallocation of dollars. And it is like for fiscal year 2017 

through fiscal year 2021, they are able to reduce unliquidated obligation and accounts receivable by $1.67 billion. 

So you can imagine as we are looking at the cutting, then when 

we see or I read something like this, I am very curious as to, one, 

whether you agree with these figures and how would, for example, 

the Air Force— because you mentioned DEAMS, Mr. Hale—expect 

to support $335 million in annual savings? 

Secretary HALE. Well it would be realized in their operation and 

maintenance budgets when it occurs. I think we will see some savings. We have got some; the Navy ERP has been around for a while 

now. I wouldn’t say the savings are massive. When you talk to people, they are more excited about the better information and more 

timely information that they can get then they are about the number of people that they have been able to eliminate, which is one 

of the ways you save money. But I am willing to believe we will 

see some savings, but it is not the only reason we need these systems. 

Ms. HANABUSA. And in looking at the chart that was an appendix 

to the report, the ERP system is actually identified as a different 

system in almost each of the divisions, like Army has the General 

Fund Enterprise Business System, Air Force has the DEAMS system, Navy has a Navy Enterprise Resource Planning system. So I 

am just curious, do you believe that in the future we are going to 

have a problem we may reduce the legacy to these different ERPs? 

But then are the ERPs then going to become a problem for us? 

Ms. MCGRATH. So if—— 

Secretary HALE. Go ahead. 

Ms. MCGRATH [continuing]. Mr. Hale doesn’t mind? 
22 

Excuse me. The military departments having three—and those 

are predominantly the financial systems that you identified—the 

importance of the Department’s ability, or an enabler for the Department to aggregate the information from those ERPs is the utilization of a standard. The standard financial information structure 

is a standard that has been defined and is being implemented within each of those ERPs. 

So at the end of the day, we can aggregate the data from those 

different systems, using the standards that have been defined. If 

we did not have those same standards embedded in each of those 

solutions, then we would not be able to aggregate the data. 

Ms. HANABUSA. So they would be speaking the same language for 

a layman? 

Ms. MCGRATH. Exactly. 

Ms. HANABUSA. Thank you very much. 

Thank you, Mr. Chair. 

Mr. BARTLETT. Thank you. 

Our inauditability is interpreted by many of our constituents as 

opportunities for wholesale theft. If you can’t audit the books how 

do you know that millions and maybe billions of money is not just 

being stolen? How can you assure our constituents that that is not 

now happening? 

Secretary HALE. You sound like my wife, Mr. Chairman—same 

question she asked me. 

First off, financial statement audits aren’t really designed to find 

fraud. They take a very small sample. They are designed to determine whether the statements are materially correct. We have a lot 

of other procedures to try to eliminate fraud. The main one is twoperson control over money. That is fundamental to everything we 

do. 

You are not supposed to be disbursing or otherwise handling finances on your own. A second person needs to be involved so that 

the only way fraud can occur is collusion. I won’t say it is perfect, 

but I don’t think we have wholesale fraud. That is the main reason. 

Then there are various checks. We have thousands of auditors 

who are looking over our shoulders. And one of their jobs certainly 

is to look for fraud and to try to see if there are any systematic 

problems. Maybe we aren’t doing two-person control at some areas 

where we should be, so that we can correct that and minimize it. 

So there is a number of ways we try to prevent fraud. I wouldn’t 

say that financial statement audits are primarily designed to detect 

fraud. 

Mr. BARTLETT. Thank you for your testimony. Thank you for 

your work in a very difficult area. 

Our committee stands in adjournment. 

[Whereupon, at 11:38 a.m., the committee was adjourned.] 
A P P E N D I X 

JANUARY 24, 2012 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

JANUARY 24, 2012 

(27) 

Statement of Hon. Howard P. ‘‘Buck’’ McKeon 

Chairman, House Committee on Armed Services 

Hearing on 

Department of Defense Perspectives on Financial 

Improvement and Audit Readiness Efforts 

January 24, 2012 

I’d like to welcome everyone to today’s hearing on ‘‘Department 

of Defense Perspectives on Financial Improvement and Audit Readiness Efforts.’’ We just heard from Representative Mike Conaway 

and Representative Rob Andrews, the Chairman and Ranking 

Member of our Defense Financial Management and Auditability 

Reform Panel, who briefed the Committee on the panel’s findings 

and recommendations, contained in the panel’s final report. They 

are our subject matter experts, so I will not restate what they just 

said. 

We are very fortunate to have our briefing be followed by today’s 

hearing, so that the committee might also receive the Department’s 

perspectives on the report and its ongoing financial management 

reform efforts. I would like to thank the Department’s witnesses 

that are here today, as well as those who have testified in previous 

panel hearings. The Department’s willingness to make time to testify in the many early morning hearings conducted by the panel is 

a testament to its commitment to achieving financial management 

reform. 

With that said, as pointed out in the panel’s report, there is 

much work to be done for DOD to reach its financial improvement 

and audit readiness goals. But, with the billions of dollars in budget cuts facing the Department and the need to have reliable information in order to make the tough decisions, DOD must take the 

necessary actions to overcome the challenges it faces. The committee stands ready to support DOD in this effort, and is interested 

in receiving feedback on the panel’s work to assist us in our oversight of this very important effort. We have with us today: 

• The Honorable Robert F. Hale, Under Secretary of Defense 

(Comptroller) 

• The Honorable Elizabeth A. McGrath, Deputy Chief Management Officer, U.S. Department of Defense 

Let me conclude by saying two more things. Given the change in 

defense strategy recently announced by the President and the significant budget cuts the Department has to implement, starting 

this year, all of us are anxious to learn more about the specific 

changes contained in the fiscal year 2013 budget request. We will 

have that opportunity next month, but although we are joined 
28 

today by Secretary Hale, I recognize that he is not at liberty to discuss these issues in advance of the President’s release of the budget. Thank you again for joining us, nevertheless. 

Lastly, following what must have been a difficult decision to resign from office, I want to wish our colleague, Representative 

Gabrielle Giffords, our very best in her recovery and make sure she 

knows that she will be missed. Gabby was a leader on the Armed 

Services Committee and a tireless advocate for our men and 

women in uniform. I know leaving public service and the constituents she worked so hard for cannot have been an easy decision. She 

will continue to be in our thoughts and prayers as we begin our 

work this year. 
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WITNESS RESPONSES TO QUESTIONS ASKED DURING 

THE HEARING 

JANUARY 24, 2012 

(43) 

RESPONSE TO QUESTION SUBMITTED BY MR. BARTLETT 

Secretary HALE. Please see the attached document below. [See page 11.] 
44 
QUESTIONS SUBMITTED BY MEMBERS POST HEARING 

JANUARY 24, 2012 

(47) 

QUESTIONS SUBMITTED BY MR. LANGEVIN 

Mr. LANGEVIN. Secretary Hale, thank you for appearing before us today. I want 

to ask you about a personal concern of mine that I have been following since I was 

a new member on the House Intelligence Committee. Anyone who has worked with 

programs that are classified as Special Access, or SAPs as they are known, soon 

learns that due to their highly classified nature, there is little opportunity for the 

normal budgetary oversight process to be applied with serious rigor. How does the 

Department conduct budgetary oversight of highly classified programs and what will 

you do to ensure that they do not become black holes on the balance sheets as you 

move the Department towards auditability? 

Secretary HALE. The intelligence committees have been big advocates for financial 

auditability for the very reason that you have highlighted. All of the military departments have included special access programs, that will have to be addressed 

using financial auditors with the appropriate access and clearance, in their plans 

for full auditability. The same thing applies to our Defense Agencies in this community. In this regard, we work very closely with the Office of the Director of National 

Intelligence (ODNI) to make sure these programs meet the same financial reporting 

and audit readiness requirements as unclassified programs. In fact, ODNI is helping 

to support timelines that will allow each of these agencies to assert financial audit 

readiness for all of their statements by FY 2014. 

Mr. LANGEVIN. Secretary Hale, according to the May 2010 Financial Improvement 

and Audit Readiness Plan Status Report, the Air Force noted that its Statement of 

Budgetary Resources audit readiness will be dependent on the deployment of several enterprise resource planning systems. The Defense Enterprise Accounting and 

Management System (DEAMS) ERP is not scheduled to be fully deployed until the 

4th Quarter of FY2016, and no deployment date was provided for the Expeditionary 

Combat Support System (ECSS). Can you explain how the Air Force plans to 

achieve the Secretary of Defense’s October 31st directive to advance the SBR audit 

readiness date to 2014? 

Secretary HALE. The earlier plan reflected a built-in dependency on the future 

system that is no longer relevant to the new timeline. These system modernization 

initiatives are still important to our long-term business process improvements as 

well as cost-effective sustainability of audit readiness. The Air Force has adjusted 

their plan to address processes and controls as well as improving interfaces between 

its current systems. Improving controls and interfaces around the systems will be 

an investment that aids the implementation of the future systems and improves the 

likelihood of successful system implementation. 

They will also consider cost-effective upgrades to existing systems to meet the new 

timeline. An example of this would be improving the ledger posting logic. 

Mr. LANGEVIN. Secretary McGrath, I also thank you for appearing before us 

today. As the Department’s Deputy Chief Management Officer, what actions have 

you taken or do you plan to take in order to avoid ERP schedule delays and cost 

increases of the past? Given the current fiscal constraints, these are liabilities that 

can no longer be accepted. Additionally, what mechanisms do you have in place or 

actions have you taken to ensure these ERP systems will be implemented with the 

capabilities needed to ultimately enable the DOD to achieve audit readiness by 

2014? 

Ms. MCGRATH. As DCMO, I have personally taken a number of actions to improve 

the acquisition of our ERP systems. For example, I have been a champion within 

the Department for the development and use of the Business Capability Lifecycle 

(BCL), which is an alternative and improved acquisition process for defense business systems. BCL is tailored to the unique characteristics of IT acquisitions—especially Commercial-Off-the-Shelf systems such as ERPs—and provides a more flexible 

and streamlined process to rapidly deliver capability to the users and reduce unnecessary documentation requirements. BCL is showing positive results on a number 

of programs and a number of other major programs are in the process of 

transitioning to the use of BCL as they enter the acquisition process or begin work 

on their next increment of capability. Additionally, as Milestone Decision Authority 

for a number of these ERP programs, I am conducting rigorous acquisition oversight 
48 

to ensure that these programs are positioned for success, including ensuring that 

they have appropriate metrics in place to better hold them accountable for performance. Through this oversight, I am closely watching their cost and schedule parameters and more closely tying business and financial management outcomes with acquisition milestone decisions to ensure that they deliver the results that we need 

from a business perspective. 

With regard to the mechanisms in place to ensure that each of the ERP systems 

are implemented with sufficient audit capabilities, in addition to the linkage of financial management outcomes with acquisition decisions discussed above, each of 

the system acquisition programs has included the requirements of the Federal Financial Management Improvement Act in the system requirements. The testing of 

these requirements is 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 Standard Financial Information Structure (SFIS) and United 

States Standard General Ledger (USSGL) requirements. 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. 

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. 

QUESTIONS SUBMITTED BY MR. SCHILLING 

Mr. SCHILLING. In your testimony, you both indicated that you received input 

from multiple sources on DOD’s audit issues. You also noted the work you are doing 

on workforce competency, and you mentioned the need to change training to match 

the new business environment. 

• How extensively have you worked with the business community to bring in 

a different perspective towards addressing DOD’s auditability and the overall 

DOD professional financial management workforce? 

• How have you worked with the private sector on the long-term goal of establishing a course-based certification program? 

• Is the private sector working with you on the pilot programs you mentioned 

in your testimony? 

Secretary HALE. We rely heavily on the expertise of public accounting firms, who 

are experienced in financial audits, to incorporate best practices from public and private sectors. In addition, we are using examination engagements, which are an integral part of our audit readiness methodology, to get DOD personnel experience with 

the requirements for audit. These examinations are essentially small-scale audits of 

single business processes. The public accounting firms performing these engagements employ the same procedures used in audit, but on a smaller scope and scale. 

These ‘‘mock-audits’’ provide our employees with experience that cannot be taught. 

In support of the DOD Financial Management (FM) Certification Program and 

professional development of the financial management workforce, we sought out advice and assistance from members of the DOD Audit Advisory Committee (DAAC), 

who are distinguished representatives of the private sector audit, accounting, and 

financial communities. When briefed on the initial design of the DOD FM Certification Program, the committee members applauded the Department’s efforts with 

the Certification Program and noted that this is exactly what is needed. 

We also sought out lessons learned and best practices from various Big 4 accounting firms and a small Certified Public Accountant (CPA) firm, all with experience 

in accounting and auditing practices, and several financial management professional 

associations, to obtain information on competencies, knowledge, skills, and abilities 

aligned with audit readiness and financial management practices. Additionally, we 

researched and reviewed knowledge level and education requirements as well as 

learning objectives associated with accredited test-based certification programs. 

We will continue to involve the representatives from the private sector as resources for the pilot and implementation of the DOD FM Certification Program. 

Their support is critical to ensuring the certification program benefits and long-term 

goals are achieved and the Department of Defense benefits by the increased capability of the workforce. 
49 

Mr. SCHILLING. You mentioned that the DOD has taken into account recent audits 

and examinations, specifically by the Marine Corps’ audit of its Statement of Budgetary Resources. Further, you point to some of the lessons learned from these 

reviews. 

• Can you elaborate on some of the most substantial and important lessons 

learned? 

• How should the other components and branches implement these lessons? 

Secretary HALE. We are continuing to learn not only from the U.S. Marine Corps 

(USMC) audit, but also from recent assertions and the clean opinion on the Defense 

Information Systems Agency Working Capital Fund financial statement audit. Some 

of the key lessons learned include the importance of being able to provide a full universe of transactions to support balances, periodically reviewing and revising estimates, and performing reconciliations on a regular basis and not only during an 

audit. Recent efforts continue to demonstrate improvement in both understanding 

and application in these areas. In addition, the Defense Finance and Accounting 

Service has enhanced electronic document retention, management, and retrieval capability. This capability has proven effective in the current USMC Statement of 

Budgetary Resources audit and is available to support future audits across DOD. 

We are sharing the lessons learned from these experiences and transferring this 

knowledge to both support the current plan and provide a better sense of remedial 

actions required. To implement the lessons, Components must change current business processes where they have the same weakness. We continue to work closely 

with all Components, including Service Providers, in applying these lessons learned 

as we continue to make progress. 

Mr. SCHILLING. In your testimony, you both indicated that you received input 

from multiple sources on DOD’s audit issues. You also noted the work you are doing 

on workforce competency, and you mentioned the need to change training to match 

the new business environment. 

• How extensively have you worked with the business community to bring in 

a different perspective towards addressing DOD’s auditability and the overall 

DOD professional financial management workforce? 

• How have you worked with the private sector on the long-term goal of establishing a course-based certification program? 

• Is the private sector working with you on the pilot programs you mentioned 

in your testimony? 

Ms. MCGRATH. We leverage the expertise of public accounting firms, experienced 

in financial audits, to incorporate best practices from the public and private sectors. 

In addition, we have incorporated examination engagements as an integral part of 

our audit readiness methodology, to provide DOD personnel applied experience with 

the requirements for audit. These examinations employ the same procedures used 

in audit, but on a smaller scope and scale. 

Additionally, the DOD Financial Management (FM) Certification Program and 

professional development initiatives take advantage of the extensive audit experience of the members of the DOD Audit Advisory Committee (DAAC), who are distinguished representatives of the private sector audit, accounting, and financial 

communities. 

The Department also sought out lessons learned and best practices from various 

Big 4 accounting firms and a small Certified Public Accountant (CPA) firm, all with 

experience in accounting and auditing practices, and several financial management 

professional associations, to obtain information on competencies, knowledge, skills, 

and abilities aligned with audit readiness and financial management practices. Additionally, the Comptroller’s staff researched and reviewed knowledge level and education requirements, as well as learning objectives associated with accredited testbased certification programs. 

The Department will continue to involve the representatives from the private sector as resources for the pilot and implementation of the DOD FM Certification Program. Their support is critical to ensuring the certification program benefits and 

long-term goals are achieved and the Department of Defense benefits by the increased capability of the workforce. 

Mr. SCHILLING. You mentioned that the DOD has taken into account recent audits 

and examinations, specifically by the Marine Corps’ audit of its Statement of Budgetary Resources. Further, you point to some of the lessons learned from these 

reviews. 

• Can you elaborate on some of the most substantial and important lessons 

learned? 

• How should the other components and branches implement these lessons? 
50 

Ms. MCGRATH. We are continuing to learn not only from the USMC audit, but 

also from recent assertions and the clean opinion on the DISA Working Capital 

Fund financial statement audit. Some of the key lessons learned include the importance of being able to provide a full universe of transactions to support balances, 

periodically reviewing and revising estimates, and performing reconciliations on a 

regular basis and not only during an audit. Recent efforts continue to demonstrate 

improvement in both understanding and application in these areas. In addition, 

DFAS has enhanced electronic document retention, management and retrieval capability. This capability has proven effective in the current USMC SBR audit and is 

available to support future audits across DOD. 

We leverage our governance structures and communications mechanisms to share 

the lessons learned from these experiences and transfer this knowledge to both support the current plan and provide a better sense of remedial actions required. To 

implement the lessons, Components must change current business processes where 

they have the same weakness. We continue to work closely with all Components, 

including Service Providers, in applying these lessons learned as we continue to 

make progress. 

Æ