DOD Financial Management: Challenges in the Implementation of Business Systems Could Impact Audit Readiness Efforts
Published: 2011-10-27T00:00:00

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 long-standing financial and related business operations and system problems. DOD is in the process of implementing modern multifunction enterprise resource planning (ERP) systems to replace many of its outdated legacy systems. The ERPs are intended to perform business-related tasks such as general ledger accounting and supply chain management. Modernizing DOD's business systems is a critical part of transforming the department's business operations, addressing high-risk areas, and providing more-accurate and reliable financial information to Congress on DOD's operations. The Panel requested that GAO provide its perspective on DOD's ERP implementation efforts and the impact implementation problems could have on DOD's efforts to improve financial management and be audit ready by fiscal year 2017. This statement is based on GAO's prior work, reports issued by the Department of Defense Inspector General (DOD IG), and GAO's ongoing oversight of selected DOD ERP efforts. Over the years, GAO has made numerous recommendations to improve the department's financial management operations.
section_title: What GAO Found
paragraphs: DOD has invested billions of dollars and will invest billions more to develop and implement 10 ERPs that it has estimated will replace over 500 legacy systems that reportedly cost hundreds of millions of dollars to operate annually. DOD considers implementation of the ERPs as critical not only for addressing weaknesses in financial management, but also for resolving weaknesses in other high-risk areas such as business systems modernization and supply chain management. The ERPs are also important for DOD's goal of departmentwide audit readiness by fiscal year 2017. Furthermore, in light of the Secretary of Defense's recent decision that the Statement of Budgetary Resources is to be audit ready by fiscal year 2014, it is critical that the department have such systems in place to support its auditability goals. To date, however, DOD's ERP implementation has been impaired by delays, cost increases, failures in delivering the necessary functionality, and a lack of compliance with required standards. Delays in implementation have extended the use of existing duplicative, stovepiped systems, and the need to fund them. More specifically, (1) GAO has reported that, based upon the data provided by DOD, 6 of the 10 ERPs DOD had identified as critical to transforming its business operations experienced schedule delays ranging from 2 to 12 years, and five had incurred cost increases totaling an estimated $6.9 billion. (2) GAO's review of 6 ERPs found that none of the programs had developed a fully integrated master schedule, a best practice and tool in the management of business-system development that is crucial to estimating the overall schedule and cost of a program. (3) DOD IG has reported that the Army's Logistics Modernization Program, which is intended to provide financial management capabilities for the Army Working Capital Fund, was not compliant with the U.S. Government Standard General Ledger, which supports the consistent recording of financial information and the preparation of standard reports required by the Office of Management and Budget and the Department of the Treasury. Further, GAO's preliminary results from an ongoing audit of two ERPs--the Army's General Fund Enterprise Business System and the Air Force's Defense Enterprise Accounting and Management System--found that the systems did not provide Defense Finance and Accounting Service users with the expected capabilities in accounting, management information, and decision support. System problems identified include interface issues between legacy systems and the new ERPs, lack of ad hoc query reporting capabilities, and reduced visibility for tracing transactions to resolve accounting differences. To compensate for these operational deficiencies, users were relying on manual workarounds to perform day-to-day operations. Such performance deficiencies, delays, and other problems in ERP implementation can negatively impact DOD's auditability goals.

section_title: Letter
paragraphs: It is a pleasure to be here today to discuss the Department of Defense’s  (DOD) efforts to improve the efficiency and effectiveness of its business  systems, in particular its enterprise resource planning (ERP) systems.  The modernization of the department’s business systems is an essential  part of the DOD’s efforts to transform its business operations and achieve  audit readiness by fiscal year 2017 as directed by the National Defense  Authorization Act for Fiscal Year 2010. In the light of the Secretary of  Defense’s recent decision that the Statement of Budgetary Resources is  to be audit ready by fiscal year 2014, it is critical that the department has  in place the systems to support its auditability goals. To support its  business functions, DOD has reported that it relies on over 2,200  business systems, including financial management, acquisition, logistics,  and personnel systems. For fiscal year 2012, the department requested  about $17.3 billion to operate, maintain, and modernize its business  systems.
The implementation of an integrated, audit-ready systems environment  through the deployment of ERP systems underlies all of DOD’s financial  improvement efforts and is crucial to achieving departmentwide audit  readiness as well as addressing long-standing weaknesses in financial  management and weaknesses in other high-risk areas such as business  systems modernization and supply chain management. In October 2010,  we reported on the status of DOD’s ERP implementation efforts. DOD  identified 10 ERPs—2 of which it reported as having been fully  deployed—as essential to its efforts to transform its business operations.  According to DOD, it has invested billions of dollars to develop and  implement these ERPs and will invest additional billions before the  remaining ERPs are fully implemented. DOD has stated that the ERPs  will replace over 500 legacy systems that reportedly cost hundreds of  millions of dollars to operate annually.
My statement today is based primarily on our prior and ongoing work and  includes information from reports issued by DOD, its components, and  the DOD Inspector General (DOD IG) related to the department’s  business transformation and financial management improvement  activities. We discussed with DOD officials the preliminary findings from  the ongoing ERP audit that are included in this testimony and considered  their comments in this statement. Our work on which this statement is  based was conducted in accordance with generally accepted auditing  standards. 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 and most complex organizations in the world.  For fiscal year 2012, the budget requested for the department was  approximately $671 billion—$553 billion in discretionary budget authority  and $118 billion to support overseas contingency operations. The  department is currently facing near- and long-term internal fiscal  pressures as it attempts to balance competing demands to support  ongoing operations, rebuild readiness following extended military  operations, and manage increasing personnel and health care costs 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 fraud, waste, abuse, and mismanagement. In  fact, all of the DOD programs on GAO’s High-Risk List relate to business  operations, including systems and processes related to management of  contracts, finances, 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 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  weapon systems acquisition and support and logistics, and (3) left the  department vulnerable to fraud, waste, and abuse. In support of its  military operations, DOD performs an assortment of interrelated and  interdependent business functions, such as logistics management,  procurement, health care management, and financial management. The  DOD systems environment that supports these business functions has  been overly complex and error prone, characterized by (1) little  standardization across the department, (2) multiple systems performing  the same tasks, (3) the same data stored in multiple systems, and (4) the  need for data to be entered manually into multiple systems.
subsections: section_title: Ten Critical DOD ERP Systems
paragraphs: The department has stated that the following ERPs are critical to  transforming the department’s business operations and addressing some  of its long-standing weaknesses. A brief description of each of the ERPs  is presented below.    The General Fund Enterprise Business System (GFEBS) was  initiated in October 2004 and 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 is intended to 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 annual spending.    The Global Combat Support System-Army (GCSS-Army) was  initiated in December 2003 and is expected to integrate multiple  logistics functions by replacing numerous legacy systems and  interfaces. The system is intended to provide tactical units with a  common authoritative source for financial and related nonfinancial  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 Army Reserve.    The Logistics Modernization Program (LMP) was initiated in  December 1999 and is intended to provide order fulfillment, demand  and supply planning, procurement, asset management, material  maintenance, and financial management capabilities for Army’s  working capital fund. The third and final deployment of LMP occurred  in October 2010.    The Navy Enterprise Resource Planning System (Navy ERP) was  initiated in July 2003 and is intended to standardize the acquisition,  financial, program management, maintenance, plant and wholesale  supply, and workforce management capabilities at Navy commands.    The Global Combat Support System–Marine Corps (GCSS-MC)  was initiated in September 2003 and is intended to provide the  deployed warfighter with enhanced capabilities in the areas of  warehousing, distribution, logistical planning, depot maintenance, and  improved asset visibility.    The Defense Enterprise Accounting and Management System  (DEAMS) was initiated in August 2003 and 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 in spending.    The Expeditionary Combat Support System (ECSS) was initiated  in January 2004 and 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.    Each of the military departments is in the process of developing its  own Service Specific Integrated Personnel and Pay System. The  military departments’ integrated personnel and pay systems replace  the Defense Integrated Military Human Resources System that was  initiated in February 1998 and intended to provide a joint, integrated,  standardized personnel and pay system for all military personnel.    The Defense Agencies Initiative (DAI) was initiated in January 2007  and 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.    The Enterprise Business System (EBS) is the second phase of the  Defense Logistics Agency’s (DLA) Business System Modernization  (BSM) effort, which was initiated in November 1999 and implemented  in July 2007. BSM focused on DLA’s operations in five core business  processes: order fulfillment, demand and supply planning,  procurement, technical/quality assurance, and financial management.  In September 2007, the name of the program was changed to  Enterprise Business System as it entered the second phase, and  according to the agency, EBS will further enhance DLA’s supply chain  management of nearly 6 million hardware and troop support items.
section_title: Schedule Slippages, Cost Increases, and Gaps in Functionality Impair the Usefulness of DOD’s ERPs and Hinder Progress toward Accountability and Auditability
paragraphs: Implementation of the ERPs is intended to standardize and streamline  DOD’s financial management and accounting systems, integrate multiple  logistics systems and finance processes, and provide asset visibility for  accountable items. Effective implementation of the ERPs is also critical to  DOD’s auditability efforts and goals. However, to date, DOD’s ERP  implementations have been negatively impacted by schedule delays, cost  increases, failures in delivering the necessary functionality, and a lack of  compliance with required standards. Delays in the implementation of  ERPs increase costs with the additional time and rework needed on the  new system. The cost of additional time and rework needed have  continued the funding of these legacy systems longer than anticipated  and further eroded the estimated savings that were to accrue to DOD as  a result of modernization. If the ERPs do not provide the intended  capabilities, DOD’s goal of modernizing and streamlining its business  processes and strengthening its financial management capabilities  leading to auditable financial statements could be jeopardized. The  following are examples of weaknesses in DOD’s implementation efforts.
subsections: section_title: Schedule Slippages and Cost Increases
paragraphs: Accurate and reliable schedule and cost estimates are essential for DOD  management to make good decisions regarding ERP implementation and  for overseeing progress of the project. The success of any program  depends on having a reliable schedule of the program’s work activities  that will occur, how long they will take, and how the activities are related  to one another. As such, the schedule not only provides a road map for  systematic execution of a program, but also provides the means by which  to gauge progress, identify and address potential problems, and promote  accountability. As highlighted below, we and the DOD IG have questioned  the accuracy and reliability of the ERPs’ schedule and cost estimates.
In October 2010, we reported that based upon the data provided by  DOD, 6 of the 10 ERPs DOD had identified as critical to transforming  its business operations had experienced schedule delays ranging  from 2 to 12 years, and five had incurred cost increases totaling an  estimated $6.9 billion. DOD told us that the ERPs will replace  hundreds of legacy systems that cost hundreds of millions of dollars to  operate annually. According to the program management officers,  while there had been schedule slippages and cost increases for  several of the ERP efforts, the functionality that was envisioned and  planned when each program was initiated remained the same. While  the original intent of each program remained the same, the anticipated  savings that were to accrue to the department may not be fully  realized.
Our October 2010 report also noted that our analysis of the schedule  and cost estimates for four ERP programs—DEAMS, ECSS, GFEBS,  and GCSS-Army—found that none of the programs were fully  following best practices for developing reliable schedule and cost  estimates. More specifically, none of the programs had developed a  fully integrated master schedule that reflected all activities, including  both government and contractor activities. In addition, none of the  programs established a valid critical path or conducted a schedule risk  analysis. The report also noted that in July and September 2008, we  reported that the schedules for the GCSS-MC and the Navy ERP  were developed using some of these best practices, but several key  practices were not fully employed that are fundamental to having a  schedule that provides a sufficiently reliable basis for estimating costs,  measuring progress, and forecasting slippages.
Furthermore, our analysis of the four ERP programs’ cost estimates  found that ECSS, GFEBS, and GCSS-Army did not include a  sensitivity analysis, while cost estimates for GFEBS did not include a  risk and uncertainty analysis. GAO, Office of Management and  Budget (OMB), and DOD guidance stipulate that risk and  uncertainty analysis should be performed to determine the level of risk  associated with the dollar estimate. A sensitivity analysis would assis decision makers in determining how changes to assumptions or k ey  cost drivers (such as labor or equipment) could affect the cost  estimate. We also previously reported similar concerns regarding  the GCSS-MC and the Navy ERP. A reliable cost estimate tha includes sensitivity analysis and information about the degree of  d  uncertainty provides the basis for realistic budget formulation an program resourcing, meaningful progress measurement, proactive  course correction, and accountability for results.
In a June 2011 report, the DOD IG reported that the Army estimated  it will spend $2.4 billion on the implementation of GFEBS. However,  the report noted that the Army had not identified all of the  requirements and costs associated with the project. In addition, the  Army used unsupported and incomplete life-cycle cost estimates to  determine $1.4 billion in cost savings and used an inappropriate  methodology to determine the estimated $3.9 billion in benefits for  implementing GFEBS.
section_title: Intended Functionality Not Always Provided
paragraphs: To support its business functions, DOD has reported that it relies on  about 2,200 business systems, including accounting, acquisition,  logistics, and personnel systems. DOD has stated that its ERPs will  replace over 500 legacy systems that cost hundreds of millions of dollars  to operate annually. However, some ERPs we reviewed did not deliver  the functionality they were intended to provide, and thereby requiring  continued operation of the existing systems.
In November 2010, we reported that after two deployments of its  LMP system, the Army had improved its implementation strategy, but  continued to face problems that might prevent the system from fully  providing its intended functionality at sites planned for the third and  final deployment. While the Army improved its data-testing strategy for  the third deployment, data quality problems continued at previous  deployment sites and prevented staff at the sites from using LMP as  intended. Also, new testing activities to support the third deployment  were designed to assess how well the software functions but did not  evaluate whether the data loaded into LMP were of sufficient quality to  support the system’s processes.
We found that the Army had yet to fully develop the software  capabilities that LMP needed to achieve its intended functionality for  some third-deployment sites. Without this functionality, LMP might  limit the ability of staff at these sites to perform certain tasks, such as  maintaining accountability of ammunition. For example, the Joint  Munitions and Lethality Life Cycle Management Command conducts  operations related to the production, management, and maintenance  of ammunition. Officials at the command’s sites told us that LMP— unlike the systems that will be replaced once LMP is deployed—did  not enable them to ship, receive, inventory, or perform stock  movements for ammunition. LMP program management officials told  us that the omission of an ammunition-specific functionality was  identified in 2009, and that its development began in January 2010.  The Army planned to deliver the functionality and interfaces in phases  through March 2011. The Army has mitigation plans to address this  functionality gap. For example, the command planned to hire 172  additional personnel to perform manual data entry until the software  can perform the required functions.
We recommended that Army report to Congress on the extent to  which the third deployment sites were able to use LMP as intended,  the benefits that LMP was providing, an assessment of the Army’s  progress in ensuring that data used in LMP can support the LMP  processes, timelines for the delivery of software and additional  capabilities necessary to achieve the full benefits of LMP, and the  costs and time frames of the mitigation strategies.
Our preliminary results from an ongoing ERP review identified problems  related to GFEBS and DEAMS providing Defense Finance and  Accounting Service (DFAS) users with the expected capabilities in  accounting, management information, and decision support. To  compensate for the deficiencies, DFAS users have devised manual  workarounds and applications to obtain the information they need to  perform their day-to-day tasks. GFEBS is expected to be fully deployed  during fiscal year 2012, is currently operational at 154 locations, including  DFAS, and is being used by approximately 35,000 users. DEAMS is  expected to be fully deployed during fiscal year 2016, is currently  operational at Scott Air Force Base and DFAS, and is being used by  about 1,100 individuals.
Examples of the problems in these systems that DFAS users have  identified include the following:    The backlog of unresolved GFEBS trouble tickets has increased  from about 250 in September 2010 to approximately 400 in May 2011.  According to Army officials, this increase in tickets was not  unexpected because the number of users and the number of  transactions being processed by the system have increased, and the  Army and DFAS are taking steps to address problems raised by  DFAS.    Approximately two-thirds of invoice and receipt data must be manually  entered into GFEBS from the invoicing and receiving system (i.e.,  Wide Area Work Flow) due to interface problems. DFAS personnel  told us that manual data entry will eventually become infeasible due to  increased quantities of data that will have to be manually entered as  GFEBS is deployed to additional locations. Army officials  acknowledged that there is a problem with the interface between Wide  Area Work Flow and GFEBS and that this problem had reduced the  effectiveness of GFEBS, and that they are working with DOD to  resolve the problem.    GFEBS lacks the ability to run ad hoc queries or to research data to  resolve problems or answer questions. The Army has recognized  this limitation and is currently developing a system enhancement that  Army officials expect will better support the users’ needs.    Manual workarounds are needed to process certain accounts  receivable transactions such as travel debts. DFAS personnel told us  that this problem is the result of the improper conversion of data  transferred from the legacy systems to DEAMS.    DFAS officials indicated that they were experiencing difficulty with  some DEAMS system interfaces. For example, the interface  problem with the Standard Procurement System has become so  severe that the interface has been turned off, and the data must be  manually entered into DEAMS.    DFAS officials told us that DEAMS does not provide the capability— which existed in the legacy systems—to produce ad hoc query reports  that can be used to perform the data analysis needed for daily  operations. They also noted that when some reports are produced,  the accuracy of those reports is questionable.    Army and Air Force officials told us that they have plans to address  these issues, and the Army has plans to validate the audit readiness  of GFEBS in a series of independent auditor examinations over the  next several fiscal years. For DEAMS, the DOD Milestone Decision  Authority has directed that the system not be deployed beyond Scott  Air Force Base until the known system weaknesses have been  corrected and the system has been independently tested to ensure  that it is operating as intended.
section_title: Financial Management Compliance
paragraphs: To be efficient and effective as accounting and financial and business  information tools, DOD’s ERPs must be able to process information  according to accounting and financial reporting standards. However, this  has not always been the case.
In a November 2010 report, the DOD IG stated that after more than 10  years in development and a cost of $1.1 billion, the Army’s LMP system  was not compliant with the U.S. Government Standard General Ledger,  which supports the consistent recording of financial information and the  preparation of standard reports required by the OMB and the Department  of the Treasury. Agencies are required by law to maintain financial  management systems that “comply substantially” with the Standard  General Ledger, which contains two series of accounts—budgetary  accounts used to recognize and track budget approval and execution and  proprietary accounts used to recognize and track assets, liabilities,  revenues, and expenses. Specifically, the DOD IG found that LMP did not  contain 42 general ledger account codes necessary to record the Army  working capital fund financial transactions. As a result, LMP cannot  record all working capital fund transactions correctly and will therefore  continue to inaccurately report financial data for the Army’s working  capital fund operations.
The DOD IG report further noted that the Army and DOD financial  communities had not established the appropriate senior-level governance  needed to develop, test, and implement the financial management  requirements and processes needed in LMP to record Army Working  Capital Fund financial data at the transaction level. As a result, LMP was  not substantially compliant with the Federal Financial Management  Improvement Act of 1996. The DOD IG also reported that the system  also did not resolve any of the Army Working Capital Fund internal control  weaknesses. The report concluded that the Army will need to spend  additional funds to comply with U.S. Government Standard General  Ledger requirements and achieve an unqualified audit opinion on its Army  Working Capital Fund financial statements.
GAO will continue to monitor the department’s progress of and provide  feedback on the status of the department’s financial management  improvement efforts. More specifically, we are in the process of finalizing  our work related to GFEBS and DEAMS.
section_title: Closing Comments
paragraphs: DOD has invested billions of dollars and will invest billions more to  implement the modern business systems it will rely on for timely,  accurate, and reliable information in managing its financial and other  business operations, preparing auditable financial statements, and  maintaining accountability for its stewardship of public funds. Too often,  though, costs exceed estimates by millions as system-development  programs run years behind schedule. Even with extended periods of  development, we have found new systems that are missing interfaces  needed to integrate them with existing systems while others, slated to  replace legacy systems, are delivered without some of the functionalities  performed by the systems they are expected to replace. Meanwhile, the  department continues to operate largely in the duplicative, stovepiped  environment of its legacy systems.
The continued deficiencies in the development and implementation of its  ERPs also erode savings DOD has expected to accrue as a result of  more-efficient business systems. While the implementation of the ERPs is  a complex, demanding endeavor, the success of these systems is critical  if DOD is to reach its auditability goals. Effective planning and  implementation and the best efforts of a committed leadership,  management, and staff will be critical.
Mr. Chairman and members of the Panel, this concludes my prepared  statement. I would be pleased to respond to any questions that you or  other members of the Panel may have at this time.
For further information regarding this testimony, please contact Asif A.  Khan, (202) 512-9869 or khana@gao.gov. Key contributors to this  testimony include J. Christopher Martin, Senior-Level Technologist; Karen  Richey, Assistant Director; Darby Smith, Assistant Director; Beatrice Alff;  Maxine Hattery; Jeffrey Isaacs; Jason Lee; and Brian Paige.
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