DOD Financial Management: Numerous Challenges Must Be Addressed to Achieve Auditability
Published: 2011-07-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As one of the largest and most complex organizations in the world, the Department of Defense (DOD) faces many challenges in resolving serious problems in its financial management and related business operations and systems. DOD is required by various statutes to (1) improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and (2) produce audited financial statements. Over the years, DOD has initiated numerous efforts to improve the department's financial management operations and achieve an unqualified (clean) opinion on the reliability of its reported financial information. These efforts have fallen short of sustained improvement in financial management or financial statement auditability. The Panel requested that GAO provide its perspective on the status of DOD's financial management weaknesses and its efforts to resolve them; the challenges DOD continues to face in improving its financial management and operations; and the status of its efforts to implement automated business systems as a critical element of DOD's Financial Improvement and Audit Readiness strategy.
section_title: What GAO Found
paragraphs: DOD financial management has been on GAO's high-risk list since 1995 and, despite several reform initiatives, remains on the list today. Pervasive deficiencies in financial management processes, systems, and controls, and the resulting lack of data reliability, continue to impair management's ability to assess the resources needed for DOD operations; track and control costs; ensure basic accountability; anticipate future costs; measure performance; maintain funds control; and reduce the risk of loss from fraud, waste, and abuse. DOD spends billions of dollars each year to maintain key business operations intended to support the warfighter, including systems and processes related to the management of contracts, finances, supply chain, support infrastructure, and weapon systems acquisition. These operations are directly impacted by the problems in financial management. In addition, the long-standing financial management weaknesses have precluded DOD from being able to undergo the scrutiny of a financial statement audit. DOD's past strategies for improving financial management were ineffective, but recent initiatives are encouraging. In 2005, DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan for improving financial management and reporting. In 2009, the DOD Comptroller directed that FIAR efforts focus on financial information in two priority areas: budget and mission-critical assets. The FIAR Plan also has a new phased approach that comprises five waves of concerted improvement activities. The first three waves focus on the two priority areas, and the last two on working toward full auditability. The plan is being implemented largely through the Army, Navy, and Air Force military departments and the Defense Logistics Agency, lending increased importance to the committed leadership in these components. Improving the department's financial management operations and thereby providing DOD management and Congress more accurate and reliable information on the results of its business operations will not be an easy task. It is critical that current initiatives related to improving the efficiency and effectiveness of financial management that have the support of the DOD's Deputy Chief Management Officer and Comptroller continue with sustained leadership and monitoring. Absent continued momentum and necessary future investments, current initiatives may falter. Below are some of the key challenges that DOD must address for its financial management to improve to the point where DOD is able to produce auditable financial statements: (1) committed and sustained leadership, (2) effective plan to correct internal control weaknesses, (3) competent financial management workforce, (4) accountability and effective oversight, (5) well-defined enterprise architecture, and (6) successful implementation of the enterprise resource planning systems.

section_title: Letter
paragraphs: It is a pleasure to be here today to discuss the status of the Department  of Defense’s (DOD) efforts to improve its financial management  operations and achieve audit readiness. At the outset, I would like to  thank the Panel for holding this hearing and to acknowledge the important  role of such hearings in the oversight of DOD’s financial management  efforts.
DOD is one of the largest and most complex organizations in the world.  For fiscal year 2012, the budget requested for the department was  approximately $671 billion—$553 billion in discretionary budget authority  and $118 billion to support overseas contingency operations. The fiscal  year 2012 budget request also noted that DOD employed over 3 million  military and civilian personnel—including active and reserve service  members. DOD operations span a wide range of defense organizations,  including the military departments and their respective major commands  and functional activities, large defense agencies and field activities, and  various combatant and joint operational commands that are responsible  for military operations for specific geographic regions or theaters of  operation. To execute its operations, the department performs interrelated  and interdependent business functions, including financial management,  logistics management, health care management, and procurement. To  support its business functions, DOD has reported that it relies on over  2,200 business systems, including accounting, acquisition, logistics, and  personnel systems.
The department’s sheer size and complexity contribute to the many  challenges DOD faces in resolving its pervasive, complex, and long- standing financial management and related business operations and  systems problems. Numerous initiatives and efforts have been  undertaken by DOD and its components to improve the department’s  financial management operations and to arrive at a point where the  reliability of its financial statements and related financial management  information would be sufficient to pass an audit with favorable (clean)  audit opinions. To date, DOD has not achieved effective financial  management capabilities or financial statement auditability.
Today, I will discuss the status of DOD’s financial management  weaknesses, its efforts to resolve those weaknesses, and the challenges  DOD continues to face in its efforts to improve its financial management  operations. In addition, I will outline the status of the department’s efforts  to implement its enterprise resource planning (ERP) systems, which  represent a critical element of the department’s Financial Improvement  and Audit Readiness (FIAR) strategy. My statement today is based on our  prior work related to the department’s FIAR Plan and ERP  implementation efforts. Our work was conducted in accordance with  generally accepted government auditing standards and our previously  published reports contain additional details on the scope and  methodology for those reviews. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The department is facing near-and long-term internal fiscal pressures as it  attempts to balance competing demands to support ongoing operations,  rebuild readiness following extended military operations, and manage  increasing personnel and health care costs as well as significant cost  growth in its weapon systems programs. For more than a decade, DOD  has dominated GAO’s list of federal programs and operations at high risk  of being vulnerable to fraud, waste, abuse. In fact, all of the DOD  programs on GAO’s High-Risk List relate to business operations,  including systems and processes related to management of contracts,  finances, supply chain, and support infrastructure, as well as weapon  systems acquisition. Long-standing and pervasive weaknesses in DOD’s  financial management and related business processes and systems have  (1) resulted in a lack of reliable information needed to make sound  decisions and report on the financial status and cost of DOD activities to  Congress and DOD decision makers; (2) adversely impacted its  operational efficiency and mission performance in areas of major  weapons system support and logistics; and (3) left the department  vulnerable to fraud, waste, and abuse.
Because of the complexity and long-term nature of DOD’s transformation  efforts, GAO has reported the need for a chief management officer (CMO)  position and a comprehensive, enterprisewide business transformation  plan. In May 2007, DOD designated the Deputy Secretary of Defense as  the CMO. In addition, the National Defense Authorization Acts for Fiscal  Years 2008 and 2009 contained provisions that codified the CMO and  Deputy CMO (DCMO) positions, required DOD to develop a strategic  management plan, and required the Secretaries of the military  departments to designate their Undersecretaries as CMOs and to develop  business transformation plans.
subsections: section_title: Overview of DOD’s Accounting and Finance Activities
paragraphs: DOD financial managers are responsible for the functions of budgeting,  financing, accounting for transactions and events, and reporting of  financial and budgetary information. To maintain accountability over the  use of public funds, DOD must carry out financial management functions  such as recording, tracking, and reporting its budgeted spending, actual  spending, and the value of its assets and liabilities. DOD relies on a  complex network of organizations and personnel to execute these  functions. Also, its financial managers must work closely with other  departmental personnel to ensure that transactions and events with  financial consequences, such as awarding and administering contracts,  managing military and civilian personnel, and authorizing employee  travel, are properly monitored, controlled, and reported, in part, to ensure  that DOD does not violate spending limitations established in legislation  or other legal provisions regarding the use of funds.
Before fiscal year 1991, the military services and defense agencies  independently managed their finance and accounting operations.  According to DOD, these decentralized operations were highly inefficient  and failed to produce reliable information. On November 26, 1990, DOD  created the Defense Finance and Accounting Service (DFAS) as its  accounting agency to consolidate, standardize, and integrate finance and  accounting requirements, functions, procedures, operations, and  systems. The military services and defense agencies pay for finance and  accounting services provided by DFAS using their operations and  maintenance appropriations. The military services continue to perform  certain finance and accounting activities at each military installation.  These activities vary by military service depending on what the services  wanted to maintain in-house and the number of personnel they were  willing to transfer to DFAS. As DOD’s accounting agency, DFAS records  these transactions in the accounting records, prepares thousands of  reports used by managers throughout DOD and by the Congress, and  prepares DOD-wide and service-specific financial statements. The  military services play a vital role in that they authorize the expenditure of  funds and are the source of most of the financial information that allows  DFAS to make payroll and contractor payments. The military services  also have responsibility for most of DOD assets and the related  information needed by DFAS to prepare annual financial statements  required under the Chief Financial Officers Act.
DOD accounting personnel are responsible for accounting for funds  received through congressional appropriations, the sale of goods and  services by working capital fund businesses, revenue generated through  nonappropriated fund activities, and the sales of military systems and  equipment to foreign governments or international organizations. DOD’s  finance activities generally involve paying the salaries of its employees,  paying retirees and annuitants, reimbursing its employees for travel- related expenses, paying contractors and vendors for goods and  services, and collecting debts owed to DOD. DOD defines its accounting  activities to include accumulating and recording operating and capital  expenses as well as appropriations, revenues, and other receipts.  According to DOD’s fiscal year 2012 budget request, in fiscal year 2010  DFAS    processed approximately 198 million payment-related transactions  and disbursed over $578 billion;    accounted for 1,129 active DOD appropriation accounts; and    processed more that 11 million commercial invoices.
section_title: Pervasive Financial Management Problems Continue to Affect the Efficiency and Effectiveness of DOD Operations
paragraphs: DOD financial management was designated as a high-risk area by GAO  in 1995. Pervasive deficiencies in financial management processes,  systems, and controls, and the resulting lack of data reliability, continue to  impair management’s ability to assess the resources needed for DOD  operations; track and control costs; ensure basic accountability; anticipate  future costs; measure performance; maintain funds control; and reduce  the risk of loss from fraud, waste, and abuse.
Other business operations, including the high-risk areas of contract  management, supply chain management, support infrastructure  management, and weapon systems acquisition are directly impacted by  the problems in financial management. We have reported that continuing  weaknesses in these business operations result in billions of dollars of  wasted resources, reduced efficiency, ineffective performance, and  inadequate accountability. Examples of the pervasive weaknesses in the  department’s business operations are highlighted below.    DOD invests billions of dollars to acquire weapon systems, but it lacks  the financial management processes and capabilities it needs to track  and report on the cost of weapon systems in a reliable manner. We  reported on this issue over 20 years ago, but the problems continue  to persist. In July 2010, we reported that although DOD and the  military departments have efforts underway to begin addressing these  financial management weaknesses, problems continue to exist and  remediation and improvement efforts would require the support of  other business areas beyond the financial community before they  could be fully addressed.    DOD also requests billions of dollars each year to maintain its weapon  systems, but it has limited ability to identify, aggregate, and use  financial management information for managing and controlling  operating and support costs. Operating and support costs can  account for a significant portion of a weapon system’s total life-cycle  costs, including costs for repair parts, maintenance, and contract  services. In July 2010, we reported that the department lacked key  information needed to manage and reduce operating and support  costs for most of the weapon systems we reviewed—including cost  estimates and historical data on actual operating and support costs.  For acquiring and maintaining weapon systems, the lack of complete  and reliable financial information hampers DOD officials in analyzing  the rate of cost growth, identifying cost drivers, and developing plans  for managing and controlling these costs. Without timely, reliable, and  useful financial information on cost, DOD management lacks  information needed to accurately report on acquisition costs, allocate  resources to programs, or evaluate program performance.
In June 2010, we reported that the Army Budget Office lacked an  adequate funds control process to provide it with ongoing assurance  that obligations and expenditures do not exceed funds available in the  Military Personnel–Army (MPA) appropriation. We found that an  obligation of $200 million in excess of available funds in the Army’s  military personnel account violated the Antideficiency Act. The  overobligation likely stemmed, in part, from lack of communication  between Army Budget and program managers so that Army Budget’s  accounting records reflected estimates instead of actual amounts until  it was too late to control the incurrence of excessive obligations in  violation of the act. Thus, at any given time in the fiscal year, Army  Budget did not know the actual obligation and expenditure levels of  the account. Army Budget explained that it relies on estimated  obligations—despite the availability of actual data from program  managers—because of inadequate financial management systems.  The lack of adequate process and system controls to maintain  effective funds control impacted the Army’s ability to prevent, identify,  correct, and report potential violations of the Antideficiency Act.
In our February 2011 report on the Defense Centers of Excellence  (DCOE), we found that DOD’s TRICARE Management Activity (TMA)  had misclassified $102.7 million of the nearly $112 million in DCOE  advisory and assistance contract obligations. The proper classification  and recording of costs are basic financial management functions that  are also key in analyzing areas for potential future savings.
Without adequate financial management processes, systems, and  controls, DOD components are at risk of reporting inaccurate,  inconsistent, and unreliable data for financial reporting and management  decision making and potentially exceeding authorized spending limits.  The lack of effective internal controls hinders management’s ability to  have reasonable assurance that their allocated resources are used  effectively, properly, and in compliance with budget and appropriations  law.
section_title: DOD’s Past Strategies for Improving Financial Management Were Ineffective but Recent Initiatives Are Encouraging
paragraphs: Over the years, DOD has initiated several broad-based reform efforts to  address its long-standing financial management weaknesses. However,  as we have reported, those efforts did not achieve their intended purpose  of improving the department’s financial management operations. In 2005,  the DOD Comptroller established the DOD FIAR Directorate to develop,  manage, and implement a strategic approach for addressing the  department’s financial management weaknesses for achieving  auditability, and for integrating these efforts with other improvement  activities, such as the department’s business system modernization  efforts. In May 2009, we identified several concerns with the adequacy  of the FIAR Plan as a strategic and management tool to resolve DOD’s  financial management difficulties and thereby position the department to  be able to produce auditable financial statements.
Overall, since the issuance of the first FIAR Plan in December 2005,  improvement efforts have not resulted in the fundamental transformation  of operations necessary to resolve the department’s long-standing  financial management deficiencies. However, DOD has made significant  improvements to the FIAR Plan that, if implemented effectively, could  result in significant improvement in DOD’s financial management and  progress toward auditability, but progress in taking corrective actions and  resolving deficiencies remains slow. While none of the military services  has obtained an unqualified (clean) audit opinion, some DOD  organizations, such as the Army Corps of Engineers, DFAS, the Defense  Contract Audit Agency, and the DOD Inspector General, have achieved  this goal. Moreover, some DOD components that have not yet received  clean audit opinions are beginning to reap the benefits of strengthened  controls and processes gained through ongoing efforts to improve their  financial management operations and reporting capabilities. Lessons  learned from the Marine Corps’ Statement of Budgetary Resources audit  can provide a roadmap to help other components better stage their audit  readiness efforts by strengthening their financial management processes  to increase data reliability as they develop action plans to become audit  ready.
In August 2009, the DOD Comptroller sought to further focus efforts of the  department and components, in order to achieve certain short- and long- term results, by giving priority to improving processes and controls that  support the financial information most often used to manage the  department. Accordingly, DOD revised its FIAR strategy and methodology  to focus on the DOD Comptroller’s two priorities—budgetary information  and asset accountability. The first priority is to strengthen processes,  controls, and systems that produce DOD’s budgetary information and the  department’s Statements of Budgetary Resources. The second priority is  to improve the accuracy and reliability of management information  pertaining to the department’s mission-critical assets, including military  equipment, real property, and general equipment, and validating  improvement through existence and completeness testing. The DOD  Comptroller directed the DOD components participating in the FIAR  Plan—the departments of the Army, Navy, Air Force and the Defense  Logistics Agency—to use a standard process and aggressively modify  their activities to support and emphasize achievement of the priorities.
GAO supports DOD’s current approach of focusing and prioritizing efforts  in order to achieve incremental progress in addressing weaknesses and  making progress toward audit readiness. Budgetary and asset information  is widely used by DOD managers at all levels, so its reliability is vital to  daily operations and management. DOD needs to provide accountability  over the existence and completeness of its assets. Problems with asset  accountability can further complicate critical functions, such as planning  for the current troop withdrawals.
In May 2010, DOD introduced a new phased approach that divides  progress toward achieving financial statement auditability into five waves  (or phases) of concerted improvement activities (see appendix I).  According to DOD, the components’ implementation of the methodology  described in the 2010 FIAR Plan is essential to the success of the  department’s efforts to ultimately achieve full financial statement  auditability. To assist the components in their efforts, the FIAR guidance,  issued along with the revised plan, details the implementation of the  methodology with an emphasis on internal controls and supporting  documentation that recognizes both the challenge of resolving the many  internal control weaknesses and the fundamental importance of  establishing effective and efficient financial management. The FIAR  Guidance provides the process for the components to follow, through  their individual Financial Improvement Plans, in assessing processes,  controls, and systems; identifying and correcting weaknesses; assessing,  validating, and sustaining corrective actions; and achieving full  auditability. The guidance directs the components to identify responsible  organizations and personnel and resource requirements for improvement  work. In developing their plans, components use a standard template that  comprises data fields aligned to the methodology. The consistent  application of a standard methodology for assessing the components’  current financial management capabilities can help establish valid  baselines against which to measure, sustain, and report progress.
section_title: Numerous Challenges Must Be Addressed in Order for DOD to Successfully Reform Financial Management
paragraphs: Improving the department’s financial management operations and thereby  providing DOD management and the Congress more accurate and  reliable information on the results of its business operations will not be an  easy task. It is critical that the current initiatives being led by the DOD  Deputy Chief Management Officer and the DOD Comptroller be continued  and provided with sufficient resources and ongoing monitoring in the  future. Absent continued momentum and necessary future investments,  the current initiatives may falter, similar to previous efforts. Below are  some of the key challenges that the department must address in order for  the financial management operations of the department to improve to the  point where DOD may be able to produce auditable financial statements.
Committed and sustained leadership. The FIAR Plan is in its sixth year  and continues to evolve based on lessons learned, corrective actions,  and policy changes that refine and build on the plan. The DOD  Comptroller has expressed commitment to the FIAR goals, and  established a focused approach that is intended to help DOD achieve  successes in the near term. But the financial transformation needed at  DOD, and its removal from GAO’s high-risk list, is a long-term endeavor.  Improving financial management will need to be a cross-functional  endeavor. It requires the involvement of DOD operations performing other  business functions that interact with financial management—including  those in the high-risk areas of contract management, supply chain  management, support infrastructure management, and weapon systems  acquisition. As acknowledged by DOD officials, sustained and active  involvement of the department’s Chief Management Officer, the Deputy  Chief Management Officer, the military departments’ Chief Management  Officers, the DOD Comptroller, and other senior leaders is critical. Within  every administration, there are changes at the senior leadership;  therefore, it is paramount that the current initiative be institutionalized  throughout the department—at all working levels—in order for success to  be achieved.
Effective plan to correct internal control weaknesses. In May 2009,  we reported that the FIAR Plan did not establish a baseline of the  department’s state of internal control and financial management  weaknesses as its starting point. Such a baseline could be used to  assess and plan for the necessary improvements and remediation to be  used to measure incremental progress toward achieving estimated  milestones for each DOD component and the department. DOD currently  has efforts underway to address known internal control weaknesses  through three interrelated programs: (1) Internal Controls over Financial  Reporting (ICOFR) program, (2) ERP implementation, and (3) FIAR Plan.  However, the effectiveness of these three interrelated efforts at  establishing a baseline remains to be seen. Furthermore, DOD has yet to  identify the specific control actions that need to be taken in Waves 4 and  5 of the FIAR Plan, which deal with asset accountability and other  financial reporting matters. Because of the department’s complexity and  magnitude, developing and implementing a comprehensive plan that  identifies DOD’s internal control weaknesses will not be an easy task. But  it is a task that is critical to resolving the long-standing weaknesses and  will require consistent management oversight and monitoring for it to be  successful.
Competent financial management workforce. Effective financial  management in DOD will require a knowledgeable and skilled workforce  that includes individuals who are trained and certified in accounting, well  versed in government accounting practices and standards, and  experienced in information technology. Hiring and retaining such a skilled  workforce is a challenge DOD must meet to succeed in its transformation  to efficient, effective, and accountable business operations. The National  Defense Authorization Act for Fiscal Year 2006 directed DOD to develop  a strategic plan to shape and improve the department’s civilian workforce.  The plan was to, among other things, include assessments of (1) existing  critical skills and competencies in DOD’s civilian workforce, (2) future  critical skills and competencies needed over the next decade, and (3) any  gaps in the existing or future critical skills and competencies identified. In  addition, DOD was to submit a plan of action for developing and  reshaping the civilian employee workforce to address any identified gaps,  as well as specific recruiting and retention goals and strategies on how to  train, compensate, and motivate civilian employees. In developing the  plan, the department identified financial management as one of its  enterprisewide mission-critical occupations.
In July 2011, we reported that DOD’s 2009 overall civilian workforce  plan had addressed some legislative requirements, including assessing  the critical skills of its existing civilian workforce. Although some aspects  of the legislative requirements were addressed, DOD still has significant  work to do. For example, while the plan included gap analyses related to  the number of personnel needed for some of the mission-critical  occupations, the department had only discussed competency gap  analyses for 3 mission-critical occupations—language, logistics  management, and information technology management. A competency  gap for financial management was not included in the department’s  analysis. Until DOD analyzes personnel needs and gaps in the financial  management area, it will not be in a position to develop an effective  financial management recruitment, retention, and investment strategy to  successfully address its financial management challenges.
Accountability and effective oversight. The department established a  governance structure for the FIAR Plan, which includes review bodies for  governance and oversight. The governance structure is intended to  provide the vision and oversight necessary to align financial improvement  and audit readiness efforts across the department. To monitor progress  and hold individuals accountable for progress, DOD managers and  oversight bodies need reliable, valid, meaningful metrics to measure  performance and the results of corrective actions. In May 2009, we  reported that the FIAR Plan did not have clear results-oriented metrics.  To its credit, DOD has taken action to begin defining results-oriented  FIAR metrics it intends to use to provide visibility of component-level  progress in assessment; and testing and remediation activities, including  progress in identifying and addressing supporting documentation issues.
We have not yet had an opportunity to assess implementation of these  metrics—including the components’ control over the accuracy of  supporting data—or their usefulness in monitoring and redirecting actions.
Ensuring effective monitoring and oversight of progress—especially by  the leadership in the components—will be key to bringing about effective  implementation, through the components’ Financial Improvement Plans,  of the department’s financial management and related business process  reform. If the department’s future FIAR Plan updates provide a  comprehensive strategy for completing Waves 4 and 5, the plan can  serve as an effective tool to help guide and direct the department’s  financial management reform efforts.
Effective oversight holds individuals accountable for carrying out their  responsibilities. DOD has introduced incentives such as including FIAR  goals in Senior Executive Service Performance Plans, increased  reprogramming thresholds granted to components that receive a positive  audit opinion on their Statement of Budgetary Resources, audit costs  funded by the Office of the Secretary of Defense after a successful audit,  and publicizing and rewarding components for successful audits. The  challenge now is to evaluate and validate these and other incentives to  determine their effectiveness and whether the right mix of incentives has  been established.
Well-defined enterprise architecture. For decades, DOD has been  challenged in modernizing its timeworn business systems. Since 1995,  we have designated DOD’s business systems modernization program as  high risk. Between 2001 and 2005, we reported that the modernization  program had spent hundreds of millions of dollars on an enterprise  architecture and investment management structures that had limited  value. Accordingly, we made explicit architecture and investment  management-related recommendations. Congress included provisions in  the Ronald W. Reagan National Defense Authorization Act for Fiscal Year  2005 that were consistent with our recommendations. In response, DOD  continues to take steps to comply with the act’s provisions and to satisfy  relevant system modernization management guidance. Collectively, these  steps address best practices in implementing the statutory provisions  concerning the business enterprise architecture and review of systems  costing in excess of $1 million. However, long-standing challenges that  we previously identified remain to be addressed. Specifically, while DOD  continues to release updates to its corporate enterprise architecture, the  architecture has yet to be federated through development of aligned  subordinate architectures for each of the military departments. In this  regard, each of the military departments has made progress in managing  its respective architecture program, but there are still limitations in the  scope and completeness, as well as the maturity of the military  departments’ architecture programs. For example, while each department  has established or is in the process of establishing an executive  committee with responsibility and accountability for the enterprise  architecture, none has fully developed an enterprise architecture  methodology or a well-defined business enterprise architecture and  transition plan to guide and constrain business transformation initiatives.  In addition, while DOD continues to establish investment management  processes, the DOD enterprise and the military departments’ approaches  to business systems investment management still lack the defined  policies and procedures to be considered effective investment selection,  control, and evaluation mechanisms. Until DOD fully implements these  longstanding institutional modernization management controls, its  business systems modernization will likely remain a high-risk program.
Successful implementation of the ERPs. The department has invested  billions of dollars and will invest billions more to implement the ERPs.  DOD officials have said that successful implementation of ERPs is key to  transforming the department’s business operations, including financial  management, and in improving the department’s capability to provide  DOD management and Congress with accurate and reliable information  on the results of DOD’s operations. DOD has stated that the ERPs will  replace over 500 legacy systems. The successful implementation of the  ERPs is not only critical for addressing long-standing weaknesses in  financial management, but equally important for helping to resolve  weaknesses in other high-risk areas such as business transformation,  business system modernization, and supply chain management.
Over the years we have reported that the department has not effectively  employed acquisition management controls to help ensure the ERPs  deliver the promised capabilities on time and within budget. Delays in the  successful implementation of ERPs have extended the use of existing  duplicative, stovepiped systems, and continued funding of the existing  legacy systems longer than anticipated. Additionally, the continued  implementation problems can erode savings that were estimated to  accrue to DOD as a result of modernizing its business systems and  thereby reduce funds that could be used for other DOD priorities.
To help improve the department’s management oversight of its ERPs, we  have recommended that DOD define success for ERP implementation in  the context of business operations and in a way that is measurable.  Accepted practices in system development include testing the system in  terms of the organization’s mission and operations—whether the system  performs as envisioned at expected levels of cost and risk when  implemented within the organization’s business operations. Developing  and using specific performance measures to evaluate a system effort  should help management understand whether the expected benefits are  being realized. Without performance measures to evaluate how well  these systems are accomplishing their desired goals, DOD decision  makers, including program managers, do not have all the information they  need to evaluate their investments to determine whether the individual  programs are helping DOD achieve business transformation and thereby  improve upon its primary mission of supporting the warfighter.
Another key element in DOD efforts to modernize its business systems is  investment management policies and procedures. We reported in June  2011 that DOD’s oversight process does not provide sufficient visibility  into the military department’s investment management activities, including  its reviews of systems that are in operations and maintenance made and  smaller investments. As discussed in our information technology  investment management framework and previous reports on DOD’s  investment management of its business systems, adequately  documenting both policies and associated procedures that govern how an  organization manages its information technology projects and investment  portfolios is important because doing so provides the basis for rigor,  discipline, and repeatability in how investments are selected and  controlled across the entire organization. Until DOD fully defines missing  policies and procedures, it is unlikely that the department’s over 2,200  business systems will be managed in a consistent, repeatable, and  effective manner that, among other things, maximizes mission  performance while minimizing or eliminating system overlap and  duplication. To this point, there is evidence showing that DOD is not  managing its systems in this manner. For example, DOD reported that of  its 79 major business and other IT investments, about a third are  encountering cost, schedule, and performance shortfalls requiring  immediate and sustained management attention. In addition, we have  previously reported that DOD’s business system environment has been  characterized by (1) little standardization, (2) multiple systems performing  the same tasks, (3) the same data stored in multiple systems, and (4)  manual data entry into multiple systems. Because DOD spends billions of  dollars annually on its business systems and related IT infrastructure, the  potential for identifying and avoiding the costs associated with duplicative  functionality across its business system investments is significant.
section_title: Closing Comments
paragraphs: In closing, I am encouraged by the recent efforts and commitment DOD’s  leaders have shown toward improving the department’s financial  management. Progress we have seen includes recently issued guidance  to aid DOD components in their efforts to address their financial  management weaknesses and achieve audit readiness; standardized  component financial improvement plans to facilitate oversight and  monitoring; and the sharing of lessons learned. In addition, the DCMO  and the DOD Comptroller have shown commitment and leadership in  moving DOD’s financial management improvement efforts forward.
The revised FIAR strategy is still in the early stages of implementation,  and DOD has a long way and many long-standing challenges to  overcome, particularly with regard to sustained commitment, leadership,  and oversight, before the department and its military components are fully  auditable, and DOD financial management is no longer considered high  risk. However, the department is heading in the right direction and making  progress. Some of the most difficult challenges ahead lie in the effective  implementation of the department’s strategy by the Army, Navy, Air  Force, and DLA, including successful implementation of ERP systems  and integration of financial management improvement efforts with other  DOD initiatives.
GAO will continue to monitor the progress of and provide feedback on the  status of DOD’s financial management improvement efforts. We currently  have work in progress to assess implementation of the department’s  FIAR strategy and efforts toward auditability.
As a final point, I want to emphasize the value of sustained congressional  interest in the department’s financial management improvement efforts,  as demonstrated by this Panel’s leadership.
Mr. Chairman and Members of the Panel, this concludes my prepared  statement. I would be pleased to respond to any questions that you or  other members of the Panel may have at this time.
For further information regarding this testimony, please contact Asif A.  Khan, (202) 512-9095 or khana@gao.gov. Key contributors to this  testimony include J. Christopher Martin, Senior-Level Technologist; F.  Abe Dymond, Assistant Director; Gayle Fischer, Assistant Director; Greg  Pugnetti, Assistant Director; Darby Smith, Assistant Director; Steve  Donahue; Keith McDaniel; Maxine Hattery; Hal Santarelli; and Sandy  Silzer.
section_title: Appendix I: FIAR Plan Waves
paragraphs: The first three waves focus on achieving the DOD Comptroller’s interim  budgetary and asset accountability priorities, while the remaining two  waves are intended to complete actions needed to achieve full financial  statement auditability. However, the department has not yet fully defined  its strategy for completing waves 4 and 5. Each wave focuses on  assessing and strengthening internal controls and business systems  related to the stage of auditability addressed in the wave.
Wave 1—Appropriations Received Audit focuses on the appropriations  receipt and distribution process, including funding appropriated by  Congress for the current fiscal year and related  apportionment/reapportionment activity by the OMB, as well as allotment  and sub-allotment activity within the department.
Wave 2—Statement of Budgetary Resources Audit focuses on  supporting the budget-related data (e.g., status of funds received,  obligated, and expended) used for management decision making and  reporting, including the Statement of Budgetary Resources. In addition to  fund balance with Treasury reporting and reconciliation, other significant  end-to-end business processes in this wave include procure-to-pay, hire- to-retire, order-to-cash, and budget-to-report.
Wave 3—Mission Critical Assets Existence and Completeness Audit  focuses on ensuring that all assets (including military equipment, general  equipment, real property, inventory, and operating materials and supplies)  that are recorded in the department’s accountable property systems of  record exist; all of the reporting entities’ assets are recorded in those  systems of record; reporting entities have the right (ownership) to report  these assets; and the assets are consistently categorized, summarized,  and reported.
Wave 4—Full Audit Except for Legacy Asset Valuation includes the  valuation assertion over new asset acquisitions and validation of  management’s assertion regarding new asset acquisitions, and it  depends on remediation of the existence and completeness assertions in  Wave 3. Also, proper contract structure for cost accumulation and cost  accounting data must be in place prior to completion of the valuation  assertion for new acquisitions. It involves the budgetary transactions  covered by the Statement of Budgetary Resources effort in Wave 2,  including accounts receivable, revenue, accounts payable, expenses,  environmental liabilities, and other liabilities.
Wave 5—Full Financial Statement Audit focuses efforts on assessing  and strengthening, as necessary, internal controls, processes, and  business systems involved in supporting the valuations reported for  legacy assets once efforts to ensure control over the valuation of new  assets acquired and the existence and completeness of all mission  assets are deemed effective on a go-forward basis. Given the lack of  documentation to support the values of the department’s legacy assets,  federal accounting standards allow for the use of alternative methods to  provide reasonable estimates for the cost of these assets.
In the context of this phased approach, DOD’s dual focus on budgetary  and asset information offers the potential to obtain preliminary  assessments regarding the effectiveness of current processes and  controls and identify potential issues that may adversely impact  subsequent waves.
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