Department of Defense: Financial Management Improvement and Audit Readiness Efforts Continue to Evolve
Published: 2010-09-29T00:00:00

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 its pervasive and long-standing financial management and related business operations and systems problems. 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. DOD has initiated numerous efforts over the years to improve the department's financial management operations and ultimately achieve unqualified (clean) opinions on the reliability of reported financial information. The Subcommittee has asked GAO to provide its perspective on DOD's current efforts to address its financial management weaknesses and achieve auditability, including the status of its Enterprise Resource Planning (ERP) system implementations. GAO's testimony is based on its prior work related to DOD's financial improvement and audit readiness strategy and related activities, including its ERP implementation efforts.
section_title: What GAO Found
paragraphs: DOD has initiated numerous efforts over the years to address its financial management weaknesses and achieve audit readiness. In 2005, DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan to define the department's strategy and methodology for improving financial management operations and controls, and reporting its progress. In 2009, DOD Comptroller directed that the department's FIAR efforts be focused on improving processes and controls supporting information most often used to manage operations, while continuing to work toward achieving financial statement auditability. To support these objectives, DOD established two priority focus areas: budget information and information pertaining to mission-critical assets. In 2010, DOD revised its FIAR strategy, governance framework, and methodology to support the DOD Comptroller's direction and priorities and to comply with fiscal year 2010 defense authorizing legislation, which incorporated GAO recommendations intended to improve the FIAR Plan as a strategic plan. Based on what GAO has seen to date, DOD's revised FIAR Plan strategy and methodology reflects a reasonable approach. Moreover, GAO supports prioritizing focus areas for improvement and is hopeful that a consistent focus provided through shared FIAR priorities will increase incremental progress toward improved financial management operations. However, developing sound plans and methodology, and getting leaders and organizations in place is only a start. DOD needs to define specific roles and responsibilities for the Chief Management Officers (CMO)--including when and how the CMOs are expected to become involved in problem resolution and in ensuring cross-functional area commitment to financial improvement activities. A key element of the FIAR strategy is successful implementation of the ERPs. According to DOD, as of December 2009, it had invested approximately $5.8 billion to develop and implement these ERPs and will invest additional billions before these efforts are complete. However, as GAO has previously reported inadequate requirements management, systems testing, ineffective oversight over business system investments, and other challenges have hindered the department's efforts to implement these systems on schedule and within cost. Whether DOD's FIAR strategy will ultimately lead to improved financial management capabilities and audit readiness depends on DOD leadership and oversight to help achieve successful implementation. Sustained effort and commitment at the department and component levels will be needed to address weaknesses and produce financial management information that is timely, reliable, and useful for managers throughout DOD. GAO will continue to monitor DOD's progress and provide feedback on the status of DOD's financial management improvement efforts.

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  Subcommittee for having this hearing and acknowledge the important role  hearings such as this one serve.
DOD is one of the largest and most complex organizations in the world. In  fiscal year 2009, DOD reported that it had over $947 billion in  disbursements, $1.8 trillion in assets, and approximately 3.2 million  military and civilian personnel—including active and reserve components.  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 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, acquisition and  contract management, logistics management, and human resource  management. According to DOD officials, the department relies on about  2,080 business systems, including accounting, acquisition, logistics, and  personnel systems, to support its business functions.
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 achieve favorable (clean) audit opinions on  the reliability of reported financial information. To date, DOD has not  implemented effective financial management capabilities or achieved  financial statement auditability.
Today, I will describe the department’s current strategy to address its  financial management weaknesses and achieve audit readiness and  provide GAO’s perspective on DOD’s efforts and progress. 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 related financial management improvement activities,  including our assessment of the department’s ability to manage and  control operations and support costs associated with its weapon systems,  and our ongoing oversight of selected DOD financial statement audits and  ERP implementation efforts. Our work was conducted in accordance with  generally accepted 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: DOD is one of the largest federal agencies with its budget representing  over half of the entire federal government’s discretionary spending. For  fiscal year 2010, Congress appropriated over $694 billion for DOD. This  included $530 billion in regular appropriations for base needs and about  $164 billion in regular and supplemental appropriations for contingency  operations in Iraq, Afghanistan, and other locations. As of June 2010, DOD  had received about $1 trillion since 2001 to support contingency  operations. The department is currently facing near-term 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 and  significant cost growth in its weapons 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, and mismanagement. In fact, all the DOD programs on GAO’s High- Risk List relate to business operations, including systems and processes  related to management of contracts, finances, the 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 affected its operational efficiency in business areas,  such as major weapons system acquisition and support and logistics; and  (3) left the department vulnerable to fraud, waste, and abuse. Detailed  examples of these effects are presented in appendix I.
DOD is required by various statutes to 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 to produce audited financial statements. Collectively these statues  required DOD to do the following    Establish a leadership and governance framework and process,  including a financial management improvement plan or strategy (over  time the department’s strategy evolved into the FIAR Plan, which  ultimately became a subordinate plan to the department’s Strategic  Management Plan) for addressing its financial management  weaknesses and report to Congress and others semi-annually on its  progress.
Concentrate the department’s efforts and resources on improving the  department’s financial management information.
Systematically tie actions to improve processes and controls with  business system modernization efforts described in the business  enterprise architecture and enterprise transition plan required by 10  U.S.C. § 2222.
Limit the resources the department spend each year to develop,  compile, report, and audit unreliable financial statements.
Submit an annual report to defense committees, the Office of  Management and Budget (OMB), the Department of the Treasury  (Treasury), GAO, and the DOD Inspector General (DOD IG)  concluding on whether DOD policies, procedures, and systems support  financial statement reliability, and the expected reliability of each DOD  financial statement.
Certify to the DOD IG whether a component or DOD financial  statement for a specific fiscal year is reliable. Following DOD’s  assertion that a financial statement is reliable, DOD may expend  resources to develop, compile, report, and audit the statement and the  statements of subsequent fiscal years.
Because of the complexity and magnitude of the challenges facing the  department in improving its business operations, GAO has long advocated  the need for a senior management official to provide strong and sustained  leadership. Recognizing that executive-level attention and a clear strategy  were needed to put DOD on a sustainable path toward successfully  transforming its business operations, including financial management, the  National Defense Authorization Act (NDAA) for fiscal year 2008  designated the Deputy Secretary of Defense as the department’s Chief  Management Officer (CMO), created a Deputy CMO position, and  designated the undersecretaries of each military department as CMOs for  their respective departments. The act also required the Secretary of  Defense, acting through the CMO, to develop a strategic management plan  that among other things would provide a detailed description of  performance goals and measures for improving and evaluating the overall  efficiency and effectiveness of the department’s business operations and  actions underway to improve operations.
To further draw the department’s attention to the need to improve its  strategy for addressing financial management weaknesses and achieve  audit readiness the NDAA for Fiscal Year 2010 made the FIAR Plan a  statutory mandate, requiring the FIAR Plan to include, among other things  specific actions to be taken and costs associated with (a) correcting  the financial management deficiencies that impair DOD’s ability to  prepare timely, reliable, and complete financial management  information; and (b) ensuring that DOD’s financial statements are  validated as ready for audit by no later than September 30, 2017, and  actions taken to correct and link financial management deficiencies  with process and control improvements and business system  modernization efforts described in the business enterprise architecture  and enterprise transition plan required by 10 U.S.C. § 2222.
Consistent with the priorities announced by the DOD Comptroller in  August 2009, the act also focused the department’s improvement efforts on  first ensuring the reliability of the department’s budgetary information and  property accountability records for mission-critical assets. In addition,  the act directed DOD to report to congressional defense committees no  later than May 15 and November 15 each year on the status of its FIAR  Plan implementation. Furthermore, the act required that the first FIAR  Plan issued following enactment of this legislation (1) include a  mechanism to conduct audits of the military intelligence programs and  agencies and submit the audited financial statements to Congress in a  classified manner and (2) identify actions taken or to be taken by the  department to address the issues identified in our May 2009 report on  DOD’s efforts to achieve financial statement auditability.
section_title: DOD’s Strategy for Improving Its Financial Management Operations and Achieving Audit Readiness Continues to Evolve
paragraphs: Over the years, the department has initiated several broad-based reform  efforts, including the 1998 Biennial Strategic Plan for the Improvement of  Financial Management within the Department of Defense and the 2003  Financial Improvement Initiative, intended to fundamentally transform its  financial management operations and achieve clean financial statement  audit opinions. In 2005, DOD’s Comptroller established the DOD FIAR  Directorate to develop, manage, and implement a strategic approach for  addressing the department’s financial management weaknesses and  achieving auditability and to integrate those efforts with other  improvement activities, such as the department’s business system  modernization efforts. The first FIAR Plan was issued in December 2005.  DOD’s FIAR Plan defines DOD’s strategy and methodology for improving  financial management and controls, and summarizes and reports the  results of the department’s improvement activities and progress toward  achieving financial statement auditability. Further, the FIAR Plan has  focused on achieving three goals: (1) implement sustained improvements  in business processes and controls to address internal control weaknesses,  (2) develop and implement financial management systems that support  effective financial management, and (3) achieve and sustain financial  statement audit readiness.
To date, the department’s improvement efforts have not resulted in the  fundamental transformation of DOD’s financial management operations  necessary to resolve the department’s long-standing financial management  weaknesses;  however, some progress has been made and the  department’s strategy has continued to evolve. While none of the military  services have obtained unqualified (clean) audit opinions on their financial  statements, some DOD organizations, such as the Army Corps of  Engineers, Defense Finance Accounting Service, the Defense Contract  Audit Agency, and the DOD IG, have achieved this goal. Moreover, some  DOD components that have not yet received clean audit opinions, such as  the Defense Information Service Agency (DISA), are beginning to reap the  benefits of strengthened controls and processes gained through ongoing  efforts to improve their financial management operations and reporting  capabilities. For example, according to DISA’s Comptroller, the agency  was able to resolve over $270 million in Treasury mismatches through  reconciliations of over $12 billion in disbursement and collection  activities. In addition, DISA’s efforts to improve processes and controls  over its accounts receivable and payable accounts have resulted in  improvements in its ability to (1) substantiate the validity of DISA’s  customer billings and collect funds due to DISA, and (2) identify areas  where funds could be deobligated and put to better use. Moreover, DISA  management has gained increased assurance over its reported cash  availability balance, thereby improving mission-critical decision making.
Since its inception, the FIAR Plan has followed an incremental approach  to structure its process for examining operations, diagnosing problems,  planning corrective actions, and preparing for audit. Moreover, the FIAR  Plan has continued to evolve and mature as a strategic plan. Initially, DOD  components independently established their own financial management  improvement priorities and methodologies and were responsible for  implementing the corrective actions they determined were needed to  address weaknesses and achieve financial statement auditability.  However, as we reported in May 2009, it was difficult to link corrective  actions or accomplishments reported by the FIAR Plan to FIAR goals and  measure progress. In addition, we reported that as the department’s  strategic plan and management tool for guiding and reporting on  incremental progress toward achieving these goals, the FIAR Plan could  be improved in several areas. Specifically, we found the following:    Clear guidance was needed in developing and implementing  improvement efforts.
A baseline of the department’s and/or key component’s current  financial management weaknesses and capabilities was needed to  effectively measure and report on incremental progress.
Linkage between FIAR Plan goals and corrective actions and reported  accomplishments was needed.
Clear results-oriented metrics for measuring and reporting incremental  progress were needed.
Accountability should be clearly defined and resources budgeted and  consumed should be identified.
We made several recommendations in our May 2009 report to increase the  FIAR Plan’s effectiveness as a strategic and management tool for guiding,  monitoring, and reporting on financial management improvement efforts  and increasing the likelihood of meeting the department’s goal of financial  statement auditability, which were incorporated into the NDAA for fiscal  year 2010. In its May 2010 FIAR Status Report and Guidance, the  department identified steps taken to address our recommendations to  strengthen its FIAR Plan strategy and chances of sustained financial  management improvements and audit readiness. For example, DOD has  established shared priorities and methodology, including guidance to  develop component financial improvement plans, and an improved  governance framework.
In August 2009, DOD’s Comptroller directed that the department focus on  improving processes and controls supporting information that is most  often used to manage the department, while continuing to work toward  achieving financial improvements aimed at achieving unqualified audit  opinions on the department’s financial statements. As a result, in 2010  DOD revised its FIAR strategy, governance framework, and methodology  to support these objectives and focus financial management improvement  efforts primarily on achieving two interim departmentwide priorities— first, strengthening processes, controls, and systems that produce  budgetary information and support the department’s Statements of  Budgetary Resources; and second, improving 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.  In addition, the DOD Comptroller directed DOD components to use a  standard financial improvement plan template to support and emphasize  achievement of the two FIAR priorities.
The department intends to progress toward achieving financial statement  auditability in five waves (or phases) of concerted improvement activities  within groups of end-to-end business processes. According to DOD’s May  2010, FIAR Plan Status Report, the lack of resources dedicated to financial  improvement activities at DOD components has been a serious  impediment to progress, except in the Navy and the Defense Logistics  Agency (DLA). As a result, the components are at different levels of  completing the waves. For example, the Air Force has already received a  positive validation by the DOD IG on the Air Force Appropriations  Received account (wave 1) and the Navy is currently undergoing a similar  review of its account. Army and DLA, are expected to complete wave 1  and be ready for validation by the end of fiscal year 2010. However, DOD is  only beginning wave 1 work at other defense agencies to ensure that  transactions affecting their appropriations received accounts are properly  recorded and reported. 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. The focus  and scope of each wave include the following:  Wave 1—Appropriations Received Audit focuses efforts on assessing and  strengthening, as necessary, internal controls and business systems  involved in appropriations receipt and distribution process, including  funding appropriated by Congress for the current fiscal year and related  apportionment/reapportionment activity by OMB, as well as allotment and  sub-allotment activity within the department.
Wave 2—Statement of Budgetary Resources (SBR) Audit focuses efforts  on assessing and strengthening, as necessary, the internal controls,  processes, and business systems supporting the budgetary-related data  (e.g., status of funds received, obligated, and expended) used for  management decision making and reporting, including the SBR. In  addition to fund balance with Treasury reporting and reconciliation,  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 efforts on assessing and strengthening, as necessary, internal  controls and business systems involved in ensuring that all assets  (including military equipment, general equipment, real property, inventory,  and operating materials and supplies) 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 focuses efforts on  assessing and strengthening, as necessary, internal controls, processes,  and business systems involved in the proprietary side of budgetary  transactions covered by the Statement of Budgetary Resources effort of  wave 2, including accounts receivable, revenue, accounts payable,  expenses, environmental liabilities, and other liabilities. This wave also  includes efforts to support valuation and reporting of new asset  acquisitions.
Wave 5—Full Financial Statement Audit focuses efforts on assessing and  strengthening, as necessary, processes, internal controls, 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.
According to DOD, critical to the success of each wave and the  department’s efforts to ultimately achieve full financial statement  auditability will be departmentwide implementation of the FIAR  methodology as outlined in DOD’s FIAR Guidance document. Issued in  May 2010, the FIAR Guidance document, which DOD intends to update  annually, defines in a single document the department’s FIAR goals,  strategy, and methodology (formerly referred to as business rules) for  becoming audit ready. The FIAR methodology prescribes the process  components should follow in executing efforts to assess processes,  controls, and systems; identify and correct weaknesses; assess, validate,  and sustain corrective actions; and achieve full auditability. Key changes  introduced in 2010 to the FIAR methodology include an emphasis on  internal controls and supporting documentation. Utilization of standard  financial improvement plans and methodology should also aid both DOD  and its components in assessing current financial management capabilities  in order to establish baselines against which to measure, sustain, and  report progress. More specifically, the standard financial improvement  plan and FIAR Guidance outline key control objectives and capabilities  that components must successfully achieve to complete each wave (or  phase) of the FIAR strategy for achieving audit readiness. For example, to  successfully complete wave 2 (SBR audit) one of the capabilities that each  component must be able to demonstrate is that it is capable of performing  Fund Balance with Treasury reconciliations at the transaction level.
section_title: The Success of DOD’s Current Strategy Is Dependent Upon Effective Implementation
paragraphs: Based on what we’ve seen of the revised FIAR Plan strategy and  methodology to date, we believe the current strategy reflects a reasonable  approach. We are hopeful that a consistent focus provided through the  shared priorities of the FIAR strategy will increase the department’s ability  to show incremental progress toward achieving auditability in the near  term, if the strategy is implemented properly. In the long term, while  improved budgetary and asset accountability information is an important  step in demonstrating incremental progress, it will not be sufficient to  achieve full financial statement auditability. Additional work will be  required to ensure that transactions are recorded and reported in  accordance with generally accepted accounting principles. At this time, it  is not possible to predict when DOD’s efforts to achieve audit readiness  will be successful. The department continues to face significant challenges  in providing and sustaining the leadership and oversight needed to ensure  that improvement efforts, including ERP implementation efforts, result in  the sustained improvements in process, control, and system capabilities  necessary to transform financial management operations. We will continue  to monitor DOD’s progress in addressing its financial management  weaknesses and transforming its business operations. As part of this  effort, we plan to assess implementation of DOD’s FIAR strategy and  guidance, as part of our review of the military departments’ financial  improvement plans.
GAO supports DOD’s current approach of prioritizing efforts, focusing first  on information management views as most important in supporting its  operations, to demonstrate incremental progress to addressing  weaknesses and achieving audit readiness. There are advantages to this  approach, including building commitment and support throughout the  department and the potential to obtain preliminary assessments on the  effectiveness of current processes and controls and identify potential  issues that may adversely affect subsequent waves. For example, testing  expenditures in wave 2 will also touch on property accountability issues,  as DOD makes significant expenditures for property. Identifying and  resolving potential issues related to expenditures for property in wave 2  will assist the department as it enters subsequent waves dealing with its  ability to reliably and completely identify, aggregate, and account for the  cost of the assets it acquires through various acquisition and construction  programs.
We also support efforts to first address weaknesses in the department’s  ability to timely, reliably, and completely record the cost of assets as they  are acquired over efforts to value legacy assets. Prior efforts to achieve  auditability of DOD’s mission assets failed, in large part, because these  efforts were focused primarily on deriving values for financial statement  reporting and not on assessing and addressing the underlying weaknesses  that impaired the department’s ability to reliably identify, aggregate, and  account for current transactions affecting these assets. GAO is willing to  work with the department to revisit the question of how DOD reports  assets in its financial statements to address unique aspects of military  assets not currently reflected in traditional financial reporting models.
Developing sound plans and a methodology and getting leaders and  organizations in place is only a start. Consistent with our previous reports  regarding the department’s CMO positions, including the CMO, Deputy  CMO and military department CMOs, and our May 2009  recommendations to improve DOD’s FIAR Plan as a strategic and  management tool for addressing financial management weaknesses and  achieving and sustaining audit readiness, DOD needs to define specific  roles and responsibilities—including when and how the CMO and military  department CMOs and other leaders are expected to become involved in  problem resolution or efforts to ensure cross-functional area commitment  and support to financial management improvement efforts; effectively  execute its plans; gauge actual progress against goals; strengthen  accountability; and make adjustments as needed. In response to our  report, DOD expanded its FIAR governance framework to include the  CMOs. While expansion of the FIAR governance framework to include the  CMOs is also encouraging, the specific roles and responsibilities of these  important leaders have not yet been fully defined. As acknowledged by  DOD officials, sustained and active involvement of the CMOs and other  senior leaders is critical in enabling a process by which DOD can more  timely identify and address cross-functional issues and ensure that other  business functions, such as acquisition and logistics, fully acknowledge  and are held accountable for their roles and responsibilities in achieving  the department’s financial management improvement goals and audit  readiness.
Sustained and active leadership and effective oversight and monitoring at  both the department and component levels are critical to ensuring  accountability for progress and targeting resources in a manner that  results in sustained improvements in the reliability of data for use in  supporting and reporting on operations. As part of GAO’s prior work  pertaining to DOD’s key ERP implementation efforts and the FIAR Plan,  we have seen a lack of focus on developing and using interim performance  metrics to measure progress and the impact of actions taken. For example,  our review of DOD’s ERP implementation efforts, which we plan to report  on in October 2010, found that DOD has not yet defined success for ERP  implementation in the context of business operations and in a way that is  measurable. In May 2009 we reported that the FIAR Plan does not use  clear results-oriented metrics to measure and report corrective actions  and accomplishments in a manner that clearly demonstrates how they  contribute individually or collectively to addressing a defined weakness,  providing a specific capability, or achieving a FIAR goal. 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 or their  usefulness in monitoring and redirecting actions.
In the past, DOD has had many initiatives and plans that failed due to a  lack of sustained leadership focus and effective oversight and monitoring.  Without sustained leadership focus and effective oversight and  monitoring, DOD’s current efforts to achieve audit readiness by a defined  date are at risk of following the path of the department’s prior efforts and  fall short of obtaining sustained substantial improvements in DOD’s  financial management operations and capabilities or achieving validation  through independent audits.
section_title: Effective Implementation of Business Systems Is Essential to Improving and Sustaining DOD Financial Management and Related Business Operations
paragraphs: DOD officials have said that successful implementation of ERPs is key to  resolving the long-standing weaknesses in the department’s business  operations in areas such as business transformation, financial  management, and supply chain management, and improving the  department’s capability to provide DOD management and Congress with  accurate and reliable information on the results of DOD’s operations. For  example in 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. These weaknesses resulted in a  shortfall of $200 million in 2008. Army Budget Office personnel explained  that they rely on estimated obligations, rather than actual data from  program managers, to record the initial obligation or adjust the estimated  obligation due to inadequate financial management systems.
DOD has identified 10 ERPs, 1 of which has been fully implemented, as  essential to its efforts to transform its business operations. Appendix II  contains a description of each of the remaining 9 ERPs currently being  implemented within the department. According to DOD, as of December  2009, it had invested approximately $5.8 billion to develop and implement  these ERPs and will invest additional billions before the remaining 9 ERPs  are fully implemented. The department has noted that the successful  implementation of these 10 ERPs will replace over 500 legacy systems that  reportedly cost hundreds of millions of dollars to operate annually.
However, our prior reviews of several ERPs have found that the  department has not effectively employed acquisition management controls  or delivered the promised capabilities on time and within budget. More  specifically, significant leadership and oversight challenges, as illustrated  by the Logistics Modernization Program (LMP) example discussed  appendix I, have hindered the department’s efforts to implement these  systems on schedule, within cost, and with the intended capabilities.  Based upon the information provided by the program management offices  (PMOs), six of the ERPs have experienced schedule slippages, as shown in  table 1, based on comparing the estimated date that each program was  originally scheduled to achieve full deployment to the full deployment  date as of December 2009. For the remaining three ERPs, the full  deployment date has either remained unchanged or has not been  established. The GFEBS PMO noted that the acquisition program baseline  approved in November 2008, established a full deployment date in fiscal  year 2011 and that date remains unchanged. Additionally, according to the  GCSS-Army PMO a full deployment date has not been established for this  effort. The PMO noted that a full deployment date will not be established  for the program until a full deployment decision has been approved by the  department. A specific timeframe has not been established for when the  decision will be made. Further, in the case of DAI, the original full  deployment date was scheduled for fiscal year 2012, but the PMO is in the  process of reevaluating the date and a new date has not yet been  established.
Prior work by GAO and the U.S. Army Test and Evaluation Command  found that delays in implementing the ERPs have occurred, in part, due to  inadequate requirements management and system testing, and data quality  issues. These delays have contributed not only to increased  implementation costs in at least five of the nine ERPS, as shown in table 2,  they have also resulted in DOD having to fund the operation and  maintenance of the legacy systems longer than anticipated, thereby  reducing funds that could be used for other DOD priorities.
Effective and sustained leadership and oversight of the department’s ERP  implementations is needed to ensure that these important initiatives are  implemented on schedule, within budget, and result in the integrated  capabilities needed to transform the department’s financial management  and related business operations.
section_title: Closing Comments
paragraphs: In closing, I am encouraged by continuing congressional oversight of  DOD’s financial management improvement efforts and the commitment  DOD’s leaders have expressed to improving the department’s financial  management and achieving financial statement audit readiness.
For instance, we have seen positive short-term progress on the part of  DOD in moving forward. In its May 2010 FIAR status report, DOD reported  actions it had taken in response to the 2010 NDAA and our prior  recommendations to enhance effectiveness of the FIAR Plan as a strategic  plan and management tool for guiding, monitoring, and reporting on the  department’s efforts to resolve its financial management weaknesses and  achieve audit readiness. The department has expanded the FIAR  governance body to include the Chief Management Officer, issued  guidance to aid DOD components in their efforts to address their financial  management weaknesses and achieve audit readiness, and standardized  component financial improvement plans to facilitate oversight and  monitoring, as well as sharing lessons learned. In addition, DOD has  revised its FIAR strategy to focus its financial management improvement  efforts on departmentwide priorities, first on budgetary information and  preparing the department’s Statements of Budgetary Resources for audit  and second on accountability over the department’s mission-critical assets  as a way of improving information used by DOD leaders to manage  operations and to more effectively demonstrate incremental progress  toward achieving audit readiness.
Whether promising signs, such as shared priorities and approaches,  develop into sustained progress will ultimately depend on DOD leadership  and oversight to help achieve successful implementation. The expanded  FIAR governance framework, including the CMOs, is a start; but their  specific roles and responsibilities toward the department’s financial  management improvement efforts still need to be defined. Importantly,  sustained and effective leadership, oversight, and accountability at the  department and component levels will be needed in order to help ensure  that DOD’s current efforts to achieve auditability by a defined date don’t  follow the path of the department’s prior efforts and fall short of obtaining  sustained substantial improvement.
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 in regard to active and sustained leadership and oversight,  before its military components and the department are fully auditable, and  financial management is no longer considered high risk. However, the  department is heading in the right direction. Some of the most difficult  challenges ahead lie in effectively implementing the department’s strategy,  including successful implementation of ERP systems and integration of  financial management improvement efforts with other DOD initiatives. We  will be issuing a report on DOD’s business system modernization efforts in  October 2010 that discusses in greater detail the cost, schedule, and other  issues that have hindered the success of important efforts.
GAO will continue to monitor progress of the department’s financial  management improvement efforts 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 through ongoing or recently initiated engagements related to (1)  the U.S. Marine Corps’ (USMC) efforts to achieve an audit opinion on its  Statement of Budgetary Resources, which regardless of its success should  provide lessons learned that can be shared with other components, (2) the  military departments’ implementation of the FIAR strategy and guidance,  and (3) the department’s efforts to develop and implement ERPs. In  addition, we will continue our oversight and monitoring of DOD’s financial  statement audits, including the Army Corps of Engineers and DOD  consolidated financial statements.
Mr. Chairman and Ranking Member McCain, this concludes my prepared  statement. I would be pleased to respond to any questions that you or  other members of the Subcommittee may have at this time.
For further information regarding this testimony, please contact Asif A.  Khan, (202) 512-9095 or khana@gao.gov. Key contributors to this  testimony include J. Christopher Martin, Senior-Level Technologist;  Evelyn Logue, Assistant Director; Darby Smith, Assistant Director; Paul  Foderaro, Assistant Director; Gayle Fischer, Assistant Director; F. Abe  Dymond, Assistant General Counsel; Beatrice Alff; Maxine Hattery; Jason  Kirwan; Crystal Lazcano; and Omar Torres.
section_title: Appendix I: Impact of Financial Management and Related Weaknesses on DOD Operations
paragraphs: Despite years of improvement efforts since 2002, DOD has annually  reported to Congress that the department is unable to provide reasonable  assurance that the information reported in its financial statements is  reliable due to long-standing weaknesses in its financial management and  related business processes, controls, and systems. Importantly, these  weaknesses not only affect the reliability of the department’s financial  reports, as illustrated in the following examples, they also adversely affect  the department’s ability to assess resource requirements; control costs;  ensure basic accountability; anticipate future costs and claims on the  budget; measure performance; maintain funds control; prevent fraud  waste, abuse, and mismanagement; and address pressing management  issues, as the following examples illustrate,    The Army Budget Office lacks 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. In June 2010, we reviewed Army obligation and  expenditure reports pertaining to Army’s fiscal year 2008 MPA  appropriation and confirmed that the Army had violated the  Antideficiency Act, as evidenced by the Army’s need to transfer $200  million from the Army working capital fund to cover the shortfall. This  shortfall stemmed, in part, from a lack of reliable financial information on  enlistment and reenlistment contracts, which provide specified bonuses to  service members. Army Budget personnel explained that they rely on  estimated obligations, rather than actual data from program managers, to  record the initial obligation or adjust the estimated obligation due to  inadequate financial management systems. Without adequate processes,  controls, and systems to establish and maintain effective funds control, the  Army’s ability to prevent, identify, and report potential Antideficiency Act  violations is impaired.
While DOD has invested over a trillion of dollars to acquire weapon  systems, also referred to as military equipment, the department continues  to lack the processes and system capabilities to reliably identify, aggregate  and report the full cost of its investment in these assets. We reported this  as an issue to the Air Force over 20 years ago. In July 2010, we reported  that although DOD and the military departments have efforts underway to  begin addressing these financial management weaknesses, DOD officials  acknowledged that additional actions were needed that will require the  support of other business areas beyond the financial community, before  they will be fully addressed. Without timely, reliable, and useful financial  information on the full cost associated with acquiring assets, both DOD  management and Congress lack key information needed for use in  effective decision making, such as determining how to allocate resources  to programs or evaluating program performance to help strengthen  oversight and accountability.
The department’s ability to identify, aggregate, and use financial  management information to develop plans for managing and controlling  operating and support costs for major weapons systems is limited. DOD  spends billions of dollars each year to sustain its weapon systems. These  operating and support (O&S) costs can account for a significant portion of  a weapon’s system’s total life-cycle costs and include costs for, among  other things, repair parts, maintenance, and contract services. However, in  July 2010 we reported that the department lacked key information needed  to effectively manage and reduce O&S costs for most of the weapon  systems we reviewed—including life-cycle O&S cost estimates and  consistent and complete historical data on actual O&S costs. Specifically,  we found that the military departments lacked (1) life-cycle O&S cost  estimates developed at the production milestone for five of the seven  aviation systems we reviewed and (2) complete data on actual O&S costs.  Without historical life-cycle O&S cost estimates and complete data on  actual O&S costs, DOD officials lack important data for analyzing the rate  of O&S cost growth for major weapon systems, identifying cost drivers,  and developing plans for managing and controlling these costs.
The department and military services continue to have difficultly  effectively deploying business systems, on time, within budget, and with  the functionality intended to significantly transform business operations.  For example, in April 2010, we reported that the management processes  the Army established prior to the second deployment of its Logistics  Modernization Program (LMP) were not effective in managing and  overseeing the second deployment of this system. Specifically, we found  that due to data quality issues, the Army was unable to ensure that the  data used by LMP were of sufficient quality to enable the Corpus Christi  and Letterkenny Army depots to perform their day-to-day missions after  LMP became operational at these locations. For example, LMP could not  automatically identify the materials needed to support repairs and ensure  that parts would be available in time to carry out the repairs. Labor rates  were also missing for some stages of repair, thereby precluding LMP from  computing labor costs for the repair projects. As a result of these data  issues, manual work-around processes had to be developed and used in  order for the depots to accomplish their repair missions. Furthermore, the  performance measures the Army used to assess implementation failed to  detect that manual work-arounds rather than LMP were used to support  repair missions immediately following LMP’s implementation at the  depots. Without adequate 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 systems investments to determine the extent to which  individual programs are helping DOD achieve business transformation,  including financial management, and whether additional remediation is  needed.
In addition to the DOD IG reports on internal controls and compliance  with laws and regulations included in DOD and military department  annual financial reports, the DOD IG has other reports highlighting a  variety of internal controls weaknessesin the department’s financial  management that affect DOD operations as the following illustrate.
In January 2010, the DOD IG evaluated the internal controls over the  USMC transactions processed through the Deployable Disbursing  System (DDS) and determined that USMC did not maintain adequate  internal controls to ensure the reliability of the data processed.  Specifically, the DOD IG found that USMC disbursing personnel had  not complied with the statute when authorizing vouchers for payment  or segregated certifying duties from disbursing when making payments.  Further, the DOD IG found that USMC personnel had circumvented  internal controls restricting access to DDS information. As a result, the  DOD IG concluded that USMC was at risk of incurring unauthorized,  duplicate, and improper payments.
In June 2009, the DOD IG reported that the Army did not have adequate  internal controls over accountability for approximately $169.6 million  of government-furnished property at two Army locations reviewed.  Specifically, the DOD IG found that Army personnel had not ensured  the proper recording of transfers of property accountability to  contractors, physical inventories and reconciliation, or the  identification of government property at these locations. As a result,  the DOD IG concluded that the Army’s property accountability  databases at these two locations were misstated and these two Army  locations were at risk of unauthorized use, destruction or loss of  government property.
section_title: Appendix II: Description of Key Enterprise Resource Planning Efforts
paragraphs: The department stated that implementation of the following nine ERPs are  critical to transforming the department’s business operations and  addressing some of its long-standing weaknesses. A brief description of  each ERP is presented below.
The General Fund Enterprise Business System (GFEBS) is intended to  support the Army’s standardized financial management and accounting  practices for the Army’s general fund, with the exception of that related to  the Army Corps of Engineers which will continue to use its existing  financial system, the Corps of Engineers Financial Management System.  GFEBS will allow the Army to share financial, asset and accounting data  across the active Army, the Army National Guard, and the Army Reserve.  The Army estimates that when fully implemented, GFEBS will be used to  control and account for about $140 billion in spending.
The Global Combat Support System-Army (GCSS-Army) is expected to  integrate multiple logistics functions by replacing numerous legacy  systems and interfaces. The system will provide tactical units with a  common authoritative source for financial and related non-financial data,  such as information related to maintenance and transportation of  equipment. The system is also intended to provide asset visibility for  accountable items. GCSS-Army will manage over $49 billion in annual  spending by the active Army, National Guard, and the Army Reserve.
The Logistics Modernization Program (LMP) is intended to provide order  fulfillment, demand and supply planning, procurement, asset management,  material maintenance, and financial management capabilities for the  Army’s working capital fund. The Army has estimated that LMP will be  populated with 6 million Army-managed inventory items valued at about  $40 billion when it is fully implemented.
The Navy Enterprise Resource Planning System (Navy ERP) is intended to  standardize the acquisition, financial, program management, maintenance,  plant and wholesale supply, and workforce management capabilities at six  Navy commands. Once it is fully deployed, the Navy estimates that the  system will control and account for approximately $71 billion (50 percent),  of the Navy’s estimated appropriated funds—after excluding the  appropriated funds for the Marine Corps and military personnel and pay.
The Global Combat Support System–Marine Corps (GCSS-MC) is intended  to provide the deployed warfighter enhanced capabilities in the areas of  warehousing, distribution, logistical planning, depot maintenance, and  improved asset visibility. According to the PMO, once the system is fully  implemented, it will control and account for approximately $1.2 billion of  inventory.
The Defense Enterprise Accounting and Management System (DEAMS) is  intended to provide the Air Force the entire spectrum of financial  management capabilities, including collections, commitments and  obligations, cost accounting, general ledger, funds control, receipts and  acceptance, accounts payable and disbursement, billing, and financial  reporting for the general fund. According to Air Force officials, when  DEAMS is fully operational, it is expected to maintain control and  accountability for about $160 billion.
The Expeditionary Combat Support System (ECSS) is intended to provide  the Air Force a single, integrated logistics system—including  transportation, supply, maintenance and repair, engineering and  acquisition—for both the Air Force’s general and working capital funds.  Additionally, ECSS is intended to provide the financial management and  accounting functions for the Air Force’s working capital fund operations.  When fully implemented, ECSS is expected to control and account for  about $36 billion of inventory.
The Service Specific Integrated Personnel and Pay Systems are intended to  provide the military departments an integrated personnel and pay system.
Defense Agencies Initiative (DAI) is intended to modernize the defense  agencies’ financial management processes by streamlining financial  management capabilities and transforming the budget, finance, and  accounting operations. When DAI is fully implemented, it is expected to  have the capability to control and account for all appropriated, working  capital and revolving funds at the defense agencies implementing the  system.
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