DOD Financial Management: Improved Controls, Processes, and Systems Are Needed for Accurate and Reliable Financial Information
Published: 2011-09-23T00:00:00

Fast Facts:

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

section_title: Letter
paragraphs: It is a pleasure to be here today to discuss the status of the Department  of Defense’s (DOD) efforts to improve its financial management  operations and achieve audit readiness. At the outset, I would like to  thank the Subcommittee for holding this hearing and to acknowledge the  important role of such hearings in the oversight of DOD’s financial  management efforts.
DOD is one of the largest and most complex organizations in the world.  For fiscal year 2012, the budget requested for the department was  approximately $671 billion—$553 billion in discretionary budget authority  and $118 billion to support overseas contingency operations. The fiscal  year 2012 budget request also noted that DOD employed over 3 million  military and civilian personnel—including active and reserve service  members. DOD operations span a wide range of defense organizations,  including the military departments and their respective major commands  and functional activities, large defense agencies and field activities, and  various combatant and joint operational commands that are responsible  for military operations for specific geographic regions or theaters of  operation. To execute its operations, the department performs interrelated  and interdependent business functions, including financial management,  logistics management, health care management, and procurement. To  support its business functions, DOD has reported that it relies on over  2,200 business systems, including accounting, acquisition, logistics, and  personnel systems.
The department’s sheer size and complexity contribute to the many  challenges DOD faces in resolving its pervasive, complex, and long- standing financial management and related business operations and  systems problems. Numerous initiatives and efforts have been  undertaken by DOD and its components to improve the department’s  financial management operations and to arrive at a point where the  reliability of its financial statements and related financial management  information would be sufficient to pass an audit with favorable (clean)  audit opinions. To date, DOD has not achieved effective financial  management capabilities or financial statement auditability.
Today, I will discuss the status of DOD’s financial management  weaknesses, its efforts to resolve those weaknesses, and the challenges  DOD continues to face in its efforts to improve its financial management  operations. In addition, I will outline the status of the department’s efforts  to implement its Enterprise Resource Planning (ERP) systems, which  represent a critical element of the department’s Financial Improvement  and Audit Readiness (FIAR) strategy. My statement today is based on our  prior work related to the department’s FIAR Plan and ERP  implementation efforts. Our work was conducted in accordance with  generally accepted government auditing standards and our previously  published reports contain additional details on the scope and  methodology for those reviews. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The department is facing near and long-term internal fiscal pressures as it  attempts to balance competing demands to support ongoing operations,  rebuild readiness following extended military operations, and manage  increasing personnel and health care costs as well as significant cost  growth in its weapon systems programs. For more than a decade, DOD  has dominated GAO’s list of federal programs and operations at high risk  of being vulnerable to fraud, waste, abuse. In fact, all of the DOD  programs on GAO’s High-Risk List relate to business operations,  including systems and processes related to management of contracts,  finances, 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 impacted its  operational efficiency and mission performance in areas of major  weapons system support and logistics; and (3) left the department  vulnerable to fraud, waste, and abuse.
Because of the complexity and long-term nature of DOD’s transformation  efforts, GAO has reported the need for a chief management officer (CMO)  position and a comprehensive, enterprisewide business transformation  plan. In May 2007, DOD designated the Deputy Secretary of Defense as  the CMO. In addition, the National Defense Authorization Acts for fiscal  years 2008 and 2009 contained provisions that codified the CMO and  Deputy Chief Management Officer (DCMO) positions, required DOD to  develop a strategic management plan, and required the Secretaries of the  military departments to designate their Undersecretaries as CMOs and to  develop business transformation plans.
subsections: section_title: Overview of DOD’s Accounting and Finance Activities
paragraphs: DOD financial managers are responsible for the functions of budgeting,  financing, accounting for transactions and events, and reporting of  financial and budgetary information. To maintain accountability over the  use of public funds, DOD must carry out financial management functions  such as recording, tracking, and reporting its budgeted spending, actual  spending, and the value of its assets and liabilities. DOD relies on a  complex network of organizations and personnel to execute these  functions. Also, its financial managers must work closely with other  departmental personnel to ensure that transactions and events with  financial consequences, such as awarding and administering contracts,  managing military and civilian personnel, and authorizing employee  travel, are properly monitored, controlled, and reported, in part, to ensure  that DOD does not violate spending limitations established by statute or  other legal provisions regarding the use of funds.
Before fiscal year 1991, the military services and defense agencies  independently managed their finance and accounting operations.  According to DOD, these decentralized operations were highly inefficient  and failed to produce reliable information. On November 26, 1990, DOD  created the Defense Finance and Accounting Service (DFAS) as its  accounting agency to consolidate, standardize, and integrate finance and  accounting requirements, functions, procedures, operations, and  systems. The military services and defense agencies pay for finance and  accounting services provided by DFAS using their operations and  maintenance appropriations. The military services continue to perform  certain finance and accounting activities at each military installation.  These activities vary by military service depending on what the services  wanted to maintain in-house and the number of personnel they were  willing to transfer to DFAS. As DOD’s accounting agency, DFAS records  these transactions in the accounting records, prepares thousands of  reports used by managers throughout DOD and by the Congress, and  prepares DOD-wide and service-specific financial statements. The  military services play a vital role in that they authorize the expenditure of  funds and are the source of most of the financial information that allows  DFAS to make payroll and contractor payments. The military services  also have responsibility over most of DOD’s assets and the related  information needed by DFAS to prepare annual financial statements  required under the Chief Financial Officers Act.
DOD accounting personnel are responsible for accounting for funds  received through congressional appropriations, the sale of goods and  services by working capital fund businesses, revenue generated through  nonappropriated fund activities, and the sales of military systems and  equipment to foreign governments or international organizations. DOD’s  finance activities generally involve paying the salaries of its employees,  paying retirees and annuitants, reimbursing its employees for travel- related expenses, paying contractors and vendors for goods and  services, and collecting debts owed to DOD. DOD defines its accounting  activities to include accumulating and recording operating and capital  expenses as well as appropriations, revenues, and other receipts.  According to DOD’s fiscal year 2012 budget request, in fiscal year 2010  DFAS    processed approximately 198 million payment-related transactions  and disbursed over $578 billion;    accounted for 1,129 active DOD appropriation accounts; and    processed more that 11 million commercial invoices.
section_title: Pervasive Financial Management Problems Continue to Affect the Efficiency and Effectiveness of DOD Operations
paragraphs: DOD financial management was designated as a high-risk area by GAO  in 1995. Pervasive deficiencies in financial management processes,  systems, and controls, and the resulting lack of data reliability, continue to  impair management’s ability to assess the resources needed for DOD  operations; track and control costs; ensure basic accountability; anticipate  future costs; measure performance; maintain funds control; and reduce  the risk of loss from fraud, waste, and abuse.
Other business operations, including the high-risk areas of contract  management, supply chain management, support infrastructure  management, and weapon systems acquisition are directly impacted by  the problems in financial management. We have reported that continuing  weaknesses in these business operations result in billions of dollars of  wasted resources, reduced efficiency, ineffective performance, and  inadequate accountability. Examples of the pervasive weaknesses in the  department’s business operations are highlighted below.    DOD invests billions of dollars to acquire weapon systems, but it lacks  the financial management processes and capabilities it needs to track  and report on the cost of weapon systems in a reliable manner. We  reported on this issue over 20 years ago, but the problems continue  to persist. In July 2010, we reported that although DOD and the  military departments have efforts underway to begin addressing these  financial management weaknesses, problems continue to exist and  remediation and improvement efforts would require the support of  other business areas beyond the financial community before they  could be fully addressed.    DOD also requests billions of dollars each year to maintain its weapon  systems, but it has limited ability to identify, aggregate, and use  financial management information for managing and controlling  operating and support costs. Operating and support costs can  account for a significant portion of a weapon system’s total life-cycle  costs, including costs for repair parts, maintenance, and contract  services. In July 2010, we reported that the department lacked key  information needed to manage and reduce operating and support  costs for most of the weapon systems we reviewed—including cost  estimates and historical data on actual operating and support costs.  For acquiring and maintaining weapon systems, the lack of complete  and reliable financial information hampers DOD officials in analyzing  the rate of cost growth, identifying cost drivers, and developing plans  for managing and controlling these costs. Without timely, reliable, and  useful financial information on cost, DOD management lacks  information needed to accurately report on acquisition costs, allocate  resources to programs, or evaluate program performance.
In June 2010, we reported that the Army Budget Office lacked an  adequate funds control process to provide it with ongoing assurance  that obligations and expenditures do not exceed funds available in the  Military Personnel–Army (MPA) appropriation. We found that an  obligation of $200 million in excess of available funds in the Army’s  military personnel account violated the Antideficiency Act. The  overobligation likely stemmed, in part, from lack of communication  between Army Budget and program managers so that Army Budget’s  accounting records reflected estimates instead of actual amounts until  it was too late to control the incurrence of excessive obligations in  violation of the act. Thus, at any given time in the fiscal year, Army  Budget did not know the actual obligation and expenditure levels of  the account. Army Budget explained that it relies on estimated  obligations—despite the availability of actual data from program  managers—because of inadequate financial management systems.  The lack of adequate process and system controls to maintain  effective funds control impacted the Army’s ability to prevent, identify,  correct, and report potential violations of the Antideficiency Act.
In our February 2011 report on the Defense Centers of Excellence  (DCOE), we found that DOD’s TRICARE Management Activity (TMA)  had misclassified $102.7 million of the nearly $112 million in DCOE  advisory and assistance contract obligations. The proper classification  and recording of costs are basic financial management functions that  are also key in analyzing areas for potential future savings.
Without adequate financial management processes, systems, and  controls, DOD components are at risk of reporting inaccurate,  inconsistent, and unreliable data for financial reporting and management  decision making and potentially exceeding authorized spending limits.  The lack of effective internal controls hinders management’s ability to  have reasonable assurance that their allocated resources are used  effectively, properly, and in compliance with budget and appropriations  law.
section_title: DOD’s Past Strategies for Improving Financial Management Were Ineffective but Recent Initiatives are Encouraging
paragraphs: Over the years, DOD has initiated several broad-based reform efforts to  address its long-standing financial management weaknesses. However,  as we have reported, those efforts did not achieve their intended purpose  of improving the department’s financial management operations. In 2005,  the DOD Comptroller established the DOD FIAR Directorate to develop,  manage, and implement a strategic approach for addressing the  department’s financial management weaknesses and for achieving  auditability, and to integrate those efforts with other improvement  activities, such as the department’s business system modernization  efforts. In May 2009, we identified several concerns with the adequacy  of the FIAR Plan as a strategic and management tool to resolve DOD’s  financial management difficulties and thereby position the department to  be able to produce auditable financial statements.
Overall, since the issuance of the first FIAR Plan in December 2005,  improvement efforts have not resulted in the fundamental transformation  of operations necessary to resolve the department’s long-standing  financial management deficiencies. However, DOD has made significant  improvements to the FIAR Plan that, if implemented effectively, could  result in significant improvement in DOD’s financial management and  progress toward auditability, but progress in taking corrective actions and  resolving deficiencies remains slow. While none of the military services  has obtained an unqualified (clean) audit opinion, some DOD  organizations, such as the Army Corps of Engineers, DFAS, the Defense  Contract Audit Agency, and the DOD Office of Inspector General, have  achieved this goal. Moreover, some DOD components that have not yet  received clean audit opinions are beginning to reap the benefits of  strengthened controls and processes gained through ongoing efforts to  improve their financial management operations and reporting capabilities.  Lessons learned from the Marine Corps’ Statement of Budgetary  Resources audit effort can provide a roadmap to help other components  better stage their audit readiness efforts by strengthening their financial  management processes to increase data reliability as they develop action  plans to become audit ready.
In August 2009, DOD’s Comptroller sought to further focus efforts of the  department and components, in order to achieve certain short- and long- term results, by giving priority to improving processes and controls that  support the financial information most often used to manage the  department. Accordingly, DOD revised its FIAR strategy and methodology  to focus on the DOD Comptroller’s two priorities—budgetary information  and asset accountability. The first priority is to strengthen processes,  controls, and systems that produce DOD’s budgetary information and the  department’s Statements of Budgetary Resources. The second priority is  to improve the accuracy and reliability of management information  pertaining to the department’s mission-critical assets, including military  equipment, real property, and general equipment, and validating  improvement through existence and completeness testing. The DOD  Comptroller directed the DOD components participating in the FIAR  Plan—the departments of the Army, the Navy, and the Air Force and the  Defense Logistics Agency—to use a standard process and aggressively  modify their activities to support and emphasize achievement of the  priorities.
GAO supports DOD’s current approach of focusing and prioritizing efforts  in order to achieve incremental progress in addressing weaknesses and  making progress toward audit readiness. Budgetary and asset information  is widely used by DOD managers at all levels, so its reliability is vital to  daily operations and management. DOD needs to provide accountability  over the existence and completeness of its assets. Problems with asset  accountability can further complicate critical functions, such as planning  for the current troop withdrawals.
In May 2010, DOD introduced a new phased approach that divides  progress toward achieving financial statement auditability into five waves  (or phases) of concerted improvement activities (see appendix I).  According to DOD, the components’ implementation of the methodology  described in the 2010 FIAR Plan is essential to the success of the  department’s efforts to ultimately achieve full financial statement  auditability. To assist the components in their efforts, the FIAR Guidance,  issued along with the revised plan, details the implementation of the  methodology with an emphasis on internal controls and supporting  documentation that recognizes both the challenge of resolving the many  internal control weaknesses and the fundamental importance of  establishing effective and efficient financial management. The FIAR  Guidance provides the process for the components to follow, through  their individual Financial Improvement Plan (FIP), in assessing  processes, controls, and systems; identifying and correcting weaknesses;  assessing, validating, and sustaining corrective actions; and achieving full  auditability. The guidance directs the components to identify responsible  organizations and personnel and resource requirements for improvement  work. In developing their plans, components use a standard template that  comprises data fields aligned to the methodology. The consistent  application of a standard methodology for assessing the components’  current financial management capabilities can help establish valid  baselines against which to measure, sustain, and report progress.
section_title: Numerous Challenges Must Be Addressed In Order For DOD to Successfully Reform Financial Management
paragraphs: Improving the department’s financial management operations and thereby  providing DOD management and the Congress more accurate and  reliable information on the results of its business operations will not be an  easy task. It is critical that the current initiatives being led by the DOD  DCMO and the DOD Comptroller be continued and provided with  sufficient resources and ongoing monitoring in the future. Absent  continued momentum and necessary future investments, the current  initiatives may falter, similar to previous efforts. Below are some of the  key challenges that the department must address in order for the financial  management operations of the department to improve.
Committed and sustained leadership. The FIAR Plan is in its sixth year  and continues to evolve based on lessons learned, corrective actions,  and policy changes that refine and build on the plan. The DOD  Comptroller has expressed commitment to the FIAR goals, and  established a focused approach that is intended to help DOD achieve  successes in the near term. But the financial transformation needed at  DOD, and its removal from GAO’s high-risk list, is a long-term effort.  Improving financial management will need to be a cross-functional  endeavor; requiring improvements in some of DOD’s other business  operations such as those in the high-risk areas of contract management,  supply chain management, support infrastructure management, and  weapon systems acquisition. As acknowledged by DOD officials,  sustained and active involvement of the department’s CMO, the DCMO,  the military departments’ CMOs, the DOD Comptroller, and other senior  leaders is critical. Within every administration, there are changes at the  senior leadership; therefore, it is paramount that the current initiative be  institutionalized throughout the department—at all working levels—in  order for success to be achieved.
Effective plan to correct internal control weaknesses. In May 2009,  we reported that the FIAR Plan did not establish a baseline of the  department’s state of internal control and financial management  weaknesses as its starting point. Such a baseline could be used to  assess and plan for the necessary improvements and remediation to be  used to measure incremental progress toward achieving estimated  milestones for each DOD component and the department. DOD currently  has efforts underway to address known internal control weaknesses  through three integrated programs: (1) Internal Controls over Financial  Reporting (ICOFR) program, (2) ERP implementation, and (3) FIAR Plan.  However, the effectiveness of these three integrated efforts at  establishing a baseline remains to be seen. As discussed in our recent  report, the lack of effective internal controls, in part, contributed to the  DOD Inspector General issuing a disclaimer of opinion on the Marine  Corps’ fiscal year 2010 Statement of Budgetary Resources (SBR). The  auditors reported that ineffective internal control and ineffective controls in  key financial systems should be addressed to ensure the reliability of  reported financial information. Examples of the problems identified  include the following:    The Marine Corps did not have effective controls in place to support  estimated obligations, referred to as “bulk obligations,” to record a  payment liability, and, as a result, was not able to reconcile the related  payment transactions to the estimates. The Marine Corps estimates  obligations in a bulk amount to record payment liabilities where it does  not have a mechanism to identify authorizing documentation as a  basis for recording the obligations.    The auditors found ineffective controls over three major information  technology systems used by the Marine Corps and reported  numerous problems that required resolution.  For example, the  auditors identified a lack of controls over interfaces between systems  to ensure completeness of the data being transferred. System  interface controls are critical for ensuring the completeness and  accuracy of data transferred between systems.
The report also noted that the Marine Corps did not develop an overall  corrective action or remediation plan that includes key elements of a risk- based plan. Instead, its approach focuses on short-term corrective  actions based on manually intensive efforts to produce reliable financial  reporting at year-end. Such efforts may not result in sustained  improvements over the long term that would help ensure that the Marine  Corps could routinely produce sound data on a timely basis for decision  making. We previously reported that using principles of risk management  helps policymakers make informed decisions about best ways to prioritize  investments, so that the investments target the areas of greatest need.  However, we found that the Marine Corps’ SBR Remediation Plan  focused on individual initiatives to address 70 auditor Notices of Findings  and Recommendations that included 139 recommendations, without  assessing risks, prioritizing actions, or ensuring that actions adequately  responded to recommendations. Further, the plan did not identify  resources, roles and responsibilities, or include performance indicators to  measure performance against action plan objectives.
Given the current efforts, goals, and timeframes for achieving auditability  of the Marine Corps’ Fiscal Year 2011 SBR, the current approach is  understandably focused on short-term actions. However, achieving  financial accountability that is sustainable in the long term will require  reliable financial systems and sound internal controls. An effective  remediation plan would help ensure that audit recommendations are fully  addressed to deal with the short-term and long-term goals.
The Marine Corps reported that actions on 88 of the 139  recommendations, including weaknesses related to accounting and  financial reporting and information technology systems were fully  implemented; however, the completeness and effectiveness of most  Marine Corps’ actions have not yet been tested. DOD Inspector General  auditors told us that tests performed during the Marine Corps’ fiscal year  2011 SBR audit effort will determine whether and to what extent the  problems identified during the fiscal year 2010 SBR audit effort have been  resolved. They also confirmed that as of August 25, 2011, the Marine  Corps had remediated the problems on 11 of the information technology  audit recommendations.
Because of the department’s complexity and magnitude, developing and  implementing a comprehensive plan that identifies DOD’s internal control  weaknesses will not be an easy task. But it is a task that is critical to  resolving the long-standing weaknesses and will require consistent  management oversight and monitoring for it to be successful.
Competent financial management workforce. Effective financial  management in DOD will require a knowledgeable and skilled workforce  that includes individuals who are trained and certified in accounting, well  versed in government accounting practices and standards, and  experienced in information technology. Hiring and retaining such a skilled  workforce is a challenge DOD must meet to succeed in its transformation  to efficient, effective, and accountable business operations. The National  Defense Authorization Act for Fiscal Year 2006 directed DOD to  develop a strategic plan to shape and improve the department’s civilian  workforce. The plan was to, among other things; include assessments of  (1) existing critical skills and competencies in DOD’s civilian workforce ,  (2) future critical skills and competencies needed over the next decade,  and (3) any gaps in the existing or future critical skills and competencies  identified. In addition, DOD was to submit a plan of action for dev eloping  and reshaping the civilian employee workforce to address any identified  gaps, as well as specific recruiting and retention goals and strategies on  how to train, compensate, and motivate civilian employees. In developi the plan, the department identified financial management as one of  its  enterprisewide mission-critical occupations.
In July 2011, we reported that DOD’s 2009 overall civilian workforce  plan had addressed some legislative requirements, including assessing  the critical skills of its existing civilian workforce. Although some aspects  of the legislative requirements were addressed, DOD still has significant  work to do. For example, while the plan included gap analyses related to  the number of personnel needed for some of the mission-critical  occupations, the department had only discussed competency gap  analyses for 3 mission-critical occupations—language, logistics  management, and information technology management. A competency  gap for financial management was not included in the department’s  analysis. Until DOD analyzes personnel needs and gaps in the financial  management area, it will not be in a position to develop an effective  financial management recruitment, retention, and investment strategy to  successfully address its financial management challenges.
Accountability and effective oversight. The department established a  governance structure for the FIAR Plan, which includes review bodies for  governance and oversight. The governance structure is intended to  provide the vision and oversight necessary to align financial improvement  and audit readiness efforts across the department. As noted in our recent  report, both DOD and the components have established senior  executive committees as well as designated officials at the appropriate  levels to monitor and oversee their financial improvement efforts. These  committees and individuals have also generally been assigned  appropriate roles and responsibilities. To monitor progress and hold  individuals accountable for progress, DOD managers and oversight  bodies need reliable, valid, meaningful metrics to measure performance  and the results of corrective actions. In May 2009, we reported that the  FIAR Plan did not have clear results-oriented metrics. To its credit, DOD  has taken action to begin defining results-oriented FIAR metrics it intends  to use to provide visibility of component-level progress in assessment;  and testing and remediation activities, including progress in identifying  and addressing supporting documentation issues. We have not yet had  an opportunity to assess implementation of these metrics—including the  components’ control over the accuracy of supporting data—or their  usefulness in monitoring and redirecting actions.
Ensuring effective monitoring and oversight of progress—especially by  the leadership in the components—will be key to bringing about effective  implementation, through the components’ FIPs. However, as noted in our  recent report,  we found that weaknesses in the Navy and Air Force  FIAR Plan implementation efforts indicate that the monitoring and  oversight of such efforts have not been effective. More specifically, we  found that component officials as well as the oversight committees at both  the component and DOD levels did not effectively carry out their  monitoring responsibilities for the Navy Civilian Pay and Air Force Military  Equipment FIPs. For the two FIPs that we reviewed, neither individual  officials nor the executive committees took sufficient action to ensure that  the FIPs were accurate or complied with the FIAR Guidance. As a result,  the Navy concluded that its Civilian Pay was ready for audit, as did the Air  Force with respect to its Military Equipment, even though they did not  have sufficient support to assert audit readiness.
On the other hand, once the Navy and Air Force submitted the FIPs to  DOD in support of their audit readiness assertions, both the DOD  Inspector General and the DOD Comptroller carried out their  responsibilities for reviewing the FIPs. In their reviews, both organizations  identified issues with the FIPs that were similar to those we had identified.  The DOD Comptroller, who makes the final determination as to whether  an assessable unit is ready for audit, concluded that neither of these FIPs  supported audit readiness.
Effective oversight and monitoring would also help ensure that lessons  learned from recent efforts would be sufficiently disseminated throughout  the department and applied to other financial improvement efforts. In  commenting on our report about the FIPs, the DOD Comptroller stated  that it is critical that the department continues to look at how effectively it  applies lessons learned.
Furthermore, effective oversight holds individuals accountable for carrying  out their responsibilities. DOD has introduced incentives such as  including FIAR goals in Senior Executive Service Performance Plans,  increased reprogramming thresholds granted to components that receive  a positive audit opinion on their Statement of Budgetary Resources, audit  costs funded by the Office of the Secretary of Defense after a successful  audit, and publicizing and rewarding components for successful audits.  The challenge now is to evaluate and validate these and other incentives  to determine their effectiveness and whether the right mix of incentives  has been established.
Well-defined enterprise architecture. For decades, DOD has been  challenged in modernizing its timeworn business systems. Since 1995,  we have designated DOD’s business systems modernization program as  high risk. Between 2001 and 2005, we reported that the modernization  program had spent hundreds of millions of dollars on an enterprise  architecture and investment management structures that had limited  value. Accordingly, we made explicit architecture and investment  management-related recommendations. Congress included provisions in  the Ronald W. Reagan National Defense Authorization Act for Fiscal Year  2005 that were consistent with our recommendations. In response, DOD  continues to take steps to comply with the act’s provisions and to satisfy  relevant system modernization management guidance. Collectively, these  steps address best practices in implementing the statutory provisions  concerning the business enterprise architecture and review of systems  costing in excess of $1 million. However, long-standing challenges that  we previously identified remain to be addressed. Specifically, while DOD  continues to release updates to its corporate enterprise architecture, the  architecture has yet to be federated through development of aligned  subordinate architectures for each of the military departments. In this  regard, each of the military departments has made progress in managing  its respective architecture program, but there are still limitations in the  scope and completeness, as well as the maturity of the military  departments’ architecture programs. For example, while each department  has established or is in the process of establishing an executive  committee with responsibility and accountability for the enterprise  architecture, none has fully developed an enterprise architecture  methodology or a well-defined business enterprise architecture and  transition plan to guide and constrain business transformation initiatives.  In addition, while DOD continues to establish investment management  processes, the DOD enterprise and the military departments’ approaches  to business systems investment management still lack the defined  policies and procedures to be considered effective investment selection,  control, and evaluation mechanisms. Until DOD fully implements these  longstanding institutional modernization management controls its  business systems modernization will likely remain a high-risk program.
Successful implementation of the ERPs. The department has invested  billions of dollars and will invest billions more to implement the ERPs. 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. According to DOD, the successful implementation of the ERPs  is not only critical for addressing long-standing weaknesses in financial  management, but equally important for helping to resolve weaknesses in  other high-risk areas such as business transformation, business system  modernization, and supply chain management. Successful  implementation will support DOD by standardizing and streamlining its  financial management and accounting systems, integrating multiple  logistics systems and finance processes, providing asset visibility for  accountable items, and integrating personnel and pay systems.  Previously, we reported that delays in the successful implementation of  ERPs have extended the use of existing duplicative, stovepiped systems,  and have continued the funding of these systems longer than  anticipated. To the degree that these business systems do not provide  the intended capabilities, DOD’s goal of departmentwide audit readiness  by the end of fiscal year 2017 could be jeopardized.
Over the years we have reported that the department has not effectively  employed acquisition management controls to help ensure the ERPs  deliver the promised capabilities on time and within budget. As we  reported in October 2010, DOD has identified 10 ERPs—1 of which had  been fully implemented—as essential to its efforts to transform its  business operations. We are currently reviewing the status of two of  these ERPs—the Army’s General Fund Enterprise Business System  (GFEBS) and the Air Force’s Defense Enterprise Accounting and  Management System (DEAMS). GFEBS is intended to support the  Army’s standardized financial management and accounting practices for  the Army’s general fund, except for funds related to the Army Corps of  Engineers. The Army estimates that GFEBS will be used to control and  account for approximately $140 billion in annual spending. DEAMS is  intended to provide the Air Force with the entire spectrum of financial  management capabilities and is expected to maintain control and  accountability for approximately $160 billion. 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.
Our preliminary results identified issues related to GFEBS and DEAMS  providing DFAS users with the expected capabilities in accounting,  management information, and decision support. To compensate, DFAS  users have devised manual workarounds and several applications to  obtain the information they need to perform their day-to-day tasks.  Examples of the issues in these systems that DFAS users have identified  include the following:    The backlog of unresolved GFEBS trouble tickets has continued to  increase from about 250 in September 2010 to approximately 400 in  May 2011. Trouble tickets represent user questions and issues with  transactions or system performance that have not been resolved.  According to Army officials, this increase in tickets was not  unexpected since the number of users and the number of transactions  being processed by the system has increased, and the Army and  DFAS are taking steps to address issues 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). DFAS personnel stated 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 Wide Area Work Flow and GFEBS interface and that  this problem 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 search for data in the  system to resolve problems or answer questions. The Army has  recognized this limitation and is currently developing a system  enhancement that they expect will better support the users’ needs.    Manual workarounds are needed to process certain accounts  receivable transactions such as travel debts. DFAS personnel stated  that the problem is the result of the data not being properly converted  from the legacy systems to DEAMS.    DFAS officials indicated that they were experiencing difficulty with  some of the 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 stated that DEAMS does not provide the capability— which existed in the legacy systems—to produce ad hoc reports that  can be used to perform the data analysis need to perform daily  operations. They also noted that when some reports are produced,  the accuracy of those reports is questionable.
The Army and Air Force have stated 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 is not to 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: Closing Comments
paragraphs: In closing, I am encouraged by the recent efforts and commitment DOD’s  leaders have shown toward improving the department’s financial  management. Progress we have seen includes recently issued guidance  to aid DOD components in their efforts to address their financial  management weaknesses and achieve audit readiness, and standardized  component financial improvement plans to facilitate oversight and  monitoring, as well as sharing lessons learned. In addition, the DOD  Comptroller and DCMO have shown commitment and leadership in  moving DOD’s financial management improvement efforts forward.
The revised FIAR strategy is still in the early stages of implementation,  and DOD has a long way and many long-standing challenges to  overcome, particularly with regard to sustained commitment, leadership,  and oversight, before the department and its military components are fully  auditable, and DOD financial management is no longer considered high  risk. However, the department is heading in the right direction and making  progress. Some of the most difficult challenges ahead lie in the effective  implementation of the department’s strategy by the Army, Navy, Air  Force, and DLA, including successful implementation of ERP systems  and integration of financial management improvement efforts with other  DOD initiatives.
GAO will continue to monitor the progress of and provide feedback on the  status of DOD’s financial management improvement efforts. We currently  have work in progress to assess implementation of the department’s  FIAR strategy and efforts toward auditability. As a final point, I want to  emphasize the value of sustained congressional interest in the  department’s financial management improvement efforts, as  demonstrated by this Subcommittee’s leadership.
Mr. Chairman and Members of the Subcommittee, 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) 512-9869 or khana@gao.gov. Key contributors to this  testimony include J. Christopher Martin, Senior-Level Technologist; F.  Abe Dymond, Assistant Director; Gayle Fischer, Assistant Director; Greg  Pugnetti, Assistant Director; Darby Smith, Assistant Director; Beatrice  Alff; Steve Donahue; Keith McDaniel; Maxine Hattery; Hal Santarelli; and  Sandy Silzer.
section_title: Appendix I: FIAR Plan Waves
paragraphs: The first three waves focus on achieving the DOD Comptroller’s interim  budgetary and asset accountability priorities, while the remaining two  waves are intended to complete actions needed to achieve full financial  statement auditability. However, the department has not yet fully defined  its strategy for completing waves 4 and 5. Each wave focuses on  assessing and strengthening internal controls and business systems  related to the stage of auditability addressed in the wave.
Wave 1—Appropriations Received Audit focuses on the appropriations  receipt and distribution process, including funding appropriated by  Congress for the current fiscal year and related  apportionment/reapportionment activity by the OMB, as well as allotment  and sub-allotment activity within the department.
Wave 2—Statement of Budgetary Resources Audit focuses on  supporting the budget-related data (e.g., status of funds received,  obligated, and expended) used for management decision making and  reporting, including the Statement of Budgetary Resources. In addition to  fund balance with Treasury reporting and reconciliation, other significant  end-to-end business processes in this wave include procure-to-pay, hire- to-retire, order-to-cash, and budget-to-report.
Wave 3—Mission Critical Assets Existence and Completeness Audit  focuses on ensuring that all assets (including military equipment, general  equipment, real property, inventory, and operating materials and supplies)  that are recorded in the department’s accountable property systems of  record exist; all of the reporting entities’ assets are recorded in those  systems of record; reporting entities have the right (ownership) to report  these assets; and the assets are consistently categorized, summarized,  and reported.
Wave 4—Full Audit Except for Legacy Asset Valuation includes the  valuation assertion over new asset acquisitions and validation of  management’s assertion regarding new asset acquisitions, and it  depends on remediation of the existence and completeness assertions in  Wave 3. Also, proper contract structure for cost accumulation and cost  accounting data must be in place prior to completion of the valuation  assertion for new acquisitions. It involves the budgetary transactions  covered by the Statement of Budgetary Resources effort in Wave 2,  including accounts receivable, revenue, accounts payable, expenses,  environmental liabilities, and other liabilities.
Wave 5—Full Financial Statement Audit focuses efforts on assessing  and strengthening, as necessary, internal controls, processes, and  business systems involved in supporting the valuations reported for  legacy assets once efforts to ensure control over the valuation of new  assets acquired and the existence and completeness of all mission  assets are deemed effective on a go-forward basis. Given the lack of  documentation to support the values of the department’s legacy assets,  federal accounting standards allow for the use of alternative methods to  provide reasonable estimates for the cost of these assets.
In the context of this phased approach, DOD’s dual focus on budgetary  and asset information offers the potential to obtain preliminary  assessments regarding the effectiveness of current processes and  controls and identify potential issues that may adversely impact  subsequent waves.
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