DOD Financial Management: Integrated Approach, Accountability, Transparency, and Incentives Are Keys to Effective Reform
Published: 2002-03-20T00:00:00

Fast Facts:

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

section_title: Letter
paragraphs: It is a pleasure to be here to discuss financial management at the  Department of Defense (DOD).  Today, DOD faces financial management  problems that are pervasive, complex, long-standing, and deeply rooted in  virtually all business operations throughout the department.  DOD’s  financial management deficiencies, taken together, represent the single  largest obstacle to achieving an unqualified opinion on the U.S.  government’s consolidated financial statements.  To date, none of the  military services or major DOD components have passed the test of an  independent financial audit because of pervasive weaknesses in financial  management systems, operations, and controls.
Overhauling financial management represents a major management  challenge that goes far beyond financial accounting to the very fiber of the  department’s range of business operations and management culture.  Previous administrations over the past several decades have tried to  address these problems in various ways but have largely been  unsuccessful.  In this regard, on September 10, 2001, Secretary of Defense  Rumsfeld announced a broad initiative intended to “transform the way the  department works and what it works on” which he estimated could save  5 percent of DOD’s budget—or an estimated $15 to $18 billion annually.  The Secretary recognized that transformation would be difficult and  expected the needed changes would take 8 or more years to complete.
The President’s Management Agenda includes improved financial  management performance as one of his five governmentwide management  goals.  In addition, in August 2001, the Principals of the Joint Financial  Management Improvement Program—the Secretary of the Treasury, the  Director of the Office of Management and Budget, the Director of the  Office of Personnel Management, and the Comptroller General—began a  series of quarterly meetings that marked the first time all four of the  Principals had gathered together in over 10 years.  To date, these sessions  have resulted in substantive deliberations and agreements focused on key  issues such as better defining measures for financial management success.  These measures include being able to routinely provide timely, reliable, and  useful financial information and having no material internal control  weaknesses.  Success on these measures will be a significant challenge to  DOD.  The principals have invited Defense Comptroller Zakheim to their  upcoming April 2002 meeting to discuss the department’s transformation  effort and to begin a constructive engagement with DOD on this important  initiative.
With the events of September 11, and the federal government’s short- and  long-term budget challenges, it is more important than ever that DOD  effectively transform its business processes to ensure that it gets the most  from every dollar spent.  The department must be able to effectively carry  out its stewardship responsibilities for the funding it receives and for the  vast amount of equipment and inventories used in support of military  operations.  Even before the events of September 11, increased  globalization, changing security threats, and rapid technological advances  were prompting fundamental changes in the environment in which DOD  operates.  These trends place a premium on increasing strategic planning,  enhancing results orientation, ensuring effective accountability,  maintaining transparency, and using integrated approaches.  Six of the 22  areas on GAO’s governmentwide “high-risk” list are DOD program areas,  and DOD shares responsibility for 2 other high-risk areas that are  governmentwide in scope. Central to effectively addressing DOD’s  financial management problems will be the understanding that these eight  areas are interrelated and cannot be addressed in an isolated, stovepiped,  or piecemeal fashion.
The recent success of our forces in Afghanistan has again demonstrated the  unparalleled excellence of our military forces.  This same level of  excellence is not yet evident in the department’s financial management and  other business processes.  This is particularly problematic because  effective financial management operations are critical to achieving the  department’s mission in a reasonably economical, efficient, and effective  manner and to providing reliable, timely financial information on a routine  basis to support management decision-making at all levels throughout  DOD.  This level of excellence will also be critical in order to enhance  overall transparency and accountability.  Success in this area will serve to  freeup resources that can be redeployed to enhance readiness, improve the  quality of life for our troops and their families, and reduce the gap between  wants and available funding in connection with major weapon systems.
Today, I will provide my perspectives on (1) how Defense got where it is  today and the underlying causes of the department’s longstanding inability  to effectively reform its financial management and other business systems  and processes and (2) the keys to successfully carrying out the Secretary’s  business process transformation and DOD’s plans and actions to date.  Last  summer, the Comptroller General shared with Secretary Rumsfeld and  Comptroller Zakheim a business transformation paper.  This paper  provided an overview of GAO’s views on the current challenges facing the  department, the keys to effective reform, and detailed one option for  addressing these challenges.
subsections: section_title: Long-Standing Financial Management Problems and Attempts at Reform
paragraphs: History is a good teacher.  To solve the problems of today, it is instructive to  look to the past.  The problems with the department’s financial  management operations date back decades, and previous attempts at  reform have largely proven unsuccessful.  These problems adversely affect  DOD’s ability to control costs, ensure basic accountability, anticipate future  costs and claims on the budget (such as for health care, weapon systems,  and environmental liabilities), measure performance, maintain funds  control, prevent fraud, and address pressing management issues.
In this regard, I would like to briefly highlight three of our recent products  that exemplify the adverse impact of DOD’s reliance on fundamentally  flawed financial management systems and processes and a weak overall  internal control environment.
In a testimony before your subcommittee last week, we highlighted  continuing problems with internal controls over approximately  $64 million in fiscal year 2001 purchase card transactions involving two  Navy activities.  Consistent with our testimony last July on fiscal year  2000 purchase card transactions at these locations, our follow-up review  demonstrated that continuing control problems left these Navy  activities vulnerable to fraudulent, improper, and abusive purchases and  theft and misuse of government property.  We are currently auditing  purchase card usage across the department.
In a testimony before your Subcommittee in July 2001, we reported that  DOD did not have adequate systems, controls, and managerial attention  to ensure that $2.7 billion of adjustments to closed appropriations were  legal and otherwise proper.  Our review of $2.2 billion of these  adjustments found that about $615 million of them should not have been  made, including about $146 million that were illegal.
In June 2001, we reported that DOD’s current financial systems could  not adequately track and report on whether the $1.1 billion in earmarked  funds that the Congress provided to DOD for spare parts and associated  logistical support were actually used for the intended purpose. The vast  majority of the funds—92 percent—were transferred to the military  services operation and maintenance accounts.  We found that once  these funds were transferred, DOD lost its ability to assure the Congress  that the funds it received for spare parts purchases were used for, and  only for, that purpose.
Problems with the department’s financial management operations go far  beyond its accounting and finance systems and processes.  The department  continues to rely on a far-flung, complex network of finance, logistics,  personnel, acquisition, and other management information systems—  80 percent of which are not under the control of the DOD Comptroller—to  gather the financial data needed to support day-to-day management  decisionmaking.  This network was not designed to be, but rather has  evolved into, the overly complex and error-prone operation that exists  today, including (1) little standardization across DOD components,  (2) multiple systems performing the same tasks, (3) the same data stored in  multiple systems, (4) manual data entry into multiple systems, and (5) a  large number of data translations and interfaces that combine to  exacerbate problems with data integrity.  DOD has determined, for  example, that efforts to reconcile a single contract involving 162 payments  resulted in an estimated 15,000 adjustments.
Many of the department’s business processes in operation today are mired  in old, inefficient processes and legacy systems, some of which go back to  the 1950s and 1960s.  For example, while implemented in 1968, the  department still relies on the Mechanization of Contract Administration  Services (MOCAS) system to process a substantial portion of the contract  payment transactions for all DOD organizations.  In fiscal year 2001,  MOCAS processed an estimated $78 billion in contract payments.  Past  efforts to replace MOCAS have failed.  Most recently, in 1994, DOD began  acquiring the Standard Procurement System (SPS) to replace the contract  administration functions currently performed by MOCAS.  However, our  July 2001 and February 2002 reporting on DOD’s $3.7 billion investment in  SPS showed that this substantial investment was not economically justified  and raised questions as to whether further investment in SPS was justified.  For the foreseeable future, DOD will continue to be saddled with MOCAS.
Moving to the 1970s, we, the Defense Inspector General, and the military  service audit organizations, issued numerous reports detailing serious  problems with the department’s financial management operations.  For  example, between 1975 and 1981, we issued more than 75 reports  documenting serious problems with DOD’s existing cost, property, fund  control, and payroll accounting systems.  In the 1980s, we found that  despite the billions of dollars invested in individual systems, these efforts,  too, fell far short of the mark, with extensive schedule delays and cost  overruns.  For example, in 1989, our report on eight major DOD system  development efforts—including two major accounting systems--under way  at that time, showed that system development cost estimates doubled, two  of the eight efforts were abandoned, and the remaining six efforts  experienced delays of from 3 to 7 years.
Beginning in the 1990s, following passage of the Chief Financial Officers  (CFO) Act of 1990, there was a recognition in DOD that broad-based  financial management reform was needed.  Over the past 12 years, the  department has initiated several departmentwide reform initiatives  intended to fundamentally reform its financial operations as well as other  key business support processes, including the Corporate Information  Management initiative, the Defense Business Operations Fund, and the  Defense Reform Initiative.  These efforts, which I will highlight today, have  proven to be unsuccessful despite good intentions and significant effort.  The conditions that led to these previous attempts at reform remain largely  unchanged today.
Corporate Information Management.  The Corporate Information  Management (CIM), initiative, begun in 1989, was expected to save billions  of dollars by streamlining operations and implementing standard  information systems.  CIM was expected to reform all DOD’s functional  areas--including finance, procurement, material management, and human  resources--through consolidating, standardizing, and integrating  information systems.  DOD also expected CIM to replace approximately  2,000 duplicative systems.  Over the years, we have made numerous  recommendations to improve CIM’s management, but these  recommendations were largely not addressed.  Instead, DOD spent billions  of dollars with little sound analytical justification.  We reported in 1997,that 8 years after beginning CIM, and spending about $20 billion on the  initiative, expected savings had yet to materialize.  The initiative was  eventually abandoned.
Defense Business Operations Fund.  In October 1991, DOD established  a new entity, the Defense Business Operations Fund by consolidating nine  existing industrial and stock funds and five other activities operated  throughout DOD.  Through this consolidation, the fund was intended to  bring greater visibility and management to the overall cost of carrying out  certain critical DOD business operations.  However, from its inception, the  fund was plagued by management problems.  In 1996, DOD announced the  fund’s elimination.  In its place, DOD established four working capital  funds.  These new working capital funds inherited their predecessor’s  operational and financial reporting problems.
Defense Reform Initiative (DRI).  In announcing the DRI program in  November 1997, the then Secretary of Defense stated that his goal was “to  ignite a revolution in business affairs.”  DRI represented a set of proposed  actions aimed at improving the effectiveness and efficiency of DOD’s  business operations, particularly in areas that have been long-standing  problems—including financial management.  In July 2000, we reportedthat while DRI got off to a good start and made progress in implementing  many of the component initiatives, it did not meet expected time frames  and goals, and the extent to which savings from these initiatives will be  realized is yet to be determined.  GAO is currently examining the extent to  which DRI efforts begun under the previous administration are continuing.
The past has clearly taught us that addressing DOD’s serious financial  management problems will not be easy.  Early in his tenure, Secretary  Rumsfeld commissioned a new study of the department’s financial  management operations.  The report on the results of the study,  Transforming Department of Defense Financial Management: A Strategy  for Change, was issued on April 13, 2001.  The report recognized that the  department will have to undergo “a radical financial management  transformation” and that it would take more than a decade to achieve.  The  report concluded that many studies and interviews with current and former  leaders in DOD point to the same problems and frustrations, and that  repeated audit reports verify systemic problems illustrating the need for  radical transformation in order to achieve success.  Secretary Rumsfeld  further confirmed the need for a fundamental transformation of DOD in his  “top-down” Quadrennial Defense Review.  Specifically, his September 30,  2001, Quadrennial Defense Review Report concluded that the department  must transform its outdated support structure, including decades-old  financial systems that are not well interconnected.  The report summed up  the challenge well in stating: “While America’s businesses have streamlined  and adopted new business models to react to fast-moving changes in  markets and technologies, the Defense Department has lagged behind  without an overarching strategy to improve its business practices.”
section_title: Underlying Causes of Financial and Related Business Process Reform Challenges
paragraphs: As part of our constructive engagement approach with DOD, the  Comptroller General met with Secretary Rumsfeld last summer to provide  our perspectives on the underlying causes of the problems that have  impeded past reform efforts at the department and to discuss options for  addressing these challenges.  There are four underlying causes a lack of sustained top-level leadership and management accountability deeply embedded cultural resistance to change, including military  service parochialism and stovepiped operations; a lack of results-oriented goals and performance measures and  monitoring; and  inadequate incentives for seeking change.
subsections: section_title: Lack of Leadership and Accountability
paragraphs: Historically, DOD has not routinely assigned accountability for  performance to specific organizations or individuals that have sufficient  authority to accomplish desired goals.  For example, under the CFO Act, it  is the responsibility of agency CFOs to establish the mission and vision for  the agency’s future financial management.  However, at DOD, the  Comptroller—who is by statute the department’s CFO---has direct  responsibility for only an estimated 20 percent of the data relied on to carry  out the department’s financial management operations.  The department  has learned through its efforts to meet the Year 2000 computing challenge  that to be successful, major improvement initiatives must have the direct,  active support and involvement of the Secretary and Deputy Secretary of  Defense.  In the Year 2000 case, the then Deputy Secretary of Defense was  personally and substantially involved and played a major role in the  department’s success.  Such top-level support and attention helps ensure  that daily activities throughout the department remain focused on  achieving shared, agencywide outcomes.  A central finding from our report  on our survey of best practices of world-class financial management  organizations---Boeing; Chase Manhattan Bank; General Electric; Pfizer;  Hewlett-Packard; Owens Corning; and the states of Massachusetts, Texas,  and Virginia—was that clear, strong executive leadership was essential to  (1) making financial management an entitywide priority, (2) redefining the  role of finance, (3) providing meaningful information to decisionmakers,  and (4) building a team of people that deliver results.
DOD past experience has suggested that top management has not had a  proactive, consistent, and continuing role in building capacity, integrating  daily operations for achieving performance goals, and creating incentives.  Sustaining top management commitment to performance goals is a  particular challenge for DOD.  In the past, the average 1.7--year tenure of  the department’s top political appointees has served to hinder long-term  planning and follow-through.
section_title: Cultural Resistance and Parochialism
paragraphs: Cultural resistance to change and military service parochialism have also  played a significant role in impeding previous attempts to implement  broad-based management reforms at DOD.  The department has  acknowledged that it confronts decades-old problems deeply grounded in  the bureaucratic history and operating practices of a complex, multifaceted  organization, and that many of these practices were developed piecemeal  and evolved to accommodate different organizations, each with its own  policies and procedures.
For example, as discussed in our July 2000 report, the department  encountered resistance to developing departmentwide solutions under the  then Secretary’s broad-based DRI. In 1997, the department established a  Defense Management Council—including high-level representatives from  each of the military services and other senior executives in the Office of the  Secretary of Defense—which was intended to serve as the “board of  directors” to help break down organizational stovepipes and overcome  cultural resistance to changes called for under DRI.  However, we found  that the council’s effectiveness was impaired because members were not  able to put their individual military services’ or DOD agencies’ interests  aside to focus on department-wide approaches to long-standing problems.
We have also seen an inability to put aside parochial views.  Cultural  resistance to change has impeded reforms not only in financial  management, but also in other business areas, such as weapon system  acquisition and inventory management.  For example, as we reported last  year, while the individual military services conduct considerable analyses  justifying major acquisitions, these analyses can be narrowly focused and  do not consider joint acquisitions with the other services.  In the inventory  management area, DOD’s culture has supported buying and storing  multiple layers of inventory rather than managing with just the amount of  stock needed.
section_title: Unclear Goals and Performance Measures
paragraphs: Further, DOD’s past reform efforts have been handicapped by the lack of  clear, linked goals and performance measures.  As a result, DOD managers  lack straightforward road maps showing how their work contributes to  attaining the department’s strategic goals, and they risk operating  autonomously rather than collectively.  In some cases, DOD had not yet  developed appropriate strategic goals, and in other cases, its strategic goals  and objectives were not linked to those of the military services and defense  agencies.
As part of our assessment of DOD’s Fiscal Year 2000 Financial  Management Improvement Plan, we reported that, for the most part, the  plan represented the military services’ and Defense components’  stovepiped approaches to reforming financial management and did not  clearly articulate how these various efforts would collectively result in an  integrated DOD-wide approach to financial management improvement.  In  addition, we reported that the department’s plan did not include  performance measures that could be used to assess DOD’s progress in  resolving its financial management problems.  DOD officials have informed  us that they are now working to revise the department’s approach to this  plan so that future years’ updates will reflect a more strategic,  departmentwide vision and provide a more effective tool for financial  management reform.
As it moves to modernize its systems, the department faces a formidable  challenge in responding to technological advances that are changing  traditional approaches to business management. For fiscal year 2001,  DOD’s reported total information technology investments of almost  $23 billion supporting a wide range of military operations as well as DOD  business functions.  As we have reported, while DOD plans to invest  billions of dollars in modernizing its financial management and other  business support systems, it does not yet have an overall blueprint—or  enterprise architecture—in place to guide and direct these investments.  As  we recently testified, our review of practices at leading organizations  showed they were able to make sure their business systems addressed  corporate—rather than individual business unit—objectives by using  enterprise architectures to guide and constrain investments.  Consistent  with our recommendation, DOD is now working to develop a financial  management enterprise architecture, which is a very positive development.
section_title: Lack of Incentives for Change
paragraphs: The final underlying cause of the department’s long-standing inability to  carry out needed fundamental reform has been the lack of incentives for  making more than incremental change to existing “business-as-usual”  processes, systems, and structures.  Traditionally, DOD has focused on  justifying its need for more funding rather than on the outcomes its  programs have produced.  DOD generally measures its performance by the  amount of money spent, people employed, or number of tasks completed.  Incentives for its decision makers to implement changed behavior have  been minimal or nonexistent.  Secretary Rumsfeld perhaps said it best in  announcing his planned transformation at DOD: “There will be real  consequences from, and real resistance to, fundamental change.”
This lack of incentive has perhaps been most evident in the department’s  acquisition area.  In DOD’s culture, the success of a manager’s career has  depended more on moving programs and operations through the DOD  process rather than on achieving better program outcomes.  The fact that a  given program may have cost more than estimated, taken longer to  complete, and not generated results or performed as promised was  secondary to fielding a new program.  To effect real change, actions are  needed to (1) break down parochialism and reward behaviors that meet  DOD-wide and congressional goals; (2) develop incentives that motivate  decisionmakers to initiate and implement efforts that are consistent with  better program outcomes, including saying “no” or pulling the plug on a  system or program that is failing; and (3) facilitate a congressional focus on  results-oriented management, particularly with respect to resource  allocation decisions.
section_title: Keys To Fundamental DOD Financial Management Reform
paragraphs: As we testified before your Subcommittee last May, our experience has  shown there are several key elements that, collectively would enable the department to effectively address the underlying causes of its inability to  resolve its long-standing financial management problems.  These elements,  which are key to any successful approach to financial management reform,  include addressing the department’s financial management challenges as part of  a comprehensive, integrated, DOD-wide business process reform; providing for sustained leadership by the Secretary of Defense and  resource control to implement needed financial management reforms; establishing clear lines of responsibility, authority, and accountability  for such reform tied to the Secretary;  incorporating results-oriented performance measures and monitoring  tied to financial management reforms; providing appropriate incentives or consequences for action or inaction; establishing an enterprisewide system architecture to guide and direct  financial management modernization investments; and ensuring effective oversight and monitoring.
Actions on many of the key areas central to successfully achieving desired  financial management and related business process transformation goals  —particularly those that rely on longer term systems improvements—will  take a number of years to fully implement.  Secretary Rumsfeld has  estimated that his envisioned transformation may take 8 or more years to  complete.  Consequently, both long-term actions focused on the Secretary’s  envisioned business transformation and short-term actions focused on  improvements within existing systems and processes will be critical going  forward.  Short-term actions in particular will be critical if the department  is to achieve the greatest possible accountability over existing resources  and more reliable data for day-to-day decisionmaking while longer-term  systems and business process reengineering efforts are under way.
Beginning with the Secretary’s recognition of a need for a fundamental  transformation of the department’s business processes, and building on  some of the work begun under past administrations, DOD has taken a  number of positive steps in many of these key areas.  At the same time, the  challenges remaining in each of these key areas are daunting.
subsections: section_title: Integrated Business Process Reform Strategy
paragraphs: As we have reported in the past,establishing the right goal is essential for  success.  Central to effectively addressing DOD’s financial management  problems will be the recognition that they cannot be addressed in an  isolated, stovepiped, or piecemeal fashion separate from the other high-risk  areas facing the department. Successfully reengineering the department’s  processes supporting its financial management and other business support  operations will be critical if DOD is to effectively address the deep-rooted  organizational emphasis on maintaining business-as-usual across the  department.
Financial management is a crosscutting issue that affects virtually all of  DOD’s business areas.  For example, improving its financial management  operations so that they can produce timely, reliable, and useful cost  information will be essential if the department is to effectively measure its  progress toward achieving many key outcomes and goals across virtually  the entire spectrum of DOD’s business operations.  At the same time, the  department’s financial management problems—and, most importantly, the  keys to their resolution---are deeply rooted in and dependent upon  developing solutions to a wide variety of management problems across  DOD’s various organizations and business areas.  For example, we have  reported that many of DOD’s financial management shortcomings were  attributable in part to human capital issues.  The department does not yet  have a strategy in place for improving its financial management human  capital.  This is especially critical in connection with DOD’s civilian  workforce, since DOD has generally done a much better job in conjunction  with human capital planning for its military personnel.  In addition, DOD’s  civilian personnel face a variety of size, shape, skills, and succession- planning challenges that need to be addressed.
As I mentioned earlier, and it bears repetition, the department has reported  that an estimated 80 percent of the data needed for sound financial  management comes from its other business operations, such as its  acquisition and logistics communities.  DOD’s vast array of costly,  nonintegrated, duplicative, and inefficient financial management systems is  reflective of its lack of an enterprisewide, integrated approach to  addressing management challenges.  DOD has acknowledged that one of  the reasons for the lack of clarity in its reporting under the Government  Performance and Results Act has been that most of the program outcomes  the department is striving to achieve are interrelated, while its management  systems are not integrated.
As I discussed previously, the Secretary of Defense has made the  fundamental transformation of business practices throughout the  department a top priority.  In this context, the Secretary established a  number of top-level committees, councils, and boards, including the Senior  Executive Committee, Business Initiative Council, and Defense Business  Practices Implementation Board.  The Senior Executive Committee was  established to help guide efforts across the department to improve its  business practices.  This committee--chaired by the Secretary of Defense,  and with membership to include the Deputy Secretary, the military service  secretaries, and the Under Secretary of Defense for Acquisition, Logistics  and Technology—was established to function as the board of directors for  the department.  The Business Initiative Council--comprising the military  service secretaries and headed by the Under Secretary of Defense for  Acquisition, Technology and Logistics--was established to encourage the  military services to explore new money saving business practices to help  offset funding requirements for transformation and other initiatives.  The  Secretary also established the Defense Business Practices Implementation  Board, composed of business leaders from the private sector.  The board is  intended to tap outside expertise to advise the department on its efforts to  improve business practices.
section_title: Active Leadership and Resource Control
paragraphs: The department’s successful Year 2000 effort illustrated, and our survey of  leading financial management organizations captured, the importance of  strong leadership from top management.  As we have stated many times  before, strong, sustained executive leadership is critical to changing a  deeply rooted corporate culture—such as the existing “business as usual”  culture at DOD—and to successfully implementing financial management  reform.  As I mentioned earlier, the personal, active involvement of the  Deputy Secretary of Defense played a key role in building entitywide  support and focus for the department’s Year 2000 initiatives.  Given the  long-standing and deeply entrenched nature of the department’s financial  management problems--combined with the numerous competing DOD  organizations, each operating with varying, often parochial views and  incentives--such visible, sustained top-level leadership will be critical.
In discussing their April 2001 report to the Secretary of Defense on  transforming financial management, the authors stated that, “unlike  previous failed attempts to improve DOD’s financial practices, there is a  new push by DOD leadership to make this issue a priority.”  With respect to  the key area of investment control, the Secretary took action to set aside  $100 million for financial modernization.  Strong, sustained executive  leadership—over a number of years and administrations—will be key to  changing a deeply rooted culture.  In addition, given that significant  investments in information systems and related processes have historically  occurred in a largely decentralized manner throughout the department,  additional actions will likely be required to implement a centralized IT  investment control strategy.  For example, in our May 2001 report, we  recommended that DOD take action to establish centralized control over  transformation investments to ensure that funding is provided for only  those proposed investments in systems and business processes that are  consistent with the department’s overall business process transformation  strategy.
section_title: Clear Lines of Responsibility and Accountability
paragraphs: Last summer, when the Comptroller General met with Secretary Rumsfeld,  he stressed the importance of establishing clear lines of responsibility,  decision-making authority, and resource control for actions across the  department tied to the Secretary as a key to reform.  As we previously  reported, such an accountability structure should emanate from the  highest levels and include the secretary of each of the military services as  well as heads of the department’s various major business areas.
The Secretary of Defense has taken action to vest responsibility and  accountability for financial management modernization with the DOD  Comptroller. In October 2001, the DOD Comptroller established the  Financial Management Modernization Executive and Steering Committees  as the governing bodies that oversee the activities related to this  modernization effort and also established a supporting working group to  provide day-to-day guidance and direction in these efforts.  DOD reports  that the executive and steering committees met for the first time in January  2002.
It is clear to us that the Comptroller has the full support of the Secretary  and that the Secretary is committed to making meaningful change.  To  make this work, it is important that the Comptroller have sufficient  authority to bring about the full, effective participation of the military  services and business process owners across the department.  The  Comptroller has direct control of 20 percent of the data needed for sound  financial management and has historically had limited ability to control  information technology investments across the department.  Addressing  issues such as centralization of authority for information systems  investments and continuity of leadership are critical to successful business  process transformation.
In addition to DOD, a number of other federal departments and agencies  are facing an array of interrelated business system management challenges  for which resolution is likely to require a number of years, challenges that  could span administrations.  One option that may have merit would be the  establishment of chief operating officers, who could be appointed for a set  term of 5 to 7 years with the potential for reappointment.  These individuals  should have a proven track record as a business process change agents for  large, diverse organizations and would spearhead business process  transformation across the department or agency.
section_title: Results-Oriented Performance
paragraphs: As discussed in our January 2001 report on DOD’s major performance and  accountability challenges, establishing a results orientation is another  key element of any approach to reform.  Such an orientation should draw  upon results that could be achieved through commercial best practices,  including outsourcing and shared servicing concepts.  Personnel  throughout the department must share the common goal of establishing  financial management operations that not only produce financial  statements that can withstand the test of an audit but, more importantly,  routinely generate useful, reliable, and timely financial information for day- to-day management purposes.
In addition, we have previously testified that DOD’s financial management  improvement efforts should be measured against an overall goal of  effectively supporting DOD’s basic business processes, including  appropriately considering related business process system  interrelationships, rather than determining system-by-system compliance.  Such a results-oriented focus is also consistent with an important lesson  learned from the department’s Year 2000 experience.  DOD’s initial Year  2000 focus was geared toward ensuring compliance on a system-by-system  basis and did not appropriately consider the interrelationships of systems  and business areas across the department.  It was not until the department,  under the direction of the then Deputy Secretary, shifted to a core mission  and function review approach that it was able to achieve the desired result  of greatly reducing its Year 2000 risk.
Since the Secretary has established an overall business process  transformation goal that will require a number of years to achieve, going  forward, it is especially critical for managers throughout the department to  focus on specific measurable metrics that, over time, collectively will  translate to achieving this overall goal.  It is important for the department  to refocus its annual accountability reporting on this overall goal of  fundamentally transforming the department’s financial management  systems and related business processes to include appropriate interim  annual measures for tracking progress toward this goal.
In the short term, it is important to focus on actions that can be taken using  existing systems and processes.  It is critical to establish interim measures  to both track performance against the department’s overall transformation  goals and facilitate near- term successes using existing systems and  processes.  The department has established an initial set of metrics  intended to evaluate financial performance, and it reports that it has seen  improvements.  For example, with respect to closed appropriation  accounts, DOD reported during the first 4 months of fiscal year 2002 a  reduction in the dollar value of adjustments to closed appropriation  accounts of about 51 percent from the same 4-month period in fiscal year  2001.  Other existing metrics concern cash and funds management,  contract and vendor payments, and disbursement accounting.  DOD also  reported that it is working to develop these metrics into higher-level  measures more appropriate for senior management. We agree with the  department’s efforts to expand the use of appropriate metrics to guide its  financial management reform efforts.
section_title: Incentives and Consequences
paragraphs: Another key to breaking down the parochial interests and stovepiped  approaches that have plagued previous reform efforts is establishing  mechanisms to reward organizations and individuals for behaviors that  comply with DOD-wide and congressional goals.  Such mechanisms should  be geared to providing appropriate incentives and penalties to motivate  decision makers to initiate and implement efforts that result in  fundamentally reformed financial management and other business support  operations.
In addition, such incentives and consequences are essential if DOD is to  break down the parochial interests that have plagued previous reform  efforts.  Incentives driving traditional ways of doing business, for example,  must be changed, and cultural resistance to new approaches must be  overcome.  Simply put, DOD must convince people throughout the  department that they must change from business-as-usual systems and  practices or they are likely to face serious consequences, organizationally  and personally.
section_title: Enterprise Architecture
paragraphs: Establishing and implementing an enterprisewide financial management  architecture is essential for the department to effectively manage its large,  complex system modernization effort now under way.  The Clinger-Cohen  Act requires agencies to develop, implement, and maintain an integrated  system architecture.  As we previously reported,such an architecture can  help ensure that the department invests only in integrated, enterprisewide  business system solutions and, conversely, will help move resources away  from non-value-added legacy business systems and nonintegrated business  system development efforts.  In addition, without an architecture, DOD  runs the serious risk that its system efforts will perpetuate the existing  system environment that suffers from systems duplication, limited  interoperability, and unnecessarily costly operations and maintenance.  In  our May 2001 report, we pointed out that DOD lacks a financial  management enterprise architecture to guide and constrain the billions of  dollars it plans to spend to modernize its financial management operations  and systems.
DOD has reported that it is in the process of contracting for the  development of a DOD-wide financial management enterprise architecture  to “achieve the Secretary’s vision of relevant, reliable and timely financial  information needed to support informed decision-making.”  Consistent  with our previous recommendations in this area, DOD has begun an  extensive effort to document the department’s current as-is financial  management architecture by inventorying systems now relied on to carry  out financial management operations throughout the department.  DOD  has identified 674 top-level systems and at least 997 associated interfaces  thus far and estimates that this inventory could include up to 1,000 systems  when completed.
While DOD’s beginning efforts at developing a financial management  enterprise architecture are off to a good start, the challenges yet  confronting the department in its efforts to fully develop, implement, and  maintain a DOD-wide financial management enterprise architecture are  unprecedented.  Our May 2001 report details a series of recommended  actions directed at ensuring DOD employs recognized best practices for  enterprise architecture management.  This effort will be further  complicated as the department strives to develop multiple enterprise  architectures across its various business areas.  For example, in June 2001,  we recommendedthat DOD develop an enterprise architecture for its  logistics operations.  As I discussed previously, an integrated reform  strategy is critical.  In this context, it is essential that DOD closely  coordinate and integrate the development and implementation of these, as  well as other, architectures. By following this integrated approach and our  previous recommendations, DOD will be in the best position to avoid the  serious risk that, after spending billions of dollars on systems  modernization, it will perpetuate the existing systems environment that  suffers from duplication of systems, limited interoperability, and  unnecessarily costly operations and maintenance.
section_title: Monitoring and Oversight
paragraphs: Ensuring effective monitoring and oversight of progress will also be a key  to bringing about effective implementation of the department’s financial  management and related business process reform.  We have previously  testified that periodic reporting of status information to department top  management, the Office of Management and Budget (OMB), the Congress,  and the audit community is another key lesson learned from the  department’s successful effort to address its Year 2000 challenge.
Previous submissions of its Financial Management Improvement Plan  have simply been compilations of data call information on the stovepiped  approaches to financial management improvements received from the  various DOD components.  It is our understanding that DOD plans to  change its approach and anchor its plans in an enterprise architecture.  If  the department’s future plans are upgraded to provide a departmentwide  strategic view of the financial management challenges facing the  department, along with planned corrective actions, these plans can serve as  an effective tool not only to help guide and direct the department’s financial  management reform efforts, but also to help maintain oversight of the  department’s financial management operations.  Going forward, this  Subcommittee’s annual oversight hearings, as well the active interest and  involvement of other cognizant defense and oversight committees in the  Congress, will continue to be key to effectively achieving and sustaining  DOD’s financial management and related business process reform  milestones and goals.
Given the size, complexity, and deeply engrained nature of the financial  management problems facing DOD, heroic end-of-the year efforts relied on  by some agencies to develop auditable financial statement balances are not  feasible at DOD.  Instead, a sustained focus on the underlying problems  impeding the development of reliable financial data throughout the  department will be necessary and is the best course of action.  In this  context, the Congress recently enacted the fiscal year 2002 National  Defense Authorization Act, which contains provisions that will provide a  framework for redirecting the department’s resources from the preparation  and audit of financial statements, which are acknowledged by DOD  leadership to be unauditable, to the improvement of DOD’s financial  management systems and financial management policies, procedures, and  internal controls.  Under this new legislation, the department will also be  required to report to the Congress on how resources have been redirected  and the progress that has been achieved.  This reporting will provide an  important vehicle for the Congress to use in assessing whether DOD is  using its available resources to best bring about the development of timely  and reliable financial information for daily decision making and transform  its financial management as envisioned by the Secretary of Defense.
In conclusion, we support Secretary Rumsfeld’s vision for transforming the  department’s full range of business processes.  Substantial personal  involvement by the Secretary and other DOD top executives will be  essential to change the DOD culture that has over time perpetuated the  status quo and been resistant to a transformation of the magnitude  envisioned by the Secretary.  Comptroller Zakheim, as the Secretary’s  leader for financial management modernization, will need to have the  ability to make the tough choices on systems, processes, and personnel,  and to control spending for new systems across the department, especially  where new systems development is involved.  Processes will have to be  reengineered, and hierarchical, process-oriented, stovepiped, and  internally focused approaches will have to be put aside.  The past has  taught us that well-intentioned initiatives will only succeed if there are the  right incentives, transparency, and accountability mechanisms in place.
The events of September 11 and other funding and asset accountability  issues associated with the war on terrorism, at least in the short term, may  dilute the focused attention and sustained action that are necessary to fully  realize the Secretary’s transformation goal, which is understandable given  the circumstances.  At the same time, the demand for increased Defense  spending, when combined with the government’s long-range fiscal  challenges, means that solutions to DOD’s business systems problems are  even more important.  As the Secretary has noted, billions of dollars of  resources could be freed up for national defense priorities by eliminating  waste and inefficiencies in DOD’s existing business processes.  Only time  will tell if the Secretary’s current transformation efforts will come to  fruition.  Others have attempted well-intentioned reform efforts in the past.  Today, the momentum exists for reform.  But, the real question remains,  will this momentum continue to exist tomorrow, next year, and throughout  the years to make the necessary cultural, systems, human capital, and other  key changes a reality?  For our part, we will continue to work  constructively with the department and the Congress in this important  area.