DOD Financial Management: Integrated Approach, Accountability, Transparency, and Incentives Are Keys to Effective Reform
Published: 2002-03-06T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Financial management problems at the Department of Defense (DOD) are complex, long-standing, and deeply rooted throughout its business operations. DOD's financial management deficiencies represent the single largest obstacle to achieving an unqualified opinion on the U.S. government's consolidated financial statements. So far, none of the military services or major DOD components have passed the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations, and controls. These problems go back decades, and earlier attempts at reform have been unsuccessful. DOD continues to rely on a far-flung, complex network of finance, logistics, personnel, acquisition, and other management information systems for financial data to support day-to-day management and decision-making. This network has evolved into an overly complex and error-prone operation with (1) little standardization across DOD components, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, (4) manual data entry into multiple systems, and (5) a large number of data translations and interfaces, which combine to exacerbate problems with data integrity. Many of the elements that are crucial to financial management reform and business process transformation--particularly those that rely on long-term systems improvements--will take years to fully implement.

section_title: Letter
paragraphs: It is a pleasure to be here to discuss financial management at the  Department of Defense (DOD). Today, DOD faces financial management  problems that are pervasive, complex, long-standing, and deeply rooted in  virtually all business operations throughout the department. DOD’s  financial management deficiencies, taken together, represent the single  largest obstacle to achieving an unqualified opinion on the U.S.  government’s consolidated financial statements. To date, none of the  military services or major DOD components have passed the test of an  independent financial audit because of pervasive weaknesses in financial  management systems, operations, and controls.
Overhauling financial management represents a major management  challenge that goes far beyond financial accounting to the very fiber of the  department’s range of business operations and management culture.  Previous administrations over the past several decades have tried to  address these problems in various ways but have largely been  unsuccessful. In this regard, on September 10, 2001, Secretary of Defense  Rumsfeld announced a broad initiative intended to “transform the way the  department works and what it works on” that he estimated could save  5 percent of DOD’s budget—or an estimated $15 to $18 billion annually.  The Secretary recognized that transformation would be difficult and  expected the needed changes would take 8 or more years to complete.
The President’s Management Agenda includes improved financial  management performance as one of his five governmentwide management  goals. In addition, in August 2001, the Principals of the Joint Financial  Management Improvement Program—the Secretary of the Treasury, the  Director of the Office of Management and Budget, the Director of the  Office of Personnel Management, and I, in my role as the Comptroller  General—began a series of quarterly meetings that marked the first time  all four of the Principals had gathered together in over 10 years. To date,  these sessions have resulted in substantive deliberations and agreements  focused on key issues such as better defining measures for financial  management success. These measures include being able to routinely  provide timely, reliable, and useful financial information and having no  material internal control weaknesses. Success on these measures will be a  significant challenge to DOD. The Principals plan to invite Defense  Comptroller Zakheim to their upcoming April 2002 meeting to discuss the  department’s transformation effort and to begin a constructive  engagement with DOD on this important initiative.
With the events of September 11, and the federal government’s short- and  long-term budget challenges, it is more important than ever that DOD  effectively transform its business processes to ensure it gets the most from  every dollar spent. The department must be able to effectively account for  the funding it receives and carry out its stewardship responsibilities for  the vast amount of equipment and inventories used in support of military  operations. Even before the events of September 11, increased  globalization, changing security threats, and rapid technological advances  were prompting fundamental changes in the environment in which DOD  operates. These trends place a premium on increasing strategic planning,  enhancing results orientation, ensuring effective accountability,  transparency, and using integrated approaches. Six of the 22 areas on  GAO’s governmentwide “high-risk” list are DOD program areas, and DOD  shares responsibility for 2 other high-risk areas that are governmentwide  in scope. Central to effectively addressing DOD’s financial management  problems will be the understanding that these eight areas are interrelated  and cannot be addressed in an isolated, stovepiped, or piecemeal fashion.
The recent success of our forces in Afghanistan has again demonstrated  the unparalleled excellence of our military forces. This same level of  excellence is not yet evident in the department’s financial management  and other business processes. This is particularly problematic because  effective financial management operations are critical to achieving the  department’s mission in a reasonably economical, efficient, and effective  manner and providing reliable, timely financial information on a routine  basis to support management decision-making at all levels throughout  DOD. This will also be critical in order to enhance overall transparency  and accountability. Success in this area will also serve to free-up resources  that can be redeployed to enhance readiness, improve the quality of life for  our troops and their families, and reduce the gap between wants and  available funding in connection with major weapon systems.
Today, I will provide my perspectives on (1) how Defense got where it is  today and the underlying causes of the department’s longstanding inability  to effectively reform its financial management and other business systems  and processes and (2) the keys to successfully carrying out the Secretary’s  business process transformation and DOD’s plans and actions to date. Last  summer, I shared with Secretary Rumsfeld and Comptroller Zakheim a  business transformation paper, which provided an overview of our views  on the current challenges facing the department and the keys to effective  reform, and detailed one option for addressing these challenges.
subsections: section_title: Long-Standing Financial Management Problems and Attempts at Reform
paragraphs: History is a good teacher, and to solve the problems of today, it is  instructive to look to the past. The problems with the department’s  financial management operations date back decades, and previous  attempts at reform have largely proven to be unsuccessful. These  problems adversely affect DOD’s ability to control costs, ensure basic  accountability, anticipate future costs and claims on the budget, such as  for health care, weapon systems, and environmental liabilities, measure  performance, maintain funds control, prevent fraud, and address pressing  management issues.
Problems with the department’s financial management operations go far  beyond its accounting and finance systems and processes. The department  continues to rely on a far-flung, complex network of finance, logistics,  personnel, acquisition, and other management information systems—  80 percent of which are not under the control of the DOD Comptroller—  to gather the financial data needed to support day-to-day management  decision-making. This network was not designed, but rather has evolved  into the overly complex and error-prone operation that exists today,  including (1) little standardization across DOD components, (2) multiple  systems performing the same tasks, (3) the same data stored in multiple  systems, (4) manual data entry into multiple systems, and (5) a large  number of data translations and interfaces which combine to exacerbate  problems with data integrity. DOD determined, for example, that efforts to  reconcile a single contract involving 162 payments resulted in an estimated  15,000 adjustments.
Many of the department’s business processes in operation today are mired  in old, inefficient processes and legacy systems, some of which go back to  the 1950s and 1960s. For example, the department relies on the  Mechanization of Contract Administration Services (MOCAS) system to  process a substantial portion of DOD contract payment transactions for all  DOD organizations, which totaled about $78 billion in fiscal year 2001.  When MOCAS was first implemented in 1968, “mechanization” was a high  tech word. Past efforts to replace MOCAS have failed. Most recently, in  1994, DOD began acquiring the Standard Procurement System (SPS) to  replace the contract administration functions currently performed by  MOCAS. However, our July 2001 and February 2002 reporting on DOD’s  $3.7 billion investment in SPS showed that this substantial investment was  not economically justified and raised questions as to whether further  investment in SPS was justified. For the foreseeable future, DOD will  continue to be saddled with MOCAS.
Moving to the 1970s, we, the Defense Inspector General, and the military  service audit organizations, issued numerous reports detailing serious  problems with the department’s financial management operations. For  example, between 1975 and 1981, we issued more than 75 reports  documenting serious problems with DOD’s existing cost, property, fund  control, and payroll accounting systems. In the 1980s, we found that  despite the billions of dollars invested in individual systems, these efforts  too fell far short of the mark, with extensive schedule delays and cost  overruns. For example, in 1989, our report on eight major DOD system  development efforts—including two major accounting systems—under  way at that time, showed that system development cost estimates doubled,  two of the eight efforts were abandoned, and the remaining six efforts  experienced delays of from 3 to 7 years.
Beginning in the 1990s, following passage of the Chief Financial Officers  (CFO) Act of 1990, there was a recognition in DOD that broad-based  financial management reform was needed. Over the past 12 years, the  department has initiated several departmentwide reform initiatives  intended to fundamentally reform its financial operations as well as other  key business support processes, including the Corporate Information  Management initiative, the Defense Business Operations Fund, and the  Defense Reform Initiative. These efforts, which I will highlight today, have  proven to be unsuccessful despite good intentions and significant effort.  The conditions that led to these previous attempts at reform remain  largely unchanged today.
Corporate Information Management. The Corporate Information  Management (CIM), initiative, begun in 1989, was expected to save billions  of dollars by streamlining operations and implementing standard  information systems. CIM was expected to reform all DOD’s functional  areas, including finance, procurement, material management, and human  resources through consolidating, standardizing, and integrating  information systems. DOD also expected CIM to replace approximately  2,000 duplicative systems. Over the years, we made numerous  recommendations to improve CIM’s management, but these  recommendations were largely not addressed. Instead, DOD spent billions  of dollars with little sound analytical justification. We reported in 1997,that 8 years after beginning CIM, and spending about $20 billion on the  initiative, expected savings had yet to materialize. The initiative was  eventually abandoned.
Defense Business Operations Fund. In October 1991, DOD established  a new entity, the Defense Business Operations Fund by consolidating nine  existing industrial and stock funds and five other activities operated  throughout DOD. Through this consolidation, the fund was intended to  bring greater visibility and management to the overall cost of carrying out  certain critical DOD business operations. However, from its inception, the  fund was plagued by management problems. In 1996, DOD announced the  fund’s elimination. In its place, DOD established four working capital  funds. These new working capital funds inherited their predecessor’s  operational and financial reporting problems.
Defense Reform Initiative (DRI). In announcing the DRI program in  November 1997, the then Secretary of Defense stated that his goal was “to  ignite a revolution in business affairs.” DRI represented a set of proposed  actions aimed at improving the effectiveness and efficiency of DOD’s  business operations, particularly in areas that have been long-standing  problems—including financial management. In July 2000, we reportedthat while DRI got off to a good start and made progress in implementing  many of the component initiatives, DRI did not meet expected timeframes  and goals, and the extent to which savings from these initiatives will be  realized is yet to be determined. GAO is currently examining the extent to  which DRI efforts begun under the previous administration are continuing.
The past has clearly taught us that addressing the department’s serious  financial management problems will not be easy. Early in his tenure,  Secretary Rumsfeld commissioned a new study of the department’s  financial management operations. The report on the results of the study,  Transforming Department of Defense Financial Management: A Strategy  for Change, was issued on April 13, 2001. The report recognized that the  department will have to undergo “a radical financial management  transformation” and that it would take more than a decade to achieve. The  report concluded that many studies and interviews with current and  former leaders in DOD point to the same problems and frustrations, and  that repetitive audit reports verify systemic problems illustrating the need  for radical transformation in order to achieve success. Secretary Rumsfeld  further confirmed the need for a fundamental transformation of DOD in  his “top-down” Quadrennial Defense Review. Specifically, his September  30, 2001, Quadrennial Defense Review Report concluded that the  department must transform its outdated support structure, including  decades old financial systems that are not well interconnected. The report  summed up the challenge well in stating: “While America’s business have  streamlined and adopted new business models to react to fast-moving  changes in markets and technologies, the Defense Department has lagged  behind without an overarching strategy to improve its business practices.”
section_title: Underlying Causes of Financial and Related Business Process Reform Challenges
paragraphs: As part of our constructive engagement approach with DOD, I met with  Secretary Rumsfeld last summer to provide our perspectives on the  underlying causes of the problems that have impeded past reform efforts  at the department and to discuss options for addressing these challenges.  There are four underlying causes a lack of sustained top-level leadership and management accountability for deeply embedded cultural resistance to change, including military service  parochialism and stovepiped operations; a lack of results-oriented goals and performance measures and  monitoring; and  inadequate incentives for seeking change.
subsections: section_title: Lack of Leadership and Accountability
paragraphs: Historically, DOD has not routinely assigned accountability for  performance to specific organizations or individuals that have sufficient  authority to accomplish desired goals. For example, under the CFO Act, it  is the responsibility of agency CFOs to establish the mission and vision for  the agency’s future financial management. However, at DOD, the  Comptroller—who is by statute the department’s CFO—has direct  responsibility for only an estimated 20 percent of the data relied on to  carry out the department’s financial management operations. The  department has learned through its efforts to meet the Year 2000  computing challenge that to be successful, major improvement initiatives  must have the direct, active support and involvement of the Secretary and  Deputy Secretary of Defense. In the Year 2000 case, the then Deputy  Secretary of Defense was personally and substantially involved and played  a major role in the department’s success. Such top-level support and  attention helps ensure that daily activities throughout the department  remain focused on achieving shared, agency-wide outcomes. A central  finding from our report on our survey of best practices of world-class  financial management organizations—Boeing, Chase Manhattan Bank,  General Electric, Pfizer, Hewlett-Packard, Owens Corning, and the states  of Massachusetts, Texas and Virginia—was that clear, strong executive  leadership was essential to (1) making financial management and  entitywide priority, (2) redefining the role of finance, (3) providing  meaningful information to decision-makers, and (4) building a team of  people that deliver results.
DOD past experience has suggested that top management has not had a  proactive, consistent, and continuing role in building capacity, integrating  daily operations for achieving performance goals, and creating incentives.  Sustaining top management commitment to performance goals is a  particular challenge for DOD. In the past, the average 1.7 year tenure of  the department’s top political appointees has served to hinder long-term  planning and follow-through.
section_title: Cultural Resistance and Parochialism
paragraphs: Cultural resistance to change and military service parochialism have also  played a significant role in impeding previous attempts to implement  broad-based management reforms at DOD. The department has  acknowledged that it confronts decades-old problems deeply grounded in  the bureaucratic history and operating practices of a complex,  multifaceted organization, and that many of these practices were  developed piecemeal and evolved to accommodate different organizations,  each with its own policies and procedures.
For example, as discussed in our July 2000 report,the department  encountered resistance to developing departmentwide solutions under the  then Secretary’s broad-based DRI. In 1997, the department established a  Defense Management Council—including high-level representatives from  each of the military services and other senior executives in the Office of  the Secretary of Defense—which was intended to serve as the “board of  directors” to help break down organizational stovepipes and overcome  cultural resistance to changes called for under DRI. However, we found  that the council’s effectiveness was impaired because members were not  able to put their individual military services’ or DOD agencies’ interests  aside to focus on department-wide approaches to long-standing problems.
We have also seen an inability to put aside parochial views. Cultural  resistance to change has impeded reforms in not only financial  management, but also in other business areas, such as weapon system  acquisition and inventory management. For example, as we reported last  year, while the individual military services conduct considerable analyses  justifying major acquisitions, these analyses can be narrowly focused and  do not consider joint acquisitions with the other services. In the inventory  management area, DOD’s culture has supported buying and storing  multiple layers of inventory rather than managing with just the amount of  stock needed.
section_title: Unclear Goals and Performance Measures
paragraphs: Further, DOD’s past reform efforts have been handicapped by the lack of  clear, linked goals and performance measures. As a result, DOD managers  lack straightforward road maps showing how their work contributes to  attaining the department’s strategic goals, and they risk operating  autonomously rather than collectively. In some cases, DOD had not yet  developed appropriate strategic goals, and in other cases, its strategic  goals and objectives were not linked to those of the military services and  defense agencies.
As part of our assessment of DOD’s Fiscal Year 2000 Financial  Management Improvement Plan, we reported that, for the most part, the  plan represented the military services’ and Defense components’  stovepiped approaches to reforming financial management, and did not  clearly articulate how these various efforts will collectively result in an  integrated DOD-wide approach to financial management improvement. In  addition, we reported the department’s plan did not have performance  measures that could be used to assess DOD’s progress in resolving its  financial management problems. DOD officials have informed us that they  are now working to revise the department’s approach to this plan so that it  in future years’ updates it will reflect a more strategic, department-wide  vision and tool for financial management reform.
The department faces a formidable challenge in responding to  technological advances that are changing traditional approaches to  business management as it moves to modernize its systems. For fiscal year  2001, DOD’s reported total information technology investments of almost  $23 billion, supporting a wide range of military operations as well as its  business functions. As we have reported,while DOD plans to invest  billions of dollars in modernizing its financial management and other  business support systems, it does not yet have an overall blueprint—or  enterprise architecture—in place to guide and direct these investments. As  we recently testified, our review of practices at leading organizations  showed they were able to make sure their business systems addressed  corporate—rather than individual business unit—objectives by using  enterprise architectures to guide and constrain investments. Consistent  with our recommendation, DOD is now working to develop a financial  management enterprise architecture, which is a very positive  development.
section_title: Lack of Incentives for Change
paragraphs: The final underlying cause of the department’s long-standing inability to  carry out needed fundamental reform has been the lack of incentives for  making more than incremental change to existing “business as usual”  processes, systems, and structures. Traditionally, DOD has focused on  justifying its need for more funding rather than on the outcomes its  programs have produced. DOD generally measures its performance by the  amount of money spent, people employed, or number of tasks completed.  Incentives for DOD decisionmakers to implement changed behavior have  been minimal or nonexistent. Secretary Rumsfeld perhaps said it best in  announcing his planned transformation at DOD, “…there will be real  consequences from, and real resistance to, fundamental change.”
This underlying problem has perhaps been most evident in the  department’s acquisition area. In DOD’s culture, the success of a  manager’s career has depended more on moving programs and operations  through the DOD process rather than on achieving better program  outcomes. The fact that a given program may have cost more than  estimated, took longer to complete, and did not generate results or  perform as promised was secondary to fielding a new program. To effect  real change, actions are needed to (1) break down parochialism and  reward behaviors that meet DOD-wide and congressional goals,  (2) develop incentives that motivate decisionmakers to initiate and  implement efforts that are consistent with better program outcomes,  including saying “no” or “pulling the plug” on a system or program that is  failing, and (3) facilitate a congressional focus on results-oriented  management, particularly with respect to resource allocation decisions.
section_title: Keys to Fundamental DOD Financial Management Reform
paragraphs: As we testified in May 2001, our experience has shown there are several  key elements that, collectively will enable the department to effectively  address the underlying causes of DOD’s inability to resolve its long- standing financial management problems. These elements, which will be  key to any successful approach to financial management reform include addressing the department’s financial management challenges as part of a  comprehensive, integrated, DOD-wide business process reform; providing for sustained leadership by the Secretary of Defense and  resource control to implement needed financial management reforms; establishing clear lines of responsibility, authority, and accountability for  such reform tied to the Secretary;  incorporating results-oriented performance measures and monitoring tied  to financial management reforms; providing appropriate incentives or consequences for action or inaction; establishing an enterprisewide system architecture to guide and direct  financial management modernization investments; and ensuring effective oversight and monitoring.
Actions on many of the key areas central to successfully achieving desired  financial management and related business process transformation goals  —particularly those that rely on longer term systems improvements—will  take a number of years to fully implement. Secretary Rumsfeld has  estimated that his envisioned transformation may take 8 or more years to  complete. Consequently, both long-term actions focused on the Secretary’s  envisioned business transformation, as well as short-term actions, focused  on improvements within existing systems and processes, will be critical  going forward. Short-term actions in particular will be critical if the  department is to achieve the greatest possible accountability over existing  resources and more reliable data for day-to-day decision-making while  longer term systems and business process reengineering efforts are under  way.
Beginning with the Secretary’s recognition of a need for a fundamental  transformation of the department’s business processes, and building on  some of the work begun under past administrations, DOD has taken a  number of positive steps in many of these key areas. At the same time, the  challenges remaining in each of these key areas are somewhat daunting.
subsections: section_title: Integrated Business Process Reform Strategy
paragraphs: As we have reported in the past,establishing the right goal is essential for  success. Central to effectively addressing DOD’s financial management  problems will be the recognition that they cannot be addressed in an  isolated, stovepiped, or piecemeal fashion separate from the other high- risk areas facing the department.Successfully reengineering the  department’s processes supporting its financial management and other  business support operations will be critical if DOD is to effectively address  deep-rooted organizational emphasis on maintaining “business as usual”  across the department.
Financial management is a crosscutting issue that affects virtually all of  DOD’s business areas. For example, improving its financial management  operations so that they can produce timely, reliable, and useful cost  information will be essential if the department is to effectively measure its  progress toward achieving many key outcomes and goals across virtually  the entire spectrum of DOD’s business operations. At the same time, the  department’s financial management problems—and, most importantly, the  keys to their resolution—are deeply rooted in and dependent upon  developing solutions to a wide variety of management problems across  DOD’s various organizations and business areas. For example, we have  reported that many of DOD’s financial management shortcomings were  attributable in part to human capital issues. The department does not yet  have a strategy in place for improving its financial management human  capital. This is especially critical in connection with DOD’s civilian  workforce, since DOD has generally done a much better job in conjunction  with human capital planning for its military personnel. In addition, DOD’s  civilian personnel face a variety of size, shape, skills, and succession  planning challenges that need to be addressed.
As I mentioned earlier, and it bears repetition, the department has  reported that an estimated 80 percent of the data needed for sound  financial management comes from its other business operations, such as  its acquisition and logistics communities. DOD’s vast array of costly,  nonintegrated, duplicative, and inefficient financial management systems  is reflective of the lack of an enterprisewide, integrated approach to  addressing its management challenges. DOD has acknowledged that one of  the reasons for the lack of clarity in its reporting under the Government  Performance and Results Act has been that most of the program outcomes  the department is striving to achieve are interrelated, while its  management systems are not integrated.
As I mentioned earlier, the Secretary of Defense has made the fundamental  transformation of business practices throughout the department a top  priority. In this context, the Secretary established a number of top-level  committees, councils and boards, including the Senior Executive  Committee, Business Initiative Council, and the Defense Business  Practices Implementation Board. The Senior Executive Committee was  established to help guide efforts across the department to improve its  business practices. This committee, chaired by the Secretary of Defense,  and with membership to include the Deputy Secretary, the military service  secretaries and the Under Secretary of Defense for Acquisition, Logistics  and Technology, was established to function as the board of directors for  the department. The Business Initiative Council, comprised of the military  service secretaries and headed by the Under Secretary of Defense for  Acquisition, Technology and Logistics, was established to encourage the  military services to explore new money saving business practices to help  offset funding requirements for transformation and other initiatives. The  Secretary also established the Defense Business Practices Implementation  Board, composed of business leaders from the private sector. The board is  intended to tap outside expertise to advise the department on its efforts to  improve business practices.
section_title: Active Leadership and Resource Control
paragraphs: The department’s successful Year 2000 effort illustrated and our survey of  leading financial management organizations captured the importance of  strong leadership from top management. As we have stated many times  before, strong, sustained executive leadership is critical to changing a  deeply rooted corporate culture—such as the existing “business as usual”  culture at DOD—and successfully implementing financial management  reform. As I mentioned earlier, the personal, active involvement of the  Deputy Secretary of Defense played a key role in building entitywide  support and focus for the department’s Year 2000 initiatives. Given the  long-standing and deeply entrenched nature of the department’s financial  management problems combined with the numerous competing DOD  organizations, each operating with varying and often parochial views and  incentives, such visible, sustained top-level leadership will be critical.
In discussing their April 2001 report to the Secretary of Defense on  transforming financial management, the authors stated that, “unlike  previous failed attempts to improve DOD’s financial practices, there is a  new push by DOD leadership to make this issue a priority.” With respect to  the key area of investment control, the Secretary took action to set aside  $100 million for financial modernization. Strong, sustained executive  leadership—over a number of years and administrations—will be key to  changing a deeply rooted culture. In addition, given that significant  investments in information systems and related processes have historically  occurred in a largely decentralized manner throughout the department,  additional actions will likely be required to implement a centralized IT  investment control strategy. For example, in our May 2001 report, we  recommended DOD take action to establish centralized control over  transformation investments to ensure that funding is provided for only  those proposed investments in systems and business processes that are  consistent with the department’s overall business process transformation  strategy.
section_title: Clear Lines of Responsibility and Accountability
paragraphs: Last summer, when I met with Secretary Rumsfeld, I stressed the  importance of establishing clear lines of responsibility, decision-making  authority, and resource control for actions across the department tied to  the Secretary as a key to reform. As we previously reported, such an  accountability structure should emanate from the highest levels and  include the secretaries of each of the military services as well as heads of  the department’s various major business areas.
The Secretary of Defense has taken action to vest responsibility and  accountability for financial management modernization with the DOD  Comptroller. In October 2001, the DOD Comptroller established the  Financial Management Modernization Executive and Steering Committees  as the governing bodies to oversee the activities related to this  modernization effort and also established a supporting working group to  provide day-to-day guidance and direction on these efforts. DOD reports  that the executive and steering committees met for the first time in  January 2002.
It is clear to us that the Comptroller has the full support of the Secretary  and that the Secretary is committed to making meaningful change. To  make this work, it will be important that the Comptroller has sufficient  authority to bring about the full, effective participation of the military  services and business process owners across the department. The  Comptroller has direct control of 20 percent of the data needed for sound  financial management and has historically had limited ability to control  information technology investments across the department. Addressing  issues such as centralization of authority for information systems  investments and continuity of leadership will be critical to successful  business process transformation.
In addition to DOD, a number of other federal departments and agencies  are facing an array of interrelated business system management challenges  for which resolution is likely to require a number of years and could span  administrations. One option that may have merit would be the  establishment of chief operating officers, who could be appointed for a set  term of 5 to 7 years, with the potential for reappointment. These  individuals should have a proven track record as a business process  change agent for a large, diverse organization and would spearhead  business process transformation across the department or agency.
section_title: Results-Oriented Performance
paragraphs: As discussed in our January 2001 report on DOD’s major performance and  accountability challenges, establishing a results orientation will be  another key element of any approach to reform. Such an orientation  should draw upon results that could be achieved through commercial best  practices, including outsourcing and shared servicing concepts. Personnel  throughout the department must share the common goal of establishing  financial management operations that not only produce financial  statements that can withstand the test of an audit but, more importantly,  routinely generate useful, reliable, and timely financial information for  day-to-day management purposes.
In addition, we have previously testified that DOD’s financial  management improvement efforts should be measured against an overall  goal of effectively supporting DOD’s basic business processes, including  appropriately considering related business process system  interrelationships, rather than determining system-by-system compliance.  Such a results-oriented focus is also consistent with an important lesson  learned from the department’s Year 2000 experience. DOD’s initial Year  2000 focus was geared toward ensuring compliance on a system-by-system  basis and did not appropriately consider the interrelationship of systems  and business areas across the department. It was not until the department,  under the direction of the then Deputy Secretary, shifted to a core mission  and function review approach that it was able to achieve the desired result  of greatly reducing its Year 2000 risk.
Since the Secretary has established an overall business process  transformation goal that will require a number of years to achieve, going  forward, it will be especially critical for managers throughout the  department to focus on specific measurable metrics that, over time,  collectively will translate to achieving this overall goal. It will be important  for the department to refocus its annual accountability reporting on this  overall goal of fundamentally transforming the department’s financial  management systems and related business processes to include  appropriate interim annual measures to track progress toward this goal.
In the short term, it will be important to focus on actions that can be taken  using existing systems and processes. Establishing interim measures to  both track performance against the department’s overall transformation  goals and facilitate near term successes using existing systems and  processes will be critical. The department has established an initial set of  metrics intended to evaluate financial performance, and reports that it has  seen improvements. For example, with respect to closed appropriation  accounts, DOD reported during the first 4 months of fiscal year 2002, a  reduction in the dollar value of adjustments to closed appropriation  accounts of about 51 percent from the same 4-month period in fiscal year  2001. Other existing metrics concern cash and funds management,  contract and vendor payments, and disbursement accounting. DOD also  reported that it is working to develop these metrics into higher level  measures more appropriate for senior management. We agree with the  department’s efforts to expand the use of appropriate metrics to guide its  financial management reform efforts.
section_title: Incentives and Consequences
paragraphs: Another key to breaking down parochial interests and stovepiped  approaches that have plagued previous reform efforts will be establishing  mechanisms to reward organizations and individuals for behaviors that  comply with DOD-wide and congressional goals. Such mechanisms should  be geared to providing appropriate incentives and penalties to motivate  decisionmakers to initiate and implement efforts that result in  fundamentally reformed financial management and other business support  operations.
In addition, such incentives and consequences will be essential if DOD is  to break down the parochial interests that have plagued previous reform  efforts. Incentives driving traditional ways of doing business, for example,  must be changed, and cultural resistance to new approaches must be  overcome. Simply put, DOD must convince people throughout the  department that they must change from “business as usual” systems and  practices or they are likely to face serious consequences, organizationally  and personally.
section_title: Enterprise Architecture
paragraphs: Establishing and implementing an enterprisewide financial management  architecture will be essential for the department to effectively manage its  large, complex system modernization effort now underway. The Clinger- Cohen Act requires agencies to develop, implement, and maintain an  integrated system architecture. As we previously reported, such an  architecture can help ensure that the department invests only in  integrated, enterprisewide business system solutions and, conversely, will  help move resources away from non-value added legacy business systems  and nonintegrated business system development efforts. In addition,  without an architecture, DOD runs the serious risk that its system efforts  will result in perpetuating the existing system environment that suffers  from systems duplication, limited interoperability, and unnecessarily  costly operations and maintenance. In our May 2001 report, we pointed  out that DOD lacks a financial management enterprise architecture to  guide and constrain the billions of dollars it plans to spend to modernize  its financial management operations and systems.
DOD has reported that it is in the process of contracting for the  development of a DOD-wide financial management enterprise architecture  to “achieve the Secretary’s vision of relevant, reliable and timely financial  information needed to support informed decision-making.” Consistent  with our previous recommendations in this area, DOD has begun an  extensive effort to document the department’s current “as-is” financial  management architecture by inventorying systems now relied on to  carryout financial management operations throughout the department.  DOD has identified 674 top-level systems and at least 997 associated  interfaces thus far and estimates that this inventory could include up to  1,000 systems when completed.
While DOD’s beginning efforts at developing a financial management  enterprise architecture are off to a good start, the challenges yet  confronting the department in its efforts to fully develop, implement, and  maintain a DOD-wide financial management enterprise architecture are  unprecedented. Our May 2001 reportdetails a series of recommended  actions directed at ensuring DOD employs recognized best practices for  enterprise architecture management. This effort will be further  complicated as the department strives to develop multiple enterprise  architectures across its various business areas. For example, in June 2001,  we recommendedthat DOD develop an enterprise architecture for its  logistics operations. As I discussed previously, an integrated reform  strategy will be critical. In this context, it is essential that DOD closely  coordinate and integrate the development and implementation of these, as  well as other, architectures. By following this integrated approach and our  previous recommendations, DOD will be in the best position to avoid the  serious risk that after spending billions of dollars on systems  modernization, it will continue to perpetuate the existing systems  environment that suffers from duplication of systems, limited  interoperability, and unnecessarily costly operations and maintenance.
section_title: Monitoring and Oversight
paragraphs: Ensuring effective monitoring and oversight of progress will also be a key  to bringing about effective implementation of the department’s financial  management and related business process reform. We have previously  testifiedthat periodic reporting of status information to department top  management, the Office of Management and Budget (OMB), the Congress,  and the audit community was another key lesson learned from the  department’s successful effort to address its Year 2000 challenge.
Previous Financial Management Improvement Plans DOD submitted to the  Congress have simply been compilations of data call information on the  stovepiped approaches to financial management improvements received  from the various DOD components. It is our understanding that DOD plans  to change its approach and anchor its plans in an enterprise system  architecture. If the department’s future plans are upgraded to provide a  department-wide strategic view of the financial management challenges  facing the DOD along with planned corrective actions, these plans can  serve as an effective tool not only to help guide and direct the  department’s financial management reform efforts, but a tool for  oversight. Going forward, this Subcommittee’s annual oversight hearings,  as well the active interest and involvement of other cognizant defense and  oversight committees in the Congress, will continue to be key to  effectively achieving and sustaining DOD’s financial management and  related business process reform milestones and goals.
Given the size, complexity, and deeply engrained nature of the financial  management problems facing DOD, heroic end-of-the year efforts relied on  by some agencies to develop auditable financial statement balances are  not feasible at DOD. Instead, a sustained focus on the underlying problems  impeding the development of reliable financial data throughout the  department will be necessary and is the best course of action. I applaud  the proposals spearheaded by the Senate Armed Services Committee, and  subsequently enacted as part of the fiscal year 2002 National Defense  Authorization Act, to provide a framework for redirecting the  department’s resources from the preparation and audit of financial  statements that are acknowledged by DOD leadership to be unauditable to  the improvement of DOD’s financial management systems and financial  management policies, procedures and internal controls. Under this new  legislation, the department will also be required to report to the Congress  on how resources have been redirected and the progress that has been  achieved. This reporting will provide an important vehicle for the  Congress to use in assessing whether DOD is using its available resources  to best bring about the development of timely and reliable financial  information for daily decisionmaking and transform its financial  management as envisioned by the Secretary of Defense.